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Prologis Reports Second Quarter 2016 Earnings Results

“The incredible effort the team has made to position our portfolio and to optimize our business is paying off,” said Hamid Moghadam, chairman and CEO, Prologis. “We delivered another great quarter and we remain focused on refining our portfolio consistent with our investment strategy, further strengthening our balance sheet and increasing operational efficiencies. These efforts keep us on the path for above-average earnings growth across the business cycle.”

Moghadam added: “Demand remains ahead of supply in both the U.S. and Europe, leading to all-time low vacancy rates. In spite of Brexit, our key business drivers remain intact, and we do not anticipate a material operational impact. Consumers continue to migrate toward e-commerce, and companies still need to adapt their supply chain strategies, driving demand for high-quality, well-located logistics facilities.”

ROBUST RESULTS REFLECT CONTINUED STRENGTH IN FUNDAMENTALS FOR HIGH-QUALITY ASSETS

Owned & Managed

2Q16

2Q15

Notes

Period End Occupancy

96.1%

95.4%

Europe increased 130 bps year-over-year

Leases Signed

49MSF

45MSF

Record leasing volume, including 9 msf of development leasing

Customer Retention

82.6%

79.0%

 

Prologis Share

2Q16

2Q15

Notes

Net Effective Rent Change

17.8%

16.6%

Led by the U.S. at 23.5%

Cash Rent Change

7.9%

5.2%

Net Effective Same Store NOI

6.1%

5.9%

Led by the U.S. at 7.5%

Cash Same Store NOI

5.3%

5.2%

 

SELF-FUNDING CONTINUES AS DISPOSITIONS AND DEVELOPMENT STARTS ACCELERATE

Prologis Share

2Q16

Notes

Building Acquisitions

$58M

     Weighted avg stabilized cap rate

6.4%

Development Stabilizations

$621M

     Estimated weighted avg yield

6.8%

     Estimated weighted avg margin

25.7%

     Estimated value creation

$159M

Development Starts

$465M

     Estimated weighted avg margin

17.6%

     Estimated value creation

$82M

      % Build-to-suit

49.8%

Total Dispositions and Contributions

$558M

      Weighted avg stabilized cap rate

6.5%

Excludes land and other real estate

Total Fund Ownership Rebalances

$411M

 

STRONG LIQUIDITY POSITION CONTINUES TO BUILD 
Prologis increased its total liquidity to $3.7 billion. During the second quarter, notable capital markets activities included the recast and upsize of the company’s Global Line of Credit to $3.0 billion.

“Our balance sheet and liquidity have never been stronger,” said Thomas S. Olinger, chief financial officer, Prologis. “We expect our financial position to continue to improve with additional capital proceeds in the back half of the year. We plan to generate proceeds above our prior forecast from incremental dispositions and contributions as well as from $200 million of additional ownership rebalancing across two of our co-investment ventures.”

GUIDANCE UPDATED FOR 2016 
Net earnings guidance increased $0.89 at the midpoint, primarily a result of an increase in expected gains from the disposition of real estate.

“We anticipate meaningful outperformance from operations,” Olinger said. “This performance will more than offset the incremental dilution from the increase in dispositions, contributions and fund ownership rebalances. Additionally, we modestly lowered our net promote income, principally driven by a negative debt mark-to-market adjustment and the weakening of the pound against the euro. With respect to guidance, these changes offset one another, and we are holding the midpoint of our Core FFO guidance constant.”

Per diluted share

Previous

Revised

GAAP Net Earnings

$0.87 to $0.95

$1.70 to $1.90

Core FFO

$2.50 to $2.60

$2.52 to $2.58

 

Operations     

Previous   

Revised

Same Store NOI – Prologis share

4.0% to 4.5%

4.75% to 5.25%

                                                                                           

Other Assumptions (in millions)  

Previous 

Revised

Strategic capital revenue

$180 to $190

$190 to $200

Net promote income

$90 to $100

$75 to $85

Realized development gains

$150 to $200

$200 to $250

Liquidity

$3,700

$4,000

                                                                                          

Capital Deployment (in millions)  

Previous 

Revised

Development stabilizations (85% Prologis share)

$2,000 to $2,200

$2,200 to $2,400

Development starts (85% Prologis share)

$1,800 to $2,300

$2,000 to $2,300

Building acquisitions (50% Prologis share)

$400 to $700

$300 to $500

Building and land dispositions (75% Prologis share)

$1,700 to $2,200

$2,000 to $2,300

Building contributions (75% Prologis share, net of retained ownership)

$900 to $1,200

$1,100 to $1,400

 

The earnings guidance described above includes potential future gains (losses) recognized from real estate transactions but excludes any future foreign currency or derivative gains or losses as these items are difficult to predict. In reconciling from net earnings to Core FFO, Prologis makes certain adjustments, including but not limited to real estate depreciation and amortization expense, gains (losses) recognized from real estate transactions and early extinguishment of debt, acquisition costs, impairment charges, deferred taxes and unrealized gains or losses on foreign currency or derivative activity. The difference between the company’s Core FFO and net earnings guidance for 2016 relates predominantly to these items. Refer to our second quarter Supplemental Information that is available on our Investor Relations website at www.ir.prologis.com and on the SEC’s website at www.sec.gov for a definition of Core FFO and other non-GAAP measures used by Prologis, along with reconciliations of these items to the closest GAAP measure for our results and guidance.

WEBCAST & CONFERENCE CALL INFORMATION
Prologis will host a live webcast and conference call to discuss quarterly results, current market conditions and future outlook. Here are the event details:

  • Tuesday, July 19, 2016, at 12 p.m. U.S. Eastern Time.
  • Live webcast at http://ir.prologis.com by clicking Investors>Investor Events and Presentations.
  • Dial in: +1 877-256-7020 or +1 973-409-9692 and enter Passcode 37196022.

A telephonic replay will be available July 19-26 at +1 (855) 859-2056 (from the United States and Canada) or +1 (404) 537-3406 (from all other countries) using conference code 37196022. The webcast replay will be posted when available in the Investor Relations “Events & Presentations” section.

ABOUT PROLOGIS
Prologis, Inc. is the global leader in logistics real estate with a focus on high-barrier, high-growth markets. As of June 30, 2016, the company owned or had investments in, on a wholly owned basis or through co-investment ventures, properties and development projects expected to total approximately 666 million square feet (62 million square meters) in 20 countries. Prologis leases modern distribution facilities to a diverse base of approximately 5,200 customers across two major categories: business-to-business and retail/online fulfillment.

FORWARD-LOOKING STATEMENTS
The statements in this document that are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are based on current expectations, estimates and projections about the industry and markets in which we operate as well as management’s beliefs and assumptions. Such statements involve uncertainties that could significantly impact our financial results. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and variations of such words and similar expressions are intended to identify such forward-looking statements, which generally are not historical in nature.  All statements that address operating performance, events or developments that we expect or anticipate will occur in the future — including statements relating to rent and occupancy growth, development activity and changes in sales or contribution volume of properties, disposition activity, general conditions in the geographic areas where we operate, our debt, capital structure and financial position, our ability to form new co-investment ventures and the availability of capital in existing or new co-investment ventures — are forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Although we believe the expectations reflected in any forward-looking statements are based on reasonable assumptions, we can give no assurance that our expectations will be attained and therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. Some of the factors that may affect outcomes and results include, but are not limited to: (i) national, international, regional and local economic climates, (ii) changes in financial markets, interest rates and foreign currency exchange rates, (iii) increased or unanticipated competition for our properties, (iv) risks associated with acquisitions, dispositions and development of properties, (v) maintenance of real estate investment trust status, tax structuring and income tax rates (vi) availability of financing and capital, the levels of debt that we maintain and our credit ratings, (vii) risks related to our investments in our co-investment ventures, including our ability to establish new co-investment ventures and funds, (viii) risks of doing business internationally, including currency risks, (ix) environmental uncertainties, including risks of natural disasters, and (x) those additional factors discussed in reports filed with the Securities and Exchange Commission by us under the heading “Risk Factors.” We undertake no duty to update any forward-looking statements appearing in this document.

 

dollars in millions, except per share/unit data

Three Months ended
June 30,

Six Months ended
June 30,

2016

2015

2016

2015

Revenues

$ 602

$ 510

$ 1,208

$ 973

Revenues – Prologis share

674

610

1,351

1,189

Net earnings attributable to common stockholders

275

140

483

485

Core FFO

324

274

654

528

AFFO

260

292

606

503

Adjusted EBITDA

459

490

1,009

858

Estimated value creation from development starts – Prologis share

82

156

121

202

Common stock dividends and common limited partnership unit distributions

231

189

461

378

Per common share – diluted:

Net earnings attributable to common stockholders

$0.52

$0.27

$   0.92

$0.92

Core FFO

0.60

0.52

1.20

1.01

AFFO

0.48

0.55

1.12

0.96

Business line reporting:

Real estate operations 

0.54

0.48

1.10

0.93

Strategic capital 

0.06

0.04

0.10

0.08

Core FFO

0.60

0.52

1.20

1.01

Realized development gains, net of taxes

0.02

0.14

0.18

0.15

Dividends and distributions per common share/unit

0.42

0.36

0.84

0.72

 

in thousands

June 30,
2016

March 31,
2016

December 31,
2015

Assets:

Investments in real estate properties:

Operating properties

$ 23,913,335

$ 23,788,600

$ 23,735,745

Development portfolio

1,770,771

1,923,362

1,872,903

Land

1,322,214

1,341,600

1,359,794

Other real estate investments

550,090

575,118

552,926

27,556,410

27,628,680

27,521,368

Less accumulated depreciation

3,521,198

3,424,143

3,274,284

Net investments in real estate properties

24,035,212

24,204,537

24,247,084

Investments in and advances to unconsolidated entities

4,483,804

4,866,664

4,755,620

Assets held for sale

393,434

431,332

378,423

Notes receivable backed by real estate

33,800

37,550

235,050

Net investments in real estate

28,946,250

29,540,083

29,616,177

Cash and cash equivalents

332,221

369,737

264,080

Other assets

1,467,463

1,465,928

1,514,510

Total assets

$ 30,745,934

$ 31,375,748

$ 31,394,767

Liabilities and Equity:

Liabilities:

Debt 

$ 11,139,415

$ 11,687,171

$ 11,626,831

Accounts payable, accrued expenses and other liabilities

1,323,485

1,347,953

1,347,100

Total liabilities

12,462,900

13,035,124

12,973,931

Equity:

Stockholders’ equity:

Preferred stock

78,235

78,235

78,235

Common stock 

5,265

5,251

5,245

Additional paid-in capital 

19,361,787

19,302,387

19,302,367

Accumulated other comprehensive loss

(848,079)

(813,900)

(791,429)

Distributions in excess of net earnings

(3,885,017)

(3,939,312)

(3,926,483)

Total stockholders’ equity

14,712,191

14,632,661

14,667,935

Noncontrolling interests

3,154,205

3,264,088

3,320,227

Noncontrolling interests – limited partnership unitholders

416,638

443,875

432,674

Total equity

18,283,034

18,340,624

18,420,836

Total liabilities and equity

$ 30,745,934

$ 31,375,748

$ 31,394,767

 

in thousands, except per share amounts

Three Months Ended

Six Months Ended

June 30,

June 30,

2016

2015

2016

2015

Revenues:

Rental

$ 546,131

$ 461,444

$ 1,100,247

$ 880,246

Strategic capital 

51,322

47,046

100,988

89,071

Development management and other 

4,702

1,914

7,220

3,934

 Total revenues 

602,155

510,404

1,208,455

973,251

Expenses:

Rental 

140,725

125,820

287,306

252,915

Strategic capital 

27,866

24,947

53,159

50,129

General and administrative 

56,934

51,974

107,477

103,280

Depreciation and amortization

230,382

190,188

480,382

359,996

Other

3,900

30,127

8,585

35,702

Total expenses

459,807

423,056

936,909

802,022

Operating income

142,348

87,348

271,546

171,229

Other income (expense):

Earnings from unconsolidated entities, net

41,454

41,784

99,765

72,826

Interest expense

(76,455)

(68,902)

(157,267)

(137,663)

Gains on dispositions of development properties and land, net

12,299

74,236

106,284

75,067

Gains on dispositions of real estate, net (excluding development properties and land)

188,051

34,546

238,383

311,430

Foreign currency and derivative gains (losses) and interest and other income (expense), net

(8,808)

(23,665)

(20,428)

21,950

Gain (losses) on early extinguishment of debt, net

2,044

(236)

992

(16,525)

Total other income

158,585

57,763

267,729

327,085

Earnings before income taxes

300,933

145,111

539,275

498,314

Current income tax expense

(9,125)

(4,706)

(25,281)

(5,545)

Deferred income tax benefit (expense)

3,983

(145)

4,602

(1,197)

Consolidated net earnings

295,791

140,260

518,596

491,572

Net loss (earnings) attributable to noncontrolling interests

(18,712)

1,658

(31,787)

(2,778)

Net earnings attributable to controlling interests

277,079

141,918

486,809

488,794

Preferred stock dividends

(1,696)

(1,678)

(3,385)

(3,348)

Net earnings attributable to common stockholders

$ 275,383

$ 140,240

$    483,424

$ 485,446

Weighted average common shares outstanding – Diluted

545,388

530,640

544,293

529,827

Net earnings per share attributable to common stockholders – Diluted

$       0.52

$       0.27

$          0.92

$       0.92

 

in thousands

Three Months Ended

Six Months Ended

June 30,

June 30,

2016

2015

2016

2015

Net earnings attributable to common stockholders

$ 275,383

$ 140,240

$ 483,424

$ 485,446

Add (deduct) NAREIT defined adjustments:

Real estate related depreciation and amortization

221,233

183,237

464,825

347,488

Gains on dispositions of real estate, net (excluding development properties and land)

(188,051)

(34,546)

(238,383)

(311,430)

Reconciling items related to noncontrolling interests

(24,015)

(20,781)

(64,290)

(32,293)

Our share of reconciling items related to unconsolidated co-investment ventures

40,027

47,578

80,027

94,950

Our share of reconciling items related to other unconsolidated ventures

1,522

1,577

(984)

3,298

Subtotal-NAREIT defined FFO

$ 326,099

$ 317,305

$ 724,619

$ 587,459

Add (deduct) our defined adjustments:

Unrealized foreign currency and derivative losses (gains), net

8,451

29,354

23,779

(3,506)

Deferred income tax expense (benefit)

(3,983)

145

(4,602)

1,197

Reconciling items related to noncontrolling interests

803

776

1,286

(792)

Our share of reconciling items related to unconsolidated co-investment ventures

2,314

(15,836)

340

(13,887)

FFO, as defined by Prologis

$ 333,684

$ 331,744

$ 745,422

$ 570,471

Adjustments to arrive at Core FFO:

Net gain on dispositions of development properties and land, net of taxes 

(10,503)

(76,306)

(96,165)

(79,540)

Acquisition expenses

967

26,130

2,228

27,434

Losses (gains) on early extinguishment of debt, net

(2,044)

236

(992)

16,525

Reconciling items related to noncontrolling interests

966

(10,198)

1,056

(12,227)

Our share of reconciling items related to unconsolidated entities

855

2,279

2,009

5,601

Core FFO

$ 323,925

$ 273,885

$ 653,558

$ 528,264

Adjustments to arrive at Adjusted FFO (“AFFO”), including our share of unconsolidated co-investment ventures less third party share of consolidated entities:

Net gains on dispositions of development properties and land, net of taxes

10,503

76,306

96,165

79,540

Straight-lined rents and amortization of lease intangibles

(22,830)

(10,528)

(54,391)

(15,360)

Property improvements

(20,700)

(14,487)

(27,957)

(25,957)

Tenant improvements

(26,592)

(18,390)

(46,881)

(36,724)

Leasing commissions

(20,558)

(16,187)

(41,838)

(28,613)

Amortization of management contracts

938

1,351

1,854

2,295

Amortization of debt premiums and financing costs, net

(4,225)

(7,967)

(9,616)

(14,386)

Stock compensation expense

16,747

13,484

29,212

26,718

Reconciling items related to noncontrolling interests

14,587

9,993

32,028

17,775

Our share of reconciling items related to unconsolidated co-investment ventures

(11,526)

(15,680)

(26,190)

(30,448)

AFFO

$ 260,269

$ 291,780

$ 605,944

$ 503,104

 

in thousands

Three Months Ended

Six Months Ended

June 30,

June 30,

2016

2015

2016

2015

Net earnings attributable to common stockholders

$  275,383

$ 140,240

$     483,424

$ 485,446

Gains on dispositions of real estate, net (excluding development properties and land)

(188,051)

(34,546)

(238,383)

(311,430)

Depreciation and amortization expenses

230,382

190,188

480,382

359,996

Interest expense 

76,455

68,902

157,267

137,663

Losses (gains) on early extinguishment of debt, net

(2,044)

236

(992)

16,525

Current and deferred income tax expense, net

5,142

4,851

20,679

6,742

Reconciling items related to noncontrolling interests – limited partnership unitholders

8,316

1,298

14,550

2,580

Pro forma adjustments

(1,069)

28,675

(7,004)

29,415

Preferred stock dividends

1,696

1,678

3,385

3,348

Unrealized foreign currency and derivative losses (gains), net

8,451

29,354

23,779

(3,506)

Stock compensation expense

16,747

13,484

29,212

26,718

Acquisition expenses

967

26,130

2,228

27,434

Adjusted EBITDA, consolidated

$ 432,375

$ 470,490

$    968,527

$ 780,931

Our share of reconciling items from unconsolidated entities less third party share of consolidated entities:

Losses (gains) on dispositions of real estate, net (excluding development properties and land)

(3,842)

472

(15,181)

477

Depreciation and amortization expenses

12,240

26,953

17,456

65,134

Interest expense

8,656

10,870

18,814

24,643

Losses on early extinguishment of debt, net

1,155

711

2,699

1,053

Current income tax expense

4,308

4,475

9,885

6,664

Unrealized foreign currency and derivative losses (gains) and deferred income tax expense, net

3,117

(15,060)

4,608

(14,679)

Acquisition expenses

1,349

(8,578)

1,774

(6,612)

Adjusted EBITDA

$ 459,358

$ 490,333

$ 1,008,582

$ 857,611

 

Adjusted EBITDA. We use Adjusted EBITDA to measure our operating performance. We calculate Adjusted EBITDA beginning with consolidated net earnings (loss) attributable to common stockholders and removing the effect of interest, income taxes, depreciation and amortization, impairment charges, third party acquisition expenses related to the acquisition of real estate, gains or losses from the acquisition or disposition of investments in real estate (other than from land and development properties), gains from the revaluation of equity investments upon acquisition of a controlling interest, gains or losses on early extinguishment of debt and derivative contracts (including cash charges), similar adjustments we make to our FFO measures (see definition below), and other non-cash charges or gains (such as stock based compensation and unrealized gains or losses on foreign currency and derivative activity). We make adjustments to reflect our economic ownership in each entity in which we invest, whether consolidated or unconsolidated.

We consider Adjusted EBITDA to provide investors relevant and useful information because it permits investors to view our operating performance on an unleveraged basis before the effects of income tax, non-cash depreciation and amortization expense, gains and losses on the disposition of non-development properties and other items (outlined above), items that affect comparability, and other significant non-cash items. We also include a pro forma adjustment in Adjusted EBITDA to reflect a full period of NOI on the operating properties we acquire and stabilize and to remove NOI on properties we dispose of during the quarter assuming the transaction occurred at the beginning of the quarter.  By excluding interest expense, Adjusted EBITDA allows investors to measure our operating performance independent of our capital structure and indebtedness and, therefore, allows for a more meaningful comparison of our operating performance to that of other companies, both in the real estate industry and in other industries. Gains and losses on the early extinguishment of debt generally include the costs of repurchasing debt securities. While not infrequent or unusual in nature, these items result from market fluctuations that can have inconsistent effects on our results of operations. The economics underlying these items reflect market and financing conditions in the short-term but can obscure our performance and the value of our long-term investment decisions and strategies.

We believe that Adjusted EBITDA helps investors to analyze our ability to meet interest payment obligations and to make quarterly preferred share dividends. We believe that investors should consider Adjusted EBITDA in conjunction with net earnings and the other required Generally Accepted Accounting Principles (“GAAP”) measures of our performance to improve their understanding of our operating results, and to make more meaningful comparisons of our performance against other companies. By using Adjusted EBITDA, an investor is assessing the earnings generated by our operations but not taking into account the eliminated expenses or gains incurred in connection with such operations.  As a result, Adjusted EBITDA has limitations as an analytical tool and should be used in conjunction with our GAAP presentations. Adjusted EBITDA does not reflect our historical cash expenditures or future cash requirements for working capital, capital expenditures, distribution requirements, contractual commitments or interest and principal payments on our outstanding debt.

While EBITDA is a relevant and widely used measure of operating performance, it does not represent net income as defined by GAAP and it should not be considered as an alternative to those indicators in evaluating operating performance or liquidity. Further, our computation of Adjusted EBITDA may not be comparable to EBITDA reported by other companies. We compensate for the limitations of Adjusted EBITDA by providing investors with financial statements prepared according to GAAP, along with this detailed discussion of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to consolidated net earnings (loss), a GAAP measurement.

Business Line Reporting. Core FFO and development gains are generated by our three lines of business: (i) real estate operations; (ii) strategic capital; and (iii) development.  Real estate operations represents total Prologis Core FFO, less the amount allocated to the Strategic Capital line of business.  The amount of Core FFO allocated to the Strategic Capital line of business represents the third party share of the asset management related fees we earn from our co-investment ventures (both consolidated and unconsolidated) less costs directly associated to our strategic capital group, plus development management income.  Development gains include our share of gains on dispositions of development properties and land, net of taxes. To calculate the per share amount, the amount generated by each line of business is divided by the weighted average diluted common shares outstanding used in our Core FFO calculation of per share amounts. Management believes evaluating our results by line of business is a useful supplemental measure of our operating performance because it helps the investing public compare the operating performance of Prologis’ respective businesses to other companies’ comparable businesses. Prologis’ computation of FFO by line of business may not be comparable to that reported by other real estate investment trusts as they may use different methodologies in computing such measures.

Calculation of Per Share Amounts

in thousands, except per share amount

Three Months Ended

Six Months Ended

June 30,

June 30,

2016

2015

2016

2015

Net earnings

Net earnings

$

275,383

$

140,240

$

483,424

$

485,446

Noncontrolling interest attributable to exchangeable limited partnership units

9,085

1,623

15,694

3,273

Gains, net of expenses, associated with exchangeable debt assumed exchanged

(1,614)

Adjusted net earnings – Diluted

$

284,468

$

141,863

$

499,118

$

487,105

Weighted average common shares outstanding – Basic

524,842

523,476

524,540

518,791

Incremental weighted average effect on exchange of limited partnership units

17,703

5,431

17,623

4,617

Incremental weighted average effect of stock awards

2,843

1,733

2,130

2,037

Incremental weighted average effect on exchangeable debt assumed exchanged (a)

4,382

Weighted average common shares outstanding – Diluted

545,388

530,640

544,293

529,827

Net earnings per share – Basic

$

0.52

$

0.27

$

0.92

$

0.94

Net earnings per share – Diluted

$

0.52

$

0.27

$

0.92

$

0.92

Core FFO

Core FFO

$

323,925

$

273,885

$

653,558

$

528,264

Noncontrolling interest attributable to exchangeable limited partnership units

47

902

93

1,782

Interest expense on exchangeable debt assumed exchanged

3,506

Core FFO – Diluted

$

323,972

$

274,787

$

653,651

$

533,552

Weighted average common shares outstanding – Basic

524,842

523,476

524,540

518,791

Incremental weighted average effect on exchange of limited partnership units

16,037

5,431

15,957

4,617

Incremental weighted average effect of stock awards

2,843

1,733

2,130

2,037

Incremental weighted average effect on exchangeable debt assumed exchanged (a)

4,382

Weighted average common shares outstanding – Diluted

543,722

530,640

542,627

529,827

Core FFO per share – Diluted

$

0.60

$

0.52

$

1.20

$

1.01

AFFO

$

260,269

$

291,780

$

605,944

$

503,104

Noncontrolling interest attributable to exchangeable limited partnership units

47

902

93

112

Interest expense on exchangeable debt assumed exchanged

3,113

AFFO – Diluted

$

260,316

$

292,682

$

606,037

$

506,329

Weighted average common shares outstanding – Basic

524,842

523,476

524,540

518,791

Incremental weighted average effect on exchange of limited partnership units

16,037

5,431

15,957

2,939

Incremental weighted average effect of stock awards

2,843

1,733

2,130

2,037

Incremental weighted average effect on exchangeable debt assumed exchanged (a)

4,382

Weighted average common shares outstanding – Diluted

543,722

530,640

542,627

528,149

AFFO per share – Diluted

$

0.48

$

0.55

$

1.12

$

0.96

(a) In March 2015, the exchangeable debt was settled primarily through the issuance of common stock. The adjustment in 2015 assumes the exchange occurred on January 1, 2015.

 

FFO, as defined by Prologis attributable to common stockholders/unitholders (“FFO, as defined by Prologis”); Core FFO attributable to common stockholders/unitholders (“Core FFO”); AFFO (collectively referred to as “FFO”). FFO is a financial measure that is not determined in accordance with GAAP, but is a 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 that FFO is only meaningful when it is used in conjunction with net earnings computed under GAAP. Furthermore, we believe the consolidated financial statements, prepared in accordance with GAAP, provide the most meaningful picture of our financial condition.

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. We exclude depreciation from our unconsolidated entities and the third parties’ share of our consolidated ventures.

(ii) 

REITs were created 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 and consolidated entities, in our definition of FFO. We exclude the gain on revaluation of equity investments upon acquisition of a controlling interest from 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 calculate our FFO measures, as defined below, based on our proportionate ownership share of both our unconsolidated and consolidated ventures.  We reflect our share of our FFO measures for unconsolidated ventures by applying our average ownership percentage for the period to the applicable reconciling items on an entity by entity basis.  We reflect our share for consolidated ventures in which we do not own 100% of the equity by adjusting our FFO measures to remove the third party ownership share of the applicable reconciling items based on average ownership percentage for the applicable periods.

We use these FFO measures, including by segment and region, to: (i) evaluate our performance and the performance of our properties in comparison with 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 with 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 revenue. While not infrequent or unusual, these additional items we exclude in calculating FFO, as defined by Prologis, defined below, are subject to significant fluctuations from period to period that cause both positive and negative short-term effects on our results of operations in inconsistent and unpredictable directions that are not relevant to our long-term outlook.

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

FFO, as defined by Prologis

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

(i) 

deferred income tax benefits and deferred income tax expenses recognized by our subsidiaries;

(ii) 

current income tax expense related to acquired tax liabilities that were recorded as deferred tax liabilities in an acquisition, to the extent the expense is offset with a deferred income tax benefit in GAAP earnings that is excluded from our defined FFO measure;

(iii) 

unhedged 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 associated with derivative financial instruments.

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.

Core FFO

In addition to FFO, as defined by Prologis, we also use Core FFO. To arrive at Core FFO, we adjust FFO, as defined by Prologis, to exclude the following recurring and nonrecurring items that we recognized directly in FFO, as defined by Prologis:

(i) 

gains or losses from contribution or sale of land or development properties;

(ii) 

income tax expense related to the sale of investments in real estate and third-party acquisition costs related to the acquisition of real estate;

(iii) 

impairment charges recognized related to our investments in real estate generally as a result of our change in intent to contribute or sell these properties;

(iv) 

gains or losses from the early extinguishment of debt and redemption and repurchase of preferred stock; and

(v) 

expenses related to natural disasters.

AFFO

To arrive at AFFO, we adjust Core FFO to include realized gains from the disposition of land and development properties and our share of recurring capital expenditures and exclude our share of the impact of; (i) straight-line rents; (ii) amortization of above- and below-market lease intangibles; (iii) amortization of management contracts; (iv) amortization of debt premiums and discounts and financing costs, net of amounts capitalized, and; (v) stock compensation expense.

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 costs of our investment. Also, we 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 analyze our operating performance primarily by the rental revenue of our real estate and the revenue driven by our strategic capital business, net of operating, administrative and financing expenses. This income stream is not directly impacted by fluctuations in the market value of our investments in real estate or debt securities.  Although these items discussed above 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 and AFFO, 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 revenue. 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. 

As discussed above, we believe AFFO is a supplemental measure of operating performance, although we also believe AFFO provides a meaningful indicator of our ability to fund our distributions to our stockholders.

Limitations on the 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:

  • The current income tax expenses and acquisition costs that are excluded from our defined FFO measures represent the taxes and transaction costs that are payable.
  • Depreciation and amortization of real estate assets are economic costs that are excluded from FFO. FFO is limited, as it does not reflect the cash requirements that may be necessary for future replacements of the real estate assets. Furthermore, the amortization of capital expenditures and leasing costs necessary to maintain the operating performance of industrial properties are not reflected in FFO.
  • Gains or losses from non-development property acquisitions and dispositions or impairment charges related to expected dispositions represent changes in value of the properties. By excluding these gains and losses, FFO does not capture realized changes in the value of acquired or disposed properties arising from changes in market conditions.
  • 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.
  • 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. 
  • 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.
  • 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.

Prologis Share represents our proportionate economic ownership of each entity included in our total owned and managed portfolio whether consolidated or unconsolidated.

Same Store. We evaluate the operating 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 the properties included in our owned and managed portfolio that were in operation (including development properties that have been completed and available for lease) at January 1, 2015 and throughout the full periods in both 2015 and 2016. We have removed all properties that were disposed of to a third party from the population for both periods. We believe the factors that impact rental income, rental expenses and NOI in the Same Store portfolio are generally the same as for the total operating 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.

Our same store measures are non-GAAP measures that are commonly used in the real estate industry and are calculated beginning with rental income and rental expenses from the financial statements prepared in accordance with GAAP. It is also common in the real estate industry and expected from the analyst and investor community that these numbers be further adjusted to remove certain non-cash items included in the financial statements prepared in accordance with GAAP to reflect a cash same store number. In order to clearly label these metrics, we call one Same Store NOI and one Same Store NOI- Cash. As these are non-GAAP measures they have certain limitations as an analytical tool and may vary among real estate companies. As a result, we provide a reconciliation from our financial statements prepared in accordance with GAAP to Same Store NOI and then to Same Store NOI- Cash with explanations of how these metrics are calculated and adjusted.

The following is a reconciliation of our consolidated rental income, rental expenses and NOI, as included in the Consolidated Statements of Operations, to the respective amounts in our Same Store portfolio analysis:

dollars in thousands

Three Months Ended

June 30,

2016

2015

Change

(%)

Rental Revenue:

Rental Revenue

$

426,150

$

357,829

Rental Recoveries

119,981

103,615

Rental Revenue per the Consolidated Statements of Operations

546,131

461,444

Properties not included and other adjustments (a)

(153,644)

(81,594)

Unconsolidated Co-Investment Ventures

447,530

429,785

Same Store – Rental Income

$

840,017

$

809,635

3.8

%

Rental Expense:

Per the Consolidated Statements of Operations

$

140,725

$

125,820

Properties not included and other adjustments (b)

(29,884)

(13,990)

Unconsolidated Co-Investment Ventures

100,528

97,210

Same Store – Rental Expense

$

211,369

$

209,040

1.1

%

NOI:

Per the Consolidated Statements of Operations

$

405,406

$

335,624

Properties not included and other adjustments

(123,760)

(67,604)

Unconsolidated Co-Investment Ventures

347,002

332,575

Same Store – NOI

$

628,648

$

600,595

4.7

%

Same Store – NOI  – Prologis Share (c)

$

362,766

$

341,857

6.1

%

NOI- Cash:

Same store- NOI

$

628,648

$

600,595

Straight-line rent adjustments (d)

$

(12,033)

$

(13,829)

Fair value lease adjustments (d)

(1,154)

2,593

Same Store – NOI- Cash

$

615,461

$

589,359

4.4

%

Same Store – NOI- Prologis Share (c)

$

354,103

$

336,401

5.3

%

(a) 

To calculate Same Store rental income, we exclude the net termination and renegotiation fees 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.

(b) 

To calculate Same Store rental expense, we include an allocation of the property management expenses for our consolidated 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 (generally the fee is based on a percentage of revenue). On consolidation, the management fee income and expenses are eliminated and the actual cost of providing property management services is recognized.

(c) 

Prologis share of Same Store is calculated using the underlying building information from the Same Store NOI and NOI – Cash calculations and applying our ownership percentage as of June 30, 2016 to the NOI of each building for both periods.

(d)

In order to derive Same Store- NOI – Cash, we adjust Same Store- NOI to exclude non-cash items included in our rental income in our financial statements, including straight line rent adjustments and adjustments related to purchase accounting to reflect leases at fair value at the time of acquisition.

Value Creation represents the value that we will create through our development and leasing activities. We calculate value creation by estimating the stabilized NOI that the property will generate and applying a stabilized capitalization rate applicable to that property. The value creation is calculated as the amount by which the value exceeds our total expected investment and does not include any fees or promotes we may earn. Value Creation for our value-added conversion properties includes the realized economic gain.

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To view the original version on PR Newswire, visit:http://www.prnewswire.com/news-releases/prologis-reports-second-quarter-2016-earnings-results-300300460.html

SOURCE Prologis, Inc.

Related Links

http://www.prologis.com

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Prologis Reports Second Quarter 2016 Earnings Results Reviewed by on . "The incredible effort the team has made to position our portfolio and to optimize our business is paying off," said Hamid Moghadam, chairman and CEO, Prologis. "The incredible effort the team has made to position our portfolio and to optimize our business is paying off," said Hamid Moghadam, chairman and CEO, Prologis. Rating:
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