By Dylan Litt and Kyle Amelio (New York University)
Overview of the deal
Acquirer: Prologis, Inc.
Target: Liberty Property Trust
Estimated value: $12.6 billion
Announcement date: 27th October 2019
Acquirer Advisors: BofA Securities and Morgan Stanley
Target Advisors: Goldman Sachs and Citigroup
In May 2019, Prologis (PLD) discussed interest in GLP's U.S. portfolio, a month later Blackstone announced it had clinched an $18.7 billion acquisition deal. The missed opportunity left Prologis hungry for urban infill property in the United States. Liberty Property Trust (LPT) emerged as a clear acquisition target with a robust portfolio of industrial properties in key U.S. markets and sluggish share performance in a surging sector. The assets in LPT's portfolio compliment Prologis' stated focus on high-growth, high-barrier markets, and have 87% overlap with Prologis' key markets. The acquisition will also result in a 720 basis point increase in Prologis’ U.S. weighting. Following the completion of the deal, the United States will represent 85.1% of its assets.
“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… the strategic fit between the portfolios allows us to capture immediate cost and long-term revenue synergies.”
Prologis chairman and CEO Hamid R. Moghadam.
On October 27th Prologis announced it would be acquiring Liberty Property Trust for $12.6 billion or $61+ a share, a roughly 21% premium to its share price. The deal was an all-stock transaction based on a 0.675 exchange rate and included Prologis' assumption of $3.2 billion in debt. The offer assigned a 4.7% cap rate to Liberty's portfolio, not including expected synergies. The transaction is expected to close in the first quarter of 2020.
The acquisition is in line with Prologis' long-term strategy of aggressive growth through strategic M&A, through which they have become the largest player in the industry. In 2011, Prologis completed a merger of equals with AMB Property Corporation, followed by a $5.9 billion acquisition of KTR Capital partners in 2015, and then an $8.5 billion purchase of DCT Industrial Partners in 2018. Prologis’ growth has far outpaced its competitors, making them the dominant player in logistics real estate.
Company Details (Prologis, Inc.)
Prologis is the global leader in logistics real estate investment trusts (REIT), with $111 billion in AUM comprising a 797 million square foot (MSF) portfolio of modern logistics space. Prologis’ footprint is so significant that about 2% of the world’s GDP flows through their facilities. Prologis' biggest market in the U.S., where it generates 78% of NOI, the rest is spread across 18 different countries in Asia, Europe, and the other Americas. Prologis' 5,000+ customers, including Amazon, Fed-Ex, and Walmart, demand the most advanced logistics facilities in key urban markets with high throughput ability.
Founded in (1983), headquartered in San Francisco, CA
Chairman and CEO: Hamid R. Moghadam
Number of employees: 1,617 (2018)
Market Cap: 56.18B
LTM Revenue: 3.58B
LTM EBITDA: 2.4B
LTM EV/Revenue: 19.96x
LTM EV/EBITDA: 29.75x
Company Details (Liberty Property Trust)
Liberty Property Trust (LPT) was a REIT that acted as an owner, operator, and developer of office and industrial space. Liberty served customers located in the United States and a small portion located in the United Kingdom. Liberty’s portfolio was comprised of 107 MSF of industrial operating space, 5.1 MSF of industrial space under development, 4.9 MSF of office space, and about 1,400 acres which gave them the ability to build approximately 20 million more square feet.
Founded in (1972), headquartered in Malvern, Pennsylvania
Chairman and CEO: William P. Hankowsky
Number of employees: 271 (2018)
Market Cap: 9.46B
LTM Revenue: 684.4M
LTM EBITDA: 431.19M
LTM EV/Revenue: 17.99x
LTM EV/EBITDA: 28.55x
Projections and assumptions
Prologis’ acquisition came at a critical time for Liberty, whose stock had been trailing the index and was about to post disappointing third-quarter earnings, likely sending the stock price lower. Prologis’ acquisition gave Liberty investors a significant bump in value and brought them into a much larger industrial platform with a better track record of outperformance.
After the deal closed earlier this year, investors began benefitting from immediate cost savings generated by the synergies between the two companies. Approximately $60 million in savings is expected from G&A, leasing, and property management expenses. Additionally, a $60 million increase will stem from mark to market adjustments comprised of $35 million in interest expense savings and $25 million in straight-line rent resets and fair value lease adjustments. Prologis expects the acquisition to generate accretion of 3%+, with an expected increase of $0.10 to $0.12 per share in core FFO by the completion of the first full year.
This acquisition is also in line with Prologis' mission for environmental sustainability, which they have made a top priority. In 2018, according to the Solar Energy Industries Association (SEIA), they ranked third amongst U.S. corporations in onsite solar installations. Liberty Property Trust had made similarly significant commitments as a pioneer in sustainable development. Beginning in 2018, every new industrial development built by Liberty had to be LEED-certified. They also published an annual report that details their efforts to reduce energy usage and lessen their carbon footprint. The emphasis on sustainability may prove to be a powerful tailwind for the company because of the potential reduction in expenses from energy savings as well as the potential to attract a growing group of ESG investors.
E-Commerce has been the underlying trend driving growth in the logistics real estate sector. With the changing dynamics of the industry, property companies must keep up with customer demands in order to stay competitive. E-commerce companies such as Amazon, one of Prologis’ largest customers, demand properties located at airports and other transportation hubs near major urban centers. Liberty’s properties and land for development will allow Prologis to offer more of these properties and capture future E-commerce demand. These facilities also require specialized attributes and Prologis continues to lead the industry in increasing throughput, one of the most important capabilities demanded by e-commerce. These high throughput properties have the best return on equity of all warehousing and logistics real estate assets.
The deal will generate significant additional capital from the sale of $2.8 billion of industrial and $700 million of office acquired from Liberty, giving Prologis the ability to fund future development opportunities. As well as capital, Liberty's 1,400-acre portfolio of land for development will allow Prologis to further build out its footprint and potentially create an expected $50 million in expanded annual development value. This translates to an additional 1% of core FFO accretion of $0.04 per share after planned asset sales and development deliveries. Prologis also expects an additional $10 million in unspecified future synergies.
Liberty also had a large build to suit business (BTS) with over 200 of these projects completed to date. This business compliments Prologis' robust BTS business in an industry that has increasing BTS demand from customers’ specialized needs. Liberty’s industry-leading building practices further compliment Prologis’ development efficiency.
Risks and uncertainties
While there are certainly many positive aspects to the acquisition, the deal does not come without potential headwinds. Over the past several years, class A industrial warehouses have seen significant cap rate compression, falling about 1.3% from 2013 to 5% today. The premium paid by Prologis valued Liberty's portfolio at a 4.7% cap rate, which is in line with current industry levels.
Although the price is in line with the industry, there has been an accelerating 9-month development cycle, which keeps upward pressure on the cap rates, with incredibly high demand pushing them downward. If there is a slowdown in demand growth the sector could see significant cap rate expansion. If cap rates return to elevated levels the value of Liberty’s portfolio could fall to below the purchase price, leaving Prologis underwater on the acquisition because of the premium they paid for the portfolio.
“I've been on many calls been asked as to do I think cap rate compression is going to continue and I've said no in the last three years and I've been dead wrong”
Prologis chairman and CEO Hamid R. Moghadam.
Liberty is also facing the threat of increasing competition from Blackstone’s acquisitions. The private equity giant is attempting to capitalize on the e-commerce fueled a boom in logistics and warehouse demand. In June of 2019, Blackstone announced the largest private real estate deal ever when they disclosed their $18.7 billion dollar acquisition of U.S. logistics assets from GLP. The deal is a reflection of Blackstone's willingness to spend, as they have spent about $70 billion on logistics and warehouse REIT acquisitions in the past few years. These acquisitions have grown their portfolio in the sector to an impressive 360 MSF, more than double the size of Prologis’ next closest competitor. If Blackstone were to take this portfolio public, as they did with Invitation Homes in 2017, this could shake up the sector and increase risks and uncertainty for Prologis.