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 September 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 October 30, 2013, was approximately 498,723,600.

 

 

 


Table of Contents

EXPLANATORY NOTE

This report combines the quarterly reports on Form 10-Q for the period ended September 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 September 30, 2013, the REIT owned an approximate 99.63% common general partnership interest in the Operating Partnership and 100% of the preferred units in the Operating Partnership. The remaining approximate 0.37% 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 – September 30, 2013 and December 31, 2012

     1   
      

Consolidated Statements of Operations – Three and Nine Months Ended September  30, 2013 and 2012

     2   
      

Consolidated Statements of Comprehensive Income – Three and Nine Months Ended September  30, 2013 and 2012

     3   
      

Consolidated Statement of Equity – Nine Months Ended September 30, 2013 September 30, 2013

     3   
      

Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2013 and 2012

     4   
      

Prologis, L.P.:

  
      

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

     5   
      

Consolidated Statements of Operations – Three and Nine Months Ended September 30, 2013 and 2012

     6   
      

Consolidated Statements of Comprehensive Income – Three and Nine Months Ended September  30, 2013 and 2012

     7   
      

Consolidated Statement of Capital – Nine Months Ended September 30, 2013 September 30, 2013

     7   
      

Consolidated Statements of Cash Flows – Nine Months Ended September 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

     49   
     Item 4.  

Controls and Procedures

     50   

PART II.

     Other Information   
     Item 1.  

Legal Proceedings

     50   
     Item 1A.  

Risk Factors

     50   
     Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

     50   
     Item 3.  

Defaults Upon Senior Securities

     51   
     Item 4.  

Mine Safety Disclosures

     51   
     Item 5.  

Other Information

     51   
     Item 6.  

Exhibits

     51   


Table of Contents

PART 1.

Item  1. Financial Statements

PROLOGIS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

 

     September 30,        
     2013     December 31,  
     (Unaudited)     2012  

ASSETS

  

Investments in real estate properties

   $ 21,599,908      $ 25,809,123   

Less accumulated depreciation

     2,540,370        2,480,660   
  

 

 

   

 

 

 

Net investments in real estate properties

     19,059,538        23,328,463   

Investments in and advances to unconsolidated entities

     4,210,305        2,195,782   

Notes receivable backed by real estate

     189,663        188,000   

Assets held for sale

     3,958        26,027   
  

 

 

   

 

 

 

Net investments in real estate

     23,463,464        25,738,272   

Cash and cash equivalents

     121,693        100,810   

Restricted cash

     42,488        176,926   

Accounts receivable

     137,879        171,084   

Other assets

     1,024,019        1,123,053   
  

 

 

   

 

 

 

Total assets

   $ 24,789,543      $ 27,310,145   
  

 

 

   

 

 

 

LIABILITIES AND EQUITY

    

Liabilities:

    

Debt

   $ 9,119,317      $ 11,790,794   

Accounts payable and accrued expenses

     692,241        611,770   

Other liabilities

     713,069        1,115,911   

Liabilities related to assets held for sale

     1,394        18,334   
  

 

 

   

 

 

 

Total liabilities

     10,526,021        13,536,809   
  

 

 

   

 

 

 

Equity:

    

Prologis, Inc. stockholders’ equity:

    

Preferred stock

     100,000        582,200   

Common stock: $0.01 par value; 498,603 shares and 461,770 shares issued and outstanding at September 30, 2013 and at December 31, 2012, respectively

     4,986        4,618   

Additional paid-in capital

     17,952,611        16,411,855   

Accumulated other comprehensive loss

     (451,658     (233,563

Distributions in excess of net earnings

     (3,852,846     (3,696,093
  

 

 

   

 

 

 

Total Prologis stockholders’ equity

     13,753,093        13,069,017   

Noncontrolling interests

     510,429        704,319   
  

 

 

   

 

 

 

Total equity

     14,263,522        13,773,336   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 24,789,543      $ 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     Nine Months Ended  
     September 30,     September 30,  
     2013     2012     2013     2012  

Revenues:

        

Rental income

   $ 297,044      $ 372,491      $ 941,969      $ 1,096,600   

Rental recoveries

     82,268        94,240        258,334        276,107   

Investment management income

     48,322        31,714        125,565        95,064   

Development management and other income

     2,551        1,017        7,872        5,859   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     430,185        499,462        1,333,740        1,473,630   
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

        

Rental expenses

     108,912        126,431        353,272        369,284   

Investment management expenses

     22,023        15,730        66,938        47,686   

General and administrative expenses

     55,034        55,886        166,140        167,460   

Depreciation and amortization

     158,889        190,148        492,690        547,036   

Other expenses

     6,370        5,580        17,494        17,142   

Merger, acquisition and other integration expenses

     —         20,659        —         52,573   

Impairment of real estate properties

     —         9,778        —         12,963   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     351,228        424,212        1,096,534        1,214,144   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     78,957        75,250        237,206        259,486   

Other income (expense):

        

Earnings from unconsolidated entities, net

     26,365        2,563        59,554        20,447   

Interest expense

     (84,885     (122,817     (292,383     (383,369

Interest and other income, net

     5,653        8,758        21,772        19,771   

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

     46,074        12,677        445,954        280,968   

Foreign currency and derivative gains (losses), net

     6,875        (5,908     15        (19,930

Gains (losses) on early extinguishment of debt, net

     (114,196     —         (164,155     4,919   

Impairment of other assets

     —         —         —         (16,135
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense)

     (114,114     (104,727     70,757        (93,329
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) before income taxes

     (35,157     (29,477     307,963        166,157   

Current income tax expense (benefit)

     11,012        (18,099     91,357        10,969   

Deferred income tax expense (benefit)

     1,168        (1,884     (6,823     (10,753
  

 

 

   

 

 

   

 

 

   

 

 

 

Total income tax expense (benefit)

     12,180        (19,983     84,534        216   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) from continuing operations

     (47,337     (9,494     223,429        165,941   
  

 

 

   

 

 

   

 

 

   

 

 

 

Discontinued operations:

        

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

     (127     8,054        1,753        29,262   

Net gains (losses) on dispositions, including related impairment charges and taxes

     40,297        (31,458     59,598        (10,335
  

 

 

   

 

 

   

 

 

   

 

 

 

Total discontinued operations

     40,170        (23,404     61,351        18,927   
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated net earnings (loss)

     (7,167     (32,898     284,780        184,868   

Net loss (earnings) attributable to noncontrolling interests

     1,768        (3,323     (3,051     (6,180
  

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss) attributable to controlling interests

     (5,399     (36,221     281,729        178,688   

Preferred stock dividends

     2,135        10,305        16,256        30,921   

Loss on preferred stock redemption

     —         —         9,108        —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss) attributable to common stockholders

   $ (7,534   $ (46,526   $ 256,365      $ 147,767   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding - Basic

     497,989        460,079        482,007        459,720   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding - Diluted

     499,848        461,979        488,409        464,938   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

        

Continuing operations

   $ (0.10   $ (0.05   $ 0.40      $ 0.28   

Discontinued operations

     0.08        (0.05     0.13        0.04   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ (0.02   $ (0.10   $ 0.53      $ 0.32   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

        

Continuing operations

   $ (0.10   $ (0.05   $ 0.40      $ 0.28   

Discontinued operations

     0.08        (0.05     0.13        0.04   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ (0.02   $ (0.10   $ 0.53      $ 0.32   
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividends per common share

   $ 0.28      $ 0.28      $ 0.84      $ 0.84   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

2


Table of Contents

PROLOGIS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands)

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
     2013     2012     2013     2012  

Consolidated net earnings (loss)

   $ (7,167   $ (32,898   $ 284,780      $ 184,868   

Other comprehensive income (loss):

        

Foreign currency translation gains (losses), net

     88,001        175,832        (250,251     7,148   

Unrealized gains (losses) and amortization on derivative contracts, net

     2,638        (5,067     21,839        (365
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     83,472        137,867        56,368        191,651   

Net loss (earnings) attributable to noncontrolling interests

     1,768        (3,323     (3,051     (6,180

Comprehensive income (loss) attributable to noncontrolling interests

     (942     (2,054     10,317        10,438   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to common stockholders

   $ 84,298      $ 132,490      $ 63,634      $ 195,909   
  

 

 

   

 

 

   

 

 

   

 

 

 

PROLOGIS, INC.

CONSOLIDATED STATEMENT OF EQUITY

Nine Months Ended September 30, 2013

(Unaudited)

(In thousands)

 

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

    —         —         —         —         —         281,729        3,051        284,780   

Effect of common stock plans

    —         1,155        11        71,525        —         —         —         71,536   

Issuance of stock in equity offering, net of issuance costs

    —         35,650        357        1,437,635        —         —         —         1,437,992   

Redemption of preferred stock

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

Issuance of warrants

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

Capital contributions

    —         —         —         —         —         —         112,316        112,316   

Settlement of noncontrolling interests

    —         28        —         (8,219     —         —         (244,599     (252,818

Foreign currency translation losses, net

    —         —         —         —         (239,853     —         (10,398     (250,251

Unrealized gains and amortization on derivative contracts, net

    —         —         —         —         21,758        —         81        21,839   

Distributions and allocations

    —         —         —         (1,137     —         (429,374     (54,341     (484,852
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of September 30, 2013

  $ 100,000        498,603      $ 4,986      $ 17,952,611      $ (451,658   $ (3,852,846   $ 510,429      $ 14,263,522   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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)

 

     Nine Months Ended  
     September 30,  
     2013     2012  

Operating activities:

    

Consolidated net earnings

   $ 284,780      $ 184,868   

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

    

Straight-lined rents

     (37,425     (47,041

Stock-based compensation awards, net

     34,253        24,054   

Depreciation and amortization

     496,085        577,898   

Earnings from unconsolidated entities, net

     (59,554     (20,447

Distributions and changes in operating receivables from unconsolidated entities

     71,234        30,321   

Amortization of debt and lease intangibles

     6,583        17,360   

Non-cash merger, acquisition and other integration expenses

     —         14,508   

Impairment of real estate properties and other assets

     —         29,098   

Net losses (gains) on dispositions, including related impairment charges, in discontinued operations

     (60,531     10,335   

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

     (445,954     (280,968

Losses (gains) on early extinguishment of debt, net

     164,155        (4,919

Unrealized foreign currency and derivative losses (gains), net

     (3,000     15,558   

Deferred income tax benefit

     (6,823     (10,753

Increase in restricted cash, accounts receivable and other assets

     (37,726     (186,450

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

     (73,829     19,926   
  

 

 

   

 

 

 

Net cash provided by operating activities

     332,248        373,348   
  

 

 

   

 

 

 

Investing activities:

    

Real estate development activity

     (541,678     (595,065

Real estate acquisitions, net of cash received

     (402,358     (173,492

Tenant improvements and lease commissions on previously leased space

     (105,324     (91,920

Non-development capital expenditures

     (56,378     (48,438

Investments in and advances to unconsolidated entities, net

     (1,036,410     (70,207

Return of investment from unconsolidated entities

     356,969        237,784   

Proceeds from dispositions and contributions of real estate properties

     3,913,670        1,010,789   

Acquisition of unconsolidated entities, net of cash received

     (461,823     (317,328
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     1,666,668        (47,877
  

 

 

   

 

 

 

Financing activities:

    

Proceeds from issuance of common stock, net

     1,502,394        29,442   

Dividends paid on common stock

     (411,539     (389,159

Dividends paid on preferred stock

     (19,549     (37,269

Redemption of preferred stock

     (482,500     —    

Noncontrolling interest contributions

     110,552        41,781   

Noncontrolling interest distributions

     (54,297     (22,541

Purchase of noncontrolling interest

     (247,803     (137,664

Debt and equity issuance costs paid

     (65,056     (10,745

Net proceeds from credit facilities, net

     158,586        270,878   

Repurchase and early extinguishment of debt

     (2,682,905     (1,314,387

Proceeds from issuance of debt

     1,565,883        1,389,984   

Payments on debt

     (1,302,876     (166,198
  

 

 

   

 

 

 

Net cash used in financing activities

     (1,929,110     (345,878
  

 

 

   

 

 

 

Effect of foreign currency exchange rate changes on cash

     (48,923     2,523   

Net increase (decrease) in cash and cash equivalents

     20,883        (17,884

Cash and cash equivalents, beginning of period

     100,810        176,072   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 121,693      $ 158,188   
  

 

 

   

 

 

 

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.

 

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Table of Contents

PROLOGIS, L.P.

CONSOLIDATED BALANCE SHEETS

(In thousands)

 

     September 30,         
     2013      December 31,  
     (Unaudited)      2012  

ASSETS

  

Investments in real estate properties

   $ 21,599,908       $ 25,809,123   

Less accumulated depreciation

     2,540,370         2,480,660   
  

 

 

    

 

 

 

Net investments in real estate properties

     19,059,538         23,328,463   

Investments in and advances to unconsolidated entities

     4,210,305         2,195,782   

Notes receivable backed by real estate

     189,663         188,000   

Assets held for sale

     3,958         26,027   
  

 

 

    

 

 

 

Net investments in real estate

     23,463,464         25,738,272   

Cash and cash equivalents

     121,693         100,810   

Restricted cash

     42,488         176,926   

Accounts receivable

     137,879         171,084   

Other assets

     1,024,019         1,123,053   
  

 

 

    

 

 

 

Total assets

   $ 24,789,543       $ 27,310,145   
  

 

 

    

 

 

 

LIABILITIES AND CAPITAL

     

Liabilities:

     

Debt

   $ 9,119,317       $ 11,790,794   

Accounts payable and accrued expenses

     692,241         611,770   

Other liabilities

     713,069         1,115,911   

Liabilities related to assets held for sale

     1,394         18,334   
  

 

 

    

 

 

 

Total liabilities

     10,526,021         13,536,809   
  

 

 

    

 

 

 

Capital:

     

Partners’ capital:

     

General partner - preferred

     100,000         582,200   

General partner - common

     13,653,093         12,486,817   

Limited partners

     50,532         51,194   
  

 

 

    

 

 

 

Total partners’ capital

     13,803,625         13,120,211   

Noncontrolling interests

     459,897         653,125   
  

 

 

    

 

 

 

Total capital

     14,263,522         13,773,336   
  

 

 

    

 

 

 

Total liabilities and capital

   $ 24,789,543       $ 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
September 30,
    Nine Months Ended
September 30,
 
     2013     2012     2013     2012  

Revenues:

        

Rental income

   $ 297,044      $ 372,491      $ 941,969      $ 1,096,600   

Rental recoveries

     82,268        94,240        258,334        276,107   

Investment management income

     48,322        31,714        125,565        95,064   

Development management and other income

     2,551        1,017        7,872        5,859   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     430,185        499,462        1,333,740        1,473,630   
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

        

Rental expenses

     108,912        126,431        353,272        369,284   

Investment management expenses

     22,023        15,730        66,938        47,686   

General and administrative expenses

     55,034        55,886        166,140        167,460   

Depreciation and amortization

     158,889        190,148        492,690        547,036   

Other expenses

     6,370        5,580        17,494        17,142   

Merger, acquisition and other integration expenses

     —         20,659        —         52,573   

Impairment of real estate properties

     —         9,778        —         12,963   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     351,228        424,212        1,096,534        1,214,144   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     78,957        75,250        237,206        259,486   

Other income (expense):

        

Earnings from unconsolidated entities, net

     26,365        2,563        59,554        20,447   

Interest expense

     (84,885     (122,817     (292,383     (383,369

Interest and other income, net

     5,653        8,758        21,772        19,771   

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

     46,074        12,677        445,954        280,968   

Foreign currency and derivative gains (losses), net

     6,875        (5,908     15        (19,930

Gains (losses) on early extinguishment of debt, net

     (114,196     —         (164,155     4,919   

Impairment of other assets

     —         —         —         (16,135
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense)

     (114,114     (104,727     70,757        (93,329
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) before income taxes

     (35,157     (29,477     307,963        166,157   

Current income tax expense (benefit)

     11,012        (18,099     91,357        10,969   

Deferred income tax expense (benefit)

     1,168        (1,884     (6,823     (10,753
  

 

 

   

 

 

   

 

 

   

 

 

 

Total income tax expense (benefit)

     12,180        (19,983     84,534        216   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) from continuing operations

     (47,337     (9,494     223,429        165,941   
  

 

 

   

 

 

   

 

 

   

 

 

 

Discontinued operations:

        

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

     (127     8,054        1,753        29,262   

Net gains (losses) on dispositions, including related impairment charges and taxes

     40,297        (31,458     59,598        (10,335
  

 

 

   

 

 

   

 

 

   

 

 

 

Total discontinued operations

     40,170        (23,404     61,351        18,927   
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated net earnings (loss)

     (7,167     (32,898     284,780        184,868   

Net loss (earnings) attributable to noncontrolling interests

     1,720        (3,475     (2,042     (5,444
  

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss) attributable to controlling interests

     (5,447     (36,373     282,738        179,424   

Preferred unit distributions

     2,135        10,305        16,256        30,921   

Loss on preferred unit redemption

     —         —         9,108        —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss) attributable to common unitholders

   $ (7,582   $ (46,678   $ 257,374      $ 148,503   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common units outstanding - Basic

     499,848        461,979        483,889        461,693   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common units outstanding - Diluted

     499,848        461,979        488,409        464,938   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

        

Continuing operations

   $ (0.10   $ (0.05   $ 0.40      $ 0.28   

Discontinued operations

     0.08        (0.05     0.13        0.04   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ (0.02     (0.10   $ 0.53      $ 0.32   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

        

Continuing operations

   $ (0.10   $ (0.05   $ 0.40      $ 0.28   

Discontinued operations

     0.08        (0.05     0.13        0.04   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ (0.02   $ (0.10   $ 0.53      $ 0.32   
  

 

 

   

 

 

   

 

 

   

 

 

 

Distributions per common unit

   $ 0.28      $ 0.28      $ 0.84      $ 0.84   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

 

6


Table of Contents

PROLOGIS, L.P.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2013     2012     2013     2012  

Consolidated net earnings (loss)

   $ (7,167   $ (32,898   $ 284,780      $ 184,868   

Other comprehensive income (loss):

        

Foreign currency translation gains (losses), net

     88,001        175,832        (250,251     7,148   

Unrealized gains (losses) and amortization on derivative contracts, net

     2,638        (5,067     21,839        (365
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     83,472        137,867        56,368        191,651   

Net loss (earnings) attributable to noncontrolling interests

     1,720        (3,475     (2,042     (5,444

Comprehensive income (loss) attributable to noncontrolling interests

     (579     (1,356     9,510        10,510   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to common unitholders

   $ 84,613      $ 133,036      $ 63,836      $ 196,717   
  

 

 

   

 

 

   

 

 

   

 

 

 

PROLOGIS, L.P.

CONSOLIDATED STATEMENT OF CAPITAL

Nine Months Ended September 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

     —         —         —          281,729        —         1,009        2,042        284,780   

Effect of REIT’s common stock plans

     —         —         1,155         71,536        —         —         —         71,536   

Issuance of units in exchange for contribution of equity offering proceeds

     —         —         35,650         1,437,992        —         —         —         1,437,992   

Redemption of preferred units

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

Issuance of warrants by the REIT

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

Capital contributions

     —         —         —          —         —         —         112,316        112,316   

Settlement of noncontrolling interests

     —         —         28         (8,219     —         —         (242,599     (250,818

Foreign currency translation losses, net

     —         —         —          (239,853     —         (888     (9,510     (250,251

Unrealized gains and amortization on derivative contracts, net

     —         —         —          21,758        —         81        —         21,839   

Distributions and allocations

     —         —         —          (430,511     (50     (864     (55,477     (486,852
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of September 30, 2013

     2,000      $ 100,000        498,603       $ 13,653,093        1,843      $ 50,532      $ 459,897      $ 14,263,522   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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)

 

     Nine Months Ended
September 30,
 
     2013     2012  

Operating activities:

    

Consolidated net earnings

   $ 284,780      $ 184,868   

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

    

Straight-lined rents

     (37,425     (47,041

REIT stock-based compensation awards, net

     34,253        24,054   

Depreciation and amortization

     496,085        577,898   

Earnings from unconsolidated entities, net

     (59,554     (20,447

Distributions and changes in operating receivables from unconsolidated entities

     71,234        30,321   

Amortization of debt and lease intangibles

     6,583        17,360   

Non-cash merger, acquisition and other integration expenses

     —         14,508   

Impairment of real estate properties and other assets

     —         29,098   

Net losses (gains) on dispositions, including related impairment charges, in discontinued operations

     (60,531     10,335   

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

     (445,954     (280,968

Losses (gains) on early extinguishment of debt, net

     164,155        (4,919

Unrealized foreign currency and derivative losses (gains), net

     (3,000     15,558   

Deferred income tax benefit

     (6,823     (10,753

Increase in restricted cash, accounts receivable and other assets

     (37,726     (186,450

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

     (73,829     19,926   
  

 

 

   

 

 

 

Net cash provided by operating activities

     332,248        373,348   
  

 

 

   

 

 

 

Investing activities:

    

Real estate development activity

     (541,678     (595,065

Real estate acquisitions, net of cash received

     (402,358     (173,492

Tenant improvements and lease commissions on previously leased space

     (105,324     (91,920

Non-development capital expenditures

     (56,378     (48,438

Investments in and advances to unconsolidated entities, net

     (1,036,410     (70,207

Return of investment from unconsolidated entities

     356,969        237,784   

Proceeds from dispositions and contributions of real estate properties

     3,913,670        1,010,789   

Acquisition of unconsolidated entities, net of cash received

     (461,823     (317,328
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     1,666,668        (47,877
  

 

 

   

 

 

 

Financing activities:

    

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

     1,502,394        29,442   

Distributions paid on common partnership units

     (415,115     (396,408

Distributions paid on preferred units

     (19,549     (37,269

Redemption of preferred stock

     (482,500     —    

Noncontrolling interest contributions

     110,552        41,781   

Noncontrolling interest distributions

     (52,721     (20,906

Purchase of noncontrolling interest

     (245,803     (132,050

Debt and equity issuance costs paid

     (65,056     (10,745

Net proceeds from credit facilities, net

     158,586        270,878   

Repurchase and early extinguishment of debt

     (2,682,905     (1,314,387

Proceeds from issuance of debt

     1,565,883        1,389,984   

Payments on debt

     (1,302,876     (166,198
  

 

 

   

 

 

 

Net cash used in financing activities

     (1,929,110     (345,878
  

 

 

   

 

 

 

Effect of foreign currency exchange rate changes on cash

     (48,923     2,523   

Net increase (decrease) in cash and cash equivalents

     20,883        (17,884

Cash and cash equivalents, beginning of period

     100,810        176,072   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 121,693      $ 158,188   
  

 

 

   

 

 

 

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 the REIT’s 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 Investment Management. Our Real Estate Operations segment represents the long-term ownership of industrial properties. Our Investment 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 September 30, 2013, the REIT owned an approximate 99.63% common general partnership interest in the Operating Partnership, and 100% of the preferred units. The remaining approximate 0.37% 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 Financial Accounting Standards Board (“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 the 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, and it did not have a material impact on the Consolidated Financial Statements.

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 the Consolidated Financial Statements.

In December 2011, the FASB issued an accounting standard update to clarify the scope of current 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 the 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 August 6, 2013, we concluded the unconsolidated co-investment venture Prologis North American Industrial Fund III (“NAIF III”). The venture sold 73 properties aggregating 9.5 million square feet to a third party for proceeds of $427.5 million and subsequently paid off all the remaining debt obligations of the venture. Following the sale of these properties, we acquired our partner’s 80% ownership in this venture and now own 100% of the remaining assets and liabilities. 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 III from its carrying value to the estimated fair value. The fair value was determined and allocated based on our valuation, estimates and assumptions of the acquisition date fair value of the tangible and intangible assets and liabilities. The preliminary allocation of net assets acquired was $519.2 million in real estate assets and $22.0 million of net other assets. As a result of these transactions, we have recorded a gain of $43.7 million in Gains on Acquisitions and Dispositions of Investments in Real Estate, Net, in the Consolidated Statements of Operations, for the three and nine months ended September 30, 2013. We have substantially completed the purchase price allocation and we do not expect future revisions, if any, to have a significant impact on our financial position or results of operations. The impact of the results in 2013 for the properties acquired from NAIF III was not significant.

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 nine months ended September 30, 2012. The gain was 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.

In connection with the acquisitions in 2012, our results for 2012 included rental income and rental expenses for the properties acquired of $124.0 million and $30.3 million, respectively, of which $9.2 million of rental income and $1.8 million of rental expenses were included in discontinued operations.

 

3. Real Estate

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

 

     September 30,      December 31,  
     2013      2012  

Industrial operating properties (1):

     

Improved land

   $ 4,311,193       $ 5,317,123   

Buildings and improvements

     14,093,704         17,291,125   

Development portfolio, including cost of land (2)

     1,084,959         951,643   

Land (3)

     1,643,055         1,794,364   

Other real estate investments (4)

     466,997         454,868   
  

 

 

    

 

 

 

Total investments in real estate properties

     21,599,908         25,809,123   

Less accumulated depreciation

     2,540,370         2,480,660   
  

 

 

    

 

 

 

Net investments in properties

   $ 19,059,538       $ 23,328,463   
  

 

 

    

 

 

 

 

(1) At September 30, 2013 and December 31, 2012, we had 1,650 and 1,853 industrial properties consisting of 268.5 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. At September 30, 2013, we had 30 properties aggregating 9.9 million square feet with an estimated value of $713.1 million that were acquired in connection with the wind down of Prologis Japan Fund 1 in June 2013 and the NAIF III acquisition in August 2013. See Notes 2 and 4 for further discussion on these transactions.

 

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PROLOGIS, INC. AND PROLOGIS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

(2) At September 30, 2013, the development portfolio consisted of 32 properties aggregating 15.1 million square feet under development with estimated completion dates primarily in 2013 and 2014 and 14 properties aggregating 6.3 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 10,217 acres and 10,915 acres at September 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) costs related to future development projects, including purchase options on land; (vi) restricted funds that are held in escrow pending the completion of tax-deferred exchange transactions involving operating properties; and (vii) earnest money deposits associated with potential acquisitions.

At September 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 nine months ended September 30, 2013, we recognized Gains on Acquisitions and Dispositions of Investments in Real Estate, Net in the Consolidated Statement of Operations of $446.0 million. This principally included: (i) a combined gain from the contributions of properties to our new ventures in Japan and Europe in the first quarter of $337.9 million, net of the deferral of the gains due to our ongoing investments, (ii) a gain of $56.9 million in the second quarter related to the contribution of one property to our new venture in Japan and the wind down of Prologis Japan Fund I, and (iii) a gain of $43.7 million in the third quarter from the conclusion of NAIF III. See Notes 2 and 4 for further discussion of these transactions. The majority of the current income tax expense in 2013 relates to asset sales and contributions of certain properties that were held in certain foreign subsidiaries or taxable REIT subsidiaries.

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 other 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):

 

     September 30,      December 31,  
     2013      2012  

Unconsolidated co-investment ventures

   $ 4,035,790       $ 2,013,080   

Other joint ventures

     174,515         182,702   
  

 

 

    

 

 

 

Totals

   $ 4,210,305       $ 2,195,782   
  

 

 

    

 

 

 

Unconsolidated Co-Investment Ventures

As of September 30, 2013, we had investments in and managed 11 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 of 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 was 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.

 

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PROLOGIS, INC. AND PROLOGIS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

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 6 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. To fund these combined transactions, we contributed ¥14.2 billion ($144.0 million), which retained our 15% ownership interest following the exercise of the overallotment option by the underwriter. In connection with the contribution of the development building to NPR, we recognized $8.3 million of current tax expense.

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 from us for approximately €2.3 billion ($3.0 billion) consisting of 195 properties in 11 target European global markets. 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 was 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 August 2013 we concluded NAIF III. See Note 2 for information regarding this transaction.

Subsequent to quarter end, on October 2, 2013, we acquired our partner’s interest in Prologis SGP Mexico (“SGP Mexico”), one of our co-investment ventures, and concluded the venture.

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

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
     2013      2012     2013      2012  

Earnings (loss) from unconsolidated co-investment ventures:

          

Americas (1)

   $ 1,664       $ (3,912   $ 15,058       $ (8,378

Europe (2)

     20,005         5,858        36,308         21,027   

Asia (3)

     4,100         432        6,569         2,640   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total earnings from unconsolidated co-investment ventures, net

   $ 25,769       $ 2,378      $ 57,935       $ 15,289   
  

 

 

    

 

 

   

 

 

    

 

 

 

Investment management and other income:

          

Americas

   $ 17,512       $ 16,937      $ 48,407       $ 50,541   

Europe (2)

     20,037         9,546        44,504         28,008   

Asia (3)

     9,840         5,131        30,821         14,973   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total investment management income

     47,389         31,614        123,732         93,522   

Development management and other income

     551         106        1,931         184   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 47,940       $ 31,720      $ 125,663       $ 93,706   
  

 

 

    

 

 

   

 

 

    

 

 

 

 

1) During the three and nine months ended September 30, 2013, we recognized gains of $1.2 million and $10.0 million, respectively, representing our share of the gain from the sale of one and three properties, respectively, by the Prologis Brazil Logistics Partners Fund and related joint ventures (“Brazil Fund”).
2) We launched PELP, which we account 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) We launched NPR, which we account 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).

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 $0.9 million and $1.9 million during the three and nine months ended September 30, 2013, respectively and $0.1 million and $1.6 million during the three and nine months ended September 30, 2012, respectively.

 

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PROLOGIS, INC. AND PROLOGIS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

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

 

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

Unconsolidated co-investment ventures by region

   2013     2012     2013      2012  

Americas

     23.5     23.2   $ 1,211,275       $ 1,111,831   

Europe (1)

     41.3     29.7     2,492,282         722,748   

Asia (1) (2)

     15.1     19.2     332,233         178,501   
  

 

 

   

 

 

   

 

 

    

 

 

 

Totals

     30.4     25.1   $ 4,035,790       $ 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, respectively.
(2) As discussed above, we completed the wind down of Prologis Japan Fund I in June 2013.

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 September 30, 2013 (1):

        

Revenues

   $ 173.2      $ 215.3      $ 56.8      $ 445.3   

Net earnings (2)

   $ 9.1      $ 41.9      $ 15.7      $ 66.7   

For the nine months ended September 30, 2013 (1):

        

Revenues

   $ 538.4      $ 571.6      $ 160.0      $ 1,270.0   

Net earnings (2)

   $ 34.9      $ 77.8      $ 32.9      $ 145.6   

As of September 30, 2013 (1):

        

Total assets

   $ 8,433.4      $ 11,471.4      $ 3,477.3      $ 23,382.1   

Amounts due to us (3)

   $ 38.3      $ 44.8      $ 94.7      $ 177.8   

Third party debt (4)

   $ 3,277.2      $ 2,715.7      $ 1,441.8      $ 7,434.7   

Total liabilities

   $ 3,620.7      $ 4,409.7      $ 1,532.4      $ 9,562.8   

Noncontrolling interest

   $ 1.6      $ 10.7      $ —       $ 12.3   

Venture partners’ equity

   $ 4,811.1      $ 7,051.0      $ 1,944.9      $ 13,807.0   

Our weighted average ownership (5)

     23.5     41.3     15.1     30.4

Our investment balance (6)

   $ 1,211.3      $ 2,492.3      $ 332.2      $ 4,035.8   

Deferred gains, net of amortization (7)

   $ 141.1      $ 184.3      $ 69.5      $ 394.9   

 

2012

   Americas     Europe     Asia     Total  

For the three months ended September 30, 2012:

        

Revenues

   $ 184.8      $ 115.5      $ 36.0      $ 336.3   

Net earnings (loss)

   $ (20.6   $ 9.6      $ 4.2      $ (6.8

For the nine months ended September 30, 2012 (1):

        

Revenues

   $ 581.0      $ 361.4      $ 105.8      $ 1,048.2   

Net earnings (loss)

   $ (66.5   $ 49.0      $ 8.9      $ (8.6

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 above and in Note 2, we have had significant activity with our unconsolidated co-investment ventures in 2012 and 2013. We concluded Prologis California and NAIF II in 2012 and NAIF III and the Prologis Japan Fund I in 2013 and only included the results of these ventures through the transaction dates. In 2013, we launched two new co-investment ventures (PELP and NPR) and the results of these ventures are included from the date these ventures acquired the properties.
(2) During the three and nine months ended September 30, 2013, the Brazil Fund sold one and three buildings for a net gain of $2.9 million and $24.0 million, respectively.

 

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PROLOGIS, INC. AND PROLOGIS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

(3) As of September 30, 2013, we had receivables from PELP and Prologis Japan Fund I for the remaining sale proceeds of $34.8 million and $8.1 million, respectively, which we expect will be repaid by the end of the year. As of September 30, 2013 and December 31, 2012, we had a note receivable from SGP Mexico of $19.7 million. As discussed earlier, we acquired our partner’s interest in SGP Mexico on October 2, 2013 at which time the note receivable was settled. The remaining amounts generally represent current balances for services provided by us to the co-investment ventures.
(4) As of September 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.

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 September 30, 2013 (in millions):

 

     Equity commitments     Expiration date for remaining
commitments

Prologis Targeted U.S. Logistics Fund (1)

    

Prologis

   $ —       (1)

Venture Partners

   $ 150.0     
  

 

 

   

 

Prologis SGP Mexico (2)

    

Prologis

   $ 24.6      (2)

Venture Partner

   $ 98.1     
  

 

 

   

 

Prologis European Properties Fund II (3) (4)

    

Prologis

   $ 23.4      March 2015

Venture Partner

   $ 302.1     
  

 

 

   

 

Europe Logistics Venture 1 (3)

    

Prologis

   $ 55.5      February 2014

Venture Partner

   $ 314.5     
  

 

 

   

 

Prologis European Logistics Partners (3) (5)

    

Prologis

   $ 193.3      January 2014

Venture Partner

   $ 193.3     
  

 

 

   

 

Prologis China Logistics Venture 1 (6)

    

Prologis

   $ 63.2      March 2015

Venture Partner

   $ 358.0     
  

 

 

   

 

Total

    

Prologis

   $ 360.0     

Venture Partners

   $ 1,416.0     
  

 

 

   

 

 

(1) During the nine months ended September 30, 2013, equity commitments of $191.5 million were obtained from third party investors and we committed to contribute an additional $100.0 million. To fund the acquisition of properties during the third quarter, the venture called capital of $171.5 million, of which $71.5 million was from third parties and $100.0 million was from us, resulting in an increase of our ownership. In October 2013, the venture raised an additional $53.5 million from third party investors and called equity commitments of $101.8 million from third party investors to repay debt and fund the acquisition of properties.
(2) As discussed above, we acquired our partner’s interest on October 2, 2013, and therefore have no remaining equity commitments after that date.
(3) Equity commitments are denominated in euro and reported above in U.S. dollar.
(4) During the nine months ended September 30, 2013, equity commitments of €325.0 million ($436.4 million) were obtained from new third party investors and we committed to contribute €125.0 million ($165.5 million). To meet the capital requirements of the venture, including the repayment of debt and contribution of properties by us, the venture called capital of €209.0 million ($276.3 million) of which €101.3 million ($134.3 million) was from third parties and €107.7 million ($142.1 million) was our share, increasing our ownership.

 

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PROLOGIS, INC. AND PROLOGIS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

(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 €138.0 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 $36.0 million of which $5.4 million was our share were called during 2013 to fund development.

In addition, during the nine months ended September 30, 2013, Prologis Targeted European Logistics Fund had equity commitments of €160.0 million ($209.5 million) and €2.0 million ($2.6 million) which were obtained from us and a third party, respectively. The venture called the commitments from us and the third party to repay debt, which increased our ownership. In October 2013, the venture raised additional equity commitments of €99.0 million ($136.6 million) from third party investors, which have subsequently been called.

Other Joint Ventures

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

 

     September 30,      December 31,  
     2013      2012  

Americas

   $ 97,253       $ 106,655   

Europe

     50,166         48,503   

Asia

     27,096         27,544   
  

 

 

    

 

 

 

Total investments in and advances to other joint ventures

   $ 174,515       $ 182,702   
  

 

 

    

 

 

 

 

5. Assets Held for Sale and Discontinued Operations

Held for Sale

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

Discontinued Operations

During the nine months ended September 30, 2013, we disposed of 39 operating properties aggregating 4.8 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 the 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     Nine Months Ended  
     September 30,     September 30,  
     2013     2012     2013     2012  

Rental income and recoveries

   $ 801      $ 23,910      $ 8,602      $ 88,245   

Rental expenses

     (575     (7,364     (3,368     (26,840

Depreciation and amortization

     (353     (8,148     (3,394     (30,862

Interest expense

     —         (344     (87     (1,281
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     (127     8,054        1,753        29,262   

Net gains (losses) on dispositions, net of taxes

     40,297        (4,049     59,598        17,074   

Impairment Charges

     —         (27,409     —         (27,409
  

 

 

   

 

 

   

 

 

   

 

 

 

Total discontinued operations

   $ 40,170      $ (23,404   $ 61,351      $ 18,927   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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.

 

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PROLOGIS, INC. AND PROLOGIS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

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

 

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

Credit Facilities

     1.2   $ 992,776         1.5   $ 888,966   

Senior notes

     5.1     4,980,625         5.6     5,223,136   

Exchangeable senior notes (3)

     3.3     397,481         4.6     876,884   

Secured mortgage debt (4)

     5.2     1,772,342         4.0     3,625,908   

Secured mortgage debt of consolidated entities

     4.5     296,783         4.4     450,923   

Other debt of consolidated entities

     4.5     4,345         4.8     67,749   

Term loan and other debt

     1.7     674,965         1.8     657,228   
  

 

 

   

 

 

    

 

 

   

 

 

 

Totals

     4.3   $ 9,119,317         4.4   $ 11,790,794   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

(1) The interest rates presented represent the effective interest rates (including amortization of the non-cash premiums or discount).
(2) Included in the outstanding balances are borrowings denominated in non-U.S. currency, principally: euro ($1.4 billion) and Japanese yen ($0.5 billion).
(3) The weighted average coupon interest rate was 3.3% and 2.8% as of September 30, 2013 and December 31, 2012, respectively. During the second quarter of 2013, we repaid $342.2 million of these notes. As of September 30, 2013, we have one series of exchangeable notes outstanding with a coupon interest rate of 3.3%.
(4) 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

On July 11, 2013, we terminated our existing global senior credit facility (the “Global Facility”) and entered into a new facility. Under the new facility funds may be drawn in U.S. dollar, euro, Japanese yen, British pound sterling and Canadian dollar on a revolving basis up to $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).

On August 14, 2013, we entered into a fourth amended and restated Japanese yen revolver (the “Revolver”). As a result, we increased our availability under the Revolver to ¥45.0 billion (approximately $461.2 million at September 30, 2013). The Revolver matures on May 14, 2018. We may increase availability under the Revolver to an amount not exceeding ¥56.5 billion (approximately $579.0 million at September 30, 2013) subject to obtaining additional lender commitments. Pricing under the Revolver was consistent with the Global Facility pricing as of September 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 September 30, 2013, were as follows (dollars in millions):

 

Aggregate lender - commitments

   $ 2,504.4   

Less:

  

Borrowings outstanding

     992.8   

Outstanding letters of credit

     72.3   
  

 

 

 

Current availability

   $ 1,439.3   
  

 

 

 

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.

Senior Notes

In connection with the equity offering in April 2013 (see Note 8 for additional details), we repaid $202.3 million of outstanding senior notes at maturity and incurred $32.6 million of debt extinguishment costs, primarily due to the prepayment of $350.0 million of senior notes that were scheduled to mature in 2014. In August 2013, we issued $1.25 billion of senior notes, consisting of $400.0 million at an interest rate of 2.75% maturing in 2019, at 99.97% of par value for an all-in rate of 2.76%; and $850.0 million at an interest rate of 4.25% maturing in 2023, at 99.74% of par value for an all-in rate of 4.28%. In connection with this issuance, we tendered several series of debt maturing in 2018 through 2020 and acquired an aggregate principal amount of debt equal to $611.4 million and recognized $114.1 million loss from the early extinguishment. We used the remaining proceeds of this issuance to repay borrowings on our Credit Facilities.

In October 2013, we commenced an any and all tender offer through which we purchased $261.7 million in principal amount of our senior notes that mature in 2017 for a premium of $41.2 million, which will be recognized as a loss on early extinguishment of debt. In conjunction with this tender, we commenced another tender offer through which we may repurchase a portion of our senior notes that mature in 2018 for an aggregate purchase price up to approximately $45 million including premiums and accrued interest. The second tender offer is expected to expire on November 21, 2013. To fund the repurchase of these notes and repay borrowings on our Credit Facilities, on November 1, 2013, we issued $500 million in principal amount of senior notes with an interest rate of 3.35% and a maturity date of February 1, 2021.

 

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PROLOGIS, INC. AND PROLOGIS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

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 in the Consolidated Statements of Operations. The fair value of the derivative associated with our exchangeable notes was a liability of $46.4 million and $39.8 million at September 30, 2013 and December 31, 2012, respectively. We recognized an unrealized gain of $6.5 million and an unrealized loss of $6.6 million for the three and nine months ended September 30, 2013, respectively, and an unrealized loss of $6.7 million and $19.1 million for the three and nine months ended September 30, 2012, respectively.

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 were 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)

   $ —         $ —        $ —         $ —         $ 48       $ 48       $ 30       $ 78   

2014 (2)

     574         —         —          659         291         1,524         27         1,551   

2015

     175         460        —          1         164         800         25         825   

2016

     641         —         —          1         310         952         126         1,078   

2017

     700         —         850         1         229         1,780         4         1,784   

2018

     862         —         142         1         113         1,118         74         1,192   

2019

     693         —         —          1         294         988         2         990   

2020

     444         —         —          1         9         454         2         456   

2021

     —          —         —          —          137         137         2         139   

2022

     —          —         —          —          7         7         3         10   

Thereafter

     850         —         —          10         137         997         6         1,003   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     4,939         460        992         675         1,739         8,805         301         9,106   

Unamortized premiums (discounts), net

     42         (63     —          —          33         12         1         13   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4,981       $ 397      $ 992       $ 675       $ 1,772       $ 8,817       $ 302       $ 9,119   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Our consolidated entities have $13.7 million available to borrow under credit facilities.
(2) We expect to use cash on hand to repay 2013 maturities of our wholly owned debt. Of the amounts maturing in 2014, we expect to refinance or repay 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 $30.1 million of secured mortgage debt, which we expect to refinance or repay, 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. Included in other debt is a term loan that can be extended until 2017 (three times each at one year), subject to satisfaction of certain conditions and payment of an extension fee.

Debt Covenants

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

 

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PROLOGIS, INC. AND PROLOGIS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

7. Other Liabilities

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

 

     2013      2012  

Tenant security deposits

   $ 192,114       $ 174,137   

Income tax liabilities

     168,876         463,102   

Unearned rents

     72,648         115,020   

Deferred income

     41,425         50,025   

Value added taxes payable

     29,836         31,399   

Lease intangible liabilities

     29,500         53,289   

Environmental

     20,064         30,075   

Other

     158,606         198,864   
  

 

 

    

 

 

 

Total other liabilities

   $ 713,069       $ 1,115,911   
  

 

 

    

 

 

 

The decrease in other liabilities from December 31, 2012 to September 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 0.37% 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.

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 we 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 the 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 nine months ended September 30, 2013, net earnings attributable to noncontrolling interests was $3.1 million, of which $4.6 million was a loss from continuing operations and $7.7 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 $245.8 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

 

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PROLOGIS, INC. AND PROLOGIS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

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.

In the second quarter of 2013, we earned a promote fee from Prologis Institutional Alliance Fund II of $18.8 million from the fund, which was based on the venture’s cumulative returns to the investors over the life of the venture. Of that amount, $13.5 million represented the third party investors’ portion and is reflected as a component of Noncontrolling Interest in the Consolidated Statements of Operations for the nine months ended September 30, 2013. We also recognized approximately $3.0 million of expense for the nine months ended September 30, 2013, in Investment Management Expenses in the Consolidated Statements of Operations, representing the cash bonus paid out to certain employees pursuant to the terms of the Prologis Promote Plan, previously referred to as the Private Capital Plan.

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 September 30, 2013, the REIT owned an approximate 99.63% 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 September 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      $ 74,611       $ 44,476       $ 589,352       $ 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     215,056         157,843         455,011         388,960         197,349         214,084   

Brazil Fund (4)

     50.0     50.0     68,503         66,494         —          —          —          —    

Prologis AMS

     38.5     38.5     63,005         59,631         145,102         160,649         44,861         63,749   

Other consolidated entities

     various        various        38,722         43,930         379,472         404,825         59,086         62,061   
      

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Operating Partnership noncontrolling interests

         459,897         653,125         1,568,937         2,352,707         301,296         518,672   

Limited partners in the Operating Partnership (5)

         50,532         51,194         —          —          —          —    
      

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

REIT noncontrolling interests

       $ 510,429       $ 704,319       $ 1,568,937       $ 2,352,707       $ 301,296       $ 518,672   
      

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) At September 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. At September 30, 2013, this included the 804,734 units of one of our limited partnerships 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 receive quarterly cash distributions equal to the quarterly dividends paid on our common stock pursuant to the terms of the applicable partnership agreements.
(2) As disclosed above, we acquired our partners’ interest in June 2013.
(3) In May 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 $139.6 million at September 30, 2013. For additional information on our unconsolidated investments, see Note 4.
(5) At September 30, 2013 and December 31, 2012, there were 1,843,131 and 1,893,266 units respectively, that 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. In the third quarter of 2013, 50,135 units were redeemed for cash. All of these outstanding limited partnership units receive quarterly cash distributions equal to the quarterly distributions paid on our common stock pursuant to the terms of the partnership agreement.

 

10. Long-Term Compensation

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

 

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PROLOGIS, INC. AND PROLOGIS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

Summary of Activity

The activity for the nine months ended September 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

     (755,264     

Forfeited / Expired

     (322,925     
  

 

 

      

Balance at September 30, 2013

     6,435,028      $ 36.04         6,290,114   
  

 

 

   

 

 

    

 

 

 

The activity for the nine months ended September 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

     (352,727  

Forfeited

     (18,326  
  

 

 

   

Balance at September 30, 2013

     316,224      $ 34.01   
  

 

 

   

 

 

 

The activity for the nine months ended September 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

     1,288,457        

Vested

     (828,158     

Forfeited

     (67,010     
  

 

 

      

Balance at September 30, 2013

     2,392,637      $ 36.88         79,306   
  

 

 

   

 

 

    

 

 

 

During the nine months ended September 30, 2013, we granted 1,288,457 RSUs which, generally, will vest over three years.

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 $2.0 million and $6.0 million of compensation expense during the three and nine months ended September 30, 2013, respectively, 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 $3.0 million and $12.0 million of compensation expense during the three and nine months ended September 30, 2013, respectively, 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.

 

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PROLOGIS, INC. AND PROLOGIS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

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

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  

REIT

   2013     2012     2013      2012  

Net earnings (loss) attributable to common stockholders

   $ (7,534   $ (46,526   $ 256,365       $ 147,767   

Noncontrolling interest attributable to exchangeable limited partnership units (1)

     (48     (152     1,446         935   
  

 

 

   

 

 

   

 

 

    

 

 

 

Adjusted net earnings (loss) attributable to common stockholders

   $ (7,582   $ (46,678   $ 257,811       $ 148,702   
  

 

 

   

 

 

   

 

 

    

 

 

 

Weighted average common shares outstanding - Basic (2)

     497,989        460,079        482,007         459,720   

Incremental weighted average effect on exchange of limited partnership units (1)

     1,859        1,900        3,099         3,260   

Incremental weighted average effect of stock awards and warrants

     —         —         3,303         1,958   
  

 

 

   

 

 

   

 

 

    

 

 

 

Weighted average common shares outstanding - Diluted (3)

     499,848        461,979        488,409         464,938   
  

 

 

   

 

 

   

 

 

    

 

 

 

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

   $ (0.02   $ (0.10   $ 0.53       $ 0.32   
  

 

 

   

 

 

   

 

 

    

 

 

 

Operating Partnership

                         

Net earnings (loss) attributable to common unitholders

   $ (7,582   $ (46,678   $ 257,374       $ 148,503   

Noncontrolling interest attributable to exchangeable limited partnership units

     —         —         437         199   
  

 

 

   

 

 

   

 

 

    

 

 

 

Adjusted net earnings (loss) attributable to common unitholders

   $ (7,582   $ (46,678   $ 257,811       $ 148,702   
  

 

 

   

 

 

   

 

 

    

 

 

 

Weighted average common partnership units outstanding - Basic (2)

     499,848        461,979        483,889         461,693   

Incremental weighted average effect on exchange of limited partnership units

     —         —         1,217         1,287   

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

     —         —         3,303         1,958   
  

 

 

   

 

 

   

 

 

    

 

 

 

Weighted average common partnership units outstanding - Diluted (3)

     499,848        461,979        488,409         464,938   
  

 

 

   

 

 

   

 

 

    

 

 

 

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

   $ (0.02   $ (0.10   $ 0.53       $ 0.32   
  

 

 

   

 

 

   

 

 

    

 

 

 

 

(1) Income (loss) allocated to the exchangeable Operating Partnership units not held by the REIT has been included in the numerator and exchangeable Operating Partnership units have been included in the denominator for the purpose of computing diluted earnings per share for all periods since the per share/unit amount is the same. Weighted average exchangeable Operating Partnership units outstanding (in thousands) were 1,859 and 1,900 for the three months ended September 30, 2013 and 2012, respectively and were 1,882 and 1,973 for the nine months ended September 30, 2013 and 2012, respectively.
(2) The increase in shares/units between the periods is due to an equity offering in April 2013. See Note 8 for more information.
(3) Total weighted average potentially dilutive stock awards and warrants outstanding (in thousands) were 14,133 and 9,633 for the three months ended September 30, 2013 and 2012, respectively, and 14,070 and 9,824 for the nine months ended September 30, 2013 and 2012, respectively. Total weighted average potentially dilutive shares/units from exchangeable debt outstanding (in thousands) were 11,879 for all periods presented. Total weighted average potentially dilutive limited partnership units outstanding (in thousands) were 1,950 and 1,285 for the three months ended September 30, 2013 and 2012, respectively and 1,426 and 1,287 for the nine months ended September 30, 2013 and 2012, respectively.

 

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 the 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.

 

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PROLOGIS, INC. AND PROLOGIS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

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 the 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 the Consolidated Statements of Operations in which the hedged items are recorded in the same period that the underlying hedged items affect earnings.

Our co-investment ventures may also enter into derivative contracts. As we act as the manager of these ventures, our ventures use the same risk mitigation and exposure limits related to counterparties. In addition, these ventures primarily follow the same hedging strategy as Prologis. For our consolidated co-investment ventures, the accounting treatment is as described in this footnote. For our unconsolidated co-investment ventures, we record our proportionate share of any earnings impact in Earnings from Unconsolidated Entities, Net in the Consolidated Statements of Operations. In addition, for derivatives in our unconsolidated ventures that have been designated and qualify as hedging instruments, we record our proportionate share of the effective gain or loss as a component of Accumulated Other Comprehensive Loss in the Consolidated Balance Sheets. In both circumstances, we record the offsetting amount as Investments in and Advances to Unconsolidated Entities in the Consolidated Balance Sheets.

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 the Consolidated Balance Sheets.

In the fourth quarter of 2012, we entered into foreign currency contracts that expired in April and May 2013. These contracts were designated and qualified as hedging instruments. During 2013, we settled these contracts with a combined notional amount of $1.3 billion. As a result of these settlements, we have realized a gain of $4.3 million, in Other Comprehensive Income (Loss) in the Consolidated Statements of Comprehensive Income for the nine months ended September 30, 2013, respectively.

We had $4.3 million recorded in Other Assets at September 30, 2013, and $15.6 million and $17.5 million recorded in Accounts Payable and Accrued Expenses at September 30, 2013 and December 31, 2012, respectively, in the Consolidated Balance Sheets relating to the fair value of our net investment hedges. Amounts included in Accumulated Other Comprehensive Loss in the Consolidated Balance Sheets at September 30, 2013 and December 31, 2012, were losses of $2.3 million and $17.5 million, respectively. None of our net investment hedges were ineffective during the three and nine months ended September 30, 2013, therefore, there was no impact on earnings. For the three and nine months ended September, 30, 2013, we recorded losses of $21.7 million and gains of $12.6 million, respectively, in Other Comprehensive Income (Loss) in the Consolidated Statements of Comprehensive Income due to the change in fair value of our net investment hedges.

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

 

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PROLOGIS, INC. AND PROLOGIS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

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 that 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 September 30, 2013. We had $6.2 million and $28.0 million accrued in Accounts Payable and Accrued Expenses in the Consolidated Balance Sheets relating to our unsettled derivative contracts at September 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 the 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 nine months ended September 30, 2013 were not considered significant. The amounts reclassified to interest expense for the three and nine months ended September 30, 2012 were $3.6 million and $9.4 million, respectively. For the next twelve months from September 30, 2013, we estimate that an additional expense of $1.2 million will be reclassified into interest expense. Amounts included in Accumulated Other Comprehensive Loss in the Consolidated Balance Sheets at September 30, 2013 and December 31, 2012, were a losses of $14.8 million and $33.8 million, respectively. For the three and nine months ended September 30, 2013, we recorded gains of $2.6 million and $14.1 million, respectively, and for the three and nine months ended September 30, 2012, we recorded losses of $8.7 million and $9.8 million, respectively, in Other Comprehensive Income (Loss) in the Consolidated Statements of Comprehensive Income due to the change in fair value of these derivatives. To the extent the hedged debt is paid off early, the amounts in Accumulated Other Comprehensive Loss are recognized as Gains (Losses) on Early Extinguishment of Debt, Net in the 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 nine months ended September 30, 2013. We recorded losses of $0.6 million and $3.1 million during the three and nine months ended September 30, 2012, respectively.

The following table summarizes the activity in our derivative instruments (in millions) for the nine months ended September 30, 2013:

 

     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     —          —          (460.0     —    
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Notional amounts at September 30

   $ 1,050.0      $ 84.6      $ —        $ —        $ 1,551.7      $ —    
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

(1) During the nine months ended September 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 nine months ended September 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 during the first quarter of 2013 from Accumulated Other Comprehensive Loss in the Consolidated Balance Sheets to Gains (Losses) on Early Extinguishment of Debt, Net in the 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.

Fair Value Measurements on a Recurring and Non-Recurring Basis

At September 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 the Consolidated Financial Statements.

Assets measured at fair value on a non-recurring basis in the 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 September 30, 2013.

 

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PROLOGIS, INC. AND PROLOGIS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

Fair Value of Financial Instruments

At September 30, 2013 and December 31, 2012, our carrying amounts of certain financial instruments, including cash and cash equivalents, restricted cash, accounts and notes receivable, accounts payable, and accrued expenses were representative of their fair values due to the short-term nature of these instruments.

At September 30, 2013 and December 31, 2012, the fair value of our derivative instruments were 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 September 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 September 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):

 

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

Debt:

           

Credit Facilities

   $ 992,776       $ 993,310       $ 888,966       $ 893,577   

Senior notes

     4,980,625         5,415,442         5,223,136         5,867,124   

Exchangeable senior notes

     397,481         525,958         876,884         1,007,236   

Secured mortgage debt

     1,772,342         1,922,436         3,625,908         3,765,556   

Secured mortgage debt of consolidated entities

     296,783         304,063         450,923         455,880   

Other debt of consolidated entities

     4,345         4,345         67,749         68,751   

Other debt

     674,965         685,293         657,228         660,951   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt

   $ 9,119,317       $ 9,850,847       $ 11,790,794       $ 12,719,075   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

13. Business Segments

Our current business strategy includes two operating segments: Real Estate Operations and Investment 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).

 

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PROLOGIS, INC. AND PROLOGIS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

   

Investment 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 Investment Management segment for all periods presented in the line item Investment Management Expenses in the 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 in the Consolidated Statements of Operations) and the properties owned by the unconsolidated entities (included in Investment Management Expenses in the Consolidated Statements of Operations), 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 Investment 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 Total Revenues in the Consolidated Statements of Operations; (ii) each reportable business segment’s net operating income from external customers to Earnings (Loss) before Income Taxes in the Consolidated Statements of Operations; and (iii) each reportable business segment’s assets to Total Assets in the Consolidated Balance Sheets. 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 Total Revenues, Earnings (Loss) before Income Taxes and Total Assets are allocated to each reportable business segment’s revenues, net operating income and assets. Items that are not directly assignable to a segment, such as certain corporate income and expenses, are reflected as reconciling items. The following reconciliations are presented in thousands:

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
     2013     2012     2013     2012  

Revenues:

        

Real estate operations:

        

Americas

   $ 328,702      $ 303,465      $ 961,042      $ 883,758   

Europe

     26,199        104,804        154,961        326,120   

Asia

     26,962        59,479        92,172        168,688   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Real Estate Operations segment

     381,863        467,748        1,208,175        1,378,566   
  

 

 

   

 

 

   

 

 

   

 

 

 

Investment management:

        

Americas

     18,357        16,934        49,972        51,758   

Europe

     20,037        9,537        44,504        28,000   

Asia

     9,928        5,243        31,089        15,306   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Investment Management segment

     48,322        31,714        125,565        95,064   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

   $ 430,185      $ 499,462      $ 1,333,740      $ 1,473,630   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net operating income:

        

Real estate operations: