Funds managed by private equity giant Blackstone Group (NYSE: BX) have agreed to acquire real estate investment trust (REIT) QTS Realty Trust (NYSE: QTS). The all-cash transaction values the data center REIT at $10 billion.
It's a notable deal for a couple of reasons. First, it continues the blistering pace of M&A in the REIT sector this year. It also shows that Blackstone sees a bright future for data infrastructure.
A closer look at the deal
Blackstone Infrastructure Partners, Blackstone Real Estate Income Trust (BREIT), and other long-term, perpetual capital vehicles managed by Blackstone have agreed to pay $78 per share in cash for QTS Realty. That price point represents a 21% premium to QTS Realty's prior closing price and a 24% premium to its volume-weighted average share price over the last 90 days.
Blackstone anticipates that the deal will close in the second half of this year. However, it's given QTS Realty a 40-day "go-shop" period to solicit other offers, which will expire on July 17. Given that opportunity, the REIT might secure a better transaction. For example, a fellow data center REIT could pursue a strategic merger, or another private equity fund could offer a higher price.
Merger mania hits the REIT sector
Blackstone's proposed acquisition of QTS Realty is the latest in a string of M&A activity in the REIT sector this year. Other notable deals include:
- Realty Income's (NYSE: O) $50 billion mega-merger with VEREIT (NYSE: VER)
- Equity Commonwealth's (NYSE: EQR) $3.4 billion merger with industrial REIT Monmouth Real Estate Investment (NYSE: MNR)
- Kimco Realty's (NYSE: KIM) $12 billion combination with Weingarten Realty Investors (NYSE: WRI)
- Brookfield Asset Management's $6.5 billion privatization of affiliate Brookfield Property (NASDAQ: BPY) (NASDAQ: BPYU)
Meanwhile, Blackstone is also working with Starwood Capital to acquire Extended Stay America (NASDAQ: STAY) for more than $6 billion.
Dual catalysts are driving this M&A boom. First, private equity funds are flush with cash and have access to low interest rates, giving them lots of dry powder to make deals. Meanwhile, REITs are taking advantage of last year's downturn to consolidate in mergers that will increase their scale so they can generate more cash flow as the commercial real estate market recovers.
Why Blackstone wants QTS Realty
Blackstone wants to add QTS Realty's data center operations to its portfolio because of the growth it sees ahead in the data infrastructure segment. Tyler Henritze, head of acquisitions Americas for Blackstone Real Estate, noted in the acquisition press release that Blackstone is "focused on investing in assets that are benefiting from strong, secular tailwinds, such as the rapid digitalization of data."
QTS Realty fits that strategy, given its portfolio of high-quality data centers in leading markets. It currently owns more than 7 million square feet of mega-scale data center space across North America and Europe. That will give Blackstone a well-positioned platform to "capitalize on these powerful trends in the data center space," Henritze added.
Data is growing exponentially. According to one estimate, worldwide data will hit 175 zettabytes by 2025, representing a 61% compound annual growth rate. To put a zettabyte into context, it's 10,000 terabytes (TB), with one TB being 1,000 gigabytes or about eight smartphones with 128 megabytes of data. In other words, we're talking about a lot of data.
That's enabling data center REITs like QTS Realty to steadily expand their data center operations. For example, the company invested $112.4 million to add 56,000 net rentable square feet at four of its data centers in the first quarter. Meanwhile, it's investing $543 million across several other projects to expand its capacity further.
Given the growing demand for data infrastructure, it should have no problem continuing to expand its operations. The REIT is also benefiting from higher rental rates at its existing space as lease contracts expire. Those dual growth drivers could enable Blackstone to generate compelling returns for its investors over the long term.
A long-term trend that real estate investors won't want to miss
The digital economy is generating an increasing amount of data, which will drive demand for additional infrastructure for years to come. That's leading Blackstone to buy up data center REIT QTS Realty so that its investors can benefit from that mega trend. Blackstone's big bet on data is another reason why real estate investors should take a closer look at investing in the data infrastructure mega trend, since it could produce compelling total returns in the coming years.