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| - | ''slightly higher over twelve months. Compiled from company data and'' | + | ''slightly higher over twelve months. <br>Compiled from company data and'' |
| ''figures from REIT.com, Reuters.com, advfn.com.'' | ''figures from REIT.com, Reuters.com, advfn.com.'' | ||
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Revision as of 20:49, October 22, 2008
Unlike other REITs, Prologis has an array of property funds under its (joint) ownership or management; the company contributes properties it has developed to these funds both to boost the value of the funds and to ensure returns on potentially problematic developments. This property fund system insulates Prologis from sudden but temporary real estate market weaknesses, reduces the risk involved in the kind of large-scale development Prologis practices, and also generates another source of cash for further reinvestment in more development. This keeps Prologis from become heavily dependant on unpredictable equity markets. However, Prologis has not gone untouched in the recent dramatic weakening of the US credit and real estate markets. The weak market seems especially troubling for Prologis because of it has more than 10B USD in debt--more than twice the value of its market capitalization. However, the company is actually relatively well-situated in terms of its traditionally high-debt REIT industry; close competitors AMB Property (AMB) and First Industrial Realty Trust (FR) all have higher debt-to-equity ratios.
Prologis hopes to offset domestic weaknesses with its substantial overseas portfolio, even turning toward development in the Middle East to avoid possible weakness in the European and Asian markets.[3] Prologis may also benefit from its environmentally responsible development--it is among the first in the industry to offer energy-efficient buildings on a large scale to accrue long-term savings to both company and tenants.
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.[4]
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.[5]
Debt
In millions. Industry Average data is quarterly and may vary
slightly higher over twelve months.
Compiled from company data and
figures from REIT.com, Reuters.com, advfn.com.
| ' | Total Debt (FY 2007) | Debt Ratio (2007-8) | Debt/Net Income (2007) |
| PLD | 10506 | 1.42 | 9.8 |
| AMB | 3494 | 1.66 | 11.1 |
| FR | 1950 | 2.04 | 12.6 |
| Industry Average | -- | 1.05 | -- |
While Prologis's debt load of 10.5 B may imply otherwise, the ratios suggest that the company is not carrying an over-large burden, and several ratings agencies have concurred that Prologis' debt situation falls in range of fair to good.[6][7]
Business Segments
- Property operations (16% of 2007 annual revenue)[10] 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%.)[11] This means that increased tenancy rates are a significant source of potential growth for Prologis[12]--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.[13]
- Investment management (3% of 2007 annual revenue)[14] 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).[15]
- Development/CDFS (81% of 2007 annual revenue)[16] 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.[17]
| 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) |
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.[19] 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.[20]
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.[21] 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.[22] 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.[23]
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),[24] 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. [25]
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.[26]
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.[27] 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.[28]
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.[30] 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,[31] 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[32]--weakening demand for industrial real estate would exacerbate the company's already high levels of tenant vacancy, hurting the profitability of PLD's properties.
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- 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. [33] 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[34] 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).[35][36]
- 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,[37] 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.[38]
- 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.[39]
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[40]--but a surprisingly hefty total revenue of 258 M in 2007 (net income 114 M).[41] 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.[42][43] 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
- ↑ "Global Platform," Prologis.com.
- ↑ "Top 25 Industrial Owners," National Real Estate Investor, Jul 1 2008.
- ↑ Haq, Robeel, "ProLogis secures Aramex warehouse contract," Arabian Business, Nov 19 2007.
- ↑ Prologis.com, "Investor Relations: Corporate Profile."
- ↑ PLD 2007 Annual Report, p.7.
- ↑ Prologis.com, "Investor Relations: Debt Ratings."
- ↑ "Fitch affirms Prologis' Sr. Unsecured Debt at BBB+," Reuters, Feb 26 2008.
- ↑ "PLD 10K 2007, p. 31.
- ↑ "PLD 10K 2007, p. 40.
- ↑ PLD 10K 2007, p. 111.
- ↑ PLD 10K 2007 , p.24.
- ↑ PLD 10K 2007, p. 32.
- ↑ Lazo, Shirley, Barrons.com, "A Retailer's Triple Play." Sept 28 2008.
- ↑ PLD 10K 2007, p. 111.
- ↑ PLD 10K 2007, pp. 40-41.
- ↑ PLD 10K 2007, p. 111.
- ↑ PLD 2007 Annual Report, p.7.
- ↑ PLD 10K 2007, p. 31.
- ↑ "REITs that work," Forbes.com, Aug 21 2008.
- ↑ "Industrial REITs on the rise, Forbes.com, Dec 3 2007.
- ↑ "Does Socially Responsible Investing Make Cents?" Equity Green, Dec 26 2006.
- ↑ "REITs buying into "Green Premium," Randyl Drummer, CoStar Group, Oct 17 2007.
- ↑ PLD Annual Report 2007, p.22.
- ↑ quoted in "'Green' REITs could get long-term gains," AFX New Limited, March 11 2008.
- ↑ "REITs buying into "Green Premium," Randyl Drummer, CoStar Group, Oct 17 2007.
- ↑ "All-Weather REITs," Peter Slatin, Forbes.com, Feb 28 2007. Second-to-last paragraph.
- ↑ PLD Annual Report 2007, p. 14
- ↑ Marino, Vivian, The New York Times, "A Global View Helps Industrial REITs," Oct 14 2007.
- ↑ "PLD 10K 2007, p. 24.
- ↑ AMB 10K 2007, p.24.
- ↑ PR Newswire "ProLogis Recognized as Leader for Carbon-Disclosure Practices," Buildings.com, Oct 7 2008.
- ↑ Hoffman, William, "Real estate boom over?" Pacific Shipper, Oct 13 2008.
- ↑ AMB data at Google Finance.
- ↑ "Corporate Real Estate Solutions," firstindustrial.com.
- ↑ FR data at Google Finance.
- ↑ FR 2007 10K, p6.
- ↑ "Company Overview," dukerealty.com as of Sept 2008.
- ↑ DRE data at Google Finance.
- ↑ DCT data at Google Finance.
- ↑ "Market Presence," PLD 10K 2007.
- ↑ KRC data at Google Finance.
- ↑ CenterPoint data at Google Finance.
- ↑ "CenterPoint Properties Trust is taken private," Peter Slatin, Forbes.com, Dec 19 2005.
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