Will Prologis' Buyout Of DCT Industrial Trust Bear Fruit?

Prologis, Inc. (NYSE:PLD) announced that it has entered into a definitive agreement with DCT Industrial Trust Inc. (NYSE:DCT) to acquire the latter in a $8.4-billion stock-for-stock deal, including debt assumption. Notably, the deal, which is anticipated to create near-term synergies of nearly $80 million, was unanimously approved by both companies’ board of directors.

Moreover, the news was well received by Wall Street, as the company’s shares witnessed a marginal rise on May 1, 2018.

Deal Terms:

DCT shareholders will be given 1.02 shares of Prologis in exchange of each DCT share. The transaction, subject to DCT stockholders’ approval and other customary closing conditions, is expected to close in third-quarter 2018.

How will Prologis Benefit From The Acquisition?

With this acquisition, Prologis adds 71-million-square-foot of operating portfolio that overlaps the company’s existing assets. This enables the company to strengthen its foothold in major high-growth markets of Southern California, the San Francisco Bay Area, New York/New Jersey, Seattle and South Florida.

Further, this deal has helped the company acquire 7.1 million square feet of development, redevelopment and value-added projects, 195 acres of land in pre-development, with build-out potential of more than 2.9 million square feet, and 215 acres of land under contract or option, with a build-out potential of more than 3.3 million square feet.

Considering DCT’s high-quality realigned portfolio, along with an efficient platform and strong customer base, the buyout is expected to solidify Prologis’ market position and improve its growth curve.

Notably, the combined portfolio will allow the company to realize significant economies of scale. In fact, management anticipates that the $80-milion synergies in corporate general and administrative cost savings, operating leverage, interest expense, and lease adjustments will increase stabilized core FFO per share by 6-8 cents, annually.

Furthermore, the combined portfolios indicate the possibility of generating additional annual revenues and development profit to the tune of $40 million, in the future.

Our Viewpoint

Prologis’ acquisition of one of its peers comes at a time when the industrial real estate market is experiencing a boom, courtesy the e-commerce boom. Additionally, there has been a significant increase in the number of industries and companies opting for consolidation of operations in a bid to improve supply chain efficiencies, and shift near large population centers. These factors have driven demand and rent for industrial realties across the nation.

Hence, amid the encouraging market scenario, this acquisition enables the company to expand its reach in major markets without having to individually purchase assets, that would not be viable given the stiff competition for quality assets.

In addition, we note that the company is well capitalized with a solid balance sheet, and the stock-for-stock deal will increase its U.S. dollar net equity.

Moreover, this Zacks Rank #3 (Hold) stock has outperformed its industry in the past three months. The stock has gained 6.3%, while the industry recorded 1% growth during this time frame.

Stocks Worth a Look

A few better-ranked stocks from the same industry are Extra Space Storage Inc. (NYSE:EXR) and Sotherly Hotels Inc. (NASDAQ:SOHO) , both carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Extra Space Storage’s FFO per share estimates for the current year remained unchanged at $4.59 in a month’s time. Its shares have gained 13.2%, over the past three months.

Sotherly Hotels’ FFO per share estimates for 2018 remained unchanged at $1.05 over the past month. The stock has climbed 11.5% during the past three months.

Note: Anything related to earnings presented in this write-up represents funds from operations (FFO) — a widely used metric to gauge the performance of REITs.

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