Prologis, Inc. and Prologis, L.P. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Prologis is a global logistics-property owner, developer and manager operating in 19 countries. The Parent and Operating Partnership are presented as one enterprise; amounts below are consolidated unless noted.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $1.751bn | $1.183bn | $4.222bn | $3.482bn |
| Rental revenue | $1.152bn | $1.037bn | $3.322bn | $3.074bn |
| Operating income | $915m | $766m | $2.654bn | $1.999bn |
| Net earnings attributable to common stockholders | $1.014bn | $722m | $2.773bn | $1.686bn |
| Diluted earnings per share | $1.36 | $0.97 | $3.72 | $2.27 |
| Operating cash flow | Not presented by quarter | Not presented by quarter | $2.849bn | $2.280bn |
Q3 strategic capital revenue was $595m, versus $141m a year earlier, largely reflecting $456m of promote revenue, primarily from Prologis European Logistics Fund. For the first nine months, strategic capital revenue was $885m and segment NOI was $645m, including $476m of promotes. Nine-month NOI was $2.478bn for Real Estate Operations, compared with $2.297bn in 2021.
Q3 operating income included $75m of gains on development-property and land dispositions and $1m on other real estate dispositions. Nine-month gains were $391m and $586m, respectively. Nine-month foreign currency, derivative and other income was $365m, compared with $143m in 2021; these items, disposition gains and promotes contributed to reported earnings and are not solely recurring rental performance.
Portfolio operating measures: Owned-and-managed occupancy was 97.8% at September 30, 2022, versus 97.7% at December 31, 2021. Rent change on leases commenced was 47.1% for the nine-month period. Q3 same-store property NOI increased 8.3% on a net-effective basis and 9.3% on a cash basis. Management estimated a 62% net effective lease mark-to-market.
Balance sheet, debt and liquidity
- Total assets were $60.946bn and debt was $18.139bn at September 30, 2022, compared with $58.486bn and $17.715bn at December 31, 2021.
- Debt had a 1.8% weighted average effective interest rate and 10-year weighted average remaining maturity. Approximately $16.1bn was fixed-rate debt and $2.1bn variable-rate debt. The company reported compliance with all financial debt covenants.
- Available liquidity was $5.339bn: $4.703bn available under credit facilities and $636m of cash. Credit-facility commitments totaled $5.248bn.
- Nine-month investing cash outflow was $3.211bn, including $2.232bn for development and $2.232bn for real estate acquisitions, partly offset by $1.722bn of disposition and contribution proceeds. Financing cash inflow was $487m. Cash increased $80m to $636m.
- Common dividends were $0.79 per share in each of the first three quarters of 2022, up from $0.63 in 2021.
Material changes and significant events
- Revenue rose 48% in Q3 year over year, with a sharp increase in strategic capital revenue from promotes; rental revenue increased about 11%.
- Nine-month operating cash flow increased to $2.849bn from $2.280bn, while investing outflows increased to $3.211bn from $897m, reflecting greater development and acquisition spending and lower real estate sale proceeds.
- On October 3, 2022, after quarter-end, Prologis completed its approximately $23bn acquisition of Duke Realty through equity issuance and assumption of debt. The acquired portfolio included about 480 industrial properties and 142 million square feet. The reported Q3 and nine-month results do not include Duke.
- Prologis issued approximately $2.7bn of senior notes during the first nine months. In June, it established a $3.0bn global facility and increased another facility to $2.0bn. On October 6, it exchanged $3.2bn of Duke notes tendered in an exchange offer.
Outlook, commentary and risks
Management reported healthy customer demand and expects market-rent growth and lease mark-to-market to support organic growth. It also cited inflation, sharply rising interest rates, and the war and energy crisis in Europe as pressures on the global economy. Management said it would be cautious with capital deployment, emphasize build-to-suit development and pause contributions to open-ended funds in the near term. The filing provides no specific numerical earnings or revenue guidance.
Key disclosed exposures include economic and property-market conditions, interest and foreign-exchange movements, financing access and credit ratings, development and acquisition execution, integration of major portfolios, international operations, co-investment ventures, REIT qualification, and natural-disaster and COVID-19-related risks. A 10% weakening of the U.S. dollar could result in a $164m cash payment to settle certain foreign-currency contracts. The company reported no material change in its previously disclosed risk factors. Ordinary-course legal proceedings were not expected to have a material adverse effect.
Important facts for investors to verify
- How Duke Realty’s acquired properties, assumed debt, integration costs and issued equity affect subsequent-period results and leverage.
- Whether the unusually large PELF promote revenue is received as expected in Q4 and how much strategic capital income is recurring.
- Whether elevated rent changes and the stated lease mark-to-market translate into renewals, occupancy and cash NOI growth.
- Development spending, leasing of the $6.2bn development portfolio, and the timing of contributions and dispositions amid changing market valuations.
- Debt refinancing costs, variable-rate exposure, foreign-currency effects and maintenance of available liquidity and covenant compliance.