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, acquisition and 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) international, national, regional and local economic
and political climates and conditions; (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, 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. 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 interest in the
co-investment ventures, which may be consolidated or unconsolidated based on our
level of control of the entity.
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, which we manage. We make operating
decisions based on our total O&M portfolio, as we manage the properties
similarly 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") to reflect our share of the financial results 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 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 measures.
MANAGEMENT'S OVERVIEW
We are the global leader in logistics real estate with a focus on high-barrier,
high-growth markets. We own, manage and develop well-located, high-quality
logistics facilities in 19 countries across four continents. Our local teams
actively manage our portfolio, which encompasses leasing, property management,
capital deployment and opportunistic dispositions. Our disposition activities
allow us to recycle capital and largely self-fund our development and
acquisition activities. The majority of our properties in the United States
("U.S.") are wholly owned, while our international properties are primarily held
in our co-investment ventures, which has 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. There is an emergence of two new structural
demand drivers for our real estate: (i) the need for more inventory as supply
chains emphasize resilience over efficiency and (ii) the acceleration of
e-commerce adoption.
As service time increasingly moves to the forefront of the global supply chain,
it drives demand for logistics real estate close to the end-consumer. We have
invested in properties located within infill and urban areas in our largest
global markets with same day access (defined as Last Touch®) and next day access
(defined as city distribution), to the consumer population. This positioning
gives us the
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unique ability to provide our customers with the right real estate solutions for their supply chains that, in turn, allows them to meet end-consumer delivery expectations. As we look to the future of logistics real estate, we are focused on solving our customers' pain points, innovating in pursuit of creative solutions and operational excellence. We are listening and responding to our customers' needs for skilled labor through initiatives to create community workforce programs to develop their talent pool, utilize our proprietary data and analytics to ensure efficient distribution solutions and leverage 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 partnership withPrologis is a competitive advantage. We accomplish all of this by employing individuals who continue to grow, embrace change and draw strength from inclusion and diversity. AtMarch 31, 2021 , our total O&M portfolio at 100%, including properties and development projects (based on gross book value and total expected investment ("TEI")), totaled$97.7 billion across 990 million square feet (92 million square meters) and four continents. Our share of the total O&M portfolio was$61.4 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 our 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 90% occupancy. Amounts represent our TEI, which includes the
estimated cost of development or expansion, 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 operating leases,
including reimbursements for the majority of our property operating costs. We
expect to generate 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 as leases expire.
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 majority of
our consolidated rental revenue, NOI and cash flows are generated in the U.S.
Development. Given the scarcity of modern logistics facilities in our target
markets, our development business provides us the opportunity to build what our
customers need. We develop properties to meet these needs, deepen our market
presence and maintain a modern portfolio. We believe we have a competitive
advantage due to (i) the strategic locations of our land bank and redevelopment
sites; (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 are leased, 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 $12.0 billion of TEI of new logistics space. In
addition to our land portfolio, we have also made investments in other
properties that have the potential to be redeveloped to increase value.
Generally, we develop properties in the U.S. for long-term hold and outside the
U.S. for contribution to our unconsolidated co-investment ventures.
Strategic Capital
Our strategic capital segment allows us to partner with many of the world's
largest institutional investors and capitalize our business through private
equity, principally perpetual open-ended or long-term ventures. We also access
capital in this segment through two publicly traded vehicles: Nippon Prologis
REIT, Inc. in Japan and FIBRA Prologis in Mexico . We align our interests with
our partners by holding significant ownership interests in all of our 9
unconsolidated co-investment ventures (ranging from 15% to 50%), which allows us
to reduce our exposure to foreign currency movements for investments outside the
U.S.
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This segment produces stable, long-term cash flows and generally contributes 10%
to 15% of our recurring consolidated revenues, earnings and FFO. We generate
strategic capital revenues from our unconsolidated co-investment ventures,
principally through asset and property management services. 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
revenues") 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 the U.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
our 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 2021 represents G&A and adjusted G&A expenses for the year ended
December 31, 2021 based on the three months endedMarch 31, 2021 .
• Rent Growth. Due to the demand for the location and quality of our
properties, we expect rents in our markets to increase. In addition, due to
strong market rent growth over the last several years, our in-place leases
have considerable upside potential. We estimated that the rental rates of our
leases are 13.6% below current market on the basis of our weighted average
ownership at
lease renewal will likely 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) in every
quarter since 2013. We expect this trend to continue for several more years
due to our current in-place rents being below market. We also expect future
growth in market rents to further contribute to increased rental income.
• Value Creation from Development. A successful development and redevelopment
program involves maintaining control of well-located and entitled land and
redevelopment sites. We believe that the carrying value of our land bank is
below its current fair value. Due to the strategic nature of our land bank,
development expertise of our teams and strength of our customer
relationships, we expect to create value as we build new properties. We
measure the estimated value creation of a development project as the margin
above our anticipated cost to develop. As properties stabilize, we expect to
realize the value creation principally through contributions to
unconsolidated co-investment ventures and increases in NOI.
• Balance Sheet Strength. We have continued to seek and execute on
opportunities to refinance debt at historically low rates, as we did during
the first quarter. At
real estate investments and our market capitalization. As a result of our low
leverage, available liquidity and investment capacity in the co-investment
ventures, we have significant capacity to capitalize on value-added
investment opportunities that will translate into future earnings growth.
• Economies of Scale from Growth. We use adjusted G&A expenses as a percentage
of the O&M portfolio to measure and evaluate our overhead costs. We have
scalable systems and infrastructure in place to grow both our consolidated
and O&M portfolios 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 Liberty Property Trust and Liberty Property Limited
Partnership (collectively "Liberty" or the "Liberty Transaction") and
Industrial Property Trust Inc. ("IPT" or the "IPT Transaction") in
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the first quarter of 2020 are key examples of this effort, where we increased
our investments in real estate in the O&M portfolio by over 20% and had
minimal increases to G&A expenses, which resulted in lower G&A expenses as a
percentage of investments in real estate.
• Staying "Ahead of What's Next™". We are working on initiatives to create
value beyond the real estate by enhancing 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 improvements to our business through innovation, data analytics
and digitization efforts. Underlying our future strategy for growth is our
ongoing commitment to, and initiatives in, environmental stewardship, social
responsibility and governance.
SUMMARY OF 2021
Our financial condition and operating results remain strong in the COVID-19
environment and the positive momentum from the fourth quarter of 2020 has
carried into 2021, as evidenced by our operating results, profitable deployment
activities and solid outlook. While we do not expect significant impacts to our
business, financial condition and operating results, we cannot fully predict
negative trends due to the continued uncertainty of COVID-19 across the globe.
Based on the demand we see in our proprietary data, strong rent collections and
in dialogue with our customers, we expect operating conditions in our portfolio
to continue to strengthen during 2021. E-commerce continues to grow well above
its historical average and customers negatively impacted by the current economy
represent a minimal percentage of our annual rent. Leasing activity accelerated
for the O&M portfolio during the three months ended March 31, 2021 , as discussed
below.
Overall, our business continuity, communication plans and technology are
allowing all functions of our business to continue to work smoothly during this
time. Generally, our employees have continued working remotely or in certain
locations in our offices under protocols to keep a safe working environment.
During the three months ended March 31, 2021 , we generated net proceeds of $793
million and realized net gains of $190 million , primarily from the contribution
of properties to our unconsolidated co-investment ventures in Japan and Europe
and dispositions to third parties in the U.S.
We completed the following consolidated financing activities that included the
issuance of $2.0 billion and redemption of $1.5 billion of senior notes, with
aggregate principal amounts in U.S. dollars. This resulted in extending our
consolidated weighted average remaining maturity to 11 years and lowering our
weighted average effective interest rate to 1.7% (principal in millions):
Aggregate Principal Issuance Date Weighted Average
Initial
Borrowing Borrowing
Date Currency USD (1) Interest Rate (2) Term (3) Maturity Dates
February € 1,350 $ 1,639 0.7% 14.3 February 2032 - 2041
February $ 400 $ 400 1.6% 10.1 March 2031
Aggregate Principal RedemptionDate Weighted Average
Redemption Borrowing
Date Currency USD (1) Interest Rate (2) Term (3) Maturity Date
March € 600 $ 716 3.4% 3.0 February 2024
March $ 750 $ 750 3.8% 4.7 November 2025
(1) The exchange rate used to calculate into
the settlement date.
(2) The interest rate represents the fixed or variable interest rate at the
issuance or redemption date of the related debt.
(3) The issuance date and redemption date weighted average term represent the
remaining maturity in years on the related debt at the issuance or
redemption date, respectively.
At March 31, 2021 , we had total available liquidity of $4.9 billion , principally
due to aggregate availability under our credit facilities of $3.9 billion and
unrestricted cash balances of $676 million . In April 2021 , we increased our
available liquidity by entering into a second global senior credit facility with
an available borrowing capacity of $1.0 billion and terminating the $500 million
multi-currency term loan.
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 subsidiaries and utilizing
derivative financial instruments.
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RESULTS OF OPERATIONS - THREE 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 three months ended
2021 2020
Real Estate Operations - NOI $ 747 $ 639
Strategic Capital - NOI 71 50
General and administrative expenses (78 ) (69 )
Depreciation and amortization expenses (398 ) (346 )
Operating income before gains on real estate transactions, net 342 274
Gains on dispositions of development properties and land, net 174
163
Gains on other dispositions of investments in real estate, net 16
31
Operating income $ 532 $ 468
See Note 11 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 the Strategic Capital segment through Strategic
Capital Expenses based on the square footage of the relative portfolios. In
addition, this segment is impacted by our development, acquisition and
disposition activities.
Below are the components of Real Estate Operations NOI for the three months
ended
2021 2020
Rental revenues $ 1,022 $ 879
Development management and other revenues 6 3
Rental expenses (278 ) (228 )
Other expenses (3 ) (15 )
Real Estate Operations - NOI $ 747 $ 639 The change in Real Estate Operations NOI for the three months ended
[[Image Removed]]
(1) Acquisition activity increased NOI in 2021, compared to 2020, primarily due
to the Liberty Transaction on
operating properties, aggregating 100 million square feet, and increased our
consolidated investments in real estate by approximately $13 billion .
(2) During both periods, we experienced positive rental rate growth. Rental rate
growth is a combination of higher rental rates on rollover of leases (or rent
change) and contractual rent increases on existing leases. If a lease has a
contractual rent increase
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driven by a metric that is not known at the time the lease commences, such as
the consumer price index or a similar metric, the rent increase is not
included in rent leveling and therefore, impacts the rental revenue we
recognize. Significant rent change during both periods continues to be a key
driver in increasing rental income. See below for key metrics on rent change
on rollover and occupancy for the consolidated operating portfolio.
(3) We calculate changes in NOI from development completions period over period
by comparing the change in NOI generated on the pool of developments that
completed on or after January 1, 2020 through March 31, 2021 .
Below are key operating metrics of our consolidated operating portfolio, which excludes non-strategic industrial properties.
[[Image Removed]]
(1) Consolidated square feet of leases commenced and weighted average net
effective rent change were calculated for leases with initial terms of one
year or greater.
(2) Calculated using the trailing twelve months immediately prior to the period
ended.
Development Activity
The following table summarizes consolidated development activity for the three
months ended
2021 2020
Starts:
Number of new development projects during the period 13 4 Square feet 5 2 TEI (1)$ 556 $ 299 Percentage of build-to-suits based on TEI 59.9 %
16.6 %
Stabilizations:
Number of development projects stabilized during the period 13
19 Square feet 4 6 TEI (1)$ 372 $ 673 Percentage of build-to-suits based on TEI 15.8 % 24.7 % Weighted average stabilized yield (2) 5.8 % 6.3 % Estimated value at completion$ 533 $
941
Estimated weighted average margin 43.2 % 39.8 %
(1) TEI also includes development starts on yards and parking lots that will be
included in other real estate investments upon completion.
(2) We calculate the weighted average stabilized yield as estimated NOI assuming
stabilized occupancy divided by TEI.
During the first quarter of 2020, we suspended several recently started
speculative development projects for the short term based on the market
conditions at that time and government restrictions due to COVID-19. By the
fourth quarter of 2020, most suspended projects were restarted and at March 31,
2021 , the entire development portfolio consisted of active projects. At March
31, 2021 , the consolidated development portfolio, including properties under
development and prestabilized properties, was expected to be completed before
August 2022 with a TEI of $3.7 billion , leaving $1.7 billion remaining to be
spent and was 61.8% leased. We expect our development activities to continue to
accelerate in 2021.
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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 capital expenditures, excluding development costs, and property
improvements per average square foot of our consolidated operating properties
during each quarter:
[[Image Removed]]
Strategic Capital
This operating segment includes revenues from asset and property management
services performed, transactional services for acquisition, disposition and
leasing activity 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.
For further details regarding the key property information and summarized
financial condition and operating results of our unconsolidated co-investment
ventures, refer to Note 4 to the Consolidated Financial Statements.
Below are the components of
2021 2020
Strategic capital revenues $ 120 $ 97
Strategic capital expenses (49 ) (47 )
Strategic Capital - NOI $ 71 $ 50 Below is additional detail of our
U.S. (1) Other Americas Europe Asia Total
2021 2020 2021 2020 2021 2020 2021 2020 2021 2020
Strategic capital
revenues ($)
Recurring fees (2) 30 25 9 8 36 28 19 15 94 76
Transactional fees (3) 4 9 2 1 5 4 13 6 24 20
Promote revenue (4) - - - 2 1 - - 2 1
Total strategic
capital revenues ($) 34 34 11 9 43 33 32 21 120 97
Strategic capital
expenses ($) (25 ) (20 ) (3 ) (4 ) (11 ) (13 ) (10 ) (10 ) (49 ) (47 )
Strategic Capital -
NOI ($) 9 14 8 5 32 20 22 11 71 50
(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
fees is due to larger portfolios and increases in the fair value of the
portfolios.
(3) Transactional fees include leasing commissions and acquisition, disposition,
development and other fees.
(4) We generally earn promote revenue directly from third-party investors in the
co-investment ventures based on cumulative returns over a three-year period
or based on development returns. Approximately 40% of the promote earned by
us is paid to our
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employees as a combination of cash and stock awards pursuant to the terms of
the PPP and expensed through Strategic Capital Expenses, as vested.
G&A Expenses
G&A expenses were $78 million and $69 million for the three months ended March
31, 2021 and 2020, respectively. G&A expenses increased in 2021 as compared to
2020, due to higher compensation expenses based largely on the increase in our
share price. We capitalize certain internal costs, including salaries and
related expenses, directly related to our development activities. For discussion
on our long-term incentive plans refer to the proxy statement for our 2021
annual meeting of stockholders.
The following table summarizes capitalized G&A for the three months ended March
31 (dollars in millions):
2021 2020
Building and land development activities $ 25 $ 22
Operating building improvements and other 7 6
Total capitalized G&A expenses$ 32
21.1 % 21.8 %
Depreciation and Amortization Expenses
Depreciation and amortization expenses were
The following table highlights the key changes in depreciation and amortization expenses during the three months endedMarch 31, 2021 from the same period in 2020 (in millions): [[Image Removed]]
(1) Included in acquisitions are the operating properties and related intangible
assets acquired in the Liberty Transaction.
Gains on Real Estate Transactions, Net
Gains on the disposition of development properties and land were$174 million and$163 million for the three months endedMarch 31, 2021 and 2020, respectively, and primarily included gains from the contribution of properties we developed to our unconsolidated co-investment ventures. Gains on other dispositions of investments in real estate were$16 million and$31 million for the three months endedMarch 31, 2021 and 2020, respectively, which included sales of operating properties and other real estate transactions. We utilized the proceeds from these transactions primarily to fund our development activities during both periods. See Note 3 to the Consolidated Financial Statements for further information on these transactions.
Our Owned and Managed ("O&M") Operating Portfolio
We manage our business and review our operating fundamentals on an O&M basis, which includes our consolidated properties and properties owned by our unconsolidated 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. 36
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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):
March 31, 2021 December 31, 2020
Number of Square Percentage Number of Square Percentage
Properties Feet Occupied Properties Feet Occupied
Consolidated 2,260 442 95.9 % 2,252 441 96.6 %
Unconsolidated 1,877 424 95.3 % 1,849 416 95.9 %
Total 4,137 866 95.6 % 4,101 857 96.2 %
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 approximately 70% of our customers, based on the total square
feet of leases commenced during these periods.
(2) Calculated using the trailing twelve months immediately prior to the period
ended.
(3) Turnover costs include external leasing commissions and tenant improvements
and represent the obligations incurred in connection with the lease
commencement for leases greater than one year. As leasing commissions are
based on the contractual rent we receive over the lease term, we experienced
increases in commissions due to higher rents on leases that commenced during
the three months ended March 31, 2021 .
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 March 31, 2021 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, 2020 and owned throughout the same
three-month period in both 2020 and 2021. 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, 2020 ) 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.
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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 our Consolidated Financial Statements prepared in accordance with
U.S. GAAP) to our Same Store Property NOI measures, as follows for the three
months ended March 31 (dollars in millions):
Percentage
2021 2020 Change
Reconciliation of Consolidated Property NOI to Same Store Property NOI measures:
Rental revenues $ 1,022 $ 879
Rental expenses (278 ) (228 )
Consolidated Property NOI 744 651
Adjustments to derive same store results: Property NOI from consolidated properties not included in same store portfolio and
other adjustments (1) (219 ) (139 ) Property NOI from unconsolidated co-investment ventures included in same store portfolio (1)(2) 566 542
Third parties' share of Property NOI from properties included in same store
portfolio (1)(2) (457 ) (446 ) Prologis Share of Same Store Property NOI - Net Effective (2)$ 634 $ 608 4.2 %
Consolidated properties straight-line rent and fair value lease adjustments
included in same store portfolio (3) (12 ) (13 )
Unconsolidated co-investment ventures straight-line rent and fair value lease
adjustments included in same store portfolio (3) (13 ) (12 ) Third parties' share of straight-line rent and fair value lease adjustments included
in same store portfolio (2)(3) 10 10 Prologis Share of Same Store Property NOI - Cash (2)(3)$ 619 $ 593 4.5 %
(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 NOI for the same store portfolio and apply our ownership percentage
at
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.
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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$67 million and$89 million for the three months endedMarch 31, 2021 and 2020, 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 a further breakdown of our share of net earnings recognized. Interest Expense
The following table details our net interest expense for the three months ended
2021 2020
Gross interest expense $ 79 $ 85
Amortization of debt discount and debt issuance costs, net 2 2
Capitalized amounts (10 ) (11 )
Net interest expense $ 71 $ 76 Weighted average effective interest rate during the period 1.8 % 2.3 %
Interest expense decreased during the three months endedMarch 31, 2021 as compared to the same period in 2020 principally due to the use of proceeds from the issuance of senior notes throughout 2020 and during the first quarter of 2021 to early redeem higher interest rate senior notes. As a result of our refinancing activities, we lowered the consolidated weighted average effective interest rate on our senior notes by over 60 basis points fromJanuary 1, 2020 toMarch 31, 2021 .
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 may use derivative financial instruments to manage foreign currency exchange rate risk related to our earnings. 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 related to our investments by borrowing in the currencies in which we invest thereby providing a natural hedge. We have issued debt in a currency that is not the same functional currency of the borrowing entity and have designated a portion of 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.
The following table details our foreign currency and derivative gains, net for
the three months ended
2021 2020
Realized foreign currency and derivative gains (losses), net:
Gains (losses) on the settlement of undesignated derivatives
Unrealized foreign currency and derivative gains (losses), net: Gains on the change in fair value of undesignated derivatives and unhedged debt
84 129
Losses on remeasurement of certain assets and liabilities (3 ) (20 ) Total unrealized foreign currency and derivative gains, net 81
109
Total foreign currency and derivative gains, net$ 80
See Note 10 to the Consolidated Financial Statements for more information about our derivative and nonderivative transactions.
Losses on Early Extinguishment of Debt, Net
During the three months ended
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notes before their stated maturity. We redeemed$1.5 billion of senior notes with stated maturities of 2024 and 2025, and$783 million of senior notes with a stated maturity of 2021, during the three months endedMarch 31, 2021 and 2020, respectively. The losses in 2020 included 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. See Note 6 to the Consolidated Financial Statements and the Liquidity and Capital Resources section, for more information regarding our debt repurchases. 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 of properties and fees earned from the co-investment ventures. 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 (benefit) for the three
months ended
2021 2020
Current income tax expense:
Income tax expense $ 14 $ 21
Income tax expense on dispositions 8 7
Income tax expense on dispositions related to acquired tax liabilities
3 -
Total current income tax expense 25 28 Deferred income tax expense: Income tax expense 4 3
Income tax benefit on dispositions related to acquired tax liabilities
(3 ) -
Total deferred income tax expense 1 3 Total income tax expense$ 26 $ 31
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 payable to us and earned during the period. We had net earnings attributable to noncontrolling interests of$32 million and$30 million for the three months endedMarch 31, 2021 and 2020, respectively. Included in these amounts were$10 million and$14 million for the three months endedMarch 31, 2021 and 2020, of net earnings attributable to the common limited partnership unitholders ofPrologis, L.P.
See Note 7 to the Consolidated Financial Statements for further information on our noncontrolling interests.
Other Comprehensive Income (Loss)
The key driver of changes in Accumulated Other Comprehensive Income (Loss)
("AOCI/L") during the three months ended March 31, 2021 and 2020, was the
currency translation adjustment derived from changes in exchange rates during
both periods primarily on our net investments in real estate outside the U.S.
and the borrowings we issue in the functional currencies of the countries where
we invest. These borrowings serve as a natural hedge of our foreign investments.
In addition, we use derivative financial instruments, such as foreign currency
forward and option contracts to manage foreign currency exchange rate risk
related to our foreign investments, that when designated the change in fair
value is included in AOCI/L.
See Note 10 to the Consolidated Financial Statements for more information on changes in other comprehensive income (loss) and about our derivative and nonderivative transactions.
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:
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• completion of the development and leasing of the properties in our
consolidated development portfolio (at
development portfolio were 61.8% leased with a current investment of
billion and a TEI of
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 and future unconsolidated co-investment
ventures and other ventures;
• 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 might 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):
• net cash flow from property operations;
• fees earned for services performed on behalf of co-investment ventures,
including promotes;
• distributions received from co-investment ventures;
• proceeds from disposition of properties, land parcels or other investments to
third parties;
• proceeds from the contributions of properties to current or future
co-investment ventures;
• available unrestricted cash balances (
• borrowing capacity under our current credit facility arrangements (
billion available at March 31, 2021 ); and in April 2021 we entered into a
second global senior credit facility, as described in Note 6 to the
Consolidated Financial Statements;
• 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.
We may also generate proceeds from the issuance of equity securities, subject to market conditions.
Debt
The following table summarizes information about our consolidated debt by currency (dollars in millions):
March 31, 2021 December 31, 2020
Weighted Average Amount Weighted Average Amount
Interest Rate Outstanding % of Total Interest Rate Outstanding % of Total
British pound
sterling 2.2 % $ 1,028 6.2 % 2.2 % $ 1,019 6.1 %
Canadian dollar 2.7 % 288 1.7 % 2.7 % 286 1.7 %
Euro 1.1 % 6,963 42.2 % 1.4 % 6,550 38.8 %
Japanese yen 0.8 % 2,460 14.9 % 0.8 % 2,877 17.1 %
U.S. dollar 2.6 % 5,764 35.0 % 2.8 % 6,117 36.3 %
Total debt (1) 1.7 % $ 16,503 1.9 % $ 16,849 (1) The weighted average maturity for total debt outstanding at
and December 31, 2020 was 134 months and 122 months, respectively.
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Our credit ratings atMarch 31, 2021 , 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 atMarch 31, 2021 (dollars in millions): Equity Commitments (1) Venture Prologis Partners Total Expiration Date Prologis TargetedU.S. Logistics Fund $ -$ 1,097 $ 1,097 2023 - 2024 (2) Prologis European Logistics Fund - 1,945 1,945 2023 - 2024 (2) Prologis UK Logistics Venture 8 49 57
2024
Prologis China Core Logistics Fund - 150 150 2022 - 2024 (2) Prologis China Logistics Venture 289 1,637 1,926 2021 - 2028 Prologis Brazil Logistics Venture 44 174 218 2026 Total$ 341 $ 5,052 $ 5,393
(1) The equity commitments for the co-investment ventures that operate in a
different functional currency than the
foreign currency exchange rate at March 31, 2021 .
(2) Venture partners have the option to cancel their equity commitment starting
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.
Cash Flow Summary The following table summarizes our cash flow activity for the three months endedMarch 31 (in millions): 2021 2020 Net cash provided by operating activities$ 817 $ 679 Net cash used in investing activities$ (107 ) $ (2,009 ) Net cash provided by (used in) financing activities$ (592 ) $ 1,050 Net increase (decrease) in cash and cash equivalents, including the effect of foreign currency exchange rates on cash$ 78 $ (281 ) Operating Activities Cash provided by operating activities, exclusive of changes in receivables and payables, was impacted by the following significant activities during the three months endedMarch 31, 2021 and 2020:
• Real estate operations. We receive the majority of our operating cash through
the net revenues of our Real Estate Operations segment. Cash flows generated
by the Real Estate Operations segment are impacted by our acquisition,
development and disposition activities which are key drivers of NOI
recognized during each period. See the Results of Operations section above
for further explanation of our Real Estate Operations segment. The revenues
from this segment include noncash adjustments for straight-lined rents and
amortization of above and below market leases of
for 2021 and 2020, respectively.
• 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 the net revenues from our Strategic
Capital 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.
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• G&A expenses and equity-based compensation awards. We incurred
and
equity-based, noncash compensation expenses of
2021 and 2020, 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 $116
million and
the cash flows generated from the operations of our unconsolidated entities
in 2021 and 2020, respectively.
• Cash paid for interest, net of amounts capitalized. We paid interest, net of
amounts capitalized, of $90 million and $111 million in 2021 and 2020,
respectively.
• Cash paid for income taxes, net of refunds. We paid income taxes, net of
refunds, of $36 million and $22 million in 2021 and 2020, 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
primarily 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 used
in investing activities during the three months ended March 31, 2021 and 2020:
• 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
purchase price,
Contributions in financing activities. All of the debt assumed was paid down
subsequent to the acquisition, see the Financing Activities section below.
See Note 3 to the Consolidated Financial Statements for more information on
this transaction.
• Investments in and advances to our unconsolidated entities. We invested cash
in our unconsolidated entities that represented our proportionate share, of
used the funds for the acquisition of properties, development and repayment
of debt. See Note 4 to the Consolidated Financial Statements for more detail
on our unconsolidated co-investment ventures.
• Return of investment from unconsolidated entities. We received distributions
from unconsolidated entities as a return of investment of
were distributions from venture activities including proceeds from property
sales, debt refinancing and the redemption of our investment in certain
unconsolidated entities.
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.
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Our repurchase of and payments on debt and proceeds from the issuance of debt
consisted of the following activity for the three months ended
2021 2020 (1)
Repurchase of and payments on debt (including
extinguishment costs)
Regularly scheduled debt principal payments and payments at
maturity $ 2 $ 2
Secured mortgage debt 285 545
Senior notes 1,645 2,917
Term loans - 601
Total $ 1,932 $ 4,065
Proceeds from the issuance of debt
Secured mortgage debt $ - $ 1
Senior notes 2,030 3,990
Term loans - 1,000
Total $ 2,030 $ 4,991 (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.
Unconsolidated Co-Investment Venture Debt
We had investments in and advances to unconsolidated co-investment ventures of$6.6 billion atMarch 31, 2021 . These ventures had total third-party debt of$12.0 billion atMarch 31, 2021 . The weighted average loan-to-value ratio for all unconsolidated co-investment ventures was 27.9% atMarch 31, 2021 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
Dividend and Distribution Requirements
Our dividend policy on our common stock is to distribute a percentage of our cash flow to ensure that we will meet the dividend requirements of the 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 undistributed taxable income.
We paid quarterly cash dividends of$0.63 and$0.58 per common share in the first quarter of 2021 and 2020, respectively. Our future common stock dividends, if and as declared, may vary and will be determined by the Board based 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 in the OP are entitled to a quarterly distribution equal to$0.64665 per unit so long as the common units receive a quarterly distribution of at least$0.40 per unit. We paid a quarterly cash distribution of$0.64665 per Class A Unit in both the first quarter of 2021 and 2020. AtMarch 31, 2021 , we had one series of preferred stock outstanding, the series Q. The annual dividend rate is 8.54% per share and dividends are payable quarterly in arrears. 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 an ongoing 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.
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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; and
• 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 recognize 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;
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• 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 region, 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 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 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 our
modified 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.
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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 three months endedMarch 31 as follows (in millions): 2021
2020
Reconciliation of net earnings attributable to common stockholders to FFO measures: Net earnings attributable to common stockholders
$ 366
Add (deduct) NAREIT defined adjustments: Real estate related depreciation and amortization 388
336
Gains on other dispositions of investments in real estate, net (16 )
(31 )
Reconciling items related to noncontrolling interests (19 ) (15 ) Our share of reconciling items included in earnings related to unconsolidated entities
79 68
NAREIT defined FFO attributable to common stockholders/unitholders 798
847
Add (deduct) our modified adjustments: Unrealized foreign currency and derivative gains, net (81 ) (110 ) Deferred income tax expense 1
3
Current income tax expense on dispositions related to acquired tax liabilities
3 -
Our share of reconciling items included in earnings related to unconsolidated entities
(1 ) 1
FFO, as modified by
720 741
Adjustments to arrive at Core FFO: Gains on dispositions of development properties and land, net (174 ) (163 ) Current income tax expense on dispositions 8
7
Losses on early extinguishment of debt and other, net 187
48
Reconciling items related to noncontrolling interests -
(3 ) Our share of reconciling items included in earnings related to unconsolidated entities
1 (31 )
Core FFO attributable to common stockholders/unitholders $ 742 © Edgar Online, source
