Real estate titans Sam Zell and Barry Sternlicht had been fighting over industrial REIT Monmouth Real Estate Investment (MNR). While Monmouth's board agreed to a cash-and-stock deal with Zell's Equity Commonwealth over an all-cash proposal from Sternlicht's Starwood Capital, shareholders ultimately rejected that merger. That led Monmouth to reengage with other bidders to see if it could find a deal shareholders would approve.
The winning bidder turned out to be a surprising new entrant: Industrial Logistics Properties Trust (ILPT -1.09%). The little-known industrial REIT has agreed to buy Monmouth for $4 billion in cash, a huge deal considering ILPT's size.
Here's a closer look at how it beat out two well-known real estate industry veterans for Monmouth.
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A bold bet on industrial real estate
ILPT has agreed to acquire Monmouth for $21 per share in cash, valuing it at $4 billion, including the assumption of $409 million in debt. That's well ahead of Equity Commonwealth's $3.4 billion deal, consisting of either $19 per share in cash or 0.713 shares of its stock. It was also considerably more than Starwood's last offer, which would have paid investors a net $19.20 a share in cash.
That $4 billion deal is a massive undertaking for ILPT. That's because it's a smaller company than Monmouth, given its roughly $1.75 billion market cap and $2.7 billion enterprise value. As a result, it's taking on an enormous amount of debt, and risk, to win this bidding war.
However, IPLT believes Monmouth is worth the cost. That's because the deal will immediately boost its funds from operations (FFO) per share, complement its existing logistics real estate portfolio, increase its scale, add geographic diversity, enhance tenant diversity, and provide a platform for additional growth. It also further increases its exposure to the fast-growing industrial real estate market.
Getting creative to beat out industry titans
ILPT has secured commitments from lenders for a $4 billion bridge loan facility to close this transaction. However, the company knows that the Monmouth deal is too big for it to handle by itself. That's why the REIT expects to enter into joint venture arrangements with one or more institutional investors for equity investments between $430 million to $1.3 billion.
Further, IPLT noted that depending on the size of the joint venture, it could also sell up to $1.6 billion of Monmouth's properties to finance the acquisition. It currently doesn't plan to sell any of its stock to fund the deal. The company believes that between the joint ventures and asset sales, it can get its post-deal leverage ratio down to between six and eight times net debt to adjusted earnings before interest, taxes, depreciation, and amortization for real estate (EBITDAre) by the end of next year.
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A high-risk gamble
IPLT is taking on an extraordinary amount of risk to acquire Monmouth. For starters, it's paying a high price as the deal values Monmouth's portfolio at a 4% first-year cap rate. While scorching demand for industrial real estate has compressed cap rates in the warehouse sector, they're still mostly above 4% in markets across the South, Midwest, and East, where Monmouth owns most of its facilities.
Meanwhile, the deal adds significant exposure to one tenant in FedEx (FDX 0.11%), Monmouth's largest at 56.8% of its annual rent. While the combined company will only get 20.7% of its rent from FedEx, that's still significant exposure to one tenant. Also of note, Amazon (AMZN -1.14%) will be the next largest at 9%. That's more than 30% of its business tied to two tenants.
Finally, even if IPLT achieves its deleveraging plan, it will still have a lot of debt at six to eight times EBITDAre. For comparisons' sake, most of its large industrial REIT rivals have leverage ratios of 5.2 times net debt to EBITDA or less. That puts it at a competitive disadvantage as its higher leverage ratio could impact its ability to grow in the future.
It paid a high price to win this high-stakes battle
IPLT is making a big splash in buying Monmouth as its $4 billion deal beat out two real estate titans who were battling over the company. While the bold deal could pay off big time if industrial real estate demand remains strong, IPLT is taking on a lot of risk. That could burn its shareholders if everything doesn't go according to plan.
