October 30, 2009
Blackstone’s Hilton Deal
The LBO market was torrid during 2006-2007. So was commercial real estate. Combine the two, and you have the Blackstone/Hilton deal.
In the Hilton negotiations, Blackstone is considering contributing $800 million of new equity to buy back debt at a discount. It also is seeking to extend debt maturing in 2013 to 2016, while converting some junior slices of debt into equity. The $800 million in additional equity would come from funds managed by Blackstone that already have invested in the deal, the biggest equity investment ever made by the 24-year-old firm founded by Stephen Schwarzman and Peter G. Peterson.
Blackstone funds and co-investors originally put up $5.6 billion in equity in the deal, while assuming $20 billion in debt. Because the talks are in the preliminary stage, the people cautioned, it is unclear what the outcome will be. But Blackstone hopes the debt load will be cut by one-fourth, or $5 billion.
Rollover is a Bad Word In This Environment
Problems may be on the way. Office buildings often don’t show financial strain in the early stages of a downturn because they are occupied by tenants who have signed long-term leases. As long as the tenants stay in business, their landlords can even see revenue increases because of escalation clauses in their contracts.
The pain starts hitting when leases expire. In tough markets, landlords typically have to spend a lot to retain or attract tenants through brokerage commissions or incentives such as free rent or interior construction. The cost of attracting tenants is a factor that is cutting into funds from operations.
SL Green during the third quarter beefed up tenant incentives, adding nearly an extra month of free rent, to 6.9 months, and offered new lease signers a construction allowance of $56.19 a square foot, up $23 from the third quarter of 2008. The company said average starting Manhattan rents were $47.31 a square foot, down from $66.78 during the same period last year.
The Germans Are Here!
No surprise here. We have what they are looking for, depressed pricing and a weak dollar.
Unlike private-equity property funds, the German open-ended funds aren’t looking for 15% to 20% returns, but aim at a dividend yield of 5% to 6%. That allows them to take a longer view of the market and to pay a premium to secure a deal.
“A lot of people are frustrated with the Germans for accepting 6.3% because cap rates in D.C. are more like 8%,” said Dan Fasulo of Real Capital Analytics.
- CRE Dominoes: Stuyvesant Town About To Go
- SF Chronicle Article Today On San Francisco Office Space Market
- Equity Office Drops Redwood Shores Rents; Highlights Trend
- Fallout from Blackstone/Equity Office Deal
- “Back of the Envelope” Office Construction Prices