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Sure, Prologis’ deal to buy Duke will make it bigger. But there’s a whole other motivating factor.

Sure, Prologis’ deal to buy Duke will make it bigger. But there’s a whole other motivating factor.

By   –  Staff Reporter, San Francisco Business Times
 Updated 

Prologis will grow its industrial portfolio by more than 15% when it acquires Duke Realty, introducing it to new customers who could fuel growth at its Essentials unit.

The San Francisco-based real estate investment trust (NYSE: PLD) launched Essentials in 2019 to sell tenants services like solar panel installation and products, including machinery and logistics technology. The business leverages Prologis’ scale to provide those products and services at reduced cost and efficiency.

The $26 billion all-stock deal for Duke’s 153 million-square-foot portfolio, announced Monday, would establish relationships with more than 550 new customers for Prologis, CIO Eugene F. Reilly told analysts Monday.

“Our teams… are today particularly excited to integrate our Essentials platform with this incredible portfolio and customer asset,” he said. “We’re highly confident that our Essentials offerings will get immediate traction with this portfolio.”

Prologis, whose industrial portfolio currently spans nearly 1 billion square feet globally, first mentioned the importance of the Duke deal in regulatory filings in May, when it initially unveiled it had made two rebuffed efforts to Duke (NYSE: DRE).

Prologis CFO Tim Arndt said the company ultimately expects Duke’s portfolio to generate a combined incremental property cash flow and Essentials income of between $70 million and $90 million annually. Prologis said in January it expects Essentials to generate $75 million this year and has said it could someday generate as much as $1 billion, according to reporting from the Wall Street Journal.

“This transaction highlights how Prologis is approaching the importance of scale,” said Michael Goldsmith, a US Real Estate Investment Trust analyst at UBS, in an interview Monday. “Prologis is getting bigger — it’s looking to build out more services that help it go beyond just the traditional landlord.”

Prologis CEO Hamid Moghadam, who I wrote about in November when the Business Times honored him at our Most-Admired CEOs program, said Monday that scale “has never been an objective” for his company. He co-founded what would later become Prologis in 1983.

“Scale has been the result and the outcome of doing a good job with customers and operating the portfolio efficiently and adding services and all kinds of other things that the customers need,” he said.

The company is the largest industrial REIT in the U.S., and the addition of Duke’s portfolio would grow its holdings to close to 1.1 billion square feet of industrial space nationwide. The Duke deal will be Prologis’ third acquisition of a competing industrial portfolio in the last three years, following Liberty Property Trust and DCT Industrial Trust.

Even so, Moghadam said he believes the acquisition is unlikely to prompt concern from regulators.

“Our concentration is less than 10% in many markets,” he said. “I mean, I don’t think there is a market in which we are more than teens in terms of total market position,” he said.

UBS research shows Prologis’ holdings account for 5.4% of the United States’ nearly 10.3 billion square feet of industrial warehouse stock; Duke’s domestic-only portfolio encompasses 1.5%. Once Prologis officially acquires Duke — it has said it is targeting the fourth quarter to close the deal — it will still own less than 8% of the country’s existing warehouse supply.

Prologis, which had $4.76 billion in revenue in 2021, expects to record $310 million to $370 million in general savings, operational leverage and lease and debt adjustments in the first year after the deal closes. The company said the Duke portfolio has potential to generate between $375 million and $400 million in cash flow, Essentials income and development value creation annually.

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