Blackstone on Real Estate: Buy It, Fix It, Sell It

"My odds are stacked
I'll go back to black
" -- Amy Winehouse

Investing in real estate can be addictive. I've had that needle in my arm since 1978. It's a problem I try to manage by writing about great companies.

In many types of investing, the odds are often stacked in favor of Blackstone Group (NYSE: BX  ) .  When the investing roulette wheel spins every day at the opening bell, I think smart money often bets on "black." So if Blackstone is selling shares of Brixmor Property Group (NYSE: BRX  ) , a supermarket-anchored retail portfolio, should you buy the IPO?

The smartest guys in the room
Blackstone has the balance sheet to hold investments until they become profitable. They have a portfolio of global real estate assets, with a keen grasp of when to buy and when to sell. So, why should retail investors buy when Blackstone is selling?

Blackstone President Tony James recently shared "collective knowledge gives us a knowledge advantage, and makes us better investors." James couldn't be more upbeat on the company's recent conference call. He acknowledged that just because it is realizing gains on some real estate assets, it doesn't signal "that we are somehow calling a market top in real estate." 

During the past nine months, Blackstone committed $8.4 billion to purchase equity in real estate, "almost twice the level of dispositions."

Blackstone is still a net buyer of real estate with the philosophy of  "Buy it, fix it, sell it." It will retain an ownership stake north of 70% in this spin-off of its retail portfolio.  During the conference call, James made it clear that "you can't look at IPO's for us as exits." He described it as "more of an appetizer than the main meal."  The company's strategy is to realize gains over the coming few years. 

It currently has more than $69 billion of real estate assets under management. So reducing leverage and increasing liquidity in the shopping center portfolio by selling $825 million in equity is just part of business as usual.

Blackstone has filed with the SEC plans to spin off interests in Extended Stay America and Hilton Hotels in the near future. Other near-term Blackstone IPO candidates include IndCor (industrial and warehouse properties) as well as Invitation Homes, the largest single-family for-rent company in the U.S. -- currently with 40,000 homes.

A Bloomberg article recently pointed out that:

When the commercial property market peaked in 2007, Blackstone sold Extended Stay to Lightstone Group LLC for $8 billion. After the credit crisis hit, Lightstone couldn't refinance Extended Stay's debt and the company filed for bankruptcy protection in 2009.

The following year, Blackstone joined New York-based Centerbridge, a lender who had worked to restructure Extended Stay debt, and Paulson, the hedge fund firm led by billionaire John Paulson, to buy back the hotel chain at a bankruptcy auction for about $3.9 billion.

Centerbridge also is a shareholder of Brixmor Property Group, the shopping-center REIT that Blackstone took public earlier this week.

So what about Brixmor?
The Brixmor IPO portfolio consists of 522 shopping centers totaling 87 million square feet of gross leasable area, or GLA, spread out over 38 states. Large tenants include Kroger, TJX Companies, Publix, and Wal-Mart -- with more than 70% of the centers grocery-anchored. The overall portfolio contains about 9,200 leases with the top 10 tenants accounting for only 18% of the average base rent, or ABR. Brixmor appears to be well diversified geographically and does not have a high concentration of leases with any single tenant.

Brixmor highlighted these positive trends in an amended S-11 filed:

  • Increased occupancy for 10 consecutive quarters on a year-over-year basis to 91.7% as of June 30, 2013
  • Increased total ABR for 23 consecutive months through June 2013
  • Executed 1,599 new leases for approximately 8.4 million sq. ft. of GLA
  • Achieved positive new and renewal lease spreads over each of the past 10 quarters, including 21% and 7%, respectively, in the six months ended June 30, 2013

There is actually a lot of good news to share about Brixmor. Just because Blackstone is spinning this business off, it doesn't mean long-term investors should be terrified.

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