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Jane Jiang

AMB AT A GLANCE

P/E ► -10.9   EV/EBITDA ► -37.8   ROA ► -1.6% VERY LOW ROE ► -8.5% VERY LOW Debt to Equity ► 1.20 AVG Interest Coverage Ratio ► 1.96 AVG

 

 

 

 

 

 

AMB Property Corporation (NYSE: AMB) leases 126 M square feet of warehouse space worldwide--about the area of a medium-sized town in America--to multinational tenants like FedEx, UPS, Nippon Express, and the United States government,^[1] as well as to nearly three thousand smaller companies spread across 47 markets in the Americas, Asia, and Europe.^[2] In addition to its REIT business, the company also has a money management business. Although only responsible for 5% of AMB's revenue, its investment advisory business provides a steady source of funding for its real estate acquisitions and development projects.

AMB builds many of its properties next to key transport centers like airports ("on-tarmac" property) and major sea/river ports, and since 2002 has been devoting a significant percentage of its annual development spending to work on projects in key commercial cities abroad.^[3] (While AMB's US presence still outweighs its global forays, new investment in 2007 (acquisitions, developments, joint ventures) was divided roughly half and half by dollar value between the US and locations abroad.^[4]) The company's international exposure allows it to attract large multinational customers who are willing to pay a premium for a more comprehensive international offering.

Because many of AMB's tenants have longer triple-net leases (avg. 6 years) where they must pay for some or all of their utilities, building insurance, and real estate tax fees, AMB has a degree of protection from rising costs.^[5]

Company Overview

AMB is a real estate investment trust that owns and leases real estate to a wide pool of tenants. It also engages in property resell and real estate management for third parties, as well as private capital activtities like independent/institutional money management and joint ventures.

Business and Financial Metrics

AMB's financial performance has held steady despite US economic downturns that have rocked the REIT boat. While revenues decreased by $40 M in 2007, cuts in expenditures pushed 2007 net income to an all-time high.

Source: Compiled from company publications.^[6][7]
*Data from 2005,^[8] may differ slightly from current adjusted/corrected figures.

Source: Company data.^[9]

Business Segments

• Rental (95% of 2007 annual revenue) is AMB's primary development/operation/resell business.^[10] 88% of its holdings are warehouses and bulk warehouses, with a remainder composed of variable-use industrial buildings and transit/shipment/air cargo sites. AMB's tenant pool is widely distributed (in 2007 its top ten customers contributed only 15.5% of its total yearly base rent), protecting the company somewhat from income loss through individual customers' credit woes and inability to pay.^[11]
  • US vs. Foreign (87% and 8% of 2007 annual revenue, respectively) rental segments are slowly evening out. Since its first push for international expansion in 2002,^[12] AMB has broadened its focus from just North America to projects in China, Japan, Korea, Singapore, Belgium, France, Germany, Italy, the Netherlands, Spain, the United Kingdom, Canada, and Mexico.^[13] Today AMB owns, shares, or manages more than one million square feet in Shanghai, nearly five million in Mexico, and more than eight million throughout Europe.

• Private Capital (5% of 2007 annual revenue) includes subsidiary companies involved in co-investment ventures, money management for third party investors, and partnerships with institutional investors. While this segment contributes relatively little to AMB's total yearly earnings, these operations are important in generating capital that can be redeployed for real estate maintenance and development.^[14]

Trends and Forces

Rising costs in US market brings mixed effects

A prolonged slump of the domestic economy would eventually affect all industrial REITs as their tenant companies feel the squeeze of a weak market on all levels of the consumer chain, and the opposite holds true for economic golden years.^[16] But with AMB the relationship is more complex than a simple strong-market-strong-company one. Rising real estate prices raise the value of AMB's properties, but the company's long triple-net leases (see Company Overview above) prevent it from immediately translating this into base rent increases; high real estate prices also adversely affect the company's acquisition/development power and hence growth levels.

Meanwhile, an overall real estate downturn is not necessarily bad for AMB. According to Forbes' Ruthie Ackerman, "industrial REITs have surged at a time when others in the real estate market have struggled," and ABM is no exception. Because a market downturn means that fewer new industrial buildings are in construction, demand increases and AMB can raise its lease rates. The weak dollar that often comes along with a slumping housing market can also increase export profits for global manufacturers--the kind of company that makes up much of AMB's tenant base.^[17]

With 87% of fy2007 revenues coming from domestic rentals and real estate activity, AMB remains closely tied to the US's overall economic health, despite some hedging effects from its triple-net leases. Particularly important is California, which by itself accounts for almost a third of AMB's total yearly revenues.^[18]

Global trade growth increases demand for transport-friendly industrial property

AMB's focus on clients with multinational, transportation-centric needs means it inevitably ends up with tenants who are highly exposed to trading changes in the global market. Thus, trade volume increases involving the Americas, Europe, and Asia all play to AMB's growing international strength. No matter which direction trade increases in, more volume means more products to be stored and distributed, and more demand for the infill storage/distribution properties AMB provides. At the same time, AMB opportunity for raising profit also exposes it to the volatility of the international market-- Peter Slatin of Forbes/Slatin Real Estate writes that "increasingly globally oriented industrial REITs will feel the impact of changing worldwide trade patterns almost immediately." As it develops its overseas reach, AMB faces increasingly stiff competition from both fellow global REIT behemoths and the many foreign small-scale real estate companies that already populate the markets AMB is eyeing.^[19] For more on AMB's international involvement, see #Business Segments above.

Environmental problems increase operating costs, decrease port property demand/profitability

Coastal hurricanes can hurt AMB's operations by damaging property and shutting down the transportation infrastructure its clients depend on. South Florida alone makes up 5% of AMB's total owned/operated square footage, and much of the company's remaining real estate is located along the exposed coastlines of important US ports and shipping centers.

Greening REITS

Because of rising energy costs, many businesses are searching for more energy-efficient properties. While the concept of a "green REIT" has been tossed around for some time in the commercial REIT community, industrial REITs and their customers are only just beginning to join the trend.^[20] As one of the earliest converts to the green trend among industrial REITs, AMB stands to gain from the lower utility costs its green buildings offer clients--especially attractive for triple-net lease tenants who must pay the warehouse utility bills themselves. While the greening process itself requires extra investment, noted experts in the field like Jerry Yudelman, who chairs the US Green Building Council, have observed that "greening" costs decrease as companies accrue experience with conversion and new green development.^[21] In addition to the decreased operating costs and increased building values, rents, and occupancy rates (pegged at -8%, +7.5%, +3% and +3.5% by a McGraw-Hill Green Building SmartMarket report),^[22] green buildings are also subject to lower insurance rates and tax credits. Still, AMB is far from the only player in the green REIT game--close competitor ProLogis was another early investor in energy-efficient buildings, and more than two thirds of the US' 300 REITs are pursuing or planning to pursue green upgrades. ^[23]

Competition

One of the larger industrial REITs (2007 total revenue: 670 M, net income: 314 M), AMB is well-placed in both the US and global market. Its two-part business plan--money management and joint venture in addition to its core real estate/rental business--gives it an extra edge that no major competitors except ProLogis have. A large customer base (2,500 companies in 44 markets) makes it stable for an REIT--not so exposed to tenant inability to pay--and its high-quality properties in major urban and shipping centers protect it from the rapid devaluation that suburban industrial properties face in market downturns. Its strong global presence makes it an attractive choice for large multinational companies with a need for transit-ready properties including a variety of industrial building types. AMB is also noted for early and continued investment in energy-efficient, environmentally friendly technologies and development. Still, AMB faces very real all-around competition in the form of ProLogis, and must compete with numerous smaller and more specialized REITs and private real estate firms, especially in the US.

• ProLogis (PLD): Another global industrial REIT focused high-traffic, infill areas, behemoth ProLogis matches (or outmatches) AMB stride for stride. With a 2007 total revenue of 6,204 M (nearly ten times AMB's 670 M) and net income 1,074 M, ProLogis can apply more far capital brawn to the real estate muscling found at transportation and industry hot spots around the world. Like AMB, ProLogis has a fund management and joint-venture business that it uses to generate capital for its real estate development and maintenance activities, and it too came early to what seems to be an increasingly lucrative green REIT trend. This owner of the "world's largest portfolio of industrial distribution facilities"^[24] is probably AMB's most direct and toughest rival.^[25] Still, ProLogis' profit margins are much lower than AMB's.

• First Industrial Realty Trust (FR): First Industrial focuses on supply-chain properties within the contiguous United States. With 64 M sq ft of leasable space^[26] and 2007 total revenues and net income at 435 M and 155 M respectively, the company is a medium-sized competitor with lower profit margins and slightly lower-quality properties than AMB. While First Industrial shares AMB's advantage of a large customer base, FR's 3000 tenant companies are distributed less evenly (top 10 customers account for 20% of total revenue--compare to AMB's 15.5%).^[27][28] Despite these relative weaknesses, FR is still a competitor for the shifting US industrial market.
• Duke Realty Corporation (DRE) is another USA-only REIT with medium-to-low profit margins compared to AMB's (2007 total revenue 1170 M, net income 280 M). Despite its sizeable 142 M sq ft of leasable space,^[29] Duke's division between commercial/healthcare and industrial real estate (with a lean towards commercial) makes its competition with AMB less direct. Its real advantage is its 7.7 thousand acres of development-ready land, yielding about 113 M additional sq feet of leasable area surrounding inland urban centers, Duke's preferred locales.^[30]
• DCT Industrial Trust may challenge AMB in Mexico, where DCT has significant presence in high-throughput, easy-access industrial holdings. DCT is smaller than AMB and has lower margins, though, with no self-generating source of development capital, putting it at a disadvantage. 2007 revenue: 260 M, net income: 40 M. 74 M leasable sq ft.^[31]

In addition to these primary all-around or US competitors, AMB also faces pressure from smaller, more specialized industrial REITs like Kilroy Realty Corporation (KRC), with just 3.9M leasable sq. ft in Southern California--one of AMB's most important regions--but a surprisingly hefty total revenue of 258 M in 2007 (net income 114 M).^[32] There are also countless private real estate firms like CenterPoint Properties, private since 2005, that are also engaged in transportation-focused industrial real estate activity.^[33][34] Foreign companies like Alexandria Real Estate Equities (ARE) are also increasingly direct competitors for AMB as the company continues its global expansion.

References

1. ↑ "AMB Property Corporation leases 318,000…" Reuters, Mar 27 2008.
2. ↑ "Global Operating Portfolio," AMB.com. Accessed Sept. 2008.
3. ↑ "Real Estate CEO rolls the dice again in new foreign gambit," San Francisco Business Times, August 30 2002.
4. ↑ AMB Property 2007 10-K, p. 57.
5. ↑ Paul Tracy, "Possible New Additions to Our Income Portfolio: AMB," Street Authority.com, April 27 2004.
6. ↑ "Financial Highlights," 2007 Annual Report.
7. ↑ AMB Property 2007 10-K, F-3.
8. ↑ AMB 2005 10K, p. 32.
9. ↑ AMB Property 2007 10-K, p. 44.
10. ↑ "AMB to sell prime sites, reap millions," San Francisco Business Times June 6 2008.
11. ↑ AMB Property 2007 10-K, pp. 22, 26.
12. ↑ "Real Estate CEO rolls the dice again in new foreign gambit," San Francisco Business Times, August 30 2002.
13. ↑ "Global Development: Asia, Europe, The Americas," AMB.com.
14. ↑ AMB Property 2007 10-K, p. 38.
15. ↑ AMB Property 2007 10-K, pp. 62, F-39.
16. ↑ "REITs that work," Forbes.com, Aug 21 2008.
17. ↑ "Industrial REITs on the rise, Forbes.com, Dec 3 2007.
18. ↑ AMB Property 2007 10-K, p. F-39.
19. ↑ "All-Weather REITs," Peter Slatin, Forbes.com, Feb 28 2007. Second-to-last paragraph.
20. ↑ "Does Socially Responsible Investing Make Cents?" Equity Green, Dec 26 2006.
21. ↑ "REITs buying into "Green Premium," Randyl Drummer, CoStar Group, Oct 17 2007.
22. ↑ quoted in "'Green' REITs could get long-term gains," AFX New Limited, March 11 2008.
23. ↑ "REITs buying into "Green Premium," Randyl Drummer, CoStar Group, Oct 17 2007.
24. ↑ "Global Platform," Prologis.com.
25. ↑ PLD data at Google Finance.
26. ↑ "Corporate Real Estate Solutions," firstindustrial.com.
27. ↑ FR data at Google Finance.
28. ↑ FR 2007 10K, p6.
29. ↑ "Company Overview," dukerealty.com as of Sept 2008.
30. ↑ DRE data at Google Finance.
31. ↑ DCT data at Google Finance.
32. ↑ KRC data at Google Finance.
33. ↑ CenterPoint data at Google Finance.
34. ↑ "CenterPoint Properties Trust is taken private," Peter Slatin, Forbes.com, Dec 19 2005.