01—Abstract
Summary
Summary of the 10-K filed February 26, 2014. Cited figures are marked; the original filing is the authoritative source.
Prologis, Inc. (NYSE: PLD) and its operating partnership, Prologis, L.P., report FY2013 results as the leading global owner, operator and developer of industrial real estate, with 569 million square feet (owned and managed) valued at $45.5 billiona across 21 countries.
The year was defined by portfolio recycling: the company contributed 254 properties (71.5 million sq ft, $6.7 billionb of proceeds) into co-investment ventures such as PELP (Europe), Nippon Prologis REIT (Japan) and others, and used the proceeds to cut total debt from $11.8 billion to $9.0 billion and lower the weighted average borrowing cost from 4.4% to 4.2%. Reported net earnings attributable to common stockholders rose to $315 million ($0.64 diluted EPS) from a loss of $81 million in 2012, aided by $597.7 million of gains on acquisitions and dispositions, while Core FFO was roughly flat at $813 million ($813.9 million in 2012). Operating fundamentals improved: the owned and managed portfolio was 95.1% occupied at year-end, up from 94.0%, and rent change on rollover was positive in every quarter of 2013 (2% to 6%).
Same-store NOI grew 2.7% in Q4 2013 on the owned and managed basis. Management points to a large development pipeline (a land bank that could support nearly 200 million square feet, $1.9 billionc of consolidated development expected investment) and a $1.4 billion April 2013 equity offering that supported the balance sheet.
Key risks include concentration in California (32.6% of consolidated operating properties by investment), currency exposure (about 29.5% of total assets in non-USD currencies, with management targeting 77% USD-denominated net equity), a $725 milliond credit facility balance, and REIT qualification requirements. Investors should weigh the shift toward a fee-based investment management model against reduced consolidated rental income, which fell as properties moved into ventures.
02—Key points
Key Highlights
- Total debt reduced by $2.8 billion to $9.0 billion; weighted average effective interest rate fell to 4.2% (from 4.4%) and average debt maturity extended to 58 months from 43 months.
- Net earnings attributable to common stockholders of $315.4 million ($0.64 diluted EPS), versus a net loss of $80.9 million in 2012, driven by $597.7 million of net gains on acquisitions and dispositions of real estate.
- Core FFO of $813.2 million, essentially flat versus $813.9 million in 2012; FFO as defined by Prologis rose to $855.2 million.
- Owned and managed portfolio 95.1% occupied at December 31, 2013 (94.0% a year earlier); rent change on rollover was positive in all four quarters of 2013.
- Contributed 254 properties (71.5 million sq ft) to co-investment ventures for $6.7 billion of proceeds, including the PELP European venture and the NPR Japan REIT; co-investment ventures under management rose to 10 with $23.8 billion gross book value.
- Dividend held at $0.28 per quarter ($1.12 annualized), with $1.4 billion of net proceeds from the April 2013 common equity offering of 35.65 million shares at $41.60.
- Concentration risk: about 32.6% of consolidated operating properties (by investment) sit in California, and roughly 29.5% of total assets are denominated in non-US currencies.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2013filed February 26, 2014Financial Statements
FY2013 against FY2012
| Line item | FY2013FY2012 | Change |
|---|---|---|
| Operating Expenses | $1.45B$1.87B | −22.6% |
| Operating Income | $304.41M$92.98M | +227.4% |
| Interest Expense | $379.33M$505.21M | −24.9% |
| Net Income | $342.92M-$39.72M | +963.3% |
| EPS (Basic) | $0.65$-0.18 | +461.1% |
| EPS (Diluted) | $0.64$-0.18 | +455.6% |
| Shares Outstanding (Basic) | 486.08M459.89M | +5.7% |
| Shares Outstanding (Diluted) | 491.55M461.85M | +6.4% |
05—Questions
Frequently Asked Questions
Why did reported net earnings swing from a loss in 2012 to a profit in 2013?
The swing reflects a combination of higher gains and lower charges. In 2013 the company recognized $597.7 million of net gains on acquisitions and dispositions, mainly from contributing operating properties to unconsolidated ventures, and 2012 included $252.9 million of real estate impairments and $80.7 million of merger integration costs that did not recur. Depreciation also fell to $648.7 million from $724.3 million as properties were contributed out. These gains are non-recurring in nature, so investors often focus on Core FFO, which was roughly flat.
Why is Core FFO flat even though the company shrank its consolidated portfolio?
Core FFO excludes gains, impairments and debt extinguishment losses. Net operating income from the Real Estate Operations segment fell to $1.09 billion from $1.32 billion because properties moved into ventures, and the company cited a $299.4 million NOI reduction from 2013 contributions. This was offset by higher Investment Management income ($179.5 million versus $126.8 million), lower interest expense ($379.3 million versus $505.2 million) and higher earnings from unconsolidated entities ($97.2 million versus $31.7 million), which together kept Core FFO stable.
How much balance sheet risk remains after the deleveraging?
Debt fell to $9.0 billion at year-end, with $1.7 billion of undrawn credit facility capacity, and the company was in compliance with all debt covenants. However, $330 million of scheduled 2014 principal payments and a $536 million term loan (extended to 2015 in January 2014) remain, and about $1.4 billion of debt is variable rate. Investors should also note $802 million of unfunded development commitments and that the REIT depends on external capital, with a credit rating downgrade possibly raising borrowing costs.
What is the growth outlook for the development and investment management businesses?
Management expects rising rents to lift net operating income, citing an 85% global-markets share of the platform and a land bank that could support nearly 200 million square feet of development. The company started 68 development projects totaling 23 million square feet in 2013 with an expected 7.6% weighted average stabilized yield, and expects Investment Management NOI to grow in 2014 due to Nippon Prologis REIT, PELP and larger ventures. Growth depends on continued fundraising for co-investment ventures and on market conditions in the US, Europe and Japan.
What are the main risks to the dividend and REIT status?
The company must distribute at least 90% of REIT taxable income to keep REIT status; failure would subject it to corporate tax for four years and significantly reduce earnings. The company also notes that prohibited-transaction taxes could apply to certain property contributions and that dividends are determined by the Board based on financial condition and distribution requirements. The company paid $1.12 per share in both 2012 and 2013, but its cash flow from operations ($485.0 million) fell short of common and preferred dividends by $88.9 million in 2013, so the company relied on disposition proceeds to fund the shortfall.
06—Continue