By Lynn Novelli

ProLogis' distribution facility in Cranbury, NJ (pictured above), is one of the company’s 1,673 properties in North America and Europe.

ProLogis Trust focuses on keeping customers' products moving efficiently

Editor's Note: This is another in our series of articles profiling companies in the REIT and publicly traded real estate industry. Portfolio runs profiles like this one on companies that have shown leadership, innovation or resourcefulness that we believe our readers will find of interest.

In today's fast-paced world, moving goods from point A to point B quickly and efficiently is essential to a company's success, no matter what product it sells. ProLogis Trust, an equity REIT, was created in 1991 with the mission of partnering with customers to achieve their distribution goals.

Under the leadership of K. Dane Brooksher, chairman and chief executive officer; Irving "Bud" Lyons III, president and chief investment officer; and Walter Rakowich, managing director and chief financial officer, ProLogis has established itself as a leading global provider of integrated distribution facilities and services. The company owns and operates 1,673 distribution facilities in North America and Europe, and is the only distribution facilities and services company with a Pan-European platform.

ProLogis serves the world's largest distribution users with a global network of facilities and occupies the number one, two or three market position in key distribution markets. Moen, Kraft Foods, BMW, General Motors, Office Max, DuPont, Home Depot, Del Monte, Whirlpool and Coca-Cola are just a sampling of the names on a customer list that reads like a who's who of Fortune 500 companies.

Making Relationships Last

In an industry comprised of warehouses and supply chains, ProLogis was among the first distribution facilities providers to frame the business in terms of relationships instead of bricks and mortar.

The 62-year-old Brooksher, a former vice president at KPMG who was handpicked to head ProLogis, does not think in terms of buildings, space and tenants, although all of those are essential to the business.

"Our overall strategy is to develop customer relationships at the highest level and identify what customers need to meet their goals," he says. "The single differentiating factor that sets ProLogis apart is our customer focus. We built ProLogis from the start on creating customer relationships instead of on a transaction basis."

Customer Driven

The company's expansion has been shaped consistently by customer needs, moving ProLogis first to a national then an international platform. Today, ProLogis is structured around three related but separate operating segments, each with a different role in satisfying customer needs across its various markets.

The property operations segment accounts for the majority of ProLogis' asset base. This segment is focused on the long-term ownership, leasing, managing and developing of industrial real estate with the focus on bulk distribution, both domestically and in Europe. At the end of the second quarter of 2001, ProLogis had more than 200 million square feet of distribution space in operation or under development in 10 countries and 99 markets in North America and Europe.

"Our overall strategy is to develop customer relationships at the highest level and identify what customers need to meet their goals."

Temperature-controlled distribution operations, or refrigerated logistics, is another strength for ProLogis. ProLogis first entered this business sector in 1997 with the purchase of CS Integrated followed by the purchase of Frigiscandia in 1998 and now owns the largest global network of temperature-controlled distribution facilities. In Europe, ProLogis is the leader in refrigerated logistics, with 89 locations and ranks third in the U.S. with 59 facilities, for a total of 370 million cubic feet of space, according to the company.

The corporate distribution facilities services business is focused on the development of industrial distribution facilities for future sale. ProLogis develops facilities for customers in locations that the customer specifies, then sells the facility and re-deploys the capital into other development opportunities.

A Step Beyond the Norm

The key to ProLogis' success in its real estate and facilities development activities is the ProLogis Operating System™, a unique customer service delivery system.

"ProLogis was the first to step beyond providing bricks and mortar to adding services that build customer relationships," explains Brooksher. "The ProLogis Operating System brings together all of the major groups within ProLogis that are required to service the customer under our strategy."

Within the Operating System, four distinct groups—Global Services, Market Services, Global Development and Integrated Solutions—work together but independently to maximize customer satisfaction. "If they are all doing their jobs, the customer should never have to pick up the phone to call us about a problem or need. It is the Operating System's function to anticipate customers' needs and help them find viable, cost-effective solutions," says Brooksher.

Around the World

The Global Services Group provides the single contact point for all the services that ProLogis is delivering to the customer as part of managing the total relationship. Working closely with the Global Services Group at the local market level are the experts in the Market Services Group.

The Global Development Group complements the other groups with design and construction capabilities for customers that are expanding or reconfiguring their facilities. The Integrated Solutions Group, the most recent addition to the Operating System, includes ProLogis professionals and consultants who offer customers a variety of value-added services related to distribution such as site identification and material handling.

Brooksher believes that the Operating System gives Pro Logis a competitive advantage in acquiring and retaining customers. "The idea behind the ProLogis Operating System is to provide seamless service to our customers," he says. "We want to make it very easy for customers to do business with us. "

The Results Are In

The ProLogis management team's unshakable focus on serving the customer has served the company and its shareholders well over the years. "From the start we have had two goals: to service customers from a real estate platform with services that relate to the distribution of product beyond providing the real estate and to increase profits and revenue and return to shareholders," Brooksher says.

Since going public in 1994 as Security Capital Industrial Trust—named after the investment group that incubated it—ProLogis has experienced steady growth in funds from operations (FFO) and return on invested capital for shareholders. Compound annual return since the IPO, including reinvestment of dividends, is just over 17 percent.

"Our long-term plan is to decrease reliance on storage and intervention and increase distribution,' Brooksher says. "We are in the process of converting the business."

Despite a slowing economy, the positive trends have continued into the second quarter of 2001. FFO for the six months ended June 30, 2001, before a non-recurring charge of $.04 per share related to an impairment adjustment for technology investments, increased 7.5 percent over the same period in 2000. Rental rate growth in the second quarter was 16.7 percent and same store net operating income increased 3.8 percent. ProLogis signed nearly 3 million square feet in new contracts in the first half of 2001.

Leveraging the European Union

As economic uncertainties continue in the U.S., ProLogis is looking to its European endeavors to offset any weakness in the domestic business, Brooksher says. "The potential for slowing in the U.S. underscores the importance of the European platform."

ProLogis expanded into Europe in 1997. The ProLogis Operating System and the company's long-term relationships with global customers positioned the company to take advantage of the opportunities created by the formation of the European Union.

"Prior to the Union, each country in Europe was a separate market. Now, all of Europe is one market, allowing companies to reconfigure their distribution networks to make them more efficient in determining how to serve a particular market base," Brooksher says.

European and global companies have been quick to recognize the advantages of working with a single distribution source. The company now serves European Union customers with 147 facilities in 25 markets and eight countries, with leading positions in France, Poland, the U.K. and the Netherlands. Nearly half of its distribution space in Europe is leased to global customers.

In the corporate distribution facilities services segment, ProLogis plans $800 million in new starts for 2001, with 60 percent in Europe and 40 percent in the U.S. This reflects the strong demand for distribution space in Europe and shortage of supply in major distribution hubs.

The European market will remain strong for the balance of 2001, says chief financial officer Walter Rakowich. "There is an ongoing market for the development and sale of industrial buildings [in Europe], and that will continue at an accelerated pace."

Rakowich predicts that greater than 50 percent of the company's corporate distribution facilities profits for 2001 will come from Europe, where the focus is on build-to-suit development.

Lou Taylor, managing director and senior real estate analyst for Deutsche Bank, New York, agrees with Rakowich's assessment. "Europe has a chronic need for modern distribution space," he says. "I have heard it said that the only people that can pull off the kind of development needed are the Americans. And that would have to be ProLogis."

Building to Suit

In the U.S., ProLogis already has observed a shift away from speculative development moving more toward build-to-suit as a result of economic belt-tightening. ProLogis will look to new companies, expanding companies and those with existing distribution space that needs to be modernized to fuel its domestic growth in 2001. The company currently is in discussion with 11 customers that have new distribution needs.

Overall, "We are on track with our development goal for the year," says Lyons. "We feel comfortable with where we are, although the mix may be different than what we expected."

The company is also using a build-to-suit project to continue its global expansion. Pro Logis recently announced an agreement with DHL Worldwide Express, the world's leading air express service, to develop a new 196,000 square foot distribution facility in Tokyo.

"There is currently a trend in Japan toward larger, more efficient distribution centers due to vertical integration, continued merger activity and a need to minimize costs in the supply chain," Lyons says. "There is little competition for build-to-suit development in the industrial property sector in Japan, and no local providers are able to offer customers access to a global network of distribution space and services such as ProLogis."

The company will finance the expansion through a private fund similar to those it has established in North America and Europe.

Cooling Trends in Europe

Meanwhile, the temperature-controlled distribution business reflects a different trend. The refrigerated business has been stable in the U.S. but slowing in Europe since 1999. In the first half of 2001, financial results for this segment were down in Europe, although results in the combined North American-European business met expectations.

Problems with the European business are related to government price support programs in Europe that previously dictated a high proportion of agricultural goods in storage, Brooksher explains. "Since 1999, when the need for government supports diminished, goods have been flowing out of European warehouses, and occupancy levels are down."

ProLogis foresaw the shift in demand from long-term storage to distribution and is shifting its focus accordingly, Brooksher says. "Our long-term plan is to decrease reliance on storage and intervention and increase distribution," he says. "We are in the process of converting the business."

To this end, in the past 24 months ProLogis has revamped the management of this segment and invested $25 million in information systems. "Now they are looking to see the pay-off," says Lyons. He expects an upturn in ProLogis' refrigerated logistics business to start gathering momentum in 2002.

Although ProLogis' business mix is changing, the management team remains committed to maintaining a conservative financial position while expanding the company's customer relationships and global presence. As of June 30, 2001, the company had total market capitalization of $7 billion with less than 38 percent debt, reflecting Pro Logis' strategy of self-funded growth to enhance shareholder returns.

By recycling capital, ProLogis can avoid competing for "costly and scarce" public equity, Lyons explains.

Recycling for Success

After ProLogis develops and sells a property, the amount of the original purchase is redeployed to new development. Gains from the sale is invested in one of four Pro Logis property funds, the North American Properties Fund I, II or III or the European Properties Fund. These funds are co-ventures with outside equity investors, primarily institutional investors that are seeking ownership in a low risk, stable group of assets.

ProLogis sells properties into the fund for a 20 percent to 25 percent ownership, and the investors contribute cash to comprise the rest of the fund. The North American Properties Fund I closed in March 2000 with total capitalization of more than $365 million. North American Properties Fund II, closed in first quarter 2001, and North American Properties Fund III, closed June 28, 2001, have total capitalization of $234 million and $208 million, respectively. The European Fund, opened last fall, already has assets of $847 million.

"Over time, we receive that 20 percent to 25 percent of rental income, plus asset management fees from the other members," explains Melissa Marsden, vice president for investor relations. "We can retain a greater portion of earnings and reinvest them at higher returns. We take the capital we received from selling properties into the fund and use it to expand our global platform over time."

This strategy removes capital from the balance sheet so that ProLogis' income increases without additional capital investment, thus improving shareholder returns, Marsden adds. In 2000, return on invested equity reached 15 percent, up from 13.4 percent in 1999 and well on its way to the company's goal of 17 percent by 2003.

By recycling development capital to finance new development, ProLogis can continue to take advantage of opportunities despite an economic slowdown. The challenge, says Deutsche Bank's Taylor, is that there will be less business to obtain, but he believes that ProLogis is positioned to win what is available.

"ProLogis has to be on the short list for those companies that are planning to expand or reconfigure," he says. "In uncertain economic times it's important to maintain your market share. The focus is on the big players with access to capital, and the top firms like ProLogis will be the ones that keep the business."

Well Built for the Future

ProLogis' strategy for maintaining its position during the current economic downturn is the same one that has brought the company to its present healthy state. "We have strong customer relationships that will let us manage through, and take advantage of, the slowdown," Brooksher says.

Taylor, who has watched the company go "from scratch to what it is today," also believes that ProLogis' strong customer relationships make it a good investment in this uncertain economic environment.

"ProLogis is a good opportunity right now for the individual investor," he says. "If I were listing its greatest strengths, I would have to start with management. They have people on board who know how to do things, and they get things done. Their tactical execution of a business plan has consistently been the best of any company in the real estate business in the last 10 years."

ProLogis makes it easy for individual investors to buy shares of common stock through the discount Dividend Reinvestment and Share Purchase Plan. Previously limited to existing shareholders, the plan was revamped in 1999 to allow new investors to take advantage of discount investing.

New investors can purchase common stock at a 2 percent discount to the current market price without paying a brokerage commission. Optional cash purchases can be made in the amount of $200 to $5,000 a month. There is a one-time enrollment fee of $10, but after that ProLogis pays reinvestment and purchase fees.

Current shareholders can automatically reinvest their dividends and/or chose optional cash purchase, also at a 2 percent discount to market. To make it as simple as possible for current shareholders, additional shares can even be purchased online through ProLogis' web site, www.prologis.com.

Like many other REITs, ProLogis is experiencing good growth in FFO but a depressed share price right now, creating a favorable situation for investors and a challenge for the management team.

Brooksher is confident that ProLogis can weather the economic storm to the benefit of customers and shareholders. "If we do a good job of serving our customers in a profitable way for our stockholders, we will increase the value of ProLogis to customers and shareholders," he says. "If we do our job and keep the curve going in the right direction, value will respond. That's what I know how to do."

Lynn Novelli is a freelance writer based in Novelty, OH.