Prologis set to acquire Duke Realty through $26 billion all-stock deal

Following its most recent overture in early May, which was denied, San Francisco-based real estate investment trust company Prologis said it had finally closed the deal, announcing it had entered into a definitive merger agreement to acquire Indianapolis-based Duke Realty Corporation, a sustainable industrial real estate development and the largest domestic-only logistics REIT (Real Estate Investment Trust).

Prologis officials said that the deal is a valued at roughly $26 billion in an all-stock transaction, including the assumption of debt, with the respective board of directors for Prologis and Duke unanimously signing off on the transaction. And they added that Prologis will hold roughly 94% of Duke Realty assets and exit one market.

Prologis is the largest industrial global real estate company, with ownership, or investments in, on a wholly-owned basis or through co-investment ventures, properties and development projects expected to total approximately 1.0 billion square feet (93 million square meters) in 19 countries, according to its website. Prologis leases modern logistics facilities to a diverse base of approximately 5,800 customers principally across two major categories: business-to-business and retail/online fulfillment, it added. And Duke Realty owns and operates approximately 164.9 million rentable square feet of industrial assets in 19 major logistics markets. 

The acquisition on an owned and managed basis comprises the following, according to Prologis:

• 153 million square feet of operating properties in 19 major U.S. logistics geographies;
• 11 million square feet of development in progress – about $1.6 billion in total expected investment; and
• 1,228 acres of land owned and under option with a build-out of approximately 21 million square feet

On a conference call earlier today, Prologis Co-founder, CEO and Chairman Hamid R. Moghadam said that Duke is a company Prologis had been interested in for some, time, adding that he has great respect for Duke Chairman and CEO Jim Connor and his management team and the portfolio they have built and curated over the years. Connor will join the Prologis board of directors upon completion of the deal.

“The assets are highly complementary to ours both in terms of physical qualities and market selection, he said. “We pursued this acquisition primarily because the combination makes great sense from a long-term growth perspective for both companies’ customers and shareholders. Our focus on customer innovation has created a platform on which assets simply perform better. Our M&A history clearly demonstrates our ability to integrate assets and people into our business and to unlock additional value in acquired portfolios.”

Prologis Chief Investment Officer Gene Reilly said on the call that the Duke Realty portfolio is located in preferred sub-markets of major U.S. markets, including Southern California, New Jersey, South Florida, Chicago, Dallas, and Atlanta.

“Duke has done an impressive job over many years repositioning its business and the company’s history as one of the best developers is now reflected in the quality of its assets and its locations,” he said. “The portfolio has long been considered top of class, and the same can be said about the Duke team. This acquisition expands our existing connections, with 239 Duke customers and introduces us to 557 new relationships. That said, there will be no material change to our top 20 customer list. In the last 10 years, we have integrated several large real estate portfolios. We outperformed our forecast each time and our teams on the ground and in corporate functions emerged stronger in each case.”

While this deal is on the way to completion, that was not necessarily appear to be the case in May, when Duke spurned a previous offer from Prologis.

In a May 10 letter sent to Duke Realty CEO Connor, Prologis’ Moghadam said that Prologis is highly confident that bringing Duke into the fold “will deliver superior value to the shareholders of both companies over the long term,” citing various benefits, including: a highly strategic and complimentary combination; incremental value created from Prologis’ platform; enhanced external growth; and significant synergies.

And he told Connor that while Prologis would prefer to continue working privately towards a deal with Duke, in an effort to benefit shareholders for both companies, “the approach clearly is not working,” leading Prologis to “conclude that a public approach may be more constructive for all.”   

At that time, Duke labeled the Prologis offer as insufficient. But Duke made it clear that the offer was insufficient.

“As we have repeatedly made clear to Prologis during our discussions over the past several months, consistent with its fiduciary duties, our Board of Directors has carefully evaluated proposals from Prologis and we remain open to exploring all paths to maximize shareholder value, and we believe the latest offer, virtually unchanged from its prior proposals, is insufficient in that regard,” the company said in a statement. “We have delivered superior returns for our shareholders based on our best-in-class industrial warehouse portfolio, world-class organization and the execution of our growth-oriented strategic plan. Our business is robust, and we have significant momentum, as evidenced by the record levels of in-service and stabilized occupancy and considerable leasing success of our development pipeline. We will continue to drive sustainable value creation and are confident in our ability to generate consistent double-digit growth in FFO, AFFO and dividends for our shareholders for years to come.”

Ward Richmond, executive vice president for global commercial real estate firm Colliers International, observed in a recent LinkedIn post that investing in high quality industrial real estate in key markets is an intelligent move.  

“There are few companies out there with such a solid portfolio of well positioned (110% leased or something?) industrial real estate assets as Duke (not to mention Prologis!),” he wrote. “If I had that Prologis money, I would do the exact same thing!”

Richmond added he has been encouraging Colliers’ tenant clients to seriously consider buying instead of leasing as well, adding that the ones who have been doing so are “high fiving each other as we speak,” as rents double on renewal rates in certain markets.

“Inflation, global conflict, pandemics, working from home, supply chain disruption all seem to point to one direction: own and control as much industrial real estate as possible (big box, last mile, infill, ports, intermodal, truck terminals, truck parking, and if you want to keep it simple—buy (or attempt to buy) elusive Industrial land sites and just hold it while you decide what innovative new facility you need to build to take your business to the next level,” said Richmond.