Place a Prudent Bet on ProLogis’ Future

ProLogis [[PLD]] has nearly tripled from its 52-week lows, but many investors remain cautious ahead of its earnings announcement. The self-managed real estate investment trust operates a network of industrial distribution properties that has remained profitable despite a turbulent real estate market. Continued access to financing has kept its deal flow alive while its operating income remains strong. So, is now the time to invest in this REIT or is there trouble looming ahead?

ProLogis’ problems began when the REIT cut its funds from operations (FFO) guidance for 2008 and 2009 last October. Standard & Poor’s reacted by cutting the firm’s credit rating to BBB- with a negative outlook, which is one of the lowest levels before so-called “junk” status. The ratings agency, along with many analysts, reasoned that lower cash flows were bad news with a $9 billion mountain of debt. If the company couldn’t afford its debt service, the results could be disastrous.

ProLogis was quick to react by announcing a plan that included re-financing or re-negotiating debt maturities on its balance sheet and in its property funds, halting new development starts, shrinking the development pipeline, de-levering the balance sheet, and retaining capital through G&A cuts and a reduction of the dividend. These actions were implemented to improve the REIT’s balance sheet and reduce the risk of failure going forward.

These plans ended up doing the trick for ProLogis and shares quickly tripled to their current levels. However, many investors remain cautious as mere plans do not guarantee results. The company still has a large amount of debt on its balance sheet and, while the real estate market shows some promise of turning around, there is still a lot of work to be done. So, how can investors get involved with this stock without putting a lot of capital at risk?

Long-term options called LEAPS are one way to gain exposure to a stock’s upside without committing a lot of capital. Currently, ProLogis has $5 January 2010 LEAPS calls available for an asking price of $8.60 per contract. This means that investors can purchase the rights to 100 shares of ProLogis anytime during the next 367 days for just $860 down right now. The breakeven point on the position is therefore $13.60 per share, which is a small premium from the current share price.

Investors looking to make an additional extra buck may be interested in a covered call opportunity. The $12.50 February 2009 call options are trading with a premium of $2.00 per contract. This means that LEAPS investors can purchase their long-term options for $860 and immediately resell the rights for $200 to realize a 23.2% return on investment in just about a month. If the stock goes down, you still own the rights and if the stock goes up you can sell for a profit!

See “A Better Covered Call Alternative” or “Using LEAPS as a Stock Substitute” for more information on this strategy or checkout our Tools & Products for more ways you can profit from using LEAPS.

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