With Duke Realty Acquisition, Prologis Doubles Down on Southern California

By Mario Marroquin

Investors seemingly can’t get enough Southern California and coastal industrial real estate. The recently announced acquisition of Duke Realty by San Francisco-based industrial giant Prologis is the latest in a string of deals along the southern California coast. In addition to existing real estate, 42.5 million square feet of industrial space are under construction in Southern California, where asking rents increased by 18.8% on a year-over-year basis at the end of the first quarter of 2022.

Less than one month after Duke Realty rejected Prologis’ $24billion takeover bid, the industrial giants agreed to a $26 billion all-stock transaction for Duke’s 153 million-square-foot portfolio of largely stabilized industrial properties across 19 markets in the U.S. and over 1,200 acres of land for development.  

Duke Realty shareholders will receive 0.475 of Prologis stock per share of Duke Realty, while Prologis will acquire over 11 millions square feet of industrial space in development, topping a total expected investment of approximately $1.6 billion.

Duke’s acquisition by Prologis is set to increase the industrial giant’s exposure to industrial real estate by more than 22% in Southern California, where Duke owns approximately 16.6 million square feet and Prologis owned 77 million square feet at the end of 2021.

Over half of Duke Realty’s net operating income (56%) came from Southern California (13.8%), New Jersey (10.6%), South Florida (9.1%),Chicago (8.1%), Dallas (7.5%) and Atlanta (7.3%) in 2021.

The announcement by Prologis and Duke comes a few weeks after real estate giant Blackstone agreed to buy PS Business Park of Southern California for $7.6 billion.

In that transaction, Blackstone agreed to acquire approximately 27 million square feet of industrial, low-rise office and multifamily real estate in the Los Angeles, San Francisco, Austin and Washington D.C. metropolitan areas.

In addition, Prologis completed a $225 million disposition in Riverside in March when IDS Real Estate Group acquired a 1.2 million-square-foot cold storage facility leased to a supplier of Whole Foods.

As reported by the Real Deal earlier this month, Rexford Industrial Realty has also been active in the Southern California market, closing on parcels and existing properties in Compton, Panorama City, Ontario, California, and Fullerton for $164 million.

Rexford was reported to have purchased six other properties in May and April for $153 million.  

A closer look

Prologis said it will exit one of Duke’s existing markets, hold on to 94% of its portfolio and assume its debt through the transaction.

Duke Realty said the transaction is expected to create an immediate accretion of up to $370 million from corporate and administrative cost savings, operating leverage and mark-to-market adjustments on leases and debt. The transaction is subject to approval of Prologis and Duke Realty shareholders, and is expected to close in the fourth quarter of 2022.

Duke Realty said Prologis will also assume its debt, which stood at $3.73 billion with a weighted average interest rate of 3.02%. Duke Realty said at the end of 2021 that it has $3.68 billion of unsecured debt outstanding and $56.2 million of secured debt.

According to Duke Realty’s 2021 annual report, $300 million in outstanding debt is to mature in 2024 with maturities increasing every year after 2025 from $375 million to $450 million in 2031.

Duke redeemed $83.7 million of its unsecured notes due October 2022 and redeemed $250 million of its unsecured notes due April 2023.The logistics firm also said it redeemed $300 million of unsecured notes and cancelled $216.3 million of unsecured notes via tender offer in 2020.