Prologis, Inc. annual report, FY2018

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Business context and reporting period

Prologis, Inc. and Prologis, L.P. filed a combined Form 10-K for the fiscal year ended December 31, 2018. Prologis is a global logistics real estate REIT operating in 19 countries, through Real Estate Operations and Strategic Capital. The filing includes annual results; fourth-quarter data are provided separately in the filing.

Financial and operating highlights

  • Revenue: $2.804 billion, up 7.1% from $2.618 billion in 2017. Rental revenue was $1.859 billion; strategic capital revenue was $406 million.
  • Earnings: Operating income was $847 million versus $771 million. Consolidated net earnings were $1.823 billion versus $1.761 billion; net earnings attributable to common stockholders were $1.643 billion versus $1.642 billion. Diluted EPS was $2.87, down from $3.06.
  • NOI and FFO: Real Estate Operations NOI was $1.784 billion, up from $1.662 billion; Strategic Capital NOI was $249 million, up from $219 million. Prologis-modified FFO was $2.232 billion versus $1.795 billion; Core FFO was $1.788 billion versus $1.551 billion. These are non-GAAP measures.
  • Cash flow: Cash from operating activities was $1.804 billion, up from $1.687 billion. Investing activities used $664 million; financing activities used $1.232 billion. Year-end cash was $344 million.
  • Debt and liquidity: Debt totaled $11.090 billion, compared with $9.413 billion a year earlier; weighted-average interest rate was 2.7% and weighted-average maturity was 76 months. Prologis reported $3.4 billion of available credit at year-end and $273 million of scheduled debt principal payments in 2019. It was in compliance with debt covenants; ratings were A3 from Moody’s and A- from S&P, both stable.
  • Portfolio: Owned-and-managed operating portfolio occupancy was 97.5%, versus 97.2% in 2017. Same-store NOI increased 3.9% on a net-effective basis and 4.5% on a cash basis.
  • Distributions: Common dividends were $1.92 per share for 2018, up from $1.76. The Series Q preferred dividend was $4.27 per share.

Material changes versus prior year

  • The August 22, 2018 DCT acquisition, valued at $8.5 billion, added 68 million square feet of operating properties. Consideration included $6.6 billion of equity and $1.9 billion of assumed debt; $1.8 billion of that debt was subsequently repaid. 2018 results include DCT only from the acquisition date.
  • Consolidated real estate assets grew by 67 million square feet, primarily due to DCT. Common shares outstanding increased, including 96.2 million shares issued in the transaction.
  • Net gains on real estate transactions declined to $841 million from $1.183 billion. The 2018 amount included a change in revenue-recognition accounting that led Prologis to recognize the full gain on contributions to unconsolidated ventures.
  • Debt increased by $1.677 billion year over year, while net interest expense fell to $229 million from $274 million. Prologis said refinancing activity lowered its effective interest rate and extended debt maturities.
  • Net earnings per share declined despite slightly higher common-stockholder earnings, reflecting the larger weighted-average share count and lower real estate transaction gains.

Outlook, commentary, risks and unusual items

  • Management described operating fundamentals as strong, citing historic-low vacancies, strong customer and investor demand, record-long lease terms and no operating-metric signs of slowing. It expected market rents to grow and estimated in-place leases were more than 15% below market at year-end.
  • No specific numeric earnings or FFO guidance is stated in the supplied filing text. Management said it remained positive on the outlook but would operate prudently amid trade and tariff disputes, market volatility and uncertainty around the U.K.’s withdrawal from the European Union.
  • The consolidated development portfolio comprised 100 properties, was 50.8% leased, and had $2.1 billion invested against $3.6 billion of estimated total investment, leaving about $1.5 billion of estimated additional investment. Most projects were expected to be completed by year-end 2019, with the remainder before July 2020.
  • Key risks include economic or logistics-sector downturns, geographic concentration (California represented 32.5% of NOI), customer defaults or lease rollover pressure, development and acquisition execution, co-investment venture partner and refinancing risks, foreign-currency movements, interest rates, and natural disasters. Prologis did not carry earthquake insurance for its Japan assets.
  • Unusual earnings items included $841 million of real estate transaction gains and $117 million of foreign-currency and derivative gains, compared with a $58 million loss in 2017. A $2 million loss was recorded on early debt extinguishment in 2018.
  • Prologis formed a Brazilian co-investment venture in January 2019. It also adopted new lease accounting in January 2019, expecting to record approximately $400 million of right-of-use assets and lease liabilities for ground and office leases.
  • Management reported effective internal controls; KPMG issued unqualified opinions on the financial statements and, for Prologis, Inc., internal control over financial reporting. Management said current legal matters were not expected to have a material adverse effect.

Important facts for investors to verify

  1. Separate recurring operating performance from acquisition effects, real estate gains, promote income and foreign-currency or derivative gains; review GAAP results alongside non-GAAP FFO and NOI reconciliations.
  2. Assess the DCT integration, the share dilution from transaction consideration, and the contribution of acquired assets to occupancy, NOI and future earnings.
  3. Review debt maturities, refinancing terms, interest-rate exposure, covenant headroom and the availability of credit facilities after the January 2019 facility upsizing.
  4. Track development leasing, completion costs and funding needs, as well as the timing and proceeds of property contributions and dispositions.
  5. Evaluate geographic, customer, currency, co-investment, environmental and natural-disaster exposures, including California concentration and limited earthquake insurance in Japan.