Thursday, June 21, 2007

Blackstone IPO a smashing success

Reuters reports today that
"Private equity firm Blackstone Group's initial public offering was about seven times subscribed, boosted by demand from Asia, the Middle East and Europe, the Financial Times reported on Thursday...The flotation on the New York Stock Exchange, worth up to $4.75 billion and underwritten by Morgan Stanley and Citigroup, is set to be priced later on Thursday. Blackstone earlier said it expects to sell 133.3 million common units at $29 to $31 each. The banks will be permitted to sell an additional 20 million shares to meet excess demand"...
I think that purchasing shares of Blackstone would be very unwise...here is one reason why:

Interest Rate Roundup posted back in November of last year that
"I wondered out loud the other day about whether Sam Zell's deal to sell Equity Office Properties to private equity buyer Blackstone Group was the mother of all bells signaling a top for REIT shares. Lo and behold, the iShares Dow Jones U.S. Real Estate Index Fund (IYR) closed down 2.59% today. That's the worst one-day percentage decline going all the way back to August 2005, and twice the decline in the Dow. Maybe investors are slowly regaining their sanity ... or maybe it's just a blip. You never know. What I BELIEVE, however, is that ...

* Real Estate Investment Trusts are wildly overvalued by a wide variety of measures (including price-to-earnings and price-to-Funds From Operations (FFO) ratios)

* A weaker economy will crimp rent growth in the office and retail markets. And in the apartment market, you have a very large (and growing) supply of "shadow rentals" from stuck house flippers who can't sell and are trying to rent instead. That will likely throttle down the rent growth we've seen at key apartment REITs.

* Lastly, REIT yields are far below what you can earn on risk-free Treasuries, much less other fixed income investments. The IYR has an indicated yield of a whopping 3.38%, for instance, versus 5.13% on a 6-month T-bill"...
and then Interest Rate Roundup posted today that
"I have gone on record in numerous venues (here's a post from May 2 ... and here's a longer story from around that same time) claiming that commercial REITs could be in trouble. I pointed out that valuations were extremely stretched, that tighter credit conditions and rising interest rates could cause them problems, and that the apartment sector in particular faced significant headwinds due to the supply overhang of former-flips-turned-rentals.
Today, the Dow Jones U.S. Real Estate Index Fund is breaking down from critical support, continuing a sell-off that has stretched back several weeks. Yep -- looks like Sam Zell sold out at the top to the geniuses at the Blackstone Group, as I mused back in November"...
In any case what you would be buying is essentially a chance get some of the lucrative fees that the firm's management charge to investors for managing "private equity" investments. But by going public, I would think that would put some limitations on what a private equity firm could do relative to non-public private equity firms due to SEC/Sarbanes-Oxley reporting requirements. So it looks to me like Blackstone's people are thinking that their returns are going to shrink so they get some extra cash now by selling shares to offset what they expect their shrinkage in future fees will be.

The high demand for the shares indicates to me that they are literally capitalizing on their brand name...

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