Prologis, Inc. and Prologis, L.P. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. Prologis is a global industrial-property owner, developer and manager, operating through Real Estate Operations and Strategic Capital. The filing presents the parent and operating partnership together as one enterprise; figures below are generally consolidated and in U.S. dollars.
Financial performance and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $510.4 million | $460.1 million | $973.3 million | $894.8 million |
| Operating income | $87.3 million | $95.3 million | $171.2 million | $166.7 million |
| Net earnings attributable to Prologis, Inc. common stockholders | $140.2 million | $72.7 million | $485.4 million | $77.4 million |
| Diluted earnings per share | $0.27 | $0.13 | $0.92 | $0.15 |
| Common dividends per share | $0.36 | $0.33 | $0.72 | $0.66 |
- Cash flow: Six-month operating cash flow was $355.9 million, up from $305.9 million. Investing used $5.08 billion, primarily reflecting the KTR acquisition; financing provided $4.73 billion. Ending cash was $351.0 million.
- Balance sheet and debt: At June 30, total assets were $31.60 billion, total debt $12.12 billion and total equity $18.35 billion. Debt increased from $9.38 billion at year-end 2014. Weighted-average debt interest rate was 2.9%, versus 3.6% at year-end; weighted-average maturity was 62 months. Credit facilities had $2.19 billion available.
- Operating measures: Six-month Real Estate Operations NOI was $595.9 million, up from $542.5 million; reported operating margin was 67.4%, versus 70.2%. Average occupancy was 95.4%, compared with 94.0%. Same-store NOI for Q2 increased 4.5% year over year.
- FFO: Six-month Core FFO was $528.3 million, compared with $461.8 million. FFO is a non-GAAP measure; the company cautions it should be considered alongside GAAP earnings.
Material changes versus the prior comparable period
- Q2 revenue rose about 11%, while operating income fell about 8%. Rental income growth and portfolio expansion were offset by higher rental costs and depreciation and amortization.
- Q2 net earnings attributable to common stockholders rose substantially, but results include material disposition gains. Six-month gains on real-estate dispositions were $386.5 million, versus $186.6 million in 2014. Six-month GAAP earnings also reflect different tax and noncontrolling-interest effects between periods.
- On May 29, Prologis acquired KTR’s real-estate assets and operating platform through its 55%-owned consolidated USLV venture: 315 operating properties totaling 59 million square feet, plus development properties and land. The transaction added $4.81 billion of net cash use in investing activities and $735.2 million of assumed debt; Prologis issued 4.5 million limited partnership units. Reported 2015 results included about one month of KTR operating results.
- Debt rose to finance KTR and other investment activity. Prologis issued €700 million of 1.375% senior notes due 2021, drew new U.S.-dollar and yen term loans, and borrowed $440.2 million under credit facilities. In March, holders exchanged $459.8 million of exchangeable notes primarily for 11.9 million common shares.
- Strategic Capital NOI declined to $48.6 million for the first half from $69.6 million, principally because 2014 included $31.3 million of Americas promotes. This was partly offset by higher earnings from unconsolidated entities.
Outlook, commentary and risks
- Management stated that operating fundamentals were improving and reported positive rent change on rollovers for ten consecutive quarters. Six-month rent change on rollovers was 9.7%–14.4%, compared with 6.6%–7.0% in 2014.
- Management expects to fund development, leasing, debt service, dividends and investment needs through operating cash, property sales and contributions, venture distributions, available credit and capital-market access. It expected to repay KTR-related credit-facility borrowings before maturity using property contributions and dispositions; this is an expectation, not a guaranteed outcome.
- At June 30, the consolidated development portfolio comprised 82 properties, 45.7% leased, with $1.5 billion invested and estimated total investment of $2.7 billion when completed and leased; $1.2 billion remained to be spent. Management said these projects were expected to be completed before October 2016.
- Market risks include foreign-exchange exposure and variable-rate debt. A 10% adverse exchange-rate movement was estimated to reduce net equity by $174.7 million. A 10% adverse interest-rate change was estimated to increase interest expense by $2.8 million, based on the period’s average variable-rate debt not covered by swaps.
- Prologis reported compliance with all debt covenants. It said it did not guarantee third-party debt of unconsolidated ventures, but those ventures may need refinancing, partner contributions or asset sales to meet maturities. Management said ordinary-course legal proceedings were not expected to have a material adverse effect and reported no material changes to the risk factors in its 2014 Form 10-K.
- The KTR purchase-price allocation was substantially complete but property valuation remained in progress. Acquisition costs of $24.7 million were recorded in other expenses. The interim financial statements were reviewed, not audited; the independent accountant reported no material modifications needed for GAAP conformity.
Important facts for investors to verify
- How KTR integration, acquired-property occupancy and remaining development commitments affect future NOI, cash flow and capital needs.
- Whether planned property contributions and dispositions repay acquisition-related borrowings on the expected timetable and terms.
- How much reported earnings growth reflects recurring property operations versus disposition gains, tax effects, acquisition costs and noncontrolling interests; compare GAAP earnings with Core FFO and its reconciliation.
- Changes in occupancy, rent-rollover spreads, same-store NOI and Strategic Capital promotes, including effects from currency movements.
- Debt maturities, variable-rate exposure, covenant headroom and the liquidity available after planned investment and distributions.