Prologis Inc. (PLD), one of the leading global providers of distribution facilities, reported second quarter 2011 fund from operations (FFO) of 3 cents per share compared with 32 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 decrease in year-over-year FFO was primarily due to impairment and merger-related costs.
The quarterly results include a two-month performance of the erstwhile ProLogis (which was acquired by its rival AMB Property Corp.) and approximately one month of the combined entity. Under the terms of the merger, AMB was the legal acquirer and ProLogis was the accounting acquirer. The all-stock deal was completed on June 3, 2011, after erstwhile ProLogis shares were delisted from NYSE, and the combined company (renamed as Prologis Inc.) began trading on the NYSE under the ticker symbol PLD.
Recurring FFO for the reported quarter was 35 cents per share compared to 28 cents in the year-ago quarter. The second quarter 2011 recurring FFO beat the Zacks Consensus Estimate by 3 cents.
Total revenues during the reported quarter were $335.9 million compared to $219.1 million in the year-ago quarter (for the erstwhile ProLogis only). Total reported revenues were well ahead of the Zacks Consensus Estimate of $230 million.
Prologis’ operating portfolio leased at quarter-end increased to 90.7% from 89.9% in first quarter 2011. During the reported quarter, the company leased a total of 33.5 million square feet of space in its operating portfolio and 1.4 million square feet in its development portfolio. Tenant retention rate achieved during the quarter was 76.7% as the company leased 22 million square feet of renewal space.
Rental rates on turnovers in the same-store portfolio declined 6.2% in the reported quarter, compared with an 8.9% decline in the first quarter of 2011. Same-store net operating income increased approximately 3.1% during the quarter on a year-over-year basis.
During the reported quarter, the company had $317 million worth of new development starts across 7 countries, out of which 9 were build-to-suit projects. About $368 million of capital was deployed by the company in the second quarter, which also included $50 million worth of acquisitions comprising 4 properties totaling approximately 910,000 square feet. The combined company completed $258 million worth of asset sale during the quarter, primarily consisting of $115 million related to the closing of the remaining Catellus assets and $144 million of industrial land building sales.
Prologis issued 34.5 million shares at $33.50 each during the reported quarter, generating about $1.1 billion in net proceeds. The secondary offering was part of the corporate strategy of the company to increase its liquidity and strengthen its balance sheet by repaying debt under its credit facility.
At the same time, Prologis closed on a new $1.75 billion global credit facility with a syndicate of 20 banks, and amended $456 million revolving credit agreement with a syndicate of 8 banks. The company also completed an exchange offer for $4.6 billion of legacy ProLogis senior unsecured notes and convertible debt, with approximately $4.4 billion.
At quarter-end, Prologis had a liquidity of over $1.5 billion, including $1.3 billion under its lines of credit and $261 million in unrestricted cash and cash equivalents. Total debt at the end of second quarter 2011 was $12.1 billion.
With the merger, Prologis has realized cost savings of over $90 million through operational synergies including gross G&A savings, reduced facility fees on its global line of credit and lower amortization of non real estate assets. This has enabled the company to create a stronger platform for value creation and sustainable growth.
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. During the second half of 2011, Prologis expects recurring FFO in the range of 78 cents to 82 cents per share.
We maintain our ‘Underperform’ recommendation on Prologis. We have a ‘Neutral’ rating and a Zacks #3 Rank for First Industrial Realty Trust Inc. (FR), a competitor of Prologis.
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