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The borrower view: Blackstone’s Jay on sourcing €15bn of debt during the pandemic

Gadi Jay, who is responsible for sourcing debt for Blackstone's European investments, says the pandemic has not prevented the US firm from financing its property strategy.

The covid-19 crisis has done little to slow US investor Blackstone’s European real estate activity. Nor has it prevented the New York-headquartered firm from sourcing huge debt deals to support its investments.

Since the onset of the pandemic in Europe, its financing deals have included a £2.6 billion (€3 billion) loan from Bank of America, Morgan Stanley and Citi in April 2020 for the purchase of the UK’s iQ Student Accommodation platform; a £300 million refinancing in October 2020 with RBC Real Estate Capital Partners and PIMCO for a life sciences portfolio in Cambridge; and a £1.8 billion loan from Starwood Capital and Apollo Global Management for the purchase of UK holiday company Bourne Leisure in March.

Blackstone also sourced multiple loans for its European last-mile logistics portfolios and was sponsor in four of last year’s European commercial mortgage-backed securities transactions. The firm sourced around €11 billion of debt in 2020, and more than €4 billion in Q1, which means it is likely to be Europe’s largest real estate borrower.

Gadi Jay, managing director in the London-based real estate division, is responsible for European real estate capital markets. We caught up with him to talk sourcing debt.

How has the supply of finance for your strategies held up?

Gadi Jay
Jay: CMBS rebounded after covid

Last March, soon after lockdown began, a number of lenders hit pause as they tried to evaluate their exposures, which made transacting more difficult.

What we did see, however, was the CMBS market return quicker than the overall banking market. We took Hansteen, a logistics company, private at the beginning of 2020 and we brought that portfolio to the financing market when there was limited liquidity from banks. We were able to finance it by sponsoring a CMBS arranged and anchored by Bank of America, which ended up pricing in July 2020.

Investors required, justifiably, a price premium for the risk they were taking at the time, notwithstanding the strength of the portfolio. But it was positive to see the CMBS market function smoothly during a time of crisis. That deal was an important milestone, and we were able to subsequently close other CMBS issuances including what we understand to be the first social housing securitisation in Europe, for Blackstone portfolio company Sage Housing, later in the year.

Why do you think the CMBS market recovered so quickly?

In the banking market, lenders either need to club together or a bank needs to be prepared to take syndication risk. At the time, banks were less prepared to take that risk because of the lack of pricing evidence. In the CMBS market, a large number of investors can be pooled together in a more efficient manner because they are buying a rated, more liquid instrument.

Did the overall reduction in liquidity impact your investment strategy?

We had to reflect in our underwriting terms where we believed we would be able to clear the financing. Financing constraints have not posed meaningful impediments to our ability to get a transaction done. Where we have conviction in an investment, we have great relationship lenders that have supported us. For example, the iQ transaction came early in the pandemic and banks closed on that landmark transaction.

How has debt pricing changed in the last year?

Our logistics CMBS issuances are helpful data points. We did similar transactions in UK urban logistics in July 2020 and February this year. In July, triple-A spreads were 170 basis points. In February they were 85bps. So, you see there the reversion to pre-pandemic pricing. Pricing has come full circle in specific sectors.

However, because of covid, financing has become more differentiated by asset class. Pricing for certain asset classes, like logistics, multifamily and maybe the most prime offices, has reverted to pre-covid. Pricing in covid-impacted sectors, like hospitality and student accommodation, has not yet reverted, albeit there is still liquidity and appetite from lenders. But people do believe, as I do, in the long-term trends in these sectors. I believe we are just in a transitional phase before we revert to normality.

“Financing constraints have not posed meaningful impediments to our ability to get a transaction done”

Did the type of lender you borrowed from change in the last year?

Whilst we have over 100 borrower relationships, our lender mix does change depending on the type of transactions we are financing in any given year. For example, with the Bourne Leisure transaction we went almost exclusively to debt funds and institutional investors. For the size, leverage and complexity of the debt, we needed to structure the financing as a hybrid corporate/real estate loan which debt funds such as Starwood and Apollo were comfortable with.

£2.6bn: Loan from Bank of America, Morgan Stanley and Citi in April 2020 for the purchase of the UK’s iQ Student Accommodation platform

£1.8bn: Loan from Starwood Capital and Apollo Global Management for the purchase of UK holiday company Bourne Leisure

>€4bn: Debt sourced by Blackstone in Q1 2021

€11bn: Debt sourced by Blackstone in 2020

£300m: Refinancing with RBC Real Estate Capital Partners and PIMCO for a life sciences portfolio in Cambridge, UK

How has the amount of leverage lenders will provide changed?

It is quite asset class specific. Even in logistics, in early to mid-2020, lenders dialled back leverage. Whereas senior leverage would have cut off LTV in the mid-60s percent typically, lenders were capping leverage at 60, or even in the high 50s. But logistics leverage is back to where it was at the start of last year. In hospitality, lenders want more visibility on cash coverage, and leverage has come in. But the big difference between the global financial crisis and this crisis is that, today, there is liquidity. The market is healthy. It is operating well. If a bank retrenches for certain reasons, there are other sources of capital capable of stepping in.

Blackstone does not typically have financial default covenants in loan deals. Are lenders now asking for them?

The way we do business has not changed. The last 12 months have, by and large, proven that if you have a strong sponsor that operates with integrity, that often counts more than having loan-to-value, income, or debt service covenants. We have had transactions where, LTV covenant or not, we have injected money to support the deals. We are talking with our lenders and keeping them abreast of situations without needing to talk about covenants. It has served us well and allowed us to operate our business efficiently over the past 12 months.

How have you managed situations where the crisis has impacted your assets’ value?

In such cases, we have had constructive conversations with the lender. A dip in value does not mean immediate action needs to necessarily be taken, because it can reflect a moment in time – mark-to-market risk, rather than fundamental credit risk. If there is a temporary value decline and funds are being used to support the income, rather than to bridge the yield shift, that seems to be a more appropriate conversation.

However, there are difficult sectors where loans and equity injection are not always feasible. Such situations require reasonable and rational conversations to reach a mutually acceptable solution. Such situations have been few and far between.

You closed a large UK life sciences financing in October. Are lenders keen on the sector?

We saw good demand both in 2020 and also when we initially financed it four years ago. Pricing and risk appetite has evolved as lenders become more familiar with the sector.

It is testament to the increased sophistication of lenders, and their ability to rebalance their portfolios, that they can go into sectors like life sciences, which are in part office hybrids.

Is the logistics financing market becoming crowded?

I do not think lenders have become indiscriminate or have rolled the clocks back to pre-GFC underwriting conventions. Lending processes are robust.

I agree a lot of lenders that may not have financed logistics to the same extent in the past are now doing so. But it is really for the same reason we are buying it: they see long-term trends have been accelerated in a short period of time.

E-commerce penetration in Europe has accelerated by three years in the space of 12 months. There is interest on the equity and debt sides, but it is based on a real sector shift.

So, yes, there is a movement in appetite and pricing and an increase in development financing, but not to an extent that I think you would be concerned.

How have you incorporated ESG into the way you borrow?

To give two examples of what we have done: two corporate issuers managed by Blackstone – Blackstone Property Partners Europe Holdings and Logicor – issued a Green Financing Framework last year; in addition, Sage’s October 2020 social housing CMBS was structured in reference to advice from ESG rating provider Sustainalytics.

We have seen the wider market focus increasingly on ESG and differentiate between investors that incorporate it into their investment practices and those that do not.