Blackstone Raises Warehouse Wager With Growth of E-Commerce

(Bloomberg) -- Blackstone Group LP is doubling down on industrial real estate by buying Gramercy Property Trust, the second multibillion-dollar takeover of a warehouse company in as many weeks with the growth in e-commerce raising demand.

Affiliates of Blackstone Real Estate Partners VIII agreed to pay $27.50 in cash for each Gramercy share in a transaction valued at $7.6 billion, according to a statement Monday. The per-share price is a 15 percent premium to Friday’s close. Gramercy, based in New York, has about $2.8 billion in debt, according to data compiled by Bloomberg. The company’s shares jumped to $27.51 at 11:17 a.m. in New York.

The shift toward online shopping has increased the need for warehouse space by retailers seeking to expand their digital operations and cut delivery times. That’s lured investors into logistics real estate at a time when sales of other commercial-property types have slowed amid concern over rising interest rates and a pullback in foreign investment. Purchases of industrial buildings surged 34 percent in the first quarter from a year earlier to $20.9 billion, according to research firm Real Capital Analytics Inc.

Last week, Prologis Inc., the world’s largest warehouse owner, agreed to acquire DCT Industrial Trust Inc. for $8.4 billion in stock and assumed debt. Shopping at Amazon.com Inc. and other internet retailers still accounts for less than 10 percent of retail sales in the U.S., but e-commerce is reconfiguring supply chains.

“The quickest way to get access to more warehouses is to buy companies that own them rather than going through the development process,” said Lindsay Dutch, an analyst at Bloomberg Intelligence. The Gramercy deal “is another demonstration of how strong demand is.”

Discounted Assets

The stock market has been punishing for all types of real estate investment trusts, pricing their holdings well below private market valuations. Investors such as Blackstone are in a good position to snap up assets at a discount, Dutch said. Warehouses in places like New Jersey and Southern California are especially prized for their proximity to high-population areas, she said.

Industrial REITs remain one of the few real estate asset classes that’s experiencing “true market rent growth,” driven by fundamentals such as expansion in the economy, population and e-commerce, SunTrust Robinson Humphrey analysts led by Ki Bin Kim said in a note to clients Monday.

Blackstone, the world’s biggest private equity owner of real estate, has stepped up its purchases in recent months. In March, the New York-based firm added 22 million square feet (2 million square meters) when it bought the Canyon Industrial Portfolio for about $1.8 billion. That transaction followed a January agreement to acquire Canada’s Pure Industrial Real Estate Trust in a C$2.48 billion ($1.9 billion) deal.

Including Gramercy, Blackstone has acquired more than 580 million square feet of industrial space since 2010 and continues to manage over 450 million square feet, according to a person with knowledge of the matter.

Among industrial real estate the firm has parted with is European logistics business Logicor which it agreed to sell its for 12.25 billion euros ($14.6 billion) to China Investment Corp. in the region’s largest-ever deal. Blackstone later bought back a 10 percent stake.

Real estate investment trusts that lease out space at warehouses and logistics centers have been outperforming those that focus on malls, rental apartments or office buildings. Values for industrial buildings climbed 11 percent in April from a year earlier, outpacing gains for other types of commercial property, Green Street Advisors LLC said in a report last week.

Blackstone Fund

Blackstone has been buying properties that offer predictable income streams since it got into the so-called core-plus real estate business in late 2013. About two years later, the firm raised $15.8 billion for Blackstone Real Estate Partners VIII -- the unit that’s acquiring Gramercy -- making it the largest real estate private equity fund on record.

The fund had $8.9 billion to spend by October 2020 and its net internal rate of return is 17 percent, according to an investor presentation on March 31. Its strategy is to acquire high-quality assets in prime markets by targeting “large, complicated situations where competition is limited,” according to a presentation by the Pennsylvania Public School Employees’ Retirement System.

The Gramercy deal is expected to be completed in the second half of the year. Gramercy shareholders will be entitled to receive the previously announced second-quarter dividend of 37.5 cents a share, payable on July 16.

Gramercy was advised by Morgan Stanley, Eastdil Secured LLC and Wachtell, Lipton, Rosen & Katz. Blackstone was advised by Citigroup Inc., Bank of America Corp. and Simpson Thacher & Bartlett LLP.

©2018 Bloomberg L.P.

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