NEW YORK CITY—In listening to Jonathan Gray, global head of real estate at Blackstone Group, describe his way of thinking—as he did at the NYU International Hospitality Industry Investment Conference on Monday, and then at the NAREIT conference Tuesday—it’s obvious why he’s been such a success. In addition to having a calm and confident demeanor, the successful investor has an amazing ability to foretell the future.
“I think there’ll be even better performance than expected in the second half of the year because, in almost every market, demand is outpacing supply for hotels,” he said.
“In fact, that extends to commercial real estate overall, Gray continued. “It feels like we’re starting to get something close to escape velocity” from the slow pace of post-recession growth. Blackstone is seeing it in the lodging, office, industrial and retail sectors.
“There is not a lot of distress” in real estate, he noted, “which does limit opportunities to buy at a discount. Nonetheless, there is still a very good supply and demand balance, and long-term he sees real estate values correlating more closely to supply.
That foresight helped Gray weather the recession and lead Blackstone to its current flourishing state. “We wrote a check for $800 million to buy debt at a discount during the crisis because we saw what happened after 9/11 and we knew that there would be a rebound.”
Similarly, when Blackstone snapped up Hilton Hotels, market watchers may have questioned the wisdom behind the deal but Gray had a vision. “We saw great things happening with the company. Chris Nassetta had a vision to grow the company during the recession and new properties were opening in China, Turkey, etc.”
Sure enough, the company has grown since Blackstone stepped in back in 2007. “When we purchased Hilton it had 500,000 rooms and 100,000 in the pipeline. Today it has 700,000 rooms and the pipeline has doubled. Sometimes in times of the greatest uncertainty, you have the greatest opportunity.”
“We want to add businesses that are public-market-ready when we take them out” to the public markets. That means businesses that are “clean,” without a lot of complications weighing them down; one way of accomplishing this is through selling off non-core assets. Blackstone’s industrial platform is a strong possibility to go public within the next year.
Of the company’s purchase of the Cosmopolitan hotel in Las Vegas last month—a move that reportedly prompted some industry watchers to call Gray crazy—he said, “We were able to buy a world-class asset at a substantial discount to replacement costs. If you believe that asset value is going to recover, its makes sense to buy assets at a discount. In the past, we bought shopping centers and hotels around the world because even when things didn’t look great, we had a good basis.”
He says, “We try to separate the noise and what we read from what’s actually going on. For example in retail, people may say the shopping center is dead, but there’s land-based retail going on in discount apparel, restaurants and other sectors. We go by a combination of looking at the analytics and being willing to go against the grain.”
In fact, Blackstone is very bullish on Las Vegas, Gray noted. “We’ve bought the largest office complex there, industrial properties and single family homes because there’s a lot of upside potential. Las Vegas is no longer just about gaming. It has the total experience: restaurants, shows and retail. The infrastructure for entertainment is incredible. We think Vegas will surprise people to the upside for the next few years.”
Generally speaking on the hotel front, Gray said, “We like markets with high occupancy and low supply, like San Francisco, Oahu and Las Vegas. We like select-service properties because with their cash flow generating ability and low cap ex needs, we can get very high rates of return. Those assets are performing well and they offer better protection in a downturn than full-service properties.”
The Blackstone executive had some advice for other hotel buyers. “If you’re buying individual assets, think about their relationship to replacement costs. Also, at big group hotels, the rates often were set at a different time so they have a good forecast for the next few years and they trade at a discount to replacement costs. I would focus on the net cash flow, the cap ex costs and the margins.
“Don’t lose faith,” Gray continued, “and don’t listen to the naysayers. We’ve invested $34 billion of investors’ capital over the last few years and going out and buying a lot of debt was one of the best decisions we made.”