Prologis, Inc. — FY 2015 Form 10-K
Reporting period: Year ended December 31, 2015. This is an annual report, not a standalone fourth-quarter filing; quarterly figures below are unaudited data included in the 10-K. Prologis is a global industrial-logistics REIT operating in 20 countries, with 607 million square feet in its operating portfolio and 669 million square feet including development and other properties.
Financial performance and condition
| Metric | 2015 | 2014 |
|---|---|---|
| Total revenue | $2.197 billion | $1.761 billion |
| Consolidated net earnings | $925.5 million | $739.3 million |
| Net earnings per diluted share | $1.64 | $1.24 |
| FFO, as defined by Prologis | $1.309 billion | $887.5 million |
| Core FFO | $1.181 billion | $953.1 million |
| Cash from operating activities | $963.4 million | $704.5 million |
| Total assets | $31.395 billion | $25.775 billion |
| Total debt | $11.627 billion | $9.337 billion |
| Cash and cash equivalents | $264.1 million | $350.7 million |
- Real Estate Operations NOI rose to $1.377 billion from $1.087 billion; its reported operating margin was 69.3%, versus 70.5%. Average occupancy was 95.3%, up from 94.5%.
- Same-store NOI increased 4.3% for 2015. Owned-and-managed portfolio occupancy was 96.3%, compared with 95.6% in 2014. Rent changes on lease rollovers ranged from 9.5% to 14.4% during 2015.
- Strategic Capital NOI was $121.9 million, slightly below $123.4 million in 2014; results reflect timing of promotes and venture activity. Prologis earned $56.6 million of total promotes, including $29.5 million recognized as third-party share revenue.
- Prologis paid common dividends of $1.52 per share in 2015, up from $1.32 in 2014. Operating cash flow exceeded cash dividends paid on common and preferred stock by $158.7 million.
- Debt’s weighted-average interest rate was 3.2%, down from 3.7%; weighted-average maturity was 67 months. The company reported $2.63 billion of available credit-facility capacity and compliance with debt covenants at year-end.
Material changes and notable items
- In May, Prologis acquired KTR Capital Partners’ real estate assets and operating platform through a consolidated venture in which it owns 55%. The portfolio included 59 million square feet of operating properties; total assets were valued at $5.8 billion. The acquisition materially expanded the portfolio and contributed about seven months of operating results.
- Revenue growth also reflects the 2014 consolidation of the North American Industrial Fund, acquisitions, and development activity. Prologis reported 73.7 million square feet of acquired operating properties in its owned-and-managed portfolio during 2015, principally through KTR.
- Net gains on real estate dispositions and revaluation were $758.9 million, versus $725.8 million in 2014. The 2015 gains were driven mainly by third-party U.S. dispositions ($609.9 million) and property contributions ($149.0 million). These gains materially affect GAAP earnings and should be distinguished from recurring property operations.
- Core FFO increased to $1.181 billion from $953.1 million, while FFO as defined by Prologis increased to $1.309 billion from $887.5 million. These are non-GAAP measures; management cautions they are supplemental and not substitutes for GAAP earnings or operating cash flow.
- For the fourth quarter, revenue was $643.2 million versus $450.9 million a year earlier; net earnings attributable to common stockholders were $118.4 million versus $408.6 million, and diluted EPS was $0.23 versus $0.81. Quarterly earnings were affected by nonrecurring and transaction-related items.
Outlook, risks and contingencies
- Management cited improving market fundamentals, strong demand for logistics space, rising market rents and development opportunities as growth drivers. It provided no specific quantified 2016 revenue, earnings or FFO guidance in the supplied filing text.
- At year-end, the consolidated development portfolio had 91 properties, was 39.3% leased, and had $1.9 billion invested against $2.9 billion estimated total investment when completed and leased; approximately $1.0 billion remained to fund. Management expected 64% of the broader development portfolio to be completed by December 31, 2016.
- Near-term funding needs included a $400 million term loan scheduled to mature in 2016, other scheduled debt principal payments of $534 million in 2016, and development commitments. Management expected to use operations, asset dispositions or contributions, venture distributions and available borrowing capacity to meet needs.
- Key risks include real-estate and logistics-sector downturns, lease renewals and customer defaults, concentrated market exposure (California represented 31.0% of operating-property NOI), development and acquisition execution, dependence on capital markets, debt refinancing and interest rates, currency movements, co-investment venture risks, natural disasters, insurance limitations, cyber threats and maintaining REIT status.
- Foreign currency translation losses were $208.9 million in 2015. A hypothetical 10% adverse exchange-rate movement was estimated to reduce net equity by $162.1 million. The company reported $2.4 billion of variable-rate debt, partly offset by interest-rate swaps.
- Management reported no known environmental liabilities or legal proceedings expected to have a material adverse effect. KPMG issued unqualified opinions on the financial statements and internal controls; management also assessed internal control over financial reporting as effective.
Investor verification priorities
- Separate recurring rental and same-store performance from disposition gains, acquisition effects, promote income and other items included in GAAP earnings and FFO.
- Review KTR’s ongoing occupancy, integration, financing costs and contribution to earnings, together with the venture partner’s share of results and capital requirements.
- Confirm the funding plan for 2016 maturities and development commitments, including the expected repayment of the $400 million term loan and completion of pending venture redemptions.
- Assess lease expirations, rollover rent changes and customer concentration; Amazon was the largest customer at 4.5% of consolidated net effective rent.
- Evaluate exposure to California and other concentrated markets, foreign currencies, variable interest rates, co-investment venture debt and uninsured catastrophe losses.