For Prologis, the world's largest warehouse owner, the biggest challenge to growth has been acquiring land in the markets most important to its e-commerce tenants. The solution: buy a rival.
The real estate investment trust agreed to acquire DCT Industrial Trust Inc. for $8.4 billion in stock and assumed debt. Stockholders in DCT will receive 1.02 Prologis shares for each of theirs, the companies said in a statement Sunday. That represents a premium of about 16% over DCT's closing price of $58.75 on April 27. DCT shareholders will receive a 36% increase in their dividend, executives said on a conference call Monday.
REITs that lease out space at warehouses and logistics centers have been outperforming those that focus on malls, rental apartments or office buildings. Shopping at Amazon.com Inc. and other internet retailers still accounts for less than 10% of retail sales in the U.S., but e-commerce is reconfiguring supply chains and shaping the fortunes of industrial landlords. Demand is especially high in and around large cities, where online shopping has caught on fastest.
DCT's 71 million square feet of real estate will help San Francisco-based Prologis deepen its presence in high-growth markets including Southern California, the San Francisco Bay area, Seattle, South Florida, and New York and New Jersey, the companies said. Those are the places that have seen the greatest demand for warehouse space and logistics services, thanks largely to e-commerce.
"DCT markets are 100% aligned with our markets," Prologis CEO Hamid Moghadam said in an interview. "There's perfect alignment between the portfolios. Think of DCT as a smaller, U.S.-focused version of Prologis. In the U.S. we're very similar — the same kinds of customers, the same customers in many cases."
The boards of both companies approved the purchase, which is expected to be completed in the third quarter.
"Land is hard to come by in high-rent markets where warehouse demand is especially high," said Lindsay Dutch, a Bloomberg Intelligence analyst. "An acquisition of DCT increases Prologis's exposure to several key, high-rent markets like Southern California and northern New Jersey."
The acquisition of Denver-based DCT includes 7.1 million square feet of development, redevelopment and value-added projects; 195 acres in the pre-development stage, predominantly in Seattle, Atlanta, South Florida and Southern California, with the potential for more than 2.9 million square feet once built out; and 215 acres under contract or option, predominately in the New York and New Jersey area, Northern and Southern California, and Chicago, with a build-out potential of more than 3.3 million square feet.
"Many of our customers are in the business of not just shipping pallets to stores, but also shipping direct to consumers," DCT CEO Phil Hawkins said in an interview. "To be in that business, you need to be in the right markets, where consumers live, and to be close in. The efficiency of the e-commerce supply chain requires location as well as functionality."
DCT and Prologis have competed to improve e-commerce services for their tenants, often in warehouses literally right next to each other, Mr. Hawkins said. He will serve on the board of the combined company, while most executives from DCT will leave, he said.
DCT and Prologis have "spent the past dozen years trying to get ahead of the other, and that competition has made us better," Mr. Hawkins said.
The companies don't expect any antitrust issues to throttle the deal. While both REITs are large, their combined market share in most markets is less than 20%, Mr. Hawkins said.
The transaction is expected to result in about $80 million in cost savings, operating leverage, interest expense and lease adjustments, and has the potential to generate $40 million of additional annual revenue and development profit in the future, the companies said.
"I am very excited about the long-term potential for revenue synergies here," Eugene Reilly, CEO of the Americas for Prologis, said on Monday's conference call.
About $550 million in dispositions, or about 7% of the combined portfolio, is planned over the next two years, Mr. Reilly said.
Prologis shares fell 2.8% to $64.75 at 10:54 a.m. in New York. DCT gained 12% to $65.68.
J.P. Morgan Chaseis serving as Prologis's financial adviser, and Bank of America is advising DCT.