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Real Estate Pushes Blackstone Ahead of Listed PE Rivals

Real Estate might very well be the main theme of the first quarter for publicly listed private equity firms.

At the Blackstone Group, the value of the firm’s real estate portfolio rose 8.7 percent in the quarter, compared to 4.9 percent growth in its private equity portfolio. Dan Fannon, an analyst who covers Blackstone for Jeffries and Co., told Buyouts that “the magnitude of the upside (in real estate) was significantly better than we had expected.”

In one of the biggest deals so far this year, Blackstone paid $9.4 billion for nearly 600 shopping malls in the United States from Centro Properties, a struggling Australian-based property firm.

Blackstone has $8.6 billion of “dry powder” remaining for real estate, and the firm just launched its next property fund, which is reported to be seeking $10 billion in fresh capital. The firm’s last real estate fund, Blackstone Real Estate partners VI, has already invested 82 percent of its $10 billion in committed capital, according to sister news service Reuters.

Overall, Blackstone and its rivals, including Kohlberg Kravis Roberts, reported stronger earnings for the first quarter, reflecting an improving deal environment and rock-bottom leverage costs (see table). Fannon, who has a “buy” rating on Blackstone, cited “improving underlying business conditions” for the strength of the overall private equity sector.

Shares of Blackstone rose nearly 2 percent on the day it announced earnings, which rose 58 percent over last year and beat analysts’ expectations. The company reported economic net income of $568 million, or 51 cents a share, compared to $360 million, or 32 cents a share, in ENI last year. Analysts who cover publicly listed private equity firms say that ENI, which strips out non-cash charges for the vesting of equity-based compensation, is the best way to measure financial results attributable to common shareholders. In all, Blackstone reported a record $150 billion in total assets under management at the end of the quarter.

KKR, it seems, is also getting on the real estate bandwagon. KKR hired former Goldman Sachs partner Ralph Rosenberg to help ramp up the firm’s real estate exposure. It’s not clear yet whether KKR plans to launch a dedicated real estate fund, but Michael Kim, an analyst who covers KKR for Sandler O’Neill, predicted that the firm would make some real estate investments from its existing funds.

In private equity, the firm rode IPOs to higher-than-expected earnings, following the firm’s successful exits from Nielsen, the ratings company, and HCA, the hospital chain. Investors, however, were more sanguine on KKR’s earnings, sending the firm’s shares down more than 2 percent on the day earnings were announced.

“As returns continue to improve, and as long as markets remain cooperative,” Kim said, “you’re going to see more and more of these exit opportunities.”

KKR’s ENI hit $743 million in the first quarter, up from $675 million a year ago. After-tax ENI per share was 96 cents compared to 93 cents a year ago.

The firm garnered some mega-sized commitments to its new KKR North American XI Fund. The Oregon Investment Council committed $525 million to the fund, while the Washington State Investment Board committed $500 million. The fund has a target of $8 billion to $10 billion. Total assets under management at KKR rose to $61 billion from $57.7 billion in the first quarter of 2010, a rise of $6.3 billion.

At Fortress Investment Group, another publicly listed PE firm, shares dropped by more than five percent after the company announced first-quarter earnings. Investors were looking for the firm to renew dividends, which had been suspended in 2008 during the financial crisis, but were disappointed when no dividend plan was announced with the report.

The firm reported a 7 percent rise in pretax distributable earnings in the first quarter. Earnings were $103 million, or 20 cents a share compared with $96 million, or 19 cents a share, in the first quarter of 2010. The firm says distributable earnings, which exclude compensation costs made to the company’s founders, is the most accurate way to measure profits available to shareholders.

Including such compensation costs, the company ran a loss of $103 million, compared to a loss of $84 million in the first quarter of 2010.

Fortress, which has $43.1 billion under management, saw a slight decline in those assets during the quarter, with the firm reporting $614 million in investor redemptions.

Rounding out U.S.-listed private equity funds is Apollo Global Management. Apollo, which is the latest PE firm to go public, saw its ENI rise by a factor of five to $390 million over the $77 million the company registered as a private firm last year. The number was $1 per share, about 15 cents above analyst expectations.

The company, which was founded in 1990 by Leon Black, went public in March and currently trades below its $19 a share offering price. The firm has about $70 billion in assets under management, a rise of $14 billion over the $56 billion it managed one year ago.

Other private equity firms are thought to be in the IPO pipeline. The Financial Times reported this week that Los Angeles-based Oaktree Capital Management was gearing up for an IPO. That follows widespread expectations that the Carlyle Group was also gearing up to go public, as it expands its product base by announcing a merger with AlpInvest, the world’s largest fund of funds firm, and saying this week that it would enter into the business of managed accounts and hedge funds of funds.