Prologis, Inc. and Prologis, L.P. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016; comparisons are with the corresponding 2015 periods unless noted. Prologis is a global logistics real estate REIT operating through Real Estate Operations and Strategic Capital. Amounts below are U.S. dollars; financial statement amounts are in millions unless specified. The two registrants are operated as one enterprise.
Key financial results
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $602.2 | $510.4 | $1,208.5 | $973.3 |
| Operating income | $142.3 | $87.3 | $271.5 | $171.2 |
| Consolidated net earnings | $295.8 | $140.3 | $518.6 | $491.6 |
| Net earnings attributable to common stockholders | $275.4 | $140.2 | $483.4 | $485.4 |
| Diluted earnings per share | $0.52 | $0.27 | $0.92 | $0.92 |
| Common dividends per share | $0.42 | $0.36 | $0.84 | $0.72 |
- Q2 revenue rose about 18% year over year and operating income about 63%. Common-stockholder earnings nearly doubled, with a significant contribution from higher real estate disposition gains.
- For the first half, revenue rose about 24%, while common-stockholder earnings were slightly lower year over year. Net disposition gains were $344.7 million versus $386.5 million in 2015; Q2 gains were $200.4 million versus $108.8 million.
- Six-month segment NOI increased to $811.6 million from $595.6 million in Real Estate Operations and to $47.8 million from $38.9 million in Strategic Capital. Management attributed the Real Estate Operations increase primarily to KTR acquisition activity, rent growth and occupancy, and development completions; dispositions partly offset the increase. Same-store NOI grew 4.7% for Q2.
- Supplemental non-GAAP measures: six-month FFO, as defined by Prologis, was $745 million versus $570 million; Core FFO was $654 million versus $528 million. These measures exclude items and should be considered alongside GAAP earnings, not as substitutes.
Cash flow, balance sheet and liquidity
- Six-month operating cash flow was $578.1 million, up from $355.9 million. Investing activities provided $908.1 million, compared with $5.08 billion used in 2015, which included the KTR acquisition. Financing used $1.43 billion, versus $4.73 billion provided in 2015.
- Cash and equivalents were $332.2 million at June 30, 2016, versus $264.1 million at December 31, 2015. Total assets were $30.75 billion and equity was $18.28 billion.
- Debt was $11.14 billion, down from $11.63 billion at year-end; weighted-average interest rate was 3.2% and weighted-average maturity was 66 months. The Operating Partnership had no credit-facility borrowings and approximately $3.42 billion of current availability. The Parent has no direct debt but guarantees the Operating Partnership’s unsecured debt.
- Management reported compliance with debt covenants. Scheduled principal payments for the remainder of 2016 were $21 million. Prologis paid $445 million in common and preferred dividends during the first half.
- Development spending was $775.5 million in the first half. The consolidated development portfolio comprised 82 properties, 53.8% leased, with $1.8 billion invested and $0.8 billion of remaining expected spending to completion and lease-up.
Material developments, outlook and risks
- Prologis described a portfolio of properties and development projects totaling $52.9 billion in gross investment across 666 million square feet in 20 countries; its investment share was $31.6 billion. Owned-and-managed operating portfolio occupancy was 96.1% overall, down from 96.9% at December 31, 2015. Consolidated occupancy was 95.7%.
- During April, Prologis redeemed portions of investments in two co-investment ventures for a combined $411 million and recorded an $86.6 million gain. Further redemption requests totaling approximately $200 million were expected to close in the second half of 2016, subject to completion.
- The global senior credit facility was amended in April: capacity increased to $3.0 billion and maturity extended to April 2020. Management said available cash, property operations, venture distributions, dispositions and financing capacity should meet anticipated needs, subject to market conditions. No specific earnings or revenue guidance was provided in the supplied filing text.
- Management cited continued rent growth, development value creation and growth in assets under management as business opportunities. In the first half, development starts totaled $720 million of estimated investment; stabilized projects totaled $1.33 billion, with an estimated 25.5% weighted-average margin.
- After the UK’s June 23 referendum to leave the EU, management did not anticipate a material operational or financial impact. The UK represented about 4.5% of Prologis’s share of annual NOI; management reported 98.8% leased occupancy at June 30 and rents about 10% below market.
- Risks include foreign-exchange exposure, interest-rate changes, development and leasing execution, access to capital, and refinancing risk at unconsolidated ventures. Prologis reported $6.6 billion of third-party debt at those ventures and no guarantees of that debt. A 10% adverse currency move was estimated to reduce net equity by $184 million; the filing estimated a $2 million increase in annual interest expense under its stated interest-rate sensitivity scenario.
- Ordinary-course legal proceedings were not expected to have a material adverse effect; the filing reported no material change in previously disclosed risk factors. Interim financial statements were reviewed by KPMG, not audited.
Important facts for investors to verify
- How much of the sharp Q2 GAAP earnings increase reflects recurring property operations versus disposition gains and other items.
- Whether occupancy, rent growth and development lease-up sustain the reported NOI and Core FFO growth, and how the sizable development spending converts into cash flow.
- Debt maturities, refinancing terms and covenant headroom, including the impact of foreign-currency debt and interest-rate exposure.
- Completion and proceeds from the announced venture redemptions, and the availability and timing of co-investment venture capital commitments.
- The assumptions and limitations behind management’s UK referendum assessment and the filing’s market-risk sensitivity estimates.