Prologis Announces Fourth Quarter and Full Year 2014 Earnings Results

SAN FRANCISCO, Jan. 27, 2015 /PRNewswire/ -- Prologis, Inc. (NYSE: PLD), the global leader in industrial real estate, today reported results for the fourth quarter and full year 2014.

Core funds from operations (Core FFO) per diluted share was $0.48 for the fourth quarter compared with $0.43 for the same period in 2013. For the full year 2014, Core FFO per diluted share was $1.88, an increase of 14 percent over 2013.

OPERATIONS OUTPERFORM EXPECTATIONS
"As we closed out the year, our global occupancies continued to climb and development leasing reached its highest level in seven years," said Hamid R. Moghadam, chairman and CEO, Prologis. "The outperformance is a direct result of our long-term strategy of operating in infill markets where global trade and consumption intersect."

Prologis ended the quarter with 96.1 percent occupancy in its operating portfolio, an increase of 100 basis points over the same period in 2013 and 110 basis points over the prior quarter. The quarterly increase was principally driven by a 160 basis point increase in spaces under 100,000 square feet and a 140 basis point increase in the company's European portfolio.

In the fourth quarter, the company leased 41.7 million square feet (3.9 million square meters) in its combined operating and development portfolios, which includes 8.9 million square feet (0.8 million square meters) of properties under development. Tenant retention was 85.5 percent.

Rent change on rollovers was positive for the eighth consecutive quarter, with GAAP rental rates on signed leases increasing 6.2 percent. In the Americas, GAAP rental rates on signed leases increased 11.5 percent.

During the fourth quarter, same store NOI for the owned and managed portfolio increased 4.1 percent on a GAAP basis, resulting in full year 2014 same store NOI growth of 3.7 percent. On a Prologis' share basis, same store NOI (GAAP) increased 4.9 percent during the fourth quarter.

CAPITAL DEPLOYMENT BENEFITS FROM GLOBAL REACH
In 2014, Prologis invested $4.3 billion ($3.1 billion Prologis' share) as the company deployed capital at attractive yields of 6.8 percent (Prologis' share).

"The global nature of our platform allows us to deploy capital where we see the highest risk-adjusted returns," adds Moghadam. "In the U.S., where market conditions are very strong and values are high, we were a net seller of non-strategic holdings. In Europe, the focus has been on net deployment where we acquired quality assets in target markets at a discount to replacement costs."

Value Creation and Development Starts
In 2014, Prologis generated an estimated $301.6 million ($272.6 million Prologis' share) of value creation from development stabilizations and through its value-added conversion program.

Development Stabilizations
In the fourth quarter, the company generated $55.4 million ($46.1 million Prologis' share) of estimated value creation from $247.4 million ($201.7 million Prologis' share) of development stabilizations at an estimated development margin of 22.4 percent. For the full year 2014, the company stabilized $1.1 billion ($955.2 million Prologis' share) of development projects with an estimated development margin of 23.0 percent, generating $254.5 million ($235.8 million Prologis' share) of estimated value creation.

Development Starts
During the quarter, Prologis started $725.2 million ($625.8 million Prologis' share) of new developments with an estimated weighted average yield upon stabilization of 7.3 percent and an estimated development margin of 21.0 percent. For the full year 2014, the company started $2.0 billion ($1.8 billion Prologis' share) of new developments with an estimated weighted average yield upon stabilization of 7.2 percent and an estimated development margin of 20.0 percent. Build-to-suits represented 49.6 percent of development starts in the fourth quarter and 32.6 percent for the full year 2014.

At year end, the book value of the company's land bank totaled $1.8 billion with an estimated build-out potential of $10.7 billion.

Acquisitions
In the fourth quarter, Prologis acquired $151.4 million ($48.2 million Prologis' share) of buildings through its co-investment ventures with a stabilized capitalization rate on Prologis' share of 6.5 percent. For the full year 2014, the company acquired $1.5 billion ($659.4 million Prologis' share) of buildings at a stabilized capitalization rate on Prologis' share of 6.4 percent. More than three-quarters of these buildings were in Europe, where the company purchased assets at a discount to replacement costs.

Equity Invested in Co-Investment Ventures
During the year, the company invested $679.0 million in the Prologis North American Industrial Fund, through a series of investments, at a weighted average stabilized capitalization rate of 6.1 percent. As a result, the company increased its ownership to 66.1 percent and consolidated the venture.

Contributions and Dispositions
During the fourth quarter, Prologis completed $213.2 million ($104.3 million Prologis' share) of contributions to its co-investment ventures and third-party building dispositions of non-strategic assets of $500.3 million ($406.8 million Prologis' share).  Prologis' share of contributions and dispositions had a stabilized capitalization rate of 5.9 percent.

During the full year, the company completed $1.7 billion ($948.7 million Prologis' share) of contributions at a weighted average stabilized capitalization rate (Prologis' share) of 5.8 percent, and $1.5 billion ($1.3 billion Prologis' share) of building dispositions at a weighted average stabilized capitalization rate (Prologis' share) of 6.4 percent.

FINANCIAL STRENGTH A TOP PRIORITY
Prologis completed more than $1.7 billion of capital markets activity in the quarter, including the previously announced issuance of a €600 million euro bond, as well as $356 million of equity issuance from the exercise of warrants related to the formation of its Prologis European Logistics Partners venture and through its At-the-Market equity program. In the full year, the company completed $7.0 billion of capital markets activity.

"We have effectively converted the currency composition of our balance sheet to U.S. dollars," said Tom Olinger, chief financial officer, Prologis. "At year end, our U.S. dollar net equity exposure was 89 percent—this allows us to operate globally with our earnings and net asset value insulated from movements in foreign currencies. We are also taking advantage of the low interest environment to enhance our debt stack, and maintaining significant liquidity to keep us nimble as opportunities arise."

In the strategic capital business, the company maintained a healthy investment queue and raised $2.5 billion through both private and public capital during the year.

NET EARNINGS
Net earnings per diluted share was $0.81 for the fourth quarter compared with $0.12 for the same period in 2013. For the full year 2014, net earnings per diluted share was $1.24 compared with $0.64 for the full year 2013.

GUIDANCE ESTABLISHED FOR 2015
Prologis established a full year 2015 Core FFO guidance range of $2.04 to $2.12 per diluted share, representing 11 percent growth at the midpoint compared with full year 2014. The company expects to recognize net earnings, for GAAP purposes, of $0.40 to $0.48 per share. This assumes (on an owned and managed basis):

• Year-end occupancy between 95.5 and 96.5 percent
• GAAP same store NOI growth between 3.5 and 4.5 percent
• Development stabilizations between $1.7 and $1.9 billion
• Development starts between $2.3 and $2.6 billion
• Building acquisitions between $1.0 and $1.5 billion
• Contributions to co-investment ventures between $1.3 and $1.8 billion
• Third-party dispositions between $1.5 and $2.0 billion
• Strategic capital revenue between $210 and $220 million
• Net G&A between $238 and $248 million

The Core FFO and earnings guidance reflected above excludes any potential future gains (losses) recognized from real estate transactions. In reconciling from net earnings to Core FFO, Prologis makes certain adjustments including but not limited to real estate depreciation and amortization expenses, gains (losses) recognized from real estate transactions and early extinguishment of debt or redemption of preferred stock, impairment charges, deferred taxes and unrealized gains or losses on foreign currency or derivative activity.

The difference between the company's Core FFO and net earnings guidance for 2015 predominantly relates to real estate depreciation.

WEBCAST & CONFERENCE CALL INFORMATION
Prologis will host a live webcast/conference call to discuss quarterly results, current market conditions and future outlook today, Jan. 27, at 12 p.m. U.S. Eastern time. Interested parties are encouraged to access the webcast by clicking the microphone icon located near the top of the opening page of the Prologis Investor Relations website (http://ir.prologis.com). Interested parties also can participate via conference call by dialing +1 877 256 7020 (toll-free from the U.S. and Canada) or +1 973 409 9692 (from all other countries) and entering conference code 48765486.

A telephonic replay will be available Jan. 27-Feb. 27 at +1 855 859 2056 (from the U.S. and Canada) or +1 404 537 3406 (from all other countries); please use conference code 48765486. The webcast replay will be posted when available in the "Events & Presentations" section of Investor Relations on the Prologis website.

ABOUT PROLOGIS
Prologis, Inc., is the global leader in industrial real estate. As of December 31, 2014, Prologis owned or had investments in, on a wholly owned basis or through co-investment ventures, properties and development projects expected to total approximately 590 million square feet (55 million square meters) in 21 countries. The company leases modern distribution facilities to more than 4,700 customers, including third-party logistics providers, transportation companies, retailers and manufacturers.

FORWARD-LOOKING STATEMENTS

The statements in this document that are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are based on current expectations, estimates and projections about the industry and markets in which Prologis operates, management's beliefs and assumptions made by management.  Such statements involve uncertainties that could significantly impact Prologis' financial results. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," variations of such words and similar expressions are intended to identify such forward-looking statements, which generally are not historical in nature.  All statements that address operating performance, events or developments that we expect or anticipate will occur in the future — including statements relating to rent and occupancy growth, development activity and changes in sales or contribution volume of properties, disposition activity, general conditions in the geographic areas where we operate, our debt and financial position, our ability to form new co-investment ventures and the availability of capital in existing or new co-investment ventures — are forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Although we believe the expectations reflected in any forward-looking statements are based on reasonable assumptions, we can give no assurance that our expectations will be attained and therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. Some of the factors that may affect outcomes and results include, but are not limited to: (i) national, international, regional and local economic climates, (ii) changes in financial markets, interest rates and foreign currency exchange rates, (iii) increased or unanticipated competition for our properties, (iv) risks associated with acquisitions, dispositions and development of properties, (v) maintenance of real estate investment trust ("REIT") status and tax structuring, (vi) availability of financing and capital, the levels of debt that we maintain and our credit ratings, (vii) risks related to our investments in our co-investment ventures and funds, including our ability to establish new co-investment ventures and funds, (viii) risks of doing business internationally, including currency risks, (ix) environmental uncertainties, including risks of natural disasters, and (x) those additional factors discussed in reports filed with the Securities and Exchange Commission by Prologis under the heading "Risk Factors." Prologis undertakes no duty to update any forward-looking statements appearing in this document.

FFO, as defined by Prologis; Core FFO; Core AFFO (collectively referred to as "FFO"). FFO is a non-GAAP measure that is commonly used in the real estate industry. The most directly comparable GAAP measure to FFO is net earnings. Although the National Association of Real Estate Investment Trusts ("NAREIT") has published a definition of FFO, modifications to the NAREIT calculation of FFO are common among REITs, as companies seek to provide financial measures that meaningfully reflect their business.

FFO is not meant to represent a comprehensive system of financial reporting and does not present, nor do we intend it to present, a complete picture of our financial condition and operating performance. We believe net earnings computed under GAAP remains the primary measure of performance and that FFO is only meaningful when it is used in conjunction with net earnings computed under GAAP. Further, we believe our consolidated financial statements, prepared in accordance with GAAP, provide the most meaningful picture of our financial condition and our operating performance.

NAREIT's FFO measure adjusts net earnings computed under GAAP to exclude historical cost depreciation and gains and losses from the sales, along with impairment charges, of previously depreciated properties. We agree that these NAREIT adjustments are useful to investors for the following reasons:

Our FFO Measures

At the same time that NAREIT created and defined its FFO measure for the REIT industry, it also recognized that "management of each of its member companies has the responsibility and authority to publish financial information that it regards as useful to the financial community." We believe stockholders, potential investors and financial analysts who review our operating results are best served by a defined FFO measure that includes other adjustments to net earnings computed under GAAP in addition to those included in the NAREIT defined measure of FFO.  Our FFO measures are used by management in analyzing our business and the performance of our properties and we believe that it is important that stockholders, potential investors and financial analysts understand the measures management uses.

We use these FFO measures, including by segment and region, to: (i) evaluate our performance and the performance of our properties in comparison to expected results and results of previous periods, relative to resource allocation decisions; (ii) evaluate the performance of our management; (iii) budget and forecast future results to assist in the allocation of resources; (iv) assess our performance as compared to similar real estate companies and the industry in general; and (v) evaluate how a specific potential investment will impact our future results. Because we make decisions with regard to our performance with a long-term outlook, we believe it is appropriate to remove the effects of short-term items that we do not expect to affect the underlying long-term performance of the properties. The long-term performance of our properties is principally driven by rental income. While not infrequent or unusual, these additional items we exclude in calculating FFO, as defined by Prologis, are subject to significant fluctuations from period to period that cause both positive and negative short-term effects on our results of operations in inconsistent and unpredictable directions that are not relevant to our long-term outlook.

We use our FFO measures as supplemental financial measures of operating performance. We do not use our FFO measures as, nor should they be considered to be, alternatives to net earnings computed under GAAP, as indicators of our operating performance, as alternatives to cash from operating activities computed under GAAP or as indicators of our ability to fund our cash needs.

FFO, as defined by Prologis

To arrive at FFO, as defined by Prologis, we adjust the NAREIT defined FFO measure to exclude:

We calculate FFO, as defined by Prologis for our unconsolidated entities on the same basis as we calculate our FFO, as defined by Prologis.

We believe investors are best served if the information that is made available to them allows them to align their analysis and evaluation of our operating results along the same lines that our management uses in planning and executing our business strategy.

Core FFO

In addition to FFO, as defined by Prologis, we also use Core FFO. To arrive at Core FFO, we adjust FFO, as defined by Prologis, to exclude the following recurring and non-recurring items that we recognized directly or our share of these items recognized by our unconsolidated entities to the extent they are included in FFO, as defined by Prologis:

We believe it is appropriate to further adjust our FFO, as defined by Prologis for certain recurring items as they were driven by transactional activity and factors relating to the financial and real estate markets, rather than factors specific to the on-going operating performance of our properties or investments. The impairment charges we have recognized were primarily based on valuations of real estate, which had declined due to market conditions, that we no longer expected to hold for long-term investment. Over the last few years, we made it a priority to strengthen our financial position by reducing our debt, our investment in certain low yielding assets and our exposure to foreign currency exchange fluctuations.  As a result, we changed our intent to sell or contribute certain of our real estate properties and recorded impairment charges when we did not expect to recover the costs of our investment. Also, we purchased portions of our debt securities when we believed it was advantageous to do so, which was based on market conditions, and in an effort to lower our borrowing costs and extend our debt maturities. As a result, we have recognized net gains or losses on the early extinguishment of certain debt due to the financial market conditions at that time. In addition, we and our co-investment ventures make acquisitions of real estate and we believe the costs associated with these transactions are transaction based and not part of our core operations.

We analyze our operating performance primarily by the rental income of our real estate and the revenue driven by our strategic capital business, net of operating, administrative and financing expenses. This income stream is not directly impacted by fluctuations in the market value of our investments in real estate or debt securities.  Although the adjustments we make to arrive at Core FFO have had a material impact on our operations and are reflected in our financial statements, the removal of the effects of these items allows us to better understand the core operating performance of our properties over the long-term.

We use Core FFO, including by segment and region, to: (i) evaluate our performance and the performance of our properties in comparison to expected results and results of previous periods, relative to resource allocation decisions; (ii) evaluate the performance of our management; (iii) budget and forecast future results to assist in the allocation of resources; (iv) provide guidance to the financial markets to understand our expected operating performance; (v) assess our operating performance as compared  to similar real estate companies and the industry in general; and (vi) evaluate how a specific potential investment will impact our future results. Because we make decisions with regard to our performance with a long-term outlook, we believe it is appropriate to remove the effects of items that we do not expect to affect the underlying long-term performance of the properties we own. As noted above, we believe the long-term performance of our properties is principally driven by rental income. We believe investors are best served if the information that is made available to them allows them to align their analysis and evaluation of our operating results along the same lines that our management uses in planning and executing our business strategy. 

Core AFFO

To arrive at Core AFFO, we adjust Core FFO to further exclude our share of; (i) straight-line rents; (ii) amortization of above- and below-market lease intangibles; (iii) recurring capital expenditures; (iv) amortization of management contracts; (v) amortization of debt premiums and discounts and financing costs, net of amounts capitalized, and; (vi) stock compensation expense.

We believe Core AFFO provides a meaningful indicator of our ability to fund cash needs, including cash distributions to our stockholders.

Limitations on Use of our FFO Measures

While we believe our defined FFO measures are important supplemental measures, neither NAREIT's nor our measures of FFO should be used alone because they exclude significant economic components of net earnings computed under GAAP and are, therefore, limited as an analytical tool. Accordingly, these are only a few of the many measures we use when analyzing our business.  Some of these limitations are:

• The current income tax expenses and acquisition costs that are excluded from our defined FFO measures represent the taxes and transaction costs that are payable.
• Depreciation and amortization of real estate assets are economic costs that are excluded from FFO. FFO is limited, as it does not reflect the cash requirements that may be necessary for future replacements of the real estate assets. Further, the amortization of capital expenditures and leasing costs necessary to maintain the operating performance of industrial properties are not reflected in FFO.
• Gains or losses from property acquisitions and dispositions or impairment charges related to expected dispositions represent changes in value of the properties. By excluding these gains and losses, FFO does not capture realized changes in the value of acquired or disposed properties arising from changes in market conditions.
• The deferred income tax benefits and expenses that are excluded from our defined FFO measures result from the creation of a deferred income tax asset or liability that may have to be settled at some future point. Our defined FFO measures do not currently reflect any income or expense that may result from such settlement.
• The foreign currency exchange gains and losses that are excluded from our defined FFO measures are generally recognized based on movements in foreign currency exchange rates through a specific point in time. The ultimate settlement of our foreign currency-denominated net assets is indefinite as to timing and amount. Our FFO measures are limited in that they do not reflect the current period changes in these net assets that result from periodic foreign currency exchange rate movements. 
• The gains and losses on extinguishment of debt that we exclude from our Core FFO, may provide a benefit or cost to us as we may be settling our debt at less or more than our future obligation.
• The merger, acquisition and other integration expenses and the natural disaster expenses that we exclude from Core FFO are costs that we have incurred.

We compensate for these limitations by using our FFO measures only in conjunction with net earnings computed under GAAP when making our decisions. This information should be read with our complete consolidated financial statements prepared under GAAP. To assist investors in compensating for these limitations, we reconcile our defined FFO measures to our net earnings computed under GAAP.

Same Store. We evaluate the operating performance of the operating properties we own and manage using a "Same Store" analysis because the population of properties in this analysis is consistent from period to period, thereby eliminating the effects of changes in the composition of the portfolio on performance measures. We include the properties included in our owned and managed portfolio that were in operation at January 1, 2013 and throughout the full periods in both 2013 and 2014. We have removed all properties that were disposed of to a third party from the population for both periods. We believe the factors that impact rental income, rental expenses and NOI in the Same Store portfolio are generally the same as for the total operating portfolio. In order to derive an appropriate measure of period-to-period operating performance, we remove the effects of foreign currency exchange rate movements by using the current exchange rate to translate from local currency into U.S. dollars, for both periods.

Our same store measures are non-GAAP measures that are commonly used in the real estate industry and are calculated beginning with rental income and rental expenses from the financial statements prepared in accordance with GAAP. It is also common in the real estate industry and expected from the analyst and investor community that these numbers be further adjusted to remove certain non-cash items included in the financial statements prepared in accordance with GAAP to reflect a cash same store number. In order to clearly label these metrics, we call one Same Store NOI- GAAP and one Same Store NOI-Adjusted Cash. As these are non-GAAP measures they have certain limitations as an analytical tool and may vary among real estate companies. As a result, we provide a reconciliation from our financial statements prepared in accordance with GAAP to Same Store NOI-GAAP and then to Same Store NOI-Adjusted Cash with explanations of how these metrics are calculated and adjusted.

The following is a reconciliation of our consolidated rental income, rental expenses and NOI, as included in the Consolidated Statements of Operations, to the respective amounts in our Same Store portfolio analysis (dollars in thousands):

Value Creation represents the value that we will create through our development and leasing activities. We calculate value creation by estimating the NOI that the property will generate at Stabilization and applying an estimated stabilized capitalization rate applicable to that property. The value creation is calculated as the amount by which the estimated value exceeds our total expected investment and does not include any fees or promotes we may earn. This can also include realized economic gains from value-added conversion properties.

SOURCE Prologis, Inc.