ProLogis (PLD)

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Revision as of 16:21, October 18, 2008

Prologis is the world's largest industrial REIT,^[1] with 512.2 million sq ft--more than the square footage of its nearest competitor, ING.^[2]

Prologis (PLD) owns and manages interests in more than 2,669 distribution facilities, service offices, and properties, spanning about 483 million square feet of space in 105 markets, including North America (72.36% of total property square footage as of September 30, 2007), Europe (19.38%), and Asia/Pacific (8.26%). The company classifies its operations into three reportable segments: Property Operations (PO), Fund Management, and Corporate Distribution Facilities Services (CDFS). Property Operations, engaged in direct long-term ownership of industrial distribution and retail properties, accounted for approximately 8.17% of 3rd quarter total segment revenues. CDFS, the property development division that feeds the PO division or sells assets to third parties, generated approximately 90.75% of the total segment revenue in the 3rd quarter, while Fund Management, accounting for long term investment management property funds and also fees and incentives from property management and development, contributed approximately 1.08% to total segment revenue. Prologis does not have a single tenant that accounts for more than 3.8% of its operating portfolio Deutsche Post AG is the company's largest tenant, contributing 3.35% of the portfolio's annualized base rent.

Prologis is the benchmark REIT owner and developer in the industrial distribution sector, and is poised to benefit most as the sector continues its broad recovery. The company had an exceptionally good 3rd quarter gross proceeds from CDFS dispositions increased to $3.1 billion in the 3rd quarter of 2007. Most of the CDFS sales were from a $2.1 billion sale of shares of Macquarie Prologis Trust to a property fund. Total FFO contribution during the quarter from CDFS sales was $230.1 million versus $92.8 million recorded in 3Q 2006. The CDFS segment develops and or rehabs industrial properties and sells these assets either to one of the company's funds or a third party. The company's current CDFS development pipeline now stands at $6.2 billion, up 16.1% over December 31, 2006. Of this amount, about $2.8 billion of projects are currently under construction, while the remaining $3.4 billion of completed developments and repositioned properties were 65% leased at the end of the quarter. CDFS generated total income of $2.4 billion from acquired property portfolios. While CDFS income is not as predictable as recurring rents, we feel this is a viable business that will continue to be profitable throughout the first part of 2008 as we do not predict a material rise in cap rates in class A properties next quarter.

All segments reported good operating results during the quarter, reflecting continued strong global industrial market demand. While North American markets could be slowing, the company is well diversified internationally, and most of the company's growth going forward will be outside of North America. In the 3rd quarter FFO came in at $1.41 per diluted share, up 78.5% from $0.79 in the same period in 2006. The substantial rise in FFO can be attributed to CFDS sales, high occupancy levels, growth in rental rates, and expansion of the investment management business. PLD increased its full year FFO guidance to $4.40 - $4.50 per share. The increase is primarily due to the 3rd quarter recognition in FFO of $0.36 per share related to PLD's acquisition of the shares of Macquarie ProLogis Trust (MPR) and subsequent contribution to a new property fund. Without this sale, FFO the 3rd quarter would have been $1.05 per share, still a 33% increase from the prior year quarter.

The company also provided guidance for 2008, and expects FFO to fall in the range of $4.65 to $4.85 per share. At the high end of guidance, this would represent over 10% y/y growth from our 2007 estimates.

During the 3rd quarter same store net operating income increased 5.4% vs. 3Q 2006. The increase in net operating income can be attributed to 9.6% growth in same store rents and 2.7% growth in average same store occupancy. YTD same store rents are up 8.4%. In the company's stabilized portfolio overall occupancy stood at 95.5% in the 3rd quarter. In Asia SS occupancy finished the quarter at 98.9%, Europe 93.7% and North America 95.6%. Leasing activity was strong during the 3rd quarter. The company signed 493 new leases representing 29 million square feet in the 3rd quarter. 3Q retention was 79%. The company has posted positive same store revenue, NOI, and occupancy growth over the past several quarters and we expect this trend to continue throughout the year. The company expects occupancies to remain stable and rental rate growth on lease turnovers to continue into 2008.

The property fund business continues to grow at a healthy clip. During the quarter, the company announced four new property funds, in addition to ProLogis North American Industrial Fund II (NAIF II), with a combined capitalization of over $14 billion. The funds will own distribution centers in Europe, the United States, Mexico and South Korea. The total fund business has now grown to $33 billion of assets, which will result in significant increases in management fees when these funds are fully invested.

Prologis currently has a large International development pipeline. The company had $777 million of development starts in the 3rd quarter of 2007 $232.3 million in North America, $357.2 million in Europe, and $187.4 million in Asia. The company expects global trade to continue growing at a brisk pace, and increased projections for total global development starts to $4 billion at the high end in 2007, up from a high end estimate of $3.6 billion last quarter. In the 3rd quarter, the company completed developments (including joint ventures) worth $509.7 million. At the quarter end, PLD had projects worth nearly $2.8 billion under development, led by Europe ($1.1 billion, 17.2% leased), Asia ($970.9 million, 20.1% leased) and North America ($617.1 million, 24.2% leased). In Asia, net absorption remains healthy, and leasing activity in the company's new inventory development is brisk. In North America, net absorption in the top 30 logistics markets remained healthy at over 32 million square feet during the 3rd quarter. In Germany, PLD signed agreements for roughly 1.8 million square feet of new development on a pre-committed basis. Nearly 80% of the company's starts this year are outside North America.

ProLogis' share of FFO from property funds increased by 105.7% in the 3rd quarter to $39.9 million, up from $19.4 million in 3Q 2006. Fee income from property funds for the quarter increased 32.8% to $27.1 million, compared with $20.4 million in the same quarter of 2006. During the quarter, total assets owned and under management increased to $34.4 billion, from $26.7 billion at December 31, 2006, a year-to-date increase of 28.8%.

1 Company Overview
- 1.1 Business and Financial Metrics
- 1.2 Business Segments
2 Trends and Forces
3 Competition
4 References

Company Overview

Prologis operates in three segments: property operations, investment management, and development/CDFS (see Business Segments below). As an REIT, the company must distribute 90% of its annual taxable income to shareholders, a practice which leaves little income for internal reinvestment. This income redistribution forces most other REITs depend on potentially volatile equity markets for reinvestment funds, but Prologis sources a significant portion of its reinvestment cash from its own property funds business and sidesteps some of the risks associated with equity market activity.^[3]

Business and Financial Metrics

Between 2003 and 2007, PLD more than quadrupled its annual revenue and tripled its operating income. This fast-paced growth derives in large part from PLD's aggressive reinvestments in development and acquisitions. 2007 alone saw an increase of 61.4% from 2006 in new industrial/retail-mixed-use development.^[4]

Source: Compiled from company publications.^[5]

Source: Company data.^[6]

Business Segments

Property operations (16% of 2007 annual revenue)^[7] includes revenues PLD earns from leasing its industrial distribution properties to clients, many of them long-term. In December 2007, the company owned 208.5 M sq ft in North America, Europe and Asia--primarily distribution properties located in major ports and trading centers, although 1.2 M sq ft were also included of North American retail properties. Unlike some REITs, PLD has sustained very aggressive development and acquisition activities over the past few years, and many of its properties are not yet leased near to capacity. (In 2007, PLD's percentage of rentable sq ft leased was 84% across three continents--much lower than competitor AMB's 94%.)^[8] This means that increased tenancy rates are a significant source of potential growth for Prologis^[9]--important, since the high risk of aggressive real estate development and acquisition means that REITs often struggle to maintain grow rates. At the same time, PLD may have a harder time filling these vacant spaces due to 2008's real estate slowdown (see Trends and Forces section below)--according to the National Association of Realtors, US industrial vacancies will increase to 10.8% by the second quarter of 2009.^[10]
Investment management (3% of 2007 annual revenue)^[11] includes revenues from both Prologis' ownership of property funds shared with institutional investors, and its management of the actual properties themselves (in addition to any interest generated on advances to the property funds). PLD takes advantage of this institutional backing to develop and acquire more aggressively than it otherwise would be able to. PLD's most profitable property funds are its European funds, which in 2005 generated only 44 M USD in operating income (second after the North America funds, 56 M), but in 2007 contributed 105 M (compare to 64 M North America and 30 M Asia).^[12]
Development/CDFS (81% of 2007 annual revenue)^[13] includes development/rehabilitation of real estate properties to be contributed PLD's related property funds or sold to third parties. Contributions to property funds in which PLD has minority ownership or managing partner status raises management/development revenue for the company. Contributing new properties to funds also lowers PLD's real estate development risk by relieving much of the pressure to find third-party buyers in an often volatile market. In 2007, this fund-contribution "safety net" allowed PLD to undertake 4.1 B of new industrial/retail-mixed-use development.^[14]

Cashflow sources, in USD Millions.

	2003	2004	2005	2006	2007
Net cash from operating activities	367	484	488	687	1,225
Net cash from financing activities (used in)	(31)	37	1,713	1,645	2,742
(Net cash used in investing activities)	(115)	(620)	(2,223)	(2,069)	(4,053)

Source: Compiled from company data.^[15]

Trends and Forces

Rising costs in US market brings mixed effects

A mild domestic real estate slump could bring benefits to PLD. 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 PLD's situation, like that of fellow industrial-distribution real estate heavyweight AMB, is more complicated. Since PLD sources much of its new development to property funds partially owned by the company, a weak real estate market with few third-party buyers poses a smaller risk to PLD than to other REITs. Furthermore, high real estate prices adversely affect the company's acquisition/development power, a primary driver of the company's strong recent growth, while lower real estate prices could help PLD maintain its aggressive expansion in North America and overseas.

According to Forbes' Ruthie Ackerman, "industrial REITs have surged at a time when others in the real estate market have struggled," and PLD is no exception. A market downturn often means that fewer new industrial buildings are in construction, increasing property demand so that PLD 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 PLD's tenant base.^[17]

Sustainability's "greening trend" in 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.^[18] PLD is the posterchild for the Greening REIT movement, and stands to gain from the lower utility costs its green buildings offer clients. 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.^[19] PLD also claims that compliance with the US Green Building Counciils' new LEED (Leadership in Energy and Environmental Design) building code makes its new buildings more durable and less in need of redevelopment down the road--whether for environmental-policy-compliance or functional reasons.^[20]

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),^[21] green buildings are also subject to lower insurance rates and tax credits. Still, while PLD was the earliest and the most aggressive in its sustainability efforts, it is far from the only player in the green REIT game--close competitor AMB 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. ^[22]

Global trade growth increases demand for transport-friendly industrial property

PLD'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 PLD'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 PLD provides. At the same time, the 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, PLD 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.^[23]

Prologis' customers include companies like Nike, Intel, Kraft, Sanyo, and Deutsche Post World's DHL, which have helped push PLD's overseas expansion overseas by urging development in Europe and Asia. Of PLD's top 25 tenants, 9 occupy PLD properties on all three continents in which the company has developments.^[24] In China, Prologis joined the 2008 Olympics building boom to develop an industrial park that served as the main distribution and logistics center for the Beijing Games.^[25]

Competition

Prologis is recognized as the largest industrial REIT in the world (2007 total revenue: 6205 M, net income: 1074 M), and at 37 M sq ft in Europe and Asia, has more property abroad than any other US REIT.^[26] Its unique plan--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 profits), and also helps PLD expand without borrowing extensively 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. PLD is the acknowledged industry leader in green development,^[27] with its early and continued investment in energy-efficient, environmentally friendly technologies and development. However, its size and aggressive expansion could actually work against it in an increasingly worsening industrial REIT environment^[28]--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 high-traffic, infill areas, AMB is ProLogis' closest competitor by size and by area of focus. Prologis has a sizeable edge in numbers: AMB's 2007 total revenue was 670 M, a mere 11% of PLD's revenue, and AMB's net income 224 M. But although it is smaller, AMB has already shown 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 frees it from complete reliance on equity markets like a traditional REIT--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. ^[29] AMB also maintains very healthy profit margins and extremely high tenancy rates of 94%, making it a real competitor with the ability to shift focus of its new development quickly 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 M sq ft of leasable space^[30] 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 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).^[31]^[32]
Duke Realty Corporation (DRE) is another USA-only REIT with medium-to-low profit margins compared to PLD's (2007 total revenue 1170 M, net income 280 M). Despite its sizeable 142 M sq ft of leasable space,^[33] 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 M additional sq feet of leasable area surrounding inland urban centers, Duke's preferred locales.^[34]
DCT Industrial Trust may challenge PLD in Mexico, where DCT has significant presence in high-throughput, easy-access industrial holdings. DCT is smaller than PLD 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.^[35]

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 3.9M leasable sq. ft in California--one of PLD's most important areas within the United States^[36]--but a surprisingly hefty total revenue of 258 M in 2007 (net income 114 M).^[37] There are also a multitude of private real estate firms like CenterPoint Properties, private since 2005, that are also engaged in transportation-focused industrial real estate activity.^[38]^[39] However, the market-wide slowdown in US industrial real estate may give PLD a significant edge over these smaller competitors, who do not have PLD's large-company cushioning, with its investment management business and property funds. As PLD continues to expand into foreign markets, especially into Dubai, India, and the Middle East, foreign companies like Alexandria Real Estate Equities (ARE) will also become increasingly direct competitors.

References

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 ==Competition==
+Prologis is recognized as the largest industrial REIT in the world (2007 total revenue: 6205 M, net income: 1074 M), and at 37 M sq ft in Europe and Asia, has more property abroad than any other US REIT.<ref>[http://www.secinfo.com/dvjdn.t2g.htm#_125 ''AMB 10K 2007,'' p.24.]</ref>  Its unique plan--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 profits), and also helps PLD expand without borrowing extensively 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. PLD is the acknowledged industry leader in green development,<ref>[http://www.buildings.com/news/detail2.aspx?contentID=58301612 PR Newswire "ProLogis Recognized as Leader for Carbon-Disclosure Practices," ''Buildings.com,'' Oct 7 2008.]</ref> with its early and continued investment in energy-efficient, environmentally friendly technologies and development. However, its size and aggressive expansion could actually work against it in an increasingly worsening industrial REIT environment<ref>[http://www.pacificshipper.com/news/article.asp?sid=32874&ltype=domestic_and_regional  Hoffman, William, "Real estate boom over?" ''Pacific Shipper,'' Oct 13 2008.]</ref>--weakening demand for industrial real estate would exacerbate the company's already high levels of tenant vacancy, hurting the profitability of PLD's properties.
+<autowikidata/>
+*[[AMB]]: Another global industrial REIT focused high-traffic, infill areas, AMB is ProLogis' closest competitor by size and by area of focus. Prologis has a sizeable edge in numbers: AMB's 2007 total revenue was 670 M, a mere 11% of PLD's revenue, and AMB's net income 224 M. But although it is smaller, AMB has already shown 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 frees it from complete reliance on equity markets like a traditional REIT--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 [[#Greening REITs|green REIT]] trend. <ref>[http://finance.google.com/finance?q=NYSE:AMB AMB data at Google Finance.]</ref>  AMB also maintains very healthy profit margins and extremely high tenancy rates of 94%, making it a real competitor with the ability to shift focus of its new development quickly 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 M sq ft of leasable space<ref>[http://www.firstindustrial.com/main.php?in_pg=corporate  "Corporate Real Estate Solutions," ''firstindustrial.com.'']</ref> 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 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).<ref>[http://finance.google.com/finance?q=NYSE%3AFR FR data at Google Finance.]</ref><ref>[http://yahoo.brand.edgar-online.com/displayfilinginfo.aspx?FilingID=5761775-1004-922739&type=sect&dcn=0001035704-08-000095 ''FR 2007 10K'', p6.]</ref>
+*[[Duke Realty Corporation (DRE)]] is another USA-only REIT with medium-to-low profit margins compared to PLD's (2007 total revenue 1170 M, net income 280 M). Despite its sizeable 142 M sq ft of leasable space,<ref>[http://www.dukerealty.com/ "Company Overview," ''dukerealty.com as of Sept 2008.'']</ref> 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 M additional sq feet of leasable area surrounding inland urban centers, Duke's preferred locales.<ref>[http://finance.google.com/finance?client=ob&q=NYSE:DRE DRE data at Google Finance.]</ref>
+*[[DCT Industrial Trust]] may challenge PLD in Mexico, where DCT has significant presence in high-throughput, easy-access industrial holdings. DCT is smaller than PLD 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.<ref>[http://finance.google.com/finance?q=NYSE:DCT DCT data at Google Finance.]</ref>
+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 3.9M leasable sq. ft in California--one of PLD's most important areas within the United States<ref>[http://www.secinfo.com/dvjdn.t2g.htm#_125 "Market Presence," ''PLD 10K 2007.'']</ref>--but a surprisingly hefty total revenue of 258 M in 2007 (net income 114 M).<ref>[http://finance.google.com/finance?q=NYSE%3AKRC KRC data at Google Finance.]</ref> There are also a multitude of private real estate firms like CenterPoint Properties, private since 2005, that are also engaged in transportation-focused industrial real estate activity.<ref>[http://finance.google.com/finance?q=CenterPoint+Properties&hl=en CenterPoint data at Google Finance.]</ref><ref>[http://www.forbes.com/business/2005/12/09/REIT-CalEast-CenterPoint-cx_ps_1209reit.html "CenterPoint Properties Trust is taken private," Peter Slatin, ''Forbes.com'', Dec 19 2005.]</ref> However, the market-wide slowdown in US industrial real estate may give PLD a significant edge over these smaller competitors, who do not have PLD's large-company cushioning, with its investment management business and property funds. As PLD continues to expand into foreign markets, especially into Dubai, India, and the Middle East, foreign companies like [[Alexandria Real Estate Equities (ARE)]] will also become increasingly direct competitors.
 <autowikidata/>