Prologis made a true blockbuster announcement this week when it said it would pay $8.4 billion for Denver-based DCT Industrial Trust.
It appears to be the second-largest industrial real estate transaction ever.
Ironically, the only bigger industrial deal occurred in 2011, when AMB Property Corp. paid $8.7 billion in stock for the larger Prologis. AMB, based in San Francisco, kept the Prologis name.
AMB that year also moved the corporate headquarters of Prologis to San Francisco from Aurora.
Prologis, in fact, the largest industrial real estate investment trust in the world, for most of its history was based in the Denver area.
In 1991, REIT pioneer William Sanders formed Security Capital Industrial Trust. SCN went on a buying spree and in 1993 entered the Denver market. SCN was one of the first big players to pick up industrial properties at still depressed prices following the real estate crash of the mid- to late 1980s caused by falling energy prices and tax law changes.
In 1998, SCN changed in name to Prologis Trust, and five years later it dropped the Trust and became simply Prologis. Prologis is an abbreviation for “professional logistics.”
Prologis is, without doubt, the 800-pound gorilla in the logistics industrial game. With a portfolio of 761 million square feet worldwide, it is about 70 percent bigger than its next five competitors combined.
The price Prologis is paying for DCT is a 15.6 percent premium to its closing last Friday, before the announcement. On Monday, DCT was the 14th best performing stock in the U.S.
And for those who really like to get down and dirty with numbers, Prologis is paying a 4.4 percent cap rate for DCT’s portfolio, while Prologis’ U.S. portfolio has a 4.6 percent cap rate.
Hamid Moghadam, the CEO and chairman of Prologis and the co-founder of AMB Property, noted that the company is not “stealing” DCT but is paying a fair price for a company with such high-quality assets.
A decade ago, Prologis, despite being the largest industrial REIT in the world, was on the ropes.
In 2008, during the Great Recession, its stock had fallen as low as $7.22, when adjusted for splits and dividends.
Yet, if you were brave enough, astute enough or just plain lucky and bought Prologis’ stock at its nadir and held on, you would have been rewarded with a more than 800 percent return.
By contrast, if you had bought a S&P 500 mutual fund or exchange traded fund at the same time and held on, you would have received about a 335 percent return.
Clearly, industrial REITs flourish and wither with the economy.
When times are tough, there is less reason to fill warehouses with goods. When the economy is booming, so are warehouses, especially the ones that are owned by companies that are masters of quickly delivering items stacked from floor to ceiling.
Frankly, the companies owe a lot of their success to Amazon, which is the top customer by rent for both companies.
Philip L. Hawkins, the CEO and president of DCT, noted in a conference call this week that his company has competed with Prologis for a long time. (Interestingly, before joining DCT in 2006 and bringing it public, he was the president and CEO of CarrAmerica Realty Corp. and was an executive with LaSalle Partners. Both CarrAmerica and LaSalle (now Jones Lang LaSalle) were companies started by Sanders, the father of Prologis.)
“I have a great deal of respect” for the leadership team at Prologis, Hawkins said.
Right back at you, according to Moghadam. He said he has “tremendous respect and admiration” for Hawkins and his colleagues at DCT.
Hawkins said that while, “maybe,” DCT could have eventually outperformed the premium offered by Prologis, he has no doubt the sale is a “great deal for DCT shareholders.”
Emotionally, selling the company is more difficult than he expected, though.
The sale, Hawkins noted, is the “beginning of the end” for DCT, a company where he has not only colleagues but also close friends.
Still, during the past several weeks he has spent a lot of time “looking under the hood of Prologis” and came away impressed.
He thinks DCT employees who join Prologis will do great and so will DCT employees who pursue ventures outside of Prologis.
The deal is expected to close in the third quarter.
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