ProLogis (PLD), one of the leading global providers of distribution facilities, reported first quarter 2011 recurring fund from operations (FFO) of 13 cents per share compared with 11 cents in the year-earlier quarter. Fund from operations, a widely used metric to gauge the performance of real estate investment trusts (REITs), is obtained after adding depreciation and other non-cash expenses to net income. The first quarter 2011 recurring FFO missed the Zacks Consensus Estimate by 2 cents.
Total revenues during the reported quarter were $ 238.8 million compared to $ 217.3 million in the year-ago quarter. Total reported revenues were well ahead of the Zacks Consensus Estimate of $ 220 million.
ProLogis’ industrial operating portfolio (which includes completed developments) leased at quarter-end decreased to 90.7% from 91.0% in fourth quarter 2010, primarily due to a fall in leasing activities. However, total operating portfolio leased during the quarter increased 147 bps compared to the first quarter of 2010. During the reported quarter, the company leased a total of 21.9 million square feet of space across the globe.
Rental rates on turnovers in the same-store portfolio declined 9.2% in the quarter, compared with a 10.5% decline in the fourth quarter of 2010. Same-store net operating income increased approximately 1% during the quarter on a year-over-year basis.
ProLogis registered development starts worth $ 99 million during the reported quarter and monetized a total of $ 31 million worth of land. The company witnessed a gradual increase in the number of requests for build-to-suit proposals for development in stronger target markets during the quarter. Consequently, management was confident of reaching its target of $ 800 million to $ 1 billion of development starts in 2011 with related land monetization of $ 200 million to $ 250 million.
During the quarter, ProLogis started development on 4 facilities in Europe totaling 1.2 million square feet, which included a 457,500-square-foot facility in the U.K. and a 240,600-square-foot facility for a third-party logistics provider in the Czech Republic. Subsequent to the quarter end, an additional build-to-suit proposal was signed with a third-party logistics provider for a major auto manufacturer in Germany.
Also during the quarter, ProLogis completed the majority of its asset sale to TPG Capital, a premier global private investment firm. Earlier, in late 2010, ProLogis had entered an agreement with TPG Capital to sell a portfolio of retail and mixed-use assets for approximately $ 505 million. The held-for-sale assets included 11 mixed-use projects with related land and development agreements, 4 shopping centers, 2 office buildings, 2 residential development joint ventures, Los Angeles Union Station, ground leases and other right-of-way leases to TPG Capital.
The asset sale was part of the long-term strategy of ProLogis to restructure its portfolio to focus on its core business of owning and managing industrial properties. The portfolio reshuffle is likely to improve ProLogis’ internal growth metrics and enable it to capitalize on the gradual revival of the economy that is expected to support strong demand for industrial properties.
With growing institutional demand for quality properties, ProLogis expects to generate $ 1.3 billion to $ 1.5 billion of proceeds in 2011 from sales of existing assets and contributions to funds primarily in the U.S. The company intends to utilize the proceeds to repay its debt and fund its existing development portfolio as well as development starts in 2011.
At quarter-end, ProLogis had cash and cash equivalents of $ 24.7 million compared with $ 37.6 million at year-end 2010. Total debt at the end of first quarter 2011 was $ 6.4 billion compared with $ 6.5 billion in the previous quarter. For full year 2011, ProLogis has reiterated its previous FFO guidance (excluding significant non-cash items) in the range of 62 cents to 66 cents per share.
Although the quarterly results were in line with the company’s expectations and signified a gradual improvement in market fundamentals, macroeconomic issues contributed to a slower pace of recovery as the industry was affected by the continued concerns about sovereign debt issues, rising energy costs, global military actions and the devastation and loss caused by the earthquake and tsunami in Japan. However, strong underlying requirements for high-quality distribution space enabled the company to remain upbeat about its performance in the coming quarters.
We maintain our ‘Neutral’ recommendation on ProLogis, which currently has a Zacks #3 Rank that translates into a short-term ‘Hold’ rating and indicates that the stock is expected to perform in line with the overall U.S. equity market for the next 1–3 months. We also have a ‘Neutral’ rating and a Zacks #3 Rank for First Industrial Realty Trust Inc. (FR), a competitor of ProLogis.
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