Prologis, Inc. and Prologis, L.P. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Interim financial statements are unaudited. Prologis, Inc. is a REIT and general partner of Prologis, L.P.; the two are operated and reported as one enterprise.
Business context
Prologis owns, develops and manages logistics properties in 19 countries across four continents. Its two segments are Real Estate Operations and Strategic Capital, which manages co-investment ventures. At June 30, the owned-and-managed portfolio totaled 786 million square feet and $71.0 billion of gross book value and total expected investment; Prologis’s share was $42.6 billion.
Key financial metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $790.4 million | $621.3 million | $1,562.4 million | $1,314.9 million |
| Consolidated net earnings | $410.8 million | $365.0 million | $784.6 million | $757.0 million |
| Net earnings attributable to common stockholders | $383.8 million | $334.6 million | $730.8 million | $700.5 million |
| Diluted earnings per share | $0.60 | $0.62 | $1.15 | $1.30 |
| Operating cash flow | Not presented quarterly | $1,003.5 million | $773.2 million | |
| Core FFO, a non-GAAP measure | Not presented quarterly | $980 million | $834 million |
At June 30, total assets were $38.7 billion, debt was $11.0 billion, cash and cash equivalents were $401.2 million, and equity was $25.8 billion. The weighted average effective interest rate on debt was 2.5%. Prologis reported $3.82 billion of available capacity under its credit facilities and compliance with all financial debt covenants. The company had approximately $1.6 billion of scheduled debt maturities in 2020.
Six-month investing cash flow was positive $81.8 million, including $1.27 billion of proceeds from property dispositions and contributions, offset by $755.6 million of development spending and $468.8 million of acquisitions. Financing cash flow used $1.03 billion. Prologis paid $0.53 per common share in each of the first two quarters.
Material changes versus comparable periods
- Q2 revenue increased 27% year over year, primarily reflecting higher rental revenue; six-month revenue rose 19%. Rental revenue increased to $1.40 billion for the first half from $1.10 billion.
- Q2 common-stockholder earnings increased 15%, while diluted EPS fell to $0.60 from $0.62. For the first half, common-stockholder earnings rose 4%, while diluted EPS declined to $1.15 from $1.30; the substantially larger weighted-average share count contributed to lower per-share results.
- Q2 gains on real estate transactions were $224.2 million versus $94.3 million a year earlier. First-half gains totaled $412.4 million, including a $135.0 million gain on a partial redemption of an investment in a co-investment venture.
- First-half Real Estate Operations NOI increased to $1.02 billion from $822 million; Strategic Capital NOI decreased to $88 million from $130 million, reflecting lower promote revenue. Strategic Capital revenue was $162.9 million for the half, down from $208.7 million.
- Operating cash flow rose to $1.00 billion from $773 million. Interest expense increased to $119.6 million for the half from $102.6 million, while the weighted-average effective interest rate for the period declined to 2.5% from 2.9%.
- The 2018 acquisition of DCT Industrial Trust, completed for $8.5 billion in August 2018, expanded the portfolio and affects year-over-year comparisons; the filing also attributes higher depreciation and amortization partly to DCT.
Operations, outlook, risks and unusual items
- Owned-and-managed portfolio occupancy was 96.8% at June 30, compared with 97.5% at December 31, 2018. Same-store property NOI increased 4.2% on a net-effective basis and 4.6% on a cash basis year over year for Q2. Management said operating fundamentals remained strong and estimated in-place rents were more than 15% below market.
- First-half development starts totaled 23 projects, 5 million square feet and $516 million of total expected investment, versus 32 projects, 11 million square feet and $1.15 billion in 2018. The development portfolio was 46.7% leased and expected to be completed before December 2020.
- Management said it expected market rents to continue growing and anticipated further positive rent changes on lease rollovers, supported by below-market in-place leases. These are forward-looking expectations, not guarantees; the filing provides no specific full-year earnings or revenue guidance in the supplied text.
- On July 15, 2019, after quarter-end, Prologis agreed to acquire Industrial Property Trust’s wholly owned real estate assets for approximately $4.0 billion in cash, including assumption and repayment of debt. Closing was expected in Q4 2019 or Q1 2020, subject to stockholder approval and customary conditions; Prologis intended to hold the portfolio through one or both U.S. co-investment ventures.
- Prologis formed Prologis Brazil Logistics Venture in January, contributing an initial portfolio and retaining a 20% interest. It also redeemed part of its investment in Prologis European Logistics Fund for approximately $313 million in February. Remaining equity commitments to co-investment ventures were $276.7 million for Prologis, principally for China and Brazil ventures.
- Adoption of the new lease standard in January resulted in recognition of $394.6 million of lease right-of-use assets and $403.2 million of lease liabilities at June 30. The company reported no opening retained-earnings adjustment.
- Key stated risks include economic and political conditions, interest and foreign-exchange movements, competition, acquisition/development execution, financing availability and credit ratings, REIT status, co-investment ventures, international operations, and environmental events. A 10% adverse move in relevant foreign exchange rates could require an $83 million settlement payment on outstanding non-designated currency contracts; a 10% increase in interest rates was estimated to add $2 million of annual interest expense. Prologis reported no material change in its previously disclosed risk factors.
- The filing says ordinary-course legal proceedings were not expected to have a material adverse effect. KPMG reviewed the interim statements but did not audit them or express an audit opinion.
Important facts for investors to verify
- Review the quality and recurrence of reported earnings, particularly property-transaction gains and the $135 million venture-redemption gain, alongside non-GAAP FFO measures.
- Assess the effect of share-count growth on per-share performance and reconcile diluted EPS with operating and same-store trends.
- Check occupancy, lease-rollover rent growth, development leasing and completion progress, and the sustainability of the below-market-rent opportunity.
- Evaluate funding, leverage, maturities and transaction execution for the proposed $4.0 billion Industrial Property Trust acquisition.
- Review foreign-currency exposures, co-investment venture commitments and debt terms, including the distinction between consolidated debt and venture-level third-party debt.