Business context and reporting period
This is the unaudited Form 10-Q for the quarter and nine months ended September 30, 2010. The filing identifies the registrants as AMB Property Corporation and AMB Property, L.P.; it does not identify Prologis as the registrant. AMB was a global industrial-property owner, operator and developer, with approximately 158.4 million square feet of properties and development projects across 49 markets in 15 countries. Its owned-and-managed operating portfolio was 92.6% leased at quarter-end.
Financial results and position
- Revenue: Third-quarter revenue was $158.7 million, up 3.3% from $153.6 million; nine-month revenue was $469.0 million, up 1.9% from $460.3 million. Nine-month rental revenue rose 3.3% to $447.1 million, while private-capital revenue fell 20.1% to $21.9 million.
- Profit: Third-quarter net income was $13.6 million and net income available to common stockholders was $6.6 million, or $0.04 per share. Continuing operations produced a common-stockholder loss of $0.03 per share; discontinued operations contributed $0.07 per share. For the nine months, net income was $22.3 million and common-stockholder income was $5.1 million, or $0.03 per share, versus a $17.9 million net loss and $0.33 per-share loss in 2009.
- Adjusted FFO: FFO, as adjusted, was $55.0 million, or $0.32 per diluted share and unit, in the quarter, versus $106.5 million and $0.71 in 2009. Nine-month adjusted FFO was $154.2 million, or $0.94, versus $240.7 million and $1.80.
- Property operations: Third-quarter property NOI was $104.3 million, versus $100.5 million. Cash-basis same-store NOI, excluding lease-termination fees, declined 3.0% for the quarter and was $81.6 million versus $85.7 million. Management cited lower rents and increased free rent; quarter-end occupancy increased 80 basis points from the prior quarter.
- Cash flow: Nine-month operating cash flow was $210.8 million, compared with $208.2 million. Investing activities used $372.1 million, versus providing $107.1 million in 2009; financing provided $138.7 million, versus using $298.2 million. Ending cash and cash equivalents were $176.4 million.
- Debt and liquidity: Consolidated debt was $3.067 billion at September 30, down from $3.213 billion at year-end 2009. The company reported approximately $1.5 billion available under three credit facilities, with $249.1 million drawn in aggregate, and approximately $1.7 billion of management-defined liquidity including about $226 million of unrestricted cash. Senior unsecured notes totaled about $1.6 billion, with a 5.8% weighted-average rate and six-year average term. The operating partnership reported compliance with financial covenants.
- Other balance-sheet measures: Total assets were $7.124 billion and total equity was $3.699 billion. Management’s share-of-debt ratios were 43.3% of share of market capitalization and 41.0% of share of assets; these are supplemental, non-GAAP measures.
Material changes versus the prior comparable period
- Revenue increased modestly, but same-store rental revenue declined 2.5% for the first nine months, reflecting lower occupancy and rental rates and increased free rent. Growth in development and other industrial rent partially offset that decline.
- Nine-month costs and expenses fell 26.9%, primarily because 2009 included $172.1 million of real-estate impairment losses; no such losses were recorded in the first nine months of 2010. Depreciation, general and administrative costs, and restructuring charges increased.
- Nine-month discontinued operations fell to $18.5 million from $92.2 million, principally because 2009 included $53.0 million of gains on value-added conversion sales and greater property-sale gains.
- Debt declined overall, while the mix shifted toward senior unsecured debt: unsecured senior debt increased from $1.156 billion at year-end 2009 to $1.571 billion on the balance sheet at quarter-end. The company issued approximately $479 million net from common-stock issuance and $300 million of 4.50% senior notes due 2017 during the nine-month period.
Outlook, commentary, risks and unusual items
- Management described improving global production, trade and customer inventory rebuilding, and expected operating fundamentals to improve in 2011, with increasing net absorption and declining availability. It expected negative rent changes on renewals and rollovers through 2011, although it believed rents had bottomed in most markets. No quantified earnings guidance was provided.
- Management cited a 14.0% U.S. industrial availability rate and positive market-wide net absorption in the third quarter. It reported quarter-end portfolio occupancy of 92.6%, average occupancy of 91.7%, and an 11.8% trailing-four-quarter decline in rent on renewals and rollovers.
- The company began approximately 920,500 square feet of development in Brazil and China during the quarter, with estimated investment of about $70 million. Six construction-in-progress projects totaled about 1.6 million square feet; management estimated $29.5 million remained to complete the company’s development portfolio under one disclosed scope, while a separate owned-and-managed discussion estimated $79.5 million remaining. Investors should reconcile these differently scoped figures against the full filing.
- AMB Mexico Fondo Logistico raised approximately $242.7 million from third parties; AMB expected to contribute 20% of total equity, or about $60.7 million at full deployment. No property investment by the venture was recorded at quarter-end. In October, the company contributed $50 million each to its U.S. and Europe logistics funds.
- Unusual items included $4.9 million of nine-month restructuring charges, $2.5 million of losses on early debt extinguishment, and $27.6 million of positive currency translation adjustment in other comprehensive income. The company authorized a two-year, $200 million share-repurchase program but had made no purchases by quarter-end.
- Near-term refinancing is relevant: the revolving facilities mature in June and July 2011, and the debt schedule shows substantial 2011 maturities. Management described financing and refinancing access as important to liquidity and distributions. Other risks include weaker leasing or rents, real-estate value declines, interest and foreign-exchange movements, development costs and delays, and co-investment exposures.
- Potential guarantees and contribution obligations, excluding specified parent guarantees, totaled $394.0 million. This included $260.6 million of potential co-investment contribution obligations and guarantees on certain joint-venture loans. These are contingent exposures, not stated expected losses. Management did not expect litigation to have a material adverse effect and reported no material pending legal proceedings.
Important facts for investors to verify
- Confirm the issuer and security being analyzed: this filing is for AMB Property Corporation and AMB Property, L.P., notwithstanding the request metadata naming Prologis.
- Review the 2011 credit-facility maturities, refinancing progress and the distinction between consolidated debt, management’s share of debt, and reported liquidity.
- Track occupancy, same-store cash NOI, lease-renewal rent changes and free-rent concessions against management’s recovery expectations.
- Reconcile development completion funding estimates across the filing and assess the timing, leasing and capital requirements of the development pipeline.
- Assess how much reported earnings and adjusted FFO depend on discontinued operations, asset sales, joint-venture activity and non-GAAP adjustments; compare these with GAAP cash flows.
- Monitor co-investment commitments, contingent guarantees, foreign-currency exposure and the company’s ability to fund dividends and distributions while maintaining covenant compliance.