Prologis, Inc. and Prologis, L.P. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; balance-sheet comparisons are with December 31, 2014. Prologis owns, develops, and operates industrial real estate globally through Real Estate Operations and Strategic Capital. The filing presents the parent and operating partnership together as one enterprise. Amounts below are in U.S. dollars; financial statement figures are converted to millions where useful.
Financial performance and position
- Revenue: $462.8 million, up from $434.7 million in Q1 2014. Rental income was $324.5 million, up from $300.9 million; rental recoveries were $94.3 million, up from $87.4 million.
- Earnings: Operating income was $83.9 million versus $71.5 million. Consolidated net earnings were $351.3 million versus $12.0 million; net earnings attributable to common stockholders were $345.2 million, or $0.67 basic and $0.65 diluted per share, versus $4.7 million and $0.01 per share. The sharp increase primarily reflects $277.7 million of gains on real estate dispositions, compared with $17.1 million a year earlier.
- Operating measures: Real Estate Operations NOI was $288.3 million versus $273.8 million, while its operating margin was 68.5% versus 70.3%. Average occupancy was 95.7% versus 94.6%. Same-store NOI for the owned and managed portfolio rose 3.5%; rent change on rollovers was positive 9.7%.
- FFO: Core FFO, a non-GAAP measure defined by Prologis, was $254.4 million versus $217.6 million. Prologis cautions that FFO measures are supplemental and should be considered with GAAP results.
- Cash flow: Operating activities provided $81.5 million versus $72.2 million. Investing activities used $200.3 million, mainly reflecting $336.0 million of development spending, partly offset by $325.8 million of disposition and contribution proceeds. Financing activities used $32.0 million. Cash fell $158.7 million to $192.0 million.
- Liquidity and debt: Debt was $8.64 billion, down from $9.38 billion at year-end; the weighted-average rate was 3.5% versus 3.6%, and weighted-average maturity was 71 months. Credit facilities had $2.56 billion available. The company reported compliance with all debt covenants.
- Balance sheet: Total assets were $25.46 billion and total liabilities $9.67 billion at March 31. Stockholders’ equity was $15.79 billion, including noncontrolling interests. Common dividends were $0.36 per share, up from $0.33.
Material changes versus the comparable period
- Revenue and operating income increased, supported by improved occupancy, leasing, acquisitions and development; same-store NOI also grew.
- GAAP earnings were materially lifted by higher property disposition gains. The $277.7 million gain is not representative of recurring rental operations.
- Net interest expense declined to $68.8 million from $85.5 million, reflecting lower debt levels and borrowing costs. The effective weighted-average interest rate for the quarter was 3.7%, versus 4.7% in Q1 2014.
- Cash provided by operations remained below common and preferred dividends paid: $81.5 million of operating cash flow versus $190.6 million of dividends. Proceeds from property dispositions and contributions helped fund the gap.
- Foreign currency translation losses in other comprehensive income were $124.3 million, versus $4.7 million in Q1 2014, principally due to weakening of the euro, British pound, yen and Brazilian real against the U.S. dollar.
Outlook, risks and unusual items
- Management said it expected adequate cash from operations, dispositions and financing sources to meet anticipated needs. It cited rising rents, development value creation and growth in assets under management as key strategies. No clear numerical full-year earnings or FFO guidance is provided in the supplied filing text.
- Management reported positive rent change on rollovers for the ninth consecutive quarter. During Q1, 39.2 million square feet were leased, and the weighted-average retention rate was 86.3%.
- On April 17, 2015, Prologis signed agreements to acquire KTR Capital Partners’ real estate assets and operating platform for approximately $5.9 billion, through USLV, in which Prologis owns 55%. The deal includes assumption of about $700 million of secured debt and issuance of up to $230 million of partnership units; closing was anticipated in Q2 2015. Prologis estimated its share of the purchase price at about $3.2 billion, including approximately $2.6 billion cash, and described potential funding sources including available facilities and a $1.0 billion committed bridge facility.
- Development commitments were significant: 78 properties in the consolidated development portfolio were 48.4% leased, with $1.5 billion invested and $0.9 billion remaining against expected total investment of $2.4 billion.
- Prologis repurchased $286.5 million of secured mortgage debt before maturity, recognizing a $16.3 million loss. Holders also exchanged approximately $459.8 million of exchangeable notes for 11.9 million shares, reducing debt but increasing shares outstanding.
- Market exposures include foreign currency and interest rates. Management estimated that a 10% adverse exchange-rate move could reduce net equity by $164.1 million; sensitivity estimates for designated forwards and currency options also indicated potential cash-flow effects. Unconsolidated ventures had $6.3 billion of third-party debt; Prologis reported no guarantees of that debt but noted refinancing may require contributions or asset sales if ventures cannot refinance.
- The company said there were no material changes to previously disclosed risk factors. It considered ordinary-course legal proceedings unlikely to have a material adverse effect. Interim financial statements were reviewed, not audited; the independent accountants reported no material modifications needed for GAAP conformity.
Important facts for investors to verify
- How much of Q1 earnings and FFO reflects recurring property operations versus disposition gains and other adjustments.
- The final KTR transaction price, funding mix, closing status, and effect on Prologis’s debt, liquidity and share or unit count.
- Whether operating cash flow can cover dividends and planned development spending without continued reliance on asset-sale proceeds or financing.
- Occupancy, rent growth, operating expenses and development lease-up, including whether margin pressure persists.
- Foreign currency exposure, hedging effectiveness, and refinancing requirements or potential capital calls at unconsolidated ventures.
- The impact of the exchangeable-note conversion and ongoing ATM issuance on dilution and per-share results.