Blackstone (BX -0.63%) has agreed to acquire Bluerock Residential Growth REIT (BRG) in a deal valuing the apartment-focused real estate investment trust (REIT) at $3.6 billion. It's paying $24.25 per share for the residential REIT, a whopping 124% premium to its share price before reports surfaced that Bluerock was exploring strategic options in September.
This deal is Blackstone's latest multibillion-dollar real estate purchase this year. It's also another in a string of multifamily transactions in the red-hot Sun Belt.
Digging into the deal
Blackstone's deal to acquire Bluerock will see it add 30 multifamily rental communities with about 11,000 units to its real estate portfolio. In addition, Bluerock has invested in loans secured by 24 multifamily communities. These properties are primarily garden-style apartment communities in fast-growing cities, including Atlanta; Phoenix; Orlando, Florida; Denver; and Austin, Texas.
Of note, Blackstone isn't acquiring Bluerock's single-family rental portfolio. Bluerock plans to spin off that business, which it will name Bluerock Homes Trust, to shareholders before closing the Blackstone deal. That entity owns interests in 3,400 homes, including 2,000 through preferred and mezzanine investments. These homes are in fast-growing markets across the country.
The $24.25-a-share price tag for Bluerock's multifamily assets represents a 124% premium to its price before the company started exploring its options. That's partly due to its relatively low valuation compared to other residential REITs. It traded at around 14 times its funds from operations (FFO) earlier this year, whereas most other residential REITs traded at more than 25 times their FFO.
Two factors drove that discount. First, Bluerock used a significant amount of preferred equity to fund its business, weighing its valuation. Second, it had a sizable portfolio of mezzanine and preferred equity investments. While those investments provide a stable income stream, they limit its upside potential.
A busy year for Blackstone
The Bluerock deal caps a huge real estate buying binge for Blackstone in 2021. Notable deals have seen the global private-equity giant acquire:
- Industrial REIT WPT Industrial Real Estate Investment Trust for $3.2 billion.
- Data center REIT QTS Realty Trust for $10 billion.
- Single-family rental platform Home Partners of America for $6 billion.
The company has also made smaller deals, including student housing and multifamily real estate investments.
Blackstone takes a thematic investing approach, which is driving its real estate acquisition activity in 2021. It sees significant demand drivers in e-commerce, data proliferation, and migration trends serving as catalysts for continued above-average rental growth rates in industrial, data, and residential housing in the coming years. That led it to pour billions of dollars into acquiring properties in those sectors this year.
Residential housing investments remain red hot
Blackstone is paying a hefty premium to expand its multifamily portfolio. That's because Bluerock owns apartments in the right location, primarily fast-growing Sun Belt cities. This location focus has the company cashing in on population growth, which is driving high occupancy levels and rental growth rates.
Bluerock reported in the third quarter that lease rates across its portfolio grew by 16.5% compared to rates on expiring leases. Meanwhile, occupancy improved to 96.2%, up from 95.1% in the prior-year period. These factors helped drive a 7.7% improvement in same-store rental revenues in the period.
That fast-paced rental growth rate is leading real estate investors to pour billions of dollars to acquire apartments across the Sun Belt region. For example, large multifamily REITs like Equity Residential (EQR -0.46%) and AvalonBay (AVB -0.81%) have spent a lot of money to expand into the region. Equity Residential has spent over $1 billion to buy apartments in Atlanta, Austin, Dallas, and Denver this year, funded primarily by selling properties in coastal gateway markets. Meanwhile, AvalonBay entered the Dallas and Charlotte, North Carolina markets in the third quarter, buying three apartment communities for more than $250 million.
In the April-to-June time frame alone, real estate investors purchased more than $50 billion of multifamily real estate, according to Real Capital Analytics data. Blackstone has been one of the biggest buyers this year, spending $1 billion on apartments in San Diego and paying $3.6 billion for Bluerock.
Another major buyer has been Independence Realty Trust (IRT 0.66%), which combined with Steadfast Apartment REIT in a nearly $7 billion deal to expand its presence in the Sun Belt region. The driving factor is a desire to own apartments in cities benefiting from population and job growth.
Capital continues to pour into residential real estate
Blackstone's acquisition of Bluerock continues this year's trend of capital pouring into multifamily properties, especially those located in the Sun Belt region. This real estate benefits from growing demand, which has pushed up occupancy levels and rental rates.
While rental rates likely won't continue growing at double-digit rates in the future, Blackstone is betting that apartments in the Sun Belt region should still deliver above-average rental growth in the coming years. That's why it's paying such a high price to acquire Bluerock's apartment portfolio.