Prologis, Inc. and Prologis, L.P. — Q1 2013 10-Q
Business context and period. The combined filing covers the unaudited three months ended March 31, 2013, with comparisons to Q1 2012. Prologis owns, operates and develops industrial real estate across the Americas, Europe and Asia; its segments are Real Estate Operations and Private Capital. At quarter-end, its owned-and-managed platform totaled 559 million square feet across 21 countries, including 525 million square feet of operating properties, 24 million square feet in development and 10 million square feet of other properties. The largest customer represented 2.0% of annualized base rent; the 25 largest represented 17.7%.
Financial results and liquidity
Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
| Metric | Q1 2013 | Q1 2012 / prior date |
|---|---|---|
| Total revenue | $490.6 | $479.4 |
| Operating income | $99.0 | $85.1 |
| Net earnings attributable to common stockholders | $265.4; $0.58 basic and $0.57 diluted per share | $202.4; $0.44 basic and diluted per share |
| Net operating income (NOI), Real Estate Operations | $318.7 | $324.0 |
| Net operating income, Private Capital | $13.7 | $15.5 |
| Core FFO, a company-defined non-GAAP measure | $187.9 | $184.8 |
| Cash from operating activities | $129.1 | $71.4 |
| Cash and cash equivalents | $785.4 | $100.8 at December 31, 2012 |
| Total debt | $9.07 billion; 4.9% weighted-average effective rate | $11.79 billion; 4.4% at December 31, 2012 |
| Credit-facility availability | $1.55 billion | Not stated for comparable date |
| Common dividend per share | $0.28 | $0.28 |
Cash flows and balance sheet. Investing activities provided $2.81 billion, principally reflecting $3.25 billion of proceeds from property contributions and dispositions. Financing activities used $2.26 billion, including $1.54 billion of debt repurchases and $496.0 million of net credit-facility payments. Operating cash flow remained below common and preferred distributions by $11.4 million for the quarter. Total assets were $24.08 billion at March 31, down from $27.31 billion at year-end; debt fell by $2.72 billion. The company reported compliance with debt covenants.
Material changes and notable items
- Revenue increased 2.3%, while Real Estate Operations NOI declined to $318.7 million and Private Capital NOI declined to $13.7 million. Same-store rental income rose 2.68%, but same-store expenses increased 9.13%, leaving same-store NOI up only 0.33%.
- Common-stockholder earnings rose, but results included $338.8 million of gains on real estate investment acquisitions and dispositions, including a $337.9 million gain related to the NPR transaction. Q1 2012 included a $273.0 million gain related to gaining control of Prologis California. Core FFO, which adjusts for specified items, increased to $187.9 million from $184.8 million.
- Prologis launched Nippon Prologis REIT (NPR), retaining a 15% interest, and formed Prologis European Logistics Partners (PELP), a 50/50 venture. The ventures acquired contributed portfolios, generating substantial cash proceeds and reducing consolidated debt; Prologis continues to hold equity-method investments in both.
- Comprehensive income was $23.3 million versus $175.3 million in Q1 2012, primarily reflecting foreign-currency translation losses of $286.3 million. The company attributed approximately $190 million of the 2013 translation loss to reversal of translation gains associated with assets contributed to NPR and PELP.
- Prologis recognized a $17.4 million loss on early extinguishment of debt and a $9.1 million loss related to preferred-stock redemption. It completed the redemption of $482.5 million of preferred stock in April 2013.
- After quarter-end, Prologis completed a 35.65 million-share offering at $41.60 per share, receiving $1.4 billion net. It intended to use part of the proceeds to repay about $470.9 million of credit-facility borrowings and repurchase about $202.3 million of senior notes due June 2013 and $341.0 million of exchangeable notes.
Outlook, risks and contingencies
- Management described industrial-market conditions as improving and reported positive rent change on rollovers for the first time in 17 quarters: effective rents on leases signed in Q1 rose 2.0% versus prior rents. Management expected positive rollover for full-year 2013, targeted a 95% leased operating portfolio, and expected development activity to increase where demand and capital availability support it. The filing does not provide a numerical company-wide earnings or FFO forecast.
- At March 31, the owned-and-managed operating portfolio was 93.7% occupied and 94.2% leased; tenant retention for Q1 was 78.0%. The development portfolio was 51.7% leased in the portfolio overview. The filing also reports 42 development properties at 60.9% leased in its liquidity discussion, using a different development-portfolio presentation.
- Management cited currency and interest-rate exposure, refinancing needs, and the risk that co-investment ventures may not refinance maturing debt on favorable terms or at all. A 10% adverse interest-rate sensitivity was estimated at $1.9 million for Q1 borrowings; a 10% move in the U.S. dollar against the euro was estimated to change cash flows by $64.1 million on remaining forward contracts.
- Prologis had $800 million of consolidated debt maturities for the remainder of 2013. It reported $442.1 million of remaining company equity commitments across unconsolidated and consolidated ventures, and had guaranteed $23.4 million of third-party venture debt. Certain property-contribution commitments are conditional on property and venture criteria.
- Management stated that ordinary-course legal proceedings were not expected to have a material adverse effect and that there were no material changes to the risk factors disclosed in the 2012 Form 10-K. The interim financial statements were reviewed by KPMG, not audited.
Important facts for investors to verify
- How much of reported earnings growth reflects recurring operations versus property contribution/disposition gains, and how Core FFO reconciles to GAAP earnings.
- Whether same-store expense growth, occupancy, rent changes and tenant retention continue to support operating performance after the large portfolio contributions.
- Use of the $1.4 billion post-quarter equity proceeds, debt repayments and the resulting share dilution and leverage.
- Near-term debt maturities, the cost and availability of refinancing, credit-facility capacity, and the company’s and ventures’ ability to meet equity commitments.
- Currency-translation effects and hedge exposures, including how much of the quarter’s comprehensive-income decline was attributable to contributed assets and exchange-rate movements.
- Clarification of the differing development-portfolio leasing figures reported in the filing and the distinction between owned, consolidated and owned-and-managed portfolio statistics.