Prologis, Inc. — Q2 2013 Form 10-Q
Business context and reporting period. This combined filing covers Prologis, Inc. and its operating partnership for the quarter and six months ended June 30, 2013, with comparisons to 2012. Prologis is a global industrial-property owner, operator and developer, with Real Estate Operations and Strategic Capital Management segments. At quarter-end, its owned and managed platform totaled 563 million square feet across 21 countries. Interim financial statements are unaudited; the independent accountants performed a review, not an audit.
Financial and operating highlights
- Revenue: Q2 revenue was $419.5 million, down from $501.2 million; first-half revenue was $908.7 million, down from $979.0 million. Lower rental income and recoveries primarily reflect properties contributed to new ventures in Japan and Europe. First-half investment-management income increased to $77.2 million from $63.4 million.
- Profit and per-share results: Q2 operating income was $61.2 million versus $101.6 million, and net loss attributable to common stockholders was $1.5 million versus a loss of $8.1 million; EPS was $0.00 versus $(0.02). For the first half, common-stockholder earnings were $263.9 million, or $0.56 per share, compared with $194.3 million, or $0.42. First-half results included $399.9 million of net gains on real-estate acquisitions and dispositions, versus $268.3 million in 2012.
- FFO: Company-defined FFO for the first half was $560.0 million versus $434.7 million; Core FFO was $391.3 million versus $386.1 million. Q2 FFO was $202.2 million versus $172.7 million and Core FFO was $203.3 million versus $201.3 million. These are non-GAAP measures; the filing cautions they should be considered alongside GAAP results.
- Operating performance and margins: Q2 same-store rental income rose 1.43% and same-store NOI rose 0.67% year over year; same-store rental expenses increased 3.52%. First-half Real Estate Operations NOI was $574.4 million, down from $660.0 million, largely because properties were contributed to ventures. Strategic Capital Management NOI was $32.3 million versus $31.4 million. Owned-and-managed operating portfolio occupancy was 93.7% at June 30, compared with 94.0% at year-end 2012 and 92.4% a year earlier.
- Cash flow: First-half operating cash flow was $203.6 million, up from $160.1 million. Cash from operations was $84.6 million less than common and preferred dividends paid; property disposition and contribution proceeds helped fund the shortfall. Investing activities provided $2.4 billion, principally reflecting $3.6 billion of property disposition and contribution proceeds. Financing activities used $2.3 billion.
- Debt and liquidity: Debt was $8.4 billion at June 30, down from $11.8 billion at December 31, 2012; weighted-average effective interest rate was 4.7%. Cash and cash equivalents were $385.4 million. Credit facilities had $1.3 billion available at quarter-end. Prologis reported compliance with debt covenants. A new $2.0 billion global revolving facility was entered into after quarter-end, with potential capacity to increase to $3.0 billion subject to lender commitments.
- Capital and distributions: In April, Prologis issued 35.65 million common shares at $41.60, receiving approximately $1.4 billion net proceeds, and redeemed $482.5 million of preferred stock. The common dividend remained $0.28 per share per quarter.
Material changes and unusual items
- Prologis contributed 12 Japanese properties to Nippon Prologis REIT and 195 European properties to Prologis European Logistics Partners, reducing directly consolidated rental assets while expanding equity-method investments and management-fee activity. These transactions contributed to the substantial reduction in reported real-estate assets and debt.
- First-half real-estate gains included a $337.9 million gain associated with the Nippon Prologis REIT transaction and a $56.9 million gain related to the Japan Fund I wind-down and a building contribution. These gains materially affect comparisons of GAAP earnings.
- First-half losses on early debt extinguishment were $50.0 million, including $32.6 million in Q2, primarily related to debt prepayments. First-half current income-tax expense rose to $80.3 million from $29.1 million, primarily due to taxable gains and taxes in Japan.
- Foreign-currency translation losses in other comprehensive income were $338.3 million for the first half, including approximately $190 million associated with reversal of translation gains on contributed properties. These losses affected comprehensive income, not the reported common-stockholder earnings figure in the same manner.
- Development activity included 25 projects started in the first half, totaling 9.2 million square feet and expected investment of $698.5 million. At June 30, the development portfolio was 27 million square feet and 51.5% leased.
Outlook, risks and contingencies
- Management described improving industrial-market conditions and expected positive rent change on lease rollovers for full-year 2013. Effective rental rates on leases signed in Q2 increased 4.0% over in-place rents; customer retention for first-half expirations was 81.3%.
- Management raised its internal 2013 U.S. net-absorption forecast to 180 million square feet from 150 million. It cited demand and rent improvement across many markets, while noting Europe remained in recession. The filing does not provide a clear numerical company-wide earnings or FFO guidance target.
- Management expected to fund obligations and investment needs through operating cash, asset sales and contributions, venture distributions, equity and debt issuance, and available credit. Remaining development costs were estimated at $602.3 million for the identified consolidated development portfolio.
- Prologis had $869.3 million of remaining equity commitments across consolidated and unconsolidated ventures at June 30. Separately, its unconsolidated co-investment ventures had $8.0 billion of third-party debt; Prologis did not guarantee that debt but cautioned that refinancing may not be available on favorable terms or at all.
- Foreign-exchange movements, interest-rate changes, derivative-counterparty performance, debt refinancing and property-market conditions are key risks. A 10% adverse interest-rate sensitivity was estimated to affect results by $1.3 million; a 10% U.S.-dollar move against the euro and yen could change cash flows on specified hedges by $105.0 million.
- Management said ordinary-course legal matters were not expected to have a material adverse effect; no material risk-factor changes were reported. Disclosure controls were deemed effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- How much of reported earnings and FFO reflects recurring operations versus property-contribution gains, debt-extinguishment losses, taxes and other adjustments.
- Whether rent growth and occupancy trends continue to offset the reduction in directly owned properties after venture contributions.
- The cash demands, timing and potential ownership effects of remaining venture commitments, development spending and upcoming debt maturities.
- Whether the new revolving facility’s terms, availability and covenant headroom remain supportive of liquidity needs.
- The assumptions and exclusions in company-defined FFO and Core FFO, and how those non-GAAP measures reconcile to GAAP earnings and cash flow.