Prologis (PLD), the world’s largest warehouse owner, plans to double its Asia holdings while scaling back growth in North America and Europe after completing the biggest merger of U.S. real estate investment trusts.
The company, which has $46 billion in owned and managed properties, will expand Asia assets to a quarter of its total portfolio value, Co-Chief Executive Officer Hamid Moghadam said in an interview at Prologis’s San Francisco headquarters. About 12 percent of the REIT’s holdings are in the region now, according to research firm Green Street Advisors Inc.
“We need to increase Asia’s percentage over time, and on the margin reduce the percentage of U.S. and Europe,” Moghadam, 54, said an hour after shareholders approved Prologis’s merger with AMB Property Corp. (AMB) on June 1. “If you think about growth rates, the emerging markets are where all the action is.”
Moghadam, after helping to engineer a deal that creates fourth-largest U.S. REIT, is seeking to expand abroad as accelerating growth signals increased demand for industrial storage space. Developing Asian economies will expand 8.4 percent next year, almost triple the U.S. growth rate and more than four times that of Europe in a “two-speed recovery,” the International Monetary Fund estimates. Imports in emerging countries may rise 9.4 percent in 2012, almost double the rate in advanced nations, the Washington-based fund said in its world economic outlook.
Japan ‘Growth Area’
Japan, projected to expand 1.8 percent, is still a “growth area” after the country’s March earthquake and tsunami showed the need for newer, safer warehouses buildings, said Matt Richmond, a fund manager at Principal Financial Group Inc., which has $327 billion in assets under management and owned more than 1 million AMB shares and 10.8 million Prologis shares at the end of March, according to data compiled by Bloomberg.
Prologis is “the only U.S. company building modern, quality product in those high-octane markets,” said Steven Frankel, lead industrial analyst for Newport Beach, California- based Green Street, which focuses on REITs. “Their technology and warehouses are state of the art.”
The Prologis-AMB merger was completed and the shares began trading today as a combined company on the New York Stock Exchange, according to a statement from the REITs. The shares fell 7 cents to $34 at 4:15 p.m. New York time.
The deal is valued at about $17 billion including assumption of debt, making it the biggest combination of U.S. REITs, topping the General Growth Properties Inc. purchase of Rouse Co. for $11.3 billion in 2004, according to data compiled by Bloomberg. The largest transaction involving a REIT was private-equity firm Blackstone Group LP (BX)’s 2007 acquisition of Equity Office Properties Trust for $34 billion.
Moghadam, formerly the head of AMB, is becoming co-CEO with Prologis’s Walter Rakowich, 53, and will take over as the sole chief at the end of next year. The new company’s corporate headquarters will be in San Francisco, while its operations will be based in the former Prologis’s home in Denver.
Prologis estimates $80 million in annual savings from the merger. Benefits from consolidating staff and overhead may be as much as $100 million a year, according to Green Street.
An improved credit profile also will lower financing expenses, Prologis said in a Jan. 31 statement on its website. Fitch Ratings yesterday raised the company’s credit rating to investment-grade level because of the merger.
“What’s most important is that the cost of capital for this company can end up being 100 basis points lower than either company on its own,” Moghadam said in the interview. “That is a huge advantage on a $25 billion balance sheet.”
Industrial companies are the second best-performing group in the Bloomberg REIT index in the past 12 months, rising 32 percent as of yesterday. U.S. sales of warehouses and distribution centers rose 11 percent in the first quarter from a year earlier to $3.2 billion, with the sector having the smallest amount of distressed debt of any property type, according to Real Capital Analytics Inc.
Industrial rents are projected to climb 5.9 percent in 2013 and 7.3 percent the next year, according to a March 24 forecast by Deutsche Bank AG’s RREEF investment unit.
“Industrial has been the biggest surprise on the commercial real estate side,” said Kevin Thorpe, chief economist at commercial broker Cassidy Turley in Washington. “There are indications that it’s not going to slow.”
Prologis may sell 10 percent to 15 percent of its portfolio and use the proceeds to reduce debt and develop new projects amid investor demand for warehouses, Moghadam said.
‘Wall of Capital’
A “wall of capital” from pension funds, private equity and other large institutions is targeting industrial buildings, with prices low relative to corporate bonds, Green Street said May 17.
“Industrial is a steady performer and isn’t correlated to other sectors,” said Ben Thypin, director of market analysis for New York-based Real Capital. “It didn’t get hot during the boom, and didn’t drop much during the crash.”
Investment firm Area Property Partners and DW Management said this week that they paid $170 million for 12 U.S. distribution centers in Atlanta, Dallas and Southern California. Blackstone this year acquired about $600 million of debt on an industrial portfolio known as CalWest, totaling 23 million square feet (2.1 million square meters), three people with knowledge of the deal said in April. In 2010, the New York-based firm bought 180 industrial buildings from Prologis.
Japan is Prologis’s largest market in Asia, with 10 percent of the company’s total assets. Its 420,900-square-foot warehouse in coastal Sendai survived the quake and tsunami with only moderate flooding on the ground floor, Moghadam said. Within weeks, the building went from being two-thirds empty to fully leased.
Such performance under severe conditions is a “calling card” as the company seeks business in Japan and elsewhere with global shippers that demand modern storage and distribution centers, Frankel said. Prologis can build about 6 million square feet of warehouse buildings as Japan enters its “reconstruction phase,” said Richmond of Principal Financial.
The merged company also is aiming to increase its investment management business, which currently has almost $26 billion in assets in 22 funds and ventures, Moghadam said.
A slowdown in global growth is the main risk after the merger, according to Richmond, based in Des Moines, Iowa. The IMF’s April report cited high unemployment in developed economies, inflation in emerging nations, debt problems spreading to the “core of Europe” and continued U.S. real estate weakness as threats to world trade and growth.
Change in Fortune
The AMB deal marks a change in fortune for Prologis, which in late 2008 was saddled with $11 billion of debt and “came perilously close to breeching its covenants,” Frankel said.
The company cut its dividend, stopped new developments and sold about $3 billion of assets to pay down loans, according to Bloomberg data. Chief Executive Officer Jeffrey Schwartz resigned in November 2008. Rakowich, who had been chief operating officer, took over as CEO and in 2009 sold operations in China and property-fund interests in Japan to Singapore’s sovereign-wealth fund for $1.3 billion.
Even with the sales, Prologis had a 71 percent debt level in May 2010, compared with a 50 percent average among its peers, according to Green Street. AMB opened merger talks in November 2010 when Moghadam called Rakowich, Prologis said in a May filing with the U.S. Securities and Exchange Commission.
An unidentified “large private equity” firm had made inquiries in May 2010 before deciding a purchase required taking on more debt, according to the filing. Keeping a lid on new borrowings is a goal for the merged company, Moghadam said.
“I want to be under 30 percent levered,” he said in the interview. “I want to have one of the top three balance sheets in the business, and it’s going to take us maybe two to three years to get there. But we’re very committed to that.”
Combining two large companies is “never a slam dunk” as cultures sometimes clash and firms face organizational issues, said Keven Lindemann of SNL Financial in Charlottesville, Virginia. One potential snag is separating Prologis’s headquarters from its operational base in Denver, he said.
Moghadam isn’t worried, saying that the merger will benefit customers and shareholders alike. The challenge comes with extending Prologis’s global reach, he said.
“Nobody’s actually, really done this on this scale before,” he said.
To contact the editor responsible for this story: Kara Wetzel at firstname.lastname@example.org