Dear Fellow Shareholders,

We had a remarkable year in 2017. Beyond posting record financial results, we simplified our business and set the stage for building an enduring company able to respond to shifting market dynamics across the globe. We have a portfolio for all seasons and a strategy for using our scale to extend our competitive advantage. With this plan firmly in place, we are positioned to achieve sustainable growth well into the future.


We leased 170 million square feet, had record year-end occupancy of 97.2 percent and net effective rent change of 21.4 percent. We will continue to benefit from the embedded rental upside in our portfolio, which positions us for strong operating performance over the next several years.

In addition, we grew our portfolio while disposing of non-strategic assets. We developed more than $2 billion of new assets, for an estimated value creation of $583 million. Some 47 percent of our new development starts were build-to-suits—another high-water mark. In 2017, our build-to-suit activity comprised 33 completions and 38 starts.

Last year, real estate operations were the strongest in our history.


Our Strategic Capital business had a transformational year. We consolidated two major funds in Europe and two in the United States. Each of these reconstituted vehicles has more than $9 billion in assets and is the leading fund in its respective geography. We raised $2.9 billion in capital from investors and increased our third-party capital under management to $28 billion.

Our best-in-class balance sheet has also been simplified. Over the last four years, we deleveraged by 1,100 basis points, achieving an “A-” rating. We have $3.6 billion of liquidity and, therefore, the capacity to self-fund our growth. Operating globally allows us to achieve higher risk-adjusted returns because we can raise low-cost capital in one part of the world and deploy it where opportunity is greatest, while reducing currency risk.


Additional 2017 Financial and Operational Highlights:

  • Core FFO, our primary financial performance metric, was $2.81 per share, an increase of 9.3 percent over 2016. We earned record net promotes of $0.16 per share for the year.
  • Our dividend increased 5 percent to $1.76 per common share.
  • Total shareholder return was 25.9 percent in 2017 and 66.0 percent over the last three years.
  • Prologis’ share of net effective same store NOI growth was 4.7 percent for the year.
  • Average rents in the global portfolio remain 14 percent below market rents, setting the stage for future growth.

As we look forward, I would like to share my view of where logistics real estate is headed. While we have benefitted from tailwinds such as e-commerce, it would be naïve to assign all our success to this single trend. Here, I will elaborate on where our portfolio is today and why it’s unique, and describe how we will leverage our scale to benefit our shareholders and customers.

OVER THE LAST FOUR YEARS, WE
DELIVERED A CORE FFO CAGR OF
13%
while
 
DELEVERAGING OUR
BALANCE SHEET BY
1,100
basis
points

 

Unique Scale and Business Impact: The Future Flow of Goods

Our logistics real estate is a must-have for customers who need high-quality space in or near urban centers. Consumers expect faster delivery and a broader selection of goods. We focus our portfolio on the consumption end of the supply chain because it harnesses powerful trends such as urbanization, millennials entering their prime spending years and online shopping. Because we’ve been at the same location strategy for decades, our portfolio is unrivaled in size, scale and functionality—and it’s impossible to replicate.

In 2017, we partnered with Oxford Economics to estimate our global economic impact. Together with our customers, we have a critical economic role both globally and in the communities in which we operate. This role has important implications for the current and future flow of goods. Highlights from this study1 include the following:

  • At $1.3 trillion, the economic value of goods flowing through our distribution centers annually represents 2.4 percent of GDP for the 19 countries where we do business and 1.7 percent of the world’s GDP.
  • Each day, 816,000 people go to work under Prologis roofs around the world.
  • Prologis’ impact on the U.S. tax base is substantial, leading to $17 billion in federal, state and local taxes each year.

Our scale allows us to innovate faster and more effectively.

We are building multistory buildings in the U.S. to fit tight site configurations in dense, land-constrained urban centers. We have built 53 such facilities in Asia. In the U.S., we redeveloped a multistory facility in New York City and we have new multistory projects underway in Seattle and San Francisco. Today, more than a third of our global portfolio comprises infill assets, many of which are positioned for what we call Last TouchTM.

Extending Our Competitive Advantage: The Prologis Five Drivers

In 2017, we rolled out a new strategic blueprint to ensure enduring excellence called the Prologis Five Drivers. These drivers have been identified as key areas for creating sustainable competitive advantage far into the future. They are also intended to demonstrate to our employees, customers and investors that the value we add to our real estate operations—the scale, global reach, customer relationships, brand, business processes, technology and talented team—enables Prologis to escape the gravitational pull of NAV on our valuation. We want to make sure everyone understands our unique ability to make real estate more valuable when it becomes part of our platform. These Five Drivers are:

1.  Increasing the urgency behind our inclusion and diversity initiatives
2.  Enhancing our customers’ experience when they partner with us
3.  Conducting advanced analytics to gain valuable insights to share with our customers
4.  Accelerating continuous improvement in key business processes across the company
5.  Identifying and growing significant procurement and ancillary revenue opportunities

I’m excited to work with our teams around the globe on these Five Drivers and am convinced they will help us realize our vision for Prologis.

Environmental, Social and Governance: Leading with Purpose

At Prologis, the ESG conversation is about how we drive value for our diverse spectrum of stakeholders. I would like to highlight some of our ESG achievements to-date2:

  • We have received over 300 sustainable building certifications, have installed 175 megawatts of solar energy and now have efficient lighting in more than 80 percent of our operating portfolio. Our focus on cool roofs and low-water solutions also improves the efficiency of our buildings and saves our customers money.
  • In 2017, we were honored with some of the most prestigious recognitions in our industry, including 10 Green Stars and being named sector leader in North America and Asia by GRESB, and receiving NAREIT’s Leader in the Light award for the sixth consecutive year.
  • Space for Good provides rent-free space in our non-occupied buildings in times of crisis. In 2017, millions suffered the devastating effects of Hurricanes Harvey and Irma and the Mexico earthquake. Our teams coordinated with organizations such as the American Red Cross, the U.S. Army Corps of Engineers and Habitat for Humanity to secure 400,000 square feet of temporary space for emergency response and recovery efforts.
  • Strong governance ensures our customers and investors can place their trust in our team’s oversight and the resilience of our operations. Green Street Advisors has named us the top REIT in corporate governance for 15 consecutive years. Our governance initiatives include the Prologis Code of Ethics and Business Conduct, Ethics Awareness Program, the Supplier Code of Conduct and recurring Anti-Corruption and FCPA training.

We have recently elevated our focus on ESG and are further enhancing our ESG value proposition. Lying at the crossroads of all Five Drivers, this group will continue to advance innovation to drive value for our constituencies in line with our corporate strategy. The group now reports to Ed Nekritz, our Chief Legal Officer. This is a timely move for Prologis, as it will allow us to look through a more comprehensive long-term lens and take our industry-leading program to yet another level.

Refreshed for the Future

We entered 2018 with superior potential for sustainable long-term growth and a portfolio uniquely positioned to deliver strong results well into the future. Our business is streamlined and ready to seek out the best opportunities, our talented global teams are already looking ahead of what’s next, and I look forward to reporting on our progress again next year.

Hamid R. Moghadam
Chairman and CEO

1. To learn more about Prologis' Future Flow of Goods study, please go to www.thefutureflowofgoods.com.
2. For more about our sustainability program and progress, please see our 2017 sustainability snapshot.