Prologis, Inc. — Q2 2017 Form 10-Q
Business and period. The filing covers the quarter and six months ended June 30, 2017, and combines Prologis, Inc. and Prologis, L.P. Prologis owns, develops and manages logistics real estate through Real Estate Operations and Strategic Capital. At quarter-end, its owned and managed portfolio covered 629 million square feet across 3,143 operating properties, with 96.2% occupancy.
Key financial metrics
Unless noted, amounts are U.S. dollars; income-statement and cash-flow amounts are in millions. Comparisons are with the corresponding 2016 period.
| Metric | Q2 2017 | Six months 2017 |
|---|---|---|
| Total revenue | $766.2; +27.2% | $1,395.3; +15.5% |
| Operating income | $275.3; +93.4% | $437.2; +61.0% |
| Net earnings attributable to common stockholders | $266.9; down 3.1% | $470.2; down 2.7% |
| Diluted earnings per share | $0.50 vs. $0.52 | $0.88 vs. $0.92 |
| Net cash from operating activities | Not presented for quarter | $745.2 vs. $633.7 |
| Core FFO, a non-GAAP measure | Not presented in supplied filing text | $808 vs. $654 |
Margins and operations. Six-month Real Estate Operations NOI was $851.7 million, up 5.4%; Strategic Capital NOI was $153.9 million, versus $51.4 million. Consolidated same-store NOI increased 3.9% in Q2. Management reported 96.2% average occupancy for the consolidated portfolio in its overview; the owned-and-managed portfolio was 96.2% occupied at June 30, down from 97.1% at December 31, 2016. Stabilized development projects had an estimated weighted-average margin of 23.3%.
Cash, debt and liquidity. Cash and cash equivalents were $271.4 million, down from $807.3 million at year-end. Total debt was $11.08 billion, up from $10.61 billion; the weighted-average interest rate was 3.0% versus 3.2%, and average maturity was 65 months. Credit-facility availability was $3.415 billion, with no borrowings outstanding. Prologis reported compliance with all debt covenants. Six-month investing cash outflow was $170.5 million and financing cash outflow was $1.126 billion. Development spending was $715.3 million; dividends paid on common and preferred stock were $470.8 million.
Material changes and unusual items
- Strategic Capital revenue rose sharply, largely because Prologis recognized approximately $124 million of third-party promote revenue in June. The related cash was expected in Q3, so it was not included in first-half operating cash flow.
- Q2 earnings included a $30.6 million net loss on early extinguishment of debt. Prologis issued £500 million of 2.25% senior notes due 2029 and used cash to redeem $618.3 million of older notes; the first-half debt-extinguishment loss was $30.6 million.
- First-half gains on real estate dispositions and contributions were $180.3 million, below $344.7 million in 2016. Q2 gains were $83.0 million versus $200.4 million.
- In March, Prologis bought its partners’ interests in NAIF and the Brazil Fund for $710.2 million and $79.8 million, respectively. In July, it contributed 190 former NAIF properties to USLF for $2.8 billion, receiving $720 million cash and additional units; USLF assumed $956 million of secured debt. Prologis expected to recognize an approximately $480 million gain in Q3, net of a deferral.
- Prologis formed the U.K. Logistics Venture and reported $329 million of its own remaining equity commitments across specified co-investment ventures; total commitments, including partners, were $2.541 billion.
Outlook, commentary and risks
Management described operating fundamentals as strong, expected market rents to continue growing at a more modest pace, and said leases across the owned-and-managed portfolio were more than 10% below market in aggregate. It expected positive rent change on lease rollover to continue for several years. The land bank was estimated to support $8.5 billion of potential logistics development investment. All properties under development at June 30 were expected to be completed before July 2019.
At quarter-end, 77 consolidated development properties were 63.5% leased, with $1.5 billion invested and $1.2 billion remaining to be spent against expected total investment of $2.7 billion. Prologis said it expected cash from operations, venture distributions, dispositions, contributions and financing capacity to meet anticipated needs. It also expected later-2017 completion of an agreement to acquire partners’ interest in its Brazil platform for approximately $362 million.
Key risks include economic and political conditions, interest and foreign-exchange movements, competition, development and transaction execution, financing availability, REIT status, international operations and co-investment venture risks. A hypothetical 10% adverse currency move was estimated to reduce net equity by $98 million; the filing also estimated sensitivity of $55 million to net income and cash flows from certain unhedged foreign-currency contracts. Legal proceedings were described as ordinary-course matters not expected to have a material adverse effect. Management reported effective disclosure controls and no material change in internal control over financial reporting. The interim financial statements were reviewed, not audited; the auditor reported no material modifications required.
Investor facts to verify
- How much of the quarter’s Strategic Capital growth came from promotes, and when were the related proceeds collected?
- Whether the expected approximately $480 million USLF contribution gain and associated debt paydown occurred as described after quarter-end.
- Development leasing, remaining spend, expected yields and the sustainability of the stated 23.3% estimated development margin.
- Occupancy and same-store NOI trends, including the decline in occupancy from year-end.
- Debt maturities, variable-rate exposure, covenant headroom and funding needs for development and co-investment commitments.
- How non-GAAP Core FFO reconciles to GAAP earnings and cash generation; Core FFO was $808 million for the first half versus $654 million.