SAN FRANCISCO, April 19, 2016 /PRNewswire/ -- Prologis, Inc. (NYSE: PLD), the global leader in logistics real estate, today reported results for the first quarter of 2016.

HIGHLIGHTS

  • Core funds from operations per diluted share was $0.61, up 24 percent year-over-year
  • Prologis' share of GAAP same store NOI increased 7.4 percent
  • Prologis' share of GAAP rent change on rollovers was +20.1 percent
  • Short-term financing associated with the acquisition of the KTR real estate portfolio was fully repaid, ahead of plan

"We are off to an excellent start this year," said Hamid Moghadam, chairman and CEO, Prologis. "Operating conditions remain extremely healthy in the majority of our markets, above our expectations. Consumption and e-commerce are the key drivers of our growth and both continue to grow faster than underlying economies would suggest. These factors, combined with our focused investment strategy, have resulted in strong operational and financial results in the first quarter."

HIGH-QUALITY PORTFOLIO DRIVES RECORD OPERATING RESULTS

 

Owned & Managed

1Q16

1Q15

Notes

Period End Occupancy

96.1%

95.9%

 

Leases Signed

46MSF

39MSF

Record leasing volume

Customer Retention

84.4%

86.3%

 
 

Prologis Share

1Q16

1Q15

Notes

Rent Change (GAAP)

20.1%

11.5%

Record led by the U.S. at 27.3%

Rent Change (Cash)

8.6%

4.7%

 

Same store NOI (GAAP)

7.4%

3.7%

Record led by the U.S. at 9.6%

Same store NOI (Cash)

6.0%

4.2%

 

PRUDENT CAPITAL DEPLOYMENT

 

Prologis Share

1Q16

Notes

Building Acquisitions

$46M

 

     Weighted avg stabilized cap rate

6.6%

 

Development Stabilizations

$468M

63% outside the U.S.

     Estimated weighted avg yield

6.8%

 

     Estimated weighted avg margin

26.8%

 

     Estimated value creation

$126M

 

Development Starts

$193M

 

     Estimated weighted avg margin

20.3%

 

     Estimated value creation

$39M

 

      % Build-to-suit

41.5%

 

Total Dispositions (Buildings and Land) and Contributions

$617M

Excludes $198M of cash received from the installment sale related to Facebook

      Weighted avg stabilized cap rate

5.7%

Excludes land and other real estate

CONTINUED STRENGTHENING OF FINANCIAL POSITION 
During the first quarter, Prologis completed $1.2 billion of refinancings and fully retired the $400 million short-term financing associated with the acquisition of the KTR real estate portfolio. Subsequent to quarter-end, the company recast its Global Line of Credit which now matures in 2021; the new facility was increased by $640 million to $3.0 billion and pricing decreased by 10 basis points to 90 basis points over LIBOR as of the closing of the line.

"With the recast of our credit facility last week and our existing yen facility, we've increased our total line capacity to $3.4 billion at attractive pricing as well as enhanced our already significant liquidity position," said Thomas S. Olinger, chief financial officer, Prologis. "During the quarter, we received positive outlook revisions to our Baa1/BBB+ credit ratings from Moody's and S&P, which support the continued upward trajectory of our balance sheet."

GAAP NET EARNINGS 
Net earnings per diluted share was $0.39 for the first quarter compared with $0.65 for the same period in 2015.

GUIDANCE UPDATED FOR 2016

 

Per diluted share

 

GAAP Net Earnings

$0.87 to $0.95

Core FFO

$2.50 to $2.60

AFFO

$2.40 to $2.50

 

Operations

Year-end occupancy

96.0% to 97.0%

GAAP Same store NOI – Prologis share

4.0% to 4.5%

 

Other Assumptions (in millions)

Strategic capital revenue

$180 to $190

Net promote income

$90 to $100

General & administrative expense*

$218 to $228

Realized development gains

$150 to $200

   

Annualized first quarter 2016 dividend

$1.68

*Reduction from original 2016 guidance due to a reclassification of $17 million to strategic capital expenses

 

Capital Deployment (in millions)

Development stabilizations (80% Prologis share)

$2,000 to $2,200

Development starts (80% Prologis share)

$1,800 to $2,300

Building acquisitions (40% Prologis share)

$400 to $700

Building and land dispositions (75% Prologis share)

$1,700 to $2,200

Building contributions (75% Prologis share, net of retained ownership)

$900 to $1,200

The Core FFO and earnings guidance described 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, acquisition costs, 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 2016 relates predominantly to these items.

WEBCAST & CONFERENCE CALL INFORMATION
Prologis will host a live webcast and conference call to discuss quarterly results, current market conditions and future outlook. Here are the event details:

  • Tuesday, April 19, 2016 at 12 p.m. U.S. Eastern Time.
  • Live webcast at https://ir.prologis.com by clicking Investors>Investor Events and Presentations
  • Dial in: +1 877-256-7020 or +1 973-409-9692 and enter Passcode 74787274.

A telephonic replay will be available April 19-26 at +1 (855) 859-2056 (from the United States and Canada) or +1 (404) 537-3406 (from all other countries) using conference code 74787274.  The webcast replay will be posted when available in the Investor Relations "Events & Presentations" section.

ABOUT PROLOGIS
Prologis, Inc., is the global leader in logistics real estate with a focus on high-barrier, high-growth markets. As of March 31, 2016, the company owned or had investments in, on a wholly owned basis or through co-investment ventures, properties and development projects expected to total approximately 667 million square feet (62 million square meters) in 20 countries. Prologis lease modern distribution facilities to a diverse base of approximately 5,200 customers across two major categories: business-to-business and retail/online fulfillment.

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 we operate as well as management's beliefs and assumptions. Such statements involve uncertainties that could significantly impact our financial results. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates" and 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, capital structure 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 status, tax structuring and income tax rates (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, 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 us under the heading "Risk Factors." We undertake no duty to update any forward-looking statements appearing in this document.

dollars in millions, except per share/unit data

Three Months ended March 31,

 

2016

2015

 

Revenues

$ 606

$ 463

 

Revenues - Prologis share

677

579

 

Net earnings attributable to common stockholders

208

345

 

Core FFO

330

254

 

AFFO

346

211

 

Adjusted EBITDA

549

367

 

Estimated value creation from development starts - Prologis share

39

46

 

Common stock dividends and common limited partnership unit distributions

230

189

           
 

Per common share - diluted:

   
   

Net earnings attributable to common stockholders

$0.39

$0.65

   

Core FFO

0.61

0.49

   

AFFO

0.64

0.41

   

Business line reporting:

   
     

Real estate operations 

0.57

0.45

     

Strategic capital 

0.04

0.04

     

Core FFO

0.61

0.49

     

Realized development gains, net of taxes

0.16

0.01

 

Dividends and distributions per common share/unit

0.42

0.36

in thousands

 

March 31, 2016

December 31, 2015

Assets:

     
 

Investments in real estate properties:

     
   

Operating properties

 

$ 23,788,600

$ 23,735,745

   

Development portfolio

 

1,923,362

1,872,903

   

Land

 

1,341,600

1,359,794

   

Other real estate investments

 

575,118

552,926

           

27,628,680

27,521,368

   

Less accumulated depreciation

 

3,424,143

3,274,284

       

Net investments in real estate properties

 

24,204,537

24,247,084

 

Investments in and advances to unconsolidated entities

 

4,866,664

4,755,620

 

Assets held for sale

 

431,332

378,423

 

Notes receivable backed by real estate

 

37,550

235,050

       

Net investments in real estate

 

29,540,083

29,616,177

               
 

Cash and cash equivalents

 

369,737

264,080

 

Other assets

 

1,465,928

1,514,510

       

Total assets

 

$ 31,375,748

$ 31,394,767

               

Liabilities and Equity:

     
 

Liabilities:

     
   

Debt 

 

$ 11,687,171

$ 11,626,831

   

Accounts payable, accrued expenses and other liabilities

 

1,347,953

1,347,100

       

Total liabilities

 

13,035,124

12,973,931

               
 

Equity:

     
   

Stockholders' equity:

     
     

Preferred stock

 

78,235

78,235

     

Common stock 

 

5,251

5,245

     

Additional paid-in capital 

 

19,311,795

19,302,367

     

Accumulated other comprehensive loss

 

(813,900)

(791,429)

     

Distributions in excess of net earnings

 

(3,948,720)

(3,926,483)

       

Total stockholders' equity

 

14,632,661

14,667,935

   

Noncontrolling interests

 

3,264,088

3,320,227

   

Noncontrolling interests - limited partnership unitholders

 

443,875

432,674

       

Total equity

 

18,340,624

18,420,836

               
       

Total liabilities and equity

 

$ 31,375,748

$ 31,394,767

in thousands, except per share amounts

Three Months Ended

       

March 31,

       

2016

2015

Revenues:

   
 

Rental

$ 554,116

$ 418,802

 

Strategic capital 

49,666

42,025

 

Development management and other 

2,518

2,020

   

 Total revenues 

606,300

462,847

           

Expenses:

   
 

Rental 

146,581

127,095

 

Strategic capital 

25,293

25,182

 

General and administrative 

50,543

51,306

 

Depreciation and amortization

250,000

169,808

 

Other

4,685

5,575

   

Total expenses

477,102

378,966

           

Operating income

129,198

83,881

           

Other income (expense):

   
 

Earnings from unconsolidated entities, net

58,311

31,042

 

Interest expense

(80,812)

(68,761)

 

Gains on dispositions of development properties and land, net

93,985

831

 

Gains on dispositions of real estate, net (excluding development properties and land)

50,332

276,884

 

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

(11,620)

45,615

 

Losses on early extinguishment of debt, net

(1,052)

(16,289)

   

Total other income

109,144

269,322

           

Earnings before income taxes

238,342

353,203

 

Current income tax expense

(16,156)

(839)

 

Deferred income tax benefit (expense)

619

(1,052)

Consolidated net earnings

222,805

351,312

Net earnings attributable to noncontrolling interests

(13,075)

(4,436)

Net earnings attributable to controlling interests

209,730

346,876

Preferred stock dividends

(1,689)

(1,670)

Net earnings attributable to common stockholders

$ 208,041

$ 345,206

Weighted average common shares outstanding - Diluted

543,562

529,022

Net earnings per share attributable to common stockholders - Diluted

$       0.39

$       0.65

in thousands

Three Months Ended

       

March 31,

       

2016

2015

     
           

Net earnings attributable to common stockholders

$ 208,041

$ 345,206

Add (deduct) NAREIT defined adjustments:

   
 

Real estate related depreciation and amortization

243,592

164,251

 

Gains on dispositions of real estate, net (excluding development properties and land)

(50,332)

(276,884)

 

Reconciling items related to noncontrolling interests

(40,275)

(11,512)

 

Our share of reconciling items related to unconsolidated co-investment ventures

40,000

47,372

 

Our share of reconciling items related to other unconsolidated ventures

(2,506)

1,721

Subtotal-NAREIT defined FFO

$ 398,520

$ 270,154

           

Add (deduct) our defined adjustments:

   
 

Unrealized foreign currency and derivative losses (gains), net

15,328

(32,860)

 

Deferred income tax benefit (expense)

(619)

1,052

 

Reconciling items related to noncontrolling interests

483

(1,568)

 

Our share of reconciling items related to unconsolidated co-investment ventures

(1,974)

1,949

FFO, as defined by Prologis

$ 411,738

$ 238,727

           

Adjustments to arrive at Core FFO:

   
 

Net gain on dispositions of development properties and land, net of taxes 

(85,662)

(3,234)

 

Acquisition expenses

1,261

1,304

 

Losses on early extinguishment of debt, net

1,052

16,289

 

Reconciling items related to noncontrolling interests

90

(2,029)

 

Our share of reconciling items related to unconsolidated entities

1,154

3,322

Core FFO

$ 329,633

$ 254,379

           

Adjustments to arrive at Adjusted FFO ("AFFO"), including our share of unconsolidated co-investment ventures less third party share of consolidated entities:

   
 

Net gains on dispositions of development properties and land, net of taxes

85,662

3,234

 

Straight-lined rents and amortization of lease intangibles

(31,561)

(4,832)

 

Property improvements

(7,257)

(11,470)

 

Tenant improvements

(20,289)

(18,334)

 

Leasing commissions

(21,280)

(12,426)

 

Amortization of management contracts

916

944

 

Amortization of debt premiums and financing costs, net

(5,391)

(6,419)

 

Stock compensation expense

12,465

13,234

 

Reconciling items related to noncontrolling interests

17,441

7,782

 

Our share of reconciling items related to unconsolidated co-investment ventures

(14,664)

(14,768)

AFFO

     

$ 345,675

$ 211,324

           

Common stock dividends and common limited partnership unit distributions

$ 230,279

$ 188,915

Payout ratio - AFFO

67%

89%

Payout ratio - AFFO, excluding development gains

89%

91%

in thousands

Three Months Ended

       

March 31,

       

2016

2015

           

Net earnings attributable to common stockholders

$  208,041

$ 345,206

   

Gains on dispositions of real estate, net (excluding development properties and land)

(50,332)

(276,884)

   

Depreciation and amortization expenses

250,000

169,808

   

Interest expense 

80,812

68,761

   

Losses on early extinguishment of debt, net

1,052

16,289

   

Current and deferred income tax expense, net

15,537

1,891

   

Reconciling items related to noncontrolling interest- limited partnership unitholders

6,234

1,282

   

Pro forma adjustments

(5,935)

740

   

Preferred stock dividends

1,689

1,670

   

Unrealized foreign currency and derivative losses (gains), net

15,328

(32,860)

   

Stock compensation expense

12,465

13,234

   

Acquisition expenses

1,261

1,304

Adjusted EBITDA, consolidated

$ 536,152

$ 310,441

           

Our share of reconciling items from unconsolidated entities less third party share of consolidated entities:

   
   

Gains on dispositions of real estate, net (excluding development properties and land)

(11,339)

5

   

Depreciation and amortization expenses

5,216

38,181

   

Interest expense

10,158

13,773

   

Losses on early extinguishment of debt, net

1,544

342

   

Current income tax expense

5,577

2,189

   

Unrealized foreign currency and derivative losses (gains) and deferred income tax expense, net

1,491

381

   

Acquisition expenses

425

1,966

Adjusted EBITDA

$ 549,224

$ 367,278

Adjusted EBITDA. We use Adjusted EBITDA to measure our operating performance. We calculate Adjusted EBITDA beginning with consolidated net earnings (loss) attributable to common stockholders and removing the effect of interest, income taxes, depreciation and amortization, impairment charges, third party acquisition expenses related to the acquisition of real estate, gains or losses from the acquisition or disposition of investments in real estate (other than from land and development properties), gains from the revaluation of equity investments upon acquisition of a controlling interest, gains or losses on early extinguishment of debt and derivative contracts (including cash charges), similar adjustments we make to our FFO measures (see definition below), and other non-cash charges or gains (such as stock based compensation and unrealized gains or losses on foreign currency and derivative activity). We make adjustments to reflect our economic ownership in each entity in which we invest, whether consolidated or unconsolidated.

We consider Adjusted EBITDA to provide investors relevant and useful information because it permits investors to view our operating performance on an unleveraged basis before the effects of income tax, non-cash depreciation and amortization expense, gains and losses on the disposition of non-development properties and other items (outlined above), items that affect comparability, and other significant non-cash items. We also include a pro forma adjustment in Adjusted EBITDA to reflect a full period of NOI on the operating properties we acquire and stabilize and to remove NOI on properties we dispose of during the quarter assuming the transaction occurred at the beginning of the quarter.  By excluding interest expense, Adjusted EBITDA allows investors to measure our operating performance independent of our capital structure and indebtedness and, therefore, allows for a more meaningful comparison of our operating performance to that of other companies, both in the real estate industry and in other industries. Gains and losses on the early extinguishment of debt generally include the costs of repurchasing debt securities. While not infrequent or unusual in nature, these items result from market fluctuations that can have inconsistent effects on our results of operations. The economics underlying these items reflect market and financing conditions in the short-term but can obscure our performance and the value of our long-term investment decisions and strategies.

We believe that Adjusted EBITDA helps investors to analyze our ability to meet interest payment obligations and to make quarterly preferred share dividends. We believe that investors should consider Adjusted EBITDA in conjunction with net earnings and the other required Generally Accepted Accounting Principles ("GAAP") measures of our performance to improve their understanding of our operating results, and to make more meaningful comparisons of our performance against other companies. By using Adjusted EBITDA, an investor is assessing the earnings generated by our operations but not taking into account the eliminated expenses or gains incurred in connection with such operations.  As a result, Adjusted EBITDA has limitations as an analytical tool and should be used in conjunction with our GAAP presentations. Adjusted EBITDA does not reflect our historical cash expenditures or future cash requirements for working capital, capital expenditures, distribution requirements, contractual commitments or interest and principal payments on our outstanding debt.

While EBITDA is a relevant and widely used measure of operating performance, it does not represent net income as defined by GAAP and it should not be considered as an alternative to those indicators in evaluating operating performance or liquidity. Further, our computation of Adjusted EBITDA may not be comparable to EBITDA reported by other companies. We compensate for the limitations of Adjusted EBITDA by providing investors with financial statements prepared according to GAAP, along with this detailed discussion of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to consolidated net earnings (loss), a GAAP measurement.

Business Line Reporting. Core FFO and development gains are generated by our three lines of business: (i) real estate operations; (ii) strategic capital; and (iii) development.  Real estate operations represents total Prologis Core FFO, less the amount allocated to the Strategic Capital line of business.  The amount of Core FFO allocated to the Strategic Capital line of business represents the third party share of the asset management related fees we earn from our co-investment ventures (both consolidated and unconsolidated) less costs directly associated to our strategic capital group, plus development management income.  Development gains include our share of gains on dispositions of development properties and land, net of taxes. To calculate the per share amount, the amount generated by each line of business is divided by the weighted average diluted common shares outstanding used in our Core FFO calculation of per share amounts. Management believes evaluating our results by line of business is a useful supplemental measure of our operating performance because it helps the investing public compare the operating performance of Prologis' respective businesses to other companies' comparable businesses. Prologis' computation of FFO by line of business may not be comparable to that reported by other real estate investment trusts as they may use different methodologies in computing such measures.

Calculation of Per Share Amounts

 

in thousands, except per share amount

Three Months Ended

 
 

March 31,

 
   

2016

   

2015

 

Net earnings

           

Net earnings

$

208,041

 

$

345,206

 

Noncontrolling interest attributable to exchangeable limited partnership units

 

6,609

   

1,650

 

Gains, net of expenses, associated with exchangeable debt assumed exchanged

 

-

   

(1,614)

 

Adjusted net earnings - Diluted

$

214,650

 

$

345,242

 

Weighted average common shares outstanding - Basic

 

524,205

   

514,022

 

Incremental weighted average effect on exchange of limited partnership units

 

17,543

   

3,794

 

Incremental weighted average effect of stock awards

 

1,814

   

2,394

 

Incremental weighted average effect on exchangeable debt assumed exchanged (a)

 

-

   

8,812

 

Weighted average common shares outstanding - Diluted

 

543,562

   

529,022

 

Net earnings per share - Basic

$

0.40

 

$

0.67

 

Net earnings per share - Diluted

$

0.39

 

$

0.65

 

Core FFO

           

Core FFO

$

329,633

 

$

254,379

 

Noncontrolling interest attributable to exchangeable limited partnership units

 

46

   

881

 

Interest expense on exchangeable debt assumed exchanged

 

-

   

3,506

 

Core FFO - Diluted

$

329,679

 

$

258,766

 

Weighted average common shares outstanding - Basic

 

524,205

   

514,022

 

Incremental weighted average effect on exchange of limited partnership units

 

15,877

   

3,794

 

Incremental weighted average effect of stock awards

 

1,814

   

2,394

 

Incremental weighted average effect on exchangeable debt assumed exchanged (a)

 

-

   

8,812

 

Weighted average common shares outstanding - Diluted

 

541,896

   

529,022

 

Core FFO per share - Diluted

$

0.61

 

$

0.49

 

AFFO

$

345,675

 

$

211,324

 

Noncontrolling interest attributable to exchangeable limited partnership units

 

1,067

   

60

 

Interest expense on exchangeable debt assumed exchanged

 

-

   

3,113

 

AFFO - Diluted

$

346,742

 

$

214,497

 

Weighted average common shares outstanding - Basic

 

524,205

   

514,022

 

Incremental weighted average effect on exchange of limited partnership units

 

17,543

   

2,103

 

Incremental weighted average effect of stock awards

 

1,814

   

2,394

 

Incremental weighted average effect on exchangeable debt assumed exchanged (a)

 

-

   

8,812

 

Weighted average common shares outstanding - Diluted

 

543,562

   

527,331

 

AFFO per share - Diluted

$

0.64

 

$

0.41

 
   

(a)

In March 2015, the exchangeable debt was settled primarily through the issuance of common stock. The adjustment in 2015 assumes the exchange occurred on January 1, 2015.

FFO, as defined by Prologis attributable to common stockholders/unitholders ("FFO, as defined by Prologis"); Core FFO attributable to common stockholders/unitholders ("Core FFO"); AFFO (collectively referred to as "FFO"). FFO is a financial measure that is not determined in accordance with GAAP, but is a 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 that FFO is only meaningful when it is used in conjunction with net earnings computed under GAAP. Furthermore, we believe our consolidated financial statements, prepared in accordance with GAAP, provide the most meaningful picture of our financial condition.

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. We exclude depreciation from our unconsolidated entities and the third parties' share of our consolidated ventures.

(ii) 

REITs were created 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 (including impairment charges) from dispositions of land and development properties, as well as our proportionate share of the gains and losses (including impairment charges) from dispositions of development properties recognized by our unconsolidated and consolidated entities, in our definition of FFO. We exclude the gain on revaluation of equity investments upon acquisition of a controlling interest from 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 calculate our FFO measures, as defined below, based on our proportionate ownership share of both our unconsolidated and consolidated ventures.  We reflect our share of our FFO measures for unconsolidated ventures by applying our average ownership percentage for the period to the applicable reconciling items on an entity by entity basis.  We reflect our share for consolidated ventures in which we do not own 100% of the equity by adjusting our FFO measures to remove the third party ownership share of the applicable reconciling items based on average ownership percentage for the applicable periods.

We use these FFO measures, including by segment and region, to: (i) evaluate our performance and the performance of our properties in comparison with 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 with 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 revenue. While not infrequent or unusual, these additional items we exclude in calculating FFO, as defined by Prologis, defined below, 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)

unhedged 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 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 nonrecurring items that we recognized directly in FFO, as defined by Prologis:

(i) 

gains or losses from 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 generally as a result of our change in intent to contribute or sell these properties;

(iv) 

gains or losses from the early extinguishment of debt and redemption and repurchase of preferred stock; and

(v) 

expenses related to natural disasters.

AFFO

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

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.

We analyze our operating performance primarily by the rental revenue 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 these items discussed above 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 and AFFO, 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 revenue. 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. 

As discussed above, we believe AFFO is a supplemental measure of operating performance, although we also believe AFFO provides a meaningful indicator of our ability to fund our distributions to our stockholders.

Limitations on the 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 we have or may pay.
  • Depreciation and amortization of real estate assets are economic costs that are excluded from FFO. Certain of our FFO measures are limited, as not all reflect the cash requirements that may be necessary for future replacements of the real estate assets. Furthermore, 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 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.

Prologis Share represents our proportionate economic ownership of each entity included in our total owned and managed portfolio whether consolidated or unconsolidated.

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 (including development properties that have been completed and available for lease) at January 1, 2015 and throughout the full periods in both 2015 and 2016. 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

Three Months Ended

 
 

March 31,

 
 

2016

 

2015

 

Change      (%)

 

Rental Revenue:

                 

Rental Revenue

$

437,104

 

$

324,547

       

Rental Recoveries

 

117,012

   

94,255

       

Rental Revenue per the Consolidated Statements of Operations

 

554,116

   

418,802

       

Properties not included and other adjustments (a)

 

(160,038)

   

(40,293)

       

Unconsolidated Co-Investment Ventures

 

441,104

   

427,657

       

Same Store - Rental Income

$

835,182

 

$

806,166

   

3.6

%

                   

Rental Expense:

                 

Per the Consolidated Statements of Operations

$

146,581

 

$

126,934

       

Properties not included and other adjustments (b)

 

(30,270)

   

(6,418)

       

Unconsolidated Co-Investment Ventures

 

101,059

   

100,625

       

Same Store - Rental Expense

$

217,370

 

$

221,141

   

-1.7

%

                   

NOI-GAAP:

                 

Per the Consolidated Statements of Operations

$

407,535

 

$

291,868

       

Properties not included and other adjustments

 

(129,768)

   

(33,875)

       

Unconsolidated Co-Investment Ventures

 

340,045

   

327,032

       

Same Store - NOI - GAAP

$

617,812

 

$

585,025

   

5.6

%

Same Store - NOI - GAAP - Prologis Share (c)

$

363,527

 

$

338,396

   

7.4

%

                   

NOI-Adjusted Cash:

                 

Same store- NOI - GAAP

$

617,812

 

$

585,025

       

Straight-line rent adjustments (d)

$

(16,628)

 

$

(17,635)

       

Fair value lease adjustments (d)

 

(1,075)

   

4,781

       

Same Store - NOI- Adjusted Cash

$

600,109

 

$

572,171

   

4.9

%

Same Store - NOI- Adjusted Cash - Prologis Share (c)

$

353,027

 

$

333,036

   

6.0

%

   

(a) 

To calculate Same Store rental income, we exclude the net termination and renegotiation fees to allow us to evaluate the growth or decline in each property's rental income without regard to items that are not indicative of the property's recurring operating performance.

   

(b)

To calculate Same Store rental expense, we include an allocation of the property management expenses for our consolidated properties based on the property management fee that is provided for in the individual management agreements under which our wholly owned management companies provide property management services (generally the fee is based on a percentage of revenue). On consolidation, the management fee income and expenses are eliminated and the actual cost of providing property management services is recognized.

   

(c) 

Prologis share of Same Store is calculated using the underlying building information from the Same Store NOI GAAP and Adjusted Cash calculations and applying our ownership percentage as of March 31, 2016 to the NOI of each building for both periods.

   

(d) 

In order to derive Same Store- NOI - Adjusted Cash, we adjust Same Store- NOI- GAAP to exclude non-cash items included in our rental income in our GAAP financial statements, including straight line rent adjustments and adjustments related to purchase accounting to reflect leases at fair value at the time of acquisition.

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

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SOURCE Prologis, Inc.

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Jennifer Nelson

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

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