PROLOGIS, INC. SAN FRANCISCO, July 21, 2015 /PRNewswire/ -- Prologis, Inc. (NYSE: PLD), the global leader in industrial real estate, today reported results for the second quarter of 2015 and announced that its Board of Directors has approved a quarterly dividend increase, raising the company's annualized dividend level by 11 percent to $1.60 per share of common stock.
Core funds from operations (Core FFO) per diluted share was $0.52 for the second quarter compared with $0.48 for the same period in 2014, an increase of 8 percent.
"The team delivered ahead of plan and our results reflect strong underlying performance across all three lines of our business," said Hamid R. Moghadam, chairman and CEO, Prologis. "We see significant earnings potential from harvesting the gap between our in-place and market rents, the profitable build-out of our land bank and the efficient scaling of our global platform."
OPERATING FUNDAMENTALS GAIN MOMENTUM
Prologis ended the quarter with 95.4 percent occupancy in its operating portfolio, an increase of 80 basis points over the same period in 2014. Excluding the KTR assets, the company ended the quarter with 95.6 percent occupancy in its operating portfolio. Prologis leased a record 44.6 million square feet (4.1 million square meters) in its combined operating and development portfolios. Tenant retention was 79.0 percent.
GAAP rental rates on signed leases during the quarter increased a record 14.4 percent from prior rents. The Americas region led the quarterly increase at 20.6 percent (U.S. at 21.9 percent), followed by Europe at 4.4 percent and Asia at 2.0 percent. Prologis' share of same store NOI increased 5.9 percent on a GAAP basis and 5.2 percent on an adjusted cash basis.
CAPITAL DEPLOYMENT ACTIVITY ACCELERATES
New investments in buildings during the second quarter totaled $6.9 billion ($4.0 billion Prologis' share).
Development Stabilizations & Starts
In the second quarter, on a Prologis share basis the company created $179.1 million of estimated value from its $578.2 million of development stabilizations at an estimated development margin of 31.0 percent.
The company started $798.7 million of new developments on a Prologis share basis with an estimated weighted average yield upon stabilization of 7.3 percent and an estimated development margin of 19.6 percent. Build-to-suit activity remains robust, comprising 44 percent of starts volume in the quarter and including multi-market customers such as BMW and Kimberly-Clark.
At quarter end, the book value of the company's land bank was $1.8 billion, with an estimated build-out potential of $11.1 billion.
Acquisitions
As previously announced, Prologis completed the acquisition of the real estate assets and operating platform of KTR Capital Partners and its affiliates for $5.9 billion ($3.2 billion Prologis' share) in the Prologis U.S. Logistics Venture. Also during the quarter, the company acquired $139.3 million of buildings on a Prologis share basis. The stabilized capitalization rate on total acquisitions in the quarter was 5.5 percent.
Contributions & Dispositions
The company completed $453.6 million of contributions and third-party dispositions on a Prologis share basis with a stabilized capitalization rate of 5.9 percent.
CAPITAL MARKETS ACTIVITY BENEFITS FROM GLOBAL ACCESS
During the quarter, Prologis completed $3.1 billion of financings at a weighted average interest rate of 1.6 percent and a weighted average term of 5 years.
"We have access to foreign-denominated debt markets, which has allowed us to take advantage of attractive pricing to further strengthen our financial position and mitigate the impact of foreign currency movements," said Tom Olinger, chief financial officer, Prologis. "As a result of our efforts, we currently have $2.4 billion in liquidity and we've addressed our unsecured debt maturities until 2017. We have the ability to complete the long-term funding of KTR and have the capital to support future growth through asset recycling."
NET EARNINGS
Net earnings per diluted share was $0.27 for the second quarter compared with $0.13 for the same period in 2014.
GROWS ANNUALIZED DIVIDEND BY 11 PERCENT AND INCREASES 2015 CORE FFO GUIDANCE MIDPOINT
Dividend
The Prologis Board of Directors declared a regular cash dividend for the quarter ending September 30, 2015, on the following securities:
-- A dividend of $0.40 per share of the company's common stock,
representing an increase of 11 percent over the June 2015 quarterly
common stock dividend, payable September 30, 2015, to common
stockholders of record at the close of business on September 18, 2015;
and
-- A dividend of $1.0675 per share of the company's 8.54 percent Series Q
Cumulative Redeemable Preferred Stock, payable September 30, 2015, to
Series Q stockholders of record at the close of business on September
18, 2015.
"This increase in our common stock dividend is the second this year, and the combined impact results in a 21 percent increase over the 2014 dividend level on a run rate basis," said Olinger. "The growth in our dividend was driven by the cash flow accretion from the KTR transaction and a stronger operations outlook."
Guidance
Prologis increased the midpoint of its full-year 2015 Core FFO guidance and narrowed the range to $2.18 to $2.22 per diluted share from $2.16 to $2.22 per diluted share, representing expected year-over-year growth of 17 percent. The company expects to recognize net earnings, for GAAP purposes, of $1.12 to $1.16 per share.
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 2015 relates predominantly to these items.
WEBCAST & CONFERENCE CALL INFORMATION
Prologis will host a live webcast/conference call to discuss quarterly results, current market conditions and future outlook today, July 21, at 11 a.m. U.S. Eastern Time. Interested parties are encouraged to access the webcast by clicking on the Investor Events and Presentations section of the Prologis Investor Relations website (http://ir.prologis.com). Interested parties also can participate via conference call by dialing +1 877-256-7020 (toll-free from the U.S. and Canada) or +1 973-409-9692 (from all other countries) and entering conference code 48765490.
A telephonic replay will be available July 21-Aug. 21 at +1 855-859-2056 (from the U.S. and Canada) or +1 404-537-3406 (from all other countries); please use conference code 48765490. 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 global leader in industrial real estate. As of June 30, 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 670 million square feet (62 million square meters) in 21 countries. The company leases modern distribution facilities to more than 5,200 customers, including third-party logistics providers, transportation companies, retailers and manufacturers.
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 June Six Months ended June
30, 30,
(dollars in thousands, except per share
data) 2015 2014 2015 2014
Revenues $510,404 $460,089 $973,251 $894,771
Net earnings
attributable to
common
stockholders 140,240 72,715 485,446 77,381
Core FFO 273,885 244,275 528,264 461,830
AFFO 411,847 224,690 624,628 402,155
Adjusted EBITDA 489,035 403,507 855,031 764,699
Value creation from
development
stabilizations -
Prologis share 179,098 82,218 301,384 132,725
Common stock
dividends paid 188,926 166,639 377,841 333,328
Per common share -
diluted:
Net earnings
attributable to
common
stockholders $0.27 $0.13 $0.92 $0.15
Core FFO 0.52 0.48 1.01 0.91
Business line
reporting:
Real estate operations 0.48 0.41 0.93 0.81
Strategic capital 0.04 0.07 0.08 0.10
---- ---- ---- ----
Core FFO 0.52 0.48 1.01 0.91
Development gains 0.14 0.05 0.15 0.06
Dividends per share 0.36 0.33 0.72 0.66
(in thousands) June 30, 2015 (A) March 31, 2015 December 31, 2014
------------- ---------------- -------------- -----------------
Assets:
Investments in real
estate properties:
Operating properties $23,685,534 $18,291,593 $18,635,452
Development
portfolio 1,547,395 1,452,266 1,473,980
Land 1,597,802 1,535,622 1,577,786
Other real estate
investments 632,318 521,018 502,927
------- ------- -------
27,463,049 21,800,499 22,190,145
Less accumulated
depreciation 3,075,438 2,877,478 2,790,781
--------- --------- ---------
Net investments in real estate
properties 24,387,611 18,923,021 19,399,364
Investments in and
advances to
unconsolidated entities 4,911,505 4,559,721 4,824,724
Assets held for sale 514,752 337,229 43,934
Note receivable backed
by real estate 197,500 197,500 -
Net investments in real estate 30,011,368 24,017,471 24,268,022
Cash and cash
equivalents 351,025 192,013 350,692
Other assets 1,240,004 1,251,337 1,199,509
Total assets $31,602,397 $25,460,821 $25,818,223
=========== =========== ===========
Liabilities and Equity:
Liabilities:
Debt $12,121,305 $8,641,421 $9,380,199
Accounts payable,
accrued expenses,
and other
liabilities 1,127,068 1,026,593 1,254,425
Total liabilities 13,248,373 9,668,014 10,634,624
---------- --------- ----------
Equity:
Stockholders'
equity:
Preferred stock 78,235 78,235 78,235
Common stock 5,241 5,240 5,095
Additional paid-
in capital 19,129,348 19,052,562 18,467,009
Accumulated other
comprehensive
loss (631,265) (701,713) (600,337)
Distributions in
excess of net
earnings (3,870,808) (3,819,351) (3,974,493)
---------- ---------- ----------
Total stockholders' equity 14,710,751 14,614,973 13,975,509
Noncontrolling
interests 3,461,450 1,122,001 1,159,901
Noncontrolling
interests -limited
partnership
unitholders 181,823 55,833 48,189
------- ------ ------
Total equity 18,354,024 15,792,807 15,183,599
---------- ---------- ----------
Total liabilities and equity $31,602,397 $25,460,821 $25,818,223
=========== =========== ===========
Three Months Ended Six Months Ended
(in thousands, except per share
amounts) June 30, June 30,
------------------------------- -------- --------
2015 (A) 2014 2015 2014
Revenues:
Rental income $461,444 $381,273 $880,246 $769,513
Strategic
capital income 47,046 76,334 89,071 121,644
Development
management and
other income 1,914 2,482 3,934 3,614
Total
revenues 510,404 460,089 973,251 894,771
------- ------- ------- -------
Expenses:
Rental expenses 125,599 109,576 252,533 220,093
Strategic
capital
expenses 20,115 27,837 40,476 52,000
General and
administrative
expenses 57,027 60,375 113,315 123,578
Depreciation
and
amortization 190,188 161,577 359,996 321,857
Other expenses 30,127 5,450 35,702 10,503
Total
expenses 423,056 364,815 802,022 728,031
------- ------- ------- -------
Operating income 87,348 95,274 171,229 166,740
Other income (expense):
Earnings from
unconsolidated
entities, net 41,784 21,151 72,826 50,897
Interest
expense (68,902) (80,184) (137,663) (165,707)
Gains on
dispositions
of development
properties and
land, net 74,236 29,541 75,067 37,051
Gains on
dispositions
of other
investments in
real estate
properties,
net 34,546 140,042 311,430 149,587
Foreign
currency and
derivative
gains
(losses),
related
amortization
and interest
and other
income
(expense), net (23,665) 15,246 21,950 1,112
Losses on early
extinguishment
of debt, net (236) (77,558) (16,525) (77,285)
Total other
income
(expense) 57,763 48,238 327,085 (4,345)
------ ------ ------- ------
Earnings before income taxes 145,111 143,512 498,314 162,395
Income tax
expense
(benefit) -
current and
deferred 4,851 (8,918) 6,742 (2,038)
Consolidated net earnings 140,260 152,430 491,572 164,433
Net loss (earnings) loss
attributable to noncontrolling
interests 1,658 (71,250) (2,778) (76,452)
----- ------- ------ -------
Net earnings attributable to
controlling interests 141,918 81,180 488,794 87,981
Preferred stock dividends (1,678) (1,948) (3,348) (4,083)
Loss on preferred stock
repurchase - (6,517) - (6,517)
Net earnings attributable to
common stockholders $140,240 $72,715 $485,446 $77,381
======== ======= ======== =======
Weighted average common shares
outstanding -Diluted 530,640 516,619 529,827 504,560
Net earnings per share
attributable to common
stockholders -Diluted $0.27 $0.13 $0.92 $0.15
----------------------- ----- ----- ----- -----
Three Months Ended Six Months Ended
(in thousands) June 30, June 30,
------------- -------- --------
2015 2014 2015 2014
Reconciliation of net earnings
to FFO
Net earnings attributable to
common stockholders $140,240 $72,715 $485,446 $77,381
Add (deduct) NAREIT defined
adjustments:
Real estate
related
depreciation
and
amortization 183,237 155,842 347,488 310,337
Gains on
dispositions
of other
investments in
real estate
properties,
net (34,546) (140,042) (311,430) (149,587)
Reconciling
items related
to
noncontrolling
interests (20,781) 59,945 (32,293) 53,744
Our share of
reconciling
items included
in earnings
from
unconsolidated
co-investment
ventures 47,578 49,737 94,950 91,453
Our share of
reconciling
items included
in earnings
from other
unconsolidated
ventures 1,577 1,734 3,298 3,084
Subtotal-NAREIT defined FFO 317,305 199,931 587,459 386,412
Add (deduct) our defined
adjustments:
Unrealized
foreign
currency and
derivative
losses (gains)
and related
amortization,
net 29,354 (10,035) (3,506) 18,075
Deferred income
tax expense
(benefit) 145 (21,446) 1,197 (20,415)
Reconciling
items related
to
noncontrolling
interests 776 - (792) -
Our share of
reconciling
items included
in earnings
from
unconsolidated
co-investment
ventures (15,836) (4,089) (13,887) (3,860)
FFO, as defined by Prologis 331,744 164,361 570,471 380,212
Adjustments to arrive at Core
FFO:
Gains on
dispositions
of development
properties and
land, net of
taxes (76,306) (24,948) (79,540) (31,106)
Acquisition
expenses 26,130 1,703 27,434 2,203
Losses on early
extinguishment
of debt and
repurchase of
preferred
stock, net 236 84,075 16,525 83,802
Reconciling
items related
to
noncontrolling
interests (10,198) - (12,227) -
Our share of
reconciling
related to
unconsolidated
co-investment
ventures 2,279 19,084 5,601 26,719
Core FFO $273,885 $244,275 $528,264 $461,830
Adjustments to arrive at
Adjusted FFO ("AFFO"),
including our share of
unconsolidated ventures less
third party share of
consolidated entities:
Gains on
dispositions
of development
properties and
land, net of
taxes 76,358 25,028 80,607 31,140
Straight-lined
rents and
amortization
of lease
intangibles (12,568) (6,483) (20,453) (15,059)
Property
improvements (18,409) (15,899) (33,339) (27,041)
Tenant
improvements (20,419) (20,707) (40,812) (40,779)
Leasing
commissions (17,398) (12,376) (31,733) (27,936)
Amortization of
management
contracts 1,351 1,092 2,295 2,397
Amortization of
debt premiums
and financing
costs, net (4,504) (1,259) (8,443) (3,528)
Cash received
(paid) on net
investment
hedges 120,067 (2,729) 121,524 (7,855)
Stock
compensation
expense 13,484 13,748 26,718 28,986
AFFO $411,847 $224,690 $624,628 $402,155
======== ======== ======== ========
Common stock dividends $188,926 $166,639 $377,841 $333,328
---------------------- -------- -------- -------- --------
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 Six Months Ended
June 30, June 30,
-------- --------
2015 2014 2015 2014
Net earnings
------------
Net earnings $140,240 $72,715 $485,446 $77,381
Noncontrolling
interest
attributable to
exchangeable
limited partnership
units 1,623 264 3,273 302
Gains, net of
expenses,
associated with
exchangeable debt
assumed exchanged - (7,498) (1,614) -
--- ------ ------ ---
Adjusted net
earnings -Diluted $141,863 $65,481 $487,105 $77,683
======== ======= ======== =======
Weighted average
common shares
outstanding -Basic 523,476 499,112 518,791 498,919
Incremental weighted
average effect on
exchange of limited
partnership units 5,431 1,964 4,617 1,964
Incremental weighted
average effect of
stock awards 1,733 3,664 2,037 3,677
Incremental weighted
average effect on
exchangeable debt
assumed exchanged
(a) - 11,879 4,382 -
--- ------ ----- ---
Weighted average
common shares
outstanding -
Diluted 530,640 516,619 529,827 504,560
======= ======= ======= =======
Net earnings per
share -Basic $0.27 $0.15 $0.94 $0.16
===== ===== ===== =====
Net earnings per
share -Diluted $0.27 $0.13 $0.92 $0.15
===== ===== ===== =====
Core FFO
--------
Core FFO $273,885 $244,275 $528,264 $461,830
Noncontrolling
interest
attributable to
exchangeable
limited partnership
units 902 35 1,782 57
Interest expense on
exchangeable debt
assumed exchanged - 4,246 3,506 8,492
--- ----- ----- -----
Core FFO - Diluted $274,787 $248,556 $533,552 $470,379
======== ======== ======== ========
Weighted average
common shares
outstanding -Basic 523,476 499,112 518,791 498,919
Incremental weighted
average effect on
exchange of limited
partnership units 5,431 1,964 4,617 1,964
Incremental weighted
average effect of
stock awards 1,733 3,664 2,037 3,677
Incremental weighted
average effect on
exchangeable debt
assumed exchanged
(a) - 11,879 4,382 11,879
--- ------ ----- ------
Weighted average
common shares
outstanding -
Diluted 530,640 516,619 529,827 516,439
======= ======= ======= =======
Core FFO per share -
Diluted $0.52 $0.48 $1.01 $0.91
-------------------- ----- ----- ----- -----
(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 and
related amortization of debt
discounts 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;
(v) merger, acquisition and other
integration expenses; and
(vi) 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 merger, acquisition and other integration expenses and the natural
disaster expenses that we exclude from Core FFO are costs that we have
incurred.
We compensate for these limitations by using our FFO measures only in conjunction with net earnings computed under GAAP when making our decisions. This information should be read with our complete consolidated financial statements prepared under GAAP. To assist investors in compensating for these limitations, we reconcile our defined FFO measures to our net earnings computed under GAAP.
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 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
June 30,
--------
2015 2014 Change (%)
Rental Income:
Per the Consolidated
Statements of Operations $461,444 $381,273
Properties not included and
other adjustments (a) (76,633) (50,548)
Unconsolidated Co-Investment
Ventures 406,189 428,155
------- -------
Same Store - Rental Income $791,000 $758,880 4.2%
-------------------------- -------- -------- ---
Rental Expense:
Per the Consolidated
Statements of Operations $125,599 $109,576
Properties not included and
other adjustments (b) (12,343) (12,098)
Unconsolidated Co-Investment
Ventures 92,909 101,955
------ -------
Same Store - Rental Expense $206,165 $199,433 3.4%
--------------------------- -------- -------- ---
NOI-GAAP:
Per the Consolidated
Statements of Operations $335,845 $271,697
Properties not included and
other adjustments (64,290) (38,450)
Unconsolidated Co-Investment
Ventures 313,280 326,200
------- -------
Same Store - NOI - GAAP $584,835 $559,447 4.5%
Same Store -NOI -GAAP -
Prologis Share (c) $349,401 $329,981 5.9%
----------------------- -------- -------- ---
NOI-Adjusted Cash:
Same store- NOI - GAAP $584,835 $559,447
Adjustments (d) (7,186) (4,656)
------ ------
Same Store - NOI- Adjusted
Cash $577,649 $554,791 4.1%
Same Store - NOI- Adjusted
Cash - Prologis Share (c) $345,507 $328,574 5.2%
-------------------------- -------- -------- ---
(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 June 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 accounts 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.
http://photos.prnewswire.com/prnvar/20141120/159840LOGO
Logo - http://photos.prnewswire.com/prnh/20141120/159840LOGO
To view the original version on PR Newswire, visit:http://www.prnewswire.com/news-releases/prologis-reports-second-quarter-2015-earnings-results-and-announces-11-percent-increase-in-quarterly-common-stock-dividend-300116081.html
SOURCE Prologis, Inc.
