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-Aug-2014All Recent SEC Filings

Show all filings for PROLOGIS, INC.

Form 10-Q for PROLOGIS, INC.


6-Aug-2014

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 the Consolidated Financial Statements and the related notes included in Item 1 of this report and our 2013 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 I, Item 1A. Risk Factors in our 2013 Annual Report on Form 10-K. References to "we," "us" and "our" refer to Prologis, Inc. and its consolidated subsidiaries.

Management's Overview

We are the leading owner, operator and developer of industrial real estate, focused on global and regional markets across the Americas, Europe and Asia. As of June 30, 2014, we owned and managed operating properties and development projects totaling 571 million square feet (53 million square meters) in 21 countries. These properties were leased to more than 4,700 customers, including third-party logistics providers, transportation companies, retailers and manufacturers.

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 is comprised of two operating segments: Real Estate Operations and Strategic Capital (previously referred to as Investment Management).

Real Estate Operations Segment

Rental Operations. This represents the primary source of our revenue, earnings and funds from operations ("FFO"). We collect rent from our customers under operating leases, including reimbursements for the vast majority of our operating costs. We expect to generate long-term internal growth in rental income by maintaining a high occupancy rate, controlling expenses and through rent increases. Our rental income is diversified due to our global presence and broad customer base. We believe that our property management, leasing and maintenance teams, together with our capital expenditure, energy management and risk management programs create cost efficiencies, and allow us to capitalize on the economies of scale inherent in owning, operating and growing a large global portfolio.

Capital Deployment. Capital deployment includes development, re-development and acquisition of industrial properties that lead to rental operations and are therefore included with that line of business for segment reporting. We deploy capital primarily in global and regional markets to meet our customers' needs. Within this line of business, we capitalize on: (i) our land bank; (ii) the development expertise of our local personnel; (iii) our global customer relationships; and (iv) the demand for high-quality distribution facilities. 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 operating properties. We develop properties for long-term hold, for contribution into our co-investment ventures, or occasionally for sale to third parties.

Strategic Capital Segment

We invest with partners and investors through our ventures, both private and public. We tailor industrial portfolios to investors' specific needs and deploy capital with a focus on larger, long duration ventures and open ended funds with leading global institutions. We also access alternative sources of public equity through publicly traded vehicles such as Nippon Prologis REIT, Inc. ("NPR") and FIBRA Prologis ("FIBRA"). NPR began trading on the Tokyo stock exchange in early 2013 and FIBRA began trading on the Mexican stock exchange in June 2014. These private and public vehicles provide capital for distinct geographies across our global platform. We hold a significant ownership interest in these ventures, which we believe provides a strong alignment of interests with our partners. We generate strategic capital revenues from our unconsolidated ventures by providing asset management and property management services. We earn additional revenues from leasing, acquisition, construction, development, disposition, legal and tax services. Depending on the structure of the venture and the returns provided to our partners, we also earn revenues through promote fees during the life of a venture or upon liquidation. We believe our co-investment ventures will continue to serve as a source of capital for investments, provide incremental revenues and mitigate risk associated with our foreign currency exposure. We plan to grow this business generally through growth in existing ventures.


Table of Contents

Growth Strategies

We believe the scale and quality of our operating platform, the skills of our team and the strength of our balance sheet provide us with unique competitive advantages. We have a plan to grow revenue, earnings, net operating income ("NOI"), Core FFO (see definition below) and dividends that is based on the following three key elements:

Rising Rents. Market rents are growing across the majority of our markets at a pace ahead of our prior forecast. We believe this trend will continue, as market rents are still below replacement-cost-justified rents. We believe demand for logistics facilities is strong across the globe and will support increases in net effective rents as many of our in-place leases were originated during low rent periods. As we are able to recover the majority of our operating expenses from customers, the increase in rent translates into increased net operating income, earnings and cash flow. During 2014, we had quarterly rent increases on rollovers of 7.0% in first quarter and 6.6% in second quarter. This quarter represented the sixth-consecutive quarter of rent growth.

Value Creation from Development. We believe one of the keys to a successful development program is to control land in strategic locations. Based on our current estimates, our land bank has the potential to support the development of nearly 180 million additional square feet. We believe that the carrying value of our land bank is below the current fair value and we expect to realize this value going forward through development or sales. During the first half of 2014, in our owned and managed portfolio, we stabilized development projects with a total expected investment of $635.4 million. We estimate that after stabilization these buildings have a value that is 22% more than their book value (using estimated yield and capitalization rates from our underwriting models).

Economies of Scale from Growth in Assets Under Management. We believe we have the infrastructure and an acquisition pipeline that will allow us to increase our investments in real estate, with minimal increases to general and administrative expenses. During the first six months of 2014, our owned and managed portfolio increased through the acquisition of $507.5 million of buildings, principally in our unconsolidated ventures in Europe, and development starts with a total expected investment of $610.8 million; and offset partially by dispositions to third parties of $621.1 million.

Summary of 2014

During the six months ended June 30, 2014, we completed the following activities as further described in the Consolidated Financial Statements in Item 1:

In January, we closed on a U.S. co-investment venture, Prologis U.S. Logistics Venture ("USLV"), in which we have a 55% equity ownership and consolidate for accounting purposes. At closing, the venture acquired a portfolio of 66 operating properties from us aggregating 12.8 million square feet for a purchase price of $1.0 billion.

In June, we launched the initial public offering for FIBRA, a Mexican real estate investment trust, on the Mexican Stock Exchange. In connection with the offering, FIBRA purchased its initial portfolio. We received equity units in FIBRA in exchange for our combined investments and have a 45% ownership interest that we account for under the equity method.

We earned a promote fee in June 2014 from our co-investment venture, Prologis Targeted U.S. Logistics Fund, of $42.1 million, which was based on the venture's cumulative returns to the investors over the last three years. Of that amount, $31.3 million represented the third party investors' portion and reflected in Strategic Capital Income in the Consolidated Statements of Operations.

We invested $274.7 million in the Prologis North American Industrial Fund ("NAIF"), increasing our ownership in the co-investment venture to 41.9%. We also invested $321.0 million in two of our European unconsolidated co-investment ventures, which represented our proportionate ownership interest, for the acquisition of properties and repayment of debt.

We generated net proceeds of $1.8 billion from the contribution and dispositions of properties and recognized a net gain of $186.6 million.

We issued 1.2 billion ($1.6 billion) of senior notes, entered into a new yen term loan and replaced our euro term loan. We used the net proceeds to buy back senior notes of $823.9 million through private transactions and repay borrowings under our credit facilities and term loans.

We commenced construction of 30 development projects on an owned and managed basis, aggregating 7.7 million square feet with a total expected investment of $610.8 million (our share was $550.3 million), including seven projects (18% of our share of the total expected investment) that were 100% leased prior to the start of development. These projects have an estimated weighted average yield at stabilization of 7.3% and an estimated development margin of 19.8%. We expect these developments to be completed on or before December 2015.

In our owned and managed portfolio, for the six months ended June 30, 2014, we incurred average turnover costs (tenant improvements and leasing costs) of $1.41 per square foot, compared to $1.40 per square foot for the same period in 2013.

Results of Operations

Six Months Ended June 30, 2014 and 2013

Real Estate Operations Segment

Included in this segment is rental income and rental expense recognized from our consolidated operating properties. We had significant real estate activity during 2014 and 2013 that impacted the size of our consolidated portfolio. In addition, the operating fundamentals in our markets have been improving, which has impacted both the occupancy and rental rates we have experienced, and has fueled development activity. Also included in this segment is revenue from land we own and lease to customers and development management and other income, offset by acquisition, disposition and land holding costs.

On January 1, 2014, we adopted a new accounting standard that changed the criteria for classifying and reporting discontinued operations. As a result, none of our property dispositions in 2014 met the criteria to be classified as discontinued operations, while the results of properties sold to third parties during 2013 were reclassified to Discontinued Operations under the previous standard.


Table of Contents

NOI from the Real Estate Operations segment for the six months ended June 30 was as follows (dollars in thousands):

                                                    2014            2013
          Rental and other income                $  598,953      $  640,048
          Rental recoveries                         174,174         173,373
          Rental and other expenses                (230,596 )      (251,315 )

          NOI - Real Estate Operations segment   $  542,531      $  562,106

          Operating margin                             70.2 %          69.1 %
          Average occupancy                            94.0 %          92.9 %

Detail of our consolidated operating properties was as follows (square feet in thousands):

                                  June 30,        December 31,       June 30,
                                    2014              2013             2013
           Number of properties       1,457               1,610          1,652
           Square Feet              246,431             267,097        262,972
           Occupied %                  94.3 %              94.9 %         93.1 %

Below are the key drivers that have influenced the NOI of this segment:

We contributed a significant number of properties into two new unconsolidated co-investment ventures in February and March 2013. As a result of the contributions of these properties, our NOI decreased $80.5 million for the six months ended June 30, 2014, from the same period in 2013. Since we have an ongoing ownership interest in these ventures, our share of the results remained in Continuing Operations in the Consolidated Statements of Operations in Item 1 through the contribution date.

Average occupancy in our operating properties increased 110 basis points to 94.0% for the six months ended June 30, 2014, from 92.9% for the same period in June 30, 2013. We leased a total of 31.4 million square feet during the six months in 2014, compared to 40.7 million square feet during the same period in 2013.

This quarter was our sixth consecutive quarter to have rent increases on rollovers, ranging from 2.0% to 7.0%.

We recognize changes in rental income from certain contractual rent increases from our existing leases and from rent change on new leases. If a lease has a contractual rent increase based on the consumer price index or similar metric, it is not included in rent leveling and therefore any increase will impact the rental income we recognize.

We increase the size of our portfolio through acquisition and development activity and expect to continue to do so in the future. We completed or acquired 26 properties in the first half of 2014 and 42 properties in all of 2013.

Under the terms of our lease agreements, we are able to recover the majority of our rental expenses from customers. Rental expense recoveries, included in both rental income and rental expenses, were 79.1% and 72.2% of total rental expenses for the six months ended June 30, 2014 and 2013, respectively.


Table of Contents

Strategic Capital Segment

The NOI from the Strategic Capital segment represents fees earned for services
performed reduced by strategic capital expenses (direct costs of managing these
entities and the properties they own). The following table details this
information by geographic location for the six months ended June 30 (dollars in
thousands):



                                                                  2014             2013
NOI - Strategic Capital segment:
Americas:
Asset management and other fees                                 $  25,045        $  26,161
Leasing commissions, acquisition and other transaction fees         5,515            5,454
Promote fees                                                       31,330               -
Strategic capital expenses                                        (29,742 )        (28,371 )

Subtotal Americas                                                  32,148            3,244
Europe:
Asset management and other fees                                    34,448           22,651
Leasing commissions, acquisition and other transaction fees         6,705            1,816
Strategic capital expenses                                        (15,344 )        (10,066 )

Subtotal Europe                                                    25,809           14,401
Asia:
Asset management and other fees                                    15,960           12,830
Leasing commissions, acquisition and other transaction fees         2,641            8,331
Strategic capital expenses                                         (6,914 )         (6,478 )

Subtotal Asia                                                      11,687           14,683

NOI - Strategic Capital segment                                 $  69,644        $  32,328

Operating Margin                                                     57.3 %           41.9 %

We had the following assets under management held through our unconsolidated co-investment ventures (in thousands):

                               June 30,       December 31,        June 30,
                                 2014             2013              2013
              Americas:
              Square feet         128,962           108,537          128,422
              Total assets   $  9,450,029     $   8,014,339     $  9,074,309
              Europe:
              Square feet         137,802           132,876          119,829
              Total assets   $ 12,235,906     $  11,818,786     $  9,937,366
              Asia:
              Square feet          23,553            22,880           17,710
              Total assets   $  4,269,690     $   4,032,125     $  3,440,894
              Total:
              Square feet         290,317           264,293          265,961
              Total assets   $ 25,955,625     $  23,865,250     $ 22,452,569

Strategic Capital income fluctuates due to the size of the co-investment ventures that are under management. We formed a co-investment venture in Mexico in June 2014 and formed two co-investment ventures in 2013 (one in Europe and one in Japan), as well as made contributions to several co-investment ventures during 2014 and 2013. We earned a promote fee in June 2014 from our co-investment venture Prologis Targeted U.S. Logistics Fund of $42.1 million, which was based on the venture's cumulative returns to the investors over the last three years. Of that amount, $31.3 million represented the third party investors' portion and is reflected in Strategic Capital Income in the Consolidated Statements of Operations. The promote fee increased the operating margin for 2014.

Direct costs associated with our Strategic Capital segment totaled $52.0 million and $44.9 million for the six months ended June 30, 2014 and 2013, respectively, and are included in Strategic Capital Expenses in the Consolidated Statements of Operations. The increase in expenses is primarily due to the increased size of our co-investment ventures and $6.2 million of expense that represents the estimated associated cash bonus earned pursuant to the terms of the Prologis Promote Plan.

See Note 4 to the Consolidated Financial Statements in Item 1 for additional information on our unconsolidated entities.

Other Components of Income (Expense)

General and Administrative ("G&A") Expenses

G&A expenses for the six months ended June 30 consisted of the following (in
thousands):



                                                     2014           2013
         Gross overhead                            $ 235,184      $ 216,467
         Allocated to rental expenses                (15,620 )      (16,697 )
         Allocated to strategic capital expenses     (52,000 )      (44,915 )
         Capitalized amounts                         (43,986 )      (43,749 )

         G&A expenses                              $ 123,578      $ 111,106


Table of Contents

The increase in gross overhead was principally due to increased compensation; including amounts related to the Prologis Promote Plan, as described above. We allocate a portion of our G&A expenses that relate to property management functions to our Real Estate Operations and Strategic Capital segments based on the size of the respective portfolios.

We capitalize certain costs directly related to our development and leasing activities. Capitalized G&A expenses include salaries and related costs, as well as other general and administrative costs. The capitalized G&A for the six months ended June 30, were as follows (in thousands):

                                                           2014         2013
        Development activities                           $ 34,264     $ 32,852
        Leasing activities                                  9,122       10,075
        Costs related to internally developed software        600          822

        Total capitalized G&A expenses                   $ 43,986     $ 43,749

For the six months ended June 30, 2014 and 2013, the capitalized salaries and related costs represented 23.3% and 25.0%, respectively, of our total salaries and related costs. Salaries and related costs are comprised primarily of wages, other compensation and employee-related expenses.

Depreciation and Amortization

Depreciation and amortization expenses were $321.9 million and $327.8 million for the six months ended June 30, 2014 and 2013, respectively. The decrease was principally a result of the disposition and contribution of properties, offset slightly by additional depreciation and amortization from completed development and acquired properties and increased leasing activity.

Earnings from Unconsolidated Entities, Net

We recognized earnings related to our investments in unconsolidated entities that are accounted for under the equity method of $50.9 million and $33.2 million for the six months ended June 30, 2014 and 2013, respectively. The increase in 2014 is due primarily to the co-investment ventures formed in the first quarter of 2013. Also, the earnings we recognize are 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) our ownership interest in each venture; and (iv) fluctuations in foreign currency exchange rates used to translate our share of net earnings to U.S. dollars, if applicable. We manage the majority of the properties in which we have an ownership interest as part of our owned and managed portfolio. See the discussion of our co-investment ventures above in the Strategic Capital segment discussion and in Note 4 to the Consolidated Financial Statements in Item 1 for further breakdown of our share of net earnings recognized.

Interest Expense

Interest expense for the six months ended June 30 included the following
components (in thousands):



                                                     2014           2013
          Gross interest expense                   $ 199,339      $ 251,644
          Amortization of premium, net                (9,947 )      (21,391 )
          Amortization of deferred loan costs          6,619          7,579

          Interest expense before capitalization     196,011        237,832
          Capitalized amounts                        (30,304 )      (30,978 )

          Net interest expense                     $ 165,707      $ 206,854

Gross interest expense decreased in 2014, compared to 2013, due to lower debt levels during the period and a decrease in interest rates. Although our debt levels remained consistent ($8.5 billion at June 30, 2014 compared to $8.4 billion as of June 30, 2013), we decreased our debt by $2.7 billion near the end of the first quarter of 2013, primarily from the proceeds received from the contributions made to our unconsolidated co-investment ventures. Our weighted average effective interest rate was 4.5% and 4.9% for the six months ended June 30, 2014 and 2013, respectively.

See Note 6 to the Consolidated Financial Statements in Item 1 and Liquidity and Capital Resources for further discussion of our debt and borrowing costs.

Gains on Acquisitions and Dispositions of Investments in Real Estate, Net

During the six months ended June 30, 2014, we recognized gains on dispositions of investments in real estate of $186.6 million, principally related to the disposition of properties and land in the United States and the contribution of properties in Mexico. During the six months ended June 30, 2013, we recognized net gains on dispositions of investments in real estate in continuing operations of $399.9 million, primarily related to the contribution of properties to NPR.

Foreign Currency and Derivative Gains (Losses) and Related Amortization, Net

Foreign currency and derivative losses for the six months ended June 30, 2014 and 2013 were primarily driven by unrealized losses of $15.2 million and $13.1 million, respectively, on the derivative instrument (exchange feature) related to our exchangeable senior notes. In 2014, this amount included $8.7 million related to the amortization of a discount associated with the derivative instrument.


Table of Contents

Losses on Early Extinguishment of Debt, Net

During the second quarter of 2014, we purchased $823.9 million in principal amount of our senior notes scheduled to mature in 2015 and 2016 and recognized a $78.0 million loss from early extinguishment. During the six months ended June 30, 2013, we extinguished certain secured mortgage debt and several series of senior notes prior to maturity, which resulted in the recognition of losses of $50.0 million.

Income Tax Expense (Benefit)

During the six months ended June 30, 2014 and 2013, our current income tax expense was $48.9 million and $80.3 million, respectively. We recognize current income tax expense for income taxes incurred by our taxable real estate investment trust subsidiaries and in certain foreign jurisdictions, as well as certain state taxes. Our current income tax expense fluctuates from period to period based primarily on the timing of our taxable income. The majority of the current income tax expense for both periods relates to asset sales and contributions of properties that were held in foreign subsidiaries, including the FIBRA transaction in 2014.

. . .

  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
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.