Prologis, Inc. — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012; balance-sheet comparisons are with December 31, 2011. Amounts below are in U.S. dollars. Prologis, Inc. and Prologis, L.P. report as one consolidated enterprise. Interim statements were reviewed by KPMG, not audited.
Business context
Prologis owns, operates and develops industrial and logistics real estate across the Americas, Europe and Asia, and manages co-investment ventures. Its two segments are Real Estate Operations and Private Capital. At quarter-end, its owned-and-managed operating portfolio was 531.4 million square feet; occupancy was 93.1% and leased percentage was 93.6%. It served approximately 4,500 customers in 21 countries.
Financial results and liquidity
- Revenue: Q3 revenue was $512.1 million, up 9.2% from $469.1 million. Nine-month revenue was $1.511 billion, up 49.8% from $1.008 billion.
- Profitability: Q3 operating income was $79.0 million versus $79.3 million; the operating margin was approximately 15.4% versus 16.9%. Q3 net loss attributable to common stockholders was $46.5 million, or $0.10 per share, versus earnings of $55.4 million, or $0.12 per share. For nine months, common earnings were $147.8 million, or $0.32 per share, versus a loss of $142.7 million, or $0.42 per share. Nine-month continuing-operations earnings were $175.3 million versus a loss of $174.2 million.
- Funds from operations: Management-defined Core FFO was $232.0 million in Q3 versus $206.4 million, and $618.0 million for nine months versus $390.5 million. FFO is a non-GAAP measure; the filing cautions it should be considered alongside GAAP results.
- Property operations: Same-store Q3 rental income increased 2.29% and same-store NOI increased 2.71% year over year. Effective rents on Q3 leases in the same-store portfolio declined 1.8% from prior leases.
- Cash flow: Nine-month operating cash flow was $373.3 million versus $104.9 million. Investing activities used $47.9 million versus $798.5 million; financing activities used $345.9 million versus providing $874.0 million. Cash and cash equivalents were $158.2 million at quarter-end.
- Debt and liquidity: Debt was $12.58 billion, up from $11.38 billion at year-end; the weighted-average effective interest rate was 4.32%, down from 5.12%. Credit facilities had $902.4 million of availability. Total assets were $28.58 billion and total equity was $14.17 billion. The company reported compliance with all debt covenants.
- Distributions: The Q3 common dividend was $0.28 per share; year-to-date dividends were $0.84 per share.
Material changes and unusual items
- Year-over-year comparisons are substantially affected by the 2011 merger and PEPR acquisition, as well as 2012 transactions. Prologis acquired its partner’s interest in NAIF II and gained control of Prologis California in Q1 2012; PEPR’s liquidation was completed in Q3, with Prologis taking the remaining assets and liabilities.
- The transactions increased real estate investment and debt. Debt also reflects reclassification of PEPR obligations into Prologis senior notes and secured mortgage debt.
- Nine-month gains on real estate investment acquisitions and dispositions were $281.0 million, including a $273.0 million non-recurring gain from gaining control of Prologis California. Q3 discontinued operations recorded a $26.8 million loss, including $27.4 million of impairment charges.
- Nine-month merger, acquisition and integration expenses were $52.6 million, down from $121.7 million. Management said it expected similar costs through the remainder of 2012. Real estate impairment charges were $29.1 million for nine months, versus $103.8 million of impairment of other assets in 2011.
- Prologis disposed of 113 operating properties totaling 14.4 million square feet during the first nine months. It began 23 development projects totaling 9.6 million square feet, with expected investment of $825.6 million on an owned-and-managed basis.
Outlook, risks and contingencies
- Management’s priorities include strengthening the balance sheet, aligning the portfolio with targeted markets, growing private capital, and improving low-yielding assets. It targeted stabilization of the operating portfolio to 95% leased and expected to complete realization of more than $115 million in annualized merger synergies by year-end 2012; management said most had already been achieved.
- Management cited improving occupancy and customer retention, and expected rent changes on rollovers to turn positive in 2013. It also expected development activity to increase. These are forward-looking expectations, not guaranteed outcomes; the filing provides no specific quantified earnings guidance.
- Scheduled debt principal payments include approximately $1.6 billion in 2013 and $3.2 billion in 2014. Development projects in the consolidated pipeline required a further $509.3 million of expected spending at quarter-end.
- Unconsolidated co-investment ventures had $7.24 billion of third-party debt in aggregate, generally secured by venture assets and non-recourse to Prologis; Prologis reported guarantees of $28.4 million. The filing warns that ventures may be unable to refinance maturing debt on favorable terms or at all.
- Foreign exchange, interest rates, refinancing, property values and execution of development and leasing plans are key exposures. At September 30, no foreign-currency forward contracts were outstanding; on October 31, Prologis entered into €600 million of forwards to hedge part of its European investment. A 10% euro movement was estimated to change cash flows on those contracts by $78.1 million. The company also reported $3.9 billion of variable-rate debt, of which $1.6 billion was fixed through swaps.
- Management reported no material change in previously disclosed risk factors. It said ordinary-course legal matters were not expected to have a material adverse effect. In August 2012, an arbitrator denied Cisco Technology’s claims concerning the Pacific Commons project, leaving Prologis with no further obligation.
Important facts for investors to verify
- How much of revenue, occupancy and FFO growth reflects acquired assets versus same-property improvement, and how the merger affects period comparability.
- The quality and cash impact of reported earnings, particularly the $273.0 million Prologis California gain, impairments and discontinued operations; compare GAAP results with Core FFO and operating cash flow.
- Debt maturities, refinancing plans and available liquidity, including the 2013–2014 maturities and the debt added through acquisitions.
- Progress toward the 95% leased objective, positive rent changes on renewals, development leasing and remaining funding needs.
- Potential capital calls, venture refinancing needs, guarantees and foreign-currency exposure, including the subsequent October hedge.