(Bloomberg Opinion)—Commercial real estate brings stock-market investors out in spots. But indiscriminate selling creates opportunities for private equity buyers. It should be no surprise then that Blackstone Inc. is bargain hunting in niches where supply is tight and landlords have pricing power.
The buyout firm, which is also the world’s largest commercial real-estate owner, has agreed the key terms on buying Industrials Reit Ltd., an operator of UK industrial estates whose stock price recently touched a two-year low after falling more than 40% from its peak. Like prime offices, this is a sub-sector where supply is constrained and vacancy rates are low.
The company’s focus is on assets close to urban areas with premises for small- and medium-sized enterprises. Rents for such property rose an average 31% upon renewal or reletting in the financial quarter ending December.
It’s familiar territory for Blackstone. The firm targeted industrial real estate long before Covid accelerated the growth of e-commerce. At around £660 million ($825 million) including assumed net debt, the potential transaction is reminiscent of the many acquisitions that created Logicor, a rollup of warehouses and distribution centers, and Mileway, formed in 2019 through the amalgamation of around 1,000 urban assets focused on the “last mile” of the supply chain.
The former was sold to a Chinese sovereign fund for €12 billion ($13 billion) in 2017. The latter was transferred to another Blackstone vehicle in a €21 billion deal last year, backed by new and existing investors.
Industrial assets constitute the second-biggest slice of the Blackstone Real Estate Income Trust, the vehicle for wealthy investors that’s recently been suffering redemptions amid mounting nervousness surrounding real estate in general.
The stock market climbed aboard the industrial sheds bandwagon in the pandemic, pushing down yields and bidding up the share prices of the few available publicly traded vehicles. Vaccines saw the the trade rapidly unwind. The London-listed players suffered an additional hit with the UK’s disastrous September budget. US logistics leader Prologis Inc. is comfortably off its recent lows, but a British discount seems to have taken hold.
Before Blackstone surfaced, Industrials Reit was trading nearly 30% below net asset value (the net worth of its portfolio in its accounts as determined by external property experts). At that level, it’s hard to use shares as a financing currency — shareholders balk at the dilution. As with most of the UK’s listed property sector, you can see why an approach to go private might come as a relief.
The putative offer looks fair on conventional metrics — priced 4% above NAV, and a 41% premium to the one-month average share price. But takeover premia are deceptively large when struck against a pulverized stock price. And the prospects for rental growth amid a dearth of new supply make it hard to get too excited about a deal around book value.
Blackstone is preempting any accusation of opportunism: It’s categorized the price under discussion as “final.” That heads off any challenge from activists demanding a sweetener. Under UK takeover rules, a unilateral bump simply wouldn’t be allowed. Blackstone could lift the price only if a rival suitor emerged. If the deal is finalized, shareholders get a choice between a humdrum offer and leaving the stock to the mercy of a market that appears to have lost faith.
The timing is astute, striking at a moment of maximum indifference. As European property companies update their NAV numbers this year, investors may start to gain more confidence in the reported figures and show more resistance to take-privates. It would be wrong to see Blackstone’s move as calling the bottom of the publicly traded property sector. Nevertheless, it’s a reminder that real estate funds still crave assets with a good chance of growing rents in the coming years — and will value them more highly than the stock market.
To contact the author of this story: Chris Hughes at [email protected].
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