New ProLogis CEO Details Plans to Put Company Back on Track

In a presentation to investors Thursday, new ProLogis CEO Walter Rakowich, the company’s former president & COO, fleshed out some specifics about how the world’s largest developer/owner of distribution facilities will move forward past its current crisis. In addition, a new report on equity REITs documents just how much those entities have been shaken up lately. ProLogis’ stock price had plummeted 78 percent in the past month, and matters came to a head on Wednesday, when it was announced that Jeffrey Schwartz, CEO & chairman for the past four years, would resign. The news was accompanied by announcements that the company would reduce its next dividend, halt new development and cut its workforce. In yesterday’s presentation, Rakowich (pictured) highlighted a three-pronged strategy to put ProLogis back on track: deleveraging the balance sheet, minimizing risk in the business model and downsizing the company for its current environment. Specific actions will include cutting a planned dividend of $2.28 per share for 2009 to $1.00, cutting general and administrative costs, eliminating development starts, and halting land acquisitions. ProLogis’ third-quarter call anticipated a total of $2.7 billion to $2.9 billion in the development pipeline this year. That figure is now $2.2 billion to $2.3 billion, Rakowich said, courtesy of serious cuts to projects already in the pipeline. The company will stop $350 million in development starts that have not yet gone vertical, and will also cut $250 million to $300 million in starts planned for the fourth quarter. A big part of minimizing the company’s risk profile will be cutting land acquisitions. In addition, Rakowich said, the dividend reduction will save the company about $290 million. He’s also looking to save about $100 million a year in G&A, mostly through layoffs, since employees account for about 70 percent of the company’s expenses. “Nothing is off the table relative to 2009” in terms of cutting costs, Rakowich promised, emphasizing that the company will focus on increasing its liquidity. “We will de-lever the balance sheet. We set a target to de-lever it by $2 billion by the end of next year. We hope to outperform that.” Rakowich noted that between 2005 and 2007, ProLogis’ pipeline doubled from 58 million square feet to 109 million square feet. Between 28 million square feet of new developments and 28 million square feet put into funds, the pipeline stayed at 109 million square feet through September of this year. He also pointed out that on an annualized basis, leasing so far this year has been better than it was in 2007, with a total of about 95 million square feet in leases throughout the entire ProLogis portfolio. “Will that continue? I think we have to manage the business as if it’s not,” Rakowich said. The company’s development pipeline peaked at $8.4 billion at the end of June and is now down $7.5 billion, with occupancy up from 42 percent to 47 percent. On Wednesday, New York–based Keefe, Bruyette & Woods released a report showing major shifts onto and off of the list of the top 20 equity REITs. Both ProLogis and General Growth Properties, which had been among the largest equity REITs at midyear, have now fallen out of the top 15. ProLogis held second place in the ranking by equity market cap (to Simon Property Group) as of June 30, then fell to 6th as of Sept. 30, and as of Nov. 10 stood at 19th. Driving the drop was a decrease in ProLogis market cap from $14.8 billion to (currently) $2.06 billion. Ironically, all this gloom and doom arises as ProLogis continues to lease megafeet of space. On Tuesday, it announced that Kimberly-Clark Corp. had taken 750,000 square feet of previously unleased space at the 3.1 million-square-foot ProLogis Park 55 in the Chicago suburb of Romeoville. Across North America, Kimberly-Clark now occupies about 1.6 million square feet of ProLogis space.