The Blackstone Group appears to be exploringa public offering for its Brixmor Property Group holdings, the most efficient way to dispose of a portfolio that size, according to industry insiders. But given falling valuations for REIT stocks, it’s not a certainty the IPO will go through.
The private equity player is interviewing investment banking professionals to help prepare a filing, according to a Reuters report. BRE Retail Holdings, an affiliate of Blackstone Real Estate Partners VI L.P., bought Brixmor, then known as Centro Properties Group U.S., for $9.4 billion in March 2011. At the time, the , the second largest retail real estate acquisition ever, was hailed as a marker of the end of the real estate downturn. Industry insiders expected Blackstone to hold the Brixmor portfolio for a few years, improve occupancy and rental rates, and sell it off or take it public.
An IPO was always the most likely scenario, because of the portfolio’s massive size, according to Barry Vinocur, editor of REIT Zone Publications, which focuses on REIT coverage. Brixmor owns approximately 600 shopping centers totaling 94 million sq. ft. Even with the tremendous amount of capital currently chasing real estate acquisitions, selling the company wholesale in the private market would require a buyer with billions of dollars in available cash. The fact that in May Blackstone hired Michael V. Pappagallo, former COO of Kimco Realty Corp., as Brixmor president and CFO, has made it seem even more likely that it was trying to make the company attractive for a public offering.
In addition, an IPO, as opposed to an outright sale, would allow Blackstone to hold on to a stake of the company and benefit from future share price increases, notes Dan Fasulo, managing director with Real Capital Analytics (RCA), a New York City-based research firm.
“Selling a portfolio all at once is a lot more efficient than doing it in pieces,” Fasulo says. “Blackstone was able to acquire this portfolio in 2011 and here we are two years on and the value of that portfolio has increased significantly due to cap rate compression in the retail sector, especially for grocery-anchored shopping centers.”
Timing an exit
A potential challenge to Blackstone’s plan is the fact that REIT stock prices have been on the decline since May, primarily due to fears of interest rate increases, notes Vinocur. Retail REIT stocks in particular are currently trading at a 7 percent average discount to net asset value (NAV), according to Jason Lail, manager of real estate research for SNL, a Charlottesville, Va.-based firm.
“That’s something to take into account: do you want to push an IPO when you are trading at a discount or do you want to wait for recovery? That’s certainly something that they will be taking into consideration if they decide to move forward,” Lail says.
Because Blackstone’s funds tend to operate on a relatively short-term basis, the firm might not be able to wait too long for the stock markets to recover before returning money to the shareholders. However, Cedrik Lachance, managing director with Green Street Advisors, a Newport Beach, Calif.-based advisory firm, notes that it’s more likely Blackstone started preparing for an IPO months ago, before REIT stocks took a dive, and might still postpone the offering. The firm’s approach to, he points out, “entails significant flexibility.”
Lachance adds that today grocery-anchored shopping centers are valued at roughly the same price point in the private and public, meaning that if Blackstone received an offer from a private buyer for the portfolio it would be able to reap a return comparable to that from an IPO.
Whatever course of action the firm ends up pursuing there has been enough value appreciation in retail assets over the past two years for Blackstone to do well, according to Fasulo.
“Given the volatility in the REIT market, it’s probably not the best timing, but at some point, it doesn’t really matter,” he says. “If cap rates are down 75 to 100 basis points from when they bought the portfolio, we are looking at unlevered returns of 15, maybe 20 percent. Levered, those are massive returns in a short amount of time.”