Prologis, Inc. and Prologis, L.P. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014; balance-sheet figures are as of June 30, 2014. Financial statements are unaudited and presented in U.S. dollars. Prologis is a global industrial-property owner, operator and developer, with Real Estate Operations and Strategic Capital segments. It owned and managed 571 million square feet across 21 countries and served more than 4,700 customers.
Financial performance and position
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total revenue | $460.1 million | $410.7 million | $894.8 million | $890.7 million |
| Operating income | $95.3 million | $58.5 million | $166.7 million | $155.6 million |
| Net earnings attributable to common stockholders | $72.7 million | $(1.5) million | $77.4 million | $263.9 million |
| Diluted EPS | $0.13 | $0.00 | $0.15 | $0.55 |
| Core FFO | Not stated here by quarter | Not stated here by quarter | $461.8 million | $391.3 million |
- Revenue and operating trends: Q2 revenue rose about 12% year over year, including higher strategic capital income. First-half revenue was nearly flat. First-half Real Estate Operations NOI was $542.5 million versus $562.1 million, reflecting property contributions to ventures; Strategic Capital NOI increased to $69.6 million from $32.3 million, including a promote fee.
- Property operations: First-half average occupancy was 94.0%, up from 92.9%; consolidated property occupancy at quarter-end was 94.3%. Q2 same-store rental income increased 3.1% and same-store NOI increased 3.8% year over year. Management reported rent increases on lease rollovers for six consecutive quarters.
- Cash flow, six months: Operating activities generated $305.9 million, compared with $203.6 million. Investing activities used $189.6 million, versus providing $2.4 billion in 2013; property disposition and contribution proceeds were $0.9 billion versus $3.6 billion. Financing activities used $350.9 million, versus $2.3 billion.
- Balance sheet and liquidity: Total assets were $24.1 billion, total liabilities $9.9 billion, and total equity $14.3 billion. Debt was $8.53 billion, down from $9.01 billion at December 31, 2013; weighted-average interest rate was 4.0% and weighted-average maturity 77 months. Cash was $267.4 million; credit-facility availability was $2.89 billion. The company reported compliance with debt covenants.
Material changes and notable transactions
- Prologis launched FIBRA Prologis in Mexico in June, exchanged property interests for FIBRA units and retained a 45% equity-method interest. The transaction generated a reported $52.5 million gain; associated tax and noncontrolling-interest effects were also significant.
- In January, Prologis formed and consolidated Prologis U.S. Logistics Venture, retaining a 55% interest; the venture acquired 66 properties from Prologis for $1.0 billion.
- Prologis increased its ownership in Prologis North American Industrial Fund to 41.9% by investing $274.7 million. Investments in unconsolidated entities rose to $5.58 billion from $4.43 billion at year-end.
- First-half property contributions and dispositions generated $1.8 billion in net proceeds and $186.6 million in gains. The comparable 2013 period included $399.9 million of gains, mainly from property contributions.
- Prologis issued €1.2 billion of senior notes, extended or replaced term-loan arrangements, and repurchased $823.9 million principal amount of notes due in 2015 and 2016. Early debt extinguishment losses were $77.3 million for the first half, including $78.0 million in Q2.
- After quarter-end, Prologis purchased another $466.6 million principal amount of notes, paying an approximately $85 million premium, expected to be recognized as an extinguishment loss. It also secured a $500 million increase in committed third-party equity for its China venture.
Outlook, risks and unusual items
- Management said market rents were growing across most markets faster than its prior forecast and expected the trend to continue. It cited a land bank with potential to support nearly 180 million additional square feet of development and stated that first-half stabilized projects had an estimated value 22% above book value.
- During the first half, Prologis started 30 development projects totaling 7.7 million square feet, with $610.8 million expected investment, a projected stabilized yield of 7.3% and development margin of 19.8%. Completion was expected on or before December 2015. These are estimates, not guarantees.
- Management said cash sources were expected to meet anticipated operating, development, acquisition, debt-service and distribution needs, subject to market conditions. No specific earnings or FFO guidance for the remainder of 2014 is provided in the supplied filing text.
- Unconsolidated co-investment ventures had $7.85 billion of third-party debt, described as primarily property-secured and nonrecourse to Prologis; Prologis reported no guarantees of that debt. The company cautioned that ventures may not be able to refinance maturing debt on favorable terms or at all. Remaining equity commitments were $2.63 billion in total, including $593.9 million attributable to Prologis.
- Foreign currency movements remain a material exposure. A 10% move in the U.S. dollar against the euro and yen was estimated to change cash flows upon settlement of forward contracts by $139 million, positive or negative. Management said adverse interest-rate changes were not expected to materially affect results or cash flows.
- Other notable items include a $42.1 million promote fee from a U.S. venture, of which $31.3 million was attributable to third-party investors, and a related estimated $6.2 million cash-bonus expense. The filing states that 2014 property disposals did not qualify as discontinued operations under newly adopted accounting guidance. Management reported no material change to previously disclosed risk factors; ordinary-course legal matters were not expected to have a material adverse effect.
Most important facts for investors to verify
- Separate recurring property performance from transaction-driven gains, the FIBRA transaction, promote fees and debt-extinguishment losses; compare GAAP earnings with Core FFO and its reconciliation.
- Review same-store rent and NOI growth, occupancy, leasing volume and the impact of contributed properties on reported segment results.
- Confirm funding and completion assumptions for development projects and clarify the filing’s stated remaining development spend: it reports $0.8 million against a $1.9 billion expected investment and $1.1 billion current investment, figures that do not appear consistent.
- Assess debt maturities, refinancing needs, interest-rate and currency exposure, and the financial capacity of co-investment ventures to meet debt and equity commitments.
- Track the post-quarter note repurchase and its expected loss, FIBRA’s performance, and whether management’s rental-growth and development assumptions are realized.