ProLogis: Not Your Average REIT

Like many REITs, ProLogis has been on a tear. The stock (symbol PLD), which traded at $25 five years ago, closed June 13 at $61.64, up 3.5% for the day. As a result of all that appreciation, the stock yields just 3.1%, despite a 15% dividend hike this year. That's low even by today's diminished standards of property-owning REITs. Just a couple of days earlier, the Stifel Nicolaus brokerage downgraded ProLogis and 20 other realty trusts, arguing that rising bond yields will drive REIT shareholders to seek bigger paydays in bonds.

However, ProLogis isn't a passive income holding that's saddled with a low yield and a high price. It's a global development company that happens to be organized as a REIT. It's more comparable to such investments as energy royalty trusts and business development companies that traditionally deliver high total returns -- yield plus significant appreciation. As a REIT, ProLogis is sheltered from taxes if it passes out most of its income. But the underlying assets can and have grown substantially in value to boost the stock price. Over the past three years through June 12, ProLogis shares returned 28% annualized. Over the past five, the stock gained 25% annualized; over the past ten, 18%.

ProLogis is the world's largest owner of warehouses, a developer, a property manager and a major buyer of industrial development land near ports, rail lines and highways. These investments benefit from high levels of trade and shipping, so ProLogis has a history of producing double-digit total returns year in and year out regardless of what Alan Greenspan says or what happens to interest rates or the price of gasoline.

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There are risks, but if you look at ProLogis like a growth stock and forget that it's a REIT, that 3% yield is a bonus, not a warning sign. That the stock is down from its February peak of $72 isn't bad news but an opportunity to buy into this great company at a more-reasonable price relative to its cash- and earnings-generating capabilities.

The biggest potential risk would come from a slowdown in the world economy, particularly in eastern Europe and Asia, where ProLogis has big plans. It owns $15 billion of property in 20 nations, including the Czech Republic, Japan, Mexico and Spain. It has a bunch of development land, but its primary assets are more than 2,500 buildings, which cater to shippers, exporters, small manufacturers and other businesses that need to be close to transportation.

Two years ago, ProLogis bought Catellus, a big industrial landowner in the San Francisco and Los Angeles areas. Then, to complement this, it acquired Parkridge, a similar British firm that owns industrial land, buildings and warehouses in Britain, Germany, Poland and Russia.

ProLogis's management says it expects its cash flow to rise substantially this year. That suggests higher dividends and earnings as well. The REIT is well-equipped to withstand currency and interest-rate complications, since it earns revenue and borrows in all kinds of currencies, including U.S. and Canadian dollars, euros, yen, pounds sterling and yuan. So its overall credit costs are a manageable 4.8%. There is $9 billion of debt, a degree of leverage that makes ProLogis riskier than blander real estate companies should it encounter a spike in vacancies (less than 5% now) or be unable to find buyers or tenants for new projects. Then its profit margins would shrink and the shares would probably sink. But that hasn't happened in a long time.

The lesson here is that if you dislike REITs because so many yield little and overpay for new properties, you need to find unconventional ones that operate in prospering sectors. A REIT isn't a fancy CD. It's a real estate business, and ProLogis is a great one.