Prologis, Inc. — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014; balance-sheet comparisons are with December 31, 2013. Amounts below are U.S. dollars. The interim financial statements are unaudited and were reviewed by KPMG, which reported no material modifications were indicated.
Business context
Prologis owns, operates, develops and manages industrial real estate across the Americas, Europe and Asia. Its two segments are Real Estate Operations and Strategic Capital. At quarter-end, it reported 585 million square feet in its owned and managed portfolio and more than 4,700 customers. The filing combines Prologis, Inc. and its operating partnership; the REIT consolidates the partnership and guarantees its unsecured debt.
Key financial results
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $415.2m | $423.1m | $1,309.9m | $1,313.7m |
| Operating income | $78.1m | $77.4m | $244.9m | $232.9m |
| Net earnings attributable to common stockholders | $136.2m | $(7.5)m | $213.6m | $256.4m |
| Diluted earnings per share | $0.23 | $(0.02) | $0.43 | $0.53 |
| Operating cash flow | Not presented separately | Not presented separately | $450.8m | $332.2m |
| Core FFO, management-defined non-GAAP measure | Not presented separately | Not presented separately | $706.7m | $598.2m |
Q3 net earnings included $151.1m of gains on real-estate acquisitions and dispositions, an $86.1m loss on early debt extinguishment and a $33.7m deferred tax benefit. For the nine-month period, gains on real-estate acquisitions and dispositions were $337.7m and losses on early debt extinguishment were $163.4m. Core FFO excludes specified items and is not a GAAP measure or a substitute for GAAP earnings or operating cash flow.
Balance sheet, liquidity and operating indicators
- At September 30, total assets were $24.1bn, total liabilities $9.9bn and equity $14.1bn. Cash and cash equivalents were $311.9m.
- Debt was $8.823bn, down from $9.011bn at year-end 2013. Weighted-average interest rate was 3.6%, versus 4.2%; weighted-average maturity was 73 months, versus 58 months.
- Credit facilities had $2.053bn of available capacity. The company reported compliance with all debt covenants. The REIT itself does not borrow; debt is held by the operating partnership.
- Nine-month cash dividends on common and preferred stock were $502.3m, exceeding operating cash flow by $51.5m. Management said dispositions and contributions of properties helped fund dividends not covered by operating cash flow.
- Real Estate Operations NOI for the first nine months was $796.4m, down from $823.7m; reported operating margin increased to 70.2% from 69.3%. Average occupancy improved to 94.0% from 92.5%.
- Same-store NOI, including managed unconsolidated ventures and adjusted for currency, increased 3.7% in Q3 year over year. Rent change on rollover was positive in each 2014 quarter, ranging from 6.6% to 9.7%.
Material changes and unusual items
- Total revenue was nearly flat for the first nine months, while operating income and operating cash flow increased. Lower interest expense helped results: nine-month net interest expense fell to $234.8m from $291.5m.
- Real Estate Operations NOI declined year over year, chiefly reflecting property contributions to ventures and dispositions. Higher occupancy, rent increases and development/acquisition activity partly offset the reduction.
- Strategic Capital NOI rose to $101.3m from $58.6m for the first nine months, including $31.3m of promote income attributable to third-party investors from a venture performance fee. The filing reports a $42.1m total promote fee and $4.2m of associated compensation expense.
- Prologis launched FIBRA Prologis in Mexico in June, contributing properties and receiving equity units; it retained a 45% interest accounted for under the equity method. The transaction generated a reported $52.5m disposition gain, tax effects and $61.0m attributable to noncontrolling interests.
- In January, Prologis formed a consolidated U.S. co-investment venture in which it owns 55%, contributing 66 properties for a stated purchase price of $1.0bn. It increased its NAIF ownership to 63.3% by September; an October 20 acquisition raised ownership to 66.1% and resulted in control, with consolidation and an expected remeasurement gain in Q4.
- The company issued euro-denominated notes and refinanced term loans, repurchased or repaid $1.3bn of debt scheduled to mature in 2015–2018, and recognized $163.4m of nine-month extinguishment losses. Debt maturities include $475m in 2015, of which $460m relates to exchangeable notes.
- The company adopted revised discontinued-operations guidance prospectively from January 1, 2014. No 2014 property dispositions qualified as discontinued operations, limiting direct comparability with 2013 presentation.
Outlook, risks and contingencies
Management cited rising market rents, development value creation and growth in assets under management as its growth drivers. It said market rents were increasing across most markets and that rent growth was ahead of its prior forecast; no specific financial guidance was provided in the filing text. Prologis expected to spend a further $1.0bn completing and leasing its consolidated development portfolio, which was 38.8% leased at quarter-end, and described ongoing development, acquisition, capital expenditure and venture-funding needs.
Remaining equity commitments to ventures were reported as $2.856bn in total in MD&A, including $601.8m for Prologis and $2.254bn for venture partners. Prologis also disclosed $7.9bn of third-party debt at unconsolidated ventures, generally property-secured and non-recourse to Prologis; refinancing at maturity is not assured. Foreign-currency translation and interest-rate movements are material exposures. A 10% currency move against the dollar was estimated to change cash flows on specified forward contracts by $145m upon settlement. Management reported no expected material interest-rate impact on results or cash flows. Ordinary-course legal proceedings were not expected to have a material adverse effect; the filing reported no material change to previously disclosed risk factors.
Important facts for investors to verify
- How much of earnings and Core FFO reflects recurring property operations versus disposition gains, promote fees, tax benefits and debt-extinguishment costs.
- Whether improved occupancy and positive rent resets can offset property contributions and sales, and whether the reported same-store growth persists.
- Funding and refinancing plans for 2015 maturities, development spending and Prologis’s venture equity commitments; confirm the precise commitment total and scope across the notes and MD&A.
- NAIF’s Q4 consolidation, including the expected remeasurement gain and resulting effects on reported assets, earnings and noncontrolling interests.
- Exposure to currency movements and venture-level debt refinancing, including the distinction between Prologis’s own debt and non-recourse co-investment venture debt.