Potential AMB Property/Prologis Merger Comes as Operating Fundamentals are Strengthening

by: Brad Case

Wednesday's news (reported by the Wall Street Journal's Anton Troianovski) that AMB Corporation (NYSE:AMB) and ProLogis (NYSE:PLD) are discussing a merger not only presents the very interesting prospect of real operating synergies; it also comes just as operating fundamentals in the warehouse/industrial sector seem to have started strengthening in earnest -- something that should help all industrial REITs, not just AMB and PLD.

CoStar Group's Randyl Drummer reported that leasing activity in the warehouse space accelerated sharply in the fourth quarter of 2010. That was bound to happen as soon as manufacturing, distribution, and retailing companies started becoming convinced that the overall economic recovery was really underway. Coupled with the wonderful paucity of new supply in industrial properties, that upsurge in leasing activity suggests that rent growth won't be far behind: in fact, CoStar predicts 8% annual rent growth in warehouse space in 2012-2013.

As CoStar's Jay Spivey says, "The story here is pretty good."

We've now seen three quarters of positive absorption in industrial space, and three straight quarters of declining vacancy rates. But the fourth-quarter numbers were much stronger: net absorption of 29 million square feet compared to just 10 million in the Q2 and 11 million in Q3, according to CoStar.

Meanwhile, an article by SNL's Tom Yeatts suggests that an AMB-PLD deal seems more like an acquisition -- of the larger PLD by the smaller AMB -- than a "merger of equals." Yeatts quotes Dave Rodgers of RBC Capital Markets and Sri Nagarajan of FBR Capital Markets as saying that AMB's access to capital on favorable terms, coupled with PLD's mission of bringing down its leverage, mean that AMB is effectively solving PLD's problem with an injection of capital in return for its assets.

Rodgers, Nagarajan, and other analysts see the possibility of significant operational synergies. PLD's assets are located in 19 countries, mainly in the U.S. and Europe along with several in Mexico, Japan, and South Korea, while AMB's are located in 15 countries, mostly in the U.S. with additional holdings in East Asia, Europe, Mexico, and Canada.

The other publicly traded industrial/warehouse REITs are DCT Industrial (NYSE:DCT), Eastgroup Properties (NYSE:EGP), First Potomac Realty Trust (NYSE:FPO), First Industrial Realty Trust (NYSE:FR), Monmouth Real Estate Investment (NYSE:MNR), and Terreno Realty (NYSE:TRNO).

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I am long Vanguard REIT Index Fund and ING Global Real Estate Fund.

Disclaimer: The opinions expressed in this post are my own and do not necessarily reflect those of the National Association of Real Estate Investment Trusts ((NAREIT)). Neither I nor NAREIT are acting as an investment advisor, investment fiduciary, broker, dealer or other market participant, nor is any offer or solicitation to buy or sell any security investment being made. This information is solely educational in nature and not intended to serve as the primary basis for any investment decision.

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