Prologis Announces Second Quarter 2013 Earnings Results

- Rents on rollover increased 4.0 percent -
- Leased 36.3 million square feet -
- Increasing deployment guidance by $1.7 billion -

PR Newswire

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The difference between the company's Core FFO and net earnings guidance for 2013 predominantly relates to real estate depreciation and recognized gains on real estate transactions.

Webcast and Conference Call Information
The company will host a webcast /conference call to discuss quarterly results, current market conditions and future outlook today, July 24, at 12:00 p.m. U.S. Eastern Time. Interested parties are encouraged to access the live webcast by clicking the microphone icon located near the top of the opening page of the Prologis Investor Relations website (http://ir.prologis.com). Interested parties also can participate via conference call by dialing +1 877-256-7020 (from the U.S. and Canada toll free) or +1 973-409-9692 (from all other countries) and enter conference code 97107173.

A telephonic replay will be available from July 24 through August 23 at +1 855-859-2056 (from the U.S. and Canada) or +1 404-537-3406 (from all other countries), with conference code 97107173. The webcast replay will be posted when available in the "Events & Presentations" section of Investor Relations on the Prologis website.

About Prologis
Prologis, Inc., is the leading owner, operator and developer of industrial real estate, focused on global and regional markets across the Americas, Europe and Asia. As of June 30, 2013, Prologis owned or had investments in, on a wholly owned basis or through co-investment ventures, properties and development projects expected to total approximately 563 million square feet (52.3 million square meters) in 21 countries. The company leases modern distribution facilities to more than 4,500 customers, including manufacturers, retailers, transportation companies, third-party logistics providers and other enterprises.

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

 



Three months ended June 30,



Six months ended June 30,

(dollars in thousands, except per share data)


2013


2012



2013


2012


Revenues


$    419,474


$    501,181



$    908,684


$    979,049


Net earnings (loss) attributable to common stockholders


(1,517)


(8,120)



263,899


194,293


FFO, as defined by Prologis


202,238


172,671



560,038


434,743


Core FFO


203,337


201,320



391,274


386,085


AFFO


143,302


148,569



283,979


282,392


Adjusted EBITDA


334,004


382,688



675,582


757,309














Per common share - diluted:












Net earnings (loss) attributable to common stockholders


$          0.00


$         (0.02)



$          0.55


$          0.42



FFO, as defined by Prologis


0.41


0.37



1.16


0.93



Core FFO


0.41


0.43



0.82


0.83


















June 30, 2013


March 31, 2013


December 31, 2012

Assets:










Investments in real estate assets:











Operating properties

$

17,755,655


$

17,521,075


$

22,608,248



Development portfolio


939,794



884,352



951,643



Land


1,710,583



1,754,053



1,794,364



Other real estate investments


492,833



436,328



454,868







20,898,865



20,595,808



25,809,123



Less accumulated depreciation


2,422,909



2,292,946



2,480,660





Net investments in properties


18,475,956



18,302,862



23,328,463


Investments in and advances to unconsolidated entities


3,884,766



3,635,214



2,195,782


Notes receivable backed by real estate


189,636



188,000



188,000


Assets held for sale


25,330



25,391



26,027





Net investments in real estate


22,575,688



22,151,467



25,738,272















Cash and cash equivalents


385,424



785,359



100,810


Restricted cash


26,642



48,605



176,926


Accounts receivable


124,980



139,691



171,084


Other assets


924,834



950,177



1,123,053





Total assets

$

24,037,568


$

24,075,299


$

27,310,145














Liabilities and Equity:










Liabilities:











Debt 

$

8,417,310


$

9,074,123


$

11,790,794



Preferred stock at redemption value


-



482,500



-



Accounts payable, accrued expenses, and other liabilities


1,297,756



1,308,143



1,746,015





Total liabilities


9,715,066



10,864,766



13,536,809















Equity:











Stockholders' equity:












Preferred stock


100,000



100,000



582,200




Common stock 


4,986



4,624



4,618




Additional paid-in capital 


17,939,829



16,461,486



16,411,855




Accumulated other comprehensive loss


(541,355)



(503,786)



(233,563)




Distributions in excess of net earnings


(3,704,034)



(3,561,429)



(3,696,093)





Total stockholders' equity


13,799,426



12,500,895



13,069,017



Noncontrolling interests


470,995



658,871



653,125



Noncontrolling interests - limited partnership unitholders


52,081



50,767



51,194





Total equity


14,322,502



13,210,533



13,773,336





Total liabilities and equity

$

24,037,568


$

24,075,299


$

27,310,145














 


Three Months Ended


Six Months Ended





June 30,


June 30,





2013

2012


2013

2012

Revenues:











Rental income

$

372,737

$

468,459


$

826,120

$

910,857


Investment management income


43,608


30,993



77,243


63,350


Development management and other income


3,129


1,729



5,321


4,842



 Total revenues 


419,474


501,181



908,684


979,049














Expenses:











Rental expenses


112,581


125,918



245,907


244,151


Investment management expenses


25,006


15,075



44,915


31,956


General and administrative expenses


54,909


51,415



111,106


111,574


Depreciation and amortization


158,965


178,756



335,454


358,315


Other expenses


6,771


7,227



11,124


11,562


Merger, acquisition and other integration expenses


-


21,186



-


31,914


Impairment of real estate properties


-


-



-


3,185



Total expenses


358,232


399,577



748,506


792,657














Operating income


61,242


101,604



160,178


186,392














Other income (expense):











Earnings from unconsolidated entities, net


8,421


3,889



33,189


17,884


Interest income 


4,577


5,366



8,790


10,793


Interest expense


(92,508)


(127,582)



(207,498)


(260,551)


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


61,035


520



399,880


268,291


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


(7,829)


13,299



469


(13,802)


Gains (losses) on early extinguishment of debt, net


(32,608)


(500)



(49,959)


4,919


Impairment of other assets


-


-



-


(16,135)



Total other income (expense)


(58,912)


(105,008)



184,871


11,399














Earnings (loss) before income taxes


2,330


(3,404)



345,049


197,791


Income tax expense - current and deferred


20,488


8,075



72,354


20,199

Earnings (loss) from continuing operations


(18,158)


(11,479)



272,695


177,592

Discontinued operations:











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


(294)


6,273



(49)


19,051


Net gains on dispositions


13,467


9,874



19,301


21,123



Total discontinued operations


13,173


16,147



19,252


40,174

Consolidated net earnings (loss)


(4,985)


4,668



291,947


217,766

Net loss (earnings) attributable to noncontrolling interests


7,284


(2,739)



(4,819)


(2,857)

Net earnings attributable to controlling interests


2,299


1,929



287,128


214,909

Preferred stock dividends


(3,816)


(10,049)



(14,121)


(20,616)

Loss on preferred stock redemption


-


-



(9,108)


-

Net earnings (loss) attributable to common stockholders

$

(1,517)

$

(8,120)


$

263,899

$

194,293

Weighted average common shares outstanding - Diluted 


486,032


459,878



478,116


464,696

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

$

0.00

$

(0.02)


$

0.55

$

0.42

 

 


Three Months Ended


Six Months Ended





June 30,


June 30,





2013

2012


2013

2012

Reconciliation of net earnings (loss) to FFO























Net earnings (loss) attributable to common stockholders

$

(1,517)

$

(8,120)


$

263,899

$

194,293


Add (deduct) NAREIT defined adjustments:












Real estate related depreciation and amortization


153,229


174,516



323,469


349,965



Net gains on non-FFO dispositions and acquisitions


(8,010)


(2,210)



(109,690)


(164,234)



Reconciling items related to noncontrolling interests


(719)


(3,950)



(3,660)


(16,004)



Our share of reconciling items included in earnings from unconsolidated entities


37,931


34,444



63,414


68,982

Subtotal-NAREIT defined FFO


180,914


194,680



537,432


433,002















Add (deduct) our defined adjustments:












Unrealized foreign currency and derivative losses (gains), net


8,133


(14,519)



7,495


9,717



Deferred income tax benefit


(4,350)


(5,809)



(2,216)


(4,758)



Our share of reconciling items included in earnings from unconsolidated entities


17,541


(1,681)



17,327


(3,218)

FFO, as defined by Prologis


202,238


172,671



560,038


434,743














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











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


(33,806)


838



(226,222)


(103,893)


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


32,608


500



59,067


(4,919)


Our share of reconciling items included in earnings from unconsolidated entities


2,297


6,125



(1,609)


8,920


Impairment charges


-


-



-


19,320


Merger, acquisition and other integration expenses


-


21,186



-


31,914



Adjustments to arrive at Core FFO


1,099


28,649



(168,764)


(48,658)

Core FFO

$

203,337

$

201,320


$

391,274

$

386,085














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











Straight-lined rents and amortization of lease intangibles


(4,906)


(6,646)



(12,790)


(17,993)


Property improvements


(19,318)


(14,755)



(33,606)


(28,169)


Tenant improvements


(27,353)


(22,150)



(47,741)


(46,137)


Leasing commissions


(19,224)


(12,784)



(32,624)


(23,117)


Amortization of management contracts


1,393


1,792



3,008


3,008


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


(3,839)


(6,063)



(10,841)


(7,452)


Stock compensation expense


13,212


7,855



27,299


16,167

AFFO



$

143,302

$

148,569


$

283,979

$

282,392














Common stock dividends

$

141,083

$

131,513


$

271,836

$

261,593

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








Three Months Ended


Six Months Ended


June 30,


June 30,


2013

2012


2013

2012

Net earnings (loss)






Net earnings (loss)

$ (1,517)

$ (8,120)


$ 263,899

$ 194,293

Noncontrolling interest attributable to exchangeable partnership units

-

-


542

1,069

Adjusted net earnings - Diluted

$ (1,517)

$ (8,120)


$ 264,441

$ 195,362







Weighted average common shares outstanding - Basic

486,032

459,878


473,892

459,549

Incremental weighted average effect on exchange of limited partnership units

-

-


1,146

3,299

Incremental weighted average effect of stock awards

-

-


3,078

1,848

Weighted average common shares outstanding - Diluted

486,032

459,878


478,116

464,696







Net earnings per share - Basic

$        0.00

$ (0.02)


$ 0.56

$ 0.42







Net earnings per share - Diluted

$        0.00

$ (0.02)


$ 0.55

$ 0.42







FFO, as defined by Prologis






FFO, as defined by Prologis

$ 202,238

$ 172,671


$ 560,038

$ 434,743

Noncontrolling interest attributable to exchangeable limited partnership units

(19)

66


1,599

1,069

Interest expense on exchangeable debt assumed exchanged

4,235

4,057


8,470

8,273

FFO, as defined by Prologis - Diluted

$ 206,454

$ 176,794


$ 570,107

$ 444,085







Weighted average common shares outstanding - Basic

486,032

459,878


473,892

459,549

Incremental weighted average effect on exchange of limited partnership units

2,093

3,250


3,093

3,299

Incremental weighted average effect of stock awards

3,339

1,838


3,078

1,848

Incremental weighted average effect on exchange of certain exchangeable debt

11,879

11,879


11,879

11,879

Weighted average common shares outstanding - Diluted

503,343

476,845


491,888

476,575







FFO, as defined by Prologis per share - Diluted

$ 0.41

$ 0.37


$ 1.16

$ 0.93







Core FFO






Core FFO

$ 203,337

$ 201,320


$ 391,274

$ 386,085

Noncontrolling interest attributable to exchangeable limited partnership units

(19)

66


1,599

1,069

Interest expense on exchange debt assumed converted

4,235

4,057


8,470

8,273

Core FFO - Diluted

$ 207,553

$ 205,443


$ 401,343

$ 395,427







Weighted average common shares outstanding - Basic

486,032

459,878


473,892

459,549

Incremental weighted average effect on exchange of limited partnership units

2,093

3,250


3,039

3,299

Incremental weighted average effect of stock awards

3,339

1,838


3,078

1,848

Incremental weighted average effect on exchange of certain exchangeable debt

11,879

11,879


11,879

11,879

Weighted average common shares outstanding - Diluted

503,343

476,845


491,888

476,575







Core FFO per share - Diluted

$ 0.41

$ 0.43


$ 0.82

$ 0.83

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

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

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

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

Our FFO Measures

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

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

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

FFO, as defined by Prologis

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

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

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

Core FFO

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

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

We believe it is appropriate to further adjust our FFO, as defined by Prologis for certain recurring items as they were driven by transactional activity and factors relating to the financial and real estate markets,  rather than factors specific to the on-going operating performance of our properties or investments. The impairment charges we recognized were primarily based on valuations of real estate, which had declined due to market conditions, that we no longer expected to hold for long-term investment. We currently have and have had over the past several years a stated priority to strengthen our financial position. We expect to accomplish this by reducing our debt, our investment in certain low yielding assets, such as land that we decide not to develop and our exposure to foreign currency exchange fluctuations. As a result, we have sold to third parties or contributed to unconsolidated entities real estate properties that, depending on market conditions, might result in a gain or loss. The impairment charges related to goodwill and other assets that we have recognized were similarly caused by the decline in the real estate markets. Also in connection with our stated priority to reduce debt and extend debt maturities, we have purchased portions of our debt securities. As a result, we recognized net gains or losses on the early extinguishment of certain debt due to the financial market conditions at that time.

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

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

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

AFFO

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

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

Limitations on Use of our FFO Measures

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

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

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

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