Business context and reporting period
AMB Property Corporation and AMB Property, L.P. filed this combined, unaudited Form 10-Q for the quarter ended March 31, 2011. AMB was a global industrial real estate owner, operator and developer, with approximately 161.0 million square feet of properties and development projects across 49 markets in 15 countries. The parent company operated primarily through the Operating Partnership. The proposed merger of equals with ProLogis was pending during the quarter; the surviving company was expected to be named ProLogis, Inc.
Key financial metrics
Amounts below are in millions of dollars except per-share amounts and ratios.
| Metric | Q1 2011 / March 31, 2011 | Comparable period / prior year-end |
|---|---|---|
| Total revenue | $165.8 | $154.1 in Q1 2010 |
| Property NOI | $106.0 | $98.5 in Q1 2010 |
| Net income (loss) | $14.3 | $(0.6) in Q1 2010 |
| Net income (loss) available to common stockholders | $7.8; $0.05 per share | $(4.4); $(0.03) per share |
| Loss from continuing operations | $(2.7); $(0.05) per share after preferred dividends | $(1.5); $(0.04) per share |
| Cash provided by operating activities | $61.7 | $70.1 in Q1 2010 |
| Cash used in investing activities | $(45.9) | $(183.3) in Q1 2010 |
| Cash provided by financing activities | $7.6 | $67.4 in Q1 2010 |
| Cash and cash equivalents | $203.6 | $198.4 at December 31, 2010 |
| Total consolidated debt | $3,426.1 | $3,331.3 at December 31, 2010 |
| Total assets | $7,420.8 | $7,372.9 at December 31, 2010 |
Property NOI was approximately 64% of reported revenue, calculated from the filing’s figures; NOI is a non-GAAP supplemental measure, not net income or operating cash flow. Cash-basis same-store NOI excluding lease termination fees increased 0.8% year over year. Reported net income benefited substantially from discontinued operations, including $14.5 million of gains on real estate sales and $1.6 million of development profits. Common and preferred dividends paid totaled $99.3 million; operating cash flow alone was below dividends and distributions, while operating cash flow plus $93.7 million of divestiture proceeds exceeded them by $53.1 million.
Material changes versus the prior comparable period
- Revenue rose 7.6%, with rental revenue up 7.8%. Consolidated average occupancy increased to 91.6% from 88.5%; the owned-and-managed portfolio was 92.8% leased at quarter-end.
- Property NOI increased to $106.0 million from $98.5 million. Cash-basis same-store NOI excluding lease termination fees increased 0.8%, although reported same-store NOI including straight-line items declined 0.3% excluding termination fees.
- Common-stockholder earnings turned positive, but continuing operations remained loss-making. The improvement in total earnings primarily reflected $17.1 million of discontinued operations versus $0.8 million a year earlier.
- Interest expense rose 7.1% to $34.9 million, and depreciation and amortization rose 16.0% to $55.0 million. Q1 2011 included $3.7 million of merger transaction costs; Q1 2010 included $3.0 million of restructuring charges and $4.8 million of continuing-operations development profits.
- Cash used in investing narrowed year over year, mainly reflecting lower contributions to unconsolidated ventures and higher divestiture proceeds. Debt increased by $94.8 million from year-end, including higher credit-facility borrowings.
Outlook, management commentary, risks and unusual items
- Management said global trade and logistics-property fundamentals were improving. It cited record Q1 leasing of 8.9 million square feet and expected stronger operating fundamentals later in 2011. The company had no quantified earnings guidance in the supplied filing text.
- Management’s 2011 priorities were to improve asset utilization, scale the organization and profitability, and form new co-investment ventures and funds. It expected earnings growth if occupancy moved toward its historical 95% average, development properties leased up, and land value was realized.
- Management reported negative rent changes on renewals and rollovers: 12.6% lower on a trailing four-quarter basis and 12.1% for the quarter. It expected negative rollover changes to continue through 2011, while believing net effective rents had bottomed in most markets.
- Reported available liquidity exceeded $1.4 billion, comprising approximately $1.2 billion of credit availability and $203.6 million of unrestricted cash. Three credit facilities had approximately $1.6 billion of capacity; about $1.2 billion was available. A $500 million facility with $230.5 million outstanding matured in July 2011, subject to extension and other conditions.
- Debt was $3.43 billion; management reported leverage of 43.0% on its share-of-debt-to-share-of-assets measure and targeted approximately 45% or less over the long term. The Operating Partnership reported compliance with debt covenants. Fixed-rate debt represented 80.3% of debt; management estimated a 10% change in rates would change annual interest cost on variable-rate debt by about $1.2 million, net of swaps.
- The quarter included $3.8 million of Japan earthquake and tsunami property losses, partly offset by approximately $1.5 million of expected insurance proceeds; $2.3 million net was recorded as accelerated depreciation. No real estate impairment losses were recorded in Q1.
- The proposed ProLogis merger remained subject to shareholder approval and other closing conditions. Shareholder lawsuits sought to delay or challenge the transaction; the parties reached agreements in principle on proposed settlements involving supplemental disclosures, subject to court approval. The filing anticipated a June 3, 2011 merger effective date if conditions were met.
- Other exposures included $260.6 million of potential contribution obligations tied to certain co-investment venture debt defaults, $61.3 million and $84.0 million of guarantees on loans of consolidated and unconsolidated ventures, respectively, and $13.2 million of letters of credit. Risks also included refinancing and interest-rate exposure, tenant defaults or lower renewal rents, development costs and leasing, foreign currency movements, environmental matters, and uninsured or underinsured losses.
Important facts for investors to verify
- Confirm merger approval, closing status, final exchange terms, and the resolution of merger-related litigation; the filing’s closing date was an expectation, not a completed transaction.
- Assess whether earnings are supported by recurring property operations: continuing operations recorded a loss, while property-sale gains drove much of reported net income.
- Review near-term maturities and refinancing or extension outcomes, especially the July 2011 credit facility and 2012 debt maturities.
- Reconcile dividend and distribution cash needs with operating cash flow and the company’s continued reliance on asset sales, financing, and co-investment capital.
- Track occupancy, renewal rent changes, tenant retention, development lease-up, remaining construction funding, and the deployment of newly formed venture commitments.
- Evaluate contingent obligations, joint-venture debt and guarantees, and the adequacy of earthquake, environmental, and other insurance coverage.