News Column

PROLOGIS, L.P. - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations

February 26, 2014

The following discussion should be read in conjunction with our Consolidated Financial Statements included in Item 8 of this report and the matters described under Item 1A. Risk Factors. 21



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Management's Overview

We believe the scale and quality of our operating platform, the skills of our team and the strength of our balance sheet will provide us with unique competitive advantages going forward. We have a straightforward plan for growth that is based on the following three key elements:



Capitalize on rental recovery. During 2013 in our owned and managed portfolio,

we had quarterly rent increases on rollovers of 2%, 4%, 6% and 6%, following

17 quarters of decreases. Market rents are growing across the majority of our

markets and we believe they have substantial room to further increase as they

remain significantly 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, following the global financial crisis. As we are able to

recover the majority of our rental expenses from customers, the increase in

rent translates into increased net operating income, earnings and cash flows.

Create value from development; by utilizing our land bank, development

expertise and customer relationships. We believe one of the keys to a

successful development program is having strategic land control and, in this

regard, we are well-positioned. Based on our current estimates, our land bank

has the potential to support the development of nearly 200 million additional

square feet. During 2013, we stabilized development projects with a total

expected investment of $1.4 billion. We estimate that after our development

and leasing activities, these buildings will have a value that is

approximately 30% more than book value (using estimated yield and

capitalization rates from our underwriting models). Based on our view of

improving market conditions, we believe that our land bank is carried on the

books below the current fair value and expect to realize this value going

forward through development and sales.



Use our scale to grow earnings. We believe we have the infrastructure in place

and the acquisition pipeline to allow us to increase our investments in real

estate either directly through acquisitions of properties or by investing in

our co-investment ventures with minimal increases to gross general and

administrative expenses beyond property level expenses. We completed an equity

offering in April 2013 in order to capitalize on these opportunities and we

made investments in real estate, as well as in our co-investment ventures as

detailed below.

We believe these three strategies will enable us to generate growth in revenue, earnings, net operating income, Core FFO and dividends for our shareholders in the coming years.



Since the Merger, we were focused on the following priorities ("The Ten Quarter Plan"), which we completed June 30, 2013:

Align our Portfolio with our Investment Strategy. We categorized our portfolio

into three main market categories - global, regional and other markets. At the

time of the Merger, 79% of the total owned and managed portfolio was in global

markets and our goal was to have 90% of the portfolio in global markets. We

substantially met this objective primarily through sales of assets in

non-strategic locations, with a portion of the proceeds recycled into new

developments. As of December 31, 2013, global markets represented 85% of the

owned and managed platform, based on gross book value.



Strengthen our Financial Position. Our intent was to further strengthen our

financial position by lowering our financial risk, reducing our currency

exposure and building one of the strongest balance sheets in the REIT

industry. By the end of 2013, we reduced our debt, improved our debt metrics,

increased our financial flexibility and ensured continued access to capital

markets. Although our debt may increase temporarily due to acquisitions and

other growth initiatives (as it did during the last half of 2013), we expect

debt as a percentage of assets to continue to decrease over time.

We have reduced our exposure to foreign currency exchange fluctuations by borrowing in local currencies where appropriate, utilizing derivative contracts to hedge our foreign denominated equity, as well as through holding assets outside the United States primarily in our co-investment ventures. As of December 31, 2013, we increased our share of net equity denominated in U.S. dollars to 77% from 45% at the time of the Merger. We expect our percentage of U.S. dollar denominated net equity to increase further in 2014.



Streamline our Investment Management Business. Several of our legacy

co-investment ventures contained fee structures that did not adequately

compensate us for the services we provide and as a result we terminated or

restructured a number of these co-investment ventures. We substantially

repositioned this business to focus on large, long duration ventures, open end

ventures and geographically focused public entities and expect to continue

with these activities in 2014. Since the Merger, we have raised a significant

amount in third-party equity and we expect to grow our investment management

business going forward. Growth will come from the deployment of the capital

commitments we have already raised, as well as new incremental capital in both

our private and public formats. We have reduced the number of our

co-investment ventures from 22 at the time of the Merger to 13 at December 31,

2013, with approximately 90% in long-life or perpetual vehicles.



Improve the Utilization of Our Low Yielding Assets. We expected 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,

as well as monetizing our land through development or sale to third parties.

We increased occupancy in our owned and managed portfolio 440 basis points

from the Merger to 95.1% at December 31, 2013. From the Merger through

December 31, 2013, we monetized approximately $890 million of our land bank

through development starts and an additional $330 million through third-party

sales.



Build the most effective and efficient organization in the REIT industry and

become the employer of choice among top professionals interested in real

estate as a career. We realized more than $115 million of cost synergies on an

annualized basis, compared to the 22



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combined expenses of AMB and ProLogis on a pre-Merger basis. These synergies

included gross general and administrative savings, as well as reduced global

line of credit facility fees and lower amortization of non real estate assets.

In addition, we implemented a new enterprise wide system that includes 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 (both implemented in January 2013).

Summary of 2013



We formed two new ventures and announced the formation of two additional

ventures: In early 2013, we launched the initial public offering for NPR. NPR will



serve as the long-term investment vehicle for our stabilized properties

in Japan. On February 14, 2013, NPR was listed on the Tokyo Stock

Exchange and commenced trading. At that time, NPR acquired a portfolio of

12 properties from us for an aggregate purchase price of 173 billion

($1.9 billion). During 2013, NPR completed two follow on equity offerings

and used the proceeds to buy properties from us at appraised value.



On March 19, 2013, we closed on a euro denominated co-investment venture,

Prologis European Logistics Partners SÀrl ("PELP"). PELP is structured as

a 50/50 joint venture with Norges Bank Investment Management ("NBIM") and

has an initial term of 15 years, which may be extended for an additional

15-year period. At closing, the venture acquired a portfolio of 195

properties from us for an aggregate purchase price of 2.3 billion ($3.0

billion). PELP acquired additional properties from us during 2013. In November, we extended the relationship with our partner in China and



formed Prologis China Logistics Venture 2. The venture is expected to

build, acquire and manage properties in China. The venture has potential

investment capacity of over $1 billion, including $588 million of committed equity of which $88 million is our share.



We announced the formation of Prologis U.S. Logistics Venture ("USLV")

with NBIM in December. We closed on the venture in January 2014 with a contribution of 66 operating properties aggregating 12.8 million square



feet for an aggregate purchase price $1.0 billion. These properties were

acquired by us in June and August through the acquisition of our

partners' interests in two previous co-investment ventures (Prologis

Institutional Alliance Fund II ("Fund II") and Prologis North American

Industrial Fund III ("NAIF III"), which are described below). We own 55%

of the equity and the venture will be consolidated for accounting purposes due to the structure and voting rights of the venture.



We concluded four ventures (one in Japan, two in the United States and one

in Mexico):



In connection with the wind down of Prologis Japan Fund I in June 2013,

we purchased 14 properties from the venture and the venture sold the remaining six properties to NPR. In June 2013, we acquired our partners' interest in Fund II, a



consolidated co-investment venture. Based on the venture's cumulative

returns to the investors, we earned a promote payment of approximately

$18.8 million from the venture. The third party investors' portion of the

promote payment was $13.5 million, which is reflected as a component of

noncontrolling interest in the Consolidated Statements of Operations in

Item 8. The assets and liabilities associated with this venture were

wholly owned at December 31, 2013, and were subsequently contributed to

USLV in January 2014. On August 6, 2013, NAIF III sold 73 properties to a third party for



$427.5 million and we acquired our partners 80% interest in the venture,

which included 18 properties. All debt of the venture was paid in full at

closing. As a result of these combined transactions, we recorded a net gain of $39.5 million. The assets and liabilities associated with this



venture were wholly owned at December 31, 2013, and were subsequently

contributed to USLV in January 2014. On October 2, 2013, we acquired our partner's 78.4% interest in Prologis

SGP Mexico ("SGP Mexico") and began consolidating its operating properties with an estimated total fair value of $409.5 million.



During the year and including the initial formation of the two new ventures

discussed above, we contributed a total of 235 development properties to

five of our unconsolidated co-investment ventures and generated net

proceeds and net gains of $6.2 billion and $416.0 million, respectively. In

addition, we contributed a total of 19 properties acquired from third

parties to three of our co-investment ventures and generated net proceeds

and net gains of $337.4 million and $139.2 million, respectively. We generated net proceeds of $785.6 million from the dispositions of land



and 89 operating buildings to third parties and recognized a net gain of

$125.4 million. In addition to the transactions discussed above, we invested a total of



$505.7 million of new commitments (with cash and through contributions) in

our unconsolidated co-investment ventures, which includes increasing our

investment in three ventures:



We increased our ownership interest in Prologis European Properties Fund

II to 32.5%. We increased our ownership interest in Prologis Targeted Europe Logistics Fund to 43.1%. We increased our ownership interest in Prologis Targeted U.S. Logistics

Fund to 25.9%. 23



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In April, we issued 35.65 million shares of common stock in a public

offering at a price of $41.60 per share, generating approximately $1.4

billion in net proceeds ("Equity Offering"). In April, we redeemed $482.5 million of our preferred stock.



We had a significant amount of capital markets activity in 2013. As a

result and in combination with our significant contribution and disposition

activity, along with the Equity Offering, we decreased our total debt to

$9.0 billion at December 31, 2013, from $11.8 billion at December 31, 2012.

We extended our maturities and lowered our borrowing costs by issuing

several series of new debt and repurchasing existing higher coupon debt. Details of debt activity are as follows: We issued senior notes during 2013 as follows (dollars in thousands): Principal Effective Amount Interest Rate Maturity Date



Senior Note Issuance Date:

August 15, 2013 $ 850,000 4.25 % August 15, 2023 August 15, 2013 $ 400,000 2.75 % February 15, 2019 November 1, 2013 $ 500,000 3.35 % February 1, 2021 December 3, 2013 700,000 3.00 % January 18, 2022



We used the proceeds of the newly issued debt to buy back debt of $1.5

billion through tender offers or private transactions, which resulted in

a loss on early extinguishment of $180.7 million.



We repaid $1.6 billion of outstanding secured mortgage debt (with an

average borrowing cost of 2.4%) with the proceeds from the contribution

of properties, primarily to PELP and NPR, and we transferred $548.0

million of outstanding mortgage debt in connection with contributions. In

addition, we used proceeds generated from property dispositions and the Equity Offering to repay $564.5 million in senior notes and $483.6



million in exchangeable senior notes. As a result of our repayment of

debt, we recorded a loss on early extinguishment of $96.3 million. All of this activity decreased our borrowing costs to 4.2% at December 31, 2013, from 4.4% at December 31, 2012, and increased the



remaining maturity from 43 months to 58 months for the same period. Also,

the issuance of the euro denominated debt and derivative contracts

increased the percentage of our total equity denominated in U.S. dollar to 77%. We commenced construction of 68 development projects on an owned and



managed basis, aggregating 23 million square feet with a total expected

investment of $1.8 billion (our share was $1.5 billion), including 27

projects (42% of our share of the total expected investment) that were 100%

leased prior to the start of development. These projects had an estimated

weighted average yield at stabilization of 7.6% and an estimated

development margin of 19.1%. We used $445.3 million of land we already

owned for these projects. We expect these developments to be completed by

June 2015 or earlier. We leased a total of 151.9 million square feet in our owned and managed



portfolio and incurred average turnover costs (tenant improvements and

leasing costs) of $1.42 per square foot. At December 31, 2013, our owned

and managed operating portfolio was 95.1% occupied and 95.1% leased as compared to 94.0% occupied and 94.5% leased at December 31, 2012.



Our rent change on roll over was positive in each quarter in 2013 for our

owned and managed portfolio, ranging from 2% to 6%. Rent change in our

portfolio is continuing its upward trend and we expect to continue to see

increases in our rents on rollover. During 2013, we retained 82.6% of customers whose leases were expiring.



Operational Outlook

The recovery of the logistics real estate market further strengthened and broadened globally during 2013. Operating fundamentals continued to improve and we believe this trend will continue as the leading indicators of industrial real estate are strong. Global trade is expected to grow 4.9% in 2014 and 5.4% in 2015 (a). Based on our own internal surveys, space utilization in our facilities continues to trend higher, which means our customers are short on capacity to handle their current needs and their future growth. Market conditions in the U.S. are very favorable and an ongoing supply and demand imbalance exists (b). The industrial market absorbed 233 million square feet in 2013, the highest level since 2005 (b). By contrast, development completions amounted to only 67 million square feet resulting in a demand imbalance of 166 million square feet, the highest on record (b). These conditions have driven U.S. market vacancy to a new record low of 7.2% (b). As customer demand remains active and supply pipelines are below historical norm, we expect vacancy to continue to decline and rental rates to continue to increase in 2014.



Operating conditions in our Latin American markets are positive and have outperformed uneven macroeconomic growth in 2013. In Mexico, demand has continued to recover and the market occupancy rate across the six largest logistics markets (Mexico City, Monterrey,

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Guadalajara, Juarez, Reynosa and Tijuana) was 91.6% at the end of 2013, up 100 basis points from the prior year, based on internally generated data. In Brazil, despite a slowing economy, we believe it is an underserved logistics market and there is strong demand for modern logistics facilities as companies serve the growing consumer market. In Europe, we believe we have seen the end of recessionary conditions in most countries. Customer sentiment continues to improve and broaden, which is translating into meaningful demand. Evidence for this includes pan-European market occupancy of 91.3%, higher than the level achieved in 2007 (c). The occupancy rate rose 1.0% in 2013 and we expect further gains in 2014. Economic momentum turned positive in 2013 and brighter macroeconomic prospects appear to be generating demand for logistics facilities, in our view. Our research indicates new starts for speculative development are near historic low levels. We expect net effective rents to continue to increase and the recovery to broaden to more of our markets. We believe high occupancy and rent growth, combined with declining capitalization rates will lead to a strong recovery in European industrial real estate values. Expansionary market conditions are evident in our Asian markets. The availability of Class-A distribution space remains highly constrained and net effective rents are rising. In Japan, vacancy rates remain below 3% (a), and there is upward pressure on rents, especially in Tokyo and Osaka, as these markets have absorbed new deliveries. Increasing development costs, driven by higher land and construction pricing, are expected to keep new supply in balance. Demand in China is accelerating and we see new requirements from retailers and e-commerce customers. Low vacancy conditions continue to lead to outsized rental rate growth, in our view. Land availability has been constrained but appears to be improving. Barriers to supply continue to drive rents ahead of inflation, and we believe that we are well positioned with our development platform to meet this accelerating demand. We believe elevated occupancy rates across our markets, coupled with the still-gradual pickup in new construction starts, are leading to notable increases in replacement-cost rents and effective rents. We expect to use our strategic land positions to support increased development activity in this environment. Our development business comprises speculative development, build-to-suit development, value-added conversions and redevelopment. We will develop directly and within our co-investment ventures, depending on location, market conditions, submarkets or building sites and availability of capital.



(a) according to the International Monetary Fund.

(b) according to CB Richard Ellis-Econometric Advisors ("CBRE").

(c) according to CBRE, Jones Lang LaSalle and DTZ.

Results of Operations

Real Estate Operations Segment

The rental income and rental expense we recognize is directly impacted by our consolidated operating portfolio. As mentioned earlier, we have had significant real estate activity during the last several years that has impacted the size of our portfolio. In addition, the operating fundamentals in our markets have been improving, which has impacted both the occupancy and rental rates we have experienced, as well as fueling development activity. 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, disposition and land holding costs. The results of properties sold to third parties have been reclassified to Discontinued Operations for all periods presented. Net operating income from the Real Estate Operations segment for the years ended December 31, was as follows (dollars in thousands): 2013 2012 2011 Rental and other income $ 1,239,496$ 1,469,419$ 1,026,825 Rental recoveries 331,518 364,320 257,327 Rental and other expenses (478,920) (517,795) (372,719) Net operating income - Real Estate Operations segment $ 1,092,094$ 1,315,944$ 911,433 Operating margin 69.5% 71.8% 71.0% Average occupancy 93.6% 92.6% 89.9%



Detail of our consolidated operating properties as of December 31, was as follows (square feet in thousands):

2013 2012 2011 Number of properties 1,610 1,853 1,797 Square Feet 267,097 316,347 291,051 Occupied % 94.9% 93.7% 91.4%



Below are the key drivers that have influenced the net operating income ("NOI") of this segment:

We contributed a significant amount of properties into our unconsolidated

co-investment ventures during 2013. We generally used the proceeds from

these contributions to repay debt and to fund future growth. As a result of

the contributions of properties we made in 2013, our NOI decreased $299.4

million in 2013 from 2012. The net change in NOI from 2011 to 2012 related

to contributions of properties during these periods was not significant.

Since we have an ongoing ownership interest in these 25



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ventures, the results remain in Continuing Operations in the Consolidated

Statements of Operations in Item 8. In addition to the decrease in NOI in

this segment during 2013, we recognized a decrease in Interest Expense and

an increase in Investment Management Income and Earnings from

Unconsolidated Entities due to our continuing ownership in and management

of these properties.



We completed the Merger and PEPR Acquisition during 2011 and as a result,

NOI increased $216.1 million in 2012 from 2011 ($293.6 million in rental

income and $77.5 million in rental expense). Occupancy of the operating properties has continued to increase. In our



Real Estate Operations segment, we leased a total of 87.6 million square

feet and incurred average turnover costs of $1.71 per square foot. This

compares to 2012, when we leased 92.4 million square feet with turnover

costs of $1.41 per square feet. The increase in turnover costs is due to

the longer term and higher value on the leases signed, resulting in higher

leasing commissions.



We calculate the change in effective rental rates on leases signed during

the quarter as compared to the previous rent on that same space. Rental

rate change on rollover (in our total owned and managed operating

portfolio) was negative for all periods in 2012 and 2011. Rental change on

rollover was positive in all four quarters of 2013 and has continued to

increase. Generally we believe that market rents are continuing to increase

and the majority of leases that are rolling were put in place at the low

end of the cycle. In addition, many of our leases have rent increases

throughout the lease term that are based on the consumer price index and

are therefore not included in rent leveling and increase the rental revenue

we recognize. We rationalized and acquired properties or a controlling interest in

several of our unconsolidated co-investment ventures:



2013 - aggregated total portfolio of $1.1 billion and 16.3 million square

feet; and



2012 - aggregated total portfolio of $2.3 billion and 46.3 million square

feet.



We have also increased the size of our portfolio through acquisition

activity and development activity. After the development properties are stabilized, we may contribute them to co-investment ventures or we may



continue to hold and operate within our consolidated portfolio depending on

various factors, including geography and market conditions. We expect to

continue to increase our consolidated portfolio through both acquisition

and development activity in the future. 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 73.4%, 74.2% and

73.8% of total rental expenses for the years ended December 31, 2013, 2012

and 2011, respectively.

Investment Management Segment

The net operating income from the Investment Management segment, representing fees and incentives earned for services performed reduced by Investment Management expenses (direct costs of managing these entities and the properties they own), for the years ended December 31 was as follows (dollars in thousands): 2013 2012 2011 Net operating income - Investment Management Segment: Americas: Asset management and other fees $ 52,030$ 55,448$ 60,240 Leasing commissions, acquisition and other transaction fees 14,078 13,974 16,632 Incentive returns 6,366 - - Investment management expenses (53,689) (37,785) (34,228) Subtotal Americas 18,785 31,637 42,644 Europe: Asset management and other fees 53,190 32,951 34,934 Leasing commissions, acquisition and other transaction fees 10,604 4,096 11,153 Investment management expenses (22,531) (15,348) (15,379) Subtotal Europe 41,263 21,699 30,708 Asia: Asset management and other fees 29,861 19,026 14,585 Leasing commissions, acquisition and other transaction fees 13,343 1,284 75 Investment management expenses (13,059) (10,687) (5,355) Subtotal Asia 30,145 9,623 9,305 Net operating income - Investment Management segment $ 90,193$ 62,959$ 82,657 Operating Margin 50.3% 49.7% 60.1% 26



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We had the following unconsolidated co-investment ventures under management as of December 31 (square feet and gross book value in thousands):

2013 2012 2011 Americas: Number of ventures 4 6 10 Square feet 108,537 127,455 190,541 Gross book value $ 8,252,983$ 9,190,638$ 12,966,744 Europe: Number of ventures 4 3 3 Square feet 132,876 70,294 67,088 Gross book value $ 11,880,603$ 6,670,689$ 6,261,114 Asia: Number of ventures 2 2 2 Square feet 22,880 11,004 10,123 Gross book value $ 3,697,179$ 1,764,608$ 2,039,881 Total: Number of ventures 10 11 15 Square feet 264,293 208,753 267,752 Gross book value $ 23,830,765$ 17,625,935$ 21,267,739 Investment management income fluctuates due to the number and size of co-investment ventures that are under management. As noted earlier, we have formed some new ventures and we have acquired the controlling interest in several co-investment ventures, which results in us owning the properties and reporting them in our consolidated results. In addition, the Merger resulted in the addition of several ventures during 2011. The direct costs associated with our Investment Management segment totaled $89.3 million, $63.8 million, and $55.0 million for the years ended December 31, 2013, 2012 and 2011, respectively, and are included in the line item Investment Management Expenses in the Consolidated Statements of Operations in Item 8. These expenses include the direct expenses associated with the asset management of the unconsolidated co-investment ventures provided by our employees who are assigned to our Investment Management segment. In addition, in order to achieve efficiencies and economies of scale, all of our property management functions are provided by a team of professionals who are assigned to our Real Estate Operations segment. These individuals perform the property-level management of the properties in our owned and managed portfolio including properties we consolidate and the properties we manage that are owned by the unconsolidated entities. We allocate the costs of our property management function to the properties we consolidate (reported in Rental Expenses) and the properties owned by the unconsolidated entities (included in Investment Management Expenses), by using the square feet owned by the respective portfolios. The increase in Investment Management Expenses in 2013 was due to the addition of PELP and NPR and additional expense related to the incentive returns we recognized in 2013, offset somewhat by the conclusion of several ventures. The increase in Investment Management Expensesin 2012 was due to the increased investment management platform and infrastructure that was part of the Merger, offset partially with a decline due to the consolidation of PEPR in June 2011 and the acquisition of three of our co-investment ventures in 2012; Prologis North American Industrial Fund II, Prologis California and Prologis North American Fund 1 (collectively the "2012 Co-Investment Venture Acquisitions").



We expect the net operating income of this segment to increase in 2014 due to NPR and PELP and the increased size of the existing ventures through acquisitions from us and third parties, as well as increased incentive returns.

See Note 5 to the Consolidated Financial Statements in Item 8 for additional information on our unconsolidated entities.

Other Components of Income

General and Administrative ("G&A") Expenses

G&A expenses for the years ended December 31 consisted of the following (in thousands): 2013 2012 2011 Gross overhead $ 434,933$ 394,845$ 332,632 Less: rental expenses (32,918) (35,954) (24,741) Less: investment management expenses (89,278) (63,820) (54,962) Capitalized amounts (83,530) (67,003) (57,768) G&A expenses $ 229,207$ 228,068$ 195,161 27



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The increase in G&A expenses and the various components from 2012 to 2013 was principally due to increased infrastructure to accommodate our growing business. In 2013, the gross book value for our owned and managed portfolio increased $1.4 billion to $45.5 billion at December 31, 2013. As discussed above, we allocate a portion of our G&A expenses that relate to property management functions to our Real Estate Operations segment and our Investment Management segment.



The increase in G&A expenses and the various components from 2011 to 2012 was due principally to the larger infrastructure associated with the combined company following the Merger and the PEPR Acquisition.

We capitalize certain costs directly related to our development and leasing activities. Capitalized G&A expenses included salaries and related costs, as well as other general and administrative costs. The capitalized G&A costs for the years ended December 31, were as follows (in thousands): 2013 2012 2011 Development activities $ 64,113$ 42,417$ 34,301 Leasing activities 18,301 23,183 21,390 Costs related to internally developed software 1,116 1,403 2,077 Total capitalized G&A expenses $ 83,530$ 67,003$ 57,768



For the years ended December 31, 2013, 2012 and 2011, the capitalized salaries and related costs represented 23.7%, 20.3%, and 20.0%, respectively, of our total salaries and related costs. Salaries and related costs are comprised primarily of wages, other compensation and employee-related expenses.

Our development activity has increased over the last three years and therefore our capitalized costs have increased. We began consolidated development projects with a total expected investment of $1.4 billion, $1.3 billion (nearly half of which was started in the fourth quarter) and $0.8 billion during 2013, 2012, and 2011 respectively.



Depreciation and Amortization

Depreciation and amortization was $648.7 million, $724.3 million and $542.4 million for the years ended December 31, 2013, 2012 and 2011, respectively. The decrease from 2012 to 2013 is primarily due to less depreciation as a result of contributions of properties, offset slightly by additional depreciation and amortization from completed and leased development properties and increased leasing activity. The increase from 2011 to 2012 is due to additional depreciation and amortization expenses associated with the assets (including intangible assets) acquired in the Merger and PEPR Acquisition during the second quarter of 2011 and the 2012 Co-Investment Venture Acquisitions, as well as completed and leased development properties and additional leasing and capital improvements in our operating properties.



Merger, Acquisition and Other Integration Expenses

We incurred significant transaction, integration and transitional costs related to the Merger and PEPR Acquisition during 2011 and 2012. See Note 14 to the Consolidated Financial Statements in Item 8 for more detail on these expenses.

Impairment of Real Estate Properties

During 2012 and 2011, we recognized impairment charges of real estate properties in continuing operations of $252.9 million and $21.2 million, respectively, due to our change of intent to no longer hold these assets for long-term investment. In 2012, these impairment charges related to our planned contribution of properties to PELP ($135.3 million), land parcels that we expected to sell to third parties ($88.9 million) and operating buildings we expected to contribute or sell ($28.7 million). See Notes 2 and 15 to the Consolidated Financial Statements in Item 8 for more detail on the process we took to value these assets and the related impairment charges recognized.



Earnings from Unconsolidated Entities, Net

We recognized net earnings from unconsolidated entities of $97.2 million, $31.7 million and $59.9 million for the years ended December 31, 2013, 2012 and 2011, respectively. The earnings we recognize are impacted by: (i) variances in revenues and expenses of the entity; (ii) the size and occupancy rate of the portfolio of properties owned by the entity; (iii) our ownership interest in the entity; 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 total owned and managed portfolio. We have had significant changes in the co-investment ventures in which we have an ownership interest that has impacted the earnings we recognized. See discussion of our co-investment ventures above in the Investment Management segment discussion and in Note 5 to the Consolidated Financial Statements in Item 8 for further breakdown of our share of net earnings recognized. 28



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Interest Expense

Interest expense from continuing operations included the following components (in thousands) for the years ended December 31:

2013 2012 2011 Gross interest expense $ 471,923$ 578,518$ 498,518



Amortization of discount (premium), net (39,015) (36,687)

228

Amortization of deferred loan costs 14,374 16,781



20,476

Interest expense before capitalization 447,282 558,612

519,222 Capitalized amounts (67,955) (53,397) (52,651) Net interest expense $ 379,327$ 505,215$ 466,571



Gross interest expense decreased in 2013 compared to 2012 due to lower debt levels. In 2013, we decreased our debt by $2.8 billion to $9.0 billion at December 31, 2013.

Gross interest expense increased in 2012 compared to 2011 due to higher debt levels as a result of the Merger, the PEPR Acquisition and the 2012 Co-Investment Venture Acquisitions, offset slightly by lower effective borrowing costs. Our weighted average effective interest rate was 4.7%, 4.6% and 5.6% for the years ended December 31, 2013, 2012 and 2011, respectively. During 2012 and 2013, we issued new debt with lower borrowing costs and used the proceeds to pay down or buy back our higher cost debt resulting in a weighted average effective interest rate of 4.2% as of December 31, 2013. Our future interest expense, both gross interest and the portion capitalized, will vary depending on, among other things, our effective borrowing rate and the level of our development activities.



See Note 9 to the Consolidated Financial Statements in Item 8 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

In 2013, we recognized net gains on acquisitions and dispositions of investments in real estate in continuing operations of $597.7 million, primarily related to contributions of operating properties to our unconsolidated entities. We received proceeds of $6.7 billion from the contribution of 254 properties aggregating 71.5 million square feet. In 2012, we recognized net gains on acquisitions and dispositions of investments in real estate in continuing operations of $305.6 million, which included $294.2 million of gains related to three 2012 co-investment ventures we acquired. The contributions of operating properties to our unconsolidated entities in 2012 resulted in cash proceeds of $381.9 million and net gains of $11.4 million. During 2011, we recognized net gains on acquisitions and dispositions of investments in real estate in continuing operations of $111.7 million. This included gains recognized in the second quarter related to the PEPR Acquisition ($85.9 million) and the acquisition of our partner's interest in one of our other unconsolidated ventures in Japan ($13.5 million). The contributions of operating properties to our unconsolidated entities in 2011 resulted in cash proceeds of $590.8 million and net gains of $12.3 million. If we realize a gain on contribution of a property to an unconsolidated entity, we recognize the portion attributable to the third party ownership in the entity. If we realize a loss on contribution, we recognize the full amount as soon as it is known. Due to our continuing involvement through our ownership in the unconsolidated entity, these dispositions are not included in discontinued operations.



Foreign Currency and Derivative Gains (Losses), Net

We and certain of our foreign consolidated subsidiaries may have intercompany or third party debt that is not denominated in the entity's functional currency. When the debt is remeasured against the functional currency of the entity, a gain or loss may result. To mitigate our foreign currency exchange exposure, we borrow in the functional currency of the borrowing entity when appropriate. Certain of our third party and intercompany debt is remeasured with the resulting adjustment recognized as a cumulative translation adjustment in Foreign Currency Translation Loss, Net in the Consolidated Statements of Comprehensive Income (Loss). This treatment is applicable to third party debt that is designated as a hedge of our net investment and intercompany debt that is deemed to be long-term in nature. If the intercompany debt is deemed short-term in nature, when the debt is remeasured, we recognize a gain or loss in earnings. We recognized net foreign currency exchange gains of $9.2 million and $7.4 million in 2013 and 2012, respectively, and losses of $5.9 million in 2011, related to the settlement and remeasurement of debt. Predominantly the gains or losses recognized in earnings relate to the remeasurement of intercompany loans between the United States parent and certain consolidated subsidiaries in Japan and Europe and result from fluctuations in the exchange rates of U.S. dollar to the euro, Japanese yen and British pound sterling. In addition, we recognized net foreign currency exchange losses of $0.6 million and $5.6 million, and gains of $2.1 million from the settlement of transactions with third parties in 2013, 2012 and 2011, respectively. We recognized unrealized losses of $42.2 million (which included an adjustment to the amortization of a discount associated with a derivative instrument in the fourth quarter of 2013) and $22.3 million in 2013 and 2012, respectively, and an unrealized gain of $45.0 million in 2011 on the derivative instrument (exchange feature) related to our exchangeable senior notes, which became exchangeable at the time of the Merger. 29



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Gains (Losses) on Early Extinguishment of Debt, Net

During the years ended December 31, 2013, 2012 and 2011, we purchased portions of several series of senior notes, senior exchangeable notes and extinguished some secured mortgage debt prior to maturity, which resulted in the recognition of losses of $277.0 million and $14.1 million in 2013 and 2012, respectively, and gains of $0.3 million in 2011. The gains or losses represent the difference between the recorded debt (net of premiums and discounts and including related debt issuance costs) and the consideration we paid to retire the debt, including fees. Included in this amount in 2012 are losses that were included in Other Comprehensive Income (Loss) in the Consolidated Statements of Comprehensive Income (Loss) in Item 8 related to hedge transactions and were deemed unrecoverable in the fourth quarter of 2012. These hedges were associated with debt that was repaid before maturity with the proceeds from the contributions to PELP in early 2013. See Note 9 to the Consolidated Financial Statements in Item 8 for more information regarding our debt repurchases.



Impairment of Other Assets

We recorded impairment charges in 2011 of $126.4 million on certain of our investments in and advances to unconsolidated entities, notes receivable and other assets, as we believed the decline in fair value to be other than temporary or we did not believe these amounts to be recoverable based on the present value of the estimated future cash flows associated with these assets, including estimated sales proceeds.



See Notes 2 and 15 to the Consolidated Financial Statements in Item 8 for further information on our process with regard to analyzing the recoverability of other assets.

Income Tax Benefit (Expense) During the years ended December 31, 2013, 2012 and 2011, our current income tax expense was $126.2 million, $17.9 million and $21.6 million. We recognize current income tax expense for income taxes incurred by our taxable REIT subsidiaries and in certain foreign jurisdictions, as well as certain state taxes. We also include in current income tax expense the interest associated with our liability for uncertain tax positions. Our current income tax expense fluctuates from period to period based primarily on the timing of our taxable income and changes in tax and interest rates. The majority of the current income tax expense in 2013 relates to asset sales and contributions of certain properties that were held in foreign entities or taxable REIT subsidiaries.



In 2013, 2012 and 2011, we recognized a net deferred tax benefit of $19.4 million, $14.3 million and $19.8 million, respectively. Deferred income tax expense 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 operating in the United States or in foreign jurisdictions.

Our income taxes are discussed in more detail in Note 16 to the Consolidated Financial Statements in Item 8.

Discontinued Operations

Earnings from discontinued operations were $123.5 million, $75.9 million and $117.0 million for 2013, 2012 and 2011, respectively. Discontinued operations represent the results of operations of properties that have been sold to third parties or that are held for sale for all periods presented, along with the related gain or loss on sale. The results of operations that have been classified as discontinued operations are reported separately in the Consolidated Financial Statements in Item 8.



See Notes 4 and 8 to the Consolidated Financial Statements in Item 8 for further details on what is reported as discontinued operations.

Other Comprehensive Income (Loss) - Foreign Currency Translation Losses, Net

For our consolidated subsidiaries whose functional currency is not the U.S. dollar, we translate their financial statements into U.S. dollars at the time we consolidate those subsidiaries' financial statements. Generally, assets and liabilities are translated at the exchange rate in effect as of the balance sheet date. The resulting translation adjustments, due to the fluctuations in exchange rates from the beginning of the period to the end of the period, are included in Foreign Currency Translation Losses, Net in the Consolidated Statements of Comprehensive Income (Loss) in Item 8. During 2013, we recorded unrealized losses of $234.7 million related to foreign currency translations of our foreign subsidiaries into U.S. dollars upon consolidation. This included approximately $190 million of foreign currency translation losses on the properties contributed to PELP and NPR due to the weakening of the euro and Japanese yen, respectively, to the U.S. dollar from December 31, 2012, through the date of the contributions. In addition we recorded net unrealized losses in 2013 due to the weakening of the Japanese yen to the U.S. dollar. During 2012, we recorded unrealized net losses of $79.0 million as the Japanese yen weakened relative to the U.S. dollar by 10.1% from December 31, 2011 to December 31, 2012, offset slightly by the euro and British pound sterling slightly strengthening against the U.S. dollar during the same period. During 2011, we recorded unrealized net losses of $192.6 million as the euro and British pound sterling remained relatively flat from December 31, 2010 to December 31, 2011, but both weakened relative to the U.S. dollar from the Merger and PEPR Acquisition date to December 31, 2011. These losses were offset slightly by the strengthening of the Japanese yen relative to the U.S. dollar during 2011. 30



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Portfolio Information

Our total owned and managed portfolio includes operating industrial properties and does not include properties under development or properties held for sale and was as follows as of December 31 (square feet in thousands): 2013 2012 2011 Number of Square Number of Square Number of Square Properties Feet Properties Feet Properties Feet Consolidated 1,610 267,097 1,853 316,347 1,797 291,051 Unconsolidated 1,323 264,293 1,163 208,753 1,403 267,752 Totals 2,933 531,390 3,016 525,100 3,200 558,803 Same Store Analysis 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, thereby eliminating the effects of changes in the composition of the portfolio on performance measures. We include properties from our consolidated portfolio, and properties owned by the co-investment ventures (accounted for on the equity method) that are managed by us (referred to as "unconsolidated entities") in our same store analysis. We have defined the same store portfolio, for the three months ended December 31, 2013, as those properties that were in operation at January 1, 2012, and have been in operation throughout the same three-month periods in both 2013 and 2012. We have removed all properties that were disposed of to a third party or were classified as held for sale from the population for both periods. We believe the factors that impact rental income, rental expenses and net operating income in the same store portfolio are generally the same as for the total portfolio. In order to derive an appropriate measure of period-to-period operating performance, we remove the effects of foreign currency exchange rate movements by using the current exchange rate to translate from local currency into U.S. dollars, for both periods. The same store portfolio, for the three months ended December 31, 2013, included 489.8 million of aggregated square feet. The following is a reconciliation of our consolidated rental income, rental expenses and net operating income (calculated as rental income and recoveries less rental expenses) for the full year, as included in the Consolidated Statements of Operations in Item 8, to the respective amounts in our same store portfolio analysis for the three months ended December 31, (dollars in thousands). Three Months Ended March 31, June 30, September 30, December 31, Full Year 2013 Rental income and rental recoveries $ 444,144$ 363,956$ 372,185$ 379,208$ 1,559,493 Rental expenses 130,354 109,837 106,811 104,936 451,938 Net operating income $ 313,790$ 254,119$ 265,374$ 274,272$ 1,107,555 2012 Rental income and rental recoveries $ 433,984$ 459,290$ 460,213$ 470,294$ 1,823,781 Rental expenses 115,674 123,248 124,401 127,916 491,239 Net operating income $ 318,310$ 336,042$ 335,812$ 342,378$ 1,332,542 31



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Table of Contents For the Three Months Ended December 31, Percentage 2013 2012 Change Rental Income (1)(2) Consolidated: Rental income per the Consolidated Statements of Operations $ 301,627 $



378,184

Rental recoveries per the Consolidated Statements of Operations 77,581



92,110

Adjustments to derive same store results: Rental income and recoveries of properties not in the same store portfolio - properties developed and acquired during the period and land subject to ground leases (29,856)



(22,691)

Effect of changes in foreign currency exchange rates and other (1,275) (4,215) Unconsolidated entities: Rental income 409,482 308,012 Same store portfolio - rental income (2)(3) $ 757,559$ 751,400 0.8% Rental Expenses (1)(4) Consolidated: Rental expenses per the Consolidated Statements of Operations $ 104,936 $



127,916

Adjustments to derive same store results: Rental expenses of properties not in the same store portfolio - properties developed and acquired during the period and land subject to ground leases (8,866)



(6,521)

Effect of changes in foreign currency exchange rates and other 4,777 516 Unconsolidated entities: Rental expenses 95,997 83,644 Adjusted same store portfolio - rental expenses (3)(4) $ 196,844$ 205,555 (4.2)% Net Operating Income (1) Consolidated: Net operating income per the Consolidated Statements of Operations $ 274,272$ 342,378 Adjustments to derive same store results: Net operating income of properties not in the same store portfolio - properties developed and acquired during the period and land subject to ground leases (20,990)



(16,170)

Effect of changes in foreign currency exchange rates and other (6,052) (4,731) Unconsolidated entities: Net operating income 313,485 224,368 Adjusted same store portfolio - net operating income (3) $ 560,715$ 545,845 2.7%



(1) As discussed above, our same store portfolio includes industrial properties

from our consolidated portfolio and owned by the unconsolidated entities

(accounted for on the equity method) that are managed by us. During the

periods presented, certain properties owned by us were contributed to a

co-investment venture and are included in the same store portfolio on an

aggregate basis. Neither our consolidated results nor those of the

unconsolidated entities, when viewed individually, would be comparable on a

same store basis due to the changes in composition of the respective

portfolios from period to period (for example, the results of a contributed

property are included in our consolidated results through the contribution

date and in the results of the unconsolidated entities subsequent to the

contribution date).



(2) We exclude the net termination and renegotiation fees from our same store

rental income to allow us to evaluate the growth or decline in each

property's rental income without regard to items that are not indicative of

the property's recurring operating performance. 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.

The adjustments to remove these items are included in "effect of changes in

foreign currency exchange rates and other" in the tables above.



(3) These amounts include activity of both our consolidated industrial properties

and those owned by our unconsolidated entities (accounted for on the equity

method) and managed by us.



(4) Rental expenses in the same store portfolio include the direct operating

expenses of the property such as property taxes, insurance, utilities, etc.

In addition, we include an allocation of the property management expenses for

our direct-owned properties based on the property management fee that is

provided for in the individual management agreements under which our wholly

owned management companies provide property management services to each property (generally, the fee is based on a percentage of revenues). On 32



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consolidation, the management fee income earned by the management companies

and the management fee expense recognized by the properties are eliminated and

the actual costs of providing property management services are recognized as

part of our consolidated rental expenses. These expenses fluctuate based on

the level of properties included in the same store portfolio and any

adjustment is included as "effect of changes in foreign currency exchange

rates and other" in the above table.

Environmental Matters

A majority of the properties acquired by us were subjected to environmental reviews either by us or the previous owners. While some of these assessments have led to further investigation and sampling, none of the environmental assessments have revealed an environmental liability that we believe would have a material adverse effect on our business, financial condition or results of operations. We record a liability for the estimated costs of environmental remediation to be incurred in connection with certain operating properties we acquire, as well as certain land parcels we acquire in connection with the planned development of the land. The liability is established to cover the environmental remediation costs, including cleanup costs, consulting fees for studies and investigations, monitoring costs and legal costs relating to cleanup, litigation defense, and the pursuit of responsible third parties. We purchase various environmental insurance policies to mitigate our exposure to environmental liabilities. We are not aware of any environmental liability that we believe would have a material adverse effect on our business, financial condition or results of operations.



Liquidity and Capital Resources

Overview

We consider our ability to generate cash from operating activities, dispositions of properties and from 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 to the common and preferred stockholders of Prologis and distributions to the holders of limited partnership units of the Operating Partnership, we expect our primary cash needs will consist of the following:



repayment of debt including payments on our credit facilities and scheduled

principal payments in 2014 of $330 million, which does not include a $536 million senior term loan that was extended in January 2014 until 2015; completion of the development and leasing of the properties in our consolidated development portfolio (a); development of new properties for long-term investment, including the acquisition of land in certain markets;



capital expenditures and leasing costs on properties in our operating

portfolio; additional investments in current unconsolidated entities or new investments in future unconsolidated entities;



depending on market and other conditions, acquisition of operating

properties and/or portfolios of operating properties in global or regional

markets for direct, long-term investment (this might include acquisitions

from our co-investment ventures); and



depending on prevailing market conditions, our liquidity requirements,

contractual restrictions and other factors, we may repurchase our outstanding debt or equity securities through cash purchases, in open market purchases, privately negotiated transactions, tender offers or otherwise. (a) As of December 31, 2013, we had 57 properties in our development portfolio that were 54.3% leased with a current investment of $1.1



billion and a total expected investment of $1.9 billion when completed

and leased, leaving $0.8 billion remaining to be spent.

We expect to fund our cash needs principally from the following sources, all subject to market conditions:

available unrestricted cash balances ($491.1 million at December 31, 2013);

property operations; fees and incentives earned for services performed on behalf of the



co-investment ventures and distributions received from the co-investment

ventures; proceeds from the disposition of properties, land parcels or other investments to third parties; proceeds from the contributions of properties to current or future co-investment ventures, including the contribution of 66 operating properties we made to USLV in January 2014;



borrowing capacity under our current credit facility arrangements discussed

below ($1.7 billion available as of December 31, 2013), other facilities or

borrowing arrangements;



proceeds from the issuance of equity securities, including through an

at-the-market offering program (we have an equity distribution agreement

that allows us to sell up to $750 million aggregate gross sales proceeds of

shares of common stock through two designated agents, who earn a fee of up

to 2% of the gross proceeds, as agreed to on a transaction-by-transaction

basis). We have not issued any shares of common stock under this program;

and proceeds from the issuance of debt securities, including secured mortgage

debt. 33



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Debt

As of December 31, 2013, we had $9.0 billion of debt with a weighted average interest rate of 4.2% and a weighted average maturity of 58 months. During 2013, we decreased our debt $2.8 billion, reduced our borrowing costs and lengthened the maturities (was $11.8 billion, 4.4% and 43 months, respectively, as of December 31, 2012) principally with the proceeds from the contribution and the sale of properties and the Equity Offering. We also issued $2.7 billion of senior notes during 2013 and used the proceeds to repay $1.7 billion of senior notes and balances on our credit facilities.



As of December 31, 2013, we had credit facilities with an aggregate borrowing capacity of $2.5 billion, of which $1.7 billion was available remaining capacity.

As of December 31, 2013, we were in compliance with all of our debt covenants. These covenants include customary financial covenants for total debt ratios, encumbered debt ratios and fixed charge coverage ratios.



See Note 9 to the Consolidated Financial Statements in Item 8 for further information on our debt.

Equity Commitments Related to Certain Co-Investment Ventures

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 venture may obtain financing for the properties and therefore the equity commitment may be less than the acquisition price of the real estate. Depending on market conditions, the investment objectives of the ventures, our liquidity needs and other factors, we may make contributions of properties to these ventures through the remaining commitment period and we may make additional cash investments in these ventures.



The following table is a summary of remaining equity commitments as of December 31, 2013 (in millions):

Expiration date for remaining Equity commitments commitments Venture Prologis Partners Total



Prologis Targeted U.S. Logistics Fund $ - $ 294.8 $

294.8 Various Prologis Targeted Europe Logistics Fund 136.0 183.4 319.4 June 2015 Prologis European Properties Fund II 12.0 154.9 166.9 September 2015 Europe Logistics Venture 1 25.7 145.8 171.5 December 2014 Prologis European Logistics Partners 255.7 255.7 511.4 February 2016 Prologis China Logistics Venture 1 61.7 349.6 411.3 March 2015 Prologis China Logistics Venture 2 88.2 500.0 588.2 November 2017 Total Unconsolidated $ 579.3$ 1,884.2$ 2,463.5 Brazil Fund (1) $ 56.9$ 56.9$ 113.8 December 2017 Total Consolidated $ 56.9$ 56.9$ 113.8 Grand Total $ 636.2$ 1,941.1$ 2,577.3



(1) Equity commitments are denominated in Brazilian real and called and reported

in U.S. dollars. During 2013, to fund development the venture called capital

of $99.6 million, of which $49.8 million was from third parties and $49.8

million was our share.

For more information on our unconsolidated co-investment ventures, see Note 5 to the Consolidated Financial Statements in Item 8.

Cash Provided by Operating Activities

Net cash provided by operating activities was $485.0 million, $463.5 million and $207.1 million for the years ended December 31, 2013, 2012 and 2011, respectively. In 2013, 2012 and 2011, cash provided by operating activities was less than the cash dividends paid on common and preferred stock by $88.9 million, $104.3 million and $207.0 million, respectively. We used a portion of the cash proceeds from the disposition of real estate properties ($5.4 billion in 2013, $2.0 billion in 2012 and $1.6 billion in 2011) to fund dividends on common and preferred stock not covered by cash flows from operating activities.



Cash Investing and Cash Financing Activities

For the years ended December 31, 2013, 2012 and 2011, investing activities provided net cash of $2.3 billion and $529.6 million and used net cash of $233.1 million, respectively. The following are the significant activities for all periods presented:

We generated cash from contributions and dispositions of properties and

land parcels of $5.4 billion in 2013, $2.0 billion in 2012 and $1.6 billion

in 2011. The increase in 2013 is primarily due to the initial contribution

of real estate properties in the first quarter of 2013 to our new

co-investment ventures, PELP and NPR, that generated cash proceeds of $1.3

billion and $1.9 billion, 34



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respectively. In 2013, we disposed of land and 89 operating properties to

third parties and contributed 254 operating properties to unconsolidated

co-investment ventures. In 2012, we disposed of land and 200 operating

properties to third parties and contributed 25 operating properties to

unconsolidated co-investment ventures. In 2011, we disposed of land and 94

operating properties to third parties that included the majority of our non-industrial assets and contributed 57 operating properties to unconsolidated co-investment ventures.



In 2013, 2012 and 2011, we invested $845.2 million, $793.3 million and

$811.0 million, respectively, in real estate development and leasing costs

for first generation leases. We have 46 properties under development and 11

properties that are completed but not stabilized as of December 31, 2013,

and we expect to continue to develop new properties as the opportunities

arise. We invested $228.0 million, $214.2 million and $144.1 million in our



operating properties during 2013, 2012 and 2011, respectively, which

included recurring capital expenditures, tenant improvements and leasing

commissions on existing operating properties that were previously leased.

In 2013, we paid net cash of $678.6 million to acquire our partners'

interest in NAIF III and SGP Mexico. In connection with the acquisition of

NAIF II in 2012, we repaid the loan from NAIF II to our partner for a total

of $336.1 million. The loan repayment was reduced by the cash acquired in

the consolidation of NAIF II. Also in 2012, we paid $47.8 million in

connection with the acquisition of two of our unconsolidated co-investment

ventures.



In 2013, we acquired 536 acres of land and 26 operating properties for a

combined total of $514.6 million, which includes properties acquired in

connection with the wind-down of Prologis Japan Fund I. In 2012, we

acquired 1,537 acres of land and 12 operating properties for a combined

total of $254.4 million. In 2011, we acquired 78 acres of land and 8 operating properties for a combined total of $214.8 million.



In 2013, 2012 and 2011, we invested cash of $1.2 billion, $165.0 million

and $37.8 million, respectively, in our unconsolidated entities, net of

repayment of advances by the entities. Our investment in 2013 principally

relates to our investment in NPR of $411.5 million, Prologis Targeted

Europe Logistics Fund of $210.2 million, Prologis European Properties Fund

II of $167.2 million, PELP of $162.3 million, the Brazil Fund and related

joint ventures of $111.5 million and Prologis Targeted U.S. Logistics Fund

of $104.8 million. See Note 5 to the Consolidated Financial Statements for

more detail on these investments.



We received distributions from unconsolidated entities as a return of

investment of $411.9 million, $291.7 million and $170.2 million during

2013, 2012 and 2011, respectively. We received $106.3 million in connection

with the wind down of Prologis Japan Fund I in 2013. During 2012, we

received $95.0 million, which represented a return of capital, from one of

our other joint ventures that held a note receivable that was repaid during

the quarter.



In 2012, we received a full redemption of a $55.0 million note receivable

that was issued in 2011 through the sale of non-industrial assets. In connection with the Merger in 2011, we acquired $234.0 million in cash. In 2011, we used $1.0 billion of cash to purchase units in PEPR. The acquisition was funded with borrowings on a new 500 million bridge



facility ("PEPR Bridge Facility"), put in place for the acquisition, and

borrowings under our other credit facilities that were subsequently paid from our equity offering in 2011 (see below for more detail).



For the years ended December 31, 2013, 2012 and 2011, financing activities used net cash of $2.4 billion and $1.1 billion and provided net cash of $163.3 million, respectively. The following are the significant activities for all periods presented:

In April 2013, we received net proceeds of $1.4 billion from the issuance

of 35.65 million shares of common stock. In June 2011, we completed an

equity offering and issued 34.5 million shares of common stock and received

net proceeds of approximately $1.1 billion.



We generated proceeds from the issuance of common stock under our incentive

stock plans, principally stock options, of $22.4 million and $31.0 million

in 2013 and 2012, respectively. We had minimal activity in 2011.



In 2013, we paid $482.5 million to redeem all of the outstanding series L,

M, O, P, R and S of preferred stock.



We paid distributions of $552.2 million, $520.3 million and $387.1 million

to our common stockholders during 2013, 2012 and 2011, respectively. We

paid dividends on our preferred stock of $21.7 million, $47.6 million, and

$27.0 million during 2013, 2012 and 2011, respectively.



In 2013, we purchased our partners' interest in Fund II for $245.8 million.

In 2012, we purchased an additional interest in PEPR for $117.3 million,

Fund II for $14.1 million, and our partner's interest in certain properties

in the Brazil Fund and related joint ventures of $4.4 million. Additionally

in 2013 and 2012, limited partners in the Operating Partnership redeemed

units for cash of $4.9 million and $5.8 million, respectively. In 2013, 2012 and 2011, partners in consolidated co-investment ventures



made contributions of $145.5 million, $70.8 million and $123.9 million,

respectively, primarily for the purchase of real estate properties by

Mexico Fondo Logistico and development within the Brazil Fund and related

joint ventures. 35



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In 2013, 2012, and 2011, we distributed $116.0 million, $44.1 million, and

$17.4 million to various noncontrolling interests, respectively. The distribution in 2013 includes cash distributions of $40.6 million to our partners in Prologis AMS due to the disposition of a portfolio of properties.



In 2013, we incurred $3.6 billion of debt principally senior notes and term

loan. In 2012, we incurred $1.4 billion of debt, principally secured

mortgage debt and senior term loan. In 2011, we incurred $577.9 million in

secured mortgage debt and borrowed $721.0 million on the PEPR Bridge

Facility. See Note 9 to the Consolidated Financial Statements for more detail on the senior note issuances in 2013.



During 2013, we extinguished senior notes and secured mortgage debt for

$4.0 billion, of which $1.6 billion is the repayment of outstanding secured

mortgage debt primarily with the proceeds received from contributions of

properties to PELP and NPR and $2.4 billion is the repayment of senior

notes. During 2012 and 2011, we extinguished certain senior notes, exchangeable senior notes, secured mortgage debt, senior term loans and other debt for $1.7 billion and $894.2 million, respectively.



We made payments of $2.0 billion, $196.7 million and $975.5 million on

regularly scheduled debt principal and maturity payments during 2013, 2012

and 2011, respectively. In 2013, we repaid $355.3 million of outstanding

senior notes, $483.6 million of exchangeable senior notes and $135.9 million of secured mortgage debt. Also in 2013, we made payments of $899.0 million on the senior term loan. In 2011, we used $711.8 million in



proceeds from our equity offering to repay the amounts borrowed under the

PEPR Bridge Facility. Additionally, 2011 activity included the repayment of

101.3 million ($146.8 million) of the euro notes that matured in April 2011.



We made net payments of $93.1 million and $37.6 million in 2013 and 2011,

respectively, on our credit facilities and received net proceeds of

$9.1 million in 2012 from our credit facilities.

Off-Balance Sheet Arrangements

Unconsolidated Co-Investment Ventures Debt

We had investments in and advances to certain unconsolidated co-investment ventures at December 31, 2013, of $4.3 billion. These unconsolidated ventures had total third party debt of $7.7 billion (in the aggregate, not our proportionate share) at December 31, 2013. This debt is primarily secured or collateralized by properties within the venture and is non-recourse to Prologis or the other investors in the co-investment ventures and matures as follows (dollars in millions): Prologis Ownership Discount/ % at 2014 2015 2016 2017 2018 Thereafter Premium Total (1) 12/31/13 Prologis Targeted U.S. Logistics Fund $ 20.0$ 185.1$ 166.5



$ 164.2$ 298.8$ 824.2$ 14.0$ 1,672.8

25.9 % Prologis North American Industrial Fund - 108.7 444.1 205.0 165.5 188.9 - 1,112.2 23.1 % Prologis Mexico Industrial Fund - - - 214.1 - - - 214.1 20.0 % Prologis Targeted Europe Logistics Fund 31.8 241.8 4.6 4.7 97.5 115.0 2.9 498.3 43.1 % Prologis European Properties Fund II (2) 430.8 343.1 216.7 67.5 415.1 518.2 (3.5 ) 1,987.9 32.5 % Prologis European Logistics Partners (3) 288.0 - 220.4 - - - 3.6 512.0 50.0 % Nippon Prologis REIT 46.2 - 222.0 22.1 286.0 958.9 - 1,535.2 15.1 % Prologis China Logistics Venture 1 - - 180.0 - - - - 180.0 15.0 % Total co-investment ventures $ 816.8$ 878.7$ 1,454.3$ 677.6$ 1,262.9$ 2,605.2$ 17.0$ 7,712.5



(1) As of December 31, 2013, we did not guarantee any third party debt of the

co-investment ventures. In our role as the manager, we work with the

co-investment ventures to refinance their maturing debt. There can be no

assurance that the co-investment ventures will be able to refinance any

maturing indebtedness on terms as favorable as the maturing debt, or at all.

If the ventures are unable to refinance the maturing indebtedness with newly

issued debt, they may be able to obtain funds by voluntary capital

contributions from us and our partners or by selling assets. Certain of the

ventures also have credit facilities, or unencumbered properties, both of

which may be used to obtain funds. Generally, the co-investment ventures

issue long-term debt and utilize the proceeds to repay borrowings under the

credit facilities.



(2) We expect that the co-investment venture will refinance or repay 2014

maturities through available cash and the issuance of new debt.



(3) We expect that the co-investment venture will repay 2014 maturities through

available cash or equity contributions from partners. 36



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Contractual Obligations

Long-Term Contractual Obligations

We had long-term contractual obligations at December 31, 2013 as follows (in millions): Payments Due By Period Less than 1 More than year 1 to 3 years 3 to 5 years 5 years Total Debt obligations, other than credit facilities and exchangeable debt (1) $ 866 $ 1,543$ 1,521$ 3,855$ 7,785 Interest on debt obligations, other than credit facilities and exchangeable debt 346 617 421 435 1,819 Exchangeable debt - 460 - - 460 Interest on exchangeable debt 15 3 - - 18 Amounts due on credit facilities - - 725 - 725 Interest on credit facilities 9 18 13 - 40 Unfunded commitments on the development portfolio (2) 614 188 - - 802 Operating lease payments 36 60 44 227 367 Total $ 1,886$ 2,889$ 2,724$ 4,517$ 12,016



(1) Included in amounts due in less than one year is a $536 million term loan

that was extended to 2015 in January 2014.



(2) We had properties in our development portfolio (completed and under

development) at December 31, 2013, with a total expected investment of

$1.9 billion. The unfunded commitments presented include not only those costs

that we are obligated to fund under construction contracts, but all costs

necessary to place the property into service, including the estimated costs

of tenant improvements, marketing and leasing costs that we will incur as the

property is leased. Other Commitments



On a continuing basis, we are engaged in various stages of negotiations for the acquisition and/or disposition of individual properties or portfolios of properties.

Distribution and Dividend Requirements

Our dividend policy on our common stock is to distribute a percentage of our cash flow to ensure we will meet the dividend requirements of the Internal Revenue Code, relative to maintaining our REIT status, while still allowing us to retain cash to meet other needs such as capital improvements and other investment activities. In 2013 and 2012, we paid a quarterly cash dividend of $0.28 per common share. Our future common stock dividends may vary and will be determined by our Board upon the circumstances prevailing at the time, including our financial condition, operating results and REIT distribution requirements, and may be adjusted at the discretion of the Board during the year.



At December 31, 2013, 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.



Critical Accounting Policies

A critical accounting policy is one that is both important to the portrayal of an entity's financial condition and results of operations and requires judgment on the part of management. Generally, the judgment requires management to make estimates and assumptions about the effect of matters that are inherently uncertain. Estimates are prepared using management's best judgment, after considering past and current economic conditions and expectations for the future. Changes in estimates could affect our financial position and specific items in our results of operations that are used by stockholders, potential investors, industry analysts and lenders in their evaluation of our performance. Of the accounting policies discussed in Note 2 to the Consolidated Financial Statements in Item 8, those presented below have been identified by us as critical accounting policies.



Impairment of Long-Lived Assets

We assess the carrying values of our respective long-lived assets whenever events or changes in circumstances indicate that the carrying amounts of these assets may not be fully recoverable.

Recoverability of real estate assets is measured by comparison of the carrying amount of the asset to the estimated future undiscounted cash flows. In order to review our real estate assets for recoverability, we consider current market conditions, as well as our intent with respect to 37



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holding or disposing of the asset. Our intent with regard to the underlying assets might change as market conditions change. Fair value is determined through various valuation techniques; including discounted cash flow models, applying a capitalization rate to estimated net operating income of a property, quoted market values and third party appraisals, where considered necessary. The use of projected future cash flows is based on assumptions that are consistent with our estimates of future expectations and the strategic plan we use to manage our underlying business. If our analysis indicates that the carrying value of a real estate property that we expect to hold is not recoverable on an undiscounted cash flow basis, we recognize an impairment charge for the amount by which the carrying value exceeds the current estimated fair value of the real estate property. At the time our intent changes to dispose of one of our real estate properties, we compare the carrying value of the property to the estimated proceeds from disposition. If there is an impairment, we record an impairment for any excess including costs to sell. Assumptions and estimates used in the recoverability analyses for future cash flows, discount rates and capitalization rates are complex and subjective. Changes in economic and operating conditions or our intent with regard to our investment that occurs subsequent to our impairment analyses could impact these assumptions and result in future impairment of our long-lived assets.



Other than Temporary Impairment of Investments in Unconsolidated Entities

When circumstances indicate there may have been a reduction in the value of an equity investment, we evaluate whether the loss in value is other than temporary. If we determine there is a loss in value that is other than temporary, we recognize an impairment charge to reflect the investment at fair value. The use of projected future cash flows and other estimates of fair value, the determination of when a loss is other than temporary, and the calculation of the amount of the loss, is complex and subjective. Use of other estimates and assumptions may result in different conclusions. Changes in economic and operating conditions, as well as changes in our intent with regard to our investment, that occur subsequent to our review could impact these assumptions and result in future impairment charges of our equity investments.



Revenue Recognition - Gains on Disposition of Real Estate

We recognize gains from the contributions and sales of real estate assets, generally at the time the title is transferred, consideration is received and we no longer have substantial continuing involvement with the real estate sold. In many of our transactions, an entity in which we have an ownership interest will acquire a real estate asset from us. We make judgments based on the specific terms of each transaction as to the amount of the total profit from the transaction that we recognize given our continuing ownership interest and our level of future involvement with the entity that acquires the assets. We also make judgments regarding recognition in earnings of certain fees and incentives earned for services provided to these entities based on when they are earned, fixed and determinable. Business Combinations We acquire individual properties, as well as portfolios of properties, or businesses. We may also acquire a controlling interest in an entity previously accounted for under the equity method of accounting. When we acquire a business or individual operating properties, with the intention to hold the investment for the long-term, we allocate the purchase price to the various components of the acquisition based upon the fair value of each component. The components typically include land, building, debt, intangible assets related to above and below market leases, value of costs to obtain tenants, deferred tax liabilities and other assumed assets and liabilities in the case of an acquisition of a business. In an acquisition of multiple properties, we must also allocate the purchase price among the properties. The allocation of the purchase price is based on our assessment of estimated fair value and often times is based upon the expected future cash flows of the property and various characteristics of the markets where the property is located. The fair value may also include an enterprise value premium that we estimate a third party would be willing to pay for a portfolio of properties. In the case of an acquisition of a controlling interest in an entity previously accounted for under the equity method of accounting, this allocation may result in a gain or a loss. The initial allocation of the purchase price is based on management's preliminary assessment, which may differ when final information becomes available. Subsequent adjustments made to the initial purchase price allocation are made within the allocation period, which typically does not exceed one year.



Consolidation

We consolidate all entities that are wholly owned and those in which we own less than 100% but control, as well as any variable interest entities in which we are the primary beneficiary. We evaluate our ability to control an entity and whether the entity is a variable interest entity and we are the primary beneficiary through consideration of the substantive terms of the arrangement to identify which enterprise has the power to direct the activities of the entity that most significantly impacts the entity's economic performance and the obligation to absorb losses of the entity or the right to receive benefits from the entity. Investments in entities in which we do not control but over which we have the ability to exercise significant influence over operating and financial policies are presented under the equity method. Investments in entities that we do not control and over which we do not exercise significant influence are carried at the lower of cost or fair value, as appropriate. Our ability to correctly assess our influence and/or control over an entity affects the presentation of these investments in our consolidated financial statements.



Capitalization of Costs and Depreciation

We capitalize costs incurred in developing, renovating, rehabilitating, and improving real estate assets as part of the investment basis. Costs incurred in making repairs and maintaining real estate assets are expensed as incurred. During the land development and construction periods, we capitalize interest costs, insurance, real estate taxes and certain general and administrative costs of the personnel performing development, renovations, and rehabilitation if such costs are incremental and identifiable to a specific activity to get the asset ready for its intended use. 38



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Capitalized costs are included in the investment basis of real estate assets. We also capitalize costs incurred to successfully originate a lease that result directly from, and are essential to, the acquisition of that lease. Leasing costs that meet the requirements for capitalization are presented as a component of other assets. We estimate the depreciable portion of our real estate assets and related useful lives in order to record depreciation expense. Our ability to estimate the depreciable portions of our real estate assets and useful lives is critical to the determination of the appropriate amount of depreciation expense recorded and the carrying value of the underlying assets. Any change to the assets to be depreciated and the estimated depreciable lives of these assets would have an impact on the depreciation expense recognized.



Income Taxes

As part of the process of preparing our consolidated financial statements, significant management judgment is required to estimate our income tax liability, the liability associated with open tax years that are under review and our compliance with REIT requirements. Our estimates are based on interpretation of tax laws. We estimate our actual current income tax due and assess temporary differences resulting from differing treatment of items for book and tax purposes resulting in the recognition of deferred income tax assets and liabilities. These estimates may have an impact on the income tax expense recognized. Adjustments may be required by a change in assessment of our deferred income tax assets and liabilities, changes in assessments of the recognition of income tax benefits for certain non-routine transactions, changes due to audit adjustments by federal and state tax authorities, our inability to qualify as a REIT, the potential for built-in-gain recognition, changes in the assessment of properties to be contributed to taxable REIT subsidiaries and changes in tax laws. Adjustments required in any given period are included within income tax expense. We recognize the tax benefit from an uncertain tax position only if it is "more-likely-than-not" that the tax position will be sustained on examination by taxing authorities.



Derivative Financial Instruments

All derivatives are recognized at fair value in the Consolidated Balance Sheets within the line items Other Assets or Accounts Payable and Accrued Expenses, as applicable. We do not net our derivative position by counterparty for purposes of balance sheet presentation and disclosure. The accounting for gains and losses that result from changes in the fair values of derivative instruments depends on whether the derivatives are designated as, and qualify as, hedging instruments. Derivatives can be designated as fair value hedges, cash flow hedges or hedges of net investments in foreign operations. For derivatives that will be accounted for as hedging instruments in accordance with the accounting standards, we formally designate and document, at inception, the financial instrument as a hedge of a specific underlying exposure, the risk management objective and the strategy for undertaking the hedge transaction. In addition, we formally assess both at inception and at least quarterly thereafter, whether the derivatives used in hedging transactions are effective at offsetting changes in either the fair values or cash flows of the related underlying exposures. Any ineffective portion of a derivative financial instrument's change in fair value is immediately recognized in earnings. Derivatives not designated as hedges are not speculative and may be used to manage our exposure to foreign currency fluctuations and variable interest rates but do not meet the strict hedge accounting requirements. Changes in the fair value of derivatives that are designated and qualify as cash flow hedges and hedges of net investments in foreign operations are recorded in Accumulated Other Comprehensive Loss in the Consolidated Balance Sheets. Due to the high degree of effectiveness between the hedging instruments and the underlying exposures hedged, fluctuations in the value of the derivative instruments will generally be offset by changes in the fair values or cash flows of the underlying exposures being hedged. The changes in fair values of derivatives that were not designated and/or did not qualify as hedging instruments are immediately recognized in earnings. For cash flow hedges, we reclassify changes in the fair value of derivatives into the applicable line item in the Consolidated Statements of Operations in which the hedged items are recorded in the same period that the underlying hedged items affect earnings.



New Accounting Pronouncements

See Note 2 to the Consolidated Financial Statements in Item 8.

Funds from Operations ("FFO")

FFO is a non-GAAP measure that is commonly used in the real estate industry. The most directly comparable GAAP measure to FFO is net earnings. Although the National Association of Real Estate Investment Trusts ("NAREIT") has published a definition of FFO, modifications to the NAREIT calculation of FFO are common among REITs, as companies seek to provide financial measures that meaningfully reflect their business. FFO is not meant to represent a comprehensive system of financial reporting and does not present, nor do we intend it to present, a complete picture of our financial condition and operating performance. We believe net earnings computed under GAAP remains the primary measure of performance and that FFO is only meaningful when it is used in conjunction with net earnings computed under GAAP. Further, we believe our consolidated financial statements, prepared in accordance with GAAP, provide the most meaningful picture of our financial condition and our operating performance. 39



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NAREIT's FFO measure adjusts net earnings computed under GAAP to exclude historical cost depreciation and gains and losses from the sales, along with impairment charges, of previously depreciated properties. We agree that these NAREIT adjustments are useful to investors for the following reasons:



(i) historical cost accounting for real estate assets in accordance with GAAP

assumes, through depreciation charges, that the value of real estate assets

diminishes predictably over time. NAREIT stated in its White Paper on FFO

"since real estate asset values have historically risen or fallen with market

conditions, many industry investors have considered presentations of

operating results for real estate companies that use historical cost

accounting to be insufficient by themselves." Consequently, NAREIT's

definition of FFO reflects the fact that real estate, as an asset class,

generally appreciates over time and depreciation charges required by GAAP do

not reflect the underlying economic realities.



(ii) REITs were created as a legal form of organization in order to encourage

public ownership of real estate as an asset class through investment in

firms that were in the business of long-term ownership and management of

real estate. The exclusion, in NAREIT's definition of FFO, of gains and

losses from the sales, along with impairment charges, of previously

depreciated operating real estate assets allows investors and analysts to

readily identify the operating results of the long-term assets that form the

core of a REIT's activity and assists in comparing those operating results

between periods. We include the gains and losses (including impairment

charges) from dispositions of land and development properties, as well as

our proportionate share of the gains and losses (including impairment charges) from dispositions of development properties recognized by our unconsolidated entities, in our definition of FFO.



Our FFO Measures

At the same time that NAREIT created and defined its FFO measure for the REIT industry, it also recognized that "management of each of its member companies has the responsibility and authority to publish financial information that it regards as useful to the financial community." We believe stockholders, potential investors and financial analysts who review our operating results are best served by a defined FFO measure that includes other adjustments to net earnings computed under GAAP in addition to those included in the NAREIT defined measure of FFO. Our FFO measures are used by management in analyzing our business and the performance of our properties and we believe that it is important that stockholders, potential investors and financial analysts understand the measures management uses. We use these FFO measures, including by segment and region, to: (i) evaluate our performance and the performance of our properties in comparison to expected results and results of previous periods, relative to resource allocation decisions; (ii) evaluate the performance of our management; (iii) budget and forecast future results to assist in the allocation of resources; (iv) assess our performance as compared to similar real estate companies and the industry in general; and (v) evaluate how a specific potential investment will impact our future results. Because we make decisions with regard to our performance with a long-term outlook, we believe it is appropriate to remove the effects of short-term items that we do not expect to affect the underlying long-term performance of the properties. The long-term performance of our properties is principally driven by rental income. While not infrequent or unusual, these additional items we exclude in calculating FFO, as defined by Prologis, are subject to significant fluctuations from period to period that cause both positive and negative short-term effects on our results of operations in inconsistent and unpredictable directions that are not relevant to our long-term outlook.



We use our FFO measures as supplemental financial measures of operating performance. We do not use our FFO measures as, nor should they be considered to be, alternatives to net earnings computed under GAAP, as indicators of our operating performance, as alternatives to cash from operating activities computed under GAAP or as indicators of our ability to fund our cash needs.

FFO, as defined by Prologis

To arrive at FFO, as defined by Prologis, we adjust the NAREIT defined FFO measure to exclude:

(i) deferred income tax benefits and deferred income tax expenses recognized by

our subsidiaries;



(ii) current income tax expense related to acquired tax liabilities that were

recorded as deferred tax liabilities in an acquisition, to the extent the

expense is offset with a deferred income tax benefit in GAAP earnings that

is excluded from our defined FFO measure;



(iii) foreign currency exchange gains and losses resulting from debt transactions

between us and our foreign consolidated subsidiaries and our foreign unconsolidated entities;



(iv) foreign currency exchange gains and losses from the remeasurement (based on

current foreign currency exchange rates) of certain third party debt of our

foreign consolidated subsidiaries and our foreign unconsolidated entities; and



(v) mark-to-market adjustments and related amortization of debt discounts

associated with derivative financial instruments.

We calculate FFO, as defined by Prologis for our unconsolidated entities on the same basis as we calculate our FFO, as defined by Prologis.

We believe investors are best served if the information that is made available to them allows them to align their analysis and evaluation of our operating results along the same lines that our management uses in planning and executing our business strategy. 40



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Core FFO

In addition to FFO, as defined by Prologis, we also use Core FFO. To arrive at Core FFO, we adjust FFO, as defined by Prologis, to exclude the following recurring and non-recurring items that we recognized directly or our share of these items recognized by our unconsolidated entities to the extent they are included in FFO, as defined by Prologis:



(i) gains or losses from acquisition, contribution or sale of land or development

properties;



(ii) income tax expense related to the sale of investments in real estate and

third-party acquisition costs related to the acquisition of real estate;

(iii) impairment charges recognized related to our investments in real estate

generally as a result of our change in intent to contribute or sell these

properties;



(iv) gains or losses from the early extinguishment of debt;

(v) merger, acquisition and other integration expenses; and

(vi) expenses related to natural disasters.

We believe it is appropriate to further adjust our FFO, as defined by Prologis for certain recurring items as they were driven by transactional activity and factors relating to the financial and real estate markets, rather than factors specific to the on-going operating performance of our properties or investments. The impairment charges we have recognized were primarily based on valuations of real estate, which had declined due to market conditions, that we no longer expected to hold for long-term investment. Over the last few years, we made it a priority to strengthen our financial position by reducing our debt, our investment in certain low yielding assets and our exposure to foreign currency exchange fluctuations. As a result, we changed our intent to sell or contribute certain of our real estate properties and recorded impairment charges when we did not expect to recover the cost of our investment. Also, we have purchased portions of our debt securities when we believed it was advantageous to do so, which was based on market conditions, and in an effort to lower our borrowing costs and extend our debt maturities. As a result, we have recognized net gains or losses on the early extinguishment of certain debt due to the financial market conditions at that time. We have also adjusted for some non-recurring items. The merger, acquisition and other integration expenses included costs we incurred in 2011 and 2012 associated with the merger with AMB and ProLogis and the PEPR Acquisition and the integration of our systems and processes. In addition, we and our co-investment ventures make acquisitions of real estate and we believe the costs associated with these transactions are transaction based and not part of our core operations. We analyze our operating performance primarily by the rental income of our real estate and the revenue driven by our investment management 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. As a result, although these items have had a material impact on our operations and are reflected in our financial statements, the removal of the effects of these items allows us to better understand the core operating performance of our properties over the long-term. We use Core FFO, including by segment and region, to: (i) evaluate our performance and the performance of our properties in comparison to expected results and results of previous periods, relative to resource allocation decisions; (ii) evaluate the performance of our management; (iii) budget and forecast future results to assist in the allocation of resources; (iv) provide guidance to the financial markets to understand our expected operating performance; (v) assess our operating performance as compared to similar real estate companies and the industry in general; and (vi) evaluate how a specific potential investment will impact our future results. Because we make decisions with regard to our performance with a long-term outlook, we believe it is appropriate to remove the effects of items that we do not expect to affect the underlying long-term performance of the properties we own. As noted above, we believe the long-term performance of our properties is principally driven by rental income. We believe investors are best served if the information that is made available to them allows them to align their analysis and evaluation of our operating results along the same lines that our management uses in planning and executing our business strategy.



Limitations on Use of our FFO Measures

While we believe our defined FFO measures are important supplemental measures, neither NAREIT's nor our measures of FFO should be used alone because they exclude significant economic components of net earnings computed under GAAP and are, therefore, limited as an analytical tool. Accordingly, these are only a few of the many measures we use when analyzing our business. Some of these limitations are:



(i) The current income tax expenses and acquisition costs that are excluded from

our defined FFO measures represent the taxes and transaction costs that are

payable.



(ii) Depreciation and amortization of real estate assets are economic costs that

are excluded from FFO. FFO is limited, as it does not reflect the cash

requirements that may be necessary for future replacements of the real

estate assets. Further, the amortization of capital expenditures and leasing

costs necessary to maintain the operating performance of industrial properties are not reflected in FFO. 41



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charges related to expected dispositions represent changes in value of the

properties. By excluding these gains and losses, FFO does not capture

realized changes in the value of acquired or disposed properties arising

from changes in market conditions.



(iv) The deferred income tax benefits and expenses that are excluded from our

defined FFO measures result from the creation of a deferred income tax asset

or liability that may have to be settled at some future point. Our defined

FFO measures do not currently reflect any income or expense that may result

from such settlement.



(v) The foreign currency exchange gains and losses that are excluded from our

defined FFO measures are generally recognized based on movements in foreign

currency exchange rates through a specific point in time. The ultimate

settlement of our foreign currency-denominated net assets is indefinite as to

timing and amount. Our FFO measures are limited in that they do not reflect

the current period changes in these net assets that result from periodic

foreign currency exchange rate movements.



(vi) The gains and losses on extinguishment of debt that we exclude from our Core

FFO, may provide a benefit or cost to us as we may be settling our debt at

less or more than our future obligation.



(vii) The merger, acquisition and other integration expenses and the natural

disaster expenses that we exclude from Core FFO are costs that we have incurred. We compensate for these limitations by using our FFO measures only in conjunction with net earnings computed under GAAP when making our decisions. This information should be read with our complete consolidated financial statements prepared under GAAP. To assist investors in compensating for these limitations, we reconcile our defined FFO measures to our net earnings computed under GAAP for the years ended December 31 as follows (in thousands). 2013 2012 2011 FFO: Reconciliation of net loss to FFO measures: Net earnings (loss) attributable to common stockholders $ 315,422$ (80,946)$ (188,110) Add (deduct) NAREIT defined adjustments: Real estate related depreciation and amortization 624,573 705,717 523,424 Impairment charges on certain real estate properties - 34,801 5,300 Net (gain) loss on non-FFO dispositions and acquisitions (271,315) (207,033) 3,092 Reconciling items related to noncontrolling interests (8,993) (27,680) (19,889) Our share of reconciling items included in earnings from unconsolidated entities 159,792 127,323 147,608 Subtotal-NAREIT defined FFO 819,479 552,182 471,425 Add (deduct) our defined adjustments: Unrealized foreign currency and derivative losses (gains) and related amortization, net 32,870 14,892 (39,034) Deferred income tax expense (benefit) 656 (8,804) (19,803) Our share of reconciling items included in earnings from unconsolidated entities 2,168 (5,835) (900) FFO, as defined by Prologis 855,173 552,435 411,688 Net gains on acquisitions and dispositions of investments in real estate, net of expenses (336,815) (121,303) (110,469) Losses (gains) on early extinguishment of debt and redemption of preferred stock 286,122 14,114 (258) Our share of reconciling items included in earnings from unconsolidated entities 8,744 23,097 2,223 Impairment charges - 264,844 145,028 Merger, acquisition and other integration expenses - 80,676 140,495 Natural disaster expenses - - 5,210 Core FFO $ 813,224$ 813,863$ 593,917


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