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Behind Prologis’ Liberty Property Trust Buy

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Prologis Inc. and Liberty Property Trust recently revealed that they entered into a definitive merger agreement by which Prologis will acquire Liberty in an all-stock transaction, valued at approximately $12.6 billion, including the assumption of debt. The board of directors of Prologis and the board of trustees of Liberty have each unanimously approved the transaction.

“Liberty’s logistics assets are highly complementary to our U.S. portfolio and this acquisition increases our holdings and growth potential in several key markets,” said Prologis chairman and CEO Hamid R. Moghadam in a prepared release. “The strategic fit between the portfolios allows us to capture immediate cost and long-term revenue synergies.”

The transaction deepens Prologis’ presence in target markets such as Lehigh Valley, Chicago, Houston, Central PA, New Jersey and Southern California.

Prologis plans to dispose of approximately $3.5 billion of assets on a pro rata share basis. This includes $2.8 billion of non-strategic logistics properties and $700 million of office properties.

“Liberty and Prologis represent two of the finest teams of real estate professionals and two of the finest portfolios of industrial real estate ever assembled,” said Bill Hankowsky, Liberty chairman and chief executive officer, in a prepared statement. “The joining of these two platforms at this moment, when industrial logistics has become so pivotal to the new economy, will further the industry’s ability to support the nation’s supply chain and enhance value creation for our combined shareholders. It is a testament to Liberty’s outstanding teams of professionals, both present and past.”

“Liberty’s high-quality logistics real estate will strengthen our portfolio as well as our customer roster,” said Prologis chief investment officer Eugene F. Reilly, in a prepared statement. “We are also excited about the caliber of talent at Liberty and expect a number of their employees to join us to help manage the portfolio and execute on capital deployment.”

The acquisition on an owned and managed basis comprises:

107 million square foot logistics operating portfolio; 87 percent overlap with key markets

5.1 million square feet of logistics development in progress

1,684 acres of land for future logistics development with build-out potential of 19.7 million square feet

4.9 million square foot office operating and development portfolio

This transaction is anticipated to create immediate cost synergies of approximately $120 million from corporate general and administrative cost savings, operating leverage, lower interest expense and lease adjustments. Initially, this transaction is expected to increase annual core funds from operations* (Core FFO) per share by $0.10-$0.12. Upon stabilization of the acquired development assets, completion of the planned non-strategic asset sales and redeployment of the related proceeds, annual stabilized Core FFO per share is forecasted to increase by an additional $0.04 per share for a total of $0.14-$0.16.

Further, there are future synergies with the potential to generate approximately $60 million in annual savings, including $10 million from revenue synergies and $50 million from incremental development value creation.

“The execution of this transaction is further evidence of the strength of Prologis’ balance sheet and will create significant additional capital from the future sale of the non-core assets,” said Prologis chief financial officer Thomas S. Olinger. “The combination of these portfolios will drive incremental Core FFO growth and long-term shareholder value.”

Under the terms of the agreement, Liberty shareholders will receive 0.675x of a Prologis share for each Liberty share they own. The transaction, which is currently expected to close in the first quarter of 2020, is subject to the approval of Liberty shareholders and other customary closing conditions.

BofA Securities and Morgan Stanley are acting as financial advisors and Wachtell, Lipton, Rosen & Katz is serving as legal advisor to Prologis. Goldman Sachs and Citigroup are acting as financial advisors and Morgan, Lewis and Bockius LLP is serving as legal advisor to Liberty.