Business context and reporting period
Prologis, Inc. and Prologis, L.P. filed a combined unaudited Form 10-Q for the three months ended March 31, 2016. Prologis is a REIT focused on owning, developing and managing logistics properties, with Real Estate Operations and Strategic Capital segments. At quarter-end, it owned or had investments in properties and development projects spanning 667 million square feet in 20 countries; its owned-and-managed operating portfolio was 609 million square feet.
Financial and operating performance
| Metric | Q1 2016 | Q1 2015 or comparison |
|---|---|---|
| Total revenue | $606.3 million | $462.8 million; up 31% |
| Operating income | $129.2 million | $83.9 million |
| Net earnings attributable to common stockholders | $208.0 million; $0.40 basic EPS and $0.39 diluted | $345.2 million; $0.67 basic and $0.65 diluted |
| Core FFO | $330 million | $254 million; up 30% |
| Cash from operating activities | $266.3 million | $81.5 million |
| Cash from investing activities | $342.6 million | $(200.3) million |
| Cash used in financing activities | $(509.3) million | $(32.0) million |
| Cash and cash equivalents | $369.7 million at March 31 | $264.1 million at December 31, 2015 |
| Total debt | $11.687 billion; weighted-average rate 3.2% | $11.627 billion at December 31, 2015 |
Common dividends were $0.42 per share, up from $0.36. Total assets were $31.376 billion and total equity was $18.341 billion. The company reported $2.416 billion of available credit-facility capacity at quarter-end. Real Estate Operations NOI was $405 million, with a reported operating margin of 72.8% versus 68.5%; Strategic Capital NOI was $24 million versus $17 million. Same-store NOI increased 5.6%.
Material changes versus the prior comparable period
- Revenue growth reflected portfolio expansion, including the May 2015 KTR acquisition, as well as higher rental and strategic-capital revenue. Management attributed $83 million of the $117 million year-over-year increase in Real Estate Operations NOI to KTR-related acquisitions; rent growth, occupancy and development leasing contributed further increases.
- Common-stockholder earnings and EPS declined despite higher operating income. Net real estate disposition gains fell to $144 million from $278 million, while depreciation and amortization increased by $80 million, primarily due to acquired and completed development properties. Interest expense rose to $80.8 million from $68.8 million.
- Operating cash flow improved year over year. Investing cash flow benefited from $603 million of property disposition and contribution proceeds and repayment of a $197.5 million real-estate-backed note. Financing cash use included $809 million of debt repayments and repurchases and $223 million of common and preferred dividends.
- Quarter-end occupancy for the owned-and-managed portfolio was 96.1%, versus 95.9% a year earlier and 96.9% at December 31, 2015. Rent increases on rollovers were 16.2% in the quarter.
Outlook, commentary and risks
- No specific full-year earnings or FFO guidance is provided in the supplied filing text. Management expects to continue development, acquisitions and property dispositions or contributions as market conditions permit; it expects properties under development at March 31 to be completed before October 2017.
- The development portfolio included 89 properties, 43.4% leased, with $1.9 billion invested and $0.8 billion of estimated remaining spend. Management reported $448 million of development projects stabilized in the quarter, with an estimated 27% gross margin; the broader stabilization table reports $511 million of total estimated investment and a 26.7% estimated weighted-average margin.
- In April 2016, the company amended its Global Facility, increasing the facility to $3.0 billion and extending scheduled maturity to April 2020. It also redeemed portions of its interests in two co-investment funds for approximately $411 million combined, based on the filing’s stated dollar equivalents.
- Management said existing cash, property operations, venture distributions, property and investment sales, and borrowing capacity should be adequate for anticipated needs. Near-term demands include $337 million of scheduled debt principal payments for the remainder of 2016 and development, leasing, capital expenditure and investment commitments.
- Risks include foreign-exchange and interest-rate exposure, refinancing needs at unconsolidated ventures, and dependence on capital markets and property transaction activity. A 10% adverse currency movement was estimated to reduce net equity by $180 million; the filing’s sensitivity analysis estimated a $2 million increase in interest expense from a 10% adverse rate change on applicable average variable-rate balances. Prologis said it did not guarantee third-party debt of its unconsolidated ventures and was in compliance with its debt covenants.
- Ordinary-course legal proceedings were not expected to have a material adverse effect. The interim financial statements received an independent accountant’s review, not a full audit; management reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- How much of revenue, NOI and Core FFO growth is recurring same-store performance versus KTR acquisition effects, development lease-up and transaction-related items?
- Whether the 16.2% rollover rent increases and 96.1% occupancy are sustained, and how the sequential occupancy decline affects future rental growth.
- The assumptions behind the estimated development margins, remaining project costs and expected completion dates, including leasing progress on the development pipeline.
- Debt maturities, variable-rate exposure, covenant headroom and refinancing capacity, including the effect of the April 2016 credit-facility amendment.
- The timing and reliability of co-investment venture distributions, remaining equity commitments of $2.912 billion in certain unconsolidated ventures, and refinancing risks borne by those ventures.
- How disposition gains, currency and derivative results, and other non-GAAP adjustments affect comparisons of GAAP earnings with Core FFO.