SAN FRANCISCO, Oct. 23, 2013 /PRNewswire/ -- Prologis, Inc. (NYSE: PLD), the leading global owner, operator and developer of industrial real estate, today reported results for the third quarter 2013.

Core funds from operations (Core FFO) per fully diluted share was $0.41 for the third quarter compared to $0.49 for the same period in 2012 which included a tax benefit of $0.06 per share. Net loss per fully diluted share was $0.02 for the third quarter compared to a net loss per share of $0.10 for the same period in 2012. The net loss in the quarter was principally due to costs associated with the company's previously announced debt tender.

Operating Portfolio Metrics
The company leased 36.1 million square feet (3.4 million square meters) in its combined operating and development portfolios in the third quarter, which included a record 5.3 million square feet (0.5 million square meters) in development leasing. Prologis ended the quarter with 93.9 percent occupancy in its operating portfolio, up 20 basis points over the prior quarter.

Tenant retention in the third quarter was 80.8 percent. GAAP and cash rental rates on leases signed in the quarter increased 6.1 percent and 0.4 percent respectively from in-place rents, an increase of 210 basis points and 380 basis points over the prior quarter.

In the third quarter, GAAP same-store net operating income (NOI) increased 1.4 percent, or 1.8 percent on an adjusted cash basis, as compared to the same period in 2012.

"Market conditions are improving faster than expected with rent growth across our markets in the U.S. and broadening in Europe," said Hamid R. Moghadam, chairman and CEO, Prologis. "Utilization in our facilities is running at an all-time high. The demand we're seeing is, by and large, just to keep up with current needs and not for future expansion."

Capital Deployment
New investments during the third quarter totaled $1.9 billion, of which $1.5 billion was Prologis' share, including:

  • $756.3 million of investments in its co-investment ventures, with a stabilized capitalization rate of 6.5 percent, including: Prologis Targeted Europe Logistics Fund (PTELF), Prologis Targeted U.S. Logistics Fund (USLF), Prologis European Properties Fund II (PEPF II), as well as the acquisition of properties from Prologis North American Industrial Fund III (NA III);
  • $612.8 million of acquisitions in buildings and land, of which $270.1 million was Prologis' share. The stabilized capitalization rate on building acquisitions was 6.0 percent; and
  • $493.7 million of development starts with an estimated weighted average yield at stabilization of 7.3 percent and an estimated development margin of 19.0 percent. Two-thirds were build-to-suits. Prologis' share of starts was $462.6 million.

In the first three quarters, the company stabilized $887.0 million in development projects, with an estimated development margin of 31.9 percent and $282.8 million in estimated value creation. During the third quarter, the company stabilized $500.2 million in development projects with an estimated margin of 38.0 percent and $190.2 million in estimated value creation, of which $164.9 million was Prologis' share.

At quarter end, Prologis' global development pipeline totaled 28.3 million square feet (2.6 million square meters), with a total expected investment of $2.3 billion, of which Prologis' share was $2.0 billion. The company's share of estimated value creation at stabilization was $395.4 million, with a weighted average estimated stabilized yield of 7.6 percent and a margin of approximately 19.5 percent.

Dispositions and Contributions
In the third quarter, Prologis completed contributions and dispositions totaling $791.8 million, of which $361.1 million was the company's share, with a stabilized capitalization rate of 7.1 percent, including:

  • Third-party building and land dispositions of $611.6 million, of which $252.4 million was the company's share; and
  • Contributions in Europe and Brazil totaling $180.2 million, of which $108.7 million was the company's share.

Investment Management
During the third quarter, Prologis raised a record $671.6 million of third-party equity for its open ended funds, including:

  • $398.4 million for PEPF II;
  • $180.0 million for USLF; and
  • $93.2 million for Prologis European Logistics Partners Sàrl (PELP).

Subsequent to quarter end, the company raised an additional $187.2 million for PTELF and USLF.

"This was the largest quarter of fundraising in our history for open ended funds," said Moghadam. "Institutions beyond the sovereign fund sector are committing new capital at levels not seen since before the global financial crisis. They are under-allocated to industrial real estate and are seeking general partners with deep operating and logistics expertise. We clearly line up well with these requirements."

During the third quarter, the company also concluded Prologis North American Industrial Fund III.

At quarter end, Prologis had $23.4 billion in combined assets under management in 14 funds.

Capital Markets
During the third quarter, Prologis completed approximately $6.3 billion of debt financings, refinancings, and principal paydowns, including:

  • The upsizing of the company's global line of credit by $350.0 million to $2.0 billion with a maturity date of July 2017, and an option to extend an additional year. Pricing is at LIBOR plus 130 basis points, a 40 basis point reduction in interest rate;
  • The upsizing of the company's Japan revolver by JPY 8.5 billion ($86 million) to JPY 45 billion ($458 million) with a maturity date of May 2018. Pricing is at LIBOR plus 130 basis points, a 40 basis point reduction in interest rate; and
  • The issuance of senior notes totaling $1.25 billion with a weighted average interest rate of 3.8 percent and term of 8.6 years, as well as the tender of $611.4 million of notes.

Subsequent to quarter end, the company raised EUR 300 million in a public Eurobond issuance for PEPF II. The five-year bond has a coupon rate of 2.75 percent.

"We had a very active quarter on the financing front," said Thomas S. Olinger, chief financial officer, Prologis.  "We took advantage of the opportunity to lock in favorable interest rates and further enhance our debt maturity profile."

Guidance for 2013
Prologis narrowed its full-year 2013 Core FFO guidance range to $1.64 to $1.66 per diluted share from $1.63 to $1.67 per diluted share. The company also expects to recognize net earnings, for GAAP purposes, of $0.53 to $0.55 per diluted share.

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 or losses on real estate transactions and early extinguishment of debt.

Webcast and Conference Call Information
The company will host a webcast /conference call to discuss quarterly results, current market conditions and future outlook today, October 23, 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 48749904.

A telephonic replay will be available from October 23 through November 22 at +1 855-859-2056 (from the U.S. and Canada) or +1 404-537-3406 (from all other countries), with conference code 48749904. 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 Sept. 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 562 million square feet (52.2 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.

(Dollars in thousands, except per share data)

   

Three months ended September 30,

 

Nine months ended September 30,

   

2013

 

2012

 

2013

 

2012

Revenues

 

$ 430,185

 

$ 499,462

 

$1,333,740

 

$1,473,630

Net earnings (loss) attributable to common stockholders

 

(7,534)

 

(46,526)

 

256,365

 

147,767

FFO, as defined by Prologis

 

82,536

 

205,891

 

642,574

 

640,634

Core FFO

 

206,895

 

231,962

 

598,169

 

618,047

Core AFFO

 

145,000

 

170,002

 

433,290

 

452,394

Adjusted EBITDA

 

354,641

 

385,117

 

1,028,025

 

1,151,902

Value creation from development stabilization - Prologis share

 

164,888

 

19,903

 

247,194

 

137,560

                   

Per common share - diluted:

               
 

Net earnings (loss) attributable to common stockholders

 

$     (0.02)

 

$     (0.10)

 

$         0.53

 

$         0.32

 

FFO, as defined by Prologis

 

0.16

 

0.44

 

1.31

 

1.37

 

Core FFO

 

0.41

 

0.49

 

1.22

 

1.32

                   
         

September 30, 2013 

 

June 30, 2013

 

December 31, 2012

Assets:

               
 

Investments in real estate assets:

               
   

Operating properties

$

18,404,897

 

$

17,755,655

 

$

22,608,248

   

Development portfolio

 

1,084,959

   

939,794

   

951,643

   

Land

 

1,643,055

   

1,710,583

   

1,794,364

   

Other real estate investments

 

466,997

   

492,833

   

454,868

           

21,599,908

   

20,898,865

   

25,809,123

   

Less accumulated depreciation

 

2,540,370

   

2,422,909

   

2,480,660

     

Net investments in properties

 

19,059,538

   

18,475,956

   

23,328,463

 

Investments in and advances to unconsolidated entities

 

4,210,305

   

3,884,766

   

2,195,782

 

Notes receivable backed by real estate

 

189,663

   

189,636

   

188,000

 

Assets held for sale

 

3,958

   

25,330

   

26,027

     

Net investments in real estate

 

23,463,464

   

22,575,688

   

25,738,272

                         
 

Cash and cash equivalents

 

121,693

   

385,424

   

100,810

 

Restricted cash

 

42,488

   

26,642

   

176,926

 

Accounts receivable

 

137,879

   

124,980

   

171,084

 

Other assets

 

1,024,019

   

924,834

   

1,123,053

   

Total assets

$

24,789,543

 

$

24,037,568

 

$

27,310,145

                         

Liabilities and Equity:

               
 

Liabilities:

               
   

Debt 

$

9,119,317

 

$

8,417,310

 

$

11,790,794

   

Accounts payable, accrued expenses, and other liabilities

 

1,406,704

   

1,297,756

   

1,746,015

     

Total liabilities

 

10,526,021

   

9,715,066

   

13,536,809

                         
 

Equity:

               
   

Stockholders' equity:

               
     

Preferred stock

 

100,000

   

100,000

   

582,200

     

Common stock 

 

4,986

   

4,986

   

4,618

     

Additional paid-in capital 

 

17,952,611

   

17,939,829

   

16,411,855

     

Accumulated other comprehensive loss

 

(451,658)

   

(541,355)

   

(233,563)

     

Distributions in excess of net earnings

 

(3,852,846)

   

(3,704,034)

   

(3,696,093)

       

Total stockholders' equity

 

13,753,093

   

13,799,426

   

13,069,017

   

Noncontrolling interests

 

459,897

   

470,995

   

653,125

   

Noncontrolling interests - limited partnership unitholders

 

50,532

   

52,081

   

51,194

       

Total equity

 

14,263,522

   

14,322,502

   

13,773,336

       

Total liabilities and equity

$

24,789,543

 

$

24,037,568

 

$

27,310,145

                         
 

Three Months Ended

 

Nine Months Ended

       

September 30,

 

September 30,

       

2013

2012

 

2013

2012

Revenues:

                 
 

Rental income

$

379,312

$

466,731

 

$

1,200,303

$

1,372,707

 

Investment management income

 

48,322

 

31,714

   

125,565

 

95,064

 

Development management and other income

 

2,551

 

1,017

   

7,872

 

5,859

   

 Total revenues 

 

430,185

 

499,462

   

1,333,740

 

1,473,630

                         

Expenses:

                 
 

Rental expenses

 

108,912

 

126,431

   

353,272

 

369,284

 

Investment management expenses

 

22,023

 

15,730

   

66,938

 

47,686

 

General and administrative expenses

 

55,034

 

55,886

   

166,140

 

167,460

 

Depreciation and amortization

 

158,889

 

190,148

   

492,690

 

547,036

 

Other expenses

 

6,370

 

5,580

   

17,494

 

17,142

 

Merger, acquisition and other integration expenses

 

-

 

20,659

   

-

 

52,573

 

Impairment of real estate properties

 

-

 

9,778

   

-

 

12,963

   

Total expenses

 

351,228

 

424,212

   

1,096,534

 

1,214,144

                         

Operating income

 

78,957

 

75,250

   

237,206

 

259,486

                         

Other income (expense):

                 
 

Earnings from unconsolidated co-investment ventures, net

 

25,769

 

2,378

   

57,816

 

15,289

 

Earnings from other unconsolidated joint ventures, net

 

596

 

185

   

1,738

 

5,158

 

Interest income 

 

4,612

 

6,399

   

13,402

 

17,192

 

Interest expense

 

(84,885)

 

(122,817)

   

(292,383)

 

(383,369)

 

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

 

46,074

 

12,677

   

445,954

 

280,968

 

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

 

7,916

 

(3,549)

   

8,385

 

(17,351)

 

Gains (losses) on early extinguishment of debt, net

 

(114,196)

 

-

   

(164,155)

 

4,919

 

Impairment of other assets

 

-

 

-

   

-

 

(16,135)

   

Total other income (expense)

 

(114,114)

 

(104,727)

   

70,757

 

(93,329)

                         

Earnings (loss) before income taxes

 

(35,157)

 

(29,477)

   

307,963

 

166,157

 

Income tax expense (benefit) - current and deferred

 

12,180

 

(19,983)

   

84,534

 

216

Earnings (loss) from continuing operations

 

(47,337)

 

(9,494)

   

223,429

 

165,941

Discontinued operations:

                 
 

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

 

(127)

 

8,054

   

1,753

 

29,262

 

Net gains (losses) on dispositions, including related impairment charges and taxes

 

40,297

 

(31,458)

   

59,598

 

(10,335)

   

Total discontinued operations

 

40,170

 

(23,404)

   

61,351

 

18,927

Consolidated net earnings (loss)

 

(7,167)

 

(32,898)

   

284,780

 

184,868

Net loss (earnings) attributable to noncontrolling interests

 

1,768

 

(3,323)

   

(3,051)

 

(6,180)

Net earnings (loss) attributable to controlling interests

 

(5,399)

 

(36,221)

   

281,729

 

178,688

Preferred stock dividends

 

(2,135)

 

(10,305)

   

(16,256)

 

(30,921)

Loss on preferred stock redemption

 

-

 

-

   

(9,108)

 

-

Net earnings (loss) attributable to common stockholders

$

(7,534)

$

(46,526)

 

$

256,365

$

147,767

Weighted average common shares outstanding - Diluted (A)

 

499,848

 

461,979

   

488,409

 

464,938

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

$

(0.02)

$

(0.10)

 

$

0.53

$

0.32

 

Three Months Ended

 

Nine Months Ended

       

September 30,

 

September 30,

       

2013

2012

 

2013

2012

Reconciliation of net earnings (loss) to FFO

                 
                         

Net earnings (loss) attributable to common stockholders

 

$   (7,534)

 

$ (46,526)

   

$ 256,365

 

$ 147,767

 

Add (deduct) NAREIT defined adjustments:

                 
   

Real estate related depreciation and amortization

 

152,743

 

185,589

   

474,559

 

534,127

   

Impairment charges on certain real estate properties

 

-

 

21,660

   

-

 

21,660

   

Net losses (gains) on non-FFO acquisitions and dispositions

 

(96,002)

 

11,096

   

(204,039)

 

(151,711)

   

Reconciling items related to noncontrolling interests

 

(4,023)

 

(6,084)

   

(7,683)

 

(22,088)

   

Our share of reconciling items included in earnings from unconsolidated co-investment ventures

 

51,155

 

32,686

   

111,603

 

95,050

   

Our share of reconciling items included in earnings from other unconsolidated joint ventures

 

1,378

 

2,623

   

4,344

 

9,241

Subtotal-NAREIT defined FFO

 

97,717

 

201,044

   

635,149

 

634,046

                         
 

Add (deduct) our defined adjustments:

                 
   

Unrealized foreign currency and derivative losses (gains), net

 

(8,082)

 

5,841

   

(587)

 

15,558

   

Deferred income tax expense (benefit)

 

1,168

 

(1,884)

   

(1,048)

 

(6,642)

   

Our share of reconciling items included in earnings from unconsolidated co-investment ventures

 

(8,267)

 

890

   

9,060

 

(2,328)

FFO, as defined by Prologis

 

82,536

 

205,891

   

642,574

 

640,634

                         

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 expenses

 

7,294

 

(11,575)

   

(218,928)

 

(115,468)

 

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

 

114,196

 

-

   

173,263

 

(4,919)

 

Our share of reconciling items included in earnings from unconsolidated entities

 

2,869

 

1,460

   

1,260

 

10,380

 

Impairment charges

 

-

 

15,527

   

-

 

34,847

 

Merger, acquisition and other integration expenses

 

-

 

20,659

   

-

 

52,573

   

Adjustments to arrive at Core FFO

 

124,359

 

26,071

   

(44,405)

 

(22,587)

Core FFO

 

$ 206,895

 

$ 231,962

   

$ 598,169

 

$ 618,047

                         

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

                 
 

Straight-lined rents and amortization of lease intangibles

 

(5,167)

 

(4,217)

   

(17,957)

 

(22,210)

 

Property improvements

 

(28,790)

 

(25,938)

   

(62,396)

 

(54,107)

 

Tenant improvements

 

(26,321)

 

(22,459)

   

(74,062)

 

(68,596)

 

Leasing commissions

 

(12,838)

 

(14,031)

   

(45,462)

 

(37,148)

 

Amortization of management contracts

 

1,386

 

1,606

   

4,394

 

4,614

 

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

 

(4,018)

 

(5,359)

   

(14,859)

 

(12,811)

 

Cash received on net investment hedges

 

1,733

 

-

   

6,044

 

-

 

Stock compensation expense

 

12,120

 

8,438

   

39,419

 

24,605

Core AFFO

 

$ 145,000

 

$ 170,002

   

$ 433,290

 

$ 452,394

                         

Common stock dividends

 

$ 141,279

 

$ 129,769

   

$ 413,115

 

$ 391,362

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

     
 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

 

2013

2012

 

2013

2012

Net earnings (loss)

         

Net earnings (loss)

$ (7,534)

$ (46,526)

 

$ 256,365

$ 147,767

Noncontrolling interest attributable to exchangeable partnership units

(47)

(152)

 

1,446

935

Adjusted net earnings - Diluted

$ (7,581)

$ (46,678)

 

$ 257,811

$ 148,702

           

Weighted average common shares outstanding - Basic

497,989

460,079

 

482,007

459,720

Incremental weighted average effect on exchange of limited partnership units

1,859

1,900

 

3,099

3,260

Incremental weighted average effect of stock awards

-

-

 

3,303

1,958

Weighted average common shares outstanding - Diluted

499,848

461,979

 

488,409

464,938

           

Net earnings per share - Basic

$ (0.02)

$ (0.10)

 

$ 0.53

$ 0.32

           

Net earnings per share - Diluted

$ (0.02)

$ (0.10)

 

$ 0.53

$ 0.32

           

FFO, as defined by Prologis

         

FFO, as defined by Prologis

$ 82,536

$ 205,891

 

$ 642,574

$ 640,634

Noncontrolling interest attributable to exchangeable limited partnership units

(47)

(134)

 

1,598

935

Interest expense on exchangeable debt assumed exchanged

-

4,229

 

12,705

12,661

FFO, as defined by Prologis - Diluted

$ 82,489

$ 209,986

 

$ 656,877

$ 654,230

           

Weighted average common shares outstanding - Basic

497,989

460,079

 

482,007

459,720

Incremental weighted average effect on exchange of limited partnership units

3,610

3,185

 

3,299

3,260

Incremental weighted average effect of stock awards

3,285

1,882

 

3,303

1,958

Incremental weighted average effect on exchange of certain exchangeable debt

-

11,879

 

11,879

11,879

Weighted average common shares outstanding - Diluted

504,884

477,025

 

500,488

476,817

           

FFO, as defined by Prologis per share - Diluted

$ 0.16

$ 0.44

 

$ 1.31

$ 1.37

           

Core FFO

         

Core FFO

$ 206,895

$ 231,962

 

$ 598,169

$ 618,047

Noncontrolling interest attributable to exchangeable limited partnership units

-

(134)

 

1,598

935

Interest expense on exchange debt assumed converted

4,235

4,229

 

12,705

12,661

Core FFO - Diluted

$ 211,130

$ 236,057

 

$ 612,472

$ 631,643

           

Weighted average common shares outstanding - Basic

497,989

460,079

 

482,007

459,720

Incremental weighted average effect on exchange of limited partnership units

3,809

3,185

 

3,299

3,260

Incremental weighted average effect of stock awards

3,285

1,882

 

3,303

1,958

Incremental weighted average effect on exchange of certain exchangeable debt

11,879

11,879

 

11,879

11,879

Weighted average common shares outstanding - Diluted

516,962

477,025

 

500,488

476,817

           

Core FFO per share - Diluted

$ 0.41

$ 0.49

 

$ 1.22

$ 1.32

             

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:

(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 and third-party acquisition costs related to the acquisition of 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 ProLogis and the acquisition of our co-investment venture Prologis European Properties and the integration of our systems and processes.

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.  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. 

Core AFFO

To arrive at Core 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 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 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. 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.

SOURCE Prologis, Inc.

Media contact & resources

Jennifer Nelson

VP, Head of Global Corporate Communications
+1 (415) 733 9409
[email protected]
San Francisco, California USA

Corporate Profile

Park Grande, Building

LET'S GET STARTED

Every connection starts with a conversation. Our team is here to help.