Vice President: Ivan Petkov
Analysts: Rhea Bhasin, Riccardo Vittorio Perego, Simon Sandewall
Deal Overview
Blackstone announced in April 2023 that it had agreed to acquire Industrials Reit (LSE:MLI) in a deal worth £511 million (Singh,2023). The acquisition will be made through Blackstone's non-traded real estate investment trust, Blackstone Real Estate Income Trust (BREIT). Under the terms of the deal, accepting shareholders of the U.K. multi-let industrial-property company will get 168 pence in cash (Walker, 2023). The offer price is a 42% premium to the company's closing price of 118.0 pence on March 31, the day before the company said it would recommend the deal if a formal offer was made.
The acquisition of Industrials Reit provides Blackstone with access to a portfolio of high-quality logistics real estate assets in key European markets. The deal is expected to close in the second half of 2023, subject to regulatory approvals. (Norman,2023). Through the acquisition of Industrials Reit, Blackstone aims to expand its presence in the European logistics real estate market and diversify its portfolio.
The Players
Blackstone
Blackstone Group Inc. is one of the world's leading investment firms, managing assets worth more than $990 billion (Blackstone, 2023). The company was founded in 1985 by Stephen Schwarzman and Peter G. Peterson. Over the years, Blackstone has built a diversified portfolio across various asset classes, centered around private equity, real estate, hedge funds, credit, and infrastructure (Blackstone, 2023).
Focusing on real estate, Blackstone’s portfolio has a total value of over $577 billion. The firm's real estate investments are focused on key areas such as office, residential, retail, industrial, hospitality, and logistics properties. The firm prides itself in its philosophy of thematic investments in “high-quality assets with outsized growth potential driven by global economic and demographic trends” (Blackstone Real Estate, 2023). Blackstone’s real estate strategy is centered around three focal points:
• Opportunistic: buying under-managed yet well located assets at a discount and create value-added by improving operations and integrating the business in the company’s eco-system
• Core+: long-term investments with moderate leverage with a focus on logistics, office, residential and health spaces.
• Debt: provide financing solutions by originating loans and investing in debt securities underpinned by real estate assets
Blackstone has been actively investing in Europe since 2002 and has a significant presence across various asset classes. The firm's European real estate portfolio consists of over 200 investments. Some notable investments in Europe include the acquisition of the Valad Europe logistics portfolio, the purchase of the Royal Mint Court office complex in London, and the acquisition of a majority stake in the Banco Popular's real estate portfolio in Spain. (Pitchbook, 2023). In recent years and in line with its “thematic investing” approach, Blackstone has strongly invested in the logistics sector in Europe. Blackstone capitalized on the growing demand for warehousing and logistics properties in Europe, particularly in the e-commerce sector. Looking ahead, the firm has announced plans to invest up to $1000 billion in growing infrastructure sectors, including renewable energy and digital infrastructure (Blackstone, 2023).
Industrials REIT
Industrials REIT is a real estate investment trust (REIT) that specializes in the acquisition, ownership, and management of modern logistics real estate (Industrials REIT, 2023).
Industrials Reit's strategy is centered around the acquisition and management of multi-let industrial (MLI) assets, which are typically small to medium-sized units that are leased to a variety of tenants. This strategy allows the company to create a diversified portfolio that is less reliant on any one tenant or sector (Industrials REIT, 2023).
The company's business model is based on the acquisition and management of MLI assets in key European markets. The company also operates a digital platform, Industrials Hive, which provides tenants with a range of value-added services and facilitates communication (Hive, 2023).
Since its inception, Industrials Reit has been successful in building a portfolio of high-quality logistics assets in key European markets. The company's focus on MLI assets and its use of a REIT structure provided several advantage levers. The company faced decreasing EPS and less favorable KPIs in past years, culminating in a sell-off last September. Still, its strong financials make it an ideal candidate for Blackstone’s take private (Industrials REIT, 2023).
Rationale
The acquisition of Industrials REIT fits perfectly into Blackstone’s long-term vision on logistics in Europe. The company sees continued expansion in the sector as online-shopping and increased inter connectivity see further demand for logistic capacity in the continent. Industrials REIT complements the CORE+ Real Estate portfolio per its long-term returns and limited leverage (see LBO). Blackstone’s strategic expansion in the UK market in recent years follows the subsequent expansion of the logistics sector, particularly post Covid. Industrials REIT MLI portfolio provides middle-sized and risk-compatible assets to the portfolio, in line with the CORE+ investment thesis.
Terminology
REIT: Real Estate Investment Trust
A REIT is a company that owns and operates income-producing real estate. REITs are designed to provide investors with a way to invest in real estate without the necessity of owning and managing physical property. REITs typically own and manage a portfolio of properties, and investors can buy shares in the company, similar to buying stock in a publicly traded company (Industrials REIT, 2023).
The REIT structure is at the core of Industrials REIT strategy, providing three key benefits:
• Stable dividends for investors as 90% of taxable income must be redistributed to shareholders annually
• Access to capital markets to finance property acquisitions and expansions
• Favourable tax treatment, yielding enhanced returns
MLI: Multi-let Industrial
MLI is a type of commercial property that consists of small to medium-sized units leased to a variety of tenants. MLI assets are often located in key logistics and transportation hubs, making them an attractive investment for companies that rely on efficient supply chains.
By focusing on MLI assets, Industrials REIT can create a diversified portfolio that is less reliant on any one tenant or sector. Overall, the combination of MLI assets and a REIT structure is at the core of Industrials Reit's strategy and development. By focusing on MLI assets and using a REIT structure, the company can provide investors with a stable dividend income while also creating value through the acquisition and management of high-quality logistics real estate.
Industry Analysis
The target company mainly invests in multi-let industrial assets, an industry with a high growth potential. One of the primary reasons for sustained growth is the inability of industrial property supply to match increasing demand in urban areas. Since the majority of land in densely-populated places in the UK is dedicated to residential use (Industrials REIT, 2023c), new MLI objects are infrequently built. In contrast, over the past two decades, the number of small to medium enterprises, the primary users of MLIs (Industrials REIT, 2023c), has increased by over 58% (GOV.UK, 2022). Additionally, the demand for these types of objects has become even bigger with the Covid-associated surge in eCommerce due to businesses having to utilise MLIs to meet their logistic needs, with many small businesses supplementing or replacing high street stores with MLIs, thereby increasing overall demand for such assets. This imbalance between supply and demand is the primary reason for sustained rental growth (Industrials REIT, 2023c).
Looking at the Real Estate Investment Trusts industry, there seems to be a strong negative dependency on the UK Official Bank rate. This result is expected given that a higher interest rate implies that acquiring additional properties using debt becomes more expensive for the REIT, thereby hindering the growth potential of the fund. Additionally, since increasing the interest rate was employed to tame inflation, it is expected that this measure will be revoked when inflation will be under control. The Bank of England anticipates inflation to fall quickly from the middle of this year (Bank of England, 2023b), indicating that an easing of the monetary policy might not be too far away. This statement is supported by the International Monetary Fund, which predicts that interest rates will likely return to pre-pandemic levels (Natal, Barrett, 2023). This decrease in the interest rate will likely significantly boost the value of REITs, making Blackstone’s investment all the more lucrative.
Data source: (Bank of England, 2023a; Investing.com, 2023; REITComparison, 2023)
Company Analysis
Interestingly, the target company is far from the biggest UK REIT by market capitalisation, accounting for only 0.92%. However, this could be in part due to the decision to focus almost exclusively on MLIs. Additionally, focusing on this type of property allows them to sustain a 4-5% rental growth per annum (Industrials REIT, 2023c), which was confirmed by the 2023 Q4 report, with the company achieving 4.8% passing rents growth and 10.6% estimated rental values growth in the previous 12 months (Industrials REIT, 2023d). Over the years, the company has been able to sustain a positive total accounting return, achieving 25% TAR for 2022 with a target of 10%+ per annum (Industrials REIT, 2022a). The dividends per share have been stable, averaging at 7.02p over the last 5 years (Industrials REIT, 2022b). Regarding economic stability, a risk heat map was included in the latest annual report, which outlined 10 factors that could potentially adversely impact the company. Even though most of them were predicted to have a low impact, the report indicated that 8 of them are having a risk increase. From the management perspective, the company has not had recent significant changes in the executive team. Paul Arenson founded Stenham Property Limited in 1995 and has been with it through multiple acquisitions, and after its sale to Industrials REIT was appointed CEO of the buyer company in 2014 and holds the position to this day. Julian Caret, the current managing director, joined the company in 2017 also as a result of an acquisition by Industrials REIT (Industrials REIT, 2023e).
Source: (Industrials REIT, 2022b).
Financial Analysis of TIM
With a focus on leveraging strong demand, inelastic rental supply, and the diversification of rental income for stabilising cash flows, Industrials REIT is pushing an optimistically promising consistency. Owing to pointed strength in income granularity and occupier diversity, coupled with sector factors such as strong demand in comparison with supply – the firm is looking at secure, long-term revenue growth, hints of which are evident in the quarterly revenue growth, particularly moving from FY21-FY22.
Over the past 5 quarters Industrials REIT revenue has grown at a relatively unsteady pace, barring the quarter ending sept-21. Sales growth has been relatively steady at 6.5% cagr over last 2 year’s reinforcing the revenue stability offered by REITs. However, operating costs have risen sharply (15% CAGR) likely reflecting a combination of inflation and need for better collection mechanisms. Interest expenses look flat over 2020- 2022 but the pressure of rising rates will likely become visible going forward. We expect revenue growth to accelerate as future rent contracts will bake in higher inflation. On the other hand, cost increases have likely peaked so margins have room to improve.
For the LBO model constructed, the financial information present in table 1 has been used as a base for the assumptions depicted in table 2.
The model assumes entry EBITDA multiple and exit EBITDA multiple are the same. Furthermore, the revenue growth and YoY margin expansion assumptions are a result of the potential growth of the total addressable market of Industrials Reit as well as of the company in that TAM, since its market share is still at low levels - less than 1 percent. The revenue growth assumption of 9.3% in table 3 is also a combination of macro-inflation in line with long-term trends (3% PA), rental premium (5% PA) and modest improvement in occupancy (1% PA). The 5% rental premium assumption is derived from the 2022 financial report, where Industrials REIT emphasised confidence in a 5% rental growth rate considering consistent 5% growth in the previous two years (Industrials REIT, 2022). The low tax rate is due to the nature of REITs themselves and the cost of debt in table 4 has been assumed from historical values of Blackstone's cost of debt (Blackstone Group Inc, 2023).
Not only is the revenue consistently increasing but Industrials REIT’s profit margin is increasing over time. One potential reason for this is that the total costs of goods sold and expenses are increasing at a lower rate than revenue between years 1 and 5, which results in the company making more profit per dollar of revenue earned. This is seen by the fact that in year 5, the net income is 32.1% of total sales, whereas it is 19.2% of total sales in year 1.
The investment return (IRR) of 18.8% for Industrials REIT looks attractive compared with the 1% return delivered by FTSE 100 over the last 5 years. However, the model’s returns are sensitive to revenue growth and IRR changes by 100bps for every 1% change in the revenue growth assumption. This is an important risk. Furthermore, on our assumptions, the company has room to further lift IRR over time by increasing debt as interest cover is very comfortable and grows from 2x to 4x over time. It can be inferred that the IRR is relatively low for Blackstone fund because the investment is not highly leveraged. The firm is primarily using equity to finance the deal, as opposed to borrowing money from creditors due to higher borrowing costs, which results in a lower IRR. One advantage of such an investment is that it reduces the company’s liabilities as it will not need to repay the debt with interest. Such a deal structure, however, allows for risk mitigation.
Prospects and Risks
The acquisition of Industrials REIT presents some prospects for Blackstone. It provides Blackstone with access to a portfolio of high-quality logistics real estate assets in key European markets. This acquisition is expected to diversify Blackstone's portfolio and expand its presence in the European logistics real estate market, where there is a growing demand for warehousing and logistics properties, particularly in the e-commerce sector. Blackstone’s long-term vision on logistics in Europe means that it sees continued expansion in the sector as online-shopping and increased interconnectivity see further demand for logistic capacity in the continent. Moreover, Industrials REIT complements Blackstone’s CORE+ Real Estate portfolio as it provides long-term returns and limited leverage.
The acquisition of Industrials REIT also presents some risks. Firstly, the acquisition is subject to regulatory approvals, and the regulatory environment could change, which could affect the deal's completion. Secondly, the acquisition of a portfolio of logistics real estate assets could be affected by any unforeseen economic events, such as a recession or changes in government policies, affecting the demand for logistics properties. Finally, Blackstone’s thematic investing approach and its focus on specific asset classes could leave it exposed to concentration risk if these investments underperform, leading to losses.
Conclusion
In conclusion, Blackstone's acquisition of Industrials Reit in a deal worth £511 million is a strategic move that will enable the company to expand its presence in the European logistics real estate market and diversify its portfolio. Industrials Reit's focus on multi-let industrial assets in key European markets aligns well with Blackstone's thematic investment philosophy, and the acquisition will provide Blackstone with access to a portfolio of high-quality logistics real estate assets. The deal is expected to close in the second half of 2023, subject to regulatory approvals. As Blackstone continues to invest in growing infrastructure sectors, including renewable energy and digital infrastructure, the acquisition of Industrials Reit positions the company well to capitalize on the increasing demand for warehousing and logistics properties in Europe.
References
Bank of England (2023a). Official Bank Rate history [online] Bank of England. Available at: https://www.bankofengland.co.uk/boeapps/database/Bank-Rate.asp [Accessed 30 Apr. 2023].
Bank of England (2023b). When will inflation in the UK come down? [online] Bank of England. Available at: https://www.bankofengland.co.uk/boeapps/database/Bank-Rate.asp [Accessed 2 May 2023].
Blackstone (2022). Blackstone - Overview. [online] ir.blackstone.com. Available at: https://ir.blackstone.com/overview/default.aspx.
Blackstone Group Inc (2023). ValueInvesting.io | Automated DCF and WACC | Intrinsic Value. [online] Valueinvesting.io. Available at: https://valueinvesting.io/BX/valuation/wacc [Accessed 2 May 2023].
GOV.UK (2022). Business population estimates for the UK and regions: 2022 statistical release. [online] GOV.UK. Available at: https://www.gov.uk/government/statistics/business-population estimates-2022/business-population-estimates-for-the-uk-and-regions-2022-statistical-release-html [Accessed 30 Apr. 2023].
Hive (2023). Industrials REIT - Industrials Hive platform. [online] Industrials REIT. Available at: https://www.industrialsreit.com/our-business/industrials-hive-platform/ [Accessed 28 Apr. 2023].
Industrials REIT (2022a). Industrials REIT financial results for the year ended 31 March 2022 [online] Industrials REIT. Available at: https://www.industrialsreit.com/investor-information/latest annual-results/ [Accessed 30 Apr. 2023].
Industrials REIT (2022b). Annual Report 2022 [online] Industrials REIT. Available at: https://www.industrialsreit.com/media/uhxn2uea/industrials-reit-ar-2022.pdf [Accessed 30 Apr. 2023].
Industrials REIT (2023a). Industrials REIT - What is a REIT? [online] Industrials REIT. Available at: https://www.industrialsreit.com/our-business/what-is-a-reit/ [Accessed 28 Apr. 2023].
Industrials REIT (2023b). Industrials REIT - Why Industrials REIT Exists. [online] Industrials REIT. Available at: https://www.industrialsreit.com/about-us/why-industrials-reit-exists/ [Accessed 28 Apr. 2023].
Industrials REIT (2023c). Industrials REIT - Why MLI. [online] Industrials REIT. Available at: https://www.industrialsreit.com/our-business/why-mli/ [Accessed 28 Apr. 2023].
Industrials REIT (2023d). Trading Update FY23 Q4 [online] Industrials REIT. Available at: https://www.industrialsreit.com/media/v3zpjhez/trading-update-fy23-q4.pdf [Accessed 30 Apr. 2023].
Industrials REIT (2023e). Leadership Team [online] Industrials REIT. Available at: https://www.industrialsreit.com/our-business/leadership-team/ [Accessed 30 Apr. 2023].
Investing.com (2023). FTSE 350 - Real Estate Investment Trusts REITs (FTNMX351020) [online] Investing.com. Available at: https://uk.investing.com/indices/ftse-350-reits [Accessed 29 Apr. 2023].
Natal, J.M., Barrett, P. (2023). Interest Rates Likely to Return Towards Pre-Pandemic Levels When Inflation Is Tamed. [online] International Monetary Fund. Available at: https://www.imf.org/en/Blogs/Articles/2023/04/10/interest-rates-likely-to-return-towards-pre pandemic-levels-when-inflation-is-tamed [Accessed 30 Apr. 2023].
Norman, P. (2023). Blackstone Finalises Terms of Take-Private of Industrials REIT. [online] CoStar. Available at: https://www.costar.com/article/396572019/blackstone-finalises-terms-of-take-private of-industrials-reit [Accessed 28 Apr. 2023].
Pitchbook (2023). Blackstone Investor Profile: Portfolio & Exits | PitchBook. [online] pitchbook.com. Available at: https://pitchbook.com/profiles/investor/10014-49#overview [Accessed 28 Apr. 2023].
REITComparison (2023). 45 UK-listed REITs. [online] REITComparison. Available at: https://reitcomparison.co.uk [Accessed 29 Apr. 2023].
Singh, P. (2023). Blackstone to acquire Industrials REIT in £700M deal (NYSE: BX) | Seeking Alpha. [online] seekingalpha.com. Available at: https://seekingalpha.com/news/3953505-blackstone to-acquire-industrials-reit-in-700m-deal [Accessed 28 Apr. 2023].
Walker, I. (2023). Industrials REIT Agrees to $640 Million Blackstone Takeover. [online] Morningstar, Inc. Available at: https://www.morningstar.com/news/dowjones/202304141613/industrials-reit-agrees-to-640-million-blackstone-takeover [Accessed 28 Apr. 2023].
Wsj.com. (2023). MLI.UK | Industrials REIT Ltd. Quarterly Income Statement - WSJ. [online] Available at: https://www.wsj.com/market-data/quotes/UK/XLON/MLI/financials/quarter/income statement [Accessed 2 May 2023].