Prologis, Inc. and Prologis, L.P. — FY 2012 Form 10-K
Reporting period: Year ended December 31, 2012. This is an annual filing, not a standalone fourth-quarter report. Prologis, Inc. and the Operating Partnership are presented as one enterprise; their consolidated assets and liabilities are substantially the same.
Business context
Prologis owns, operates and develops industrial and logistics real estate across the Americas, Europe and Asia. At year-end, its owned and managed platform totaled 554 million square feet in 21 countries, serving approximately 4,500 customers. The business reports Real Estate Operations and Private Capital segments. Comparisons with 2011 are affected by the June 2011 AMB merger and PEPR acquisition; 2011 includes only about seven months of their results.
Financial and operating performance
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Total revenue | $2.006 billion | $1.451 billion |
| Operating income | $108.4 million | $104.0 million |
| Loss from continuing operations | $93.2 million | $267.2 million |
| Net loss attributable to common stockholders | $80.9 million; $0.18 per share | $188.1 million; $0.51 per share |
| Net cash from operating activities | $463.5 million | $207.1 million |
| Prologis-defined FFO (non-GAAP) | $552.4 million | $411.7 million |
| Core FFO (non-GAAP) | $813.9 million | $593.9 million |
- Revenue increased 38% year over year, largely reflecting the merger and PEPR acquisition, 2012 venture consolidations/acquisitions, and improved occupancy. Real Estate Operations segment NOI rose to $1.347 billion from $931.1 million; Private Capital NOI fell to $63.0 million from $82.7 million, partly because ventures were concluded.
- GAAP operating income was modestly higher, but the company remained loss-making after interest expense, depreciation, impairment charges and other items. Operating income was $108.4 million against $507.5 million of interest expense.
- Net loss improved year over year, but results included $283.5 million of real estate impairment charges, $16.1 million of impairment of goodwill and other assets, and $305.6 million of gains on real estate acquisitions and dispositions. The gains included $294.2 million from consolidating acquired venture interests.
- Cash from operations remained below cash distributions paid on common and preferred stock: $463.5 million versus approximately $567.8 million. The filing says property sale and contribution proceeds helped fund the shortfall.
- At December 31, total debt was $11.79 billion, up from $11.38 billion; weighted-average effective borrowing cost declined to 4.4% from 5.1%. Total assets were $27.31 billion and total liabilities $13.54 billion.
- Cash and cash equivalents were $100.8 million; restricted cash was $176.9 million. Credit facilities had $1.16 billion of remaining capacity. The company reported compliance with debt covenants.
- Consolidated operating properties were 93.7% occupied at year-end, versus 91.4% a year earlier. The broader owned and managed operating portfolio was 94.0% occupied. The development portfolio comprised 45 properties, 57.4% leased, with $759 million of remaining expected investment.
Material changes and unusual items
- 2012 included consolidation or acquisition of several co-investment ventures, increasing real estate investment by $2.2 billion and debt by $1.4 billion. These transactions generated $294.2 million of fair-value remeasurement gains.
- Prologis recognized $135.3 million of impairment on properties expected to be contributed to the planned European venture, PELP, and additional impairment on land and other properties. The impairment reflected expected proceeds below carrying value, including assets developed during the 2008–2009 peak.
- Property dispositions and contributions generated approximately $2.0 billion of proceeds in 2012. The company disposed of land and 200 operating buildings and contributed 25 buildings to unconsolidated ventures.
- Development activity expanded: 40 projects totaling 16.9 million square feet commenced, with $1.6 billion expected investment ($1.4 billion Prologis share); 20 projects were fully leased before construction began.
- Annualized cost synergies since the merger exceeded $115 million. Merger, acquisition and integration costs were $80.7 million in 2012, down from $140.5 million in 2011.
Outlook, management commentary and risks
- Management described industrial markets as recovering and forecast 150 million square feet of U.S. net absorption in 2013. It cited IMF global trade growth forecasts of 3.8% for 2013 and approximately 5% for 2014. These are market forecasts, not company earnings guidance.
- Management targeted a 95% leased operating portfolio, further development and lease-up, portfolio concentration in strategic global and regional markets, and lower leverage and foreign-currency exposure. It anticipated positive rent rollover in 2013, while fourth-quarter same-store effective rent on new leases was down 2.4% and tenant retention was 87.3%.
- For 2013, scheduled debt principal payments were approximately $1.5 billion. Management expected proceeds from the Japan and Europe venture transactions and other dispositions to support debt reduction and investment. No specific 2013 FFO or earnings guidance is provided in the supplied filing text.
- After year-end, Nippon Prologis REIT acquired 12 properties for ¥173 billion, producing ¥153 billion (about $1.7 billion) in net cash proceeds. Prologis expected to recognize an approximately $300 million gain in first-quarter 2013 and retain at least 15% ownership. PELP was expected to acquire 195 European properties for estimated proceeds of about €2.3 billion ($3.1 billion at year-end exchange rates), subject to closing.
- Key risks include economic and credit-market volatility, leasing and rent pressure, development and disposition execution, refinancing and covenant risk, foreign exchange exposure, reliance on external capital and distributions, geographic and industrial-sector concentration, co-investment venture obligations, environmental liabilities, and natural disasters. About 40.6% of assets were invested in non-U.S.-dollar currencies; earthquake insurance was not carried for wholly owned Japanese assets.
- Management and KPMG reported effective internal control over financial reporting; KPMG issued unqualified opinions on the financial statements and controls. Ordinary-course legal matters were not expected to have a material adverse effect; the filing reports that a Cisco arbitration ruling in August 2012 denied the relief sought.
Important facts for investors to verify
- Reconcile reported GAAP losses with FFO and Core FFO, including the substantial acquisition gains, impairments, integration costs and other excluded items.
- Verify completion, final proceeds, debt repayment and accounting treatment for the NPR and PELP transactions, including the expected 2013 gain and resulting ongoing ownership and fee income.
- Review debt maturities, refinancing plans, variable-rate exposure, covenant headroom and the company’s ability to reduce leverage while funding development commitments and distributions.
- Assess whether occupancy gains convert into positive same-store rent growth; monitor lease renewals, tenant retention and weaker markets or property categories.
- Evaluate cash distribution coverage: operating cash flow was below 2012 common and preferred dividends, with dispositions providing a significant funding source.
- Consider foreign-currency, geographic concentration, venture debt and capital commitments, impairment assumptions, and catastrophe-insurance limitations.