Morningstar | No-Moat Prologis Purchases Industrial Property Trust; Raising FVE to $77
No-moat Prologis continues to grow rapidly, as e-commerce and distribution companies demand ever-increasing amounts logistics space. Core funds from operations came in at $0.77 per share in the second quarter, up 8.5% from the linked quarter. Prologis' substantial bottom-line growth is attributable to both the DCT Industrial Trust merger that closed in third-quarter 2018 and healthy 4.6% same-store cash net operating income growth. Prologis announced that it will acquire the wholly owned assets of Industrial Property Trust, a U.S.-focused nontraded industrial REIT, at a 4.5% cap rate for about $4 billion in cash in a deal set to close by the end of the year. After updating our model to incorporate recent results and the merger, we are increasing our fair value estimate for Prologis to $77 per share.Operating metrics remain stellar. Occupancy remained flat from last quarter at 96.7% as the company continued to increase rent at a double-digit pace, 25.6% on a net effective basis. We anticipate that Prologis will continue to raise rents aggressively until occupancy falters, possibly during a cyclical downturn. Despite the increased prices, customer retention increased to 79.4% from 72.5% in the second quarter of 2018, indicating that tenants continue to be willing to pay for logistics space.
Regarding the Industrial Property Trust deal, while we understand that a purchase priced at a 4.5% cap rate is dilutive to the 5% cap rate that we place on Prologis as a whole, we think that there are some offsetting factors. Specifically, we expect management can offset some costs through marking current rents to market rents, the planned disposal of 20% of the portfolio, and expense synergies resulting from not purchasing the IPT operating platform. We agree with management’s assessment that IPT’s portfolio is high quality because the acquired portfolio’s occupancy is quite strong at 97% with comparable rent per square foot to Prologis.
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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