Prologis Closes $5.9B KTR Buyout; Core FFO Outlook Up - Analyst Blog

Prologis Inc. PLD has finally accomplished the acquisition of KTR Capital Partners’ (KTR) real estate assets and operating platform as well as its affiliates for $5.9 billion. The buyout is expected to provide a strong boost to the company’s position in the U.S. target markets. Following the acquisition, the company has also raised its core funds from operations (“FFO”) outlook for 2015.

Prologis' share of the completed purchase was valued at around $3.2 billion. That included $2.6 billion in cash, $400 million in secured mortgage debt assumption and issuance of $202 million in common limited partnership units in Prologis, L.P.

The acquisition took place through Prologis U.S. Logistics Venture (“USLV”) in a 55–45 consolidated joint venture with Norges Bank Investment Management (NBIM), which is the manager of the Norwegian Government Pension Fund Global. The deal brought around 60 million square feet of operating portfolio to Prologis. It also included 3.6 million square feet of development-in-progress space as well as a well-located land bank that offers a build-out potential of 6.7 million square feet.

Prologis expects the deal to be accretive to its annual core FFO by around 9 cents per share. This led to an upward revision in its 2015 core FFO guidance range to $2.16–$2.22 per share from $2.07–$2.13 per share guided earlier, representing year-over-year growth of over 16% at the midpoint.

Amid a decent improvement in the industrial market, thanks to the fast-growing e-commerce industry, we believe that Prologis would get sufficient scope to ride on the growth trajectory, given the scale of KTR acquisition.

The buyout also fits Prologis’ strategy with around 95% of the platform overlapping its existing U.S. portfolio, and specifically adding to its strength in Southern California, New Jersey, Chicago, South Florida, Seattle and Dallas.

Further, the company projects a reduction of around 10% in general and administrative expenses as a percentage of assets under management, as well as a rise in U.S. dollar equity exposure to 95%. Both factors are encouraging given the global currency fluctuations. Moreover, the projected core FFO accretion is estimated to be around 15 cents per share on an annual stabilized basis.

Prologis currently carries a Zacks Rank #2 (Buy). Investors interested in the REIT industry may also consider stocks like Extra Space Storage Inc. EXR, Liberty Property Trust LPT and Kilroy Realty Corp. KRC. All these stocks hold the same Zacks Rank as Prologis.

Note: FFO, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.

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