ProLogis to Sell China Operations, Interest in Japan Funds to GIC for $1.3B

Looking for ways to quickly cut debt and strengthen its balance sheet, industrial REIT giant ProLogis said it was selling its China operations and a 20 percent interest in its Japan property funds to GIC Real Estate for $1.3 billion. The Denver-based provider and developer of distribution facilities said the net proceeds will be used to reduce debt. The company expects to record a net loss on the transaction of approximately 4 to 6 percent book value of the assets sold. The development pipeline will be cut by $1 billion, including $255 million in costs to complete development of the assets owned directly and within the company’s joint ventures in China. The transaction is expected to close in January. Tuesday’s announcement comes several weeks after ProLogis announced a multi-pronged plan of action to get the company back on track following a 78 percent drop in its stock price within a month. On Nov. 12, the REIT announced CEO & chairman Jeffrey Schwartz had resigned and was replaced as CEO by Walter Rakowich, the former president & COO. A day later, the company outlined its strategy, which included deleveraging the balance sheet, minimizing risk in the business model and downsizing the company. Eliminating development starts and land acquisitions was part of the plan as was renegotiating debt maturities. Rakowich said Tuesday that selling the China operations and investment in the Japan funds was not an easy decision, but was an important milestone in the strategy announced in November to help the firm get back on track financially. “In one substantial step, this transaction helps ProLogis de-lever its balance sheet, relieve near term refinancing pressure and enhance liquidity,” Rakowich said in a news release. He added that GIC, which is the real estate investment company of the Government of Singapore Investment Corp., has been a partner in the Japan and China funds and is a “natural buyer” for the assets. “In China, ProLogis’ team of associates will join affiliates of GIC RE to manage the portfolio, and in Japan, ProLogis and GIC RE will identify a group of dedicated associates that will transition over time to manage the GIC RE assets,” Rakowich said. Assets to be sold in China include 20.7 million square feet of completed properties and properties under development with a total expected investment of $861 million that were 45.5 percent leased and 713 acres of land with a carrying value of $213 million. It also includes ProLogis’ interest in five China joint ventures and one property fund, of which the company’s share aggregates 4.4 million square feet with a total investment of $184 million and a 30 percent interest in SZITC CP, a retail JV with a book value of $53 million were also part of the China assets to be sold. The REIT will sell its 20 percent interest in the Japan funds that own 27.1 million square feet of properties to GIC RE, which already owns 80 percent. GIC RE will pay ProLogis $140 million for a 637,000-square-foot building from the development pipeline. Also expected to close in the first quarter of 2009, this sale would satisfy the remainder of GIC RE’s equity commitment to ProLogis Japan Fund II. ProLogis will retain some assets in Japan, including 4.5 million square feet of facilities completed and in lease up with a total investment of $687 million and 4.2 million square feet of facilities under development with a total expected investment of $681 million and 64 acres of land with a carrying value of $173 million. Wall Street seemed to like the ProLogis announcement early in the day with the stock hitting $11.25 per share then dropping below $11 by mid-morning. But by early afternoon, the stock was trading on the New York Stock Exchange at $9.84, up 68 cents, or 7.42 percent. Earlier in the year, before the recession started hitting REIT stocks hard this fall, ProLogis was trading at a high of $66.58 per share. Dave Rogers, a REIT analyst with RBC Capital Markets, told Bloomberg Tuesday that the China and Japan dispositions were a “good set of starting transactions,” but he expected more to come because of the firm’s debt load, the maturity schedule and the tough capital environment.