Prologis, Inc. quarterly report, Q3 FY2013

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Prologis, Inc. — Q3 2013 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2013. The filing combines Prologis, Inc. and Prologis, L.P.; financial figures below are consolidated and in U.S. dollars. Balance-sheet figures compare September 30, 2013 with December 31, 2012.

Business context

Prologis owns, operates and develops industrial real estate and manages co-investment ventures across the Americas, Europe and Asia. At quarter-end, its owned and managed platform totaled 562 million square feet in 21 countries, including 523 million square feet of operating properties at 93.9% occupancy and 28 million square feet in development, 50.3% leased. The business reports Real Estate Operations and Investment Management segments.

Financial performance and position

  • Revenue: Q3 revenue was $430.2 million, down from $499.5 million in Q3 2012. Nine-month revenue was $1.334 billion versus $1.474 billion. Lower rental income primarily reflected properties contributed to new ventures; investment management income increased.
  • Profit: Q3 operating income was $79.0 million versus $75.3 million, but the company recorded a $7.2 million consolidated net loss and a $7.5 million loss attributable to common stockholders, compared with losses of $32.9 million and $46.5 million, respectively, a year earlier. Nine-month net earnings attributable to common stockholders were $256.4 million versus $147.8 million. Nine-month continuing-operations earnings were $223.4 million versus $165.9 million.
  • Non-GAAP measures: Nine-month FFO, as defined by Prologis, was $642.6 million versus $640.6 million; Core FFO was $598.2 million versus $618.0 million. Q3 Core FFO was $206.9 million versus $232.0 million. The company cautions that these measures are supplemental and not substitutes for GAAP results or operating cash flow.
  • Margins and property trends: Nine-month Real Estate Operations NOI margin was 69.3%, down from 72.0%, as contributions reduced the consolidated property base. For the Q3 same-store portfolio, rental income increased 1.89% and NOI increased 1.43% year over year. Effective rents on leases signed in Q3 rose 6.1% over prior rents; retention of expiring customers was 81.1% for the first nine months.
  • Cash flow: Nine-month operating cash flow was $332.2 million, down from $373.3 million. Investing activities provided $1.667 billion, chiefly reflecting $3.914 billion of property disposition and contribution proceeds; financing activities used $1.929 billion. Operating cash flow fell short of common and preferred distributions by $98.8 million, with property-sale and contribution proceeds used to fund the shortfall.
  • Debt and liquidity: Debt declined to $9.119 billion from $11.791 billion; the weighted-average effective rate was 4.3% and average maturity 4.5 years. Cash and cash equivalents were $121.7 million, with $1.439 billion available under credit facilities. The company reported compliance with debt covenants. Scheduled debt maturities were approximately $1.6 billion in 2014.
  • Capital and distributions: An April common-stock offering generated approximately $1.4 billion in net proceeds. Prologis redeemed $482.5 million of preferred stock and had $100 million of Series Q preferred stock remaining. Common dividends were $0.28 per share for Q3 and $0.84 per share for the first nine months, unchanged from comparable 2012 periods.

Material changes and unusual items

  • Prologis contributed properties to two new ventures: Nippon Prologis REIT in Japan and Prologis European Logistics Partners in Europe. These transactions generated substantial proceeds and reduced reported consolidated rental revenue and debt while expanding investment-management and equity-method activity.
  • Nine-month gains on acquisitions and dispositions of real estate were $446.0 million, including gains associated with the Japan and Europe venture transactions and the NAIF III transaction. These gains materially supported reported earnings.
  • Q3 included a $114.2 million loss on early extinguishment of debt; the nine-month loss was $164.2 million. The company issued $1.25 billion of senior notes in August and used proceeds partly to retire debt and repay credit-facility borrowings.
  • Nine-month foreign-currency translation losses were $250.3 million, including reversal of translation gains on contributed properties and the effect of weaker yen and euro. Current income-tax expense rose to $91.4 million from $11.0 million, mainly due to sales and contributions of certain properties.
  • After quarter-end, Prologis purchased $261.7 million of 2017 notes at a premium and issued $500 million of senior notes on November 1, 2013, at 3.35%, due 2021. It also reported acquiring its partner’s interest in SGP Mexico on October 2.

Outlook, commentary and risks

Management described logistics-property fundamentals as improving across its markets, citing rent growth, demand and constrained Class-A supply. It raised its internal 2013 U.S. net-absorption forecast to 200 million square feet from 180 million. Management expects to pursue rent growth, development using its land bank, and growth through acquisitions and co-investment ventures. No company-wide numerical earnings or FFO guidance is provided in the supplied filing text.

Key exposures include foreign-currency movements, interest-rate changes, refinancing requirements, development and leasing execution, and availability of capital for co-investment ventures. Unconsolidated co-investment ventures had $7.4 billion of third-party debt; Prologis said it did not guarantee that debt at September 30, but noted refinancing may require asset sales or partner capital contributions. The company had $421 million of remaining equity commitments. Management stated that ordinary-course legal proceedings were not expected to have a material adverse effect and that no material risk-factor changes had occurred. Disclosure controls were judged effective; the interim financial statements were reviewed by KPMG, not audited.

Most important facts for investors to verify

  1. How much recurring operating performance is represented by rental and investment-management income versus transaction gains, debt-extinguishment losses, taxes and currency effects?
  2. Whether rent growth and occupancy can offset the reduced consolidated property base following venture contributions; also monitor same-store NOI, leasing spreads and tenant retention.
  3. How the 2014 maturities, subsequent debt tenders and refinancing activity affect interest expense, leverage and available liquidity.
  4. The funding, timing and expected returns on Prologis’s $421 million of equity commitments and development spending, as well as refinancing needs at unconsolidated ventures.
  5. Whether operating cash flow can better cover dividends and investment needs without reliance on property-sale or contribution proceeds; assess FFO and Core FFO alongside GAAP earnings and cash flow.