Prologis, Inc. — FY 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. This is an annual filing; quarterly figures below are for Q4 2011. Prologis, Inc. and Prologis, L.P. file combined statements and are operated as one enterprise. AMB and ProLogis merged on June 3, 2011, and Prologis acquired control of ProLogis European Properties (PEPR) in May 2011. Prologis was the accounting acquirer, so 2011 includes the acquired businesses only after those transactions; comparisons with 2010 are therefore not like-for-like.
Financial and operating performance
- Revenue: FY 2011 total revenue was $1.533 billion, up from $884.6 million in 2010. Rental income was $1.377 billion versus $744.5 million; private capital revenue was $137.6 million versus $122.5 million. The increase largely reflects the merger and PEPR consolidation, as well as higher occupancy.
- Profitability: FY 2011 operating income was $127.4 million, compared with an operating loss of $601.5 million in 2010. The company reported a $244.5 million loss from continuing operations and a $157.9 million consolidated net loss; net loss attributable to common shares was $188.1 million, or $0.51 per share. In 2010, the common-share loss was $1.296 billion, or $5.90 per share.
- Q4: Revenue was $484.1 million, versus $236.2 million in Q4 2010. Common-share net loss was $45.5 million, or $0.10 per share, versus a $1.167 billion loss, or $4.86 per share, in Q4 2010. Acquisition timing and significant 2010 impairment charges affect the comparison.
- Margins and property operations: Real Estate Operations segment net operating income (NOI) was $987.0 million, up from $530.5 million; Private Capital segment NOI was $82.7 million, approximately flat with $81.9 million. Same-store NOI for Q4 increased 0.4% year over year. Effective rental rates on Q4 2011 same-store leases declined 4.5% from prior leases. The filing reports different occupancy measures for different portfolios: consolidated operating properties were 91.4% occupied at year-end, while the broader owned-and-managed portfolio was 92.2% occupied.
- FFO: Prologis-defined FFO attributable to common shares was $411.7 million, versus negative $974.2 million in 2010; Core FFO was $593.9 million, versus $237.4 million. These are non-GAAP measures; management cautions they are not substitutes for GAAP earnings or operating cash flow.
- Cash flow and distributions: Operating cash flow was $207.1 million, down from $240.8 million in 2010. Cash distributions to common and preferred holders and noncontrolling interests exceeded operating cash flow by $224.4 million; property dispositions helped fund the shortfall. Investing activities used $233.1 million and financing activities provided $163.3 million. Common distributions were $1.06 per share for 2011, compared with $1.25 in 2010; a $0.28-per-share Q1 2012 distribution was declared.
- Debt and liquidity: Debt was $11.382 billion at year-end, versus $6.506 billion a year earlier, mainly reflecting acquired debt. It had fallen from $12.1 billion at June 30, primarily through property-sale proceeds. The weighted-average debt interest rate was 5.12%; net interest expense was $468.7 million. Cash and cash equivalents were $176.1 million, with $1.165 billion available under credit facilities. Scheduled 2012 consolidated debt principal payments were $1.2 billion. The company reported compliance with debt covenants.
- Balance sheet: Total assets were $27.724 billion and total liabilities were $13.268 billion. Real estate investments before depreciation were $24.788 billion. Cash and cash equivalents increased from $37.6 million at year-end 2010.
Material changes versus prior periods
- The merger and PEPR acquisition substantially expanded the business: year-end total assets rose to $27.7 billion from $14.9 billion, and consolidated real estate properties before depreciation increased to $24.8 billion from $12.9 billion.
- Year-end debt increased by $4.9 billion year over year, notwithstanding post-acquisition repayments. The 2011 equity offering issued 34.5 million shares and generated approximately $1.1 billion net proceeds.
- Occupancy improved: the broader owned-and-managed operating portfolio rose from 89.0% at year-end 2010 to 92.2% at year-end 2011. Renewal retention, however, declined to 74.7% from 79.5%.
- Real estate impairment charges in continuing operations fell to $21.2 million from $736.6 million in 2010; goodwill and other asset impairments were $126.4 million versus $412.7 million. FY 2011 also included $140.5 million of merger, acquisition and integration expenses.
- Foreign-currency translation losses in other comprehensive income were $171.0 million, compared with $42.3 million in 2010.
Outlook, management commentary, risks and contingencies
- Management expected U.S. industrial-space net absorption of 150–175 million square feet in 2012, following more than 117 million square feet in 2011. It described U.S. market fundamentals as improving, while noting a continued slow global recovery and moderate economic growth. This is market outlook, not financial guidance.
- Management targeted more than $115 million in annualized merger synergies, said approximately 90% had been realized, and expected full realization by year-end 2012. Integration and transition costs were expected to continue through 2012.
- Strategic priorities include reducing leverage and currency exposure, disposing of non-core assets, improving returns from low-yielding assets, leasing development properties, and streamlining and growing the private capital business. Management expects to use disposition proceeds for debt reduction and reinvestment.
- Risks include refinancing and interest-rate exposure, access to capital, foreign-exchange movements, leasing and occupancy, property-market and geographic concentration, development execution, co-investment venture obligations, environmental matters, and maintaining REIT status. About 43.5% of assets, or $12.1 billion, were invested in non-U.S. currencies; no foreign-currency put options or forward contracts were outstanding at year-end.
- Unconsolidated co-investment ventures had $9.3 billion of third-party debt in aggregate, not Prologis’s proportionate share. Prologis guaranteed $6.9 million of that debt and may need to contribute additional capital. Remaining Prologis equity commitments were reported at $324.3 million.
- In the Pacific Commons arbitration, Cisco sought approximately $200 million in alleged damages. Prologis said it believed the claims lacked merit, was defending them, and recorded no liability because it assessed the low end of the loss range as zero. The filing reports no environmental liability believed material to the company.
- KPMG gave unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Investor verification priorities
- Separate the merger and PEPR acquisition effects from underlying rental growth when assessing year-over-year revenue, NOI, occupancy and leverage.
- Reconcile the reported occupancy figures by portfolio definition, and track same-store rent changes, renewal retention and development lease-up.
- Assess recurring cash generation against distributions, capital spending and the $1.2 billion of scheduled 2012 principal payments; verify disposition and refinancing assumptions.
- Review the debt maturity schedule, variable-rate exposure, covenant headroom, post-year-end financing, and the debt and capital commitments of unconsolidated ventures.
- Evaluate the sustainability of FFO and Core FFO by reviewing their reconciliations to GAAP results and the adjustments excluded from Core FFO.
- Monitor the Pacific Commons claim, tax and environmental contingencies, merger integration costs and delivery of the stated synergy target.