Despite being launched in the face of the downturn, Blackstone Real Estate Debt Strategies grew to become a $9bn lender under head Michael Nash. Now, he tells Al Barbarino, no deal is too big or complex for the firm.
But Nash, who had partnered with the firm during his previous 10-year stint at Merrill Lynch, becoming a close professional colleague of Blackstone’s global real estate head Jonathan Gray, wasted no time in changing that.
By May 2008, the senior managing director of Blackstone’s new Real Estate Debt Strategies division, dubbed BREDS, had raised roughly half a billion dollars through a low-profile firm willing to take “an early vote” on the lending business.
“We felt we could make their clients a lot of money buying distressed CMBS bonds and at that point in time you couldn’t really do much else,” Nash says, noting, after some prodding, that the client in question was JPMorgan.
“Coming out of the gates with a major firm like that was one of the initial launch points for the success of the business,” he adds. “This was the proverbial: ‘if you do a good job, people will take notice’. ”
While people did take notice, the timing wasn’t exactly ideal. The financial markets were rolling towards instability, roiled in large part by flighty debt instruments. Soon the financial markets entered lockdown, with very few commercial real estate assets being traded
“We were trying to buy real estate or lend into that environment, but people were just battening down the hatch and saying: ‘We’ll call you if we need you.’
“Then the world started to heal and people started to come out of their hole,” Nash says. “Fortunately, we had made very good traction with our limited partners and we started accelerating the fund raising in 2009 and 2010, and started raising a lot of money for the business.”
Today, BREDS has $9bn under management. The success of the group, which now includes 68 employees in the New York offices and 13 in Europe, is predicated on unrivalled expertise within its niche, tapping a range of borrowers looking to revive transitional properties, Nash says.
“This isn’t cash flow-based lending in a pure sense,” Nash says. “You’re looking at an asset, what it is today, what it can become tomorrow. You’re looking at the business plan and embracing that with your debt capital. These assets don’t just stand on their own. You have to constantly invest in them.”
The business has evolved into what Nash calls a “three-legged stool,” with a bread-and-butter funds business, a mortgage REIT and a liquid business trading CMBS (see panel below).
In late 2012 the firm fully integrated Capital Trusts’ CT Investment Management Co (CTIMCO) into its business. That deal paved the way for BREDS’ foray into the first-mortgage business, becoming US REIT Blackstone Mortgage Trust the year after. Nash has grown that business exponentially, creating a potential blueprint for similar future acquisitions.
While growth is not an integral part of the strategy, it is a by-product of Blackstone’s prowess in a lending area Nash says many other lenders cannot navigate. BREDS’ loans typically range from between $50m to $500m, and are five-year, floating-rate deals (although borrowers have the option to pay the loan back as early as within 18 months). And no loan is too big for BREDS.
“We are primarily a floating-rate lender because when you lend into transitional assets, the borrower wants the option to either sell or refinance once they have elevated cash flow,” Nash says. “The product works great for those who are buying real estate with a short-term focus.”
Twenty five years in real estate
Nash began his career as an accountant in the late 1980s after graduating from New York University with a master’s degree in finance. He switched to real estate in 1989, working for a number of banks, including the Bank of Nova Scotia.
In 1997 he joined Merrill Lynch, working on buy-side transactions geared towards high-yielding equity and debt products, before starting a mezzanine finance business, and stayed at the bank until 2006.
BREDS’ growth is impressive, but whereas the group has completed less than 200 deals, some top lenders in the field have completed thousands. Yet Nash insists that growth and origination targets are not a focus.
“When people have to do things in a time-sensitive way and they’re complicated deals, there’s actually not that many people you can call,” he says. “Firms like us have more longevity in this space than people would conventionally think because we’re problem solvers and we can do things that other firms might not be able to do.”
When BREDS bid to buy a €750m loan portfolio called Project Charlie from Lloyds bank, it lost out to Cerberus “fair and square,” as Nash frankly admits.
However, the loss quickly became an opportunity, as BREDS’ focus turned to some old-fashioned canvassing and cold-calling.
The biggest loan in that portfolio belonged to Invista European Real Estate Trust, and Nash was determined to take advantage of the work his team had completed during the bidding process.
“We had done all the work, so I told the guys and the gals, ‘why don’t you call all of the borrowers and introduce yourself,’ to see if they needed refinancing, recap, whatever,” Nash says. “Many of these borrowers we had no relationship with. So we introduced ourselves to Invista.
“Our reputation preceded us,” he adds. “We laid out some ideas and they were highly receptive to that, because it squared up with their business plan. When you have done the work and you make life easier for the borrower, that’s music to their ears, because people generally want the path of least resistance to get to a closing.”
That exercise led to a €220m multi-jurisdiction loan to Invista in April, €100m of which BREDS has now syndicated to Bank of America Merrill Lynch. “We felt we could split the transaction into a senior and a junior tranche – we held the junior – and sell the senior to the market.”
Bayswater deal turned heads
In September 2013, the same pound-the-pavement approach led to an £85m, three-year loan, with financing partner Deutsche Bank, to Meyer Bergman on the Whiteleys shopping centre in Bayswater, west London. The transaction, which was led by Rob Harper, head of BREDS’ Europe division, turned heads when it was completed in a matter of weeks.
“On this particular deal we had an acquaintance-like relationship with the borrower,” Nash says. “The deal was fairly complicated but very well-capitalised. London is our backyard. [Blackstone has] been investing in Europe through our London office for nearly 15 years.”
The century-old former department store was redeveloped and transferred into the Standard Life Investments UK Shopping Centre Trust about eight years ago, but efforts to successfully establish the centre as a profitable venue have been limited.
Nash says the deal may allow for reconfiguration of the retail element at the shopping centre and the inclusion of a residential component.
The original deal has already spurred a subsequent one – a £32m loan for the owner to scoop up an adjacent retail property.
“It doesn’t have a lot of cash flow in place, but it does have the repositioning aspect,” Nash says. “Again, you have to go to specialist finance companies like ours that can deal with complicated things in a way that we can. If you asked the borrowers, they’re very happy with our performance.”
Nash also lists the CTIMCO acquisition as one of BREDS’ pinnacle achievements. It was a relatively small deal in monetary terms, with Blackstone acquiring CTIMCO for about $32m in September 2012 after the latter was hit hard by the recession.
While Blackstone had until then carved out a significant mezzanine lending business via its BREDS 1 private fund, the integration of CTIMCO marked a foray into first-mortgage lending.
CTIMCO was the internal manager of balance-sheet assets and managed accounts for quoted lender Capital Trust, chaired by Sam Zell. The deal gave BREDS the people and the management contract to manage all of CT’s assets.
“We bought the contract that basically bought the team, technology and the right to manage the company’s balance sheet on behalf of the public shareholders,” Nash says. “We had a blank piece of paper as to what to do and our best thought was to re-energise it, rebrand it, in a sense re-float the company with a new business plan. And our simple thought was we could be a first-mortgage, floating-rate transition lender.”
“Up until that point the BREDS business was more conventional,” he adds. “We were running our hedge fund and our drawdown funds, but didn’t have any permanent capital, and Capital Trust provided a really interesting opportunity for us to scale up the business and create a different approach to real estate lending.”■
Building CTIMCO’s business
In May 2013, Capital Trust raised $660m of fresh equity to restart its lending business and became Blackstone Mortgage Trust. BREDS has since expanded the operation from an equity capitalisation of $50m to $1.4bn. Shareholders that bought stock at the May 2013 $25.5-per-share launch price – including Blackstone and its affiliates, which own around 5% – will have made more than $3-per-share as of today. Nash doesn’t rule out more acquisitions of this kind in future.
“That platform is scalable in a lot of different ways,” he says. “You could do it through mergers and acquisitions, or you could just make the company bigger by expanding activity.
“With a publicly traded company you can raise additional forms of capital, debt or equity, and we’ve already accessed the equity markets a few times, and the convertible debt market once. It’s a limitless expansion opportunity.”■
Business rests comfortably on “three-legged stool”
Senior managing director Mike Nash says each element of BREDS’ “three-legged stool” — the fund business engaged in mezzanine lending, the mortgage REIT and the CMBS-trading business — all work hand-in-hand as “a holistically-run business.”
The business is focused on office, residential, hospitality and to a lesser degree retail properties across the top 15 US markets and major European cities.
BREDS’ fund business includes its first, fully-invested BREDS fund, which was followed by BREDS II. BREDS is in harvesting mode and about 60% of its loans have been repaid. Nash says he expects to fully monetise the deal in the coming 12 to 15 months.
BREDS II, launched in April 2013, is investing in the US and Europe and has raised $3.3bn. The inclusion of two separate accounts (made up of adviser and institutional class shares respectively) brings the total available capital close to $4bn. The fund is about 60% closed or committed.
BREDS’ second element, the Blackstone Mortgage Trust, is a public mortgage REIT acquired by Blackstone in December 2012 when it bought CTIMCO/Capital Trust. It is listed on the New York Stock Exchange under the ticker BXMT, with a current price more than $3 above its issue price in May 2013. The REIT had a market equity capitalisation of $1.4bn as of early August, with a balance sheet roughly three times that size.
The mortgage REIT has a lower risk appetite and targets more conventional first- mortgage senior lending, while deals that have a “little bit more customisation, structuring, leverage or risk would be done by the private fund”, Nash says.
“I’m not suggesting that that risk is approaching equity-style risk, but in the spectrum of debt lending there’s lower leverage stuff and a little bit more leverage here,” he adds.
The third, liquid arm of BREDS is a nearly $1bn business in terms of managed capital. It includes the closed-end funds Blackstone Real Estate Income Fund (BREIF) and BREIF II, which are raising money through private client channels — including Morgan Stanley and Merrill Lynch — for investment in liquid CMBS buying.
While growth for the sake of it is not a focus for BREDS, Nash welcomes the idea of expanding the lending business on a greater scale across the US and European markets, and perhaps even into Asia.
“The growth has come because we’ve done some interesting yield-focused things and delivered high performance to investors,” Nash says. “We’re trying to be thoughtful about it. We always want to provide a good return for either shareholders in BXMT or our investors in the liquid business. But if we don’t like the deal for whatever reason, we’re not going to just shovel money out the door.” ■
Nash shows confidence in rising market
“Supply remains muted, the economy is growing at 4% which, on a relative basis to Europe and the emerging markets, is a faster pace,” says head of BREDS Mike Nash, summing up the US commercial real estate outlook.
“The markets are in good shape, there’s good liquidity and there’s good transparency. It allows us good confidence to do our thing, so my personal market view is that this cycle will extend longer than previous cycles have.
“Because we went through a crisis, the fact is that capital is still dislocated at some level, but I think lessons have been learned from 2006 and 2007 that still sit on the minds of people that participate in the business. I see a decent amount of discipline.
“Having said that, the market’s got more liquid and more aggressive, with people chasing yield and returns.”■