SAN FRANCISCO, July 24, 2013 /PRNewswire/ -- Prologis, Inc. (NYSE: PLD), the leading global owner, operator and developer of industrial real estate, today reported results for the second quarter 2013.

Core funds from operations (Core FFO) per fully diluted share was $0.41 for the second quarter compared to $0.43 for the same period in 2012. Net loss per fully diluted share was less than $0.01 for the second quarter compared to a net loss per share of $0.02 for the same period in 2012. The net loss in the quarter was principally due to costs associated with the early extinguishment of debt, as well as from depreciation on real estate.

Operating Portfolio Metrics
The company leased 36.3 million square feet (3.4 million square meters) in its combined operating and development portfolios in the second quarter. Prologis ended the quarter with 93.7 percent occupancy in its operating portfolio, consistent with the prior quarter. Tenant retention in the second quarter was 84.6 percent. GAAP rental rates on leases signed in the quarter increased 4.0 percent from prior rents compared to a decrease of 3.8 percent in the same period in 2012.

During the second quarter, same-store net operating income (NOI) increased 0.7 percent and decreased 0.4 percent on an adjusted cash basis.

"With our accomplishments in the quarter we are closing out our 10 quarter plan ahead of schedule," said Hamid R. Moghadam, chairman and CEO, Prologis. "Our efforts have simplified the company and built a strong foundation for sustainable growth."

Capital Deployment
Invested capital during the second quarter totaled $922.2 million, of which $796.7 million was Prologis' share, including:

  • Development starts of $385.3 million with a weighted average estimated yield of 7.1% and an estimated development margin of 13.9 percent. Prologis' share was $301.4 million and the company's estimated share of value creation upon stabilization is expected to be $42.7 million;
  • Acquisitions of $127.2 million of buildings and land, of which $85.6 million was Prologis' share. The stabilized capitalization rate on building acquisitions was 7.2 percent; and 
  • $409.7 million of investments in our co-investment ventures, including Prologis Targeted Europe Logistics Fund, Prologis European Properties Fund II, and Prologis Institutional Alliance Fund II, with a stabilized capitalization rate of 6.4 percent.

Subsequent to quarter end, Prologis European Logistics Partners Sarl, the company's joint venture with Norges Bank Investment Management, acquired a portfolio in the United Kingdom for $380 million, of which $190 million was Prologis' share.

At quarter end, Prologis' global development pipeline comprised 26.6 million square feet (2.5 million square meters), with a total expected investment of $2.3 billion, of which Prologis' share was $1.8 billion. The company's share of estimated value creation at stabilization is expected to be $363.9 million, with a weighted average estimated stabilized yield expected to be 7.7 percent and a margin of approximately 21.3 percent.

Dispositions and Contributions
Prologis completed $567.2 million in contributions and dispositions in the second quarter, of which $347.7 million was the company's share, with a stabilized capitalization rate of 5.6 percent, including:

  • $282.0 million in contributions to Nippon Prologis REIT and Prologis Mexico Fondo Logistico, of which $237.3 million was the company's share; and
  • $285.2 million of third-party building and land dispositions, of which $110.4 million was the company's share.

Investment Management
During the second quarter, the company further streamlined its co-investment ventures by rationalizing two funds:

  • Prologis Japan Fund 1, the assets of which were acquired by Nippon Prologis REIT and Prologis; and
  • Prologis Institutional Alliance Fund II, in which the company acquired its outside partners' interests and the assets are now wholly-owned by Prologis.

At quarter end, Prologis had $22.8 billion in combined assets under management in 15 funds.

Capital Markets
During the second quarter, Prologis completed approximately $4.3 billion in capital markets transactions, including:

  • $1.5 billion from its follow-on equity offering, including the over-allotment;
  • $2.3 billion in debt financings, re-financings, and pay-downs; and
  • $482.5 million in preferred stock redemptions.

The company also established an at-the-market equity offering program to sell up to $750 million of its common stock.

Subsequent to quarter end, Prologis recast and upsized its global line of credit by $350 million to $2.0 billion, extended the initial term to 2017, and achieved a 40 basis point reduction in interest rate.

"Our capital markets activity in the quarter provides us with enhanced financial flexibility," said Thomas S. Olinger, chief financial officer, Prologis. "We have a strong balance sheet and the proven ability to access multiple sources of capital to fund our growth opportunities."

Guidance for 2013
Prologis narrowed its full-year 2013 Core FFO guidance range to $1.63 to $1.67 per diluted share. The company also expects to recognize net earnings, for GAAP purposes, of $0.58 to $0.62 per share.

In addition, the company increased its full-year deployment guidance range by $1.7 billion, to $3.5 billion to $4.1 billion.

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 expense, 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 2013 predominantly relates to real estate depreciation and recognized gains on real estate transactions.

Webcast and Conference Call Information
The company will host a webcast /conference call to discuss quarterly results, current market conditions and future outlook today, July 24, at 12:00 p.m. U.S. Eastern Time. Interested parties are encouraged to access the live 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 (from the U.S. and Canada toll free) or +1 973-409-9692 (from all other countries) and enter conference code 97107173.

A telephonic replay will be available from July 24 through August 23 at +1 855-859-2056 (from the U.S. and Canada) or +1 404-537-3406 (from all other countries), with conference code 97107173. 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 leading owner, operator and developer of industrial real estate, focused on global and regional markets across the Americas, Europe and Asia. As of June 30, 2013, Prologis owned or had investments in, on a wholly owned basis or through co-investment ventures, properties and development projects expected to total approximately 563 million square feet (52.3 million square meters) in 21 countries. The company leases modern distribution facilities to more than 4,500 customers, including manufacturers, retailers, transportation companies, third-party logistics providers and other enterprises.

The statements in this release 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 developed properties, disposition activity, general conditions in the geographic areas where we operate, synergies to be realized from our recent merger transaction, our debt and financial position, our ability to form new property funds and the availability of capital in existing or new property funds — 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 release.

   

Three months ended June 30,

   

Six months ended June 30,

(dollars in thousands, except per share data)

 

2013

 

2012

   

2013

 

2012

 

Revenues

 

$    419,474

 

$    501,181

   

$    908,684

 

$    979,049

 

Net earnings (loss) attributable to common stockholders

 

(1,517)

 

(8,120)

   

263,899

 

194,293

 

FFO, as defined by Prologis

 

202,238

 

172,671

   

560,038

 

434,743

 

Core FFO

 

203,337

 

201,320

   

391,274

 

386,085

 

AFFO

 

143,302

 

148,569

   

283,979

 

282,392

 

Adjusted EBITDA

 

334,004

 

382,688

   

675,582

 

757,309

                       
 

Per common share - diluted:

                 
   

Net earnings (loss) attributable to common stockholders

 

$          0.00

 

$         (0.02)

   

$          0.55

 

$          0.42

   

FFO, as defined by Prologis

 

0.41

 

0.37

   

1.16

 

0.93

   

Core FFO

 

0.41

 

0.43

   

0.82

 

0.83

                       
         

June 30, 2013

 

March 31, 2013

 

December 31, 2012

Assets:

               
 

Investments in real estate assets:

               
   

Operating properties

$

17,755,655

 

$

17,521,075

 

$

22,608,248

   

Development portfolio

 

939,794

   

884,352

   

951,643

   

Land

 

1,710,583

   

1,754,053

   

1,794,364

   

Other real estate investments

 

492,833

   

436,328

   

454,868

           

20,898,865

   

20,595,808

   

25,809,123

   

Less accumulated depreciation

 

2,422,909

   

2,292,946

   

2,480,660

       

Net investments in properties

 

18,475,956

   

18,302,862

   

23,328,463

 

Investments in and advances to unconsolidated entities

 

3,884,766

   

3,635,214

   

2,195,782

 

Notes receivable backed by real estate

 

189,636

   

188,000

   

188,000

 

Assets held for sale

 

25,330

   

25,391

   

26,027

       

Net investments in real estate

 

22,575,688

   

22,151,467

   

25,738,272

                         
 

Cash and cash equivalents

 

385,424

   

785,359

   

100,810

 

Restricted cash

 

26,642

   

48,605

   

176,926

 

Accounts receivable

 

124,980

   

139,691

   

171,084

 

Other assets

 

924,834

   

950,177

   

1,123,053

       

Total assets

$

24,037,568

 

$

24,075,299

 

$

27,310,145

                         

Liabilities and Equity:

               
 

Liabilities:

               
   

Debt 

$

8,417,310

 

$

9,074,123

 

$

11,790,794

   

Preferred stock at redemption value

 

-

   

482,500

   

-

   

Accounts payable, accrued expenses, and other liabilities

 

1,297,756

   

1,308,143

   

1,746,015

       

Total liabilities

 

9,715,066

   

10,864,766

   

13,536,809

                         
 

Equity:

               
   

Stockholders' equity:

               
     

Preferred stock

 

100,000

   

100,000

   

582,200

     

Common stock 

 

4,986

   

4,624

   

4,618

     

Additional paid-in capital 

 

17,939,829

   

16,461,486

   

16,411,855

     

Accumulated other comprehensive loss

 

(541,355)

   

(503,786)

   

(233,563)

     

Distributions in excess of net earnings

 

(3,704,034)

   

(3,561,429)

   

(3,696,093)

       

Total stockholders' equity

 

13,799,426

   

12,500,895

   

13,069,017

   

Noncontrolling interests

 

470,995

   

658,871

   

653,125

   

Noncontrolling interests - limited partnership unitholders

 

52,081

   

50,767

   

51,194

       

Total equity

 

14,322,502

   

13,210,533

   

13,773,336

       

Total liabilities and equity

$

24,037,568

 

$

24,075,299

 

$

27,310,145

                         
 

Three Months Ended

 

Six Months Ended

       

June 30,

 

June 30,

       

2013

2012

 

2013

2012

Revenues:

                 
 

Rental income

$

372,737

$

468,459

 

$

826,120

$

910,857

 

Investment management income

 

43,608

 

30,993

   

77,243

 

63,350

 

Development management and other income

 

3,129

 

1,729

   

5,321

 

4,842

   

 Total revenues 

 

419,474

 

501,181

   

908,684

 

979,049

                         

Expenses:

                 
 

Rental expenses

 

112,581

 

125,918

   

245,907

 

244,151

 

Investment management expenses

 

25,006

 

15,075

   

44,915

 

31,956

 

General and administrative expenses

 

54,909

 

51,415

   

111,106

 

111,574

 

Depreciation and amortization

 

158,965

 

178,756

   

335,454

 

358,315

 

Other expenses

 

6,771

 

7,227

   

11,124

 

11,562

 

Merger, acquisition and other integration expenses

 

-

 

21,186

   

-

 

31,914

 

Impairment of real estate properties

 

-

 

-

   

-

 

3,185

   

Total expenses

 

358,232

 

399,577

   

748,506

 

792,657

                         

Operating income

 

61,242

 

101,604

   

160,178

 

186,392

                         

Other income (expense):

                 
 

Earnings from unconsolidated entities, net

 

8,421

 

3,889

   

33,189

 

17,884

 

Interest income 

 

4,577

 

5,366

   

8,790

 

10,793

 

Interest expense

 

(92,508)

 

(127,582)

   

(207,498)

 

(260,551)

 

Gains on acquisitions and dispositions of investments in real estate, net

 

61,035

 

520

   

399,880

 

268,291

 

Foreign currency and derivative gains (losses) and other income (expenses), net

 

(7,829)

 

13,299

   

469

 

(13,802)

 

Gains (losses) on early extinguishment of debt, net

 

(32,608)

 

(500)

   

(49,959)

 

4,919

 

Impairment of other assets

 

-

 

-

   

-

 

(16,135)

   

Total other income (expense)

 

(58,912)

 

(105,008)

   

184,871

 

11,399

                         

Earnings (loss) before income taxes

 

2,330

 

(3,404)

   

345,049

 

197,791

 

Income tax expense - current and deferred

 

20,488

 

8,075

   

72,354

 

20,199

Earnings (loss) from continuing operations

 

(18,158)

 

(11,479)

   

272,695

 

177,592

Discontinued operations:

                 
 

Income (loss) attributable to disposed properties and assets held for sale

 

(294)

 

6,273

   

(49)

 

19,051

 

Net gains on dispositions

 

13,467

 

9,874

   

19,301

 

21,123

   

Total discontinued operations

 

13,173

 

16,147

   

19,252

 

40,174

Consolidated net earnings (loss)

 

(4,985)

 

4,668

   

291,947

 

217,766

Net loss (earnings) attributable to noncontrolling interests

 

7,284

 

(2,739)

   

(4,819)

 

(2,857)

Net earnings attributable to controlling interests

 

2,299

 

1,929

   

287,128

 

214,909

Preferred stock dividends

 

(3,816)

 

(10,049)

   

(14,121)

 

(20,616)

Loss on preferred stock redemption

 

-

 

-

   

(9,108)

 

-

Net earnings (loss) attributable to common stockholders

$

(1,517)

$

(8,120)

 

$

263,899

$

194,293

Weighted average common shares outstanding - Diluted 

 

486,032

 

459,878

   

478,116

 

464,696

Net earnings (loss) per share attributable to common stockholders - Diluted

$

0.00

$

(0.02)

 

$

0.55

$

0.42

 

Three Months Ended

 

Six Months Ended

       

June 30,

 

June 30,

       

2013

2012

 

2013

2012

Reconciliation of net earnings (loss) to FFO

                 
                         

Net earnings (loss) attributable to common stockholders

$

(1,517)

$

(8,120)

 

$

263,899

$

194,293

 

Add (deduct) NAREIT defined adjustments:

                 
   

Real estate related depreciation and amortization

 

153,229

 

174,516

   

323,469

 

349,965

   

Net gains on non-FFO dispositions and acquisitions

 

(8,010)

 

(2,210)

   

(109,690)

 

(164,234)

   

Reconciling items related to noncontrolling interests

 

(719)

 

(3,950)

   

(3,660)

 

(16,004)

   

Our share of reconciling items included in earnings from unconsolidated entities

 

37,931

 

34,444

   

63,414

 

68,982

Subtotal-NAREIT defined FFO

 

180,914

 

194,680

   

537,432

 

433,002

                         
 

Add (deduct) our defined adjustments:

                 
   

Unrealized foreign currency and derivative losses (gains), net

 

8,133

 

(14,519)

   

7,495

 

9,717

   

Deferred income tax benefit

 

(4,350)

 

(5,809)

   

(2,216)

 

(4,758)

   

Our share of reconciling items included in earnings from unconsolidated entities

 

17,541

 

(1,681)

   

17,327

 

(3,218)

FFO, as defined by Prologis

 

202,238

 

172,671

   

560,038

 

434,743

                         

Adjustments to arrive at Core FFO, including our share of unconsolidated entities:

                 
 

Net losses (gains) on acquisitions and dispositions of investments in real estate, net of related income taxes

 

(33,806)

 

838

   

(226,222)

 

(103,893)

 

Losses (gains) on early extinguishment of debt and redemption of preferred stock, net

 

32,608

 

500

   

59,067

 

(4,919)

 

Our share of reconciling items included in earnings from unconsolidated entities

 

2,297

 

6,125

   

(1,609)

 

8,920

 

Impairment charges

 

-

 

-

   

-

 

19,320

 

Merger, acquisition and other integration expenses

 

-

 

21,186

   

-

 

31,914

   

Adjustments to arrive at Core FFO

 

1,099

 

28,649

   

(168,764)

 

(48,658)

Core FFO

$

203,337

$

201,320

 

$

391,274

$

386,085

                         

Adjustments to arrive at Adjusted FFO ("AFFO"), including our share of unconsolidated entities:

                 
 

Straight-lined rents and amortization of lease intangibles

 

(4,906)

 

(6,646)

   

(12,790)

 

(17,993)

 

Property improvements

 

(19,318)

 

(14,755)

   

(33,606)

 

(28,169)

 

Tenant improvements

 

(27,353)

 

(22,150)

   

(47,741)

 

(46,137)

 

Leasing commissions

 

(19,224)

 

(12,784)

   

(32,624)

 

(23,117)

 

Amortization of management contracts

 

1,393

 

1,792

   

3,008

 

3,008

 

Amortization of debt discounts/(premiums) and financing costs, net of capitalization

 

(3,839)

 

(6,063)

   

(10,841)

 

(7,452)

 

Stock compensation expense

 

13,212

 

7,855

   

27,299

 

16,167

AFFO

   

$

143,302

$

148,569

 

$

283,979

$

282,392

                         

Common stock dividends

$

141,083

$

131,513

 

$

271,836

$

261,593

Calculation of Per Share Amounts is as follows (in thousands, except per share amounts):

           
 

Three Months Ended

 

Six Months Ended

 

June 30,

 

June 30,

 

2013

2012

 

2013

2012

Net earnings (loss)

         

Net earnings (loss)

$ (1,517)

$ (8,120)

 

$ 263,899

$ 194,293

Noncontrolling interest attributable to exchangeable partnership units

-

-

 

542

1,069

Adjusted net earnings - Diluted

$ (1,517)

$ (8,120)

 

$ 264,441

$ 195,362

           

Weighted average common shares outstanding - Basic

486,032

459,878

 

473,892

459,549

Incremental weighted average effect on exchange of limited partnership units

-

-

 

1,146

3,299

Incremental weighted average effect of stock awards

-

-

 

3,078

1,848

Weighted average common shares outstanding - Diluted

486,032

459,878

 

478,116

464,696

           

Net earnings per share - Basic

$        0.00

$ (0.02)

 

$ 0.56

$ 0.42

           

Net earnings per share - Diluted

$        0.00

$ (0.02)

 

$ 0.55

$ 0.42

           

FFO, as defined by Prologis

         

FFO, as defined by Prologis

$ 202,238

$ 172,671

 

$ 560,038

$ 434,743

Noncontrolling interest attributable to exchangeable limited partnership units

(19)

66

 

1,599

1,069

Interest expense on exchangeable debt assumed exchanged

4,235

4,057

 

8,470

8,273

FFO, as defined by Prologis - Diluted

$ 206,454

$ 176,794

 

$ 570,107

$ 444,085

           

Weighted average common shares outstanding - Basic

486,032

459,878

 

473,892

459,549

Incremental weighted average effect on exchange of limited partnership units

2,093

3,250

 

3,093

3,299

Incremental weighted average effect of stock awards

3,339

1,838

 

3,078

1,848

Incremental weighted average effect on exchange of certain exchangeable debt

11,879

11,879

 

11,879

11,879

Weighted average common shares outstanding - Diluted

503,343

476,845

 

491,888

476,575

           

FFO, as defined by Prologis per share - Diluted

$ 0.41

$ 0.37

 

$ 1.16

$ 0.93

           

Core FFO

         

Core FFO

$ 203,337

$ 201,320

 

$ 391,274

$ 386,085

Noncontrolling interest attributable to exchangeable limited partnership units

(19)

66

 

1,599

1,069

Interest expense on exchange debt assumed converted

4,235

4,057

 

8,470

8,273

Core FFO - Diluted

$ 207,553

$ 205,443

 

$ 401,343

$ 395,427

           

Weighted average common shares outstanding - Basic

486,032

459,878

 

473,892

459,549

Incremental weighted average effect on exchange of limited partnership units

2,093

3,250

 

3,039

3,299

Incremental weighted average effect of stock awards

3,339

1,838

 

3,078

1,848

Incremental weighted average effect on exchange of certain exchangeable debt

11,879

11,879

 

11,879

11,879

Weighted average common shares outstanding - Diluted

503,343

476,845

 

491,888

476,575

           

Core FFO per share - Diluted

$ 0.41

$ 0.43

 

$ 0.82

$ 0.83

FFO, as defined by Prologis; Core FFO; 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:

(i)   historical cost accounting for real estate assets in accordance with GAAP assumes, through depreciation charges, that the value of real estate assets diminishes predictably over time. NAREIT stated in its White Paper on FFO "since real estate asset values have historically risen or fallen with market conditions, many industry investors have considered presentations of operating results for real estate companies that use historical cost accounting to be insufficient by themselves." Consequently, NAREIT's definition of FFO reflects the fact that real estate, as an asset class, generally appreciates over time and depreciation charges required by GAAP do not reflect the underlying economic realities.
(ii)  REITs were created as a legal form of organization in order to encourage public ownership of real estate as an asset class through investment in firms that were in the business of long-term ownership and management of real estate. The exclusion, in NAREIT's definition of FFO, of gains and losses from the sales, along with impairment charges, of previously depreciated operating real estate assets allows investors and analysts to readily identify the operating results of the long-term assets that form the core of a REIT's activity and assists in comparing those operating results between periods. We include the gains and losses from dispositions and impairment charges of land and development properties, as well as our proportionate share of the gains and losses from dispositions and impairment charges recognized by our unconsolidated entities, in our definition of FFO.

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:
(i)   deferred income tax benefits and deferred income tax expenses recognized by our subsidiaries;
(ii)  current income tax expense related to acquired tax liabilities that were recorded as deferred tax liabilities in an acquisition, to the extent the expense is offset with a deferred income tax benefit in GAAP earnings that is excluded from our defined FFO measure;
(iii)  foreign currency exchange gains and losses resulting from debt transactions between us and our foreign consolidated subsidiaries and our foreign unconsolidated entities;
(iv)   foreign currency exchange gains and losses from the remeasurement (based on current foreign currency exchange rates) of certain third party debt of our foreign consolidated subsidiaries and our foreign unconsolidated entities; and 
(v)   mark-to-market adjustments associated with derivative financial instruments.

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 recognized by our unconsolidated entities to the extent they are included in FFO, as defined by Prologis:

(i)     gains or losses from acquisition, contribution or sale of land or development properties;
(ii)    income tax expense related to the sale of investments in real estate;
(iii)   impairment charges recognized related to our investments in  real estate (either directly or through our investments in unconsolidated entities) generally as a result of our change in intent to contribute or sell these properties;
(iv)   impairment charges of goodwill and other assets;
(v)    gains or losses from the early extinguishment of debt;
(vi)   merger, acquisition and other integration expenses; and
(vii)  expenses related to natural disasters.

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 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. We currently have and have had over the past several years a stated priority to strengthen our financial position. We expect to accomplish this by reducing our debt, our investment in certain low yielding assets, such as land that we decide not to develop and our exposure to foreign currency exchange fluctuations. As a result, we have sold to third parties or contributed to unconsolidated entities real estate properties that, depending on market conditions, might result in a gain or loss. The impairment charges related to goodwill and other assets that we have recognized were similarly caused by the decline in the real estate markets. Also in connection with our stated priority to reduce debt and extend debt maturities, we have purchased portions of our debt securities. As a result, we recognized net gains or losses on the early extinguishment of certain debt due to the financial market conditions at that time.

We have also adjusted for some non-recurring items. The merger, acquisition and other integration expenses include costs we incurred in 2012 associated with the merger with AMB Property Corporation and the acquisition of our co-investment venture Prologis European Properties and the integration of our systems and processes. We have not adjusted for the acquisition costs that we have incurred as a result of routine acquisitions but only the costs associated with significant business combinations that we would expect to be infrequent in nature.

We analyze our operating performance primarily by the rental income of our real estate and the revenue driven by our investment management 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.  As a result, although these items 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. 

AFFO

To arrive at AFFO, we adjust Core FFO  to further exclude; (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, net of amounts capitalized, and; (vi) stock compensation expense.

We believe 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 that are excluded from our defined FFO measures represent the taxes 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 the 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 impairment charges of goodwill and other assets that we exclude from Core FFO, have been or may be realized as a loss in the future upon the ultimate disposition of the related investments or other assets through the form of lower cash proceeds. 
  • 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. To assist investors in compensating for these limitations, we reconcile our defined FFO measures to our net earnings computed under GAAP. This information should be read with our complete financial statements prepared under GAAP.

SOURCE Prologis, Inc.

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Jennifer Nelson

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+1 (415) 733 9409
[email protected]
San Francisco, California USA

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