Buy, Fix, Sell. Repeat.

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When Real Estate Forum last put the spotlight on Blackstone Real Estate Group a decade ago, many of the asset management firm's headline-making, transformative real estate plays were still in the future. It had yet to acquire Equity Office Properties or Hilton Worldwide, for example, and the bubble in the for-sale housing market that eventually led to Blackstone's formation of Invitation Homes had yet to occur. Nor had it begun operating globally beyond forays into Europe. In 2004, investor capital under management totaled $4.8 billion; today Blackstone Real Estate Group has $80 billion in investor capital under management, more than one-quarter of the firm's overall total. Yet one key aspect of Blackstone's present-day story was also evident in 2004, and that was the basic philosophy behind its real estate strategy.

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“We like to buy the best assets we can, add value to them and then sell them,” John Kukral, then the president and CEO of Blackstone Real Estate Group, said in 2004. Ten years later, Jonathan Gray, the firm's global head of real estate, tells Forum, the same buy it/fix it/sell it continuum underpins an operation that is exponentially larger than it was a decade ago.

“At its heart, it's pretty simple,” says Gray. Similarly, John Schreiber, who co-founded Blackstone Real Estate Advisors in 1992, says “it's a pretty simple business. First, we go in with a thesis on how we can improve the value of the asset over a period of three to five years. Using new capital and often new management, we change the value of the real estate and then sell it on.” That simplicity, though, belies the combination of expertise, relationships, granular market knowledge and integration necessary to make it succeed on a large scale, let alone a global one.

For one thing, the underlying buy it/fix it/sell it formula can be carried out via a number of different avenues, some more complex than others. “Sometimes we do that through buying public companies,” Gray explains. “Sometimes we do it through buying debt. Sometimes it's a portfolio. Sometimes it's individual assets.” Shortly after its 2007 acquisition of EOP, for example, Blackstone sold off about two-thirds of the portfolio, Schreiber says, and likely will sell off the remainder by next year.

Whichever way Blackstone approaches it, though, the object is to buy assets below physical replacement cost, “and then figure out how you can add value,” says Gray. “On a single asset, maybe it's redoing the lobby or spending capital renovating the rooms in a hotel. With a company, it could entail looking at their organizational structure, changing a management team or, in the case of some of the franchise businesses we have bought, accelerating the growth.” And the exit strategy may mean selling an asset or, in the case of entity-level investments, taking the company public. The company did five IPOs of real estate platforms over the past year—Hilton, La Quinta, Extended Stay America, Brixmor and SeaWorld—and others are likely to follow.

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Compared to a decade ago—and, for that matter, two decades ago, when Gray joined Blackstone and took on its newly formed real estate platform—the operation is undoubtedly larger. Yet Gray, along with the other leaders of the business, maintains that it hasn't really changed to any great degree. “So much of what we're doing is the same,” he says. “We're doing it on a broader geographic basis and across different product types, but at its core it's really the same business.”

That continuity in Blackstone's approach has been maintained in part through conscious effort as the real estate platform has evolved from a US focus into a global one. “One of the things that happens with businesses as they grow is that sometimes they may be become very silo-ed and bureaucratic, and they lose what's made them special,” says Gray. “So our way to counteract this is to try to keep the business as integrated as possible."

A key element of maintaining that level of integration is constant communication and collaboration. “We have a culture that's developed here, in the real estate group in particular, that's very low ego, that's very much information sharing and inclusive,” Bill Stein, global head of asset management in the real estate group, tells Forum. “One of the advantages we have is that we have all these businesses, we own all this real estate and we're getting all this information. And part of my job has been to figure out how we utilize that information in a way that not only helps us run the assets we have but also helps the deal teams become informed on what's happening on a real-time basis to help them leverage what they're going to go out and buy.”

As for communicating, Gray says, every Monday morning there's a phone call among Blackstone's 20 real estate partners around the globe. “And then we go up after that and do our investment committee with all of our global real estate people as well as some of the senior leaders of the firm,” he says. “We do that every week. Bill Stein does asset management calls globally. We do investor relations/business development calls on a global basis each week. There are acquisition review committees, which are done on a global basis. We have asset management meetings. We have a global meeting in the beginning of January in New York,” as well as strategy sessions such as one held in London a few days after Forum interviewed Gray and other members of Blackstone's investor committee. “We are in constant contact with each other, e-mailing and speaking.”

Stein recounts a favorite anecdote to illustrate this dynamic. “When we bought Hilton in 2007, CEO Chris Nassetta, whom we knew was great, called me one day,” he recalls. “He said, 'I finally figured you guys out.' And I said, 'Well, what are you talking about, Chris?' He replied, 'You guys are like bees. All I have to do is tell one of you something and two minutes later everybody in your group knows.' And I said, 'That's the culture here.' And I've always said if you have an issue, you can send an email and copy three of us and you'll get one answer; that's all you have to worry about.”

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Frank Cohen, who oversees acquisitions in the US with Tyler Henritze, sounds a similar theme. “Globally, we are in constant communication,” he tells Forum. “The people that we have in Europe and Asia are people we've worked with for years. So we know each other well, we talk and e-mail a lot and we do global calls. Once a week, we go through new transactions. This is separate and apart from the formal investment committee process; it's just a review of transactions where all of the global investment partners get on the phone and talk about the positives and negatives of every new deal. We can compare what's happening across the globe” and identify interesting investment opportunities.

“It's very difficult to invest in your own fishbowl,” Cohen adds. “It's much easier when you have colleagues on which you can rely and compare notes.”

Adds Tyler Henritze, “There's a very consistent approach to risk and reward, and the way we think about investing in Japan or Australia or Europe or the US is one very consistent investment philosophy. There's a lot of homegrown DNA within Blackstone.”

Gray champions the global investment committee concept because “I want that person in Mumbai to be hearing about the shopping center deal in California, to hear how we think about risk and how we think about return” in a broader context. “The deal you may be looking at in Mumbai may be a good deal for Mumbai, but maybe on a global basis it's not a compelling investment. And so using a shared sense of risk/return and the right metrics is very helpful for everybody.”

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Kathleen McCarthy, who heads up investor relations and business development, tells Forum, “Our whole mantra when it comes to team management is heavy integration and running one team, not just in New York”—where much of the senior management of the real estate group occupies the 42nd floor of 345 Park Ave.—“but globally. Granted, people have different functions—you have asset management, acquisitions, investor relations, finance—but the idea is that we're running a globally integrated business where people understand, regardless of their role. what we're doing and what we're trying to accomplish,” with few barriers between the businesses.

Post-financial crisis, McCarthy says, “There's been enormous growth in the size of our team, the number of markets in which we operate and the types and amount of capital we're managing. And our primary goal is to make sure the quality of that operation and the returns we deliver to our investors doesn't change with that growth.” Part and parcel of that, she adds, is “managing to instill a small-place experience and maintain laser focus, even in a bigger business.”

Gray says the basic idea is to build “one culture and one process. So we look at the world with the same sort of buy it/fix it/sell it approach and we're executing in the same way around the globe. The way we do our financial reporting, our underwriting of deals, our investment committee memos, our correspondence with our limited partners—it's the same standard.”

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Part of the Blackstone edge is the ancillary benefits of owning and operating hundreds of millions of square feet of office, industrial, retail, hotel and multifamily. “We have a huge advantage in that we have access to an enormous amount of information and data that come off our existing owned portfolios and real estate assets,” Henritze says. “As a result, we're able to see things in real time more quickly than you may be able to gather” from third-party research reports or newspapers.

“What we try to do as a team is look at that data and those trends and try to identify patterns or themes before others do, and then exploit those by investing capital and moving quickly before those themes are broadly accepted and understood in the marketplace,” he continues. “We try to stay focused on that data and not rely on 'noise' beyond that.”

Chris Heady, head of real estate Asia, tells Forum that the company is “fairly methodical about our growth even though it's been rapid. And part of that methodology has been that as we establish new businesses or new geographies, we move people who are a core part of the team to those geographies so that we implant the same standard of care and the same diligence and rigor to the real estate investing that we've done throughout our history.” Heady, for instance, had been involved in a number of transactions in the US and Europe as well as Asia before being tapped to oversee Asian operations.

When Forum last profiled Blackstone 10 years ago, the firm had taken notice that a number of its competitors were operating in Asia, some of which pulled back or pulled out amid the global financial crisis. “Although we recognized in 2004 that there was probably a great opportunity there, organizationally we hadn't addressed how we would execute that with the existing team,” Heady says. The company opened its first Asian office, in Mumbai, two years later.

For the first few years, says Heady, “we initially invested a very limited amount of capital and were patient. And then over the past few years, we've stepped in and have really accelerated our investment activities.” Today, Blackstone's Asian real estate business employs approximately 60 professionals in six offices. “We've invested a significant amount of capital in the various markets in the region,” focusing on China, Japan, India and Australia.

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Although broadly speaking, Blackstone is pursuing similar opportunities across the region, the various Asian markets differ in the details. Similarly in Europe, says Ken Caplan, “It's important to understand the differences between countries and the nuances within countries, such as what's happening in different cities.” 

“People tend to be broad-brush and say, 'the US is now recovering, so let's focus on European distress,” says Caplan, who is Blackstone's head of real estate, Europe. “There may be a rationale for that, but you really need to understand what's happening within each market. For example, the underlying economy in London is different from that of the regions in the UK. There are interesting opportunities in both, but it's important to understand the differences and to invest accordingly.”

The range of opportunities in Europe has been comparable to what Blackstone sees in the US, to include individual assets as well as entity-level investments. In July, for example, UK-based Max Property Group Plc announced that it would be sold for $707 million to Marina Topco Ltd., a wholly owned subsidiary of Blackstone Real Estate Partners Europe IV.

“As Max was established with a limited life strategy, the board has always been mindful of its duty to identify the best possible route to crystallize the company's success in a way that would secure the optimal exit for shareholders,” Max chairman Aubrey Adams said in a statement. “This approach from Blackstone, one of the world's largest and best funded property investors, delivers that opportunity at a price which fully recognizes Max's current and future value.”

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Blackstone has also been an active investor in European debt. “There are many different types of investment opportunities in loans or loan portfolios, some of which we find attractive and some that we don't,” says Caplan. “We're really fortunate as we've been investing globally for 23 years and in Europe for 18; we now have more than 80 people in Europe focused on the real estate business.”

On Asia, Heady says, “We participate in some bigger loan portfolio investments as well. Typically for us we're focused on the underlying real estate and the quality, and again what our effective basis would be for investing through the debt. Our spectrum of investments runs from everything from individual buildings that we acquire and fix up to investing in large companies.

Among other recent deals, “We privatized a large Australian company that was trading at what we thought were attractive levels,” says Heady. “We've invested in one of the more significant Chinese mall companies at the entity level. Running the spectrum between buying individual properties and acquiring the stakes in entities gives us an advantage over our competition in some ways, because we have that flexibility and so we've employed that in Asia.” Compared to some other large investors in the region, he adds, Blackstone has probably been more active in entity-level investing.

Not only the investments, but also the investors, have become more international. “If you go back nearly 10 years ago, our investor base was more US and Europe based. Now if you look at this investor base, it is more global in nature—specifically, Asia,” McCarthy says. “About half of our capital continues to come from US investors,” compared to something closer to two-thirds of the capital seven or eight years ago. “That's really been filled in with the international capital,” which comes mainly from large institutions including, but not limited to, sovereign wealth funds. “They have the reverse situation that US pension plans have, which is lots of capital inflows and not enough places to invest their capital.”

In terms of geography, McCarthy says, “the international investors are the most global in terms of their portfolio and risk tolerances. But the US remains the focus for just about everyone globally, and for most domestic institutions, the US would be the vast majority of what they have in their real estate portfolios.”

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An outgrowth of the global financial crisis was the Blackstone Real Estate Debt Strategies (BREDS) platform, headed by chief investment officer of BREDS, Michael Nash. BREDS invests in mezzanine debt and preferred equity through its mezzanine funds; it provides first mortgage lending through its public mortgage REIT, Blackstone Mortgage Trust; and it trades CMBS securities via its hedge fund.

“Complicated borrower situations are where we thrive,” Nash tells Forum. Yet the underlying real estate has to be up to the standards Blackstone observes when making acquisitions—Nash isn't about to risk an investor's money, or his firm's reputation, on what looks like an easy deal.

Among other factors, it can be concerns about the borrower that prompts Nash and his team to turn a deal down. “It could be a terrific asset and terrific location, but we're just not comfortable with the borrower's business plan,” he says. Although BREDS is distinct from Blackstone's equity side, Nash considers himself highly fortunate to have access to the expertise of the equity team.

In late August, Forum sister publication GlobeSt.com reported that BREDS provided a $120-million construction loan to a joint venture between Eastview Development and GTIS Partners to build Biscayne Beach, a 51-story, 399-unit luxury condominium in Miami's East Edgewater neighborhood. “A loan of this significance is a good indication of the strength in the Miami market as well as Blackstone's confidence in Biscayne Beach,” Reid Boren, a partner at Eastview, told GlobeSt.com. GTIS' Robert Vahradian said competition for the financing was keen; “We chose Blackstone as we have previously completed financings with them of approximately $250 million, and were highly confident in their ability to execute on a timely basis.”

BREDS was launched in the US, but has since become active in Europe as well. Domestically, a clear growth area is urbanization, especially as it pertains to millennials' live/work/play preferences. “They don't want to work at their father's office building on Park Avenue,” says Nash. “Their office preference may be a nonconventional building that's been renovated or repurposed” in, say, Midtown South. Similarly, tech-sector San Franciscans want to live and work in the city with greater frequency rather than take a bus to a suburban corporate campus. All of this means redevelopment and repositioning of older assets, which provides further debt opportunities for BREDS.

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The real estate group's newest initiative is the launch of a core-plus strategy at the start of 2014. A.J. Agarwal, who heads up the US Core plus business, explains the impetus behind the new platform. “Blackstone is the biggest buyer, seller and financer of commercial real estate in the United States,” he tells Forum. “We have always seen very attractive risk-adjusted transactions that just were not opportunistic, that were not distressed, that didn't require a massive fix.”

In late 2013, though, Blackstone came across an opportunity that involved “a phenomenal collection” of grocery-anchored shopping centers in coastal markets, Agarwal recounts. It offered a chance “to buy in at low replacement cost, with rents that were below market rents, and a cap rate that was 100 basis points wide of where the closest publicly traded comp was trading. And we said, this is such an attractive opportunity that we should find a way to match the opportunity with our investor base.”

The $718-million deal for a stake in the Edens shopping center portfolio was at first seen as a one-off transaction. “And then we found another one and then another one,” and others after that, Agarwal says. “When you're the largest owner of office assets in America, when you're the second largest owner of industrial in America, when you're a huge owner of retail, when you own more than 35,000 multifamily units, you have proprietary, real-time data on what is happening in markets.”

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Agarwal offers a variation on the buy it/fix/sell it mantra: “I'd say the equivalent is buy it, improve it and hold it with regards to our core plus business.”

The opportunity the core plus platform represents, says Gray, is “to bring our buy it/fix it/sell it approach to an asset class where there's maybe not as much 'fix it' involved. You're not going to be buying the same sort of public companies or mezzanine debt to get control. You're not going to be buying hotels. But there might be a need to buy a high-quality asset and do a little bit of leasing because there's some rollover down the road, or maybe a little refurbishment.”

In terms of future expansion potential, Gray sees Latin America as a strong possibility for opportunistic and core-plus deals. “In our debt business, we've got a really good business in the US and we've got a business in Europe. I would love, over time, to build an Asian debt business as well.”

Ultimately, Gray says, the objective is “to try to use the information and the people we have around the globe and our ability to access large amounts of capital, to have leading businesses in each of those regions of the world and each of those asset classes. That's really the focus, and doing it in a way where we stay incredibly integrated and we have the same best-in-class standards around the globe in everything we do. It makes for a full-time job.”