Prologis, Inc. and Prologis, L.P. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012. Unless noted, dollar amounts below are in U.S. dollars. Prologis, Inc. is the REIT and general partner of Prologis, L.P.; the two registrants are presented as one operating enterprise.
Business context and period comparability
Prologis owns, operates and develops industrial real estate globally, with Real Estate Operations and Private Capital segments. At quarter-end, its owned and managed platform covered approximately 584 million square feet in 22 countries, including operating properties, development projects and properties managed for others.
Year-over-year comparisons are materially affected by the June 2011 merger of AMB and ProLogis and the 2011 consolidation of Prologis European Properties (PEPR). Q1 2011 reflects historical ProLogis only, not the combined company; reported growth therefore is not a like-for-like measure of organic performance.
Financial and operating results
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Total revenue | $500.1 million | $229.9 million |
| Operating income | $90.9 million | $28.8 million |
| Net earnings (loss) available to common stockholders | $202.4 million | $(46.6) million |
| Basic and diluted earnings (loss) per share | $0.44 | $(0.18) |
| Net cash from operating activities | $71.4 million | $2.6 million |
| Net cash from investing activities | $176.6 million | $178.3 million |
| Net cash used in financing activities | $(80.2) million | $(195.2) million |
Quarter-end total assets were $28.9 billion, including $24.3 billion of net real estate properties. Debt was $12.4 billion, up from $11.4 billion at December 31, 2011; weighted-average effective debt interest rate was 4.41%, versus 5.12% at year-end. Cash and cash equivalents were $343.7 million, and credit facility availability was $1.224 billion. The company reported compliance with debt covenants.
Same-store net operating income increased 1.7%; same-store rental income declined 0.6% and expenses declined 6.6%. The total owned and managed operating portfolio was 92.3% occupied and 92.7% leased, versus 92.2% occupied and 92.5% leased at year-end. Effective rents on new and renewal leases signed in the same-store portfolio fell 1.1%; existing customers renewed 78.3% of expiring leases, versus 65.9% a year earlier.
Prologis-defined FFO was $262.1 million versus $62.1 million; Core FFO was $184.8 million versus $74.4 million. These are non-GAAP measures and include specified adjustments; they should be considered alongside GAAP results. Common dividends were $0.28 per share, up from $0.25.
Material changes and unusual items
- Q1 venture transactions consolidated NAIF II and Prologis California, adding real estate and debt. Prologis recognized a $273.0 million fair-value gain on the Prologis California transaction; total net gains on acquisitions and dispositions of real estate investments were $267.8 million.
- Prologis sold 70 properties and land totaling about 7.9 million square feet during the quarter, generating approximately $687.0 million in net proceeds from property dispositions reported in discontinued operations. Total investing cash inflows from dispositions were $713.0 million.
- Reported earnings included a $16.1 million impairment of other assets, a $3.2 million real estate impairment, a $26.8 million unrealized loss on the exchange feature of exchangeable notes, and a $5.4 million gain on early debt extinguishment. Merger and integration expense was $10.7 million.
- Foreign-currency translation produced a $41.2 million comprehensive loss in Q1 2012, compared with a $203.9 million gain in Q1 2011. The change primarily reflected currency movements, including a weaker yen against the U.S. dollar.
Outlook, management commentary and risks
Management reported positive U.S. industrial net absorption for seven consecutive quarters and cited 13.4% U.S. availability, its lowest level since Q2 2009. It expected U.S. net absorption of 150–175 million square feet in 2012 and anticipated increased development activity in selected markets. Management’s stated objective is to stabilize the operating portfolio at 95% leased. Three development projects totaling 1.5 million square feet began in Q1, with expected investment of $211 million; two were fully leased before development.
Management said it had identified more than $115 million in annualized merger synergies, believed substantially all had been realized, and expected the full amount by year-end 2012. The filing provides no specific full-year earnings or FFO guidance. Management described plans to reduce leverage, sell nonstrategic or low-yielding assets, recycle capital into development or acquisitions, and expand private-capital activity. These plans depend on market conditions and available financing and partner capital.
Cash from operations was below common and preferred dividends and noncontrolling-interest distributions by $80.7 million in Q1; property-sale proceeds helped fund distributions. Scheduled consolidated debt principal payments for the remainder of 2012 were approximately $668.8 million. The filing states that $448.9 million of exchangeable notes and $58.9 million of senior notes were repaid in April 2012 using cash and credit facilities.
Unconsolidated co-investment ventures had $7.24 billion of aggregate third-party debt, not Prologis’s proportionate share, with $404.4 million due in 2012. Prologis cautioned that refinancing may not be available on favorable terms or at all; asset sales or partner contributions may be needed. The company also faces foreign-exchange and interest-rate risks and had no foreign-currency put options or forward contracts outstanding at quarter-end.
In a Pacific Commons arbitration, Cisco sought relief and approximately $200 million in damages. Prologis disputed the claims, reported that it was defending the matter, and recorded no liability because it assessed the low end of its loss range as zero. Management said it knew of no environmental liability expected to have a material adverse effect. The interim financial statements were reviewed by KPMG, not audited; the filing reports no material changes to risk factors from the 2011 Form 10-K.
Most important facts for investors to verify
- Separate acquisition-driven growth from underlying same-store performance; confirm subsequent occupancy, leasing spreads and rent trends.
- Track debt reduction and refinancing against near-term maturities, including the effect of the April 2012 repayments and credit-facility borrowings.
- Assess whether operating cash flow can support dividends, development spending and debt service without continued reliance on property dispositions.
- Monitor delivery of the stated merger synergies and the timing and cost of remaining integration work.
- Follow refinancing and capital-call needs at co-investment ventures and the outcome of the Pacific Commons arbitration.