The Milestone portfolio includes 1-23 Interchange Drive in the suburbs of Melbourne
With e-commerce on the rise, warehouses are in demand and Blackstone has just used that hunger for distribution space to notch Australia’s largest-ever direct real estate sale.
The US fund management giant has agreed to sell the Milestone Logistics portfolio to ESR Milestone Partnership (EMP), a collaborative venture between ESR and Singapore sovereign wealth fund GIC, for A$3.8 billion ($2.9 billion), according to a statement from ESR.
“The opportunity to secure such a large portfolio with extremely well-located assets across Adelaide, Brisbane, Melbourne, Perth and Sydney, strategically positions EMP to benefit from the continued growth in demand for warehouse space, particularly as the robust demand for logistics real estate is expected to remain strong due to sustained growth in e-commerce,” said ESR Australia chief executive Phil Pearce.
The sale, which ends a bidding contest that pitted Hong Kong-listed ESR and its Singaporean partner against four other contenders, is the latest logistics giga-transaction by Blackstone and sets a new bar for warehouse investments in Australia, as increased competition squeezes investment yields.
ESR Australia Doubles
The Milestone purchase adds 45 assets covering 1.4 million square metres (15 million square feet) of gross floor area to ESR’s Australian holdings, just over the 1.36 million square metres that it had under management at the end of last year, according to its 2020 financial statement.
Phil Pearce of ESR Australia has just doubled his portfolio
“You don’t get opportunities like this every day,” Pearce told Mingtiandi. “It took them (Blackstone) five years to build the portfolio and it would take us five or six to build something similar, so being able to get it done in one deal is a significant advantage.”
The portfolio buy, which includes properties in Sydney, Melbourne, Brisbane, Adelaide and Perth, is nearly equal in value to ESR’s assets under management in Australia, which totalled $3.4 billion as of 31 December, after the pan-Asian logistics player first entered the Aussie market in 2018. Pearce indicated that beyond the existing built area in the portfolio, the 3.6 million square metres of site area included in the purchase provides opportunity for future expansion.
“The portfolio is land-rich, with low site coverage of only 38 percent, providing plenty of opportunity for ESR to redevelop these assets over time,” Pearce said. A typical logistics project in Australia covers 50-6o percent of the site area, according to Pearce.
GIC, which has already partnered extensively with ESR in Australia, will be contributing 80 percent of the equity to the venture, with ESR taking care of the remaining 20 percent. ANZ Bank, MUFG Bank, Standard Chartered Bank and United Overseas Bank are providing fully underwritten debt facilities for the acquisition.
Blackstone had engaged JLL and Eastdil Secured to market the Milestone portfolio since late last year, with the firm having also dangled the possibility of an IPO for the set of warehouses, which it had built up through a series of acquisitions over the past five years. Lead advisors to Blackstone from JLL were Tony Iuliano, Stuart Crow and Adrian Rowse.
The US fund manager, which has made logistics properties one of its mainline strategies in recent years, had marketed Milestone through a two-stage tender process, which attracted 10 first-round bids. The second round included ARA Asset Management’s Logos, AXA Investment Managers of France, Australia’s Dexus and Singapore’s Mapletree making separate competing offers, before Logos and AXA reportedly joined forces last week. The transaction remains subject to approval by Australia’s Foreign Investment Review Board.
Logistics Yields Enter Office Territory
Milestone’s tenants include Australian retail major Woolworths, shipping firm Toll Group and Caterpillar dealer WestTrac, as well as Michigan-based Lineage Logistics — the world’s largest cold storage firm.
Together, Milestone’s occupiers generate about A$150 million in revenue annually, which puts the sale of the portfolio at a capitalisation rate of around 4.5 percent and brings logistics transactions into a yield range previously more common for prime office deals. The averaged weighted time to lease expiry in the portfolio is 6.9 years, and and an independent appraisal had valued the portfolio at A$3.43 billion.
“The Australian logistics market is very attractive to sovereign funds and international asset managers, with the sector viewed as one of the most dynamic and resilient asset classes globally. Given the market’s growth prospects, there remains huge unsatisfied demand for Australian logistics opportunities,” said Stuart Crow, CEO for Capital Markets in Asia Pacific at JLL. He added: “Increasingly, we are seeing opportunities for investors to expand their exposure in logistics through platform deals.”
ESR, which also has operations in China, Japan, India, Korea and Southeast Asia, has been rapidly ramping up its presence in Australia under the leadership of Pearce, a one-time Goodman executive.
Last year the firm signed a pair of deals with GIC to develop and acquire A$1.5 billion in warehouse projects in Australia, and just last month ESR picked up a business park in Sydney from fund manager AMP Capital for A$71 million.
The Milestone acquisition boosts ESR from having the sixth- or seventh-largest logistics real estate portfolio in Australia to rank the firm third in the country behind only market leader Goodman and fund manager Charter Hall.
Record-Breaking Warehouses
For followers of Blackstone’s thematic approach to investment, the sale of the Milestone portfolio has echoes of a deal four years ago between the firm run by billionaire Stephen Schwarzman and China’s sovereign wealth fund.
Blackstone’s sale of the Logicor portfolio in 2017 was Europe’s largest single real estate deal ever
In 2017, Blackstone scored Europe’s single largest real estate deal ever when it sold the Logicor platform to CIC for €12.25 billion (then $13.82 billion). That deal, which involved 630 distribution centres in 17 European countries, came after Blackstone had completed more than 50 transactions to acquire and tune the Logicor platform.
Two years ago, Blackstone was the buyer in another record-breaking logistics deal, when it purchased GLP’s US assets for $18.7 billion. That 2019 acquisition, which was the largest private real estate transaction ever, brought Blackstone 16.6 million square metres of properties on behalf of a pair of funds and nearly doubled the Manhattan-based firm’s US industrial portfolio.
Portfolios in the Making
During the past two years, Blackstone has given the appearance of assembling fresh warehouse portfolios in Japan and India, rhyming with the strategy it employed in Europe and Australia.
In 2019, the firm spent JPY 100 billion (then $920 million) to buy a set of six logistics facilities in Japan from a private fund managed by Mapletree. Blackstone then followed up in August last year by purchasing a set of four Japanese warehouses from Daiwa House Industry, the property development division of the Daiwa conglomerate, for around JPY 55 billion.
An India logistics platform also appears to be underway, with local news reports indicating last week that Blackstone is set to buy Embassy Industrial Parks for $700 million from a joint venture between Warburg Pincus and local development titan Embassy Group, which is also Blackstone’s partner in the Embassy Office Parks REIT.
Should the Embassy Industrial Parks deal be consummated, it would add 2 million square metres of industrial space — primarily warehouses — to a portfolio that Blackstone has been assembling through development and acquisitions since 2019. Significantly, the fund manager spent around $54 million one year ago to buy a 54 percent stake in Mumbai-based Allcargo Logistics Ltd’s warehousing business.
With the Milestone deal said to have been signed this weekend, Blackstone may have a few extra Aussie dollars on hand for its pursuit of Crown Resorts, with the US firm offering $6 billion for the casino operator’s business, provided that it can hold onto its licences.
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