Prologis, Inc. and Prologis, L.P. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Prologis is a global logistics-property owner, developer and manager operating in 19 countries through Real Estate Operations and Strategic Capital. Prologis, Inc. is a REIT and the general partner of Prologis, L.P.; the entities are reported together and have substantially the same assets and liabilities.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $621.3 million | $766.2 million | $1,314.9 million | $1,395.3 million |
| Operating income | $187.3 million | $275.3 million | $424.4 million | $437.2 million |
| Net earnings attributable to common stockholders | $334.6 million | $266.9 million | $700.5 million | $470.2 million |
| Diluted earnings per share | $0.62 | $0.50 | $1.30 | $0.88 |
| Net cash provided by operating activities | Not presented quarterly | Not presented quarterly | $773.2 million | $745.2 million |
- Q2 revenue fell 18.9% and operating income fell 32.0% year over year, while common-stockholder earnings increased 25.4%. For the first half, revenue declined 5.8%, operating income declined 2.9%, and common-stockholder earnings rose 49.0%.
- Higher first-half earnings reflected, among other factors, $289.4 million of net real estate disposition gains versus $180.3 million a year earlier, and $44.3 million of foreign-currency and derivative gains versus $27.5 million of losses. These items make GAAP earnings less representative of recurring property operations.
- Strategic Capital revenue was $75.7 million in Q2 versus $180.7 million in Q2 2017. Promote revenue was $5.7 million versus $123.9 million. For the first half, Strategic Capital revenue was $208.7 million versus $237.7 million, including promote revenue of $68.2 million versus $127.1 million.
- First-half segment NOI was $822 million for Real Estate Operations and $130 million for Strategic Capital, compared with $852 million and $154 million, respectively, in 2017. Q2 same-store NOI increased 4.7% on a net-effective basis and 6.3% on a cash basis.
- At June 30, occupancy was 97.4% across the owned-and-managed portfolio, versus 97.2% at December 31, 2017. Net effective rents on first-half lease rollovers increased 21.3% for leases representing approximately 7% of the portfolio’s proportionate economic ownership.
- Cash and cash equivalents were $527.8 million, total assets $29.5 billion, debt $9.43 billion and total equity $18.73 billion at June 30. Debt was nearly unchanged from year-end 2017; its weighted-average interest rate was 2.9% and weighted-average maturity was 73 months. The company reported $3.4 billion of available credit-facility capacity and compliance with all financial debt covenants.
- First-half investing cash outflow was $186.8 million and financing cash outflow was $500.2 million. Development spending was $788.6 million, acquisitions $289.0 million, and proceeds from dispositions and property contributions $901.8 million. Common dividends were $0.48 per share in each quarter.
Material changes and notable items
- Effective January 1, 2018, Prologis adopted new revenue-recognition guidance. It now recognizes the full gain on contributions of real estate to unconsolidated ventures; previously, the portion attributable to its ownership was deferred. No opening retained-earnings adjustment was recorded. The reported 2018 contribution gains are therefore not directly comparable with prior-year gains.
- Prologis generated $1.1 billion of net proceeds and recognized $289 million of net gains from property contributions and dispositions in the first half. It also stabilized developments with total expected investment of $1.0 billion; management estimated completed value 35.6% above development cost.
- In January, Prologis issued €400 million of floating-rate notes due 2020 and used proceeds to repay term-loan borrowings. In June, it issued $400 million of 3.88% notes due 2028 and $300 million of 4.38% notes due 2048, using proceeds to repay other borrowings. Prologis reported $109 million of scheduled principal payments for the remainder of 2018.
Outlook, risks and contingencies
- Management said operating fundamentals remained strong and expected market rents to continue growing. It estimated in-place leases were more than 15% below market rents at June 30 and expected positive rent growth on lease renewals to continue for several years. These are expectations, not guarantees.
- The consolidated land bank was estimated to support $7.5 billion of potential development investment. The 83-property consolidated development portfolio was 51.8% leased, with $1.2 billion of estimated additional investment required to complete and lease it. Properties under development at quarter-end were expected to be completed before October 2019.
- Prologis stated that operating cash flow, venture distributions, property sales and contributions, and financing capacity were expected to meet anticipated needs. It also expected to acquire DCT Industrial Trust in August 2018, principally through stock issuance and assumption of debt; some assumed debt was expected to be repaid with cash, credit facilities and debt issuance. The filing provides no specific earnings guidance.
- The proposed DCT transaction was valued at approximately $8.2 billion, including assumed debt, based on Prologis’ July 19 share price. The fixed exchange ratio was 1.02 Prologis shares per DCT share. Three putative class actions alleged deficiencies in merger disclosures and sought to enjoin or rescind the transaction; Prologis said it considered the claims meritless and intended to defend them. Closing remained subject to DCT stockholder approval and other conditions.
- Key stated risks include economic and political conditions, interest and foreign-exchange movements, competition, development and acquisition execution, financing availability and credit ratings, co-investment venture risks, international operations, environmental events and potential trade restrictions or tariffs. Management said tariffs were not then expected to materially change customer consumption, but acknowledged broader adverse economic effects were possible.
Important facts for investors to verify
- Whether the DCT merger closed as expected, its final consideration and financing, and the outcome of the related lawsuits.
- Whether high occupancy, rent growth and lease-rollover increases persisted, and whether development completions achieved expected leasing and returns.
- How much reported earnings growth depended on property-sale gains, foreign-exchange effects and timing-sensitive promote revenue versus recurring operations.
- Whether development spending, acquisition commitments, debt maturities and dividends remain supported by operating cash flow and available liquidity.
- The effects of currency, interest-rate and trade-policy changes on international assets, debt, cash flows and earnings.