Prologis Operating Results Exceed Forecast

SAN FRANCISCO—Locally based Prologis Inc. recently reported results for the first quarter 2014, showing that operating results had exceeded the company's prior forecast. According to Hamid R. Moghadam, chairman and CEO, Prologis, the company “started the year with excellent momentum as strong market fundamentals drove demand for our product, leading to the fifth-consecutive quarter of rent growth.”

According to the firm, core funds from operations per fully diluted share was $0.43 for the first quarter compared to $0.40 for the same period in 2013.

“Growth in global trade, consumption and e-commerce continues to fuel customer requirements for modern, well-located logistics facilities,” Moghadam explains. “Investor interest is leading to further capitalization rate compression in most regions across the globe, most notably in Europe.”

The company leased 33.7 million square feet (3.1 million square meters) in its combined operating and development portfolios in the first quarter. Prologis ended the quarter with 94.5% occupancy in its operating portfolio, up 80 basis points over the same period in 2013, and as expected, down 60 basis points from year-end.

Tenant retention in the quarter was 84.6%, up 660 basis points from the same period in 2013, with tenant renewals totaling 23.3 million square feet (2.2 million square meters). GAAP rental rates on leases signed in the quarter increased 7% from prior rents compared to an increase of 2% in the same period in 2013. All divisions had positive rent change on rollover, led by the Americas at 10.4%.

In the first quarter, GAAP same-store net operating income increased 3%, or 4.1% on an adjusted cash basis, as compared to the same period in 2013. This increase was driven by higher occupancy and increasing rental rents.

New investments during the first quarter, excluding contributions and dispositions, totaled $542.7 million ($303.6 million Prologis' share).

The company acquired $370.5 million ($163.1 million Prologis' share) of buildings, principally in Europe. The stabilized capitalization rate on building acquisitions was 7%.

During the quarter, Prologis started $172.2 million ($140.5 million Prologis' share) of new development projects, with an estimated weighted average yield upon stabilization of 7.7% and an estimated development margin of 22.2%.

The company stabilized $264.1 million in development projects, with an estimated development margin of 22.2% and $58.6 million ($50.5 million Prologis' share) of estimated value creation.

At quarter end, Prologis' global development pipeline had a total expected investment of $2.3 billion ($1.9 billion Prologis' share). The pipeline had an estimated weighted average yield at stabilization of 7.3%, an estimated development margin of 20.3%, and $408.8 million of estimated value creation upon stabilization.

In the first quarter, Prologis completed contributions and dispositions totaling $1.2 billion ($568.3 million Prologis' share), with a stabilized capitalization rate of 6.2%. This includes, as previously announced, the contribution of a $1.0 billion ($453.4 million Prologis' share) stabilized portfolio of 66 logistics facilities totaling approximately 12.8 million square feet to Prologis US Logistics Venture.

Through April 22, 2014, Prologis raised $582.5 million of third-party equity for its ventures, including: $283.3 million for Prologis European Logistics Partners; $215.6 million for Prologis European Properties Fund II; $58.6 million for Prologis Targeted Europe Logistics Fund; and $25.0 million for Prologis Targeted U.S. Logistics Fund.

At quarter end, Prologis had $27.3 billion ($8.3 billion Prologis' share) in combined assets under management in 15 co-investment ventures.

During the first quarter, Prologis took the opportunity to further access the current low interest rate environment to complete approximately $1.2 billion of debt financings and refinancings, including the issuance of EUR700 million ($965.2 million) of Eurobonds.

Subsequent to quarter end, the company closed on the issuance of EUR300 million ($413.6 million) of Prologis European Properties Fund II Eurobonds. Additionally, the company redeemed $194.2 million of U.S. senior notes and repaid $239.3 million of secured debt.

“The recent credit ratings upgrade from Standard & Poor's to BBB+ is affirmation of our earnings trajectory, significant liquidity, and our demonstrated commitment to build one of the strongest balance sheets in the REIT sector,” says Thomas S. Olinger, chief financial officer, Prologis. "Our euro-related financings in the first quarter enabled us to increase our US dollar net equity position to 82%, further minimizing foreign currency exposure."

The board of directors of Prologis also recently approved a plan during the first quarter to raise the company's annualized dividend level by 18% to $1.32 per share of common stock. The dividend is expected to be declared quarterly.

Net earnings per fully diluted share was $0.01 for the first quarter compared to net earnings per share of $0.57 for the same period in 2013. The year-over-year decrease was primarily due to a lower level of gains on the contributions and disposition of operating properties.

Prologis narrowed its full-year 2014 Core FFO guidance range to $1.76 to $1.82 per diluted share from $1.74 to $1.82 per diluted share. The company also narrowed its guidance for net earnings to a range of $0.06 to $0.12 per diluted share.

The Core FFO and earnings guidance reflected above excludes any potential future gains (losses) recognized from real estate transactions. In reconciling from net earnings to Core FFO, Prologis makes certain adjustments, including but not limited to real estate depreciation and amortization expense, gains (losses) recognized from real estate transactions and early extinguishment of debt or redemption of preferred stock, impairment charges, deferred taxes, and unrealized gains or losses on foreign currency or derivative activity.

The difference between the company's Core FFO and net earnings guidance for 2014 predominantly relates to real estate depreciation and recognized gains or losses on real estate transactions and early extinguishment of debt.