Jeff Schwartz is resigning

Mike Mueller of JP Morgan Securities says "PLD may finally be moving from a bull market strategy to a bear market strategy that focuses more on liquidity rather than earnings momentum. Considering the stock's recent performance, these look like appropriate actions at first glance."

Given Schwartz' role in the company's growth, Deutsche Bank analyst Lou Taylor called his exit "stunning," adding that "We interpret the change as a difference of opinion about future strategy. The board must believe a halt of all construction is required. Whether Mr. Schwartz disagreed and resigned or the board felt new leadership was required is unknown at this point."

With regard to the dividend cut, Taylor said he didn't feel it was required, "but as is the case at other companies, if the market is not giving the company any credit for the dividend then there is some rational to reducing the dividend and retaining the capital for additional liquidity."

ProLogis needs $1.7 billion to complete the projects it has under construction in its pipeline and has access to $1.5 billion of credit line capacity and cash plus another $275 million from the dividend reduction, according to Taylor's estimate. In addition, he estimates that the company has approximately $2.0 billion of completed and leased projects that will be contributed to its different funds. "The funds have capacity, so either the board is concerned about the ultimate sale of these assets, or views these assets as a future source of liquidity," he said.

ProLogis shares are down nearly 60% since the company held its third quarter earnings call with analysts on Oct. 23. Year-to-date, the company's share price is off more than 85%. In afternoon trading Wednesday, the company's share price stood at $4.64, down 32% ($2.23) on the day, marking a new 52-week low for the company. The company's 52-week high is $71.79.

Citigroup Global Markets analyst Michael Bilerman says Thursday's meeting "could add to investors' concerns" if management chooses not to provide new information and instead revisits the position the company outlined in its third quarter conference call and the recent release of its covenants (PLD is currently in compliance).

"PLD will likely focus on capital sources and uses, may provide more detail on current negotiations with lenders, and will likely address any need for an equity infusion to meet debt maturities, particularly in the funds," he said. "PLD will also likely provide some update on tenant discussions, especially in light of DHL's recent announcement, and could further reduce its development pipeline."

On the bright side, Bilerman says additional lease-up of the development pipeline would drive a significant near-term cash injection for ProLogis that would put the company in a stronger position to handle debt maturities and reduce leverage, "as current fund capacity is sufficient across most regions to take out the existing pipeline even in the absence of debt," he said. "Continued leasing progress or signs of reduced risk on the debt refi side could be a significant boon for the shares."

In the existing pipeline, which totals $8.2 billion, $1.4 billion is fully leased and completed and another $1.1 billion is under construction and fully preleased, according Bilerman's data. "We estimate that the remaining $5.7-billion pipeline is 27% leased," he said.

ProLogis consolidated debt maturities over the next two years totals $3.9 billion and consists largely of two unsecured notes (totaling $750 million) with low rates and the 2010 expiration (assuming 2009 extension options are exercised) of the global credit facilities, of which there is $3 billion outstanding. The company's funds have $1.8 billion maturing through year-end 2009 and rising to $3.6 billion in 2010, of which $2.6 billion consists of European debt "where the lending environment has become particularly challenging," Bilerman says.

"We estimate PLD's share of the debt expiring over the next two years ($5.4bn) is $1.5 billion, certain portions of which may bear some risk of requiring deleveraging," he said. "On the earnings front, merchant development profits will likely decrease dramatically in 2009 and stay low in 2010 as margins get squeezed or turn negative due to rising cap rates against legacy yields and 2009 starts fall significantly year-over-year.

Citi is rating ProLogis shares as Sell/High Risk, as it has with all REITs in its coverage universe. "The company's development pipeline has expanded from $600 million at its trough during the recession and now stands at over $8 billion and current earnings are highly dependent on PLD's ability to source fund capital and achieve attractive margins," Bilerman says. "Given the current liquidity crunch, we believe fund capital will become more expensive and more difficult to source. In particular, we see risk to the company's merchant development income stream, which currently comprises 50% of FFO, given the likelihood that rising cap rates and contracting development yields will depress development margins from current peak levels."

Instant Insights /

ProLogis Halting All New Development

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