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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

(Mark One)

þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2011

or

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to            

Commission File Number: 001-13545 (Prologis, Inc.) 001-14245 (Prologis, L.P.)

 

 

 

LOGO

Prologis, Inc.

Prologis, L.P.

(Exact name of registrant as specified in its charter)

 

Maryland (Prologis, Inc.)

Delaware (Prologis, L.P.)

 

94-3281941 (Prologis, Inc.)

94-3285362 (Prologis, L.P.)

(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
Pier 1, Bay 1, San Francisco, California   94111
(Address or principal executive offices)   (Zip Code)

(415) 394-9000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

(Former name, former address and former fiscal year, if changed since last report)

AMB Property Corporation

AMB Property, L.P.

 

   

Title of Each Class

 

Name of Each Exchange on Which Registered

Prologis, Inc.

  Common Stock, $.01 par value   New York Stock Exchange

Prologis, Inc.

  6.50% Series L Cumulative Redeemable Preferred Stock   New York Stock Exchange

Prologis, Inc.

  6.75% Series M Cumulative Redeemable Preferred Stock   New York Stock Exchange

Prologis, Inc.

  7.00% Series O Cumulative Redeemable Preferred Stock   New York Stock Exchange

Prologis, Inc.

  6.85% Series P Cumulative Redeemable Preferred Stock   New York Stock Exchange

Prologis, Inc.

  6.75% Series R Cumulative Redeemable Preferred Stock   New York Stock Exchange

Prologis, Inc.

  6.75% Series S Cumulative Redeemable Preferred Stock   New York Stock Exchange

Prologis, L.P.

  None   None

Securities registered pursuant to Section 12(g) of the Act:

Prologis, Inc. - NONE

Prologis, L.P. - NONE

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Prologis, Inc.: Yes þ No ¨            Prologis, L.P.: Yes þ No ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Prologis, Inc.: Yes ¨ No þ             Prologis, L.P.: Yes ¨ No þ

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Prologis, Inc.: Yes þ No ¨    Prologis, L.P.: Yes þ No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website; if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter periods that the registrant was required to submit and post such files). Prologis, Inc.: Yes þ No ¨    Prologis, L.P.: Yes þ No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):

 

Prologis, Inc.:    þ    Large accelerated filer   ¨    Accelerated filer
   ¨    Non-accelerated filer (do not check if a smaller reporting company)   ¨    Smaller reporting company

 

Prologis, L.P.:    ¨    Large accelerated filer   ¨    Accelerated filer
   þ    Non-accelerated filer (do not check if a smaller reporting company)   ¨    Smaller reporting company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).

Prologis, Inc.: Yes ¨ No þ            Prologis, L.P.: Yes ¨ No þ

Based on the closing price of Prologis, Inc.’s common stock on June 30, 2011, the aggregate market value of the voting common equity held by non-affiliates of Prologis, Inc. was $16,284,024,207.

The number of shares of Prologis, Inc.’s common stock outstanding as of February 22, 2012 was approximately 458,974,100.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of Part III of this report are incorporated by reference to the registrant’s definitive proxy statement for the 2012 annual meeting of its stockholders or will be provided in an amendment filed on Form 10-K/A.

 

 

 

 


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EXPLANATORY NOTE

This report combines the annual reports on Form 10-K for the year ended December 31, 2011 of Prologis, Inc. and Prologis, L.P. Unless stated otherwise or the context otherwise requires, references to “Prologis, Inc.” or the “REIT”, mean Prologis, Inc., and its consolidated subsidiaries; and references to “Prologis, L.P.” or the “Operating Partnership” mean Prologis, L.P., and its consolidated subsidiaries. The terms “the Company”, “Prologis”, “we”, “our” or “us” means the REIT and the Operating Partnership collectively.

Prologis, Inc. is a real estate investment trust and the general partner of the Operating Partnership. As of December 31, 2011, the REIT owned an approximate 99.55% common general partnership interest in the Operating Partnership and 100% of the preferred units in the Operating Partnership. The remaining approximate 0.45% common limited partnership interests are owned by non-affiliated investors and certain current and former directors and officers of the REIT. As the sole general partner of the Operating Partnership, the REIT has full, exclusive and complete responsibility and discretion in the day-to-day management and control of the Operating Partnership.

We operate the REIT and the Operating Partnership as one enterprise. The management of the REIT consists of the same members as the management of the Operating Partnership. These members are officers of the REIT and employees of the Operating Partnership or one of its direct or indirect subsidiaries. As general partner with control of the Operating Partnership, the REIT consolidates the Operating Partnership for financial reporting purposes, and the REIT does not have significant assets other than its investment in the Operating Partnership. Therefore, the assets and liabilities of the REIT and the Operating Partnership are the same on their respective financial statements.

We believe combining the annual reports on Form 10-K of the REIT and the Operating Partnership into this single report results in the following benefits:

 

   

enhances investors’ understanding of the REIT and the Operating Partnership by enabling investors to view the business as a whole in the same manner as management views and operates the business;

   

eliminates duplicative disclosure and provides a more streamlined and readable presentation since a substantial portion of the Company’s disclosure applies to both the REIT and the Operating Partnership; and

   

creates time and cost efficiencies through the preparation of one combined report instead of two separate reports.

We believe it is important to understand the few differences between the REIT and the Operating Partnership in the context of how we operate as an interrelated consolidated company. The REIT’s only material asset is its ownership of partnership interests in the Operating Partnership. As a result, the REIT does not conduct business itself, other than acting as the sole general partner of the Operating Partnership and issuing public equity from time to time. The REIT itself does not issue any indebtedness, but guarantees the unsecured debt of the Operating Partnership. The Operating Partnership holds substantially all the assets of the business, directly or indirectly, and holds the ownership interests in the Company’s investment in certain investees. The Operating Partnership conducts the operations of the business and is structured as a partnership with no publicly traded equity. Except for net proceeds from equity issuances by the REIT, which are contributed to the Operating Partnership in exchange for partnership units, the Operating Partnership generates the capital required by the business through the Operating Partnership’s operations, its incurrence of indebtedness and the issuance of partnership units to third parties.

Noncontrolling interests, stockholders’ equity and partners’ capital are the main areas of difference between the consolidated financial statements of the REIT and those of the Operating Partnership. The noncontrolling interests in the Operating Partnership’s financial statements include the interests in consolidated investees not owned by the Operating Partnership. The noncontrolling interests in the REIT’s financial statements include the same noncontrolling interests at the Operating Partnership level, as well as the common limited partnership interests in the Operating Partnership, which are accounted for as partners’ capital by the Operating Partnership.

In order to highlight the differences between the REIT and the Operating Partnership, there are separate sections in this report, as applicable, that separately discuss the REIT and the Operating Partnership including separate financial statements, controls and procedures sections, and separate Exhibit 31 and 32 certifications. In the sections that combine disclosure of the REIT and the Operating Partnership, this report refers to actions or holdings as being actions or holdings of Prologis.


Table of Contents

TABLE OF CONTENTS

  Item  

Description

  Page  
  PART I  

1.

 

Business

    3   
 

The Company

    3   
 

Investment Strategy

    4   
 

Business Strategy

    4   
 

Our Operating Segments

    5   
 

Code of Ethics and Business Conduct

    6   
 

Environmental Matters

    7   
 

Insurance Coverage

    7   

1A.

 

Risk Factors

    7   

1B.

 

Unresolved Staff Comments

    15   

2.

 

Properties

    15   
 

Geographic Distribution

    15   
 

Unconsolidated Co-Investment Ventures

    18   

3.

 

Legal Proceedings

    19   

4.

 

Mine Safety Disclosures

    19   
  PART II  

5.

 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

    19   
 

Market Information and Holders

    19   
 

Dividends

    20   
 

Securities Authorized for Issuance Under Equity Compensation Plans

    21   
 

Other Stockholder Matters

    21   

6.

 

Selected Financial Data

    22   

7.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

    24   
 

The Company

    24   
 

Business Strategy

    25   
 

Results of Operations

    27   
 

Portfolio Information

    33   
 

Environmental Matters

    35   
 

Liquidity and Capital Resources

    35   
 

Off-Balance Sheet Arrangements

    39   
 

Contractual Obligations

    40   
 

Critical Accounting Policies

    40   
 

New Accounting Pronouncements

    42   
 

Funds from Operations

    42   

7A.

 

Quantitative and Qualitative Disclosure About Market Risk

    45   

8.

 

Financial Statements and Supplementary Data

    46   

9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

    46   

9A.

 

Controls and Procedures

    46   

9B.

 

Other Information

    47   
  PART III  

10.

 

Directors, Executive Officers and Corporate Governance

    47   

11.

 

Executive Compensation

    47   

12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

    47   

13.

 

Certain Relationships and Related Transactions, and Director Independence

    47   

14.

 

Principal Accounting Fees and Services

    47   
  PART IV  

15.

 

Exhibits, Financial Statement Schedules

    48   

 

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The statements in this report 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, management’s beliefs and assumptions made by management. Such statements involve uncertainties that could significantly impact our financial results. Words such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “seeks”, “estimates”, 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, synergies to be realized from our recent merger transaction, our debt and financial position, our ability to form new property funds and the availability of capital in existing or new property funds — 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 (“REIT”) status and tax structuring, (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, (viii) risks of doing business internationally, including currency risks, (ix) environmental uncertainties, including risks of natural disasters, and (x) those additional factors discussed under “Item 1A. Risk Factors” in this report. We undertake no duty to update any forward-looking statements appearing in this report except as may be required by law.

PART I

ITEM 1. Business

The Company

We are the leading global owner, operator and developer of industrial real estate, focused on markets tied to global trade across the Americas, Europe and Asia. As of December 31, 2011, we owned, or had investments in, on a consolidated basis or through unconsolidated investees, properties and development projects totaling approximately 600 million square feet (55.7 million square meters) in 22 countries. These properties are leased to approximately 4,500 customers, including third-party logistics providers, manufacturers, retailers, transportation companies and other enterprises.

Of the approximately 600 million square feet of our owned and managed portfolio as of December 31, 2011:

 

   

approximately 559 million square feet were operating industrial distribution buildings with a gross book value of $42.8 billion that were 92.2% occupied;

   

approximately 13 million square feet in our development portfolio with a total current investment of $1.0 billion and a total expected investment of $1.4 billion that were 43.6% leased;

   

approximately 25 million square feet consist of properties we manage on behalf of third parties, properties in which we have an ownership interest but do not manage and non-industrial properties we own; and

   

the largest customer and 25 largest customers accounted for 2.4% and 17.9%, respectively, of the annualized base rent of the combined portfolio.

Prologis, Inc. (the “REIT”) is a self-administered and self-managed real estate investment trust. The REIT is the sole general partner of Prologis, L.P. (the “Operating Partnership”). We operate the REIT and the Operating Partnership as one enterprise. The management of the REIT consists of the same members as the management of the Operating Partnership. These members are officers of the REIT and employees of the Operating Partnership. As general partner with control of the Operating Partnership, the REIT consolidates the Operating Partnership for financial reporting purposes, and the REIT does not have significant assets other than its investment in the Operating Partnership. Therefore, the assets and liabilities of the REIT and the Operating Partnership are the same on their respective financial statements and we refer to the REIT and the Operating Partnership collectively throughout this document as “the Company”, “Prologis”, “we”, “our” or “us”. The REIT commenced operations as a fully integrated real estate company in 1997, elected to be taxed as a real estate investment trust (a “REIT”) under the Internal Revenue Code of 1986, as amended (“Internal Revenue Code”), and believes the current organization and method of operation will enable the REIT to maintain its status as a REIT. The Operating Partnership was also formed in 1997.

We have investments in entities through a variety of ventures. We co-invest in entities that own multiple properties with private capital investors and provide asset and property management services to these entities. We refer to these entities as co-investment ventures. Our ownership interest in these entities generally ranges from 10-50%. We also have investments in joint ventures, generally with one partner and that we do not manage. We refer to our investments in the entities accounted for on the equity method, both unconsolidated co-investment ventures and joint ventures as unconsolidated investees.

Our global headquarters are located at Pier 1, Bay 1, San Francisco, California 94111 and our global operational headquarters are located at 4545 Airport Way, Denver, Colorado 80239. Our other principal office locations are in Amsterdam, the Grand Duchy of Luxembourg, Mexico City, Shanghai, Singapore and Tokyo.

 

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Our Internet website address is www.prologis.com. All reports required to be filed with the Securities and Exchange Commission (the “SEC”) are available or may be accessed free of charge through the Investor Relations section of our Internet website as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The REIT’s common stock is listed on the New York Stock Exchange (“NYSE”) under the ticker “PLD” and is a component of the S&P 500.

Merger of AMB and ProLogis and Acquisition of PEPR

On June 3, 2011, AMB Property Corporation (“AMB”) completed the merger with ProLogis, a Maryland REIT (“ProLogis”) in which ProLogis shareholders received 0.4464 of a share of common stock of AMB for each outstanding common share of beneficial interest in ProLogis (the “Merger). Following the Merger, AMB changed its name to Prologis, Inc. In the Merger, AMB was the legal acquirer and ProLogis was the accounting acquirer. In May 2011, we also acquired a controlling interest in and began consolidating ProLogis European Properties (“PEPR”) (the “PEPR Acquisition”).

We have recorded the purchase price allocations for both the Merger ($5.9 billion) and PEPR Acquisition ($1.6 billion) in our December 31, 2011 Consolidated Balance Sheet. Our results for 2011 reflect approximately seven months of the impact of the Merger and the PEPR Acquisition. Therefore, period to period comparisons may not be meaningful. See Note 3 to the Consolidated Financial Statements in Item 8 for more information relating to both the Merger and PEPR Acquisition.

Investment Strategy

We believe that gross domestic product (“GDP”) growth and growth in global trade are important drivers of demand for our product. Trade and GDP are correlated as higher levels of investment, production and consumption within a globalized economy are consistent with increased levels of imports and exports. As the world produces and consumes more, we believe that the volume of global trade will continue to increase at a rate in excess of growth in global GDP. Significant supply chain reconfiguration, obsolescence and customers’ preference to lease, rather than own, facilities also drive demand for quality distribution space.

Our investment strategy focuses on providing distribution and logistics space to customers whose businesses are tied to global trade and depend on the efficient movement of goods through the global supply chain to support global trade. We have a deep global presence with assets under management of $43.8 billion spanning 22 countries on four continents. Our properties are primarily located in two main market categories, global markets and regional markets. Global markets comprise approximately 30 of the largest markets tied to global trade. These markets feature large population centers with high per-capita consumption rates and are located near major airports, seaports and ground transportation systems. Similar to global markets, regional markets benefit from large population centers but typically are not as tied to the global supply chain and are often less supply constrained. As of December 31, 2011, global and regional markets represented approximately 83% and 12%, respectively of our overall owned and managed platform (based on our share of net operating income of the properties). Approximately 5% of our total portfolio falls in markets that we do not classify as global or regional markets. Our investment strategy would be to exit these other markets over time. Our portfolio allows us to have local market knowledge, construction expertise and a commitment to sustainable design. We are supported by a broad and diverse customer base, comprising relationships with multinational corporations that result in repeatable business.

Business Strategy

Our business strategy focuses on three principal lines of business within two business segments, as follows:

Real Estate Operations Segment

Rental Operations - This represents the primary source of our core revenue, earnings and funds from operations (or FFO as defined in “Item 7. Management’s Discussion and Analysis of Financial Condition”). We collect rent from our customers under operating leases, including reimbursements for the vast majority of our operating costs. We seek to generate long-term internal growth in rents by maintaining a high occupancy rate at our properties, by controlling expenses and through contractual rent increases on existing space and renewals on rollover space, thus capitalizing on the economies of scale inherent in owning, operating and growing a large global portfolio. Our rental income is diversified due to both our global presence and our broad customer base. We expect to increase overall rental income primarily through the leasing of space currently available in our properties. We believe that our regular maintenance programs, capital expenditure programs, energy management and sustainability programs create cost efficencies that provide a benefit to our customers as well as the Company.

Capital Deployment Activities - Our development and re-development activities support our rental operations and are therefore included with that line of business for segment reporting. We develop and re-develop industrial properties primarily in global and regional markets to meet our customers’ needs. Within this line of business, we provide additional value creation by utilizing: (i) the land that we currently own in global and regional markets; (ii) the development expertise of our local personnel; (iii) our global customer relationships; and (iv) the demand for high quality distribution facilities in key markets. We seek to increase our rental income and the net asset value of the Company, through the leasing of newly developed space, as well as through the acquisition of new properties. Depending on several factors, we may develop properties directly or in co-investment ventures for long-term hold, for contribution into one of our co-investment ventures, or for sale to third parties. Properties that we choose to contribute or sell may result in the recognition of gains or losses. Generally, in the U.S., Europe and Japan we are developing directly while in emerging markets such as Brazil, China and Mexico we are developing with our private capital partners in a variety of co-investment ventures.

Private Capital Segment - We co-invest in properties with private capital investors through a variety of co-investment ventures. We have a direct and long-standing relationship with a significant number of institutional investors. We tailor industrial portfolios to investors’ specific

 

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needs and deploy capital in both close-ended and open-ended structures, while providing complete portfolio management and financial reporting services. We generally own 10-50% in the ventures. We believe our co-investment in each of our ventures provides a strong alignment of interests with our co-investment partners’ interests. We generate revenues from our unconsolidated co-investment ventures by providing asset management and property management services. We may also earn revenues through additional services provided such as leasing, acquisition, construction, development, disposition, legal and tax services. Depending on the structure of the venture and the returns provided to our partners, we may also earn revenues through incentive returns or promotes. We believe our co-investment program with private capital investors will continue to serve as a source of capital for new investments and provide revenues for our stockholders, as well as mitigate risk associated with our foreign currency exposure. We expect to grow this business with the formation of new ventures and by raising additional third-party capital in our existing ventures.

Our Operating Segments

As discussed above, our current business strategy includes two operating segments: Real Estate Operations, which includes our Capital Deployment activities, and Private Capital. Our Real Estate Operations segment represents the long-term ownership of industrial operating properties, including development activities. Our Private Capital segment represents the long-term management of co-investment ventures and the properties they own. Please see “Item 1A Risk Factors”, our property information and market presence as presented in “Item 2. Properties”, a discussion of our segment results in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our segment footnote – Note22 to our Consolidated Financial Statements in Item 8 for more information with regard to the investments and results of operations of our segments.

Competition

The existence of competitively priced distribution space available in any market could have a material impact on our ability to rent space and on the rents that we can charge. To the extent we wish to acquire land for future development of properties in our Real Estate Operations segment or dispose of land, we may compete with local, regional, and national developers. We also face competition from investment managers for institutional capital.

We believe we have competitive advantages due to (i) our ability to respond quickly to customers’ needs for high-quality distribution space in key global distribution markets; (ii) our established relationships with key customers served by our local personnel; (iii) our ability to leverage our organizational structure to provide a single point of contact for our global customers through our Global Customer Solutions team; (iv) our property management and leasing expertise; (v) our relationships and proven track record with current and prospective investors in our private capital business; (vi) our global experience in the development and management of industrial properties; (vii) the strategic locations of our land that we expect to develop; and (viii) our personnel who are experienced in the land entitlement process.

Customers

We have developed a customer base that is diverse in terms of industry concentration and represents a broad spectrum of international, national, regional and local distribution space users. At December 31, 2011, in our Real Estate Operations segment, we had 3,163 customers occupying 266.0 million square feet of distribution space. In the unconsolidated properties we manage, we had 2,476 customers occupying 249.3 million square feet of distribution space. In our Real Estate Operations segment, our largest customer and 25 largest customers accounted for 0.6% and 7.2%, respectively, of our annualized base rent at December 31, 2011.

Within our Global Customer Solutions team, we develop long-term relationships with our customers and understand their business and needs, serving as their strategic partner for real estate on a global basis. Keeping in close contact with customers and focusing on exceptional customer service sets us apart from other real estate providers as much more than a landlord. We believe that what we offer in terms of scope, scale and quality of assets is unique. Our in-depth knowledge of our markets helps us stay ahead of trends and create forward-thinking solutions for their distribution networks. This depth of customer knowledge results in greater retention and expanded service, which garners additional business from the same customer across multiple geographies. Approximately 50.0 % of our annual base rent is derived from customers who lease from us in more than one location and more than one country.

In our Private Capital segment, we consider our private capital investors to be our customers. As of December 31, 2011, we partnered with 117 investors, several of which invest in multiple funds.

Employees

We employ 1,457 persons in our entire organization. Our employees work in four countries in the Americas (925 persons), in 15 countries in Europe (345 persons) and in three countries in Asia (187 persons). Of the total, we have assigned 862 employees to our Real Estate Operations segment and 67 employees to our Private Capital segment. We have 528 employees who work in corporate and support positions who are not assigned to a segment who may assist with segment activities. We believe our relationships with our employees are good. Our employees are not organized under collective bargaining agreements, although some of our employees in Europe are represented by statutory Works Councils and benefit from applicable labor agreements.

Management’s Overview

At the time of the Merger, we established key strategic priorities to guide our path over the next two years. These priorities are:

 

 

to align our portfolio with our investment strategy while serving the needs of our customers;

 

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to strengthen our financial position and build one of the top balance sheets in the REIT industry;

 

 

to streamline our private capital business and position it for substantial growth;

 

 

to improve the utilization of our low yielding assets; and

 

 

to build the most effective and efficient organization in the REIT industry and to become the employer of choice among top professionals interested in real estate as a career.

Align our Portfolio with our Investment Strategy

Subsequent to the Merger, we performed a comprehensive review of our owned and managed portfolio, and categorized the portfolio into three main segments – global, regional and other markets. Global markets represent approximately 83% of our overall owned and managed platform (based on our share of net operating income of the properties). Regional markets represent 12% of our total owned and managed platform. We intend to hold only the highest quality class-A product in our regional markets. We also own a small number of assets in other markets, which account for 5% of our owned and managed platform and that we plan to exit from in an orderly fashion in the next few years. By segmenting our markets in this manner, we were able to construct a strategy that includes culling the portfolio for buildings and potentially submarkets that are no longer a strategic fit for the company. We expect to use the proceeds from dispositions to pay down debt and to recycle capital into new development projects or strategic acquisitions.

Strengthen our Financial Position

We intend to further strengthen our financial position by lowering our financial risk and currency exposure and building one of the strongest balance sheets in the REIT industry. We expect to lower our financial risk by reducing leverage and maintaining staggered debt maturities, which will provide us with more financial flexibility and allow continued access to debt capital markets. This financial flexibility will position us to capitalize on market opportunities across the entire business cycle as they become available. We expect to lower our currency exposure by owning assets outside the U.S. primarily in co-investment ventures in which we maintain an ownership interest and provide services generating private capital revenue. We will accomplish this through contributions and sales to our existing and newly formed co-investment ventures. In addition, we expect that new development projects, particularly in emerging markets such as Brazil, China and Mexico, will be done in conjunction with our private capital partners. We will also reduce our exposure to foreign currency exchange fluctuations by borrowing in local currencies when appropriate.

Streamline Private Capital Business

We are rationalizing our private capital business in conjunction with our private capital investors. Some of our co-investment ventures have fee structures that do not adequately compensate us for the services we provide. Therefore, we may terminate or restructure certain of these co-investment ventures. In other cases, we may combine some co-investment ventures to gain operational efficiencies. In every case, however, we will work very closely with our partners and venture investors who will be active participants in these decisions. We plan to grow our private capital business with the deployment of the private capital commitments we have already raised, formation of new co-investment ventures and raising incremental capital for our existing co-investment ventures.

Improve the Utilization of Our Low Yielding Assets

We plan to increase the value of our low yielding assets by stabilizing our operating portfolio to its historical average of 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.

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 have identified more than $115 million of Merger cost synergies on an annualized basis, as compared to the combined expenses of AMB and ProLogis on a pre-Merger basis. These synergies include gross general and administrative savings, reduced global line of credit facility fees and lower amortization of non real estate assets. We believe we have realized approximately 90% of these synergies already and expect to realize the full amount by year - end 2012. In addition, we are in the process of implementing a new enterprise wide system that will include a property management/billing system, a human resources system, a general ledger and accounting system and a data warehouse. In connection with this implementation, we are striving to utilize the most effective global business processes with the enhanced system functionality. We have implemented two new compensation plans that we believe will better align employees’ compensation to our performance. We believe these efforts and others will help us with the attainment of this objective.

See “Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a discussion of our 2011 results and progress attaining the objectives outlined above.

Code of Ethics and Business Conduct

We maintain a Code of Ethics and Business Conduct applicable to our Board and all of our officers and employees, including the principal co-executive officers, the principal financial officer and the principal accounting officer, or persons performing similar functions. A copy of our Code of Ethics and Business Conduct is available on our website, www.prologis.com. In addition to being accessible through our website, copies of our Code of Ethics and Business Conduct can be obtained, free of charge, upon written request to Investor Relations, Pier 1, Bay 1, San Francisco, California 94111. Any amendments to or waivers of our Code of Ethics and Business Conduct that apply to the principal

 

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executive officers, the principal financial officer, or the principal accounting officer, or persons performing similar functions, and that relate to any matter enumerated in Item 406(b) of Regulation S-K, will be disclosed on our website.

Environmental Matters

We are exposed to various environmental risks that may result in unanticipated losses and affect our operating results and financial condition. Either the previous owners or we subjected a majority of the properties we have acquired, including land, to environmental reviews. While some of these assessments have led to further investigation and sampling, none of the environmental assessments has revealed an environmental liability that we believe would have a material adverse effect on our business, financial condition or results of operations. See Note 21 to our Consolidated Financial Statements in Item 8 and “Item 1A. Risk Factors”.

Insurance Coverage

We carry insurance coverage on our properties. We determine the type of coverage and the policy specifications and limits based on what we deem to be the risks associated with our ownership of properties and our business operations in specific markets. Such coverages include property damage and rental loss insurance resulting from such perils as fire, additional perils as covered under an extended coverage policy, named windstorm, flood, earthquake and terrorism; commercial general liability insurance; and environmental insurance. Insurance is maintained through a combination of commercial insurance, self insurance and through a wholly-owned captive insurance entity. We believe that our insurance coverage contains policy specifications and insured limits that are customary for similar properties, business activities and markets and we believe our properties are adequately insured. However, an uninsured loss could result in loss of capital investment and anticipated revenues and earnings. See further discussion in “Item 1A. Risk Factors”.

ITEM 1A. Risk Factors

Our operations and structure involve various risks that could adversely affect our financial condition, results of operations, distributable cash flow and value of our securities. These risks include, among others:

General

Disruptions in the Global Capital and Credit Markets may adversely affect our operating results and financial condition.

Global market and economic conditions have been challenging with tighter credit conditions and slower growth in most major economies during the last few years. Although signs of recovery may exist, there are continued concerns about the systemic impact of inflation, the availability and cost of credit, a lagging real estate market and geopolitical issues that contribute to increased market volatility and uncertain expectations for the global economy. To the extent there is turmoil in the financial markets, it has the potential to materially affect the value of our properties and investments in our unconsolidated investees, the availability or the terms of financing that we and our unconsolidated investees have or may anticipate utilizing, our ability and that of our unconsolidated investees to make principal and interest payments on, or refinance any outstanding debt when due and may impact the ability of our customers to enter into new leasing transactions or satisfy rental payments under existing leases.

The market volatility over the last several years has made the valuation of our properties and those of our unconsolidated investees more difficult. There may be significant uncertainty in the valuation, or in the stability of the value, of our properties and those of our unconsolidated investees, that could result in a decrease in the value of our properties and those of our unconsolidated investees. As a result, we may not be able to recover the current carrying amount of our investments in real estate properties, including our unconsolidated investees, which may require us to recognize an impairment charge in earnings in addition to the charges we previously recognized.

Any additional, continued or recurring disruptions in the capital and credit markets may adversely affect our financial condition, results of operations, cash flow and ability to make distributions and payments to our security holders and the market price of our securities.

As a global company, we are subject to social, political and economic risks of doing business in many countries.

We conduct a significant portion of our business and employ a substantial number of people outside of the United States. During 2011, we generated approximately 41.9% or $642 million of our revenue from operations outside the United States. Circumstances and developments related to international operations that could negatively affect our business, financial condition or results of operations include, but are not limited to, the following factors:

 

   

difficulties and costs of staffing and managing international operations in certain regions;

 

   

differing employment practices and labor issues;

 

   

local businesses and cultural factors that differ from our usual standards and practices;

 

   

volatility in currencies;

 

   

currency restrictions, which may prevent the transfer of capital and profits to the United States;

 

   

unexpected changes in regulatory requirements and other laws;

 

   

potentially adverse tax consequences;

 

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the responsibility of complying with multiple and potentially conflicting laws, e.g., with respect to corrupt practices, employment and licensing;

 

   

the impact of regional or country-specific business cycles and economic instability;

 

   

political instability, uncertainty over property rights, civil unrest, drug trafficking, political activism or the continuation or escalation of terrorist or gang activities (particularly with respect to our operations in Mexico);

 

   

foreign ownership restrictions with respect to operations in countries; and

 

   

access to capital may be more restricted, or unavailable on favorable terms or at all in certain locations.

Our global growth (including growth in new regions in the United States) also subjects us to certain risks, including risks associated with funding increasing headcount, integrating new offices, and establishing effective controls and procedures to regulate the operations of new offices and to monitor compliance with regulations such as the Foreign Corrupt Practices Act, the UK Bribery Act and similar laws.

Although we have committed substantial resources to expand our global platform, if we are unable to successfully manage the risks associated with our global business or to adequately manage operational fluctuations, our business, financial condition and results of operations could be harmed.

In addition, our international operations and, specifically, the ability of our non-U.S. subsidiaries to dividend or otherwise transfer cash among our subsidiaries, including transfers of cash to pay interest and principal on our debt, may be affected by currency exchange control regulations, transfer pricing regulations and potentially adverse tax consequences, among other things.

The depreciation in the value of the foreign currency in countries where we have a significant investment may adversely affect our results of operations and financial position.

We have pursued, and intend to continue to pursue, growth opportunities in international markets where the U.S. dollar is not the functional currency. At December 31, 2011, approximately 43.5% or $12.1 billion of our total assets are invested in a currency other than the U.S. dollar, primarily the euro, Japanese yen and British pound sterling. As a result, we are subject to foreign currency risk due to potential fluctuations in exchange rates between foreign currencies and the U.S. dollar. A significant change in the value of the foreign currency of one or more countries where we have a significant investment may have a material adverse effect on our financial position, debt covenant ratios and results of operations. Although we attempt to mitigate adverse effects by borrowing under debt agreements denominated in foreign currencies and, on occasion and when deemed appropriate, using derivative contracts, there can be no assurance that those attempts to mitigate foreign currency risk will be successful.

Real estate investments are not as liquid as certain other types of assets, which may reduce economic returns to investors.

Real estate investments are not as liquid as certain other types of investments and this lack of liquidity may limit our ability to react promptly to changes in economic or other conditions. In addition, significant expenditures associated with real estate investments, such as secured mortgage payments, real estate taxes and maintenance costs, are generally not reduced when circumstances cause a reduction in income from the investments. Like other companies qualifying as REITs under the Internal Revenue Code, we are only able to hold property for sale in the ordinary course of business through taxable REIT subsidiaries in order to not incur punitive taxation on any tax gain from the sale of such property. While we may dispose of certain properties that have been held for investment in order to generate liquidity, if we do not satisfy certain safe harbors or we believe there is too much risk of incurring the punitive tax on any tax gain from the sale, we may not pursue such sales.

In the event that we do not have sufficient cash available to us through our operations or available credit facilities to continue operating our business as usual, we may need to find alternative ways to increase our liquidity. Such alternatives may include, without limitation, divesting ourselves of properties, whether or not they otherwise meet our strategic objectives to keep in the long term, at less than optimal terms, incurring debt, entering into leases with our customers at lower rental rates or less than optimal terms or entering into lease renewals with our existing customers without an increase in rental rates at turnover. There can be no assurance, however, that such alternative ways to increase our liquidity will be available to us. Additionally, taking such measures to increase our liquidity may adversely affect our financial condition, results of operations, cash flow, our ability to make distributions and payments to our security holders and the market price of our securities.

Risks Related to our Business

General economic conditions and other events or occurrences that affect areas in which our properties are geographically concentrated, may impact financial results.

We are exposed to general economic conditions, local, regional, national and international economic conditions and other events and occurrences that affect the markets in which we own properties. Our operating performance is further impacted by the economic conditions of the specific markets in which we have concentrations of properties.

As of December 31, 2011, approximately 23.0% of our consolidated operating properties or $4.9 billion (based on investment before depreciation) are located in California, which represented 18.8% of the aggregate square footage of our operating properties and 20.8% of our annualized base rent. Our revenue from, and the value of, our properties located in California may be affected by local real estate conditions (such as an oversupply of or reduced demand for industrial properties) and the local economic climate. Business layoffs, downsizing, industry

 

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slowdowns, changing demographics and other factors may adversely impact California’s economic climate. Because of the number of properties we have located in California, a downturn in California’s economy or real estate conditions could adversely affect our financial condition, results of operations, cash flow and ability to make distributions and payments to our security holders and the market price of our securities.

In addition to California, we also have significant holdings (defined as more than 3% of total investment before depreciation) in operating properties in certain global and regional markets located in Chicago, Dallas/Fort Worth, France, Japan, New Jersey/New York City, South Florida and the United Kingdom. Our operating performance could be adversely affected if conditions become less favorable in any of the markets in which we have a concentration of properties. Conditions such as an oversupply of distribution space or a reduction in demand for distribution space, among other factors, may impact operating conditions. Any material oversupply of distribution space or material reduction in demand for distribution space could adversely affect our results of operations, distributable cash flow and the value of our securities.

In addition, our unconsolidated investees have concentrations of properties in the same markets mentioned above, as well as in markets in Central and Eastern Pennsylvania, Germany, Mexico, Poland and Reno and are subject to the economic conditions in those markets.

A number of our properties are located in areas that are known to be subject to earthquake activity. U.S. properties located in active seismic areas include properties in the San Francisco Bay Area, Los Angeles, and Seattle. International properties located in active seismic areas include Japan and Mexico. We generally carry earthquake insurance on our properties located in areas historically subject to seismic activity, subject to coverage limitations and deductibles if we believe it is commercially reasonable. We evaluate our earthquake insurance coverage annually in light of current industry practice through an analysis prepared by outside consultants and in some specific instances have elected to self insure our earthquake exposure based on this analysis. We have elected not to carry earthquake insurance for wholly owned assets in Japan based on this analysis.

Further, a number of our properties are located in areas that are known to be subject to hurricane and/or flood risk. We carry hurricane and flood hazard insurance on all of our properties located in areas historically subject to such activity, subject to coverage limitations and deductibles if we believe it is commercially reasonable. We evaluate our insurance coverage annually in light of current industry practice through an analysis prepared by outside consultants.

Our insurance coverage does not include all potential losses.

We and our unconsolidated investees currently carry insurance coverage including property damage and rental loss insurance resulting from certain perils such as fire and additional perils as covered under an extended coverage policy, namely windstorm, flood, earthquake and terrorism; commercial general liability insurance; and environmental insurance, as appropriate for the markets where each of our properties and business operations are located. The insurance coverage contains policy specifications and insured limits customarily carried for similar properties, business activities and markets. We believe our properties and the properties of our unconsolidated investees are adequately insured. However, there are certain losses, including losses from floods, earthquakes, acts of war, acts of terrorism or riots, that are not generally insured against or that are not generally fully insured against because it is not deemed economically feasible or prudent to do so. If an uninsured loss or a loss in excess of insured limits occurs with respect to one or more of our properties, we could experience a significant loss of capital invested and future revenues in these properties and could potentially remain obligated under any recourse debt associated with the property.

Furthermore, we cannot be sure that our insurance companies will be able to continue to offer products with sufficient coverage at commercially reasonable rates. If we experience a loss that is uninsured or that exceeds insured limits with respect to one or more of our properties or if our insurance companies fail to meet their coverage commitments to us in the event of an insured loss, then we could lose the capital invested in the damaged properties, as well as the anticipated future revenue from those properties and, if there is recourse debt, then we would remain obligated for any mortgage debt or other financial obligations related to the properties. Any such losses or higher insurance costs could adversely affect our financial condition, results of operations, cash flow and ability to make distributions and payments to our security holders and the market price of our securities.

Investments in real estate properties are subject to risks that could adversely affect our business.

Investments in real estate properties are subject to varying degrees of risk. While we seek to minimize these risks through geographic diversification of our portfolio, market research and our property management capabilities, these risks cannot be eliminated. Some of the factors that may affect real estate values include:

 

   

local conditions, such as an oversupply of distribution space or a reduction in demand for distribution space in an area;

 

   

the attractiveness of our properties to potential customers;

 

   

competition from other available properties;

 

   

increasing costs of rehabilitating, repositioning, renovating and making improvements to our properties;

 

   

our ability to provide adequate maintenance of, and insurance on, our properties;

 

   

our ability to control rents and variable operating costs;

 

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governmental regulations, including zoning, usage and tax laws and changes in these laws; and

 

   

potential liability under, and changes in, environmental, zoning and other laws.

Our investments are concentrated in the industrial distribution sector and our business would be adversely affected by an economic downturn in that sector.

Our investments in real estate assets are primarily concentrated in the industrial distribution sector. This concentration may expose us to the risk of economic downturns in this sector to a greater extent than if our business activities were more diversified.

Our operating results and distributable cash flow will depend on the continued generation of lease revenues from customers and we may be unable to lease vacant space or renew leases or re-lease space on favorable terms as leases expire.

Our operating results and distributable cash flow would be adversely affected if a significant number of our customers were unable to meet their lease obligations. We are also subject to the risk that, upon the expiration of leases for space located in our properties, leases may not be renewed by existing customers, the space may not be re-leased to new customers or the terms of renewal or re-leasing (including the cost of required renovations or concessions to customers) may be less favorable to us than current lease terms. Our competitors may offer space at rental rates below current market rates or below the rental rates we currently charge our customers, we may lose potential customers, and we may be pressured to reduce our rental rates below those we currently charge in order to retain customers when our customers’ leases expire. In the event of default by a significant number of customers, we may experience delays and incur substantial costs in enforcing our rights as landlord, and may be unable to re-lease spaces. A customer may experience a downturn in its business, which may cause the loss of the customer or may weaken its financial condition, resulting in the customer’s failure to make rental payments when due or requiring a restructuring that might reduce cash flow from the lease. In addition, a customer may seek the protection of bankruptcy, insolvency or similar laws, which could result in the rejection and termination of such customer’s lease and thereby cause a reduction in our available cash flow.

If we decide to contribute or sell properties to an unconsolidated investee or third parties to generate proceeds, we may not be successful.

We may contribute or sell properties to certain of our unconsolidated investees or third parties on a case-by-case basis. Our ability to sell properties on advantageous terms is affected by competition from other owners of properties that are trying to dispose of their properties; market conditions, including the capitalization rates applicable to our properties; and other factors beyond our control. If our competitors sell assets similar to assets we intend to divest in the same markets and/or at valuations below our valuations for comparable assets, we may be unable to divest our assets at favorable pricing or on favorable terms or at all. The unconsolidated investee or third parties who might acquire our properties may need to have access to debt and equity capital, in the private and public markets, in order to acquire properties from us. Should they have limited or no access to capital on favorable terms, then dispositions could be delayed. If we are unable to generate proceeds through property sales we may have to delay our deleveraging plans, which may result in adverse effects on our liquidity, distributable cash flow, debt covenant ratios, and the value of our securities.

We may acquire properties, which involves risks that could adversely affect our operating results and the value of our securities.

We may acquire industrial properties. The acquisition of properties involves risks, including the risk that the acquired property will not perform as anticipated and that any actual costs for rehabilitation, repositioning, renovation and improvements identified in the pre-acquisition due diligence process will exceed estimates. When we acquire properties, we may face risks associated with a lack of market knowledge or understanding of the local economy, forging new business relationships in the area and unfamiliarity with local government and permitting procedures. Additionally, there is, and it is expected there will continue to be, significant competition for properties that meet our investment criteria as well as risks associated with obtaining financing for acquisition activities.

Our real estate development strategies may not be successful.

Our real estate development strategy is focused on monetizing land in the future through sales to third parties, development of industrial properties to hold for long-term investment or contribution or sale to an unconsolidated investee, depending on market conditions, our liquidity needs and other factors. We may expand investment in our development, renovation and redevelopment business and we will complete the build-out and leasing of our development platform. We may also develop, renovate and redevelop properties within existing or newly formed development co-investment ventures. The real estate development, renovation and redevelopment business involves significant risks that could adversely affect our financial condition, results of operations, cash flow and ability to make distributions and payments to our security holders and the market price of our securities, which include the following risks:

 

   

we may not be able to obtain financing for development projects on favorable terms or at all and complete construction on schedule or within budget, resulting in increased debt service and construction costs and delays in leasing the properties and generating cash flow;

 

   

we may not be able to obtain, or may experience delays in obtaining, all necessary zoning, land-use, building, occupancy and other governmental permits and authorizations;

 

   

we may seek to sell certain land parcels and not be able to find a third party to acquire such land or the sales price will not allow us to recover our investment, resulting in additional impairment charges;

 

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development opportunities that we explore may be abandoned and the related investment impaired;

 

   

the properties may perform below anticipated levels, producing cash flow below budgeted amounts;

 

   

we may not be able to lease properties on favorable terms or at all;

 

   

construction costs, total investment amounts and our share of remaining funding may exceed our estimates and projects may not be completed, delivered or stabilized as planned;

 

   

we may not be able to attract third party investment in new development co-investment ventures or sufficient customer demand for our product;

 

   

we may not be able to capture the anticipated enhanced value created by our redevelopment projects on expected timetables or at all;

 

   

we may experience delays (temporary or permanent) if there is public opposition to our activities; and

 

   

substantial renovation, new development and redevelopment activities, regardless of their ultimate success, typically require a significant amount of management’s time and attention, diverting their attention from our day-to-day operations.

We are exposed to various environmental risks that may result in unanticipated losses that could affect our operating results and financial condition.

Under various federal, state and local laws, ordinances and regulations, a current or previous owner, developer or operator of real estate may be liable for the costs of removal or remediation of certain hazardous or toxic substances. The costs of removal or remediation of such substances could be substantial. Such laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the release or presence of such hazardous substances. In addition, third parties may sue the owner or operator of a site for damages based on personal injury, property damage or other costs, including investigation and clean-up costs, resulting from the environmental contamination.

Environmental laws in some countries, including the United States, also require that owners or operators of buildings containing asbestos properly manage and maintain the asbestos, adequately inform or train those who may come into contact with asbestos and undertake special precautions, including removal or other abatement, in the event that asbestos is disturbed during building renovation or demolition. These laws may impose fines and penalties on building owners or operators who fail to comply with these requirements and may allow third parties to seek recovery from owners or operators for personal injury associated with exposure to asbestos. Some of our properties are known to contain asbestos-containing building materials.

In addition, some of our properties are leased or have been leased, in part, to owners and operators of businesses that use, store or otherwise handle petroleum products or other hazardous or toxic substances, creating a potential for the release of such hazardous or toxic substances. Further, certain of our properties are on, adjacent to or near other properties that have contained or currently contain petroleum products or other hazardous or toxic substances, or upon which others have engaged, are engaged or may engage in activities that may release such hazardous or toxic substances. From time to time, we may acquire properties, or interests in properties, with known adverse environmental conditions where we believe that the environmental liabilities associated with these conditions are quantifiable and that the acquisition will yield a superior risk-adjusted return. In connection with certain divested properties, we have agreed to remain responsible for, and to bear the cost of, remediating or monitoring certain environmental conditions on the properties.

We cannot give any assurance that other such conditions do not exist or may not arise in the future. The presence of such substances on our real estate properties could adversely affect our ability to lease, develop or sell such properties or to borrow using such properties as collateral and may have an adverse effect on our distributable cash flow.

We are subject to risks and liabilities in connection with forming co-investment ventures, investing in new or existing co-investment ventures, attracting third party investment and investing in and managing properties through co-investment ventures.

As of December 31, 2011, we have an investment in approximately 277.8 million square feet held through unconsolidated investees. Our organizational documents do not limit the amount of available funds that we may invest in unconsolidated investees, and we may and currently intend to develop and acquire properties through co-investment ventures and investments in other entities when warranted by the circumstances. However, there can be no assurance that we will be able to form new co-investment ventures, attract third party investment or make additional investments in new or existing co-investment ventures, successfully develop or acquire properties through unconsolidated entities, or realize value from such unconsolidated entities. Our inability to do so may have an adverse effect on our growth, our earnings and the market price of our securities.

Our partners in our unconsolidated investments may share certain approval rights over major decisions and some partners may manage the properties in the unconsolidated investees. Our unconsolidated investments involve certain risks, including:

 

   

if our partners fail to fund their share of any required capital contributions, then we may choose to contribute such capital;

 

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our partners might have economic or other business interests or goals that are inconsistent with our business interests or goals that would affect our ability to operate the property;

 

   

the venture or other governing agreements often restrict the transfer of an interest in the co-investment venture or may otherwise restrict our ability to sell the interest when we desire or on advantageous terms;

 

   

our relationships with our partners are generally contractual in nature and may be terminated or dissolved under the terms of the agreements, and in such event, we may not continue to manage or invest in the assets underlying such relationships resulting in reduced fee revenue or causing a need to purchase such interest to continue ownership; and

 

   

disputes between us and our partners may result in litigation or arbitration that would increase our expenses and prevent our officers and directors from focusing their time and effort on our business and result in subjecting the properties owned by the applicable co-investment venture to additional risk.

We generally seek to maintain sufficient influence over our unconsolidated investees to permit us to achieve our business objectives; however, we may not be able to do so, and the occurrence of one or more of the events described above could adversely affect our financial condition, results of operations, cash flow and ability to make distributions and payments to our security holders and the market price of our securities.

Contingent or unknown liabilities could adversely affect our financial condition.

We have acquired and may in the future acquire properties subject to liabilities and without any recourse, or with only limited recourse, with respect to unknown liabilities. As a result, if a liability were asserted against us based upon ownership of any of these entities or properties, then we might have to pay substantial sums to settle it, which could adversely affect our cash flow. Contingent or unknown liabilities with respect to entities or properties acquired might include:

 

   

liabilities for environmental conditions;

 

   

losses in excess of our insured coverage;

 

   

accrued but unpaid liabilities incurred in the ordinary course of business;

 

   

tax, legal and regulatory liabilities; and

 

   

claims for indemnification by the general partners, officers and directors and others indemnified by the former owners of our properties.

Risks Related to Financing and Capital

We face risks associated with the use of debt to fund our business activities, including refinancing and interest rate risks, and our operating results and financial condition could be adversely affected if we are unable to make required payments on our debt or are unable to refinance our debt.

We are subject to risks normally associated with debt financing, including the risk that our cash flow will be insufficient to meet required payments of principal and interest. There can be no assurance that we will be able to refinance any maturing indebtedness, that such refinancing would be on terms as favorable as the terms of the maturing indebtedness, or that we will be able to otherwise obtain funds by selling assets or raising equity to make required payments on maturing indebtedness. If we are unable to refinance our indebtedness at maturity or meet our payment obligations, the amount of our distributable cash flow and our financial condition would be adversely affected and, if the maturing debt is secured, the lender may foreclose on the property securing such indebtedness. Our Global Senior Credit Agreement, Yen-based credit agreement and certain other debt bears interest at variable rates. Increases in interest rates would increase our interest expense under these agreements. In addition, our unconsolidated investees may be unable to refinance indebtedness or meet payment obligations, which may impact our distributable cash flow and our financial condition and/or we may be required to recognize impairment charges of our investments.

Covenants in our credit agreements could limit our flexibility and breaches of these covenants could adversely affect our financial condition.

The terms of our various credit agreements, including our Global Senior Credit Agreement and Yen-based credit agreement, the indentures under which our senior notes are issued and other note agreements, require us to comply with a number of customary financial covenants, such as maintaining debt service coverage, leverage ratios, fixed charge ratios and other operating covenants including maintaining insurance coverage. These covenants may limit our flexibility in our operations, and breaches of these covenants could result in defaults under the instruments governing the applicable indebtedness. If we default under the covenant provisions and are unable to cure the default, refinance the indebtedness or meet payment obligations, the amount of our distributable cash flow and our financial condition could be adversely affected.

Adverse changes in our credit ratings could negatively affect our financing activity.

The credit ratings of our senior unsecured notes and preferred stock are based on our operating performance, liquidity and leverage ratios, overall financial position and other factors employed by the credit rating agencies in their rating analyses of us. Our credit ratings can affect

 

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the amount of capital we can access, as well as the terms and pricing of any debt we may incur. There can be no assurance that we will be able to maintain our current credit ratings, and in the event our credit ratings are downgraded, we would likely incur higher borrowing costs and may encounter difficulty in obtaining additional financing. Also, a downgrade in our credit ratings may trigger additional payments or other negative consequences under our current and future credit facilities and debt instruments. Adverse changes in our credit ratings could negatively impact our refinancing and other capital market activities, our ability to manage debt maturities, our future growth, our financial condition, the market price of our securities, and our development and acquisition activity.

We are dependent on external sources of capital.

In order to qualify as a REIT, we are required each year to distribute to our stockholders at least 90% of our REIT taxable income (determined without regard to the dividends-paid deduction and by excluding any net capital gain) and we may be subject to tax to the extent our income is not fully distributed. While historically we have satisfied these distribution requirements by making cash distributions to our stockholders, we may choose to satisfy these requirements by making distributions of cash or other property, including, in limited circumstances, our own stock. For distributions with respect to taxable years ending on or before December 31, 2011, and in some cases declared as late as December 31, 2012, the REIT can satisfy up to 90% of the distribution requirements discussed above through the distribution of shares of our stock if certain conditions are met. Assuming we continue to satisfy these distribution requirements with cash, we may not be able to fund all future capital needs, including acquisition and development activities, from cash retained from operations and may have to rely on third-party sources of capital. Further, in order to maintain our REIT status and not have to pay federal income and excise taxes, we may need to borrow funds on a short-term basis to meet the REIT distribution requirements even if the then-prevailing market conditions are not favorable for these borrowings. These short-term borrowing needs could result from differences in timing between the actual receipt of cash and inclusion of income for federal income tax purposes, or the effect of non-deductible capital expenditures, the creation of reserves or required debt or amortization payments. Our ability to access debt and equity capital on favorable terms or at all is dependent upon a number of factors, including general market conditions, the market’s perception of our growth potential, our current and potential future earnings and cash distributions and the market price of our securities.

Federal Income Tax Risks

Our failure to qualify as a REIT would have serious adverse consequences.

The REIT elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code, commencing with the taxable year ended December 31, 1997. We believe we have operated so as to qualify as a REIT under the Internal Revenue Code and believe that the current organization and method of operation comply with the rules and regulations promulgated under the Internal Revenue Code to enable us to continue to qualify as a REIT. However, it is possible that we are organized or have operated in a manner that would not allow us to qualify as a REIT, or that our future operations could cause us to fail to qualify. Qualification as a REIT requires us to satisfy numerous requirements (some on an annual and others on a quarterly basis) established under highly technical and complex sections of the Internal Revenue Code for which there are only limited judicial and administrative interpretations, and involves the determination of various factual matters and circumstances not entirely within our control. For example, in order to qualify as a REIT, the REIT must derive at least 95% of its gross income in any year from qualifying sources. In addition, we must pay dividends to our stockholders aggregating annually at least 90% of the REIT taxable income (determined without regard to the dividends paid deduction and by excluding capital gains) and must satisfy specified asset tests on a quarterly basis. The provisions of the Internal Revenue Code and applicable Treasury regulations regarding qualification as a REIT are more complicated in our case because we hold assets through the Operating Partnership.

If we fail to qualify as a REIT in any taxable year, we will be required to pay federal income tax (including any applicable alternative minimum tax) on taxable income at regular corporate rates. Unless we are entitled to relief under certain statutory provisions, we would be disqualified from treatment as a REIT for the four taxable years following the year in which we lost the qualification. If we lost our REIT status, our net earnings would be significantly reduced for each of the years involved.

Furthermore, we own a direct or indirect interest in certain subsidiary REITs which elected to be taxed as REITs under Sections 856 through 860 of the Internal Revenue Code. Provided that each subsidiary REIT qualifies as a REIT, our interest in such subsidiary REIT will be treated as a qualifying real estate asset for purposes of the REIT asset tests, and any dividend income or gains derived by us from such subsidiary REIT will generally be treated as income that qualifies for purposes of the REIT gross income tests. To qualify as a REIT, the subsidiary REIT must independently satisfy all of the REIT qualification requirements. If such subsidiary REIT were to fail to qualify as a REIT, and certain relief provisions did not apply, it would be treated as a regular taxable corporation and its income would be subject to United States federal income tax. In addition, a failure of the subsidiary REIT to qualify as a REIT would have an adverse effect on our ability to comply with the REIT income and asset tests, and thus our ability to qualify as a REIT.

Certain property transfers may generate prohibited transaction income, resulting in a penalty tax on gain attributable to the transaction.

From time to time, we may transfer or otherwise dispose of some of our properties, including by contributing properties to our co-investment ventures. Under the Internal Revenue Code, any gain resulting from transfers of properties we hold as inventory or primarily for sale to customers in the ordinary course of business is treated as income from a prohibited transaction subject to a 100% penalty tax. We do not believe that our transfers or disposals of property or our contributions of properties into our co-investment ventures are prohibited transactions. However, whether property is held for investment purposes is a question of fact that depends on all the facts and circumstances surrounding the particular transaction. The Internal Revenue Service may contend that certain transfers or dispositions of properties by us or contributions of properties into our co-investment ventures are prohibited transactions. While we believe that the Internal Revenue Service

 

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would not prevail in any such dispute, if the Internal Revenue Service were to argue successfully that a transfer, disposition, or contribution of property constituted a prohibited transaction, we would be required to pay a 100% penalty tax on any gain allocable to us from the prohibited transaction. In addition, income from a prohibited transaction might adversely affect our ability to satisfy the income tests for qualification as a REIT.

Legislative or regulatory action could adversely affect us.

In recent years, numerous legislative, judicial and administrative changes have been made to the federal income tax taws applicable to investments in REITs and similar entities. Additional changes to tax laws are likely to continue to occur in the future, and may impact our taxation or that of our stockholders.

Risks relating to the Merger

The combined company may be unable to integrate its businesses successfully and realize the anticipated synergies and related benefits of the Merger or do so within the anticipated timeframe.

On June 3, 2011, AMB and ProLogis completed the Merger. The Merger involved a combination of two companies that previously operated as independent public companies, each of which operated its own private capital platform focused on the industrial real estate sector and served as the sponsor or manager of, or in a similar capacity with respect to, numerous private equity investment vehicles.

The combined company is required to devote significant management attention and resources to integrating the business practices and operations of the constituent companies. Potential difficulties the combined company may encounter in the integration process include the following:

 

   

the inability to successfully combine the businesses in a manner that permits the combined company to achieve the cost savings anticipated to result from the Merger;

 

   

the complexities associated with managing the combined businesses out of several different locations and integrating personnel and systems from the two companies;

 

   

the additional complexities of combining two companies with different histories, cultures, regulatory restrictions, markets and customer bases;

 

   

the failure to retain key employees of either of the two companies; and

 

   

performance shortfalls as a result of the diversion of management’s attention caused by completing the Merger.

For all these reasons, it is possible that the integration process could result in the distraction of our management, the disruption of our ongoing business or the diversion of our resources to the integration process as we attempt to complete the integration process, any of which could adversely affect our financial condition, results of operations, cash flow and ability to make distributions and payments to security holders and the market price of our securities.

Other Risks

Risks Associated with our Dependence on Key Personnel.

We depend on the efforts of our executive officers and other key employees. From time to time, our personnel and their roles may change. In connection with the completion of the Merger, there were changes to our personnel and their roles. While we believe that we have retained our key talent and can find suitable employees to meet our personnel needs, the loss of key personnel, any change in their roles, or the limitation of their availability could adversely affect our financial condition, results of operations, cash flow and ability to make distributions and payments to security holders and the market price of our securities. If we are unable to continue to attract and retain our executive officers, or if compensation costs required to attract and retain key employees become more expensive, our performance and competitive position could be materially adversely affected.

Compliance or failure to comply with the Americans with Disabilities Act and other similar regulations could result in substantial costs.

Under the Americans with Disabilities Act, places of public accommodation must meet certain federal requirements related to access and use by disabled persons. Noncompliance could result in the imposition of fines by the federal government or the award of damages to private litigants. If we are required to make unanticipated expenditures to comply with the Americans with Disabilities Act, including removing access barriers, then our cash flow and the amounts available to make distributions and payments to our security holders may be adversely affected. Our properties are also subject to various federal, state and local regulatory requirements, such as state and local fire and life-safety requirements. We could incur fines or private damage awards if we fail to comply with these requirements. While we believe that our properties are currently in material compliance with these regulatory requirements, the requirements may change or new requirements may be imposed that could require significant unanticipated expenditures by us that will affect our cash flow and results of operations.

We are subject to governmental regulations and actions that affect operating results and financial condition.

Many laws, including tax laws, and governmental regulations apply to us, our unconsolidated investees and our properties. Changes in these laws and governmental regulations, or their interpretation by agencies or the courts, could occur, which might affect our ability to conduct business.

 

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Our business could be adversely impacted if we have deficiencies in our disclosure controls and procedures or internal control over financial reporting.

The design and effectiveness of our disclosure controls and procedures and internal control over financial reporting may not prevent all errors, misstatements or misrepresentations. While management will continue to review the effectiveness of our disclosure controls and procedures and internal control over financial reporting, there can be no guarantee that our internal control over financial reporting will be effective in accomplishing all control objectives all of the time. Deficiencies, including any material weakness, in our internal control over financial reporting which may occur in the future could result in misstatements of our results of operations, restatements of our financial statements, a decline in the price of our securities, or otherwise materially adversely affect our business, reputation, results of operations, financial condition or liquidity.

We are exposed to the potential impacts of future climate change and climate change related risks.

We consider that we are exposed to potential physical risks from possible future changes in climate. Our distribution facilities may be exposed to rare catastrophic weather events, such as severe storms and/or floods. If the frequency of extreme weather events increases due to climate change, our exposure to these events could increase.

We do not currently consider ourselves to be exposed to regulatory risks related to climate change, as our operations do not emit a significant amount of greenhouse gases. However, we may be adversely impacted as a real estate developer in the future by potential impacts to the supply chain and/or stricter energy efficiency standards for buildings.

ITEM 1B. Unresolved Staff Comments

None.

ITEM 2. Properties

We are invested in real estate properties that are primarily generic industrial properties. In Japan, our industrial properties are generally multi-level centers, which is common in Japan due to the high cost and limited availability of land. Our properties are typically used for distribution, storage, packaging, assembly and light manufacturing of consumer and industrial products. Based on the square footage of the operating properties included in our Real Estate Operations segment at December 31, 2011 (and discussed below), our properties are 100% industrial properties; including 92.5% used for bulk distribution, 4.4% used for light manufacturing and assembly, 1.3% used for flex industrial, 1.0% used for on-tarmac and 0.8% used for other purposes.

Geographic Distribution

Our investment strategy focuses on providing distribution and logistics space to customers whose businesses are tied to global trade and depend on the efficient movement of goods through the global supply chain. Our properties are primarily located in two main market types, global markets and regional markets. Global markets account for 85.4% of our consolidated operating properties (based on investment balance) and comprise approximately 30 of the largest and most liquid markets tied to global trade. These markets feature large population centers with high per-capita consumption rates and close proximity to airports, seaports and ground transportation systems. Regional markets account for 10.6% of our consolidated operating properties. Similar to global markets, regional markets benefit from large population centers but typically are not as tied to the global supply chain and are often less supply constrained.

 

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The information in the following tables is as of December 31, 2011 for our consolidated operating properties, properties in our development portfolio and land, including 375 buildings owned by entities we consolidate but of which we own less than 100%. All of these assets are included in our Real Estate Operations segment. This includes our portfolio of operating properties we developed or are currently developing. No individual property or group of properties operating as a single business unit amounted to 10% or more of our consolidated total assets at December 31, 2011 or generated income equal to 10% or more of our consolidated gross revenues for the year ended December 31, 2011. These tables do not include properties that are owned by unconsolidated investees.

 

Consolidated operating properties in the Real Estate
Operations segment at December 31, 2011

(dollars and rentable square footage in thousands):

   No. of
Bldgs.
     Percentage
Occupied (1)
    Rentable
Square
Footage
     Investment
Before
Depreciation
     Encumbrances
(2)
 

Americas:

             

Global Markets:

             

United States:

             

Atlanta

     67         83.6      9,419           $ 378,553         $ 52,400     

Baltimore/Washington

     35         94.1      4,041           246,877         13,876     

Central & Eastern PA

     9         98.7      3,794           192,602         -      

Central Valley, CA

     13         86.0      5,251           270,542         8,966     

Chicago

     143         92.8      24,576           1,404,575         187,225     

Dallas/Fort Worth

     112         92.8      15,963           701,177         66,365     

Houston

     56         99.1      4,665           169,948         9,350     

New Jersey/New York City

     115         89.8      13,234           1,034,141         133,736     

San Francisco Bay Area

     213         88.9      17,233           1,677,961         126,837     

Seattle

     27         93.3      3,488           320,240         13,165     

South Florida

     65         92.1      6,298           649,979         40,317     

Southern California

     185         95.9      32,235           2,998,831         309,721     

On Tarmac

     29         92.2      2,354           266,237         9,064     

Canada

     14         91.7      4,690           472,823         -      

Mexico

     61         91.7      10,399           588,178         170,352     

Regional and Other Markets - United States:

             

Austin

     9         97.3      1,006           59,934         -      

Boston

     26         94.4      3,336           178,437         10,549     

Charlotte

     13         97.5      1,641           61,044         17,663     

Cincinnati

     16         94.7      2,513           85,053         22,015     

Columbus

     24         93.2      5,143           202,636         29,222     

Denver

     20         94.5      3,563           206,437         32,971     

El Paso

     8         84.6      931           33,437         -      

Indianapolis

     11         98.7      1,274           42,625         4,950     

Las Vegas

     8         78.6      840           47,398         -      

Louisville

     8         98.6      2,707           102,734         -      

Memphis

     17         91.0      4,094           123,802         -      

Minneapolis

     6         84.8      1,303           53,161         -      

Nashville

     22         80.6      2,032           57,109         -      

Orlando

     23         72.6      2,648           158,027         -      

Phoenix

     20         88.6      2,348           116,419         -      

Portland

     11         94.5      1,374           94,221         18,338     

Reno

     11         93.3      2,184           94,701         10,108     

San Antonio

     30         88.5      3,056           117,804         3,183     

Savannah

     1         61.0      346           16,847         -      

St. Louis

     6         88.6      685           24,158         -      

Tampa

     11         82.7      837           35,279         8,696     
  

 

 

    

 

 

   

 

 

    

 

 

 

Subtotal Americas

         1,445         92.0      201,501           13,283,927         1,299,069     
  

 

 

    

 

 

   

 

 

    

 

 

 

Europe:

             

Global Markets:

             

Belgium

     6         99.5      1,497           119,143         33,369     

France

     82         92.7      22,116           1,707,371         253,774     

Germany

     36         93.3      6,104           456,527         62,042     

Netherlands

     22         91.4      4,623           367,640         56,338     

Poland

     45         81.1      10,125           570,561         145,083     

Spain

     21         79.8      5,529           505,549         44,006     

United Kingdom

     38         91.2      7,172           688,122         153,495     

Regional and Other Markets:

             

Austria

     1         100.0      115           10,192         -      

Czech Republic

     20         83.4      4,056           302,457         44,033     

Hungary

     19         85.0      3,171           180,581         8,629     

Italy

     23         89.0      7,400           473,225         104,525     

Romania

     4         98.6      1,160           52,662         -      

Slovakia

     1         100.0      287           16,656         -      

Sweden

     5         100.0      2,285           193,691         -      
  

 

 

    

 

 

   

 

 

    

 

 

 

Subtotal Europe

     323         89.3      75,640           5,644,377         905,294     
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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Table of Contents

Consolidated operating properties in the Real Estate
Operations segment at December 31, 2011

(dollars and rentable square footage in thousands):

   No. of
Bldgs.
     Percentage
Occupied (1)
    Rentable
Square
Footage
     Investment
Before
Depreciation
     Encumbrances
(2)
 

Asia:

             

Global Markets:

             

China

     7         96.1      1,750           54,669         -      

Japan

     17         94.3      11,218           2,429,412         782,422     

Singapore

     5         100.0      942           140,163         21,710     
  

 

 

    

 

 

   

 

 

    

 

 

 

Subtotal Asia

     29         94.9      13,910           2,624,244         804,132     
  

 

 

    

 

 

   

 

 

    

 

 

 

Total operating properties

         1,797         91.4      291,051           $ 21,552,548         $ 3,008,495     

 

    Investment in Land     Development Portfolio  

Consolidated land and development portfolio in the Real
Estate Operations segment at December 31, 2011

(dollars and rentable square footage in thousands):

  Acres     Investment     No. of
Bldgs.
    Percentage
Leased (1)
    Rentable
Square
Footage
    Current
Investment
    Total
Expected
Investment
(3)
 

Americas:

             

Global Markets:

             

United States:

             

Atlanta

    732        $28,003                             $ -         $ -    

Baltimore/Washington

    106        14,868        2               171        7,540        15,583   

Central & Eastern PA

    339        29,354                                      

Central Valley

    188        17,005                                      

Chicago

    638        60,090                                      

Dallas/Ft. Worth

    470        23,373                                      

Houston

    65        7,928        1               147        4,115        7,752   

New Jersey/New York City

    305        124,431        3        63.5      497        45,142        66,078   

Seattle

    15        2,121                                      

South Florida

    377        141,581        1               190        3,456        15,912   

Southern California

    779        121,810        2               686        46,838        60,978   

Canada

    230        92,034                                      

Mexico

    1,021        221,568        5        60.9      817        34,408        49,960   

Regional and Other Markets:

             

United States:

             

Boston

    18        7,114                                      

Central Florida

    147        26,336                                      

Charlotte- Greenville

    20        1,359                                      

Cincinnati

    75        4,915                                      

Columbus

    199        6,692                                      

Denver

    66        8,315                                      

El Paso

    16        953                                      

Indianapolis

    127        4,469                                      

Jacksonville

    103        10,929                                      

Las Vegas

    66        7,561                                      

Louisville

    13        425                                      

Memphis

    159        6,452                                      

Norfolk

    84        7,814                                      

Phoenix

    148        7,608                                      

Portland

    23        2,572                                      

Reno

    173        9,882                                      

Savannah

    229        13,082                                      
 

 

 

 

Subtotal Americas

        6,931        1,010,644        14        32.4      2,508        141,499        216,263   
 

 

 

 

 

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Table of Contents
    Investment in Land     Development Portfolio  

Consolidated land and development portfolio in the
Real Estate Operations segment at December 31, 2011

(dollars and rentable square footage in thousands):

  Acres     Investment     No. of
Bldgs.
    Percentage
Leased (1)
    Rentable
Square
Footage
    Current
Investment
    Total
Expected
Investment
(3)
 

Europe:

             

Global Markets:

             

Belgium

    30        10,298                                      

France

    396        68,434        2        43.9      506        28,340        37,301   

Germany

    203        50,475        4        58.3      766        34,581        64,963   

Netherlands

    63        57,384                                      

Poland

    893        116,942        2        50.6      407        19,469        29,390   

Spain

    100        19,586                                      

United Kingdom

    981        243,325        1        100.0      458        37,716        42,720   

Regional and Other Markets:

             

Austria

    28        13,976                                      

Czech Republic

    308        45,249        1        100.0      314        17,572        18,369   

Hungary

    338        46,716                                      

Italy

    114        33,589                                      

Romania

    90        12,436                                      

Slovakia

    108        18,591                                      
 

 

 

 

Subtotal Europe

    3,652        737,001        10        67.2     2,451        137,678        192,743   
 

 

 

 

Asia:

             

Global Markets:

             

China

    42        11,467                                      

Japan

    98        225,121        6        50.1      4,478        581,354        757,888   
 

 

 

 

Subtotal Asia

    140        236,588        6        50.1      4,478        581,354        757,888   
 

 

 

 

Total land and development portfolio

        10,723        $    1,984,233        30        49.8      9,437        $    860,531        $  1,166,894   

The following is a summary of our investment in consolidated real estate properties at December 31, 2011:

 

      Investment Before
Depreciation
(in thousands)
 

Industrial properties

   $ 21,552,548   

Development portfolio

     860,531   

Land

     1,984,233   

Other real estate investments (4)

     390,225   
  

 

 

 

Total

   $ 24,787,537   

 

(1) Represents the percentage occupied for our operating properties and leased for the properties in the development portfolio at December 31, 2011. Operating properties at December 31, 2011 include completed development properties that may be in the initial lease-up phase, which reduces the overall leased percentage.

 

(2) Certain properties are pledged as security under our secured mortgage debt and assessment bonds at December 31, 2011. For purposes of this table, the total principal balance of a debt issuance that is secured by a pool of properties is allocated among the properties in the pool based on each property’s investment balance. In addition to the amounts reflected here, we also have a $12.6 million in encumbrances related to our development portfolio and $147.1 million of encumbrances related to other real estate properties not included in the Real Estate Operations segment. See Schedule III — Real Estate and Accumulated Depreciation to our Consolidated Financial Statements in Item 8 for additional identification of the properties pledged.

 

(3) Represents the total expected investment when the property under development is completed and leased. This includes the cost of land, development and leasing costs.

 

(4) Included in other investments are: (i) certain other non-industrial real estate; (ii) our corporate office buildings; (iii) land subject to ground leases; (iv) certain infrastructure costs related to projects we are developing on behalf of others; (v) costs incurred related to future development projects, including purchase options on land; and (vi) earnest money deposits associated with potential acquisitions.

Unconsolidated Co-Investment Ventures

At December 31, 2011, we had an investment in properties through our unconsolidated co-investment ventures that we also managed of 1,403 properties with 267.8 million square feet and a total entity investment of $21.3 billion. See further discussion in Note 6 to our Consolidated Financial Statements in Item 8.

 

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Table of Contents

ITEM 3. Legal Proceedings

From time to time, we and our unconsolidated investees are parties to a variety of legal proceedings arising in the ordinary course of business. We believe that, with respect to any such matters that we are currently a party to, the ultimate disposition of any such matter will not result in a material adverse effect on our business, financial position or results of operations.

In December 2011, arbitration hearings began in connection with a dispute related to a real estate development project known as Pacific Commons. The plaintiff, Cisco Technology, Inc. (“Cisco”), is seeking rescission of a 2007 Restructuring and Settlement Agreement (the “Contract”) and other agreements, and declaratory relief, and damages for breach of the Contract. Specifically, Cisco seeks (1) declaratory relief that Prologis owes certain Community Facilities District taxes that have been assessed against Cisco’s land, following Cisco’s purchase of the land from Prologis through the exercise of option agreements; (2) declaratory relief that Prologis’ partial transfers of rights and obligations under the Contract to third parties are void; and (3) damages for alleged breaches of the Contract relating to the plans to build a baseball stadium at Pacific Commons. Although the total damages alleged by Cisco are approximately $200 million, we believe these claims are without merit and are defending these matters vigorously. Based on the facts and circumstances surrounding this dispute, we believe the low end of our range of loss is zero and therefore, in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”), we have not recorded any liability with respect to this matter as of December 31, 2011.

ITEM 4. Mine Safety Disclosures

Not Applicable

PART II

ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information and Holders

Our common stock is listed on the NYSE under the symbol “PLD”. The following table sets forth the high and low sale price of the common stock of the REIT (AMB pre-merger), as reported in the NYSE Composite Tape, and the declared dividends per common share, for the periods indicated.

 

      High      Low      Dividends (1)  

2010

        

First Quarter (1)

   $ 29.60       $ 21.80       $ 0.28   

Second Quarter (1)

     29.17         23.14         0.28   

Third Quarter (1)

     26.97         22.05         0.28   

Fourth Quarter (1)

     32.18         26.14         0.28   

2011

        

First Quarter (1)

   $ 36.47       $ 31.75       $ 0.28   

Second Quarter (1)

     37.44         31.76         0.28   

Third Quarter

     37.46         23.94         0.28   

Fourth Quarter

     30.56         21.74         0.28   

2012

        

First Quarter (through February 22)

   $ 34.73       $ 28.16       $ 0.28 (2) 

 

(1) The per share sale price and dividends are different than the amounts disclosed in our Consolidated Financial Statements in Item 8. The difference is due to the distinction between legal and accounting acquirer. The pre-Merger information presented is historical AMB amounts as it was the legal acquirer.
(2) Declared on February 22, 2012 and payable on March 30, 2012 to holders of record on March 12, 2012.

On February 22, 2012, we had approximately 458,974,100 shares of common stock outstanding, which were held of record by approximately 6,700 stockholders.

 

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Stock Performance Graph

The following line graph compares the change in the REIT’s cumulative total stockholder’s return on shares of its common stock from December 31, 2006 to the cumulative total return of the Standard and Poor’s 500 Stock Index and the FTSE NAREIT Equity REITs Index from December 31, 2006 to December 31, 2011. The graph assumes an initial investment of $100 in the common stock of the REIT (AMB pre-Merger) and each of the indices on December 31, 2006 and, as required by the SEC, the reinvestment of all dividends. The return shown on the graph is not necessarily indicative of future performance.

 

LOGO

*$100 invested on 12/31/06 in stock or index, including reinvestment of dividends. Fiscal year ending December 31.

Copyright © 2012 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.

This graph and the accompanying text are not “soliciting material,” are not deemed filed with the SEC and are not to be incorporated by reference in any filing by the company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing.

Dividends

In order to comply with the REIT requirements of the Internal Revenue Code, we are generally required to make common and preferred stock dividends (other than capital gain distributions) to our stockholders in amounts that together at least equal (i) the sum of (a) 90% of our “REIT taxable income” computed without regard to the dividends paid deduction and net capital gains and (b) 90% of the net income (after tax), if any, from foreclosure property, minus (ii) certain excess non-cash income. Our common stock distribution policy is to distribute a percentage of our cash flow that ensures that we will meet the distribution requirements of the Internal Revenue Code and that allows us to also retain cash to meet other needs, such as capital improvements and other investment activities.

Prior to the Merger, ProLogis paid a cash distribution of $0.1125 per common share (or $0.25 after being adjusted by the Merger exchange ratio) for the first quarter on February 28, 2011 and for the second quarter on May 25, 2011. Also prior to the Merger, AMB paid a dividend of $0.28 per common share on February 28, 2011 for the first quarter and on May 25, 2011 for the second quarter. Neither AMB dividend has been reflected in the Consolidated Financial Statements in Item 8 since ProLogis is considered the accounting acquirer, as discussed earlier. We paid a cash distribution of $0.28 per common share for the third quarter on September 30, 2011 and for the fourth quarter on December 29, 2011. Our future common stock dividends may vary and will be determined by our Board of Directors (“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.

In addition to common stock, at December 31, 2011, we had seven series of preferred stock outstanding (“Series L Preferred Stock”, “Series M Preferred Stock”, “Series O Preferred Stock”, “Series P Preferred Stock”, “Series Q Preferred Stock”, “Series R Preferred Stock” and “Series S Preferred Stock”). The Series Q, R and S Preferred Stock was issued in connection with the Merger and exchanged for the outstanding C, F and G Cumulative Redeemable Preferred Shares of beneficial interest in ProLogis, respectively.

 

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Holders of each series of preferred stock outstanding have limited voting rights, subject to certain conditions, and are entitled to receive cumulative preferential dividends based upon each series’ respective liquidation preference. Dividends for Series Q, R and S are payable quarterly in arrears on the last day of March, June, September and December. Dividends for Series L, M, O and P are payable quarterly in arrears on the 15th day of April, July, October and January. Dividends on preferred stock are payable when, and if, they have been declared by the Board, out of funds legally available for payment of dividends. After the respective redemption dates, each series of preferred stock can be redeemed at our option. The cash redemption price (other than the portion consisting of accrued and unpaid dividends) with respect to Series Q Preferred Stock is payable solely out of the cumulative sales proceeds of other capital shares of ours, which may include shares of other series of preferred stock. With respect to the payment of dividends, each series of preferred stock ranks on parity with our other series of preferred stock. The following table sets forth the Company’s dividends paid or payable per share for the years ended December 31, 2011 and 2010:

 

     Years Ended December 31,  
          2011(1)              2010(1)        

Series L Preferred stock

   $ 1.63       $ 1.63   

Series M Preferred stock

   $ 1.69       $ 1.69   

Series O Preferred stock

   $ 1.75       $ 1.75   

Series P Preferred stock

   $ 1.71       $ 1.71   

Series Q Preferred stock (2)

   $ 3.20         n/a   

Series R Preferred stock (2)

   $ 1.27         n/a   

Series S Preferred stock (2)

   $ 1.27         n/a   

 

(1) The dividends are different than the amounts disclosed in our Consolidated Financial Statements in Item 8. The difference is due to the distinction between legal and accounting acquirer. The pre-Merger information presented is historical AMB amounts as it was the legal acquirer.

 

(2) The Series Q, R and S Preferred Stock was issued in connection with the Merger and exchanged for the outstanding C, F and G Cumulative Redeemable Preferred Shares of beneficial interest in ProLogis, respectively. Amounts reflect actual dividends paid or payable during 2011 subsequent to the Merger.

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.

For more information regarding our dividends, see Note 11 to our Consolidated Financial Statements in Item 8.

Securities Authorized for Issuance Under Equity Compensation Plans

For information regarding securities authorized for issuance under our equity compensation plans see Notes 11 and 14 to our Consolidated Financial Statements in Item 8.

Other Stockholder Matters

Common Stock Plans

See our 2012 Proxy Statement or our subsequent amendment of this Form 10-K for further information relative to our equity compensation plans.

 

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ITEM 6. Selected Financial Data

The following table sets forth selected financial data related to our historical financial condition and results of operations for 2011 and the four preceding years. As previously discussed, since ProLogis was the accounting acquirer in the Merger, the historical results of ProLogis are included for the entire period presented and AMB’s results are included subsequent to the Merger. Certain amounts for the years prior to 2011 presented in the table below have been reclassified to conform to the 2011 financial statement presentation and to reflect discontinued operations. The amounts in the table below are in millions, except for per share amounts.

REIT

 

    Years Ended December 31,  
     2011 (1)     2010     2009     2008     2007  

Operating Data:

         

Total revenues (2)

  $ 1,533      $ 885      $ 1,027      $ 5,369      $ 5,917   

Total expenses (2)

  $ 1,406      $ 1,486      $ 1,072      $ 4,878      $ 4,907   

Operating income (loss) (2)(3)

  $ 127      $ (601)      $ (45)      $ 491      $ 1,010   

Interest expense

  $ 469      $ 461      $ 373      $ 384      $ 388   

Earnings (loss) from continuing operations (3)

  $ (244)      $ (1,589)      $ (355)      $ (367)      $ 841   

Discontinued operations (3)

  $ 87      $ 319      $ 379      $ (83)      $ 216   

Consolidated net earnings (loss) (3)

  $ (158)      $ (1,270)      $ 24      $ (450)      $ 1,058   

Net earnings (loss) attributable to common shares (3)

  $ (188)      $ (1,296)      $ (3)      $ (479)      $ 1,028   

Net earnings (loss) per share attributable to common shares — Basic:

         

Continuing operations (4)

  $ (0.74)      $ (7.35)      $ (2.12)      $ (3.38)      $ 7.07   

Discontinued operations (4)

    0.23        1.45        2.11        (0.70)        1.89   
 

 

 

 

Net earnings (loss) per share attributable to common shares - Basic (3)(4)

  $ (0.51)      $ (5.90)      $ (0.01)      $ (4.08)      $ 8.96   

Net earnings (loss) per share attributable to common shares - Diluted:

         

Continuing operations (4)

  $ (0.74)      $ (7.35)      $ (2.12)      $ (3.38)      $ 6.84   

Discontinued operations (4)

    0.23        1.45        2.11        (0.70)        1.81   
 

 

 

 

Net earnings (loss) per share attributable to common shares — Diluted (3)(4)

  $ (0.51)      $ (5.90)      $ (0.01)      $ (4.08)      $ 8.65   
 

 

 

 

Weighted average common shares outstanding:

         

Basic (4)

    371        220        180        117        115   

Diluted (4)

    371        220        180        117        119   

Common Share Distributions:

         

Common share cash distributions paid

  $ 387      $ 281      $ 272      $ 543      $ 473   

Common share distributions per share (4)

  $ 1.06      $ 1.25      $ 1.57      $ 4.63      $ 4.12   

FFO (5):

         

Reconciliation of net earnings (loss) to FFO:

         

Net earnings (loss) attributable to common shares (3)

  $ (188)      $ (1,296)      $ (3)      $ (479)      $ 1,028   

Total NAREIT defined adjustments (6)

    660        368        260        449        150   

Total our defined adjustments

    (60)        (46)        (71)        164        28   
 

 

 

 

FFO attributable to common shares as defined by Prologis

  $ 412      $ (974)      $ 186      $ 134      $ 1,206   
 

 

 

 

Cash Flow Data:

         

Net cash provided by operating activities (2)

  $ 207      $ 241      $ 89      $ 888      $ 1,230   

Net cash provided by (used in) investing activities (2)

  $ (233)      $ 733      $ 1,235      $ (1,347)      $ (4,076)   

Net cash provided by (used in) financing activities

  $ 163      $ (970)      $ (1,463)      $ 358      $ 2,742   

 

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     As of December 31,  
      2011 (1)      2010      2009      2008 (6)      2007 (6)  

Financial Position:

              

Real estate properties, excluding land, before depreciation

   $   22,803       $   11,346       $   12,606       $   13,234       $   14,414     

Land

   $ 1,984       $ 1,534       $ 2,574       $ 2,483       $ 2,153     

Net investments in properties

   $ 22,630       $ 11,284       $ 13,508       $ 14,134       $ 15,199     

Investments in and advances to unconsolidated investees

   $ 2,858       $ 2,025       $ 2,107       $ 2,195       $ 2,252     

Total assets

   $ 27,724       $ 14,903       $ 16,797       $ 19,210       $ 19,652     

Total debt

   $ 11,382       $ 6,506       $ 7,978       $ 10,711       $ 10,217     

Total liabilities

   $ 13,268       $ 7,382       $ 8,790       $ 12,452       $ 11,848     

Noncontrolling interests

   $ 794       $ 15       $ 20       $ 20       $ 79     

Stockholders’ equity

   $ 13,662       $ 7,505       $ 7,987       $ 6,738       $ 7,725     

Number of common shares outstanding (4)

     459         254         212         119         115     

Operating Partnership

 

     Years Ended December 31,  
      2011 (1)      2010      2009      2008      2007  

Operating Data:

              

Total revenues (2)

   $ 1,533       $ 885       $ 1,027       $ 5,369       $ 5,917   

Total expenses (2)

   $ 1,406       $ 1,486       $ 1,072       $ 4,878       $ 4,907   

Operating income (loss) (2)(3)

   $ 127       $ (601)       $ (45)       $ 491       $ 1,010   

Interest expense

   $ 469       $ 461       $ 373       $ 384       $ 388   

Earnings (loss) from continuing operations (3)

   $ (244)       $ (1,589)       $ (355)       $ (367)       $ 841   

Discontinued operations (3)

   $ 87       $ 319       $ 379       $ (83)       $ 216   

Consolidated net earnings (loss) (3)

   $ (158)       $ (1,270)       $ 24       $ (450)       $ 1,058   

Net earnings (loss) attributable to common unitholders (3)

   $ (188)       $ (1,296)       $ (3)       $ (479)       $ 1,028   

Net earnings (loss) per unit attributable to common unitholders — Basic:

              

Continuing operations (4)

   $ (0.74)       $ (7.35)       $ (2.12)       $ (3.38)       $ 7.07   

Discontinued operations (4)

     0.23         1.45         2.11         (0.70)         1.89   
  

 

 

 

Net earnings (loss) per unit attributable to common unitholders - Basic (3)(4)

   $ (0.51)       $ (5.90)       $ (0.01)       $ (4.08)       $ 8.96   

Net earnings (loss) per unit attributable to common unitholders - Diluted:

              

Continuing operations (4)

   $ (0.74)       $ (7.35)       $ (2.12)       $ (3.38)       $ 6.84   

Discontinued operations (4)

     0.23         1.45         2.11         (0.70)         1.81   
  

 

 

 

Net earnings (loss) per unit attributable to common unitholders — Diluted (3)(4)

   $ (0.51)       $ (5.90)       $ (0.01)       $ (4.08)       $ 8.65   
  

 

 

 

Weighted average common units outstanding:

              

Basic (4)

     372         220         180         117         115   

Diluted (4)

     372         220         180         117         119   

Common Unit Distributions:

              

Common unit cash distributions paid

   $ 388       $ 281       $ 272       $ 543       $ 473   

Common unit distributions per unit (4)

   $ 1.06       $ 1.25       $ 1.57       $ 4.63       $ 4.12   

FFO (5):

              

Reconciliation of net earnings (loss) to FFO:

              

Net earnings (loss) attributable to common units (3)

   $ (188)       $ (1,296)       $ (3)       $ (479)       $ 1,028   

Total NAREIT defined adjustments (6)

     660         368         260         449         150   

Total our defined adjustments

     (60)         (46)         (71)         164         28   
  

 

 

 

FFO attributable to common units as defined by Prologis

   $ 412       $ (974)       $ 186       $ 134       $ 1,206   
  

 

 

 

Cash Flow Data:

              

Net cash provided by operating activities (2)

   $ 207       $ 241       $ 89       $ 888       $ 1,230   

Net cash provided by (used in) investing activities (2)

   $ (233)       $ 733       $ 1,235       $ (1,347)       $ (4,076)   

Net cash provided by (used in) financing activities

   $ 163       $ (970)       $ (1,463)       $ 358       $ 2,742   

 

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     As of December 31,  
      2011 (1)      2010      2009      2008 (6)      2007 (6)  

Financial Position:

              

Real estate properties, excluding land, before depreciation

   $   22,803       $   11,346       $   12,606       $   13,234       $   14,414   

Land

   $ 1,984       $ 1,534       $ 2,574       $ 2,483       $ 2,153   

Net investments in properties

   $ 22,630       $ 11,284       $ 13,508       $ 14,134       $ 15,199   

Investments in and advances to unconsolidated investees

   $ 2,858       $ 2,025       $ 2,107       $ 2,195       $ 2,252   

Total assets

   $ 27,724       $ 14,903       $ 16,797       $ 19,210       $ 19,652   

Total debt

   $ 11,382       $ 6,506       $ 7,978       $ 10,711       $ 10,217   

Total liabilities

   $ 13,268       $ 7,382       $ 8,790       $ 12,452       $ 11,848   

Noncontrolling interests

   $ 735       $ 15       $ 20       $ 20       $ 79   

Partner’s capital

   $ 13,721       $ 7,505       $ 7,987       $ 6,738       $ 7,725   

Number of common units outstanding (4)

     461         254         212         119         115   

 

(1) In 2011, we completed the Merger and PEPR Acquisition (see Note 3 to our Consolidated Financial Statements in Item 8 for additional information). Activity in 2011 includes seven months of results in connection with the Merger and PEPR Acquisition.

 

(2) During 2011, 2010 and 2009, we contributed certain properties with any resulting gain or loss reflected as net gains in our Consolidated Statements of Operations and as cash provided by investing activities in our Consolidated Statements of Cash Flows. In 2008 and previous years, we reflected these contributions as gross revenues and expenses and as cash provided by operating activities. See our Consolidated Financial Statements in Item 8 for more information.

 

(3) During 2011, we recognized impairment charges of $23.9 million on certain real estate properties, which includes $2.7 million in Discontinued Operations, and $126.4 million related to goodwill and other assets. During 2010, we recognized impairment charges of $824.3 million on certain of our real estate properties, which includes $87.7 million in Discontinued Operations, and $412.7 million related to goodwill and other assets. During 2009, we recognized impairment charges of $331.6 million on certain of our real estate properties and $163.6 million related to goodwill and other assets. During 2008, we recognized impairment charges of $274.7 million on certain of our real estate properties and $320.6 million related to goodwill and other assets. In addition, during 2008, we recognized impairment charges of $198.2 million in Discontinued Operations related to the net assets of our China operations that were reclassified as held for sale and our share of impairment charges recorded by an unconsolidated investee of $108.2 million. We did not recognize any impairment in 2007. See Note 16 to our Consolidated Financial Statements in Item 8 for more information.

 

(4) The historical shares of ProLogis were adjusted by the Merger exchange ratio of 0.4464 for all periods presented. As a result, the per share/unit calculations and shares/units outstanding were also adjusted.

 

(5) See definition of Funds From Operations (“FFO”) in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

 

(6) In 2011, the definition of NAREIT defined FFO was amended, according to which impairment write-downs of depreciable real estate should be excluded in the computation of FFO. As a result, NAREIT defined adjustments were adjusted for the impairment charge on certain real estate properties for all periods presented. Amounts of impairment excluded from the calculation of FFO were $5.3 million, $127.0 million and $46.6 million for 2011, 2010 and 2009, respectively. There were no impairment amounts excluded from the calculation of FFO in 2008.

ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

The Company

We are the leading global owner, operator and developer of industrial real estate, focused on markets tied to global trade across the Americas, Europe and Asia. As of December 31, 2011, we owned, or had investments in, on a consolidated basis or through unconsolidated ventures, properties and development projects totaling approximately 600 million square feet (55.7 million square meters) in 22 countries. These properties are leased to approximately 4,500 customers, including third-party logistics providers, manufacturers, retailers, transportation companies and other enterprises.

Of the approximately 600 million square feet of our owned and managed portfolio as of December 31, 2011:

 

   

approximately 559 million square feet were operating industrial distribution buildings with a gross book value of $42.8 billion that were 92.2% occupied;

 

   

approximately 13 million square feet in our development portfolio with a total expected investment of $1.4 billion that were 43.6% leased;

 

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approximately 25 million square feet consist of properties we manage on behalf of third parties, properties in which we have an ownership interest but do not manage and non-industrial properties we own; and

 

   

the largest customer and 25 largest customers accounted for 2.4% and 17.9%, respectively, of the annualized base rent of the combined portfolio.

Prologis, Inc. is a self-administered and self-managed real estate investment trust, and is the sole general partner of Prologis, L.P. We operate the REIT and the Operating Partnership as one enterprise, and, therefore, our discussion and analysis refers to the REIT and its consolidated subsidiaries, including the Operating Partnership, collectively.

On June 3, 2011, we completed the Merger in which ProLogis shareholders received 0.4464 of a share of AMB common stock for each outstanding common share of beneficial interest in ProLogis. Following the Merger, AMB changed its name to Prologis, Inc. In the Merger, AMB was the legal acquirer and ProLogis was the accounting acquirer. Therefore, pre-Merger activity included in the Management Discussion and Analysis is the activity of ProLogis and does not include AMB results until June 3, 2011. In May 2011, we also acquired a controlling interest in and began consolidating PEPR. We have recorded the purchase price allocations for both the Merger of $5.9 billion and PEPR Acquisition of $1.6 billion in our December 31, 2011 Consolidated Balance Sheet. Our results for 2011 reflect approximately seven months of the impact of the Merger and the PEPR Acquisition. Therefore, period to period comparisons may not provide as meaningful of information as if those transactions were reflected in both periods. As a result of this Merger, we have identified more than $115 million on an annualized basis of merger cost synergies, as compared to the combined expenses of AMB and ProLogis on a pre-Merger basis. These synergies include gross general and administrative savings, reduced global line of credit facility fees and lower amortization of non real estate assets. We believe we have realized approximately 90% of these synergies already and expect to realize the full amount by year-end 2012. See Note 3 to the Consolidated Financial Statements in Item 8 for more information relating to both the Merger and PEPR Acquisition.

Business Strategy

Our current business strategy includes two operating segments: Real Estate Operations and Private Capital.

We generate revenues, earnings, net operating income, and funds from operations, both as defined below, and cash flows through our segments primarily through three lines of business, as follows:

Real Estate Operations Segment

Rental Operations- This represents the primary source of our core revenue, earnings and funds from operations (or FFO as defined below). We collect rent from our customers under operating leases, including reimbursements for the vast majority of our operating costs. We seek to generate long-term internal growth in rents by maintaining a high occupancy rate at our properties, by controlling expenses and through contractual rent increases on existing space and renewals on rollover space, thus capitalizing on the economies of scale inherent in owning, operating and growing a large global portfolio. Our rental income is diversified due to both our global presence and our broad customer base. We expect to increase overall rental income primarily through the leasing of space currently available in our properties. We believe that our regular maintenance programs, capital expenditure programs, energy management and sustainability programs create cost efficiencies that provide a benefit to our customers as well as the Company.

Capital Deployment Activities - Our development and re-development activities support our rental operations and are, therefore, included with that line of business for segment reporting. We develop and re-develop industrial properties primarily in global and regional markets to meet our customers’ needs. Within this line of business, we provide additional value creation by utilizing: (i) the land that we currently own in global and regional markets; (ii) the development expertise of our local personnel; (iii) our global customer relationships; and (iv) the demand for high quality distribution facilities in key markets. We seek to increase our rental income and the net asset value of the Company through the leasing of newly developed space, as well as through the acquisition of new properties. Depending on several factors, we may develop properties directly or in co-investment ventures for long-term hold, for contribution into one of our co-investment ventures, or for sale to third parties. Properties that we choose to contribute or sell may result in the recognition of gains or losses. Generally, in the U.S., Europe and Japan, we are developing directly while in emerging markets, such as Brazil, China and Mexico, we are developing with our private capital partners in a variety of co-investment ventures.

Private Capital Segment-We co-invest in properties with private capital investors through a variety of co-investment ventures. We have a direct and long-standing relationship with a significant number of institutional investors. We tailor industrial portfolios to investors’ specific needs and deploy capital in both close-ended and open-ended structures, while providing complete portfolio management and financial reporting services. We generally own 10-50% in the ventures. We believe our co-investment in each of our ventures provides a strong alignment of interests with our co-investment partners’ interests. We generate revenues from our unconsolidated co-investment ventures by providing asset management and property management services. We may also earn revenues through additional services provided such as leasing, acquisition, construction, development, disposition, legal and tax services. Depending on the structure of the venture and the returns provided to our partners, we may also earn revenues through incentive returns or promotes. We believe our co-investment program with private capital investors will continue to serve as a source of capital for new investments and provide revenues for our stockholders, as well as mitigate risk associated with our foreign currency exposure. We expect to grow this business with the formation of new ventures and by raising additional third-party capital in our existing ventures.

In 2009, we recognized income in the CDFS business segment related to gains from the Japan property funds that were deferred upon original contributions and triggered with the sale of our investments. We no longer have a CDFS business segment.

 

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Summary of 2011

During the year ended December 31, 2011, we completed the following activities in support of our strategic priorities:

 

   

Completed the Merger on June 3, 2011 and have completed the majority of the integration activities.

 

   

Completed the PEPR Acquisition in May 2011.

 

   

In connection with the Merger and PEPR Acquisition, we increased our debt to $12.1 billion at June 30, 2011. As of December 31, 2011, we have reduced our debt to $11.4 billion due primarily to repayments that were funded with proceeds from dispositions of properties.

 

   

As of June 30, 2011 our total owned and managed portfolio, including consolidated and unconsolidated properties, was 90.7% occupied and 91.3% leased. As a result of significant leasing activity in the second half of 2011 we increased to 92.2% occupied and 92.5% leased, as of December 31, 2011.

 

   

Issued 34.5 million shares of common stock in a public offering at a price of $33.50 per share, generating approximately $1.1 billion in net proceeds (“2011 Equity Offering) in late June 2011.

 

   

Entered into a new global senior credit agreement, terminated our existing global line of credit and amended a yen revolving credit agreement.

 

   

Completed an exchange offer in June 2011 for ProLogis senior notes and exchangeable senior notes.

Operational Outlook

Despite the ongoing slowdown in the global economic recovery, fourth-quarter real estate fundamentals in the U.S. industrial markets continued to improve consistent with the improvement we saw in the third quarter. Though down from its rebound third-quarter level, net absorption of U.S. industrial space measured 28 million square feet in the fourth quarter. Net absorption has been positive for the last six consecutive quarters, reducing the availability rate by 90 basis points during that time. At 13.6%, availability is at its lowest level since the second quarter of 2009. Net effective rent has made modest improvements, and as a result, some speculative development is beginning in selected locations such as Miami, Washington D.C., Seattle, Southern California, and Houston.

Though economic growth remains relatively moderate, inventories continue to rise, and utilization rates have been on an overall upward trajectory since late 2010. In the U.S., net absorption totaled more than 117 million square feet in 2011, representing a remarkable improvement over the past few years, and we expect net absorption of 150 - 175 million square feet in 2012.

Within Europe and Japan, we believe significant supply chain reconfiguration, the ongoing globalization of Central and Eastern Europe, obsolescence and strong tenant preference to rent rather than own will fuel additional demand for industrial space. Moreover, the undersupply of Class-A distribution space in Japan has and will continue to create demand for more modern, earthquake-resistant product, especially as Japan rebuilds and regroups from the March 2011 earthquake and tsunami, which temporarily interrupted its supply chain. Demand in emerging markets where we have investments primarily through our co-investment ventures, such as Brazil, China, and Mexico, remains strong.

In our total owned and managed operating portfolio, which includes properties managed by us and owned by our unconsolidated co-investment ventures that are accounted for under the equity method and including properties that were part of the Merger, we leased 138.8 million square feet of space in 2011. Excluding the properties that were part of the Merger, we leased 119.4 million square feet of space during the year ended December 31, 2010. The effective rental rates on leases signed during the fourth quarter of 2011 in our same store portfolio (as defined below) decreased by 4.5% when compared with the rental rates on the previous leases on that same space. The total owned and managed portfolio was 92.2% occupied at December 31, 2011, up from 89.0% at December 31, 2010. Our existing customers renewed their leases 74.7% of the time in 2011 as compared with 79.5% in 2010.

We believe that capital deployment opportunities are increasing and we are currently evaluating multiple opportunities in our global and regional markets around the globe. Our development business consists of speculative development, build-to-suit development, value added coversions and redevelopment. We expect to develop directly and within the co-investment structures depending on location, market conditions, submarkets or building sites, and availability of capital. We believe that developing, redeveloping and/or expanding of well-located, high-quality industrial properties provides higher rates of return than may be obtained from purchasing existing properties. However, development projects may require significant management attention and capital investment to maximize returns. During 2011, in response to this emerging demand, we (including ProLogis, AMB pre-Merger, and unconsolidated entities) commenced development of 42 properties totaling 10.8 million square feet with a total expected investment of $1.0 billion. Of this amount, $863.5 million is our share and $153.2 million is the share of our co-investment venture partners.

 

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Results of Operations

Summary

The following table illustrates the net operating income for each of our segments, along with the reconciling items to Loss from Continuing Operations on our Consolidated Statements of Operations:

 

     Years Ended December 31,  
      2011      2010      2009  

Net operating income – real estate operations segment

   $ 986,989       $ 530,498       $ 463,845   

Net operating income – private capital segment

     82,657         81,867         101,547   

Net operating income – CDFS business segment

     -         -         180,237   

General and administrative expenses

     (195,161)         (165,981)         (192,231)   

Merger, acquisition and other integration expenses

     (140,495)         -         -   

Impairment of real estate properties

     (21,237)         (736,612)         (331,592)   

Depreciation and amortization

     (585,323)         (311,268)         (266,364)   

Earnings from unconsolidated investees, net

     59,935         23,678         28,059   

Interest expense

     (468,738)         (461,166)         (372,768)   

Impairment of goodwill and other assets

     (126,432)         (412,745)         (163,644)   

Interest and other income (expense), net

     12,008         15,847         (39,349)   

Gains on acquisitions and dispositions of investments in real estate, net

     111,684         28,488         35,262   

Foreign currency exchange and derivative gains (losses), net

     41,172         (11,081)         35,626   

Gain (loss) on early extinguishment of debt, net

     258         (201,486)         172,258   

Income tax benefit (expense)

     (1,776)         30,499         (5,975)   
  

 

 

 

Loss from continuing operations

   $ (244,459)       $ (1,589,462)       $ (355,089)   

See Note 22 to our Consolidated Financial Statements in Item 8 for additional information regarding our segments and a reconciliation of net operating income to Loss Before Income Taxes.

Real Estate Operations Segment

The net operating income of the Real Estate Operations segment consisted of rental income and rental expenses from industrial properties that we own and consolidate and is impacted by our capital deployment activities. The size and percentage of occupancy of our consolidated operating portfolio fluctuates due to the timing of acquisitions, development activity and contributions. Such fluctuations affect the net operating income we recognize in this segment in a particular period. 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 costs and land holding costs. As discussed earlier, results for 2011 included approximately seven months of rental income and expenses from the properties acquired through the Merger and PEPR Acquisition. The results of properties that were sold to third parties are presented as Discontinued Operations in our Consolidated Financial Statements in Item 8 for all periods and therefore do not impact the segment results. The net operating income from the Real Estate Operations segment for the years ended December 31, was as follows (in thousands):

 

      2011      2010      2009  

Rental and other income

   $ 1,395,672       $ 762,061       $ 701,971   

Rental and other expenses

     408,683         231,563         238,126   
  

 

 

 

Total net operating income - Real Estate Operations segment

   $ 986,989       $ 530,498       $ 463,845   

The increases in rental income and rental expenses in 2011 from 2010 are due principally to the impact of the Merger and the PEPR Acquisition, increased occupancy in our consolidated operating portfolio (from 85.9% at December 31, 2010 to 91.4% at December 31, 2011) and the completion and stabilization of new development properties. The results for 2011 include approximately seven months of rental income and rental expenses from properties acquired through the Merger and PEPR Acquisition of $565.5 million and $147.6 million, respectively. In our consolidated portfolio, we leased 63.4 million square feet in 2011 compared to 57.3 million square feet in 2010. The increase in net operating income in 2010 over 2009 is due primarily to increased occupancy in the development portfolio. We calculate the change in effective rental rates on the previous leases on that same space for leases signed during a quarter, based on our same store portfolio (as defined below). During 2011 (over the four quarters), the percentage change in rental rates ranged from a decrease of 8.9% to a decrease of 4.5%. During 2010 (over the four quarters), the percentage change in rental rates ranged from a decrease of 15.7% to a decrease of 8.5%. The decrease was due to: (i) leases turning that were put in place when market rents were at or near peak; and (ii) decreased market rents. 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 $283.1 million, $161.0 million and $150.3 million for the years ended December 31, 2011, 2010 and 2009, respectively.

 

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Our consolidated operating portfolio as of December 31 was as follows (square feet in thousands):

 

      Number of
Properties
     Square Feet      Leased %  

2011 (1)

     1,797         291,051         91.7%   

2010

     985         168,547         87.6%   

2009

     1,188         191,623         82.7%   

 

(1) The amount at December 31, 2011 included 848 properties with 126.3 million square feet that were acquired through the Merger and PEPR Acquisition.

Private Capital Segment

The net operating income of the Private Capital segment consisted of fees and incentives earned for services performed for our unconsolidated investees and certain third parties, reduced by our direct costs of managing these entities and the properties they own.

The direct costs associated with our Private Capital segment totaled $55.0 million, $40.7 million and $43.4 million for the years ended December 31, 2011, 2010 and 2009, respectively, and are included in the line item Private Capital Expenses in our 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 individuals who are assigned to our Private Capital 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 investees. 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 investees (included in Private Capital Expenses), by using the square feet owned by the respective portfolios. The increase in Private Capital Expenses in 2011 is due to the increased private capital platform and infrastructure that was part of the Merger, offset partially with a decline in the portion of our property management expenses that are allocated to this segment due to the consolidation of PEPR.

The net operating income from the Private Capital segment for the years ended December 31 was as follows (in thousands):

 

      2011      2010      2009  

Unconsolidated ventures:

        

Americas (1)

   $ 42,644       $ 40,354       $ 44,284   

Europe (2)

     30,708         41,200         34,508   

Asia (3)

     9,305         313         22,755   
  

 

 

 

Total net operating income - Private Capital segment

   $ 82,657       $ 81,867       $ 101,547   

 

(1) Represents the fees earned by us from 10, 10 and 12 unconsolidated co-investment ventures for each of the years ended December 31, 2011, 2010 and 2009, respectively, reduced by private capital expenses. In connection with the Merger, we added three co-investment ventures in the Americas (with investments in the U.S., Mexico and Brazil). In December 2010, we sold our interests in three U.S. co-investment ventures.

 

(2) Represents the fees earned by us from several different unconsolidated co-investment ventures, reduced by private capital expenses. In 2011, we had one co-investment venture during the entire year, we included PEPR up to the date we began consolidating at the end of May 2011, and added two co-investment ventures acquired through the Merger. In 2010 and 2009, we had two co-investment ventures for the entire year.

 

(3) Represents the fees earned by us from our investments in three unconsolidated co-investment ventures in 2011 and only one co-investment venture in South Korea during 2010, reduced by private capital expenses. We sold our investment in the Korea co-investment venture during the third quarter 2011. With the Merger, we acquired an investment in an unconsolidated co-investment venture in each of Japan and China. In addition to the Korea co-investment venture in 2009, we had two co-investment ventures in Japan that were sold in February of 2009.

See Note 6 to our Consolidated Financial Statements in Item 8 for additional information on our unconsolidated investees.

CDFS Business Segment

Net operating income of the CDFS business segment for 2009 was $180.2 million. As previously discussed, our business strategy no longer includes the CDFS business segment. The amount in 2009 is the recognition of gains previously deferred from the contribution of properties and recognized due to the sale of our investments in the Japan co-investment venture in February 2009.

 

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Other Components of Income

General and Administrative (“G&A”) Expense and Reduction in Workforce (“RIF”)

G&A expenses for the years ended December 31 consisted of the following (in thousands):

 

      2011      2010      2009  

Gross G&A expense (1)

   $ 332,632       $ 266,932       $ 304,153   

Reported as rental expenses

     (24,741)         (19,709)         (19,446)   

Reported as private capital expenses

     (54,962)         (40,659)         (43,416)   

Capitalized amounts

     (57,768)         (40,583)         (49,060)   
  

 

 

    

 

 

    

 

 

 

Net G&A

   $ 195,161       $ 165,981       $ 192,231   

 

(1) 2009 included expenses related to a RIF program. At the end of 2008, in response to the difficult economic climate, we initiated G &A expense reductions. These initiatives included a RIF plan that had a total cost of $11.7 million in the year ended December 31, 2009.

The increase in G&A expenses and the various components from 2010 to 2011 is primarily due to the Merger, PEPR Acquisition and the larger infrastructure associated with our larger company. Overall G&A expense decreased from 2009 to 2010 due to lower gross G&A expense, as a result of the RIF program in 2009 and various cost savings measures, offset by lower capitalized G&A.

Merger, Acquisition and Other Integration Expenses

In connection with the Merger and other related activities, we have incurred significant transaction, integration, and transitional costs. These costs include investment banker advisory fees; legal, tax, accounting and valuation fees; termination and severance costs (both cash and stock based compensation awards) for terminated and transitional employees; system conversion costs; and other integration costs. These costs are expensed as incurred. The costs that were obligations of AMB and expensed pre-Merger are not included in our Consolidated Financial Statements. At the time of the Merger, we terminated our existing credit facilities and wrote-off the remaining unamortized deferred loan costs associated with such facilities, which are included as a merger expense. In addition, we have included costs associated with the acquisition of a controlling interest in PEPR and the reduction in workforce charges associated with dispositions made in 2011. We expect to continue to recognize costs, primarily compensation and severance costs for transitional employees and system conversion and implementation costs through the end of 2012 as incurred. The following is a breakdown of the costs incurred during 2011 (in thousands):

 

      2011  

Termination, severance and transitional employee costs

   $ 58,445   

Professional fees

     46,467   

Office closure, travel and other costs

     24,714   

Write-off of deferred loan costs

     10,869   
  

 

 

 

Total

   $ 140,495   

The majority of the costs incurred in 2011 were incurred during the second quarter of 2011 when the Merger and the PEPR Acquisition were completed.

Impairment of Real Estate Properties

During 2011, 2010 and 2009, we recognized impairment charges of real estate properties in continuing operations of $21.2 million, $736.6 million and $331.6 million, respectively, due to our change of intent to no longer hold these assets for long-term investment. In 2010, the charges primarily included land as a result of our change in strategy. Changes in economic and operating conditions and our ultimate investment intent with regard to our investments in real estate that occur in the future may result in additional impairment charges or gains at the time of sale. See Note 16 to our Consolidated Financial Statements in Item 8 for more detail on the process we took to value these assets and the related impairments taken.

Depreciation and Amortization Expense

Depreciation and amortization expense was $585.3 million, $311.3 million and $266.4 million for the years ended December 31, 2011, 2010 and 2009, respectively. The increase from 2010 to 2011 is primarily due to additional depreciation and amortization expenses associated with the properties acquired through the Merger and PEPR Acquisition (including intangible assets), completed and leased development properties and increased leasing activity. The increase from 2009 to 2010 is due to the completion, retention and leasing of our developed properties.

 

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Interest Expense

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

 

      2011      2010      2009  

Gross interest expense

   $ 500,685       $ 435,289       $ 382,362   

Amortization of discount, net

     228         47,136         67,542   

Amortization of deferred loan costs

     20,476         32,402         17,069   
  

 

 

    

 

 

    

 

 

 

Interest expense before capitalization

     521,389         514,827         466,973   

Capitalized amounts

     (52,651)         (53,661)         (94,205)   
  

 

 

    

 

 

    

 

 

 

Net interest expense

   $ 468,738       $ 461,166       $ 372,768   

Gross interest expense increased in 2011 from 2010 due primarily to higher debt levels as a result of the Merger and PEPR Acquisition, offset partially by decreased interest rates. The decrease in capitalized amounts in 2011 from 2010 was due to lower interest rates during 2011.

During the first part of 2011, we had lower debt balances as a result of repayment and repurchases of debt made in 2010 with proceeds from asset sales and the November 2010 equity offering. We reduced our outstanding debt at December 31, 2010 to $6.5 billion. In connection with the Merger and PEPR Acquisition, we added approximately $5.9 billion of debt at fair value at the beginning of June 2011 and approximately seven months of related interest expense in 2011. At December 31, 2011, our debt balance was $11.4 billion, a decrease from $12.1 billion at June 30, 2011, primarily due to repayments funded by proceeds received from the dispositions of properties. All of these activities have resulted in a lower weighted average effective interest rate (including amortization of premiums, discounts and deferred loan costs) of 5.58% in 2011, as compared with 6.48% in 2010.

The increase in interest expense in 2010 over 2009 is due to increased borrowing rates and lower capitalization due to less development activity in 2010. In addition, in 2010 we wrote-off $7.7 million in deferred loan costs based on the proportionate amount that we reduced our borrowing capacity on our global line of credit. The lower amortization of discount is due to the buyback of exchangeable debt that includes a non-cash discount. Our weighted average effective interest rate (including amortization of deferred loan costs) was 5.34% for the year ended December 31, 2009.

Our future interest expense, both gross and the portion capitalized, will vary depending on, among other things, the level of our development activities, which we expect will increase subsequent to the Merger. See Notes 3 and 9 to our Consolidated Financial Statements in Item 8 and Liquidity and Capital Resources for further discussion of our debt and borrowing costs.

Earnings from Unconsolidated Investees, Net

We recognized net earnings of $59.9 million, $23.7 million and $28.1 million for the years ended December 31, 2011, 2010 and 2009, respectively. These earnings relate to our investment in unconsolidated investees that are accounted for on the equity method. The primary reason for the increase in 2011 over 2010 is due to the investments we acquired through the Merger, partially offset by the consolidation of PEPR. 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. See discussion of our portfolio results in the section, “Portfolio Information”. See also Note 6 to our Consolidated Financial Statements in Item 8 for further breakdown of our share of net earnings recognized.

Impairment of Goodwill and Other Assets

Based on our review of goodwill in 2010, we recognized an impairment charge of $368.5 million related to goodwill allocated to the Real Estate Operations segment in the Americas and Europe reporting units. The review of goodwill was triggered by the strategic decision we made in the fourth quarter of 2010 to significantly downsize our development platform and, as a result, to sell to third parties certain other assets, some of which were acquired in the acquisitions that originally created the goodwill.

In 2011, 2010 and 2009, we recorded impairment charges of $126.4 million, $44.3 million and $163.6 million, respectively, on certain of our investments in and advances to unconsolidated investees, notes receivable and other assets, as 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 or we believed the decline in fair value to be other than temporary.

See Notes 2 and 16 to our Consolidated Financial Statements in Item 8 for further information on our process with regard to analyzing the recoverability of goodwill and other assets. Also see Note 6 to our Consolidated Financial Statements in Item 8 for further information on our unconsolidated investees.

 

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Interest and Other Income (Expense), Net

We recognized interest and other income not allocated to a segment of $12.0 million and $15.8 million in 2011 and 2010, respectively, and other expense of $39.3 million in 2009. The primary components in 2009 were adjustments of $20.3 million to accruals we had related to rent indemnifications we had made to certain co-investment ventures due to changes in leasing and other assumptions and settlement costs of $13.0 million related to an obligation we assumed in the 2005 acquisition of Catellus.

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

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 a joint venture in Japan ($13.5 million) and the contribution or sale of properties to unconsolidated co-investment ventures. The gains represent the adjustment to fair value of our equity investments at the time we gained control and consolidated the entities. The contribution activity resulted in cash proceeds of $590.8 million and net gains of $12.3 million.

During 2010, we recognized net gains on dispositions of investments in real estate in continuing operations of $28.5 million, which related to the contribution of land and operating properties to unconsolidated investees ($58.3 million gain), additional proceeds from contributions we made to PEPF II in 2009 based on valuations received as of December 31, 2010 and our contribution agreement with the fund ($27.4 million gain) and the sale of land parcels to third parties ($7.4 million gain), offset by a loss of $64.6 million related to the sale of certain unconsolidated investees.

The 2010 contribution activity resulted in cash proceeds of $469.7 million related to the contribution of development properties aggregating 2.1 million square feet and land to unconsolidated investees, and the sale of 90% of two development properties in Japan with 1.3 million square feet. We continue to own 10% of the Japan properties, which are accounted for under the equity method of accounting, and we continue to manage the properties.

During 2009, we recognized net gains of $35.3 million related to the contribution of properties ($13.0 million), the recognition of previously deferred gains from PEPR and ProLogis Korea Fund on properties they sold to third parties ($9.9 million), the sale of land parcels ($6.4 million), and a gain on settlement of an obligation to our fund partner in connection with the restructure of one of our Americas funds ($6.0 million). The contribution activity resulted in total cash proceeds of $643.7 million and included 43 properties aggregating 9.2 million square feet to PEPF II.

If we realize a gain on contribution or sale of a property to an unconsolidated investee, 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 co-investment venture, these dispositions are not included in discontinued operations.

Foreign Currency Exchange 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 intercompany debt is remeasured with the resulting adjustment recognized as a cumulative translation adjustment in Foreign Currency Translation Gains (Losses), Net in our Consolidated Statements of Comprehensive Income (Loss). This treatment is applicable to 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 losses of $5.9 million and losses of $11.5 million in 2011 and 2010, respectively, and gains of $58.2 million in 2009, related to the remeasurement of debt. Predominantly the gains or losses recognized in earnings relate to the remeasurement of intercompany loans between the U.S. parent and certain consolidated subsidiaries in Japan and Europe and result from fluctuations in the exchange rates of U.S. dollars to the euro, Japanese yen, British pound sterling and Singapore dollar. In addition, we recognized net foreign currency exchange gains of $2.1 million and $0.4 million and losses of $22.6 million from the settlement of transactions with third parties during December 31, 2011, 2010 and 2009, respectively.

In connection with the Merger and the exchange offer discussed in Note 9 to our Consolidated Financial Statements in Item 8, our convertible senior notes became exchangeable senior notes issued by the Operating Partnership that are exchangeable into common stock of the REIT. As a result, the accounting for the exchangeable senior notes has changed and, we are now required to separate the fair value of the derivative instrument (exchange feature) from the debt instrument and account for it separately as a derivative. We adjust the derivative instrument at each reporting period to fair value with the resulting adjustment being recorded in earnings. In 2011, we recognized an unrealized gain of $45.0 million.

Gains (Losses) on Early Extinguishment of Debt, Net

During the years ended December 31, 2011, 2010 and 2009, we purchased portions of several series of senior notes, senior exchangeable notes and Eurobonds outstanding and extinguished some secured mortgage debt prior to maturity, which resulted in the recognition of gains of $0.3 million in 2011, losses of $201.5 million in 2010, and gains of $172.3 million in 2009. 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. See Note 9 to our Consolidated Financial Statements in Item 8 for more information regarding our debt repurchases.

 

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Income Tax Benefit (Expense)

During the years ended December 31, 2011, 2010 and 2009, our current income tax expense was $21.6 million, $21.7 million and $29.3 million, respectively. 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.

In 2011, 2010 and 2009, we recognized a net deferred tax benefit of $19.8 million, $52.2 million and $23.3 million, respectively. Deferred income tax expense is generally a function of the period’s temporary differences and the utilization of net operating losses generated in prior years that had been previously recognized as deferred income tax assets in certain of our taxable subsidiaries operating in the U.S. or in foreign jurisdictions. The deferred tax benefit recorded during 2010 is primarily due to impairment charges recorded to the book basis of real estate properties and investments in unconsolidated investees, net operating loss (“NOL”) carryforwards recorded for certain jurisdictions, and the reversal of deferred tax liabilities related to built-in-gains. In addition, during the second quarter of 2010, we recognized a deferred income tax benefit of approximately $27.5 million resulting from the conversion of two of our European management companies to taxable entities. This conversion was approved by the applicable tax authorities in June 2010 and created an asset for tax purposes that will be utilized against future taxable income as it is amortized. The deferred tax benefit was partially offset by an increase to the valuation allowance in certain jurisdictions because we could not sustain a conclusion that it was more likely than not that we could realize the deferred tax assets and NOL carryforwards.

Our income taxes are discussed in more detail in Note 17 to our Consolidated Financial Statements in Item 8.

Discontinued Operations

Discontinued operations represent a component of an entity that has either been disposed of or is classified as held for sale if both the operations and cash flows of the component have been or will be eliminated from ongoing operations of the entity as a result of the disposal transaction and the entity will not have any significant continuing involvement in the operations of the component after the disposal transaction. The results of operations of the component of the entity that has been classified as discontinued operations are reported separately in our Consolidated Financial Statements in Item 8.

During 2011, 2010 and 2009, we disposed of land subject to ground leases and 94, 205 and 140 properties, respectively, to third parties that met the requirements to be classified as discontinued operations. Therefore, the results of operations for these disposed properties are included in discontinued operations for all periods presented, along with the gains recognized during the period.

See Notes 4 and 8 to our Consolidated Financial Statements in Item 8.

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 Other Comprehensive Income (Loss).

During 2011, we recorded unrealized net losses in Other Comprehensive Income (Loss) of $171.0 million that related to foreign currency translations of our foreign subsidiaries into U.S. dollars upon consolidation. The euro and pound sterling remained relatively flat from December 31, 2010 to December, 31 2011, but both weakened 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 yen to the U.S. dollar during 2011.

During 2010, we recognized unrealized net losses in Other Comprehensive Income (Loss) of $42.3 million related to foreign currency translations of our international business units into U.S. dollars upon consolidation, mainly as a result of the yen strengthening against the U.S. dollar, partially offset by the strengthening of the U.S. dollar to the euro and pound sterling, from the beginning of the year to December 31, 2010.

During 2009, we recognized unrealized net gains in Other Comprehensive Income (Loss) of $59.9 million. This includes $209.2 million in gains, mainly as a result of the strengthening of the British pound sterling to the U.S. dollar offset partially by the strengthening of the U.S. dollar to the euro and yen. These gains were offset by a decrease in other comprehensive income of $149.3 million, as a result of the sale of our China operations and our investments in the Japan property funds in February 2009, and represents the gains previously included as currency translation adjustments.

 

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Portfolio Information

Our total owned and managed portfolio of properties includes operating industrial properties and does not include properties under development, properties held for sale or non-industrial properties and was as follows as of December 31 (square feet in thousands):

 

    2011      2010      2009  
     Number of
Properties
    Square Feet      Number of
Properties
    Square Feet      Number of
Properties
    Square Feet  

Consolidated

    1,797        291,051         985        168,547         1,215        192,637   

Unconsolidated

    1,403        267,752         1,179        255,367         1,289        274,617   
 

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Totals

    3,200        558,803         2,164        423,914         2,504        467,254   

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 owned by us, and properties owned by the unconsolidated co-investment ventures (accounted for on the equity method) that are managed by us (referred to as “unconsolidated investees”), in our same store analysis. We have defined the same store portfolio, for the three months ended December 31, 2011, as those properties that were in operation at January 1, 2010 and also December 31, 2011, including completed development properties. 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 included 538.4 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 less rental expenses) for the full year, as included in our Consolidated Statements of Operations in Item 8, to the respective amounts in our same store portfolio analysis.

 

    Three Months Ended        
    March 31     June 30     September 30     December 31     Full Year  

2011

         

Rental income

  $ 199,129      $ 285,339      $ 449,787      $ 442,581      $ 1,376,836   

Rental expenses

    61,875        79,261        125,216        118,300        384,652   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net operating income

  $ 137,254      $ 206,078      $ 324,571      $ 324,281      $ 992,184   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

2010

         

Rental income

  $ 181,526      $ 182,116      $ 188,347      $ 192,551      $ 744,540   

Rental expenses

    54,503        52,321        55,254        53,130        215,208   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net operating income

  $ 127,023      $ 129,795      $ 133,093      $ 139,421      $ 529,332   

 

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    For the Three Months Ended December 31,  
     2011     2010     Percentage
Change
 

Rental Income (1)(2)

     

Consolidated:

     

Rental income per our Consolidated Statements of Operations

  $ 442,581      $ 192,551     

Adjustments to derive same store results:

     

Rental income of properties not in the same store portfolio — properties developed and acquired during the period and land subject to ground leases

    (28,913)        (9,157)     

Effect of changes in foreign currency exchange rates and other

    (235)        918     

Unconsolidated investees:

     

Rental income of properties managed by us and owned by our unconsolidated investees

    377,646        330,928     

Rental income of AMB properties pre-Merger

           269,106     
 

 

 

   

Same store portfolio – rental income (2)(3)

  $ 791,079      $ 784,346        0.9%   

Rental Expenses (1)(4)

     

Consolidated:

     

Rental expenses per our Consolidated Statements of Operations

  $ 118,300      $ 53,130     

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

    (16,663)        (6,328)     

Effect of changes in foreign currency exchange rates and other

    7,410        5,496     

Unconsolidated investees:

     

Rental expenses of properties managed by us and owned by our unconsolidated investees

    100,814        79,677     

Rental expense of AMB properties pre-Merger

           73,734     
 

 

 

 

Adjusted same store portfolio – rental expenses (3)(4)

  $ 209,861      $ 205,709        2.0%   

Net Operating Income (1)

     

Consolidated:

     

Net operating income per our Consolidated Statements of Operations

  $ 324,281      $ 139,421     

Adjustments to derive same store results:

     

Net operating income of properties not in the same store portfolio — properties developed and acquired during the period and land subject to ground leases

    (12,250)        (2,829)     

Effect of changes in foreign currency exchange rates and other

    (7,645)        (4,578)     

Unconsolidated investees:

     

Net operating income of properties managed by us and owned by our unconsolidated investees

    276,832        251,251     

Net operating income of AMB properties pre-Merger

           195,372     
 

 

 

   

Adjusted same store portfolio – net operating income (3)

  $ 581,218      $ 578,637        0.4%   

 

(1) As discussed above, our same store portfolio includes industrial properties from our consolidated portfolio and owned by the unconsolidated investees (accounted for on the equity method) that are managed by us. In addition, we have included the properties owned and managed by AMB as of January 1, 2010 that we still own at December 31, 2011 in the same store portfolio. During the periods presented, certain properties owned by us were contributed to an unconsolidated investee and are included in the same store portfolio on an aggregate basis. Neither our consolidated results nor that of the unconsolidated investees, 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 would be included in our consolidated results through the contribution date and in the results of the unconsolidated investee subsequent to the contribution date).

 

(2) We exclude the net termination and renegotiation fees from our same store rental income to allow us to evaluate the growth or decline in each property’s rental income without regard to items that are not indicative of the property’s recurring operating performance. Net termination and renegotiation fees represent the gross fee negotiated to allow a customer to terminate or renegotiate their lease, offset by the write-off of the asset recognized due to the adjustment to straight-line rents over the lease term. The adjustments to remove these items are included as “effect of changes in foreign currency exchange rates and other” in the tables above.

 

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(3) These amounts include rental income, rental expenses and net operating income of both our consolidated industrial properties and those owned by our unconsolidated investees (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 consolidation, the management fee income earned by the management companies and the management fee expense recognized by the properties are eliminated and the actual costs of providing property management services are recognized as part of our consolidated rental expenses. These expenses fluctuate based on the level of properties included in the same store portfolio and any adjustment is included as “effect of changes in foreign currency exchange rates and other” in the above table.

Environmental Matters

A majority of the properties acquired by us were subjected to environmental reviews either by us or the previous owners. While some of these assessments have led to further investigation and sampling, none of the environmental assessments have revealed an environmental liability that we believe would have a material adverse effect on our business, financial condition or results of operations.

We record a liability for the estimated costs of environmental remediation to be incurred in connection with certain operating properties we acquire, as well as certain land parcels we acquire in connection with the planned development of the land. The liability is established to cover the environmental remediation costs, including cleanup costs, consulting fees for studies and investigations, monitoring costs and legal costs relating to cleanup, litigation defense, and the pursuit of responsible third parties. We purchase various environmental insurance policies to mitigate our exposure to environmental liabilities. We are not aware of any environmental liability that we believe would have a material adverse effect on our business, financial condition or results of operations.

Liquidity and Capital Resources

Overview

We consider our ability to generate cash from operating activities, dispositions of properties and from available financing sources to be adequate to meet our anticipated future development, acquisition, operating, debt service, dividend and distribution requirements.

Near-Term Principal Cash Sources and Uses

In addition to dividends to the common and preferred stockholders of the REIT and distributions to the limited partnership units of the Operating Partnership, we expect our primary cash needs will consist of the following:

 

   

completion of the development and leasing of the properties in our consolidated development portfolio (a);

 

   

investments in current or future unconsolidated investees, primarily for the development and/or acquisition of properties depending on market and other conditions (b);

 

   

development of new properties for long-term investment;

 

   

repayment of debt, including payments on our credit facilities and repurchases of senior notes and/or exchangeable senior notes;

 

   

scheduled consolidated debt principal payments in 2012 of $1.2 billion;

 

   

capital expenditures and leasing costs on properties;

 

   

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

 

   

merger integration and transition expenses.

 

  (a) As of December 31, 2011, we had 30 properties in our development portfolio that were 49.8% leased with a current investment of $860.5 million and a total expected investment of $1.2 billion when completed and leased, leaving $306.4 million remaining to be spent.
  (b) See Note 6 to the Consolidated Financial Statements in Item 8 for discussion of the capital commitments of certain co-investment ventures.

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

 

   

available unrestricted cash balances ($176.1 million at December 31, 2011);

 

   

property operations;

 

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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 or sales of properties to co-investment ventures;

 

   

borrowing capacity under our current credit facility arrangements discussed below ($1.2 billion available as of December 31, 2011), other facilities or borrowing arrangements;

 

   

proceeds from the issuance of equity securities; and

 

   

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

We may repurchase our outstanding debt securities through cash purchases, in open market purchases, privately negotiated transactions, tender offers or otherwise. Such repurchases will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors.

Debt

In 2012 we have scheduled debt maturities of $1.2 billion, including $361 million of our consolidated but not wholly owned entities. We expect to pay these maturities with proceeds from the disposition of properties and available borrowings under our credit facilities. As of December 31, 2011, 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.

Credit Facilities

On June 3, 2011, we entered into a global senior credit facility (“Global Facility”), pursuant to which the Operating Partnership and certain subsidiaries and affiliates may obtain loans and/or procure the issuance of letters of credit in various currencies on a revolving basis in an aggregate amount. The loans cannot exceed $1.71 billion (subject to currency fluctuations) and may be obtained in U.S. dollars, euros, Japanese yen, Canadian dollars and British pounds. We may increase availability under the Global Facility to $2.75 billion, subject to currency fluctuations and obtaining additional lender commitments.

The Global Facility is scheduled to mature on June 3, 2015, but the Operating Partnership may, at its option and subject to the satisfaction of certain conditions and payment of an extension fee, extend the maturity date of the Global Facility to June 3, 2016. Pricing under the Global Facility, including the spread over LIBOR, facility fees and letter of credit fees, varies based upon the public debt ratings of the Operating Partnership. The Global Facility contains customary representations, covenants and defaults (including a cross-acceleration to other recourse indebtedness of more than $50 million).

In addition, on June 3, 2011, we entered into a Yen revolver (the “Revolver”), which has a total borrowing capacity of ¥36.5 billion (approximately $471.3 million at December 31, 2011). The Revolver matures on March 1, 2014, but we may, at our option and subject to the satisfaction of customary conditions and payment of an extension fee, extend the maturity date to February 27, 2015. We may increase availability under the Revolver to an amount not exceeding ¥56.5 billion (approximately $729.6 million at December 31, 2011), subject to obtaining additional lender commitments. Pricing under the Revolver is consistent with the Global Facility pricing. The Revolver contains certain customary representations, covenants and defaults that are substantially the same as the corresponding provisions of the Global Facility. We refer to the Global Facility and Revolver collectively as “Credit Facilities”.

Information related to our Credit Facilities as of December 31, 2011 is as follows (dollars in millions):

 

Aggregate lender - commitments

  $ 2,184.6   

Less:

 

Borrowings outstanding

    (934.9)   

Outstanding letters of credit

    (85.0)   
 

 

 

 

Current availability

  $ 1,164.7   

On February 2, 2012, we entered into a senior term loan agreement where we may obtain loans in an aggregate amount not to exceed €487.5 million (approximately $634 million). The loans can be obtained in U.S. dollars, euros, Japanese yen, and British pounds sterling. We may increase the borrowings to approximately €987.5 million, subject to obtaining additional lender commitments. The loan agreement is scheduled to mature on February 2, 2014, but we may extend the maturity date three times, in each case up to one year, subject to satisfaction of certain conditions and payment of an extension fee. We used the proceeds from this senior term loan to pay off the two outstanding term loans assumed in connection with the Merger and the remainder to pay down borrowings on the Credit Facilities.

 

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Equity Commitments Related to Certain Co-Investment Ventures

Certain co-investment ventures have equity commitments from us and our venture partners. We may fulfill our equity commitment through contributions of properties or cash. Our venture partners fulfill their equity commitment with cash. We are committed to offer to contribute certain properties that we develop and stabilize in select markets in Europe and Mexico to certain co-investment ventures. These ventures are committed to acquire such properties, subject to certain exceptions, including that the properties meet certain specified leasing and other criteria, and that the ventures have available capital. Generally the venture obtains financing for the properties and therefore the equity commitment is less than the acquisition price of the real estate. We are not obligated to contribute properties at a loss. 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.

The following table is a summary of remaining equity commitments as of December 31, 2011 (in millions):

 

     Equity commitments     Expiration date for remaining
commitments
 

Prologis SGP Mexico (1)

   

Prologis

  $ 24.6        (1

Venture Partner

  $ 98.1     
 

 

 

 

Prologis Europe Logistics Venture 1 (2)

   

Prologis

  $ 79.5        February 2014   

Venture Partner

  $ 450.9     
 

 

 

 

Prologis China Logistics Venture 1

   

Prologis

  $ 71.0        March 2015   

Venture Partner

  $ 402.1     
 

 

 

 

Total Unconsolidated

   

Prologis

  $ 175.1     

Venture Partners

  $ 951.1     
 

 

 

 

Prologis Brazil Logistics Partners Fund

   

Prologis

  $ 149.2        December 2013   

Venture Partner

  $ 149.2     
 

 

 

 

Total Consolidated

   

Prologis

  $ 149.2     

Venture Partners

  $ 149.2     
 

 

 

 

Grand Total

   

Prologis

  $ 324.3     

Venture Partners

  $ 1,100.3           

 

(1) These equity commitments will be called only to pay outstanding debt of the venture. The debt is due in the third quarter of 2012, with an option to extend until the third quarter of 2013.

 

(2) Equity commitments are denominated in euro and reported above in U.S. dollars.

In addition to the co-investment ventures listed above, we obtained additional equity commitments of €82 million (approximately $110.3 million) from our partners in October 2011 in an unconsolidated co-investment venture, Prologis Targeted Europe Logistics Fund. This equity was called in October 2011 to cover the acquisition of properties from us. One of our unconsolidated co-investment ventures, Prologis Targeted U.S. Logistics Fund, used its remaining equity commitments in the fourth quarter of 2011 to cover the acquisition of 40 properties from us.

For more information on our investments in unconsolidated co-investment ventures, see Note 6 to our Consolidated Financial Statements in Item 8.

Cash Provided by Operating Activities

Net cash provided by operating activities was $207.1 million, $240.8 million and $89.1 million for the years ended December 31, 2011, 2010 and 2009, respectively. In 2011, 2010 and 2009, cash provided by operating activities was less than the cash dividends paid on common and preferred shares and distributions to noncontrolling interests by $224.4 million, $66.9 million and $209.7 million, respectively. We used proceeds from the disposition of real estate properties ($1.6 billion in both 2011 and 2010 and $1.5 billion in 2009) to fund dividends on common and preferred shares and distributions to noncontrolling interests not covered by cash flows from operating activities.

 

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Cash Investing and Cash Financing Activities

For the years ended December 31, 2011, 2010 and 2009, investing activities used net cash of $233.1 million and provided net cash of $733.3 million and $1.2 billion, respectively. The following are the significant activities for all periods presented:

 

   

We generated cash from contributions and dispositions of properties and land parcels of $1.6 billion, $1.6 billion and $1.5 billion during 2011, 2010 and 2009, respectively. In 2011, we contributed and disposed of land, land subject to ground leases and 169 properties that included the majority of our non-core assets. In 2010 and 2009, we disposed of land and 214 and 183 properties, respectively.

 

   

We invested $1.2 billion, $543.9 million and $1.3 billion in real estate during 2011, 2010 and 2009, respectively; including costs for current and future development projects and recurring capital expenditures and tenant improvements on existing operating properties. In 2011, we acquired eight properties with an aggregate purchase price of $86.5 million.

 

   

In connection with the Merger, we acquired $234.0 million in cash in 2011.

 

   

During the second quarter 2011, we used $1.0 billion of cash to purchase units in PEPR (see Note 3 to the Consolidated Financial Statements in Item 8). The acquisition was funded with borrowings on a new €500 million bridge facility (“PEPR Bridge Facility”) that was put in place for the acquisition and borrowings under our credit facilities. The borrowings on the PEPR Bridge Facility were repaid with proceeds from the 2011 Equity Offering.

 

   

We invested cash of $37.8 million, $335.4 million and $401.4 million during 2011, 2010 and 2009, respectively, in unconsolidated investees including investments in connection with property contributions we made, net of repayment of advances by the investees.

 

   

We received distributions from unconsolidated investees as a return of investment and proceeds from the sale of our investments of $170.2 million, $220.2 million and $81.2 million during 2011, 2010 and 2009, respectively.

 

   

In 2009, we received $1.3 billion in proceeds from the sale of our China operations and our property fund interests in Japan. The proceeds were used to pay down borrowings on our Credit Facilities.

 

   

We generated net cash proceeds from payments on notes receivable of $6.5 million, $18.4 million and $12.4 million in 2011, 2010 and 2009, respectively.

 

   

In the first quarter of 2011, we invested $55.0 million in a preferred equity interest in a subsidiary of the buyer of a portfolio of non-core assets. In 2010, we invested $188.0 million in a preferred equity interest in a subsidiary of a buyer of a portfolio of assets and we purchased an $81.0 million loan to ProLogis North American Industrial Fund II from the lender.

For the years ended December 31, 2011, 2010 and 2009, financing activities provided net cash of $163.3 million and used net cash of $969.8 million and $1.5 billion, respectively. The following are the significant activities for all periods presented:

 

   

In 2011, we repurchased and extinguished $894.5 million of the original principal amount of our senior notes, exchangeable senior notes and secured mortgage debt for a total of $894.2 million. In 2010, we repurchased and extinguished $3.0 billion of the original principal amount of our senior notes, exchangeable senior notes, and secured mortgage debt for $3.1 billion. In 2009, we repurchased and extinguished $1.5 billion of the original principal amount of our senior notes, exchangeable senior notes, and secured mortgage debt for $1.2 billion.

 

   

In 2011, we incurred $577.9 million in secured mortgage debt and borrowed $721.0 million on the PEPR Bridge Facility. In 2010, we issued $1.1 billion of senior notes due 2017 and 2020 and $460.0 million of exchangeable senior notes due 2015. The proceeds were used to repay borrowings under our Credit Facilities. We also incurred $300.3 million in secured mortgage debt. In 2009, we issued $950.0 million of senior notes and $498.9 million of secured mortgage debt.

 

   

We had net payments on our credit facilities of $37.6 million, $246.3 million and $2.4 billion in 2011, 2010 and 2009, respectively. In connection with the Merger, we repaid the outstanding balance under our existing global line of credit and entered into new Credit Facilities.

 

   

In 2011, we used $711.8 million in proceeds from the 2011 Equity Offering to repay the amounts borrowed under the PEPR Bridge Facility. In addition, we made net payments of $263.7 million, $257.5 million and $351.8 million on regularly scheduled debt principal and maturity payments during 2011, 2010 and 2009, respectively. This includes the repayment of €101.3 million ($146.8 million) of the euro notes that matured in April 2011.

 

   

In June 2011, we completed the 2011 Equity Offering and issued 34.5 million shares of common stock and received net proceeds of approximately $1.1 billion. In November of 2010, we received net proceeds of $1.1 billion from the issuance of 41.1 million common shares. In April 2009, we received net proceeds of $1.1 billion from the issuance of 78.0 million common shares.

 

   

We generated proceeds from the sale and issuance of common stock under our various common share plans of $30.8 million and $337.4 million during 2010 and 2009, respectively, primarily from our at-the-market equity issuance program. We had minimal activity in 2011. The at-the-market equity program was terminated in connection with the Merger.

 

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We paid distributions of $387.1 million, $280.7 million and $271.8 million to our common stockholders during 2011, 2010 and 2009, respectively. We paid dividends on our preferred stock of $27.0 million, $25.4 million and $25.4 million during 2011, 2010 and 2009, respectively.

 

   

In 2011, we received proceeds of $123.9 million from our noncontrolling interest partners, primarily for the purchase of real estate properties by our consolidated co-investment venture, Mexico Fondo Logistico. In addition, we distributed $17.4 million to noncontrolling interests in 2011.

Off-Balance Sheet Arrangements

Unconsolidated Co-Investment Ventures Debt

We had investments in and advances to certain unconsolidated co-investment ventures at December 31, 2011 of $2.4 billion. These unconsolidated ventures had total third party debt of $9.3 billion (in the aggregate, not our proportionate share) at December 31, 2011 that matures as follows (in millions):

 

     2012     2013     2014     2015     2016     Thereafter    

Discount/

Premium

    Total (1)  

Prologis California LLC

  $ -      $ -      $ 137.5      $ -      $ 52.5      $ 120.0      $ -      $ 310.0   

Prologis North American Properties Fund I

    108.7        -        -        -        -        -        -        108.7   

Prologis North American Properties Fund XI

    0.7        0.4        -        -        -        -        0.1        1.2   

Prologis North American Industrial Fund

    52.0        80.0        -        108.7        444.0        559.5        -        1,244.2   

Prologis North American Industrial Fund II (2)

    159.6        75.3        476.1        74.8        136.5        325.7        (4.7)        1,243.3   

Prologis North American Industrial
Fund III (3)

    203.5        385.6        146.4        -        -        280.0        (1.4)        1,014.1   

Prologis Targeted U.S. Logistics Fund

    42.6        188.8        102.5        280.7        158.6        810.0        15.2        1,598.4   

Prologis Mexico Industrial Fund

    -        -        -        -        -        214.1        -        214.1   

Prologis SGP Mexico (4)

    62.4        3.7        3.9        4.1        144.8        -        -        218.9   

Prologis European Properties Fund II (5)

    13.6        485.4        223.5        462.3        229.8        209.3        -        1,623.9   

Prologis Targeted Europe Logistics Fund

    9.3        9.4        388.7        226.9        2.3        2.4        12.8        651.8   

Prologis Japan Fund 1 (6)

    218.5        529.5        -        1.8        120.7        81.5        9.4        961.4   

Prologis China Logistics Venture 1

    -        -        -        -        100.0        -        -        100.0   
 

 

 

 

Total property funds

  $ 870.9      $ 1,758.1      $ 1,478.6      $ 1,159.3      $ 1,389.2      $ 2,602.5      $ 31.4      $ 9,290.0   

 

(1) As of December 31, 2011, we had guaranteed $6.9 million of the third party debt of the co-investment ventures. In our role as the manager, we work with the co-investment ventures to refinance their maturing debt. There can be no assurance that the co-investment ventures will be able to refinance any maturing indebtedness on terms as favorable as the maturing debt, or at all. If the ventures are unable to refinance the maturing indebtedness with newly issued debt, they may be able to obtain funds by voluntary capital contributions from us and our partners or by selling assets. Certain of the ventures also have credit facilities, or unencumbered properties, both of which may be used to obtain funds. Generally, the co-investment ventures issue long-term debt and utilize the proceeds to repay borrowings under the credit facilities.

 

(2) In February 2012, we bought out our partner and own 100% of this venture and will begin consolidating. In connection with this transaction, we repaid the loan this venture had to our partner of $334.6 million. We had a note receivable from this fund of $78.9 million that will now eliminate in consolidation.

 

(3) We have a note receivable from this venture. The outstanding balance at December 31, 2011 was $21.4 million and is not included in the maturities above as it is not third party debt. In February 2012, this loan payable to us and loans from Prologis North American Industrial Fund III payable to our partner were restructured into equity according to our ownership percentages. This resulted in additional equity to us of approximately $25 million.

 

(4) Through the Merger we acquired a note receivable from this venture. The outstanding balance at December 31, 2011 was $19.8 million and is not included in the maturities above as it is not third party debt. This venture has capital commitments from us and our partner that we expect to be used to repay this debt maturing in 2012.

 

(5) PEPF II has a €150 million ($196.1 million) credit facility. The facility is denominated in euro and pound sterling.

 

(6) The debt included in 2012 maturities is due October 2012. The co-investment venture expects to re-finance the debt in the first half of 2012.

 

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Contractual Obligations

Long-Term Contractual Obligations

We had long-term contractual obligations at December 31, 2011 as follows (in millions):

 

     Payments Due By Period  
      Total      Less than 1
year
     1 to 3 years      3 to 5 years      More than
5 years
 

Debt obligations, other than Credit Facilities

   $           10,387       $ 1,220       $ 3,272       $ 2,130       $ 3,765   

Interest on debt obligations, other than Credit Facilities

     2,506         532         862         585         527   

Unfunded commitments on the development portfolio (1)

     306         306         -         -         -   

Operating lease payments

     331         26         44         33         228   

Amounts due on Credit Facilities

     935         -         291         644         -   

Interest on Credit Facilities

     70         16         47         7         -   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Totals

   $ 14,535       $ 2,100       $ 4,516       $ 3,399       $ 4,520   

 

(1) We had properties in our development portfolio (completed and under development) at December 31, 2011 with a total expected investment of $1.2 billion. The unfunded commitments presented include not only those costs that we are obligated to fund under construction contracts, but all costs necessary to place the property into service, including the estimated costs of tenant improvements, marketing and leasing costs which 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.

Prior to the Merger, ProLogis paid a cash distribution of $0.25 (adjusted by Merger exchange ratio) per common share for the first quarter on February 28, 2011 and for the second quarter on May 25, 2011. Also prior to the Merger, AMB paid a dividend of $0.28 per common share on February 28, 2011 for the first quarter and on May 25, 2011 for the second quarter. Neither AMB dividend has been reflected in the Consolidated Financial Statements in Item 8 since ProLogis is the accounting acquirer, as discussed earlier. We paid a cash dividend of $0.28 per common share for each of the third and fourth quarters of 2011. A cash distribution of $0.28 for the first quarter of 2012 was declared on February 22, 2012. This distribution will be paid on March 30, 2012 to holders of common shares on March 12, 2012. Our future common stock dividends may vary and will be determined by our Board upon the circumstances prevailing at the time, including our financial condition, operating results and REIT distribution requirements, and may be adjusted at the discretion of the Board during the year.

At December 31, 2011, we had seven series of preferred stock outstanding. The annual dividend rates on preferred stock are 6.5% per Series L share, 6.75% per Series M share, 7.0% per Series O share, 6.85% per Series P share, 8.54% per Series Q share, 6.75% per Series R share and 6.75% per Series S share. The Series Q, R and S were preferred shares of beneficial interest in ProLogis prior to the Merger and distributions on those shares have been reflected in the Consolidated Financial Statements in Item 8 through December 31, 2011. The dividends on the remaining preferred stock have been included in the Consolidated Financial Statements since the Merger. The dividends on preferred stock are payable quarterly in arrears.

Pursuant to the terms of our preferred stock, we are restricted from declaring or paying any dividend with respect to our common stock unless and until all cumulative dividends with respect to the preferred stock has 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. The current economic environment has increased the degree of uncertainty inherent in these estimates and assumptions. 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 our Consolidated Financial Statements in Item 8, those presented below have been identified by us as critical accounting policies.

 

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Impairment of Long-Lived Assets and Goodwill

We assess the carrying values of our respective long-lived assets, including goodwill, 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 holding or disposing of the asset. Our intent with regard to the underlying assets might change as market conditions change, as well as other factors, especially in the current global economic environment. 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 the real estate asset 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.

We use a two step approach to our goodwill impairment evaluation. The first step of the goodwill impairment test is used to identify whether there is any potential impairment. If the fair value of a reporting unit exceeds its corresponding book value, including goodwill, the goodwill of the reporting unit is not considered to be impaired and the second step of the impairment test is unnecessary. If the carrying amount of the reporting unit exceeds its fair value, the second step of the impairment test is performed. The second step requires that we compare the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill to measure the amount of impairment loss, if any.

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 real estate properties and/or goodwill.

Other than Temporary Impairment of Investments in Unconsolidated Investees

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 investee that acquires the assets. We also make judgments regarding recognition in earnings of certain fees and incentives based on when they are earned, fixed and determinable.

Business Combinations

We acquire individual properties, as well as portfolios of properties, or businesses. 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. The initial allocation of the purchase price is based on management’s preliminary assessment, which may differ when final information becomes available. Subsequent adjustments made to the initial purchase price allocation are made within the allocation period, which typically does not exceed one year.

Consolidation

We consolidate all entities that are wholly owned and those in which we own less than 100% but control, as well as any variable interest entities in which we are the primary beneficiary. We evaluate our ability to control an entity and whether the entity is a variable interest entity and we are the primary beneficiary through consideration of the substantive terms of the arrangement to identify which enterprise has the power to direct the activities of a variable interest 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.

 

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Capitalization of Costs and Depreciation