Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended March 31, 2012

 

¨ 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)

 

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

 

 

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 for the past 90 days.

 

Prologis, Inc.    Yes  x    No  ¨
Prologis, L.P.    Yes  x    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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter periods that the registrant was required to submit and post such files).

 

Prologis, Inc.    Yes  x    No  ¨
Prologis, L.P.    Yes  x    No  ¨

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 definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):

Prologis, Inc.:

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Prologis, L.P.:

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (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  x
Prologis, L.P.    Yes  ¨    No  x

The number of shares of Prologis, Inc.’s common stock outstanding as of May 1, 2012 was approximately 460,398,400.

 

 

 


Table of Contents

EXPLANATORY NOTE

This report combines the quarterly reports on Form 10-Q for the period ended March 31, 2012 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 March 31, 2012, the REIT owned an approximate 99.56% common general partnership interest in the Operating Partnership and 100% of the preferred units in the Operating Partnership. The remaining approximate 0.44% common limited partnership interest is 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 quarterly reports on Form 10-Q 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

PROLOGIS

INDEX

 

                 Page
Number
 

PART I.

   Financial Information   
  

Item 1.

    

Financial Statements

  
  

    Prologis, Inc.:

  
       

Consolidated Balance Sheets - March 31, 2012 and December 31, 2011

     1   
       

Consolidated Statements of Operations - Three Months Ended March 31, 2012 and 2011

     2   
       

Consolidated Statements of Comprehensive Income - Three Months Ended March 31, 2012 and 2011

     3   
       

Consolidated Statement of Equity - Three Months Ended March 31, 2012

     3   
       

Consolidated Statements of Cash Flows - Three Months Ended March 31, 2012 and 2011

     4   
  

    Prologis, L.P.:

  
       

Consolidated Balance Sheets - March 31, 2012 and December 31, 2011

     5   
       

Consolidated Statements of Operations - Three Months Ended March 31, 2012 and 2011

     6   
       

Consolidated Statements of Comprehensive Income - Three Months Ended March 31, 2012 and 2011

     7   
       

Consolidated Statement of Capital - Three Months Ended March 31, 2012

     7   
       

Consolidated Statements of Cash Flows - Three Months Ended March 31, 2012 and 2011

     8   
  

    Prologis, Inc. and Prologis, L.P.:

  
       

Notes to Consolidated Financial Statements

     9   
       

Reports of Independent Registered Public Accounting Firm

     27   
   Item 2.     

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

     29   
   Item 3.     

Quantitative and Qualitative Disclosures About Market Risk

     44   
   Item 4.     

Controls and Procedures

     45   

PART II.

   Other Information   
   Item 1.     

Legal Proceedings

     45   
   Item 1A.     

Risk Factors

     45   
   Item 2.     

Unregistered Sales of Equity Securities and Use of Proceeds

     45   
   Item 3.     

Defaults Upon Senior Securities

     45   
   Item 4.     

Mine Safety Disclosures

     46   
   Item 5.     

Other Information

     46   
   Item 6.     

Exhibits

     46   


Table of Contents

PART 1.

Item  1. Financial Statements

PROLOGIS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

 

     March 31,
2012
(Unaudited)
    December 31,
2011
 

ASSETS

    

Investments in real estate properties

   $ 26,578,485      $ 24,787,537   

Less accumulated depreciation

     2,256,901        2,157,907   
  

 

 

   

 

 

 

Net investments in real estate properties

     24,321,584        22,629,630   

Investments in and advances to unconsolidated investees

     2,452,939        2,857,755   

Notes receivable backed by real estate

     247,241        322,834   

Assets held for sale

     102,183        444,850   
  

 

 

   

 

 

 

Net investments in real estate

     27,123,947        26,255,069   

Cash and cash equivalents

     343,736        176,072   

Restricted cash

     91,957        71,992   

Accounts receivable

     163,679        147,999   

Other assets

     1,144,634        1,072,780   
  

 

 

   

 

 

 

Total assets

   $ 28,867,953      $ 27,723,912   
  

 

 

   

 

 

 

LIABILITIES AND EQUITY

    

Liabilities:

    

Debt

   $ 12,380,921      $ 11,382,408   

Accounts payable and accrued expenses

     674,084        639,490   

Other liabilities

     1,258,442        1,225,548   

Liabilities related to assets held for sale

     3,846        20,992   
  

 

 

   

 

 

 

Total liabilities

     14,317,293        13,268,438   
  

 

 

   

 

 

 

Equity:

    

Prologis, Inc. stockholders’ equity:

    

Preferred stock

     582,200        582,200   

Common stock; $0.01 par value; 460,359 shares issued and 459,555 shares outstanding at March 31, 2012 and 459,401 shares issued and 458,597 shares outstanding at December 31, 2011

     4,604        4,594   

Additional paid-in capital

     16,370,254        16,349,328   

Accumulated other comprehensive loss

     (219,574     (182,321

Distributions in excess of net earnings

     (3,019,829     (3,092,162
  

 

 

   

 

 

 

Total Prologis stockholders’ equity

     13,717,655        13,661,639   

Noncontrolling interests

     833,005        793,835   
  

 

 

   

 

 

 

Total equity

     14,550,660        14,455,474   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 28,867,953      $ 27,723,912   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

1


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PROLOGIS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per share amounts)

 

     Three Months Ended
March 31,
 
     2012     2011  

Revenues:

    

Rental income

   $ 464,594      $ 195,714   

Private capital revenue

     32,357        29,834   

Development management and other income

     3,113        4,319   
  

 

 

   

 

 

 

Total revenues

     500,064        229,867   
  

 

 

   

 

 

 

Expenses:

    

Rental expenses

     125,096        60,624   

Private capital expenses

     16,881        10,552   

General and administrative expenses

     60,159        39,183   

Merger, acquisition and other integration expenses

     10,728        5,988   

Impairment of real estate properties

     3,185        —     

Depreciation and amortization

     188,801        80,049   

Other expenses

     4,335        4,684   
  

 

 

   

 

 

 

Total expenses

     409,185        201,080   
  

 

 

   

 

 

 

Operating income

     90,879        28,787   

Other income (expense):

    

Earnings from unconsolidated investees, net

     13,995        13,641   

Interest expense

     (133,447     (90,527

Impairment of other assets

     (16,135     —     

Interest and other income (expense), net

     5,101        (2,579

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

     267,771        3,725   

Foreign currency exchange and derivative gains (losses), net

     (26,775     1,374   

Gain on early extinguishment of debt, net

     5,419        —     
  

 

 

   

 

 

 

Total other income (expense)

     115,929        (74,366
  

 

 

   

 

 

 

Earnings (loss) before income taxes

     206,808        (45,579

Current income tax expense

     11,073        5,505   

Deferred income tax expense

     1,051        864   
  

 

 

   

 

 

 

Total income tax expense

     12,124        6,369   
  

 

 

   

 

 

 

Earnings (loss) from continuing operations

     194,684        (51,948
  

 

 

   

 

 

 

Discontinued operations:

    

Income attributable to disposed properties and assets held for sale

     7,164        9,824   

Net gains on dispositions, net of taxes

     11,249        1,960   
  

 

 

   

 

 

 

Total discontinued operations

     18,413        11,784   
  

 

 

   

 

 

 

Consolidated net earnings (loss)

     213,097        (40,164

Net earnings attributable to noncontrolling interests

     (118     (83
  

 

 

   

 

 

 

Net earnings (loss) attributable to controlling interests

     212,979        (40,247

Less preferred share dividends

     10,567        6,369   
  

 

 

   

 

 

 

Net earnings (loss) available for common stockholders

   $ 202,412      $ (46,616
  

 

 

   

 

 

 

Weighted average common shares outstanding - Basic

     459,203        254,698   
  

 

 

   

 

 

 

Weighted average common shares outstanding - Diluted

     476,107        254,698   
  

 

 

   

 

 

 

Net earnings (loss) per share available for common stockholders - Basic:

    

Continuing operations

   $ 0.40      $ (0.23

Discontinued operations

     0.04        0.05   
  

 

 

   

 

 

 

Net earnings (loss) per share available for common stockholders - Basic

   $ 0.44      $ (0.18
  

 

 

   

 

 

 

Net earnings (loss) per share available for common stockholders - Diluted:

    

Continuing operations

   $ 0.40      $ (0.23

Discontinued operations

     0.04        0.05   
  

 

 

   

 

 

 

Net earnings (loss) per share available for common stockholders - Diluted

   $ 0.44      $ (0.18
  

 

 

   

 

 

 

Dividends per common share

   $ 0.28      $ 0.25   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

2


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PROLOGIS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands)

 

     Three Months Ended
March 31,
 
     2012     2011  

Consolidated net earnings (loss)

   $ 213,097      $ (40,164

Other comprehensive income (loss):

    

Foreign currency translation gains (losses), net

     (41,241     203,861   

Unrealized gains and amortization on derivative contracts, net

     3,455        15,372   
  

 

 

   

 

 

 

Comprehensive income

     175,311        179,069   

Comprehensive (income) loss attributable to noncontrolling interests

     415        (2,691
  

 

 

   

 

 

 

Comprehensive income available for common stockholders

   $ 175,726      $ 176,378   

PROLOGIS, INC.

CONSOLIDATED STATEMENT OF EQUITY

Three Months Ended March 31, 2012

(Unaudited)

(In thousands)

 

          Common Stock           Accumulated     Distributions              
    Preferred
Stock
    Number
of
Shares
    Par
Value
    Additional
Paid-in
Capital
    Other
Comprehensive
Loss
    in Excess  of
Net
Earnings
    Non-
controlling
interests
    Total
Equity
 

Balance as of January 1, 2012

  $ 582,200        459,401      $ 4,594      $ 16,349,328      $ (182,321   $ (3,092,162   $ 793,835      $ 14,455,474   

Consolidated net earnings

    —          —          —          —          —          212,979        118        213,097   

Adjustment to the Merger purchase price allocation

    —          —          —          —          —          —          32,234        32,234   

Effect of common stock plans

    —          958        10        20,193        —          —          —          20,203   

Capital contributions, net of acquisitions

    —          —          —          —          —          —          12,834        12,834   

Foreign currency translation gains (losses), net

    —          —          —          —          (40,708     —          (533     (41,241

Unrealized gains and amortization on derivative contracts, net

    —          —          —          —          3,455        —          —          3,455   

Distributions and allocations

    —          —          —          733        —          (140,646     (5,483     (145,396
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of March 31, 2012

  $ 582,200        460,359      $ 4,604      $ 16,370,254      $ (219,574   $ (3,019,829   $ 833,005      $ 14,550,660   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

3


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PROLOGIS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

     Three Months Ended
March 31,
 
     2012     2011  

Operating activities:

    

Consolidated net earnings (loss)

   $ 213,097      $ (40,164

Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:

    

Straight-lined rents

     (18,644     (12,602

Cost (settlement) of stock-based compensation awards, net

     12,223        (1,537

Depreciation and amortization

     191,825        83,121   

Earnings from unconsolidated investees, net

     (13,995     (13,641

Changes in operating receivables and distributions from unconsolidated investees

     1,302        23,063   

Amortization of debt and lease intangibles

     7,682        12,835   

Non-cash merger expenses

     2,575        —     

Impairment of real estate properties and other assets

     19,320        —     

Net gains on dispositions, net of taxes, included in discontinued operations

     (11,249     (3,876

Gains recognized on property acquisitions and dispositions, net

     (267,771     (3,725

Gain on early extinguishment of debt, net

     (5,419     —     

Unrealized foreign currency and derivative losses (gains), net

     24,243        (1,635

Deferred income tax expense

     1,051        864   

Increase in restricted cash, accounts receivable and other assets

     (45,433     (56,198

Increase (decrease) in accounts payable and accrued expenses and other liabilities

     (39,372     16,057   
  

 

 

   

 

 

 

Net cash provided by operating activities

     71,435        2,562   
  

 

 

   

 

 

 

Investing activities:

    

Real estate investments

     (179,569     (200,746

Tenant improvements and lease commissions on previously leased space

     (30,326     (12,290

Non-development capital expenditures

     (12,027     (4,674

Net advances from (investments in and net advances to) unconsolidated investees

     (31,724     11,329   

Return of investment from unconsolidated investees

     34,571        38,693   

Proceeds from dispositions of real estate properties

     712,964        394,494   

Proceeds from repayment of notes receivable

     —          6,450   

Investments in notes receivable backed by real estate and advances on other notes receivable

     —          (55,000

Acquisition of NAIF II, net of cash received

     (317,328     —     
  

 

 

   

 

 

 

Net cash provided by investing activities

     176,561        178,256   
  

 

 

   

 

 

 

Financing activities:

    

Issuance of common stock, net

     18,591        31   

Dividends paid on common stock

     (129,512     (64,043

Dividends paid on preferred stock

     (16,659     (6,354

Noncontrolling interest contributions

     12,834        —     

Noncontrolling interest distributions

     (6,008     (85

Debt and equity issuance costs paid

     (2,810     (3,039

Payments on credit facilities, net

     (51,452     (269,817

Proceeds from issuance of debt

     1,022,667        164,503   

Payments on debt

     (927,869     (16,351
  

 

 

   

 

 

 

Net cash used in financing activities

     (80,218     (195,155
  

 

 

   

 

 

 

Effect of foreign currency exchange rate changes on cash

     (114     1,447   

Net increase (decrease) in cash and cash equivalents

     167,664        (12,890

Cash and cash equivalents, beginning of period

     176,072        37,634   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 343,736      $ 24,744   
  

 

 

   

 

 

 

See Note 16 for information on non-cash investing and financing activities and other information.

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

4


Table of Contents

PROLOGIS, L.P.

CONSOLIDATED BALANCE SHEETS

(In thousands)

 

     March 31,
2012
(Unaudited)
     December 31,
2011
 

ASSETS

     

Investments in real estate properties

   $ 26,578,485       $ 24,787,537   

Less accumulated depreciation

     2,256,901         2,157,907   
  

 

 

    

 

 

 

Net investments in real estate properties

     24,321,584         22,629,630   

Investments in and advances to unconsolidated investees

     2,452,939         2,857,755   

Notes receivable backed by real estate

     247,241         322,834   

Assets held for sale

     102,183         444,850   
  

 

 

    

 

 

 

Net investments in real estate

     27,123,947         26,255,069   

Cash and cash equivalents

     343,736         176,072   

Restricted cash

     91,957         71,992   

Accounts receivable

     163,679         147,999   

Other assets

     1,144,634         1,072,780   
  

 

 

    

 

 

 

Total assets

   $ 28,867,953       $ 27,723,912   
  

 

 

    

 

 

 

LIABILITIES AND CAPITAL

     

Liabilities:

     

Debt

   $ 12,380,921       $ 11,382,408   

Accounts payable and accrued expenses

     674,084         639,490   

Other liabilities

     1,258,442         1,225,548   

Liabilities related to assets held for sale

     3,846         20,992   
  

 

 

    

 

 

 

Total liabilities

     14,317,293         13,268,438   
  

 

 

    

 

 

 

Capital:

     

Partners’ capital:

     

General partner - preferred

     582,200         582,200   

General partner - common

     13,135,455         13,079,439   

Limited partners

     58,055         58,613   
  

 

 

    

 

 

 

Total partners’ capital

     13,775,710         13,720,252   

Noncontrolling interests

     774,950         735,222   
  

 

 

    

 

 

 

Total capital

     14,550,660         14,455,474   
  

 

 

    

 

 

 

Total liabilities and capital

   $ 28,867,953       $ 27,723,912   
  

 

 

    

 

 

 

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

5


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PROLOGIS, L.P.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per unit amounts)

 

     Three Months Ended
March 31,
 
     2012     2011  

Revenues:

    

Rental income

   $ 464,594      $ 195,714   

Private capital revenue

     32,357        29,834   

Development management and other income

     3,113        4,319   
  

 

 

   

 

 

 

Total revenues

     500,064        229,867   
  

 

 

   

 

 

 

Expenses:

    

Rental expenses

     125,096        60,624   

Private capital expenses

     16,881        10,552   

General and administrative expenses

     60,159        39,183   

Merger, acquisition and other integration expenses

     10,728        5,988   

Impairment of real estate properties

     3,185        —     

Depreciation and amortization

     188,801        80,049   

Other expenses

     4,335        4,684   
  

 

 

   

 

 

 

Total expenses

     409,185        201,080   
  

 

 

   

 

 

 

Operating income

     90,879        28,787   

Other income (expense):

    

Earnings from unconsolidated investees, net

     13,995        13,641   

Interest expense

     (133,447     (90,527

Impairment of other assets

     (16,135     —     

Interest and other income (expense), net

     5,101        (2,579

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

     267,771        3,725   

Foreign currency exchange and derivative gains (losses), net

     (26,775     1,374   

Gain on early extinguishment of debt, net

     5,419        —     
  

 

 

   

 

 

 

Total other income (expense)

     115,929        (74,366
  

 

 

   

 

 

 

Earnings (loss) before income taxes

     206,808        (45,579

Current income tax expense

     11,073        5,505   

Deferred income tax expense

     1,051        864   
  

 

 

   

 

 

 

Total income tax expense

     12,124        6,369   
  

 

 

   

 

 

 

Earnings (loss) from continuing operations

     194,684        (51,948
  

 

 

   

 

 

 

Discontinued operations:

    

Income attributable to disposed properties and assets held for sale

     7,164        9,824   

Net gains on dispositions, net of taxes

     11,249        1,960   
  

 

 

   

 

 

 

Total discontinued operations

     18,413        11,784   
  

 

 

   

 

 

 

Consolidated net earnings (loss)

     213,097        (40,164

Net (earnings) loss attributable to noncontrolling interests

     823        (83
  

 

 

   

 

 

 

Net earnings (loss) attributable to controlling interests

     213,920        (40,247

Less preferred unit dividends

     10,567        6,369   
  

 

 

   

 

 

 

Net earnings (loss) available for common unitholders

   $ 203,353      $ (46,616
  

 

 

   

 

 

 

Weighted average common units outstanding - Basic

     461,259        254,698   
  

 

 

   

 

 

 

Weighted average common units outstanding - Diluted

     476,107        254,698   
  

 

 

   

 

 

 

Net earnings (loss) per unit available for common unitholders - Basic:

    

Continuing operations

   $ 0.40      $ (0.23

Discontinued operations

     0.04        0.05   
  

 

 

   

 

 

 

Net earnings (loss) per unit available for common unitholders - Basic

   $ 0.44      $ (0.18
  

 

 

   

 

 

 

Net earnings (loss) per unit available for common unitholders - Diluted:

    

Continuing operations

   $ 0.40      $ (0.23

Discontinued operations

     0.04        0.05   
  

 

 

   

 

 

 

Net earnings (loss) per unit available for common unitholders - Diluted

   $ 0.44      $ (0.18
  

 

 

   

 

 

 

Distributions per common unit

   $ 0.28      $ 0.25   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

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PROLOGIS, L.P.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands)

 

     Three Months Ended
March 31,
 
     2012     2011  

Consolidated net earnings (loss)

   $ 213,097      $ (40,164

Other comprehensive income (loss):

    

Foreign currency translation gains (losses), net

     (41,241     203,861   

Unrealized gains and amortization on derivative contracts, net

     3,455        15,372   
  

 

 

   

 

 

 

Comprehensive income

     175,311        179,069   

Comprehensive (income) loss attributable to noncontrolling interests

     1,356        (2,691
  

 

 

   

 

 

 

Comprehensive income available for common unitholders

   $ 176,667      $ 176,378   

PROLOGIS, L.P.

CONSOLIDATED STATEMENT OF CAPITAL

Three Months Ended March 31, 2012

(Unaudited)

(In thousands)

 

    General Partner     Limited Partners     Non-        
    Preferred     Common     Common     controlling        
    Units     Amount     Units     Amount     Units     Amount     Interests     Total  

Balance as of January 1, 2012

    21,300      $ 582,200        459,401      $ 13,079,439        2,059      $ 58,613      $ 735,222      $ 14,455,474   

Consolidated net earnings (loss)

    —          —          —          212,979        —          941        (823     213,097   

Adjustment to the Merger purchase price allocation

    —          —          —          —          —          —          32,234        32,234   

Effect of REIT’s common stock plans

    —          —          958        20,203        —          —          —          20,203   

Capital contributions, net of acquisitions

    —          —          —          —          —          —          12,834        12,834   

Foreign currency translation gains (losses), net

    —          —          —          (40,708     —          —          (533     (41,241

Unrealized gain and amortization on derivative contracts, net

    —          —          —          3,455        —          —          —          3,455   

Distributions and allocations

    —          —          —          (139,913     (24     (1,499     (3,984     (145,396
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of March 31, 2012

    21,300      $ 582,200        460,359      $ 13,135,455        2,035      $ 58,055      $ 774,950      $ 14,550,660   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

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PROLOGIS, L.P.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

     Three Months Ended
March 31,
 
     2012     2011  

Operating activities:

    

Consolidated net earnings (loss)

   $ 213,097      $ (40,164

Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:

    

Straight-lined rents

     (18,644     (12,602

Cost (settlement) of REIT stock-based compensation awards, net

     12,223        (1,537

Depreciation and amortization

     191,825        83,121   

Earnings from unconsolidated investees, net

     (13,995     (13,641

Changes in operating receivables and distributions from unconsolidated investees

     1,302        23,063   

Amortization of debt and lease intangibles

     7,682        12,835   

Non-cash merger expenses

     2,575        —     

Impairment of real estate properties and other assets

     19,320        —     

Net gains on dispositions, net of taxes, included in discontinued operations

     (11,249     (3,876

Gains recognized on property acquisitions and dispositions, net

     (267,771     (3,725

Gain on early extinguishment of debt, net

     (5,419     —     

Unrealized foreign currency and derivative losses (gains), net

     24,243        (1,635

Deferred income tax expense

     1,051        864   

Increase in restricted cash, accounts receivable and other assets

     (45,433     (56,198

Increase (decrease) in accounts payable and accrued expenses and other liabilities

     (39,372     16,057   
  

 

 

   

 

 

 

Net cash provided by operating activities

     71,435        2,562   
  

 

 

   

 

 

 

Investing activities:

    

Real estate investments

     (179,569     (200,746

Tenant improvements and lease commissions on previously leased space

     (30,326     (12,290

Non-development capital expenditures

     (12,027     (4,674

Net advances from (investments in and advances to) unconsolidated investees

     (31,724     11,329   

Return of investment from unconsolidated investees

     34,571        38,693   

Proceeds from dispositions of real estate properties

     712,964        394,494   

Proceeds from repayment of notes receivable

     —          6,450   

Investments in notes receivable backed by real estate and advances on other notes receivable

     —          (55,000

Acquisition of NAIF II, net of cash received

     (317,328     —     
  

 

 

   

 

 

 

Net cash provided by investing activities

     176,561        178,256   
  

 

 

   

 

 

 

Financing activities:

    

Proceeds from issuance of common partnership units in exchange for contributions from the REIT, net

     18,591        31   

Distributions paid on common partnership units

     (130,917     (64,043

Distributions paid on preferred units

     (16,659     (6,354

Noncontrolling interest contributions

     12,834        —     

Noncontrolling interest distributions

     (4,603     (85

Debt and equity issuance costs paid

     (2,810     (3,039

Payments on credit facilities, net

     (51,452     (269,817

Proceeds from issuance of debt

     1,022,667        164,503   

Payments on debt

     (927,869     (16,351
  

 

 

   

 

 

 

Net cash used in financing activities

     (80,218     (195,155
  

 

 

   

 

 

 

Effect of foreign currency exchange rate changes on cash

     (114     1,447   

Net increase (decrease) in cash and cash equivalents

     167,664        (12,890

Cash and cash equivalents, beginning of period

     176,072        37,634   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 343,736      $ 24,744   
  

 

 

   

 

 

 

See Note 16 for information on non-cash investing and financing activities and other information.

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

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PROLOGIS, INC. AND PROLOGIS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

1.   General

Business. On June 3, 2011, AMB Property Corporation (“AMB”) and AMB Property, LP completed the merger contemplated by the Agreement and Plan of Merger with ProLogis, a Maryland real estate investment trust (“ProLogis”) and its subsidiaries (the “Merger”). Following the Merger, AMB changed its name to Prologis, Inc. (the “REIT”). As a result of the Merger, each outstanding common share of beneficial interest of ProLogis was converted into 0.4464 of a newly issued share of common stock of the REIT. As further discussed in Note 2, AMB was the legal acquirer and ProLogis was the accounting acquirer. As such, the period ended March 31, 2011 includes the historical results of ProLogis only. See Note 2 for further discussion on the Merger.

Prologis, Inc. commenced operations as a fully integrated real estate company in 1997, elected to be taxed as a real estate investment trust under the Internal Revenue Code of 1986, as amended, and believes the current organization and method of operation will enable the REIT to maintain its status as a real estate investment trust. The REIT is the general partner of Prologis, L.P. (the “Operating Partnership”). Through our controlling interest in the Operating Partnership, we are engaged in the ownership, acquisition, development and operation of industrial properties in global, regional and other distribution markets throughout the Americas, Europe and Asia. Our current business strategy includes two reportable business segments: Real Estate Operations and Private Capital. Our Real Estate Operations segment represents the long-term ownership of industrial properties. Our Private Capital segment represents the long-term management of co-investment ventures and other unconsolidated investees. See Note 15 for further discussion of our business segments. Unless otherwise indicated, the notes to the Consolidated Financial Statements apply to both the REIT and the Operating Partnership. The terms “the Company”, “Prologis”, “we”, “our” or “us” means the REIT and Operating Partnership collectively.

As of March 31, 2012, the REIT owned an approximate 99.56% common general partnership interest in the Operating Partnership, and 100% of the preferred units. The remaining approximate 0.44% common limited partnership interest is 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.

Basis of Presentation. The accompanying consolidated financial statements, presented in the U.S. dollar, are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities as of the date of the financial statements and revenue and expenses during the reporting period. Our actual results could differ from those estimates and assumptions. All material intercompany transactions with consolidated entities have been eliminated.

The accompanying unaudited interim financial information has been prepared according to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted in accordance with such rules and regulations. Our management believes that the disclosures presented in these financial statements are adequate to make the information presented not misleading. In our opinion, all adjustments and eliminations, consisting only of normal recurring adjustments, necessary to present fairly the financial position and results of operations for both the REIT and the Operating Partnership for the reported periods have been included. The results of operations for such interim periods are not necessarily indicative of the results for the full year. The accompanying unaudited interim financial information should be read in conjunction with the December 31, 2011 Consolidated Financial Statements of Prologis, as previously filed with the SEC on Form 10-K and other public information.

Certain amounts included in the accompanying Consolidated Financial Statements for 2011 have been reclassified to conform to the 2012 financial statement presentation.

Recent Accounting Pronouncements. In December 2011, the Financial Accounting Standards Board (“FASB”) issued an accounting standard update that requires disclosures about offsetting and related arrangements to enable financial statements users to evaluate the effect or potential effect of netting arrangements on an entity’s financial position, including rights of setoff associated with certain financial instruments and derivative instruments. The disclosure requirements are effective for us on January 1, 2013, and we do not expect the guidance to have a material impact on our Consolidated Financial Statements.

In December 2011, the FASB issued an accounting standard update to clarify the scope of current U.S. GAAP. The update clarifies that the real estate sales guidance applies to the derecognition of a subsidiary that is in-substance real estate as a result of default on the subsidiary’s nonrecourse debt. That is, even if the reporting entity ceases to have a controlling financial interest under the consolidation guidance, the reporting entity would continue to include the real estate, debt, and the results of the subsidiary’s operations in its consolidated financial statements until legal title to the real estate is transferred to legally satisfy the debt. This accounting standard update is effective for fiscal years and interim periods within those years beginning after June 15, 2012. We do not expect the guidance to impact our Consolidated Financial Statements.

In September 2011, the FASB issued an accounting standard update to amend and simplify the rules related to testing goodwill for impairment. The update allows an entity to make an initial qualitative evaluation, based on the entity’s events and circumstances, to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The results of this qualitative assessment determine whether it is necessary to perform the currently required two-step impairment test. The new guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. We adopted this standard as of January 1, 2012 and it has not had a material impact on our Consolidated Financial Statements.

 

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PROLOGIS, INC. AND PROLOGIS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

In June 2011, the FASB issued an accounting standard update that eliminates the option to present components of other comprehensive income as part of the changes in stockholders’ equity, and requires the presentation of components of net income and other comprehensive income either in a single continuous statement or in two separate but consecutive statements. This accounting standard update is effective, on a retrospective basis, for interim and annual periods beginning after December 15, 2011. We adopted this standard as of January 1, 2012. As this standard is for presentation purposes only, it had no impact on our Consolidated Financial Statements.

In May 2011, the FASB issued an accounting standard update to amend the requirements in GAAP for measuring fair value and for disclosing information about fair value measurements in order to achieve further convergence with International Financial Reporting Standards. We adopted the standard as of January 1, 2012, and the adoption of this standard was not considered material.

 

2.   Business Combinations

Merger of AMB and ProLogis

As discussed in Note 1, we completed the Merger on June 3, 2011. After consideration of all applicable factors pursuant to the business combination accounting rules, the Merger resulted in a reverse acquisition in which AMB was the “legal acquirer” because AMB issued its common stock to ProLogis shareholders and ProLogis was the “accounting acquirer” due to various factors, including the fact that ProLogis shareholders held the largest portion of the voting rights in the merged entity and ProLogis appointees represented the majority of the Board of Directors. In our Consolidated Financial Statements, the period ended March 31, 2011 includes the historical results of ProLogis only.

The purchase price allocation reflects aggregate consideration of approximately $5.9 billion. The allocation of the purchase price requires a significant amount of judgment. The allocation was based on our valuation, estimates and assumptions of the acquisition date fair value of the tangible and intangible assets and liabilities acquired. While the current allocation of the purchase price is substantially complete, the valuation of the real estate properties is in process of being finalized. We do not expect future revisions, if any, to have a significant impact on our financial position or results of operations.

Acquisition of ProLogis European Properties

During the second quarter of 2011, we increased our ownership of ProLogis European Properties (“PEPR”) through open market purchases and a mandatory tender offer. In May 2011, we settled our mandatory tender offer that resulted in the acquisition of an additional 96.5 million ordinary units and 2.7 million convertible preferred units of PEPR. During all of the second quarter of 2011, we made aggregate cash purchases totaling €715.8 million ($1.0 billion). We funded the purchases through borrowings under our global line of credit and a new €500 million bridge facility, which was subsequently repaid with proceeds from an equity offering in June 2011.

Upon completion of the tender offer, we met the requirements to consolidate PEPR. In accordance with the accounting rules for business combinations, we marked our equity investment in PEPR from carrying value to fair value of approximately €486 million, which resulted in the recognition of a gain of €59.6 million ($85.9 million). We refer to this transaction as the “PEPR Acquisition”. The fair value was based on the trading price for our previously owned units and our acquisition price for the PEPR units purchased during the tender offer period.

We have allocated the aggregate purchase price, representing the share of PEPR we owned at the time of consolidation of €1.1 billion ($1.6 billion). The allocation was based on our valuation, estimates and assumptions of the acquisition date fair value of the tangible and intangible assets and liabilities acquired. While the current allocation of the purchase price is substantially complete, the valuation of the real estate properties is being finalized. We do not expect future revisions, if any, to have a significant impact on our financial position or results of operations.

Pro forma Information (unaudited)

The following unaudited pro forma financial information presents our results as though the Merger and the PEPR Acquisition, as well as the equity offering in June 2011 that was used, in part, to repay the loans used to fund the PEPR Acquisition, had been consummated as of January 1, 2010. The pro forma information does not necessarily reflect the actual results of operations had the transactions been consummated at the beginning of the period indicated nor is it necessarily indicative of future operating results. The pro forma information does not give effect to any cost synergies or other operating efficiencies that could result from the Merger and also does not include any merger and integration expenses. The results for the three months ended March 31, 2011 included three months of pro forma adjustments for both the Merger and PEPR Acquisition.

 

    Three Months Ended
March 31,
 

(amounts in thousands, except per share amounts)

  2011  

Total revenues

  $ 490,331   

Net earnings (loss) available for stockholders

  $ (54,260

Net earnings (loss) per share available for common stockholders - basic

  $ (0.12

Net earnings (loss) per share available for common stockholders - diluted

  $ (0.12

 

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Table of Contents

PROLOGIS, INC. AND PROLOGIS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

These results include certain adjustments, primarily decreased revenues resulting from the amortization of the net asset from the acquired leases with favorable or unfavorable rents relative to estimated market rents, increased depreciation and amortization expense resulting from the adjustment of real estate assets to estimated fair value and recognition of intangible assets related to in-place leases and acquired management contracts and lower interest expense due to the accretion of the fair value adjustment of debt.

Acquisitions of Unconsolidated Co-Investment Ventures

On February 3, 2012, we acquired our partner’s 63% interest in and now own 100% of our previously unconsolidated co-investment venture Prologis North American Industrial Fund II (“NAIF II”) and we repaid the loan from NAIF II to our partner for a total of $336.1 million. The assets and liabilities of this venture, as well as the activity since the acquisition date, have been included in our Consolidated Financial Statements. In accordance with the accounting rules for business combinations, we marked our equity investment in NAIF II from its carrying value to the estimated fair value. The fair value was determined and allocated based on our valuation, estimates, and assumptions of the acquisition date fair value of the tangible and intangible assets and liabilities. The preliminary allocation of net assets acquired is approximately $1.6 billion in real estate assets, $36.6 million of net other assets, and $880.9 million in debt. We have not recorded a gain or loss with this transaction, as the carrying value of our investment was equal to the estimated fair value. We have substantially completed the purchase price allocation, and we do not expect future revisions, if any, to have a significant impact on our financial position or results of operations.

On February 22, 2012, we dissolved the unconsolidated co-investment venture Prologis California (“Prologis California”) and divided the portfolio equally with our partner. The net value of the assets and liabilities distributed represents the fair value of our ownership interest in the co-investment venture on that date. In accordance with the accounting rules for business combinations, we marked our equity investment in Prologis California from its carrying value to the estimated fair value which resulted in a gain of $273.0 million. The gain is recorded in Gains on Acquisitions and Dispositions of Investments in Real Estate, Net in the Consolidated Statements of Operations. The fair value was determined and allocated based on our valuation, estimates, and assumptions of the acquisition date fair value of the tangible and intangible assets and liabilities. The preliminary allocation of net assets acquired is approximately $496.3 million in real estate assets, $17.7 million of net other assets, and $150.0 million in debt. We have substantially completed the purchase price allocation, and we do not expect future revisions, if any, to have a significant impact on our financial position or results of operations.

We refer to these two transactions collectively as “Q1 Venture Acquisitions”.

 

3.   Real Estate

Investments in real estate properties are presented at cost, and consist of the following (in thousands):

 

     March 31,
2012
     December 31,
2011
 

Industrial operating properties (1):

     

Improved land

   $ 5,479,522       $ 4,813,145   

Buildings and improvements

     17,959,181         16,739,403   

Development portfolio, including cost of land (2)

     787,029         860,531   

Land (3)

     1,933,321         1,984,233   

Other real estate investments (4)

     419,432         390,225   
  

 

 

    

 

 

 

Total investments in real estate properties

     26,578,485         24,787,537   

Less accumulated depreciation

     2,256,901         2,157,907   
  

 

 

    

 

 

 

Net investments in properties

   $ 24,321,584       $ 22,629,630   
  

 

 

    

 

 

 

 

(1) At March 31, 2012 and December 31, 2011, we had 1,937 and 1,797 industrial properties consisting of 329.2 million square feet and 291.1 million square feet, respectively. Included at March 31, 2012 were 180 properties totaling $2.1 billion that were acquired in connection with the Q1 Venture Acquisitions.
(2) At March 31, 2012, the development portfolio consisted of 24 properties aggregating 8.7 million square feet. At December 31, 2011, we had 30 properties aggregating 9.5 million square feet under development. Our total expected investment upon completion of the properties currently in the development portfolio at March 31, 2012 was $1.1 billion, including land, development and leasing costs.
(3) Land consisted of 10,595 acres and 10,723 acres at March 31, 2012 and December 31, 2011, respectively, and included land parcels that we may develop or sell depending on market conditions and other factors.
(4) Included in other investments are: (i) certain non-industrial real estate; (ii) our corporate office buildings; (iii) certain infrastructure costs related to projects we are developing on behalf of others; (iv) land subject to ground leases; (v) costs incurred related to future development projects, including purchase options on land; and (vi) earnest money deposits associated with potential acquisitions.

At March 31, 2012, excluding our assets held for sale, we owned real estate assets in the Americas (Canada, Mexico and the United States), Europe (Austria, Belgium, the Czech Republic, France, Germany, Hungary, Italy, the Netherlands, Poland, Romania, Slovakia, Spain, Sweden and the United Kingdom) and Asia (China, Japan and Singapore).

During the three months ended March 31, 2012, we recognized Gains on Acquisitions and Dispositions of Investments in Real Estate, Net in continuing operations of $267.8 million. This included a gain of $273.0 million related to the acquisition of our share of Prologis California (see Note 2 for further discussion of the Prologis California transaction).

 

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Table of Contents

PROLOGIS, INC. AND PROLOGIS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

See Note 6 for further discussion of properties we sold to third parties that are reported in discontinued operations.

During the three months ended March 31, 2012, we recorded an impairment charge of $16.1 million related to the land received in 2011 in exchange for a note receivable. This impairment was recorded in Impairment of Other Assets in our consolidated Financial Statements.

 

4.   Unconsolidated Investees

Summary of Investments

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%. These entities may be consolidated or unconsolidated, depending on the structure, our partner’s rights and participation and our level of control of the entity. This Note details our unconsolidated co-investment ventures. See Note 10 for more detail regarding our consolidated investments.

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 other joint ventures, as unconsolidated investees.

Our investments in and advances to our unconsolidated investees are summarized below (in thousands):

 

     March 31,
2012
     December 31,
2011
 

Unconsolidated co-investment ventures

   $ 2,066,629       $ 2,471,179   

Other joint ventures

     386,310         386,576   
  

 

 

    

 

 

 

Totals

   $ 2,452,939       $ 2,857,755   
  

 

 

    

 

 

 

Unconsolidated Co-Investment Ventures

As of March 31, 2012, we had investments in and managed 13 unconsolidated co-investment ventures that own portfolios of operating industrial properties and may also develop properties. Private capital revenue includes revenues we earn for the management services we provide to unconsolidated investees and certain third parties. These fees are recognized as earned and may include property and asset management fees or transactional fees for leasing, acquisition, construction, financing, legal and tax services. We may also earn promote payments based on the third party investor returns over time. In addition, we may earn fees for services provided to develop a building within the co-investment venture. These are reflected as Development Management and Other Income in the Consolidated Statements of Operations.

Summarized information regarding our investments in the co-investment ventures is as follows (in thousands):

 

     Three Months Ended
March 31,
 
     2012      2011  

Earnings (loss) from unconsolidated co-investment ventures:

     

Americas

   $ 2,283       $ 2,622   

Europe

     7,997         9,092   

Asia

     1,478         209   
  

 

 

    

 

 

 

Total earnings from unconsolidated co-investment ventures, net

   $ 11,758       $ 11,923   
  

 

 

    

 

 

 

Private capital revenue and other income:

     

Americas

   $ 17,523       $ 13,205   

Europe

     9,137         13,325   

Asia

     4,754         193   
  

 

 

    

 

 

 

Total private capital revenue

     31,414         26,723   

Development management and other income

     76         1,901   
  

 

 

    

 

 

 

Total

   $ 31,490       $ 28,624   
  

 

 

    

 

 

 

We completed the Merger and PEPR Acquisition in the second quarter of 2011. During the first quarter of 2012, we also acquired one of our unconsolidated co-investment venture and dissolved another, both located in the Americas. Therefore 2011 may not be comparable to 2012. See Note 2 for more information on these transactions.

Private capital revenues include fees and incentives we earn for services provided to our unconsolidated co-investment ventures (shown above), as well as fees earned from other unconsolidated investees and third parties of $1.0 million and $3.1 million during the three months ended March 31, 2012 and 2011, respectively.

 

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PROLOGIS, INC. AND PROLOGIS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

Information about our investments in the co-investment ventures is as follows (dollars in thousands):

 

     Weighted Average
Ownership Percentage
    Investment in and Advances to  

Unconsolidated co-investment ventures by region

   March 31,
2012
    December 31,
2011
    March 31,
2012
     December 31,
2011
 

Americas

     25.3     28.2   $ 1,189,505       $ 1,596,295   

Europe

     30.1     29.9     671,849         662,010   

Asia

     19.3     19.4     205,275         212,874   
  

 

 

   

 

 

   

 

 

    

 

 

 

Totals

     26.2     27.9   $ 2,066,629       $ 2,471,179   
  

 

 

   

 

 

   

 

 

    

 

 

 

Summarized financial information of the co-investment ventures (for the entire entity, not our proportionate share) and our investment in such ventures is presented below (dollars in millions):

 

2012

   Americas     Europe     Asia     Total  

For the three months ended March 31, 2012: (1)

        

Revenues

   $ 210.7      $ 125.0      $ 34.8      $ 370.5   

Net earnings (loss)

   $ (10.1   $ 23.7      $ 5.6      $ 19.2   

As of March 31, 2012:

        

Total assets

   $ 9,868.7      $ 6,132.6      $ 2,099.7      $ 18,101.0   

Amounts due to (from) us (2)

   $ 35.3      $ 10.9      $ 9.7      $ 55.9   

Third party debt (3)

   $ 4,079.2      $ 2,153.2      $ 1,009.3      $ 7,241.7   

Total liabilities

   $ 4,522.4      $ 2,667.0      $ 1,107.9      $ 8,297.3   

Noncontrolling interest

   $ 0.3      $ 6.1      $ —        $ 6.4   

Venture partners’ equity

   $ 5,346.0      $ 3,459.5      $ 991.8      $ 9,797.3   

Our weighted average ownership (4)

     25.3     30.1     19.3     26.2

Our investment balance (5)

   $ 1,189.5      $ 671.8      $ 205.3      $ 2,066.6   

Deferred gains, net of amortization (6)

   $ 154.5      $ 182.3      $ 0.1      $ 336.9   

 

2011

   Americas     Europe     Asia     Total  

For the three months ended March 31, 2011:

        

Revenues

   $ 173.3      $ 190.4      $ 3.0      $ 366.7   

Net earnings (loss)

   $ (14.5   $ 20.5      $ 1.1      $ 7.1   

As of December 31, 2011:

        

Total assets

   $ 12,236.0      $ 6,211.8      $ 2,245.1      $ 20,692.9   

Amounts due to (from) us (2)

   $ 59.5      $ 8.1      $ 9.3      $ 76.9   

Third party debt (3)

   $ 5,952.8      $ 2,275.8      $ 1,061.4      $ 9,290.0   

Total liabilities

   $ 6,386.4      $ 2,758.9      $ 1,174.0      $ 10,319.3   

Noncontrolling interest

   $ 1.7      $ 6.2      $ —        $ 7.9   

Venture partners’ equity

   $ 5,847.9      $ 3,446.7      $ 1,071.1      $ 10,365.7   

Our weighted average ownership (4)

     28.2     29.9     19.4     27.9

Our investment balance (5)

   $ 1,596.3      $ 662.0      $ 212.9      $ 2,471.2   

Deferred gains, net of amortization (6)

   $ 227.6      $ 191.0      $ 0.1      $ 418.7   

 

(1) As discussed in Note 2 activity for the three months ended March 31, 2012 includes those co-investment ventures acquired through the Merger offset by the removal of PEPR, which was included for the three months ended March 31, 2011. In addition, we began consolidating two of our North America co-investment ventures during the first quarter of 2012. The results of the ventures are included through the transaction date.
(2) At December 31, 2011, we had notes receivable aggregating $41.2 million from Prologis North American Industrial Fund III ($21.4 million) and Prologis SGP Mexico ($19.8 million). We have a receivable from a venture related to our share of cash proceeds received from the sale of assets in March 2012 that was paid to us in April. In February 2012, Prologis North American Industrial Fund III restructured the loan payable to us and our partner into equity according to our ownership percentages. As of March 31, 2012, we have one note receivable from Prologis SGP Mexico of $19.8 million. The remaining amounts represent current balances from services provided by us to the co-investment ventures.
(3) As discussed in Note 2, debt was reduced by $1.4 billion related to the consolidation of two unconsolidated co-investment ventures during the first quarter of 2012. As of March 31, 2012 and December 31, 2011, we guaranteed $6.6 million of the third party debt of certain unconsolidated ventures. As of December 31, 2011, we had pledged properties included in our Real Estate Operations segment with an undepreciated cost of approximately $277.0 million, to serve as additional collateral for the secured mortgage loan of NAIF II payable to an affiliate of our venture partner. In connection with the acquisition of our partner’s interest in February 2012, we repaid this loan, and these assets are no longer pledged.
(4) Represents our weighted average ownership interest in all co-investment ventures based on each entity’s contribution to total assets, before depreciation, net of other liabilities.

 

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PROLOGIS, INC. AND PROLOGIS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

(5) The difference between our ownership interest of the venture’s equity and our investment balance results principally from three types of transactions: (i) deferring a portion of the gains we recognize from a contribution of one of our properties to the venture (see next footnote); (ii) recording additional costs associated with our investment in the venture; and (iii) advances to the venture.
(6) This amount is recorded as a reduction to our investment and represents the gains that were deferred when we contributed a property to a venture due to our continuing ownership in the property.

Equity Commitments Related to Certain Unconsolidated Co-Investment Ventures

Certain unconsolidated 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 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. 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 March 31, 2012 (in millions):

 

     Equity commitments      Expiration date for remaining
commitments
 

Prologis Targeted U.S. Logistics Fund (1)

     

Prologis

   $ —           Open-Ended  (1) 

Venture Partners

   $ 128.0      
  

 

 

    

 

 

 

Prologis SGP Mexico (2)

     

Prologis

   $ 24.6               (2) 

Venture Partner

   $ 98.1      
  

 

 

    

 

 

 

Europe Logistics Venture 1 (3)

     

Prologis

   $ 78.3         February 2014   

Venture Partner

   $ 444.3      
  

 

 

    

 

 

 

Prologis China Logistics Venture 1

     

Prologis

   $ 71.0         March 2015   

Venture Partner

   $ 402.1      
  

 

 

    

 

 

 

Total

     

Prologis

   $ 173.9      

Venture Partners

   $ 1,072.5      
  

 

 

    

 

 

 

 

(1) We secured $128 million in commitments from third parties in the first quarter in order to fund future contributions or to pay down existing debt.
(2) These equity commitments will be called only to pay outstanding debt of the venture. The relevant debt is due in the third quarter of 2012, with an option to extend until the third quarter of 2013.
(3) Equity commitments are denominated in euro and reported above in U.S. dollar. During the first quarter of 2012, this co-investment venture acquired two buildings with proceeds from commitments previously called. In addition, in the first quarter of 2012, the venture called capital of $14.3 million from our partner to fund the contribution of one property to this venture.

Other Joint Ventures

Our investments in and advances to these entities are as follows (in thousands):

     March 31,
2012
     December 31,
2011
 

Americas

   $ 305,518       $ 305,352   

Europe

     51,843         50,474   

Asia

     28,949         30,750   
  

 

 

    

 

 

 

Total investments in and advances to other joint ventures

   $ 386,310       $ 386,576   
  

 

 

    

 

 

 

 

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PROLOGIS, INC. AND PROLOGIS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

5.   Notes Receivable Backed by Real Estate

The activity on the notes receivable backed by real estate for the three months ended March 31, 2012 is as follows (in thousands):

 

     $188  million
Preferred
Equity Interest
     $55  million
Preferred
Equity Interest
    NAIF II
Secured
Mortgage
Receivable (1)
    Total  

Balance as of December 31, 2011

   $ 188,000       $ 55,970      $ 78,864      $ 322,834   

Elimination upon acquisition of NAIF II

     —           —          (78,864     (78,864

Accrued interest/(interest payments received), net

     3,281         (10     —          3,271   
  

 

 

    

 

 

   

 

 

   

 

 

 

Balance as of March 31, 2012

   $ 191,281       $ 55,960      $ —        $ 247,241   
  

 

 

    

 

 

   

 

 

   

 

 

 

 

(1) The balance as of December 31, 2011 represented a loan to NAIF II secured by 12 buildings. In February 2012, we purchased the remaining interest in NAIF II. As a result, we began consolidating this entity and eliminated this note receivable. See Note 2 for more detail on this transaction.

 

6.   Assets Held for Sale and Discontinued Operations

Held for Sale

As of March 31, 2012, we had land and nine operating properties that met the criteria to be classified as held for sale. The amounts included in held for sale as of March 31, 2012 primarily include real estate investment balances and the related assets and liabilities for each property.

Discontinued Operations

During the three months ended March 31, 2012, we disposed of land subject to ground leases and 70 operating properties aggregating 7.9 million square feet to third parties, most of which was included in Assets Held for Sale at December 31, 2011. During all of 2011, we disposed of land subject to ground leases and 94 properties aggregating 10.7 million square feet to third parties.

The operations of the properties held for sale or disposed of to third parties and the aggregate net gains recognized upon their disposition are presented as Discontinued Operations in our Consolidated Statements of Operations for all periods presented. Interest expense is included in discontinued operations only if it is directly attributable to these properties.

Discontinued operations are summarized as follows (in thousands):

 

     Three Months Ended
March  31,
 
     2012     2011  

Rental income

   $ 12,907      $ 19,658   

Rental expenses

     (2,719     (6,063

Depreciation and amortization expense

     (3,024     (3,736

Other expenses

     —          (35
  

 

 

   

 

 

 

Income attributable to disposed properties and assets held for sale

     7,164        9,824   

Net gains on dispositions

     11,249        3,876   

Income tax on dispositions

     —          (1,916
  

 

 

   

 

 

 

Total discontinued operations

   $ 18,413      $ 11,784   
  

 

 

   

 

 

 

The following information relates to properties disposed of during the periods presented and recorded as discontinued operations, including adjustments to previous dispositions for actual versus estimated selling costs (dollars in thousands):

 

     Three Months Ended  
     March 31,  
     2012      2011  

Number of properties

     70         33   

Net proceeds from dispositions

   $ 686,965       $ 331,153   

Net gains from dispositions, net of taxes

   $ 11,249       $ 3,876   

 

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Table of Contents

PROLOGIS, INC. AND PROLOGIS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

7.   Debt

All debt is held directly or indirectly by the Operating Partnership. The REIT itself does not have any indebtedness, but guarantees the unsecured debt of the Operating Partnership. We generally do not guarantee the debt issued by consolidated subsidiaries in which we own less than 100%.

Our debt consisted of the following (dollars in thousands):

 

     March 31, 2012      December 31, 2011  
     Weighted Average
Interest  Rate (1)
    Amount
Outstanding
     Weighted
Average  Interest
Rate
    Amount
Outstanding
 

Credit Facilities

     1.68   $ 850,909         2.17   $ 936,796   

Senior notes

     5.66     4,747,916         6.30     4,772,607   

Exchangeable senior notes (2)

     4.82     1,322,800         4.82     1,315,448   

Secured mortgage debt

     4.18     2,806,496         4.71     1,725,773   

Secured mortgage debt of consolidated investees

     4.45     1,366,774         4.54     1,468,637   

Other debt of consolidated investees

     4.33     625,419         5.30     775,763   

Other debt

     1.98     660,607         2.44     387,384   
  

 

 

   

 

 

    

 

 

   

 

 

 

Totals

     4.41   $ 12,380,921         5.12   $ 11,382,408   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

(1) The interest rates presented represent the effective interest rates (including amortization of the non-cash premiums or discount).
(2) The weighted average coupon interest rate was 2.6% as of March 31, 2012 and December 31, 2011.

Credit Facilities

We have a global senior credit facility (“Global Facility”), where funds may be drawn in U.S. dollar, euro, Japanese yen, British pound sterling and Canadian dollar on a revolving basis. The loans cannot exceed $1.71 billion (subject to currency fluctuations). We may increase 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 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).

We also have a ¥36.5 billion (approximately $445 million at March 31, 2012) yen revolver (the “Revolver”). 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 $688.8 million at March 31, 2012) 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 the Revolver, collectively, as our “Credit Facilities”.

Commitments and availability under our Credit Facilities as of March 31, 2012 were as follows (dollars in millions):

 

Aggregate lender - commitments

   $ 2,146.1   

Less:

  

Borrowings outstanding

     849.6   

Outstanding letters of credit

     73.0   
  

 

 

 

Current availability

   $ 1,223.5   
  

 

 

 

Exchangeable Senior Notes

In connection with the Merger and exchange offer, 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 now requires us to separate the fair value of the derivative instrument (exchange feature) from the debt instrument and account for it separately as a derivative. We have determined that the exchangeable notes issued in 2010 are the only exchangeable notes where the fair value of the derivative is not zero at March 31, 2012, therefore this modification in accounting for the exchangeable notes only affected these notes. At each reporting period, we adjust the derivative instrument to fair value with the resulting adjustment being recorded in earnings as Foreign Currency Exchange and Derivative Gains (Losses), Net. The fair value of the derivative associated with our exchangeable notes was a liability of $44.3 million and $17.5 million at March 31, 2012 and December 31, 2011, respectively, and therefore, we have recognized an unrealized loss of $26.8 million for the three months ended March 31, 2012.

 

16


Table of Contents

PROLOGIS, INC. AND PROLOGIS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

Secured Mortgage Debt

TMK bonds are a financing vehicle in Japan for special purpose companies known as TMKs. In the first quarter of 2012, we issued ¥30.5 billion ($372 million as of March 31, 2012) TMK bonds with maturity dates ranging from March 2017 to March 2019 with interest rates ranging from 1.0% to 1.2%, and secured by three properties and with an undepreciated cost at March 31, 2012 of $528.9 million.

In the first quarter of 2012 in connection with the acquisition of NAIF II (see Note 2 for more details), we have assumed additional mortgage debt of $880.9 million, with maturity dates ranging from September 2012 to December 2018. Subsequent to the acquisition, we have paid down a portion of outstanding debt and reduced the balance to $728.7 million, secured by 90 properties with an undepreciated cost of $1.4 billion at March 31, 2012.

In the first quarter of 2012 in connection with the acquisition of our share of Prologis California (See Note 2 for more details), we assumed additional mortgage debt of $150.0 million payable in 2014 and secured by 24 properties with an undepreciated cost of $236.2 million at March 31, 2012.

Other Debt

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 ($641.9 million at March 31, 2012). The loans can be obtained in U.S. dollar, euro, Japanese yen, and British pound sterling. We may increase the borrowings to approximately €987.5 million ($1.3 billion at March, 2012), 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 at our option, in each case up to one year, subject to satisfaction of certain conditions and payment of an extension fee. We used the proceeds of the entire senior term loan to pay off the existing two term loans assumed in connection with the Merger and the remainder to pay down credit facilities.

Long-Term Debt Maturities

Principal payments due on our debt, for the remainder of 2012 and for each of the years in the ten-year period ending December 31, 2021 and thereafter are as follows (in millions):

 

     Prologis                
     Unsecured      Secured             Consolidated      Total  

Maturity

   Senior
Debt
     Exchangeable
Notes
    Credit
Facilities
     Other
Debt
     Mortgage
Debt
     Total      Investees
Debt
     Consolidated
Debt
 

2012 (1) (2)

   $ 64       $ 458      $ —         $ 1       $ 33       $ 556       $ 113       $ 669   

2013 (2)

     376         482        —           1         202         1,061         573         1,634   

2014

     374         —          409         643         578         2,004         1,070         3,074   

2015

     287         460        441         1         208         1,397         21         1,418   

2016

     638         —          —           1         314         953         111         1,064   

2017

     700         —          —           1         558         1,259         2         1,261   

2018

     900         —          —           1         247         1,148         64         1,212   

2019

     647         —          —           1         284         932         1         933   

2020

     683         —          —           1         10         694         1         695   

2021

     —           —          —           —           162         162         1         163   

Thereafter

     —           —          —           10         143         153         2         155   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     4,669         1,400        850         661         2,739         10,319         1,959         12,278   

Unamortized (discounts) premiums, net

     79         (78     1         —           68         70         33         103   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4,748       $ 1,322      $ 851       $ 661       $ 2,807       $ 10,389       $ 1,992       $ 12,381   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) We expect to repay the amounts maturing in 2012 with borrowings under our Credit Facilities, cash generated from operations or with proceeds from the disposition of real estate properties. In April 2012, we paid off $448.9 million related to the exchangeable notes and repaid $58.9 million of senior unsecured notes at maturity, both of which were paid from our cash on hand and borrowings on our Credit Facilities. The maturities in 2012 in our consolidated but not wholly owned subsidiaries principally include $64.1 million of unsecured credit facilities; and $30.4 million of secured mortgage debt, which we expect to extend, or pay, either by the entity issuing new debt, with proceeds from asset sales, available cash flows, or equity contributions to the funds by us and our venture partner.
(2) The maturities in 2012 and 2013 include the aggregate principal amounts of the exchangeable senior notes issued in 2007 and 2008, based on the year in which the holders first have the right to require us to repurchase their notes for cash. The exchangeable senior notes issued in November 2007 are included as 2013 maturities since the holders have the right to require us to repurchase their notes for cash in January 2013. The holders of these notes also have the option to exchange their notes in November 2012, which we may settle in cash or common stock, at our option.

Debt Covenants

Our debt agreements contain various covenants, including maintenance of specified financial ratios. As of March 31, 2012 we were in compliance with all covenants.

 

17


Table of Contents

PROLOGIS, INC. AND PROLOGIS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

8.   Other Liabilities:

Other liabilities consisted of the following, net of amortization, if applicable, as of March 31, 2012 and December 31, 2011 (in thousands):

 

     March 31,
2012
     December 31,
2011
 

Income tax liabilities

   $ 659,606       $ 634,790   

Tenant security deposits

     168,495         158,544   

Unearned rents

     114,637         115,093   

Lease intangible assets

     68,482         68,256   

Deferred income

     47,186         52,045   

Environmental

     38,582         40,206   

Value added tax and other tax liabilities

     35,296         42,895   

Other

     126,158         113,719   
  

 

 

    

 

 

 

Totals

   $ 1,258,442       $ 1,225,548   
  

 

 

    

 

 

 

 

9.   Stockholders’ Equity of the REIT and Partners’ Capital of the Operating Partnership

Operating Partnership

For each share of common stock or preferred stock the REIT issues, the Operating Partnership issues a corresponding common or preferred partnership unit, as applicable, to the REIT in exchange for the contribution of the proceeds from the stock issuance. In addition, other third parties and certain current and former directors and officers of the REIT own common limited partnership units that make up approximately 0.44% of the common partnership units.

Preferred Stock of the REIT

We had the following preferred stock issued and outstanding (in thousands, except per share and par value data):

 

     March 31,
2012
     December 31,
2011
 

Series L Preferred stock at stated liquidation preference of $25 per share;

     

$0.01 par value; 2,000 shares

   $ 49,100       $ 49,100   

Series M Preferred stock at stated liquidation preference of $25 per share;

     

$0.01 par value; 2,300 shares

     57,500         57,500   

Series O Preferred stock at stated liquidation preference of $25 per share;

     

$0.01 par value; 3,000 shares

     75,300         75,300   

Series P Preferred stock at stated liquidation preference of $25 per share;

     

$0.01 par value; 2,000 shares

     50,300         50,300   

Series Q Preferred stock at stated liquidation preference of $50 per share;

     

$0.01 par value; 2,000 shares

     100,000         100,000   

Series R Preferred stock at stated liquidation preference of $25 per share;

     

$0.01 par value; 5,000 shares

     125,000         125,000   

Series S Preferred stock at stated liquidation preference of $25 per share;

     

$0.01 par value; 5,000 shares

     125,000         125,000   
  

 

 

    

 

 

 

Total preferred stock

   $ 582,200       $ 582,200   
  

 

 

    

 

 

 

The holders of the preferred stock have preference rights with respect to distributions and liquidation over the common stock and certain rights in the case of arrearage. Holders of the preferred stock are not entitled to vote on any matters, except under certain limited circumstances. The series L, M, O, P, R and S preferred stock are redeemable solely at our option, in whole or in part. The series Q preferred stock will be redeemable at our option on and after November 13, 2026.

 

10.   Noncontrolling Interests

Operating Partnership

We report noncontrolling interest related to several entities we consolidate but do not own 100% of the common equity. These entities include four real estate partnerships that have issued limited partnership units to third parties. Depending on the specific partnership agreements, these limited partnership units are exchangeable into shares of our common stock (or cash), generally at a rate of one share of common stock to one unit. We evaluated the noncontrolling interests with redemption provisions that permit the issuer to settle in either cash or common stock at the option of the issuer to determine whether temporary or permanent equity classification on the balance sheet is appropriate, including the requirement to settle in unregistered shares, and determined that these units meet the requirements to qualify for presentation as permanent equity.

We also consolidate several entities in which we do not own 100% but the units are not exchangeable into our common stock. If we contribute a property to a consolidated co-investment venture, the property is still reflected in our Consolidated Financial Statements, but due to our ownership of less than 100%, there is an increase in noncontrolling interest related to the contributed properties, which represents the cash we receive from our partners.

 

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PROLOGIS, INC. AND PROLOGIS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

REIT

The noncontrolling interest of the REIT includes the noncontrolling interests presented in the Operating Partnership, as well as the common limited partnership units in the Operating Partnership that are not owned by the REIT. As of March 31, 2012, the REIT owned approximately 99.56% of the common partnership units of the Operating Partnership.

The following is a summary of the noncontrolling interest and the consolidated entity’s total investment in real estate and debt at March 31, 2012 and December 31, 2011 (dollars in thousands):

 

     Our  Ownership
Percentage
    Our  Noncontrolling
Interest
     Consolidated Entity
Total  Investment In
Real Estate
     Consolidated  Entity
Debt
 
     2012     2011     2012      2011      2012      2011      2012      2011  

Partnerships with exchangeable units (1)

     various        various      $ 43,356       $ 11,173       $ 752,095       $ 748,803       $ 26,417       $ 26,417   

Prologis Institutional Alliance Fund II

     24.1     24.1     323,296         324,721         626,190         624,318         213,819         220,625   

PEPR (2)

     93.7     93.7     104,845         106,759         3,748,208         4,047,329         1,441,134         1,699,587   

Mexico Fondo Logistico (AFORES)

     20.0     20.0     123,529         118,580         319,829         312,914         190,518         177,000   

Prologis AMS

     38.6     38.6     83,807         83,897         211,671         211,627         76,292         77,041   

Other consolidated entities

     various        various        96,117         90,092         548,889         620,052         76,908         70,140   
      

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Operating Partnership noncontrolling interests

         774,950         735,222         6,206,882         6,565,043         2,025,088         2,270,810   

Limited partners in the Operating Partnership (3)

         58,055         58,613         —           —           —           —     
      

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

REIT noncontrolling interests

       $ 833,005       $ 793,835       $ 6,206,882       $ 6,565,043       $ 2,025,088       $ 2,270,810   
      

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) At March 31, 2012 and December 31, 2011, there were 1,285,312 and 1,302,238 limited partnership units, respectively, that were exchangeable into an equal number of shares of the REIT’s common stock. In the first quarter of 2012, 16,926 limited partnership units were exchanged for cash. The majority of the outstanding limited partnership units are entitled to quarterly cash distributions equal to the quarterly dividends paid on our common stock. In the first quarter of 2012, we recorded an additional purchase accounting adjustment of $32.2 million associated with the Merger.
(2) In the first quarter of 2012, PEPR sold land under a ground lease and 18 properties aggregating 3,670 million square feet for $342.3 million to third parties. We paid down $263.9 million of outstanding debt in PEPR with proceeds from these dispositions.
(3) At March 31, 2012 and December 31, 2011, 2,034,657 and 2,058,730 units were associated with the common limited partners in the Operating Partnership and exchangeable into an equal number of shares of the REIT’s common stock. In the first quarter of 2012, 24,073 units were exchanged for cash. The majority of the outstanding limited partnership units are entitled to quarterly cash distributions equal to the quarterly distributions paid on our common stock.

 

11.   Long-Term Compensation

Under its incentive plans, Prologis had stock options and full value awards (restricted stock, restricted share units (“RSUs”) and performance based shares (“PSAs”)).

Summary of Activity

The activity for the three months ended March 31, 2012, with respect to our stock options, was as follows:

 

     Options Outstanding         
     Number of Options     Weighted Average
Exercise  Price
     Options Exercisable  

Balance at December 31, 2011

     9,879,960      $ 34.93      

Exercised

     (899,466     22.47      

Forfeited

     (67,193     41.52      
  

 

 

   

 

 

    

 

 

 

Balance at March 31, 2012

     8,913,301      $ 36.14         8,239,510   
  

 

 

   

 

 

    

 

 

 

 

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PROLOGIS, INC. AND PROLOGIS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

The activity for the three months ended March 31, 2012, with respect to our unvested restricted stock, was as follows:

 

     Number of
Shares
    Weighted Average
Grant  Date Fair
Value
 

Balance at December 31, 2011

     1,192,982     

Granted

     5,000     

Vested

     (444,738  

Forfeited

     (1,375  
  

 

 

   

Balance at March 31, 2012

     751,869      $ 34.03   
  

 

 

   

 

 

 

The activity for the three months ended March 31, 2012, with respect to our RSU and PSA awards, was as follows:

 

     Number of
Shares
    Weighted  Average
Grant-Date Fair Value
     Number of
Shares  Vested
 

Balance at December 31, 2011

     1,684,713        

Granted

     1,562,227        

Distributed

     (456,468     

Forfeited/Expired

     (38,621     
  

 

 

      

Balance at March 31, 2012

     2,751,851      $ 31.66         48,735   
  

 

 

   

 

 

    

 

 

 

In the first quarter of 2012, we granted 1,523,222 RSUs, which will vest over three years. In addition, 39,005 PSAs were earned based on 2011 performance.

 

12.   Merger, Acquisition and Other Integration Expenses

In connection with the Merger, 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, which in some cases will be through the end of 2012. Certain of these costs were obligations of AMB and expensed prior to the closing of the Merger by AMB. 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. The following is a breakdown of the costs incurred during the three months ended March 31:

 

     2012      2011  

Termination, severance and transitional employee costs

   $ 7,685       $ 3,807   

Professional fees

     2,216         2,181   

Office closure, travel and other costs

     827         —     
  

 

 

    

 

 

 

Total

   $ 10,728       $ 5,988   
  

 

 

    

 

 

 

 

13.   Earnings (Loss) Per Common Share /Unit

We determine basic earnings per share/unit based on the weighted average number of shares of common stock/units outstanding during the period. We compute diluted earnings per share/unit based on the weighted average number of shares outstanding combined with the incremental weighted average effect from all outstanding potentially dilutive instruments.

 

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PROLOGIS, INC. AND PROLOGIS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

The following table sets forth the computation of our basic and diluted earnings per share/unit (in thousands, except per share/unit amounts):

 

     Three Months Ended
March  31,
 

REIT

   2012      2011 (1)(2)  

Net earnings (loss) available for common stockholders

   $ 202,412       $ (46,616

Noncontrolling interest attributable to exchangeable limited partnership units

     1,003         —     

Interest expense on exchangeable debt assumed exchanged

     4,216         —     
  

 

 

    

 

 

 

Adjusted net earnings (loss) available for common stockholders

   $ 207,631       $ (46,616
  

 

 

    

 

 

 

Weighted average common shares outstanding - Basic

     459,203         254,698   

Incremental weighted average effect on exchange of limited partnership units

     3,347         —     

Incremental weighted average effect of share awards

     1,678         —     

Incremental weighted average effect on exchange of certain exchangeable debt

     11,879         —     
  

 

 

    

 

 

 

Weighted average common shares outstanding - Diluted (3)

     476,107         254,698   
  

 

 

    

 

 

 

Net earnings (loss) per share available for common stockholders - Basic and Diluted

   $ 0.44       $ (0.18
  

 

 

    

 

 

 

Operating Partnership

             

Net earnings (loss) available for common unitholders

   $ 203,353       $ (46,616

Noncontrolling interest attributable to exchangeable limited partnership units

     62         —     

Interest expense on exchangeable debt assumed exchanged

     4,216         —     
  

 

 

    

 

 

 

Adjusted net earnings (loss) available for common unitholders

   $ 207,631       $ (46,616
  

 

 

    

 

 

 

Weighted average common partnership units outstanding - Basic

     461,259         254,698   

Incremental weighted average effect on exchange of limited partnership units

     1,291         —     

Incremental weighted average effect of share awards

     1,678         —     

Incremental weighted average effect on exchange of certain exchangeable debt

     11,879         —     
  

 

 

    

 

 

 

Weighted average common partnership units outstanding - Diluted (3)

     476,107         254,698   
  

 

 

    

 

 

 

Net earnings (loss) per unit available for common unitholders - Basic and Diluted

   $ 0.44       $ (0.18
  

 

 

    

 

 

 

 

(1) In periods with a net loss, the inclusion of any incremental shares/units is anti-dilutive and, therefore, both basic and diluted shares/units are the same.
(2) As a result of the Merger, 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.
(3) Total weighted average potentially dilutive share awards outstanding (in thousands) were 10,132 and 3,457 for the three months ended March 31, 2012 and 2011, respectively.

 

14.   Financial Instruments and Fair Value Measurements

Derivative Financial Instruments

In the normal course of business, our operations are exposed to global market risks, including the effect of changes in foreign currency exchange rates and interest rates. To manage these risks, we may enter into various derivative contracts. We may use foreign currency contracts, including forwards and options, to manage foreign currency exposure. We may use interest rate swaps or caps to manage the effect of interest rate fluctuations. We do not use derivative financial instruments for trading purposes. The majority of our derivative financial instruments are customized derivative transactions and are not exchange-traded. Management reviews our hedging program, derivative positions, and overall risk management strategy on a regular basis. We only enter into transactions that we believe will be effective at offsetting the underlying risk.

Our use of derivatives does involve the risk that counterparties may default on a derivative contract. We establish exposure limits for each counterparty to minimize this risk and provide counterparty diversification. Substantially all of our derivative exposures are with counterparties that have long-term credit ratings of single-A or better. We enter into master agreements with counterparties that generally allow for netting of certain exposures; therefore, the actual loss we would recognize if all counterparties failed to perform as contracted would be significantly lower. To mitigate pre-settlement risk, minimum credit standards become more stringent as the duration of the derivative financial instrument increases. To minimize the concentration of credit risk, we enter into derivative transactions with a portfolio of financial institutions. Based on these factors, we consider the risk of counterparty default to be minimal.

All derivatives are recognized at fair value in our Consolidated Balance Sheets within the line items Other Assets or Accounts Payable and Accrued Expenses, as applicable. We do not net our derivative position by counterparty for purposes of balance sheet presentation and disclosure. The accounting for gains and losses that result from changes in the fair values of derivative instruments depends on whether the derivatives are designated as, and qualify as, hedging instruments. Derivatives can be designated as fair value hedges, cash flow hedges or hedges of net investments in foreign operations.

 

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PROLOGIS, INC. AND PROLOGIS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

Changes in the fair value of derivatives that are designated and qualify as cash flow hedges are recorded in Accumulated Other Comprehensive Loss in our Consolidated Balance Sheets. We reclassify changes in the fair value of derivatives into the applicable line item in our Consolidated Statements of Operations in which the hedged items are recorded in the same period that the underlying hedged items affect earnings. Due to the high degree of effectiveness between the hedging instruments and the underlying exposures hedged, fluctuations in the value of the derivative instruments will generally be offset by changes in the fair values or cash flows of the underlying exposures being hedged. The changes in fair values of derivatives that were not designated and/or did not qualify as hedging instruments are immediately recognized in earnings.

For derivatives that will be accounted for as hedging instruments in accordance with the accounting standards, we formally designate and document, at inception, the financial instrument as a hedge of a specific underlying exposure, the risk management objective and the strategy for undertaking the hedge transaction. In addition, we formally assess both at inception and at least quarterly thereafter, whether the derivatives used in hedging transactions are effective at offsetting changes in either the fair values or cash flows of the related underlying exposures. Any ineffective portion of a derivative financial instrument’s change in fair value is immediately recognized in earnings. Derivatives not designated as hedges are not speculative and are used to manage our exposure to foreign currency fluctuations but do not meet the strict hedge accounting requirements.

Our interest rate risk management strategy is to limit the impact of future interest rate changes on earnings and cash flows as well as to stabilize interest expense and manage our exposure to interest rate movements. To achieve this objective, we have entered into interest rate swap and cap agreements, which allow us to borrow on a fixed rate basis for longer-term debt issuances. The maximum length of time that we hedge our exposure to future cash flows is typically less than 10 years. We use cash flow hedges to minimize the variability in cash flows of assets or liabilities or forecasted transactions caused by fluctuations in interest rates. We also have entered into interest rate swap agreements which allow us to receive variable-rate amounts from a counterparty in exchange for us making fixed-rate payments over the life of our agreements without the exchange of the underlying notional amount. We had 40 interest rate swap contracts, including 33 contracts denominated in euro, two contracts denominated in British pound sterling, four contracts denominated in Japanese yen and one contract denominated in U.S. dollar, outstanding at March 31, 2012. We also had one interest rate cap contract, denominated in Japanese yen, outstanding at March 31, 2012.

We had $32.5 million and $28.5 million accrued in Accounts Payable and Accrued Expenses in our Consolidated Balance Sheets relating to these unsettled derivative contracts at March 31, 2012 and December 31, 2011, respectively.

We recorded a loss of $0.9 million for ineffectiveness during the three months ended March 31, 2012. We did not have ineffectiveness during the three months ended March 31, 2011. The amount reclassified to interest expense for the three months ended March 31, 2012 was $2.6 million. The amount reclassified to interest expense for the three months ended March 31, 2011 is not considered material. Amounts included in Accumulated Other Comprehensive Loss in our Consolidated Balance Sheet at March 31, 2012 and December 31, 2011 were losses of $48.3 million and $51.7 million, respectively.

We typically designate our interest rate swap and interest rate cap agreements as cash flow hedges as these derivative instruments may be used to manage the interest rate risk on potential future debt issuances or to fix the interest rate on a variable rate debt issuance. The effective portion of the gain or loss on the derivative is reported as a component of Accumulated Other Comprehensive Loss (“AOCI”) in our Consolidated Balance Sheets, and reclassified to Interest Expense in the Consolidated Statements of Operations over the corresponding period of the hedged item. For the next twelve months from March 31, 2012, we estimate that an additional $14.2 million will be reclassified as interest expense. Losses on the derivative representing hedge ineffectiveness are recognized in Interest Expense at the time the ineffectiveness occurred.

The following table summarizes the activity in our derivative instruments (in millions) for the three months ended March 31:

 

     2012      2011  
     Interest Rate
Swaps
    Interest Rate
Caps
     Interest Rate
Swaps
     Interest Rate
Caps
 

Notional amounts at January 1

   $ 1,496.5      $ —         $ 268.1       $ —     

New contracts

     367.0        194.1         —           —     

Acquired contracts

     71.0        —           —           —     

Matured or expired contracts

     (393.3     —           —           —     
  

 

 

   

 

 

    

 

 

    

 

 

 

Notional amounts at March 31

   $ 1,541.2      $ 194.1       $ 268.1       $ —     
  

 

 

   

 

 

    

 

 

    

 

 

 

Fair Value Measurements

We have estimated the fair value of our financial instruments using available market information and valuation methodologies we believe to be appropriate for these purposes. Considerable judgment and a high degree of subjectivity are involved in developing these estimates and, accordingly, they are not necessarily indicative of amounts that we would realize upon disposition.

Fair Value Measurements on a Recurring and Non-recurring Basis

At March 31, 2012, other than the derivatives discussed above and in Note 7, we do not have any significant financial assets or financial liabilities that are measured at fair value on a recurring basis in our consolidated financial statements.

 

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PROLOGIS, INC. AND PROLOGIS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

Non-financial assets measured at fair value on a non-recurring basis in our consolidated financial statements consist of real estate assets and investments in and advances to unconsolidated investees that were subject to impairment charges. The fair value of these assets at March 31, 2012 was not considered material.

Fair Value of Financial Instruments

At March 31, 2012 and December 31, 2011, the carrying amounts of certain of our financial instruments, including cash and cash equivalents, accounts and notes receivable and accounts payable and accrued expenses were representative of their fair values due to the short-term nature of these instruments and the recent acquisition of these items.

At March 31, 2012 and December 31, 2011, the fair value of our senior notes and exchangeable senior notes, has been estimated based upon quoted market prices for the same (Level 1) or similar (Level 2) issues when current quoted market prices are available, the fair value of our Credit Facilities has been estimated by discounting the future cash flows using rates and borrowing spreads currently available to us (Level 3), and the fair value of our secured mortgage debt and assessment bonds that do not have current quoted market prices available has been estimated by discounting the future cash flows using rates currently available to us for debt with similar terms and maturities (Level 3). The fair value of our derivative financial instruments is determined through widely accepted valuation techniques, such as a discounted cash flow analysis on the expected cash flows and a Black Sholes option pricing model (Level 2). The differences in the fair value of our debt from the carrying value in the table below are the result of differences in interest rates and/or borrowing spreads that were available to us at March 31, 2012 and December 31, 2011, as compared with those in effect when the debt was issued or acquired. The senior notes and many of the issues of secured mortgage debt contain pre-payment penalties or yield maintenance provisions that could make the cost of refinancing the debt at lower rates exceed the benefit that would be derived from doing so.

The following table reflects the carrying amounts and estimated fair values of our debt (in thousands):

 

     March 31, 2012      December 31, 2011  
     Carrying Value      Fair Value      Carrying Value      Fair Value  

Debt:

           

Credit Facilities

   $ 850,909       $ 853,463       $ 936,796       $ 940,334   

Senior notes

     4,747,916         5,191,281         4,772,607         5,038,678   

Exchangeable senior notes

     1,322,800         1,456,632         1,315,448         1,431,805   

Secured mortgage debt

     2,806,496         2,939,167         1,725,773         1,861,261   

Secured mortgage debt of consolidated investees

     1,366,774         1,384,553         1,468,637         1,486,040   

Other debt of consolidated investees

     625,419         630,152         775,763         751,075   

Other debt

     660,607         660,067         387,384         389,804   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt

   $ 12,380,921       $ 13,115,315       $ 11,382,408       $ 11,898,997   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

15.   Business Segments

Our business strategy currently includes two operating segments, as follows:

 

   

Real Estate Operations — representing the direct long-term ownership of industrial operating properties. Each operating property is considered to be an individual operating segment having similar economic characteristics that are combined within the reportable segment based upon geographic location. Also included in this segment is the development and acquisition of properties for continued direct ownership, including land held for development and properties currently under development and land we own and lease to customers under ground leases. We own real estate in the Americas (Canada, Mexico and the United States), Europe (Austria, Belgium, the Czech Republic, France, Germany, Hungary, Italy, the Netherlands, Poland, Romania, Slovakia, Spain, Sweden and the United Kingdom) and Asia (China, Japan and Singapore)

 

   

Private Capital — representing the long-term management of unconsolidated co-investment ventures and other joint ventures. We recognize fees and incentives earned for services performed on behalf of the unconsolidated investees and certain third parties. In connection with the Merger, we have reevaluated this segment to exclude our investments and earnings of all of our unconsolidated co-investment ventures to better align the segment with the way management evaluates this line of business. We have reclassified prior periods to reflect this change.

We report the costs associated with our private capital segment for all periods presented in the line item Private Capital Expenses in our Consolidated Statements of Operations. These costs include the direct expenses associated with the asset management of the property funds 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 we own 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. We are further reimbursed by the co-investments ventures for certain expenses associated with managing these property funds.

Each entity we manage is considered to be an individual operating segment having similar economic characteristics that are combined within the reportable segment based upon geographic location. Our operations in the private capital segment are in the Americas (Brazil, Canada, Mexico and the United States), Europe (Belgium, the Czech Republic, France, Germany, Hungary, Italy, the Netherlands, Poland, Slovakia, Spain, Sweden and the United Kingdom) and Asia (China and Japan).

 

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PROLOGIS, INC. AND PROLOGIS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

We present the operations and net gains associated with properties sold to third parties or classified as held for sale as discontinued operations, which results in the restatement of prior year operating results to exclude the items presented as discontinued operations.

Reconciliations are presented below for: (i) each reportable business segment’s revenue from external customers to our Total Revenues; (ii) each reportable business segment’s net operating income from external customers to our Earnings (Loss) before Income Taxes; and (iii) each reportable business segment’s assets to our Total Assets. Our chief operating decision makers rely primarily on net operating income and similar measures to make decisions about allocating resources and assessing segment performance. The applicable components of our Total Revenues, Earnings (Loss) before Income Taxes and Total Assets are allocated to each reportable business segment’s revenues, net operating income and assets. Items that are not directly assignable to a segment, such as certain corporate income and expenses, are reflected as reconciling items. The following reconciliations are presented in thousands:

 

     Three Months Ended
March 31,
 
     2012     2011  

Revenues:

    

Real estate operations (1):

    

Americas

   $ 295,543      $ 150,062   

Europe

     118,544        26,545   

Asia

     53,620        23,426   
  

 

 

   

 

 

 

Total Real Estate Operations segment

     467,707        200,033   
  

 

 

   

 

 

 

Private capital (2):

    

Americas

     18,354        16,149   

Europe

     9,137        13,324   

Asia

     4,866        361   
  

 

 

   

 

 

 

Total Private Capital segment

     32,357        29,834   
  

 

 

   

 

 

 

Total revenues

   $ 500,064      $ 229,867   
  

 

 

   

 

 

 

Net operating income:

    

Real estate operations (3):

    

Americas

   $ 207,603      $ 102,453   

Europe

     89,199        15,284   

Asia

     41,474        16,988   
  

 

 

   

 

 

 

Total Real Estate Operations segment

     338,276        134,725   
  

 

 

   

 

 

 

Private capital (2)(4):

    

Americas

     7,947        9,391   

Europe

     5,384        9,804   

Asia

     2,145        87   
  

 

 

   

 

 

 

Total Private Capital segment

     15,476        19,282   
  

 

 

   

 

 

 

Total segment net operating income

     353,752        154,007   

Reconciling items:

    

General and administrative expenses

     (60,159     (39,183

Merger, acquisition and other integration expenses

     (10,728     (5,988

Impairment of real estate properties

     (3,185     —     

Depreciation and amortization expense

     (188,801     (80,049

Earnings from unconsolidated investees, net

     13,995        13,641   

Interest expense

     (133,447     (90,527

Impairment of goodwill and other assets

     (16,135     —     

Interest and other income (expense), net

     5,101        (2,579

Gains on acquisitions and dispositions of investments in real estate, net (5)

     267,771        3,725   

Foreign currency exchange and derivative gains (losses), net

     (26,775     1,374   

Gain on early extinguishment of debt, net

     5,419        —     
  

 

 

   

 

 

 

Total reconciling items

     (146,944     (199,586
  

 

 

   

 

 

 

Earnings (loss) before income taxes

   $ 206,808      $ (45,579
  

 

 

   

 

 

 

 

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PROLOGIS, INC. AND PROLOGIS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

     March 31,
2012
     December 31,
2011
 

Assets:

     

Real estate operations:

     

Americas

   $ 15,342,375       $ 13,305,147   

Europe

     6,676,158         6,823,814   

Asia

     3,408,290         3,502,033   
  

 

 

    

 

 

 

Total Real Estate Operations segment

     25,426,823         23,630,994   
  

 

 

    

 

 

 

Private capital (6):

     

Americas

     25,514         43,394   

Europe

     62,344         61,946   

Asia

     8,235         9,368   
  

 

 

    

 

 

 

Total Private Capital segment

     96,093         114,708   
  

 

 

    

 

 

 

Total segment assets

     25,522,916         23,745,702   
  

 

 

    

 

 

 

Reconciling items:

     

Investments in and advances to other unconsolidated investees

     2,452,939         2,857,755   

Notes receivable backed by real estate

     247,241         322,834   

Assets held for sale

     102,183         444,850   

Cash and cash equivalents

     343,736         176,072   

Other assets

     198,938         176,699   
  

 

 

    

 

 

 

Total reconciling items

     3,345,037         3,978,210   
  

 

 

    

 

 

 

Total assets

   $ 28,867,953       $ 27,723,912   
  

 

 

    

 

 

 

 

(1) Includes rental income of our industrial properties and land subject to ground leases, as well as development management and other income.
(2) Includes revenues earned from managing our unconsolidated entities and certain third parties.
(3) Includes rental income less rental expenses of our industrial properties and land subject to ground leases, as well as development management and other income less related expenses.
(4) Amounts are reduced by the direct costs we incur to manage the unconsolidated entities and certain third parties that are presented as Private Capital Expenses in our Consolidated Statements of Operations.
(5) Included in 2012 is a $273.0 million gain on acquisition of Prologis California. See Note 2 for further information on this transaction.
(6) Represents management contracts recorded in connection with business combinations and goodwill associated with the Private Capital segment.

 

16.   Supplemental Cash Flow Information

Non-cash investing and financing activities for the three months ended March 31, 2012 and 2011 are as follows:

 

   

See Note 2 for discussion on Q1 Venture Acquisitions.

 

   

During the three months ended March 31, 2012 and 2011, we capitalized portions of the total cost of our stock-based compensation awards of $2.1 million and $1.4 million, respectively, to the investment basis of our real estate or other assets.

 

   

In the first quarter of 2012, we received $2.5 million of ownership interests in certain unconsolidated investees as a portion of our proceeds from the contribution of properties to these entities.

The amount of interest paid in cash, net of amounts capitalized, for the three months ended March 31, 2012 and 2011 was $127.6 million and $68.2 million, respectively.

During the three months ended March 31, 2012 and 2011, cash paid for income taxes, net of refunds, was $9.8 million and $5.9 million, respectively.

 

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PROLOGIS, INC. AND PROLOGIS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

17.   Commitments and Contingencies

Litigation

In the normal course of business, 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 its 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 GAAP, we have not recorded any liability with respect to this matter as of March 31, 2012

 

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Prologis, Inc.:

We have reviewed the accompanying consolidated balance sheet of Prologis, Inc. and subsidiaries (the “Company”) as of March 31, 2012, the related consolidated statements of operations, comprehensive income and cash flows for the three-month periods ended March 31, 2012 and 2011, and the related consolidated statement of equity for the three-month period ended March 31, 2012. These consolidated financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Prologis, Inc. and subsidiaries as of December 31, 2011, and the related consolidated statements of operations, comprehensive income (loss), equity, and cash flows for the year then ended (not presented herein); and in our report dated February 28, 2012, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2011, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

 

KPMG LLP

Denver, Colorado

May 7, 2012

 

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Report of Independent Registered Public Accounting Firm

The Partners

Prologis, L.P.:

We have reviewed the accompanying consolidated balance sheet of Prologis, L.P. and subsidiaries (the “Operating Partnership”) as of March 31, 2012, the related consolidated statements of operations, comprehensive income and cash flows for the three-month periods ended March 31, 2012 and 2011, and the related consolidated statement of capital for the three-month period ended March 31, 2012. These consolidated financial statements are the responsibility of the Operating Partnership’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Prologis, L.P. and subsidiaries as of December 31, 2011, and the related consolidated statements of operations, comprehensive income (loss), capital, and cash flows for the year then ended (not presented herein); and in our report dated February 28, 2012, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2011, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

 

KPMG LLP

Denver, Colorado

May 7, 2012

 

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our Consolidated Financial Statements and the related notes included in Item 1 of this report and our 2011 Annual Report on Form 10-K.

Certain statements contained in this discussion or elsewhere in this report may be deemed “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Words and phrases such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “seeks”, “estimates”, “designed to achieve”, 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 sales or contribution volume or profitability on such sales and contributions, economic and market conditions in the geographic areas where we operate and the availability of capital in existing or new co-investment ventures – are forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Although we believe the expectations reflected in any forward-looking statements are based on reasonable assumptions, we can give no assurance that our expectations will be attained and therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. Many of the factors that may affect outcomes and results are beyond our ability to control. For further discussion of these factors see Part II, “Item 1A. Risk Factors” in our 2011 Annual Report on Form 10-K. References to “we”, “us” and “our” refer to ProLogis and its consolidated subsidiaries prior to the Merger (defined below) and to Prologis, Inc. and its consolidated subsidiaries following the Merger.

Management’s Overview

We are the leading global owner, operator and developer of industrial real estate, focused on global or regional markets across the Americas, Europe and Asia. As of March 31, 2012, we owned, or had investments in, on a consolidated basis or through unconsolidated ventures, properties and development projects totaling approximately 584 million square feet (54.3 million square meters) in 22 countries. These properties are leased to approximately 4,500 customers, including manufacturers, retailers, transportation companies, third-party logistics providers and other enterprises.

Of the approximately 584 million square feet of our owned and managed portfolio as of March 31, 2012:

 

   

approximately 537 million square feet were in our operating portfolio with a gross book value of $41.1 billion that were 92.3% occupied;

 

   

approximately 12 million square feet were in our development portfolio with a total expected investment of $1.4 billion and were 43.5% leased;

 

   

approximately 35 million square feet consisted of properties we manage on behalf of third parties, properties in which we have an ownership interest but do not manage and other properties we own; and

 

   

the largest customer and 25 largest customers accounted for 2.5% and 18.4%, 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, and is the sole general partner of Prologis, L.P. (the “Operating Partnership”). 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.

Our current business strategy includes two operating segments: Real Estate Operations and Private Capital. We generate revenues, earnings, net operating income (calculated on rental income less rental expenses), and funds from operations (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.

 

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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 fund structures and joint ventures, 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.

On June 3, 2011, we completed a merger in which ProLogis shareholders received 0.4464 of a share of AMB Property Corporation (“AMB”) common stock 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 Acquisition”). Since the Merger and PEPR Acquisition did not occur until second quarter 2011, our results for the first quarter of 2011 do not reflect any impact from the Merger or the PEPR Acquisition. Therefore, period to period comparisons may not provide as meaningful information as if those transactions were reflected in both periods. See Note 2 to the Consolidated Financial Statements in Item 1 for more information relating to both the Merger and PEPR Acquisition.

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;

 

   

to strengthen our financial position and build one of the top balance sheets in the real estate investment trust 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 real estate investment trust 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. As of March 31, 2012, global markets represented approximately 83% of our overall owned and managed platform (based on our share of net operating income of the properties) and regional markets represented 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 real estate investment trust 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 will reduce our exposure to foreign currency exchange fluctuations by borrowing in local currency where appropriate, and we might also enter into derivative contracts to swap U.S. dollar denominated debt into obligations denominated in euro and yen. We expect to also lower our currency exposure by holding assets we own 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.

Streamline Private Capital Business

We are rationalizing our private capital business in conjunction with our private capital investors. Some of our legacy co-investment ventures have fee structures that do not adequately compensate us for the services we provide. Also, some ventures have governance or decision making processes in place that we would like to change. 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.

 

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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 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 real estate investment trust 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 substantially all of these synergies already and expect to realize the full amount by the end of 2012. In addition, we are in the process of implementing a new enterprise wide system that will include a property management/billing system (implemented in April 2012), 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. As of January 1, 2012, we 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.

Summary of 2012

During the three months ended March 31, 2012, we completed the following activities in support of our strategic priorities:

 

   

We rationalized two of our unconsolidated co-investment ventures by purchasing our partner’s interest in Prologis North America Fund II (“ NAIF II”) and dissolving Prologis California and dividing the portfolio equally with our partner (collectively “Q1 Venture Acquisitions”). These two transactions increased our real estate by $2.1 billion and debt by $1.4 billion. See Note 2 to our Consolidated Financial Statements in Item 1 for more details.

 

   

We generated aggregate proceeds of $715.4 million from the disposition of land and 70 properties to third parties and the contribution of one property to one of our co-investment ventures and used the proceeds to reduce our outstanding debt.

 

   

We began three development projects in the first quarter of 2012 aggregating 1.5 million square feet with a total expected investment of $211.0 million, including two projects (or 93% of the total expected investment) that were 100% leased prior to development.

 

   

We entered into a multi-currency senior term loan agreement and used the proceeds to pay off two outstanding term loans with the remainder used to pay down our credit facilities.

 

   

As of March 31, 2012, our total owned and managed portfolio, including both consolidated and unconsolidated properties, was 92.3% occupied and 92.7% leased as compared to 92.2% occupied and 92.5% leased at December 31, 2011.

Operational Outlook

U.S. industrial net absorption measured 25.2 million square feet in the first quarter of 2012, down slightly from 27.7 million square feet in the fourth quarter of 2011. Typically, the first quarter has less absorption. Net absorption has been positive for the last seven consecutive quarters, reducing the availability rate by 120 basis points during that time. At 13.4%, 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 with lower relative vacancy levels, such as South Florida, Southern California, New Jersey 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 continue to expect net absorption of 150—175 million square feet in 2012.

Within Europe and Japan, we believe significant supply chain reconfiguration, 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 from the March 2011 earthquake and tsunami, which temporarily interrupted its supply chain. Demand for logistics real estate in emerging markets where we have investments primarily through our co-investment ventures, such as Brazil, China, and Mexico, remains strong due to growing economies.

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, we leased 30.9 million square feet of space during the three months ended March 31, 2012. Excluding the properties that were part of the Merger, we leased 21.9 million square feet of space during the three months ended March 31, 2011. The effective rental rates on leases signed during the first quarter of 2012 in our same store portfolio (as defined below) decreased by 1.1% when compared with the rental rates on the previous leases on that same space. The total owned and managed portfolio was 92.3% occupied at March 31, 2012, up from 92.2% at December 31, 2011. Our existing customers with expiring leases renewed their leases 78.3% of the time during the three months of 2012 as compared with 65.9% in the first quarter of 2011.

Due to the lack of supply of class A facilities, coupled with the decreasing vacancy rates, we expect development volume to increase in our markets. Our development business consists of speculative development, build-to-suit development, value added conversions 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. In response to this emerging demand, we are actively pursuing various development opportunities, as shown with the commencement of the development of three properties in the first quarter of 2012.

 

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Results of Operations

Three Months Ended March 31, 2012 and 2011

Summary

The following table illustrates the net operating income for each of our segments, along with the reconciling items to Earnings (Loss) from Continuing Operations on our Consolidated Statements of Operations in Item 1 for the three months ended March 31 (dollars in thousands):

 

     2012     2011  

Net operating income –Real Estate Operations segment

   $ 338,276      $ 134,725   

Net operating income – Private Capital segment

     15,476        19,282   

Other:

    

General and administrative expenses

     (60,159     (39,183

Merger, acquisition and other integration expenses

     (10,728     (5,988

Impairment of real estate properties and other assets

     (19,320     —     

Depreciation and amortization expense

     (188,801     (80,049

Earnings from unconsolidated investees, net

     13,995        13,641   

Interest expense

     (133,447     (90,527

Interest and other income (expense), net

     5,101        (2,579

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

     267,771        3,725   

Foreign currency exchange and derivative gains (losses), net

     (26,775     1,374   

Gain on early extinguishment of debt, net

     5,419        —     

Income tax expense

     (12,124     (6,369
  

 

 

   

 

 

 

Earnings (loss) from continuing operations

   $ 194,684      $ (51,948
  

 

 

   

 

 

 

See Note 15 to our Consolidated Financial Statements in Item 1 for additional information regarding our segments and a reconciliation of net operating income to Earnings (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. The net operating income from the Real Estate Operations segment for the three months ended March 31, excluding amounts presented as Discontinued Operations in our Consolidated Financial Statements in Item 1, was as follows (in thousands):

 

     2012      2011  

Rental and other income

   $ 467,707       $ 200,033   

Rental and other expenses

     129,431         65,308   
  

 

 

    

 

 

 

Total net operating income—Real Estate Operations segment

   $ 338,276       $ 134,725   
  

 

 

    

 

 

 

The increase in rental income and rental expense in 2012 from 2011 are due primarily to the impact of the Merger and the PEPR Acquisition in the second quarter of 2011, the Q1 Venture Acquisitions, increased occupancy in our consolidated operating portfolio (from 85.7% at March 31, 2011 to 91.9% at March 31, 2012) and the completion and stabilization of new development properties. The results for 2012 included rental income and expenses from properties acquired through the Merger and PEPR Acquisition of $225.3 million and $59.0 million, respectively.

In our consolidated portfolio, we leased 16.8 million square feet for the three months ended March 31, 2012 compared to 10.7 million square feet for the three months ended March 31, 2011. In our total owned and managed portfolio, we calculated the change in effective rental rates on leases signed during the quarter as compared to the previous rent on that same space in our same store portfolio (as defined below). During the first quarter of 2012 and 2011, the percentage decrease was 1.1% and 9.2%, respectively. A decline in rental rates is 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 expenses, were $91.9 million and $43.0 million for the three months ended March 31, 2012 and 2011, respectively.

 

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Our consolidated operating properties are as follows (square feet in thousands):

 

     Number of
Properties
     Square Feet      Occupied %  

March 31, 2012 (1)

     1,937         329,193         91.8

December 31, 2011 (2)

     1,797         291,051         91.4

March 31, 2011

     983         167,563         85.7
  

 

 

    

 

 

    

 

 

 

 

(1) The increase in properties from December 31, 2011 to March 31, 2012 is principally related to the Q1 Venture Acquisitions, as discussed above.
(2) The increase in properties from March 31, 2011 to December 31, 2011 is principally related to 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 $16.9 million and $10.6 million for the three months ended March 31, 2012 and 2011, respectively, and are included in the line item Private Capital Expenses in our Consolidated Statements of Operations in Item I. 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 2012 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 and the Q1 Venture Acquisitions.

The net operating income from the Private Capital segment, representing fees earned reduced by private capital expenses, for the three months ended March 31 was as follows (in thousands):

 

     2012      2011  

Americas (1)

   $ 7,947       $ 9,391   

Europe (2)

     5,384         9,804   

Asia (3)

     2,145         87   
  

 

 

    

 

 

 

Total net operating income—Private Capital segment

   $ 15,476       $ 19,282   
  

 

 

    

 

 

 

 

(1) We had seven unconsolidated operating co-investment ventures as of January 1, 2011. In connection with the Merger, we added three co-investment ventures. During the first quarter of 2012, we dissolved one co-investment venture and acquired 50% of the related portfolio and purchased our partner’s interest in another, leaving eight unconsolidated operating co-investment ventures remaining at March 31, 2012.
(2) Represents the fees earned by us from three and two unconsolidated co-investment ventures for the three months ended March 31, 2012 and 2011, respectively. The increase is due to two co-investment ventures added through the Merger reduced by PEPR that we began consolidating at the end of May 2011.
(3) Represents the fees earned by us from our investments in two and one unconsolidated co-investment ventures for the three months ended March 31, 2012 and 2011, respectively. We sold our investment in a 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.

See Note 4 to our Consolidated Financial Statements in Item 1 for additional information on our unconsolidated investees.

Other Components of Income

General and Administrative (“G&A”) Expense

G&A expenses for the three months ended March 31 consisted of the following (in thousands):

 

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     2012     2011  

Gross G&A expense

   $ 101,814      $ 66,543   

Reported as rental expenses

     (8,158     (4,911

Reported as private capital expenses

     (16,881     (10,552

Capitalized amounts

     (16,616     (11,897
  

 

 

   

 

 

 

Net G&A

   $ 60,159      $ 39,183   
  

 

 

   

 

 

 

The increase in G&A expenses and the various components is due primarily to the Merger, PEPR Acquisition and the larger infrastructure associated with the combined company.

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, which in some cases will be through the end of 2012. In 2011, the costs that were obligations of AMB and expensed pre-Merger are not included in our Consolidated Financial Statements. For the three months ended March 31, 2011, we have included reduction in workforce charges associated with dispositions made in 2011. The following is a breakdown of the costs incurred during the three months ended March 31 (in thousands):

 

     2012      2011  

Termination, severance and transitional employee costs

   $ 7,685       $ 3,807   

Professional fees

     2,216         2,181   

Office closure, travel and other costs

     827         —     
  

 

 

    

 

 

 

Total

   $ 10,728       $ 5,988   
  

 

 

    

 

 

 

Impairment of real estate properties and other assets

During the three months ended March 31, 2012, we recorded an impairment charge of $16.1 million related to the land received in 2011 in exchange for a note receivable.

Depreciation and Amortization

Depreciation and amortization expenses were $188.8 million and $80.0 million for the three months ended March 31, 2012 and 2011, respectively. The increase is primarily due to additional depreciation and amortization expenses associated with the assets (including intangible assets) acquired in the second quarter 2011, through the Merger and PEPR Acquisition, and the Q1 Venture Acquisitions, and completed and leased development properties.

Earnings from Unconsolidated Investees, Net

We recognized net earnings of $14.0 million and $13.6 million for the three months ended March 31, 2012 and 2011, 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 2012 over 2011 is due to the investments we acquired through the Merger, partially offset by the consolidation of PEPR and the Q1 Venture Acquisitions. 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. dollar, 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 4 to our Consolidated Financial Statements in Item I for further breakdown of our share of net earnings recognized.

Interest Expense

Interest expense from continuing operations for the three months ended March 31 included the following components (in thousands):

 

     2012     2011  

Gross interest expense

   $ 148,847      $ 89,023   

Amortization of discount (premium), net

     (6,737     7,838   

Amortization of deferred loan costs

     4,956        4,997   
  

 

 

   

 

 

 

Interest expense before capitalization

     147,066        101,858   

Capitalized amounts

     (13,619     (11,331
  

 

 

   

 

 

 

Net interest expense

   $ 133,447      $ 90,527   
  

 

 

   

 

 

 

Gross interest expense and capitalized amounts increased in 2012 from 2011 primarily due to higher debt levels as a result of the Merger, the PEPR Acquisition and the Q1 Venture Acquisitions in the first quarter of 2012, partially offset by lower effective interest rates.

 

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Our weighted average effective interest rate (including amortization of deferred loan costs) was 4.90% and 6.20% for the three month period ended March 31, 2012 and 2011, respectively. Our future interest expense, both gross and the portion capitalized, will vary depending on, among other things, the level of our development activities. As a result of the Merger and PEPR Acquisition, we increased our debt from $6.4 billion at March 31, 2011 to $12.1 billion at June 30, 2011. We reduced our debt to $11.4 billion at December 31, 2011. As a result of the Q1 Venture Acquisitions, we increased debt to $12.4 billion as of March 31, 2012, which we expect to reduce with proceeds from property sales. See Notes 2 and 7 to our Consolidated Financial Statements in Item 1 and Liquidity and Capital Resources for further discussion of our debt and borrowing costs.

Interest and Other Income (Expense), Net

During the three months ended March 31, 2011, we recognized a $6.9 million charge related to one of our buildings in Japan that was damaged from the earthquake and related tsunami in March 2011.

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

We recognized net gains on acquisitions and dispositions of investments in real estate in continuing operations of $267.8 million during the three months ended March 31, 2012. This included a $273.0 million gain related to the Prologis California transaction. The gains represent the adjustment to fair value of our equity investments at the time we gained control and consolidated the entities. See Note 2 for more details on this transaction.

Foreign Currency Exchange and Derivative Gains (Losses), Net

In connection with the Merger and the exchange offer discussed in Note 7 to our Consolidated Financial Statements in Item 1, 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 changed, which required us 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. We recognized an unrealized loss of $26.8 million for the three months ended March 31, 2012.

Gain on Early Extinguishment of Debt, Net

During the three months ended March 31, 2012, we extinguished some secured mortgage debt, unsecured credit facilities of PEPR and two term loans prior to maturity, which resulted in the recognition of $5.4 million in net gains. 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.

Income Tax Expense

During the three months ended March 31, 2012 and 2011, our current income tax expense was $11.1 million and $5.5 million, respectively. We recognize current income tax expense for income taxes incurred by our taxable real estate investment trust 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.

During the three months ended 2012 and 2011, we recognized a net deferred tax expense of $1.1 million and $0.9 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.

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 1.

During the three months ended March 31, 2012, we disposed of land subject to ground leases and 70 properties aggregating 7.9 million square feet to third parties, most of which was included in Assets Held for Sale at December 31, 2011. The net gains on disposition of these properties, net of taxes, are reflected in discontinued operations, along with the results of operations of these properties for all periods presented. During all of 2011, we disposed of land subject to ground leases and 94 properties aggregating 10.7 million square feet to third parties.

As of March 31, 2012, we had land and nine operating properties that met the criteria to be recorded as held for sale, including the real estate investment balances and the related assets and liabilities of each property.

See Note 6 to our Consolidated Financial Statements in Item 1.

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. dollar 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).

 

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During the three months ended March 31, 2012 and 2011, we recorded unrealized losses in Other Comprehensive Income (Loss) of $41.2 million and gains of $203.9 million, respectively, related to foreign currency translations of our foreign subsidiaries into U.S. dollar upon consolidation. In 2012, we recorded net unrealized losses due to the weakening of yen to the U.S. dollar, from the beginning to the end of the period. In 2011, the unrealized gains are mainly the result of the strengthening of the euro and pound sterling to the U.S. dollar, from the beginning to the end of the period.

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 (square feet in thousands):

 

     March 31, 2012      December 31, 2011 (1)      March 31, 2011  
     Number  of
Properties
     Square Feet      Number  of
Properties
     Square Feet      Number  of
Properties
     Square Feet  

Consolidated

     1,937         329,193         1,797         291,051         983         167,563   

Unconsolidated

     1,158         208,775         1,403         267,752         1,179         255,248   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Totals

     3,095         537,968