ProLogis (PLD)

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Prologis (NYSE:PLD) is the world's largest industrial REIT,^[1] with 512.2 M sq ft 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 M sq ft in 105 markets including North America (72% of PLD's total property square footage as of September 2007), Europe (19%), and Asia/Pacific (8%).

Unlike many REITs who must 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 may cause a new development to sell for less than it should. However, Prologis has not gone untouched in the recent weakening of the US credit and real estate markets. PLD has 10 B USD in debt (debt ratio 1.42); however, the company is actually relatively well-situated for its traditionally high-debt REIT industry; close competitors AMB Property (AMB) and First Industrial Realty Trust (FR) all have higher debt-to-equity ratios. (See Debt below.)

1 Company Overview
- 1.1 Business and Financial Metrics
  - 1.1.1 Debt
- 1.2 Business Segments
  - 1.2.1 Property fund business model
2 Key Trends and Forces
3 Competition
4 References

Company Overview

As an REIT, Prologis 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 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).

Business and Financial Metrics

Between 2003 and 2007, PLD more than quadrupled its annual revenue and tripled its operating income. This fast-paced growth comes in large part from PLD's aggressive reinvestment in development and acquisitions. 2007 alone saw a year-on-year increase of 61.4% in new industrial/retail-mixed-use development undertaken for the year.^[4]

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.^[5]^[6]

Source: Compiled from company publications.^[7]

Source: Company data.^[8]

Business Segments

Property operations (16% of 2007 annual revenue)^[9] includes revenues PLD earns from leasing its industrial distribution properties to clients. In December 2007, the company owned 208.5 M sq ft in North America, Europe and Asia--primarily warehouse and distribution centers located in major ports, trading centers, as well as airport tarmac properties (PLD has exclusive rights to the new Beijing international airport), 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%.)^[10]

Investment management (3% of 2007 annual revenue)^[11] includes revenues both from Prologis' joint ownership of property funds shared with institutional investors, and from its management of the actual properties contributed to the funds (in addition to any interest generated on advances to the property funds). 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 to PLD's related property funds or sold to third parties. PLD is currently focusing on overseas development, especially in Europe and Asia, where it already has significant holdings.

Property fund business model

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 profit 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. In 2007, this property-fund safety net allowed PLD to undertake 4.1 B of new industrial/retail-mixed-use development,^[14] far more than any other industrial REIT.

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]

Key Trends and Forces

Rising costs in US market brings mixed effects

Since PLD sources much of its new development to property funds partially owned by the company, a slow 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.^[16]

Sustainability's "greening trend" in REITS

Rising energy costs are prompting many businesses to favor energy-efficient properties. Still a relatively new concept,^[17] "green REITs" claim that 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),^[18] green buildings are also subject to lower insurance rates and tax credits. PLD was the earliest and the most aggressive in its sustainability efforts, but 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. ^[19] While the greening process itself requires extra investment, experts have observed that "greening" costs decrease as companies accrue experience with conversion and new green development.^[20]

Global trade growth increases demand for transport-friendly industrial property

PLD's focus on clients with multinational, transportation-centric needs means that many of its tenants 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.^[21]

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.^[22] 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.^[23] Recently, Prologis has also been turning toward development in the Middle East to avoid possible weakness in the European and Asian markets.^[24]

Source: Compiled from company publications.^[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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-[[Image:Prologis.jpg|left]] Prologis (NYSE:PLD) is the world's largest industrial [[REIT]],<ref>[http://www.prologis.com/en/globalplatform/default.aspx "Global Platform," ''Prologis.com.'']</ref> with 512.2 million sq ft of rentable property--more than double the square footage of its nearest competitor, [[ING Clarion Global Real Estate Income Fund (IGR)|ING]].<ref>[http://nreionline.com/research/real_estate_top_industrial_owners_0701/ "Top 25 Industrial Owners," ''National Real Estate Investor,'' Jul 1 2008.]</ref> The company owns and manages interests in more than 2,669 distribution facilities, service offices, and other properties, spanning about 483 M sq ft in 105 markets including North America (72% of PLD's total property square footage as of September 2007), Europe (19%), and Asia/Pacific (8%).
+[[Image:Prologis.jpg|left]] Prologis (NYSE:PLD) is the world's largest industrial [[REIT]],<ref>[http://www.prologis.com/en/globalplatform/default.aspx "Global Platform," ''Prologis.com.'']</ref> with 512.2 M sq ft of rentable property--more than double the square footage of its nearest competitor, [[ING Clarion Global Real Estate Income Fund (IGR)|ING]].<ref>[http://nreionline.com/research/real_estate_top_industrial_owners_0701/ "Top 25 Industrial Owners," ''National Real Estate Investor,'' Jul 1 2008.]</ref> The company owns and manages interests in more than 2,669 distribution facilities, service offices, and other properties, spanning about 483 M sq ft in 105 markets including North America (72% of PLD's total property square footage as of September 2007), Europe (19%), and Asia/Pacific (8%).
-Unlike many other REITs, who must distribute 90% of their taxable income as dividends and thus must raise additional capital for real estate development from equity markets, Prologis has a number of [[property fund]]s 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 thus 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 may cause a new development to sell for less than it should.  However, Prologis has not gone untouched in the recent weakening of the US credit and real estate markets. PLD has 10B USD in debt (debt ratio of 1.42); however. That said, 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. {{fact}}
+Unlike many REITs who must 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 fund]]s 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 may cause a new development to sell for less than it should.  However, Prologis has not gone untouched in the recent weakening of the US credit and real estate markets. PLD has 10 B USD in debt (debt ratio 1.42); however, the company is actually relatively well-situated for its traditionally high-debt REIT industry; close competitors [[AMB Property (AMB)]] and [[First Industrial Realty Trust (FR)]] all have higher debt-to-equity ratios. ''(See [[#Debt|Debt]] below.)''
 ==Company Overview==
-As an [[REIT]], Prologis 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.<ref>[http://ir.prologis.com/investors/index.cfm ''Prologis.com,'' "Investor Relations: Corporate Profile."]</ref>
+As an [[REIT]], Prologis 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 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.<ref>[http://ir.prologis.com/investors/index.cfm ''Prologis.com,'' "Investor Relations: Corporate Profile."]</ref>
-While Prologis maintains multinational business relationships with its largest clients and often undertakes new overseas development specifically on 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)]].
+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)]].
 ===Business and Financial Metrics===
-Between 2003 and 2007, PLD more than quadrupled its annual revenue and tripled its operating income. This fast-paced growth comes 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.<ref>[http://ir.prologis.com/investors/AnnualReport2007/index.html ''PLD 2007 Annual Report,'' p.7.]</ref>
+Between 2003 and 2007, PLD more than quadrupled its annual revenue and tripled its operating income. This fast-paced growth comes in large part from PLD's aggressive reinvestment in development and acquisitions. 2007 alone saw a [[year-on-year]] increase of 61.4% in new industrial/retail-mixed-use development undertaken for the year.<ref>[http://ir.prologis.com/investors/AnnualReport2007/index.html ''PLD 2007 Annual Report,'' p.7.]</ref>
 ====Debt====
 ''figures from REIT.com, Reuters.com, advfn.com.''
 {| {{table}}
-| align="center" style="background:#f0f0f0;"|''''''
+| align="center" style="background:#f0f0f0;"|
 | align="center" style="background:#f0f0f0;"|'''Total Debt (FY 2007)'''
 | align="center" style="background:#f0f0f0;"|'''Debt Ratio (2007-8)'''
 | PLD||10506||1.42||9.8
 |-
-| AMB||3494||1.66||11.1
+| [[AMB]]||3494||1.66||11.1
 |-
-| FR||1950||2.04||12.6
+| [[FR]]||1950||2.04||12.6
 |-
 | Industry Average||--||1.05||--