ProLogis Repositions Portfolio - Analyst Blog

ProLogis (PLD), a leading global provider of distribution facilities, has recently entered an agreement with TPG Capital, a premier global private investment firm, to sell a portfolio of retail and mixed-use assets for approximately $505 million. The transaction is expected to be completed in first quarter 2011. ProLogis intends to utilize the proceeds from the asset sale to repay debt and fund future development activity.

ProLogis sold a portfolio of 11 mixed-use projects with related land and development agreements, 4 shopping centers, 2 office buildings, 2 residential development joint ventures, Los Angeles Union Station, ground leases and other right-of-way leases to TPG Capital.

The assets were primarily associated with the Catellus Development Corporation that was acquired by ProLogis in 2005. The asset sale was part of the long-term strategy of the company to restructure its portfolio to focus on its core business of owning and managing industrial properties. 

The portfolio reshuffle is likely to improve ProLogis' internal growth metrics and enable it to capitalize on the gradual revival of the economy that is expected to support strong demand for industrial properties. Most of the ProLogis employees associated with the traded-off assets are expected to be offered employment with Catellus.

ProLogis will retain a preferred equity interest in Catellus to the tune of approximately $70 million, enabling it to earn a preferred return of 7% annually for the first three years, 8% for the fourth year and 10% thereafter until redeemed. 

ProLogis anticipates recording $170 million to $190 million in impairment charges related to the transaction. The company intends to record total impairment charges of $640 million to $680 million in fourth quarter 2010 related to land sales and sale of other non-strategic assets.

However, ProLogis has reiterated its earlier FFO (fund from operations) guidance, excluding significant non-cash items, in the range of 70 cents to 78 cents per share. Fund from operations, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and other non-cash expenses to net income.

We maintain our ‘Neutral' rating on ProLogis with a Zacks #4 Rank, which translates into a short-term ‘Sell' recommendation and indicates that the stock is expected to perform well below the overall U.S. equity market for the next 1–3 months. We also have a ‘Neutral' rating and a Zacks #3 Rank (short-term ‘Hold') for AMB Property Corp. (AMB), a competitor of ProLogis.