Prologis, Inc. and Prologis, L.P. — Q2 2020 Form 10-Q
Business context and reporting period. The filing covers the quarter and six months ended June 30, 2020. Prologis owns, develops and manages logistics real estate in 19 countries through two segments: Real Estate Operations and Strategic Capital. The filing presents the parent and operating partnership as one enterprise. Financial statements are unaudited; the independent accountant performed a review, not an audit.
Key financial metrics
Amounts below are in millions of dollars, except per-share data. Comparisons are with the same 2019 period unless noted.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $1,266 | $790 | $2,244 | $1,562 |
| Operating income | $612 | $442 | $1,080 | $819 |
| Net earnings attributable to common stockholders | $405 | $384 | $894 | $731 |
| Diluted earnings per share | $0.54 | $0.60 | $1.23 | $1.15 |
| Operating cash flow | Not separately provided | Not separately provided | $1,355 | $1,004 |
| Investing cash flow | Not separately provided | Not separately provided | $(2,251) | $82 |
| Financing cash flow | Not separately provided | Not separately provided | $354 | $(1,034) |
- Q2 revenue increased 60%, reflecting the Liberty acquisition, growth in rental revenue and a substantial Strategic Capital promote. Q2 strategic capital revenue was $321 million, including $228 million of promote revenue. The promote was earned primarily in June from a U.S. co-investment venture.
- Q2 common-stockholder net earnings increased about 5%, while diluted EPS declined to $0.54 from $0.60; weighted-average diluted shares rose to 766 million from 655 million, principally reflecting equity issued in the Liberty transaction.
- For the first six months, Real Estate Operations NOI was $1,345 million versus $1,023 million; Strategic Capital NOI was $289 million versus $88 million. Strategic Capital’s increase largely reflects promote revenue. Core FFO, a non-GAAP measure, was $1,453 million versus $980 million.
- At June 30, total assets were $55.2 billion, compared with $40.0 billion at year-end 2019; debt was $15.7 billion versus $11.9 billion. Debt’s weighted-average effective interest rate was 2.2%, and weighted-average maturity was 116 months.
- Cash and cash equivalents were $549 million, down from $1,089 million at year-end. Reported total liquidity was $4.6 billion, including $4.1 billion of current borrowing availability and available term loans. Management reported no significant debt due until 2022 and compliance with all financial debt covenants.
Material changes and operating performance
- Prologis completed the $13.0 billion Liberty transaction on February 4, 2020, issuing approximately $10.0 billion of equity and assuming $2.8 billion of debt. It acquired 519 industrial properties totaling about 100 million square feet. The resulting increase in scale materially affects period-to-period comparisons.
- In January, co-investment ventures acquired Industrial Property Trust assets for $2.0 billion each; Prologis reported its aggregate investment in the acquisitions as $1.6 billion. The consolidated venture’s acquisition was reflected in Prologis’s statements.
- Prologis reported $325 million of net gains from real estate dispositions and contributions for the first half. Six-month gains on dispositions of development properties and land were $249 million; gains on other real estate dispositions were $75 million.
- Same-store property NOI attributable to Prologis increased 2.6% on a net-effective basis and 2.9% on a cash basis in Q2. The owned-and-managed portfolio was 95.7% occupied at June 30, down from 96.5% at December 31, 2019.
- Development starts fell to six projects with $365 million of total expected investment in the first half, from 23 projects and $516 million in 2019. Prologis suspended some speculative projects; those suspended projects had $353 million of expected investment. The active consolidated development portfolio was 67.8% leased and had $1.1 billion of estimated remaining investment.
Outlook, commentary and risks
- Management said COVID-19’s economic effects remained uncertain, but its outlook for the remainder of 2020 was more positive than at March 31. It expected market rents to remain flat for the rest of 2020, while noting in-place leases were about 13% below market and could support rent increases as leases renew.
- Management reported 71 million square feet of leases commenced in the owned-and-managed portfolio during the first half, 19.1% net effective rent change and 78.4% customer retention.
- As of July 21, management reported collecting 96.1% of June rent and 91.4% of July rent, excluding deferred amounts. It cautioned that bad debt could increase later in the year. The filing gives two granted rent-deferral totals as of July 21: $16.9 million in Note 1 and $31 million in the MD&A. The text does not clearly reconcile these figures.
- Prologis identified economic and political conditions, interest and foreign-exchange movements, competition, acquisition and development execution, financing access, co-investment venture risks, international operations, environmental events and COVID-19 among factors that could affect results. It reported no material change in previously disclosed risk factors and stated that ordinary-course legal proceedings were not expected to have a material adverse effect.
- Unusual items include $66 million of first-half losses on early extinguishment of debt and volatile foreign-currency and derivative results. Q2 recorded a $61 million net foreign-currency and derivative loss, versus a $2 million gain in Q2 2019.
Most important facts for investors to verify
- Reconcile the $16.9 million and $31 million rent-deferral figures, and confirm subsequent collections, concessions and credit-loss trends.
- Assess how much reported revenue, NOI and Core FFO growth is attributable to the Liberty and IPT acquisitions and the $228 million Q2 promote, rather than recurring operations.
- Review dilution from acquisition-related equity issuance and its effect on per-share performance, as well as the future disposition or contribution of non-strategic acquired assets.
- Track occupancy, leasing spreads, development suspensions and remaining development commitments against management’s outlook for flat market rents.
- Monitor debt maturities, refinancing costs, currency exposure and liquidity; reported debt increased substantially following acquisitions, although management reported covenant compliance and $4.6 billion of liquidity.