Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
PLD > SEC Filings for PLD > Form 10-Q on 6-Nov-2012All Recent SEC Filings

Show all filings for PROLOGIS, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for PROLOGIS, INC.


6-Nov-2012

Quarterly Report


ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our Consolidated Financial Statements and the related notes included in Item 1 of this report and our 2011 Annual Report on Form 10-K.

Certain statements contained in this discussion or elsewhere in this report may be deemed "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Words and phrases such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," "designed to achieve," variations of such words and similar expressions are intended to identify such forward-looking statements, which generally are not historical in nature. All statements that address operating performance, events or developments that we expect or anticipate will occur in the future - including statements relating to rent and occupancy growth, development activity and sales or contribution volume or profitability on such sales and contributions, economic and market conditions in the geographic areas where we operate 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. Many of the factors that may affect outcomes and results are beyond our ability to control. For further discussion of these factors see "Part II, Item 1A. Risk Factors" in our 2011 Annual Report on Form 10-K. References to "we," "us" and "our" refer to ProLogis and its consolidated subsidiaries prior to the Merger (defined below) and to Prologis, Inc. and its consolidated subsidiaries following the Merger.

Management's Overview

We are the leading global owner, operator and developer of industrial real estate, focused on global and regional markets across the Americas, Europe and Asia. As of September 30, 2012, on an owned and managed basis, we had properties and development projects totaling 565 million square feet (52.5 million square meters) in 21 countries. These properties are leased to approximately 4,500 customers, including third-party logistics providers, manufacturers, retailers, transportation companies, and other enterprises.

Of the 565 million square feet of our owned and managed portfolio as of September 30, 2012:

530 million square feet were in our operating portfolio with a gross book value of $41.1 billion that were 93.1% occupied;

16 million square feet were in our development portfolio with a total expected investment of $1.5 billion that were 46.7% leased;

19 million square feet consisted of properties in which we have an ownership interest but do not manage and other properties we own, including assets held for sale; and

the largest customer and 25 largest customers accounted for 2.2% and 18.1%, respectively, of our annualized base rent.

Prologis, Inc. (the "REIT") is a self-administered and self-managed real estate investment trust, and is the sole general partner of Prologis, L.P. (the "Operating Partnership"). We operate the REIT and the Operating Partnership as one enterprise, and, therefore, our discussion and analysis refers to the REIT and its consolidated subsidiaries, including the Operating Partnership, collectively.

Our business strategy includes two operating segments: Real Estate Operations and Private Capital. We generate revenues, earnings, net operating income (calculated as rental income less rental expenses), funds from operations (as defined below) and cash flows through our segments primarily through three lines of business, as follows:

Real Estate Operations Segment

Rental Operations-This represents the primary source of our core revenue, earnings and funds from operations (or FFO as defined below). We collect rent from our customers under operating leases, including reimbursements for the vast majority of our operating costs. We seek to generate long-term internal growth in rental income by maintaining a high occupancy rate at our properties, by controlling expenses and through contractual rent increases on existing space and renewals on rollover space, thus capitalizing on the economies of scale inherent in owning, operating and growing a large global portfolio. Our rental income is diversified due to both our global presence and our broad customer base. We expect to generate long-term internal growth in rents by increasing our occupancy rate and through rent increases on existing space and renewals on rollovers. We believe that our property management and leasing teams, regular maintenance programs, capital expenditure programs, energy management and sustainability programs create cost efficiencies, allowing us to leverage our global platform and provide flexible solutions for our customers as well as for us.

Capital Deployment Activities-Our development and re-development activities support our rental operations and are, therefore, included with that line of business for segment reporting. We develop and re-develop industrial properties primarily in global and regional markets to meet our customers' needs. Within this line of business, we provide additional value creation by utilizing:
(i) the land that we currently own in global and regional markets; (ii) the development expertise of our local personnel; (iii) our global customer relationships; and (iv) the demand for high-quality distribution facilities in key markets. We seek to increase our rental income and the net asset value of the Company through the leasing of newly developed space, as well as through the acquisition of properties. Depending on several factors, we may develop properties directly or in co-investment ventures for long-term hold, for contribution into one of our co-investment ventures, or for sale to third parties. Properties that we choose to contribute or sell may result in the recognition of gains or losses. Currently, in the United States, Europe and Japan, we are developing directly while in emerging markets, such as Brazil, China and Mexico, we are developing with our private capital partners in a variety of co-investment ventures.


Table of Contents

Private Capital Segment -We co-invest in properties with private capital investors through a variety of co-investment ventures. We have a direct and long-standing relationship with a significant number of institutional investors. We tailor industrial portfolios to investors' specific needs and deploy capital in both close-ended and open-ended fund structures and joint ventures, while providing complete portfolio management and financial reporting services. We generally own 15-50% in the ventures. We believe our co-investment in each of our ventures provides a strong alignment of interests with our co-investment partners' interests. We generate revenues from our unconsolidated co-investment ventures by providing asset management and property management services. We may also earn revenues through additional services provided such as leasing, acquisition, construction, development, disposition, legal and tax services. Depending on the structure of the venture and the returns provided to our partners, we may also earn revenues through incentive returns or promotes. We believe our co-investment program with private capital investors will continue to serve as a source of capital for new investments and provide revenues for our stockholders, as well as mitigate risk associated with our foreign currency exposure. We expect to grow this business with the formation of new ventures and by raising additional third-party capital in our existing ventures.

On June 3, 2011, we completed a merger (hereafter referred to as the "Merger") in which ProLogis shareholders received 0.4464 of a share of AMB Property Corporation ("AMB") common stock for each outstanding common share of beneficial interest in ProLogis . Following the Merger, AMB changed its name to Prologis, Inc. In the Merger, AMB was the legal acquirer and ProLogis was the accounting acquirer. In May 2011, we also acquired a controlling interest in and began consolidating ProLogis European Properties ("PEPR Acquisition"). As a result, our nine-month results for 2011 reflect approximately four months of impact of the Merger and the PEPR Acquisition. Therefore, period-to-period comparisons may not provide as meaningful information as if those transactions were reflected in both periods. See Note 2 to the Consolidated Financial Statements in Item 1 for more information relating to both the Merger and PEPR Acquisition.

Upon the closing of the Merger, we established key strategic priorities to guide our path over the next two years. These priorities are:

to align our portfolio with our investment strategy while serving the needs of our customers;

to strengthen our financial position and build one of the top balance sheets in the real estate investment trust industry;

to streamline our private capital business and position it for substantial growth;

to improve the utilization of our low yielding assets; and

to build the most effective and efficient organization in the real estate investment trust industry and to become the employer of choice among top professionals interested in real estate as a career.

Align our Portfolio with our Investment Strategy

We have categorized the portfolio into three main segments - global, regional and other markets. As of September 30, 2012, global markets represented approximately 83% of our overall owned and managed platform (based on our share of net operating income of the properties) and regional markets represented approximately 12% of our total owned and managed platform. We intend to hold only the highest quality class-A product in our regional markets. We also own a small number of assets in other markets, which account for approximately 5% of our owned and managed platform and that we plan to exit from in an orderly fashion in the next few years. By segmenting our markets in this manner, we were able to construct a strategy that includes culling the portfolio for buildings and potentially submarkets that are no longer a strategic fit. We expect to use the proceeds from dispositions to pay off debt that is collateralized by the disposed asset, if any, pay debt as it becomes due and to recycle capital into new development projects or strategic acquisitions.

Strengthen our Financial Position

We intend to further strengthen our financial position by lowering our financial risk and currency exposure and building one of the strongest balance sheets in the real estate investment trust industry. We expect to lower our financial risk by reducing leverage with proceeds from contributions and asset sales, increasing the size of our unencumbered asset portfolio and maintaining staggered debt maturities, which will provide us with more financial flexibility and allow continued access to debt capital markets. This financial flexibility will position us to capitalize on market opportunities across the entire business cycle as they become available. We will reduce our exposure to foreign currency exchange fluctuations by borrowing in local currency where appropriate, and we might also enter into derivative contracts to hedge our foreign denominated equity and swap U.S.-dollar-denominated debt into obligations denominated in foreign currencies. We expect to also lower our currency exposure by holding assets we own outside the United States primarily in co-investment ventures in which we maintain an ownership interest and provide services generating private capital revenue. We will accomplish this through contributions and sales to our existing and newly formed co-investment ventures. In addition, we expect that new development projects, particularly in emerging markets such as Brazil, China and Mexico, will be done in conjunction with our private capital partners.

Streamline Private Capital Business

We are working with our private capital investors to evaluate certain of our co-investment ventures. Some of our legacy co-investment ventures have fee structures that do not adequately compensate us for the services we provide. Also, some ventures have governance or decision making processes in place that we would like to change. Therefore, we may terminate or restructure certain of these co-investment ventures. In other cases, we may combine some co-investment ventures to gain operational efficiencies. In every case, however, we will work very closely with our partners and venture investors who will be active participants in these decisions. We plan to grow our private capital business with the deployment of the private capital commitments we have already raised, formation of new co-investment ventures and raising incremental capital for our existing co-investment ventures.


Table of Contents

Improve the Utilization of Our Low-Yielding Assets

We plan to increase the value of our low-yielding assets by stabilizing our operating portfolio to 95% leased, completing the build-out and lease-up of our development projects and monetizing our land through development or sale to third parties.

Build the most effective and efficient organization in the real estate investment trust industry and become the employer of choice among top professionals interested in real estate as a career

We have identified more than $115 million of Merger cost synergies on an annualized basis, compared to the combined expenses of AMB and ProLogis on a pre-Merger basis. These synergies include gross general and administrative savings, reduced global line of credit facility fees and lower amortization of non real estate assets. We believe the majority of these synergies have been realized and expect to recognize the full amount by the end of 2012, and we continue to look for additional savings opportunities. In addition, we are in the process of implementing a new enterprise wide system that will include a property management/billing system (implemented in April 2012), a human resources system (implemented in July 2012), a general ledger and accounting system and a data warehouse. In connection with this implementation, we are striving to utilize the most effective global business processes with the enhanced system functionality. As of January 1, 2012, we implemented two new compensation plans that we believe will better align employees' compensation to our performance. We believe these efforts and others will help us with the attainment of this objective.

Summary of 2012

During the nine months ended September 30, 2012, we completed the following activities in support of our strategic priorities:

We purchased our partner's interest in Prologis North America Fund II (" NAIF II") and dissolved Prologis California and divided the portfolio equally with our partner (collectively "Q1 Venture Acquisitions"). These two transactions increased our investment in real estate by $2.1 billion, and our debt by $1.4 billion. See Note 2 to our Consolidated Financial Statements in Item 1 for more details.

We concluded Prologis North American Fund XI by disposing of the remaining asset in the fund during the third quarter of 2012.

During the third quarter, PEPR completed its delisting from the European stock exchanges; as part of the liquidation of PEPR, we have acquired all of the assets and liabilities. We may continue to own these properties, contribute them to a new or existing co-investment venture or sell them to a third party.

In 2012, we issued secured property-level debt on assets in Japan (known as TMK bonds) or increased existing TMK bonds for a combined amount of 48.0 billion ($618.3 million as of September 30, 2012).

We generated aggregate proceeds of $1.1 billion from the disposition of land, land subject to ground leases and 113 properties to third parties and the contribution of two properties to two unconsolidated co-investment ventures and four properties to one consolidated co-investment venture. We used the proceeds to reduce our outstanding debt, repurchase PEPR units, acquire real estate properties and fund our development activities.

We began 23 development projects on an owned and managed basis aggregating 9.6 million square feet with a total expected investment of $825.6 million (our share was $745.7 million), including 13 projects (or 73% of the total expected investment) that were 100% leased prior to development.

We entered into a 487.5 million ($633.2 million as of September 30, 2012) multi-currency senior term loan agreement and used the proceeds to pay off two outstanding term loans with the remainder used to pay down our credit facilities.

As of September 30, 2012, our total owned and managed operating portfolio was 93.1% occupied and 93.6% leased as compared to 92.2% occupied and 92.5% leased at December 31, 2011 and 91.0% occupied and 91.6% leased at September 30, 2011.

Operational Outlook

Global trade volumes remain well above their pre-crisis peak, and while revised slightly down, the International Monetary Fund forecasts growth of over 3% for this year and 4.5% for 2013. Consumption in the United States is strong with retail sales coming in at over 5.4% year-over-year and online sales growing three times faster. The National Retail Federation forecasts a year-over-year increase of 4.1% for all holiday sales, which compares favorably to the ten-year average increase of 3.5%. Real inventories have also increased at an average annual rate of 2.5% for the first nine months of 2012. Inventories are the only major economic indicator of demand for industrial real estate that remains below peak, by about 3%. We think there is significant opportunity for growth in inventories as consumer confidence improves.

According to CBRE Econometric Advisors, net absorption of the U.S. industrial space measured 20 million square feet in the third quarter of 2012. The overall availability rate in the United States fell by 10 basis points during the third quarter to 13.1% and 20 basis points to 12.2% in the hub and gateway markets. While this is slightly below our forecast, it's worth noting that new supply also came in below our forecast. Deliveries in the quarter represented a fraction of the obsolescence rate. The third quarter marks the ninth consecutive quarter of improving occupancy and indicates that despite the deceleration in third quarter net absorption, the market is firmly on track to tighten. We believe that pent-up demand could result in a robust net absorption in the fourth quarter.

Our occupancy in the Americas was up 110 basis points from June 30, 2012, with strong leasing activity across the majority of our markets, particularly in the San Francisco Bay Area, Eastern Pennsylvania, Dallas and Mexico City. Notably, we have seen a pick-up in demand in the border markets of Mexico for the first time in a few years. Growing demand and increases in occupancy are also having a positive impact on rents. Following three years of rent rolldowns, we appear to be at a positive inflection point and we expect rent change on rollovers to be positive for 2013.


Table of Contents

Within Europe and Japan, we believe significant supply chain reconfiguration, obsolescence and growing customer preference to rent rather than own will continue to fuel additional demand for industrial space. Moreover, the undersupply of class-A distribution space in Japan has continued and will continue to create demand for more modern, earthquake-resistant product, especially following the devastating earthquake and tsunami that occurred in March 2011. Demand for logistics real estate in emerging markets where we have investments primarily through our co-investment ventures, such as Brazil, China, and Mexico, remains strong due to growing economies.

In our total owned and managed operating portfolio, we leased 104.8 million square feet of space during the nine months ended September 30, 2012. Including the properties that were part of the Merger, we leased 101.2 million square feet of space during the nine months ended September 30, 2011. The effective rental rates on leases signed during the third quarter of 2012 in our same store portfolio (as defined below) decreased by 1.8% when compared with the rental rates on the previous leases on that same space. The total owned and managed portfolio was 93.1% occupied at September 30, 2012, up from 92.2% at December 31, 2011. During the nine months ended September 30, 2012, we retained 82.9% of customers whose leases were expiring as compared to 73.0% during the first nine months of 2011.

Due to the lack of supply of class-A facilities, high space utilization rates and decreasing vacancy rates, we expect development volume to increase in our markets. Our development business consists of speculative development, build-to-suit development, value-added conversions and redevelopment. We expect to develop directly and within the co-investment structures depending on location, market conditions, submarkets or building sites and availability of capital. In response to this emerging demand, we are actively pursuing various development opportunities, and we have commenced development of 23 properties in our owned and managed portfolio during the first nine months of 2012.

Results of Operations

Nine Months Ended September 30, 2012 and 2011

Summary

The following table illustrates the net operating income for each of our
segments, along with the reconciling items to Earnings (Loss) from Continuing
Operations in our Consolidated Statements of Operations in Item 1 for the nine
months ended September 30 (in thousands):



                                                                2012             2011
Net operating income-Real Estate Operations segment          $ 1,016,160      $  642,673
Net operating income-Private Capital segment                      47,378          58,161
Other:
General and administrative expenses                             (167,460 )      (144,364 )
Merger, acquisition and other integration expenses               (52,573 )      (121,723 )
Impairment of real estate properties and other assets            (29,098 )      (103,823 )
Depreciation and amortization                                   (560,563 )      (377,193 )
Earnings from unconsolidated entities, net                        20,447          56,015
Interest expense                                                (384,489 )      (339,306 )
Interest and other income, net                                    19,771           7,341
Gains on acquisitions and dispositions of investments in
real estate, net                                                 280,968         114,650
Foreign currency and derivative gains (losses), net              (19,930 )        43,643
Gain (loss) on early extinguishment of debt, net                   4,919            (298 )
Income tax expense                                                  (216 )        (9,960 )

Earnings (loss) from continuing operations                   $   175,314      $ (174,184 )

See Note 15 to our Consolidated Financial Statements in Item 1 for additional information regarding our segments and a reconciliation of net operating income to Earnings (Loss) Before Income Taxes.

Real Estate Operations Segment

The net operating income of the Real Estate Operations segment consisted of rental income and rental expenses from industrial properties that we own and consolidate and is impacted by our capital deployment activities. The size and percentage of occupancy of our consolidated operating portfolio fluctuates due to the timing of acquisitions, development activity and contributions. Such fluctuations affect the net operating income we recognize in this segment in a particular period. Also included in this segment is revenue from land we own and lease to customers under ground leases and development management and other income, offset by acquisition costs and land holding costs. The net operating income from the Real Estate Operations segment for the nine months ended September 30, excluding amounts presented as Discontinued Operations in our Consolidated Financial Statements in Item 1, was as follows (in thousands):

                                                                 2012                2011
Rental and other income                                       $ 1,415,981             $ 910,993
Rental and other expenses                                         399,821               268,320

Total net operating income-Real Estate Operations segment     $ 1,016,160             $ 642,673


Table of Contents

The increase in rental income and rental expense in 2012 from 2011 was due primarily to the impact of the Merger and the PEPR Acquisition in the second quarter of 2011, the Q1 Venture Acquisitions in 2012 and increased occupancy in our consolidated operating properties (from 89.4% at September 30, 2011 to 93.0% at September 30, 2012), including the completion and stabilization of new development properties. The results for 2012 included rental income and expenses from properties acquired through the Merger, PEPR Acquisition and Q1 Venture Acquisitions of $760.0 million and $198.7 million, respectively, while 2011 included approximately four months of rental income and expense of properties acquired through the Merger and PEPR Acquisition of $302.0 million and $82.7 million, respectively.

In our consolidated portfolio, we leased 62.7 million square feet for the nine months ended September 30, 2012 compared to 38.6 million square feet for the nine months ended September 30, 2011. In our total owned and managed portfolio, we calculate the change in effective rental rates on leases signed during the quarter as compared to the previous rent on that same space in our same store portfolio (as defined below). During the first, second and third quarters of 2012, the percentage decrease was 1.1%, 3.9% and 1.8%, respectively, compared to a decrease of 8.9%, 6.1% and 8.6% during the first, second and third quarters of 2011, respectively. A decline in rental rates is due to: (i) leases turning that were put in place when market rents were at or near peak and (ii) decreased market rents. Under the terms of our lease agreements, we are able to recover the majority of our rental expenses from customers. Rental expense recoveries, which are included in both rental income and expenses, were 74.6% and 73.1% of rental expenses for the nine months ended September 30, 2012 and 2011, respectively.

Our consolidated operating properties were as follows (square feet in thousands):

                                   Number of
                                   Properties       Square Feet      Occupied %
         September 30, 2012 (1)          1,898           320,341            93.0 %
         December 31, 2011 (2)           1,797           291,051            91.4 %
         September 30, 2011              1,895           302,474            89.4 %

(1) The increase in properties from December 31, 2011 to September 30, 2012 is principally related to the Q1 Venture Acquisitions, as discussed above.

(2) The decrease in properties from September 30, 2011 to December 31, 2011 is principally related to third party building dispositions and contributions to . . .

  Add PLD to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for PLD - All Recent SEC Filings
Sign Up for a Free Trial to the NEW EDGAR Online Pro
Detailed SEC, Financial, Ownership and Offering Data on over 12,000 U.S. Public Companies.
Actionable and easy-to-use with searching, alerting, downloading and more.
Request a Trial Sign Up Now


Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.