AMB Property Corporation Forges Ahead in its International Pursuit for Industrial Space

By Lynn Novelli

In the interconnected world of the 21st century, the globalization of commerce is a reality. From shoes to conveyor belts, computer chips to automobiles, countries around the world annually exchange more than $9 trillion of merchandise, according to the World Trade Organization. Global trade has become an economic necessity for the developed countries of the world.

AMB Property Corporation (NYSE: AMB), based in San Francisco, has embraced the phenomenal growth of global trade and used it as a launching pad for international success. AMB develops, builds, owns and leases industrial distribution facilities located in international transportation hubs to facilitate what the company has dubbed "High Throughput Distribution."

"Manufacturing is moving overseas at an increasing pace, creating goods for sale to high disposable income locations," says Hamid Moghadam, AMB chairman and CEO. "Goods must be moved through airports, harbors and other transportation centers for rapid distribution. They need distribution facilities at strategic locations."

Moghadam says AMB was among "the first to understand the effect of global trade on the demand for industrial space. Time is money. The days of goods sitting in warehouses for long periods of time are over."

From Advisors to Operators

Moghadam and two partners, Douglas D. Abbey and T. Robert Burke, (the A and B in the company name) founded AMB in 1983 as a real estate advisory company to pension funds, foundations and endowments. After 14 years in this business, the founders were convinced that real estate investment through a public company would be attractive to institutional investors. In 1997, AMB reinvented itself, issuing an IPO to become a publicly traded operating company structured as a REIT.

The AMB Ohta Distribution Center in Ohta, Japan boasts more than 780,000 square feet.

Through the company's first years, AMB's sound, research-based approach to investments earned respect from its clients, as well as a string of positive returns. When the company went public, the founders offered shares of the REIT to investment clients in exchange for their management and real estate interests. In an impressive vote of confidence, more than 95 percent of the clients' portfolios were transferred to the new AMB Property Corporation REIT.

Abbey and Burke retired shortly after the IPO, leaving Moghadam to build a new executive team and direct the business according to his own vision. By 1999, his newly assembled team detected the beginnings of the shift in commerce to a global platform and started to refocus AMB's portfolio solely on industrial properties within major infill markets.

AMB began purchasing domestic properties in the most strategic distribution markets, close to major international cargo airports and seaports with the necessary infrastructure and employment base to meet customers' needs for supply-chain efficiencies. Instead of large, deep warehouses with high ceilings and extensive racks for long-term storage, AMB began constructing or reconfiguring existing buildings to wide, shallow space with numerous docks that facilitate the rapid transfer of goods.

Within a few short years, AMB realized it could apply the same concept to international markets. The opening of the Amsterdam office in 2002 marked the beginning of AMB's international expansion, followed quickly by offices and facilities in Mexico and East Asia.

Location Is Everything

Both internationally and domestically, AMB offers customers, such as DHL and Federal Express, the strategic advantage of being closer to their customers or adjacent to the largest airports, seaports and interstates for easy access. "Our properties are highly desirable for companies whose business models depend on speed to market," Moghadam says.

Louis Taylor, senior real estate analyst with Deutsche Bank, has covered AMB for eight years and says that the company has created a winning business model. "Moving goods quickly has become a dominant driver in international shipping and distribution," he says. "AMB is wise to focus on facilities that help companies minimize their inventory investment."

The AMB CDG Cargo Center in Roissey-en-France boasts more than 500,000 square feet.

AMB's operating portfolio consists of 115 million square feet in 11 countries and 42 markets, serving more than 2,700 customers. The properties average 95.8 percent occupancy, compared to a national average in 2005 of 90.4 percent. Internationally, the company focuses on markets that are key to global trade, such as Brussels, Frankfurt, Hamburg, Milan, Paris, Shanghai and Tokyo. On the domestic front, AMB owns and operates facilities in Atlanta, Dallas, Los Angeles, San Francisco, Seattle and other major U.S. transportation centers.

As of 2006, AMB had a five–year annual dividend growth rate of 3.53 percent with a five-year annual revenue growth rate of 7.43 percent. Stockholders' total return in 2005 was an impressive 26.8 percent. First Call earnings per share growth rates for the company have grown steadily from 2.32 percent in 2001 to a projected 3.12 percent for 2006. For 2007, the projection is 3.35 percent and 3.6 percent for 2008.

"Improving industrial fundamentals and robust margins on recently completed projects in AMB's development pipeline, especially in Japan, support this optimistic forecast," says John Stewart, a research analyst with Credit-Suisse North America.

UPSIDE-DOWNSIDE Samplings of what analysts are saying about AMB Property Corporation. BANC OF AMERICA SECURITIES Rating: Buy (10/19/06) Target Price: $58 "While we are growing concerned about U.S. industrial fundamentals, given new supply forecasts exceeding that of demand, AMB remains well positioned in supply-constrained coastal logistics markets, which should continue to see healthy rent growth and occupancy levels." CITIGROUP GLOBAL MARKETS Rating: Cautious (10/18/06) Target Price: $58 "AMB continues to have strong near-term earnings momentum, driven by development profits, but management appeared more cautious on this quarter's call than recent calls, particularly about U.S. market conditions. Forty-seven percent of the company's 2006 FFO is from development profits and private capital income/promotes, which may be hard to replicate given the pipeline of developments currently for 2007." STIFEL NICOLAUS & CO. Rating: Buy (10/19/06) Target Price: $60 "Overseas properties currently make up 9 percent of AMB's base rent, but we expect this number to grow over the next few years, as management targets 60 percent of 2006 development starts in Europe and Asia. The current $1.2 billion pipeline is 70 percent in North America and 30 percent in Europe and Asia." A.G. EDWARDS & SONS Rating: Hold (10/19/06) Target Price: $58 "AMB remains well positioned to capitalize on improving industrial real estate trends with its high quality portfolio in port and airport markets. AMB has increased its international exposure to approximately 11 percent of its ABR, though remains a long way from reaching its ultimate goal of 40 percent by 2010."

New Strategies

Moghadam, who is a former NAREIT chair and received NAREIT's Industry Leadership Award in 2005, has mapped out a growth path for the company that fine tunes the High Throughput Distribution concept in a way he believes will generate even higher earnings.

Growth from operations will continue to be the company's number one focus, and Moghadam says that this comes down to Economics 101: the law of supply and demand. "AMB looks for areas of high demand tied to global trade, and we control these locations," he says. "They become scarce over time. We have taken key positions at ports where there is high demand and short supply. The result is pressure on rents."

This first strategy for growth has positioned AMB as an industrial market leader, growing same store NOI at the sector's highest rate since 1997.

AMB PROPERTY CORPORATION Pier 1, Bay 1 San Francisco, California 94111 PHONE: (415) 394-9000 WEB SITE: www.amb.com MANAGEMENT: Hamid Moghadam, chairman and CEO; Eugene Reilly, president, North America; Guy Jaquier, president, Europe and Asia. TICKER SYMBOL: AMB, listed on the New York Stock Exchange • 52-Week High: $62.23 • 52-Week Low: $42.45

In 2004, AMB's second growth strategy, its development program, shifted into high gear. In 2003, AMB's development pipeline consisted of fewer than 5 million square feet with an estimated total investment at completion of $233 million. By early fourth quarter 2006, AMB had more than doubled the square footage in its development pipeline, with more than 45 build-to-suit and speculative projects representing more than 12 million square feet and an estimated investment in excess of $1.5 billion.

"Our development program is led by customer demand and relationships with customers such as FedEx and DHL," Moghadam says. "We need to develop facilities to support their needs."

AMB's aggressive development program will continue unabated, Taylor predicts. "Merchant development—build, sell and use the profits to build again—will be the major driver of AMB's growth for the next several years," he says.

AMB has more than 1,300 acres in its global land bank. That's enough property, the company says, to build 24 million square feet of additional logistics and distribution facilities.

Fundamental Success

AMB will fund this exponential growth through joint ventures with private capital as an alternative to issuing public equity. "Real estate is a very capital intensive business," Moghadam says. "You cannot constantly issue new equity whenever you need capital because that dilutes shareholder value."

AMB has used private equity exclusively since going public in 1997, and is the only large REIT that has never brought a follow-on offering since its IPO. In fact, AMB has re-purchased some $10 million in public equity, Moghadam points out, and he expects the company's private capital business to continue as a major driver of future growth.

AMB relies on investment funds from a variety of private capital sources such as governmental/corporate pension funds, foundations, endowments, trusts and other institutions. The company combines capital from these sources with AMB's own funds in a series of U.S. and international funds, creating a capital management business within the REIT.

Stewart agrees with Moghadam's assessment of the advantages of this strategy in that it "preserves the scarcity value of AMB's public equity." However, Stewart adds, "The drawback is that it may lead some investors to still perceive AMB as a pension fund advisor rather than a real estate operator."

Typically, the company provides 20 percent of capital in a fund and investors provide 80 percent, explains Scott Sedlack, an analyst with A.G. Edwards & Sons. "AMB subsequently develops or acquires the property, which it then places in one of these funds," he says.

Using this strategy, AMB has raised more than $1.6 billion in equity from institutional investors, utilizing nearly a dozen co-investment funds. AMB currently has more than $3.1 billion in co-investment assets under management.

In the fourth quarter of 2006, AMB was in the process of creating a new development fund specifically for the pursuit of merchant development opportunities in non-core markets, Sedlack says. "In the first quarter of 2007, it will launch a new European fund, to be followed by a non-Japan Asian fund," he adds. "A Canadian fund is not far behind as they ramp up their development in Toronto."

While international exposure currently comprises just 11 percent of its portfolio, Moghadam makes no secret of the fact that the company seeks to expand its global platform. "The continued growth of global trade and changes in supply chain practices influence where properties should be located," he says. "We are driven by trying to fulfill our customers' needs."

With those factors coming into play, Sedlack forecasts that AMB's international platform will soon reach 15 percent of its total portfolio and will reach 40 percent by 2010. According to AMB's 2005 annual report, "as much as 50 percent" of its business "may take place outside of the United States within five years."

Customer Satisfaction

The philosophical underpinning of AMB's growth both domestically and internationally is a sincere desire to meet customers' needs. Moghadam is proud of what he calls AMB's "customer-centric" approach. "We could be real estate-centric and invest in markets," he says. "AMB prefers to look at who operates in the global supply chain and what markets they need to be in. We are there to meet their needs."

He is equally proud of AMB's award-winning corporate governance, which the executive team considers a "fundamental element." AMB's founders took the high road with governance practices. In 1997, they determined that directors would serve annual terms, and directors, founders and executive officers would maintain a significant but non-controlling interest in the company. They also opted out of the anti-takeover provisions frequently adopted by Maryland-chartered companies, and chose not to enact a shareholders' rights plan or "poison pill," which protects the firm and its shareholders in a hostile takeover attempt.

Over the years, these basic four tenets have been followed by multiple enhancements, such as a stock option plan that forbids re-pricing of options; eliminating employment contracts for executive officers; and one that made stockholder consent a requirement for enactment of any future poison pill plans.

From selecting the right location to meeting customer needs to strict corporate governance, Moghadam considers it all fundamental to AMB's mission of enduring excellence. "We are building a company that will stand for excellence 20, 30, 40 years from now," he says. "We strive to achieve intergenerational excellence in the industrial business."