The Blackstone Group L.P. (NYSE:BX) Morgan Stanley Financials Conference June 12, 2019 12:00 PM ET
Jon Gray - President and COO
Conference Call Participants
Mike Cyprys - Morgan Stanley
All right. Why don’t we go ahead and get started. Great. Good afternoon, everyone. I’m Mike Cyprys, Morgan Stanley’s Brokers and Asset Managers Analyst. And I’ve been asked to read our disclosure statements that we have some important disclosures, including personal holding disclosures, Morgan Stanley disclosures that appear on our public website at morganstanley.com/researchdisclosures and you should also get them at the registration desk.
So I’m honored to have with us today, Jon Gray, Blackstone’s President and Chief Operating Officer. Jon has been with the firm for 27 years, I believe it is and is currently on the board of directors, the management committee and he was previously Global Head of Real Estate at Blackstone. Also here in the audience is Weston Tucker, Head of Investor Relations. There he is.
Blackstone, as many of you know, is a diversified alternative asset manager, over 500 billion in investor capital under management across four main businesses, private equity, real estate, credit and hedge fund solutions. And as you know, Blackstone recently announced plans to convert from a partnership structure to a C-Corporation effective in July. So with that, Jon, welcome.
It's great to be here.
Q - Mike Cyprys
Thanks for joining us. And before we start our fireside chat, I thought we’d start with some polling questions, so we all [ph] can get a sense of some of the views in the room. So first question, what is the main catalyst that would drive you to buy Blackstone? Is it, a, growth in assets under management; b, fee related earnings growth and margin expansion; c, stronger investment performance, boosting value of the accrued carry receivable; d, cash performance fees [indiscernible]; or e, more positive outlook on macro economic growth and extension of the cycle? So with that, 10 seconds.
Well, I was quick. Do you want to reset that? That was only two seconds. All right. There we go. Wow. This is cool. Yeah. All right. And we'll see. The answer is, b, fee related earnings growth and margin expansion and that's been consistent with what we saw from a number of the other peers that have presented yesterday as well in terms of investor perceptions.
Okay, next question. How much incremental benefit from C-Corp conversion do you see from current levels? Remember, Blackstone announced that they converted -- will convert to a C-Corp in July. How much incremental benefit to the shares from here do you see? Is it, a, less than zero percent; b, zero to 5%; c, 5% to 10%; d, 10% to 15%; or e, 15% plus? 10 seconds.
We need a little Jeopardy music.
All right. We’ll consider that for next year. And the answer is, c, 5% to 10%. Remember, it's a little mixed all over the place. But generally, most people expect some incremental appreciation from here from the C-Corp conversion.
Okay, we’ll bring up the third question. What primary valuation metric do you expect will be the most commonly used to value Blackstone in three years time? Is it, a, sum [ph] of the parts; b, price to earnings; c, DCF; d, price to fee related earnings; or e, dividend yield? 10 seconds. And the answer, b, price to earnings. Is that what you would have picked as well?
No, but I think it's helpful.
Is there one that you would have picked?
Actually, I think it's a positive thing for us because it says people want to look at us as a company. When I say I wouldn't have picked it, I wouldn't have picked it because I thought this audience would have gotten into this, breaking apart, look at the pieces, but I think more and more as we become a C-Corp, people will look at us like other C-Corps. So, I think it should be the right metric over time.
Okay. Great. Last question. How do you think the market will value Blackstone’s shares on a PE basis a year from now, assuming no recession? Is it a, 13 times; b, 14 times; c, 15 times; d, 16 times; or e, 17 times or higher? And just as context, Blackstone trades at 14 times consensus earnings today, and the S&P is trading about 17 times today on 2020 numbers. And the answer, c, 15 times.
Great. So why don't we dive in? Lot of different topics to get through. Maybe we could just start off, Blackstone, yourself and others have been on the road meeting with investors post the recently announced C-Corp announcement decision, I guess what's the pitch you've been telling investors and why is it now a good time for investors to be buying Blackstone’s shares?
Sure. So I will start with the short form elevator pitch and then maybe put in a little detail. First off, we’re in a sector of alternatives that is fast growing and benefiting from some really powerful trends. Secondly, we are the global leader in that sector, growing materially faster than the sector overall, and have built a powerful business that relies on our brand name, not capital.
Third, despite the strength of the business model, we have historically traded at big discounts to the market, both from a multiple standpoint and a dividend yield standpoint. And the fourth is that we think, because of two powerful factors, there's a re-rating process that's starting, that's the C-Corp conversion, number one, and the step up in our fee related earnings is number two.
So I'll just go through each of those. I'll start with the sort of mega trend, which is, everyone here knows we're in a very low interest rate environment around the world, I think lower than almost all of us would have expected looking back a year, 5, 10 years ago. That is leading investors to look for higher rates of return. And it's not just pension funds or endowments or sovereign wealth funds, or individual investors, or insurance companies, it's pretty much everybody.
And when you look at the track record of alternatives, and the data is out there publicly, from our returns, other big players, the public pension plans, you see very strong performance over long periods of time. So almost all those investors are increasing their allocations to alternatives. I spend a lot of time with these investors and it's pretty much universal. So that's the backdrop we're operating in.
Secondly, we are a fast growing player in that space, despite being the largest player. We have grown our AUM six fold since our IPO in 2007. We had gross inflows of over $100 billion in 2017, over 100 billion in ‘18. We said we'd raise even more this year. Why do we raise all this capital? Again, it's based on performance. We've delivered 15 net in private equity, and real estate private equity, both of those over, call it 30 years.
We've done it 14% net in secondaries, 12% in credit. That performance has built up enormous confidence with investors, so that they'll allocate capital to us and trust and allow us to expand. So our secondaries business goes from private equity secondaries to real estate, to infrastructure, to impact, to technology, wherever it goes and that's true across real estate and credit and hedge funds and so forth. And our business is increasingly a branded business.
I think when you think about investment firms, you think about, oh, what are the things they buy and hold, we have 512 billion of assets under management, and less than $2 billion of capital in our funds. Growth for us does not require capital. We have no net debt as a firm and we pay out basically 100% of our earnings between mostly dividends, but also now some share buybacks and our margins today, of our – our FRE margins, 50 plus percent.
That is a powerful combination and speaks to the branded nature of the business. And we see the growth potential for the business from here. And I'm sure we'll talk about some of that as significant. So, the stock, however, has not reflected that. If you look prior to our conversion announcement, we matched the S&P in terms of total return over that 12 year period. And because we grew so much, what happened obviously, massive multiple compression and high dividend yield, to put it in context, we've historically traded at 10 to 12 times earnings, call it a 30 plus percent discount to the market.
And we've had a dividend yield that is always right around the top of the 150 biggest companies. Generally, the people around us are in the tobacco business or landline phone companies. So we obviously have been looking at this, we do own, the insiders, roughly half the company. And we have been focused on what can we do to get people to recognize this company as very special. And as I said, there are now, I think, two very important catalysts.
The first is this conversion. After tax reform, we steadied this quite a bit. Fortunately, a couple of our competitors did this before as we got to watch the response. We obviously looked at the data, which said 20% of our shares were held by index funds and long-only managers. And a typical company of our size would be more than 60% owned by those folks. We went out and talked to people and what we would hear in talking to people is, look, we can't buy your stock because of the K1.
And it was true of institutional guys. Clearly, the index guys were prohibited, foreign investors were prohibited, we were hearing this everywhere we went. And now that we've made the change, we're hearing a bunch of folks say, hey, we're going to now look at this company, you have a really special and powerful business model, we've never been able to buy it. And this process, yes, the stock has moved up a bit. But people, most of these folks still can't buy until July 1. I think that's very powerful.
And then the second thing, as I mentioned, is this growth in fee related earnings. Our business, we get two sources of income, we get our fee related earnings, management fees against virtually all of our expenses. And then performance related net realizations. And those tend to be more episodic. And obviously, all of you value more of those fee related earnings. What we've said to the marketplace is, we started last Investor Day that because of four flagship funds at the time we were going out to raise and because of the growth in our core plus real estate business, we thought over a reasonable period of time, we would go to $2 a share, at the time we were at low $1, today, trailing 12 months, $1.24.
This was just a fee related component. What's happened since then? We've raised the vast majority of those four flagship funds, approximately $65 billion, most of which was raised in a single closing in each of those funds, something that's pretty extraordinary. If you looked historically, given their scale, and our core plus real estate business has continued to march along and our private REIT in particular has been accelerating. So we think as we go from a third of our earnings being fee related to a majority and overtime even a bigger percentage being fee related, again, the opportunity to re-rate the stock, because we're seeing both growth in earnings and an improvement in the composition.
So, we're a persistent bunch, we think this is a very, very special franchise. And the market, I think, is starting to see this. And the idea that you can raise capital and move into adjacencies and grow without putting up capital and that you're really differentiated in your space, I think that's powerful. And the idea that we still trade at discounts to market to us still seems a bit odd and we're hoping that that will change, it's begun. We think we're still early in that process.
Do I hear growth, brand, capital light, high margin. Follow up question is, how should we be thinking about or how do you think about what your comp set is, who should we be comping you against?
Well, if you look at more branded companies, traditionally, they trade at high multiples, because they generate high returns on invested capital and they grow quickly. In financial land, those are companies like MasterCard, and Visa, MSCI and they trade at 30 to 35 times earnings. Now, if I say that to this room, they're going to say, oh, but a component of your earnings are more volatile, blah, blah, blah. I would say, okay, but is 10 to 15 times the right metric for business of our quality that I think has real moats around it and it's difficult to replicate? So, I think if you recognize the power of the brand and what it can do, and the way we can grow, and the way we can distribute out cash flow to investors, I think this re-rating process will get us to a higher multiple. It may take a little bit of time, but I think because of these two catalysts, it feels like it's coming more quickly than certainly in the past.
Great. And you’ve worked at Blackstone your entire career, you’ve built a real estate business into what it is today. You've been in the President role now for about a year and a half. Can you talk about your priorities, as you manage the firm day to day, what has the first one and a half year has been like relative to your expectations?
Well, that part is very busy, would be the answer. I'll come back to that. So in terms of my priorities, our priorities, I'd start by saying the firm was on a great trajectory. So there was no need to sort of do any dramatic course correction. I'd focus on a few things. First off, in an environment where technology is so rapidly changing so many industries, making sure that we're thinking about growth in all of our areas and transformation is really important.
I would also say, in an environment where multiples are high by historic standards, and you can expect multiple expansion, you need to again buy things that will grow more quickly in order to generate returns. So what does that mean for us? It means we have to be bigger in Asia. We raised our first Asian private equity fund a little over a year ago. Last year, we raised two real estate vehicles in Asia. I'll be in Asia again next week. I think that's a big area -- is a big area of focus.
Life Sciences, another fast growing area, given what's happening in genomics and precision medicine, and the need for capital, we acquired a business called Clarus, have now integrated them in and created Blackstone Life Sciences. I think that's really important. We just hired a senior partner in the growth equity space, again, taking advantage of Blackstone, our scale, what we own, our brand, and then the ability to do more there. And then I would just say more generally, across the firm, thinking about growth, it can be in real estate, it can be in credit, private equity, everywhere across the firm.
Secondarily I'd say that's a real focus for me, integration of the firm. We have a business that operates in some regards, very integrated, but also, we have some large separately run businesses that can benefit from the information we see. So, when you're the largest owner of real estate in the world, that has benefits to your corporate business. When you're the biggest investor in leverage loans and our GSO business, that has benefits. How can we do a better job, systemizing the sharing of information, building a data science business to share, making sure our portfolio companies are communicating, making sure our support functions are working more closely together, our marketing functions, the danger of these businesses is that they're not connected, that you have sort of free floating molecules and making sure we make this as integrated as possible is important.
I would say on the stock side, what we've been focusing on is trying to make this a more understandable and accessible security to own. So, one of the things we did about a year ago, was put in place a share buyback program and just say, hey, look, we're going to keep the organic share count constant, we want to do that for investors, we’re big owners too, that became a goal. We used to use this E&I metric, for those of you who follow the industry, which was a volatile balance sheet metric, which really masked what was happening in the underlying business. When we reflected on it, we talked to you and a bunch of investors out there and we moved to distributable earnings, which is essentially the cash earnings of the business. And if you want to understand our future potential carry, look at our net accrued carry, but we simplified that. And the third step, of course, was the conversion to make our security much more accessible to the world.
In terms of the experience, I'd say it's been incredible. I love the firm. I love the people at the firm, the energy at the firm, the dynamism about the place, the number of growth initiatives, and the level of caring of the people at Blackstone to work with a group of people who are this committed is extraordinary. I'd say the challenge is, because we run a centralized investment committee process, it is a lot of [indiscernible]. And so, the time demands of the job are significant, plus all the issues that come up along the way invariably operating a business at this scale, but for me, it's the only place I've ever worked and so to have the opportunity to help lead it and work with Steve and Tony James as well, is a great gift.
Great. And Blackstone has grown six fold since the IPO, you mentioned some of the new initiatives, I guess how much growth is really left on the table at this point to drive future inflows. You touched upon some of the new initiatives. I guess, what are the next steps with those?
Yeah. So I’d start with the backdrop I mentioned at the beginning, which is what's driving this growth is a need for return. So, we still see very strong investor appetite for our activities. In terms of where the growth can come from, we have a bunch of engines that are up and just beginning to get to scale. I mean, you've seen our tactical opportunities business, started very small, 30 plus billion.
Same story with our secondaries business; infrastructure, today, relatively small, I think, big potential, particularly as another perpetual capital vehicle, which is another important point about our business, which is the vast majority of our capital is either on 10 plus year contracts or now increasingly in these perpetual vehicles. So, infrastructure, very interesting area, I talked about life sciences, I talked about growth equity.
Core plus real estate today has four vehicles. The private REIT and three open ended institutional funds in the US, Europe and Asia, all now growing fairly quickly. Our public mortgage REIT, again, another perpetual capital vehicle that's been growing very nicely. And then I would say, continue to look at adjacencies in different areas in credit, in private equity and so forth where we can add on.
Then I guess, I’d switch to the channels. And I would say, while we’ll continue to grow in the pension fund channel, sovereign wealth fund, still, there's plenty of room, there are areas where penetration of alternatives are low single digit, retail insurance. So in the retail space, this year, we're going to raise over $20 billion, which is many multiples, I would guess of any competitor in that space. The opportunities there, yes, are for some of our traditional drawdown funds, but are even more so for perpetual capital, for things that are on the shelf for some of our liquid alternatives, our direct lending vehicles.
We can create vehicles, again, based on the power of our brand and our relationship and the confidence in those institutions that can grow to big scale. Retail, early stages, I would say. And there's obviously an opportunity at some point around 401(k). Why does a 22 year old who's got a retirement plan, a target date fund, need daily liquidity for money he or she own access for 40 plus years. And I think policymakers, over time may open that up.
In insurance, in a very low interest rate environment, you can't just be in corporate investment grade bonds. So private credit, something we can create, through our GSO business or real estate debt business becomes very attracted, structured credit, and more exposure to alternatives, again, driving returns. So for us, I sort of feel like the limiting factor in a lot of ways because of the ability we have to raise capital is really about the organization, the culture and the investment discipline. That has to grow, because we cannot do a poor job for our investors. That's the most important thing.
And so because there's so much desire for return, and so much confidence in the Blackstone brand, and domain expertise, I would say in many respects, we're governing this by our ability to roll things out that really are part of our system, and are going to operate at the quality we need.
And given all that growth, and amid all the expected future growth, how do you maintain your culture? What do you have to do differently today versus five or 10 years ago? And how do you evolve the firm here to be successful?
So that's, I think, when you ask about my job, that's really the most important thing, which is, the key question is, as a business like this grows, how do you maintain the processes, the discipline, the energy, everything that's made the firm so successful over the last 30 years, and I think there are two elements to this. One is really the culture of the place. So you have to get enormously talented people to come to the firm. My favorite stat is we had 15,000 young people apply for 85 jobs, analyst jobs last year.
I would say I'm lucky, I applied a long time ago. That's really important. Get them in the door, and then make sure you have a real meritocracy, where super talented people can rise up and you also are very thoughtful around succession and transition, something the firm I think has done very, very well. And then when you have people in the building, you encourage them to be entrepreneurial, to think about telecom infrastructure in emerging markets or buying single family homes, that the way we generate returns is by finding new geographies, areas to go into being creative. And you have a place that really encourages that. So, that's sort of one side of the equation.
The other side of the equation is having a really robust superstructure that provides order and process connectivity and discipline to all that talent and energy. And so when we create a new business, we don't have a franchise operation where you get the right to the Blackstone name and you report back at the end of the year how you've done. We have centralized investment committee functions, no matter where you are around the globe. We make sure we have very disciplined written memos around heads up committee, pre IC, IC committees, we’re focused on the downside on technological disintermediation, rising interest rates, regulatory risk, currency risk, labor costs going up and we plug this all together.
And the key thing is, as we move into a new area, as we build out our infrastructure business, they get in a 11 o'clock slot on Monday to review their deals, we populate it with a group of our senior most professionals who sit there and review those transactions and we have the same process. And to me, that's core to the business. And if you said, what do I think the most about it, as we grow, we maintain this, we move our people around the world, we bring them together, lots of little things, we've moved our partners’ meetings to the mornings, instead of the evening, so our Asian and European partners, you travel a ton, you really want to keep this thing together as you grow. And if we do that, then we can benefit from this enormous scale and reach an ability to write big checks and nobody else can. And yet, we're still super disciplined and super tight.
Great. Want to dive into some of the newer initiatives, maybe just starting off with BREIT, that’s been a focus of the firm recently, strategy is raising, I think about 600 million a month, if I'm not mistaken. Can you talk about what's special about this product? How big do you think this could be? And maybe you could also touch upon broadly, how do you think about retail investors becoming more invested, gaining exposure to real estate in a bigger way?
So, the history of private REITs is bad. So historically, this was sort of a backwater of finance, where you would charge 10 points upfront to the investor, you'd layer that with acquisition, disposition and financing fees, you'd hire a bunch of people somewhere in a warehouse in Phoenix or Dallas, who didn't have a lot of investing experience, who would buy high yielding properties, even if they were leased way above market to get a dividend yield. And then it would end with losses, substantial losses for the investors and litigation. And that went on for 25 or 30 years in different places.
And we had a simple view that what if we brought Blackstone quality expertise underwriting, adding value to the underlying assets, charged investors basically what we charged our institutional clients. Wouldn't investors like that? And we were able to convince some of the big wire houses who were nervous about this product, to do it with us. And again, I think it speaks to the power of our brand that these firms said, okay, we trust you Blackstone, and we’ll do this. And we’ve built a product that's performed extremely well, that's focused primarily on rental housing, and also on logistics assets in basically the smile states, has performed great for the investors, the customers like it.
And because it's 10.99, we're starting to --we get investors now around the world where it's continuing to grow out, and the capital is growing. And 600 plus million dollars a month, when you do the math, the power of that is significant and again, speaks to the strength of the franchise and what can be created. This was an idea, 2.5 years ago. That's now going to grow to be, I think, over time, one of the largest businesses at Blackstone, and it says to us, in the retail channel, if we build things that meet the investors’ needs and this case is liquidity, yield and asset class, they like real estate, that there is a big audience for our products.
Insurance, just another new initiative, it's something you've been involved with for years, you've always had insurance clients going back many years, I guess. So, what, I guess, how do you think about the new initiative here relative to what you've been doing in the space historically, how big is the opportunity? But also, how are you differentiating in the marketplace versus some of the competitors out there?
So again, I think the need here is about returns and the need to move beyond sovereign bonds and corporate investment grade. We see it, as we've served insurance clients historically, they've been relatively limited in the amount of alternatives they've done. We're now saying, there's an openness to doing more of that, there's an openness to more structured credit that they moved away from certainly post-crisis and there's definitely an openness in the US and Europe to more private credit that we originate.
And so our thought here is to serve both third-party insurance companies, as well as more strategic relationships, which we have with Fidelity & Guaranty, which we own a stake in as well. I see this as an asset class that has something like $30 trillion globally, that needs to generate higher rates of return. We brought on all sorts of people around risk and regulatory capital, legal, we’re building this again like any Blackstone business for the long term. And so I think the potential is significant. I'm not going to predict the timing of when this happens. But I think certainly from an AUM and an earnings perspective, I think this can be a meaningful contributor over time.
Taking a step back, maybe we could talk about the broader macro environment, nine years into a bull market here, starting to see some cracks show, I guess, what's your take on the US and global economy?
Yeah. So the US economy started decelerating, let's say, a little bit over a year ago, it felt like up until six weeks ago, with the Fed going a little more dovish, the trade thing at that time, feeling like it was going to get resolved, that we were getting a little bit of a bounce, by the way, Europe and China had slowed more than the US. I think it's too soon to say how significant the impact of the trade friction will be, although we're seeing the Fed and central banks around the world become a little more dovish, which is helpful.
But I think we're still in sort of the same place, a slower rate of growth than we were a year before. We talked -- the hotel business has gone from sort of same store revenues, nationally from 3% to 2%. To me, that's sort of a good proxy, we've seen a deceleration. But I don't -- on the flip side, we don't see the kind of excesses in housing, commercial real estate, banking that generally precipitate a recession.
So we're operating under the assumption over the next couple of years that growth will be slower, but again, not negative. The bigger challenge, of course, is investors with as I said, multiples pretty high, where do you find opportunity, in this kind of backdrop, which is a bit more of a challenge. But overall, I think we'd be in the camp of, growth continues, albeit at this somewhat slower pace.
Which leads my follow-up question, of course, against that backdrop, where are you seeing the most attractive opportunities to deploy capital today, across the globe?
So, there are a handful of places that I would argue are inexpensive. There's not a lot of distress around the world. I think the secondary space in alternatives is interesting, because the sector has grown so much, there's not a lot of liquidity. I think private lending in Europe, non-investment grade is interesting. There are, I’d call those, a handful of niches, what we’re generally looking for are a few things, situations where we can really add value. So buying a public company or a large division of a public company that has been under managed, where you can really transform that business, we're working on a couple of those today. I think that’s interesting and for us, scale remains a big competitive advantage, be it Thomson Reuters, or the GLP deal we did in the warehouse space recently in real estate.
Beyond intervention in scale, I'd say the main area of focus is where do you have a differentiated view versus the market overall? Where do you see trends differently, and then try to express that, not just in one part of Blackstone, but across the firm. So that would be like the movement of goods from physical retail to online retail. If you believe that, then you go out and buy $20 billion of warehouses, particularly last mile warehouses closed in to serve customers. You buy an online payments business, you buy businesses that do warehouse racking systems, you try to express it in that way.
At the same time, people are doing a lot of online shopping, they're still physically looking for ways to entertain themselves. So what does that mean? By arenas, by exhibitions, and meeting space businesses, by resort, hotels, all sorts of things where people come together, we've been buying gaming businesses, across real estate and tactical opportunities and private equity, all sorts of things because physical entertainment still exists.
In the US, on the energy front, what we're seeing is the impact of the shale revolution, which may not necessarily be great for energy prices, but it's good for energy volumes. So in our energy equity business, try to develop pipelines in our infrastructure business by existing pipeline systems; in our energy debt business, lend against them. We have a public manager who buys public MLPs, called Harvest, try to find a way to express it and you could go through lists of global travel, which is clearly a growth industry, aging demographics around the world.
I think India is on a very positive trajectory now. We've been big players there in real estate where we're the largest office owner in the IT services space. So as you get deeper in the cycle, you go from having your arms really wide, to looking at a more narrow set of opportunities. And that's what's happening. But because of the range of places we operate and scale, we're still finding a way to deploy capital.
Any particular areas that you're avoiding, but that seemed a bit…?
Well, I would say that sort of deep value more buggy with businesses, I think one of the big challenges today is distressed investing, because a lot of the companies that are distressed face really significant secular challenges, and their businesses are in decline and their multiples are compressing a lot. So, it doesn't mean you won't buy these businesses. But there are lots of media businesses and other type of distribution businesses that are under enormous pressure. Retail is clearly a challenge business, both the stores themselves, doesn't mean every retailer, doesn't mean every geography. But, yeah, sort of in many cases, I'm nervous about being on sort of the wrong side of history, because a lot of these trends feel very powerful and still in early stages.
Want to dive in a little bit more on real estate. You mentioned $19 billion GLP transaction, the warehouse acquisition there. I guess, what does that mean for BREP 9, for BREP 8, does that use up the rest of BREP 8 and what attracted you to this particular asset? It seems like some of the logistics prices are a bit high.
Yeah. So in terms of what it means for the firm, yes, it will end our BREP 8 fund and start our new BREP 9 global fund. I don't know if we’ve said that publicly yet. But yes, that will be the case. I just did. We did the transaction. Interestingly, again, speaking to the power of the platform, two-thirds of it went into the BREP 8, BREP 9 opportunistic complex and a third went in to BREIT and the ability to show up to the seller, and write a single check was very powerful. And investors on both sides of our firm definitely benefited from that.
Why did we do it? As I said, the simple movement of goods from land based retail to online. Today, 20% of apparel in the US is bought online. 10 years ago, it was 5%. I'd be willing to make a guess, it's going to be a lot higher than 20%, when you look out another 10 years, and this particular portfolio, because it was focused on what we called the last mile, which is stuff in New Jersey and in and around LA, Seattle, San Francisco, these places, that's the most valuable logistics real estate, because it's hard to replicate, stuff that's more out in the cornfield, obviously, there's a limit on how much the value there can grow. The infill nature of a lot of this portfolio was quite attractive to us.
And again, it was thematic investing where we had real conviction, you're less exposed here, obviously, to some of the labor cost issues that exist in other portions of real estate today, and you have this powerful trend. We certainly didn't buy it at some bargain basement price. But we think because of the strength of the fundamentals, we’ll do well here. And to put it in context, we've now bought nearly 1 billion square feet of warehouses all around the world since 2010. So we are definitely believers.
And probably I guess, where do you think we are in the real estate cycle relative to the overall economic cycle? And how does this recent significant decline in rates so quickly impact that -- the real estate market at all, so how did [indiscernible]?
Look, there's a good news, bad news story in commercial real estate if we focus here in the US. The good news is, supply has not come back the way it typically does. It's still in the low 1% range. Demand, which ties to economic growth, is fine. And so you're still seeing declining levels of vacancy, which is a good sign. Generally, this late in an economic cycle, the developers are out there building lots and lots of stuff and that creates issues. So that's the positive.
The challenges that the rate environment has kept cap rates, yields on real estate low. And so there's -- and there's very little distress. So I think real estate, and I've said this publicly, can grow in value, as a sector, but at a lower rate, certainly than it did, let's say, over the previous five years. And again, the importance of sector selection goes way up. So logistics, we like single family, multifamily, rental housing, where we're building today, only 1.2 homes in the United States, probably need 1.5 million or 1.6 million, have really good fundamentals. Places like the West Coast in the United States, Berlin, Bangalore, India, Shenzhen, wherever you see lots of technology and creative industries housed, you're seeing really powerful trends in terms of demand. Obviously, other parts of the country in the world, not as strong.
So I think, again, in real estate, sort of buying the market is probably a little bit tougher. But because of the overall healthy supply demand fundamentals, we don't see any sort of sharp decline ahead.
And hotels, that's been an area you've been involved with in the past, whether it's Hilton or Strategic Hotels there, I guess, how are you thinking about that today, as an opportunity set, either on the physical brand side, physical side or on the brand side?
Yeah. Well, we really like the branded business. And I'm still the Chairman of Hilton, even though we've sold out of that. I think the brands, particularly the biggest best brands have, again, very high return on invested capital businesses. They put up almost no money to Hiltons and Marriott. So, I really like that business.
In terms of physical real estate, the biggest challenge today in the US is the increase in labor costs. And, our expense is now growing faster, or in line with revenues or faster. And therefore, EBITDA growth is very little to negative. And what it makes you look for, again, is geographically places with faster growth, or sectors where there's less construction. So big meetings hotels, big resort hotels are more attractive, sort of run of the mill urban hotels, which are more exposed to the Airbnb phenomena, and are exposed to rising labor costs, become a little less interesting.
What happens to some of the mall properties, retail properties that are out there?
I think we're going to see, I think the best malls will see significant capital reinvestment. They'll become more entertainment oriented, more restaurants, smaller size stores will still exist, but will require a lot of capital investment. I don't know if the rents will grow as fast. I think you will see a fair amount of retail that is torn down or repurposed over time. That trend here in the US, and certainly in the UK seems inexorable.
Great. Maybe shifting gears a bit. Monetization, 2018 was a bit lighter than what we saw in 2017. That was a record year for Blackstone. I guess what does it take for realization activity to pick up from here? And what sort of that market outlook?
So, part of it is obviously the stock market and asset values generally, [indiscernible] do people have confidence to make big commitments? That's part of it. The second condition, though, is obviously for the individual assets, be it in private equity or real estate private equity, have we completed our mission, we say buy it, fix it, sell it, if we haven't completed the fix it, we're not going to sell. So it's hard to say, well, the market is at this level, therefore Blackstone can sell this.
What you can look at is the storehouse of value, which is we have accrued carry on our balance sheet at the end of Q1 of, I think $3.22 a share. That should be harvested over the next few years. It's just difficult to say exactly what the timing is. And a lot of it can be based on an individual investment. In ‘17, we sold our European logistics platform that led to a big realization. So it tends to be a bit lumpier.
And we're going to open up to the audience questions in just a moment. I just wanted to ask a question about C-Corp. July 1, is that still the date that you expect there and can you just help us understand some of the moving pieces under the hood around taxes, on the tax leakage side, your views around index inclusion and expectations around expansion of the shareholder base.
Yes, so it is July 1. That is not changing. On the tax side, as I mentioned, it turned out better than we expected. So low single digit, we said publicly leakage in years one to five on average and low double digit we think afterwards, which was a lot better than when we originally set off on this. As it relates to long-only managers, the meetings we've been having, Weston Tucker, who you noted, Michael Chae, our CFO, have been doing a lot of this, the responses have been very positive. I think people -- most people said, look, we love your company, we know your company, we just haven't been able to buy it. We've seen some of that. Obviously, the share price performance since the announcement has greatly outperformed the market. But we still feel like there's a ways to go because many of these folks have been doing work, still haven't been able to buy.
On the index inclusion side, we would expect as a group of indices who can buy as you know. I think it represents about 40% of the total index investors out there. There are some like S&P who have been -- who are resistant now who have grandfathered certain companies, but said, you can't have dual class stock. What we think is interesting is if you look at the data, the dual class companies have generally, in the S&P, produced more than twice the performance, which makes sense when you have companies like Nike or Berkshire Hathaway or Google, or you have somebody like Steve Schwarzman, who wakes up every day intensely focused on the success of the business. We think investors should have the opportunity to participate in that. And we'll see over time, we hope that changes, but there will be a big chunk of index inclusion that will happen, but we just won't get to all of them, at least not yet.
Great. Why don't we see if there's any questions here in the audience? We have microphones coming around. Maybe just on C-Corp, what concerns did you have initially? And how did you get over those concerns? What did it take?
Well, we're very value and cash flow oriented, so to say to a group of people who spends all their time discounting cash flows, that you should voluntarily increase and pay more taxes and that's going to lead to a higher NPV. I can tell you that did not happen in one meeting. That was a journey. And look, this was a very big decision for us. And, we just really struggled thinking about that. And I will say that we looked at it analytically, we got to see the other folks in our industry. We saw good signs in all of that. But the most powerful thing was, I think, the feedback we were getting from investors, Weston and I in particular, were up in Boston.
And, this was in February, we went to a bunch of meetings, and at the end of the meetings, we would ask, can you buy the stock, and there would be two of the 10 or 12 PMs in the room who would say yes. And that hit home. And I remember talking to Steve after that, and we were talking and ultimately we had a bunch of meetings with our management committee and board, that you really can't have a security where more than two thirds of the potential buyers won't buy your stock. And given that the leakage ended up being relatively small, ultimately, the decision became fairly straightforward. But because of the importance of it to our shareholders, we wanted to make sure we made the right call.
Okay. Any other questions? A question over here.
Thanks. Quick question on some of the initiatives that you mentioned, specifically around data science and some of the capabilities and software to implement around portfolio company management, would you go so far as to use some of that data in the investment decision process? Or is it more to improve margins and growth within core companies?
Yeah, well, I think the data science area is really important. And again, back to an advantage of Blackstone is because of the scale of our business, we can afford today, what is a 15 person data science team that over time, I think will grow to be much larger. And I think getting real time data and investing initially is probably the most helpful thing. Some of that will come from our own portfolio companies, some of it will be accessing third party data. And we're doing that now real time as we're looking at both companies in private equity and in real estate, we looked at it in the context of an infrastructure deal we were doing, there are all sorts of real time data sets that exist, that if you have the right people to access them, they're really helpful.
The second area is with our portfolio companies, we were going through an example this week, where one of our businesses targets a certain type of customer profile. And our data science team was able to say, look, you're going out and talking to hundreds of customers. But here's what the profile of your customers actually, what they look like. And if we run this against what's out there publicly available, and this is an industry where there's a lot of publicly available data, we can make this a much more efficient process. So I think all of us, we were in liquids and alternatives, will the machines get better than us? I think about the machines helping to augment what we do. And we want to be the leader in this and because of our scale, we should be able to invest more than others.
Other questions? Well, if you have any questions, just raise your hand, and I'll call you, but maybe if you could talk about direct lending private credit. You're rebuilding your BDC business after selling your last business. So just, can you give us an update on how that's progressing? And how you're differentiating in the marketplace?
Yeah, so we had a joint venture in direct lending, which is not something we normally do and we like to control our brand and our destiny. So, we exited the vehicle with our partners, we got a $600 million payment. It was a good outcome on both sides. And we said -- and this is really rare, very few organizations would voluntarily give up $20 billion of AUM and say, oh, we can rebuild this. And we've started back on that process. It's now a year plus, we have something like $10 billion now, we've raised the buying power.
Obviously, that's not all in the ground yet, because you raise the capital, you'll deploy it. But it reflects the fact that given our track record in that space, again, and our brand name, we can raise capital in that case, both in the retail systems as well as institutionally. I think our advantage, and the reason why it works is, we're continuing to do what we've always done, which is provide capital to companies who aren't big enough to access public markets to borrow and want a one stop solution. And so we've got a very healthy pipeline in our direct lending business.
I would also, just because we're here, make one other comment around the leverage loan business, which I know this, you read every day in the press about, it is the next subprime according to many of the reports. That area, which we’re also active in syndicated leverage loans, mostly from private equity deals, is seeing very low levels of defaults and has the highest coverage ratios that it's had since the crisis. People talk about covenant light, but that really reflects the fact that the leverage loan market now looks and feels more like the high yield market. The high yield market, which is junior credit, doesn't have covenants, maintenance covenants, because it's distributed credit, and you have a zillion holders.
As the leverage loan market on the senior side has become more and more owned and distributed to CLOs, it makes sense that some of those maintenance covenants go away. But when we look at loan to values, and we look at coverages, we don't see the kind of deterioration where people are comparing this to the subprime market. We actually think it's a pretty interesting space, getting paid LIBOR plus 400, call it, unleverage today, 6.5%, 7% for taking on risk that goes from zero to four times debt to EBITDA on the capital structure.
So generally, private credit still feels like a pretty good business to us, despite a lot of negative color out there.
Great. And we had a question in the back. We have two minutes left.
Yeah, so just thinking about kind of shifting societal trends, private capital, direct lending, something that kind of comes to mind is [indiscernible]. So here's, kind of a sector where there is some yield relative to other sectors where there's a lack of yield, and certainly a flat yield curve and a store for yield. So does Blackstone do anything in this space, I guess, specifically on the real estate side, would that be debt or equity, just kind of curious.
Yeah, we have big real estate and credit lending businesses. So as I was talking about, we do big leverage lending in the syndicated market, we do direct lending in both Europe and the United States. In real estate, we've got a public mortgage REIT that does first mortgages, we've got a mezz fund, we invest in CMBS. So, we are big players across the credit spectrum. And our strength has been that we started as an equity shop. And that's really made us, I think, very effective on the credit side. And so yes, in this environment, where there's a hunger for yield, be it retail investors, insurance investors, traditional pension funds, all of them are looking for yield. And it's one of the reasons why our credit business has grown to be so large.
Any other questions? Maybe just last one. As you look out next three to five years, which business at Blackstone you think will be the biggest three to five years from now?
Well, the question is the measure of biggest. If the measurement is the earnings production, I think real estate has and is likely, because of the growth of the core plus and that perpetual capital will continue to be the largest earnings contributor to Blackstone. I think that will continue.
AUM wise, that's hard to say. Credit with insurance embedded in it could grow to be the largest private equity complex because of what's happening in secondaries and tactical opportunities could grow quite a bit. So, that's hard to say exactly where it is. But I would say again, for us, the focus really isn't AUM. The focus is delivering great returns for our investors, and then delivering great returns for our shareholders. And AUM obviously comes along with it. But we don't want to move into low margin businesses. We don't want to buy AUM, we want to grow the business really thoughtfully.
Great. Let's leave it there. Thanks very much. Please join me in thanking Jon Gray.
Thank you, all.