Much of Blackstone’s success is out of its hands
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By Jonathan Guilford
NEW YORK, July 19 (Reuters Breakingviews) -Blackstone BX.N boss Steve Schwarzman has locked in his strategy. It’s now up to the U.S. Federal Reserve as to whether it works. The goliath of private equity and credit asset management plowed nearly $34 billion into new investments in the second quarter, the highest rate since mid-2022 when interest-rate hikes began. The die is now cast.
Second-quarter results unveiled Thursday show promising signs. Blackstone is back to spending after a deal slowdown built its dry powder to $200 billion last year. Big asset managers need to keep buying and selling assets in order to reap fees and return money to their backers. Thing is, Blackstone and its ilk buy assets with loads of leverage. Rising rates make that a costlier proposition.
In real estate, the fastest-growing area for new investments in Blackstone right now, the effect is visible. Property prices are expressed as a ratio of operating income to valuation, also called a capitalization rate. This cap rate has been climbing - Blackstone’s $112 billion property fund for small investors upped its assumed residential cap rate from 4.7% in early 2022 to 5.5% today.
In effect, this means Blackstone thinks each dollar of income it collects from a renter translates into a lower valuation for the building. That makes sense: If debt is more expensive, the yield on a property is relatively less valuable. Put another way, gleaning each dollar of yield on that building – via capital improvements or otherwise – is more expensive.
It’s not disastrous: rents could still grow, supporting overall valuations. Still, BREIT’s cap rate – though more conservative than, say, the broad prime multifamily market, according to CBRE – hasn’t risen as much as the 10-year Treasury yield. It suggests that Blackstone and its fellow landlords are being ambitiously overoptimistic, or taking for granted that the Fed will substantially cut rates.
Blackstone has reason to hope for the best. If rates fall, the yield on Blackstone’s properties becomes more attractive, especially if rents continue increasing. There’s been some recent slowdown on that front: the Bureau of Labor Statistics’ rent index plateaued last quarter. But as Schwarzman points out, the rate of building is slowing; shrinking supply should support rents. Meanwhile, the market foresees a Fed rate cut coming in September.
While real estate is particularly sensitive to this dynamic, a highly levered portfolio of other assets looks similar. A widget-maker’s income is less attractive if the owner must shell out higher debt payments, say, or refinance at a higher rate. So Schwarzman is stuck between his own investors and the Fed. His bet that rates and supply will go his way might work. He and his peers just have to wait and see.
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CONTEXT NEWS
Blackstone on July 18 reported nearly $1.3 billion in distributable earnings, a measure that excludes unrealized gains from investments, for the second quarter. The result represents an increase of 3.3% year-over-year, though a slight decline from the prior quarter, and came in narrowly below analyst expectations, according to Visible Alpha.
In real estate, revenue tied to the performance of perpetual-life funds fell 99.5% year-over-year, to under $1 million. This is the lowest result since the firm launched Blackstone Real Estate Income Trust, a perpetual fund targeting individual investors, in 2017.
Blackstone put nearly $10 billion into new investments in property in the quarter, the highest since 2022 and double the prior quarter.
Graphic: Sky-rocketing rent growth has waned recently https://reut.rs/4f2OfUd
Graphic: A September Fed rate cut is seen as near-sure bet A September Fed rate cut is seen as near-sure bet https://reut.rs/3y2zb8o
Editing by Lauren Silva Laughlin and Sharon Lam
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