Prologis wants SEGRO... but I'd buy this industrial REIT instead

Is the industrial real estate investment trust (REIT) sector entering another wave of consolidation?

That remains to be seen, but this week certainly did open with one big warehouse owner offering to buy another. By that, I mean Prologis (NYSE: PLD) – the world's largest owner of industrial real estate – made an unsolicited $16.6 billion all-stock proposal to purchase UK-based SEGRO, the largest European-based industrial REIT.

That values SEGRO at about £0.925 per share, a 25% premium to its closing price before the announcement. Shares rose sharply on the news as investors welcomed it.

But SEGRO's board was far less appreciative.

Every single member promptly rejected the proposal, calling it "opportunistically timed." According to them, Prologis is materially undervaluing their long-term prospects.

That might seem a bit arrogant coming from such a smaller company. After all, its market cap is at least eight times less than that of Prologis.

Yet after reviewing the transaction, I’m in full agreement with the board’s unanimous decision. This was a low-ball offer; there’s no two ways about it.

So if Prologis is serious about getting its hands on its fellow REIT, things could get quite interesting from here.

I’ll be blunt right up front: I think Prologis does want SEGRO, and for good reason.

While it already owns the world’s biggest and best industrial portfolio – one it’s carefully constructed over decades – integrating SEGRO into its operations would still strengthen it significantly.

This European competitor holds high-quality warehouses in supply-constrained markets such as Amsterdam, London, and Paris. So its value is only going up from here (just as SEGRO’s board contested).

It also already owns data centers and is aggressively searching out further AI infrastructure opportunities – another set of assets that will only become more expensive as time goes on. Since Prologis is seeking to do the same, acquiring SEGRO would be quite the money-making, power-expanding accomplishment.

Yet SEGRO, for its part, is doing just fine on its own. While it could benefit from the right offer, it doesn’t need one. So Prologis’ cashless stock-exchange offer, where every SEGRO share is worth 0.084 of a Prologis share, isn’t attractive.

Moreover, while there would be obvious cost savings from the two companies merging operations, that would be over time. Right now, estimates suggest the deal would be only modestly accretive – at best – to Prologis’ 2027 funds from operations (FFO) per share.

Plus, its shares have declined since the offer was made.

All things considered, I would have been shocked if SEGRO said yes. And I have to imagine that Prologis would have been pleasantly surprised as well.

This might very well have been an intentional low-ball offer to get procedures started for a more reasonable final proposal. In which case, Prologis will probably have to raise its bid by no less than 8% to make things truly happen.

Perhaps by as much as 10%.

I also believe it will have to include a meaningful amount of cash in the end – enough to reduce market risk for SEGRO shareholders. The thing is that SEGRO management must know there are multiple ways to make that happen.

And so does Prologis.

It should come as little surprise that a company as massive, well-managed, and essential as Prologis has its perks… or that one of those perks is significant financial flexibility.

For one thing, the REIT has an investment-grade balance sheet that gives it easy and cheap access to further funding. But it also manages an enormous strategic capital platform in the form of institutional joint ventures and private investment vehicles.

Prologis is already a master at using such options to monetize its assets and opportunities. So it could easily sell more mature properties into already established funds if it needed to raise cash – and all without doing much damage, if any at all, to its balance sheet.

Again, I’m sure management is well aware of that possibility. We are talking about executives in charge of the gold standard in industrial real estate – a company that houses $3.2 trillion worth of ever-moving goods every year.

Its global platform serves the world’s largest retailers and supply chain operators. And the customer relationships it develops are second to none. So I do trust that – somehow, someway – Prologis knows what it’s doing with this SEGRO offer.

That’s why I’m not concerned about the fact that we hold Prologis in our Wide Moat REIT Portfolio in The Wide Moat Letter… where shares have appreciated nearly 50% since we first recommended it.

The stock now trades at approximately 29x adjusted funds from operations (AFFO). That puts it modestly above its long-term average of 27x – which isn’t even close to excessive for a company of this size and scale.

And analysts currently expect AFFO to grow 14% this year and 5% next year.

These are all healthy numbers for current shareholders to remain current shareholders – with or without the SEGRO deal. But they’re not enough to suggest an opening for new investors to get in at a good price.

We’re not suggesting its British takeover target either, for the record. The way we see it, there’s another industrial REIT altogether that’s looking much more investable today.

If I were allocating fresh capital to an industrial REIT, it would be Rexford Industrial Realty (NYSE: REXR).

Rexford is significantly smaller than Prologis, with a market capitalization of just $7.8 billion versus $127.7 billion. Unlike Prologis, it doesn't operate globally. Instead, it focuses exclusively on one of the most valuable industrial markets in the world: Southern California.

That concentration isn't a weakness, it's the moat.

Rexford owns distribution centers and light industrial facilities strategically positioned near the ports of Los Angeles and Long Beach, major freeways, rail corridors, and dense population centers. These are locations that simply cannot be replicated.

Its portfolio benefits from:

In short, while Rexford is much smaller than Prologis – or even SEGRO, with its $15.7 billion market capitalization – it owns some of the most irreplaceable industrial real estate on the planet.

And its current valuation makes the opportunity even more compelling. Today, Rexford trades at just 17.3x AFFO compared with its historical average of 32.3x – a 46% discount to its normal valuation.

Markets often confuse short-term uncertainty with permanent impairment. I don't believe that's the case here.

The Southern California industrial market didn't lose its strategic importance. The ports didn't disappear. The barriers to entry didn't suddenly evaporate. What changed was investor sentiment.

That's why I'd rather buy an exceptional business when it's temporarily out of favor than chase a fully valued one everyone already loves.

In investing, your returns are determined not only by the quality of the assets you own, but by the price you pay for them. Today, Rexford offers both a world-class portfolio and one of the most attractive valuations I've seen in years.

Happy SWAN investing!

Brad Thomas
Editor, The Wide Moat Daily

Wide Moat Research recently reviewed the concept of HALO stocks: publicly traded companies that are immune to the threat of artificial intelligence (AI) rendering them obsolete.

And it’s hard to find businesses that are more HALO-ish than those centered around growing and making food.

If you want to diversify your portfolio outside of the AI trade, last week’s Wide Moat Show could be precisely what you’ve been waiting for.

Click here to watch the full episode.