How Blackstone turned an overlooked real estate company into gold [case study]
We recently analyzed one of the smartest private equity plays in real estate history: Blackstone's 2021 acquisition of QTS Realty Trust.
---- The Setup ----
QTS by the numbers (pre-acquisition):
-- $300M annual NOI
-- $1B in development projects
-- $500M cash vs $2.8B liabilities (mostly long-term debt)
-- Growing NOI 10-20% annually
---- Challenges ----
-- Too small to compete with data center giants
-- Larger peers were 7 -10x larger
-- G&A drag was 2x peers on a relative basis
-- Growth funded with equity, seen as dilutive
-- Analysts thought it was fairly valued at $8B
---- Opportunity ----
What did Blackstone see?
-- Scale potential: QTS had prime development sites but lacked capital
-- AI timing: Data demand was about to explode
-- Attractive development margins
-- Another unique platform (like BX's prior acquisitions)
---- Execution ----
Blackstone's playbook:
-- $10B all-cash takeover.
-- Eliminated equity dilution with aligned capital
-- Funded massive development acceleration
-- Added operational expertise to reduce G&A drag
---- Results ----
-- Revenue growth since acquisition: $0.7B to $4.2B
-- +500 bps of annual returns for BREIT
-- Development pipeline from $1B to $25B, $80B potential
-- While the rest of the market sank by 20%
---- Takeaways for real estate investors ----
When modeling investment returns, garbage-in-garbage-out is a real risk. ...but so is oversimplification. Many pundits thought Blackstone was crazy to buy this data center REIT at a 3% going-in yield, 4.3% on the REIT's operating assets. But what did Blackstone see that others didn't? Growth.
Sometimes speculating on future growth ends badly (ask apartment syndicators), but sales normally go to the highest bidders, which means investing prudently has a lot to do with being able to handicap relative uncertainty around growth.
Since sales go to the highest bidders, attributing no value to growth most frequently means you're not an equity investor.
PS - Want to go beyond the headlines to understand the frameworks that drive real estate transactions and capital markets? DM us to explore our upcoming FastTrack cohort.
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