Morningstar | No-Moat Prologis Completes Merger With DCT Industrial
After incorporating the all-stock merger between DCT Industrial and Prologis into our model, we are raising our fair value estimate for Prologis to $67 per share from $60 and maintaining our no-moat rating. While Prologis acquired DCT Industrial at a cap rate of 4.4%, which would be dilutive to the 5% cap rate we place on Prologis, we think management’s estimates of $80 million in expense synergies are reasonable and recognize that DCT has a development portfolio that offsets this imbalance. We also understand that Prologis’ planned disposition of 7% of DCT’s portfolio will offset some of the costs. We continue to expect that e-commerce will grow as a proportion of total retail spending and will fuel growing demand for Prologis’ warehousing and logistic space, but we remain skeptical of the company’s ability to earn an economic profit in excess of the company's cost of capital.Although rents for industrial warehouses are increasing rapidly with e-commerce growth, we see warehouse space as a relatively easily replicable commodity good and we expect new supply to prevent any excess economic profit in the medium to long term. CBRE’s report “Q2 2018 U.S. Industrial & Logistics Figures†shows that 48.9 million square feet of new warehousing space was completed in the second quarter, which demonstrates that Prologis is attracting competition. Given the commoditylike nature of warehouse space, we expect increased competition from rising supply will prevent Prologis from charging above market rents over the medium to long term. Further, we estimate that only about 20% of the company’s lease portfolio is expiring before 2020, so the company has limited capacity to immediately capitalize on the presently high market rents through releasing. While Prologis continues to enjoy a sustained strong run from the growth of e-commerce, we doubt that the warehouse leasing business model is conducive to developing a sustainable economic advantage.
Prologis is a self-administered and self-managed real estate investment trust and is the sole general partner of Prologis, L.P. The company owns, manages and develops logistics facilities, with a focus on the consumption side of the global supply chain. Most of the company's properties in the United States are wholly owned, while its properties outside the United States are primarily held in co-investment ventures. The company has two segments: Real Estate Operations, which represents the ownership and development of operating properties, and includes land held for development and properties under development; and Strategic Capital, which represents the management of unconsolidated co-investment ventures.
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