JeffSchwartz is resigning

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

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

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

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

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ProLogis shares are down nearly 60% since the company held itsthird quarter earnings call with analysts on Oct. 23. Year-to-date,the company's share price is off more than 85%. In afternoontrading Wednesday, the company's share price stood at $4.64, down32% ($2.23) on the day, marking a new 52-week low for the company.The company's 52-week high is $71.79.

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Citigroup Global Markets analyst Michael Bilerman saysThursday's meeting "could add to investors' concerns" if managementchooses not to provide new information and instead revisits theposition the company outlined in its third quarter conference calland the recent release of its covenants (PLD is currently incompliance).

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"PLD will likely focus on capital sources and uses, may providemore detail on current negotiations with lenders, and will likelyaddress any need for an equity infusion to meet debt maturities,particularly in the funds," he said. "PLD will also likely providesome update on tenant discussions, especially in light of DHL'srecent announcement, and could further reduce its developmentpipeline."

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On the bright side, Bilerman says additional lease-up of thedevelopment pipeline would drive a significant near-term cashinjection for ProLogis that would put the company in a strongerposition to handle debt maturities and reduce leverage, "as currentfund capacity is sufficient across most regions to take out theexisting pipeline even in the absence of debt," he said. "Continuedleasing progress or signs of reduced risk on the debt refi sidecould be a significant boon for the shares."

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

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ProLogis consolidated debt maturities over the next two yearstotals $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 globalcredit facilities, of which there is $3 billion outstanding. Thecompany's funds have $1.8 billion maturing through year-end 2009and rising to $3.6 billion in 2010, of which $2.6 billion consistsof European debt "where the lending environment has becomeparticularly challenging," Bilerman says.

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"We estimate PLD's share of the debt expiring over the next twoyears ($5.4bn) is $1.5 billion, certain portions of which may bearsome risk of requiring deleveraging," he said. "On the earningsfront, merchant development profits will likely decreasedramatically in 2009 and stay low in 2010 as margins get squeezedor turn negative due to rising cap rates against legacy yields and2009 starts fall significantly year-over-year.

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Citi is rating ProLogis shares as Sell/High Risk, as it has withall REITs in its coverage universe. "The company's developmentpipeline has expanded from $600 million at its trough during therecession and now stands at over $8 billion and current earningsare highly dependent on PLD's ability to source fund capital andachieve attractive margins," Bilerman says. "Given the currentliquidity crunch, we believe fund capital will become moreexpensive and more difficult to source. In particular, we see riskto the company's merchant development income stream, whichcurrently comprises 50% of FFO, given the likelihood that risingcap rates and contracting development yields will depressdevelopment margins from current peak levels."

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