Prologis, Inc. and Prologis, L.P. — Q1 2014 10-Q
Reporting period: Three months ended March 31, 2014; balance-sheet figures are as of March 31, 2014. Prologis owns, operates and develops industrial real estate and manages co-investment ventures across the Americas, Europe and Asia. At quarter-end, it owned and managed 574 million square feet in 21 countries. The combined filing reports the REIT and its controlled operating partnership as one enterprise.
Key financial results
| Metric | Q1 2014 | Q1 2013 or prior date |
|---|---|---|
| Total revenue | $434.7 million | $480.0 million |
| Operating income | $71.5 million | $97.0 million |
| Net earnings attributable to common stockholders | $4.7 million; $0.01 per diluted share | $265.4 million; $0.57 per diluted share |
| Prologis-defined FFO | $215.9 million | $357.8 million |
| Core FFO | $217.6 million | $187.9 million |
| Net cash from operating activities | $72.2 million | $129.1 million |
| Cash and cash equivalents | $188.9 million | $491.1 million at Dec. 31, 2013 |
| Total debt | $8.87 billion; 4.4% weighted-average rate | $9.01 billion; 4.2% at Dec. 31, 2013 |
| Credit facility availability | $2.27 billion | Not stated for comparison |
| Common dividend | $0.33 per share | $0.28 per share |
All dollar amounts above are U.S. dollars. Operating margin for Real Estate Operations was 70.3%, versus 69.8% a year earlier; Investment Management operating margin was 46.7%, versus 40.8%. Same-store NOI increased 3.0% year over year. Real Estate Operations segment NOI fell to $273.8 million from $311.6 million, while Investment Management segment NOI rose to $21.1 million from $13.7 million.
Material changes and operating activity
- Revenue declined 9.4%, primarily reflecting a smaller owned-property base after major property contributions to co-investment ventures in 2013. Management attributed an $80.2 million year-over-year reduction in Real Estate Operations NOI to those contributions.
- 2013 GAAP earnings included substantial property contribution and disposition gains: $338.8 million in continuing operations, plus $7.6 million from discontinued operations. Q1 2014 recorded $17.1 million of net real-estate gains and no discontinued operations. The large year-over-year decline in GAAP earnings therefore is not a like-for-like measure of underlying operating performance.
- Portfolio leasing indicators improved year over year: owned-and-managed operating occupancy was 94.5% and leased occupancy 94.8%, compared with 93.7% and 94.2% at March 31, 2013. Rental rates on leases signed during the quarter increased 7.0% over in-place rents; customer retention on expiring leases was 84.6%.
- Prologis formed and consolidated Prologis U.S. Logistics Venture, in which it owns 55%. The venture acquired 66 properties totaling 12.8 million square feet from Prologis for a stated purchase price of $1.0 billion. Noncontrolling interests increased by about $455.6 million in the quarter.
- Prologis issued €700 million of 3.375% senior notes due 2024. Debt declined overall, while weighted-average maturity increased to 66 months from 58 months at year-end; the weighted-average interest rate rose from 4.2% to 4.4%.
- Operating cash flow did not cover common and preferred dividends: the shortfall was $96.0 million, compared with $11.4 million in Q1 2013. Management said dispositions and property contributions helped fund distributions.
Outlook, risks and contingencies
- Management described logistics market conditions as improving and cited positive rent growth across all geographies, stronger demand and development opportunities. It reported 7% rental-rate growth on Q1 lease rollovers and expected further occupancy and rent gains; these are management views, not quantified company earnings guidance.
- Prologis started 13 development projects totaling 2.4 million square feet, with expected investment of $172.2 million and an estimated stabilized yield of 7.7%. Its development portfolio included 57 properties, 45.6% leased, with $744.0 million remaining to spend to complete and lease. Estimates depend on construction, leasing and market conditions.
- Remaining equity commitments were $617.4 million for Prologis and $1.994 billion for venture partners, or $2.612 billion combined. Prologis may fund its commitments in cash or property, subject to venture terms and market conditions.
- Management identified scheduled debt principal payments of $295 million for the remainder of 2014. In April, after quarter-end, Prologis acquired a partner’s 5.6% interest in a venture for $83.5 million and repurchased $185.0 million of senior notes. These subsequent transactions are not reflected in March 31 balances.
- Co-investment ventures had $7.4 billion of third-party debt in aggregate; Prologis stated it did not guarantee this debt. Refinancing may be difficult or less favorable, and ventures could need capital contributions or asset sales if they cannot refinance.
- Currency and derivative movements were notable: Q1 included $28.2 million of foreign-currency and derivative losses in earnings. Prologis estimated that a 10% U.S. dollar move against the euro and yen would change cash flows on its currency forwards by $162 million, positively or negatively. It reported compliance with debt covenants.
- The company adopted new discontinued-operations accounting prospectively in 2014, so most property disposals are expected to remain in continuing operations. KPMG performed interim reviews, not audits, and reported no material modifications needed to the interim statements.
Important facts for investors to verify
- How much of the decline in reported revenue and GAAP earnings reflects portfolio contributions and prior-year gains, versus changes in underlying property performance; compare same-store NOI and Core FFO alongside GAAP results.
- Whether operating cash flow can better cover dividends and planned development, investment and debt-service needs, given the Q1 distribution shortfall and lower cash balance.
- The timing and funding of the $744.0 million remaining development spend and Prologis’s $617.4 million share of venture equity commitments.
- Debt maturities, refinancing exposure, borrowing costs and the ability of co-investment ventures to refinance their non-recourse debt.
- How occupancy, rent growth, leasing costs and development yields evolve against management’s market expectations; Prologis’s stated operating outlook is not formal quantified earnings guidance.
- The effect of currency movements, derivative valuations and future dispositions on reported earnings, cash flows and equity.