Prologis, Inc. annual report, FY2019

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Prologis, Inc. — 2019 Form 10-K

Reporting period: Fiscal year ended December 31, 2019. The combined filing covers Prologis, Inc. and its operating partnership, Prologis, L.P., which are managed as one enterprise. Prologis is a global logistics real estate REIT operating in 19 countries, with Real Estate Operations and Strategic Capital segments.

Financial and operating performance

  • Revenue: $3.331 billion, up 18.8% from $2.804 billion in 2018. Rental revenue rose to $2.832 billion from $2.389 billion; strategic capital revenue increased to $492 million from $406 million.
  • Profit: Consolidated net earnings were $1.702 billion, down 6.6% from $1.823 billion. Net earnings attributable to common stockholders were $1.567 billion, or $2.48 per diluted share, versus $1.643 billion, or $2.87 per diluted share, in 2018.
  • NOI and FFO: Real Estate Operations NOI increased 17.2% to $2.091 billion; Strategic Capital NOI rose 23.3% to $307 million. Prologis-modified FFO increased 16.1% to $2.591 billion, and Core FFO increased 21.0% to $2.164 billion. Both FFO measures are non-GAAP.
  • Cash flow: Operating cash flow was $2.264 billion, up from $1.804 billion. Investing activities used $685 million and financing activities used $840 million. Cash and cash equivalents ended the year at $1.089 billion.
  • Margins and occupancy: The filing reports segment NOI rather than a single company-wide operating margin. Owned-and-managed portfolio occupancy was 96.5%, down from 97.5%; weighted-average net effective rent change was 23.7% for the year.
  • Debt and liquidity: Total debt was $11.906 billion, up from $11.090 billion. The weighted-average effective interest rate was 2.2%, and weighted-average debt maturity was 7.8 years. Available credit-facility capacity was $3.7 billion; total liquidity, including unrestricted cash, was $4.8 billion. The company reported compliance with debt covenants and ratings of A3 (Moody’s) and A− (S&P), both stable.
  • Dividends: Common dividends were $2.12 per share, up from $1.92. Series Q preferred dividends were $4.27 per share.

Material changes versus 2018

  • Revenue growth reflected portfolio expansion, including the 2018 DCT acquisition, as well as higher rents and strategic capital activity. Consolidated operating properties totaled 362 million square feet; the broader owned-and-managed portfolio totaled 735 million square feet.
  • Despite higher rents, owned-and-managed occupancy declined by 1.0 percentage point. Management linked the decline to prioritizing rental-rate growth; rent change on rollover for the owned-and-managed portfolio was 23.7% for 2019.
  • Reported earnings declined even as revenue and segment NOI grew. Net earnings from unconsolidated entities fell to $200 million from $298 million, primarily because 2018 included significant European property-disposition gains. Foreign-currency and derivative results shifted from a $117 million gain in 2018 to a $42 million loss in 2019.
  • Net cash from operations rose by $460 million. Debt increased by $816 million, while cash increased from $344 million to $1.089 billion.
  • Prologis adopted the new lease accounting standard in 2019, recognizing lease right-of-use assets and liabilities and expensing certain internal leasing costs that had previously been capitalized.

Outlook, transactions and risks

  • Outlook: Management said it expected market rents to continue growing over the next few years and estimated in-place leases were more than 15% below current market rents. It also cited development, acquisitions and scale efficiencies as growth opportunities. The provided filing text does not give a clear quantified earnings or FFO forecast.
  • Development: The consolidated development portfolio had total expected investment of $4.0 billion, was 50% leased, and required an estimated additional $2.1 billion of investment. Approximately 64% of projects under development were expected to be completed by December 31, 2020.
  • Subsequent acquisitions: In January 2020, two co-investment ventures acquired Industrial Property Trust assets for approximately $4 billion, with Prologis investing approximately $1.6 billion. Prologis completed the approximately $13 billion Liberty transaction on February 4, 2020, using equity and assumed debt. The filing’s descriptions differ on Liberty portfolio size: the overview cites 550 properties and 108 million square feet, while a financial-statement note cites 502 consolidated industrial properties and 96.4 million square feet.
  • Contingencies: Six lawsuits related to the Liberty transaction remained outstanding at the filing date; plaintiffs sought rescission and/or damages, among other relief. Prologis said it considered the claims without merit and intended to defend them. Management did not expect other ordinary-course litigation or identified environmental matters to have a material adverse effect.
  • Key risks: Logistics-sector and local-market downturns, including California concentration; customer defaults and lease rollover; development and acquisition execution; integration of IPT and Liberty; foreign currency exposure; debt refinancing, interest rates and the LIBOR transition; natural disasters and insurance limitations; cybersecurity; and continued qualification as a REIT.
  • Unusual items: Prologis earned $181 million of promotes in 2019, including $166 million recorded in Strategic Capital revenue. Real estate disposition gains totaled $858 million across the two reported gains lines, materially contributing to reported operating income. The annual financial statements received unqualified audit opinions from KPMG; the auditor identified assessment of expected property holding periods as a critical audit matter.

Important facts for investors to verify

  1. Reconcile Liberty’s portfolio figures in the filing and assess acquisition financing, dilution, integration costs and realization of expected efficiencies.
  2. Track occupancy, renewal spreads and the conversion of above-market lease potential into recurring cash NOI, particularly as occupancy declined in 2019.
  3. Separate recurring operating performance from disposition gains and promote revenue when evaluating earnings and FFO growth.
  4. Review the development pipeline’s lease-up, completion schedule and remaining funding needs, alongside available liquidity and debt maturities.
  5. Monitor the Liberty-related litigation, foreign-exchange and interest-rate exposures, and the effects of subsequent acquisitions on leverage and credit ratings.