SAN FRANCISCO, Jan. 26, 2016 /PRNewswire/ -- Prologis, Inc. (NYSE: PLD), the global leader in industrial real estate, today reported results for the fourth quarter and full year 2015.

HIGHLIGHTS

  • Core funds from operations per diluted share was $2.23, up 19 percent year-over-year
  • Prologis' share of GAAP same store NOI increased 5.6 percent for the full year
  • Prologis' share of estimated value creation was $699 million, $533 million from development stabilizations, reflecting a 32.5 percent margin and $166 from value-added conversions
  • Short-term financing associated with the acquisition of the KTR real estate portfolio was reduced to $400 million, ahead of plan

"Financial and operating results in 2015 exceeded expectations and reflected outstanding execution by the team and favorable market conditions," said Hamid Moghadam, chairman and CEO, Prologis. "We enter 2016 with record occupancy levels, substantial requirements from our customers to further optimize their supply chains, and strong institutional interest in our co-investment ventures."

"In spite of macroeconomic uncertainty, vacancy rates are at all-time lows. Discussions with our global customers support our view that the power of domestic consumption and the growth of e-commerce will continue to drive demand for well-located distribution space, particularly in major gateway markets," Moghadam added. "Given our expectations that supply and demand will reach equilibrium by the end of 2016 in the U.S., we anticipate an extended period of low vacancy that will support favorable operating conditions."

STRONG OPERATING PERFORMANCE CONTINUES

 

Owned & Managed

4Q15

4Q14

Notes

Period End Occupancy

96.9%

96.1%

Ended 2015 with record global occupancy

Leases Signed

40MSF

42MSF

More than 166MSF leased in 2015

Customer Retention

85.9%

85.5%

 
 

Prologis Share

4Q15

4Q14

Notes

Rent Change (GAAP)

12.4%

8.4%

Led by the U.S. at 18.0%

Rent Change (Cash)

2.9%

0.7%

 

Same store NOI (GAAP)

6.6%

4.9%

Led by the U.S. at 8.7%

Same store NOI (Cash)

4.5%

5.2%

 

CAPITAL DEPLOYMENT PRICING AND MARGINS REMAIN STRONG

 

Prologis Share (Millions of $)

4Q15

2015

Notes

Building Acquisitions

$554

$4,069

 

      Weighted avg stabilized cap rate

5.2%

5.5%

 

Development Stabilizations

$290

$1,640

 

      Estimated weighted avg margin

25.5%

32.5%

 

      Estimated value creation

$74

$533

Estimated weighted average yield of 7.3% in 2015

Value Creation from Value-Added Conversions

$0

$166

 

Development Starts

$569

$1,815

 

     Estimated weighted avg margin

20.2%

20.9%

 

      % Build-to-suit

56.1%

43.6%

Projects include Amazon, Hitachi, Siemens and Subaru

Total Dispositions (Buildings and Land) and Contributions

$819

$2,524

Excludes the sale of the Morris retail portfolio in December 2015 to affiliates of Blackstone Real Estate Advisors L.P.

      Weighted avg stabilized cap rate

6.4%

5.3%

Excludes land and other real estate

"We completed more than 35 dispositions and contributions in the fourth quarter at strong pricing, demonstrating that buyer demand for high-quality industrial real estate remains strong and diverse," said Michael Curless, chief investment officer, Prologis. "We continue to deploy capital profitably to meet our customers' needs, and are very pleased with the $1.8 billion of developments that we stabilized this year at margins in excess of 30 percent."

FINANCING ACTIVITY STRENGTHENS BALANCE SHEET
During the fourth quarter, Prologis completed $1.8 billion of refinancings and reduced the short-term financing associated with the acquisition of the KTR real estate portfolio to $400 million.

"Our key credit metrics improved as our book leverage was reduced to 38.4 percent and our debt-to-EBITDA ratio declined to 6.9 times or 6.0 times, including realized development gains. We continue to maintain considerable liquidity with over $2.8 billion at year end and we have no bond maturities until 2018," said Thomas S. Olinger, chief financial officer, Prologis. "With the capital recycling activity currently underway, we are on track to pay down the remaining short-term financing during the first half of the year as well as fund our 2016 deployment needs."

GAAP NET EARNINGS
Net earnings per diluted share was $0.23 for the fourth quarter compared with $0.81 for the same period in 2014. For the full year 2015, net earnings per diluted share was $1.64 compared with $1.24 for the full year 2014.

GUIDANCE ESTABLISHED FOR 2016 – CORE FFO EXPECTED TO GROW 14% YEAR-OVER-YEAR

 

Per diluted share

 

Core FFO

$2.50 to $2.60

GAAP Net Earnings

$0.28 to $0.36

 

Operations

Year-end occupancy

96.0% to 97.0%

GAAP Same store NOI – Prologis share

3.5% to 4.5%

 

Other Assumptions (in millions)

Strategic capital revenue

$180 to $190

Net promote income

$90 to $100

General & administrative expense

$235 to $245

Realized development gains

$150 to $200

   

Annualized fourth quarter 2015 dividend

$1.60

 

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, January 26, 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 19377453.

A telephonic replay will be available January 26-February 2 at +1 (855) 859-2056 (from the United States and Canada) or +1 (404) 537-3406 (from all other countries) using conference code 19377453. The webcast replay will be posted when available in the Investor Relations "Events & Presentations" section.

ABOUT PROLOGIS
Prologis, Inc. is the global leader in industrial real estate. As of December 31, 2015, Prologis owned or had investments in, on a wholly owned basis or through co-investment ventures, properties and development projects expected to total approximately 669 million square feet (62 million square meters) in 20 countries. The company leases modern distribution facilities to more than 5,200 customers, including third-party logistics providers, transportation companies, retailers and manufacturers.

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

   

Three Months ended December 31,

 

Twelve Months ended December 31,

(dollars in thousands, except per share data)

 

2015

 

2014

 

2015

 

2014

 

Revenues

 

$ 643,201

 

$ 450,865

 

$ 2,197,074

 

$ 1,760,787

 

Net earnings attributable to common stockholders

 

118,363

 

408,609

 

862,788

 

622,235

 

Core FFO

 

345,758

 

246,421

 

1,181,290

 

953,147

 

AFFO

 

307,607

 

234,954

 

1,287,869

 

903,253

 

Adjusted EBITDA

 

514,705

 

414,311

 

1,936,351

 

1,629,614

 

Value creation from development stabilizations - Prologis share

 

73,923

 

46,138

 

533,213

 

235,784

 

Common stock dividends and common limited partnership units paid

 

219,170

 

168,261

 

806,946

 

668,286

                       
 

Per common share - diluted:

               
   

Net earnings attributable to common stockholders

 

$       0.23

 

$       0.81

 

$          1.64

 

$          1.24

   

Core FFO

 

0.64

 

0.48

 

2.23

 

1.88

   

Business line reporting:

               
     

Real estate operations 

 

0.55

 

0.44

 

2.02

 

1.68

     

Strategic capital 

 

0.09

 

0.04

 

0.21

 

0.20

     

Core FFO

 

0.64

 

0.48

 

2.23

 

1.88

     

Realized development gains

 

0.10

 

0.09

 

0.49

 

0.29

 

Dividends and distributions per common share/unit

 

0.40

 

0.33

 

1.52

 

1.32

                       
                       

(in thousands)

December 31, 2015

 

September 30, 2015

 

December 31, 2014

Assets:

               
 

Investments in real estate properties:

               
   

Operating properties

 

$ 23,735,745

   

$ 23,499,186

   

$        18,635,452

   

Development portfolio

 

1,872,903

   

1,575,389

   

1,473,980

   

Land

 

1,359,794

   

1,569,416

   

1,577,786

   

Other real estate investments

 

552,926

   

625,367

   

502,927

           

27,521,368

   

27,269,358

   

22,190,145

   

Less accumulated depreciation

 

3,274,284

   

3,156,445

   

2,790,781

       

Net investments in real estate properties

 

24,247,084

   

24,112,913

   

19,399,364

 

Investments in and advances to unconsolidated entities

 

4,755,620

   

4,841,225

   

4,824,724

 

Assets held for sale

 

378,423

   

369,382

   

43,934

 

Notes receivable backed by real estate

 

235,050

   

197,500

   

-

       

Net investments in real estate

 

29,616,177

   

29,521,020

   

24,268,022

                         
 

Cash and cash equivalents

 

264,080

   

310,433

   

350,692

 

Other assets

 

1,514,510

   

1,544,579

   

1,156,287

       

Total assets

 

$ 31,394,767

   

$ 31,376,032

   

$        25,775,001

                         

Liabilities and Equity:

               
 

Liabilities:

               
   

Debt 

 

$ 11,626,831

   

$ 11,891,033

   

$          9,336,977

   

Accounts payable, accrued expenses and other liabilities

 

1,347,100

   

1,300,028

   

1,254,425

       

Total liabilities

 

12,973,931

   

13,191,061

   

10,591,402

                         
 

Equity:

               
   

Stockholders' equity:

               
     

Preferred stock

 

78,235

   

78,235

   

78,235

     

Common stock 

 

5,245

   

5,242

   

5,095

     

Additional paid-in capital 

 

19,302,367

   

19,150,336

   

18,467,009

     

Accumulated other comprehensive loss

 

(791,429)

   

(776,570)

   

(600,337)

     

Distributions in excess of net earnings

 

(3,926,483)

   

(3,825,673)

   

(3,974,493)

       

Total stockholders' equity

 

14,667,935

   

14,631,570

   

13,975,509

   

Noncontrolling interests

 

3,320,227

   

3,371,425

   

1,159,901

   

Noncontrolling interests - limited partnership unitholders

 

432,674

   

181,976

   

48,189

       

Total equity

 

18,420,836

   

18,184,971

   

15,183,599

       

Total liabilities and equity

 

$ 31,394,767

   

$ 31,376,032

   

$        25,775,001

                         
 

Three Months Ended

 

Twelve Months Ended

(in thousands, except per share amounts)

December 31,

 

December 31,

       

2015

2014

 

2015

2014

Revenues:

                 
 

Rental

 

$ 560,186

 

$ 402,014

   

$ 1,973,187

 

$ 1,527,349

 

Strategic capital 

 

77,115

 

44,157

   

210,362

 

219,871

 

Development management and other 

 

5,900

 

4,694

   

13,525

 

13,567

   

 Total revenues 

 

643,201

 

450,865

   

2,197,074

 

1,760,787

                         

Expenses:

                 
 

Rental 

 

150,776

 

108,370

   

543,214

 

430,787

 

Strategic capital 

 

26,228

 

22,054

   

88,418

 

96,496

 

General and administrative 

 

65,509

 

65,987

   

238,199

 

247,768

 

Depreciation and amortization

 

272,906

 

171,402

   

880,373

 

642,461

 

Other (A)

 

22,231

 

8,096

   

66,698

 

23,467

   

Total expenses

 

537,650

 

375,909

   

1,816,902

 

1,440,979

                         

Operating income

 

105,551

 

74,956

   

380,172

 

319,808

                         

Other income (expense):

                 
 

Earnings from unconsolidated entities, net

 

52,879

 

54,877

   

159,262

 

134,288

 

Interest expense

 

(82,665)

 

(74,092)

   

(301,363)

 

(308,885)

 

Gains on dispositions of development properties and land, net

 

47,978

 

46,171

   

258,088

 

172,492

 

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

 

55,621

 

341,924

   

500,799

 

553,298

 

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

 

19,191

 

(14,527)

   

37,950

 

7,927

 

Losses on early extinguishment of debt, net

 

(69,778)

 

(1,939)

   

(86,303)

 

(165,300)

   

Total other income

 

23,226

 

352,414

   

568,433

 

393,820

                         

Earnings before income taxes

 

128,777

 

427,370

   

948,605

 

713,628

 

Current income tax expense

 

(5,319)

 

(2,293)

   

(28,147)

 

(61,585)

 

Deferred income tax benefit

 

3,299

 

2,647

   

5,057

 

87,241

Consolidated net earnings

 

126,757

 

427,724

   

925,515

 

739,284

Net earnings attributable to noncontrolling interests

 

(6,762)

 

(17,437)

   

(56,076)

 

(103,101)

Net earnings attributable to controlling interests

 

119,995

 

410,287

   

869,439

 

636,183

Preferred stock dividends

 

(1,632)

 

(1,678)

   

(6,651)

 

(7,431)

Loss on preferred stock repurchase

 

-

 

-

   

-

 

(6,517)

Net earnings attributable to common stockholders

 

$ 118,363

 

$ 408,609

   

$    862,788

 

$    622,235

Weighted average common shares outstanding - Diluted

 

542,435

 

507,896

   

533,944

 

506,391

Net earnings per share attributable to common stockholders - Diluted

 

$       0.23

 

$       0.81

   

$          1.64

 

$          1.24

 

Three Months Ended

 

Twelve Months Ended

(in thousands)

December 31,

 

December 31,

       

2015

2014

 

2015

2014

Reconciliation of net earnings to FFO

                 
                         

Net earnings attributable to common stockholders

 

$ 118,363

 

$ 408,609

   

$    862,788

 

$ 622,235

Add (deduct) NAREIT defined adjustments:

                 
 

Real estate related depreciation and amortization

 

267,087

 

164,107

   

854,471

 

617,814

 

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

 

(55,621)

 

(341,924)

   

(500,799)

 

(553,298)

 

Reconciling items related to noncontrolling interests

 

(44,733)

 

(984)

   

(78,106)

 

47,939

 

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

 

34,732

 

30,719

   

179,031

 

179,302

 

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

 

1,637

 

2,702

   

6,585

 

7,238

Subtotal-NAREIT defined FFO

 

321,465

 

263,229

   

1,323,970

 

921,230

                         

Add (deduct) our defined adjustments:

                 
 

Unrealized foreign currency and derivative losses (gains), net

 

(7,830)

 

19,887

   

1,026

 

18,984

 

Deferred income tax benefit

 

(3,299)

 

(2,647)

   

(5,057)

 

(87,241)

 

Current income tax expense related to acquired tax liabilities

 

-

 

-

   

3,497

 

30,521

 

Reconciling items related to noncontrolling interests

 

(163)

 

-

   

(1,330)

 

-

 

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

 

(1,793)

 

3,728

   

(13,564)

 

4,015

FFO, as defined by Prologis

 

308,380

 

284,197

   

1,308,542

 

887,509

                         

Adjustments to arrive at Core FFO:

                 
 

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

 

(53,108)

 

(45,484)

   

(258,288)

 

(156,992)

 

Acquisition expenses

 

17,485

 

1,578

   

47,034

 

4,194

 

Losses on early extinguishment of debt and repurchase of preferred stock, net

 

69,778

 

1,939

   

86,303

 

171,817

 

Reconciling items related to noncontrolling interests

 

1,286

 

-

   

(11,121)

 

-

 

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

 

1,937

 

4,191

   

8,820

 

46,619

Core FFO

 

$ 345,758

 

$ 246,421

   

$ 1,181,290

 

$ 953,147

                         

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

                 
 

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

 

53,537

 

44,969

   

259,784

 

149,778

 

Straight-lined rents and amortization of lease intangibles

 

(22,451)

 

(5,681)

   

(63,581)

 

(26,278)

 

Property improvements

 

(36,066)

 

(35,557)

   

(91,541)

 

(96,729)

 

Tenant improvements

 

(27,055)

 

(22,961)

   

(92,015)

 

(86,490)

 

Leasing commissions

 

(21,463)

 

(19,084)

   

(73,787)

 

(62,604)

 

Amortization of management contracts

 

920

 

1,101

   

4,303

 

4,943

 

Amortization of debt premiums and financing costs, net

 

(5,758)

 

(1,933)

   

(18,417)

 

(3,102)

 

Cash received on net investment hedges

 

6,644

 

13,243

   

128,168

 

13,110

 

Stock compensation expense

 

13,541

 

14,436

   

53,665

 

57,478

AFFO

     

$ 307,607

 

$ 234,954

   

$ 1,287,869

 

$ 903,253

                         

Common stock dividends and common limited partnership unit distributions

 

$ 219,170

 

$ 168,261

   

$    806,946

 

$ 668,286

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 is as follows (in thousands, except per share amounts):

 

Three Months Ended

   

Twelve Months Ended

 
 

December 31,

   

December 31,

 
   

2015

   

2014

     

2015

   

2014

 

Net earnings

                         

Net earnings

$

118,363

 

$

408,609

   

$

862,788

 

$

622,235

 

Noncontrolling interest attributable to exchangeable limited partnership units

 

5,745

   

1,768

     

13,120

   

3,636

 

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

 

-

   

-

     

(1,614)

   

-

 

Adjusted net earnings - Diluted

$

124,108

 

$

410,377

   

$

874,294

 

$

625,871

 

Weighted average common shares outstanding - Basic

 

523,770

   

501,178

     

521,241

   

499,583

 

Incremental weighted average effect on exchange of limited partnership units

 

16,393

   

3,457

     

8,569

   

3,501

 

Incremental weighted average effect of stock awards

 

2,272

   

3,261

     

1,961

   

3,307

 

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

 

-

   

-

     

2,173

   

-

 

Weighted average common shares outstanding - Diluted

 

542,435

   

507,896

     

533,944

   

506,391

 

Net earnings per share - Basic

$

0.23

 

$

0.82

   

$

1.66

 

$

1.25

 

Net earnings per share - Diluted

$

0.23

 

$

0.81

   

$

1.64

 

$

1.24

 

Core FFO

                         

Core FFO

$

345,758

 

$

246,421

   

$

1,181,290

 

$

953,147

 

Noncontrolling interest attributable to exchangeable limited partnership units

 

53

   

60

     

213

   

209

 

Interest expense on exchangeable debt assumed exchanged

 

-

   

4,246

     

3,506

   

16,984

 

Core FFO - Diluted

$

345,811

 

$

250,727

   

$

1,185,009

 

$

970,340

 

Weighted average common shares outstanding - Basic

 

523,770

   

501,178

     

521,241

   

499,583

 

Incremental weighted average effect on exchange of limited partnership units

 

14,897

   

1,964

     

6,897

   

1,964

 

Incremental weighted average effect of stock awards

 

2,272

   

3,261

     

1,961

   

3,307

 

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

 

-

   

11,879

     

2,173

   

11,879

 

Weighted average common shares outstanding - Diluted

 

540,939

   

518,282

     

532,272

   

516,733

 

Core FFO per share - Diluted

$

0.64

 

$

0.48

   

$

2.23

 

$

1.88

 
   

(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 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. 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 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, 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 non-recurring 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.

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 income of our real estate and the revenue driven by our strategic capital business, net of operating, administrative and financing expenses. This income stream is not directly impacted by fluctuations in the market value of our investments in real estate or debt securities.  Although 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, 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 include realized gains from the disposition of land and development properties and to exclude our share of the impact of; (i) straight-line rents; (ii) amortization of above- and below-market lease intangibles; (iii) recurring capital expenditures; (iv) amortization of management contracts; (v) amortization of debt premiums and discounts and financing costs, net of amounts capitalized, and; (vi) stock compensation expense.

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

Limitations on Use of our FFO Measures

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

  • The current income tax expenses and acquisition costs that are excluded from our defined FFO measures represent the taxes and transaction costs that are payable.
  • Depreciation and amortization of real estate assets are economic costs that are excluded from FFO. FFO is limited, as it does not reflect the cash requirements that may be necessary for future replacements of the real estate assets. Further, the amortization of capital expenditures and leasing costs necessary to maintain the operating performance of industrial properties are not reflected in FFO.
  • Gains or losses from non-development 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.

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, 2014 and throughout the full periods in both 2014 and 2015. 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

 
 

December 31,

 
 

2015

 

2014

 

Change      (%)

 

Rental Revenue:

                 

Per the Consolidated Statements of Operations

$

560,186

 

$

402,014

       

Properties not included and other adjustments (a)

 

(178,482)

   

(53,884)

       

Unconsolidated Co-Investment Ventures

 

404,886

   

408,344

       

Same Store - Rental Income

$

786,590

 

$

756,474

   

4.0%

 
                   

Rental Expense:

                 

Per the Consolidated Statements of Operations

$

150,776

 

$

108,370

       

Properties not included and other adjustments (b)

 

(43,805)

   

(7,415)

       

Unconsolidated Co-Investment Ventures

 

92,416

   

93,807

       

Same Store - Rental Expense

$

199,387

 

$

194,762

   

2.4%

 
                   

NOI-GAAP:

                 

Per the Consolidated Statements of Operations

$

409,410

 

$

293,644

       

Properties not included and other adjustments

 

(134,677)

   

(46,469)

       

Unconsolidated Co-Investment Ventures

 

312,470

   

314,537

       

Same Store - NOI - GAAP

$

587,203

 

$

561,712

   

4.5%

 

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

$

351,450

 

$

329,825

   

6.6%

 
                   

NOI-Adjusted Cash:

                 

Same store- NOI - GAAP

$

587,203

 

$

561,712

       

Adjustments (d)

 

(13,089)

   

(6,913)

       

Same Store - NOI- Adjusted Cash

$

574,114

 

$

554,799

   

3.5%

 

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

$

342,518

 

$

327,638

   

4.5%

 
   

(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 September 30, 2015 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 NOI that the property will generate at Stabilization and applying an estimated stabilized capitalization rate applicable to that property. The value creation is calculated as the amount by which the estimated value exceeds our total expected investment and does not include any fees or promotes we may earn. This can also include realized economic gains from value-added conversion properties.

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SOURCE Prologis, Inc.

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+1 (415) 733 9409
[email protected]
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