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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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
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
made investments in real estate, as well as in our co-investment ventures as
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
• 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
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 Statesprimarily 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
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
through development starts and an additional
• 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
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
resources system (implemented in
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
serve as the long-term investment vehicle for our stabilized properties
Exchange and commenced trading. At that time,
12 properties from us for an aggregate purchase price of ¥173 billion
and used the proceeds to buy properties from us at appraised value.
Prologis European Logistics Partners SÀrl ("PELP"). PELP is structured as
a 50/50 joint venture with
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 (
billion). PELP acquired additional properties from us during 2013. • In November, we extended the relationship with our partner in
formed Prologis China Logistics Venture 2. The venture is expected to
build, acquire and manage properties in
investment capacity of over
$1 billion, including $588 millionof committed equity of which $88 millionis our share.
• We announced the formation of Prologis U.S. Logistics Venture ("USLV")
with NBIM in December. We closed on the venture in
January 2014with a contribution of 66 operating properties aggregating 12.8 million square
feet for an aggregate purchase price
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
• In connection with the wind down of Prologis Japan Fund I in
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
promote payment was
noncontrolling interest in the Consolidated Statements of Operations in
Item 8. The assets and liabilities associated with this venture were
wholly owned at
January 2014. • On August 6, 2013, NAIF III sold 73 properties to a third party for
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
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
• 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
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 millionand $139.2 million, respectively. • We generated net proceeds of $785.6 millionfrom 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
our unconsolidated co-investment ventures, which includes increasing our
investment in three ventures:
• We increased our ownership interest in
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
billion in net proceeds ("Equity Offering"). • In April, we redeemed
$482.5 millionof 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
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
$ 850,0004.25 % August 15, 2023 August 15, 2013 $ 400,0002.75 % February 15, 2019 November 1, 2013 $ 500,0003.35 % 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
billion through tender offers or private transactions, which resulted in
a loss on early extinguishment of
• We repaid
average borrowing cost of 2.4%) with the proceeds from the contribution
of properties, primarily to PELP and
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 millionin 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
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
owned for these projects. We expect these developments to be completed by
June 2015or 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
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.
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
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Guadalajara, Juarez, Reynosaand 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 Tokyoand 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 Chinais 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
(b) according to
(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 $ 1,026,825Rental 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 $ 911,433Operating margin 69.5% 71.8% 71.0% Average occupancy 93.6% 92.6% 89.9%
Detail of our consolidated operating properties as of
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
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,
$77.5 millionin 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
compares to 2012, when we leased 92.4 million square feet with turnover
the longer term and higher value on the leases signed, resulting in higher
• 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
• 2012 - aggregated total portfolio of
• 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
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 31was as follows (dollars in thousands): 2013 2012 2011 Net operating income - Investment Management Segment: Americas: Asset management and other fees $ 52,030 $ 55,448 $ 60,240Leasing 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 $ 82,657Operating Margin 50.3% 49.7% 60.1% 26
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We had the following unconsolidated co-investment ventures under management as of
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 $ 12,966,744Europe: Number of ventures 4 3 3 Square feet 132,876 70,294 67,088 Gross book value $ 11,880,603 $ 6,670,689 $ 6,261,114Asia: Number of ventures 2 2 2 Square feet 22,880 11,004 10,123 Gross book value $ 3,697,179 $ 1,764,608 $ 2,039,881Total: Number of ventures 10 11 15 Square feet 264,293 208,753 267,752 Gross book value $ 23,830,765 $ 17,625,935 $ 21,267,739Investment 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 millionfor 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 NPRand 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 2011and the acquisition of three of our co-investment ventures in 2012; Prologis North American Industrial Fund II, Prologis California and Prologis North American Fund1 (collectively the "2012 Co-Investment Venture Acquisitions").
We expect the net operating income of this segment to increase in 2014 due to
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 31consisted of the following (in thousands): 2013 2012 2011 Gross overhead $ 434,933 $ 394,845 $ 332,632Less: 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 $ 195,16127
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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 billionto $45.5 billionat 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 $ 34,301Leasing 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
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 billionduring 2013, 2012, and 2011 respectively.
Depreciation and Amortization
Depreciation and amortization was
$648.7 million, $724.3 millionand $542.4 millionfor 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.
During 2012 and 2011, we recognized impairment charges of real estate properties in continuing operations of
$252.9 millionand $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 millionand $59.9 millionfor 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 from continuing operations included the following components (in thousands) for the years ended
2013 2012 2011 Gross interest expense
$ 471,923 $ 578,518 $ 498,518
Amortization of discount (premium), net (39,015) (36,687)
Amortization of deferred loan costs 14,374 16,781
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
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 billionfrom 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 millionof 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 millionand 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 millionand 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 millionand $7.4 millionin 2013 and 2012, respectively, and losses of $5.9 millionin 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 Statesparent and certain consolidated subsidiaries in Japanand Europeand 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 millionand $5.6 million, and gains of $2.1 millionfrom 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 millionin 2013 and 2012, respectively, and an unrealized gain of $45.0 millionin 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 millionand $14.1 millionin 2013 and 2012, respectively, and gains of $0.3 millionin 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 millionon 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 millionand $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
Our income taxes are discussed in more detail in Note 16 to the Consolidated Financial Statements in Item 8.
Earnings from discontinued operations were
$123.5 million, $75.9 millionand $117.0 millionfor 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 millionrelated to foreign currency translations of our foreign subsidiaries into U.S. dollars upon consolidation. This included approximately $190 millionof foreign currency translation losses on the properties contributed to PELP and NPRdue 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 millionas the Japanese yen weakened relative to the U.S. dollar by 10.1% from December 31, 2011to 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 millionas the euro and British pound sterling remained relatively flat from December 31, 2010to 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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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 $ 1,559,493Rental expenses 130,354 109,837 106,811 104,936 451,938 Net operating income $ 313,790 $ 254,119 $ 265,374 $ 274,272 $ 1,107,5552012 Rental income and rental recoveries $ 433,984 $ 459,290 $ 460,213 $ 470,294 $ 1,823,781Rental expenses 115,674 123,248 124,401 127,916 491,239 Net operating income $ 318,310 $ 336,042 $ 335,812 $ 342,378 $ 1,332,54231
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
Rental recoveries per the Consolidated Statements of Operations 77,581
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)
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 $ 751,4000.8% Rental Expenses (1)(4) Consolidated: Rental expenses per the Consolidated Statements of Operations $ 104,936$
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)
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 $ 342,378Adjustments 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)
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 $ 545,8452.7%
(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
(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.
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
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.
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 millionsenior term loan that was extended in January 2014until 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
and leased, leaving
We expect to fund our cash needs principally from the following sources, all subject to market conditions:
• available unrestricted cash balances (
• 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
• borrowing capacity under our current credit facility arrangements discussed
• 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
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
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December 31, 2013, we had $9.0 billionof 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 billionof senior notes during 2013 and used the proceeds to repay $1.7 billionof senior notes and balances on our credit facilities.
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 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
Expiration date for remaining Equity commitments commitments Venture Prologis Partners Total
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 $ 2,463.5Brazil Fund (1) $ 56.9 $ 56.9 $ 113.8December 2017 Total Consolidated $ 56.9 $ 56.9 $ 113.8Grand 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
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 millionand $207.1 millionfor 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 millionand $207.0 million, respectively. We used a portion of the cash proceeds from the disposition of real estate properties ( $5.4 billionin 2013, $2.0 billionin 2012 and $1.6 billionin 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
• We generated cash from contributions and dispositions of properties and
land parcels of
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
$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
for first generation leases. We have 46 properties under development and 11
properties that are completed but not stabilized as of
and we expect to continue to develop new properties as the opportunities
arise. • We invested
$228.0 million, $214.2 millionand $144.1 millionin 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
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
the consolidation of NAIF II. Also in 2012, we paid
connection with the acquisition of two of our unconsolidated co-investment
• In 2013, we acquired 536 acres of land and 26 operating properties for a
combined total of
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
$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
repayment of advances by the entities. Our investment in 2013 principally
relates to our investment in
joint ventures of
more detail on these investments.
• We received distributions from unconsolidated entities as a return of
2013, 2012 and 2011, respectively. We received
with the wind down of Prologis Japan Fund I in 2013. During 2012, we
our other joint ventures that held a note receivable that was repaid during
• In 2012, we received a full redemption of a
that was issued in 2011 through the sale of non-industrial assets. • In connection with the Merger in 2011, we acquired
$234.0 millionin cash. • In 2011, we used $1.0 billionof 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
of 35.65 million shares of common stock. In
equity offering and issued 34.5 million shares of common stock and received
net proceeds of approximately
• We generated proceeds from the issuance of common stock under our incentive
stock plans, principally stock options, of
in 2013 and 2012, respectively. We had minimal activity in 2011.
• In 2013, we paid
M, O, P, R and S of preferred stock.
• We paid distributions of
to our common stockholders during 2013, 2012 and 2011, respectively. We
paid dividends on our preferred stock of
$27.0 millionduring 2013, 2012 and 2011, respectively.
• In 2013, we purchased our partners' interest in Fund II for
In 2012, we purchased an additional interest in PEPR for
Fund II for
in 2013 and 2012, limited partners in the
units for cash of
$4.9 millionand $5.8 million, respectively. • In 2013, 2012 and 2011, partners in consolidated co-investment ventures
made contributions of
respectively, primarily for the purchase of real estate properties by
Mexico Fondo Logistico and development within the
joint ventures. 35
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• In 2013, 2012, and 2011, we distributed
$17.4 millionto various noncontrolling interests, respectively. The distribution in 2013 includes cash distributions of $40.6 millionto our partners in Prologis AMS due to the disposition of a portfolio of properties.
• In 2013, we incurred
loan. In 2012, we incurred
mortgage debt and senior term loan. In 2011, we incurred
secured mortgage debt and borrowed
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
mortgage debt primarily with the proceeds received from contributions of
properties to PELP and
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 billionand $894.2 million, respectively.
• We made payments of
regularly scheduled debt principal and maturity payments during 2013, 2012
and 2011, respectively. In 2013, we repaid
$483.6 millionof exchangeable senior notes and $135.9 millionof secured mortgage debt. Also in 2013, we made payments of $899.0 millionon the senior term loan. In 2011, we used $711.8 millionin
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
respectively, on our credit facilities and received net proceeds of
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
Prologis North American IndustrialFund - 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 FundII (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
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
(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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Long-Term Contractual Obligations
We had long-term contractual obligations at
December 31, 2013as 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 $ 7,785Interest 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
that was extended to 2015 in
(2) We had properties in our development portfolio (completed and under
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
$0.28per 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.
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.
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.
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
(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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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
(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
(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
(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 31as 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