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Prologis Announces First Quarter 2013 Earnings Results

- Positive rent change on rollover for the first time in 17 quarters -

- Completes J-REIT IPO and European joint venture -

- Significantly improves financial position -

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

Core funds from operations (Core FFO) per fully diluted share was $0.40 for the first quarter compared to $0.40 for the same period in 2012.

Net earnings per fully diluted share was $0.57 for the first quarter compared to net earnings of $0.44 for the same period in 2012. In both periods, net earnings for the quarter were principally due to gains on real estate transactions.

Operating Portfolio Metrics
The company leased 35.8 million square feet (3.3 million square meters) in its combined operating and development portfolios in the first quarter. Prologis' operating portfolio was 93.7 percent occupied on March 31, 2013. Tenant retention in the quarter was 78.0 percent. GAAP rental rates on leases signed in the first quarter increased by 2.0 percent from in-place rents. During the first quarter, same-store net operating income (NOI) increased 0.3 percent, and on an adjusted cash basis 1.8 percent.

"We concluded several priorities in the first quarter and are beginning to capitalize on growth opportunities," said Hamid R. Moghadam, chairman and CEO, Prologis. "Real estate fundamentals are solid and demand for our product is leading to rental growth. For the first time in 17 quarters, rent change on rollovers is positive."

Dispositions and Contributions
Prologis completed $5.3 billion in contributions and dispositions in the first quarter, of which $3.3 billion was Prologis' share. Notable transactions include approximately:

  • $3.1 billion in contributions related to the formation of Prologis European Logistics Partners Sàrl (PELP), of which 50 percent was the company's share; and
  • $1.9 billion in contributions to Nippon Prologis REIT, of which $1.6 billion was the company's share; and 
  • $203 million of third-party building and land dispositions, of which $99 million was the company's share.

Prologis realized value creation of $247 million associated with contribution and disposition activity in the quarter.

Development Starts and Building Acquisitions
Committed capital during the first quarter totaled approximately $436 million, of which $314 million was Prologis' share, including:

  • Development starts of $313 million with an estimated development margin of 21.8 percent. Prologis' share was $218 million and the company's estimated share of value creation upon stabilization was $39 million.
  • Acquisitions of $123 million, including $109 million in land and land infrastructure, as well as $14 million in buildings. Prologis' share included $96 million.

At quarter end, Prologis' global development pipeline comprised 23.7 million square feet (2.2 million square meters), with a total expected investment of $2.0 billion, of which Prologis' share was $1.8 billion. The company's share of estimated value creation at stabilization is expected to be $371 million, with a weighted average estimated stabilized yield of 7.8 percent and a margin of approximately 21.6 percent.

Capital Markets
During the first quarter, Prologis completed approximately $3.0 billion of capital markets activity including debt financings, re-financings, and pay-downs.

As a result, and in combination with the significant disposition and contribution activity, the company:

  • Lowered its share of total debt by $2.4 billion;
  • Improved the company's debt as a percent of gross real estate assets to 37.5 percent and debt to adjusted EBITDA to 7.52 times; and
  • Increased its USD net equity to 66 percent.

"During the quarter, we made considerable progress strengthening our financial position and reducing our foreign net equity exposure," said Thomas Olinger, chief financial officer, Prologis. "With a strong balance sheet in place, we are well positioned to grow our company strategically."

Subsequent to quarter end, the company redeemed $482 million of its outstanding preferred stock.

Guidance for 2013
Prologis maintains its full-year 2013 Core FFO guidance range of $1.60 to $1.70 per diluted share. The company also expects to recognize net earnings, for GAAP purposes, of $0.55 to $0.65 per share.

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

The difference between the company's Core FFO and net earnings guidance for 2013 predominantly relates to real estate depreciation and recognized gains 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, April 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 26751768.

A telephonic replay will be available from April 24 through May 24 at +1 855-859-2056 (from the U.S. and Canada) or +1 404-537-3406 (from all other countries), with conference code 26751768. The webcast replay will be posted when available in the "Financial Information" 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 March 31, 2013, Prologis owned or had investments in, on a consolidated basis or through unconsolidated joint ventures, properties and development projects expected to total approximately 559 million square feet (51.9 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 March 31,

(dollars in thousands, except per share data)


 

2013


 

2012


 

Revenues


 

$    490,616


 

$    479,430


 

Net earnings attributable to common stockholders


 

265,416


 

202,412


 

FFO, as defined by Prologis


 

357,800


 

262,072


 

Core FFO


 

187,937


 

184,765


 

AFFO


 

135,977


 

133,823


 

Adjusted EBITDA


 

337,668


 

377,063


 

 

 

 

 

 

 

 

Per common share - diluted:


 

 

 

 

 

 

Net earnings attributable to common stockholders


 

$          0.57


 

$          0.44


 

 

FFO, as defined by Prologis


 

0.76


 

0.56


 

 

Core FFO


 

0.40


 

0.40


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


 

 

 

 

 

March 31, 2013


 

December 31, 2012

Assets:


 

 

 

 

 

 

Investments in real estate assets:


 

 

 

 

 

 

 

Operating properties

$

17,521,075


 

$

22,608,248


 

 

Development portfolio


 

884,352


 

 

951,643


 

 

Land


 

1,754,053


 

 

1,794,364


 

 

Other real estate investments


 

436,328


 

 

454,868


 

 

 

 

 

 

20,595,808


 

 

25,809,123


 

 

Less accumulated depreciation


 

2,292,946


 

 

2,480,660


 

 

 

 

Net investments in properties


 

18,302,862


 

 

23,328,463


 

Investments in and advances to unconsolidated entities


 

3,635,214


 

 

2,195,782


 

Notes receivable backed by real estate


 

188,000


 

 

188,000


 

Assets held for sale


 

25,391


 

 

26,027


 

 

 

 

Net investments in real estate


 

22,151,467


 

 

25,738,272


 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents


 

785,359


 

 

100,810


 

Restricted cash


 

48,605


 

 

176,926


 

Accounts receivable


 

139,691


 

 

171,084


 

Other assets


 

950,177


 

 

1,123,053


 

 

 

 

Total assets

$

24,075,299


 

$

27,310,145


 

 

 

 

 

 

 

 

 

 

Liabilities and Equity:


 

 

 

 

 

 

Liabilities:


 

 

 

 

 

 

 

Debt 

$

9,074,123


 

$

11,790,794


 

 

Preferred stock at redemption value


 

482,500


 

 

-


 

 

Accounts payable, accrued expenses, and other liabilities


 

1,308,143


 

 

1,746,015


 

 

 

 

Total liabilities


 

10,864,766


 

 

13,536,809


 

 

 

 

 

 

 

 

 

 

 

Equity:


 

 

 

 

 

 

 

Stockholders' equity:


 

 

 

 

 

 

 

 

Preferred stock


 

100,000


 

 

582,200


 

 

 

Common stock 


 

4,624


 

 

4,618


 

 

 

Additional paid-in capital 


 

16,461,486


 

 

16,411,855


 

 

 

Accumulated other comprehensive loss


 

(503,786)


 

 

(233,563)


 

 

 

Distributions in excess of net earnings


 

(3,561,429)


 

 

(3,696,093)


 

 

 

 

Total stockholders' equity


 

12,500,895


 

 

13,069,017


 

 

Noncontrolling interests


 

658,871


 

 

653,125


 

 

Noncontrolling interests - limited partnership unitholders


 

50,767


 

 

51,194


 

 

 

 

Total equity


 

13,210,533


 

 

13,773,336


 

 

 

 

Total liabilities and equity

$

24,075,299


 

$

27,310,145


 

 

 

 

 

 

 

 

 

 

 

 


 

Three Months Ended


 

 

 

 

March 31,


 

 

 

 

2013

2012

Revenues:


 

 

 

 

 

Rental income

$

454,789

$

443,960


 

Private capital revenue


 

33,635


 

32,357


 

Development management and other income


 

2,192


 

3,113


 

 

 Total revenues 


 

490,616


 

479,430


 

 

 

 

 

 

 

 

Expenses:


 

 

 

 

 

Rental expenses


 

133,919


 

118,731


 

Private capital expenses


 

19,909


 

16,881


 

General and administrative expenses


 

56,197


 

60,159


 

Depreciation and amortization


 

177,266


 

180,280


 

Other expenses


 

4,353


 

4,335


 

Merger, acquisition and other integration expenses


 

-


 

10,728


 

Impairment of real estate properties


 

-


 

3,185


 

 

Total expenses


 

391,644


 

394,299


 

 

 

 

 

 

 

 

Operating income


 

98,972


 

85,131


 

 

 

 

 

 

 

 

Other income (expense):


 

 

 

 

 

Earnings from unconsolidated co-investment ventures, net


 

24,768


 

13,995


 

Interest income 


 

4,213


 

5,427


 

Interest expense


 

(115,028)


 

(133,056)


 

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


 

338,845


 

267,771


 

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


 

8,298


 

(27,101)


 

Gain (loss) on early extinguishment of debt, net


 

(17,351)


 

5,419


 

Impairment of other assets


 

-


 

(16,135)


 

 

Total other income (expense)


 

243,745


 

116,320


 

 

 

 

 

 

 

 

Earnings before income taxes


 

342,717


 

201,451


 

Income tax expense - current and deferred


 

51,866


 

12,124

Earnings from continuing operations


 

290,851


 

189,327

Discontinued operations:


 

 

 

 

 

Income attributable to disposed properties and assets held for sale


 

247


 

12,521


 

Net gain on dispositions


 

5,834


 

11,249


 

 

Total discontinued operations


 

6,081


 

23,770

Consolidated net earnings


 

296,932


 

213,097

Net earnings attributable to noncontrolling interests


 

(12,103)


 

(118)

Net earnings attributable to controlling interests


 

284,829


 

212,979

Preferred stock dividends


 

(10,305)


 

(10,567)

Loss on preferred stock redemption


 

(9,108)


 

-

Net earnings attributable to common stockholders

$

265,416

$

202,412

Weighted average common shares outstanding - Diluted (A)


 

477,059


 

476,107

Net earnings per share attributable to common stockholders - Diluted

$

0.57

$

0.44

 


 

Three Months Ended


 

 

 

 

March 31,


 

 

 

 

2013

2012

Reconciliation of net earnings to FFO


 

 

 

 

 

 

 

 

 

 

 

 

Net earnings attributable to common stockholders

$

265,416

$

202,412


 

Add (deduct) NAREIT defined adjustments:


 

 

 

 

 

 

Real estate related depreciation and amortization


 

171,017


 

176,171


 

 

Net gain on non-FFO dispositions and acquisitions


 

(102,457)


 

(162,745)


 

 

Reconciling items related to noncontrolling interests


 

(2,941)


 

(12,054)


 

 

Our share of reconciling items included in earnings from unconsolidated entities


 

25,483


 

34,538

Subtotal-NAREIT defined FFO


 

356,518


 

238,322


 

 

 

 

 

 

 

 

 

Add (deduct) our defined adjustments:


 

 

 

 

 

 

Unrealized foreign currency and derivative losses (gains), net


 

(638)


 

24,236


 

 

Deferred income tax benefit


 

2,134


 

1,051


 

 

Our share of reconciling items included in earnings from unconsolidated entities


 

(214)


 

(1,537)

FFO, as defined by Prologis


 

357,800


 

262,072


 

 

 

 

 

 

 

 

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


 

 

 

 

 

Net gain on acquisitions and dispositions of investments in real estate, net of income taxes


 

(192,416)


 

(104,731)


 

Loss (gain) on early extinguishment of debt and redemption of preferred stock, net


 

26,459


 

(5,419)


 

Our share of reconciling items included in earnings from unconsolidated entities


 

(3,906)


 

2,795


 

Impairment charges


 

-


 

19,320


 

Merger, acquisition and other integration expenses


 

-


 

10,728


 

 

Adjustments to arrive at Core FFO


 

(169,863)


 

(77,307)

Core FFO

$

187,937

$

184,765


 

 

 

 

 

 

 

 

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


 

 

 

 

 

Straight-lined rents and amortization of lease intangibles


 

(7,884)


 

(11,347)


 

Property improvements


 

(14,288)


 

(13,414)


 

Tenant improvements


 

(20,388)


 

(23,987)


 

Leasing commissions


 

(13,400)


 

(10,333)


 

Amortization of management contracts


 

1,615


 

1,216


 

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


 

(7,002)


 

(1,389)


 

Stock compensation expense


 

9,387


 

8,312

AFFO


 

 

$

135,977

$

133,823


 

 

 

 

 

 

 

 

Common stock dividends

$

130,753

$

130,080

 

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


 

 

 

 

Three Months Ended


 

March 31,


 

2013

2012

Net earnings


 

 

Net earnings

$ 265,416

$ 202,412

Noncontrolling interest attributable to exchangeable partnership units

50

1,003

Interest expense on exchangeable debt assumed exchanged

4,235

4,216

Adjusted net earnings - Diluted

$ 269,701

$ 207,631


 

 

 

Weighted average common shares outstanding - Basic

461,468

459,203

Incremental weighted average effect on exchange of limited partnership units

1,146

3,347

Incremental weighted average effect of stock awards

2,566

1,678

Incremental weighted average effect on exchange of certain exchangeable debt

11,879

11,879

Weighted average common shares outstanding - Diluted

477,059

476,107


 

 

 

Net earnings per share - Basic

$ 0.58

$ 0.44


 

 

 

Net earnings per share - Diluted

$ 0.57

$ 0.44


 

 

 

FFO, as defined by Prologis


 

 

FFO, as defined by Prologis

$ 357,800

$ 262,072

Noncontrolling interest attributable to exchangeable limited partnership units

1,254

1,003

Interest expense on exchangeable debt assumed exchanged

4,235

4,216

FFO, as defined by Prologis - Diluted

$ 363,289

$ 267,291


 

 

 

Weighted average common shares outstanding - Basic

461,468

459,203

Incremental weighted average effect on exchange of limited partnership units

3,067

3,347

Incremental weighted average effect of stock awards

2,566

1,678

Incremental weighted average effect on exchange of certain exchangeable debt

11,879

11,879

Weighted average common shares outstanding - Diluted

478,980

476,107


 

 

 

FFO, as defined by Prologis per share - Diluted

$ 0.76

$ 0.56


 

 

 

Core FFO


 

 

Core FFO

$ 187,937

$ 184,765

Noncontrolling interest attributable to exchangeable limited partnership units

489

1,003

Interest expense on exchange debt assumed converted

4,235

4,216

Core FFO - Diluted

$ 192,661

$ 189,984


 

 

 

Weighted average common shares outstanding - Basic

461,468

459,203

Incremental weighted average effect on exchange of limited partnership units

3,039

3,347

Incremental weighted average effect of stock awards

2,566

1,678

Incremental weighted average effect on exchange of certain exchangeable debt

11,879

11,879

Weighted average common shares outstanding - Diluted

478,952

476,107


 

 

 

Core FFO per share - Diluted

$ 0.40

$ 0.40


 

 

 

 

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

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

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, they are two of many measures we use when analyzing our business.  Some of these limitations are:

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

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

SOURCE Prologis, Inc.



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