Editor’s Note: This is one in a continuing series of company profiles in Real Estate Portfolio. These articles are intended to give our readers an in-depth look at the management philosophies and corporate strategies of some of the leading firms in the REIT and publicly traded real estate industry.

Public since1997, AMB Property Corporation, the second largest industrial REIT in the country, has accumulated approximately 60 million square feet of industrial warehouse properties in 28 major distribution markets. By restructuring its portfolio to include sites in those distribution markets and tapping into local talent, this San Francisco, CA, REIT is positioning itself to be the e-tailer’s industrial warehouse of choice, an approach that has drawn the attention of analysts and investors.
Active in industrial real estate for more than 15 years, AMB’s origins date back to 1983, when Douglas Abbey, Hamid Moghadam and T. Robert Burke founded the company to provide real estate advisory and management services to institutional clients. It was privately held until 1997, serving a distinguished list of more than 70 institutional investors with a combined total of more than $2.8 billion of real estate under management. During these 15 years, AMB also formed and managed two private REITs with total assets of nearly $1.0 billion.

In 1997, the principals responded to what they perceived as a shift to public ownership of real estate by establishing the public REIT, AMB Property Corporation. At that time, 95 percent of AMB’s original account and fund clients contributed their properties, and the principals contributed their business in exchange for shares in the REIT.

Under AMB Investment Management, Inc., a subsidiary of AMB Property Corporation, AMB continues to manage the portfolios of the 10 institutional investors who decided not to participate in the REIT. This arrangement plays a key role in AMB’s overall business strategy by giving the REIT a link to high quality, private capital sources. Fees from AMB Investment Management contribute two percent of the company’s total profits.

Response Time Is Critical

AMB’s portfolio reflects the management team’s unconventional approach to industrial property development and management. In its typically atypical style, AMB has developed a unique product/market strategy.

While other industrial property developers are out looking for low-rent space in suburban and semi-rural industrial parks, AMB focuses exclusively on warehouse space in supply-constrained hub markets. Good highway access or a location within an airport or seaport submarket is essential.

Consequently, more than 50 percent of AMB’s properties are located in six major hubs: Atlanta, GA, Dallas, TX, Chicago, IL, Los Angeles, CA, San Francisco, CA, and northern New Jersey.

Selling retail assets has allowed the REIT to focus exclusively on improving and expanding its industrial assets. Not surprisingly, AMB has some new ideas on how to develop and manage warehouse space.

"Inventory as a percentage of GNP has declined over the past 30 years from 60 percent to 40 percent. We are running the economy with less inventory. The storage end of the business is becoming a dinosaur," explains Hamid Moghadam, President and Chief Executive Officer.

"Just-in-time strategies, the Internet and technology mean that industrial warehousing is shifting from a storage business to a high flow-through distribution business. To respond to this trend, AMB has created e-SpaceTM, or expedited space, our term for high throughput distribution properties."

In the e-space business, which Moghadam believes is the future of industrial warehousing, location, not low rent, is everything. Wholesale and retail sales operations will have to meet customer delivery expectations, and that will require highly efficient distribution systems, he explains.

"The cost of distribution is capital and transportation, so customers will pay high rent for a location close to population centers and accessible to transportation," he says. "Response time is critical."

The ultimate expression of the e-space concept is AMB’s on-the-tarmac facilities at major airports. A 230,000 sq. ft. building is in use at the Dallas–Fort Worth airport, with a second one planned for that location. A pair of warehouses totaling 154,000 square feet is under construction at the Portland International Airport, Portland, OR, and a 192,000 sq. ft. facility is under construction at the Houston airport.

"Think about a 747 loaded with freight coming in, getting unloaded into the cargo warehouse. The freight is processed and on its way to the customer," says Moghadam.

In his view, the ideal industrial warehouse is a big, empty, shallow building with freight doors and loading docks on opposite sides. It is empty, he says, because product is constantly flowing through.

"What will happen to industrial real estate with super-flat floors and 32 feet clear, out in the middle of the boonies?" he asks. "That’s the low-cost inventory business. All they care about is rent. I’ll send them my customers who want to store snow tires for nine months."

Analysts are intrigued by the e-space concept, but have adopted a wait-and-see attitude. AMB’s success with e-space will hinge on how broadly the concept can be applied, says Jim Sullivan, senior analyst, Green Street Advisors, Newport Beach, CA. "They probably are ahead of the curve, but is this just a sexy spin on a boring product or is there some depth to it?"

Sullivan expects e-space will have only a limited effect on AMB’s current portfolio. "As long as they stick to the strategy of generic buildings [that could be put to other uses if e-space fails], the risk is small," he says. "But the quality of the tenants as far as credit risk and quality could make a difference. AMB needs to make sure they are compensated for the additional risk."

Greg Whyte, managing director, Morgan Stanley/Dean Witter, New York, NY, believes that the e-space concept typifies AMB’s thoughtful approach to industrial property development.

"Management took a long, hard look at how the company can best be positioned for high throughput as a result of e-commerce," he says. "They realize that when it comes to distribution, you want to be at Main and Main, not in outlying areas."

At this time, e-Space still is only a small percentage of AMB’s portfolio. However, the company plans to increase the proportion of e-Space assets in its portfolio and possibly partner with a third-party logistics provider.

"Just-in-time strategies, the Internet and technology mean that industrial warehousing is shifting from a storage business to a high flow-through distribution business."

Property Management

AMB develops and manages its traditional warehouses and e-space under an organizational model that is startlingly different from that of traditional companies. Where most public real estate companies have a vertically integrated structure, AMB collaborates with local companies on day-to-day leasing, management and development of its properties.

AMB calls this structure their Strategic Alliance Program. The goal, according to Moghadam, is to strengthen the ties between AMB and other real estate professionals to create mutually beneficial relationships.

AMB contracts with some 50 real estate management companies to provide property management services such as rent, collection and custodial services. AMB also outsources its leasing, a much more common practice in the sector.

"We seek the best local entrepreneurial talent and partner with them," explains Moghadam. "It is a very flexible arrangement that allows us to get into—or out of—a market quickly without worrying about hiring or layoffs." Case in point: AMB’s sale of nearly $1 billion in retail properties will have no effect on staffing levels.

The AMB management team developed the Alliance concept based on careful analysis of their market. They recognized that industrial properties and shopping malls are the only two types of real estate that do not require on-site property management. "In terms of customer relationships, who does the managing makes no difference," says Moghadam.

AMB usually works with two different partners in each market to deliberately create healthy competition between service providers. The REIT monitors its partners’ performance and collects market information from them.

"The next piece of business in a market goes to the alliance partner that has provided AMB with the best service and the best insight. This creates an incentive for everyone to do their best for shareholders," says Moghadam.

Green Street’s Sullivan admits that he has viewed AMB’s Strategic Alliance Program with skepticism, knowing that, historically, owner-managed properties outperform those managed by a third party. "In a good market, both strategies can be equally good," he says, "but in a down market, outsourcing can be bad."

So far, says Sullivan, he has been "pleasantly surprised in the performance of their [AMB’s] portfolio compared to their peers." But, he adds, "They have not yet proven themselves in a down market."

The Difference Is Management

The AMB management team’s experience as pension fund advisors gives them a perspective on industrial real estate that is different from that of other REIT chiefs, says Whyte.

"AMB’s management team is astute in evaluating the business and the asset class and adapting to changes in the market," he says. "They did not go public in the mid-90’s when most real estate development companies were looking for alternative sources of capital. They waited and did it when the time was right to expand their opportunities for growth, improve operating efficiencies and reduce the cost of capital."

Sullivan calls the AMB team "smart" and "visionary," particularly compared to managers with a more traditional background in private real estate development.

"As pension fund managers, their decisions had to be research-driven, and they carry this over into their management style today," he says. "They did not build their business on doing the next deal, but on well-thought-out decisions.

"The most important difference between AMB and others in the sector is how their management thinks about business."

An example is AMB’s recent decision to sell its retail portfolio and redeploy the capital to its industrial portfolio. In June 1999, AMB sold nine shopping centers for a total of $207 million, followed by the August sale of 12 shopping centers for $246 million and the December sale of six more for $164 million.

A portion of the net proceeds from the sales was used to reinvest in industrial properties. The remainder was used to pay down secured and unsecured debt.

"The sale was not a rash decision," says Sullivan. "It was well thought-out and flawlessly executed, founded on research into the long-term prospects for retail and industrial business."

AMB has about a dozen retail properties still to sell, but will bide their time until the market and the offer are right, he adds. Decisions like these have earned AMB’s management team plaudits from the investment community and respect from analysts.

AMB’s Moghadam shies away from excessive praise. He will go so far as to call the AMB team "creative" in its approach to industrial property development and management. He is more willing to boast about AMB’s corporate governance structure.

All AMB directors are elected annually, and the company has a charter provision against repricing stock options. Each of the company’s six directors is compensated exclusively through stock options.

"Our goal is to manage the company in a way that maximizes value for all AMB shareholders," says Moghadam. Reflecting that philosophy, the board does not have a "shareholders’ rights" plan, and the bylaws do not include anti-takeover language.

Growth Strategy and Outlook

Moghadam frequently is heard to state that AMB’s goal is to maximize returns on equity and capital for investors.

To achieve this goal, the company focuses on long-term investment strategies for internal growth. Profit growth for the REIT does not depend on acquisitions. Instead, AMB’s strategy is to grow cash flow from a portfolio of quality properties.

The REIT is known throughout the industry for consistently making investments in its properties that help maintain a high level of tenant satisfaction. Despite critics who contend that external management is inefficient and expensive, Moghadam believes that outsourcing property management enhances tenant satisfaction and maximizes efficiency.

The numbers tell the story. In 1998 AMB’s same-store net operating income growth was 7.1 percent, compared with an industry average of 3.7 percent. A 14.3 percent increase in base rent on expired leases contributed most of the growth. In 1999, occupancy rates were up, driving rental growth and continuing the same-property NOI growth trend that the company experienced in 1998.

For third quarter 1999, the most recent data available at press time, FFO per share was up 10.4 percent over third quarter 1998. Same-store growth was powered by a 10.9 percent increase in base rents, and total portfolio occupancy increased to 96.5 percent, from 95.6 percent at June 30, 1999.

For 2000, analysts give AMB the thumbs-up, and they have expectations that the company will continue to outperform the sector. With a total debt ratio (liabilities + preferred stock to market value) of 47 percent, compared with the REIT average of 51 percent, AMB’s balance sheet is slightly stronger than the competition’s. "AMB has a great balance sheet with plenty of capacity to undertake their business strategy," says Whyte.

Sullivan characterizes AMB’s prospects for 2000 as "solid." The REIT’s current stock price reflects some of those expectations but is still "a little on the cheap side," he adds.

"AMB is a smart company with a solid strategy," Sullivan says.

Lynn Novelli, a freelance writer from Russell, Ohio, is a frequent contributor to Real Estate Portfolio.