UBS Notes Significant M&A Activity - Latest Industrial REIT Pick

On August 18, UBS Global Research analysts Jeremy Metz and Russ Nussbaum published research notes focused on the bevy of recent activity in U.S. institutional quality industrial and warehouse properties so far this year. According to Metz, "…2015 continues to be marked by M&A with close to $8B announced in the last 30-days alone at sub-6% cap rates, highlighting the robust demand/pricing for institutional grade industrial CRE in the U.S." He noted that strong fundamentals, such as: higher rent and occupancy levels, combined with new development at "rational" levels, are helping to fuel demand for this asset class. M&A Big Picture - 2015 YTD UBS reported that rumors surfaced last week that sovereign wealth fund ADIA and PSP were in negotiations to buy a 55 million SF portfolio of assets from Exeter Property Group for $3.25 billion.

Source: Exeter Property Group This acquisition would be at a ~5.9 percent cap rate according to sources named in the report. Metz believes that an outright sale at that cap rate might preclude a rumored Exeter IPO. Larger industrial M&A deals so far this year mentioned in the report included: Prologis, Inc.

's $5.9 billion acquisition of the KTR industrial portfolio at a 5.4 percent cap rate. • http://www.benzinga.com/news/earnings/15/04/5424370/5-slides-explain-phenomenal-prologis-jv-bet-on-u-s-industrial-real-estat Prologis acquired the portfolio through a 55/45 JV with Norges Bank Investment Management (NBIM) in the Prologis U.S. Logistics Venture.

Source: Prologis - April 2015 The same $890 billion Norwegian sovereign wealth fund had previously invested in a Prologis European industrial portfolio back in 2012. In February 2015, The Blackstone Group

closed the sale of its IndCor U.S. industrial real estate platform to GIC for $8 billion, which represented a 5.8 percent cap rate. Blackstone had already filed for an IndCor IPO in September 2014, but chose an outright sale to realize the imbedded gains in the industrial portfolio it had assembled from 2010 to 2014. UBS Industrial REIT Picks In the industrial REIT space, UBS maintains a Buy rating on global logistics giant Prologis; while Nussbaum upgraded the second largest U.S. industrial REIT $7 billion cap Duke Realty

from Neutral to Buy in a separate August 18, morning note. Nussbaum mentioned DCT Industrial

as another name that UBS likes as a U.S. industrial pure-play, but he chose to maintain his Neutral rating. UBS - Duke Realty: Upgraded Neutral To Buy, PT Raised From $21 To $23 The new UBS target price of $23 is in-line with the UBS forward NAV estimate of $22.52 per share. UBS utilized a lowered 5.85 percent blended cap rate, (previously 6 percent), which reflected recent public and private transactions across industrial, medical office building (MOB), and office asset classes. UBS Rationale While Duke Realty is the second largest U.S. industrial REIT, it has actively been pruning non-core office assets from its portfolio. Nussbaum noted there had been "…over $3B of asset sales since the start of 2013 including ~$1.4B in 2Q15, DRE continues to actively reposition the portfolio away from non-core suburban office/light industrial and into bulk industrial." He expects that for FY2016, Duke will have reduced the NOI from these assets from ~11 percent to ~5 percent; and pointed out that the MOB assets are well-located. Duke's $550 million development pipeline is 45 percent pre-leased at ~7.1 percent cap rates, and should be fully funded from recycled capital. Investor Takeaway While some major players are choosing to realize gains on high quality U.S. industrial assets to take advantage of cap rates below 6 percent; it appears that buyers are looking at the strong fundamentals, synergies from scale in existing markets, and the long-term value proposition.