PROLOGIS, INC. The following should be read in conjunction with the Consolidated Financial
Statements and related Notes included in Item 1 of this report and our Annual
Report on Form 10-K for the year ended
The statements in this report that are not historical facts are forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
These forward-looking statements are based on current expectations, estimates
and projections about the industry and markets in which we operate as well as
management's beliefs and assumptions. Such statements involve uncertainties that
could significantly impact our financial results. Words such as "expects,"
"anticipates," "intends," "plans," "believes," "seeks," and "estimates"
including 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,
contribution and disposition activity, general conditions in the geographic
areas where we operate, our debt, capital structure and financial position, our
ability to form new co-investment ventures and the availability of capital in
existing or new co-investment ventures - are forward-looking statements. These
statements are not guarantees of future performance and involve certain risks,
uncertainties and assumptions that are difficult to predict. Although we believe
the expectations reflected in any forward-looking statements are based on
reasonable assumptions, we can give no assurance that our expectations will be
attained, and therefore actual outcomes and results may differ materially from
what is expressed or forecasted in such forward-looking statements. Some of the
factors that may affect outcomes and results include, but are not limited to:
(i) national, international, regional and local economic and political climates;
(ii) changes in global 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, tax
structuring and changes in income tax laws and rates; (vi) availability of
financing and capital, the levels of debt that we maintain and our credit
ratings; (vii) risks related to our investments in our co-investment ventures,
including our ability to establish new co-investment ventures; (viii) risks of
doing business internationally, including currency risks; (ix) environmental
uncertainties, including risks of natural disasters; (x) risks related to the
coronavirus ("COVID-19") pandemic; and (xi) those additional factors discussed
under Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the
year ended December 31, 2019 and in Item 1A. in our Quarterly Report on Form
10-Q for the quarter ended March 31, 2020 . We undertake no duty to update any
forward-looking statements appearing in this report except as may be required by
law.
Prologis, Inc. is a self-administered and self-managed REIT and is the sole
general partner of Prologis, L.P. through which it holds substantially all of
its assets. We operate Prologis, Inc. and Prologis, L.P. as one enterprise and,
therefore, our discussion and analysis refers to Prologis, Inc. and its
consolidated subsidiaries, including Prologis, L.P. , collectively. We invest in
real estate through wholly owned subsidiaries and other entities through which
we co-invest with partners and investors. We have a significant ownership in the
co-investment ventures, which may be consolidated or unconsolidated based on our
level of control of the entities.
We operate and manage our business on an owned and managed ("O&M") basis and
therefore evaluate the operating performance of the properties for our O&M
portfolio, which includes our consolidated properties and properties owned by
our unconsolidated co-investment ventures. We make operating decisions based on
our total O&M portfolio, as we manage these properties regardless of ownership.
We also evaluate our results based on our proportionate economic ownership of
each property included in the O&M portfolio ("our share") as it represents the
financial results of our share of the O&M portfolio.
Included in our discussion below are references to funds from operations ("FFO")
and net operating income ("NOI"), neither of which are measurements calculated
in accordance with U.S. generally accepted accounting principles ("GAAP"). See
below for a reconciliation of Net Earnings Attributable to Common
Stockholders/Unitholders in the Consolidated Statements of Income to our FFO
measures and a reconciliation of NOI to Operating Income, the most directly
comparable GAAP measure.
MANAGEMENT'S OVERVIEW
As the global leader in logistics real estate, Prologis has a presence in 19
countries across four continents. We own, manage and develop well-located,
high-quality logistics facilities, with a focus on the consumption side of the
global supply chain. Our local teams actively manage our portfolio, which
encompasses leasing and property management, capital deployment and
opportunistic dispositions, generally allowing us to recycle capital to
self-fund our development and acquisition activities. The majority of our
properties in the U.S. are wholly owned, while our properties outside the U.S.
are primarily held in co-investment ventures that have the benefit of mitigating
our exposure to foreign currency movements.
Our portfolio is focused on the world's most vibrant centers of commerce and our
scale allows us to respond to our customers' needs for the highest-quality
buildings across these locations. As e-commerce increasingly moves to the
forefront of the global supply chain, it drives demand for logistics real estate
close to the end consumer. Over time, we have invested in properties located
within infill and urban areas in our largest global markets with immediate
access to the consumer population; these are our Last Touch® facilities. This
positioning gives us the unique ability to provide our customers with the right
solutions in their supply chains that, in turn, allows them to meet end consumer
expectations. As we look to the future of logistics real estate, we strive to
innovate through the development of multistory logistics facilities, creating
community workforce programs to develop skilled labor, leveraging technology to
invest in data
31
-------------------------------------------------------------------------------- driven operational efficiencies and utilizing our scale to negotiate better pricing on common products and services that our customers need. Our customers turn to us because they know that a strategic relationship withPrologis is a competitive advantage. OnJanuary 8, 2020 , our twoU.S. co-investment ventures, PrologisU.S. Logistics Venture ("USLV") andPrologis Targeted U.S. Logistics Fund ("USLF") acquired the wholly-owned real estate assets ofIndustrial Property Trust Inc. ("IPT") for$2.0 billion each, that we refer to as the "IPT Transaction" and is detailed in Notes 3, 4, 6 and 8 to the Consolidated Financial Statements. Our aggregate investment in the acquisitions was$1.6 billion . The portfolio included 235 industrial operating properties, aggregating 37 million square feet. OnFebruary 4, 2020 , we acquiredLiberty Property Trust andLiberty Property Limited Partnership (collectively "Liberty") through a merger transaction that we refer to as the "Liberty Transaction" and is detailed in Note 2 to the Consolidated Financial Statements. The Liberty portfolio was primarily comprised of logistics real estate assets, including 519 industrial operating properties, aggregating 100 million square feet, which were highly complementary to ourU.S. portfolio in terms of product quality, location and growth potential. The portfolio also included development in progress, land for future logistics facilities and office properties. The acquisition expanded our presence in target markets such asLehigh Valley ,Chicago ,Houston ,Central Pennsylvania ,New Jersey andSouthern California . The total acquisition price was$13.0 billion through the issuance of equity based on the value of thePrologis common stock issued using the closing price onFebruary 3, 2020 and the assumption of debt, and includes transaction costs. As a result of the closely aligned portfolios and similar business strategy, we integrated the IPT and Liberty properties while adding minimal property management expenses and further scaling our operations. On a combined basis, there were 42 million square feet of non-strategic industrial properties with a gross book value of approximately$3 billion acquired in both the Liberty Transaction and the IPT Transaction that we do not intend to operate long-term. Depending on the expected hold period, these assets are either classified as Assets Held for Sale or Contribution or Other Real Estate Investments in the Consolidated Balance Sheets. AtJune 30, 2020 , our total O&M portfolio at 100%, including properties and development projects (based on gross book value and total expected investment ("TEI")), totaled$91.5 billion across 963 million square feet (89 million square meters) and four continents. Our share of the total O&M portfolio was$58.6 billion . We lease modern logistics facilities to a diverse base of approximately 5,500 customers.
Our business comprises two operating segments:
Below is information summarizing consolidated activity within our segments (in millions):
[[Image Removed]]
(1) NOI from Real Estate Operations is calculated directly from the Consolidated
Financial Statements as Rental Revenues and Development Management and Other
Revenues less Rental Expenses and Other Expenses.
(2) A developed property moves into the operating portfolio when it meets our
definition of stabilization, which is the earlier of one year after
completion or reaching 90% occupancy. Amounts represent our TEI, which is
comprised of the estimated cost of development or expansion, including land,
construction and leasing costs.
Real Estate Operations
Rental. Rental operations comprise the largest component of our operating
segments and generally contribute 85% to 90% of our consolidated revenues,
earnings and FFO. We collect rent from our customers through long-term operating
leases, including reimbursements for the majority of our property operating
costs. We expect to generate long-term internal growth by increasing rents,
maintaining high occupancy rates and controlling expenses. The primary driver of
our revenue growth will be rolling in-place leases to current market rents. We
believe our active portfolio management, combined with the skills of our
property, leasing, maintenance, capital, energy, sustainability and risk
management teams allow us to maximize NOI across our portfolio. A significant
amount of our rental revenue, NOI and cash flows are generated in the U.S.
32
-------------------------------------------------------------------------------- Development. Given the scarcity of modern logistics facilities in urban centers, we believe our development business allows us to build what our customers need. We develop properties to meet these needs, deepen our market presence and refresh our portfolio quality. We believe we have a competitive advantage due to (i) the strategic locations of our land bank; (ii) the development expertise of our local teams; and (iii) the depth of our customer relationships. Successful development and redevelopment efforts provide significant earnings growth as projects lease up and generate income and increase the net asset value of our Real Estate Operations segment. Based on our current estimates, our consolidated land, including options, has the potential to support the development of$12.3 billion of TEI of new logistics space. Generally, we develop properties in theU.S. for long-term hold and outside theU.S. for contribution to our unconsolidated co-investment ventures.Strategic Capital Our strategic capital segment allows us to partner with some of the world's largest institutional investors to grow our business through private capital. We also access capital in this segment through two publicly traded vehicles: Nippon Prologis REIT, Inc. inJapan and FIBRA Prologis inMexico . We align our interests with those of our partners by holding significant ownership interests in all of our unconsolidated co-investment ventures (ranging from 15% to 50%), which generally allows us to reduce our exposure to foreign currency movements for investments outside theU.S. This segment produces stable, long-term cash flows and generally contributes 10% to 15% of our consolidated revenues, earnings and FFO. We generate strategic capital revenues from our unconsolidated co-investment ventures, principally through asset and property management services. These revenues are principally earned from open-ended or long-term ventures. We earn additional revenues by providing leasing, acquisition, construction, development, financing, legal and disposition services. In certain ventures, we also have the ability to earn revenues through incentive fees ("promotes" or "promote revenue") periodically during the life of a venture or upon liquidation. We plan to profitably grow this business by increasing our assets under management in existing or new ventures. Most of the strategic capital revenues are generated outside theU.S. NOI in this segment is calculated directly from our Consolidated Financial Statements as Strategic Capital Revenues less Strategic Capital Expenses and excludes property-related NOI. FUTURE GROWTH We believe the quality and scale of our global portfolio, the expertise of our team, the depth of our customer relationships and the strength of our balance sheet give us unique competitive advantages to grow revenues, NOI, earnings, FFO and cash flows. [[Image Removed]]
(1) Calculated using the trailing twelve months immediately prior to the period
ended.
(2) General and Administrative ("G&A") Expenses is a line item in the
Consolidated Financial Statements. Adjusted G&A expenses is calculated from
the Consolidated Financial Statements as
Expenses, less expenses under the Prologis Promote Plan ("PPP") and
property-level management expenses for the properties owned by the ventures.
Annualized 2020 represents adjusted G&A expenses for the year ended December
31, 2020 based on the six months ended June 30, 2020 .
• Rent Growth. Due to the COVID-19 pandemic and the current economic
environment, we expect market rents to remain flat for the remainder of 2020.
However, due to strong market rent growth over the last several years, our
in-place leases have considerable upside potential. We estimate that our
leases are approximately 13% below current market rent on the basis of our
weighted average ownership at
remain flat, a lease renewal will translate into increased future rental
income on a consolidated basis or through the earnings we recognize from our
unconsolidated co-investment ventures based on our ownership. We have
experienced positive rent change on rollover (comparing the net effective
rent ("NER") of the new lease to the prior lease for the same space) every
quarter since 2013. We expect this positive rent change trend to continue for
several more years due to our current in-place rents being below market.
• Value Creation from Development. A successful development and redevelopment
program involves maintaining control of well-located and entitled land. We
believe the carrying value of our land bank is below its current fair value.
Due to the strategic nature of our land bank and development expertise of our
teams, we expect to realize future value creation as we build out the land
bank. We measure the estimated value of a development project as the margin
above our anticipated cost to develop. We
33
--------------------------------------------------------------------------------
calculate the margin by comparing the estimated yield on the investment to
capitalization rates from our underwriting models. As properties underdevelopment stabilize, we expect to realize the value creation principally
through contributions to the unconsolidated co-investment ventures and
increases in the NOI of our operating portfolio.
• Economies of Scale from Growth. We use adjusted G&A expenses as a percentage
of the real estate basis of the O&M portfolio to measure and manage our
overhead costs. We have the systems and infrastructure in place to grow both
our consolidated portfolio and O&M portfolio with limited incremental G&A
expense. We believe we can continue to grow NOI and strategic capital
revenues organically and through accretive development and acquisition
activity while further reducing G&A as a percentage of our investments in
real estate. As noted in the graph above, the acquisitions of the Liberty and
IPT portfolios are key examples of this where we increased our O&M portfolio
by approximately
increases to G&A expenses, resulting in lower G&A expenses as a percentage of
the real estate basis.
• Staying "Ahead of What's Next™". We are working on initiatives to create
value beyond the real estate by reengineering our customers' experience,
utilizing our scale to streamline our procurement activities and negotiating
better pricing on products and services for us and our customers, as well as
delivering enhancements to our business through innovation and data
analytics.
SUMMARY OF 2020
While the economic impact of COVID-19 remains unknown, the combination of what
we see in our proprietary data, the pace of rent collections and dialogue with
our customers provides us with a more positive outlook for the remainder of 2020
than at March 31, 2020 . However, as the uncertainty continues surrounding the
timing and nature of economies reopening, it remains difficult to predict the
impact on our business and future financial condition and operating results.
We have experienced minimal impacts from the current environment on our O&M
portfolio operating fundamentals in 2020. This is the result of favorable market
fundamentals in the logistics real estate sector, our significant
in-place-to-market rent spreads on leases and rent collections that are on pace
with or ahead of 2019 levels for each month since the pandemic began in March
2020 . Leasing activity has remained strong for the O&M portfolio throughout 2020
with the commencement of 71 million square feet of leases, net effective rent
change of 19.1% and a customer retention rate of 78.4%. E-commerce has been the
clear driver of leasing activity and we continue to expect an acceleration of
e-commerce adoption due to consumer demand. While customers that serve essential
daily needs continue to thrive, leasing during the second quarter of 2020
included non-essential industries as well. Customers that have been negatively
impacted by the current economy represent a minimal percentage of our annual
rent.
As of July 21, 2020 , we have collected 96.1% of June and 91.4% of July rents for
the O&M portfolio, which excludes the deferral of rents for June and July of
2.0% and 0.7%, respectively, that have been deferred until later in the year. We
have received requests from certain customers for rent concessions and for those
granted, it is generally the deferral of the rent payment to a period later in
2020 which will have no impact on revenue recognition. As of July 21st , we have
granted $31 million of rental deferral requests in 2020 or 48 basis points of
annualized rental revenue. Although COVID-19 continues to have a minimal impact
on our rent collections, we may see an increase in bad debt during the remainder
of the year.
Our capital deployment and disposition activities have continued throughout this
time and we expect the volume of these activities to accelerate in the second
half of 2020.
Our business continuity, communication plans and technology are allowing all
functions of the business to work smoothly during this time. Our employees have
either continued working remotely or in our offices under certain protocols to
keep a safe working environment. We have not had any lay-offs and we have
extended financial assistance to employees in need. Our local property and
leasing teams have continued to maintain our properties and work with our
customers to help them navigate the new environment while following established
measures to keep them and our customers safe. In addition, we are providing
assistance across the globe in the form of direct cash grants, supplies and the
donation of over one million square feet through our Space for Good program.
Also, we contributed $5 million to the Prologis Foundation for donations to
COVID-19 relief organizations during the six months ended June 30, 2020 .
We completed the following significant activities in 2020 as described in the Notes to the Consolidated Financial Statements:
• In January, our
wholly owned real estate assets of IPT for
assumption and repayment of debt. As USLV is a consolidated co-investment
venture, our Results of Operations section includes a discussion of the
acquired properties. USLF is an unconsolidated co-investment venture and
therefore the acquisition is included in the discussion of our O&M Operating
Portfolio. For further discussion on the acquisition by USLF, see Note 4, and
for USLV, see Notes 6 and 8.
• In February, we completed the Liberty Transaction for
the issuance of equity and the assumption of debt. We assumed
debt with a weighted average stated interest rate of 3.8%. We paid down
billion of the assumed debt with senior notes we issued at lower rates in
Statements for more information on the Liberty Transaction.
34
--------------------------------------------------------------------------------
• We earned promotes aggregating
expenses), primarily in June from our unconsolidated co-investment venture in
the U.S. , which was recorded in Strategic Capital Revenues.
• We generated net proceeds of $1.3 billion and realized net gains of $325 million, primarily from the contribution of properties to our unconsolidated
co-investment ventures in
parties in the U.S. • We have total available liquidity of
aggregate availability on our global senior credit facility and Japanese yen
revolver of
unrestricted cash balances of
until 2022.
• Additionally, we completed the following financing activities that resulted
in extending our weighted average remaining maturity to 10 years and keeping
our weighted average effective interest rate at 2.2% (principal in millions):
Aggregate Principal
Weighted Average Stated
Initial Borrowing Interest Rate at Issuance
Borrowing Date Currency USD (1) Date Maturity Dates
February € 1,350 $ 1,485 0.6% February 2022 - 2035
February $ 2,200 $ 2,200 2.4% April 2027 - 2050
February £ 250 $ 322 1.9% February 2035
June ¥ 41,200 $ 386 1.0% June 2027 - 2050
Aggregate Principal
Redemption Borrowing Stated Interest Rate at
Date Currency USD (1) the Redemption
Date Maturity Date
January € 400 $ 446 0.0% January 2020
March € 700 $ 783 1.4% May 2021
June € 213 $ 238 3.0% January 2022
June € 100 $ 113 3.4% February 2024
(1) The exchange rate used to calculate into
the settlement date.
In February 2020 , we completed an exchange offer for two series of Liberty's
senior notes for an aggregate amount of $750 million , with $690 million , or 92%,
of the aggregate principal amount being validly tendered for exchange. These
senior notes are in the aggregate principal amounts of $400 million due in
October 2026 with an interest rate of 3.3% and $350 million due in February 2029
with an interest rate of 4.4%. The senior notes were exchanged for notes issued
by a wholly owned subsidiary and guaranteed by the OP. All other terms of the
exchanged Liberty senior notes remained substantially the same.
Throughout this discussion, we reflect amounts in U.S. dollars, our reporting
currency. Included in these amounts are consolidated and unconsolidated
investments denominated in foreign currencies, principally the British pound
sterling, euro and Japanese yen that are impacted by fluctuations in exchange
rates when translated to U.S. dollars. We mitigate our exposure to foreign
currency fluctuations by investing outside the U.S. through co-investment
ventures, borrowing in the functional currency of our consolidated subsidiaries
and utilizing derivative financial instruments.
RESULTS OF OPERATIONS - SIX MONTHS ENDED
We evaluate our business operations based on the NOI of our two operating
segments:
Below is a reconciliation of our NOI by segment to Operating Income per the
Consolidated Financial Statements for the six months ended
2020 2019
Real Estate Operations - NOI $ 1,345 $ 1,023
Strategic Capital - NOI 289 88
General and administrative expenses (134 ) (136 ) Depreciation and amortization expenses (744 ) (568 ) Operating income before gains on real estate transactions, net 756
407
Gains on dispositions of development properties and land, net 249
239
Gains on other dispositions of investments in real estate, net 75
173
Operating income $ 1,080 $ 819
35
-------------------------------------------------------------------------------- See Note 12 to the Consolidated Financial Statements for more information on our segments and a reconciliation of each business segment's NOI to Operating Income and Earnings Before Income Taxes. Real Estate Operations This operating segment principally includes rental revenue and rental expenses recognized from our consolidated properties. We allocate the costs of our property management and leasing functions to the Real Estate Operations segment through Rental Expenses and theStrategic Capital segment through Strategic Capital Expenses based on the square footage of the relative portfolios. The operating fundamentals in the markets in which we operate have been strong, which has increased rents and kept occupancies high. In addition, this segment is impacted by our development, acquisition and disposition activities.
Below are the components of Real Estate Operations revenues, expenses and NOI
for the six months ended
2020 2019
Rental revenues $ 1,823 $ 1,397
Development management and other revenues 4 2
Rental expenses (460 ) (369 )
Other expenses (22 ) (7 )
Real Estate Operations - NOI $ 1,345 $ 1,023 The change in Real Estate Operations NOI for the six months ended
[[Image Removed]]
(1) Acquisition activity increased NOI in 2020, compared to 2019, primarily due
to the Liberty Transaction and the IPT Transaction.
(2) During both periods, we experienced positive rental rate growth. Rental rate
growth (or rent change) is a combination of the rollover of existing leases
to higher rental rates and contractual rent increases on existing leases. If
a lease has a contractual rent increase driven by a metric that is not known
at the time the lease commences, such as the consumer price index or a
similar metric, the rent increase is not included in rent leveling and
therefore, impacts the rental revenue we recognize. We experienced an
increase in consolidated NER change from 28.2% during the six months ended
on rent change on rollover and occupancy for the consolidated operating
portfolio.
(3) We calculate changes in NOI from development completions period over period
by comparing the change in NOI generated on the pool of developments that
were completed on or after January 1, 2019 through June 30, 2020 .
36
--------------------------------------------------------------------------------
Below are key operating metrics of our consolidated operating portfolio, excluding non-strategic industrial properties.
[[Image Removed]]
(1) The increase in consolidated square feet in the first quarter of 2020 is a
result of properties acquired in the Liberty Transaction and the IPT
Transaction.
The decrease in occupancy in the first quarter of 2020 was driven primarily by
significantly higher lease roll and changes in the composition of the operating
portfolio as a result of deployment activity.
(2) Consolidated square feet of leases commenced and weighted average net
effective rent change were calculated for leases with initial terms of one
year or greater.
(3) Calculated using the trailing twelve months immediately prior to the period
ended.
Development Activity
The following table summarizes consolidated development activity for the six
months ended
2020 2019
Starts:
Number of new development projects during the period 6 23 Square feet 2 5 TEI$ 365 $ 516 Percentage of build-to-suits based on TEI 31.7 %
35.5 %
Stabilizations:
Number of development projects stabilized during the period 31
31 Square feet 10 12 TEI$ 1,006 $ 1,166 Weighted average stabilized yield (1) 6.4 % 6.5 % Estimated value at completion$ 1,386 $
1,588
Estimated weighted average margin 37.7 % 36.2 %
(1) We calculate the weighted average stabilized yield as estimated NOI assuming
stabilized occupancy divided by TEI.
In the first quarter of 2020, we suspended several recently started speculative
development projects for the short-term. As of June 30, 2020 , these suspended
development projects have a TEI of $353 million , and remain within our
consolidated development portfolio at period end. We have continued with the
development of buildings that are build-to-suit and plan to commence with new
and suspended speculative developments when market conditions warrant.
At
37
--------------------------------------------------------------------------------
Capital Expenditures
We capitalize costs incurred in renovating, improving and leasing our operating
properties as part of the investment basis or within other assets. The following
graph summarizes our total capital expenditures, excluding development costs, of
our consolidated operating properties during each quarter:
[[Image Removed]]
Strategic Capital
This operating segment includes revenues from asset and property management,
other fees for services performed and promote revenue earned from the
unconsolidated entities. Revenues associated with the Strategic Capital segment
fluctuate because of changes in the size of the portfolios through acquisitions
and dispositions, the fair value of the properties and other transactional
activity including foreign currency exchange rates and timing of promotes. These
revenues are reduced by the direct costs associated with the asset and
property-level management expenses for the properties owned by these ventures.
We allocate the costs of our property management and leasing functions to the
Strategic Capital segment through Strategic Capital Expenses and to the Real
Estate Operations segment through Rental Expenses based on the square footage of
the relative portfolios.
Below are the components of
2020 2019
Strategic capital revenues $ 417 $ 163
Strategic capital expenses (128 ) (75 )
Strategic Capital - NOI $ 289 $ 88 Below is additional detail of our
U.S. (1) Other Americas Europe Asia Total
2020 2019 2020 2019 2020 2019 2020 2019 2020 2019
Strategic capital
revenues ($)
Recurring fees (2) 53 35 16 15 56 51 31 27 156 128
Transactional fees (3) 11 6 3 2 7 8 12 12 33 28
Promote revenue (4) 227 - - 5 1 2 - - 228 7
Total strategic
capital revenues ($) 291 41 19 22 64 61 43 39 417 163
Strategic capital
expenses ($) (74 ) (30 ) (8 ) (7 ) (24 ) (18 ) (22 ) (20 ) (128 ) (75 )
Strategic Capital -
NOI ($) 217 11 11 15 40 43 21 19 289 88
(1) The
employees who are based in the U.S. but also support other geographies.
(2) Recurring fees include asset and property management fees. The increase in
the U.S. is primarily due to the IPT Transaction.
(3) Transactional fees include leasing commission, acquisition, disposition,
development and other fees.
(4) We earn promote revenue directly from third-party investors in the
co-investment ventures and occasionally from the venture. The promote is
generally based on cumulative returns over a three-year period. Under either
structure, when the promote is earned we recognize the third-party investors'
share of the promote. Approximately 40% of the promote earned by us is paid
to our employees as a combination of cash and stock awards pursuant to the
terms of the PPP and expensed through Strategic Capital Expenses, as vested.
38
--------------------------------------------------------------------------------
The following real estate investments were held through our unconsolidated
co-investment ventures based on historical cost (dollars and square feet in
millions):
U.S. Other Americas Europe Asia Total
Jun 30, Jun 30,
2020 (1) Dec 31, 2019 2020 (2) Dec 31, 2019 Jun 30, 2020 Dec 31, 2019 Jun 30, 2020 Dec 31, 2019 Jun 30, 2020 Dec 31, 2019Ventures 1 1 2 2 3 3 3 3 9 9 Operating properties 689 605 225 214 745 731 158 144 1,817 1,694 Square feet 113 99 49 44 178 176 65 59 405 378 Total assets ($) 10,276 8,408 2,938 2,707 14,872 14,677 9,420 8,758 37,506 34,550
(1) The increase in the
Transaction, and excludes 24 operating properties, aggregating 4 million
square feet, classified as assets held for sale.
(2) PBLV and our other Brazilian joint ventures are combined as one venture for
the purpose of this table.
See Note 4 to the Consolidated Financial Statements for additional information on our unconsolidated co-investment ventures.
G&A Expenses G&A expenses were$134 million and$136 million for the six months endedJune 30, 2020 and 2019. Included in the six months endedJune 30, 2020 is a contribution of$5 million to thePrologis Foundation for donations to COVID-19 relief organizations. We capitalize certain internal costs, including salaries and related expenses, directly related to our development activities. The following table summarizes capitalized G&A for the six months endedJune 30 (dollars in millions): 2020 2019 Building and land development activities$ 38 $ 35 Operating building improvements and other 12
10
Total capitalized G&A expenses$ 50
20.9 % 19.5 %
Depreciation and Amortization Expenses
Depreciation and amortization expenses were
The following table highlights the key changes in depreciation and amortization expenses during the six months endedJune 30, 2020 from the same period in 2019 (in millions): [[Image Removed]]
(1) Included in acquisitions are the operating properties and related intangible
assets acquired in the Liberty Transaction and the IPT Transaction.
39
--------------------------------------------------------------------------------
Gains on Real Estate Transactions, Net
The following table summarizes our Gains on Dispositions ofDevelopment Properties and Land, net and Gains on Other Dispositions of Investments in Real Estate, net, which includes sales of non-developed properties (primarily operating properties) and other real estate transactions, net for the six months endedJune 30 (in millions): 2020 2019
Gains on dispositions of development properties and land, net Contributions to unconsolidated entities
$ 231 $ 228 Dispositions to third parties 18
11
Total gains on dispositions of development properties and land, net
$ 249
Gains on other dispositions of investments in real estate, net Contributions to unconsolidated entities
$ - $ 38
Dispositions to third parties 75 -
Gains on partial redemption of investment in an unconsolidated co-investment venture -
135
Total gains on other dispositions of investments in real estate, net$ 75 $ 173
We utilized the proceeds from these transactions primarily to fund our capital investments during both periods. See Note 3 to the Consolidated Financial Statements for further information on the gains we recognized.
Our Owned and Managed ("O&M") Operating Portfolio
We manage our business and review our operating fundamentals on an O&M basis, which includes properties wholly owned by us or owned by one of our co-investment ventures. We believe reviewing the fundamentals this way allows management to understand the entire impact to the financial statements, as it will affect both theReal Estate Operations andStrategic Capital segments, as well as the net earnings we recognize from our unconsolidated co-investment ventures based on our ownership. We do not control the unconsolidated co-investment ventures for purposes of GAAP and the presentation of the ventures' operating information does not represent a legal claim. Our O&M operating portfolio does not include our development portfolio, value-added properties, non-industrial properties or properties we do not have the intent to hold long-term that are classified as either held for sale or within other real estate investments. Value-added properties are properties that are expected to be repurposed or redeveloped to a higher and better use and recently acquired properties that present opportunities to create greater value. See below for information on our O&M operating portfolio (square feet in millions): June 30, 2020 December 31, 2019 Number of Square Percentage Number of Square Percentage Properties Feet Occupied Properties Feet Occupied Consolidated 2,240 436 96.3 % 1,882 359 96.1 % Unconsolidated 1,797 403 95.1 % 1,676 376 96.8 % Total 4,037 839 95.7 % 3,558 735 96.5 %
Below are the key operating metrics summarizing the leasing activity of our O&M operating portfolio.
[[Image Removed]]
(1) Square feet of leases commenced and weighted average net effective rent
change were calculated for leases with initial terms of one year or greater.
We retained more than 70% of our customers, based on the total square feet of
leases commenced during these periods.
40
--------------------------------------------------------------------------------
(2) Calculated using the trailing twelve months immediately prior to the period
ended.
(3) Turnover costs are defined as leasing commissions and tenant improvements and
represent the obligations incurred in connection with the lease commencement
for leases greater than one year.
Same Store Analysis
Our same store metrics are non-GAAP financial measures, which are commonly used
in the real estate industry and expected from the financial community, on both a
net effective and cash basis. We evaluate the 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,
which allows us and investors to analyze our ongoing business operations. We
determine our same store metrics on property NOI, which is calculated as rental
revenue less rental expense for the applicable properties in the same store
population for both consolidated and unconsolidated properties based on our
ownership interest, as further defined below.
We define our same store population for the three months ended June 30, 2020 as
the properties in our O&M operating portfolio, including the property NOI for
both consolidated properties and properties owned by the unconsolidated
co-investment ventures, at January 1, 2019 and owned throughout the same
three-month period in both 2019 and 2020. We believe the drivers of property NOI
for the consolidated portfolio are generally the same for the properties owned
by the ventures in which we invest and therefore we evaluate the same store
metrics of the O&M portfolio based on Prologis' ownership in the properties
("Prologis Share"). The same store population excludes properties held for sale
to third parties, along with development properties that were not stabilized at
the beginning of the period (January 1, 2019 ) and properties acquired or
disposed of to third parties during the period. To derive an appropriate measure
of period-to-period operating performance, we remove the effects of foreign
currency exchange rate movements by using the reported period-end exchange rate
to translate from local currency into the U.S. dollar for both periods.
As non-GAAP financial measures, the same store metrics have certain limitations
as an analytical tool and may vary among real estate companies. As a result, we
provide a reconciliation of Rental Revenues less Rental Expenses ("Property
NOI") (from the Consolidated Financial Statements prepared in accordance with
U.S. GAAP) to our Same Store Property NOI measures, as follows for the three
months ended June 30 (dollars in millions):
Percentage
2020 2019 Change
Reconciliation of Consolidated Property NOI to Same Store Property NOI measures:
Rental revenues $ 944 $ 701
Rental expenses (232 ) (181 )
Consolidated Property NOI 712 520
Adjustments to derive same store results: Property NOI from consolidated properties not included in same store portfolio and
other adjustments (1)(2) (232 ) (51 ) Property NOI from unconsolidated co-investment ventures included in same store portfolio (1)(2) 484 474
Third parties' share of Property NOI from properties included in same store
portfolio (1)(2) (395 ) (388 ) Prologis Share of Same Store Property NOI - Net Effective (2)$ 569 $ 555 2.6 %
Consolidated properties straight-line rent and fair value lease adjustments
included in same store portfolio (3) (9 ) (12 )
Unconsolidated co-investment ventures straight-line rent and fair value lease
adjustments included in same store portfolio (3) (10 ) (6 ) Third parties' share of straight-line rent and fair value lease adjustments included
in same store portfolio (2)(3) 8 5 Prologis Share of Same Store Property NOI - Cash (2)(3)$ 558 $ 542 2.9 %
(1) We exclude properties held for sale to third parties, along with development
properties that were not stabilized at the beginning of the period and
properties acquired or disposed of to third parties during the period. We
also exclude net termination and renegotiation fees to allow us to evaluate
the growth or decline in each property's rental revenues without regard to
one-time items that are not indicative of the property's recurring operating
performance. Net termination and renegotiation fees represent the gross fee
negotiated to allow a customer to terminate or renegotiate their lease,
offset by the write-off of the asset recorded due to the adjustment to
straight-line rents over the lease term. Same Store Property NOI is adjusted
to include an allocation of property management expenses for our
consolidated properties based on the property management services provided
to each property (generally, based on a percentage of revenues). On
consolidation, these amounts are eliminated and the actual costs of
providing property management services are recognized as part of our
consolidated rental expense.
(2) We include the Property NOI for the same store portfolio for bothconsolidated properties and properties owned by the co-investment ventures
based on our investment in the underlying properties. In order to calculate
our share of Same Store Property NOI from the co-investment ventures in
which we own less than 100%, we use the co-investment ventures' underlying
Property
41
--------------------------------------------------------------------------------
NOI for the same store portfolio and apply our ownership percentage at June
30, 2020 to the Property NOI for both periods, including the properties
contributed during the period. We adjust the total Property NOI from the
same store portfolio of the co-investment ventures by subtracting the third
parties' share of both consolidated and unconsolidated co-investment
ventures.
During the periods presented, certain wholly owned properties were contributed
to a co-investment venture and are included in the same store portfolio. Neither
our consolidated results nor those of the co-investment ventures, when viewed
individually, would be comparable on a same store basis because of the changes
in composition of the respective portfolios from period to period (e.g. the
results of a contributed property are included in our consolidated results
through the contribution date and in the results of the venture subsequent to
the contribution date based on our ownership interest at the end of the period).
As a result, only line items labeled "Prologis Share of Same Store Property NOI"
are comparable period over period.
(3) We further remove certain noncash items (straight-line rent and amortization
of fair value lease adjustments) included in the financial statements
prepared in accordance with
Cash measure.
We manage our business and compensate our executives based on the same store
results of our O&M portfolio at 100% as we manage our portfolio on an ownership
blind basis. We calculate those results by including 100% of the properties
included in our same store portfolio.
Other Components of Income (Expense)
Earnings from Unconsolidated Entities, Net
We recognized net earnings from unconsolidated entities, which are accounted for using the equity method, of$143 million and$105 million for the six months endedJune 30, 2020 and 2019, respectively. The earnings we recognize can be impacted by: (i) variances in revenues and expenses of each venture; (ii) the size and occupancy rate of the portfolio of properties owned by each venture; (iii) gains or losses from the dispositions of properties and extinguishment of debt; (iv) our ownership interest in each venture; and (v) fluctuations in foreign currency exchange rates used to translate our share of net earnings toU.S. dollars. See the discussion of our unconsolidated entities above in theStrategic Capital segment discussion and in Note 4 to the Consolidated Financial Statements for further breakdown of our share of net earnings recognized. Interest Expense
The following table details our net interest expense for the six months ended
2020 2019
Gross interest expense $ 175 $ 137
Amortization of debt discount and debt issuance costs, net 3 9
Capitalized amounts (21 ) (26 )
Net interest expense $ 157 $ 120 Weighted average effective interest rate during the period 2.3 % 2.5 %
Interest expense increased due to higher debt balances in 2020 as compared to 2019, including the debt assumed in the Liberty Transaction, reduced partially by lower interest rates as a result of our refinancing activities as discussed under the Summary of 2020 section.
See Note 6 to the Consolidated Financial Statements and the Liquidity and Capital Resources section below, for further discussion of our debt and borrowing costs.
Foreign Currency and Derivative Gains, Net
We are exposed to foreign currency exchange risk related to investments in and
earnings from our foreign investments. We use derivative financial instruments
to manage foreign currency exchange rate risk. We recognize the change in fair
value of the undesignated derivative contracts in unrealized gains and losses.
Upon settlement of these transactions, we recognize realized gains or losses.
We primarily hedge our foreign currency risk by borrowing in the currencies in
which we invest thereby providing a natural hedge. We may also issue debt in a
currency that is not the same functional currency of the borrowing entity and we
generally designate the debt as a nonderivative net investment hedge. We
recognize the remeasurement and settlement of the unhedged portion of the debt
and accrued interest in unrealized gains or losses. We also recognize the change
in fair value and settlement of any undesignated derivative contracts to hedge
the eventual payment of these borrowings in a foreign currency in unrealized
gains or losses.
42
--------------------------------------------------------------------------------
The following table details our foreign currency and derivative gains, net for
the six months ended
2020 2019
Realized foreign currency and derivative gains, net: Gains on the settlement of undesignated derivatives
$ 10 $ 7 Total realized foreign currency and derivative gains, net 10
7
Unrealized foreign currency and derivative gains (losses), net: Gains on the change in fair value of undesignated derivatives and unhedged debt
60 5
Losses on remeasurement of certain assets and liabilities (18 ) (1 ) Total unrealized foreign currency and derivative gains, net 42
4
Total foreign currency and derivative gains, net$ 52
See Note 11 to the Consolidated Financial Statements for more information about our derivative and nonderivative transactions.
Losses on Early Extinguishment of Debt, Net
During the six months endedJune 30, 2020 , we recognized$66 million of losses upon the redemption of certain euro senior notes in March and June as described above and the extinguishment of debt assumed in the Liberty Transaction and the IPT Transaction, which represented the excess of the prepayment penalties over the premium recorded upon assumption of the debt. During the six months endedJune 30, 2019 , losses on early extinguishment of debt were not significant. Income Tax Expense We recognize income tax expense related to our taxable REIT subsidiaries and in the local, state and foreign jurisdictions in which we operate. Our current income tax expense fluctuates from period to period based primarily on the timing of our taxable income, including gains on the disposition and contribution of properties. Deferred income tax expense (benefit) is generally a function of the period's temporary differences and the utilization of net operating losses generated in prior years that had been previously recognized as deferred income tax assets in taxable subsidiaries. The following table summarizes our income tax expense for the six months endedJune 30 (in millions): 2020 2019 Current income tax expense: Income tax expense$ 46 $ 21
Income tax expense on dispositions 30 10 Total current income tax expense 76 31
Deferred income tax expense: Income tax expense 1 9
Total deferred income tax expense 1 9 Total income tax expense
$ 77 $ 40
Net Earnings Attributable to Noncontrolling Interests
This amount represents the third-party investors' share of the earnings generated in consolidated entities in which we do not own 100% of the equity, reduced by the third-party share of fees or promotes earned by us during the period. We had net earnings attributable to noncontrolling interests of$79 million and$51 million for the six months endedJune 30, 2020 and 2019, respectively. Included in these amounts were$26 million and$22 million for the six months endedJune 30, 2020 and 2019, of net earnings attributable to the common limited partnership unitholders ofPrologis, L.P.
See Note 8 to the Consolidated Financial Statements for further information on our noncontrolling interests.
43
--------------------------------------------------------------------------------
Other Comprehensive Income (Loss)
See Note 11 to the Consolidated Financial Statements for more information about our derivative and nonderivative transactions and other comprehensive income (loss).
RESULTS OF OPERATIONS - THREE MONTHS ENDED
Except as separately discussed above, the changes in comprehensive income attributable to common stockholders and unitholders and its components for the three months endedJune 30, 2020 , as compared to the three months endedJune 30, 2019 , are similar to the changes for the six-month periods ended on the same dates.
LIQUIDITY AND CAPITAL RESOURCES
Overview We consider our ability to generate cash from operating activities, distributions from our co-investment ventures, contributions and dispositions of properties and available financing sources to be adequate to meet our anticipated future development, acquisition, operating, debt service, dividend and distribution requirements.
Near-Term Principal Cash Sources and Uses
In addition to dividends and distributions, we expect our primary cash needs will consist of the following:
• completion of the development and leasing of the properties in our active
consolidated development portfolio (at
development projects, 71 properties in our development portfolio were 67.8%
leased with a current investment of
when completed and leased, leaving $1.1 billion of estimated additional
required investment);
• development of new properties that we may hold for long-term investment or
subsequently contribute to unconsolidated co-investment ventures, including
the acquisition of land in certain markets;
• capital expenditures and leasing costs on properties in our operating
portfolio;
• repayment of debt and scheduled principal payments of
• additional investments in current unconsolidated entities or new investments
in future unconsolidated entities;
• acquisition of operating properties or portfolios of operating properties
(depending on market and other conditions) for direct, long-term investment
in our consolidated portfolio (this may include acquisitions from our
co-investment ventures); and
• repurchase of our outstanding debt or equity securities (depending on
prevailing market conditions, our liquidity, contractual restrictions and
other factors) through cash purchases, open-market purchases, privately
negotiated transactions, tender offers or otherwise.
We expect to fund our cash needs principally from the following sources (subject to market conditions):
• available unrestricted cash balances (
• net cash flow from property operations;
• fees earned for services performed on behalf of the co-investment ventures,
including promotes;
• distributions received from the co-investment ventures;
• proceeds from the disposition of properties, land parcels or other
investments to third parties;
• proceeds from the contribution of properties to current or future
co-investment ventures;
• borrowing capacity under our current credit facility arrangements, term loans
and other borrowing arrangements (
• proceeds from the issuance of debt; and
• proceeds from the sale of a portion of our investments in co-investment
ventures to achieve long-term ownership targets.
44
--------------------------------------------------------------------------------
We may also generate proceeds from the issuance of equity securities, subject to market conditions. InFebruary 2020 , we completed the Liberty Transaction for$13.0 billion , primarily through the issuance of equity. Debt
The following table summarizes information about our consolidated debt by currency (dollars in millions):
June 30, 2020 December 31, 2019
Weighted Average Amount Weighted Average Amount
Interest Rate Outstanding % of Total Interest Rate Outstanding % of Total
British pound
sterling 2.2 % $ 1,077 6.9 % 2.3 % $ 657 5.5 %
Canadian dollar 3.4 % 266 1.7 % 3.4 % 280 2.3 %
Euro 1.7 % 6,081 38.8 % 1.9 % 6,129 51.5 %
Japanese yen 0.8 % 2,481 15.8 % 0.7 % 2,329 19.6 %
U.S. dollar 3.3 % 5,762 36.8 % 4.4 % 2,511 21.1 %
Total debt (1) 2.2 % $ 15,667 2.2 % $ 11,906 (1) The weighted average maturity for total debt outstanding at
December 31, 2019 was 116 months and 94 months, respectively. Our credit ratings atJune 30, 2020 , were A3 from Moody's and A- fromStandard & Poor's , both with stable outlook. These ratings allow us to borrow at an advantageous interest rate. Adverse changes in our credit ratings could negatively impact our business and, in particular, our refinancing and other capital market activities, our ability to manage debt maturities, our future growth and our development and acquisition activity. A securities rating is not a recommendation to buy, sell or hold securities and is subject to revision or withdrawal at any time by the rating organization.
At
See Note 6 to the Consolidated Financial Statements for further discussion on our debt.
Equity Commitments Related to
Certain co-investment ventures have equity commitments from us and our venture partners. Our venture partners fulfill their equity commitment with cash. We may fulfill our equity commitment through contributions of properties or cash. The following table summarizes the remaining equity commitments atJune 30, 2020 (dollars in millions): Equity Commitments Venture Prologis Partners Total Exchange Rate Expiration Date Prologis TargetedU.S. Logistics Fund $ -$ 933 $ 933
N/A 2022 - 2023 (1)
1.12 U.S.
Prologis European dollar/
Logistics Fund - 1,401 1,401 1euro 2022 - 2023 (1)
1.23 dollar/
Prologis UK Logistics 1 British Venture 9 4958 pound sterling 2021 0.14 U.S. dollar/ Prologis China Core 1
Chinese
Logistics Fund - 108 108 renminbi 2022
Prologis China Logistics
Venture 315 1,788 2,103 N/A 2021 - 2028
0.18 U.S.
dollar/
Prologis Brazil Logistics 1 Brazilian
Venture 33 133 166 real 2026
Total $ 357 $ 4,412 $ 4,769 (1) Venture partners have the option to cancel their equity commitment up to 18
months after the initial commitment date.
See the Cash Flow Summary below for more information about our investment activity in our co-investment ventures.
45
--------------------------------------------------------------------------------
Cash Flow Summary The following table summarizes our cash flow activity for the six months endedJune 30 (in millions): 2020 2019 Net cash provided by operating activities$ 1,355 $ 1,004 Net cash provided by (used in) investing activities$ (2,251 ) $ 82 Net cash provided by (used in) financing activities$ 354 $ (1,034 ) Net increase (decrease) in cash and cash equivalents, including the effect of foreign currency exchange rates on cash$ (540 ) $ 57 Operating Activities
Cash provided by operating activities, exclusive of changes in receivables and
payables, is impacted by the following significant activity during the six
months ended
• Real estate operations. We receive the majority of our operating cash through
the net revenues of our Real Estate Operations segment. See the Results of
Operations section above for further explanation of our Real Estate
Operations segment. The revenues from this segment include noncashadjustments for straight-lined rents and amortization of above and below
market leases of
• Strategic capital. We also generate operating cash through our Strategic
Capital segment by providing asset and property management and other services
to our unconsolidated co-investment ventures. See the Results of Operations
section above for the key drivers of net revenues from our
segment. Included in Strategic Capital Revenues is the third-party investors'
share that is owed for promotes, which is recognized in operating activities
in the period the cash is received.
• G&A expenses and equity-based compensation awards. We incurred
and
recognized equity-based, noncash compensation expenses of
million in 2020 and 2019, respectively, which were recorded to Rental
Expenses in the Real Estate Operations segment, Strategic Capital Expenses in
the Strategic Capital segment and G&A Expenses.
• Operating distributions from unconsolidated entities. We received $183
million and
2020 and 2019, respectively.
• Cash paid for interest, net of amounts capitalized. As disclosed in Note 13
to the Consolidated Financial Statements, we paid interest, net of amounts
capitalized, of
• Cash paid for income taxes, net of refunds. As disclosed in Note 13 to the
Consolidated Financial Statements, we paid income taxes, net of refunds, of
$45 million and$40 million in 2020 and 2019, respectively. Investing Activities Cash provided by investing activities is driven by proceeds from contributions and dispositions of real estate properties. Cash used in investing activities is principally driven by our capital deployment activities of investing in real estate development, acquisitions and capital expenditures. See Note 3 to the Consolidated Financial Statements for further information on these activities. In addition, the following significant transactions also impacted our cash provided by or used in investing activities during the six months endedJune 30, 2020 and 2019:
• Liberty Transaction, net of cash acquired. We paid net cash of
complete the Liberty Transaction in 2020, primarily due to transaction costs.
The acquisition was financed through the issuance of equity and the
assumption of debt. A portion of this debt was paid down subsequent to the
acquisition, see the Financing Activities section below. See Note 2 to the
Consolidated Financial Statements for more information on this transaction.
• IPT Transaction, net of cash acquired. Our consolidated co-investment
venture, USLV, acquired real estate assets from IPT for a cash purchase price
of
price,
Contributions in financing activities. All of the debt assumed was paid down
subsequent to the acquisition, see the Financing Activities section below.
See Notes 3 and 8 to the Consolidated Financial Statements for more
information on this transaction.
• Investments in and advances to. We invested cash in our unconsolidated
entities that represented our proportionate share, of
million in 2020 and 2019, respectively. The ventures used the funds for the
acquisition of properties, development and repayment of debt. See Notes 3 and
4 to the Consolidated Financial Statements for more detail on our
unconsolidated co-investment ventures.
46
--------------------------------------------------------------------------------
• Return of investment. We received distributions from unconsolidated entities
as a return of investment of
respectively. Included in these amounts were distributions from venture
activities including proceeds from property sales, debt refinancing and the
redemption of our investment in certain unconsolidated entities.
• Settlement of net investment hedges. We paid a net amount of
2019, respectively. See Note 11 to the Consolidated Financial Statements for
further information on our derivative transactions.
Financing Activities
Cash provided by and used in financing activities is principally driven by proceeds from and payments on credit facilities and other debt, along with dividends paid on common and preferred stock and noncontrolling interest contributions and distributions.
Our repurchase of and payments on debt and proceeds from the issuance of debt
consisted of the following activity for the six months ended
2020 (1) 2019
Repurchase of and payments on debt (including extinguishment costs) Regularly scheduled debt principal payments and payments at maturity$ 4 $ 24 Secured mortgage debt 545 413 Senior notes 3,290 - Term loans 851 1,672 Total$ 4,690 $ 2,109 Proceeds from the issuance of debt Secured mortgage debt$ 1 $ 195 Senior notes 4,376 91 Term loans 1,000 1,612 Total$ 5,377 $ 1,898
(1) We completed the Liberty Transaction in 2020 and assumed
debt, of which
of senior notes. USLV assumed
all of which was paid off at closing. The assumption of debt was excluded
from the table above. See Note 6 to the Consolidated Financial Statements for
more information.
Off-Balance Sheet Arrangements
Unconsolidated Co-Investment Venture Debt
We had investments in and advances to unconsolidated co-investment ventures of$6.2 billion atJune 30, 2020 . These ventures had total third-party debt of$10.8 billion atJune 30, 2020 . The weighted average loan-to-value ratio for all unconsolidated co-investment ventures was 27.8% atJune 30, 2020 based on gross book value. Loan-to-value, a non-GAAP measure, was calculated as the percentage of total third-party debt to the gross book value of real estate for each venture and weighted based on the cumulative gross book value of all unconsolidated co-investment ventures.
At
Contractual Obligations
Dividend and Distribution Requirements
Our common stock dividend policy is to distribute a percentage of our cash flow
to ensure that we will meet the dividend requirements of the Internal Revenue
Code ("IRC"), relative to maintaining our REIT status, while still allowing us
to retain cash to fund capital improvements and other investment activities.
Under the IRC, REITs may be subject to certain federal income and excise taxes on our undistributed taxable income.
We paid a quarterly cash dividend of$0.58 and$0.53 per common share in the first two quarters of 2020 and 2019, respectively. Our future common stock dividends, if and as declared, may vary and will be determined by the board of directors ("Board") upon the circumstances prevailing at the time, including our financial condition, operating results and REIT distribution requirements, and may be adjusted at the discretion of the Board during the year. We make distributions on the common limited partnership units outstanding at the same per unit amount as our common stock dividend. The Class A Units inPrologis, L.P. are entitled to a quarterly distribution equal to$0.64665 per unit so long as the common 47
--------------------------------------------------------------------------------
units receive a quarterly distribution of at least
At
Pursuant to the terms of our preferred stock, we are restricted from declaring or paying any dividend with respect to our common stock unless and until all cumulative dividends with respect to the preferred stock have been paid and sufficient funds have been set aside for dividends that have been declared for the relevant dividend period with respect to the preferred stock. Other Commitments
On a continuing basis, we are engaged in various stages of negotiations for the acquisition or disposition of individual properties or portfolios of properties.
NEW ACCOUNTING PRONOUNCEMENTS
See Note 1 to the Consolidated Financial Statements.
FUNDS FROM OPERATIONS ATTRIBUTABLE TO COMMON STOCKHOLDERS/UNITHOLDERS ("FFO")
FFO is a non-GAAP financial measure that is commonly used in the real estate industry. The most directly comparable GAAP measure to FFO is net earnings.
The National Association of Real Estate Investment Trusts ("NAREIT") defines FFO as 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 also exclude the gains on revaluation of equity investments upon acquisition of a controlling interest and the gain recognized from a partial sale of our investment, as these are similar to gains from the sales of previously depreciated properties. We exclude similar adjustments from our unconsolidated entities and the third parties' share of our consolidated co-investment ventures. Our FFO Measures Our FFO measures begin with NAREIT's definition and we make certain adjustments to reflect our business and the way that management plans and executes our business strategy. While not infrequent or unusual, the additional items we adjust for in calculating FFO, as modified byPrologis and Core FFO, both as defined below, are subject to significant fluctuations from period to period. Although these items may have 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. These items have 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 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 noncontrolling interests share of the applicable reconciling items based on our average ownership percentage for the applicable periods. These FFO measures are used by management as supplemental financial measures of operating performance and we believe that it is important that stockholders, potential investors and financial analysts understand the measures management uses. 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. We analyze our operating performance principally by the rental revenue of our real estate and the revenues from 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.
FFO, as modified by
To arrive at FFO, as modified by
• deferred income tax benefits and deferred income tax expenses recognized by
our subsidiaries;
• current income tax expense related to acquired tax liabilities that wererecorded as deferred tax liabilities in an acquisition, to the extent the
expense is offset with a deferred income tax benefit in earnings that is
excluded from our defined FFO measure;
48
--------------------------------------------------------------------------------
• foreign currency exchange gains and losses resulting from (i) debt
transactions between us and our foreign entities, (ii) third-party debt that
is used to hedge our investment in foreign entities, (iii) derivative
financial instruments related to any such debt transactions, and (iv)
mark-to-market adjustments associated with other derivative financial
instruments
We use FFO, as modified by
Core FFO attributable to common stockholders/unitholders ("Core FFO")
In addition to FFO, as modified byPrologis , we also use Core FFO. To arrive at Core FFO, we adjust FFO, as modified byPrologis , to exclude the following recurring and nonrecurring items that we recognized directly in FFO, as modified byPrologis :
• gains or losses from the disposition of land and development properties that
were developed with the intent to contribute or sell;
• income tax expense related to the sale of investments in real estate;
• 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;
• gains or losses from the early extinguishment of debt and redemption and
repurchase of preferred stock; and
• expenses related to natural disasters.
We use Core FFO, including by segment and geographies, to: (i) assess our operating performance as compared to other real estate companies; (ii) evaluate our performance and the performance of our properties in comparison with expected results and results of previous periods; (iii) evaluate the performance of our management; (iv) budget and forecast future results to assist in the allocation of resources; (v) provide guidance to the financial markets to understand our expected operating performance; and (vi) evaluate how a specific potential investment will impact our future results.
Limitations on the use of our FFO measures
While we believe our modified 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 the limitations are: • The current income tax expenses that are excluded from our modified 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. Furthermore, the amortization of capital expenditures and leasing
costs necessary to maintain the operating performance of logistics facilities
are not reflected in FFO.
• Gains or losses from non-development property dispositions and 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 disposed properties arising from changes in
market conditions.
• The deferred income tax benefits and expenses that are excluded from ourmodified 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 modified
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 ourmodified 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 or preferred stock that we
exclude from our Core FFO, may provide a benefit or cost to us as we may be
settling our obligation at less or more than our future obligation.
• The natural disaster expenses that we exclude from Core FFO are costs that we
have incurred.
49
-------------------------------------------------------------------------------- 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 modified FFO measures to our net earnings computed under GAAP for six months endedJune 30 as follows (in millions): 2020
2019
Reconciliation of net earnings attributable to common stockholders/unitholders to FFO measures: Net earnings attributable to common stockholders
$ 894
Add (deduct) NAREIT defined adjustments: Real estate related depreciation and amortization 725
551
Gains on other dispositions of investments in real estate, net (75 )
(173 )
Reconciling items related to noncontrolling interests (15 ) (25 ) Our share of reconciling items included in earnings related to unconsolidated entities
142 117
NAREIT defined FFO attributable to common stockholders/unitholders 1,671
1,201
Add (deduct) our modified adjustments: Unrealized foreign currency and derivative gains, net (43 ) (4 ) Deferred income tax expense 1
9
Our share of reconciling items included in earnings related to unconsolidated entities
3
(3 )
FFO, as modified by
1,632 1,203
Adjustments to arrive at Core FFO: Gains on dispositions of development properties and land, net (249 ) (239 ) Current income tax expense on dispositions 30
10
Losses on early extinguishment of debt and other, net 74
2
Reconciling items related to noncontrolling interests (3 )
-
Our share of reconciling items included in earnings related to unconsolidated entities
(31 ) 4
Core FFO attributable to common stockholders/unitholders
© Edgar Online, source
