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WIKI ANALYSIS
Prologis (NYSE:PLD) is the world's largest industrial REIT,[1] with 512.2 million square feet of rentable property - more than double the square footage of its nearest competitor, ING.[2] The company owns and manages interests in more than 2,669 distribution facilities, service offices, and other properties, spanning about 483 million square feet in 105 markets including North America, Europe, and Asia/Pacific.
Unlike many REITs who distribute 90% of their taxable income as dividends and thus need to raise additional capital for real estate development from equity markets, Prologis has a number of property funds that generate capital the company then uses for new development. These property funds are real estate mutual funds which Prologis has set up with institutional investors; Prologis contributes real estate properties it has developed to the funds and acts a managing partner as well as minority owner. This practice brings Prologis revenue from the development of real estate, rental revenues through the mutual funds, and property fund management fees - none of which are subject to the REIT 90% redistribution rule. Since Prologis can usually count on its property funds to purchase its properties, the property fund system also reduces the companies' exposure to general market conditions, where a temporarily weak market or lack of buyers would cause a new development to sell for less.
Company Overview
As an REIT, Prologis distributes 90% of its annual taxable income to shareholders, a practice which leaves little income for internal reinvestment. This income redistribution forces most other REITs to depend on potentially volatile equity markets for reinvestment funds, but Prologis sidesteps some of the risks associated with equity market activity by sourcing a significant portion of its reinvestment cash from its own property funds business.[3]
While Prologis maintains multinational business relationships with its largest clients and often undertakes new overseas development specifically at the request of these tenants, the company does not have a single tenant that accounts for more than 3.8% of its operating portfolio. Prologis' customers include Kraft Foods (KFT), Sanyo (SANYY), and Intel (INTC).
Prologis joint-owns and manages property funds with large institutional investors who have much more capital at their disposal than the company does; Prologis uses this institutional backing to develop and acquire more aggressively than it otherwise would be able to. By contributing developed real estate to the property funds in which Prologis has minority ownership or managing partner status, Prologis increases the value of these property funds, and also generates alternative sources of revenue via management/development fees and rental income distributed through the fund. The option of selling newly developed properties to these funds also lowers Prologis' real estate development risk - it relieves much of the pressure to quickly find third-party buyers in an often volatile market, since the funds can often act as a "backup" or "pre-arranged" buyer.
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Competition
Prologis is recognized as the largest industrial REIT in the world and with 37 million square feet in Europe and Asia, has more property abroad than any other US REIT.[4] Its unique plan - to buy, develop, and then sell or contribute as needed to its property funds - insulates it from temporarily flagging demand for industrial real estate (although a longer downturn would eventually cut away at the company's margins), and also helps PLD expand without borrowing heavily from equity markets. The company's high-quality properties in major ports and urban shipping centers protect it from the rapid devaluation that suburban industrial properties face in market downturns. However, its size and aggressive expansion would actually work against it in a worsening industrial REIT market[5] - weakening demand for industrial real estate would exacerbate the company's already high levels of tenant vacancy, hurting the profitability of PLD's properties.
- AMB: Another global industrial REIT focused on high-traffic, infill areas, AMB is ProLogis' closest competitor by size and by area of focus. Although it is smaller, AMB has already proven itself able to attract the same kind of major multinational client that ProLogis pursues. Like ProLogis, AMB also has an alternate source of income that provides a degree of freedom from equity markets - the fund management and joint-venture businesses generate capital for AMB's own real estate development and maintenance activities. AMB is even the second biggest player in the green REIT trend.[6] AMB also maintains healthy gross margins and high tenancy rates of 94%, making it an agile competitor able to quickly shift the focus of its new development to the hottest new international trading centers.
- First Industrial Realty Trust (FR): First Industrial focuses on supply-chain properties within the contiguous United States. With 64 million square feet of leasable space,[7] the company is a medium-sized competitor with lower gross margins and slightly lower-quality properties than PLD. First Industrial shares PLD's advantage of a large customer base and its 3000 tenant companies are distributed about as evenly (top 10 customers account for 20% of total revenue).[8][9]
- Duke Realty Corporation (DRE) is another USA-only REIT with medium-to-low gross margins compared to PLD's. Despite its sizeable 142 million square feet of leasable space,[10] Duke's division between commercial/healthcare and industrial real estate (with a lean towards commercial) makes its competition with PLD less direct. Its real advantage is its 7.7 thousand acres of development-ready land, yielding about 113 million additional sq feet of leasable area surrounding inland urban centers, Duke's preferred locales.[11]
- DCT Industrial Trust competes with PLD in Mexico, where DCT has significant presence in high-throughput, easy-access industrial holdings. However, DCT is much smaller than PLD and has lower margins, with no internally generated source of development capital. The company has 74 million leasable square feet.[12]
In addition to these primary all-around or US competitors, PLD also faces pressure from smaller, more specialized industrial REITs like Kilroy Realty Corporation (KRC), with just 3.9 million leasable square feet in California - one of PLD's most important areas within the United States.[13] There are also a multitude of private real estate firms like CenterPoint Properties active in transportation-focused industrial real estate.[14][15] However, the market-wide slowdown in US industrial real estate gives PLD a significant edge over these smaller competitors, who do not have PLD's cushioning from the investment management business and property funds. Finally, as PLD continues to expand into foreign markets, especially into Dubai, India, and the Middle East, foreign companies like Alexandria Real Estate Equities (ARE) are also increasingly direct competitors.
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