Prologis Meets Earnings, Guides Same

Zacks

Prologis Inc.’s (PLD) first quarter 2013 core FFO (funds from operations) per share of 40 cents was in line with the Zacks Consensus Estimate as well as the prior-year quarter figure.

Results reflected decent revenues in the reported quarter, and completion of the Japan-REIT IPO as well as the European joint venture. Moreover, its strategic measures have helped it to lower its overall debt level.

Quarter in Detail

Total revenue during the reported quarter was $490.6 million, up 2.3% from the prior-year quarter and well ahead of the Zacks Consensus Estimate of $471 million.

Prologis leased a record of 35.8 million square feet of space across the globe. Total occupancy in the operating portfolio was 93.7% at quarter-end, down 30 bps (basis points) sequentially. Tenant retention was 78.0% while GAAP rental rates on leases signed climbed 2.0% from in-place rents.

Same-store net operating income (:NOI) moved up 0.3%, and 1.8% on an adjusted cash basis. Notably, the company experienced a positive rent change on rollover for the first time in 17 quarters.

Notable Activities During 1Q

Development starts amounted to $313 million. Of this, Prologis' share was $218 million and projected share of value creation upon stabilization was $39 million. Total acquisitions of $123 million included $109 in land and land infrastructure, as well as $14 million in buildings. Of these Prologis' share was $96 million.

Prologis' global development pipeline comprised 23.7 million square feet at quarter end, with total expected investment of $2.0 billion. Of this, Prologis' share was $1.8 billion. Moreover, the company accomplished $5.3 billion in contributions and dispositions in the reported quarter, of which $3.3 billion was Prologis' share.

Prologis completed around $3.0 billion of capital market activity which included debt financings, re-financings as well as pay-downs. Subsequent to quarter-end, the company redeemed $482 million of its outstanding preferred stock.

Liquidity

At quarter-end, Prologis had cash and cash equivalents of $785.4 million, up from $100.8 million as of the prior quarter end. Moreover, total debt stood at $9.1 billion, down from $11.8 billion from the prior-quarter end.

Notably, the company’s capital market activity along with substantial disposition and contribution moves helped it to lower its share of total debt by $2.4 billion. Moreover, the company also experienced an improvement to its debt as a percent of gross real estate assets to 37.5% and debt to adjusted EBITDA to 7.52 times.

Outlook

For full year 2013, Prologis has reiterated its core FFO guidance at $1.60 to $1.70 per share.

Our Take

Prologis is trying to capitalize on global prospects. With growth in e-Commerce, there is an increasing demand for Class-A facilities and the company stands to benefit as it has the capacity to offer modern distribution facilities in strategic infill locations. Moreover, leasing decisions that were earlier postponed due to volatility in the markets are gradually coming off the shelf.

Its build-to-suit deal in the first quarter with end-to-end e-Commerce service provider - SpeedFC, a subsidiary of Navarre Corp. (NAVR) and the transaction with Chinese logistics provider, Deppon are expected to contribute meaningfully to the company’s top line.

Recently, Prologis penned a new build-to-suit deal with Subaru of America for a distribution center spanning 715,000 square feet in the Northwest Indianapolis submarket at Prologis Park Lebanon. Notably, with rising occupancies over the last two years, the Indianapolis market offers strong growth potential.

Also, the joint venture with Norges Bank Investment Management is a strategic fit as it will enable the company to substantially penetrate the industrial real estate market of Europe. Such moves are expected to augment the company’s top line, going forward.

Yet, continued troubles in the residential sector have weighed on the company’s commercial property operations. Its increasing international presence might have a negative impact in times of economic fluctuations, impairing top-line growth. Prologis currently holds a Zacks Rank #3 (Hold).

We look forward to the results of other REITs that are scheduled to release their first quarter 2013 results tomorrow (Apr 25), after the market closes. These include CBRE Group Inc. (CBG) and Taubman Centers Inc. (TCO).

Note: FFO, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.
 

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