Prologis, Inc. and Prologis, L.P. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. The combined filing presents Prologis, Inc. and its operating partnership as one enterprise; the partnership owns substantially all operating assets and incurs the debt. Prologis is a logistics real estate owner, developer and manager operating in 19 countries.
Financial and operating performance
| Metric | Q1 2018 | Q1 2017 or prior period |
|---|---|---|
| Total revenue | $693.7 million | $629.2 million |
| Operating income | $237.1 million | $161.9 million |
| Net earnings attributable to Prologis, Inc. common stockholders | $365.9 million; diluted EPS $0.68 | $203.3 million; diluted EPS $0.38 |
| Cash from operating activities | $349.2 million | $352.8 million |
| Cash from investing activities | $151.9 million | $56.5 million |
| Cash used in financing activities | $496.0 million | $828.9 million |
| Cash and cash equivalents | $458.1 million | $447.0 million at December 31, 2017 |
| Debt | $9.46 billion; weighted average interest rate 2.8% | $9.41 billion; 2.9% at December 31, 2017 |
| Common dividend per share | $0.48 | $0.44 |
- At March 31, 2018, total assets were $29.67 billion and total equity was $18.79 billion. Credit facilities had $3.19 billion of availability.
- Segment NOI was $414.5 million for Real Estate Operations, versus $416.8 million, and $89.1 million for Strategic Capital, versus $25.2 million.
- Owned and managed portfolio occupancy was 96.8%, compared with 97.2% at year-end 2017. Same-store NOI increased 4.4% on a net-effective basis and 6.5% on a cash basis. Net effective rent on lease rollover increased 16.0% in the quarter.
- Modified FFO was $598 million versus $378 million; Core FFO was $443 million versus $347 million. These are non-GAAP measures and are not substitutes for GAAP earnings or operating cash flow.
Changes and unusual items
- Revenue increased about 10%, while common-stockholder net earnings rose substantially. The comparison includes $195.1 million of net real estate disposition gains, versus $97.3 million a year earlier, and $62.5 million of promote revenue, versus $3.1 million.
- Beginning January 1, 2018, Prologis adopted new revenue recognition guidance and recognized the full gain on contributions of properties to unconsolidated ventures. The company says the prior approach deferred the portion attributable to its ownership interest; this accounting change contributed to the year-over-year gain comparison.
- Rental revenue fell to $427.9 million from $439.9 million. Management attributed lower Real Estate Operations NOI primarily to property contributions and dispositions, partly offset by higher occupancy and rent growth.
- Interest expense declined to $47.2 million from $72.9 million. Prologis cited reduced secured debt following a 2017 venture contribution, changes in debt composition and interest rates, and settlement of Canadian loan swaps.
- Strategic Capital growth was concentrated in promotes, primarily from the China Logistics Venture. Management notes that promote revenue is variable and depends on venture performance and valuations.
Outlook, liquidity and risks
- Management said operating fundamentals remained strong and expects market rent growth over the next several years. It estimates portfolio leases are more than 14% below current market rents, while noting this is an estimate rather than a guarantee of future increases.
- The consolidated land bank is estimated to support $8.1 billion of development total estimated investment. At quarter-end, 84 consolidated development properties were 60.5% leased, with $1.7 billion invested and an estimated further $1.1 billion required to complete and lease them. Management expected current projects under development to be completed before October 2019.
- Management considers cash, operating cash flow, venture distributions, property sales and contributions, and borrowing capacity sufficient for anticipated needs, subject to market conditions. Scheduled 2018 debt principal payments were $164 million; the company reported compliance with financial debt covenants and credit ratings of A3 from Moody’s and A− from S&P, both stable.
- Unconsolidated co-investment ventures had $8.4 billion of third-party debt; Prologis reported no guarantees of that debt. It cautioned that ventures may not be able to refinance maturities on favorable terms or at all. Remaining venture equity commitments totaled $3.92 billion, including $317 million attributable to Prologis.
- Key disclosed risks include economic and political conditions, interest and foreign exchange rates, competition, development and transaction risks, access to financing, REIT and tax matters, co-investment venture risks, international operations and environmental or natural-disaster events. The filing reported no material change to the prior annual report’s risk factors and no legal proceedings expected to have a material adverse effect.
- The filing gives no clear quantitative full-year earnings or FFO guidance. The interim financial statements were reviewed by KPMG, not audited.
Important facts for investors to verify
- How much of Q1 earnings growth reflects recurring property operations versus disposition gains, promote revenue and the new revenue recognition treatment.
- Whether occupancy, same-store NOI growth and the 16% rent-rollover increase persist, and how quickly below-market leases reset.
- Development completion, leasing and funding progress, including the estimated $1.1 billion remaining investment in the existing consolidated pipeline.
- Debt maturities, refinancing costs, currency and interest-rate exposure, and the ability of unconsolidated ventures to refinance their debt and meet commitments.
- The timing and variability of future promote income, and the cash available after dividends, development spending and other investment needs.