Blackstone Group LP; market cap (as of 10/10/15): $39.6bn
BioMed Realty Trust Inc; market cap (as of 10/10/15): $4.8bn
The Deal in Brief
On Thursday Blackstone Group LP agreed to buy landlord BioMed Realty Trust Inc, a supplier of office space to healthcare and biotech companies. This represents an important addition to the, already huge, private equity firm’s real estate portfolio, in a deal valued at $4.8bn, betting on growth in real estate demand from the life sciences and biotechnology industries. On the day of the announcement BioMed’s shares were up 8.6% at $23.45 in premarket trading, just shy of the offer price of $23.75.
The world’s largest private equity investor in real estate will pay $23.75 a share in an all-cash transaction, according to a statement released on Thursday. This represents a 10% premium over BioMed’s closing price on Wednesday, and about 24% increase with respect to BioMed’s closing price on September 22, when Bloomberg first reported Blackstone’s interest.
With a 20 year history, listed on the NYSE since 2004, BioMed has become one of the leading, if not the most important, provider of real estate solutions to the life science community. With a portfolio of 115 medical office and laboratory buildings, it owns and develops more than 18 million square feet of rentable space in Boston, San Francisco, San Diego, New York and other cities, with 91% of its space leased. Among its 250 tenants we find local organizations such as UC San Diego, The Salk Institute of Biological Studies and the J. Craig Venter Institute, and almost half of its tenants nationwide are composed of research institutions or large public companies.
Despite a steady and significant growth in its property portfolio over the years, the Real Estate Investment Trust (REIT) has struggled to boost its share price during the recent biotech industry boom. Some analysts suggest that partial-explanations can be found, considering that the company has faced earnings headwinds and management changes in the short term, which contributed to keeping its share price from rising.
But, regardless of these events, two considerations must be taken into account before judging whether BioMed will be a good bet for Blackstone. Firstly, the industry is in a very positive momentum: both biotech and pharma industries have experienced robust growth in recent years due to the aging population and faster FDA approvals and are expected to continue delivering growth rates higher than the rest of the economy. Secondly, BioMed’s financial data do not look too bad: during the first six months of this year, revenue dipped 1% to $336 million while earnings per share came in at $0.20, slightly ahead of $0.19 per share in earnings for the same period last year.
Crazy Rates – Crazy REITS
REITs have become extremely popular recently. A Real Estate Investment Trust is a type of security that invests in real estate through properties or mortgages and often trades on major exchanges like a stock. It is an investment vehicle comparable to a mutual fund, allowing both small and large investors to acquire ownership in real estate ventures and providing them with an extremely liquid stake in such an illiquid asset class.
They are required to have at least 100 shareholders. At least 75% of a REIT’s assets must be invested in real estate, cash or U.S. Treasuries; and they must be able to derive 75% of their gross income from real estate.
They receive special tax considerations and typically offer high dividend yields. As a matter of fact, they are required by law to maintain dividend payout ratios of at least 90%. This requirement has made them the haven for yield-seeking investors, which have been struggling with an ultra-low rates environment. On top of that, REITs can deduct these dividends and avoid most or all tax liabilities, though investors still pay income tax on the payouts they receive. All these features explain why they have outperformed all the other asset classes in recent times.
Another important thing to note is that, for some time already, investors were expecting a rate hike. When the interest rates are low, the sectors that pay significant dividends attract yield-seeking investors. In that environment, the demand for Reits and utilities goes up and attracts investors’ money, pushing the prices up. It’s a cycle that might turn when the interest rates go up. In fact Reit prices slipped 7% since April as investors prepared for the rate hike, which would make bonds a more attractive investment. Due to discounted investors’ expectations, many publicly traded Reits are trading at discount to what investors would pay for their individual property assets. In fact, BioMed shares traded at about 20% discount to its net asset value. This is why the sector is very attractive nowadays and why we can expect a rise in the takeover activity.
Blackstone has always been a global leader in private equity real estate, with $92 billion in assets under management and a portfolio which includes premier properties in many top locations in the U.S., Europe and Asia, with a diversified mix of hotels, office, retail, industrial, residential and healthcare investments.
Back in 2009, Blackstone’s real estate funds committed to invest c. $51bn in investor capital and, since then, real estate has become Blackstone’s most high-profile and lucrative business. The company has been snapping up commercial properties across the United States and Europe. Precisely, in April, the company bought GE’s real estate assets for $23bn which is one of the biggest property deals since 2007. In May 2015, the New York-based private equity acquired three high-end resorts: the JW Marriott and the Ritz-Carlton in Florida, and the JW Marriott Phoenix Desert Ridge in Arizona, for about $1.25bn, reaching an agreement with a group led by Paulson & Co. Moreover, in August Blackstone acquired Excel Trust (the owner of the San Diego shopping center), for about $2bn, and in September, just a couple of weeks ago, the Chicago-based Strategic Hotels & Resorts for $3.93bn.
Historically, the real estate sector has always followed a procyclical pattern, decreasing just after the beginning of a crisis and re-gaining at the beginning of an economic recovery. Looking at the numbers we can see that this market has been characterized by an upward trend lately. Does this mean that can we consider this as an indicator that the economy is finally recovering from the financial crisis?
Morgan Stanley and Raymond James advised BioMed Realty, while Blackstone’s advisers are Citigroup, Wells Fargo, JPMorgan and BoAML.
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