Prologis, Inc. and Prologis, L.P. — FY 2013 Form 10-K
Reporting period: Year ended December 31, 2013; this is an annual filing, not a standalone fourth-quarter report. Prologis, Inc. is the REIT and general partner of Prologis, L.P.; the filing presents them as one operating enterprise. Financial results below are consolidated unless noted.
Business context
Prologis owns, operates, develops and manages industrial real estate across the Americas, Europe and Asia. At year-end, its owned-and-managed platform totaled 569 million square feet in 21 countries, including 529 million square feet of operating properties and 30 million square feet under development. The operating portfolio was 95.1% occupied on an owned-and-managed basis. The company reports Real Estate Operations and Investment Management segments.
Financial and operating metrics
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Total revenue | $1.750 billion | $1.961 billion |
| Operating income | $304.4 million | $93.0 million |
| Net earnings attributable to common stockholders | $315.4 million; $0.65 basic EPS and $0.64 diluted EPS | Loss of $80.9 million; loss of $0.18 per share |
| Net operating income, Real Estate Operations | $1.092 billion; 69.5% operating margin | $1.316 billion; 71.8% margin |
| Net operating income, Investment Management | $90.2 million; 50.3% operating margin | $63.0 million; 49.7% margin |
| Prologis-defined FFO / Core FFO | $855.2 million / $813.2 million | $552.4 million / $813.9 million |
| Cash from operating activities | $485.0 million | $463.5 million |
| Total assets / debt | $24.572 billion / $9.011 billion | $27.310 billion / $11.791 billion |
| Cash and cash equivalents | $491.1 million | $100.8 million |
Year-end debt had a 4.2% weighted-average effective interest rate and 58-month weighted-average maturity, versus 4.4% and 43 months in 2012. Credit facilities had $1.652 billion of remaining capacity. Prologis reported compliance with debt covenants. The company paid $1.12 per common share in 2013, unchanged from 2012.
Material changes versus the prior year
- Revenue fell about 11%, primarily reflecting substantial property contributions to unconsolidated ventures, which reduced Real Estate Operations NOI by $299.4 million. Investment management income and earnings from unconsolidated entities increased alongside the expanded venture platform.
- Common-stockholder earnings improved from a loss to a profit. Results included $597.7 million of net gains on real estate acquisitions and dispositions and $277.0 million of losses on early debt extinguishment; these items materially affected GAAP earnings.
- Prologis-defined FFO increased from $552.4 million to $855.2 million, while Core FFO was essentially unchanged at $813.2 million versus $813.9 million. These are non-GAAP measures and should be considered alongside GAAP results.
- Debt declined $2.8 billion, primarily through property contributions and sales, an equity offering and debt refinancing. Cash from operations remained below cash dividends paid on common and preferred stock; the filing says property-sale proceeds helped fund the shortfall.
- Year-end owned-and-managed occupancy rose to 95.1% from 94.5% leased in 2012; consolidated year-end operating properties were 94.9% occupied versus 93.7% in 2012. Full-year average occupancy in Real Estate Operations was 93.6%, up from 92.6%.
Outlook, commentary and risks
- Management expected rental rates and occupancy to continue improving in 2014, and anticipated higher Investment Management NOI from NPR, PELP, venture growth and incentive returns. The filing does not provide a clear numerical company-wide earnings or FFO forecast.
- Management reported positive rent changes on rollover in each 2013 quarter, from 2% to 6%, following 17 quarters of declines; customer retention on expiring leases was 82.6%. It cited strong demand and constrained supply across several regions. Its stated global-trade growth estimates were 4.9% for 2014 and 5.4% for 2015.
- Development remained a significant capital commitment: the filing reported $802 million of unfunded commitments for the consolidated development portfolio. Prologis also had $2.463 billion of remaining equity commitments to unconsolidated ventures, including its share and partners’ commitments.
- Key risks include lease renewals, tenant defaults and rent pressure; development, acquisition and disposition execution; refinancing, interest-rate and covenant risks; foreign-currency exposure; dependence on capital markets and property-sale proceeds; co-investment venture and partner risks; and environmental, weather and geographic concentration exposures. California represented 29.1% of consolidated annualized base rent.
- Foreign-currency translation losses were $234.7 million in 2013. Prologis said it used local-currency debt and derivatives to reduce exposure; approximately 77% of net equity was denominated in U.S. dollars at year-end.
- After year-end, Prologis contributed 66 properties to USLV in January 2014 and extended a $536 million term loan to 2015. In February 2014 it issued €700 million of 3.375% notes due 2024. KPMG issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Reconcile GAAP earnings with the significant property gains, debt-extinguishment losses, taxes and discontinued-operations results; assess how repeatable the reported FFO and Core FFO are.
- Confirm the sources used to fund distributions, given that operating cash flow was below common and preferred dividends paid in 2013.
- Review debt maturities, variable-rate exposure, available facility capacity and the effect of the January 2014 term-loan extension and subsequent euro-note issuance.
- Assess the return, funding needs and non-recourse debt of unconsolidated ventures, including the $2.463 billion of remaining equity commitments and the timing of venture debt maturities.
- Track occupancy, lease rollover and renewal spreads, development lease-up and remaining costs, and the concentration of rent and assets in California and other key markets.
- Review foreign-currency sensitivity, hedging effectiveness, and the distinction between venture debt described as non-recourse and other disclosed guarantees or commitments.