BEA 4th Quarter GDP 1st Estimate 0.7% Q&A: Why Did GDPNow...

BEA 4th Quarter GDP 1st Estimate 0.7% Q&A: Why Did GDPNow Rise After Durable Goods? When are Construction Revisions Coming? Blackstone Group LP, manager of the world's biggest leveraged buyout fund, reported third-quarter profit that missed analysts' estimates as real estate fees fell, sending its shares down the most since going public in June. The firm had a net loss of $113.2 million, or 44 cents a share, including costs of $802.6 million, mostly from compensation related to the IPO. That compared with a loss of $165.5 million, or 65 cents, a year earlier. Blackstone said at the time of its IPO that it may continue to have net losses 'for a number of years' because of the cost of buying stakes from executives. Blackstone's chief operating officer Hamilton James said Monday the sagging private-equity market might not make a comeback until major Wall Street banks get a better handle on the credit crisis. My comment: We might have a better handle on the credit crisis sometime on or around January 1, 2012 . That number was not plucked out of the air. It is based on historical new home sales, historical starts, and mortgage rate resets in conjunction with a consumer led recession. See 'The mortgage black hole is worsening... it is deeper, darker, scarier than what the banks originally thought,' he said. 'My sense is they don't have a clear picture of how this will play out, and their confidence is low.' James believes the market for leveraged loans, which buyout funds use to finance deals, appears to be picking up after a crippling summer. This was Blackstone’s first full quarter as a public company after debuting on the New York Stock Exchange on June 22 at $31 per share. It surged 13.1% to close at $35.06 on its first day. But the year's most anticipated IPO has failed to hold on to even that modest pop. Blackstone reported a loss of $113.2 million, or 44 cents per share, compared to a profit of $372.5 million when it was a private company last year. The loss included the impact of $802.6 million in non-cash charges for compensation and other charges related to its IPO. After it reported its second-quarter results, James said he believed the debt market crisis could help Blackstone by pushing weaker rivals out of business. Blackstone’s corporate private equity unit, which buys companies and then takes them private, logged a 42% jump in revenue. But the real estate business’ revenue tumbled 44% to $109.1 million because of tightening in the subprime residential lending market, which has spilled over into the commercial real estate market. My comment: A spillover into commercial real estate? How shocking! Who could possibly have figured that out? For more on commercial real estate please see The record price paid in January for the 41-story aluminum-clad office tower at 666 Fifth Avenue — $1.8 billion — was breathtaking, even by the standards of the heady Midtown Manhattan commercial real estate market. A group of lenders led by the real estate unit of Barclays Capital agreed to provide an interest-only first mortgage of $1.215 billion based on an annual cash flow of $114 million, or 1.5 times the debt service, according to a document filed with the Securities and Exchange Commission. But a footnote pointed out that the cash flow from existing rents would actually cover only 0.65 percent of the debt service. Mr. White [president of Real Capital Analytics] calculated that the building’s shortfall amounts to $5 million a month. A $100 million reserve fund was included in the debt package to cover the shortfall. My Comment: Let's do the math. At $5 million a month, the $100 million reserve fund will be wiped out in 20 months (1.67 years). Think lease rates and occupancies will be rising over the next two years? Think again. Like many buyers, Kushner relied on high-cost short-term financing to make up most of the gap between the first mortgage and the purchase price for 666 Fifth. My comment: It's staggering how many dependent on short term financing have blown sky high. For proof, look at asset backed commercial paper. It's now a dead market. The Kushners are thought to be much better off than Harry Macklowe, the New York real estate investor who also faces a deadline for repaying a bridge loan. Many real estate professionals say Mr. Macklowe could lose control of the seven Midtown Manhattan office buildings he bought this year as part of the Blackstone Group’s purchase of Equity Office Properties as well as his prized General Motors Building on Fifth Avenue between 58th and 59th Streets. My comment: Anyone who thinks they knew better than Sam Zell as to what commercial real estate is worth, needs to think again. Blackstone bought at the tip top of the market in a bidding war that went far beyond silly. More on this in just a bit. Marketing the retail space at 666 Fifth Avenue as a condo has posed a major challenge for Mr. Michaels [chief executive of the Carlton Group]. The space is leased to Brooks Brothers Hickey-Freeman, a men’s clothing retailer and the National Basketball Association. Though the annual rents are $600 to $700 a square foot, well below the market rate, the leases have another seven years or so left. Faith Hope Consolo, the chairwoman of retail sales and leasing for Prudential Douglas Elliman, said annual rents in some nearby stores are $1,700 a square foot or more. But those levels cannot be reached unless the current tenants can be induced to move. My comment: Blackstone has long term lease rates below what it needs to pay the bills. In a turndown, it will be the higher laying leases that leave, not the lower paying ones. Blackstone increased the per share value to $55.50 in cash from $54. Excluding debt, the deal is estimated to be worth about $22.3 billion. The big boys made some major mistakes here. And smaller strip malls are everywhere right as we head into a recession. The more I look at these deals the more convinced I am that commercial real estate is not about return on capital. It is about return of capital. The content on this site is provided as general information only and should not be taken as investment advice. All site content, including advertisements, shall not be construed as a recommendation to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The ideas expressed on this site are solely the opinions of the author(s) and do not necessarily represent the opinions of sponsors or firms affiliated with the author(s). 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