Prologis, Inc. quarterly report, Q1 FY2017

Business context and reporting period

Prologis, Inc. and Prologis, L.P. filed a combined, unaudited Form 10-Q for the quarter ended March 31, 2017. Prologis is a global logistics real estate owner, developer and manager, operating through Real Estate Operations and Strategic Capital. At quarter-end, its owned and managed portfolio comprised 3,147 properties and 627 million square feet across consolidated and unconsolidated holdings, with 96.6% occupancy.

Financial and operating performance

Amounts below are in millions, except per-share data, percentages and where noted.

• Revenue increased 3.8%. Real Estate Operations NOI rose to $417 million from $404 million; Strategic Capital NOI was $25 million versus $26 million.
• Same-store NOI for the owned and managed portfolio increased 4.6%; same-store rental revenue rose 4.4%.
• Net earnings attributable to common stockholders declined despite higher operating income, reflecting lower gains on dispositions ($97 million versus $144 million) and lower earnings from unconsolidated entities ($49 million versus $58 million).
• Cash from investing activities was $56.5 million, compared with $332.3 million; cash used in financing was $828.9 million, compared with $516.5 million. Cash and equivalents fell to $395.8 million from $807.3 million at year-end, principally amid financing activity that included a $789.8 million purchase of noncontrolling interests.
• Quarterly common dividend was $0.44 per share, up from $0.42. Core FFO increased while modified FFO declined; both are non-GAAP measures and should be considered alongside GAAP results.

Debt, liquidity and balance sheet

• Total assets were $29.8 billion and total debt was $11.0 billion at March 31, 2017, versus $30.2 billion and $10.6 billion, respectively, at December 31, 2016. Weighted-average debt interest rate was 3.1%, and weighted-average maturity was 58 months.
• Unrestricted cash was $396 million. Credit facility commitments totaled $3.398 billion, with $3.362 billion available after letters of credit and no borrowings outstanding.
• Scheduled 2017 debt principal payments were $803 million. Management expected to fund them with operating cash, property disposition proceeds or, if needed, credit facilities. The company reported compliance with all debt covenants.
• Debt is incurred by the Operating Partnership; Prologis, Inc. guarantees its unsecured debt. Approximately $2.0 billion of debt was variable-rate at quarter-end; management’s sensitivity analysis estimated a $1 million annual interest expense increase from a 10% adverse rate change.

Material changes, outlook and risks

• Prologis acquired the remaining partner interests in Prologis North American Industrial Fund for $710 million and the Brazil Fund for $80 million, bringing both ventures to full ownership.
• The company formed UKLV, a 15%-owned U.K. co-investment venture, and contributed a portfolio valued at approximately $252 million. It also sold its ELV investment for approximately $84 million and contributed properties to another venture.
• Development starts totaled 12 projects with $312 million estimated total investment, versus 11 projects and $193 million a year earlier. Twenty-three projects with $479 million estimated investment stabilized; estimated weighted-average margin was 24.3%. Management said all properties under development at quarter-end were expected to be completed before August 2018.
• Management expected market rents to continue growing, though at a more modest pace, and estimated in-place leases were more than 10% below market in aggregate. It cited continued positive rent changes on lease rollovers. No specific full-year earnings or FFO guidance is provided in the supplied filing text.
• Near-term funding needs include $0.8 billion of remaining spending to complete and lease the existing development portfolio, scheduled debt payments, property capital expenditures, and investment commitments. Remaining equity commitments to certain co-investment ventures totaled $2.593 billion, including $330 million attributable to Prologis.
• Unconsolidated co-investment ventures had $6.7 billion of third-party debt; Prologis reported no guarantees of that debt. Their ability to refinance maturities is not assured. Other stated risks include economic and political conditions, competition, financing and interest rates, foreign exchange, development and transaction execution, REIT status, and environmental events. The filing reported no material change to the prior annual report’s risk factors and no legal proceedings expected to have a material adverse effect.
• KPMG reviewed the interim financial statements but did not express an audit opinion. The company reported effective disclosure controls and no material quarterly change in internal control over financial reporting.

Important facts for investors to verify

• Whether occupancy and same-store rent and NOI growth remain strong, particularly as consolidated occupancy was 96.3% at quarter-end versus 97.0% at year-end.
• How the large decline in cash and increase in debt evolve after the venture buyouts, and whether the $803 million of 2017 maturities are repaid or refinanced as expected.
• Execution, lease-up and realized returns on development spending, including the $0.8 billion remaining commitment and the assumptions behind estimated development margins.
• Funding and refinancing needs of unconsolidated ventures, Prologis’s share of outstanding commitments, and the implications of venture-level debt despite the absence of guarantees.
• Drivers of the divergence between GAAP earnings, modified FFO and Core FFO, including disposition gains and other adjustments; these non-GAAP measures are not substitutes for GAAP earnings or operating cash flow.