Table of Contents

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 2013

or

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

For the transition period from             to             

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

 

 

 

LOGO

Prologis, Inc.

Prologis, L.P.

(Exact name of registrant as specified in its charter)

 

Maryland (Prologis, Inc.)

Delaware (Prologis, L.P.)

 

94-3281941 (Prologis, Inc.)

94-3285362 (Prologis, L.P.)

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

(415) 394-9000

(Registrant’s telephone number, including area code)

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

 

   

Title of Each Class

 

Name of Each Exchange on Which Registered

Prologis, Inc.

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

Prologis, L.P.

  4.000% Notes due 2018   New York Stock Exchange

Prologis, L.P.

  3.000% Notes due 2022   New York Stock Exchange

Prologis, L.P.

  3.375% Notes due 2024   New York Stock Exchange

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

Prologis, Inc. - NONE

Prologis, L.P. - NONE

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

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

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

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

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

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

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

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

 

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

 

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

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

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

Based on the closing price of Prologis, Inc.’s common stock on June 30, 2013, the aggregate market value of the voting common equity held by non-affiliates of Prologis, Inc. was $18,639,338,377.

The number of shares of Prologis, Inc.’s common stock outstanding as of February 21, 2014 was approximately 499,613,700.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of Part III of this report are incorporated by reference to the registrant’s definitive proxy statement for the 2014 annual meeting of its stockholders or will be provided in an amendment filed on Form 10-K/A.

 

 

 

 


Table of Contents

EXPLANATORY NOTE

This report combines the annual reports on Form 10-K for the year ended December 31, 2013 of Prologis, Inc. and Prologis, L.P. Unless stated otherwise or the context otherwise requires, references to “Prologis, Inc.” 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 Prologis, Inc. and the Operating Partnership collectively.

Prologis, Inc. is a real estate investment trust (a “REIT”) and the general partner of the Operating Partnership. As of December 31, 2013, Prologis, Inc. owned an approximate 99.65% common general partnership interest in the Operating Partnership and 100% of the preferred units in the Operating Partnership. The remaining approximate 0.35% common limited partnership interests are owned by non-affiliated investors and certain current and former directors and officers of Prologis, Inc. As the sole general partner of the Operating Partnership, Prologis, Inc. has full, exclusive and complete responsibility and discretion in the day-to-day management and control of the Operating Partnership.

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

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

 

   

enhances investors’ understanding of Prologis, Inc. 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 Prologis, Inc. 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 Prologis, Inc. and the Operating Partnership in the context of how we operate as an interrelated consolidated company. Prologis, Inc.’s only material asset is its ownership of partnership interests in the Operating Partnership. As a result, Prologis, Inc. 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. Prologis, Inc. 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 Prologis, Inc., 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 Prologis, Inc. 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 Prologis, Inc.’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 Prologis, Inc. and the Operating Partnership, there are separate sections in this report, as applicable, that separately discuss Prologis, Inc. and the Operating Partnership including separate financial statements and separate Exhibit 31 and 32 certifications. In the sections that combine disclosure of Prologis, Inc. and the Operating Partnership, this report refers to actions or holdings as being actions or holdings of Prologis.


Table of Contents

TABLE OF CONTENTS

  Item  

Description

  Page  
  PART I  

1.

 

Business

    4   
 

The Company

    4   
 

Investment Strategy

    5   
 

Business Strategy and Operating Segments

    5   
 

Code of Ethics and Business Conduct

    6   
 

Environmental Matters

    6   
 

Insurance Coverage

    6   

1A.

 

Risk Factors

    7   

1B.

 

Unresolved Staff Comments

    14   

2.

 

Properties

    14   
 

Geographic Distribution

    14   
 

Lease Expirations

    17   
 

Unconsolidated Co-Investment Ventures

    18   

3.

 

Legal Proceedings

    18   

4.

 

Mine Safety Disclosures

    18   
  PART II  

5.

 

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

    19   
 

Market Information and Holders

    19   
 

Dividends

    20   
 

Securities Authorized for Issuance Under Equity Compensation Plans

    20   
 

Other Stockholder Matters

    20   

6.

 

Selected Financial Data

    21   

7.

 

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

    21   
 

Management’s Overview

    22   
 

Results of Operations

    25   
 

Portfolio Information

    31   
 

Environmental Matters

    33   
 

Liquidity and Capital Resources

    33   
 

Off-Balance Sheet Arrangements

    36   
 

Contractual Obligations

    37   
 

Critical Accounting Policies

    37   
 

New Accounting Pronouncements

    39   
 

Funds from Operations

    39   

7A.

 

Quantitative and Qualitative Disclosure About Market Risk

    42   

8.

 

Financial Statements and Supplementary Data

    43   

9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

    44   

9A.

 

Controls and Procedures

    44   

9B.

 

Other Information

    45   
  PART III  

10.

 

Directors, Executive Officers and Corporate Governance

    45   

11.

 

Executive Compensation

    45   

12.

 

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

    45   

13.

 

Certain Relationships and Related Transactions, and Director Independence

    45   

14.

 

Principal Accounting Fees and Services

    45   
  PART IV  

15.

 

Exhibits, Financial Statement Schedules

    45   

 

3


Table of Contents

The statements in this report that are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are based on current expectations, estimates and projections about the industry and markets in which we operate, management’s beliefs and assumptions made by management. Such statements involve uncertainties that could significantly impact our financial results. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” variations of such words and similar expressions are intended to identify such forward-looking statements, which generally are not historical in nature. All statements that address operating performance, events or developments that we expect or anticipate will occur in the future — including statements relating to rent and occupancy growth, development activity and changes in sales or contribution volume of properties, disposition activity, general conditions in the geographic areas where we operate, our debt, capital structure and financial position, our ability to form new co-investment ventures and the availability of capital in existing or new co-investment ventures — are forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Although we believe the expectations reflected in any forward-looking statements are based on reasonable assumptions, we can give no assurance that our expectations will be attained and therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. Some of the factors that may affect outcomes and results include, but are not limited to: (i) national, international, regional and local economic climates, (ii) changes in financial markets, interest rates and foreign currency exchange rates, (iii) increased or unanticipated competition for our properties, (iv) risks associated with acquisitions, dispositions and development of properties, (v) maintenance of REIT status and tax structuring, (vi) availability of financing and capital, the levels of debt that we maintain and our credit ratings, (vii) risks related to our investments in our co-investment ventures, including our ability to establish new co-investment ventures, (viii) risks of doing business internationally, including currency risks, (ix) environmental uncertainties, including risks of natural disasters, and (x) those additional factors discussed under Item 1A. Risk Factors in this report. We undertake no duty to update any forward-looking statements appearing in this report except as may be required by law.

PART I

ITEM 1. Business

The Company

We are the leading global owner, operator and developer of industrial real estate, focused on global and regional markets across the Americas, Europe and Asia. As of December 31, 2013, on an owned and managed basis, we had properties and development projects totaling 569 million square feet (52.9 million square meters) in 21 countries. These properties are leased to more than 4,500 customers, including third-party logistics providers, transportation companies, retailers, manufacturers, and other enterprises.

Of the 569 million square feet (representing an investment of $45.5 billion) in our owned and managed portfolio as of December 31, 2013:

 

   

529 million square feet were in our operating portfolio with a gross book value of $41.5 billion that were 95.1 % occupied;

 

   

30 million square feet were in our development portfolio with a total expected investment of $2.4 billion that were 45.3% leased;

 

   

land available for future development was $1.6 billion;

 

   

10 million square feet consisted of properties in which we have an ownership interest but do not manage, including other non-industrial properties we own; and

 

   

the largest customer and 25 largest customers accounted for 1.8% and 17.2 %, respectively, of our annualized base rent.

Prologis, Inc. commenced operations as a fully integrated real estate company in 1997, elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (“Internal Revenue Code”), and believes the current organization and method of operation will enable Prologis, Inc. to maintain its status as a REIT. The Operating Partnership was also formed in 1997.

We have investments in entities through a variety of ventures. We co-invest in entities that own multiple properties with partners and 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 participating and other rights and our level of control of the entity. The co-investment ventures may have one or more investors.

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

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

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

 

4


Table of Contents

Investment Strategy

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

Our investment strategy focuses on providing distribution and logistics space to customers whose businesses are tied to global trade and depend on the efficient movement of goods through the global supply chain. We have a deep global presence with assets under management of $45.5 billion (based on expected investment) spanning 21 countries on four continents. Our properties are primarily located in two main categories, global markets and regional markets. Global markets comprise approximately 30 of the largest markets tied to global trade. These markets feature large population centers with high per-capita consumption rates and are located near major airports, seaports and ground transportation systems. Regional markets benefit from large population centers but typically are not as tied to the global supply chain, but rather serve local consumption and are often less supply constrained. We intend to primarily hold only the highest quality class-A product in global and regional markets. As of December 31, 2013, global and regional markets represented approximately 84% and 14%, respectively of our overall owned and managed platform (based on our share of net operating income of the properties). We also own a small number of assets in other markets, which account for approximately 2% of our owned and managed platform. We generally plan to exit from these other markets in an orderly fashion in the next few years, although we may continue to opportunistically invest in other markets. We have local market knowledge, construction expertise and a commitment to sustainable design across our diverse portfolio. We are supported by a broad and diverse customer base, comprising relationships with multinational corporations that result in repeatable business.

Business Strategy and Operating Segments

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

Real Estate Operations Segment

Rental Operations - This represents the primary source of our revenue, earnings and funds from operations (“FFO”). We collect rent from our customers under operating leases, including reimbursements for the vast majority of our operating costs. We expect to generate long-term internal growth in rental income by maintaining a high occupancy rate at our properties, by controlling expenses and through contractual rent increases on existing space and through rent increases on renewals on rollover space, thus capitalizing on the economies of scale inherent in owning, operating and growing a large global portfolio. Our rental income is diversified due to both our global presence and our broad customer base. We believe that our property management and leasing teams, regular maintenance and capital expenditure programs, energy management and sustainability programs and risk management programs create cost efficiencies, allowing us to leverage our global platform and provide flexible solutions for our customers.

Capital Deployment - Capital deployment includes development, re-development and acquisition activities that support our rental operations and are therefore included with that line of business for segment reporting. We acquire, develop and re-develop industrial properties primarily in global and regional markets to meet our customers’ needs. Within this line of business, we capitalize on: (i) the land that we currently own in global and regional markets; (ii) the development expertise of our local personnel; (iii) our global customer relationships; and (iv) the demand for high-quality distribution facilities in key markets. We seek to increase our rental income and the net asset value of the Company through the leasing of newly developed space, as well as through the acquisition of new properties. Depending on several factors, we may develop properties for long-term hold, for contribution into one of our co-investment ventures, or occasionally for sale to third parties. During 2013, we recognized gains in continuing operations of $563 million from the disposition of properties – primarily properties we developed. We develop directly as well as with our partners in certain co-investment ventures.

Investment Management Segment - We invest with partners and investors through our co-investment ventures, both private and public. We tailor industrial portfolios to investors’ specific needs and deploy capital with a focus on larger, long duration ventures and open ended funds with leading global institutions. We also access alternative sources of public equity such as the Nippon Prologis REIT, Inc. (“NPR”) which began trading on the Tokyo Stock Exchange in early 2013. These private and public vehicles source strategic capital for distinct geographies across our global platform. We typically hold an ownership interest in these ventures between 15-50%. We generate investment management revenues from our unconsolidated co-investment ventures by providing asset management and property management services. We may earn revenues through additional services provided such as leasing, acquisition, construction, development, disposition, legal and tax services. Depending on the structure of the venture and the returns provided to our partners, we may also earn revenues through incentive returns or promotes during the life of a venture or upon liquidation. We believe our co-investments with investors will continue to serve as a source of capital for new investments and provide revenues for our stockholders, as well as mitigate risk associated with our foreign currency exposure. We may grow this business with the formation of new ventures and through the growth in existing ventures with new third-party capital and additional investments by us. At December 31, 2013, we had 13 co-investment ventures with assets under management (consolidated and unconsolidated) and approximately 90% of these ventures (based on the gross book value of the buildings in these ventures) are long-life or perpetual vehicles.

Competition

The existence of competitively priced distribution space available in any market could have a material impact on our ability to rent space and on the rents that we can charge, which impacts both of our operating segments. To the extent we wish to acquire land for future development

 

5


Table of Contents

of properties in our Real Estate Operations segment or dispose of land, we may compete with local, regional, and national developers. We also face competition from investment managers for institutional capital within our Investment Management segment.

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

Customers

We have a broad customer base that is diverse in terms of industry concentration and represents a broad spectrum of international, national, regional and local distribution space users. At December 31, 2013, in our Real Estate Operations segment, we had more than 3,500 customers occupying 253.5 million square feet of distribution space. On an owned and managed basis, we had more than 4,500 customers occupying 503.8 million square feet of distribution space. Our largest customer and 25 largest customers accounted for 1.6% and 22.6%, respectively, of our annualized base rent at December 31, 2013, for our Real Estate Operations segment and 1.8% and 17.2%, respectively, for our owned and managed portfolio (which includes our Real Estate Operations segment and our unconsolidated co-investment ventures).

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

In our Investment Management segment, we also consider our partners and investors to be our customers. As of December 31, 2013, we partnered with 104 investors, several of which invest in multiple ventures.

Employees

We employ 1,468 persons across the globe. Our employees work in 4 countries in the Americas (873 persons), 15 countries in Europe (387 persons) and 3 countries in Asia (208 persons). Of the total, we have assigned 918 employees to our Real Estate Operations segment and 98 employees to our Investment Management segment. We have 452 employees who work in corporate and support positions who are not assigned to a segment. We believe our relationships with our employees are good. Our employees are not organized under collective bargaining agreements, although some of our employees in Europe are represented by statutory Works Councils and benefit from applicable labor agreements.

Code of Ethics and Business Conduct

We maintain a Code of Ethics and Business Conduct applicable to our Board of Directors (“Board”) and all of our officers and employees, including the principal executive officer, the principal financial officer and the principal accounting officer, or persons performing similar functions. A copy of our Code of Ethics and Business Conduct is available on our website, www.prologis.com. In addition to being accessible through our website, copies of our Code of Ethics and Business Conduct can be obtained, free of charge, upon written request to Investor Relations, Pier 1, Bay 1, San Francisco, California 94111. Any amendments to or waivers of our Code of Ethics and Business Conduct that apply to the principal executive officer, the principal financial officer, or the principal accounting officer, or persons performing similar functions, and that relate to any matter enumerated in Item 406(b) of Regulation S-K, will be disclosed on our website.

Environmental Matters

We are exposed to various environmental risks that may result in unanticipated losses and affect our operating results and financial condition. Either the previous owners or we have subjected a majority of the properties we have acquired, including land, to environmental reviews. While some of these assessments have led to further investigation and sampling, none of the environmental assessments has revealed an environmental liability that we believe would have a material adverse effect on our business, financial condition or results of operations. See Item 1A. Risk Factors and Note 20 to the Consolidated Financial Statements in Item 8.

Insurance Coverage

We carry insurance coverage on our properties. We determine the type of coverage and the policy specifications and limits based on what we deem to be the risks associated with our ownership of properties and our business operations in specific markets. Such coverage typically includes property damage and rental loss insurance resulting from such perils as fire, windstorm, flood, earthquake and terrorism; commercial general liability insurance; and environmental insurance. Insurance is maintained through a combination of commercial insurance, self

 

6


Table of Contents

insurance and through a wholly-owned captive insurance entity. The costs to insure our properties are primarily covered through reimbursements from our customers. We believe that our insurance coverage contains policy specifications and insured limits that are customary for similar properties, business activities and markets and we believe our properties are adequately insured. See further discussion in Item 1A. Risk Factors.

ITEM 1A. Risk Factors

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

General

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

We conduct a significant portion of our business and employ a substantial number of people outside of the United States. During 2013, we generated approximately $527 million or 30.1% of our revenue from operations outside the United States. Circumstances and developments related to international operations that could negatively affect our business, financial condition, results of operations or cash flow include, but are not limited to, the following factors:

 

   

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

 

   

differing employment practices and labor issues;

 

   

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

 

   

volatility in currencies;

 

   

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

 

   

unexpected changes in regulatory requirements and other laws;

 

   

potentially adverse tax consequences;

 

   

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

 

   

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

 

   

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

 

   

foreign ownership restrictions in operations with the respective countries; and

 

   

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

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

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

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

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

We have pursued, and intend to continue to pursue, growth opportunities in international markets where the U.S. dollar is not the functional currency. At December 31, 2013, approximately $7.3 billion or 29.5 % of our total assets are invested in a currency other than the U.S. dollar, primarily the British pound sterling, euro and Japanese yen. As a result, we are subject to foreign currency risk due to potential fluctuations in exchange rates between foreign currencies and the U.S. dollar. A significant change in the value of the foreign currency of one or more countries where we have a significant investment may have a material adverse effect on our financial position, debt covenant ratios, results of operations and cash flow. Although we attempt to mitigate adverse effects by borrowing under debt agreements denominated in foreign currencies and using derivative contracts, there can be no assurance that those attempts to mitigate foreign currency risk will be successful.

 

7


Table of Contents

Hedging arrangements involve risks, such as the risk that counterparties may fail to honor their obligations under these arrangements and the risk of fluctuation in the relative value of the foreign currency. The funds required to settle such arrangements could be significant depending on the stability and movement of foreign currency. The failure to hedge effectively against exchange rate changes may materially adversely affect our results of operations and financial position.

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

To the extent there is turmoil in the financial markets, it has the potential to materially affect the value of our properties and investments in our unconsolidated entities, the availability or the terms of financing that we and our unconsolidated entities have or may anticipate utilizing, our ability and that of our unconsolidated entities to make principal and interest payments on, or refinance any outstanding debt when due and may impact the ability of our customers to enter into new leasing transactions or satisfy rental payments under existing leases.

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

Risks Related to our Business

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

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

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

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

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

As of December 31, 2013, approximately 32.6% of our consolidated operating properties or $5.8 billion (based on investment before depreciation) are located in California, which represented 24.4% of the aggregate square footage of our operating properties and 29.1% of our annualized base rent. Our revenue from, and the value of, our properties located in California may be affected by local real estate conditions (such as an oversupply of or reduced demand for industrial properties) and the local economic climate. Business layoffs, downsizing, industry slowdowns, changing demographics and other factors may adversely impact California’s economic climate. Because of the number of properties we have located in California, a downturn in California’s economy or real estate conditions could adversely affect our financial condition, results of operations, cash flow and ability to make distributions and payments to our security holders and the market price of our securities.

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

In addition, the unconsolidated entities in which we invest have concentrations of properties in the same markets mentioned above, as well as in markets in France, Germany, the Netherlands, Poland and the United Kingdom, and are subject to the economic conditions in those markets.

A number of our properties are located in areas that are known to be subject to earthquake activity. United States properties located in active seismic areas include properties in the San Francisco Bay Area, Los Angeles, and Seattle. International properties located in active seismic

 

8


Table of Contents

areas include Japan and Mexico. We generally carry earthquake insurance on our properties located in areas historically subject to seismic activity, subject to coverage limitations and deductibles if we believe it is commercially reasonable. We evaluate our earthquake insurance coverage annually in light of current industry practice through an analysis prepared by outside consultants and in some specific instances have elected to self insure our earthquake exposure based on this analysis. We have elected not to carry earthquake insurance for our assets in Japan based on this analysis.

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

Our insurance coverage does not include all potential losses.

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

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

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

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

 

   

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

 

   

the attractiveness of our properties to potential customers;

 

   

competition from other available properties;

 

   

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

 

   

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

 

   

our ability to control rents and variable operating costs;

 

   

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

 

   

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

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

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

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

Our operating results and distributable cash flow would be adversely affected if a significant number of our customers were unable to meet their lease obligations. We are also subject to the risk that, upon the expiration of leases for space located in our properties, leases may not be renewed by existing customers, the space may not be re-leased to new customers or the terms of renewal or re-leasing (including the cost of

 

9


Table of Contents

required renovations or concessions to customers) may be less favorable to us than current lease terms. Our competitors may offer space at rental rates below current market rates or below the rental rates we currently charge our customers, we may lose potential customers, and we may be pressured to reduce our rental rates below those we currently charge in order to retain customers when our customers’ leases expire. In the event of default by a significant number of customers, we may experience delays and incur substantial costs in enforcing our rights as landlord, and may be unable to re-lease spaces. A customer may experience a downturn in its business, which may cause the loss of the customer or may weaken its financial condition, resulting in the customer’s failure to make rental payments when due or requiring a restructuring that might reduce cash flow from the lease. In addition, a customer may seek the protection of bankruptcy, insolvency or similar laws, which could result in the rejection and termination of such customer’s lease and thereby cause a reduction in our available cash flow.

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

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

Our real estate development strategies may not be successful.

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

 

   

we may not be able to obtain financing for development projects on favorable terms or at all;

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

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

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

 

10


Table of Contents

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

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

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

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

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

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

As of December 31, 2013, we had an investment in real estate containing approximately 270 million square feet held through unconsolidated entities. Our organizational documents do not limit the amount of available funds that we may invest in unconsolidated entities, and we may and currently intend to develop and acquire properties through co-investment ventures and investments in other entities when warranted by the circumstances. However, there can be no assurance that we will be able to form new co-investment ventures, attract third party investment or make additional investments in new or existing co-investment ventures, successfully develop or acquire properties through unconsolidated entities, or realize value from such unconsolidated entities. Our inability to do so may have an adverse effect on our growth, our earnings and the market price of our securities.

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

We generally seek to maintain sufficient influence over our unconsolidated entities to permit us to achieve our business objectives; however, we may not be able to do so. We have formed publicly traded investment vehicles, like our publicly traded REIT in Japan, for which we serve as sponsor and/or manager. We have contributed, and may continue to contribute, assets into such vehicles. As with any of our publicly traded entities or funds, there is a risk that our managerial relationship may be terminated.

 

11


Table of Contents

The occurrence of one or more of the events described above could adversely affect our financial condition, results of operations, cash flow and ability to make distributions and payments to our security holders and the market price of our securities.

Contingent or unknown liabilities could adversely affect our financial condition.

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

Risks Related to Financing and Capital

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

We are subject to risks normally associated with debt financing, including the risk that our cash flow will be insufficient to meet required payments of principal and interest. There can be no assurance that we will be able to refinance any maturing indebtedness, that such refinancing would be on terms as favorable as the terms of the maturing indebtedness, or that we will be able to otherwise obtain funds by selling assets or raising equity to make required payments on maturing indebtedness. If we are unable to refinance our indebtedness at maturity or meet our payment obligations, the amount of our distributable cash flow and our financial condition would be adversely affected and, if the maturing debt is secured, the lender may foreclose on the property securing such indebtedness. Our global senior credit facility, Japanese yen-based credit agreement and certain other debt bears interest at variable rates. Increases in interest rates would increase our interest expense under these agreements. From time to time, we may enter into interest rate swap or cap agreements. Such hedging arrangements involve risks, such as the risk that counterparties may fail to honor their obligations under these arrangements. The funds required to settle any swap breakage arrangements, if any, could be significant depending on the size of underlying financing and the applicable interest rates at the time of breakage. The failure to hedge effectively against interest rate changes may materially adversely affect our results of operations and financial position. In addition, our unconsolidated entities may be unable to refinance indebtedness or meet payment obligations, which may impact our distributable cash flow and our financial condition and/or we may be required to recognize impairment charges of our investments.

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

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

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

The credit ratings of our senior unsecured notes and preferred stock are based on our operating performance, liquidity and leverage ratios, overall financial position and other factors employed by the credit rating agencies in their rating analyses of us. Our credit ratings can affect the amount of capital we can access, as well as the terms and pricing of any debt we may incur. There can be no assurance that we will be able to maintain our current credit ratings, and in the event our credit ratings are downgraded, we would likely incur higher borrowing costs and may encounter difficulty in obtaining additional financing. Also, a downgrade in our credit ratings may trigger additional payments or other negative consequences under our current and future credit facilities and debt instruments. Adverse changes in our credit ratings could negatively impact our refinancing and other capital market activities, our ability to manage debt maturities, our future growth, our financial condition, the market price of our securities, and our development and acquisition activity.

We are dependent on external sources of capital.

In order to qualify as a REIT, we are required each year to distribute to our stockholders at least 90% of our REIT taxable income (determined without regard to the dividends-paid deduction and by excluding any net capital gain) and we may be subject to tax to the extent our income is not fully distributed. While historically we have satisfied these distribution requirements by making cash distributions to our stockholders, we may choose to satisfy these requirements by making distributions of cash or other property, including, in limited circumstances, our own stock. For distributions with respect to taxable years ending on or before December 31, 2013, and in some cases declared as late as December 31, 2014, the REIT can satisfy up to 90% of the distribution requirements discussed above through the distribution of shares of our stock if certain conditions are met. Assuming we continue to satisfy these distribution requirements with cash, we may not be able to fund all future capital needs, including acquisition and development activities, from cash retained from operations and may have to rely on third-party sources of capital. Further, in order to maintain our REIT status and not have to pay federal income and excise taxes, we may need to borrow funds on a short-term basis to meet the REIT distribution requirements even if the then-prevailing market conditions are not favorable for these borrowings. These short-term borrowing needs could result from differences in timing between the actual receipt of cash and inclusion of income for federal income tax purposes, or the effect of non-deductible capital expenditures, the creation of reserves or required debt or

 

12


Table of Contents

amortization payments. Our ability to access debt and equity capital on favorable terms or at all is dependent upon a number of factors, including general market conditions, the market’s perception of our growth potential, our current and potential future earnings and cash distributions and the market price of our securities.

Our stockholders may experience dilution if we issue additional common stock.

Any additional future issuance of common stock will reduce the percentage of our common stock owned by investors. In most circumstances, stockholders will not be entitled to vote on whether or not we issue additional common stock. In addition, depending on the terms and pricing of an additional offering of our common stock and the value of the properties, our stockholders may experience dilution in both book value and fair value of their common stock.

Federal Income Tax Risks

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

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

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

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

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

From time to time, we may transfer or otherwise dispose of some of our properties, including by contributing properties to our co-investment ventures. Under the Internal Revenue Code, any gain resulting from transfers of properties we hold as inventory or primarily for sale to customers in the ordinary course of business is treated as income from a prohibited transaction subject to a 100% penalty tax. We do not believe that our transfers or disposals of property or our contributions of properties into our co-investment ventures are prohibited transactions. However, whether property is held for investment purposes is a question of fact that depends on all the facts and circumstances surrounding the particular transaction. The Internal Revenue Service may contend that certain transfers or dispositions of properties by us or contributions of properties into our co-investment ventures are prohibited transactions. While we believe that the Internal Revenue Service would not prevail in any such dispute, if the Internal Revenue Code were to argue successfully that a transfer, disposition, or contribution of property constituted a prohibited transaction, we would be required to pay a 100% penalty tax on any gain allocable to us from the prohibited transaction. In addition, income from a prohibited transaction might adversely affect our ability to satisfy the income tests for qualification as a REIT.

Legislative or regulatory action could adversely affect us.

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

Other Risks

Risks Associated with our Dependence on Key Personnel.

We depend on the efforts of our executive officers and other key employees. From time to time, our personnel and their roles may change. In connection with the completion of the Merger, there were changes to our personnel and their roles. While we believe that we have retained

 

13


Table of Contents

our key talent and have found suitable employees to meet our personnel needs, the loss of key personnel, any change in their roles, or the limitation of their availability could adversely affect our financial condition, results of operations, cash flow and ability to make distributions and payments to security holders and the market price of our securities. If we are unable to continue to attract and retain our executive officers, or if compensation costs required to attract and retain key employees become more expensive, our performance and competitive position could be materially adversely affected.

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

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

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

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

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

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

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

ITEM 1B. Unresolved Staff Comments

None.

 

ITEM 2. Properties

We are invested in real estate properties that are predominately industrial properties. In Japan, our industrial properties are generally multi-level centers, which is common in Japan due to the high cost and limited availability of land. Our properties are typically used for distribution, storage, packaging, assembly and light manufacturing of consumer and industrial products. The vast majority of our operating properties are used by our customers for bulk distribution.

Geographic Distribution

Our investment strategy focuses on providing distribution and logistics space to customers whose businesses are tied to global trade and depend on the efficient movement of goods through the global supply chain. Our properties are primarily located in two main market types, global markets and regional markets.

We manage our business on an “ownership blind” basis without regard to whether a particular property is wholly owned by us or owned by one of our co-investment ventures. We believe this allows us to make business decisions based on the property operations and not based on our ownership. As such, we have included the operating property information for our Real Estate Operations segment and our owned and managed portfolio. The owned and managed portfolio includes the properties we consolidate and the properties owned by our unconsolidated co-investment ventures reflected at 100% of Prologis’ basis, not our proportionate share.

Included in our Real Estate Operations segment are 70 buildings that are owned by entities we consolidate but of which we own less than 100%. No individual property or group of properties operating as a single business unit amounted to 10% or more of our consolidated total assets at December 31, 2013, or generated income equal to 10% or more of our consolidated gross revenues for the year ended December 31, 2013.

 

14


Table of Contents

Dollars and square feet in the following tables are in thousands.

 

      Consolidated - Real Estate Operations  Segment       Owned and Managed  
Operating properties  

Rentable

Square
Footage

    Gross Book
Value
    Encumbrances (1)    

Rentable

Square
Footage

    Gross Book
Value
 

Americas:

         

Global Markets:

         

United States:

         

Atlanta

    11,641      $ 473,711      $ 40,256        15,122      $ 682,544   

Baltimore/Washington

    3,993        295,896        37,953        7,596        618,639   

Central & Eastern Pennsylvania

    12,261        742,091        68,760        14,842        894,956   

Central Valley California

    7,592        449,315        44,735        9,985        587,562   

Chicago

    26,190        1,496,703        196,157        36,566        2,187,163   

Dallas/Fort Worth

    17,528        753,568        109,625        23,915        1,135,489   

Houston

    6,146        288,460        47,633        10,907        644,994   

New Jersey/New York City

    13,798        1,051,973        116,625        20,678        1,824,860   

San Francisco Bay Area

    15,301        1,583,637        59,083        19,208        1,973,099   

Seattle

    3,386        319,743        44,430        10,758        994,090   

South Florida

    6,612        691,439        55,085        10,677        1,046,435   

Southern California

    42,343        3,766,502        401,537        57,284        5,149,176   

On Tarmac

    2,417        274,856        6,150        2,712        325,469   

Canada

    4,690        438,984              6,383        604,006   

Mexico

    21,460        1,254,170        344,626        30,964        1,858,728   

Brazil

                      4,043        370,412   

Regional Markets - United States:

         

Austin

    1,006        60,056              2,213        140,969   

Charlotte

    1,836        71,626        14,307        2,275        97,661   

Cincinnati

    3,387        119,402        40,400        6,663        273,432   

Columbus

    6,791        250,142        34,279        9,344        360,972   

Denver

    3,895        227,374        29,646        5,136        292,220   

Indianapolis

    2,614        91,797        29,297        5,095        199,794   

Las Vegas

    2,882        152,275              3,585        205,693   

Louisville

    3,435        143,684        12,608        3,435        143,684   

Memphis

    4,577        156,959        23,691        5,297        183,679   

Nashville

    4,562        159,939        41,603        5,961        211,885   

Orlando

    2,959        184,449              4,178        277,403   

Phoenix

    2,036        104,417              2,528        129,233   

Portland

    826        51,465        8,940        2,052        150,855   

San Antonio

    3,759        163,349        22,502        5,606        260,810   

Other Markets - United States

    8,756        395,416        28,893        11,848        628,865   
 

 

 

 

Subtotal Americas

    248,679        16,213,398        1,858,821        356,856        24,454,777   
 

 

 

 

Europe:

         

Global Markets:

         

Belgium

    440        36,592              2,016        173,266   

France

    899        71,553              30,026        2,536,025   

Germany

    1,257        87,947              20,020        1,857,506   

Netherlands

                      11,089        1,064,607   

Poland

    1,645        85,002              21,234        1,471,898   

Spain

    449        45,679              7,125        584,138   

United Kingdom

    834        83,350              20,077        2,590,057   

Regional Markets:

         

Czech Republic

    278        25,699              6,828        520,979   

Hungary

    201        12,163              5,348        386,789   

Italy

    1,277        86,843              8,378        540,323   

Slovakia

    548        32,412              4,620        332,142   

Sweden

    524        38,407              3,807        401,558   

Other Markets

    1,274        66,757              1,274        66,757   
 

 

 

 

Subtotal Europe

    9,626        672,404              141,842        12,526,045   
 

 

 

 

Asia

         

Global Markets:

         

China

    2,194        74,107              6,566        340,327   

Japan

    4,365        647,415        14,294        22,873        4,078,374   

Singapore

    942        145,032              942        145,032   
 

 

 

 

Subtotal Asia

    7,501        866,554        14,294        30,381        4,563,733   
 

 

 

 

Total operating portfolio

    265,806      $ 17,752,356      $ 1,873,115        529,079      $ 41,544,555   

Value added properties (2)

    1,291        48,708              2,311        87,274   
 

 

 

 

Total operating properties

    267,097      $ 17,801,064      $ 1,873,115        531,390      $ 41,631,829   

 

15


Table of Contents
   

 

Investment in Land

   

 

Development
Portfolio

 

Consolidated land and development portfolio in the

Real Estate Operations segment

  Acres     

Estimated Build
Out Potential

(sq. ft.) (3)

    Current
Investment
    Rentable
Square
Footage
    Total
Expected
Investment (4)
 

Americas:

          

Global Markets:

          

United States:

          

Atlanta

    613         8,655      $ 26,584            $   

Baltimore/Washington

    97         1,147        10,245        395        42,742   

Central & Eastern Pennsylvania

    416         5,412        50,192               

Central Valley California

    1,144         20,560        42,304               

Chicago

    511         9,497        33,209               

Dallas/Ft. Worth

    428         7,583        30,329        2,023        83,665   

Houston

    81         1,191        9,201        282        17,184   

New Jersey/New York City

    183         2,841        76,281        2,645        275,544   

Seattle

                       241        17,067   

South Florida

    341         5,794        151,377        312        27,585   

Southern California

    699         13,939        129,949        2,363        159,094   

Canada

    179         3,435        54,928        910        101,608   

Mexico

    789         14,530        152,090        1,944        121,970   

Regional Markets:

          

United States:

          

Central Florida

    129         1,901        27,027               

Charlotte

    20         308        1,389               

Cincinnati

    15         216        2,035        1,791        76,127   

Columbus

    142         2,364        4,705        767        29,992   

Denver

    49         836        6,281        402        23,556   

Indianapolis

    39         655        1,973        715        23,855   

Las Vegas

    75         1,281        7,818               

Memphis

    165         2,839        6,901               

Phoenix

    36         698        3,451        486        22,269   

Portland

    23         389        2,843               

Other Markets - United States

    565         8,790        37,358               
 

 

 

 

Subtotal Americas

    6,739         114,861        868,470        15,276        1,022,258   
 

 

 

 

Europe:

          

Global Markets:

          

Belgium

    27         526        10,744               

France

    448         7,992        79,745        1,322        71,058   

Germany

    112         2,239        25,752               

Netherlands

    56         1,538        53,355               

Poland

    696         12,958        89,516        376        24,350   

Spain

    100         2,021        17,031               

United Kingdom

    665         9,275        184,687        1,865        235,650   

Regional Markets:

          

Czech Republic

    191         3,201        38,501        238        15,304   

Hungary

    338         5,686        40,388               

Italy

    107         2,451        34,048               

Slovakia

    90         1,947        16,633        151        9,798   

Sweden

                       164        20,159   

Other markets

    119         2,600        22,236               
 

 

 

 

Subtotal Europe

    2,949         52,434        612,636        4,116        376,319   
 

 

 

 

Asia:

          

Global Markets:

          

China

    18         172        8,793        131        5,707   

Japan

    41         2,173        26,267        3,538        459,131   

Singapore

                       17        2,056   
 

 

 

 

Subtotal Asia

    59         2,345        35,060        3,686        466,894   
 

 

 

 

Total land and development portfolio

    9,747         169,640      $ 1,516,166        23,078      $ 1,865,471   

 

16


Table of Contents

The following is a summary of our investment in consolidated real estate properties at December 31, 2013 (in thousands):

 

      Investment Before
Depreciation
 

Industrial operating properties

   $ 17,801,064   

Development portfolio, including cost of land

     1,021,017   

Land

     1,516,166   

Other real estate investments (5)

     486,230   
  

 

 

 

Total consolidated real estate properties

   $ 20,824,477   

 

(1) Certain of our consolidated properties are pledged as security under our secured mortgage debt and assessment bonds at December 31, 2013. For purposes of this table, the total principal balance of a debt issuance that is secured by a pool of properties is allocated among the properties in the pool based on each property’s investment balance. In addition to the amounts reflected here, we also have $26.0 million of encumbrances related to other real estate properties not included in the Real Estate Operations segment. See Schedule III — Real Estate and Accumulated Depreciation to the Consolidated Financial Statements in Item 8 for additional identification of the properties pledged.

 

(2) Value added properties represent properties that are expected to be repurposed to a better use or acquired properties with opportunities to improve operating challenges and create higher value.

 

(3) Represents the estimated finished square feet available for rent upon completion of an industrial building on existing parcels of land included in this table.

 

(4) Represents the total expected investment when the property under development is completed and leased. This includes the cost of land, development and leasing costs. As of December 31, 2013, 83% of the properties under development in the development portfolio are expected to be complete by December 31, 2014, and 13% of the properties under development are completed but not yet stabilized (defined as a property that has been completed for less than one year and is less than 90% occupied).

 

(5) Included in other investments are: (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) earnest money deposits associated with potential acquisitions; and (vii) restricted funds that are held in escrow pending the completion of tax-deferred exchange transactions involving operating properties.

Lease Expirations

We generally lease our properties on a long term basis (with a weighted average lease term of seven years). The following table summarizes the lease expirations of our consolidated operating portfolio for leases in place as of December 31, 2013, without giving effect to the exercise of renewal options or termination rights, if any (dollars and square feet in thousands).

 

Year   

Number

of Leases

     Occupied Square
Feet
     Annualized Base
Rent
     % of Annualized
Base Rent
 

Month-to-month

     234         7,213       $ 23,871         1.8%   

2014

     904         36,110         180,084         13.9%   

2015

     877         48,321         235,977         18.2%   

2016

     746         45,931         226,200         17.4%   

2017

     507         36,245         184,766         14.2%   

2018

     394         26,539         152,013         11.7%   

2019

     217         22,944         115,797         8.9%   

2020

     81         7,876         46,865         3.6%   

2021

     50         6,164         28,558         2.2%   

2022

     34         3,074         20,045         1.5%   

2023

     46         5,631         38,640         3.0%   

2024 and thereafter

     46         7,132         47,203         3.6%   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     4,136         253,180       $ 1,300,019         100%   

 

17


Table of Contents

Unconsolidated Co-Investment Ventures

Included in our owned and managed portfolio, at December 31, 2013, are investments in 1,323 real estate properties that we hold through our equity investments in unconsolidated co-investment ventures, primarily industrial properties that we also manage. Below is a summary of our unconsolidated co-investment ventures, which represents 100% of the venture, not our proportionate share, as of December 31, 2013 (in thousands).

 

    

 

Operating Portfolio

     Development
Portfolio -

Total Expected
Investment
     Investment
in Land
 
Unconsolidated Co-Investment Venture    Square
Feet
     Gross Book
Value
       

Americas:

           

Prologis Targeted U.S. Logistics Fund

     48,490       $ 4,418,783       $ 3,024       $   

Prologis North American Industrial Fund

     46,500         2,859,230                   

Prologis Mexico Industrial Fund

     9,503         604,558                   

Prologis Brazil Logistics Partners Fund (“Brazil Fund”) and related joint ventures

     4,044         370,412         202,316         45,238   
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal Americas

     108,537         8,252,983         205,340         45,238   
  

 

 

    

 

 

    

 

 

    

 

 

 

Europe:

           

Prologis Targeted Europe Logistics Fund

     13,652         1,764,442         27,963           

Prologis European Properties Fund II

     62,364         5,691,874         9,823           

Europe Logistics Venture 1

     5,070         448,045                   

Prologis European Logistics Partners

     51,790         3,976,242         19,251           
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal Europe

     132,876         11,880,603         57,037           
  

 

 

    

 

 

    

 

 

    

 

 

 

Asia:

           

Nippon Prologis REIT

     18,508         3,430,960                   

Prologis China Logistics Venture 1

     4,372         266,219         241,676         23,847   
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal Asia

     22,880         3,697,179         241,676         23,847   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     264,293       $ 23,830,765       $ 504,053       $ 69,085   

For more information regarding our unconsolidated co-investment ventures, see Note 5 to the Consolidated Financial Statements in Item 8.

ITEM 3. Legal Proceedings

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

 

ITEM 4. Mine Safety Disclosures

Not Applicable

 

18


Table of Contents

PART II

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

Market Information and Holders

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

 

      High      Low      Dividends  

2012

        

First Quarter

   $ 36.03       $ 28.16       $ 0.28   

Second Quarter

     36.62         30.03         0.28   

Third Quarter

     37.58         31.03         0.28   

Fourth Quarter

     36.80         32.31         0.28   

2013

        

First Quarter

   $ 41.02       $ 37.04       $ 0.28   

Second Quarter

     45.52         35.09         0.28   

Third Quarter

     40.58         34.60         0.28   

Fourth Quarter

     40.99         35.71         0.28   

On February 21, 2014, we had approximately 499,613,700 shares of common stock outstanding, which were held of record by approximately 5,787 stockholders.

Stock Performance Graph

The following line graph compares the change in Prologis, Inc. cumulative total stockholder’s return on shares of its common stock from December 31, 2008, to the cumulative total return of the Standard and Poor’s 500 Stock Index and the FTSE NAREIT Equity REITs Index from December 31, 2008 to December 31, 2013. The graph assumes an initial investment of $100 in the common stock of Prologis, Inc. (AMB pre-Merger) and each of the indices on December 31, 2008, and, as required by the SEC, the reinvestment of all dividends. The return shown on the graph is not necessarily indicative of future performance.

 

LOGO

*$100 invested on 12/31/08 in stock or index, including reinvestment of dividends. Fiscal year ending December 31.

Copyright © 2014 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.

 

19


Table of Contents

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

Dividends

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

In 2013, we paid a quarterly cash dividend of $0.28 per common share. Our future common stock dividends may vary and will be determined by our Board upon the circumstances prevailing at the time, including our financial condition, operating results, estimated taxable income and REIT distribution requirements, and may be adjusted at the discretion of the Board during the year.

On April 19, 2013, we redeemed all of the outstanding series L, M, O, P, R, and S preferred stock. On December 31, 2013, we had one remaining series of preferred stock outstanding, the “series Q preferred stock”.

Holders of preferred stock outstanding have limited voting rights, subject to certain conditions, and are entitled to receive cumulative preferential dividends based upon each series’ respective liquidation preference. Dividends are payable quarterly in arrears on the last day of March, June, September and December. Dividends are payable when, and if, they have been declared by the Board, out of funds legally available for payment of dividends. After the respective redemption dates, preferred stock can be redeemed at our option. The following table sets forth the Company’s dividends paid or payable per share for the years ended December 31, 2013 and 2012:

 

     Years Ended December 31,  
      2013      2012  

Series L preferred stock

   $ 0.41       $ 1.63   

Series M preferred stock

   $ 0.42       $ 1.69   

Series O preferred stock

   $ 0.44       $ 1.75   

Series P preferred stock

   $ 0.43       $ 1.71   

Series Q preferred stock

   $ 4.27       $ 4.27   

Series R preferred stock

   $ 0.42       $ 1.69   

Series S preferred stock

   $ 0.42       $ 1.69   

Pursuant to the terms of our preferred stock, we are restricted from declaring or paying any dividend with respect to our common stock unless and until all cumulative dividends with respect to the preferred stock have been paid and sufficient funds have been set aside for dividends that have been declared for the relevant dividend period with respect to the preferred stock.

For more information regarding dividends, see Note 10 to the Consolidated Financial Statements in Item 8.

Securities Authorized for Issuance Under Equity Compensation Plans

For information regarding securities authorized for issuance under our equity compensation plans see Notes 10 and 13 to the Consolidated Financial Statements in Item 8.

Other Stockholder Matters

Common Stock Plans

See our 2014 Proxy Statement or our subsequent amendment of this Form 10-K for further information relative to our equity compensation plans.

 

20


Table of Contents

ITEM 6. Selected Financial Data

The following table sets forth selected financial data related to our historical financial condition and results of operations for 2013 and the four preceding years for both Prologis, Inc. and the Operating Partnership. As previously discussed, since ProLogis was the accounting acquirer in the Merger, the historical results of ProLogis are included for the entire period presented and the combined company’s results are included subsequent to the Merger. Certain amounts for the years prior to 2013 presented in the table below have been reclassified to conform to the 2013 financial statement presentation and to reflect discontinued operations. The amounts in the tables below are in millions, except for per share/unit amounts.

 

    Years Ended December 31,  
     2013     2012     2011 (1)     2010     2009  

Operating Data:

         

Total revenues

  $ 1,750      $ 1,961      $ 1,422      $ 827      $ 974   

Earnings (loss) from continuing operations (2)

  $ 230      $ (106)      $ (275)      $ (1,605)      $ (372)   

Net earnings (loss) per share attributable to common stock / unitholders - Basic (2):

         

Continuing operations (3)

  $ 0.40      $ (0.35)      $ (0.83)      $ (7.42)      $ (2.21)   

Discontinued operations (3)

  $ 0.25      $ 0.17      $ 0.32      $ 1.52      $ 2.20   

Net earnings (loss) per share attributable to common stock / unitholders - Basic

  $ 0.65      $ (0.18)      $ (0.51)      $ (5.90)      $ (0.01)   

Net earnings (loss) per share attributable to common stock / unitholders - Diluted (2):

         

Continuing operations

  $ 0.39      $ (0.34)      $ (0.82)      $ (7.42)      $ (2.21)   

Discontinued operations

  $ 0.25      $ 0.16      $ 0.31      $ 1.52        2.20   

Net earnings (loss) per share attributable to common stock / unitholders - Diluted

  $ 0.64      $ (0.18)      $ (0.51)      $ (5.90)      $ (0.01)   

Common share / unit distributions per share / unit (2)

  $ 1.12      $ 1.12      $ 1.06      $ 1.25      $ 1.57   

Balance Sheet Data:

         

Total assets

  $ 24,572      $ 27,310      $ 27,724      $ 14,903      $ 16,797   

Total debt

  $ 9,011      $ 11,791      $ 11,382      $ 6,506      $ 7,978   

FFO (4):

         

Reconciliation of net earnings (loss) to FFO:

         

Net earnings (loss) attributable to common shares

  $ 315      $ (81)      $ (188)      $ (1,296)      $ (3)   

Total NAREIT defined adjustments

    504        633        660        368        260   

Total our defined adjustments

    36               (60)        (46)        (71)   
 

 

 

 

FFO, as defined by Prologis

  $ 855      $ 552      $ 412      $ (974)      $ 186   

Total core defined adjustments

    (42)        262        182        1,255        159   
 

 

 

 

Core FFO (4)

  $ 813      $ 814      $ 594      $ 281      $ 345   

 

(1) In 2011, we completed the Merger and an acquisition of one of our unconsolidated entities, Prologis European Properties – “PEPR Acquisition” (see Note 3 to the Consolidated Financial Statements in Item 8 for additional information). Activity in 2011 included seven months of results associated with the Merger and PEPR Acquisition.

 

(2) We recognized significant gains on acquisitions and dispositions of investments in real estate of $0.7 billion in 2013. In 2010, we recognized impairment charges of $1.2 billion in real estate and goodwill. The historical shares and units of ProLogis were adjusted by the Merger exchange ratio of 0.4464 for the periods prior to the Merger. As a result, the per share/unit calculations were also adjusted.

 

(3) Net earnings (loss) attributable to common unitholders for the Operating Partnership was $(0.34) and $0.16 for continuing operations and discontinued operations, respectively, in 2012 and was $(0.82) and $0.31 for continuing operations and discontinued operations, respectively, in 2011. For all other periods, the amounts for the Operating Partnership agreed to Prologis.

 

(4) FFO and Core FFO are non-GAAP measures used in the real estate industry. See definitions and a complete reconciliation of FFO and Core FFO to net earnings in Item  7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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

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

 

21


Table of Contents

Management’s Overview

We believe the scale and quality of our operating platform, the skills of our team and the strength of our balance sheet will provide us with unique competitive advantages going forward. We have a straightforward plan for growth that is based on the following three key elements:

 

 

Capitalize on rental recovery. During 2013 in our owned and managed portfolio, we had quarterly rent increases on rollovers of 2%, 4%, 6% and 6%, following 17 quarters of decreases. Market rents are growing across the majority of our markets and we believe they have substantial room to further increase as they remain significantly below replacement-cost-justified rents. We believe demand for logistics facilities is strong across the globe and will support increases in net effective rents as many of our in place leases were originated during low rent periods, following the global financial crisis. As we are able to recover the majority of our rental expenses from customers, the increase in rent translates into increased net operating income, earnings and cash flows.

 

 

Create value from development; by utilizing our land bank, development expertise and customer relationships. We believe one of the keys to a successful development program is having strategic land control and, in this regard, we are well-positioned. Based on our current estimates, our land bank has the potential to support the development of nearly 200 million additional square feet. During 2013, we stabilized development projects with a total expected investment of $1.4 billion. We estimate that after our development and leasing activities, these buildings will have a value that is approximately 30% more than book value (using estimated yield and capitalization rates from our underwriting models). Based on our view of improving market conditions, we believe that our land bank is carried on the books below the current fair value and expect to realize this value going forward through development and sales.

 

 

Use our scale to grow earnings. We believe we have the infrastructure in place and the acquisition pipeline to allow us to increase our investments in real estate either directly through acquisitions of properties or by investing in our co-investment ventures with minimal increases to gross general and administrative expenses beyond property level expenses. We completed an equity offering in April 2013 in order to capitalize on these opportunities and we made investments in real estate, as well as in our co-investment ventures as detailed below.

We believe these three strategies will enable us to generate growth in revenue, earnings, net operating income, Core FFO and dividends for our shareholders in the coming years.

Since the Merger, we were focused on the following priorities (“The Ten Quarter Plan”), which we completed June 30, 2013:

 

 

Align our Portfolio with our Investment Strategy. We categorized our portfolio into three main market categories – global, regional and other markets. At the time of the Merger, 79% of the total owned and managed portfolio was in global markets and our goal was to have 90% of the portfolio in global markets. We substantially met this objective primarily through sales of assets in non-strategic locations, with a portion of the proceeds recycled into new developments. As of December 31, 2013, global markets represented 85% of the owned and managed platform, based on gross book value.

 

 

Strengthen our Financial Position. Our intent was to further strengthen our financial position by lowering our financial risk, reducing our currency exposure and building one of the strongest balance sheets in the REIT industry. By the end of 2013, we reduced our debt, improved our debt metrics, increased our financial flexibility and ensured continued access to capital markets. Although our debt may increase temporarily due to acquisitions and other growth initiatives (as it did during the last half of 2013), we expect debt as a percentage of assets to continue to decrease over time.

We have reduced our exposure to foreign currency exchange fluctuations by borrowing in local currencies where appropriate, utilizing derivative contracts to hedge our foreign denominated equity, as well as through holding assets outside the United States primarily in our co-investment ventures. As of December 31, 2013, we increased our share of net equity denominated in U.S. dollars to 77% from 45% at the time of the Merger. We expect our percentage of U.S. dollar denominated net equity to increase further in 2014.

 

 

Streamline our Investment Management Business. Several of our legacy co-investment ventures contained fee structures that did not adequately compensate us for the services we provide and as a result we terminated or restructured a number of these co-investment ventures. We substantially repositioned this business to focus on large, long duration ventures, open end ventures and geographically focused public entities and expect to continue with these activities in 2014. Since the Merger, we have raised a significant amount in third-party equity and we expect to grow our investment management business going forward. Growth will come from the deployment of the capital commitments we have already raised, as well as new incremental capital in both our private and public formats. We have reduced the number of our co-investment ventures from 22 at the time of the Merger to 13 at December 31, 2013, with approximately 90% in long-life or perpetual vehicles.

 

 

Improve the Utilization of Our Low Yielding Assets. We expected to increase the value of our low yielding assets by stabilizing our operating portfolio to 95% leased, completing the build-out and lease-up of our development projects, as well as monetizing our land through development or sale to third parties. We increased occupancy in our owned and managed portfolio 440 basis points from the Merger to 95.1% at December 31, 2013. From the Merger through December 31, 2013, we monetized approximately $890 million of our land bank through development starts and an additional $330 million through third-party sales.

 

 

Build the most effective and efficient organization in the REIT industry and become the employer of choice among top professionals interested in real estate as a career. We realized more than $115 million of cost synergies on an annualized basis, compared to the

 

22


Table of Contents
 

combined expenses of AMB and ProLogis on a pre-Merger basis. These synergies included gross general and administrative savings, as well as reduced global line of credit facility fees and lower amortization of non real estate assets. In addition, we implemented a new enterprise wide system that includes a property management/billing system (implemented in April 2012), a human resources system (implemented in July 2012), a general ledger and accounting system and a data warehouse (both implemented in January 2013).

Summary of 2013

 

   

We formed two new ventures and announced the formation of two additional ventures:

 

   

In early 2013, we launched the initial public offering for NPR. NPR will serve as the long-term investment vehicle for our stabilized properties in Japan. On February 14, 2013, NPR was listed on the Tokyo 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). During 2013, NPR completed two follow on equity offerings and used the proceeds to buy properties from us at appraised value.

 

   

On March 19, 2013, we closed on a euro denominated co-investment venture, Prologis European Logistics Partners Sàrl (“PELP”). PELP is structured as a 50/50 joint venture with Norges Bank Investment Management (“NBIM”) and has an initial term of 15 years, which may be extended for an additional 15-year period. At closing, the venture acquired a portfolio of 195 properties from us for an aggregate purchase price of €2.3 billion ($3.0 billion). PELP acquired additional properties from us during 2013.

 

   

In November, we extended the relationship with our partner in China and formed Prologis China Logistics Venture 2. The venture is expected to build, acquire and manage properties in China. The venture has potential investment capacity of over $1 billion, including $588 million of committed equity of which $88 million is our share.

 

   

We announced the formation of Prologis U.S. Logistics Venture (“USLV”) with NBIM in December. We closed on the venture in January 2014 with a contribution of 66 operating properties aggregating 12.8 million square feet for an aggregate purchase price $1.0 billion. These properties were acquired by us in June and August through the acquisition of our partners’ interests in two previous co-investment ventures (Prologis Institutional Alliance Fund II (“Fund II”) and Prologis North American Industrial Fund III (“NAIF III”), which are described below). We own 55% of the equity and the venture will be consolidated for accounting purposes due to the structure and voting rights of the venture.

 

   

We concluded four ventures (one in Japan, two in the United States and one in Mexico):

 

   

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 six properties to NPR.

 

   

In June 2013, we acquired our partners’ interest in Fund II, a consolidated co-investment venture. Based on the venture’s cumulative returns to the investors, we earned a promote payment of approximately $18.8 million from the venture. The third party investors’ portion of the promote payment was $13.5 million, which is reflected as a component of noncontrolling interest in the Consolidated Statements of Operations in Item 8. The assets and liabilities associated with this venture were wholly owned at December 31, 2013, and were subsequently contributed to USLV in January 2014.

 

   

On August 6, 2013, NAIF III sold 73 properties to a third party for $427.5 million and we acquired our partners 80% interest in the venture, which included 18 properties. All debt of the venture was paid in full at closing. As a result of these combined transactions, we recorded a net gain of $39.5 million. The assets and liabilities associated with this venture were wholly owned at December 31, 2013, and were subsequently contributed to USLV in January 2014.

 

   

On October 2, 2013, we acquired our partner’s 78.4% interest in Prologis SGP Mexico (“SGP Mexico”) and began consolidating its operating properties with an estimated total fair value of $409.5 million.

 

   

During the year and including the initial formation of the two new ventures discussed above, we contributed a total of 235 development properties to five of our unconsolidated co-investment ventures and generated net proceeds and net gains of $6.2 billion and $416.0 million, respectively. In addition, we contributed a total of 19 properties acquired from third parties to three of our co-investment ventures and generated net proceeds and net gains of $337.4 million and $139.2 million, respectively.

 

   

We generated net proceeds of $785.6 million from the dispositions of land and 89 operating buildings to third parties and recognized a net gain of $125.4 million.

 

   

In addition to the transactions discussed above, we invested a total of $505.7 million of new commitments (with cash and through contributions) in our unconsolidated co-investment ventures, which includes increasing our investment in three ventures:

 

   

We increased our ownership interest in Prologis European Properties Fund II to 32.5%.

 

   

We increased our ownership interest in Prologis Targeted Europe Logistics Fund to 43.1%.

 

   

We increased our ownership interest in Prologis Targeted U.S. Logistics Fund to 25.9%.

 

23


Table of Contents
   

In April, we issued 35.65 million shares of common stock in a public offering at a price of $41.60 per share, generating approximately $1.4 billion in net proceeds (“Equity Offering”).

 

   

In April, we redeemed $482.5 million of our preferred stock.

 

   

We had a significant amount of capital markets activity in 2013. As a result and in combination with our significant contribution and disposition activity, along with the Equity Offering, we decreased our total debt to $9.0 billion at December 31, 2013, from $11.8 billion at December 31, 2012. We extended our maturities and lowered our borrowing costs by issuing several series of new debt and repurchasing existing higher coupon debt. Details of debt activity are as follows:

 

   

We issued senior notes during 2013 as follows (dollars in thousands):

 

      Principal
Amount
     Effective
Interest Rate
    Maturity Date  

Senior Note Issuance Date:

       

August 15, 2013

   $ 850,000         4.25     August 15, 2023   

August 15, 2013

   $ 400,000         2.75     February 15, 2019   

November 1, 2013

   $ 500,000         3.35     February 1, 2021   

December 3, 2013

   700,000         3.00     January 18, 2022   

 

   

We used the proceeds of the newly issued debt to buy back debt of $1.5 billion through tender offers or private transactions, which resulted in a loss on early extinguishment of $180.7 million.

 

   

We repaid $1.6 billion of outstanding secured mortgage debt (with an average borrowing cost of 2.4%) with the proceeds from the contribution of properties, primarily to PELP and NPR, and we transferred $548.0 million of outstanding mortgage debt in connection with contributions. In addition, we used proceeds generated from property dispositions and the Equity Offering to repay $564.5 million in senior notes and $483.6 million in exchangeable senior notes. As a result of our repayment of debt, we recorded a loss on early extinguishment of $96.3 million.

 

   

All of this activity decreased our borrowing costs to 4.2% at December 31, 2013, from 4.4% at December 31, 2012, and increased the remaining maturity from 43 months to 58 months for the same period. Also, the issuance of the euro denominated debt and derivative contracts increased the percentage of our total equity denominated in U.S. dollar to 77%.

 

   

We commenced construction of 68 development projects on an owned and managed basis, aggregating 23 million square feet with a total expected investment of $1.8 billion (our share was $1.5 billion), including 27 projects (42% of our share of the total expected investment) that were 100% leased prior to the start of development. These projects had an estimated weighted average yield at stabilization of 7.6% and an estimated development margin of 19.1%. We used $445.3 million of land we already owned for these projects. We expect these developments to be completed by June 2015 or earlier.

 

   

We leased a total of 151.9 million square feet in our owned and managed portfolio and incurred average turnover costs (tenant improvements and leasing costs) of $1.42 per square foot. At December 31, 2013, our owned and managed operating portfolio was 95.1% occupied and 95.1% leased as compared to 94.0% occupied and 94.5% leased at December 31, 2012.

 

   

Our rent change on roll over was positive in each quarter in 2013 for our owned and managed portfolio, ranging from 2% to 6%. Rent change in our portfolio is continuing its upward trend and we expect to continue to see increases in our rents on rollover. During 2013, we retained 82.6% of customers whose leases were expiring.

Operational Outlook

The recovery of the logistics real estate market further strengthened and broadened globally during 2013. Operating fundamentals continued to improve and we believe this trend will continue as the leading indicators of industrial real estate are strong. Global trade is expected to grow 4.9% in 2014 and 5.4% in 2015 (a). Based on our own internal surveys, space utilization in our facilities continues to trend higher, which means our customers are short on capacity to handle their current needs and their future growth.

Market conditions in the U.S. are very favorable and an ongoing supply and demand imbalance exists (b). The industrial market absorbed 233 million square feet in 2013, the highest level since 2005 (b). By contrast, development completions amounted to only 67 million square feet resulting in a demand imbalance of 166 million square feet, the highest on record (b). These conditions have driven U.S. market vacancy to a new record low of 7.2% (b). As customer demand remains active and supply pipelines are below historical norm, we expect vacancy to continue to decline and rental rates to continue to increase in 2014.

Operating conditions in our Latin American markets are positive and have outperformed uneven macroeconomic growth in 2013. In Mexico, demand has continued to recover and the market occupancy rate across the six largest logistics markets (Mexico City, Monterrey,

 

24


Table of Contents

Guadalajara, Juarez, Reynosa and Tijuana) was 91.6% at the end of 2013, up 100 basis points from the prior year, based on internally generated data. In Brazil, despite a slowing economy, we believe it is an underserved logistics market and there is strong demand for modern logistics facilities as companies serve the growing consumer market.

In Europe, we believe we have seen the end of recessionary conditions in most countries. Customer sentiment continues to improve and broaden, which is translating into meaningful demand. Evidence for this includes pan-European market occupancy of 91.3%, higher than the level achieved in 2007 (c). The occupancy rate rose 1.0% in 2013 and we expect further gains in 2014. Economic momentum turned positive in 2013 and brighter macroeconomic prospects appear to be generating demand for logistics facilities, in our view. Our research indicates new starts for speculative development are near historic low levels. We expect net effective rents to continue to increase and the recovery to broaden to more of our markets. We believe high occupancy and rent growth, combined with declining capitalization rates will lead to a strong recovery in European industrial real estate values.

Expansionary market conditions are evident in our Asian markets. The availability of Class-A distribution space remains highly constrained and net effective rents are rising. In Japan, vacancy rates remain below 3% (a), and there is upward pressure on rents, especially in Tokyo and Osaka, as these markets have absorbed new deliveries. Increasing development costs, driven by higher land and construction pricing, are expected to keep new supply in balance. Demand in China is accelerating and we see new requirements from retailers and e-commerce customers. Low vacancy conditions continue to lead to outsized rental rate growth, in our view. Land availability has been constrained but appears to be improving. Barriers to supply continue to drive rents ahead of inflation, and we believe that we are well positioned with our development platform to meet this accelerating demand.

We believe elevated occupancy rates across our markets, coupled with the still-gradual pickup in new construction starts, are leading to notable increases in replacement-cost rents and effective rents. We expect to use our strategic land positions to support increased development activity in this environment. Our development business comprises speculative development, build-to-suit development, value-added conversions and redevelopment. We will develop directly and within our co-investment ventures, depending on location, market conditions, submarkets or building sites and availability of capital.

 

 

(a) according to the International Monetary Fund.

 

(b) according to CB Richard Ellis-Econometric Advisors (“CBRE”).

 

(c) according to CBRE, Jones Lang LaSalle and DTZ.

Results of Operations

Real Estate Operations Segment

The rental income and rental expense we recognize is directly impacted by our consolidated operating portfolio. As mentioned earlier, we have had significant real estate activity during the last several years that has impacted the size of our portfolio. In addition, the operating fundamentals in our markets have been improving, which has impacted both the occupancy and rental rates we have experienced, as well as fueling development activity. Also included in this segment is revenue from land we own and lease to customers under ground leases and development management and other income, offset by acquisition, disposition and land holding costs. The results of properties sold to third parties have been reclassified to Discontinued Operations for all periods presented. Net operating income from the Real Estate Operations segment for the years ended December 31, was as follows (dollars in thousands):

 

      2013      2012      2011  

Rental and other income

   $ 1,239,496       $ 1,469,419       $ 1,026,825   

Rental recoveries

     331,518         364,320         257,327   

Rental and other expenses

     (478,920)         (517,795)         (372,719)   
  

 

 

 

Net operating income - Real Estate Operations segment

   $ 1,092,094       $ 1,315,944       $ 911,433   
  

 

 

 

Operating margin

     69.5%         71.8%         71.0%   

Average occupancy

     93.6%         92.6%         89.9%   

Detail of our consolidated operating properties as of December 31, was as follows (square feet in thousands):

 

      2013      2012      2011  

Number of properties

     1,610         1,853         1,797   

Square Feet

     267,097         316,347         291,051   

Occupied %

     94.9%         93.7%         91.4%   

Below are the key drivers that have influenced the net operating income (“NOI”) of this segment:

 

   

We contributed a significant amount of properties into our unconsolidated co-investment ventures during 2013. We generally used the proceeds from these contributions to repay debt and to fund future growth. As a result of the contributions of properties we made in 2013, our NOI decreased $299.4 million in 2013 from 2012. The net change in NOI from 2011 to 2012 related to contributions of properties during these periods was not significant. Since we have an ongoing ownership interest in these

 

25


Table of Contents
 

ventures, the results remain in Continuing Operations in the Consolidated Statements of Operations in Item 8. In addition to the decrease in NOI in this segment during 2013, we recognized a decrease in Interest Expense and an increase in Investment Management Income and Earnings from Unconsolidated Entities due to our continuing ownership in and management of these properties.

 

   

We completed the Merger and PEPR Acquisition during 2011 and as a result, NOI increased $216.1 million in 2012 from 2011 ($293.6 million in rental income and $77.5 million in rental expense).

 

   

Occupancy of the operating properties has continued to increase. In our Real Estate Operations segment, we leased a total of 87.6 million square feet and incurred average turnover costs of $1.71 per square foot. This compares to 2012, when we leased 92.4 million square feet with turnover costs of $1.41 per square feet. The increase in turnover costs is due to the longer term and higher value on the leases signed, resulting in higher leasing commissions.

 

   

We calculate the change in effective rental rates on leases signed during the quarter as compared to the previous rent on that same space. Rental rate change on rollover (in our total owned and managed operating portfolio) was negative for all periods in 2012 and 2011. Rental change on rollover was positive in all four quarters of 2013 and has continued to increase. Generally we believe that market rents are continuing to increase and the majority of leases that are rolling were put in place at the low end of the cycle. In addition, many of our leases have rent increases throughout the lease term that are based on the consumer price index and are therefore not included in rent leveling and increase the rental revenue we recognize.

 

   

We rationalized and acquired properties or a controlling interest in several of our unconsolidated co-investment ventures:

 

   

2013 — aggregated total portfolio of $1.1 billion and 16.3 million square feet; and

 

   

2012 — aggregated total portfolio of $2.3 billion and 46.3 million square feet.

 

   

We have also increased the size of our portfolio through acquisition activity and development activity. After the development properties are stabilized, we may contribute them to co-investment ventures or we may continue to hold and operate within our consolidated portfolio depending on various factors, including geography and market conditions. We expect to continue to increase our consolidated portfolio through both acquisition and development activity in the future.

 

   

Under the terms of our lease agreements, we are able to recover the majority of our rental expenses from customers. Rental expense recoveries, included in both rental income and rental expenses, were 73.4%, 74.2% and 73.8% of total rental expenses for the years ended December 31, 2013, 2012 and 2011, respectively.

Investment Management Segment

The net operating income from the Investment Management segment, representing fees and incentives earned for services performed reduced by Investment Management expenses (direct costs of managing these entities and the properties they own), for the years ended December 31 was as follows (dollars in thousands):

 

      2013      2012      2011  

Net operating income — Investment Management Segment:

        

Americas:

        

Asset management and other fees

   $ 52,030       $ 55,448       $ 60,240   

Leasing commissions, acquisition and other transaction fees

     14,078         13,974         16,632   

Incentive returns

     6,366                 

Investment management expenses

     (53,689)         (37,785)         (34,228)   
  

 

 

 

Subtotal Americas

     18,785         31,637         42,644   

Europe:

        

Asset management and other fees

     53,190         32,951         34,934   

Leasing commissions, acquisition and other transaction fees

     10,604         4,096         11,153   

Investment management expenses

     (22,531)         (15,348)         (15,379)   
  

 

 

 

Subtotal Europe

     41,263         21,699         30,708   

Asia:

        

Asset management and other fees

     29,861         19,026         14,585   

Leasing commissions, acquisition and other transaction fees

     13,343         1,284         75   

Investment management expenses

     (13,059)         (10,687)         (5,355)   
  

 

 

 

Subtotal Asia

     30,145         9,623         9,305   
  

 

 

 

Net operating income — Investment Management segment

   $ 90,193       $ 62,959       $ 82,657   
  

 

 

 

Operating Margin

     50.3%         49.7%         60.1%   

 

26


Table of Contents

We had the following unconsolidated co-investment ventures under management as of December 31 (square feet and gross book value in thousands):

 

      2013      2012      2011  

Americas:

        

Number of ventures

     4         6         10   

Square feet

     108,537         127,455         190,541   

Gross book value

   $ 8,252,983       $ 9,190,638       $ 12,966,744   

Europe:

        

Number of ventures

     4         3         3   

Square feet

     132,876         70,294         67,088   

Gross book value

   $ 11,880,603       $ 6,670,689       $ 6,261,114   

Asia:

        

Number of ventures

     2         2         2   

Square feet

     22,880         11,004         10,123   

Gross book value

   $ 3,697,179       $ 1,764,608       $ 2,039,881   

Total:

        

Number of ventures

     10         11         15   

Square feet

     264,293         208,753         267,752   

Gross book value

   $   23,830,765       $   17,625,935       $   21,267,739   

Investment management income fluctuates due to the number and size of co-investment ventures that are under management. As noted earlier, we have formed some new ventures and we have acquired the controlling interest in several co-investment ventures, which results in us owning the properties and reporting them in our consolidated results. In addition, the Merger resulted in the addition of several ventures during 2011.

The direct costs associated with our Investment Management segment totaled $89.3 million, $63.8 million, and $55.0 million for the years ended December 31, 2013, 2012 and 2011, respectively, and are included in the line item Investment Management Expenses in the Consolidated Statements of Operations in Item 8. These expenses include the direct expenses associated with the asset management of the unconsolidated co-investment ventures provided by our employees who are assigned to our Investment Management segment. In addition, in order to achieve efficiencies and economies of scale, all of our property management functions are provided by a team of professionals who are assigned to our Real Estate Operations segment. These individuals perform the property-level management of the properties in our owned and managed portfolio including properties we consolidate and the properties we manage that are owned by the unconsolidated entities. We allocate the costs of our property management function to the properties we consolidate (reported in Rental Expenses) and the properties owned by the unconsolidated entities (included in Investment Management Expenses), by using the square feet owned by the respective portfolios. The increase in Investment Management Expenses in 2013 was due to the addition of PELP and NPR and additional expense related to the incentive returns we recognized in 2013, offset somewhat by the conclusion of several ventures. The increase in Investment Management Expenses in 2012 was due to the increased investment management platform and infrastructure that was part of the Merger, offset partially with a decline due to the consolidation of PEPR in June 2011 and the acquisition of three of our co-investment ventures in 2012; Prologis North American Industrial Fund II, Prologis California and Prologis North American Fund 1 (collectively the “2012 Co-Investment Venture Acquisitions”).

We expect the net operating income of this segment to increase in 2014 due to NPR and PELP and the increased size of the existing ventures through acquisitions from us and third parties, as well as increased incentive returns.

See Note 5 to the Consolidated Financial Statements in Item 8 for additional information on our unconsolidated entities.

Other Components of Income

General and Administrative (“G&A”) Expenses

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

 

      2013      2012      2011  

Gross overhead

   $ 434,933       $ 394,845       $ 332,632   

Less: rental expenses

     (32,918)         (35,954)         (24,741)   

Less: investment management expenses

     (89,278)         (63,820)         (54,962)   

Capitalized amounts

     (83,530)         (67,003)         (57,768)   
  

 

 

 

G&A expenses

   $   229,207       $   228,068       $   195,161   

 

27


Table of Contents

The increase in G&A expenses and the various components from 2012 to 2013 was principally due to increased infrastructure to accommodate our growing business. In 2013, the gross book value for our owned and managed portfolio increased $1.4 billion to $45.5 billion at December 31, 2013. As discussed above, we allocate a portion of our G&A expenses that relate to property management functions to our Real Estate Operations segment and our Investment Management segment.

The increase in G&A expenses and the various components from 2011 to 2012 was due principally to the larger infrastructure associated with the combined company following the Merger and the PEPR Acquisition.

We capitalize certain costs directly related to our development and leasing activities. Capitalized G&A expenses included salaries and related costs, as well as other general and administrative costs. The capitalized G&A costs for the years ended December 31, were as follows (in thousands):

 

      2013      2012      2011  

Development activities

   $   64,113       $   42,417       $   34,301   

Leasing activities

     18,301         23,183         21,390   

Costs related to internally developed software

     1,116         1,403         2,077   
  

 

 

 

Total capitalized G&A expenses

   $   83,530       $   67,003       $   57,768   

For the years ended December 31, 2013, 2012 and 2011, the capitalized salaries and related costs represented 23.7%, 20.3%, and 20.0%, respectively, of our total salaries and related costs. Salaries and related costs are comprised primarily of wages, other compensation and employee-related expenses.

Our development activity has increased over the last three years and therefore our capitalized costs have increased. We began consolidated development projects with a total expected investment of $1.4 billion, $1.3 billion (nearly half of which was started in the fourth quarter) and $0.8 billion during 2013, 2012, and 2011 respectively.

Depreciation and Amortization

Depreciation and amortization was $648.7 million, $724.3 million and $542.4 million for the years ended December 31, 2013, 2012 and 2011, respectively. The decrease from 2012 to 2013 is primarily due to less depreciation as a result of contributions of properties, offset slightly by additional depreciation and amortization from completed and leased development properties and increased leasing activity. The increase from 2011 to 2012 is due to additional depreciation and amortization expenses associated with the assets (including intangible assets) acquired in the Merger and PEPR Acquisition during the second quarter of 2011 and the 2012 Co-Investment Venture Acquisitions, as well as completed and leased development properties and additional leasing and capital improvements in our operating properties.

Merger, Acquisition and Other Integration Expenses

We incurred significant transaction, integration and transitional costs related to the Merger and PEPR Acquisition during 2011 and 2012. See Note 14 to the Consolidated Financial Statements in Item 8 for more detail on these expenses.

Impairment of Real Estate Properties

During 2012 and 2011, we recognized impairment charges of real estate properties in continuing operations of $252.9 million and $21.2 million, respectively, due to our change of intent to no longer hold these assets for long-term investment. In 2012, these impairment charges related to our planned contribution of properties to PELP ($135.3 million), land parcels that we expected to sell to third parties ($88.9 million) and operating buildings we expected to contribute or sell ($28.7 million). See Notes 2 and 15 to the Consolidated Financial Statements in Item 8 for more detail on the process we took to value these assets and the related impairment charges recognized.

Earnings from Unconsolidated Entities, Net

We recognized net earnings from unconsolidated entities of $97.2 million, $31.7 million and $59.9 million for the years ended December 31, 2013, 2012 and 2011, respectively. The earnings we recognize are impacted by: (i) variances in revenues and expenses of the entity; (ii) the size and occupancy rate of the portfolio of properties owned by the entity; (iii) our ownership interest in the entity; and (iv) fluctuations in foreign currency exchange rates used to translate our share of net earnings to U.S. dollars, if applicable. We manage the majority of the properties in which we have an ownership interest as part of our total owned and managed portfolio. We have had significant changes in the co-investment ventures in which we have an ownership interest that has impacted the earnings we recognized. See discussion of our co-investment ventures above in the Investment Management segment discussion and in Note 5 to the Consolidated Financial Statements in Item 8 for further breakdown of our share of net earnings recognized.

 

28


Table of Contents

Interest Expense

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

 

            2013                  2012                  2011        

Gross interest expense

   $ 471,923       $ 578,518       $ 498,518   

Amortization of discount (premium), net

     (39,015)         (36,687)         228   

Amortization of deferred loan costs

     14,374         16,781         20,476   
  

 

 

    

 

 

    

 

 

 

Interest expense before capitalization

     447,282         558,612         519,222   

Capitalized amounts

     (67,955)         (53,397)         (52,651)   
  

 

 

    

 

 

    

 

 

 

Net interest expense

   $ 379,327       $ 505,215       $ 466,571   

Gross interest expense decreased in 2013 compared to 2012 due to lower debt levels. In 2013, we decreased our debt by $2.8 billion to $9.0 billion at December 31, 2013.

Gross interest expense increased in 2012 compared to 2011 due to higher debt levels as a result of the Merger, the PEPR Acquisition and the 2012 Co-Investment Venture Acquisitions, offset slightly by lower effective borrowing costs.

Our weighted average effective interest rate was 4.7%, 4.6% and 5.6% for the years ended December 31, 2013, 2012 and 2011, respectively. During 2012 and 2013, we issued new debt with lower borrowing costs and used the proceeds to pay down or buy back our higher cost debt resulting in a weighted average effective interest rate of 4.2% as of December 31, 2013.

Our future interest expense, both gross interest and the portion capitalized, will vary depending on, among other things, our effective borrowing rate and the level of our development activities.

See Note 9 to the Consolidated Financial Statements in Item 8 and Liquidity and Capital Resources for further discussion of our debt and borrowing costs.

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

In 2013, we recognized net gains on acquisitions and dispositions of investments in real estate in continuing operations of $597.7 million, primarily related to contributions of operating properties to our unconsolidated entities. We received proceeds of $6.7 billion from the contribution of 254 properties aggregating 71.5 million square feet.

In 2012, we recognized net gains on acquisitions and dispositions of investments in real estate in continuing operations of $305.6 million, which included $294.2 million of gains related to three 2012 co-investment ventures we acquired. The contributions of operating properties to our unconsolidated entities in 2012 resulted in cash proceeds of $381.9 million and net gains of $11.4 million.

During 2011, we recognized net gains on acquisitions and dispositions of investments in real estate in continuing operations of $111.7 million. This included gains recognized in the second quarter related to the PEPR Acquisition ($85.9 million) and the acquisition of our partner’s interest in one of our other unconsolidated ventures in Japan ($13.5 million). The contributions of operating properties to our unconsolidated entities in 2011 resulted in cash proceeds of $590.8 million and net gains of $12.3 million.

If we realize a gain on contribution of a property to an unconsolidated entity, we recognize the portion attributable to the third party ownership in the entity. If we realize a loss on contribution, we recognize the full amount as soon as it is known. Due to our continuing involvement through our ownership in the unconsolidated entity, these dispositions are not included in discontinued operations.

Foreign Currency and Derivative Gains (Losses), Net

We and certain of our foreign consolidated subsidiaries may have intercompany or third party debt that is not denominated in the entity’s functional currency. When the debt is remeasured against the functional currency of the entity, a gain or loss may result. To mitigate our foreign currency exchange exposure, we borrow in the functional currency of the borrowing entity when appropriate. Certain of our third party and intercompany debt is remeasured with the resulting adjustment recognized as a cumulative translation adjustment in Foreign Currency Translation Loss, Net in the Consolidated Statements of Comprehensive Income (Loss). This treatment is applicable to third party debt that is designated as a hedge of our net investment and intercompany debt that is deemed to be long-term in nature.

If the intercompany debt is deemed short-term in nature, when the debt is remeasured, we recognize a gain or loss in earnings. We recognized net foreign currency exchange gains of $9.2 million and $7.4 million in 2013 and 2012, respectively, and losses of $5.9 million in 2011, related to the settlement and remeasurement of debt. Predominantly the gains or losses recognized in earnings relate to the remeasurement of intercompany loans between the United States parent and certain consolidated subsidiaries in Japan and Europe and result from fluctuations in the exchange rates of U.S. dollar to the euro, Japanese yen and British pound sterling. In addition, we recognized net foreign currency exchange losses of $0.6 million and $5.6 million, and gains of $2.1 million from the settlement of transactions with third parties in 2013, 2012 and 2011, respectively.

We recognized unrealized losses of $42.2 million (which included an adjustment to the amortization of a discount associated with a derivative instrument in the fourth quarter of 2013) and $22.3 million in 2013 and 2012, respectively, and an unrealized gain of $45.0 million in 2011 on the derivative instrument (exchange feature) related to our exchangeable senior notes, which became exchangeable at the time of the Merger.

 

29


Table of Contents

Gains (Losses) on Early Extinguishment of Debt, Net

During the years ended December 31, 2013, 2012 and 2011, we purchased portions of several series of senior notes, senior exchangeable notes and extinguished some secured mortgage debt prior to maturity, which resulted in the recognition of losses of $277.0 million and $14.1 million in 2013 and 2012, respectively, and gains of $0.3 million in 2011. The gains or losses represent the difference between the recorded debt (net of premiums and discounts and including related debt issuance costs) and the consideration we paid to retire the debt, including fees. Included in this amount in 2012 are losses that were included in Other Comprehensive Income (Loss) in the Consolidated Statements of Comprehensive Income (Loss) in Item 8 related to hedge transactions and were deemed unrecoverable in the fourth quarter of 2012. These hedges were associated with debt that was repaid before maturity with the proceeds from the contributions to PELP in early 2013. See Note 9 to the Consolidated Financial Statements in Item 8 for more information regarding our debt repurchases.

Impairment of Other Assets

We recorded impairment charges in 2011 of $126.4 million on certain of our investments in and advances to unconsolidated entities, notes receivable and other assets, as we believed the decline in fair value to be other than temporary or we did not believe these amounts to be recoverable based on the present value of the estimated future cash flows associated with these assets, including estimated sales proceeds.

See Notes 2 and 15 to the Consolidated Financial Statements in Item 8 for further information on our process with regard to analyzing the recoverability of other assets.

Income Tax Benefit (Expense)

During the years ended December 31, 2013, 2012 and 2011, our current income tax expense was $126.2 million, $17.9 million and $21.6 million. We recognize current income tax expense for income taxes incurred by our taxable REIT subsidiaries and in certain foreign jurisdictions, as well as certain state taxes. We also include in current income tax expense the interest associated with our liability for uncertain tax positions. Our current income tax expense fluctuates from period to period based primarily on the timing of our taxable income and changes in tax and interest rates. The majority of the current income tax expense in 2013 relates to asset sales and contributions of certain properties that were held in foreign entities or taxable REIT subsidiaries.

In 2013, 2012 and 2011, we recognized a net deferred tax benefit of $19.4 million, $14.3 million and $19.8 million, respectively. Deferred income tax expense is generally a function of the period’s temporary differences and the utilization of net operating losses generated in prior years that had been previously recognized as deferred income tax assets in taxable subsidiaries operating in the United States or in foreign jurisdictions.

Our income taxes are discussed in more detail in Note 16 to the Consolidated Financial Statements in Item 8.

Discontinued Operations

Earnings from discontinued operations were $123.5 million, $75.9 million and $117.0 million for 2013, 2012 and 2011, respectively. Discontinued operations represent the results of operations of properties that have been sold to third parties or that are held for sale for all periods presented, along with the related gain or loss on sale. The results of operations that have been classified as discontinued operations are reported separately in the Consolidated Financial Statements in Item 8.

See Notes 4 and 8 to the Consolidated Financial Statements in Item 8 for further details on what is reported as discontinued operations.

Other Comprehensive Income (Loss) – Foreign Currency Translation Losses, Net

For our consolidated subsidiaries whose functional currency is not the U.S. dollar, we translate their financial statements into U.S. dollars at the time we consolidate those subsidiaries’ financial statements. Generally, assets and liabilities are translated at the exchange rate in effect as of the balance sheet date. The resulting translation adjustments, due to the fluctuations in exchange rates from the beginning of the period to the end of the period, are included in Foreign Currency Translation Losses, Net in the Consolidated Statements of Comprehensive Income (Loss) in Item 8.

During 2013, we recorded unrealized losses of $234.7 million related to foreign currency translations of our foreign subsidiaries into U.S. dollars upon consolidation. This included approximately $190 million of foreign currency translation losses on the properties contributed to PELP and NPR due to the weakening of the euro and Japanese yen, respectively, to the U.S. dollar from December 31, 2012, through the date of the contributions. In addition we recorded net unrealized losses in 2013 due to the weakening of the Japanese yen to the U.S. dollar. During 2012, we recorded unrealized net losses of $79.0 million as the Japanese yen weakened relative to the U.S. dollar by 10.1% from December 31, 2011 to December 31, 2012, offset slightly by the euro and British pound sterling slightly strengthening against the U.S. dollar during the same period. During 2011, we recorded unrealized net losses of $192.6 million as the euro and British pound sterling remained relatively flat from December 31, 2010 to December 31, 2011, but both weakened relative to the U.S. dollar from the Merger and PEPR Acquisition date to December 31, 2011. These losses were offset slightly by the strengthening of the Japanese yen relative to the U.S. dollar during 2011.

 

30


Table of Contents

Portfolio Information

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

 

     2013      2012      2011  
      Number of
Properties
    

Square

Feet

     Number of
Properties
    

Square

Feet

     Number of
Properties
    

Square

Feet

 

Consolidated

     1,610         267,097         1,853         316,347         1,797         291,051   

Unconsolidated

     1,323         264,293         1,163         208,753         1,403         267,752   
  

 

 

 

Totals

     2,933         531,390         3,016         525,100         3,200         558,803   

Same Store Analysis

We evaluate the performance of the operating properties we own and manage using a “same store” analysis because the population of properties in this analysis is consistent from period to period, thereby eliminating the effects of changes in the composition of the portfolio on performance measures. We include properties from our consolidated portfolio, and properties owned by the co-investment ventures (accounted for on the equity method) that are managed by us (referred to as “unconsolidated entities”) in our same store analysis. We have defined the same store portfolio, for the three months ended December 31, 2013, as those properties that were in operation at January 1, 2012, and have been in operation throughout the same three-month periods in both 2013 and 2012. We have removed all properties that were disposed of to a third party or were classified as held for sale from the population for both periods. We believe the factors that impact rental income, rental expenses and net operating income in the same store portfolio are generally the same as for the total portfolio. In order to derive an appropriate measure of period-to-period operating performance, we remove the effects of foreign currency exchange rate movements by using the current exchange rate to translate from local currency into U.S. dollars, for both periods. The same store portfolio, for the three months ended December 31, 2013, included 489.8 million of aggregated square feet.

The following is a reconciliation of our consolidated rental income, rental expenses and net operating income (calculated as rental income and recoveries less rental expenses) for the full year, as included in the Consolidated Statements of Operations in Item 8, to the respective amounts in our same store portfolio analysis for the three months ended December 31, (dollars in thousands).

 

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

 

 

 

2013

             

Rental income and rental recoveries

  $ 444,144       $   363,956       $ 372,185       $ 379,208       $   1,559,493   

Rental expenses

    130,354         109,837         106,811         104,936         451,938   
 

 

 

 

Net operating income

  $ 313,790       $   254,119       $ 265,374       $ 274,272       $ 1,107,555   
 

 

 

 

2012

             

Rental income and rental recoveries

  $ 433,984       $ 459,290       $ 460,213       $ 470,294       $ 1,823,781   

Rental expenses

    115,674         123,248         124,401         127,916         491,239   
 

 

 

 

Net operating income

  $ 318,310       $ 336,042       $ 335,812       $ 342,378       $ 1,332,542   

 

31


Table of Contents
     For the Three Months Ended December 31,  
          2013              2012              Percentage    
Change
 

Rental Income (1)(2)

        

Consolidated:

        

Rental income per the Consolidated Statements of Operations

   $ 301,627       $ 378,184      

Rental recoveries per the Consolidated Statements of Operations

     77,581         92,110      

Adjustments to derive same store results:

        

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

     (29,856)         (22,691)      

Effect of changes in foreign currency exchange rates and other

     (1,275)         (4,215)      

Unconsolidated entities:

        

Rental income

     409,482         308,012      
  

 

 

    

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

   $ 757,559       $ 751,400         0.8%   

Rental Expenses (1)(4)

        

Consolidated:

        

Rental expenses per the Consolidated Statements of Operations

   $ 104,936       $ 127,916      

Adjustments to derive same store results:

        

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

     (8,866)         (6,521)      

Effect of changes in foreign currency exchange rates and other

     4,777         516      

Unconsolidated entities:

        

Rental expenses

     95,997         83,644      
  

 

 

    

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

   $ 196,844       $ 205,555         (4.2)%   

Net Operating Income (1)

        

Consolidated:

        

Net operating income per the Consolidated Statements of Operations

   $ 274,272       $ 342,378      

Adjustments to derive same store results:

        

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

     (20,990)         (16,170)      

Effect of changes in foreign currency exchange rates and other

     (6,052)         (4,731)      

Unconsolidated entities:

        

Net operating income

     313,485         224,368      
  

 

 

    

Adjusted same store portfolio – net operating income (3)

   $ 560,715       $ 545,845         2.7%   

 

(1) As discussed above, our same store portfolio includes industrial properties from our consolidated portfolio and owned by the unconsolidated entities (accounted for on the equity method) that are managed by us. During the periods presented, certain properties owned by us were contributed to a co-investment venture and are included in the same store portfolio on an aggregate basis. Neither our consolidated results nor those of the unconsolidated entities, when viewed individually, would be comparable on a same store basis due to the changes in composition of the respective portfolios from period to period (for example, the results of a contributed property are included in our consolidated results through the contribution date and in the results of the unconsolidated entities subsequent to the contribution date).

 

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

 

(3) These amounts include activity of both our consolidated industrial properties and those owned by our unconsolidated entities (accounted for on the equity method) and managed by us.

 

(4)

Rental expenses in the same store portfolio include the direct operating expenses of the property such as property taxes, insurance, utilities, etc. In addition, we include an allocation of the property management expenses for our direct-owned properties based on the property management fee that is provided for in the individual management agreements under which our wholly owned management companies provide property management services to each property (generally, the fee is based on a percentage of revenues). On

 

32


Table of Contents
  consolidation, the management fee income earned by the management companies and the management fee expense recognized by the properties are eliminated and the actual costs of providing property management services are recognized as part of our consolidated rental expenses. These expenses fluctuate based on the level of properties included in the same store portfolio and any adjustment is included as “effect of changes in foreign currency exchange rates and other” in the above table.

Environmental Matters

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

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

Liquidity and Capital Resources

Overview

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

Near-Term Principal Cash Sources and Uses

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

 

   

repayment of debt including payments on our credit facilities and scheduled principal payments in 2014 of $330 million, which does not include a $536 million senior term loan that was extended in January 2014 until 2015;

 

   

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

 

   

development of new properties for long-term investment, including the acquisition of land in certain markets;

 

   

capital expenditures and leasing costs on properties in our operating portfolio;

 

   

additional investments in current unconsolidated entities or new investments in future unconsolidated entities;

 

   

depending on market and other conditions, acquisition of operating properties and/or portfolios of operating properties in global or regional markets for direct, long-term investment (this might include acquisitions from our co-investment ventures); and

 

   

depending on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors, we may repurchase our outstanding debt or equity securities through cash purchases, in open market purchases, privately negotiated transactions, tender offers or otherwise.

 

  (a) As of December 31, 2013, we had 57 properties in our development portfolio that were 54.3% leased with a current investment of $1.1 billion and a total expected investment of $1.9 billion when completed and leased, leaving $0.8 billion remaining to be spent.

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

 

   

available unrestricted cash balances ($491.1 million at December 31, 2013);

 

   

property operations;

 

   

fees and incentives earned for services performed on behalf of the co-investment ventures and distributions received from the co-investment ventures;

 

   

proceeds from the disposition of properties, land parcels or other investments to third parties;

 

   

proceeds from the contributions of properties to current or future co-investment ventures, including the contribution of 66 operating properties we made to USLV in January 2014;

 

   

borrowing capacity under our current credit facility arrangements discussed below ($1.7 billion available as of December 31, 2013), other facilities or borrowing arrangements;

 

   

proceeds from the issuance of equity securities, including through an at-the-market offering program (we have 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 this program; and

 

   

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

 

33


Table of Contents

Debt

As of December 31, 2013, we had $9.0 billion of debt with a weighted average interest rate of 4.2% and a weighted average maturity of 58 months. During 2013, we decreased our debt $2.8 billion, reduced our borrowing costs and lengthened the maturities (was $11.8 billion, 4.4% and 43 months, respectively, as of December 31, 2012) principally with the proceeds from the contribution and the sale of properties and the Equity Offering. We also issued $2.7 billion of senior notes during 2013 and used the proceeds to repay $1.7 billion of senior notes and balances on our credit facilities.

As of December 31, 2013, we had credit facilities with an aggregate borrowing capacity of $2.5 billion, of which $1.7 billion was available remaining capacity.

As of December 31, 2013, we were in compliance with all of our debt covenants. These covenants include customary financial covenants for total debt ratios, encumbered debt ratios and fixed charge coverage ratios.

See Note 9 to the Consolidated Financial Statements in Item 8 for further information on our debt.

Equity Commitments Related to Certain 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 December 31, 2013 (in millions):

 

      Equity commitments     

Expiration date

for remaining
commitments

     Prologis      Venture
Partners
     Total       

Prologis Targeted U.S. Logistics Fund

   $ -      $ 294.8       $ 294.8       Various

Prologis Targeted Europe Logistics Fund

     136.0         183.4         319.4       June 2015

Prologis European Properties Fund II

     12.0         154.9         166.9       September 2015

Europe Logistics Venture 1

     25.7         145.8         171.5       December 2014

Prologis European Logistics Partners

     255.7         255.7         511.4       February 2016

Prologis China Logistics Venture 1

     61.7         349.6         411.3       March 2015

Prologis China Logistics Venture 2

     88.2         500.0         588.2       November 2017
  

 

 

    

Total Unconsolidated

   $ 579.3       $ 1,884.2       $ 2,463.5      

Brazil Fund (1)

   $ 56.9       $ 56.9       $ 113.8       December 2017
  

 

 

    

Total Consolidated

   $ 56.9       $ 56.9       $ 113.8      
  

 

 

    

Grand Total

   $ 636.2       $ 1,941.1       $ 2,577.3        

 

(1) Equity commitments are denominated in Brazilian real and called and reported in U.S. dollars. During 2013, to fund development the venture called capital of $99.6 million, of which $49.8 million was from third parties and $49.8 million was our share.

For more information on our unconsolidated co-investment ventures, see Note 5 to the Consolidated Financial Statements in Item 8.

Cash Provided by Operating Activities

Net cash provided by operating activities was $485.0 million, $463.5 million and $207.1 million for the years ended December 31, 2013, 2012 and 2011, respectively. In 2013, 2012 and 2011, cash provided by operating activities was less than the cash dividends paid on common and preferred stock by $88.9 million, $104.3 million and $207.0 million, respectively. We used a portion of the cash proceeds from the disposition of real estate properties ($5.4 billion in 2013, $2.0 billion in 2012 and $1.6 billion in 2011) to fund dividends on common and preferred stock not covered by cash flows from operating activities.

Cash Investing and Cash Financing Activities

For the years ended December 31, 2013, 2012 and 2011, investing activities provided net cash of $2.3 billion and $529.6 million and used net cash of $233.1 million, respectively. The following are the significant activities for all periods presented:

 

   

We generated cash from contributions and dispositions of properties and land parcels of $5.4 billion in 2013, $2.0 billion in 2012 and $1.6 billion in 2011. The increase in 2013 is primarily due to the initial contribution of real estate properties in the first quarter of 2013 to our new co-investment ventures, PELP and NPR, that generated cash proceeds of $1.3 billion and $1.9 billion,

 

34


Table of Contents
 

respectively. In 2013, we disposed of land and 89 operating properties to third parties and contributed 254 operating properties to unconsolidated co-investment ventures. In 2012, we disposed of land and 200 operating properties to third parties and contributed 25 operating properties to unconsolidated co-investment ventures. In 2011, we disposed of land and 94 operating properties to third parties that included the majority of our non-industrial assets and contributed 57 operating properties to unconsolidated co-investment ventures.

 

   

In 2013, 2012 and 2011, we invested $845.2 million, $793.3 million and $811.0 million, respectively, in real estate development and leasing costs for first generation leases. We have 46 properties under development and 11 properties that are completed but not stabilized as of December 31, 2013, and we expect to continue to develop new properties as the opportunities arise.

 

   

We invested $228.0 million, $214.2 million and $144.1 million in our operating properties during 2013, 2012 and 2011, respectively, which included recurring capital expenditures, tenant improvements and leasing commissions on existing operating properties that were previously leased.

 

   

In 2013, we paid net cash of $678.6 million to acquire our partners’ interest in NAIF III and SGP Mexico. In connection with the acquisition of NAIF II in 2012, we repaid the loan from NAIF II to our partner for a total of $336.1 million. The loan repayment was reduced by the cash acquired in the consolidation of NAIF II. Also in 2012, we paid $47.8 million in connection with the acquisition of two of our unconsolidated co-investment ventures.

 

   

In 2013, we acquired 536 acres of land and 26 operating properties for a combined total of $514.6 million, which includes properties acquired in connection with the wind-down of Prologis Japan Fund I. In 2012, we acquired 1,537 acres of land and 12 operating properties for a combined total of $254.4 million. In 2011, we acquired 78 acres of land and 8 operating properties for a combined total of $214.8 million.

 

   

In 2013, 2012 and 2011, we invested cash of $1.2 billion, $165.0 million and $37.8 million, respectively, in our unconsolidated entities, net of repayment of advances by the entities. Our investment in 2013 principally relates to our investment in NPR of $411.5 million, Prologis Targeted Europe Logistics Fund of $210.2 million, Prologis European Properties Fund II of $167.2 million, PELP of $162.3 million, the Brazil Fund and related joint ventures of $111.5 million and Prologis Targeted U.S. Logistics Fund of $104.8 million. See Note 5 to the Consolidated Financial Statements for more detail on these investments.

 

   

We received distributions from unconsolidated entities as a return of investment of $411.9 million, $291.7 million and $170.2 million during 2013, 2012 and 2011, respectively. We received $106.3 million in connection with the wind down of Prologis Japan Fund I in 2013. During 2012, we received $95.0 million, which represented a return of capital, from one of our other joint ventures that held a note receivable that was repaid during the quarter.

 

   

In 2012, we received a full redemption of a $55.0 million note receivable that was issued in 2011 through the sale of non-industrial assets.

 

   

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

 

   

In 2011, we used $1.0 billion of cash to purchase units in PEPR. The acquisition was funded with borrowings on a new €500 million bridge facility (“PEPR Bridge Facility”), put in place for the acquisition, and borrowings under our other credit facilities that were subsequently paid from our equity offering in 2011 (see below for more detail).

For the years ended December 31, 2013, 2012 and 2011, financing activities used net cash of $2.4 billion and $1.1 billion and provided net cash of $163.3 million, respectively. The following are the significant activities for all periods presented:

 

   

In April 2013, we received net proceeds of $1.4 billion from the issuance of 35.65 million shares of common stock. In June 2011, we completed an equity offering and issued 34.5 million shares of common stock and received net proceeds of approximately $1.1 billion.

 

   

We generated proceeds from the issuance of common stock under our incentive stock plans, principally stock options, of $22.4 million and $31.0 million in 2013 and 2012, respectively. We had minimal activity in 2011.

 

   

In 2013, we paid $482.5 million to redeem all of the outstanding series L, M, O, P, R and S of preferred stock.

 

   

We paid distributions of $552.2 million, $520.3 million and $387.1 million to our common stockholders during 2013, 2012 and 2011, respectively. We paid dividends on our preferred stock of $21.7 million, $47.6 million, and $27.0 million during 2013, 2012 and 2011, respectively.

 

   

In 2013, we purchased our partners’ interest in Fund II for $245.8 million. In 2012, we purchased an additional interest in PEPR for $117.3 million, Fund II for $14.1 million, and our partner’s interest in certain properties in the Brazil Fund and related joint ventures of $4.4 million. Additionally in 2013 and 2012, limited partners in the Operating Partnership redeemed units for cash of $4.9 million and $5.8 million, respectively.

 

   

In 2013, 2012 and 2011, partners in consolidated co-investment ventures made contributions of $145.5 million, $70.8 million and $123.9 million, respectively, primarily for the purchase of real estate properties by Mexico Fondo Logistico and development within the Brazil Fund and related joint ventures.

 

35


Table of Contents
   

In 2013, 2012, and 2011, we distributed $116.0 million, $44.1 million, and $17.4 million to various noncontrolling interests, respectively. The distribution in 2013 includes cash distributions of $40.6 million to our partners in Prologis AMS due to the disposition of a portfolio of properties.

 

   

In 2013, we incurred $3.6 billion of debt principally senior notes and term loan. In 2012, we incurred $1.4 billion of debt, principally secured mortgage debt and senior term loan. In 2011, we incurred $577.9 million in secured mortgage debt and borrowed $721.0 million on the PEPR Bridge Facility. See Note 9 to the Consolidated Financial Statements for more detail on the senior note issuances in 2013.

 

   

During 2013, we extinguished senior notes and secured mortgage debt for $4.0 billion, of which $1.6 billion is the repayment of outstanding secured mortgage debt primarily with the proceeds received from contributions of properties to PELP and NPR and $2.4 billion is the repayment of senior notes. During 2012 and 2011, we extinguished certain senior notes, exchangeable senior notes, secured mortgage debt, senior term loans and other debt for $1.7 billion and $894.2 million, respectively.

 

   

We made payments of $2.0 billion, $196.7 million and $975.5 million on regularly scheduled debt principal and maturity payments during 2013, 2012 and 2011, respectively. In 2013, we repaid $355.3 million of outstanding senior notes, $483.6 million of exchangeable senior notes and $135.9 million of secured mortgage debt. Also in 2013, we made payments of $899.0 million on the senior term loan. In 2011, we used $711.8 million in proceeds from our equity offering to repay the amounts borrowed under the PEPR Bridge Facility. Additionally, 2011 activity included the repayment of €101.3 million ($146.8 million) of the euro notes that matured in April 2011.

 

   

We made net payments of $93.1 million and $37.6 million in 2013 and 2011, respectively, on our credit facilities and received net proceeds of $9.1 million in 2012 from our credit facilities.

Off-Balance Sheet Arrangements

Unconsolidated Co-Investment Ventures Debt

We had investments in and advances to certain unconsolidated co-investment ventures at December 31, 2013, of $4.3 billion. These unconsolidated ventures had total third party debt of $7.7 billion (in the aggregate, not our proportionate share) at December 31, 2013. This debt is primarily secured or collateralized by properties within the venture and is non-recourse to Prologis or the other investors in the co-investment ventures and matures as follows (dollars in millions):

 

     2014     2015     2016     2017     2018     Thereafter    

Discount/

Premium

    Total (1)     Prologis
Ownership
% at
12/31/13
 

Prologis Targeted U.S. Logistics Fund

  $ 20.0      $ 185.1      $ 166.5      $ 164.2      $ 298.8      $ 824.2      $ 14.0      $ 1,672.8        25.9

Prologis North American Industrial Fund

           108.7        444.1        205.0        165.5        188.9               1,112.2        23.1

Prologis Mexico Industrial Fund

                         214.1                             214.1        20.0

Prologis Targeted Europe Logistics Fund

    31.8        241.8        4.6        4.7        97.5        115.0        2.9        498.3        43.1

Prologis European Properties Fund II (2)

    430.8        343.1        216.7        67.5        415.1        518.2        (3.5     1,987.9        32.5

Prologis European Logistics Partners (3)

    288.0               220.4                             3.6        512.0        50.0

Nippon Prologis REIT

    46.2               222.0        22.1        286.0        958.9               1,535.2        15.1

Prologis China Logistics Venture 1

                  180.0                                    180.0        15.0
 

 

 

   

Total co-investment ventures

  $ 816.8      $ 878.7      $ 1,454.3      $ 677.6      $ 1,262.9      $ 2,605.2      $ 17.0      $ 7,712.5           

 

(1) As of December 31, 2013, we did not guarantee any third party debt of the co-investment ventures. In our role as the manager, we work with the co-investment ventures to refinance their maturing debt. There can be no assurance that the co-investment ventures will be able to refinance any maturing indebtedness on terms as favorable as the maturing debt, or at all. If the ventures are unable to refinance the maturing indebtedness with newly issued debt, they may be able to obtain funds by voluntary capital contributions from us and our partners or by selling assets. Certain of the ventures also have credit facilities, or unencumbered properties, both of which may be used to obtain funds. Generally, the co-investment ventures issue long-term debt and utilize the proceeds to repay borrowings under the credit facilities.

 

(2) We expect that the co-investment venture will refinance or repay 2014 maturities through available cash and the issuance of new debt.

 

(3) We expect that the co-investment venture will repay 2014 maturities through available cash or equity contributions from partners.

 

36


Table of Contents

Contractual Obligations

Long-Term Contractual Obligations

We had long-term contractual obligations at December 31, 2013 as follows (in millions):

 

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

Debt obligations, other than credit facilities and exchangeable debt (1)

   $ 866       $ 1,543       $ 1,521       $ 3,855       $ 7,785   

Interest on debt obligations, other than credit facilities and exchangeable debt

     346         617         421         435         1,819   

Exchangeable debt

             460                         460   

Interest on exchangeable debt

     15         3                         18   

Amounts due on credit facilities

                     725                 725   

Interest on credit facilities

     9         18         13                 40   

Unfunded commitments on the development portfolio (2)

     614         188                         802   

Operating lease payments

     36         60         44         227         367   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,886       $ 2,889       $ 2,724       $ 4,517       $ 12,016   

 

(1) Included in amounts due in less than one year is a $536 million term loan that was extended to 2015 in January 2014.

 

(2) We had properties in our development portfolio (completed and under development) at December 31, 2013, with a total expected investment of $1.9 billion. The unfunded commitments presented include not only those costs that we are obligated to fund under construction contracts, but all costs necessary to place the property into service, including the estimated costs of tenant improvements, marketing and leasing costs that we will incur as the property is leased.

Other Commitments

On a continuing basis, we are engaged in various stages of negotiations for the acquisition and/or disposition of individual properties or portfolios of properties.

Distribution and Dividend Requirements

Our dividend policy on our common stock is to distribute a percentage of our cash flow to ensure we will meet the dividend requirements of the Internal Revenue Code, relative to maintaining our REIT status, while still allowing us to retain cash to meet other needs such as capital improvements and other investment activities.

In 2013 and 2012, we paid a quarterly cash dividend of $0.28 per common share. Our future common stock dividends may vary and will be determined by our Board upon the circumstances prevailing at the time, including our financial condition, operating results and REIT distribution requirements, and may be adjusted at the discretion of the Board during the year.

At December 31, 2013, we had one series of preferred stock outstanding, the series Q. The annual dividend rate is 8.54% per share and dividends are payable quarterly in arrears.

Pursuant to the terms of our preferred stock, we are restricted from declaring or paying any dividend with respect to our common stock unless and until all cumulative dividends with respect to the preferred stock have been paid and sufficient funds have been set aside for dividends that have been declared for the relevant dividend period with respect to the preferred stock.

Critical Accounting Policies

A critical accounting policy is one that is both important to the portrayal of an entity’s financial condition and results of operations and requires judgment on the part of management. Generally, the judgment requires management to make estimates and assumptions about the effect of matters that are inherently uncertain. Estimates are prepared using management’s best judgment, after considering past and current economic conditions and expectations for the future. Changes in estimates could affect our financial position and specific items in our results of operations that are used by stockholders, potential investors, industry analysts and lenders in their evaluation of our performance. Of the accounting policies discussed in Note 2 to the Consolidated Financial Statements in Item 8, those presented below have been identified by us as critical accounting policies.

Impairment of Long-Lived Assets

We assess the carrying values of our respective long-lived assets whenever events or changes in circumstances indicate that the carrying amounts of these assets may not be fully recoverable.

Recoverability of real estate assets is measured by comparison of the carrying amount of the asset to the estimated future undiscounted cash flows. In order to review our real estate assets for recoverability, we consider current market conditions, as well as our intent with respect to

 

37


Table of Contents

holding or disposing of the asset. Our intent with regard to the underlying assets might change as market conditions change. Fair value is determined through various valuation techniques; including discounted cash flow models, applying a capitalization rate to estimated net operating income of a property, quoted market values and third party appraisals, where considered necessary. The use of projected future cash flows is based on assumptions that are consistent with our estimates of future expectations and the strategic plan we use to manage our underlying business. If our analysis indicates that the carrying value of a real estate property that we expect to hold is not recoverable on an undiscounted cash flow basis, we recognize an impairment charge for the amount by which the carrying value exceeds the current estimated fair value of the real estate property. At the time our intent changes to dispose of one of our real estate properties, we compare the carrying value of the property to the estimated proceeds from disposition. If there is an impairment, we record an impairment for any excess including costs to sell.

Assumptions and estimates used in the recoverability analyses for future cash flows, discount rates and capitalization rates are complex and subjective. Changes in economic and operating conditions or our intent with regard to our investment that occurs subsequent to our impairment analyses could impact these assumptions and result in future impairment of our long-lived assets.

Other than Temporary Impairment of Investments in Unconsolidated Entities

When circumstances indicate there may have been a reduction in the value of an equity investment, we evaluate whether the loss in value is other than temporary. If we determine there is a loss in value that is other than temporary, we recognize an impairment charge to reflect the investment at fair value. The use of projected future cash flows and other estimates of fair value, the determination of when a loss is other than temporary, and the calculation of the amount of the loss, is complex and subjective. Use of other estimates and assumptions may result in different conclusions. Changes in economic and operating conditions, as well as changes in our intent with regard to our investment, that occur subsequent to our review could impact these assumptions and result in future impairment charges of our equity investments.

Revenue Recognition – Gains on Disposition of Real Estate

We recognize gains from the contributions and sales of real estate assets, generally at the time the title is transferred, consideration is received and we no longer have substantial continuing involvement with the real estate sold. In many of our transactions, an entity in which we have an ownership interest will acquire a real estate asset from us. We make judgments based on the specific terms of each transaction as to the amount of the total profit from the transaction that we recognize given our continuing ownership interest and our level of future involvement with the entity that acquires the assets. We also make judgments regarding recognition in earnings of certain fees and incentives earned for services provided to these entities based on when they are earned, fixed and determinable.

Business Combinations

We acquire individual properties, as well as portfolios of properties, or businesses. We may also acquire a controlling interest in an entity previously accounted for under the equity method of accounting. When we acquire a business or individual operating properties, with the intention to hold the investment for the long-term, we allocate the purchase price to the various components of the acquisition based upon the fair value of each component. The components typically include land, building, debt, intangible assets related to above and below market leases, value of costs to obtain tenants, deferred tax liabilities and other assumed assets and liabilities in the case of an acquisition of a business. In an acquisition of multiple properties, we must also allocate the purchase price among the properties. The allocation of the purchase price is based on our assessment of estimated fair value and often times is based upon the expected future cash flows of the property and various characteristics of the markets where the property is located. The fair value may also include an enterprise value premium that we estimate a third party would be willing to pay for a portfolio of properties. In the case of an acquisition of a controlling interest in an entity previously accounted for under the equity method of accounting, this allocation may result in a gain or a loss. The initial allocation of the purchase price is based on management’s preliminary assessment, which may differ when final information becomes available. Subsequent adjustments made to the initial purchase price allocation are made within the allocation period, which typically does not exceed one year.

Consolidation

We consolidate all entities that are wholly owned and those in which we own less than 100% but control, as well as any variable interest entities in which we are the primary beneficiary. We evaluate our ability to control an entity and whether the entity is a variable interest entity and we are the primary beneficiary through consideration of the substantive terms of the arrangement to identify which enterprise has the power to direct the activities of the entity that most significantly impacts the entity’s economic performance and the obligation to absorb losses of the entity or the right to receive benefits from the entity. Investments in entities in which we do not control but over which we have the ability to exercise significant influence over operating and financial policies are presented under the equity method. Investments in entities that we do not control and over which we do not exercise significant influence are carried at the lower of cost or fair value, as appropriate. Our ability to correctly assess our influence and/or control over an entity affects the presentation of these investments in our consolidated financial statements.

Capitalization of Costs and Depreciation

We capitalize costs incurred in developing, renovating, rehabilitating, and improving real estate assets as part of the investment basis. Costs incurred in making repairs and maintaining real estate assets are expensed as incurred. During the land development and construction periods, we capitalize interest costs, insurance, real estate taxes and certain general and administrative costs of the personnel performing development, renovations, and rehabilitation if such costs are incremental and identifiable to a specific activity to get the asset ready for its intended use.

 

38


Table of Contents

Capitalized costs are included in the investment basis of real estate assets. We also capitalize costs incurred to successfully originate a lease that result directly from, and are essential to, the acquisition of that lease. Leasing costs that meet the requirements for capitalization are presented as a component of other assets.

We estimate the depreciable portion of our real estate assets and related useful lives in order to record depreciation expense. Our ability to estimate the depreciable portions of our real estate assets and useful lives is critical to the determination of the appropriate amount of depreciation expense recorded and the carrying value of the underlying assets. Any change to the assets to be depreciated and the estimated depreciable lives of these assets would have an impact on the depreciation expense recognized.

Income Taxes

As part of the process of preparing our consolidated financial statements, significant management judgment is required to estimate our income tax liability, the liability associated with open tax years that are under review and our compliance with REIT requirements. Our estimates are based on interpretation of tax laws. We estimate our actual current income tax due and assess temporary differences resulting from differing treatment of items for book and tax purposes resulting in the recognition of deferred income tax assets and liabilities. These estimates may have an impact on the income tax expense recognized. Adjustments may be required by a change in assessment of our deferred income tax assets and liabilities, changes in assessments of the recognition of income tax benefits for certain non-routine transactions, changes due to audit adjustments by federal and state tax authorities, our inability to qualify as a REIT, the potential for built-in-gain recognition, changes in the assessment of properties to be contributed to taxable REIT subsidiaries and changes in tax laws. Adjustments required in any given period are included within income tax expense. We recognize the tax benefit from an uncertain tax position only if it is “more-likely-than-not” that the tax position will be sustained on examination by taxing authorities.

Derivative Financial Instruments

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. The accounting for gains and losses that result from changes in the fair values of derivative instruments depends on whether the derivatives are designated as, and qualify as, hedging instruments. Derivatives can be designated as fair value hedges, cash flow hedges or hedges of net investments in foreign operations.

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

New Accounting Pronouncements

See Note 2 to the Consolidated Financial Statements in Item 8.

Funds from Operations (“FFO”)

FFO is a non-GAAP measure that is commonly used in the real estate industry. The most directly comparable GAAP measure to FFO is net earnings. Although the National Association of Real Estate Investment Trusts (“NAREIT”) has published a definition of FFO, modifications to the NAREIT calculation of FFO are common among REITs, as companies seek to provide financial measures that meaningfully reflect their business.

FFO is not meant to represent a comprehensive system of financial reporting and does not present, nor do we intend it to present, a complete picture of our financial condition and operating performance. We believe net earnings computed under GAAP remains the primary measure of performance and that FFO is only meaningful when it is used in conjunction with net earnings computed under GAAP. Further, we believe our consolidated financial statements, prepared in accordance with GAAP, provide the most meaningful picture of our financial condition and our operating performance.

 

39


Table of Contents

NAREIT’s FFO measure adjusts net earnings computed under GAAP to exclude historical cost depreciation and gains and losses from the sales, along with impairment charges, of previously depreciated properties. We agree that these NAREIT adjustments are useful to investors for the following reasons:

 

(i) historical cost accounting for real estate assets in accordance with GAAP assumes, through depreciation charges, that the value of real estate assets diminishes predictably over time. NAREIT stated in its White Paper on FFO “since real estate asset values have historically risen or fallen with market conditions, many industry investors have considered presentations of operating results for real estate companies that use historical cost accounting to be insufficient by themselves.” Consequently, NAREIT’s definition of FFO reflects the fact that real estate, as an asset class, generally appreciates over time and depreciation charges required by GAAP do not reflect the underlying economic realities.

 

(ii) REITs were created as a legal form of organization in order to encourage public ownership of real estate as an asset class through investment in firms that were in the business of long-term ownership and management of real estate. The exclusion, in NAREIT’s definition of FFO, of gains and losses from the sales, along with impairment charges, of previously depreciated operating real estate assets allows investors and analysts to readily identify the operating results of the long-term assets that form the core of a REIT’s activity and assists in comparing those operating results between periods. We include the gains and losses (including impairment charges) from dispositions of land and development properties, as well as our proportionate share of the gains and losses (including impairment charges) from dispositions of development properties recognized by our unconsolidated entities, in our definition of FFO.

Our FFO Measures

At the same time that NAREIT created and defined its FFO measure for the REIT industry, it also recognized that “management of each of its member companies has the responsibility and authority to publish financial information that it regards as useful to the financial community.” We believe stockholders, potential investors and financial analysts who review our operating results are best served by a defined FFO measure that includes other adjustments to net earnings computed under GAAP in addition to those included in the NAREIT defined measure of FFO. Our FFO measures are used by management in analyzing our business and the performance of our properties and we believe that it is important that stockholders, potential investors and financial analysts understand the measures management uses.

We use these FFO measures, including by segment and region, to: (i) evaluate our performance and the performance of our properties in comparison to expected results and results of previous periods, relative to resource allocation decisions; (ii) evaluate the performance of our management; (iii) budget and forecast future results to assist in the allocation of resources; (iv) assess our performance as compared to similar real estate companies and the industry in general; and (v) evaluate how a specific potential investment will impact our future results. Because we make decisions with regard to our performance with a long-term outlook, we believe it is appropriate to remove the effects of short-term items that we do not expect to affect the underlying long-term performance of the properties. The long-term performance of our properties is principally driven by rental income. While not infrequent or unusual, these additional items we exclude in calculating FFO, as defined by Prologis, are subject to significant fluctuations from period to period that cause both positive and negative short-term effects on our results of operations in inconsistent and unpredictable directions that are not relevant to our long-term outlook.

We use our FFO measures as supplemental financial measures of operating performance. We do not use our FFO measures as, nor should they be considered to be, alternatives to net earnings computed under GAAP, as indicators of our operating performance, as alternatives to cash from operating activities computed under GAAP or as indicators of our ability to fund our cash needs.

FFO, as defined by Prologis

To arrive at FFO, as defined by Prologis, we adjust the NAREIT defined FFO measure to exclude:

 

(i) deferred income tax benefits and deferred income tax expenses recognized by our subsidiaries;

 

(ii) current income tax expense related to acquired tax liabilities that were recorded as deferred tax liabilities in an acquisition, to the extent the expense is offset with a deferred income tax benefit in GAAP earnings that is excluded from our defined FFO measure;

 

(iii) foreign currency exchange gains and losses resulting from debt transactions between us and our foreign consolidated subsidiaries and our foreign unconsolidated entities;

 

(iv) foreign currency exchange gains and losses from the remeasurement (based on current foreign currency exchange rates) of certain third party debt of our foreign consolidated subsidiaries and our foreign unconsolidated entities; and

 

(v) mark-to-market adjustments and related amortization of debt discounts associated with derivative financial instruments.

We calculate FFO, as defined by Prologis for our unconsolidated entities on the same basis as we calculate our FFO, as defined by Prologis.

We believe investors are best served if the information that is made available to them allows them to align their analysis and evaluation of our operating results along the same lines that our management uses in planning and executing our business strategy.

 

40


Table of Contents

Core FFO

In addition to FFO, as defined by Prologis, we also use Core FFO. To arrive at Core FFO, we adjust FFO, as defined by Prologis, to exclude the following recurring and non-recurring items that we recognized directly or our share of these items recognized by our unconsolidated entities to the extent they are included in FFO, as defined by Prologis:

 

(i) gains or losses from acquisition, contribution or sale of land or development properties;

 

(ii) income tax expense related to the sale of investments in real estate and third-party acquisition costs related to the acquisition of real estate;

 

(iii) impairment charges recognized related to our investments in real estate generally as a result of our change in intent to contribute or sell these properties;

 

(iv) gains or losses from the early extinguishment of debt;

 

(v) merger, acquisition and other integration expenses; and

 

(vi) expenses related to natural disasters.

We believe it is appropriate to further adjust our FFO, as defined by Prologis for certain recurring items as they were driven by transactional activity and factors relating to the financial and real estate markets, rather than factors specific to the on-going operating performance of our properties or investments. The impairment charges we have recognized were primarily based on valuations of real estate, which had declined due to market conditions, that we no longer expected to hold for long-term investment. Over the last few years, we made it a priority to strengthen our financial position by reducing our debt, our investment in certain low yielding assets and our exposure to foreign currency exchange fluctuations. As a result, we changed our intent to sell or contribute certain of our real estate properties and recorded impairment charges when we did not expect to recover the cost of our investment. Also, we have purchased portions of our debt securities when we believed it was advantageous to do so, which was based on market conditions, and in an effort to lower our borrowing costs and extend our debt maturities. As a result, we have recognized net gains or losses on the early extinguishment of certain debt due to the financial market conditions at that time.

We have also adjusted for some non-recurring items. The merger, acquisition and other integration expenses included costs we incurred in 2011 and 2012 associated with the merger with AMB and ProLogis and the PEPR Acquisition and the integration of our systems and processes. In addition, we and our co-investment ventures make acquisitions of real estate and we believe the costs associated with these transactions are transaction based and not part of our core operations.

We analyze our operating performance primarily by the rental income of our real estate and the revenue driven by our investment management business, net of operating, administrative and financing expenses. This income stream is not directly impacted by fluctuations in the market value of our investments in real estate or debt securities. As a result, although these items have had a material impact on our operations and are reflected in our financial statements, the removal of the effects of these items allows us to better understand the core operating performance of our properties over the long-term.

We use Core FFO, including by segment and region, to: (i) evaluate our performance and the performance of our properties in comparison to expected results and results of previous periods, relative to resource allocation decisions; (ii) evaluate the performance of our management; (iii) budget and forecast future results to assist in the allocation of resources; (iv) provide guidance to the financial markets to understand our expected operating performance; (v) assess our operating performance as compared to similar real estate companies and the industry in general; and (vi) evaluate how a specific potential investment will impact our future results. Because we make decisions with regard to our performance with a long-term outlook, we believe it is appropriate to remove the effects of items that we do not expect to affect the underlying long-term performance of the properties we own. As noted above, we believe the long-term performance of our properties is principally driven by rental income. We believe investors are best served if the information that is made available to them allows them to align their analysis and evaluation of our operating results along the same lines that our management uses in planning and executing our business strategy.

Limitations on Use of our FFO Measures

While we believe our defined FFO measures are important supplemental measures, neither NAREIT’s nor our measures of FFO should be used alone because they exclude significant economic components of net earnings computed under GAAP and are, therefore, limited as an analytical tool. Accordingly, these are only a few of the many measures we use when analyzing our business. Some of these limitations are:

 

(i) The current income tax expenses and acquisition costs that are excluded from our defined FFO measures represent the taxes and transaction costs that are payable.

 

(ii) Depreciation and amortization of real estate assets are economic costs that are excluded from FFO. FFO is limited, as it does not reflect the cash requirements that may be necessary for future replacements of the real estate assets. Further, the amortization of capital expenditures and leasing costs necessary to maintain the operating performance of industrial properties are not reflected in FFO.

 

41


Table of Contents
(iii) Gains or losses from property acquisitions and dispositions or impairment charges related to expected dispositions represent changes in value of the properties. By excluding these gains and losses, FFO does not capture realized changes in the value of acquired or disposed properties arising from changes in market conditions.

 

(iv) The deferred income tax benefits and expenses that are excluded from our defined FFO measures result from the creation of a deferred income tax asset or liability that may have to be settled at some future point. Our defined FFO measures do not currently reflect any income or expense that may result from such settlement.

 

(v) The foreign currency exchange gains and losses that are excluded from our defined FFO measures are generally recognized based on movements in foreign currency exchange rates through a specific point in time. The ultimate settlement of our foreign currency-denominated net assets is indefinite as to timing and amount. Our FFO measures are limited in that they do not reflect the current period changes in these net assets that result from periodic foreign currency exchange rate movements.

 

(vi) The gains and losses on extinguishment of debt that we exclude from our Core FFO, may provide a benefit or cost to us as we may be settling our debt at less or more than our future obligation.

 

(vii) The merger, acquisition and other integration expenses and the natural disaster expenses that we exclude from Core FFO are costs that we have incurred.

We compensate for these limitations by using our FFO measures only in conjunction with net earnings computed under GAAP when making our decisions. This information should be read with our complete consolidated financial statements prepared under GAAP. To assist investors in compensating for these limitations, we reconcile our defined FFO measures to our net earnings computed under GAAP for the years ended December 31 as follows (in thousands).

 

     2013     2012     2011  

FFO:

     

Reconciliation of net loss to FFO measures:

     

Net earnings (loss) attributable to common stockholders

  $ 315,422      $ (80,946)      $ (188,110)   

Add (deduct) NAREIT defined adjustments:

     

Real estate related depreciation and amortization

    624,573        705,717        523,424   

Impairment charges on certain real estate properties

           34,801        5,300   

Net (gain) loss on non-FFO dispositions and acquisitions

    (271,315)        (207,033)        3,092   

Reconciling items related to noncontrolling interests

    (8,993)        (27,680)        (19,889)   

Our share of reconciling items included in earnings from unconsolidated entities

    159,792        127,323        147,608   
 

 

 

   

 

 

   

 

 

 

Subtotal-NAREIT defined FFO

    819,479        552,182        471,425   

Add (deduct) our defined adjustments:

     

Unrealized foreign currency and derivative losses (gains) and related amortization, net

    32,870        14,892        (39,034)   

Deferred income tax expense (benefit)

    656        (8,804)        (19,803)   

Our share of reconciling items included in earnings from unconsolidated entities

    2,168        (5,835)        (900)   
 

 

 

   

 

 

   

 

 

 

FFO, as defined by Prologis

    855,173        552,435        411,688   

Net gains on acquisitions and dispositions of investments in real estate, net of expenses

    (336,815)        (121,303)        (110,469)   

Losses (gains) on early extinguishment of debt and redemption of preferred stock

    286,122        14,114        (258)   

Our share of reconciling items included in earnings from unconsolidated entities

    8,744        23,097        2,223   

Impairment charges

           264,844        145,028   

Merger, acquisition and other integration expenses

           80,676        140,495   

Natural disaster expenses

                  5,210   
 

 

 

   

 

 

   

 

 

 

Core FFO

  $ 813,224      $ 813,863      $ 593,917   

ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk

We are exposed to the impact of interest rate changes and foreign-exchange related variability and earnings volatility on our foreign investments. We have used certain derivative financial instruments, primarily foreign currency forward contracts, to reduce our foreign currency market risk, as we deem appropriate. We have also used interest rate swap agreements to reduce our interest rate market risk. We do not use financial instruments for trading or speculative purposes and all financial instruments are entered into in accordance with established policies and procedures.

We monitor our market risk exposures using a sensitivity analysis. Our sensitivity analysis estimates the exposure to market risk sensitive instruments assuming a hypothetical 10% adverse change in interest rates at December 31, 2013. The results of the sensitivity analysis are

 

42


Table of Contents

summarized below. The sensitivity analysis is of limited predictive value. As a result, our ultimate realized gains or losses with respect to interest rate and foreign currency exchange rate fluctuations will depend on the exposures that arise during a future period, hedging strategies at the time and the prevailing interest and foreign currency exchange rates. The failure to hedge effectively against exchange and interest rate changes may materially adversely affect our results of operations and financial position.

Foreign Currency Risk

Foreign currency risk is the possibility that our financial results could be better or worse than planned because of changes in foreign currency exchange rates.

Our primary exposure to foreign currency exchange rates relates to the translation of the net income and net investment of our foreign entities into U.S. dollar, principally euro, British pound sterling and Japanese yen, especially to the extent we wish to repatriate funds to the United States. We also have some exposure to movements in exchange rates related to certain intercompany loans we issue from time to time. To mitigate our foreign currency exchange exposure, we borrow in the functional currency of the borrowing entity, when appropriate. We also may use foreign currency forward contracts or other forms of hedging instruments to manage foreign currency exchange rate risk associated with the projected net operating income or net equity of our foreign consolidated subsidiaries and unconsolidated entities. Hedging arrangements involve risks, such as the risk that counterparties may fail to honor their obligations under these arrangements and the risk of fluctuation in the relative value of the foreign currency. The funds required to settle such arrangements could be significant depending on the stability and movement of foreign currency. The failure to hedge effectively against exchange and interest rate changes may materially adversely affect our results of operations and financial position. We may experience fluctuations in our earnings as a result of changes in foreign currency exchange rates.

In 2013, we entered into seven foreign currency forward contracts that expire in June 2017 and June 2018 with an aggregate notional amount of €599.9 million ($800.0 million using the 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 forward contracts that expire in June 2018 with an aggregate notional amount of ¥24.1 billion ($250.0 million using the forward rate of 96.54) to hedge a portion of our investment in Japan at a fixed yen rate in U.S. dollars. Based on a sensitivity analysis, a strengthening or weakening of the U.S. dollar against the euro and Japanese yen by 10% would result in a $105.0 million positive or negative change, respectively, in our cash flows upon settlement of the forward contracts. These derivatives were designated and qualify as hedging instruments and therefore the changes in fair value of these derivatives will be recorded in the foreign currency translation component of Accumulated Other Comprehensive Loss in the Consolidated Balance Sheets in Item 8.

We issued €700 million ($950.5 million) of debt during December 2013. This debt was issued by the Operating Partnership, which is a U.S. dollar functional entity. To mitigate the risk of fluctuations in the exchange rate of the euro, we designated the debt as a non-derivative financial instrument hedge, and as a result, the change in the value of this debt upon translation into U.S. dollars is recorded in the foreign currency translation component of Accumulated Other Comprehensive Loss in the Consolidated Balance Sheets in Item 8 to offset the foreign currency fluctuations related to our investment in Europe.

We may enter into similar agreements in the future to further hedge our investments in Europe, Japan or other regions outside the United States. As of December 31, 2013, taking into account the net investment hedges, approximately 77% of our net equity was denominated in U.S. dollars.

Interest Rate Risk

Our interest rate risk objective is to limit the impact of future interest rate changes on earnings and cash flows. To achieve this objective, we primarily borrow on a fixed rate basis for longer-term debt issuances. As of December 31, 2013, we had a total of $1.4 billion of variable rate debt outstanding, of which $725.5 million was outstanding on our credit facilities, $535.9 million was outstanding under a multi-currency senior term loan and $96.0 million was outstanding secured mortgage debt. As of December 31, 2013, we have entered into interest rate swap agreements to fix $71.0 million of our variable rate secured mortgage debt.

Our primary interest rate risk not subject to interest rate swap agreements is created by the variable rate credit facilities, senior term loan and certain secured mortgage debt. During the year ended December 31, 2013, we had weighted average daily outstanding borrowings of $1.4 billion on our variable rate debt not subject to interest rate swap agreements. Based on the results of a sensitivity analysis assuming a 10% adverse change in interest rates based on our average outstanding balances during the period, the impact was $2.2 million, which equates to a change in interest rates of 16 basis points.

ITEM 8. Financial Statements and Supplementary Data

The Consolidated Balance Sheets as of December 31, 2013 and 2012, the Consolidated Statements of Operations, Comprehensive Income (Loss), Equity/Capital and Cash Flows for each of the years in the three-year period ended December 31, 2013, Notes to Consolidated Financial Statements and Schedule III — Real Estate and Accumulated Depreciation, together with the reports of KPMG LLP, Independent Registered Public Accounting Firm, are included under Item 15 of this report and are incorporated herein by reference. Selected unaudited quarterly financial data is presented in Note 23 of the Consolidated Financial Statements.

 

43


Table of Contents

ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

ITEM 9A. Controls and Procedures

Controls and Procedures (Prologis, Inc.)

Prologis, Inc. carried out an evaluation under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of December 31, 2013. Based on this evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms. Subsequent to December 31, 2013, there were no significant changes in the internal controls or in other factors that could significantly affect these controls, including any corrective actions with regard to significant deficiencies and material weaknesses.

Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15(d)-15(f) under the Exchange Act) that occurred during the quarter ended December 31, 2013, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Management’s Annual Report on Internal Control over Financial Reporting

We are responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act.

Under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of the internal control over financial reporting was conducted as of December 31, 2013, based on the criteria described in “Internal Control — Integrated Framework” (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management determined that, as of December 31, 2013, the internal control over financial reporting was effective.

Our internal control over financial reporting as of December 31, 2013, has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their attestation report which is included herein.

Limitations of the Effectiveness of Controls

Management’s assessment included an evaluation of the design of the internal control over financial reporting and testing of the operational effectiveness of the internal control over financial reporting. The internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Controls and Procedures (Prologis, L.P.)

Prologis, L.P. carried out an evaluation under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act as of December 31, 2013. Based on this evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms. Subsequent to December 31, 2013, there were no significant changes in the internal controls or in other factors that could significantly affect these controls, including any corrective actions with regard to significant deficiencies and material weaknesses.

Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15(d)-15(f) under the Exchange Act) that occurred during the quarter ended December 31, 2013, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Management’s Annual Report on Internal Control over Financial Reporting

We are responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act.

 

44


Table of Contents

Under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of the internal control over financial reporting was conducted as of December 31, 2013, based on the criteria described in “Internal Control — Integrated Framework” (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management determined that, as of December 31, 2013, the internal control over financial reporting was effective.

Limitations of the Effectiveness of Controls

Management’s assessment included an evaluation of the design of the internal control over financial reporting and testing of the operational effectiveness of the internal control over financial reporting. The internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

ITEM 9B. Other Information

None.

PART III

ITEM 10. Directors, Executive Officers and Corporate Governance

Directors and Officers

The information required by this item is incorporated herein by reference to the descriptions under the captions “Election of Directors — Nominees,” Information Relating to Stockholders, Directors, Nominees, and Executive Officers — Certain Information with Respect to Executive Officers, “Additional Information — Section 16(a) Beneficial Ownership Reporting Compliance,” “Corporate Governance ,” and “Board of Directors” in our 2014 Proxy Statement or will be provided in an amendment filed on Form 10-K/A.

ITEM 11. Executive Compensation

The information required by this item is incorporated herein by reference to the descriptions under the captions “Executive Compensation Matters” and “Board of Directors and Committees” in our 2014 Proxy Statement or will be provided in an amendment filed on Form 10-K/A.

ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by this item is incorporated herein by reference to the descriptions under the captions “Information Relating to Stockholders, Directors, Nominees, and Executive Officers — Security Ownership” and “Equity Compensation Plans” in our 2014 Proxy Statement or will be provided in an amendment filed on Form 10-K/A.

ITEM 13. Certain Relationships and Related Transactions, and Director Independence

The information required by this item is incorporated herein by reference to the descriptions under the captions “Information Relating to Stockholders, Directors, Nominees, and Executive Officers — Certain Relationships and Related Transactions” and “Corporate Governance” in our 2014 Proxy Statement or will be provided in an amendment filed on Form 10-K/A.

ITEM 14. Principal Accounting Fees and Services

The information required by this item is incorporated herein by reference to the description under the caption “Independent Registered Public Accounting Firm” in our 2014 Proxy Statement or will be provided in an amendment filed on Form 10-K/A.

PART IV

ITEM 15. Exhibits, Financial Statement Schedules

The following documents are filed as a part of this report:

 

  (a) Financial Statements and Schedules:

 

  1. Financial Statements:

See Index to Consolidated Financial Statements and Schedule III on page 47 of this report, which is incorporated herein by reference.

 

  2. Financial Statement Schedules:

Schedule III — Real Estate and Accumulated Depreciation

 

45


Table of Contents

All other schedules have been omitted since the required information is presented in the Consolidated Financial Statements and the related Notes or is not applicable.

(b) Exhibits: The Exhibits required by Item 601 of Regulation S-K are listed in the Index to Exhibits on pages 121 to 126 of this report, which is incorporated herein by reference.

(c) Financial Statements: See Index to Consolidated Financial Statements and Schedule III on page 47 of this report, which is incorporated by reference.

 

46


Table of Contents

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE III

 

     Page  

Prologis, Inc. and Prologis L.P.:

  

Reports of Independent Registered Public Accounting Firm

     48   

Prologis, Inc.:

  

Consolidated Balance Sheets

     51   

Consolidated Statements of Operations

     52   

Consolidated Statements of Comprehensive Income (Loss)

     53   

Consolidated Statements of Equity

     54   

Consolidated Statements of Cash Flows

     55   

Prologis, L.P.:

  

Consolidated Balance Sheets

     56   

Consolidated Statements of Operations

     57   

Consolidated Statements of Comprehensive Income (Loss)

     58   

Consolidated Statements of Capital

     59   

Consolidated Statements of Cash Flows

     60   

Prologis, Inc. and Prologis L.P.:

  

Notes to Consolidated Financial Statements

     61   

Reports of Independent Registered Public Accounting Firm

     104   

Schedule III — Real Estate and Accumulated Depreciation

     106   

 

47


Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

Prologis, Inc.:

We have audited the accompanying consolidated balance sheets of Prologis, Inc. and subsidiaries as of December 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive income (loss), equity, and cash flows for each of the years in the three-year period ended December 31, 2013. These consolidated financial statements are the responsibility of Prologis, Inc.’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Prologis, Inc. and subsidiaries as of December 31, 2013 and 2012, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Prologis, Inc.’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control — Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 26, 2014 expressed an unqualified opinion on the effectiveness of Prologis, Inc.’s internal control over financial reporting.

KPMG LLP

Denver, Colorado

February 26, 2014

 

48


Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Partners

Prologis, L.P.:

We have audited the accompanying consolidated balance sheets of Prologis, L.P. and subsidiaries as of December 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive income (loss), capital, and cash flows for each of the years in the three-year period ended December 31, 2013. These consolidated financial statements are the responsibility of Prologis, L.P.’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Prologis, L.P. and subsidiaries as of December 31, 2013 and 2012, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles.

KPMG LLP

Denver, Colorado

February 26, 2014

 

49


Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

Prologis, Inc.:

We have audited Prologis, Inc.’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control — Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Prologis, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on Prologis, Inc.’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Prologis, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control — Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Prologis, Inc. and subsidiaries as of December 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive income (loss), equity, and cash flows for each of the years in the three-year period ended December 31, 2013, and our report dated February 26, 2014 expressed an unqualified opinion on those consolidated financial statements.

KPMG LLP

Denver, Colorado

February 26, 2014

 

50


Table of Contents

PROLOGIS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

 

     December 31,  
      2013      2012  

ASSETS

  

Investments in real estate properties

   $ 20,824,477       $ 25,809,123   

Less accumulated depreciation

     2,568,998         2,480,660   
  

 

 

    

 

 

 

Net investments in real estate properties

     18,255,479         23,328,463   

Investments in and advances to unconsolidated entities

     4,430,239         2,195,782   

Notes receivable backed by real estate

     188,000         188,000   

Assets held for sale

     4,042         26,027   
  

 

 

    

 

 

 

Net investments in real estate

     22,877,760         25,738,272   

Cash and cash equivalents

     491,129         100,810   

Restricted cash

     14,210         176,926   

Accounts receivable

     128,196         171,084   

Other assets

     1,061,012         1,123,053   
  

 

 

    

 

 

 

Total assets

   $         24,572,307       $         27,310,145   

LIABILITIES AND EQUITY

     

Liabilities:

     

Debt

   $ 9,011,216       $ 11,790,794   

Accounts payable and accrued expenses

     641,011         611,770   

Other liabilities

     742,191         1,115,911   

Liabilities related to assets held for sale

     1,436         18,334   
  

 

 

    

 

 

 

Total liabilities

     10,395,854         13,536,809   
  

 

 

    

 

 

 

Equity: