Back to top

Analyst Blog

Industrial real estate investment trust (REIT) Prologis Inc.’s (PLD - Analyst Report) core FFO (funds from operations) per share of 41 cents in the third quarter 2013 was line with the Zacks Consensus Estimate. However, it fell short of the prior-year quarter figure by 8 cents.

While the company experienced a notable decline in expenses (17.2%), the benefit was partly shadowed by a fall in revenues. Yet, the company’s strategic measures and capital market moves helped enhance flexibility and extend maturities. Notably, the company’s rents on rollover increased 6.1% in the quarter.

Quarter in Detail

Total revenue during the reported quarter was $430.2 million, down 13.9% from the prior-year quarter. Results reflect a decline in rental income (18.7%) though investment management fees and development management income moved north. However, the revenue figure was well above the Zacks Consensus Estimate of $400 million.

Prologis leased 36.1 million square feet of space in its combined operating and development portfolios (including 5.3 million square feet in development leasing).

Total occupancy in the operating portfolio was 93.9% at quarter end, up 20 basis points (bps) sequentially. Tenant retention was 80.8% in the third quarter, down from 84.6% reported in the prior quarter.

GAAP rental rates on leases signed climbed 6.1% from prior rents, depicting a rise of 210 bps (cash rental rates moved up 0.4%, reflecting a 380 bps uptick) sequentially.

Same-store net operating income (NOI) on a GAAP basis climbed 1.4% (up 1.8 % on an adjusted cash basis) from the year-ago quarter.

Notable Activities During 3Q

Development starts amounted to $493.7 million. Of this, two-thirds were build-to-suits and Prologis' share of starts was $462.6 million. Total acquisitions of buildings and land worth $612.8 million were made. Of these, Prologis' share was $270.1 million.

Moreover, investments worth $756.3 million in its co-investment ventures were made during the reported quarter. Overall, new investments aggregated $1.9 billion, of which $1.5 billion was Prologis' share.

Prologis' global development pipeline comprised 28.3 million square feet at quarter end, with total expected investment of $2.3 billion. Of this, Prologis' share was $2.0 billion. The company accomplished $791.8 million in contributions and dispositions in the reported quarter, of which $361.1 million was Prologis' share, with a stabilized cap rate of 7.1%.

Notably, Prologis raised $671.6 million of third-party equity for its open ended funds. At the end of the quarter, Prologis had $23.4 billion in combined assets under management in 14 funds.

Liquidity

At quarter-end, Prologis had cash and cash equivalents of $121.7 million, well below $385.4 million as of the prior-quarter end. Moreover, total debt slightly increased to $9.1 billion from $8.4 billion recorded at the prior-quarter end.

It has been quite an active quarter for Prologis in terms of capital market activity. The company closed approximately $6.3 billion of debt financings, refinancings, and principal paydowns. This included the upsizing of its global line of credit, Japan revolver and senior notes issuance. These measures helped the company improve its debt maturity profile and lock in debts at favorable interests.

Narrows Outlook

For full-year 2013, Prologis narrowed its core FFO guidance to $1.64 to $1.66 from the prior range of $1.63 to $1.67 per share.
 
Our Take

Going forward, we believe that amid the backdrop of a larger customer base, rise in e-Commerce application and supply chain consolidation, there will continue to be an increasing demand for Class-A facilities. Prologis stands to benefit as it has the capacity to offer modern distribution facilities in strategic infill locations.

The company penned several Build-to-Suit deals in recent times, the latest being with Walmart.com Brazil - WMB Comercio Eletronico LTDA, a unit of Wal-Mart Stores Inc.’s (WMT - Analyst Report) global e-commerce organization for a distribution center, which would span 576,000 square foot in Sao Paulo, Brazil.

Also, the company’s efforts to increase its dominance in the industrial real estate market of Europe and Asia is encouraging. Yet, with the sluggish economic growth, we are not overtly optimistic on the stock and believe that the risk/reward profile is currently balanced.

We now look forward to the results of other REITs that are scheduled to release second quarter 2013 results this week. These include Taubman Centers Inc. (TCO - Analyst Report) and Ventas Inc. (VTR - Analyst Report).

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.

Please login to Zacks.com or register to post a comment.