On Prologis’ Q3 call, Tom Olinger, CFO, started with an update on the company’s $8.5 billion acquisition of DCT. “Our financial and operating results reflect this mid-quarter transaction which closed on August 22. The integration went exceptionally well and is complete and we refinanced the $1.8 billion debt we assumed in the transaction at an average interest rate of 2.4% in a term of over 13 years.”
Olinger explained that the company already hits its expected annual synergies run rate of $80 million with the vast majority of that in cash savings. Now, he said that the company’s focus is on realizing the incremental $40 million of future annual value creation from development and revenue synergies.
Turning to market conditions, he said that fundamentals remain healthy and well-located space continues to be in high demand. “There were several notable bankruptcies announced recently and our exposure to these firms is minimal. These customers leased from us about less than 30 basis points of our net effective rent.”
He explained that the company has been monitoring these companies for some time and are confident they will be able to “quickly lease up any spaces we get back from these customers at higher rent given they’re approximately 10% below market. Broadly we feel very good about our business. Market rents across our portfolio are growing in line with our forecast with Europe slightly ahead.”
Next up on the firm’s quarterly call was Hamid Moghadam, chairman and CEO, who briefly talked about the topic of trade, tariff and retailer bankruptcies, noting that to date, the company has seen no measurable impact on its business.
“Sure, if we search real hard we can point to one or two companies who backed out our lease negotiations in the U.S. but the impact of those isolated cases was negligible in the context of our overall leasing volume. There are plenty of other customers that are waiting in line for quality space and are frustrated by the shortage of suitable options,” he said.
In fact, Moghadam pointed out that the REIT’s “latest forecast for the U.S. this year has revised up net absorption by 15% to 260 million square feet. Completions in 2018 will fall short of demand for the ninth consecutive year, this time by an estimated 10 million square feet.”
He also said that Europe remains a bright spot for the company. “Our markets in continental Europe are strong and getting stronger, vacancies are at historic lows, customer sentiment is improving, and escalating replacement costs are driving up rental rates.”