KKR (NYSE: KKR) is cashing in on the industrial real estate boom. The private-equity giant has agreed to sell a portfolio of 149 high-quality distribution buildings with 14.5 million square feet of space across a dozen markets to Oxford Properties, the real estate arm of Canadian pension fund Ontario Municipal Employees Retirement System.
The $2.2 billion deal will see the private equity firm cash in on its strategy of assembling a portfolio of logistics properties in recent years. However, the sale doesn't mean KKR is any less bullish on the sector's long-term prospects.
Building a more valuable portfolio one deal at a time
KKR has become a major player in the real estate market. The firm had $32 billion of real estate assets under management across several property types. One of its largest areas of focus is industrial real estate, where it recently owned more than 35 million square feet across several major U.S. metro areas.
KKR built that portfolio one property deal at a time. Over the last four years, it closed more than 50 individual property transactions to construct its industrial operating portfolio, Alpha Industrial Properties. These deals have come in all shapes and sizes.
For example, last December KKR bought a portfolio of 9.7 million square feet of industrial properties across seven major U.S. markets for $835 million. Meanwhile, in March of this year, it purchased a five-building industrial portfolio in Phoenix with 540,000 square feet for $68 million. It has also made one-off property purchases in Denver and Southern California this past month.
This strategy of steadily building a large-scale industrial portfolio one deal at a time is now paying off, as KKR is selling a portion of its properties to Oxford. That sale validates its strategy, unlocking the value it created by building that portfolio for its investors. It also showcases the market opportunity it still sees ahead for industrial real estate.
A blistering hot sector
KKR made it clear that it's not exiting industrial real estate with this deal. Quite the contrary, it will continue to hold more than 20 million square feet of industrial real estate across several major U.S. markets. That portfolio positions it to capture some of the upside it sees ahead from the sector. Meanwhile, the sale allows it to cash in the demand from investors who want to get into the space.
Demand for industrial real estate is scorching hot. Industry leader Prologis (NYSE: PLD) said that "demand for logistics space is robust and diverse, and operating conditions remain the healthiest in our 38-year history." Because of that, the industrial REIT (real estate investment trust) noted in a recent press release that "vacancies in our markets are at all-time lows, contributing to record rent growth."
Those tight market conditions are driving the need for more warehouse space in the U.S. According to CBRE, the U.S. will need to add 330 million square feet of new warehouse space dedicated to online order fulfillment alone by 2025 to support the projected rise in online sales. But while companies like Prologis are investing billions in building this space, several roadblocks make it more challenging to develop more warehouse space. This means existing space is becoming increasingly more valuable.
That's leading real estate investors to pay big money for a large-scale platform of warehouse properties. For example, Blackstone Group's (NYSE: BX) non-traded REIT, BREIT, recently agreed to acquire WPT Industrial Real Estate Investment Trust (TSX: WIR.UN), a Canadian REIT focused on the U.S. industrial sector, at a hefty 32.1% premium to its net asset value (NAV).
Meanwhile, real estate titans Sam Zell and Barry Sternlicht are battling for control over another industrial REIT, Monmouth Real Estate Investment (NYSE: MNR). Zell's Equity Commonwealth (NYSE: EQC) recently boosted its bid by 6.4%, bringing its total premium to more than 23.1% above the REIT's pre-deal trading price. These savvy investors are willing to pay a big premium for a large-scale industrial portfolio so that they can benefit from the sector's long-term upside.
Harvesting value from a red-hot sector
KKR is cashing in on a portion of the industrial portfolio it built over the last few years. That deal showcases the value created in its strategy. Meanwhile, it can continue capturing the sector's upside potential with its retained portfolio as it benefits from the e-commerce megatrend. That market opportunity is why real estate investors will want to look for ways to add this sector to their portfolios.