Friday, May 4, 2018

Prologis to Acquire DCT Industrial Trust

Prologis Inc., the world's largest logistics property owner, has agreed to buy Denver-based DCT Industrial Trust Inc. for $8.4 billion in stock and assumed debt.

The boards of directors of both companies unanimously approved the all-stock definitive merger agreement in which Prologis will add DCT's existing 71 million-square-foot portfolio plus 7.1 million square feet of development and redevelopment projects and 195 acres of land, predominantly in Seattle, Atlanta, South Florida and Southern California, with development potential of 2.9 million square feet.

The merger also includes 215 acres of projects under contract or option for sale in New York and New Jersey, Southern California, Northern California and Chicago with build-out potential of more than 3.3 million square feet.

The portfolio bolsters Prologis’ (NYSE: PLD) presence in such high-growth markets as Southern California, the San Francisco Bay Area, New York and New Jersey, Seattle and South Florida. Prologis Chairman and Chief Executive Officer Hamid Moghadam said the San Francisco-based REIT has for some time considered DCT’s portfolio to be complementary in quality, market position and growth potential.

Gene Reilly, Prologis CEO of the Americas, noted that the company expects to sell off about $550 million of the DCT property over the next two years, less than 7% of the portfolio.

"This high level of strategic fit will allow us to capture significant scale economies immediately," Moghadam said. "What we're picking up is 71 million square feet of irreplaceable real estate and we're keeping 93 percent of it. It would have taken us years and years to [aggregate] this portfolio in this type of market."

Moghadam noted that the two companies' complementary portfolios in key submarkets, sometimes within the same business parks like DCT properties in Sumner, WA; Brisbane, CA in the San Francisco Bay Area and Miami's Beacon submarket, make the merger more valuable than the sum of its parts.

"Having that kind of share and market presence, the ability to move tenants around and the ability to understand tenants' options and be able to serve them better, those are all intangibles that we have certainly not factored into the economics of this transaction," Moghadam said.

Logistics Firms Join Lodging, Mall Cos. as M&A Targets
Analysts said to expect more consolidation activity this year among REITs and other real estate operators.

In addition to the proposed Prologis/DCT merger, Marriott Vacations Worldwide Corp. today agreed to buy ILG Inc. in a stock-and-cash deal valued at $4.7 billion, creating the largest luxury brand for timeshare vacation resorts. The pairings are the second and third notable real estate buyout transactions announced this year, in addition to mall owner GGP Inc.'s acceptence of a $9.25 billion cash-and-stock offer from Toronto-based Brookfield Property Partners L.P.

In the lodging sector, Pebblebrook Hotel Trust last week stepped up overtures to buy LaSalle Hotel Properties, upping its offer to $3.7 billion.The proposed $26.5 billion pairing of T-Mobile US and Sprint Corp. announced over the weekend could affect millions of square feet of commercial property.

With REITs trading at discounts to net-asset values in the mid-teens and the market awash in public and private capital, 2018 is positioned to be a year of consolidation, REIT analyst Mitch Germain said in a note to clients.

"We anticipate the potential for additional M&A activity as there are record levels of private-equity dry powder on the sidelines and debt financing is readily available," Germain said.

Logistics has been among the hottest property sectors as e-commerce growth has fueled demand for more distribution centers, including locations near population centers in the final link of the supply chain to ship online purchases quickly to consumers. The transaction is Prologis's largest since the $8.4 billion acquisition of AMB Property Corp. in 2011, at the time the second-largest industrial REIT behind Prologis.

John Guinee, analyst with Stifel, Nicolaus & Co., said investors should look for more mergers & acquisitions activity in the industrial REIT sector amid impressive operating and leasing conditions and stronger-than-expected e-commerce demand.

"While we do not expect a topping bid [for DCT], we do assume that the other industrial REITs will be fielding or fending off acquisition proposals sooner than later," Guinee said.

The merger reflects the frustration of many buyers and abundance of capital trying to compete for a very limited number of logistics assets coming to market, said John DeGrinis, senior executive vice president, North Los Angeles in Colliers International's Encino market.

"This doesn't surprise me," DeGrinis told CoStar News, adding he expects to see more M&A activity in the sector. "It was becoming very evident a year ago that these two REITs and 30 or 40 other companies are all trying to do the same thing, which is buy and lease industrial properties or buy land to build assets."

"Keep in mind that when a big portfolio comes to market, there are probably 100 entities that would love to buy it, but 40 guys that get the offering memorandum and only one wins," DeGrinis added. "It's so difficult that I was wondering when the REITs would start taking over one another as another way to amass assets."

Under the terms of the deal expected to close in the third quarter, DCT shareholders will receive 1.02 Prologis shares for each DCT share. The price represents a roughly 16% premium for DCT shareholders. Prologis expects DCT President and CEO Philip Hawkins to join the Prologis board of directors.

Matt Kopsky, REIT analyst with Edward Jones, said the merger is a good strategic fit, as DCT owns warehouses in high-growth markets, which overlap nicely with Prologis's portfolio.

"DCT has a robust development pipeline in core markets," Kopsky said. "While a lot of [the pipeline] is speculative, we believe there is strong demand in these markets to fill them quickly."

While the economic cycle is in its later stages, Kopsky said industrial property markets have strong staying power given the growth in e-commerce demand and the modernization of supply chains to accommodate that growth.

"Well-located industrial real estate has pricing power and we believe that Prologis paid a fair price to acquire more of this," Kopsky said.

J.P. Morgan is acting as financial advisor and Mayer Brown LLP serving as legal advisor to Prologis. BofA Merrill Lynch is serving as financial advisor and Goodwin Procter LLP as legal advisor to DCT.

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