Prologis, Inc. and Prologis, L.P. — 2020 Third-Quarter Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Prologis is a global logistics real estate owner, developer and manager operating in 19 countries. Prologis, Inc. is the REIT parent and general partner of Prologis, L.P.; the combined filing reports them as one enterprise.
Financial performance and position
- Third-quarter revenue: $1.083 billion, up 15% from $942 million in 2019. Rental revenue was $980 million, up 38%.
- Third-quarter earnings: Net earnings attributable to common stockholders were $299 million, down 34% from $451 million; diluted EPS was $0.40 versus $0.71. Operating income before real estate transaction gains declined to $313 million from $348 million. Foreign currency and derivative losses of $101 million and early debt-extinguishment losses of $98 million weighed on quarterly results.
- Nine-month revenue and earnings: Revenue was $3.327 billion, up 33%. Net earnings attributable to common stockholders were $1.193 billion versus $1.181 billion; diluted EPS was $1.63 versus $1.86.
- Operating measures: Nine-month Real Estate Operations NOI was $2.080 billion versus $1.551 billion, and Strategic Capital NOI was $342 million versus $255 million. Core FFO was $2.141 billion versus $1.613 billion; FFO as modified by Prologis was $2.352 billion versus $1.883 billion. These are non-GAAP measures. Same-store property NOI for the third quarter increased 1.9% on a net-effective basis and 2.2% on a cash basis.
- Cash flow: Nine-month operating cash flow was $2.333 billion versus $1.648 billion. Investing activities used $2.580 billion, principally reflecting development and acquisitions, including the IPT transaction. Financing activities provided $94 million. Cash ended the period at $940 million, down from $1.089 billion at year-end 2019.
- Debt and liquidity: Debt was $16.518 billion, up from $11.906 billion at December 31, 2019; the reported weighted-average effective rate was 2.0%, versus 2.2%. Total liquidity was $5.173 billion, including $4.233 billion of available borrowing capacity and $940 million cash. Weighted-average debt maturity was 126 months. Management reported compliance with all debt covenants; ratings were A3 from Moody’s and A- from S&P, both stable.
- Balance sheet: Total assets were $55.760 billion versus $40.032 billion at year-end 2019; total equity was $36.489 billion versus $26.072 billion. Acquisitions materially affect period-to-period comparability.
Material changes versus the prior comparable period
- Revenue and NOI increased substantially, primarily reflecting the February Liberty acquisition and January IPT acquisitions, along with operating growth. Prologis acquired 519 Liberty industrial properties totaling about 99.6 million square feet; the IPT portfolios added 235 properties totaling about 37 million square feet.
- Quarterly common earnings declined despite higher revenue, affected by foreign currency and derivative losses, higher interest expense and increased debt-extinguishment losses. The prior-year quarter included $148 million of promote revenue, compared with none in third-quarter 2020, making Strategic Capital revenue and earnings uneven between periods.
- For the nine months, operating cash flow increased, while investing outflows rose sharply with acquisition and development activity. Net debt increased alongside the acquisitions and associated financing.
- Common shares issued and outstanding increased to approximately 739 million from 632 million at year-end, principally reflecting equity issued in the Liberty transaction.
Outlook, management commentary and risks
- Management said operating fundamentals remained strong despite COVID-19 and that its outlook was improving, while emphasizing that the pandemic’s duration and effects remained uncertain. As of October 19, Prologis had collected 99.0% of third-quarter rent and 93.4% of October rent for its owned-and-managed portfolio. It had granted $40 million of rent deferrals in 2020 and collected 94.8% of deferred rents then due.
- Owned-and-managed leasing activity totaled 113 million square feet for the first nine months, including 42 million in the third quarter. Third-quarter net effective rent change on rollover was 22.8%. Management estimated in-place leases were approximately 12% below market rent and expected market rents to increase.
- Management expected capital deployment and dispositions to accelerate in the fourth quarter and anticipated restarting most suspended speculative development projects by year-end. At September 30, active consolidated development had $3.0 billion of total expected investment, was 71.3% leased and had $1.1 billion remaining to spend; suspended projects represented $316 million of expected investment.
- About 42 million square feet of non-strategic industrial assets acquired through Liberty and IPT, with gross book value of approximately $3 billion, were not intended for long-term operation. The company expects to sell or contribute these assets, depending on anticipated holding periods.
- Material risks include COVID-19 and economic conditions, interest rates and foreign exchange, acquisition and development execution, financing availability and credit ratings, international operations, co-investment venture exposures, environmental events and maintaining REIT status. The filing reported no material change in previously disclosed risk factors and no legal proceedings expected to have a material adverse effect.
- The filing reported $21 million of rent deferrals for consolidated properties as of October 19 under its lease-concession disclosure; the broader owned-and-managed portfolio figure was $40 million. Deferred rent was generally documented with a note receivable and revenue continued to be recognized.
Important facts for investors to verify
- Whether rent collections and repayment of deferred amounts remain strong, and whether bad debt or further concessions increase.
- How much of revenue, NOI and FFO growth is recurring versus acquisition-related, disposition gains or promote revenue; review the company’s non-GAAP reconciliations.
- Progress and proceeds from disposing of or contributing non-strategic Liberty and IPT assets, and the effect on leverage and earnings.
- Development lease-up, remaining funding needs and the pace of restarting suspended projects.
- Debt maturities, refinancing costs, foreign-currency exposure, liquidity and covenant compliance as the enlarged portfolio is integrated.