Sustaining Economic Value
[EC1] [2.9] In today’s market, ProLogis recognizes the importance of reducing debt and increasing balance sheet liquidity. Taking a prudent approach to our operations, in November of 2008, ProLogis announced a definitive action plan that aims to both de-risk our business model and de-leverage the company.
[2.9] One of the first actions we announced in support of that plan was the sale of our operations in China and certain assets in Japan to GIC Real Estate for a total cash consideration of $1.3 billion. This allowed us to reduce our development pipeline by almost $1 billion, eliminating the need to spend an additional $250 million of construction costs and eliminating the leasing risk associated with these properties. In addition, we halted all but previously committed development starts and stopped $500 million of planned development starts from previous quarters. In an effort to readjust operations, we also realigned our regional offices to better support the ongoing management of our core assets.
[EC1] [2.9] Our goal is to de-leverage the company by $2.0 billion by the end of 2009. Toward this goal in the fourth quarter of 2008, we completed contributions to our property funds and sales to third parties of assets totaling $1.33 billion. We anticipate a similar level of disposition activity in 2009 and will use the cash generated to pay down debt.
[2.9] We have also taken action to right-size the company for the current economic environment, with an anticipated annual cash savings of nearly $100 million. Part of this effort included a reduction of workforce in order to achieve our objective of a 20-25% decrease in general and administrative expenses.
[2.9] Lastly, ProLogis is in the process of renegotiating certain terms of its lending agreements to provide more financial flexibility both on-balance sheet and within our property funds going forward. For example, in December of 2008, we completed a tender offer for a portion of our 5.25% notes due November 15, 2010. We repurchased approximately $310 million principal amount of these notes, representing approximately 62% of the principal amount outstanding, for a total consideration of approximately $217 million. We also announced the closing of $104.7 million of secured financing with a large institutional investor on behalf of an affiliate of ProLogis North American Industrial Fund II. The proceeds were used to refinance a $62 million secured debt facility that was set to mature in January 2009 and pay down $42 million of another debt facility, thereby reducing 2009 maturities in the fund by approximately $104 million.
[2.9] To reflect the changes in our business model, we have also revised the structure of our financial reporting measures, bringing our reporting from three business segments to two. For additional background and rationale of this approach, please refer to pages three through 12 in our 2008 annual report on 10-K. While no one can be absolutely certain of the duration of this downturn or what the lasting effects will be, ProLogis can be certain about this: we will continue to be a global enterprise, focused on our core industrial business, growing our investment management segment and eventually resuming development in markets with strong underlying demand. Most importantly, we will do all of this in a more conservative manner than in previous years, and with a lower level of debt.