Morningstar | No-Moat Prologis Delivers Results Near Expectations for 2Q
Prologis continues to enjoy growth resulting from increases in e-commerce consumption. Second-quarter results were generally in line with our forecasts with quarterly core funds from operations of $0.71 per share and cash same-store net operating income of 7% for the quarter. The sustained demand for industrial warehousing space has maintained Prologis' annual occupancy rates above 96% since 2014. The company's period-end occupancy continued a growth trend by pushing occupancy up 60 basis points to 97.4%. Continued occupancy growth combined with a 21% leasing spread shows that demand for industrial space remains very strong. We continue to believe that no-moat Prologis is fairly valued and we will maintain our fair value estimate of $60.Prologis announced that it would purchase DCT Industrial, another industrial warehouse REIT, in an $8.4 billion all-stock transaction set to close in August. The purchase price represents a 15.6% premium over DCT's shares announcement price and an estimated 4.4% cap rate for DCT’s domestically focused portfolio. We place a 5% cap rate on Prologis' portfolio, so while Prologis would be diluting their earnings by buying a company at a 4.4% cap rate we recognize that Prologis' U.S. portfolio would trade at a similar cap rate and the deal decreases the overall company's risk by increasing the U.S. exposure. However, we also estimate that the DCT merger would slightly decrease the overall quality of Prologis' portfolio as Prologis' rent per square foot (excluding unconsolidated joint ventures) was $6.77 in 2017, which is 15% higher than the $5.86 DCT's rent per square foot.
While Prologis is paying a premium to buy DCT, we believe that there are significant cost savings to be had as a result of reduced overhead redundancies because DCT and Prologis largely operate similar storage businesses in similar regions and through planned debt refinancing. The company estimated $80 million of immediate cost synergies, which we think is an attainable amount that would reduce our estimate of 2019 expenses (excluding depreciation) by 5.6% thus partially offset the premium paid. Overall, while the company paid a large premium for the DCT portfolio, we think the reduction in risk and the potential cost savings make it a reasonable deal and lead us to maintain our fair value estimate.
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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