Thursday, January 25, 2018

Prologis: With Buyers Paying Top Dollar, It's Out with the Old, In with the New

Prologis Inc. (NYSE:PLD), expects to wrap up several asset sales of industrial property, much of which it acquired in the purchase of the AMB Property Corp. and its 1,130 industrial buildings totaling 142 million rentable square feet seven years ago.

Leading off its traditional position as one of the first REITs to report quarterly earnings, Prologis this week announced it plans to continue to capitalize on the extraordinary investor demand for warehouse/distribution property by selling another $1.6 billion in assets in 2018 and recycle the proceeds into new development.

A bit surprisingly, that disposition strategy will keep Prologis operating counter to other public REITs in the industrial property sector.

Last year, public REITs were net buyers of industrial properties purchasing about 110 million square feet of properties for about for $14.8 billion, according to CoStar data. They sold about 66 million square feet for $6.5 billion.

Prologis' share of the activity included buying about 4.1 million square feet in the U.S. for $466.2 million, while selling 16.7 million square feet for $1.2 billion, according to the company.

"Just to put everything in context, we sold $11.6 billion of real estate since the merger (with AMB)," Tom Olinger, CFO of Prologis told analysts this week. "I think that represents a couple of companies added in our sector. So we have been very deliberate and active in the dispositions market, probably more than anybody in the business."

Bottom line, Olinger said, Prologis has sold 88% of what it wanted to sell, and has done it faster than it projected, thanks to ongoing investor demand for the sector and continued leasing demand in the markets in which it operates.

Prologis has been deploying capital from those sales back into development. Last year, the REIT started construction on 11.8 million square of new development in the U.S. valued at more than $1 billion. This year, it expects to complete another 10.1 million square feet in the U.S. valued at $990 million.

Some of that new distribution space could end up being on behalf of Prologis' largest tenant: Amazon, which leases more than 16.6 million square feet from the REIT and accounts for 3% of its net effective rent.

In its quarterly conference call, analysts asked Prologis executives about Amazon's plans. The dominant online retailer is said to have 30 to 35 build-to-suit warehouse specs out in the marketplace for a new prototype. The warehouses would have a much smaller footprint, measuring from 100,000 to 200,000 square feet, but much higher at 75-foot heights, and multi-story.

"Amazon has pretty much got the same strategy we do. They want to be near where the consumers are," Hamid Moghadam, chairman and CEO of Prologis said.

But, Moghadam added, knowing the right strategy is one thing. Finding the available land to support it is another.

"Look, it's kind of getting harder and harder to find large plots of land that support single story, 800 million-square-foot type buildings in these urban areas," said the Prologis CEO. "So they need to be able to squeeze that much business into a smaller footprint by going vertical. And even in the 800 million-square-foot, they mezzanine them at three levels. So operating multiple levels with low clear heights are not anything unusual for them by any stretch."

"Any building that we do for Amazon, or for anybody else, we go through the same analysis," Moghadam added. "Do we want to own this building in a soft leasing market without Amazon renewing? And if the answer to that is that the building is fungible and divisible and we can lease it to a normal tenant, we keep it."

Demand for distribution space is also coming from other customer segments, including transportation, construction, food and auto, Moghadam said. And e-commerce as a percentage of the demand has also been fairly steady.

There are several others in the e-commerce sector besides Amazon who have big plans for new distribution rollouts this year, he added.

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