Prologis, Inc. and Prologis, L.P. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Prologis is a global logistics real estate owner, developer and manager operating in 19 countries. The filing combines the Parent and Operating Partnership, which are operated as one enterprise.
Financial and operating performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $2.451 billion | $1.252 billion | $4.220 billion | $2.471 billion |
| Consolidated net earnings | $1.279 billion | $646 million | $1.778 billion | $1.866 billion |
| Net earnings attributable to common stockholders | $1.215 billion | $610 million | $1.678 billion | $1.759 billion |
| Basic/diluted EPS | $1.31 / $1.31 | $0.82 / $0.82 | $1.82 / $1.81 | $2.38 / $2.36 |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $2.329 billion | $1.645 billion |
| Investing cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $(4.513) billion | $(1.959) billion |
| Financing cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $2.452 billion | $229 million |
- Q2 rental revenue was $1.651 billion, up from $1.093 billion. Strategic capital revenue was $799 million versus $156 million, including $669 million of promote revenue, principally from a U.S. co-investment venture.
- For the first half, real estate segment NOI was $2.466 billion versus $1.614 billion; strategic capital NOI was $711 million versus $181 million. These are non-GAAP segment measures.
- Six-month Core FFO attributable to common stockholders/unitholders was $2.894 billion versus $1.681 billion. The filing cautions that FFO and Core FFO are non-GAAP measures and should be considered with GAAP results.
- At June 30, total assets were $92.392 billion, debt was $28.129 billion and total equity/capital was $58.078 billion. Cash and cash equivalents were $531 million.
- Debt had a 2.9% weighted-average interest rate and 10-year weighted-average remaining maturity, compared with 2.5% and 9 years at year-end 2022. Available liquidity was $6.364 billion, including $5.833 billion of current credit-facility availability. Prologis reported compliance with all financial debt covenants.
- Six-month real estate acquisitions totaled $3.449 billion in cash-flow outlays; development spending was $1.712 billion. Dividends were $0.87 per common share in each of the first two quarters, versus $0.79 in 2022.
Material changes versus the prior comparable period
- Revenue growth reflects the October 2022 Duke Realty acquisition, which added a substantial logistics portfolio, as well as exceptional promote income in 2023. The filing identifies a June acquisition of 70 U.S. properties totaling 13.8 million square feet for $3.1 billion.
- Q2 common EPS increased to $1.31 from $0.82, while first-half EPS declined to $1.82 from $2.38. The comparison is affected by prior-year real estate disposition gains: first-half 2022 included $585 million of gains on other real estate dispositions, compared with $29 million in 2023. First-half 2023 also had higher interest expense, $286 million versus $124 million.
- First-half operating cash flow rose to $2.329 billion from $1.645 billion, while investing outflows increased with acquisitions and development. Cash increased by $253 million over the first half, versus a $119 million decline in 2022.
- Occupancy in the owned-and-managed operating portfolio was 97.2% at June 30, 2023, down from 98.2% at December 31, 2022. Net effective rent change on leases commenced in the first half was 73.4%. Management estimated lease mark-to-market at approximately 66%.
- Development starts slowed: 10 buildings and $403 million of total expected investment (TEI) in the first half, compared with 58 buildings and $2.728 billion in 2022. Stabilized development yield was 6.4% versus 6.0%; estimated weighted-average development margin was 36.7% versus 76.5%.
Outlook, risks and unusual items
- Management cited consistent logistics demand, low vacancy and accumulated market-rent growth as drivers of expected organic growth. It highlighted rent increases as leases roll over, a development land bank with estimated potential TEI of $33.8 billion on a consolidated basis, and continued growth of co-investment ventures. The filing does not provide a clear numerical earnings or revenue forecast in the supplied text.
- The development portfolio was 39.5% leased at June 30, with $4.2 billion invested, $6.4 billion TEI and an estimated $2.2 billion remaining to spend; expected completion was before April 2025.
- The $669 million of Q2 promote revenue is a material, potentially timing-sensitive item. Management said approximately 40% of promote revenue earned by the company is paid to employees under the promote plan; most cash associated with the USLF promote was expected in Q3 2023.
- Key stated risks include economic and political conditions, interest and foreign-exchange movements, competition, acquisition/development and integration risks, financing availability and credit ratings, co-investment venture risks, international operations, environmental events and natural disasters. A 10% weakening of the U.S. dollar could result in a $153 million cash settlement on outstanding undesignated currency contracts; a 10% interest-rate increase would add an estimated $6 million of annual interest expense based on the specified sensitivity assumptions.
- Prologis reported no material change in its previously disclosed risk factors and no legal proceedings expected to have a material adverse effect. KPMG’s interim review found no material modifications needed for GAAP conformity; this was a review, not an audit.
Investor facts to verify
- How much of reported earnings and strategic capital growth is recurring versus the $669 million promote, and when the related cash was received.
- Post-Duke operating performance, including occupancy, leasing spreads and the integration and operating costs of acquired properties.
- Debt funding and refinancing costs: debt rose to $28.129 billion, and $5.363 billion of senior notes were issued in the first half at a weighted-average 4.7% rate.
- Execution, leasing and funding needs for the $6.4 billion development portfolio, including the remaining $2.2 billion investment requirement.
- Performance and redemption requests in co-investment ventures, as well as the timing and extent of committed equity funding.