Blackstone stands to make a paper profit of more than $8 billion in the McLean, Virginia-based hotel operator’s initial public offering, scheduled for today. That would be second only to the $10.1 billion of gains that Apollo Global Management LLC has had from its 2008 investment in chemicals producer LyondellBasell Industries NV, according to data compiled by Bloomberg. Hilton would become No. 1 if the shares rise more than $1 above the high end of the proposed price range.
The turnaround of the world’s largest hotel chain marks a triumph for New York-based Blackstone, which bought Hilton at the end of the 2007 buyout boom only to see property values and hotel occupancies plunge during the credit crisis that ensued. The rebound reflects Hilton’s strides under Chief Executive Officer Christopher Nassetta in increasing revenue and profit, as well as a recovery in the lodging and capital markets.
“With Hilton, they demonstrated the best attributes of what private equity advertises itself to be, which is finding and improving companies with an intensive dose of new and better management,” said Mike Kirby, chairman of Green Street Advisors Inc., a Newport Beach, California-based property-research firm. “The commercial real estate market has had an amazing recovery from its near-death experience, and that clearly helped.”
Hilton and existing shareholders are offering 112.8 million shares in the IPO for $18 to $21 each. The sale was more than five times oversubscribed as of yesterday afternoon, two people with knowledge of the matter said.
Blackstone, the world’s largest manager of alternative assets such as private-equity funds and real estate, isn’t selling in the IPO and will hold about 750.6 million shares after the offering, according to a regulatory filing. That represents a 76.2 percent stake valued at $14.6 billion at the middle of the expected price range.
Based on the roughly $6.5 billion that Blackstone and its investors have put into Hilton, the valuation would give the firm an unrealized gain of $8.1 billion. If Hilton prices at $21, Blackstone’s shares would be worth $15.8 billion, for a paper profit of about $9.3 billion.
In nominal terms, the Hilton profit would surpass the $7 billion that Henry Kravis’s KKR & Co. reaped from the 1986 buyout of supermarket chain Safeway Inc., and a similar return a group led by financier J. Christopher Flowers made from the 2000 takeover of the predecessor to Tokyo-based Shinsei Bank Ltd.
Apollo’s gain in Houston-based LyondellBasell currently holds the record for a private-equity deal. The New York-based firm amassed its interest through the purchase of distressed debt rather than a traditional buyout. It accumulated the stake in 2008 and 2009 and owned as much as 30 percent of LyondellBasell.
Apollo sold almost all of its shares beginning in September 2012. As of Nov. 1, Apollo owned 14.72 million shares of LyondellBasell, a 2.7 percent stake with a current market value of $1.1 billion.
More About Blackstone’s Hotel Investments:
- Hilton CEO Says Hotel Chain Was ‘Totally Dysfunctional’ Before Blackstone
- Extended Stay Raises $565 Million in Its IPO, Starts Trading Tomorrow
- Hotel Chain Extended Stay America Plans to Raise $593 Million in U.S. IPO
- Blackstone Maneuvers its La Quinta, Extended Stay and Hilton Chess Pieces
Other boom-era buyouts that have rebounded from losses include Realogy Holdings Corp., the real estate brokerage that Apollo took public last year. The firm roughly doubled its money when it exited its stake in July. Warburg Pincus LLC and TPG Capital, which bought Neiman Marcus Inc. in 2005, reaped more than a 150 percent profit in the luxury-goods retailer’s sale. Deals such as Energy Future Holdings Corp., the biggest leveraged buyout, and Freescale Semiconductor Inc. remain underwater.
Hilton is Blackstone’s biggest deal ever by the amount of investor money at stake. The ultimate return depends on how the shares perform and the price at which the firm sells stock over time. Blackstone Chairman and CEO Stephen Schwarzman has said his company intends to remain a substantial Hilton shareholder for “many years.”
Peter Rose, a Blackstone spokesman, declined to comment. The firm has five directors on Hilton’s nine-person board, including Jonathan Gray, Blackstone’s head of real estate and Hilton’s chairman; Tyler Henritze, a senior managing director in real estate; and Michael Chae, a partner in private equity.
“No doubt, it’s a tremendous win for Blackstone,” said Douglas Weill, managing partner of Hodes Weill & Associates, a New York-based firm that advises institutions on real estate investments. “For some of the investors, though, it’s not a full exit until cash is returned.”
Blackstone is the biggest manager of real estate private- equity funds, with $69 billion of property assets under management. Its 2007 Blackstone Real Estate Partners VI fund, which contains the Hilton investment, had a net internal rate of return of 10 percent as of the second quarter. That ranked in the top 25 percent of all opportunistic real estate funds raised that year, according to an October report from the Chicago-based National Council of Real Estate Investment Fiduciaries and Townsend Group, a Cleveland-based adviser to institutional investors in real estate.
Opportunistic funds look for investments that offer returns of about 15 percent or more through fixing some element of distress, such as filling vacancies in a building or collecting on delinquent loans. The median net internal rate of return for opportunistic real estate funds from 2007 was 2.3 percent, while the bottom quarter of funds lost money, according to the report, which was based on 24 funds reporting results as of June 30.
Funds in the top quarter of performance showed a net multiple of 1.4 times cash invested, while the median was about break-even.
Investors focus most on the multiple of equity invested, rather than internal rates of return, Weill said. Hilton’s implied return of about 2.3 times the equity invested “sounds like a pretty big multiple relative to where they had been carrying the valuation for some time,” he said.
Blackstone bought Hilton Hotels Corp., then based in Beverly Hills, California, for $26 billion in October 2007. It was drawn by the growth potential that opened up the previous year when Hilton reacquired Hilton International, giving it rights to franchise, manage and develop hotels outside the U.S.
Hilton was a joint deal between Blackstone’s real estate and private-equity units. The BREP VI fund put in almost $3 billion of equity and fund investors added $1.4 billion, which includes some of the equity invested in a 2010 debt restructuring. Blackstone Capital Partners V contributed about $1.6 billion, according to fund documents obtained by Bloomberg News.
Soon after the transaction closed, the distress in credit markets deepened, and travel shrank during the recession, buffeting the hotel industry. Blackstone marked down the value of its Hilton investment by 70 percent in 2009. It also bought back some of the company’s debt and restructured loans in April 2010 to cut Hilton’s debt by $4 billion and extend maturities by two years, in exchange for contributing more equity.
“One of their major competitive advantages is their big checkbook,” Weill said of Blackstone. “When Hilton went south, they were able to step up and protect their position by buying debt at a discount.”
Hilton stands in contrast to many peak-era investments, particularly in lodging, which reacts swiftly to economic swings. Of the 10 largest hotel-company and portfolio purchases of 2007 tracked by Real Capital Analytics Inc., at least half went bankrupt or had to surrender assets to lenders.
“Blackstone was smart enough to put in long-term financing that had a variable interest rate,” said Kirby of Green Street. “Even as hotel rents and occupancies went down, so did the cost of paying interest. They were able to avoid the same fate that hit so many real estate deals.”
The company also benefited from four straight years of rising U.S. room rates and occupancies. Revenue per available room, the main measure of average daily performance, will rise an estimated 5.7 percent this year and 6 percent in 2014, after gaining 6.8 percent last year and 8.2 percent in 2011, according to STR, a Hendersonville, Tennessee-based lodging research firm. Revpar fell 17 percent in 2009 in the wake of the credit crisis and recession.
Hilton has expanded its room count by more than a third under CEO Nassetta, almost all of it outside the U.S. The company now has 171 hotels open or under development in China, up from six when Blackstone bought it. It also has expanded its Waldorf Astoria and Conrad luxury brands.
“This is the tip of the iceberg,” Nassetta said in a presentation video for the IPO roadshow. “We are just getting going with international growth.”
Nassetta was brought in just after the Hilton deal closed, having previously served as CEO and president of Host Hotels & Resorts Inc., the biggest hotel real estate investment trust. He and Blackstone’s Gray had known each other for 15 years.
Eight months before Hilton, Gray bought Equity Office Properties Trust, the biggest U.S. office landlord at the time, for $39 billion, then flipped many of its more than 500 buildings to help pay down debt. This insulated Blackstone, even as it crushed some of the buyers, who had to turn over holdings to lenders after credit markets shut down.
Extended Stay America Inc. was another 2007 deal for which Blackstone earned renown for timing real estate cycles. The firm sold the hotel chain for $8 billion in June of that year to Lightstone Group LLC, having bought it for $3.1 billion in 2004. When the credit crisis pushed Extended Stay into bankruptcy in 2009, Blackstone teamed with Centerbridge Partners LP and Paulson & Co. to buy it for $3.9 billion in 2010. The trio almost tripled their paper profit when Charlotte, North Carolina-based Extended Stay went public last month.
Other property assets Blackstone bought near the real estate market’s low in 2009 and 2010 and sold at a profit include a minority stake in General Growth Properties Inc., the No. 2 U.S. shopping-mall landlord, and a 50 percent interest in the Broadgate office complex in central London.
“They have a great eye for value and that starts with Jon Gray,” said Weill. “He’s a great stock picker and Blackstone is very hands-on from an asset-management perspective.”
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