01—Abstract
Summary
Summary of the 10-K filed February 19, 2016. Cited figures are marked; the original filing is the authoritative source.
Prologis, Inc. (NYSE: PLD) closed 2015 as the largest logistics real estate owner in the world by its own description, with 669 million square feet owned or invested in across 20 countries and $51.5 billiona of owned and managed real estate.
The company runs two segments: Real Estate Operations, which contributed about 90% of 2015 revenues, earnings and FFO, and Strategic Capital, which manages co-investment ventures for institutional partners and contributed about 10%. Total revenues rose 25% to $2.197 billionb, net earnings attributable to common stockholders rose to $862.8 million ($1.64 diluted EPS), and Core FFO rose 24% to $1.181 billion. Results were lifted by the May 2015 KTR acquisition, which added about $5.8 billion of assets, and by $759 million of gains from dispositions and contributions.
The balance sheet grew substantially. Total assets reached $31.4 billion and debt rose to $11.6 billionc, with a weighted average effective rate of 3.2%, down from 3.7%. Financing for KTR relied on new senior notes, term loans and a $2.4 billion contribution from the venture partner in USLV, which raised noncontrolling interests to $3.75 billion.
Operating metrics were strong: average occupancy reached 95.3%d, same store NOI grew 4.3%, and rent change on rollover ranged from 9.5% to 14.4%. Risks disclosed include a 31.9% concentration of consolidated operating property value in California, foreign currency exposure (about 20% of total assets outside USD), dependence on REIT status, and reliance on co-investment ventures and capital markets access. Management guided to continued rent growth and development value creation.
The company also reported an estimated 154 million square feet of additional development potential in its owned and managed land bank, and expected the carrying value of that land to be below fair value. Investors should weigh the strong growth and rent momentum against higher leverage, the larger consolidated asset base from KTR, and continued exposure to a few large markets and currencies.
02—Key points
Key Highlights
- Revenue grew 25% to $2.197 billion in 2015 from $1.761 billion in 2014, driven largely by the KTR acquisition and higher rental revenue.
- Core FFO rose 24% to $1.181 billion (about $2.25 per diluted share equivalent on roughly 534 million diluted shares/units), and FFO as defined by Prologis reached $1.309 billion.
- Real Estate Operations NOI increased 27% to $1.377 billion, with average occupancy of 95.3% and 80 basis points of occupancy improvement.
- Same store NOI grew 4.3% for the full year, and rent change on rollover was between 9.5% and 14.4% in 2015, showing strong pricing power.
- Gains on dispositions and contributions totaled $759 million, a significant contributor to 2015 net earnings of $925.5 million consolidated.
- Total debt increased to $11.6 billion, weighted average interest rate fell to 3.2%, and the company holds Baa1/BBB+ ratings with stable outlooks.
- Portfolio concentration risk: about 31.9% of consolidated operating property value sits in California, and about 20% of total assets are denominated in non-USD currencies.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2015filed February 19, 2016Financial Statements
FY2015 against FY2014
| Line item | FY2015FY2014 | Change |
|---|---|---|
| Operating Expenses | $1.82B$1.44B | +26.1% |
| Operating Income | $380.17M$319.81M | +18.9% |
| Interest Expense | $301.36M$308.88M | −2.4% |
| Net Income | $862.79M$636.18M | +35.6% |
| EPS (Basic) | $1.66$1.25 | +32.8% |
| EPS (Diluted) | $1.64$1.24 | +32.3% |
| Shares Outstanding (Basic) | 521.24M499.58M | +4.3% |
| Shares Outstanding (Diluted) | 533.94M506.39M | +5.4% |
05—Questions
Frequently Asked Questions
How did the KTR acquisition change Prologis's size and financial profile?
In May 2015 Prologis acquired KTR's real estate and operating platform for about $5.8 billion in total asset value through its 55% owned venture USLV. The deal added 315 operating properties (59 million square feet) and was funded with cash, assumed mortgage debt, 4.5 million operating partnership units and a $2.3 billion partner contribution. It boosted consolidated assets and rental revenue, but it also increased debt and noncontrolling interests, and the company still had a $400 million term loan balance to repay from future disposition proceeds.
What is driving rental growth and what is the outlook?
Market rents are rising in many logistics markets, and many in-place leases were signed during the low-rent period after the financial crisis. Prologis reported positive rent change on rollovers every quarter for three years, with quarterly increases of 9.5% to 14.4% in 2015. Management expects continued rent growth, along with value creation from its land bank, which it believes is carried below fair value and could support more than 154 million square feet of additional development.
How does Prologis make money beyond owning buildings?
The Strategic Capital segment earns asset management, property management, leasing, acquisition and development fees from nine unconsolidated co-investment ventures managing about 276.5 million square feet. It also earns promotes, which are incentive fees tied to venture returns. In 2015 Strategic Capital contributed about 10% of revenues and earnings, with NOI of $121.9 million, and it provides a capital-light source of income that aligns Prologis's interests with its institutional partners.
What are the main risks investors should monitor?
Key risks include heavy concentration in California (31.9% of consolidated operating property value) and other large US, Japanese and European markets, foreign currency exposure on roughly $6.3 billion of non-USD assets, and refinancing and covenant risk on about $11.6 billion of debt. The company must also distribute at least 90% of REIT taxable income to keep its REIT status. Its reliance on co-investment ventures and access to capital markets for growth could also limit its flexibility if conditions deteriorate.
Why do Prologis's reported earnings differ from its FFO measures?
Prologis reports net earnings under GAAP, but also uses NAREIT FFO and its own FFO and Core FFO. These measures exclude real estate depreciation, gains on property sales, deferred taxes, unhedged currency and derivative items and debt extinguishment losses. In 2015 net earnings attributable to common stockholders were $862.8 million, while Core FFO was $1.181 billion. Investors should use these adjusted metrics alongside GAAP results, since the company itself notes the limitations of FFO as a substitute for net earnings or cash flow.
06—Continue