Prologis Q1 FFO a Penny Ahead, Outlook Narrowed - Analyst Blog

Prologis Inc. PLD – the industrial real estate investment trust (REIT) – came up with better-than-expected results in the first quarter of 2014. The company reported core FFO (funds from operations) per share of 43 cents, which was a penny above the Zacks Consensus Estimate and 3 cents ahead of the year-ago quarter figure.

While total revenue declined from the year-ago quarter, it managed to beat the Zacks Consensus Estimate. The company has also narrowed its 2014 guidance.

Total revenue during the reported quarter was $434.7 million, down 11.4% from the prior-year quarter. However, the revenue figure was well above the Zacks Consensus Estimate of $388 million. Results reflect a decline in rental income (down 14.6%) and development management and other income (down 48.4%), though partly dwarfed by the northward movement of investment management fees (up 34.7%).

Quarter in Detail

During first-quarter 2014, Prologis leased 33.7 million square feet of space in its combined operating and development portfolios. Total occupancy in the operating portfolio was 94.5% at the quarter end, up 80 basis points (bps) year over year.

In the quarter, tenant retention was 84.6% (with tenant renewals aggregating 23.3 million square feet), reflecting a rise of 660 bps year over year. Rents on rollover increased 7.0% and it is positive for the 5th consecutive quarter.

Therefore, as a result of increased occupancy levels and higher rental rates, same-store net operating income increased 3.0% year over year.

Notable Activities in Q1

Excluding contributions and dispositions, new investments in the first quarter aggregated $542.7 million (Prologis' share was $303.6 million). Specifically, the company acquired $370.5 million (Prologis' share was $163.1 million) of buildings, predominately in Europe and commenced $172.2 million (Prologis' share was $140.5 million) of new development projects. Moreover, it stabilized $264.1 million worth of developments with estimated margin of 22.2%.

On the other hand, contributions and dispositions worth $1.2 billion (Prologis' share was $568.3 million), with a stabilized capitalization rate of 6.2%, was accomplished by the company in the reported quarter. Notably, at quarter end Prologis' global development pipeline's total expected investment stood at $2.3 billion, of which Prologis' share was $1.9 billion.

Liquidity

Prologis exited first-quarter 2014 with cash and cash equivalents of $188.9 million, down from $491.1 million at year-end 2013. However, the company lowered its total debt to $8.9 billion at the end of the first quarter from $9.0 billion at the prior-year end.

To benefit from the current low interest rate environment, the company accomplished around $1.2 billion of debt financings and refinancings, together with the €700 million ($965.2 million) of Eurobonds issuance.

Narrowed Outlook

Prologis has narrowed its guidance for 2014. The company now expects core FFO in the range of $1.76 to $1.82 from $1.74 to $1.82 per diluted share. The mid-point of this range is a cent ahead of the Zacks Consensus Estimate of $1.78 per share for full-year 2014.

Our Take

Going forward, we believe that amid a rise in global trade and consumption levels, as well as a rise in e-Commerce application and supply chain consolidation, there will continue to be an increasing demand for Class-A facilities. However, new supply is substantially below the required levels.

In such an environment, Prologis stands to benefit given its capacity to offer modern distribution facilities in strategic infill locations around the globe. Its move to lower foreign currency exposure and the recent credit ratings upgrade from Standard & Poor's are also encouraging.  But competition is intensifying and interest rate issues remain, thus not making us overtly optimistic on the stock.

Prologis currently carries a Zacks Rank #3 (Hold). Investors interested in the REIT industry may also consider stocks like Duke Realty Corporation DRE, Public Storage PSA and Terreno Realty Corp. TRNO. All these stocks currently carry a Zacks Rank #2 (Buy).

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.