JOSEPH BETLEJ
PORTFOLIO MANAGER
IVY REAL ESTATE FUND

COMPANY: Prologis
TICKER: PLD (NYSE)
PRICE: $51.91 (as of 4 p.m. yesterday)
52-WEEK RANGE: $36.50-$56.31
MARKET CAPITALIZATION: $12.7 billion

Joseph Betlej is the portfolio manager of the Ivy Real Estate Fund (IRSAX), with more than $200 million under management. Prologis owns, operates, and develops industrial distribution properties worldwide. Mr. Betlej spoke to David Dalley of The New York Sun and explained why he believes Prologis stock could increase by about 12% over the next 12 to 18 months.

What does Prologis do?

They own and manage distribution warehouses across the U.S. and internationally. They work with larger facilities mainly targeted to help with supply chain management for companies. The companies lease the warehouses from Prologis.

Why do you like the stock?

I think first of all, in terms of real estate market fundamentals, we’ve seen occupancies improve and now we’re beginning to see rental rate improvement, which we believe will be a strong driver of earnings going forward. Things are good across the market, but the location of Prologis’s properties are in key distribution points that allow them to be on the front end of that rental growth.

Another thing I like is their recent merger with Catellus, which they completed late last year. Catellus is in the same business as Prologis and has an inventory of industrial land that Prologis can now develop. It has provided them with some strong opportunities.

I think most importantly, though, Prologis exemplifies what I call the asset manager strategy. What they do well is bring in money partners; e.g. pension funds, international investors, etc., who want to invest in warehouse real estate, but don’t necessarily have the on-the-ground access to markets. These money partners are looking for a lower but more predictable return, which allows Prologis to capture a much larger portion of the upside. It’s a system of shared ownership and profit. The partner gets the preferred return, and Prologis gets everything above that hurdle rate.

Is that sort of arrangement just a creative type of bank loan?

It’s more a recognition of the standing that Prologis has in the market. They can effectively exploit their market dominance and their connections, their access to property, etc., and form these strategic partnerships. Essentially they’re a gatekeeper and are getting paid to offer access to others.

What do you think the stock’s worth?

From a valuation perspective, it’s considered one of the higher-quality companies around, but it trades in my opinion at a discount to some of the other high-quality stocks. I think once people recognize the strength of Prologis’s earning power due to its asset manager strategy, the stock could trade in the upper $50s. I think it could be at about $58 in 12 to 18 months. On top of that you have the 3% dividend.

What will it take for the stock to reach that price?

The company has been doing a better job at making the earnings from that asset management business steadier and more predictable. In doing so, the market will gain more confidence in the return from that segment, and that’ll push the stock up.

What are the risks?

The company has generated a strong pipeline of development, and development is not without risk. That’s no. 1. No. 2, much of this development pipeline is international, so whenever you’re doing business overseas, you have some risks attached to that. They work in Mexico, China, Japan, and Europe. However, the portfolio of properties that they own is getting more diversified over time, and that will help mitigate these risks.