Business context and reporting period
Prologis, Inc. and Prologis, L.P. jointly report results for the quarter and nine months ended September 30, 2019. Prologis is a global logistics real estate owner, developer and manager operating in 19 countries. Its two segments are Real Estate Operations and Strategic Capital. The companies are operated as one enterprise; Prologis, Inc. is the REIT parent and general partner of Prologis, L.P.
Financial and operating performance
Amounts below are U.S. dollars; financial statement amounts are in millions unless otherwise stated.
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $942.2 | $682.4 | $2,504.6 | $1,997.4 |
| Operating income | $471.5 | $375.6 | $1,290.1 | $1,089.4 |
| Net earnings attributable to Prologis, Inc. common stockholders | $450.6 | $346.3 | $1,181.5 | $1,046.9 |
| Diluted earnings per share | $0.71 | $0.60 | $1.86 | $1.90 |
| Operating cash flow | Not separately provided | Not separately provided | $1,647.7 | $1,273.9 |
| Core FFO, as modified by Prologis (non-GAAP) | Not separately provided | Not separately provided | $1,613 | $1,262 |
Q3 revenue rose 38%, led by rental revenue of $710.5 million (up 17%) and strategic capital revenue of $230.5 million versus $71.1 million. The latter included $148.2 million of promote revenue, principally from a European venture. Q3 common-stockholder earnings increased 30%; diluted EPS was unchanged from the prior-year quarter. For the first nine months, revenue increased 25% and common earnings rose 13%, while diluted EPS decreased from $1.90 to $1.86, with a substantially larger weighted-average share count contributing to the per-share comparison.
Nine-month segment NOI (non-GAAP) was $1,551 million for Real Estate Operations versus $1,283 million, and $255 million for Strategic Capital versus $166 million. Q3 same-store property NOI for Prologis’ share grew 4.0% on a net-effective basis and 4.3% on a cash basis.
- Cash flows: Nine-month investing cash use was $282.2 million, compared with $644.1 million in 2018; financing cash use was $683.4 million, compared with $789.1 million. Cash and cash equivalents increased by $681.1 million to $1,025.0 million.
- Balance sheet and liquidity: At September 30, total assets were $39.45 billion, debt was $11.46 billion and equity was $25.94 billion. The company reported $3.89 billion of available credit-facility capacity and $4.9 billion of total liquidity, including cash.
- Debt: Weighted-average effective interest rate was 2.3%, down from 2.7% at year-end 2018; weighted-average debt maturity was 98 months, up from 76 months. Debt covenants were met. Scheduled principal payments were $13 million for the remainder of 2019 and $470 million in 2020.
- Portfolio: The owned-and-managed portfolio comprised 3,517 properties and 726 million square feet, with 96.5% occupancy, versus 97.5% at December 31, 2018. Third-quarter trailing net effective rent change on rollover was 22.5%.
Material changes, outlook and risks
- Prologis said operating fundamentals remained strong and cited demand, rent growth and supply-chain reconfiguration, including e-commerce, as drivers. Management estimated in-place leases were more than 15% below current market rents and expected positive rent change on rollover to continue for several years, subject to market conditions.
- Development starts for the first nine months totaled 37 projects, 11 million square feet and $1.064 billion of estimated total investment, down from 45 projects, 16 million square feet and $1.506 billion in 2018. Stabilizations were 52 projects and $1.809 billion of estimated investment. The development portfolio was 50.4% leased and expected to complete before April 2021; management estimated $1.1 billion of additional investment remained for the current consolidated development portfolio.
- Prologis agreed to acquire Industrial Property Trust’s wholly owned real estate assets for approximately $4.0 billion, including assumption and repayment of debt. Closing was expected in January 2020, subject to stockholder approval and customary conditions. Prologis planned to place the portfolio equally into two U.S. co-investment ventures and expected its own investment to be approximately $1.3 billion, funded with cash and debt.
- September 2019 euro-denominated note issuance totaled €1.8 billion (about $2.0 billion) at a weighted-average fixed rate of 0.7%, with maturities from 2027 to 2049. Proceeds refinanced near-term and other debt; remaining proceeds were expected to repay borrowings and support general corporate purposes.
- Key stated risks include economic and political conditions, interest and foreign-exchange movements, competition, acquisition and development execution, access to capital and credit ratings, co-investment venture risks, international operations and environmental or natural-disaster events. A hypothetical 10% weakening of the U.S. dollar was estimated to result in a $97 million cash payment on outstanding foreign-currency forward contracts. The filing reported no material change to the risk factors in the 2018 Form 10-K.
- Legal matters were described as ordinary-course proceedings not expected to have a material adverse effect. Management concluded disclosure controls were effective; the interim financial statements received an accountant’s review, not an audit.
Important facts for investors to verify
- Whether the IPT transaction closes on the expected timetable and at the stated terms, and how the planned venture allocations and $1.3 billion company funding affect leverage and liquidity.
- Whether rent growth and occupancy stabilize or continue to weaken; occupancy had declined 100 basis points from year-end, despite strong reported rollover rent change.
- How much of earnings and strategic capital growth is recurring: Q3 included a large European promote, while gains on property transactions and foreign-currency/derivative gains also affect reported results.
- Debt refinancing, foreign-currency exposure and the company’s ability to maintain its credit ratings, covenant compliance and access to capital.
- Development leasing, remaining funding needs, and the timing and proceeds of planned property contributions and dispositions.
- Non-GAAP measures such as NOI and Core FFO should be considered alongside GAAP earnings and cash flows; the filing notes these measures have limitations and are not substitutes for GAAP results.