Blackstone and TPG have agreed to make hundreds of millions of dollars of unscheduled repayments on loans funding their real estate investment trusts, in exchange for promises that their lenders will not take punitive action as the property market sours.
The private equity firms moved to renegotiate terms with their banks and other lenders as they brace themselves for a fall in property prices in the upheaval caused by the coronavirus pandemic.
The Reits — which are managed by the private equity firms and listed on the stock market — make money by borrowing from banks and lending the cash at higher interest rates to hotel operators, apartment block developers and other owners of commercial property.
But with many offices remaining empty, and those businesses that can reopen having to adjust to social distancing rules, the consequences are rippling through the real estate sector, creating uncertainty about the prospects for buildings regarded as trophy assets only a few months ago.
Blackstone Mortgage Trust has made unplanned repayments of $200m and pledged an extra $414m of collateral to its banks, according to a regulatory filing last week. TPG’s Real Estate Finance Trust handed over $160m.
In exchange, the Reits secured commitments that they would not face margin calls if the coronavirus pandemic hit the value of their underlying assets, which include hotels, city-centre apartment blocks and office buildings.
“It certainly comes at a cost,” said Stephen Laws, an analyst at Raymond James. “They are pledging more collateral or posting cash in order to get waivers. [Banks] aren’t going to do anything for free. It works on both sides of the equation here for the mortgage Reit sector.”
Blackstone’s trust set aside $178m to meet potential losses, including at an apartment building and a hotel in New York, the pandemic-hit city where 23 per cent of its portfolio is located.
The city was among the worst-affected in the early weeks of the pandemic, which is now taking a toll on big economic centres including Texas, Florida and California.
TPG declined to comment. Blackstone pointed to an earnings disclosure stating that it had capitalised its Reit “for the road ahead, for both the continuing recovery . . . and for the possibility that the recovery will be prolonged”.
Tenants, property owners and lenders are calculating the economic consequences of the pandemic, and eyeing each other’s intentions with increasing unease.
Last month the clothing retailer Gap asked a court to tear up every single lease it had signed with one big landlord, citing Covid-related health restrictions affecting its business. Landlords, meanwhile, are considering whether to sue tenants for unpaid rent or cut deals, and considering how to approach their own lenders.
Both Blackstone and TPG have conceded ground to some of their Reits’ own borrowers, who sought relief from their previously agreed payments.
The Blackstone Reit alone completed 13 loan modifications between April and June, often requiring borrowers to contribute additional cash in exchange for concessions that analysts say would typically involve waiving financial covenants or deferring interest payments.
Analysts say more such adjustments are likely to be needed to bring credit agreements into line with the new economic reality — one that is already visible in the share price of the listed property sector.
The share price of the Blackstone Reit is 41 per cent below the peak reached in the middle of February, while TPG’s Reit is down 56 per cent over the same period.