Business context and reporting period
Prologis, Inc. and Prologis, L.P. filed a combined, unaudited Form 10-Q for the quarter ended September 30, 2018. Prologis is a global logistics real estate owner, developer and manager operating in 19 countries through Real Estate Operations and Strategic Capital. Unless noted, amounts below are U.S. dollars.
The results include DCT Industrial Trust for 40 days following its August 22, 2018 merger into Prologis. DCT added 408 operating properties, 10 properties under development and land.
Financial and operating highlights
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $682 million | $603 million | $1,997 million | $1,998 million |
| Operating income | $182 million | $175 million | $606 million | $613 million |
| Consolidated net earnings | $376 million | $913 million | $1,132 million | $1,422 million |
| Net earnings attributable to common stockholders | $346 million | $876 million | $1,047 million | $1,346 million |
| Diluted earnings per share | $0.60 | $1.63 | $1.90 | $2.51 |
| Cash provided by operating activities | Not presented quarterly | Not presented quarterly | $1,274 million | $1,360 million |
| Dividends per common share | $0.48 | $0.44 | $1.44 | $1.32 |
- Q3 revenue increased about 13%, reflecting higher rental revenue and DCT’s contribution. Nine-month revenue was essentially flat; rental revenue increased while Strategic Capital revenue declined.
- Q3 common earnings fell substantially from 2017, principally because prior-year results included much larger gains on property contributions, dispositions and revaluation. Such gains were $194 million in Q3 2018 versus $779 million in Q3 2017, and $483 million versus $959 million for the nine-month periods.
- Nine-month Real Estate Operations NOI was $1,283 million, up from $1,255 million. Strategic Capital NOI was $166 million, down from $186 million, including lower promote revenue ($68 million versus $127 million). Core FFO was $1,262 million versus $1,178 million; FFO and Core FFO are non-GAAP measures.
- At September 30, total assets were $38.3 billion, total equity $25.4 billion, cash and cash equivalents $276 million, and debt $11.2 billion, compared with $9.4 billion of debt at year-end 2017. Debt’s weighted average interest rate was 2.7% and weighted average maturity was 76 months.
- Credit facilities had $3.2 billion available. Prologis reported compliance with all financial debt covenants. Cash declined by $171 million during the first nine months; operating cash flow was $1,274 million, investing activities used $644 million and financing activities used $789 million.
- The owned-and-managed operating portfolio was 97.5% occupied at quarter-end. Nine-month lease rollover produced a 21.7% increase in net effective rents. Management estimated in-place rents were more than 15% below market.
Material changes, outlook and risks
- The $8.5 billion DCT transaction was funded through approximately $6.6 billion of equity and assumption of $1.9 billion of debt. Prologis had repaid $1.8 billion of the assumed debt by quarter-end, using debt issuance proceeds. Total debt increased from year-end, while management reported that debt activity extended maturities and lowered the weighted average rate.
- Management described operating fundamentals as strong and expected market rents to continue growing, citing the rent gap and positive lease rollover. It reported $7.8 billion of potential development investment supported by its consolidated land bank. Developments under way at quarter-end were expected to be completed before October 2019.
- At quarter-end, 94 properties in the consolidated development portfolio were 44.3% leased, with $2.0 billion invested and an estimated $1.2 billion of additional investment to complete and lease them. The company expected to fund needs from operations, venture distributions, property sales or contributions, and available borrowing capacity. No specific full-year earnings or FFO guidance is stated in the supplied filing text.
- In October 2018, Prologis and certain co-investment ventures sold a portfolio of operating buildings and land in Europe and the U.S.; this was a subsequent-period event. The filing also reports $3.1 billion of remaining equity commitments across certain ventures, including $264 million attributable to Prologis.
- Risks include economic and political conditions, interest and foreign-exchange movements, competition, acquisition and development execution, access to capital, co-investment venture performance, international operations, environmental events and potential trade-policy changes. A 10% adverse currency move was estimated to produce a $55 million negative change in net income and cash flows on settlement of specified forward contracts; the filing estimated a 10% adverse interest-rate change would add $3 million of annual interest expense on relevant variable-rate debt.
- Management said ordinary-course legal proceedings were not expected to have a material adverse effect. KPMG performed an interim review, not an audit, and reported no material modifications necessary for GAAP conformity.
Important facts for investors to verify
- Separate recurring property and venture operating performance from transaction gains, promotes and other items when evaluating earnings and FFO.
- Review the DCT integration, acquired-property contribution, financing and resulting share dilution; the filing’s reported results include only 40 days of DCT operations.
- Track debt maturities, refinancing costs, interest-rate exposure and the use of the $3.2 billion of available credit capacity.
- Monitor occupancy, lease rollover spreads, development leasing and completion costs, and the timing and proceeds of the October portfolio sale.
- Assess the effect of foreign exchange and venture commitments, and consult the full 10-K risk factors referenced by the filing.