Earnings Preview: ProLogis (PLD)

ProLogis (PLD), one of the leading global providers of distribution facilities, is scheduled to report its fiscal 2010 second quarter earnings on Jul 22, 2010. The current Zacks Consensus Estimate for the second quarter is 14 cents per share, representing a year-over-year decline of 26.3%. ProLogis has consistently missed earnings estimates with a trailing four-quarter average of -14.4% as the economic woes in the residential sector continue to weigh on commercial property operations.

First Quarter Recap

ProLogis reported first quarter 2010 recurring FFO (fund from operations) of 13 cents per share, missing the Zacks Consensus Estimate by a penny. Fund from Operations is a widely used metric to gauge the performance of REITs and is obtained after adding depreciation and amortization and other non-cash expenses to net income. Recurring FFO during the quarter decreased drastically from 86 cents per share reported in the year-ago period.

ProLogis’ industrial operating portfolio, including its development properties, was 89.2% leased at quarter-end compared with 88.3% in the year-ago quarter. Total leasing activity was 29.6 million square feet in the first quarter of 2010, compared with 27.0 million square feet in the year ago quarter.

In order to decrease the risk associated with cyclical local real estate markets and economies, and increase the stability and predictability of the earnings, ProLogis has drastically reduced its idle assets.

The company completed sales of $47.0 million, including $8.0 million related to fee agreements during the quarter. ProLogis expects to start $700 million to $800 million of new developments in 2010. The company also expects to monetize approximately $350 million to $400 million of land in 2010.

Following the release of first quarter results, ProLogis has widened its fiscal year 2010 FFO guidance, excluding significant non-cash items, from the range of $0.74 to $0.78 per share to $0.70 to $0.78.

Agreement of Analysts

In the last 7 days, there were no earnings estimate revisions for the second quarter and fiscal 2010 as analysts, in general, were neutral about the future outlook of the company. In the last 30 days, none of the 14 analysts covering the stock have revised their earnings estimates for the second quarter. For fiscal 2010, only 1 out of 12 analysts covering the stock has reduced earnings estimate in the last 30 days, while none have increased them. This is a rather negative showing.

Magnitude of Estimate Revisions

Earnings estimates have remained stagnant for the last 30 days for the second quarter and full fiscal 2010 at 14 cents and 58 cents per share, respectively, meaning that analysts were overtly cautious about the performance of the company.

Neutral on ProLogis

We currently have a Neutral recommendation on ProLogis with a Zacks #4 Rank, which translates into a short-term Sell rating and indicates that the stock is expected to underperform the overall U.S. equity market for the next 1-3 months. The credit crunch has widened the bid-ask spread between buyers and sellers of commercial real estate, which has caused deal volumes to fall dramatically. In addition, market vacancy increases will mitigate ProLogis’ ability to push through rental rate increases, adversely affecting the top line growth of the company.

Meanwhile, our long-term Neutral recommendation on the stock is based on the belief that ProLogis has considerably reduced operating risks through continued lease-up of its development portfolio. ProLogis also has a geographically diverse portfolio of distribution facilities that integrate international scope and expertise with a strong local presence in its markets, which provides a strong upside potential for the company.

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