Prologis Reaches $26B Deal To Buy Duke Realty
The largest owner of industrial property in the world is poised to make its biggest expansion yet.
Prologis has reached an agreement to acquire Duke Realty Corp. in an all-stock transaction valuing the latter at $25.6B, including debt, the two publicly traded REITs announced on Monday. Duke shareholders will receive 0.475 shares of Prologis for each share in Duke they own when the transaction closes, likely in the fourth quarter.
The transaction, which both companies' boards agreed to unanimously but is still pending shareholder approval, is the culmination of a months-long courtship of Duke by Prologis, which had most recently offered 0.466 shares per share of Duke, at a total value of $24B, in May. When Prologis' most recent offer was formalized on Friday, it represented a 31% premium on Duke's public value, according to a presentation to investors Prologis released on Monday.
When the transaction is complete, Prologis will add 165M SF of assets, all in the U.S., to its global portfolio, which had just cracked 1B SF this year, according to the presentation. Prologis plans to exit one of Duke's markets but hold 94% of the latter's portfolio.
In addition to Duke’s portfolio of completed warehouses, which was over 98% occupied at the time of the announcement, Prologis is set to acquire 11M SF worth of distribution centers that are under construction, potentially worth a combined $1.1B, it said in the announcement. Duke also owns land with development rights for a further 21M SF of warehouses, worth a potential $3.5B.
The acquisition could be significant in keeping Prologis atop the list of the world’s largest owners of industrial real estate, as Blackstone has amassed 950M SF since entering the asset class just 10 years ago, Quartz reports.
Mergers and acquisitions have become the most effective method for Prologis to grow its portfolio of warehouse assets in recent years as its acquisition targets have grown. Prologis paid more than $8B to acquire DCT Industrial Trust in 2018. In 2019, it paid over $12B to buy Liberty Property Trust. Both purchases were in all-stock transactions. Prologis paid 15.6% and 21.3% premiums on DCT and Liberty's public stock prices at the time, according to its investor presentation.
Prologis expects to realize between $310M and $370M in value accretion within one year of completing its acquisition of Duke, with as much as $300M coming from expected rent hikes of Duke’s tenants. In Southern California, New Jersey and Pennsylvania — three of the markets in which Prologis’ portfolio stands to grow the most from the transaction — tenants whose five-year leases expired last year faced rent hikes over 60%. For tenants in expiring 10-year leases, renewals have been even more expensive.
Though the health of the global economy has deteriorated significantly in the past few months, Prologis still expects 2022 to be another year of major rent growth for in-place tenants, company leadership said on its first-quarter earnings call. Pandemic-induced supply chain revamps from companies of all sizes have created unprecedented demand that even huge increases in construction have failed to keep pace with, leaving the pipeline for new warehouse space thinner than it has ever been, Prologis researchers said in a May webinar.
All this comes in the context of Amazon, the single biggest driver of industrial demand for years now, planning to put at least 10M SF of its leased warehouse portfolio up for sublease as it has acknowledged being a bit overzealous in its pandemic expansion. Prologis owns more Amazon-leased industrial real estate than any other company.
Even as the Amazon executive who led that expansion has resigned, and even as the company delays planned openings of some of its newest distribution centers, the number of potential tenants that Amazon outbid during its expansion drive leaves a deep pool of potential subtenants and backfill opportunities, the heads of both Prologis and Duke said at a trade event on Thursday.