Prologis, Inc. and Prologis, L.P. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017; comparisons are with the same 2016 periods unless noted. Prologis, Inc. is the REIT parent and consolidates the operating partnership, which conducts substantially all operations and incurs the debt. Prologis owns and manages logistics properties and develops properties; its Strategic Capital segment manages co-investment ventures.
Key financial metrics
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $602.9 million | $704.6 million | $1,998.2 million | $1,913.0 million |
| Operating income | $175.5 million | $232.6 million | $612.6 million | $504.2 million |
| Net earnings attributable to Prologis, Inc. common stockholders | $876.2 million | $279.3 million | $1,346.4 million | $762.7 million |
| Diluted earnings per share | $1.63 | $0.52 | $2.51 | $1.44 |
| Operating income margin (calculated) | 29.1% | 33.0% | 30.7% | 26.4% |
| Core FFO attributable to common stockholders/unitholders | Not stated for quarter | Not stated for quarter | $1,178 million | $1,056 million |
Q3 and nine-month earnings included gains on real estate contributions/dispositions and revaluation of equity investments of $779.1 million and $959.4 million, respectively, versus $117.3 million and $462.0 million in 2016. These gains materially affected GAAP net earnings. Nine-month FFO, as modified by Prologis, was $1,376 million versus $1,194 million.
- Cash flow: Nine-month operating cash flow was $1,360 million versus $997 million; investing cash flow was $342 million versus $730 million; financing cash flow was negative $1,957 million versus negative $1,629 million. Cash ended at $568.7 million, down from $807.3 million at year-end 2016.
- Debt and liquidity: Debt was $9,721 million, down from $10,608 million at December 31, 2016; weighted-average interest rate was 3.0% versus 3.2%, and weighted-average maturity was 66 versus 60 months. Credit facilities had $3,438 million available. The company reported compliance with all debt covenants.
- Balance sheet: Total assets were $29,654 million and total equity was $18,559 million at September 30, 2017. Cash plus available credit facilities provided substantial reported liquidity, alongside ongoing development and investment commitments.
- Operating performance: Owned-and-managed portfolio occupancy was 96.3% at quarter-end; weighted-average rent change on rollover was 28.2% for 2017. Third-quarter same-store NOI increased 2.9% year over year.
Material changes versus comparable periods
- Q3 revenue declined 14.4%, primarily reflecting lower Strategic Capital revenue, including the absence of the prior-year European promote. Nine-month revenue rose 4.5%, supported by higher Strategic Capital activity.
- Nine-month operating income increased to $612.6 million from $504.2 million, while Real Estate Operations NOI rose to $1,255 million from $1,226 million and Strategic Capital NOI rose to $186 million from $149 million. The nine-month increase in net earnings was strongly influenced by larger property transaction and revaluation gains.
- Nine-month operating cash flow increased, while investing cash flow decreased as returns from investments and other activity differed from 2016. Proceeds from property contributions and dispositions were $2,355 million in the cash flow statement, versus $1,859 million in 2016.
- Prologis contributed 190 properties owned by NAIF to USLF in July, increasing its USLF ownership to 27.1%; USLF assumed $956 million of secured debt. Prologis also acquired interests in Brazilian ventures and consolidated additional Brazilian properties.
- Debt fell by $887 million from year-end, largely following the USLF contribution and debt repayments. A new £500 million senior note issuance helped refinance existing debt and extend maturities.
Outlook, risks, contingencies and unusual items
- Management said operating fundamentals remained strong and expected continued rent growth, high occupancy and development opportunities. It estimated owned-and-managed leases were 12% below market and cited a land bank capable of supporting $9.1 billion of total expected development investment. The filing provides no specific quantified earnings or FFO guidance.
- At quarter-end, the consolidated development portfolio included 79 properties, 62.5% leased, with $1.5 billion invested and $1.2 billion remaining to be spent; expected total investment at completion and lease-up was $2.7 billion.
- Management identified risks including economic and political conditions, interest and foreign-exchange movements, competition, acquisition/development execution, financing availability, REIT qualification, co-investment venture performance, international operations and environmental events. A 10% adverse currency movement was estimated to reduce net equity by $172 million; interest-rate sensitivity was estimated at $1 million of additional annual interest expense for a 9-basis-point rate change.
- The company reported no material change in its previously disclosed risk factors. It said ordinary-course legal proceedings were not expected to have a material adverse effect. No defaults on senior securities were reported.
- Unusual items included the substantial property contribution/disposition and revaluation gains, a $30.6 million nine-month loss on early debt extinguishment, and $46.3 million of nine-month foreign currency and derivative losses. The interim financial statements received an accountant’s review, not an audit opinion.
Important facts for investors to verify
- How much of reported earnings growth reflects recurring property and fee operations versus transaction, contribution and revaluation gains; compare GAAP earnings with Core FFO and cash generation.
- Whether rent growth, occupancy and same-store NOI trends persist, and whether the 28.2% rent change on rollover translates into realized, sustained cash flow growth.
- Funding needs and returns for development commitments, venture equity commitments, and properties held for sale or contribution.
- Debt maturities, refinancing costs, covenant headroom, available facility capacity and exposure to foreign currencies and variable rates.
- Performance, refinancing needs and capital obligations of unconsolidated ventures, including the reported $7.9 billion of their third-party debt and $3.0 billion of remaining venture equity commitments.