Prologis just got bigger, following its merger with AMB. European president Philip Dunne talks to Richard Lowe about managing an increased number of mandates and its recent ownership tussle with APG
The modern day logistics sector, characterised by sophisticated, institutional-grade distribution facilities, has come a long way from the days of old-fashioned, mixed-use business parks. The name Prologis is synonymous with today's burgeoning institutional asset class and has been at the forefront of the market's transformation - and in more ways than one, thanks to its recent merger with AMB Property Corporation.
The joining of two companies - dubbed a "merger of equals" - brings together Prologis, established in 1991 as Security Capital Investment Trust, and AMB, which was founded even earlier in 1983, to create "the pre-eminent global industrial real estate company" with $44bn (€30.5bn) and 55.7sqm of logistics assets under management.
In the intervening years, both US firms had set about establishing respective global platforms, and the merger no doubt consolidates their dominant position across continents. "What we've managed to create is one of the largest real estate companies in the world, and very clearly the largest industrial-focused real estate company," says Philip Dunne, president for Europe at Prologis.
Dunne explains that the merger allowed Prologis to strengthen its balance sheet (AMB's was less leveraged coming out of the crisis), while both parties benefited from their respective presence in global markets. Prologis was stronger in Europe, but had sold out of its Chinese business as part of its deleveraging process, while AMB had managed to retain its platforms there and in other emerging markets such as Brazil. "That was a significant dent in our global platform," Dunne says in reference to Prologis' exit from China. "But nevertheless, our strategic ambitions have always been to be a global company."
Within Europe, the merger creates a similar picture of predominance in the institutional logistics sector. None of its rivals can claim to have €8.7bn in European logistics assets under management. "For both of us, it takes a competitor off the stage," Dunne says. "AMB certainly had a very ambitious five-year growth plan for their European business. The merger has effectively achieved that for them, because they have gone from 1.7sqm to a platform of 13.5sqm."
In Europe, the merger also brings a number of real estate funds from both stables under one roof. This includes the listed vehicle Prologis European Properties (PEPR) and the closed-ended, non-listed Prologis European Properties Fund II (PEP2), which were established by Prologis in 1999 and 2007, respectively. From AMB's side of the business comes the renamed Prologis Targeted Europe Logistics Fund, an open-ended vehicle, as well as AMB's joint venture with Allianz Real Estate, announced earlier in 2011.
APG, which recently entered into a high profile ownership tussle with Prologis over PEPR, raised concerns over the potential conflicts of interest of running several mandates with overlapping investment objectives.
However, Dunne argues that the potential risk is limited. In fact, the greatest potential for overlap exists between PEPR and PEP2, two vehicles that Prologis has been managing concurrently for the past four years. Both funds potentially target the same types of assets, but Dunne says Prologis has established a strategy that allows for varying degrees of shared ownership during investment periods, whereby at any one time ownership of particular assets can be split between PEPR, PEP2 and Prologis itself. "Over time we will manage those parks into a single ownership so there is no overlap," Dunne adds. He cites the high occupancy levels at PEPR (93%) and PEP2 (94%) as evidence of the effectiveness of this strategy.
Meanwhile, the open-ended Targeted Europe Logistics Fund (TELF) targets segments of the European logistics market: ports, airports, strategic ‘infill' locations in tighter urban locations, rather than ‘big box' distribution facilities outside cities. The €470m (including a 15% co-investment from Prologis) joint venture with Allianz Real Estate is to follow a similar strategy, but this is restricted to the western European euro-zone markets, while the TELF can invest in other markets like the UK. "So the risk of overlap is fairly minimal," Dunne says. "It's our job to manage that and to make sure we manage the interests of each of the funds and the best interest of the unit holders of these funds."
Prologis estimates that it has approximately $3.2bn of uncalled capital to deploy globally, $1bn (or close to €700m) of which will be targeting European logistics through the Allianz Real Estate JV, the open-ended Targeted Europe Logistics Fund (which it seeks to raise capital for as and when opportunities arise) and by introducing further equity and/or leverage to the fully deployed PEP2 fund.
Prologis recently offered up to €97.5m of new shares in PEPR. It had built up a 93% ownership of the fund, which is listed on Euronext Amsterdam, in response to an attempt this year by APG and a consortium of investors led by Goodman Group to take the fund private. Prologis did this by offering to buy remaining interests at €6.20 per share, in a bid to head off APG and Goodman's offer of €6 per share. It worked.
"There is no reason - neither financially nor commercially - that Prologis would have chosen to surrender control of PEPR," Dunne says. "It was maybe a little bit opportunistic from APG's perspective. Their bidding for PEPR did ultimately allow them to exit at a price they believed made sense for their investors in getting PEPR trading close to NAV. We're happy to buy the rest of our interests in it at a price close to NAV, so everybody is probably reasonably pleased with the outcome."
Dunne adds that as well as publicly criticising PEPR's governance structure - mainly revolving around a lock-in management contract that prevented shareholders from being able to replace the manager should they want to - APG have also praised the Prologis for the management of the PEPR portfolio.
"APG took the decision to team up with Goodman to have a go at acquiring it, albeit it was going to be highly unlikely given that we - Prologis the investor - had significant control over it. So it forced us as Prologis to move with a little bit more pace," Dunne says. "We're about 7% shy of total ownership. We will continue to operate it as a public company. We will continue to work on improving the overall corporate governance of it as well as developing and evolving the strategy of that fund. Ultimately, it will be recapitalised in some shape or form and that may be an opportunity for other investors to get access to the portfolio."
Dunne is confident that all of Prologis' European funds can benefit from a stabilizing rental picture in European logistics and from a very focused capital deployment strategy. "The most important thing for all of those vehicles is that we work really hard to, firstly, manage the portfolio, manage our occupancies, but over time manage the growth and the overall total returns of those funds by way of rental growth," he says. "If we do those things really well, we think we can exceed our funds' expectations in terms of total return."
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