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Blackstone CMBS Default Presages Bad Times for Property Owners

It’s a totemic moment because Blackstone led the revival of the European CMBS market after the financial crisis.

Bloomberg Opinion) -- Blackstone Inc.’s clash with lenders backing a small portion of its European real-estate portfolio is more than just a little local difficulty in a market with specific problems. It could well be a pivotal moment in the property cycle, serving as a warning of the grim prognosis for lower-quality office and retail assets everywhere.

At issue is Blackstone’s default on around €300 million ($319 million) of the remaining principal of €531 million of commercial mortgage-backed securities financing properties in Finland. The CMBS supported assets acquired in the 2017 purchase of Sponda Plc. Pandemic travel restrictions, the popularity of hybrid working, rising rates and neighboring Russia’s war in Ukraine have lowered Finnish rents and valuations. So a refinancing by the time the debt matured in the middle of last month wasn’t possible.

Blackstone sought more time to arrange an orderly sale of the properties, offering to repay some of the debt and to increase interest payments in return. But negotiations with the CMBS investors failed to produce a long-term extension. Now a so-called special servicer will take charge of getting creditors their money back. This could involve a speedier liquidation than Blackstone might have wanted, risking lower valuations.

Of course, talks may resume. If Blackstone believes there’s latent equity value in the portfolio — mainly small suburban offices but also some retail space including hypermarkets — it would surely make sense for it to make a fresh offer to debtholders, with the most obvious inducement being a willingness to pay down more of the principal.

It’s a totemic moment because Blackstone led the revival of the European CMBS market after the financial crisis. The firm dominates in Europe, accounting for around half of the market, according to Scope Ratings. So it may be no surprise to see one of its deals now entering special servicing. But this is still a rare sight in Europe, and others tend to follow where Blackstone leads.

The macroeconomic and geopolitical environment is the main explanation for the challenging backdrop. But Blackstone partly has itself to blame. It should arguably have offloaded these assets sooner. This is a niche corner of global real estate. When local investment demand dries up, you can’t expect international buyers to fill the void. There was a brief period after the Sponda deal closed when property yields were low and asset valuations high. Unfortunately, the window of opportunity to sell the non-core pieces of the purchase appears to have been taken up with bedding down the newly acquired business.

There are several takeaways. One is for buyout firms mulling taking listed property firms private, tempted by stock-market valuations that are lower than the net asset value of the buildings in the accounts. Blackstone’s €1.8 billion offer for Sponda was textbook – the 28% premium to the firm’s three-month share price was still barely 2% above the target’s adjusted NAV. Blackstone hailed the move as advancing a strategy of investing in “high-quality real estate assets and businesses across the Nordic region.”

But in any offer for a whole property company, there will always be lower quality assets bundled in. Deals struck at NAV can be seen as a blend of underpaying for assets that deserve a premium to that valuation benchmark, and overpaying for the weaker assets that merit a discount. The snag is that the losses on the chaff may outweigh the bargains on the wheat.

The fact that this portfolio includes second-tier offices and retail assets reinforces the prevailing fear that these risk becoming zombie properties. Office tenants want environmentally friendly buildings in top locations with attractive interiors to lure staff away from home-working. Retail space needs to be outstanding to compete with e-commerce.

In ordinary times, you might have expected Blackstone to make a greater initial effort to retain control of even this small part of its portfolio — with a view to waiting for the market to recover and sprucing up the buildings in the meantime. But these are not prime assets, and these are not ordinary times. Expect to see more landlords handing over the keys to lenders when properties don’t fit the bill.

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To contact the author of this story:
Chris Hughes at [email protected]

© 2023 Bloomberg L.P.

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