The real estate investment trust (REIT) sector has been undergoing massive consolidation lately. Known as “dividend cash cows,” investors find a safe haven in REIT stocks when the tides are running low.
Private equity firm Blackstone Group (BX) has jumped on the REIT bandwagon lately, with multiple investments and purchases being made in the sector recently. REITs typically acquire and dispose of assets on a regular basis, making it a very dynamic sector. Additionally, bigger fish in the industry are constantly on the lookout for attractive smaller ones. One such deal attracting maximum traction today is Prologis’s (PLD) offer to buy Duke Reality (DRE).
Prologis owns and manages massive warehouses which are rented out to retail, logistics, and e-commerce giants, including Amazon (AMZN), Home Depot (HD), and FedEx Corp. (FDX), to name a few.
As of March 31, 2022, Prologis had about 1,001 million square feet (MSF) of warehouse space under its umbrella spread across four continents and boasted $214 billion of assets under management.
As per stats, about $2.2 trillion worth of economic value of goods passed through PLD’s distribution centers globally, which is approximately 2.5% of the world’s GDP. The numbers themselves speak volumes about the length and breadth of PLD’s operations in the space.
Meanwhile, Duke Realty is a U.S.-based REIT with a focus on the ownership, management, and development of industrial properties. DRE owns approximately 160 million rentable square feet of high-quality industrial assets in 19 key U.S. logistics markets and is celebrating its golden jubilee this year. Similar to PLD, DRE stock has lost 22.8% year-to-date, vis-à-vis gaining 11.6% over the past year.
Prologis’s Offer for Duke
Global warehouse REIT mammoth Prologis has pitched to purchase industrial REIT giant Duke Realty in an all-stock deal valued at $23.7 billion.
Prologis has offered to buy each share of DRE for $61.68 a piece, reflecting a 29% premium to DRE’s closing price on May 9. Should the deal conclude, each shareholder of Duke Realty would get around 0.466 shares of Prologis. Moreover, post the takeover, Duke shareholders will own 19% of the combined entity.
Prologis has been negotiating internally with Duke Realty for a possible buyout deal since November 2021. However, a lack of interest from DRE’s management forced the former to make an unsolicited bid. Meanwhile, the implied premium on Prologis’s bid has been rising steadily over five months of negotiation and is currently 10% higher than the initial bid set in November.
Following the news, PLD stock fell 5.3% to close at $125.41 and extended the losses during after-hours trading. Meanwhile, DRE stock surged more than 18% on the news but ended the day up only 3.9% to close at $49.58. However, the uptick in price was far from the bid price offered by Prologis.
Usually, when a bid is made, investors push up the stock price of the target company very close to the offer price. But in DRE’s case, the stock price didn’t show much reaction, probably implying that investors are not too thrilled about the deal, or that they demand a higher price.
What Makes this Deal Lucrative for Prologis?
Under the current scenario, the demand for e-commerce and logistical services has received a huge boost, owing to both the pandemic and shifting consumer preferences for convenience. The ongoing supply chain issues, port congestion, and container shortages have pumped up the demand for warehousing and storage spaces.
Notably, surging rental rates and a limited supply of warehouse space are two of the major attractive forces for the sub-sector.
Prologis Research forecasts that in 2022, vacancies will remain at historic lows, propelled by net absorption of 375 MSF, lower than completions of 400 MSF. As a result, PLD expects that rent rates in the U.S. market will rise another 10% on top of the already sky-high rent rates. Moreover, PLD expects the supply chain issues to linger into 2023, adding to the competition for already low vacant spaces in the industrial and warehouse sub-segments.
According to the Co-founder, Chairman and CEO of Prologis, Hamid R. Moghadam, the combined entity will have significant synergies and will be immediately accretive to core FFO (less promotes) to both shareholders. Duke’s ready portfolio of assets will be highly complementary and immediately add to PLD’s upswing in revenue.
Writing to Duke Realty CEO James Connor, Moghadam concluded, “Jim, we are committed to completing the acquisition of Duke Realty. I hope that you, your board, and your advisors are prepared to engage with us. Again, we firmly believe this proposal is the best path to drive long-term value for Duke Realty shareholders.”
Following the news of the bid, Truist Financial analyst Ki Bin Kim maintained a Buy rating on the PLD stock with a price target of $166, which implies 32.4% upside potential to current levels.
As per Kim, the acquisition of DRE will be 1% accretive to the combined entity in year one, followed by a 100-200 basis point further accretion in year two. Notably, the analyst thinks that a bid with a 29% premium will be difficult for DRE’s Board to disapprove, especially considering the current uncertain macroeconomic environment.
The other analysts on the Street also have a Strong Buy consensus rating on the PLD stock, with 11 Buys and three Holds. The average Prologis price target of $179.36 implies 43% upside potential to current levels.
Concluding Thoughts
All things are working in favor of the REIT sector currently, with record high rental rates and robust underlying demand and supply crunches.
Considering the current volatility in the markets and the accelerated pace of consolidation, the high premium offered to DRE shareholders looks very attractive. Furthermore, the combined entity post-takeover will be in a better position to generate value from its platform and scale. Plus, the current DRE shareholders will get a share of the combined entity, unlike other cash offers which sweep out investments in one go, making it a win-win situation for both parties.
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