FUR Winthrop Realty Trust New (delisted)

We have recently lowered our long-term recommendation on Prologis Inc. (PLD) – the erstwhile AMB Property Corp., from Neutral to Underperform primarily driven by macroeconomic issues that have contributed to a slower pace of recovery of the industrial real estate sector.

Prologis, a leading industrial real estate investment trust (REIT), acquires, develops, operates and manages industrial real estate space in North America, Asia and Europe. The majority of the company’s portfolio comprises high throughput distribution (HTD), which provides multiple options for quick movement and the distribution of goods to the customer and serves as a critical element in creating efficiencies in the global supply chain.

HTD properties are warehouses or other industrial properties that are located near airports, seaports, and ground transportation facilities, which enable rapid distribution of customers’ products.

Given its international presence, Prologis has lately faced unfavorable foreign currency movements and other economic fluctuations that have impaired its top-line growth.

Although first quarter 2011 results were in line with the company’s expectations and signified a gradual improvement in market fundamentals, macroeconomic issues contributed to a slower pace of recovery as the industry was affected by the continued concerns about sovereign debt issues, rising energy costs, global military actions and the devastation and loss caused by the earthquake and tsunami in Japan.

In addition, the unrelenting troubles in the residential sector are weighing on commercial property operations. The credit crunch has also widened the bid-ask spread between buyers and sellers of commercial real estate, which has caused deal volumes to fall dramatically.In addition, market vacancy increases will mitigate Prologis’ ability to push through rental rate increases. This has significantly affected the long-term growth of the company.

However, Prologis has recently merged with the erstwhile namesake company in an all-stock deal to become a behemoth of sorts in the industrial real estate sector. The combined entity brings two of the most complementary customer franchises on the same platform and creates a $44 billion worth of asset pool at their disposal.

The merger is expected to lead to potential cost savings through operational synergies and would help create a stronger platform for value creation and sustainable growth. If the company can weather the current deluge of negative investor confidence on the stock, it can well expect a steady reversal of fortunes. 

Prologis presently has a Zacks #4 Rank that translates into a short-term Sell rating. However, we have an Outperform recommendation and a Zacks #1 Rank (short-term Strong Buy) for Winthrop Realty Trust (FUR), one of the peers of Prologis.

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