Since the all-cash offer by Mapletree Commercial Trust for Mapletree North Asia Commercial Trust - funded by sponsor Mapletree Investments - and the all cash offer for the privatisation of Frasers Hospitality Trust by Frasers Property, market watchers believe that it is highly unlikely the next REIT merger will be an offer that comprises units of the acquiring REIT.
There are a few REITs that need size and liquidity; and they surely need lower costs of capital. These would include, in particular, the REITs with all-foreign assets such as REITs with Chinese properties listed on SGX, REITs with US properties listed on SGX and REITs with only European Union properties listed on SGX (there is only one).
The next mega-REIT merger, contrary to market watcher wisdom, is indeed an all-share merger. Prologis and Duke Realty Corporation announced on June 13, that the two companies have entered into a definitive merger agreement by which Prologis will acquire Duke Realty in an all-stock transaction, valued at approximately US$26 billion, including debt. The respective board of directors for Prologis and Duke Realty have unanimously approved the transaction.
According to Prologis’ press release, it plans to hold 94% of Duke Realty’s assets, and exit one market. Duke Realty owns 153 million square feet of operating properties in 19 major U.S. logistics geographies. Duke also owns 11 million square feet of development in progress with about US$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.
Prologis owns on a wholly-owned basis or through co-investment ventures, properties and development projects, around one billion square feet (93 million square meters) in 19 countries.
The transaction is anticipated to create immediate accretion of approximately US$310-370 million from corporate general and administrative cost savings and operating leverage as well as mark-to-market adjustments on leases and debt. In year one, the transaction is expected to increase annual core funds from operations (Core FFO), excluding promotes per share by US$0.20-0.25. On a Core AFFO basis, excluding promotes, the deal is expected to be earnings neutral in year one. Further, future synergies have the potential to generate approximately US$375-400 million in annual earnings and value creation, including US$70-90 million from incremental property cash flow and essentials income, US$5-10 million in cost of capital savings and US$300 million in incremental development value creation.
See also: Changes in ICR, leverage to come into effect immediately, with additional disclosures in March
In 1Q2022, Prologis recorded net earnings per diluted share of US$1.54 for the quarter compared with US$0.49 for the first quarter of 2021. Core funds from operations (Core FFO) per diluted share was US$1.09 for the quarter compared with US$0.97 for the same period in 2021.
During the first quarter, Prologis and its co-investment ventures issued US$2.6 billion of debt at a weighted average interest rate of 1.5%. This includes US$1.6 billion in green bond raises. The company maintained US$6.8 billion in cash and availability on its credit facilities.
As of March 31, 2022, debt as a percentage of total market capitalisation was 13.5%, and the company's weighted average interest rate on its share of total debt was 1.7% with a weighted average term (to maturity) of 10.0 years. The combined investment capacity of Prologis and its open-ended ventures, at levels in line with their current ratings, is approximately US$18 billion.
If all approvals are obtained for the merger with Duke Realty, the transaction will complete in 4Q2022.
