Prologis, Inc. and Prologis, L.P. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. The combined, unaudited filing covers Prologis, Inc., a REIT, and its operating partnership, which owns and operates substantially all business assets. Prologis owns, manages and develops logistics facilities in 19 countries; its segments are Real Estate Operations and Strategic Capital. KPMG reviewed the interim statements and reported no material modifications needed for GAAP conformity; this was not an audit.
Financial results and position
Amounts are U.S. dollars; income statement and cash flow figures below are in millions unless stated otherwise.
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $1,151 | $1,266 | $2,299 | $2,244 |
| Rental revenue | $1,015 | $944 | $2,036 | $1,823 |
| Net earnings attributable to common stockholders | $599 | $405 | $964 | $894 |
| Diluted earnings per share | $0.81 | $0.54 | $1.30 | $1.23 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $1,466 | $1,355 |
| Core FFO attributable to common stockholders/unitholders (non-GAAP) | Not shown in the supplied filing text | Not shown in the supplied filing text | $1,517 | $1,453 |
- Q2 rental revenue increased about 7% year over year, while total revenue declined about 9%, chiefly because strategic capital revenue fell to $129 million from $321 million. The prior-year quarter included a $228 million promote; Q2 2021 promote revenue was $11 million.
- Six-month Real Estate Operations NOI rose to $1,516 million from $1,345 million. Strategic Capital NOI declined to $155 million from $289 million, mainly reflecting the prior-year promote. Six-month FFO, as modified by Prologis, was $1,666 million versus $1,632 million (non-GAAP).
- For the quarter, same-store property NOI increased 6.1% on a net-effective basis and 5.8% on a cash basis. Owned-and-managed portfolio occupancy was 96.4% at June 30, 2021, compared with 96.2% at year-end 2020. Management estimated in-place rents were 16.9% below current market rents.
- At June 30, total assets were $56.4 billion, debt was $17.0 billion, and total equity/capital was $36.5 billion. Debt was $16.8 billion at December 31, 2020. Cash and cash equivalents were $601 million.
- Available liquidity was $5.6 billion: $5.0 billion of credit-facility availability and $601 million of cash. Weighted-average debt interest rate was 1.6%, with a weighted-average remaining maturity of 11.3 years. The company reported compliance with all financial debt covenants; ratings were A3 from Moody’s and A- from S&P, both stable.
- Six-month investing cash outflow was $516 million, versus $2,251 million in 2020; financing cash outflow was $915 million, versus $354 million of inflow. Real estate development spending was $997 million, acquisitions were $831 million, and proceeds from dispositions and contributions were $1,830 million. Common dividends paid were $936 million; the quarterly common dividend was $0.63 per share, up from $0.58 in 2020.
Material changes and unusual items
- Six-month GAAP net earnings rose to $1,050 million from $976 million, and operating income increased to $1,233 million from $1,080 million. Results included $505 million of net gains on real estate dispositions, compared with $325 million in the prior-year period.
- Six-month losses on early debt extinguishment increased to $187 million from $66 million. Prologis issued approximately $2.6 billion of senior notes and redeemed approximately $1.5 billion during the period, refinancing higher-rate debt and extending maturities.
- Development starts increased to 31 projects with $1.145 billion of total expected investment, from 6 projects and $365 million in the prior-year period. At June 30, the consolidated development portfolio had $3.7 billion of expected total investment, was 56.8% leased, and had an estimated $1.5 billion remaining to be spent.
- Prologis generated $2.0 billion of net proceeds and realized $505 million of net gains during the first half, primarily from property contributions to co-investment ventures and third-party dispositions.
Outlook, commentary and risks
- Management described first-half fundamentals as strong: leasing accelerated, rent collections remained exceptional, and demand for logistics space was robust. It expected strong rent growth, asset valuations and profitable investment activity to support results in the rest of 2021, and said development activity was expected to accelerate. The filing does not provide a clear numerical full-year earnings or FFO guidance figure in the supplied text.
- Management cited e-commerce growth and supply-chain resilience needs as demand drivers. It said the rent gap between in-place and current market rates offered potential for future rent growth, while noting outcomes depend on market conditions and lease renewals.
- Risks include COVID-19 uncertainty, economic and political conditions, interest and foreign-exchange movements, competition, acquisition/development execution, financing availability, REIT qualification, international operations and co-investment venture risks. Management reported no material change to the risk factors in its 2020 Form 10-K.
- Foreign-currency and derivative gains were $74 million for the first half, versus $52 million in 2020. The filing states that a 10% weakening of the U.S. dollar against relevant currencies could result in a $149 million cash payment on settlement of outstanding forward contracts. A 10% increase in rates on average variable-rate debt was estimated to add $1 million of annual interest expense.
- Prologis stated ordinary-course legal proceedings were not expected to have a material adverse effect. No material changes in internal control were reported, and disclosure controls were deemed effective.
Important facts for investors to verify
- How much of earnings and FFO growth reflects recurring rental operations versus disposition gains, promotes, currency effects and debt-extinguishment costs.
- Whether rent increases on lease rollover and the 16.9% estimated market-rent gap translate into realized cash rent growth and sustained occupancy.
- Development spending, leasing progress, stabilization yields and remaining funding needs for the $3.7 billion development portfolio.
- Debt maturities, refinancing costs, covenant headroom, credit-facility availability and sensitivity to currency and interest-rate changes.
- Whether co-investment venture commitments, distributions and third-party leverage remain consistent with the company’s liquidity and capital-allocation plans.