Developer of the Year: ProLogis From Here to There

[ By Ron Derven ]

ProLogis Parc Narita, Chiba, Japan (multi-tenant).

Companies and individuals will often describe their progress in business as a "journey." For Aurora, Colorado-based ProLogis and its CEO, Jeffrey H. Schwartz, their journey was no metaphor; it was real and rigorous -- across North America, Europe and into Asia, first to Japan and then on to China.

On that journey, its portfolio of industrial properties -- since its initial IPO in 1994 -- has flourished, growing from 16 million square feet in 15 markets in the U.S. to over 300 million square feet in 75 markets in 17 countries on three continents. Put another way, the firm has grown from 500 customers served by 60 employees in the U.S. to more than 4,000 customers served by 830 people globally.

For ProLogis' innovative and successful approach to its business, its contributions to the commercial real estate industry and its positive impact on its headquarters city and the communities in which it works, the National Association of Industrial and Office Properties (NAIOP) is proud to name it and its CEO the Developer of the Year for 2005. Since 1979, this award has been presented to one company annually.

The Possible Dream
ProLogis started in business in 1991 as Security Capital Industrial Trust. In 1998, it changed its name to ProLogis Trust and later, simply, to "ProLogis." It is a real estate investment trust (REIT), operating a global network of industrial distribution properties. It was founded on the principle that businesses need more flexibility when developing and managing networks of distribution and manufacturing facilities.

ProLogis had big plans early on, but it also had its doubters: "The greatest obstacle was getting beyond a common belief that the goals we set could not be accomplished," said Schwartz. "When we started, people said it was impossible to build a pan-North American development company. First, they said it was impossible for a development company to encompass the entire United States, because no one had really done that before. The other national developers had been loose partnerships, but we were the first to build a true national development program that stretched from Seattle to Miami."

Once ProLogis accomplished its initial goal, critics pounced to disparage its next great vision: "After that, everyone said it was impossible for a U.S. development company to build a pan-European development company. The French said it was impossible to develop in both France and the U.K. and the British thought the same thing. Yet, we built the number one market position in Europe in less than seven years; today, we are 10 times the size of our closest competitor."

Later, going to Japan, it entered a market that critics thought was closed -- a market in which it was difficult to change the way the logistics industry worked, and a market that lacked modern distribution space. "We built up our position there in less than three years," said Schwartz. "It is all about putting together teams of the best people; we have phenomenally talented people around the world."

Schwartz can be counted among those phenomenally talented people at ProLogis. He joined the firm in 1994 after selling his company, The Krauss/Schwartz Company, the largest industrial developer in Florida at the time, to ProLogis. He took over as CEO in January 2005, but he was a driving force behind the firm's worldwide expansion and has held a variety of international posts with the company, including president of international operations and chief operating officer, Asia, in which he was responsible for the ProLogis Operating System? and day-to-day operations in Asia.

The Real Challenge

Park Marston Gate #8, West Midlands, United Kingdom (Amazon.com).

What's the biggest challenge in the commercial real estate business today? Schwartz said it is hiring the right people. "What made us successful in the U.S. was the core group of people we put together at the beginning, including Walt Rakowich, Robert Watson and Larry Harmsen. They were the group that really drove the company and all of them have been around for 10 or 11 years. Then, adding people such as Chuck Sullivan, our regional manager in the Southeast, to that core group helped to drive the company. It is all about the people. It is the Alan Curtises, the Robin von Weilers, the Ranald Hahns, the original group of senior people that I recruited in Europe. Also, we have tremendous senior people in Japan - Masato Miki and Mike Yamada -- and in China, Ming Z. Mei.

"It's easy to build buildings: I've been doing that for 20 years," he went on. "The real challenge is getting the right people, having the right customer relationships, establishing the right local relationships, creating the right community relationships and having the right governmental relationships. With these in place, you get things done, and that's the key to success."

Business Strategy Evolves

ProLogis Park Isle d'Abeau #7, Lyon, France (ElcoBrant).

ProLogis' business is organized into two operating segments: property operations and its corporate distribution facilities services (CDFS) business. During its first few years in business, it sought to differentiate itself from its competition by fully meeting customer needs on a national, regional and local basis in the U.S. To execute that strategy, it acquired and developed industrial distribution properties across the United States, while building a national management team. These operating properties represented the property operations segment of the company. ProLogis continues to hold some investments on a long-term basis, while generating income from leasing the properties to customers, according to the firm.

However, as ProLogis' best customers expanded to the far reaches of Mexico, Europe and then Asia, so did the company's portfolio and its management team. ProLogis expanded its operations to Mexico in 1996 and to Europe in 1997 and now has operations in 11 European countries. In 2001, ProLogis again expanded its business, this time to Asia, with the initiation of operations in Japan. ProLogis opened a representative office in China in 2003 and, in 2004, acquired its first real estate assets in China. Further expansion in 2004 included Singapore, with the acquisition of an operating property, and Canada, with the acquisition of land for future development.

ProLogis' CDFS Business
As a REIT, ProLogis has to distribute rather than reinvest substantial amounts of its internally-generated capital. In 1995, it expanded its business to include a corporate distribution facilities services operating segment. The CDFS business segment tapped into ProLogis' enormous development expertise, which had been primarily focused on the development of properties for direct, long-term investment. Now the company wanted to develop properties for sale to third parties. The CDFS business provided ProLogis with funds that it could use as an alternative to public capital.

At this point, ProLogis made another critical decision and shifted the focus of its CDFS business segment from developing and selling properties to third parties to developing properties that would be contributed to property funds. These property funds would be formed by ProLogis with private equity capital. ProLogis would maintain an ownership position in the funds and it would manage the properties. As ProLogis' property funds grew, it expanded the business to include rehabilitated and/or repositioned properties.

Said Schwartz: "These funds give us access to the best institutional capital - groups such as Eaton Vance, the Government of Singapore Investment Corp. (GIC), the Teachers Insurance and Annuity Association (TIAA-CREF), and ABP in the Netherlands - and the funds also give these same investors access to the best industrial development in every part of the world. We have been very pleased with the fund partners we have put together, and they have been pleased with the returns. So it has worked out very well."

Critical Acquisitions
ProLogis' growth has been accelerated by several critical acquisitions, including Meridian Industrial Trust, Keystone Property Trust and the $4.9 billion Catellus Development Corporation. Meridian substantially increased the company's presence in the largest logistics markets in North America and generated significant operational and cost benefits. Schwartz said of the other two: "Keystone was really a portfolio acquisition; it gave us a number one market position in New Jersey and Pennsylvania, which together constitute the second largest distribution market in the U.S., second only to California.

"We see the Catellus merger/acquisition as being far more strategic," he said. "One, it was significantly larger -- 40 million square feet of the best industrial property in the United States. The average age of the Catellus portfolio properties is less than seven years. It is a great, great portfolio and a land bank that will allow for the additional development of more than 20 million square feet. Therefore, when you add that to ProLogis' land bank, you have a very significant land bank going forward. In addition, the Catellus land positions are in the best markets -- six million square feet of entitlement in the New Jersey area, all surrounding the port. The bulk of the remainder of the land is in California and Chicago. It is a great land position, very strategic to us. But most importantly about Catellus, we have gotten some great people and an opportunity to take our development business to an even higher level."

The Catellus transaction dramatically changes the landscape of the U.S. industrial real estate market by consolidating two of the largest industrial property developers in North America, according to Schwartz. "The addition of Ted Antenucci, president of Catellus Commercial Development, and his team of experienced development professionals, will enhance ProLogis' North American development capabilities and, in turn, our growth potential and shareholder value," he said.

Customer Relationships

ProLogis Parc Shiniba, Tokyo, Japan (DHL Japan, Inc.).

While its people and its management skills are critical to ProLogis' success, Schwartz points to the company's customers as the most important factor in its continued growth. In fact, the company's motto is "Follow the Customer" and the company has done just that around the world.

"It is customer relationships -- focusing on our customers, servicing our customers, allowing our customers access to a global platform -- nobody else can do that today," said Schwartz. "We can serve our customers in an unparalleled fashion in North America, Europe and Asia. This is important when you are talking about the DHLs of the world, the FedExes, the Unilevers, the Sonys -- the companies that do business on a global basis. They find this to be very powerful."

Schwartz cited Unilever as an example of how ProLogis works with its customers. In 1999, Unilever Home and Personal Care (HPC) became a customer of ProLogis. Unilever's head of warehousing and director of supply chain and logistics services faced the task of merging the supply chain operations of three different companies that were acquired by Unilever HPC- Lever Brothers, Chesebrough-Pond's, and Helene Curtis. These three companies had distinct product lines that needed to be concentrated in one cohesive distribution system to ensure cost-effective and efficient delivery service to Unilever's top customers, such as Wal-Mart and Kmart.

Unilever's goal was to consolidate and optimize the division's national distribution network, which at the time consisted of 15 distribution centers spread out across North America.

ProLogis developed a plan that called for the rapid development of five mega- distribution centers, strategically located in Georgia, Pennsylvania, Texas, Illinois and California, to best serve Unilever's biggest and most demanding customers.

According to ProLogis, the enhanced network, which consolidated 15 smaller facilities to the five mega-distribution centers, improved supply chain efficiencies and has resulted in an estimated annual savings of more than $20 million for Unilever, including savings in transportation and facility operations costs.

The company credits its ProLogis Operating System? in helping to giving it a competitive edge in markets around the world. The firm contends that this global network of distribution facilities and services helps companies to streamline real estate and supply chain operations.

ProLogis: Supporter of NAIOP

ProLogis Park Suzhou, Suzhou (Greater Shangahi Area), China (multi-tenant).

ProLogis continues to be a great supporter of NAIOP; 33 of its people in the U.S. are members, including six who participate at the director level. Larry Harmsen, senior vice president, was the president of the Southern California Chapter last year and remains on the executive committee there. Brian Marsh, senior vice president, was the president of the Columbus Chapter last year. ProLogis urges its executives to take leadership roles within NAIOP.

"I have been a big, big supporter of NAIOP since the mid-1980s," explained Schwartz. "I had my own company in Tampa, Florida -- The Krauss/Schwartz Company. We were NAIOP Tampa Bay Chapter's 'Developer of the Year' for five years in a row and I was on the National Board for a year before moving to Europe to build ProLogis' European business. We have a very active participation in NAIOP throughout the company and I personally want to become more active again. We think it is a great organization.

"While belonging to NAIOP raises our profile within the industry, more significantly, NAIOP raises the profile of the overall industry nationally. We think this is very, very important and very significant."

ProLogis Helps Others
One of the main criteria for selecting the Developer of the Year is the firm's commitment to giving back to the community. In the finest tradition of the commercial real estate industry, ProLogis is committed to giving back to the community where it is headquartered, as well as to other communities in which it does business.

"In 2002, we created the ProLogis Foundation, which matches employee gifts to higher education institutions and also makes direct contributions to many social welfare, health organizations and youth groups," noted the CEO. "We are active contributors to the Ronald McDonald House, the Boys and Girls Club of Metro Denver, the Day of Caring, Special Olympics of Colorado and the Colorado Coalition for the Homeless, among many other groups. After last year's terrible tsunami, we greatly expanded the range of our giving, as we became involved in helping the relief efforts in and around the Indian Ocean. We donated tens of thousands of dollars, directly and through matching gifts, but given the scale of that tragedy, I wish we could do more."

A special example of its work can be found in the Sable and Fletcher schools, near ProLogis' headquarters. "We are deeply involved with Sable and Fletcher Elementary Schools here in Aurora," he said. "Starting in 2001, we 'adopted' Sable because we thought we could help there. Our people spent a lot of time tutoring and helping out in a variety of ways. Last year, we got involved with Junior Achievement (JA) and we had so many ProLogis associates volunteer for JA earlier this year that we now are involved with the group at both schools."

ProLogis has also become involved in Share Colorado as a way for it to help the students at Sable around Thanksgiving and the holiday season. "It's a great organization, and they do a wonderful job of working with companies to help out those who might not otherwise have a good meal at Thanksgiving or receive presents at the holidays," he said. "We are happy to help and bring something to these schools and these students. We allow our people time off to do this, and we know that it is a great investment because it's good for the kids and good for all of us, as well."

ProLogis a Decade from Now
ProLogis issued its first IPO in 1994, a short 11 years ago, and has grown into a global powerhouse since. Looking ahead, what does Schwartz see for the company? "I would like us to be serving customers even better than we have in the past," he said. "I would like to grow our organization with the great people that we have -- see them developing even further and make sure that we are the clear market leader in our field.

"I only recently became CEO of ProLogis - on January 1 of this year - and I would like to say that I am proud of the people we have put together here, throughout North America, Europe, and Asia," he added. "We have a great group of people; people who work hard and work together. We have come a long way in the past 11 years. Of course, that is nothing compared to what we plan to do over the next 10 years."