Blackstone/Ivanhoé Cambridge Reach $5.3 Billion Deal for Stuyvesant Town, Prompting Some to See Similarities to 2006
11,227-Unit Stuyvesant Town/Peter Cooper Village Multifamily Complex Becomes Latest Billion-Dollar CRE Play for Pair of Investment Giants
The Blackstone Group is on a roll, queuing up one multi-billion-dollar deal after another. Its latest is a reported $5.3 billion agreement to buy New York City’s largest apartment complex, the massive Stuyvesant Town/Peter Cooper Village, out of foreclosure. The pair of adjoining, rent-stabilized complexes contain 56 multi-story buildings with a combined 11,227 units covering an 80-acre site on Manhattan's east side.
Blackstone has sewn up a deal to acquire the property in a joint venture with Canada-based pension fund manager Ivanhoé Cambridge under an agreement with the City of New York that hinges on maintaining a portion of the affordable housing units in the complex for the next 20 years, while winning apparent approval to convert others to market rate rents.
The sale price is just $100 million less than a joint venture of Tishman Speyer and Blackrock, Inc. paid to buy the properties nine years ago this same month. MetLife Inc., netted a $3 billion gain on the sale and years later would still be boasting of having identified the housing bubble early and bailing out of such investments and exiting sub-prime mortgaged backed securities prior to the collapse in housing values which triggered a global economic recession in 2007.
While observers have noted similarities in market conditions between 2006 and 2015, Tishman/Blackrock was getting something in its deal from nine years ago that Blackstone won’t be: 20% more in annual revenue. The sprawling complex pulled in nearly $482 million in annual revenue in 2009. Last year, though, revenue was $383 million - and that was with 98% occupancy, according to mortgage-related documents.
Blackstone is also getting something Tishman/Blackrock was never able to pull off: an agreement to convert the affordable, rent-controlled complex to market rate rents. Tishman/Blackrock turned over the keys to loanholders on the complex in 2009 when it lost court challenges for its plan to convert the complex to market rate rents. The complex has been tied up in foreclosures and court hearings ever since.
Despite the drop in rent, financial analysts have called the new deal a "compelling transaction." Blackstone/Ivanhoé Cambridge is “paying 82% of peak 2007 valuation (including cap improvements),” said Mike Cyprys, a research analyst with Morgan Stanley Research. "All-in cost is about $500 per square foot, a significant discount to replacement cost that's well over $1,000 per square foot. The transaction accelerates the growth in Blackstone's core+ fund, an open-end structure currently with about $5.2 billion invested and $3.3 billion of dry powder."
However, the most important aspect of the deal may be that Blackstone/Ivanhoé Cambridge have secured an agreement with New York City to allow the complex to convert a number of units, according to Dan Garodnick, New York City Council Member representing the East Side of Manhattan and Chair of Economic Development Committee. His district encompasses the complex.
In the deal with Blackstone/Ivanhoé Cambridge, “we were able to preserve nearly half of all StuyTown/Peter Cooper units for middle-class tenants,” Garodnick said.
As a result of previous litigation against Tishman Speyer, all of the units are currently subject to rent stabilization, at least until 2020. Roughly half of the complex’s apartments have already seen their rents increase to market-rate - currently as high as $10,000 per month.
However, more than 5,000 traditionally rent-stabilized apartments remain with rents below-market which are being lost to de-regulation. The remainder of the complex, rent stabilized because of the litigation, will lose all protections under rent stabilization for occupants in 2020.
About 5,000 of the units will be preserved as "affordable" for 20 years, with a five-year phase-in of the rent increases, according to Garodnick. Another 1,400 units that have their rents regulated until 2020 will now be regulated until 2025.
The plan will halt the loss of more than 300 affordable apartments each year, according to the office of New York Mayor Bill de Blasio. Blackstone/Ivanhoé Cambridge will reportedly get a $225 million tax break in exchange for the agreement.
“After years of battles, this sale puts StuyTown/PCV on a more stable and affordable path,” Garodnick said.
“It is a tremendous honor and responsibility to become co-owners of Stuyvesant Town and Peter Cooper Village,” said Jon Gray, global head of real estate for Blackstone. “We and Ivanhoé Cambridge are pleased to have reached this agreement with the City of New York, the Mayor, Councilman Garodnick and the Tenants Association to preserve its heritage of affordable rental housing. We intend to own Stuyvesant Town and Peter Cooper Village on behalf of our investors for many years to come.”
That deal allowing rent rate conversions will add significant upside to the value of the complex. The $5.3 billion reported price greatly exceeds the last appraised value of $3.5 billion from one year ago, according to commercial mortgage backed securities documents. The current amount outstanding on the first mortgage notes financing the last purchase is also $3.5 billion.
According to analysts, Fannie Mae and Freddie Mac are considered probable contenders to finance the Blackstone/Ivanhoé Cambridge purchase through their large multifamily originators such as Walker & Dunlop. The GSE's strong market share could help provide attractive debt financing, particularly with the affordable units that are not counted toward either Freddie's or Fannie’s $30 billion multifamily lending limits.
Blackstone’s Billion-Dollars CRE Queue
For Blackstone, it's been a busy couple of months. Earlier this month the PE giant announced a deal to acquire BioMed Realty Trust Inc. in an all-cash transaction valued at $8 billion. The REIT owns 18.8 million rentable square feet of office properties in the U.S. and the U.K. It also struck a deal to acquire hotel firm Strategic Hotels & Resorts Inc.’s portfolio for about $6 billion, including debt. The REIT owns 18 high-end hotels in the U.S. and Germany.
Steve Schwarzman, chairman and CEO of Blackstone touted the strength of commercial real estate in his quarterly earnings conference call.
Blackstone tied the first quarterly loss in nearly four years reported this past week to the sluggish private equity business. Private equity took a big hit during the quarter and was the firm's only losing sector posting a negative net income of $512.54 million.
But the international investment behemoth has found a profitable counterbalance to the lagging segment. And that is U.S. commercial real estate. In its real estate segment, economic net income was a positive $10.46 million.
Its real estate holdings show appreciation of 8.6% year-to-date. And its total real estate assets under management was up 16% year-over-year to $93.2 billion as a result of record level of fundraising activity and strong market appreciation.
“Housing in the U.S. is strong and expected to get stronger,” Schwarzman said. “Office leasing is good; the auto and tech sectors are healthy and low oil prices too should be good for the consumer. In the lodging space, which has been one of the hardest hit sectors this year in terms of public market evaluations, revenue trends actually remain quite strong.”
Overall, Blackstone has raised $100 billion in the last 12 months, giving it the largest amount of private equity raised for investment at a time of significant market dislocation. Commenting on the recent the Biomed and Strategic Hotels deals, Schwarzman said: "In real estate, for example, as public REITs declined 15% and lodging REITs went down unbelievably 30% peak-to-trough, as well as some individual companies, we pivoted to public to private transactions,” he said.
By CoStar Group