Prologis, Inc. — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. Prologis, Inc. and Prologis, L.P. filed combined reports and are operated as one enterprise. Financial statements are unaudited; KPMG performed an interim review, not an audit.
Business context and reporting period
Prologis owns, develops and operates industrial properties globally and manages property funds and other investees. The June 3, 2011 merger with AMB and the May 2011 acquisition and consolidation of ProLogis European Properties (PEPR) substantially expanded the company. 2011 results include acquired operations for only part of the year and are therefore not directly comparable with 2010.
At September 30, Prologis owned 1,895 industrial properties totaling 302.5 million square feet. Its consolidated portfolio was 90.1% leased and 89.4% occupied. The broader managed operating portfolio, including unconsolidated investees, was 91.0% occupied.
Key financial metrics
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenue | $501.4 million | $228.6 million | $1,075.7 million | $665.2 million |
| Operating income | $90.8 million | $35.7 million | $82.3 million | $99.5 million |
| Net earnings (loss) attributable to common shares | $55.4 million | $(15.1) million | $(142.7) million | $(129.3) million |
| Basic earnings (loss) per share | $0.12 | $(0.07) | $(0.42) | $(0.61) |
| Net cash from operating activities | Not separately stated for quarter | $104.9 million | $224.6 million |
Reported operating margin was approximately 18.1% for Q3 and 7.7% for the nine-month period; acquisition-related changes make these comparisons less informative. Same-store net operating income decreased 0.7% in Q3 year over year. Effective rents on same-store leases signed were below the prior leases by 8.6% in Q1, 6.1% in Q2 and 8.9% in Q3.
At September 30, total assets were $28.6 billion, debt was $12.1 billion and equity was $14.6 billion. Debt was $6.5 billion at December 31, 2010. The weighted-average debt interest rate was 5.00%, versus 5.79% at year-end 2010. Cash and cash equivalents were $216.7 million; restricted cash was $77.8 million. Credit facilities had $768.5 million of availability after borrowings and letters of credit. Scheduled debt principal maturities were $1.5 billion in 2012 and $1.7 billion in 2013; approximately $310 million of 2011–2012 maturities was repaid in October.
Operating cash flow fell year over year, while investing activities used $798.5 million and financing activities provided $874.0 million. Common distributions were $0.28 per share in Q3 and $0.78 per share for the nine months, versus $0.34 and $1.01, respectively, in 2010.
Material changes and unusual items
- Revenue growth primarily reflects the merger and PEPR consolidation, including $325.3 million of acquired-property rental income in the approximately four months included in 2011 results.
- Merger, acquisition and integration expenses were $121.7 million for the first nine months. Management said integration costs could continue through the end of 2012.
- A $103.8 million impairment was recorded, primarily on two unconsolidated property-fund investments. Net gains on acquisitions and dispositions were $114.7 million for the nine months, including gains from gaining control of PEPR and a Japanese joint venture.
- Q3 foreign currency and derivative gains were $52.5 million; the nine-month gain was $43.6 million. These included fair-value gains on the exchange feature of exchangeable notes.
- The merger and PEPR acquisition increased real estate assets and debt materially. Prologis also issued 34.5 million common shares in a June offering, generating approximately $1.1 billion net proceeds, principally used to repay acquisition-related borrowings.
Outlook, risks and contingencies
- Management expected U.S. industrial net absorption to exceed 125 million square feet in 2011, with some anticipated growth delayed by one or two quarters, and expected absorption as a share of stock to exceed its pre-crisis peak in 2012. Management cited solid U.S. fundamentals and demand for modern distribution space, while acknowledging a slower-than-expected global recovery.
- Management identified more than $90 million of annualized merger synergies and expected to realize the total by year-end 2012, if not sooner. It also described priorities to reduce leverage, streamline the portfolio and private-capital platform, and fund development through dispositions and fund contributions.
- Development commitments require further spending: the MD&A reports $432.8 million remaining for 21 properties under development as of September 30. The filing also reports a broader development portfolio and expected investment; figures use different portfolio scopes.
- Unconsolidated property funds had $9.1 billion of third-party debt. Prologis generally had not guaranteed this debt, but refinancing may be unavailable or less favorable; fund contributions or asset sales could be needed. Prologis also had $340 million of remaining fund equity commitments and had pledged directly owned properties valued at approximately $276 million as additional collateral for a fund loan.
- Prologis reported no outstanding foreign-currency put options or forward contracts at September 30, leaving earnings exposed to currency movements. It reported compliance with debt covenants. Ordinary-course litigation was not expected by management to have a material adverse effect; a merger-related settlement required $600,000 of attorneys’ fees, accrued.
- Management recorded a $5.2 million charge for repairs related primarily to a Japan property damaged in the March 2011 earthquake and tsunami. A UK entity related to a receivable entered administration; management expected recovery based on information then available and said it would continue to evaluate the investment.
Important facts for investors to verify
- How much reported growth and improved occupancy reflect acquired assets versus organic leasing and same-store performance.
- Progress on realizing merger synergies and controlling continuing integration costs.
- Debt refinancing and repayment plans for near-term maturities, and the effect of leverage on liquidity and distributions.
- Leasing, occupancy and rent trends, particularly same-store rent changes and development lease-up.
- Valuations, refinancing exposure and capital commitments tied to unconsolidated funds, including whether expected receivable recoveries are realized.