Industrial REIT ProLogis
Outperforms Rivals

Most real-estate investment trusts have taken a huge hit this year as investor appetite for property has waned. But ProLogis, the world's largest owner, manager and developer of industrial space, has performed well compared with many of its peers.

The Denver industrial REIT, which operates in 105 markets across Asia, North America and Europe, has boasted strong earnings, and analysts and investors say its management has a proven track record of increasing shareholder value. ProLogis shares are down 7% for the year, compared with a drop of about 17% in the Dow Jones Composite REIT Index as of yesterday's close.

Recently, the company has garnered attention by expanding its use of property funds. ProLogis develops warehouse and distribution facilities and places the properties in funds it creates. An institutional investment partner, such as a pension fund, retains a majority stake, while ProLogis holds about a 20% interest in the fund. It is a way for the company to gain access to large sums of capital for new projects and collect lucrative asset-management fees from its fund partners.

ProLogis just launched four property funds with a capacity for $14 billion in investments in Europe, Mexico and South Korea, allaying fears that institutional investors' interest would cease amid roiling credit markets. Chief Executive Jeffrey H. Schwartz spoke to The Wall Street Journal about making deals in a tumultuous environment, global appetite for real estate and whether capitalization rates -- a property's yield in the first year of ownership -- will stay at historic lows.

WSJ: In what way are you being affected by the volatility in the capital markets?

Mr. Schwartz: Well, I think while we're very observant of what's happening in the capital markets and watching it carefully, to date, our business remains extremely strong. In fact, from an investment standpoint, we've seen a flight to quality, as evidenced by all the subscription agreements that were signed in the new funds we formed in Europe and Mexico just last week. So at the height of the volatility, we raised over $4.6 billion in private-equity funds.

WSJ: Unlike equity REITS such as ProLogis that own buildings, mortgage REITS buy or make loans, and several have faced serious liquidity crises. What do you think of what's happening with those distant cousins of yours, mortgage REITs?

Mr. Schwartz: They're not our cousins! It's really not something I focus on. ... Clearly, there has been overaggressiveness in subprime lending and policies and practices that shouldn't have taken place. ... People talk about it being a $60 billion to $90 billion total loss-type problem, which I don't know if it's a good statistic or a bad statistic, but it's less than what we're spending in Iraq. The hysteria from the financial sector could spread to the mainstream of the U.S., but to date we haven't seen that.

WSJ: ProLogis stock got hurt like other REITs this year. What were investors missing?

Mr. Schwartz: I don't think people understand that we are very different from the average REIT. Other REITs pay out 80%, 90%, in a lot of cases over 100%, of their cash flow in dividends. We pay out far less than 50% of our funds from operations [a profit measure that excludes gains or losses from property sales while adding back depreciation, among other adjustments] and actually retain over $600 million a year to reinvest in the business. ... Our reinvestment ... of profits is higher than anyone else in the industry.

WSJ: What markets are you not in that you'd like to move into?

Mr. Schwartz: The 21 countries we operate in account for 87% of the world's gross domestic product, so incrementally, you don't get that much out of additional geographic expansion. But long-term, I see India being potentially a very good opportunity for us. Brazil has potential. ... But again, if the 21 countries you operate in account for 87% of GDP, your greatest growth is going to come from the places you're already in.

WSJ: How do you address the risk of overseas investments?

Mr. Schwartz: Is there greater risk in building in Heathrow in London ... than building in Dallas or Houston? In fact, there's lower risk because the entitlement process is more difficult in the U.K. so the barriers to entry are far greater. ... And there's clearly a lower risk associated with global diversification because if there's a downturn in the U.S. driven by subprime [mortgages] and housing, 78% of our organic growth is not U.S.-based.

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