Business context and reporting period
Prologis, Inc. and Prologis, L.P. filed a combined unaudited Form 10-Q for the quarter and nine months ended September 30, 2015. Prologis is a global industrial real estate owner, developer and manager operating across the Americas, Europe and Asia through Real Estate Operations and Strategic Capital. At quarter-end, it owned or had investments in properties and development projects expected to total approximately 671 million square feet in 21 countries.
The results reflect approximately four months of the May 2015 KTR acquisition. Prologis owns 55% of USLV, the consolidated venture that acquired KTR.
Financial and operating highlights
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $580.6 million | $415.2 million | $1,553.9 million | $1,309.9 million |
| Operating income | $103.4 million | $78.1 million | $274.6 million | $244.9 million |
| Net earnings attributable to common stockholders | $259.0 million | $136.2 million | $744.4 million | $213.6 million |
| Diluted earnings per share | $0.49 | $0.23 | $1.41 | $0.43 |
| Net cash from operating activities | Not presented by quarter | $649.8 million | $450.8 million |
- Quarterly revenue increased about 40% year over year, chiefly reflecting portfolio growth, including KTR; nine-month revenue increased about 19%.
- GAAP earnings included net real estate disposition gains of $268.8 million in Q3 and $655.3 million for the nine months. Nine-month results also compare with 2014, which included $163.4 million of losses on early debt extinguishment and an $84.6 million deferred tax benefit.
- For the nine months, NAREIT FFO was $1.00 billion versus $603.3 million; Prologis-defined Core FFO was $835.5 million versus $706.7 million. These are non-GAAP measures and should be considered alongside GAAP earnings.
- Real Estate Operations NOI was $983.7 million for the nine months, up from $796.4 million; operating margin was 69.2% versus 70.2%. Average occupancy was 95.2% versus 94.0%. Q3 same-store NOI increased 4.7% year over year.
- Rent change on rollover for the owned and managed portfolio was 9.7%–14.4% in the first nine months, compared with 6.6%–9.7% in the prior-year period. The company reported positive rent change for eleven consecutive quarters.
- At September 30, total assets were $31.42 billion, total debt $11.93 billion, and total equity $18.18 billion. Debt was up from $9.38 billion at December 31, 2014; its weighted-average interest rate was 3.0% versus 3.6% and weighted-average maturity was 60 months versus 70 months.
- Cash and cash equivalents were $310.4 million. Credit facilities had $2.44 billion available. Nine-month investing cash outflow was $4.87 billion, primarily reflecting the $4.81 billion KTR acquisition outlay; financing cash inflow was $4.19 billion.
- Common dividends were $0.40 per share in Q3 and $1.12 per share for the nine months, compared with $0.33 and $0.99, respectively, in 2014.
Material changes versus the prior comparable period
- KTR added 315 operating properties totaling 59 million square feet, plus development projects and land. The acquisition materially expanded consolidated assets, debt and noncontrolling interests; the venture partner contributed approximately $2.3 billion.
- Consolidated real estate operating properties increased to 1,909 buildings and 342.8 million square feet from 1,607 buildings and 282.3 million square feet at December 31, 2014. Period-end occupancy was 95.2%, below 96.3% at year-end, partly because KTR properties were 89.2% occupied at acquisition.
- Strategic Capital NOI declined to $71.1 million for the nine months from $101.3 million. The prior-year period included a $31.3 million third-party promote from a U.S. venture; no comparable promote was recorded in 2015.
- Nine-month disposition proceeds were $2.01 billion, generating $655.3 million of net gains. The prior-year period had more property contributions, while 2015 included greater third-party sale proceeds.
- Foreign currency translation losses in other comprehensive income were $197.9 million for the nine months, versus $72.0 million in 2014, primarily reflecting weaker foreign currencies against the U.S. dollar.
Outlook, risks and unusual items
- Management described global logistics demand and market rents as strong and expected rent growth to continue. It cited a land bank capable of supporting more than 174 million additional square feet and estimated a 34% value premium over book value or development cost for projects stabilized in the first nine months. These are management expectations, not guarantees.
- Management said it expected to fund cash needs through operations, dispositions and contributions, venture distributions, available credit and debt or equity issuance. It expected to use property contributions and sales to repay the $1.0 billion U.S.-dollar term loan used for KTR. Development commitments included $0.9 billion of remaining spending to complete and lease the consolidated development portfolio.
- On October 27, 2015, after quarter-end, Prologis issued $750 million of 3.75% senior notes due 2025, intending to use proceeds in part to repurchase $300 million of notes due 2017 and potentially tender for certain 2019 and 2020 notes.
- On October 9, Prologis completed an approximately $820 million property acquisition; the retail properties were expected to be sold for approximately $374 million, subject to adjustments, in Q4 2015.
- Market risks include foreign exchange and interest-rate movements. The filing estimated that a 10% reduction in relevant exchange rates would reduce net equity by $148.3 million; a 10% adverse interest-rate change would add $2.4 million of interest expense based on the stated sensitivity assumptions. Prologis reported compliance with debt covenants.
- Unconsolidated co-investment ventures had $6.6 billion of third-party debt, of which Prologis estimated its proportionate share at $1.8 billion; it reported no guarantees of that debt. Remaining equity commitments across certain ventures totaled $2.31 billion, including $281 million attributable to Prologis.
- The filing reported ordinary-course legal proceedings with no expected material adverse effect and no material changes to the risk factors disclosed in the 2014 Form 10-K. Interim results are not necessarily indicative of full-year results.
Investor verification priorities
- Separate recurring rental and same-store performance from acquisition effects and the substantial disposition gains included in GAAP earnings.
- Review KTR integration, property occupancy, leasing progress and the eventual completion of the preliminary purchase-price allocation.
- Assess the funding and repayment plan for the $1.0 billion term loan, near-term maturities, development spending and the post-quarter debt tender and repurchases.
- Track foreign-exchange exposure, variable-rate debt, hedging effectiveness and the financial condition and refinancing capacity of co-investment ventures.
- Compare Prologis-defined Core FFO with GAAP earnings and cash flow, including the effects of excluded gains, taxes, acquisition costs and debt-extinguishment items.