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 June 30, 2013

 

¨ 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

(Registrants’ 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 August 1, 2013 was approximately 498,605,600.

 

 

 


Table of Contents

EXPLANATORY NOTE

This report combines the quarterly reports on Form 10-Q for the period ended June 30, 2013 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 June 30, 2013, the REIT owned an approximate 99.62% common general partnership interest in the Operating Partnership and 100% of the preferred units in the Operating Partnership. The remaining approximate 0.38% common limited partnership interests are owned by non-affiliated investors and certain current and former directors and officers of the REIT. As the sole general partner of the Operating Partnership, the REIT has full, exclusive and complete responsibility and discretion in the day-to-day management and control of the Operating Partnership.

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

We believe combining the 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 entities. 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 entities 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 – June 30, 2013 and December 31, 2012

     1   
   

Consolidated Statements of Operations – Three and Six Months Ended June 30, 2013 and 2012

     2   
   

Consolidated Statements of Comprehensive Income (Loss) – Three and Six Months Ended June 30, 2013 and 2012

     3   
   

Consolidated Statement of Equity – Six Months Ended June 30, 2013

     3   
   

Consolidated Statements of Cash Flows – Six Months Ended June 30, 2013 and 2012

     4   
 

Prologis, L.P.:

  
   

Consolidated Balance Sheets – June 30, 2013 and December 31, 2012

     5   
   

Consolidated Statements of Operations – Three and Six Months Ended June 30, 2013 and 2012

     6   
   

Consolidated Statements of Comprehensive Income (Loss) – Three and Six Months Ended June 30, 2013 and 2012

     7   
   

Consolidated Statement of Capital – Six Months Ended June 30, 2013

     7   
   

Consolidated Statements of Cash Flows – Six Months Ended June 30, 2013 and 2012

     8   
 

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

  
   

Notes to Consolidated Financial Statements

     9   
   

Reports of Independent Registered Public Accounting Firm

     28   
  Item 2.  

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

     30   
  Item 3.  

Quantitative and Qualitative Disclosures About Market Risk

     47   
  Item 4.  

Controls and Procedures

     48   
PART II.  

Other Information

  
  Item 1.  

Legal Proceedings

     49   
  Item 1A.  

Risk Factors

     49   
  Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

     49   
  Item 3.  

Defaults Upon Senior Securities

     49   
  Item 4.  

Mine Safety Disclosures

     49   
  Item 5.  

Other Information

     49   
  Item 6.  

Exhibits

     49   

 

i


Table of Contents

PART 1.

Item  1. Financial Statements

PROLOGIS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

 

    

June 30,

2013

    December 31,  
     (Unaudited)     2012  

ASSETS

    

Investments in real estate properties

   $ 20,898,865      $ 25,809,123   

Less accumulated depreciation

     2,422,909        2,480,660   
  

 

 

   

 

 

 

Net investments in real estate properties

     18,475,956        23,328,463   

Investments in and advances to unconsolidated entities

     3,884,766        2,195,782   

Notes receivable backed by real estate

     189,636        188,000   

Assets held for sale

     25,330        26,027   
  

 

 

   

 

 

 

Net investments in real estate

     22,575,688        25,738,272   

Cash and cash equivalents

     385,424        100,810   

Restricted cash

     26,642        176,926   

Accounts receivable

     124,980        171,084   

Other assets

     924,834        1,123,053   
  

 

 

   

 

 

 

Total assets

   $ 24,037,568      $ 27,310,145   
  

 

 

   

 

 

 

LIABILITIES AND EQUITY

    

Liabilities:

    

Debt

   $ 8,417,310      $ 11,790,794   

Accounts payable and accrued expenses

     651,081        611,770   

Other liabilities

     628,618        1,115,911   

Liabilities related to assets held for sale

     18,057        18,334   
  

 

 

   

 

 

 

Total liabilities

     9,715,066        13,536,809   
  

 

 

   

 

 

 

Equity:

    

Prologis, Inc. stockholders’ equity:

    

Preferred stock

     100,000        582,200   

Common stock: $0.01 par value; 498,597 shares and 461,770 shares issued and outstanding at June 30, 2013 and at December 31, 2012, respectively

     4,986        4,618   

Additional paid-in capital

     17,939,829        16,411,855   

Accumulated other comprehensive loss

     (541,355     (233,563

Distributions in excess of net earnings

     (3,704,034     (3,696,093
  

 

 

   

 

 

 

Total Prologis stockholders’ equity

     13,799,426        13,069,017   

Noncontrolling interests

     523,076        704,319   
  

 

 

   

 

 

 

Total equity

     14,322,502        13,773,336   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 24,037,568      $ 27,310,145   
  

 

 

   

 

 

 

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

 

1


Table of Contents

PROLOGIS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per share amounts)

 

    

Three Months Ended

June 30,

   

Six Months Ended

June 30,

 
     2013     2012     2013     2012  

Revenues:

        

Rental income

   $ 294,267      $ 372,010      $ 648,913      $ 727,896   

Rental recoveries

     78,470        96,449        177,207        182,961   

Investment management income

     43,608        30,993        77,243        63,350   

Development management and other income

     3,129        1,729        5,321        4,842   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     419,474        501,181        908,684        979,049   
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

        

Rental expenses

     112,581        125,918        245,907        244,151   

Investment management expenses

     25,006        15,075        44,915        31,956   

General and administrative expenses

     54,909        51,415        111,106        111,574   

Depreciation and amortization

     158,965        178,756        335,454        358,315   

Other expenses

     6,771        7,227        11,124        11,562   

Merger, acquisition and other integration expenses

     —          21,186        —          31,914   

Impairment of real estate properties

     —          —         —          3,185   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     358,232        399,577        748,506        792,657   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     61,242        101,604        160,178        186,392   

Other income (expense):

        

Earnings from unconsolidated entities, net

     8,421        3,889        33,189        17,884   

Interest expense

     (92,508     (127,582     (207,498     (260,551

Interest and other income, net

     4,492        5,912        16,119        11,013   

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

     61,035        520        399,880        268,291   

Foreign currency and derivative gains (losses), net

     (7,744     12,753        (6,860     (14,022

Gains (losses) on early extinguishment of debt, net

     (32,608     (500     (49,959     4,919   

Impairment of other assets

     —          —         —          (16,135
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense)

     (58,912     (105,008     184,871        11,399   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) before income taxes

     2,330        (3,404     345,049        197,791   

Current income tax expense

     24,838        17,995        80,345        29,068   

Deferred income tax benefit

     (4,350     (9,920     (7,991     (8,869
  

 

 

   

 

 

   

 

 

   

 

 

 

Total income tax expense

     20,488        8,075        72,354        20,199   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) from continuing operations

     (18,158     (11,479     272,695        177,592   
  

 

 

   

 

 

   

 

 

   

 

 

 

Discontinued operations:

        

Income (loss) attributable to disposed properties and assets held for sale

     (294     6,273        (49     19,051   

Net gains on dispositions

     13,467        9,874        19,301        21,123   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total discontinued operations

     13,173        16,147        19,252        40,174   
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated net earnings (loss)

     (4,985     4,668        291,947        217,766   

Net loss (earnings) attributable to noncontrolling interests

     7,284        (2,739     (4,819     (2,857
  

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings attributable to controlling interests

     2,299        1,929        287,128        214,909   

Preferred stock dividends

     3,816        10,049        14,121        20,616   

Loss on preferred stock redemption

     —          —         9,108        —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss) attributable to common stockholders

   $ (1,517   $ (8,120   $ 263,899      $ 194,293   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding - Basic

     486,032        459,878        473,892        459,549   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding - Diluted

     486,032        459,878        480,009        464,696   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss) per share attributable to common stockholders - Basic:

        

Continuing operations

   $ (0.03   $ (0.06   $ 0.52      $ 0.33   

Discontinued operations

     0.03        0.04        0.04        0.09   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss) per share attributable to common stockholders - Basic

   $ 0.00      $ (0.02   $ 0.56      $ 0.42   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

        

Continuing operations

   $ (0.03   $ (0.06   $ 0.51      $ 0.33   

Discontinued operations

     0.03        0.04        0.04        0.09   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 0.00      $ (0.02   $ 0.55      $ 0.42   
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividends per common share

   $ 0.28      $ 0.28      $ 0.56      $ 0.56   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

2


Table of Contents

PROLOGIS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(In thousands)

 

    

Three Months Ended

June 30,

   

Six Months Ended

June 30,

 
     2013     2012     2013     2012  

Consolidated net earnings (loss)

   $ (4,985   $ 4,668      $ 291,947      $ 217,766   

Other comprehensive income (loss):

        

Foreign currency translation losses, net

     (51,998     (127,443     (338,252     (168,684

Unrealized gains and amortization on derivative contracts, net

     6,565        1,247        19,201        4,702   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

     (50,418     (121,528     (27,104     53,784   

Net loss (earnings) attributable to noncontrolling interests

     7,284        (2,739     (4,819     (2,857

Comprehensive loss attributable to noncontrolling interests

     7,864        11,959        11,259        12,492   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) attributable to common stockholders

   $ (35,270   $ (112,308   $ (20,664   $ 63,419   
  

 

 

   

 

 

   

 

 

   

 

 

 

PROLOGIS, INC.

CONSOLIDATED STATEMENT OF EQUITY

Six Months Ended June 30, 2013

(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, 2013

  $ 582,200        461,770      $ 4,618      $ 16,411,855      $ (233,563   $ (3,696,093   $ 704,319      $ 13,773,336   

Consolidated net earnings

    —          —          —          —          —          287,128        4,819        291,947   

Effect of common stock plans

    —          1,149        11        55,328        —          —          —          55,339   

Issuance of stock in equity offering, net of issuance costs

    —          35,650        357        1,437,688        —          —          —          1,438,045   

Redemption of preferred stock

    (482,200     —          —          8,593        —          (9,108     —          (482,715

Issuance of warrants

    —          —          —          32,359        —          —          —          32,359   

Capital contributions, net

    —          —          —          —          —          —          77,823        77,823   

Settlement of noncontrolling interests

    —          28        —          (4,994     —          —          (245,862     (250,856

Foreign currency translation losses, net

    —          —          —          —          (326,920     —          (11,332     (338,252

Unrealized gains and amortization on derivative contracts, net

    —          —          —          —          19,128        —          73        19,201   

Distributions and allocations

    —          —          —          (1,000     —          (285,961     (6,764     (293,725
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of June 30, 2013

  $ 100,000        498,597      $ 4,986      $ 17,939,829      $ (541,355   $ (3,704,034   $ 523,076      $ 14,322,502   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

3


Table of Contents

PROLOGIS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

    

Six Months Ended

June 30,

 
     2013     2012  

Operating activities:

    

Consolidated net earnings

   $ 291,947      $ 217,766   

Adjustments to reconcile net earnings to net cash provided by operating activities:

    

Straight-lined rents

     (27,205     (35,205

Stock-based compensation awards, net

     21,990        16,169   

Depreciation and amortization

     336,843        379,602   

Earnings from unconsolidated entities, net

     (33,189     (17,884

Distributions and changes in operating receivables from unconsolidated entities

     51,312        14,461   

Amortization of debt and lease intangibles

     4,399        13,144   

Non-cash merger, acquisition and other integration expenses

     —          5,379   

Impairment of real estate properties and other assets

     —          19,320   

Net gains on dispositions in discontinued operations

     (19,301     (21,123

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

     (399,880     (268,291

Losses (gains) on early extinguishment of debt, net

     49,959        (4,919

Unrealized foreign currency and derivative losses, net

     5,923        9,717   

Deferred income tax benefit

     (7,991     (8,869

Decrease (increase) in restricted cash, accounts receivable and other assets

     54,979        (103,574

Decrease in accounts payable and accrued expenses and other liabilities

     (126,218     (55,588
  

 

 

   

 

 

 

Net cash provided by operating activities

     203,568        160,105   
  

 

 

   

 

 

 

Investing activities:

    

Real estate development activity

     (313,769     (381,487

Real estate acquisitions, net of cash received

     (336,956     (74,823

Tenant improvements and lease commissions on previously leased space

     (70,678     (60,822

Non-development capital expenditures

     (30,109     (24,915

Investments in and advances to unconsolidated entities, net

     (598,371     (50,366

Return of investment from unconsolidated entities

     147,661        208,834   

Proceeds from dispositions and contributions of real estate properties

     3,620,074        891,266   

Acquisition of NAIF II and other unconsolidated entities, net of cash received

     —          (317,328
  

 

 

   

 

 

 

Net cash provided by investing activities

     2,417,852        190,359   
  

 

 

   

 

 

 

Financing activities:

    

Proceeds from issuance of common stock, net

     1,502,342        23,064   

Dividends paid on common stock

     (270,776     (259,922

Dividends paid on preferred stock

     (17,414     (26,964

Redemption of preferred stock

     (482,500     —    

Noncontrolling interest contributions

     76,984        36,920   

Noncontrolling interest distributions

     (8,824     (7,825

Purchase of noncontrolling interest

     (243,046     (127,523

Debt and equity issuance costs paid

     (45,352     (9,694

Net proceeds from (payments on) credit facilities, net

     (194,028     220,742   

Repurchase of debt

     (1,776,913     (1,314,387

Proceeds from issuance of debt

     256,825        1,378,119   

Payments on debt

     (1,083,075     (152,431
  

 

 

   

 

 

 

Net cash used in financing activities

     (2,285,777     (239,901
  

 

 

   

 

 

 

Effect of foreign currency exchange rate changes on cash

     (51,029     6,996   

Net increase in cash and cash equivalents

     284,614        117,559   

Cash and cash equivalents, beginning of period

     100,810        176,072   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 385,424      $ 293,631   
  

 

 

   

 

 

 

See Note 14 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)

 

     June 30,
2013
(Unaudited)
     December 31,
2012
 

ASSETS

  

Investments in real estate properties

   $ 20,898,865       $ 25,809,123   

Less accumulated depreciation

     2,422,909         2,480,660   
  

 

 

    

 

 

 

Net investments in real estate properties

     18,475,956         23,328,463   

Investments in and advances to unconsolidated entities

     3,884,766         2,195,782   

Notes receivable backed by real estate

     189,636         188,000   

Assets held for sale

     25,330         26,027   
  

 

 

    

 

 

 

Net investments in real estate

     22,575,688         25,738,272   

Cash and cash equivalents

     385,424         100,810   

Restricted cash

     26,642         176,926   

Accounts receivable

     124,980         171,084   

Other assets

     924,834         1,123,053   
  

 

 

    

 

 

 

Total assets

   $ 24,037,568       $ 27,310,145   
  

 

 

    

 

 

 

LIABILITIES AND CAPITAL

     

Liabilities:

     

Debt

   $ 8,417,310       $ 11,790,794   

Accounts payable and accrued expenses

     651,081         611,770   

Other liabilities

     628,618         1,115,911   

Liabilities related to assets held for sale

     18,057         18,334   
  

 

 

    

 

 

 

Total liabilities

     9,715,066         13,536,809   
  

 

 

    

 

 

 

Capital:

     

Partners’ capital:

     

General partner - preferred

     100,000         582,200   

General partner - common

     13,699,426         12,486,817   

Limited partners

     52,081         51,194   
  

 

 

    

 

 

 

Total partners’ capital

     13,851,507         13,120,211   

Noncontrolling interests

     470,995         653,125   
  

 

 

    

 

 

 

Total capital

     14,322,502         13,773,336   
  

 

 

    

 

 

 

Total liabilities and capital

   $ 24,037,568       $ 27,310,145   
  

 

 

    

 

 

 

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

 

5


Table of Contents

PROLOGIS, L.P.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per unit amounts)

 

    

Three Months Ended

June 30,

   

Six Months Ended

June 30,

 
     2013     2012     2013     2012  

Revenues:

        

Rental income

   $ 294,267      $ 372,010      $ 648,913      $ 727,896   

Rental recoveries

     78,470        96,449        177,207        182,961   

Investment management income

     43,608        30,993        77,243        63,350   

Development management and other income

     3,129        1,729        5,321        4,842   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     419,474        501,181        908,684        979,049   
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

        

Rental expenses

     112,581        125,918        245,907        244,151   

Investment management expenses

     25,006        15,075        44,915        31,956   

General and administrative expenses

     54,909        51,415        111,106        111,574   

Depreciation and amortization

     158,965        178,756        335,454        358,315   

Other expenses

     6,771        7,227        11,124        11,562   

Merger, acquisition and other integration expenses

     —         21,186        —         31,914   

Impairment of real estate properties

     —         —         —         3,185   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     358,232        399,577        748,506        792,657   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     61,242        101,604        160,178        186,392   

Other income (expense):

        

Earnings from unconsolidated entities, net

     8,421        3,889        33,189        17,884   

Interest expense

     (92,508     (127,582     (207,498     (260,551

Interest and other income, net

     4,492        5,912        16,119        11,013   

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

     61,035        520        399,880        268,291   

Foreign currency and derivative gains (losses), net

     (7,744     12,753        (6,860     (14,022

Gains (losses) on early extinguishment of debt, net

     (32,608     (500     (49,959     4,919   

Impairment of other assets

     —         —         —         (16,135
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense)

     (58,912     (105,008     184,871        11,399   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) before income taxes

     2,330        (3,404     345,049        197,791   

Current income tax expense

     24,838        17,995        80,345        29,068   

Deferred income tax benefit

     (4,350     (9,920     (7,991     (8,869
  

 

 

   

 

 

   

 

 

   

 

 

 

Total income tax expense

     20,488        8,075        72,354        20,199   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) from continuing operations

     (18,158     (11,479     272,695        177,592   
  

 

 

   

 

 

   

 

 

   

 

 

 

Discontinued operations:

        

Income (loss) attributable to disposed properties and assets held for sale

     (294     6,273        (49     19,051   

Net gains on dispositions

     13,467        9,874        19,301        21,123   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total discontinued operations

     13,173        16,147        19,252        40,174   
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated net earnings (loss)

     (4,985     4,668        291,947        217,766   

Net loss (earnings) attributable to noncontrolling interests

     7,209        (2,792     (3,762     (1,969
  

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings attributable to controlling interests

     2,224        1,876        288,185        215,797   

Preferred unit distributions

     3,816        10,049        14,121        20,616   

Loss on preferred unit redemption

     —         —         9,108        —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss) attributable to common unitholders

   $ (1,592   $ (8,173   $ 264,956      $ 195,181   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common units outstanding - Basic

     487,925        461,842        475,785        461,559   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common units outstanding - Diluted

     487,925        461,842        480,009        464,696   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

        

Continuing operations

   $ (0.03   $ (0.05   $ 0.52      $ 0.33   

Discontinued operations

     0.03        0.03        0.04        0.09   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 0.00      $ (0.02   $ 0.56      $ 0.42   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

        

Continuing operations

   $ (0.03   $ (0.05   $ 0.51      $ 0.33   

Discontinued operations

     0.03        0.03        0.04        0.09   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 0.00      $ (0.02   $ 0.55      $ 0.42   
  

 

 

   

 

 

   

 

 

   

 

 

 

Distributions per common unit

   $ 0.28      $ 0.28      $ 0.56      $ 0.56   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

 

6


Table of Contents

PROLOGIS, L.P.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(In thousands)

 

    

Three Months Ended

June 30,

   

Six Months Ended

June 30,

 
     2013     2012     2013     2012  

Consolidated net earnings (loss)

   $ (4,985   $ 4,668      $ 291,947      $ 217,766   

Other comprehensive income (loss):

        

Foreign currency translation losses, net

     (51,998     (127,443     (338,252     (168,684

Unrealized gains and amortization on derivative contracts, net

     6,565        1,247        19,201        4,702   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

     (50,418     (121,528     (27,104     53,784   

Net loss (earnings) attributable to noncontrolling interests

     7,209        (2,792     (3,762     (1,969

Comprehensive loss attributable to noncontrolling interests

     7,801        11,333        10,089        11,866   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) attributable to common unitholders

   $ (35,408   $ (112,987   $ (20,777   $ 63,681   
  

 

 

   

 

 

   

 

 

   

 

 

 

PROLOGIS, L.P.

CONSOLIDATED STATEMENT OF CAPITAL

Six Months Ended June 30, 2013

(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, 2013

     21,300      $ 582,200        461,770       $ 12,486,817        1,893       $ 51,194      $ 653,125      $ 13,773,336   

Consolidated net earnings

     —          —          —           287,128        —           1,057        3,762        291,947   

Effect of REIT’s common stock plans

     —          —          1,149         55,339        —           —          —          55,339   

Issuance of units in exchange for contribution of equity offering proceeds

     —          —          35,650         1,438,045        —           —          —          1,438,045   

Redemption of preferred units

     (19,300     (482,200     —           (515     —           —          —          (482,715

Issuance of warrants by the REIT

     —          —          —           32,359        —           —          —          32,359   

Capital contributions, net

     —          —          —           —          —           —          77,823        77,823   

Settlement of noncontrolling interests

     —          —          28         (4,994     —           —          (245,862     (250,856

Foreign currency translation losses, net

     —          —          —           (326,920     —           (1,243     (10,089     (338,252

Unrealized gains and amortization on derivative contracts, net

     —          —          —           19,128        —           73        —          19,201   

Distributions and allocations

     —          —          —           (286,961     —           1,000        (7,764     (293,725
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance as of June 30, 2013

     2,000      $ 100,000        498,597       $ 13,699,426        1,893       $ 52,081      $ 470,995      $ 14,322,502   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

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

 

7


Table of Contents

PROLOGIS, L.P.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

    

Six Months Ended

June 30,

 
     2013     2012  

Operating activities:

    

Consolidated net earnings

   $ 291,947      $ 217,766   

Adjustments to reconcile net earnings to net cash provided by operating activities:

    

Straight-lined rents

     (27,205     (35,205

REIT stock-based compensation awards, net

     21,990        16,169   

Depreciation and amortization

     336,843        379,602   

Earnings from unconsolidated entities, net

     (33,189     (17,884

Distributions and changes in operating receivables from unconsolidated entities

     51,312        14,461   

Amortization of debt and lease intangibles

     4,399        13,144   

Non-cash merger, acquisition and other integration expenses

     —          5,379   

Impairment of real estate properties and other assets

     —          19,320   

Net gains on dispositions in discontinued operations

     (19,301     (21,123

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

     (399,880     (268,291

Losses (gains) on early extinguishment of debt, net

     49,959        (4,919

Unrealized foreign currency and derivative losses, net

     5,923        9,717   

Deferred income tax benefit

     (7,991     (8,869

Decrease (increase) in restricted cash, accounts receivable and other assets

     54,979        (103,574

Decrease in accounts payable and accrued expenses and other liabilities

     (126,218     (55,588
  

 

 

   

 

 

 

Net cash provided by operating activities

     203,568        160,105   
  

 

 

   

 

 

 

Investing activities:

    

Real estate development activity

     (313,769     (381,487

Real estate acquisitions, net of cash received

     (336,956     (74,823

Tenant improvements and lease commissions on previously leased space

     (70,678     (60,822

Non-development capital expenditures

     (30,109     (24,915

Investments in and advances to unconsolidated entities, net

     (598,371     (50,366

Return of investment from unconsolidated entities

     147,661        208,834   

Proceeds from dispositions and contributions of real estate properties

     3,620,074        891,266   

Acquisition of NAIF II and other unconsolidated entities, net of cash received

     —          (317,328
  

 

 

   

 

 

 

Net cash provided by investing activities

     2,417,852        190,359   
  

 

 

   

 

 

 

Financing activities:

    

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

     1,502,342        23,064   

Distributions paid on common partnership units

     (271,836     (266,529

Distributions paid on preferred units

     (17,414     (26,964

Redemption of preferred stock

     (482,500     —    

Noncontrolling interest contributions

     76,984        36,920   

Noncontrolling interest distributions

     (7,764     (6,722

Purchase of noncontrolling interest

     (243,046     (122,019

Debt and equity issuance costs paid

     (45,352     (9,694

Net proceeds from (payments on) credit facilities, net

     (194,028     220,742   

Repurchase of debt

     (1,776,913     (1,314,387

Proceeds from issuance of debt

     256,825        1,378,119   

Payments on debt

     (1,083,075     (152,431
  

 

 

   

 

 

 

Net cash used in financing activities

     (2,285,777     (239,901
  

 

 

   

 

 

 

Effect of foreign currency exchange rate changes on cash

     (51,029     6,996   

Net increase in cash and cash equivalents

     284,614        117,559   

Cash and cash equivalents, beginning of period

     100,810        176,072   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 385,424      $ 293,631   
  

 

 

   

 

 

 

See Note 14 for information on non-cash investing and financing activities and other information.

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

 

8


Table of Contents

PROLOGIS, INC. AND PROLOGIS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

1. General

Business. Prologis, Inc. (the “REIT”) 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 primarily in global and regional markets throughout the Americas, Europe and Asia. Our current business strategy includes two reportable business segments: Real Estate Operations and Strategic Capital Management. Our Real Estate Operations segment represents the long-term ownership of industrial properties. Our Strategic Capital Management segment (previously referred to as Private Capital) represents the long-term management of co-investment ventures and other unconsolidated entities. See Note 13 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 June 30, 2013, the REIT owned an approximate 99.62% common general partnership interest in the Operating Partnership, and 100% of the preferred units. The remaining approximate 0.38% common limited partnership interests are owned by non-affiliated investors and certain current and former directors and officers of the REIT. As the sole general partner of the Operating Partnership, the REIT has full, exclusive and complete responsibility and discretion in the day-to-day management and control of the Operating Partnership. We operate the REIT and the Operating Partnership as one enterprise. The management of the REIT consists of the same members as the management of the Operating Partnership. These members are officers of the REIT and employees of the Operating Partnership or one of its direct or indirect subsidiaries. As general partner with control of the Operating Partnership, the REIT consolidates the Operating Partnership for financial reporting purposes, and the REIT does not have significant assets other than its investment in the Operating Partnership. Therefore, the assets and liabilities of the REIT and the Operating Partnership are the same on their respective financial statements.

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, 2012 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 2012 have been reclassified to conform to the 2013 financial statement presentation.

Recent Accounting Pronouncements. In March 2013, the FASB issued an accounting standard update on the accounting for currency translation adjustment (“CTA”) when a parent sells or transfers part of its ownership interest in a foreign subsidiary. When a company sells a subsidiary or group of assets that constitute a business while maintaining ownership of the foreign entity in which those assets or subsidiary reside, a complete or substantially complete liquidation of the foreign entity is required in order for a parent entity to release CTA to earnings. However, for a company that sells all or part of its ownership interest in a foreign entity, CTA is released upon the loss of a controlling financial interest in a consolidated foreign entity or partial sale of an equity method investment in a foreign entity. For step acquisitions, the CTA associated with the previous equity-method investment is fully released when control is obtained and consolidation occurs. The guidance is effective for us on January 1, 2014, and we do not expect the guidance to have a material impact on our Consolidated Financial Statements.

In February 2013, the FASB issued an accounting standard update that requires disclosure of the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income. The new guidance was effective for us on January 1, 2013 for annual and interim periods. We adopted this standard as of January 1, 2013. See Note 12 for additional disclosure.

In December 2011, the FASB issued an accounting standard update that requires disclosures about offsetting and related arrangements to enable financial statement 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. In January 2013, the FASB clarified that the guidance applies only to derivatives, repurchase agreements and reverse purchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with specific criteria under GAAP or subject to a master netting arrangement or similar agreement. We adopted this standard as of January 1, 2013 and it did not 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 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. We adopted this standard as of January 1, 2013 and it did not have any impact on our Consolidated Financial Statements.

 

9


Table of Contents

PROLOGIS, INC. AND PROLOGIS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

2. Business Combinations

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 purchase price allocation is complete and adjustments recorded during the one year measurement period were not considered to be material to our financial position or results of operations. The allocation of net assets acquired was $1.6 billion in real estate assets, $27.3 million of net other assets and $875.4 million in debt. We did not record a gain or loss with this transaction, as the carrying value of our investment was equal to the estimated fair value.

On February 22, 2012, we dissolved the unconsolidated co-investment venture Prologis California and divided the portfolio equally with our partner. The net value of the assets and liabilities distributed represented 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 for the six months ended June 30, 2012. 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 purchase price allocation is complete and adjustments recorded during the one year measurement period were not considered to be material to our financial position or results of operations. The allocation of net assets acquired was $496.3 million in real estate assets, $17.7 million of net other assets and $150.0 million in debt.

 

3. Real Estate

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

 

     June 30,      December 31,  
     2013      2012  

Industrial operating properties (1):

     

Improved land

   $ 4,141,908       $ 5,317,123   

Buildings and improvements

     13,613,747         17,291,125   

Development portfolio, including cost of land (2)

     939,794         951,643   

Land (3)

     1,710,583         1,794,364   

Other real estate investments (4)

     492,833         454,868   
  

 

 

    

 

 

 

Total investments in real estate properties

     20,898,865         25,809,123   

Less accumulated depreciation

     2,422,909         2,480,660   
  

 

 

    

 

 

 

Net investments in properties

   $ 18,475,956       $ 23,328,463   
  

 

 

    

 

 

 

 

(1) At June 30, 2013 and December 31, 2012, we had 1,652 and 1,853 industrial properties consisting of 263.0 million square feet and 316.3 million square feet, respectively. In 2013, in connection with our two new ventures in Japan and Europe, we contributed 207 properties with a net carrying value of $4.6 billion, consisting of 58.3 million square feet for gross proceeds of $4.9 billion. In connection with the wind down of Japan Fund 1 in June 2013, we purchased 14 properties aggregating 1.8 million square feet with an estimated value of $212.5 million from the venture. See Note 4 for further discussion on these transactions.
(2) At June 30, 2013, the development portfolio consisted of 31 properties aggregating 15.3 million square feet under development with estimated completion dates primarily in 2013 and 2014 and 12 properties aggregating 2.8 million square feet of pre-stabilized completed properties. At December 31, 2012, the development portfolio consisted of 30 properties aggregating 13.2 million square feet that were under development and 15 properties aggregating 4.8 million square feet that were pre-stabilized completed properties.
(3) Land consisted of 10,392 acres and 10,915 acres at June 30, 2013 and December 31, 2012, respectively, and included land parcels that we may develop or sell depending on market conditions and other factors.
(4) Included in other investments were: (i) certain non-industrial real estate; (ii) our corporate office buildings; (iii) land parcels that are ground leased to third parties; (iv) certain infrastructure costs related to projects we are developing on behalf of others; (v) earnest money deposits associated with potential acquisitions; (vi) restricted funds that are held in escrow pending the completion of tax-deferred exchange transactions involving operating properties; and (vii) costs related to future development projects, including purchase options on land.

At June 30, 2013, excluding our assets held for sale, we owned real estate properties 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 six months ended June 30, 2013, we recognized Gains on Acquisitions and Dispositions of Investments in Real Estate, Net in continuing operations of $399.9 million. This included gains of $1.8 million and $337.9 million, net of the deferral of the gains due to our ongoing investment from the contributions of properties in the first quarter to our new ventures in Europe and Japan, respectively. Also included is a $56.9 million gain related to the contribution of one property to our new venture in Japan and the wind down of Prologis Japan Fund I during the second quarter. See Note 4 for further discussion of these transactions.

 

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PROLOGIS, INC. AND PROLOGIS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

See Note 5 for further discussion of properties we sold to third parties that are reported in discontinued operations.

 

4. Unconsolidated Entities

Summary of Investments

We have investments in entities through a variety of ventures. We co-invest in entities that own multiple properties with strategic 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 15-50%. 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 9 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 unconsolidated joint ventures, collectively, as unconsolidated entities.

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

 

     June 30,      December 31,  
     2013      2012  

Unconsolidated co-investment ventures

   $ 3,708,196       $ 2,013,080   

Other joint ventures

     176,570         182,702   
  

 

 

    

 

 

 

Totals

   $ 3,884,766       $ 2,195,782   
  

 

 

    

 

 

 

Unconsolidated Co-Investment Ventures

As of June 30, 2013, we had investments in and managed 12 unconsolidated co-investment ventures that own portfolios of operating industrial properties and may also develop properties. Investment Management Income includes revenues we earn for the management services we provide to unconsolidated entities 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 incentive returns or promotes 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.

In the first quarter of 2013, we launched the initial public offering for Nippon Prologis REIT, Inc. (“NPR”). NPR is a long-term investment vehicle for our stabilized properties in Japan. On February 14, 2013, NPR was listed on the Japan Stock Exchange and commenced trading. At that time, NPR acquired a portfolio of 12 properties from us for an aggregate purchase price of ¥173 billion ($1.9 billion), net cash proceeds of ¥158 billion ($1.7 billion). At the time, we had a 15% ownership interest that we accounted for under the equity method. As a result of this transaction, we recognized a gain of $337.9 million, net of a $59.6 million deferral due to our ongoing investment. The gain is recorded in Gains on Acquisitions and Dispositions of Investments in Real Estate, Net in the Consolidated Statements of Operations. We recognized $38.6 million of current tax expense in connection with this contribution.

On March 19, 2013, we closed Prologis European Logistics Partners Sàrl (“PELP”), a joint venture with Norges Bank Investment Management (“NBIM”), which is the manager of the Norwegian Government Pension Fund Global. We have a 50% ownership interest that we account for under the equity method. The venture has an initial term of 15 years, which may be extended for an additional 15-year period, and thereafter extended upon negotiation between partners. We will have the ability to reduce our ownership to 20% following the second anniversary of closing. The venture acquired a portfolio for approximately €2.3 billion ($3.0 billion) consisting of 195 properties in 11 target European global markets that were contributed by us. As a result of this transaction, we recognized a gain of $1.8 million, net of a deferred gain due to our ongoing investment. The gain is recorded in Gains on Acquisitions and Dispositions of Investments in Real Estate, Net in the Consolidated Statements of Operations. In connection with the closing, a warrant NBIM received at signing to acquire six million shares of Prologis common stock with a strike price of $35.64 became exercisable. The warrant can be net share settled.

In connection with the wind down of Prologis Japan Fund I, in June 2013 we purchased 14 properties from the venture and the venture sold the remaining eight properties aggregating 4.3 million square feet to NPR, based on appraised values. In addition, we contributed one pre-stabilized building to NPR for $232.6 million. As a result of the combined transactions, we recorded a net gain of $56.9 million in Gains on Acquisitions and Dispositions of Investments in Real Estate, Net in the Consolidated Statements of Operations. In connection with the contribution of the development building to NPR, we recognized $8.3 million of current tax expense.

NPR completed a secondary offering in June 2013 to fund the purchase of these properties. In connection with this offering, we invested ¥14.2 billion ($151.1 million) that temporarily increased our ownership interest to 17%. In July 2013, the underwriters exercised the overallotment option and our ownership interest decreased to 15%.

On August 6, 2013, Prologis North American Fund III sold $427.5 million of properties to a third party and we acquired the remaining properties for $529.0 million. All debt was paid in full at closing.

 

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PROLOGIS, INC. AND PROLOGIS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

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

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2013     2012     2013      2012  

Earnings from unconsolidated co-investment ventures:

         

Americas (1)

   $ (874   $ (6,749   $ 13,394       $ (4,466

Europe (2)

     8,761        7,172        16,303         15,169   

Asia (3)

     (16     730        2,469         2,208   
  

 

 

   

 

 

   

 

 

    

 

 

 

Total earnings from unconsolidated co-investment ventures, net

   $ 7,871      $ 1,153      $ 32,166       $ 12,911   
  

 

 

   

 

 

   

 

 

    

 

 

 

Investment management and other income:

         

Americas

   $ 14,818      $ 16,081      $ 30,895       $ 33,604   

Europe (2)

     13,854        9,325        24,467         18,462   

Asia (3)

     14,239        5,088        20,981         9,842   
  

 

 

   

 

 

   

 

 

    

 

 

 

Total investment management income

     42,911        30,494        76,343         61,908   

Development management and other income

     333        2        1,380         78   
  

 

 

   

 

 

   

 

 

    

 

 

 

Total

   $ 43,244      $ 30,496      $ 77,723       $ 61,986   
  

 

 

   

 

 

   

 

 

    

 

 

 

 

1) During the first quarter of 2013, we recognized a gain of $8.7 million representing our share of the gain from the sale of two properties in February 2013 in the Prologis Brazil Logistics Partners Fund (“Brazil Fund”).
2) In the first quarter of 2013, we launched PELP, which we started accounting for under the equity method. Our proportionate share of its net earnings is included in 2013 from the date it commenced operations (see above for additional information).
3) In the first quarter of 2013, we launched NPR, which we started accounting for under the equity method. Our proportionate share of its net earnings is included in 2013 from the date it commenced operations. In addition, in connection with the wind down of Prologis Japan Fund I in June 2013, the venture sold eight properties to NPR and we acquired the remaining 14 properties (see above for additional information).

Investment Management Income includes fees and incentives we earn for services provided to our unconsolidated co-investment ventures (shown above), as well as fees earned from other unconsolidated entities and third parties of $0.7 million and $0.9 million during the three and six months ended June 30, 2013, respectively and $0.5 million and $1.5 million during the three and six months ended June 30, 2012, respectively.

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

 

     Weighted Average
Ownership Percentage
    Investment in and Advances to  
     June 30,     December 31,     June 30,      December 31,  

Unconsolidated co-investment ventures by region

   2013     2012     2013      2012  

Americas

     21.6     23.2   $ 1,106,713       $ 1,111,831   

Europe (1)

     39.6     29.7     2,173,996         722,748   

Asia (1)(2)

     17.2     19.2     427,487         178,501   
  

 

 

   

 

 

   

 

 

    

 

 

 

Totals

     28.4     25.1   $ 3,708,196       $ 2,013,080   
  

 

 

   

 

 

   

 

 

    

 

 

 

 

(1) As discussed above, the primary reason for the increase in our investments in and advances to our unconsolidated entities in Europe and Asia is due to PELP and NPR.
(2) As discussed above, we substantially completed the wind down of Prologis Japan Fund I in June 2013. The investments in and advances to amount for Asia, as of June 30, 2013, includes a receivable from Prologis Japan Fund I of $93.1 million for the estimated remaining net proceeds.

 

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PROLOGIS, INC. AND PROLOGIS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

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):

 

2013

   Americas     Europe     Asia     Total  

For the three months ended June 30, 2013 (1):

        

Revenues

   $ 183.1      $ 206.9      $ 53.8      $ 443.8   

Net earnings

   $ 3.5      $ 14.2      $ 8.2      $ 25.9   

For the six months ended June 30, 2013 (1):

        

Revenues

   $ 365.2      $ 355.3      $ 99.1      $ 819.6   

Net earnings (2)

   $ 33.8      $ 44.8      $ 12.4      $ 91.0   

As of June 30, 2013(1):

        

Total assets

   $ 9,074.3      $ 9,937.4      $ 4,122.0      $ 23,133.7   

Amounts due to us (3)

   $ 26.9      $ 79.2      $ 153.8      $ 259.9   

Third party debt (4)

   $ 3,950.2      $ 2,639.5      $ 1,404.5      $ 7,994.2   

Total liabilities

   $ 4,160.2      $ 3,647.4      $ 1,582.8      $ 9,390.4   

Noncontrolling interest

   $ 1.5      $ 9.4      $ —       $ 10.9   

Venture partners’ equity

   $ 4,912.6      $ 6,280.6      $ 2,539.2      $ 13,732.4   

Our weighted average ownership (5)

     21.6     39.6     17.2     28.4

Our investment balance (6)

   $ 1,106.7      $ 2,174.0      $ 427.5      $ 3,708.2   

Deferred gains, net of amortization (7)

   $ 145.3      $ 181.6      $ 69.8      $ 396.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

2012

   Americas     Europe     Asia     Total  

For the three months ended June 30, 2012:

        

Revenues

   $ 185.8      $ 120.9      $ 35.0      $ 341.7   

Net earnings (loss)

   $ (28.0   $ 24.3      $ (0.9   $ (4.6

For the six months ended June 30, 2012 (1):

        

Revenues

   $ 396.2      $ 245.9      $ 69.8      $ 711.9   

Net earnings (loss)

   $ (38.1   $ 48.0      $ 4.7      $ 14.6   

As of December 31, 2012:

        

Total assets

   $ 9,070.4      $ 6,605.2      $ 1,937.0      $ 17,612.6   

Amounts due to us (3)

   $ 31.9      $ 33.3      $ 7.7      $ 72.9   

Third party debt (4)

   $ 3,835.5      $ 2,384.2      $ 972.9      $ 7,192.6   

Total liabilities

   $ 4,170.4      $ 2,953.8      $ 1,062.5      $ 8,186.7   

Noncontrolling interest

   $ 1.4      $ 7.5      $ —       $ 8.9   

Venture partners’ equity

   $ 4,898.6      $ 3,643.9      $ 874.5      $ 9,417.0   

Our weighted average ownership (5)

     23.2     29.7     19.2     25.1

Our investment balance (6)

   $ 1,111.8      $ 722.8      $ 178.5      $ 2,013.1   

Deferred gains, net of amortization (7)

   $ 147.9      $ 181.6      $ 0.1      $ 329.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) As discussed in Note 2, in 2012, we concluded two of our co-investment ventures in the Americas whose results are not included in 2013 (NAIF II and Prologis California). First quarter of 2012 included activities for these ventures only through the transaction date. In addition, in the first quarter of 2013, we launched two new co-investment ventures, PELP and NPR, and the results of these ventures are included in the three and six months ended June 30, 2013. In June 2013, Prologis Japan Fund I substantially completed the wind down process. See above for more details on these transactions.
(2) During the first quarter of 2013, the Brazil Fund sold two buildings for a net gain of $21.1 million.
(3) As of June 30, 2013, we had one note receivable from Prologis SGP Mexico of $19.8 million; a receivable from PELP for the remaining sale proceeds of $67.7 million until final closing audits are completed; and a receivable from Prologis Japan Fund I for the estimated remaining net sale proceeds of $93.1 million that will be repaid by the end of the year. As of December 31, 2012, we had one note receivable from Prologis SGP Mexico of $19.7 million. The remaining amounts generally represent current balances from services provided by us to the co-investment ventures.
(4) As of June 30, 2013, we did not guarantee any third party debt of our co-investment ventures. As of December 31, 2012, we guaranteed $30.4 million of the third party debt of certain co-investment ventures.
(5) 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.
(6) 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 subfootnote); (ii) recording additional costs associated with our investment in the venture; and (iii) advances to the venture.
(7) 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.

 

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PROLOGIS, INC. AND PROLOGIS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

Equity Commitments Related to Certain Unconsolidated Co-Investment Ventures

Certain co-investment ventures have equity commitments from us and our venture partners. Our venture partners fulfill their equity commitment with cash. We may fulfill our equity commitment through contributions of properties or cash. The venture may obtain financing for the properties and therefore the equity commitment may be less than the acquisition price of the real estate. Depending on market conditions, the investment objectives of the ventures, our liquidity needs and other factors, we may make contributions of properties to these ventures through the remaining commitment period and we may make additional cash investments in these ventures.

The following table is a summary of remaining equity commitments as of June 30, 2013 (in millions):

 

    Equity commitments     Expiration date for  remaining
commitments

Prologis Targeted U.S. Logistics Fund (1)

   

Prologis

  $ 100.0      Open-Ended

Venture Partners

  $ 31.5     
 

 

 

   

 

Prologis SGP Mexico (2)

   

Prologis

  $ 24.6      (2)

Venture Partner

  $ 98.1     
 

 

 

   

 

Prologis European Properties Fund II (3) (4)

   

Prologis

  $ 111.2      March 2015

Venture Partner

  $ 27.5     
 

 

 

   

 

Europe Logistics Venture 1 (3)

   

Prologis

  $ 53.7      February 2014

Venture Partner

  $ 304.3     
 

 

 

   

 

Prologis European Logistics Partners (3) (5)

   

Prologis

  $ 277.5      January 2014

Venture Partner

  $ 277.5     
 

 

 

   

 

Prologis Targeted Europe Logistics Fund (3) (6)

   

Prologis

  $ 143.9      (6)

Venture Partner

  $ 2.6     
 

 

 

   

 

Prologis China Logistics Venture 1 (7)

   

Prologis

  $ 65.9      March 2015

Venture Partner

  $ 373.4     
 

 

 

   

 

Total

   

Prologis

  $ 776.8     

Venture Partners

  $ 1,114.9     
 

 

 

   

 

 

(1) During the six months ended June 30, 2013, equity commitments of $11.5 million were obtained from third party investors and $10.0 million of third party equity commitments were called. In June 2013, we committed to contribute an additional $100.0 million to the venture. In July 2013, additional equity commitments of $30.0 million were obtained from third party investors and the venture called all outstanding commitments from us and the third parties, which increased our ownership.
(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 2013, with an option to extend until the third quarter of 2014.
(3) Equity commitments are denominated in euro and reported above in U.S. dollar.
(4) During the six months ended June 30, 2013, equity commitments of €30.0 million ($39.2 million) were obtained from a new third party investor and we committed to contribute €125.0 million ($163.5 million). To fund the extension of a building and to repay debt, this venture called capital of €49.0 million ($63.7 million) in April 2013. We contributed €40.0 million ($52.0 million), which included our share of the capital called, as well as an additional investment that increased our ownership interest in this venture, while the remaining €9.0 million ($11.8 million) was called from third parties. In July 2013, an additional €95.0 million ($124.3 million) of equity commitments were obtained from third party investors. Also in July, the venture called capital of €160.0 million ($209.3 million) to fund a contribution from us and increase net equity of which €92.3 million ($120.7 million) was from third parties and €67.7 million ($88.6 million) was our share thereby increasing our ownership.
(5) This venture was formed in March 2013, with an equity commitment of €2.4 billion ($3.1 billion), which included €1.2 billion ($1.6 billion) commitment from both our partner and us. As discussed above, in March we contributed 195 properties to this venture using the majority of the equity commitments. In June 2013, the venture obtained additional equity commitments of €138 million ($180.5 million) of which €69.0 million ($90.3 million) was our share. These commitments were called in July 2013 to fund the acquisition of properties from a third party.
(6) Equity commitments of €160.0 million ($209.5 million) and €2.0 million ($2.6 million) were obtained from us and a third party, respectively, during the second quarter of 2013. Subsequently, we contributed €50.0 million ($65.6 million) reducing our total equity commitment as of June 30, 2013. In July 2013, the venture called the remaining commitments from us and the third party to repay debt, which increased our ownership.
(7) Equity commitments of $10.0 million of which $1.5 million was our share were called during the second quarter of 2013 to fund development.

 

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PROLOGIS, INC. AND PROLOGIS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

Other Joint Ventures

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

 

     June 30,      December 31,  
     2013      2012  

Americas

   $ 102,142       $ 106,655   

Europe

     47,303         48,503   

Asia

     27,125         27,544   
  

 

 

    

 

 

 

Total investments in and advances to other joint ventures

   $ 176,570       $ 182,702   
  

 

 

    

 

 

 

 

5. Assets Held for Sale and Discontinued Operations

Held for Sale

As of June 30, 2013, we had land and two operating properties that met the criteria to be classified as held for sale. The amounts included in held for sale, as of June 30, 2013, include real estate investment balances and the related assets and liabilities for each property.

Discontinued Operations

During the six months ended June 30, 2013, we disposed of 20 operating properties aggregating 1.9 million square feet to third parties. During all of 2012, we disposed of land, land subject to ground leases and 200 operating properties aggregating 27.2 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     Six Months Ended  
     June 30,     June 30,  
     2013     2012     2013     2012  

Rental income and recoveries

   $ 643      $ 24,351      $ 2,671      $ 59,453   

Rental expenses

     (478     (8,597     (1,245     (18,178

Depreciation and amortization expense

     (447     (9,022     (1,388     (21,287

Interest expense

     (12     (459     (87     (937
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) attributable to disposed properties and assets held for sale

     (294     6,273        (49     19,051   

Net gains on dispositions

     13,467        9,874        19,301        21,123   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total discontinued operations

   $ 13,173      $ 16,147      $ 19,252      $ 40,174   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

6. 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 non-wholly owned subsidiaries.

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

 

     June 30, 2013      December 31, 2012  
     Weighted
Average Interest
Rate (1)
    Amount
Outstanding  (2)
     Weighted
Average  Interest
Rate (1)
    Amount
Outstanding
 

Credit Facilities

     1.6   $ 630,836         1.5   $ 888,966   

Senior notes (3)

     5.6     4,436,785         5.6     5,223,136   

Exchangeable senior notes (4)

     3.3     397,481         4.6     876,884   

Secured mortgage debt (5)

     5.1     1,974,909         4.0     3,625,908   

Secured mortgage debt of consolidated entities

     4.5     308,204         4.4     450,923   

Other debt of consolidated entities

     4.8     14,437         4.8     67,749   

Other debt

     1.8     654,658         1.8     657,228   
  

 

 

   

 

 

    

 

 

   

 

 

 

Totals

     4.7   $ 8,417,310         4.4   $ 11,790,794   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

(1) The interest rates presented represent the effective interest rates (including amortization of the non-cash premiums or discount).

 

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PROLOGIS, INC. AND PROLOGIS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

(2) Included in the outstanding balances are borrowings denominated in non-U.S. currency, principally: euro ($1.2 billion) and Japanese yen ($0.6 billion).
(3) In the second quarter of 2013, we incurred $32.6 million of debt extinguishment costs, primarily due to the prepayment of $350 million senior notes that were scheduled to mature in 2014, that were included in Gains (Losses) on Early Extinguishment of Debt, Net in our Consolidated Statements of Operations. In addition, we repaid $202.3 million of outstanding senior notes at maturity.
(4) The weighted average coupon interest rate was 3.3% and 2.8% as of June 30, 2013 and December 31, 2012, respectively. During the second quarter of 2013, we repaid $342.2 million of these notes. As of June 30, 2013, we only have one series of exchangeable notes outstanding with a coupon interest rate of 3.3%.
(5) In the first quarter of 2013, we repaid $1.4 billion of outstanding secured mortgage debt with the proceeds received from contributions of properties to PELP and NPR. In addition, we transferred $353.2 million of debt to PELP in connection with the contribution.

Credit Facilities

During the six months ended June 30, 2013, we had a global senior credit facility where funds may be drawn in U.S. dollar, euro, Japanese yen, British pound sterling and Canadian dollar on a revolving basis up to $1.6 billion (subject to currency fluctuations). On July 11, 2013, we terminated the existing facility and entered into a new facility (collectively the “Global Facility”), where we may draw in the aforementioned currencies on a revolving basis in an aggregate amount not exceeding $2.0 billion (subject to currency fluctuations). We may increase the Global Facility to $3.0 billion (subject to currency fluctuations and obtaining additional lender commitments). The Global Facility is scheduled to mature on July 11, 2017; however, we may extend the maturity date by six months twice, subject to satisfaction of certain conditions and payment of an extension fee. 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 $369.0 million at June 30, 2013) Japanese 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 $571.2 million at June 30, 2013) subject to obtaining additional lender commitments. Pricing under the Revolver was consistent with the Global Facility pricing as of June 30, 2013. 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 June 30, 2013 were as follows (dollars in millions):

 

Aggregate lender - commitments

   $ 2,026.1   

Less:

  

Borrowings outstanding

     630.8   

Outstanding letters of credit

     68.2   
  

 

 

 

Current availability

   $ 1,327.1   
  

 

 

 

In February 2013, we entered into a $500 million bridge loan under which we can borrow in U. S. dollar, euro or yen. We borrowed ¥20 billion ($215.7 million) under the bridge loan to make our initial cash investment in NPR. In connection with the contribution of properties to NPR, we paid the borrowings outstanding on this bridge loan and terminated the facility.

Exchangeable Senior Notes

The accounting for the exchangeable senior notes 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. At each reporting period, we adjust the derivative instrument to fair value with the resulting adjustment being recorded in earnings as Foreign Currency and Derivative Gains (Losses), Net. The fair value of the derivative associated with our exchangeable notes was a liability of $52.9 million and $39.8 million at June 30, 2013 and December 31, 2012, respectively. We recognized an unrealized loss of $12.1 million and $13.1 million for the three and six months ended June 30, 2013, respectively, and an unrealized gain of $14.4 million and an unrealized loss of $12.4 million for the three and six months ended June 30, 2012, respectively.

 

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PROLOGIS, INC. AND PROLOGIS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

Long-Term Debt Maturities

Principal payments due on our debt, for the remainder of 2013 and for each of the years in the ten-year period ending December 31, 2022 and thereafter was as follows (in millions):

 

    Prologis              
    Unsecured     Secured           Consolidated     Total  
    Senior     Exchangeable     Credit     Other     Mortgage           Entities’     Consolidated  

Maturity

  Debt     Notes     Facilities     Debt     Debt     Total     Debt (1)     Debt  

2013 (2)

  $ 92      $ —        $ —        $ —        $ 41      $ 133      $ 42      $ 175   

2014 (2) (3)

    557        —          322        638        475        1,992        36        2,028   

2015

    175        460        309        1        149        1,094        25        1,119   

2016

    640        —          —          1        312        953        126        1,079   

2017

    700        —          —          1        264        965        4        969   

2018

    900        —          —          1        113        1,014        74        1,088   

2019

    647        —          —          1        294        942        2        944   

2020

    662        —          —          1        9        672        2        674   

2021

    —          —          —          1        135        136        2        138   

2022

    —          —          —          —          7        7        2        9   

Thereafter

    —          —          —          10        137        147        6        153   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal

    4,373        460        631        655        1,936        8,055        321        8,376   

Unamortized premiums (discounts), net

    64        (63     —          —          39        40        1        41   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 4,437      $ 397      $ 631      $ 655      $ 1,975      $ 8,095      $ 322      $ 8,417   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Our consolidated entities have $7.6 million available to borrow under credit facilities.
(2) We expect to use the proceeds from property dispositions, cash on hand, and borrowings on our Credit Facilities to repay 2013 maturities of our wholly owned debt. Of the amounts maturing in 2014, we expect to extend or pay these amounts with proceeds from asset sales, available cash and borrowings on our Credit Facilities. The maturities in 2013 of debt of our consolidated but not wholly owned subsidiaries includes $42.0 million of secured mortgage debt, which we expect to extend, or pay, through the issuance of new debt, with proceeds from asset sales, available cash, or equity contributions to our consolidated entities by us and our venture partners.
(3) On July 10, 2013, we repaid $160.0 million of secured mortgage debt with a scheduled maturity date in 2014.

Debt Covenants

Our debt agreements contain various covenants, including maintenance of specified financial ratios. As of June 30, 2013, we were in compliance with all covenants.

 

7. Other Liabilities

Other liabilities consisted of the following, net of amortization, if applicable, as of June 30, 2013 and December 31, 2012 (in thousands):

 

     2013      2012  

Income tax liabilities

   $ 173,652       $ 463,102   

Tenant security deposits

     153,149         174,137   

Unearned rents

     63,731         115,020   

Deferred income

     41,704         50,025   

Lease intangible liabilities

     30,407         53,289   

Environmental

     25,812         30,075   

Value added taxes payable

     4,930         31,399   

Other

     135,233         198,864   
  

 

 

    

 

 

 

Total other liabilities

   $ 628,618       $ 1,115,911   
  

 

 

    

 

 

 

The decrease in other liabilities from December 31, 2012 to June 30, 2013 is principally due to the NPR and PELP contributions. See Note 4 for more details on these transactions.

 

8. 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 0.38% of the common partnership units.

Common Stock

On April 30, 2013, we completed a public offering of 35.65 million shares of common stock at a price of $41.60 per share, generating approximately $1.4 billion in net proceeds.

 

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PROLOGIS, INC. AND PROLOGIS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

In June 2013, we entered into an equity distribution agreement that allows us to sell up to $750 million aggregate gross sales proceeds of shares of common stock through two designated agents, who earn a fee of up to 2% of the gross proceeds, as agreed to on a transaction-by-transaction basis. We have not issued any shares of common stock under the new agreement.

Preferred Stock of the REIT

On April 19, 2013, we redeemed all of the outstanding series L, M, O, P, R, and S preferred stock. We recognized a loss of $9.1 million in the first quarter of 2013, which primarily represented the difference between redemption value and carrying value net of deferred issuance costs. This amount was recognized in March when use notified the holders of our intent to redeem these series of preferred stock.

We have two million shares of series Q preferred stock, our only remaining outstanding series of preferred stock, with a liquidation preference of $50 per share and a par value of $0.01, which will be redeemable at our option on and after November 13, 2026.

 

9. Noncontrolling Interests

Operating Partnership

We report noncontrolling interests related to several entities we consolidate but do not own 100% of the common equity. These entities include two 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 the REIT’s 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% and the units of the entity 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.

During the three months ended June 30, 2013, net loss attributable to noncontrolling interests was $7.3 million, of which $12.4 million was a loss from continuing operations and $5.1 million was income from discontinued operations. All other periods were not considered significant.

In June 2013, we acquired our partners’ interest in Prologis Institutional Alliance Fund II, a consolidated co-investment venture. In connection with this transaction, we paid $243.0 million and issued 804,734 limited partnership units worth $31.3 million in one of our limited partnerships based primarily on appraised values of the properties. These units are exchangeable into an equal number of shares of our common stock. The difference between the amount we paid and the noncontrolling interest balance at the time was not significant, but was adjusted through equity with no gain or loss recognized. As a result of this transaction, the assets and liabilities associated with this venture are now wholly owned in our Consolidated Balance Sheets.

Based on the venture’s cumulative returns to the investors over the life of the venture, we earned a promote fee from Prologis Institutional Alliance Fund II of approximately $18.0 million from the fund. Of that amount, approximately $13.0 million represented the third party investors’ portion and is reflected as a component of Noncontrolling Interest in our Consolidated Statements of Operations. We also recognized approximately $3.0 million of expense in Investment Management Expenses in our Consolidated Statements of Operations representing the estimated cash bonus to be paid out to certain employees.

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 June 30, 2013, the REIT owned an approximate 99.62% common general partnership interest in 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 June 30, 2013 and December 31, 2012 (dollars in thousands):

 

     Our  Ownership
Percentage
    Noncontrolling Interest      Total Investment In
Real Estate
     Debt  
     2013     2012     2013      2012      2013      2012      2013      2012  

Partnerships with exchangeable units (1)

     various        various      $ 74,432       $ 44,476       $ 578,654       $ 826,605       $ —        $ —    

Prologis Institutional Alliance Fund II (2)

     N/A        28.2     —          280,751         —          571,668         —          178,778   

Mexico Fondo Logistico (AFORES) (3)

     20.0     20.0     216,466         157,843         452,048         388,960         208,564         214,084   

Brazil Fund (4)

     50.0     50.0     77,807         66,494         —          —          —          —    

Prologis AMS

     38.5     38.5     62,803         59,631         145,030         160,649         55,988         63,749   

Other consolidated entities

     various        various        39,487         43,930         374,634         404,825         58,257         62,061   
      

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Operating Partnership noncontrolling interests

         470,995         653,125         1,550,366         2,352,707         322,809         518,672   

Limited partners in the Operating Partnership (5)

         52,081         51,194         —          —          —           —    
      

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

REIT noncontrolling interests

       $ 523,076       $ 704,319       $ 1,550,366       $ 2,352,707       $ 322,809       $ 518,672   
      

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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PROLOGIS, INC. AND PROLOGIS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

(1) At June 30, 2013 and December 31, 2012, there were 1,949,501 and 1,173,571 limited partnership units, respectively, that were exchangeable into an equal number of shares of the REIT’s common stock. This includes the 804,734 units issued as part of the Prologis Institutional Alliance Fund II transaction. In the second quarter of 2013, 1,053 limited partnership units were redeemed for cash and the remaining limited partnership units of one of our limited partnerships were redeemed for 27,751 shares of common stock. All of these outstanding limited partnership units are entitled to quarterly cash distributions equal to the quarterly dividends paid on our common stock.
(2) As disclosed above, we acquired our partners’ interest in June 2013.
(3) In the second quarter of 2013, we contributed land and five properties aggregating 0.7 million square feet to this entity for $52.1 million. As this entity is consolidated, we did not record a gain on this transaction.
(4) We have a 50% ownership interest in and consolidate the Brazil Fund that in turn has investments in several joint ventures that are accounted for on the equity method. The Brazil Fund’s assets are primarily investments in unconsolidated entities of $127.2 million at June 30, 2013. For additional information of our unconsolidated investment, see Note 4.
(5) At June 30, 2013 and December 31, 2012, 1,893,266 units were associated with the limited partners in the Operating Partnership and were exchangeable into an equal number of shares of the REIT’s common stock. All of these outstanding limited partnership units are entitled to quarterly cash distributions equal to the quarterly distributions paid on our common stock.

 

10. 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”)) outstanding.

Summary of Activity

The activity for the six months ended June 30, 2013, with respect to our stock options, was as follows:

 

     Options Outstanding         
     Number of Options     Weighted Average
Exercise Price
     Options Exercisable  

Balance at December 31, 2012

     7,513,217        

Exercised

     (752,015     

Forfeited / Expired

     (278,517     
  

 

 

      

Balance at June 30, 2013

     6,482,685      $ 36.23         6,333,605   
  

 

 

   

 

 

    

 

 

 

The activity for the six months ended June 30, 2013, with respect to our unvested restricted stock, was as follows:

 

     Number of
Shares
    Weighted Average
Grant  Date Fair Value
 

Balance at December 31, 2012

     687,277     

Vested

     (347,520  

Forfeited

     (2,992  
  

 

 

   

Balance at June 30, 2013

     336,765      $ 34.01   
  

 

 

   

 

 

 

The activity for the six months ended June 30, 2013, 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, 2012

     1,999,348        

Granted

     1,217,852        

Vested

     (797,121     

Forfeited

     (17,414     
  

 

 

      

Balance at June 30, 2013

     2,402,665      $ 36.72         79,306   
  

 

 

   

 

 

    

 

 

 

During the six months ended we granted 1,217,852 RSUs which, generally, will vest over three years.

 

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PROLOGIS, INC. AND PROLOGIS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

Outperformance Plan

In February 2013, we granted points under our outperformance plan with an aggregate fair value of $23.9 million as of the date of the grant. Such points relate to a three-year performance period that began on January 1, 2013 and will end on December 31, 2015. If the compensation pool for this performance period is funded, the participants’ points will be paid in the form of restricted common stock. As the 2013 award is equity-classified, the fair value of the award is measured at the grant-date and amortized over the performance period. We recognized $4.0 million of compensation expense, during the six months ended June 30, 2013, for the 2013 award.

On May 1, 2013, the compensation committee of the Board approved a modification of the settlement terms for the award granted under our outperformance plan in 2012. The 2012 award is now payable in shares of common stock instead of cash and was reclassified from liability to equity based on the fair value at the modification date using the Monte Carlo simulation model. The new grant-date fair value less the amount of compensation expense recognized to date is amortized over the remaining performance period, through December 31, 2014. We recognized $9.0 million of compensation expense, during the six months ended June 30, 2013, for the 2012 award based on the fair value of $36.1 million as of the modification date in May 2013.

 

11. Earnings 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.

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     Six Months Ended  
     June 30,     June 30,  

REIT

   2013     2012     2013      2012  

Net earnings (loss) attributable to common stockholders

   $ (1,517   $ (8,120   $ 263,899       $ 194,293   

Noncontrolling interest attributable to exchangeable limited partnership units

     —         —         1,599         1,069   
  

 

 

   

 

 

   

 

 

    

 

 

 

Adjusted net earnings (loss) attributable to common stockholders

   $ (1,517   $ (8,120   $ 265,498       $ 195,362   
  

 

 

   

 

 

   

 

 

    

 

 

 

Weighted average common shares outstanding - Basic (1)

     486,032        459,878        473,892         459,549   

Incremental weighted average effect on exchange of limited partnership units

     —         —         3,039         3,299   

Incremental weighted average effect of stock awards and warrants

     —         —         3,078         1,848   
  

 

 

   

 

 

   

 

 

    

 

 

 

Weighted average common shares outstanding - Diluted (2)

     486,032        459,878        480,009         464,696   
  

 

 

   

 

 

   

 

 

    

 

 

 

Net earnings (loss) per share attributable to common stockholders -

         

Basic

   $ 0.00      $ (0.02   $ 0.56       $ 0.42   

Diluted

   $ 0.00      $ (0.02   $ 0.55       $ 0.42   

Operating Partnership

                         

Net earnings (loss) attributable to common unitholders

   $ (1,592   $ (8,173   $ 264,956       $ 195,181   

Noncontrolling interest attributable to exchangeable limited partnership units

     —         —         542         121   
  

 

 

   

 

 

   

 

 

    

 

 

 

Adjusted net earnings (loss) attributable to common unitholders

   $ (1,592   $ (8,173   $ 265,498       $ 195,302   
  

 

 

   

 

 

   

 

 

    

 

 

 

Weighted average common partnership units outstanding - Basic (1)

     487,925        461,842        475,785         461,559   

Incremental weighted average effect on exchange of limited partnership units

     —         —         1,146         1,289   

Incremental weighted average effect of stock awards and warrants of the REIT

     —         —         3,078         1,848   
  

 

 

   

 

 

   

 

 

    

 

 

 

Weighted average common partnership units outstanding - Diluted (3)

     487,925        461,842        480,009         464,696   
  

 

 

   

 

 

   

 

 

    

 

 

 

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

         

Basic

   $ 0.00      $ (0.02   $ 0.56       $ 0.42   

Diluted

   $ 0.00      $ (0.02   $ 0.55       $ 0.42   

 

(1) The increase in shares / units between the periods is due to an equity offering in April 2013. See Note 8 for more information.
(2) Total weighted average potentially dilutive limited partnership units outstanding (in thousands) were 3,039 and 3,250 for the three months ended June 30, 2013 and 2012, respectively, and 3,053 and 3,299 for the six months ended June 30, 2013 and 2012, respectively. Total weighted average potentially dilutive stock awards and warrants outstanding (in thousands) were 14,047 and 9,835 for the three months ended June 30, 2013 and 2012, respectively, and 14,032 and 9,977 for the six months ended June 30, 2013 and 2012, respectively. Total weighted average potentially dilutive exchangeable debt outstanding (in thousands) were 11,879 for the three months and six months ended June 30, 2013 and 2012.

 

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PROLOGIS, INC. AND PROLOGIS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

(3) Total weighted average potentially dilutive limited partnership units outstanding (in thousands) were 1,146 and 1,285 for the three months ended June 30, 2013 and 2012, respectively, and 1,160 and 1,289 for the six months ended June 30, 2013 and 2012, respectively. Total weighted average potentially dilutive stock awards and warrants outstanding (in thousands) were 14,047 and 9,835 for the three months ended June 30, 2013 and 2012, respectively, and 14,032 and 9,977 for the six months ended June 30, 2013 and 2012, respectively. Total weighted average potentially dilutive exchangeable debt outstanding (in thousands) were 11,879 for the three months and six months ended June 30, 2013 and 2012.

 

12. 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. Foreign currency contracts, including forwards and options, may be used to manage foreign currency exposure. We may use interest rate swaps to manage the effect of interest rate fluctuations. We do not use derivative financial instruments for trading or speculative 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 highly 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; thereby significantly reducing the actual loss that would be incurred should a counterparty fail to perform its contractual obligations. 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. Derivatives can be designated as fair value hedges, cash flow hedges or hedges of net investments in foreign operations. 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.

For derivatives that will be accounted for as hedging instruments in accordance with the accounting standards, at inception of the transaction, we formally designate and document 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. The ineffective portion of a derivative financial instrument’s change in fair value, if any, 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

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

Foreign currency hedges

We hedge the net assets of certain international subsidiaries (net investment hedges) using foreign currency derivative contracts to offset the translation and economic exposures related to our investments in these subsidiaries by locking in a forward exchange rate at the inception of the hedge. We measure the effectiveness of our net investment hedges by using the changes in forward exchange rates because this method reflects our risk management strategies, the economics of those strategies in our financial statements and better manages interest rate differentials between different countries. Under this method, all changes in fair value of the forward currency derivative contracts designated as net investment hedges are reported in equity in the foreign currency translation component of Accumulated Other Comprehensive Loss and offsets translation adjustments on the underlying net assets of foreign subsidiaries and affiliates, which are also recorded in Accumulated Other Comprehensive Loss. Ineffectiveness, if any, is recognized in earnings.

In 2013, we entered into seven foreign currency contracts that expire in June 2017 and June 2018 with an aggregate notional amount of €599.9 million ($800.0 million using the weighted average forward rate of 1.33) to hedge a portion of our investment in Europe at a fixed euro rate in U.S. dollars. We also entered into three foreign currency contracts that expire in June 2018 with an aggregate notional amount of ¥24.1 billion ($250.0 million using the weighted average forward rate of 96.54) to hedge a portion of our investment in Japan at a fixed yen rate in U.S. dollars. Pursuant to these contracts, we will sell either euro or yen and buy U.S. dollars at the forward rate upon maturity. In addition, we will receive quarterly payments in U.S. dollars at a predetermined rate with no corresponding payments by us. These derivatives were designated and qualify as hedging instruments and, therefore, the changes in fair value of these derivatives were recorded in the foreign currency translation component of Accumulated Other Comprehensive Loss in our Consolidated Balance Sheets.

 

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PROLOGIS, INC. AND PROLOGIS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

In the fourth quarter of 2012, we entered into foreign currency contracts that expired in April and May 2013. During 2013, we settled these contracts with a combined notional amount of $1.3 billion. As a result, we recorded a loss of $1.1 million and a gain of $4.3 million, in Other Comprehensive Income (Loss) for the three and six months ended June 30, 2013, respectively.

We had $12.4 million recorded in Other Assets at June 30, 2013, and $17.5 million recorded in Accounts Payable and Accrued Expenses at December 31, 2012 in our Consolidated Balance Sheets relating to the fair value of our net investment hedges. Amounts included in Accumulated Other Comprehensive Loss in our Consolidated Balance Sheets at June 30, 2013 and December 31, 2012, were gains of $12.4 million and losses of $17.5 million, respectively. None of our net investment hedges were ineffective during the three and six months ended June 30, 2013, and therefore, there was no impact on earnings.

Interest rate hedges

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 may enter into interest rate swap agreements, which allow us to borrow on a fixed rate basis for longer-term debt issuances, or interest rate cap agreements, which allow us to minimize the impact of increases in interest rates. 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 variable rate 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, liabilities or forecasted transactions caused by fluctuations in interest rates.

We 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 two interest rate swap contracts, including one contract denominated in euro and one contract denominated in U.S dollar, outstanding at June 30, 2013. We had $6.3 million and $28.0 million accrued in Accounts Payable and Accrued Expenses in our Consolidated Balance Sheets relating to our unsettled derivative contracts at June 30, 2013 and December 31, 2012, respectively.

The effective portion of the gain or loss on the derivative is reported as a component of Accumulated Other Comprehensive Loss in our Consolidated Balance Sheets, and reclassified to Interest Expense in the Consolidated Statements of Operations over the corresponding period of the hedged item. The amounts reclassified to interest expense for the three and six months ended June 30, 2013 and 2012 were not considered material. For the next twelve months from June 30, 2013, we estimate that an additional expense of $1.1 million will be reclassified into interest expense. Amounts included in Accumulated Other Comprehensive Loss in our Consolidated Balance Sheets at June 30, 2013 and December 31, 2012 were losses of $14.7 million and $33.8 million, respectively. To the extent the hedged debt is paid off early, the amounts in Comprehensive Income (Loss) are recognized as Gains (Losses) on Early Extinguishment of Debt in our Consolidated Statements of Operations.

Losses on a derivative representing hedge ineffectiveness are recognized in Interest Expense at the time the ineffectiveness occurred. Losses due to hedge ineffectiveness were not considered material during the three and six months ended June 30, 2013. We recorded gains of $2.3 million and $1.4 million during the three and six months ended June 30, 2012, respectively.

The following table summarizes the activity in our derivative instruments (in millions) for the six months ended June 30:

 

     2013      2012  
     Foreign
Currency
Contracts
    Interest Rate
Swaps (1)
    Interest Rate
Caps
     Foreign
Currency
Forwards
     Interest Rate
Swaps
    Interest Rate
Caps
 

Notional amounts at January 1

   $ 1,303.8      $ 1,314.8      $ —         $ —        $ 1,496.5      $ —     

New contracts

     1,050.0        —          —           —          444.2        —    

Acquired contracts (2)

     —          —          —           —          71.0        —    

Matured or expired contracts

     (1,303.8     (1,230.2     —           —          (456.0     —    
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Notional amounts at June 30

   $ 1,050.0      $ 84.6      $ —         $ —        $ 1,555.7      $ —    
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

(1) During the six months ended June 30, 2013, we settled 12 contracts with a notional value of $319.9 million, and contributed 13 contracts with a notional value of $383.9 million related to the transfer of assets to the newly formed PELP co-investment venture. We also settled five contracts in Japan with a notional value of $526.4 million in connection with the contributions of properties to NPR.
(2) During the six months ended June 30, 2012, we acquired one interest rate swap contract with a notional amount of $71.0 million in connection with the acquisition of our interest in NAIF II.

In connection with the contributions to NPR, we reclassified a loss related to interest rate swaps of $7.8 million for the during the first quarter of 2013 from Accumulated Other Comprehensive Loss in our Consolidated Balance Sheets to Gains (Losses) on Early Extinguishment of Debt, net in our Consolidated Statements of Operations.

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.

 

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PROLOGIS, INC. AND PROLOGIS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

Fair Value Measurements on a Recurring and Non-recurring Basis

At June 30, 2013, other than the derivatives discussed above and in Note 6, 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.

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 entities that were subject to impairment charges. There were no assets that met this criteria at June 30, 2013.

Fair Value of Financial Instruments

At June 30, 2013 and December 31, 2012, the carrying amounts of certain of our financial instruments, including cash and cash equivalents, restricted cash, 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.

At June 30, 2013 and December 31, 2012, the fair value of our derivative instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves, foreign exchange rates, and implied volatilities. The fair values of our interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts or payments and the discounted expected variable cash payments. The variable cash payments are based on an expectation of future interest rates, or forward curves, derived from observable market interest rate curves. The fair values of our net investment hedges are based upon the change in the spot rate at the end of the period as compared to the strike price at inception.

We incorporate credit valuation adjustments to appropriately reflect both our nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.

We have determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy. Although the credit valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by us and our counterparties, we assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and have determined that the credit valuation adjustments are not significant to the overall valuation of our derivatives.

At June 30, 2013 and December 31, 2012, 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 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 June 30, 2013 and December 31, 2012, 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):

 

     June 30, 2013      December 31, 2012  
     Carrying Value      Fair Value      Carrying Value      Fair Value  

Debt:

           

Credit Facilities

   $ 630,836       $ 633,796       $ 888,966       $ 893,577   

Senior notes

     4,436,785         4,916,105         5,223,136         5,867,124   

Exchangeable senior notes

     397,481         535,066         876,884         1,007,236   

Secured mortgage debt

     1,974,909         2,115,313         3,625,908         3,765,556   

Secured mortgage debt of consolidated entities

     308,204         312,707         450,923         455,880   

Other debt of consolidated entities

     14,437         14,432         67,749         68,751   

Other debt

     654,658         657,501         657,228         660,951   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt

   $ 8,417,310       $ 9,184,920       $ 11,790,794       $ 12,719,075   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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PROLOGIS, INC. AND PROLOGIS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

13. Business Segments

Our current business strategy includes two operating segments: Real Estate Operations and Strategic Capital Management. We generate revenues, earnings, net operating income and cash flows through our segments, as follows:

 

   

Real Estate Operations – This represents the direct long-term ownership of industrial operating properties and is the primary source of our core revenue and earnings. We collect rent from our customers under operating leases, including reimbursements for the vast majority of our operating costs. 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. Our Real Estate Operations segment also includes development and re-development activities. We develop and re-develop industrial properties primarily in global and regional markets to meet our customers’ needs. 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. Land held for development, properties currently under development and land we own and lease to customers under ground leases are also included in this segment.

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).

 

   

Strategic Capital Management – This represents the long-term management of unconsolidated co-investment ventures and other joint ventures. We have direct and long-standing relationships 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 venture structures and other joint ventures, while providing complete portfolio management and financial reporting services. We recognize fees and incentives earned for services performed on behalf of the unconsolidated entities and certain third parties.

We report the costs associated with our Strategic Capital Management segment for all periods presented in the line item Investment Management Expenses in our Consolidated Statements of Operations. These costs include the direct expenses associated with the asset management of the co-investment ventures provided by individuals who are assigned to our Investment Management segment. In addition, in order to achieve efficiencies and economies of scale, all of our property management functions are provided by a team of professionals who are assigned to our Real Estate Operations segment. These individuals perform the property-level management of the properties in our owned and managed portfolio, including properties we consolidate and the properties we manage that are owned by the unconsolidated entities. We allocate the costs of our property management function to the properties we consolidate (reported in Rental Expenses) and the properties owned by the unconsolidated entities (included in Investment Management Expenses), by using the square feet owned by the respective portfolios. We are further reimbursed by the co-investment ventures for certain expenses associated with managing these co-investment ventures.

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 Strategic Capital Management 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).

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.

 

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PROLOGIS, INC. AND PROLOGIS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

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 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 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
June 30,
    Six Months Ended
June 30,
 
     2013     2012     2013     2012  

Revenues:

        

Real estate operations:

        

Americas

   $ 322,022      $ 304,959      $ 637,425      $ 585,174   

Europe

     29,295        109,639        128,761        221,316   

Asia

     24,549        55,590        65,255        109,209   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Real Estate Operations segment

     375,866        470,188        831,441        915,699   
  

 

 

   

 

 

   

 

 

   

 

 

 

Strategic capital management:

        

Americas

     15,428        16,470        31,615        34,824   

Europe

     13,854        9,326        24,467        18,463   

Asia

     14,326        5,197        21,161        10,063   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Strategic Capital Management segment

     43,608        30,993        77,243        63,350   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

   $ 419,474      $ 501,181      $ 908,684      $ 979,049   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net operating income:

        

Real estate operations:

        

Americas

   $ 220,996      $ 210,748      $ 441,744      $ 408,172   

Europe

     18,492        83,011        85,699        167,055   

Asia

     17,026        43,284        46,967        84,759   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Real Estate Operations segment

     256,514        337,043        574,410        659,986   
  

 

 

   

 

 

   

 

 

   

 

 

 

Strategic capital management:

        

Americas

     361        7,798        3,244        15,745   

Europe

     7,530        5,418        14,401        10,802   
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