Prologis, Inc. and Prologis, L.P. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Prologis is a global logistics real estate REIT operating in 19 countries. Its two segments are Real Estate (rental operations and development) and Strategic Capital (services to co-investment ventures). The filing combines the parent and operating partnership; their consolidated assets and liabilities are substantially the same. Unless noted, financial amounts below are U.S. dollars.
Financial results and operating metrics
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Total revenue | $1.769 billion | $1.219 billion |
| Operating income before real estate transaction gains | $575 million | $411 million |
| Net earnings attributable to Prologis, Inc. common stockholders | $463 million; $0.50 diluted EPS | $1.149 billion; $1.54 diluted EPS |
| Core FFO attributable to common stockholders/unitholders (non-GAAP) | $1.157 billion | $834 million |
| Cash from operating activities | $1.114 billion | $842 million |
| Cash and cash equivalents at quarter end | $523 million | $278 million at Dec. 31, 2022 |
| Total debt at quarter end | $25.153 billion | $23.876 billion at Dec. 31, 2022 |
- Rental revenue rose to $1.634 billion from $1.077 billion, substantially reflecting the Duke Realty acquisition completed in October 2022. Strategic capital revenue was $135 million versus $134 million.
- Real Estate segment NOI was $1.214 billion versus $800 million; Strategic Capital segment NOI was $63 million versus $82 million. Same-store property NOI on Prologis’s share increased 9.9% on a net-effective basis and 11.4% on a cash basis.
- Owned-and-managed operating portfolio occupancy was 98.0% at quarter end, compared with 98.2% at Dec. 31, 2022. Net-effective rent change on leases commenced during the quarter was 68.8%. Management estimated the portfolio’s net-effective lease mark-to-market at approximately 68%.
- Net investing cash outflow was $1.049 billion, including $937 million of real estate development spending. Financing cash inflow was $172 million. Common dividends were $0.87 per share, up from $0.79 a year earlier.
- Quarter-end debt had a 2.6% weighted-average interest rate and 10-year weighted-average remaining maturity. Total liquidity was $5.744 billion, including $5.221 billion of available credit and $523 million of cash. Prologis reported compliance with all financial debt covenants.
Material changes versus the prior-year quarter
- Revenue increased about 45%, principally reflecting the Duke portfolio and higher rents. Depreciation and amortization increased to $602 million from $397 million, also substantially due to Duke-related assets and lease intangibles.
- Common-stockholder net earnings and diluted EPS declined materially, despite higher revenue and operating income before transaction gains. Q1 2022 included $210 million of gains on development-property and land dispositions and $585 million of gains on other real estate dispositions; Q1 2023 recorded only $4 million of the latter and no development-property disposition gains. Higher interest expense also weighed on earnings: $136 million versus $64 million.
- Core FFO increased to $1.157 billion from $834 million. This is a non-GAAP measure; it should be considered alongside GAAP net earnings and cash flows.
- Operating cash flow increased, while investing cash flow swung from a $283 million inflow to a $1.049 billion outflow. Proceeds from property dispositions and contributions were far lower than in Q1 2022, when they totaled $1.495 billion in investing cash flows.
- Development starts slowed sharply: 2 buildings and $59 million of total expected investment (TEI), versus 31 buildings and $1.041 billion in Q1 2022. Fifteen buildings stabilized, with $700 million TEI and a 6.5% estimated stabilized yield. The development portfolio was 43.4% leased, with $2.5 billion of estimated remaining investment.
Outlook, risks and other notable items
- Management cited continued customer demand, low vacancy and rent growth, while acknowledging a slowing economy and uncertain macroeconomic conditions. It expects some decline in asset valuations, plans to remain cautious in capital deployment, and anticipated a faster pace of development starts and contributions to open-ended funds in the second half of 2023. No specific full-year earnings or FFO guidance is stated in the provided filing text.
- Management sees potential for continued organic rent growth from leases rolling to market; it reported a 68% net-effective lease mark-to-market. The timing and extent of realizing this potential depend on leasing conditions and renewals.
- On April 5, 2023, after quarter end, Prologis amended and restated a global credit facility, increasing its capacity by $1.0 billion to $3.0 billion and extending its initial maturity to June 2027. Total credit-facility capacity became $6.5 billion.
- Risks identified include economic and political conditions, interest and foreign-exchange rate changes, financing access and credit ratings, acquisition and development execution, co-investment venture performance, international operations, natural disasters and REIT tax status. A 10% weakening of the U.S. dollar could result in a $163 million cash settlement on outstanding undesignated currency forwards; a 10% increase in interest rates on average variable-rate debt was estimated to add $6 million of annual interest expense.
- Higher insurance costs partly reflected an unusually active storm season. The filing reports ordinary-course legal proceedings, with no expected material adverse effect, and no material change in previously disclosed risk factors. KPMG reviewed the interim statements; this was a review, not an audit.
Important facts for investors to verify
- How much of revenue, NOI and FFO growth reflects Duke consolidation versus same-store performance and rent increases.
- Whether rent-rollover gains, occupancy and the estimated lease mark-to-market translate into sustained cash NOI growth.
- Development completion, leasing, remaining funding needs and returns, particularly given management’s caution on valuations and capital deployment.
- Debt issuance costs, interest-rate exposure, upcoming maturities and the impact of the post-quarter credit-facility amendment.
- The reconciliation and limitations of Core FFO and other non-GAAP measures relative to GAAP earnings and operating cash flow.