Prologis Wins Over Duke Realty in $26 Billion REIT Mega Deal

Prologis Wins Over Duke Realty in $26 Billion REIT Mega Deal

The giant industrial REIT is getting even bigger.

Prologis ‘ ( PLD -7.51%) perseverance has paid off. After months of failed negotiations, the company finally persuaded smaller rival Duke Realty ( DRE 0.98%) to agree to a merger deal. The combination will create an even larger behemoth in the real estate investment trust ( REIT ) sector.

Here’s a look at the deal and what it means for the industry. The behemoth is getting bigger

Prologis has agreed to acquire Duke Realty in an all-stock deal valuing the fellow industrial REIT at $26 billion, including the assumption of debt. Prologis is already the largest industrial REIT — and one of the biggest REITs overall — with a market cap of more than $81 billion. The combination with Duke — the second-largest industrial REIT, with a market cap of over $19.5 billion — will give it a market value of more than $100 billion.

Prologis will exchange 0.475 of its shares for each Duke Realty share. That’s a slight improvement from its prior exchange offers of 0.465 and 0.466 shares, which Duke had said weren’t enough to get a deal done. The agreed-upon exchange offer represents a nearly 12% premium to Duke’s last closing price. The companies expect the deal to close by the end of this year. Why Prologis wanted Duke so badly

The merger between Prologis and Duke Realty will create an even larger industry behemoth with significant embedded growth potential. Prologis currently owns 1 billion square feet of operating properties around the world. Those properties are 97.4% leased at an average rate that’s 47% below current market rents. In addition, Prologis has enough land to build out 193 million square feet of space at an implied investment of $27.8 billion.

The acquisition of Duke Realty will add 153 million square feet of operating properties across 19 major U.S. logistics markets. This portfolio is 98.4% leased at an average rate 48% below current market rents. In addition, Duke is investing $1.6 billion to develop another 11 million square feet of logistics space. Meanwhile, the company has enough land to build an additional 21 million square feet of warehouse space at a projected cost of $3.5 billion.

Prologis estimates that the addition of Duke Realty will add $0.20 to $0.25 per share to its core funds from operations (FFO) in the first year. That’s meaningful accretion for a company that expects to produce $4.50 to $4.56 per share of core FFO this year. The company should benefit from $310 million to $370 million of cost savings and higher rates as existing leases expire and reset to market rates. In addition, the company sees future cost savings and Duke’s development upside generating $375 million to $400 million of annual earnings and value creation. A bold bet that industrial real estate will remain strong

Prologis’ deal comes at an interesting time for the industrial real estate sector. Industrial REIT stock prices have tumbled over the past few months, largely driven by Amazon ‘s ( AMZN -5.45%) announcement that it had more warehouse space than it currently needs. According to the Wall Street Journal , the e-commerce giant plans to sublease at least 10 million square feet of warehouse capacity. It’s also looking at options to end or renegotiate more leases.

On the one hand, that’s a sizable amount of warehouse space about to hit the open market. However, given that vacancies are at record low levels across most markets and demand from other customers remains strong, it might not impact the market as much as investors fear. Prologis’ deal to acquire its largest rival suggests it doesn’t expect a major slowdown in the industrial real estate sector. Otherwise, it would have waited to buy Duke toward the bottom of the cycle.

One factor driving this view is a recent report it published after the Amazon news. The Prologis report highlighted that the “true months of supply” (a proprietary metric it developed, which compares all vacant spaces to “trailing net absorption”) suggested that all available logistics space in the U.S. would dry up in 16 months at the current pace of absorption and new supply additions. Any number below 50 months has historically driven rent growth, implying that rates likely won’t come down anytime soon. A big vote of confidence for the sector

Prologis had been trying to buy Duke Realty since last November. While a lot has changed in the market since then, the company has remained steadfast in its desire to acquire its largest rival. That […]

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