Blackstone eyes debt and rescue financing

The private equity firm has said it is looking at select investment opportunities 'in areas that have already hit bottom', such as rescue financing for the retail sector, while it waits for the resurgence of its core areas of focus, private equity and real estate.

The Blackstone Group said it would focus on debt and rescue financing while it waited on the sidelines for the real estate industry to bottom out, chief executive Stephen Schwarzman said in an investor call last week.

Blackstone has more than $12 billion of dry powder in its real estate funds, “the  largest amount of available capital in the industry”, according to Schwarzman. The firm said in November it had a $13 billion “war chest” during its third quarter earnings call.

Schwarzman said the firm saw great opportunities in debt, with the potential for “high yields with little risk”.  However, he added the firm was “patiently remaining on the sidelines” for real estate opportunities to become more attractive in late 2010 or even later as sellers are forced to come to market.

“We basically think real estate still has farther to fall [as compared to private equity] before we get really active,” said chief operating officer Tony “Hamilton” James. “We’re actually looking at some interesting things in areas that have already hit bottom but they, for the most part, take the form today of rescue financing.” James said hotels traditionally “hit bottom” first followed by retail, offices and then apartments.

Weakness in the hotel sector increased during the fourth quarter and will continue to increase throughout 2009, noted Schwarzman, who added that Blackstone’s investment in Hilton significantly outperformed the industry last year. The hotel chain, purchased for $20.1 billion in 2007, reported flat EBITDA in the fourth quarter and 9.2 percent EBITDA growth for the year. 2009, the founder said, would be substantially more challenging.

The office market is lagging the hotel market but will suffer declining revenue and occupancy, he added. However, Blackstone said substantially delevered its office portfolio through asset sales in 2007 when the firm was the world’s largest seller of assets.

Blackstone’s real estate practice reported negative fourth quarter revenues of $477.8 million and a loss of $718 million for 2008. The loss compares to annual gains of $1.3 billion in 2007. The loss was driven primarily by depreciation in the fair value of the funds’ portfolio investments.