Prologis, Inc. and Prologis, L.P. — 2016 Q3 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Prologis owns, develops and manages logistics properties through Real Estate Operations and Strategic Capital. Prologis, Inc. and the Operating Partnership are operated as one enterprise; the Partnership holds substantially all operating assets and debt.
Key financial metrics
Amounts in USD millions, except per-share data. Comparisons are with the corresponding 2015 period.
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue | $704.6 | $580.6 | $1,913.0 | $1,553.9 |
| Operating income | $232.6 | $103.4 | $504.2 | $274.6 |
| Net earnings attributable to common stockholders | $279.3 | $259.0 | $762.7 | $744.4 |
| Diluted earnings per share | $0.52 | $0.49 | $1.44 | $1.41 |
| Operating cash flow | Not stated separately | Not stated separately | $997.0 | $756.6 |
| Dividends per common share | $0.42 | $0.40 | $1.26 | $1.12 |
- At September 30, 2016, total assets were $30.9 billion, debt was $11.26 billion, and cash and equivalents were $375 million. Debt was down from $11.63 billion at December 31, 2015. Weighted-average debt interest rate was 3.1%; weighted-average maturity was 64 months.
- Credit facilities had $3.47 billion of commitments and $3.43 billion of availability; there were no borrowings outstanding. The company reported compliance with all debt covenants.
- Real Estate Operations NOI for the first nine months was $1.231 billion, up from $983 million. Operating margin was 74.2%, versus 69.6%. Same-store NOI for Q3 increased 4.4%.
- Strategic Capital NOI for the first nine months was $144 million, versus $57 million. Core FFO was $1.056 billion, versus $836 million; Prologis-modified FFO was $1.194 billion, versus $1.000 billion.
- Cash from investing activities was $730 million for the nine months, including $1.86 billion of proceeds from property dispositions and contributions. Financing activities used $1.63 billion, including $1.68 billion of debt repayments and $669 million of dividends paid by Prologis, Inc.
Material changes versus the prior comparable period
- Q3 revenue rose to $704.6 million from $580.6 million, while operating income increased to $232.6 million from $103.4 million. Strategic Capital revenue included substantial European promotes; the company reported $73 million of Q3 net promote revenue after cash bonus expenses. The third-party share of promotes recognized was $88 million, with cash expected in Q4.
- Q3 net earnings were nearly unchanged year over year, despite higher operating income, as gains on real estate dispositions fell to $117 million from $269 million. For the first nine months, such gains declined to $462 million from $655 million.
- For the nine months, Real Estate Operations NOI increased by $248 million. Management attributed the increase principally to acquisitions (including KTR), rent growth and occupancy, and completed developments; contributions and dispositions partly offset growth.
- Occupancy across the owned and managed operating portfolio was 96.6% at quarter-end, compared with 96.9% at December 31, 2015. Consolidated-property occupancy was 96.4%.
- Operating cash flow increased year over year, but the company adopted cash-flow classification guidance retrospectively. Distributions from equity-method ventures are classified according to their nature, and certain employee share-withholding tax payments moved from operating to financing activities; comparisons should account for these reclassifications.
Outlook, commentary and risks
- Management said expected cash needs were adequately covered by operating cash generation, venture distributions, property and investment dispositions, and financing capacity. No specific full-year earnings or revenue guidance is provided in the supplied filing text.
- At September 30, the consolidated development portfolio comprised 80 properties, 56.5% leased, with $1.8 billion invested and $0.8 billion of estimated remaining spending. Development starts had estimated total investment of $1.2 billion; projects then under development were expected to be completed before February 2018.
- Management cited ongoing rent growth and development as growth drivers. During the first nine months, stabilized projects had $1.8 billion of total estimated investment and an estimated weighted-average margin of 26.8%.
- Management did not anticipate a material operational or financial impact from the UK vote to leave the EU. The UK portfolio was 99.6% leased, with a nine-year weighted-average lease term; it represented about 4% of Prologis’s share of annual NOI.
- Foreign-currency translation losses were $70 million for the first nine months. The filing’s sensitivity analysis estimated that a 10% reduction in exchange rates would reduce net equity by $181 million. A 10% adverse interest-rate change was estimated to add $2 million of annual interest expense.
- Unconsolidated ventures had $6.7 billion of third-party debt; Prologis reported no guarantees of that debt. The company noted that refinancing maturing venture debt may not be available on equally favorable terms, or at all. Prologis also had $2.69 billion of remaining equity commitments across certain ventures, including $299 million attributable to Prologis.
- Legal proceedings arose in the ordinary course of business; management did not expect their disposition to cause a material adverse effect. No material changes to the previously reported risk factors were disclosed. The interim financial statements received an independent accountant review, not an audit.
Important facts for investors to verify
- How much of reported Strategic Capital performance and earnings growth is repeatable, given the timing and size of Q3 European promotes?
- Whether occupancy, same-store NOI growth, rent spreads and development lease-up continue to support operating performance.
- The cash timing and realization of promote receivables, including the $88 million third-party promote share expected in Q4.
- Upcoming debt maturities, refinancing needs, available credit capacity and the funding plan for development spending and venture commitments.
- The impact of currency movements and the accounting reclassifications on reported cash-flow comparisons and equity.