Remarkable Rebound

How a real estate investment trust battered by the recession joined forces with a rival and emerged stronger than ever

Events in the second half of 2008 still cause nightmares for business leaders. A stock market crash, frozen credit markets, and cratered consumer confidence wreaked havoc on every industry. ProLogis, a publicly traded real estate investment trust focused on logistics real estate, was hit hard by the events.

On January 1, 2008, the ProLogis share price was riding high at around seventy dollars. This was before ProLogis’ merger with AMB Property Corporation, which created the current Prologis. In November—following the shocking collapse of global financial giant Lehman Brothers and the unraveling of the financial industry—ProLogis’ stock bottomed out at $2.20.

With the economy tanking, the volume of global trade was declining dramatically. Demand for distribution space and related services plummeted, diminishing the company’s revenue. The executive team had to act swiftly and forcefully to regain the confidence of shareholders, financiers, and customers.

In order to get the company back on solid footing, the team had to tackle a lot of work. To begin, the board of trustees and CEO parted ways. The remaining executive team, including Edward Nekritz, chief legal officer and general counsel, faced some difficult decisions.

The company’s rapid growth strategy that had depended on aggressive borrowing to acquire real estate had served it well precrash. Now, with the economy struggling and the financial markets frozen, the size of its debts was alarming. The executive team needed to focus on improving the balance sheet—and quickly.

With an urgent need to quickly raise capital in order to meet its debt obligations, ProLogis sold assets and raised equity. Nekritz and his team of fifteen lawyers around the world worked long hours on these transactions, supplemented with outside counsel on some of the largest deals. The sales stretched out over two and a half years. “We did everything we could to regain the confidence of our constituents—financiers, investors, customers, and employees,” Nekritz says. During a meeting with investors, analysts and lenders, ProLogis’ executives made a pledge to turn the company’s fortunes around. “Our chief executive officer at the time said, ‘Don’t just trust us. Watch us,’” Nekritz recalls.

The company’s survival mode strategy also included reducing dividend payments to shareholders, cutting costs, and halting new development. For a real estate investment trust, cutting back on dividends is a frustrating step, Nekritz points out, as regular dividends are prominent attractions for investors in this asset class. Yet these were no ordinary times—it was the worst financial crisis since the Great Depression. Hitting the emergency brake on new development was unfortunate, but given the sputtering economy, it was also central to the leadership team’s plan.

A decision to sell its assets in China and a portion of its interest in its Japan portfolio—both markets with enormous potential—to its partner, the Singapore government, was particularly tough, but necessary. Perhaps no decision was tougher than the layoffs that followed though. “We had to let good people go,” Nekritz says. “In many respects, we had to cut off an arm to save the body—the company. It was a painful period.”

The legal team was spared from personnel cuts due to the spike in transactional workload headed its way, and like an in-house boutique law firm, it knew ProLogis’ business inside and out. Its work was going to be indispensable to the turnaround. What’s more, legal was not overstaffed, not even during high-growth phases. “My philosophy has never been to staff for the peaks or valleys,” he says.

As the legal group’s chief, Nekritz contributed much to devising the company’s survival strategy and the “blocking and tackling” that came afterward. He worked with the board, providing advice on business strategy from the perspective of financial and human resources, regulatory, and compliance. In addition to the transaction work required, the legal team also restructured some of the company’s private capital ventures.

The strategy took patience, but step by step, the company steadily improved its balance sheet. By late 2010, ProLogis had improved its financial standing significantly, and the economy was growing again. The stage was set for a transformative merger with an industry rival—a deal in which Nekritz played a key role.

We did everything we could to regain the confidence of 15our constituents—financiers, investors, customers, and employees.

Five years ago, AMB and ProLogis merged, which was considered a landmark transaction for the real estate industry. The notion that ProLogis would join forces with AMB may have surprised industry observers. For many years, the two companies battled it out in many of the same markets. “We were Coke and Pepsi; Hertz and Avis,” Nekritz says. In fact, what was later described as “a merger of equals” had been discussed more than once before the recession. From a big picture perspective, it made a lot of sense. “Our portfolios were highly complementary, the synergies were compelling and there was great respect for each other’s business,” Nekritz says.

Previous merger talks never got past the conceptual stage. This time would be different. Talks between the two companies began in mid-December 2010, and it quickly became clear that the nettlesome issues that could not be overcome in the past could be surmounted this time. The benefits of a merger, which would create the largest industrial real estate company in the world, were too obvious to ignore. The two sides spent weekends in late December and early January in hotels hammering out the details.

The question of who would run the post-merger company was made easier by the fact that ProLogis’ chief executive officer, Walt Rakowich, was not interested in running the post-merger company long-term. The executive team decided on a cochief executive officer leadership structure, with both chief executive officers sharing the top role during a transitional period, after which AMB’s chief executive officer, Hamid Moghadam, would assume the top role.

The time the teams spent together gave them the opportunity to develop personal relationships that helped the talks go as smoothly as either side could have hoped. “It was a very quick dance this time,” Nekritz recalls. The management teams approached the merger—and the reorganization thereafter—as if the new entity was a startup, albeit one with nearly $45 billion of global assets. Most importantly, “the newly-combined company had the best talent in the industry,” Nekritz says.

The new leadership team had a clear vision—build a company of enduring excellence in global real estate. They set out to align their real estate portfolio with its new investment strategy while serving the needs of customers, enhance asset utilization, build a rock solid balance sheet, reenergize their combined investment management franchises, and build a culture of empowered accountability.

The alliance allowed the combined company to take the best platforms and processes of reach company and forge them into an improved organization. One example affected Prologis’ legal team. While AMB relied on outside counsel with a skeleton in-house team, Nekritz successfully made the case that a capable and seasoned in-house team was the way to go. In hindsight, all agreed it was the right decision as the in-house legal team was able to quickly showcase its value proposition with the real estate teams throughout the company.

Both ProLogis and AMB owned investment management businesses, so the new entity rationalized the number of funds from twenty to eleven and worked on making the remaining funds more efficient. In addition, the new company sold off over $10 billion in nonstrategic assets over the first two and a half years after the merger. That work continues, as do new acquisitions, providing plenty of work for legal. “We have from fifty-five to sixty-five deals going on at any one time,” Nekritz says. And the company has been focused on boosting asset utilization by increasing occupancy—a key component of profitability. On that front, its occupancy is up significantly since the merger.

Responsible for Prologis’ investment services group, which works side by side with the lawyers and real estate experts handling contract negotiations, real estate, and corporate due diligence and closings on acquisitions, dispositions, and financings, Nekritz and his team were intimately involved with these activities.

It’s rare for mergers to succeed over the long term because most fail to create value. The merger of AMB and ProLogis did. With an 11 percent per-year-on-average increase in the stock price, shareholders benefited. It has been a success by other measures too. Total assets under management are now $63 billion, occupancy has increased from less than 91 percent to more than 96 percent and the number of customers has increased from 4,500 to 5,200. Its share price was at $50 as of late-June 2016.

With a successful five-year track record, the executive leadership, representing a blend from each company, can take great pride in creating a strong industry stalwart. Nekritz and the legal team were vital contributors to the effort, and they continue to facilitate transactions that are taking the company to new heights.