• Prologis Offers To Buy Warehouse Developer Duke Realty in $24 Billion Deal

    Prologis, the nation’s largest industrial real estate investment trust, is offering to buy Duke Realty in an almost $24 billion deal that’s just the latest in a flurry of acquisitions among REITs since last year, particularly those that own warehouse and logistics property.

    San Francisco-based Prologis sent a letter Tuesday to James Connor, chairman and CEO of Duke, with the all-stock offer after months of pursuing the Indianapolis-based company. The 20% premium on Duke shares that Prologis offered back in November has increased to 29% in the new offer.

    Demand for industrial properties has accelerated during the pandemic as a result of increased online shopping that requires warehouses to process orders for delivery to doorsteps. The Prologis offer reflects demand for industrial properties that has been producing strong results for Duke, and it indicates that desirability of industrial real estate is still increasing.

    “We are confident that the proposed combination will be a win-win for our respective shareholders,” Prologis CEO and co-founder Hamid Moghadam said in a statement. “Prologis has a proven track record serving as a leader and innovator in our industry."

    There were 15 acquisition deals in the REIT industry last year totaling $84 billion, according to the industry trade group Nareit, including Industrial Logistics Properties Trust agreeing to pay $4 billion for industrial REIT Monmouth Real Estate Investment Corp. The Industrial Logistics bid beat out aggressive offers from commercial real estate magnates Sam Zell and Barry Sternlicht, showing the increasing desirability of industrial sites.

    In the Prologis offer, Duke stockholders would receive 0.466 a share of Prologis common stock for each share of Duke they own in a proposal valued at $61.68 for each Duke share, which closed Monday at $47.71, in a $23.7 billion deal. Following discussions between executive teams, Prologis first sent a letter to Duke in November regarding a potential transaction at an exchange ratio of 0.465 a Prologis share.

    Sweetening the Deal

    Over the past five months, Duke has not substantively engaged Prologis while the implied premium of the offer has steadily increased, according to Prologis.

    On May 3, Prologis modestly increased its proposed exchange ratio based on Duke’s stock price at the time — in a final attempt to engage privately to reach agreement on a mutually beneficial transaction, according to analysis by Morgan Stanley Research. Duke rejected the Prologis proposal that same evening, Morgan Stanley said.

    In an email to CoStar News, Ron Hubbard, head of investor relations for Duke, said, “We cannot comment on anything related to this at this time. We will make a statement when appropriate.”

    Economies of scale have been a large driver of growth for Prologis, Morgan Stanley said Tuesday following the offer announcement. Prologis has used all-stock transactions previously to drive that growth. Such deals include Prologis’ acquisitions in 2020 of Liberty Property Trust for $13 billion including the assumption of debt.

    With Duke, Prologis would be getting a portfolio of properties that are larger in size on average than Prologis’ current holdings, according to Morgan Stanley. The average warehouse size for Duke is 315,000 square feet, while Prologis’ average warehouse size is closer to 210,000 square feet. Duke said earlier this year it’s reached 100% occupancy for its industrial portfolios in Chicago and Texas.

    From a geographic perspective, there is overlap in the two companies’ portfolios in major coastal gateway markets such as Southern California and New Jersey, where Duke has been expanding aggressively. However, Morgan Stanley suggested Prologis’ holdings on average may be closer to consumers.

    Analyzing Potential Acquisitions

    Prologis’ Moghadam talked about the company’s outlook for acquisitions this year in his first-quarter earnings conference call last month.

    “Our general appetite for acquisitions is always the same," he said. “We look at every single deal of any significance that happens in any of our markets. You would expect us to. And usually, the three criteria that we look at are: number one, fit with the portfolio in terms of quality and location; the second would be valuation and economics and returns and things of that nature; and third, we look at a process and determine whether it's a process we can be successful in or not.”

    Duke reported net income of $0.65 per diluted share for the first quarter, compared to $0.21 per diluted share for the first quarter of 2021. The company attributed the significantly higher net income to gains on property sales.

    It also increased its earnings guidance for the year.

    “Our increases to guidance this quarter are based on the continued acceleration of market rents and strong demand for industrial space, as we have continued to benefit from strong rent growth, occupancy and embedded rent escalators in our portfolio,” Mark Denien, Duke’s executive vice president and chief financial officer, said in a statement.

    He added that “we have also increased our development guidance to fund growth, primarily in coastal tier one markets."

    Source: www.CoStar.com