Prologis Q2 FFO Beats Estimates, Raises Outlook, Shares Up

Driven by higher rental income and strategic capital earnings, Prologis Inc. (PLD) reported better-than-expected results in the second quarter of 2014. The company reported core FFO (funds from operations) per share of 48 cents, which was 2 cents above the Zacks Consensus Estimate and 7 cents ahead of the year-ago quarter figure.

Moreover, this industrial real estate investment trust (:REIT) raised its 2014 outlook. Reflecting the positive sentiments, the shares were up 1.0% during yesterday’s regular trading session on the NYSE.

Total revenue came in at $460.1 million, up 12.0% from the prior-year quarter. The figure was also well above the Zacks Consensus Estimate of $409 million.

Quarter in Detail

During second-quarter 2014, Prologis leased 29.0 million square feet in its combined operating and development portfolios. Total occupancy in the operating portfolio was 94.6% at the quarter end, up 90 basis points (bps) year over year.

Tenant retention was 84.8% while rental rates (:GAAP) on leases signed climbed 6.6% from prior rents, as against an increase of 4.0% in the comparable prior-year period.

Therefore, as a result of increased occupancy levels and higher rental rates, same-store net operating income increased 3.8% year over year (GAAP basis) and 5.3% on an adjusted cash basis.

New investment was $850.4 million, of which $765.2 million comprised Prologis' share. The company purchased $137.0 million of buildings, mainly in Europe and the U.S., of which $80.7 million was Prologis' share. Moreover, the company accomplished $603.7 million of contributions, third-party building, land and other non-strategic real estate dispositions, of which $499.6 million was Prologis' share.

Prologis' global development pipeline had a total projected investment of $2.4 billion ($2.1 billion as Prologis' share) at the end of the second quarter. The company also made concerted efforts for streamlining its strategic capital business. It had $28.7 billion in combined assets under management in 11 major co-investment ventures at the quarter end, of which $9.4 billion consisted of Prologis' share.

Liquidity

Prologis exited second-quarter 2014 with cash and cash equivalents of $267.4 million, up from $188.9 million at first quarter-end. The company’s capital market moves helped it to improve its liquidity. Prologis also lowered its total debt to $8.5 billion at the end of the second quarter from $8.9 billion at the prior-quarter end. Its capital market activities totaled $3.6 billion during the quarter.

Raised Outlook

Encouragingly, Prologis raised the midpoint of its full-year 2014 core FFO guidance range to $1.82 to $1.86 per share from the earlier $1.76 to $1.82 per share. This uptick is backed by faster-than-expected rental growth and deployment, coupled with lower interest expenses from its refinancing moves. This range is also above the Zacks Consensus Estimate of $1.80 per share.

Our Take

Prologis has been capitalizing on global growth opportunities, with notable investments in the U.S., China, Europe, Japan and Mexico in the recent quarters. Amid a larger customer base, rise in e-Commerce application and supply chain consolidation, there is an increasing demand for high-quality logistics facilities in these markets.

But with new construction starts still slow at picking up pace, rents are increasing significantly in many of its markets. And with the capacity to offer modern distribution facilities in strategic infill locations around the globe, Prologis is well leveraging on this demand-supply imbalance.

Moreover, its strategic efforts have led to an encouraging improvement in liquidity. Also, an outlook raise as well as favorable credit conditions further boosts investor sentiments. But with intensifying competition and prevailing interest rate issues, we are not overtly optimistic on the stock. Prologis currently carries a Zacks Rank #3 (Hold).

We presently await the earnings of other REITs like SL Green Realty Corp. (SLG), Avalonbay Communities Inc. (AVB) and The Macerich Company (MAC) that are scheduled to release next.

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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