Can Blackstone’s $19bn logistics deal deliver opportunistic returns?

The private equity giant says it will lean heavily on location advantages and operational expertise to hit performance targets for its mammoth acquisition.

Boxes speed by on the conveyor system at a warehouse.

While Blackstone’s $18.7 billion purchase of GLP’s US industrial portfolio is the latest high-conviction bet on the future of e-commerce logistics, its strategy for the properties raises the question of how stable, well-performing assets will generate high returns.

Totaling 179 million square feet, with blue chip tenants such as Amazon, FedEx and DHL, the acquisition nearly doubles the New York manager’s US industrial holdings to roughly 370 million square feet. Blackstone will split the properties between Blackstone Real Estate Partners, the firm’s global opportunistic strategy, and its income-oriented non-listed REIT, Blackstone Real Estate Income Trust.

While BREIT seems the more natural fit for infill e-commerce warehouses in top-10 metros, 115 million square feet – $13.4 billion of the transaction – will fall under BREP. “A lot of people are scratching their heads about that,” said one capital raiser who asked not to be named. “How does two-thirds of that fit into an opportunity fund?”

Blackstone and GLP, a shared history in US industrial real estate

2010:

  • Blackstone launches IndCor Properties and builds it out with a series of acquisitions.
  • GLP is listed on Singapore Stock Exchange with world’s largest real estate IPO.

2014

  • Blackstone considers taking IndCor, which has grown to 117 million square feet, public.
  • GLP close acquires IndCor for $8.1 billion in a private transaction, marking its entry into the US.

2015

  • GLP grows its US logistics holdings to $13 billion assets under management, making it the second largest operator in the country.

2016

  • Blackstone makes first major US industrial acquisition since exiting IndCor, purchasing LBA Realty’s 12 million square foot portfolio for $1.4 billion.

2017

  • Blackstone forms a strategic partnership with Talos Capital to target US industrial real estate opportunities. They acquired 27 million square feet of logistics property for $2 billion that year.
  • Blackstone forms Gateway Industrial Properties, a portfolio company focused on acquiring distribution centers.

2018

  • Blackstone continues acquiring US assets, including Gramercy Property Trust for $7.6 billion and Cabot Properties for $1.8 billion.

2019

  • Blackstone combines Gramercy Property Trust, Gateway Industrial Properties and Talos Capital to create Link Industrial Properties, its US logistics platform.
  • GLP considers taking US portfolio – roughly half of which was part of IndCor – public.
  • Blackstone purchases GLP’s US holdings for $18.7 billion in a deal projected to close in the third quarter.

Ken Caplan, co-head of Blackstone real estate, said the dual opportunistic-core approach enabled the firm to take on the entire GLP US portfolio by providing “a one-stop solution” for the Singaporean firm, which had reportedly considered taking its US platform public.

The allocation of the GLP portfolio between the two strategies is largely determined by the demand growth in a particular market. The BREIT properties have an aggregate vacancy rate of 5 percent, according to documents filed with the SEC, and are in markets where demand is strong but stable, such as Dallas/Fort Worth, Texas; Chicago; central Pennsylvania; Atlanta and central Florida. Meanwhile, the opportunistic portions of the acquisition are in rapid-growth metros such as Los Angeles, the San Francisco Bay Area, New Jersey and south Florida.

Although vacancy is also low within the BREP portfolio, Caplan said there is embedded upside because rents are below market rate in markets that are trending upward. Blackstone’s strategy is based in part on a belief that prices will continue to rise. It is not alone in this conviction. Prologis, the largest industrial owner in the world with $97 billion of assets under management, sees a 15 percent spread between the rents on its current leases and market rents, presenting a $350 million opportunity, according to research from Goldman Sachs.

Projected rent growth appears to have played a substantial role in the cost of the acquisition, Eric Frankel, a senior analyst with Green Street Advisors, tells PERE. Despite the high price tag, he said the fundamentals of the deal are sound and it fits in with other recent Blackstone transactions, including its $7.6 billion take private of Gramercy Property Trust, an e-commerce-focused REIT, in October 2018.

“Blackstone has implied that there’s still room to run with the rent growth in the US logistics market and we agree with that theme,” Frankel said. The opportunistic strategy “doesn’t strike me as out of line.”

Continued rent increases in industrial real estate are not a given, however. In fact, a recent Deloitte report predicts slower growth in the sector as new supply outpaces demand. The financial services firm projects industrial vacancies to rise from the 7 percent seen in 2018 to 10.3 percent in 2023. More than half a billion square feet of new industrial real estate space is expected to hit the market by next year, according to the report, compared to an estimated 421 million square feet of fresh demand.

Yet rent growth is expected to account for only part of the value creation for the portfolio. Caplan said Blackstone aims to leverage data and analytics from its previous investments in the logistics space – such as demographic shifts and income patterns – to optimize operations at its new properties. The firm has acquired more than 930 million square feet of logistics assets globally since 2010.

“A lot of people see strength in the fundamentals of logistics, but our scale, capital and the data from what we already own put us is in a really unique position to see opportunities and act upon them,” Caplan tells PERE.

In addition to its broad exposure to US logistics, the firm is acutely familiar with much of its new portfolio. Roughly half the GLP US assets by value, a source familiar with the deal tells PERE, were once part of the IndCor Properties platform, which Blackstone sold to GLP in 2014 for $8.1 billion. The deal helped launch GLP’s presence in the US. The Singaporean manager shed the weaker assets, added value to the ones in stronger markets and acquired additional properties, said the source, who was not authorized to discuss the transaction publicly. GLP declined to comment on the sale.

Since selling IndCor, Blackstone has gradually built its US warehouse platform, now known as Link Industrial Properties, through a series of bulk acquisitions. Its first big splash in the space came in 2016 with its $1.4 billion purchase of LBA Realty, a 12 million square-foot portfolio. It followed that up by buying four million square feet from Principle Real Estate Investors in 2017 and a 22-million-square-foot portfolio from Cabot Properties in 2018 for $500 million and $1.8 billion, respectively. It is unclear if or how the new properties will be integrated with Link.

For the $5.3 billion BREIT portion of its most recent deal, Blackstone expects to use a combination of cash on hand, existing debt assumption and new property-level debt, according to a disclosure document filed with the SEC. Blackstone declined to comment on how it would finance the BREP portion of the acquisition, but Frankel said the firm typically follows a standard playbook for large acquisitions, which includes using a “meaningful amount of leverage” to boost profits and pave the way for quick sales.

Meghan Neenan, managing director and head of non-bank financial institutions at Fitch Ratings, said she expects the firm to offset the cost through syndication, possibly by offering co-investment opportunities to its investors. Still, she said it is noteworthy that Blackstone could bear the upfront costs for such a large portfolio without a joint venture partner.

“These guys are certainly the 800-pound gorilla in the space,” Neenan said. “There are a few other guys that are sizeable as well, but certainly not to the scale of Blackstone. They have been early to the logistics space and probably are better able to identify opportunities than others.”

Three’s company

Following its acquisition of GLP’s US holdings, Blackstone now holds more than half a billion square feet of global logistics real estate, according to Real Capital Analytics data. Only GLP and Prologis have more industrial property.

Not only has Blackstone solidified its commitment to logistics, it also demonstrated how few investors can make a similarly big splash in this space. Just as GLP did with its US portfolio, Blackstone flirted with the idea of taking IndCor public in 2014 before keeping it in private hands. If the firm decides to do the same with Link Properties, potential buyers would make up a very short list.