• Prologis To Acquire Duke Realty in $26 Billion All-Stock Deal

    Real estate investment trust Prologis said it will buy smaller rival Duke Realty in a $26 billion deal, following months of Duke giving Prologis a cold shoulder about combining.

    The stock transaction, which includes the assumption of debt, comes at a time of fluctuation in the capital markets with volatility in stock values and borrowing costs. It also follows e-commerce giant Amazon, a major tenant of both REITs, saying it plans to scale back its expanding use of industrial space.

    “This transaction increases the strength, size and diversification of our balance sheet while expanding the opportunity for Prologis to apply innovation to drive long-term growth,” Tim Arndt, Prologis’ chief financial officer, said in a statement. “In addition to generating significant synergies, the combination of these portfolios will help us deliver more services to our customers and drive incremental long-term earnings growth.”

    With the Duke transaction, San Francisco-based Prologis — the largest U.S. industrial REIT — is gaining properties in key regions, including Southern California, New Jersey, South Florida, Chicago, Dallas and Atlanta. It also reflects increased industrial space demand: In May, there were more than 80 million square feet of industrial leases signed across the country, up 16% from the same month a year earlier and 85% higher than May 2019, almost a year before the arrival of the pandemic, according to CoStar research.

    There will be no significant funding requirements because the deal will be concluded through a 100% stock-for-stock transaction, Arndt told analysts on a call Monday.

    “Like Prologis, Duke has no meaningful debt maturities until 2026, keeping interest rate exposure limited and preserving incredible flexibility for how and when we refinance debt,” Arndt added.

    However, rising interest rates may deter other bidders from making a larger offer.

    “We estimate this values" Duke at a 3.7% implied rate of return, John P. Kim, industrial REIT analyst for BMO Capital Markets, wrote in a note to clients. "Given rising interest costs, we don’t anticipate a competing bid (namely, Blackstone) despite" Duke’s "high-quality portfolio."

    Solid Demand Seen

    Prologis said it isn’t concerned with the pullback of Seattle-based Amazon from taking on new industrial space.

    “This Amazon thing honestly has gotten so much misinformation and play,” Hamid Moghadam, chairman and CEO of Prologis, said on the conference call. “Nothing in anything that they said was something new.”

    Moghadam said Amazon has been signaling its intentions to slow its expansion for two or three years.

    “I’m not at all concerned about Amazon because it’s not ‘the’ driver, but it’s a big driver. If anything [e-commerce demand] is getting broader today than it was a couple of years ago and, yes, Amazon could be having a lower share of that, but certainly the overall market is broader than it would have been,” he said.

    The acquisition includes 153 million square feet of operating properties in 19 major U.S. logistics geographies; 11 million square feet of development in progress — about $1.6 billion in total expected investment; and 1,228 acres of land owned and under option with a build-out of about 21 million square feet.

    Prologis plans to hold roughly 94% of Indianapolis-based Duke’s assets and exit one market, which it did not identify.

    “With respect to the 6% that we’re planning for sale, we’re perfectly happy keeping those [properties] for some period of time,” Moghadam said. “I think we can extract the best value out of those assets when the time comes up.”

    Prologis said it would also complete all projects under development and keep Duke’s land bank.

    Last month, Duke rejected a nearly $24 billion acquisition offer from Prologis, calling it insufficient. The decision was at least the second time Duke spurned a Prologis proposal to combine over a period of several months, but it left the door open for another offer.

    With the combined company, Prologis expects to generate about $375 million to $400 million in annual savings and value creation, including $70 million to $90 million from incremental property cash flow and $300 million in incremental development value creation.

    The transaction still needs approval from both REITs and is expected to close in the fourth quarter.

    Source: www.CoStar.com