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SAN FRANCISCO–Prologis is acquiring rivalindustrial REIT DCT Industrial Trust in astock-for-stock deal for $8.4 billion. The deal, which boards ofdirectors for both companies have approved, comes as e-commerceactivity is driving industrial demand to new heights.

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BTIG estimates that the deal represents“$67.91/sh” for DCT's stock, a 15.6% premium over market close onFriday, April 27. It also estimates the implied cap rate on thetransaction at 4.3% to 4.5%, which is 40 to 60 basis points lowerthan its most recent NAV estimate. BTIG analysts write that whilethe rationale makes sense — portfolio overlap, last-mile/infillfocus, strong development platform — “Prologis offered a sizeablepremium (26.3x 2018 FFO/sh) in an already aggressively pricedsector.”

Complementary Portfolios

Denver-based DCT Industrial Trust's 71 million square footoperating portfolio will expand Prologis' presence inSouthern California, the San Francisco Bay Area, NewYork/New Jersey, Seattle and SouthFlorida. Prologis chairman and chief executive officerHamid R. Moghadam said the REITs' respectiveportfolios are very complementary and will allow Prologis “tocapture significant scale economies immediately.”

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In addition, he said, “our current platform initiatives,particularly in the areas of advanced analytics, customerexperience and procurement and ancillary revenues, will enable usto extract significant upside from the combined portfolios.”

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In a research note Mizuho REITs analyst RichardAnderson called DCT Industrial Trust a “standout” and a“clear growth leader since it revamped the company. The REIT nowhas 71 million square feet of operating assets weighted towardinfill coastal areas. “In our view, the quality of the DCTportfolio and the improvements it has made over the past severalyears are being reflected in the terms of this transaction as theycurrently exist,” he wrote.

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The acquisition will include:

  • 7.1 million square feet of development, redevelopment andvalue-added projects
  • 195 acres of land in pre-development, predominantly in Seattle,Atlanta, South Florida and Southern California with build-outpotential of over 2.9 million square feet
  • 215 acres of land under contract or option, mainly in NewYork/New Jersey, Southern California, Northern California andChicago, with a build-out potential of over 3.3 million squarefeet

The transaction is expected to create near-term synergies of $80million in corporate general and administrative cost savings,operating leverage, interest expense and lease adjustments, whichare forecast to increase annual stabilized core funds fromoperations per share by $0.06-$0.08. A combination of revenuesynergies and incremental development volume could generate $40million of additional annual revenue and development profit in thefuture.

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Under the terms of the agreement, DCT shareholders will receive1.02 Prologis shares for each DCT share they own. The transaction,which is currently expected to close in the third quarter of 2018,is subject to the approval of DCT stockholders and other customaryclosing conditions. At closing, it is expected that DCT IndustrialCEO Philip L. Hawkins will join the Prologis boardof directors.

Unabated Demand For Industrial Product

The industrial sector has been operating at near capacity foryears as e-commerce activity and last mile demand continue to fuelgrowth. As CBRE noted in its 2018 industrial andlogistics report:

Consistent demand for all types of warehouse space, steadily declining availability and a steady rise in rentshave been this cycle's hallmarks, resulting in someimpressive milestones: 30 consecutive quarters of positive netabsorption, availability at its lowest since 2001, and 24consecutive quarters of rent growth.

It predicts that over the next year rents will continue risingat roughly the rate of the past few years. It also notes thatalthough the gap between supply and demand narrowed in 2017 tonear-equilibrium for the first time in more than a decade, theinability of the supply side to meet demand remains a problem. Lastmile users are struggling to find adequate prime infill space,while development of warehouse space in infill locations isdifficult due to the high costs of building in cities and the lackof large sites that can support warehouses.

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Erika Morphy

Erika Morphy has been writing about commercial real estate at GlobeSt.com for more than ten years, covering the capital markets, the Mid-Atlantic region and national topics. She's a nerd so favorite examples of the former include accounting standards, Basel III and what Congress is brewing.