ProLogis (PLD)

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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. However, Prologis has not gone untouched in the 2007-8 weakening of the US credit and real estate markets. PLD has 10 B USD in debt (debt/equity 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.)

[edit] 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).

[edit] 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]

[edit] Debt

In millions. Industry Average data is quarterly. slightly higher over twelve months.
Compiled from company data and figures from REIT.com, Reuters.com, advfn.com.

While Prologis's debt load of 10.5 B seems to 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]

Prologis' annual revenue and net operating income, 2003-2007. Source: Compiled from company publications.^[7]

Prologis' earnings by segment, 2007. Source: Company data.^[8]

[edit] Business Segments

• Property operations (737 M net operating income and 16% of annual revenue in 2007)^[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 and trading centers, as well as airport tarmac properties (PLD has exclusive rights to industrial distribution development and leasing in the new Beijing international airport). The company also owns about 1.2 M sq ft of North American commercial/retail properties. Unlike some REITs, PLD has developed and acquired aggressively 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 (199 M net operating income, 3% of annual revenue, 2007)^[11] includes revenues from Prologis' joint ownership of property funds shared with institutional investors, from its management of the actual properties contributed to the funds, and from interest generated on advances to the property funds. PLD's most profitable property funds are its European funds--in 2005 these generated only 44 M USD in annual operating income (second after the North America funds, 56 M), but by 2007 they were contributing 105 M (compare to 64 M North America and 30 M Asia).^[12]

• Development/CDFS (790 M net operating income, 81% of annual revenue, 2007)^[13] includes proft from the sale of developed/rehabilitated real estate properties to be contributed to PLD's property funds or sold to third parties. Since 2007, PLD has been focusing on overseas development, especially in Europe and Asia.

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

[edit] Key Trends and Forces

[edit] 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 growth from 2005-8, while lower real estate prices would 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 income for global manufacturers--the kind of company that makes up much of PLD's tenant base.^[16]

[edit] 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 United State's 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 gain experience with converting and developing new green buildings.^[20]

[edit] Global trade growth increases demand for transport-friendly industrial property

PLD's focus on multinational, import-/export-heavy clients 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 income 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 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] Since 2007, Prologis has also been turning toward development in the Middle East to avoid possible weakness in the European and Asian markets.^[24]

Global distribution of Prologis' rentable real estate, 2007. Source: Compiled from company publications.^[25]

[edit] Competition

Prologis is recognized as the largest industrial REIT in the world (2007 total revenue: 6205 M, net income: 1074 M), and with 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 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^[27]--weakening demand for industrial real estate would exacerbate the company's already high levels of tenant vacancy, hurting the profitability of PLD's properties.

 ProLogis

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	Select All  |  Select None Companies Alexandria Real Estate Equities (ARE) Biomed Realty Trust (BMR) DCT Industrial Trust (DCT) Digital Realty Trust (DLR) EastGroup Properties (EGP) EXTRA SPACE STORAGE (EXR) First Industrial Realty Trust (FR) PMC Commercial Trust (PCC) ProLogis (PLD) Sovran Self Storage (SSS) U-Store-It Trust (YSI) Public Storage (PSA) AMB Property (AMB) Cancel

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Company	Data From	Rentable Square Feet	Net Income	Revenue	Total Debt	Operating Income
Alexandria Real Estate Equities (ARE)	2007	12.1M[28]	$93.7M[29]	$405M[29]	$2.79B[28]	$85.2M[29]
AMB Property (AMB)	2007	118M[30]	$314M[31]	$670M[31]	$3.5B[31]	$297M[31]
DCT Industrial Trust (DCT)	2007	57.2M[32]	$40.1M[33]	$260M[34]	$1.16B[35]	$62.2M[33]
First Industrial Realty Trust (FR)	2007	64M[36]	$155M[37]	$435M[37]	$1.95B[36]	($45.2M)[37]
ProLogis (PLD)	2007	209M[38]	$1.07B[39]	$6.21B[39]	$10.5B[39]	$1.14B[39]

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See all REIT - Industrial Industry WikiData

• AMB: Another global industrial REIT focused on 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 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 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.^[40] 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 M sq ft of leasable space^[41] and 2007 total revenues and net income at 435 M and 155 M respectively, 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).^[42][43]
• Duke Realty Corporation (DRE) is another USA-only REIT with medium-to-low gross margins compared to PLD's (2007 total revenue 1170 M, net income 280 M). Despite its sizeable 142 M sq ft of leasable space,^[44] 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.^[45]
• DCT Industrial Trust is a compeitor for 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. DCT's 2007 revenue was 260 M and net income was 40 M. The company has 74 M leasable sq ft.^[46]

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^[47]--but a surprisingly hefty total revenue of 258 M in 2007 (net income 114 M).^[48] There are also a multitude of private real estate firms like CenterPoint Properties active in transportation-focused industrial real estate.^[49][50] 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.

[edit] References

1. ↑ "Global Platform," Prologis.com.
2. ↑ "Top 25 Industrial Owners," National Real Estate Investor, Jul 1 2008.
3. ↑ Prologis.com, "Investor Relations: Corporate Profile."
4. ↑ PLD 2007 Annual Report, p.7.
5. ↑ Prologis.com, "Investor Relations: Debt Ratings."
6. ↑ "Fitch affirms Prologis' Sr. Unsecured Debt at BBB+," Reuters, Feb 26 2008.
7. ↑ "PLD 10K 2007, p. 31.
8. ↑ "PLD 10K 2007, p. 40.
9. ↑ PLD 10K 2007, p. 111.
10. ↑ PLD 10K 2007 , p.24.
11. ↑ PLD 10K 2007, p. 111.
12. ↑ PLD 10K 2007, pp. 40-41.
13. ↑ PLD 10K 2007, p. 111.
14. ↑ PLD 2007 Annual Report, p.7.
15. ↑ PLD 10K 2007, p. 31.
16. ↑ "Industrial REITs on the rise, Forbes.com, Dec 3 2007.
17. ↑ "Does Socially Responsible Investing Make Cents?" Equity Green, Dec 26 2006.
18. ↑ quoted in "'Green' REITs could get long-term gains," AFX New Limited, March 11 2008.
19. ↑ "REITs buying into "Green Premium," Randyl Drummer, CoStar Group, Oct 17 2007.
20. ↑ "REITs buying into "Green Premium," Randyl Drummer, CoStar Group, Oct 17 2007.
21. ↑ "All-Weather REITs," Peter Slatin, Forbes.com, Feb 28 2007. Second-to-last paragraph.
22. ↑ PLD Annual Report 2007, p. 14
23. ↑ Marino, Vivian, The New York Times, "A Global View Helps Industrial REITs," Oct 14 2007.
24. ↑ Haq, Robeel, "ProLogis secures Aramex warehouse contract," Arabian Business, Nov 19 2007.
25. ↑ "PLD 10K 2007, p. 24.
26. ↑ AMB 10K 2007, p.24.
27. ↑ Hoffman, William, "Real estate boom over?" Pacific Shipper, Oct 13 2008.
28. ↑ ^{28.0 28.1} ARE,2007,10-K.Item-6,Page-23
29. ↑ ^{29.0 29.1 29.2} ARE,2007,10-K.Item-6,Page-22
30. ↑ AMB,2007,10-K.Item-7,Page-38
31. ↑ ^{31.0 31.1 31.2 31.3} AMB,2007,10-K.Item-6,Page-36
32. ↑ DCT,2007,10-K.Item-2,Page-27
33. ↑ ^{33.0 33.1} DCT,2007,10-K.Item-15,Page-F-4
34. ↑ DCT,2007,10-K.Item-6,Page-34
35. ↑ DCT,2007,10-K.Item-15,Page-F-24
36. ↑ ^{36.0 36.1} FR,2007,10-K.Item-6,Page-26
37. ↑ ^{37.0 37.1 37.2} FR,2007,10-K.Item-6,Page-25
38. ↑ PLD,2007,10-K.Item-2,Page-24
39. ↑ ^{39.0 39.1 39.2 39.3} PLD,2007,10-K.Item-6,Page-31
40. ↑ AMB data at Google Finance.
41. ↑ "Corporate Real Estate Solutions," firstindustrial.com.
42. ↑ FR data at Google Finance.
43. ↑ FR 2007 10K, p6.
44. ↑ "Company Overview," dukerealty.com as of Sept 2008.
45. ↑ DRE data at Google Finance.
46. ↑ DCT data at Google Finance.
47. ↑ "Market Presence," PLD 10K 2007.
48. ↑ KRC data at Google Finance.
49. ↑ CenterPoint data at Google Finance.
50. ↑ "CenterPoint Properties Trust is taken private," Peter Slatin, Forbes.com, Dec 19 2005.