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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 2014

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.

  1.375% Notes due 2020   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. þ

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, 2014, the aggregate market value of the voting common equity held by non-affiliates of Prologis, Inc. was $20,348,477,088.

The number of shares of Prologis, Inc.’s common stock outstanding at February 20, 2015, was approximately 512,138,000

.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of Part III of this report are incorporated by reference to the registrant’s definitive proxy statement for the 2015 annual meeting of its stockholders or will be provided in an amendment filed on Form 10-K/A.

 

 

 

 


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EXPLANATORY NOTE

This report combines the annual reports on Form 10-K for the year ended December 31, 2014, of Prologis, Inc. and Prologis, L.P. Unless stated otherwise or the context otherwise requires, references to “Prologis, Inc.” or the “Parent” 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. At December 31, 2014, 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 subsidiaries. As general partner with control of the Operating Partnership, Prologis, Inc. consolidates the Operating Partnership for financial reporting purposes. Since the only significant asset of Prologis, Inc. is its investment in the Operating Partnership, the assets and liabilities of Prologis, Inc. and the Operating Partnership are the same on their respective financial statements.

We believe the combined annual report on Form 10-K 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 the Company. 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 incur 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 capital required by the business through the Operating Partnership’s operations, incurrence of indebtedness and 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, not owned by Prologis, Inc., 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.


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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

    7   

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   
 

Preferred Stock Dividends

    20   
 

Securities Authorized for Issuance Under Equity Compensation Plans

    20   
 

Other Stockholder Matters

    21   

6.

 

Selected Financial Data

    21   

7.

 

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

    22   
 

Management’s Overview

    22   
 

Results of Operations

    23   
 

Environmental Matters

    30   
 

Liquidity and Capital Resources

    31   
 

Off-Balance Sheet Arrangements

    34   
 

Contractual Obligations

    34   
 

Critical Accounting Policies

    35   
 

New Accounting Pronouncements

    37   
 

Funds from Operations (“FFO”)

    37   

7A.

 

Quantitative and Qualitative Disclosure About Market Risk

    40   

8.

 

Financial Statements and Supplementary Data

    41   

9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

    41   

9A.

 

Controls and Procedures

    41   

9B.

 

Other Information

    42   
  PART III  

10.

 

Directors, Executive Officers and Corporate Governance

    42   

11.

 

Executive Compensation

    42   

12.

 

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

    42   

13.

 

Certain Relationships and Related Transactions, and Director Independence

    42   

14.

 

Principal Accounting Fees and Services

    43   
  PART IV  

15.

 

Exhibits, Financial Statement Schedules

    43   

 

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The statements in this report that are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are based on current expectations, estimates and projections about the industry and markets in which we operate, management’s beliefs and assumptions made by management. Such statements involve uncertainties that could significantly impact our financial results. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” variations of such words and similar expressions are intended to identify such forward-looking statements, which generally are not historical in nature. All statements that address operating performance, events or developments that we expect or anticipate will occur in the future — including statements relating to rent and occupancy growth, development activity and changes in sales or contribution volume of properties, disposition activity, general conditions in the geographic areas where we operate, 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 global leader in industrial real estate, focused on markets across the Americas, Europe and Asia. At December 31, 2014, we owned or had investments in, on a wholly-owned basis or through co-investment ventures, properties and development projects expected to total approximately 590 million square feet (55 million square meters) in 21 countries. We lease modern distribution facilities to more than 4,700 customers, including third-party logistics providers, transportation companies, retailers and manufacturers.

 

LOGO

Details of the 590 million square feet, which represents an expected investment on an owned and managed basis of $45.6 billion, were as follows:

 

   

537 million square feet were in our operating portfolio with a gross book value of $40.6 billion and 96.1% occupancy;

 

   

40 million square feet were in our development portfolio with a total expected investment of $3.2 billion that were 40.9% leased;

 

   

$1.8 billion of land was available for future development;

 

   

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

 

   

2.1% and 18.6% of the annualized net effective rent were attributable to our largest customer and 25 largest customers, respectively.

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

 

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Our global corporate headquarters are at Pier 1, Bay 1, San Francisco, California 94111, and our global operational headquarters are at 4545 Airport Way, Denver, Colorado 80239. Other principal offices are in Amsterdam, Luxembourg, Mexico City, Sao Paulo, Shanghai, Singapore and Tokyo.

Our Internet address is www.prologis.com. All reports required to be filed with the Securities and Exchange Commission (“SEC”) are available or can be accessed free of charge through the Investor Relations section of our website after we electronically submit material 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 Standard & Poors (“S&P”) 500.

Investment Strategy

Both macroeconomics and demographics are important drivers of our business, including population growth, consumption and rising affluence. In developed markets, including in the U.S., Europe and Japan, the reconfiguration of supply chains, and the operational efficiencies that can be realized from our modern logistics facilities, are an important driver. In emerging markets, such as Mexico, Brazil and China, increases in affluence and the rise of consumer classes create demand as new supply chains are constructed. Taken together, logistics real estate markets benefit from economic growth, but depend to a greater degree upon the modernization of supply chains around the world and demographic growth.

We have investments in entities through a variety of ventures. We co-invest with partners and investors in entities that own multiple properties and provide asset and property management services to these entities. We refer to these entities as co-investment ventures. These entities may be consolidated or unconsolidated, depending on the structure, our partners’ participating and other rights and our level of control. The co-investment ventures may have one or more investors.

Our investment strategy focuses on providing distribution facilities 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 worldwide presence of $45.6 billion (based on expected investment) in our owned and managed portfolio spanning 21 countries on four continents. We classify our properties into two main market categories: global and regional. Global markets comprise approximately 30 of the largest markets tied to global trade. They feature large population centers with high per-capita consumption rates and are 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; instead, they serve local consumption and are less supply constrained. We intend to hold primarily Class-A product in our global and regional markets. At December 31, 2014, global and regional markets represented approximately 86% and 13%, respectively, of our owned and managed portfolio (based on our share of the properties’ gross book value). We also have a small investment in other markets that accounts for approximately 1% of our owned and managed portfolio. We have deep knowledge of our local markets, construction expertise and a commitment to sustainable design across our portfolio. We are supported by a broad and diverse customer base and have relationships with multinational corporations that bring us repeat business across our portfolio. For more detail on our properties, see Item 2. Properties.

Business Strategy and Operating Segments

Our business comprises two operating segments: Real Estate Operations and Strategic Capital.

Real Estate Operations

Rental Operations. Rental operations represent the main source of our revenues, earnings and funds from operations (“FFO”). See definition and a complete reconciliation of net earnings to FFO in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. We collect rent from our customers through operating leases, including reimbursements for the majority of our operating costs. We expect to generate long-term internal growth in rental income by maintaining high occupancy rates, controlling expenses and through rent increases. Our rental income is diversified due to our global presence and broad customer base. We believe our property management, leasing and maintenance teams, together with our capital expenditure, energy management and risk management programs, create cost efficiencies that allow us to capitalize on the economies of scale inherent in owning, operating and growing a global portfolio.

Capital Deployment. Capital deployment includes the development, re-development and acquisition of industrial properties that lead to rental operations and is therefore included with rental operations for segment reporting. We deploy capital primarily in global and regional markets to meet our customers’ needs. We capitalize on the following: (i) our land bank; (ii) the development expertise of our local teams; (iii) our global customer relationships; and (iv) the demand for high-quality distribution facilities. We aim to increase our rental income and the Company’s net asset value by leasing newly developed space and acquiring operating properties. We develop properties for long-term hold, for contribution to our co-investment ventures and, occasionally, for sale to third parties.

Strategic Capital

We invest with partners and investors through private and public ventures which may be consolidated or unconsolidated. We tailor industrial portfolios to investors’ specific needs, with a focus on long-term ventures and open-ended funds. We also access alternative sources of equity through publicly traded vehicles such as Nippon Prologis REIT, Inc. (“NPR”) and FIBRA Prologis. These private and public vehicles provide capital for distinct geographies across our global platform. We hold a significant ownership interest in these ventures, aligning our interests with those of our partners. We generate strategic capital revenues from our unconsolidated ventures through asset

 

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management and property management services and we earn additional revenues from leasing, acquisition, construction, development and disposition services provided. Depending on the structure of the venture and the returns provided to our partners, we also earn revenues through incentive fees during the life of a venture or upon liquidation (we refer to these incentive fees as promotes). We believe our co-investment ventures will continue to serve as a source of capital for investments, provide incremental revenues and mitigate risk associated with our foreign currency exposure. We plan to grow this business generally through existing ventures.

Competition

Competitively priced distribution space could impact our occupancy rates and have an adverse effect on how much rent we can charge, which in turn could affect both of our operating segments. To the extent we wish to acquire land for development or dispose of land, we may compete with local, regional and national operators and/or developers. We also face competition from investment managers for institutional capital within our strategic capital business.

We believe we have competitive advantages due to our:

 

   

ability to respond quickly to customers’ needs for high-quality distribution space in key global and regional markets;

 

   

established relationships with key customers served by our local teams;

 

   

ability to leverage our organizational scale and structure to provide a single point of contact for global customers through the Prologis global customer solutions team;

 

   

property management and leasing expertise;

 

   

relationships and proven track record with current and prospective investors in our strategic capital business;

 

   

global experience developing and managing industrial properties;

 

   

well-positioned land bank; and

 

   

team members with experience in the land entitlement process.

Customers

Our broad customer base represents a spectrum of international, national, regional and local distribution users. At December 31, 2014, in Real Estate Operations, we had more than 3,900 customers occupying 271.6 million square feet of distribution space. On an owned and managed basis, we had more than 4,700 customers occupying 519.1 million square feet of distribution space. Our largest customer and 25 largest customers accounted for 1.9% and 19.5%, respectively, of our net effective rent at December 31, 2014, for Real Estate Operations and 2.1% and 18.6%, respectively, for our owned and managed portfolio.

In Strategic Capital, we view our partners and investors as our customers. At December 31, 2014, in our private ventures, we partnered with more than 100 investors, several of which invest in multiple ventures.

Employees

We employ 1,505 people across the globe. Our employees work in four countries in the Americas (900 people), 14 countries in Europe (360 people) and three countries in Asia (245 people). Of the total, we have assigned 955 employees to Real Estate Operations and 90 employees to Strategic Capital. Further, we have 460 individuals who work in corporate and support positions that support both segments. We believe we have good relationships with our employees. Prologis employees are not organized under collective bargaining agreements, although some employees in Europe are represented by statutory Works Councils and as such they 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

 

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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 19 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 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 2014, we generated approximately $369.6 million or 21.0% 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, results of operations and cash flow could be harmed.

In addition, we may be impacted by, 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, due to 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, 2014, approximately $6.4 billion or 24.9% of our total assets are invested in a currency other than the U.S. dollar,

 

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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 U.S. dollar reported 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. 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 the hedged 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 global financial markets, it has the potential to adversely 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 new 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. 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.

At December 31, 2014, approximately 33.6% of our consolidated operating properties or $6.3 billion (based on investment before depreciation) are located in California, which represented 25.9% of the aggregate square footage of our operating properties and 31.9% of our net operating income. 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, New Jersey/New York City, South Florida and Canada. 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 co-investment ventures in which we invest have concentrations of properties in the same markets mentioned above, as well as in markets in France, Germany, Japan, Mexico, the Netherlands, Poland and the United Kingdom, and are subject to the economic conditions in those markets.

 

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A number of our investments, both wholly-owned and owned through co-investment ventures, 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 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 co-investment ventures 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 co-investment ventures 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

 

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

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

We have acquired properties and will continue to acquire properties, both through the direct acquisition of real estate and through the acquisition of entities that own the real estate. 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. The acquired properties or entities may also be subject to liabilities, which may be 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 may have to pay substantial sums to settle it.

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 a co-investment venture, depending on market conditions, our liquidity needs and other factors. We may increase our investment in the development, renovation and redevelopment business and we will complete the build-out and leasing of our development portfolio. 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.

 

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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 unconsolidated co-investment ventures or third parties to generate proceeds, we may not be successful.

We may decide to contribute or sell properties to certain of our unconsolidated co-investment ventures or third parties depending on a number of factors. 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 at all. The unconsolidated co-investment venture or third party 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, this 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.

At December 31, 2014, we had an investment in real estate containing approximately 261 million square feet held through unconsolidated co-investment ventures, both public and private. Our organizational documents do not limit the amount of available funds that we may invest in unconsolidated ventures, 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 ventures, successfully develop or acquire properties through unconsolidated ventures, or realize value from such investments. Our inability to do so may have an adverse effect on our growth, results of operations, cash flows and the market price of our securities.

Our co-investment ventures involve certain additional risks that we do not otherwise face, including:

 

   

our partners may share certain approval rights over major decisions made on behalf of the ventures;

 

   

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 co-investment ventures to permit us to achieve our business objectives; however, we may not be able to continue to do so indefinitely. We have formed publicly traded investment vehicles, such as NPR and FIBRA Prologis, for which we serve as sponsor and/or manager. We have contributed, and may continue to contribute, assets into such vehicles. There is a risk that our managerial relationship may be terminated.

 

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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.

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, which may adversely affect our operating results and financial condition 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 credit facilities 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 the underlying financing and the applicable interest rates at the time of breakage. The failure to hedge effectively against interest rate changes may adversely affect our results of operations and financial position. In addition, our co-investment ventures may be unable to refinance indebtedness or meet payment obligations, which may impact our distributable cash flow and our financial condition.

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 credit facilities, 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, our operating results 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.

At December 31, 2014, our credit ratings were Baa1 from Moody’s and BBB+ from S&P, both with outlook stable. A securities rating is not a recommendation to buy, sell or hold securities and is subject to revision or withdrawal at any time by the rating organization.

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 taxable 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, 2014, and in some cases declared as late as December 31, 2015, the REIT can satisfy up to 90% of the distribution requirements discussed above through the distribution of shares of our stock if certain conditions are met. Assuming we continue to satisfy these distribution requirements with cash, we may not be able to fund all future capital needs, including acquisition and development activities, from cash retained from operations and may have to rely on third-party sources of capital. Further, in order to maintain our REIT status and not have to pay federal income and excise taxes, we may need to borrow funds on a short-term basis to meet the REIT distribution requirements even if the then-prevailing market conditions are not favorable for these borrowings. These short-term borrowing needs could result from differences in timing between the actual receipt of cash and inclusion of income for federal income tax purposes, or the effect of non-deductible capital expenditures, the creation of reserves or required debt or amortization payments. Our ability to access debt and equity capital on favorable terms or at all is dependent upon a number of factors, including general market conditions, the market’s perception of our growth potential, our current and potential future earnings and cash distributions and the market price of our securities.

 

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Our stockholders may experience dilution if we issue additional common stock or units in the Operating Partnership.

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

Federal Income Tax Risks

Our failure of Prologis, Inc. to qualify as a REIT would have serious adverse consequences.

Prologis, Inc. 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 Prologis, Inc. to qualify as a REIT under the Internal Revenue Code and believe that the current organization and method of operation comply with the rules and regulations promulgated under the Internal Revenue Code to enable Prologis, Inc. 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 Prologis, Inc. to qualify as a REIT, or that our future operations could cause Prologis, Inc. to fail to qualify. Qualification as a REIT requires us to satisfy numerous requirements (some annually 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, Inc. must derive at least 95% of its gross income in any year from qualifying sources. In addition, Prologis, Inc. must pay dividends to its stockholders aggregating annually at least 90% of its 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 for Prologis, Inc. because we hold assets through the Operating Partnership.

If Prologis, Inc. fails 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, Prologis, Inc. would be disqualified from treatment as a REIT for the four taxable years following the year in which it lost the qualification. If Prologis, Inc. lost its 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 the ability of Prologis, Inc. to comply with the REIT income and asset tests, and thus its 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

Our business and operations could suffer in the event of system failures or cyber security attacks.

Despite system redundancy, the implementation of security measures and the existence of a disaster recovery plan for our internal information technology systems, our systems are vulnerable to damages from any number of sources, including energy blackouts, natural disasters, terrorism, war, telecommunication failures and cyber security attacks, such as computer viruses or unauthorized access. Any system failure or accident that causes interruptions in our operations could result in a material disruption to our business. We may also incur additional costs to remedy damages caused by such disruptions. Any compromise of our security could also result in a violation of applicable privacy and other laws, unauthorized access to information of ours and others, significant legal and financial exposure, damage to our reputation, loss or misuse of the information and a loss of confidence in our security measures, which could harm our business.

 

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

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

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

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 continually reviews 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 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. 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 facilities to customers whose businesses are tied to global trade and depend on the efficient movement of goods through the global supply chain. We classify our properties into two main market categories: global and regional.

We manage our business on an owned and managed basis without regard to whether a particular property is wholly-owned by us or owned by one of our co-investment ventures. We believe that the operating fundamentals of our owned and managed portfolio are consistent with those of our consolidated portfolio and therefore allow us to make business decisions based on the property operations versus our ownership. As such, we have included operating property information for Real Estate Operations 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 the ventures, not our proportionate share.

Included in Real Estate Operations are 321 buildings owned by entities we consolidate but of which we own less than 100% of the equity. 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, 2014, or generated income equal to 10% or more of our consolidated gross revenues for the year ended December 31, 2014.

 

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

 

       Consolidated - Real Estate Operations        Owned and Managed  
Operating properties    Rentable
Square
Footage
     Gross Book
Value
     Encumbrances (1)      Rentable
Square
Footage
     Gross Book
Value
 

Global Markets - Americas:

              

United States:

              

Atlanta

     11,455       $ 495,377       $ 76,218         14,343       $ 657,146   

Baltimore/Washington

     5,967         524,429         115,225         8,073         706,223   

Central Valley California

     10,093         553,989         86,451         10,197         558,138   

Central & Eastern Pennsylvania

     14,925         927,252         84,543         14,925         927,252   

Chicago

     28,888         1,620,872         187,287         35,591         2,137,078   

Dallas/Fort Worth

     20,971         982,684         160,562         24,405         1,245,974   

Houston

     8,574         461,757         92,131         12,373         754,346   

New Jersey/New York City

     17,364         1,384,633         134,335         21,926         1,978,072   

San Francisco Bay Area

     14,650         1,487,808         48,042         18,261         1,837,550   

Seattle

     3,821         362,005         47,252         10,923         1,044,750   

South Florida

     7,222         773,855         70,119         10,679         1,081,769   

Southern California

     48,233         4,223,267         288,407         58,793         5,295,266   

Canada

     7,065         642,728                 7,065         642,728   

Mexico:

              

Guadalajara

     60         4,379                 5,872         315,122   

Mexico City

     387         24,901                 10,762         724,319   

Monterrey

                             3,413         196,639   

Brazil

                             5,266         414,355   

Regional Markets - Americas:

              

United States:

              

Austin

     2,213         147,661         29,640         2,213         147,661   

Charlotte

     2,527         117,250         21,603         2,527         117,250   

Cincinnati

     5,899         256,015         132,023         5,899         256,015   

Columbus

     8,545         297,320         102,553         8,545         297,320   

Denver

     4,491         272,418         56,196         4,491         272,418   

Indianapolis

     5,095         206,916         87,282         5,095         206,916   

Las Vegas

     3,610         200,462         31,253         3,610         200,462   

Louisville

     3,435         144,441         14,580         3,435         144,441   

Memphis

     5,297         184,815         6,026         5,297         184,815   

Nashville

     4,660         178,113         65,827         4,660         178,113   

Orlando

     3,488         234,777         38,633         3,895         261,761   

Phoenix

     2,139         116,259         8,208         2,139         116,259   

Portland

     2,010         151,401         56,109         2,010         151,401   

Reno

     3,543         161,482         33,252         3,543         161,482   

San Antonio

     5,606         255,715         61,924         5,606         255,715   

Mexico:

              

Juarez

                             3,106         135,764   

Reynosa

                             4,385         205,649   

Tijuana

                             4,217         204,525   

Other Markets - United States

     3,907         171,685         5,186         4,681         249,064   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal Americas

     266,140         17,566,666         2,140,867         352,221         24,263,758   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Global Markets - Europe:

              

Belgium

     439         32,231                 2,497         179,404   

Czech Republic

     278         20,142                 7,737         518,874   

France

     1,873         97,795                 32,010         2,354,233   

Germany

     1,161         65,688                 20,405         1,655,157   

Italy

     1,277         76,600                 8,813         498,953   

Netherlands

                             14,526         1,197,299   

Poland

     2,142         99,331                 23,056         1,421,752   

Spain

     449         40,213                 8,191         577,083   

United Kingdom

     834         79,825                 21,033         2,784,984   

Regional Markets - Europe:

              

Hungary

     285         17,717                 5,837         362,611   

Slovakia

     549         28,796                 4,897         314,811   

Sweden

     524         34,264                 3,807         305,756   

Other Markets - Europe

     1,275         58,865                 1,275         58,865   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal Europe

     11,086         651,467                 154,084         12,229,782   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Global Markets - Asia:

              

China

     2,324         79,540                 7,597         387,508   

Japan

     1,215         180,157                 22,113         3,567,803   

Singapore

     959         140,303                 959         140,303   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal Asia

     4,498         400,000                 30,669         4,095,614   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total operating portfolio

     281,724         18,618,133         2,140,867         536,974         40,589,154   

Value added properties (2)

     558         17,319                 6,008         342,611   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total operating properties

     282,282       $ 18,635,452         $2,140,867         542,982       $ 40,931,765   

 

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Table of Contents
     Investment in Land      Development
Portfolio
 

Consolidated land and development portfolio in

Real Estate Operations

   Acres     

Estimated Build
Out Potential

(sq. ft.) (3)

     Current
Investment
     Rentable
Square
Footage
     Total
Expected
Investment (4)
 

Global Markets - Americas:

              

United States:

              

Atlanta

     473         6,619       $ 23,071         715       $ 30,869   

Baltimore/Washington

     39         400         1,567                   

Central Valley California

     1,025         19,560         54,016         1,001         63,614   

Central & Eastern Pennsylvania

     188         2,474         26,079         3,009         149,410   

Chicago

     510         9,479         38,791         330         19,912   

Dallas/Ft. Worth

     552         9,156         46,451         1,286         74,373   

Houston

     70         1,112         8,636         229         15,459   

New Jersey/New York City

     148         2,356         66,964         1,767         169,899   

San Francisco Bay Area

     66         1,248         21,372                   

South Florida

     316         5,629         158,140         330         30,626   

Southern California

     660         12,993         116,844         1,818         131,459   

Canada

     171         3,281         49,686         1,169         110,809   

Mexico:

              

Guadalajara

     50         1,066         11,615         231         13,958   

Mexico City

     301         5,661         112,503         1,333         88,783   

Monterrey

     161         2,656         30,995         501         30,437   

Regional Markets - Americas:

              

United States:

              

Charlotte

     7         103         651         205         10,849   

Columbus

     121         1,861         4,397         410         17,149   

Denver

     26         444         4,175         795         46,465   

Indianapolis

     13         231         981                   

Las Vegas

     54         1,076         5,876         464         26,901   

Memphis

     151         2,586         7,306         218         10,746   

Orlando

     122         1,768         27,055         124         8,637   

Phoenix

     38         698         3,058                   

Portland

     11         181         1,390         208         14,232   

Reno

     117         1,911         5,116                   

Mexico:

              

Juarez

     137         2,692         13,864         210         11,324   

Reynosa

     196         3,460         12,221         163         9,421   

Tijuana

     34         626         5,723                   

Other Markets - United States

     401         6,051         30,552         740         46,931   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal Americas

     6,158         107,378         889,095         17,256         1,132,263   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Global Markets - Europe:

              

Belgium

     27         526         9,534                   

Czech Republic

     217         3,504         42,074         1,132         69,935   

France

     449         8,398         78,831         880         65,637   

Germany

     58         1,161         13,540         282         17,369   

Italy

     107         2,451         30,084                   

Netherlands

     56         1,538         47,789         657         45,817   

Poland

     634         12,215         74,576         486         28,292   

Spain

     100         2,021         16,507         139         15,959   

United Kingdom

     609         9,401         211,340         2,719         370,444   

Regional Markets - Europe:

              

Hungary

     335         5,604         35,348                   

Slovakia

     78         1,708         13,076         255         13,154   

Sweden

                             447         35,649   

Other Markets - Europe

     118         2,600         19,641                   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal Europe

     2,788         51,127         592,340         6,997         662,256   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Global Markets - Asia:

              

China

     18         172         5,889                   

Japan

     53         2,423         90,462         6,039         747,128   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal Asia

     71         2,595         96,351         6,039         747,128   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total land and development portfolio

     9,017         161,100       $ 1,577,786         30,292       $ 2,541,647   

 

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Table of Contents

The following is a summary of our investment in consolidated real estate properties at December 31, 2014 (in thousands):

 

      Investment Before
Depreciation
 

Industrial operating properties

   $ 18,635,452   

Development portfolio, including cost of land

     1,473,980   

Land

     1,577,786   

Other real estate investments (5)

     502,927   
  

 

 

 

Total consolidated real estate properties

   $ 22,190,145   

 

(1) Certain of our consolidated properties are pledged as security under our secured mortgage debt and assessment bonds at December 31, 2014. 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 $18.3 million of encumbrances related to other real estate properties not included in Real Estate Operations. 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 development 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 and development and leasing costs. At December 31, 2014, 65% of the properties under development in the development portfolio were expected to be complete by December 31, 2015, and 25% of the properties in the development portfolio were already completed but not yet stabilized. A property is defined as stabilized when it has been completed for one year or is 90% occupied.

 

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

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 at December 31, 2014, without giving effect to the exercise of renewal options or termination rights, if any (dollars and square feet in thousands):

 

     Number
of Leases
     Occupied
Square Feet
     Net Effective Rent  
Year          $      % of Total      $ Per Square Foot  

2015

     851         42,596       $ 185,671         15.7%       $ 4.36   

2016

     837         53,225         217,042         18.3%         4.08   

2017

     773         51,082         224,117         18.9%         4.39   

2018

     484         36,944         173,210         14.6%         4.69   

2019

     395         30,749         138,710         11.7%         4.51   

2020

     183         13,529         65,701         5.6%         4.86   

2021

     92         10,334         43,440         3.7%         4.20   

2022

     37         5,116         22,695         1.9%         4.44   

2023

     41         6,145         30,735         2.6%         5.00   

2024

     32         6,169         29,425         2.5%         4.77   

Thereafter

     38         9,509         52,927         4.5%         5.60   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     3,763         265,398       $ 1,183,673         100%       $ 4.46   
        

 

 

    

 

 

    

 

 

 

Month to month

     181         6,126            
  

 

 

    

 

 

          

Total

     3,944         271,524                              

 

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Table of Contents

Unconsolidated Co-Investment Ventures

Included in our owned and managed portfolio are investments in 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, at December 31, 2014 (in thousands):

 

    

 

Operating Properties

     Development
Portfolio -

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

Americas:

           

Prologis Targeted U.S. Logistics Fund

     50,491       $ 4,592,157       $       $   

FIBRA Prologis

     31,364         1,755,544         11,895         1,230   

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

     5,266         414,355         154,613         147,272   
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal Americas

     87,121         6,762,056         166,508         148,502   
  

 

 

    

 

 

    

 

 

    

 

 

 

Europe:

           

Prologis Targeted Europe Logistics Fund

     15,535         1,832,926                   

Prologis European Properties Fund II

     68,928         5,516,778         6,231         2,475   

Europe Logistics Venture 1

     5,257         405,761                   

Prologis European Logistics Partners Sàrl

     57,688         4,083,178         17,985         9,847   
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal Europe

     147,408         11,838,643         24,216         12,322   
  

 

 

    

 

 

    

 

 

    

 

 

 

Asia:

           

Nippon Prologis REIT

     20,898         3,387,646                   

Prologis China Logistics Venture

     5,273         307,968         414,299         58,758   
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal Asia

     26,171         3,695,614         414,299         58,758   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     260,700       $ 22,296,313       $ 605,023       $ 219,582   

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 co-investment ventures are parties to a variety of legal proceedings arising in the ordinary course of business. We believe that, with respect to any such matters to which we are currently a party, 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

 

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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 our common stock, as reported in the NYSE Composite Tape, and the declared dividends per share, for the periods indicated.

 

      High      Low      Dividends  

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   

2014

        

First Quarter

   $ 42.10       $ 36.33       $ 0.33   

Second Quarter

     42.66         39.72         0.33   

Third Quarter

     42.38         37.28         0.33   

Fourth Quarter

     44.05         37.12         0.33   

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 February 20, 2015, we had approximately 512,138,000 shares of common stock outstanding, which were held of record by approximately 5,290 stockholders.

 

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Table of Contents

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, 2009, to the cumulative total return of the S&P 500 Stock Index and the FTSE NAREIT Equity REITs Index from December 31, 2009 to December 31, 2014. The graph assumes an initial investment of $100 in our common stock and each of the indices on December 31, 2009, 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 12/31/09 in stock or index, including reinvestment of dividends. Fiscal year ending December 31.

Copyright© 2015 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.

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

Preferred Stock Dividends

At December 31, 2014, we had one series of preferred stock outstanding – the “series Q preferred stock.” On April 19, 2013, we redeemed all of the outstanding series L, M, O, P, R, and S preferred stock.

The following table sets forth the Company’s dividends payable per share for the years ended December 31:

 

      2014      2013  

Series L preferred stock

     n/a       $ 0.41   

Series M, R and S preferred stock

     n/a       $ 0.42   

Series O preferred stock

     n/a       $ 0.44   

Series P preferred stock

     n/a       $ 0.43   

Series Q preferred stock

   $ 4.27       $ 4.27   

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.

 

20


Table of Contents

Other Stockholder Matters

Common Stock Plans

Further information relative to our equity compensation plans will be provided in our 2015 Proxy Statement or in an amendment of this Form 10-K for further information relative to our equity compensation plans.

ITEM 6. Selected Financial Data

The following table sets forth selected financial data related to our historical financial condition and results of operations for both Prologis, Inc. and the Operating Partnership. The amounts in the tables below are in millions, except for per share/unit amounts.

 

    Years Ended December 31,  
     2014     2013     2012     2011 (1)     2010 (2)  

Operating Data:

         

Total revenues

  $ 1,761      $ 1,750      $ 1,961      $ 1,422      $ 827   

Earnings (loss) from continuing operations (3)

  $ 739      $ 230      $ (106)      $ (275)      $ (1,605)   

Net earnings (loss) per share attributable to common stock/unitholders - Basic (3):

         

Continuing operations (4)

  $ 1.25      $ 0.40      $ (0.35)      $ (0.83)      $ (7.42)   

Discontinued operations (4)(5)

  $      $ 0.25      $ 0.17      $ 0.32      $ 1.52   

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

  $ 1.25      $ 0.65      $ (0.18)      $ (0.51)      $ (5.90)   

Net earnings (loss) per share attributable to common stock/unitholders - Diluted (3):

         

Continuing operations

  $ 1.24      $ 0.39      $ (0.34)      $ (0.82)      $ (7.42)   

Discontinued operations (5)

  $      $ 0.25      $ 0.16      $ 0.31      $ 1.52   

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

  $ 1.24      $ 0.64      $ (0.18)      $ (0.51)      $ (5.90)   

Common share/unit distributions per share/unit (3)

  $ 1.32      $ 1.12      $ 1.12      $ 1.06      $ 1.25   

Balance Sheet Data:

         

Total assets

  $ 25,818      $ 24,572      $ 27,310      $ 27,724      $ 14,903   

Total debt

  $ 9,380      $ 9,011      $ 11,791      $ 11,382      $ 6,506   

FFO (6):

         

Reconciliation of net earnings (loss) to FFO:

         

Net earnings (loss) attributable to common shares

  $ 622      $ 315      $ (81)      $ (188)      $ (1,296)   

Total NAREIT defined adjustments

    299        504        633        660        368   

Total our defined adjustments

    (33)        36               (60)        (46)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

FFO, as defined by Prologis

  $ 888      $ 855      $ 552      $ 412      $ (974)   

Total core defined adjustments

    65        (42)        262        182        1,255   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Core FFO (6)

  $ 953      $ 813      $ 814      $ 594      $ 281   

 

(1) In 2011, AMB Property Corporation (“AMB”) completed a merger (the “Merger”) with ProLogis, a Maryland REIT (“ProLogis”). In the Merger, AMB was the legal acquirer and ProLogis was the accounting acquirer. Following the Merger, AMB changed its name to Prologis, Inc. In 2011, we also completed an acquisition of one of our unconsolidated ventures in Europe. Activity in 2011 included five months of results of ProLogis, as it was the accounting acquirer in the Merger and seven months of results of the combined company resulting from the Merger and the acquisition in Europe.

 

(2) 2010 includes the results of ProLogis, as it was the accounting acquirer in the Merger.

 

(3) We recognized significant net gains on dispositions of investments in real estate and revaluation of equity investments upon acquisition of a controlling interest of $0.7 billion and $0.6 billion in 2014 and 2013, respectively. In 2010, we recognized impairment charges of $1.2 billion related to certain investments 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.

 

(4) For 2014 and 2013, the amounts for the Operating Partnership were the same as Prologis, Inc. 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. Pre-Merger, there was no Operating Partnership.

 

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(5) In 2014, the accounting standard changed for classifying and reporting discontinued operations and as such, none of our dispositions in 2014 met the qualifications to be reported as discontinued operations.

 

(6) FFO; FFO, as defined by Prologis and Core FFO are non-GAAP measures used in the real estate industry. See definitions and a complete reconciliation of net earnings to FFO and Core FFO 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 the Consolidated Financial Statements included in Item 8 of this report and the matters described under Item 1A. Risk Factors.

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 give us unique competitive advantages. Our plan to grow revenue, earnings, net operating income (“NOI”), cash flows and Core FFO (see below for definition) is based on:

 

 

Rising Rents. Market rents are increasing across many of our markets. We expect growth to continue as demand for logistics facilities is strong across the globe. As many of our leases originated during low rent period following the global financial crisis, there is considerable room for growth of in-place leases, which translates into increased NOI, earnings and cash flow. We had positive rent change on rollovers (when comparing the net effective rent of the new lease to the prior lease for the same space) during each quarter of 2014, ranging between 6.2% and 9.7%, and the fourth quarter marked the eighth consecutive quarter of positive rental increases.

 

 

Value Creation from Development. We believe a successful development program involves maintaining control of well-positioned land. Based on our current estimates, our land bank has the potential to support the development of nearly 180 million additional square feet. We believe the carrying value of our land bank is below its current fair value, and we expect to realize this value going forward through development or land sales. During 2014, in our owned and managed portfolio, we stabilized development projects with a total expected investment of $1.1 billion. We estimate that post-stabilization, the value of these buildings will be approximately 23.0% more than their book value or the cost to develop (defined as estimated margin and calculated using estimated yield and capitalization rates from our underwriting models).

 

 

Economies of Scale from Growth in Assets Under Management. We believe we have the infrastructure and an acquisition pipeline that will allow us to increase our investments in real estate, with minimal increases to general and administrative expenses. During 2014, our owned and managed real estate assets increased through the acquisition of $1.5 billion of buildings, principally in our unconsolidated ventures in Europe, and development starts with a total expected investment of $2.0 billion; offset partially by dispositions to third parties of $1.5 billion. With all of this activity, we had minimal incremental gross general and administrative expenses.

Summary of 2014

During the year ended December 31, 2014, we completed the following activities as further described in the Consolidated Financial Statements:

 

 

In January, we closed on a U.S. co-investment venture, Prologis U.S. Logistics Venture (“USLV”), in which we have a 55% equity ownership and consolidate for financial reporting purposes. At closing, the venture acquired a portfolio of 66 operating properties from us, aggregating 12.8 million square feet for a purchase price of $1.0 billion.

 

 

In June, we completed the initial public offering for FIBRA Prologis, a Mexican REIT on the Mexican Stock Exchange. In connection with the offering, FIBRA Prologis purchased its initial portfolio of $1.6 billion from us and two of our co-investment ventures. We received equity units in FIBRA Prologis in exchange for our combined investments resulting in a 45% ownership interest in FIBRA Prologis that we account for under the equity method.

 

 

We earned a promote of $42.1 million in June from our co-investment venture, Prologis Targeted U.S. Logistics Fund (“USLF”), which was based on the venture’s cumulative returns to the investors over the previous three calendar years. Of that amount, $31.3 million represented the third-party investors’ portion and is reflected in Strategic Capital Income in the Consolidated Statements of Operations.

 

 

We increased our ownership of Prologis North American Industrial Fund (“NAIF”) to 66.1% by acquiring equity units from all but one partner for an aggregate purchase price of $679.0 million, which resulted in us obtaining control over and consolidating NAIF. As a result of remeasuring our equity investment to fair value upon consolidation in the fourth quarter, we recognized a gain of $201.3 million.

 

 

We invested $587.2 million in three of our European unconsolidated co-investment ventures, which represented our proportionate ownership interest, for the acquisition of properties and repayment of debt.

 

 

We generated net proceeds of $3.2 billion and net gains of $524.5 million from the contribution and disposition of real estate investments, including the initial portfolio of FIBRA Prologis discussed above. The gains were principally driven by dispositions in the United States and contribution of stabilized properties in Japan and Mexico.

 

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We issued €1.8 billion ($2.4 billion) of senior notes, entered into a new yen term loan and replaced our euro term loan. We used the net proceeds to buy back senior notes through private transactions, repay secured mortgage debt, fund additional investments in our co-investment ventures and for general corporate purposes. This activity reduced our weighted average interest rate and extended our maturities, as further discussed below in Liquidity and Capital Resources.

 

 

In December, we received proceeds of $353.9 million through the issuance of equity securities from the exercise of a warrant issued in connection with the formation of Prologis European Logistics Partners Sàrl (“PELP”) and through our at-the-market (“ATM”) program. See Note 10 to the Consolidated Financial Statements for additional information about our ATM program.

Results of Operations

Real Estate Operations

Included in this segment is rental income and rental expense recognized from our consolidated operating properties. We had significant real estate activity during 2014 and 2013 that impacted the size of our consolidated portfolio. In addition, the operating fundamentals in the markets of our operating portfolio have been improving, which has positively impacted both the occupancy and rental rates we have experienced, and has also fueled development activity. Also included in this segment is revenue from land we own and lease to customers and development management and other income, net of acquisition, disposition and land holding costs.

Real Estate Operations NOI for the years ended December 31 was as follows (dollars in thousands):

 

      2014      2013      2012  

Rental and other income

   $ 1,192,176       $ 1,239,496       $ 1,469,419   

Rental recoveries

     348,740         331,518         364,320   

Rental and other expenses

     (454,254)         (478,920)         (517,795)   
  

 

 

    

 

 

    

 

 

 

Real Estate Operations - NOI

   $ 1,086,662       $ 1,092,094       $ 1,315,944   
  

 

 

    

 

 

    

 

 

 

Operating margin

     70.5%         69.5%         71.8%   

Average occupancy

     94.5%         93.6%         92.6%   

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

 

      2014      2013      2012  

Number of properties

     1,607         1,610         1,853   

Square Feet

     282,282         267,097         316,347   

Occupied %

     96.3%         94.9%         93.7%   

Below are the key drivers of Real Estate Operations NOI:

 

 

We had significant activity within the portfolio, including acquisitions, contributions to co-investment ventures and dispositions to third parties. This impacted NOI as follows:

2014 as compared to 2013

 

   

Acquisitions and development activity: $84.8 million increase;

 

   

Consolidation of NAIF: $35.8 million increase;

 

   

Contribution activity: $140.3 million decrease;

 

   

Disposition activity: $44.0 million decrease

2013 as compared to 2012

 

   

Acquisitions and development activity: $71.6 million increase;

 

   

Contribution activity: $299.4 million decrease

 

 

Average occupancy in our operating properties increased 90 basis points in 2014 from 2013 and 100 basis points in 2013 from 2012.

 

 

We leased a total of 72.9 million square feet, 87.6 million square feet and 92.4 million square feet during 2014, 2013 and 2012, respectively.

 

 

We recognize changes in rental income from certain contractual rent increases from our existing leases and from rent change on new leases. If a lease has a contractual rent increase based on the consumer price index or similar metric that is not known at the time of lease signing, the rent increase is not included in rent leveling and therefore any rent increase will impact the rental income we recognize.

 

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We have experienced an increase in rental rates on the turnover of existing leases for the last eight quarters that has resulted in higher average rental rates in our portfolio and increased rental income and NOI as those leases commenced.

 

 

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 81.0%, 73.4% and 74.2% of total rental expenses for the year ended December 31, 2014, 2013, and 2012 respectively. The increase was due in part to the higher average occupancy of our portfolio.

 

 

We adopted a new accounting standard, as of January 1, 2014, that changed the criteria for classifying and reporting discontinued operations. The results of the third-party dispositions remained in continuing operations in 2014, whereas in 2013 and 2012, the results were reclassified to discontinued operations and not included in Real Estate Operations.

Strategic Capital

Included in this segment is income comprised of fees and promotes earned for services performed for our unconsolidated co-investment ventures reduced by the expenses recognized for the direct costs associated with the asset management of these ventures and allocated property-level management costs for the properties owned by the ventures. Income associated with Strategic Capital fluctuates due to the size of co-investment ventures that are under management, the transactional activity in the venture and the timing of promotes. We had significant co-investment venture activity in 2014 and 2013 that impacted Strategic Capital NOI as detailed below.

Strategic Capital NOI for the years ended December 31 was as follows (in thousands):

 

      2014      2013      2012  

Strategic Capital - NOI:

        

Americas:

        

Asset management and other fees

   $ 51,490       $ 52,030       $ 55,448   

Leasing commissions, acquisition and other transaction fees

     12,348         14,078         13,974   

Promotes

     31,330         6,366           

Strategic capital expenses

     (53,126)         (53,689)         (37,785)   
  

 

 

    

 

 

    

 

 

 

Subtotal Americas

     42,042         18,785         31,637   

Europe:

        

Asset management and other fees

     70,539         53,190         32,951   

Leasing commissions, acquisition and other transaction fees

     16,010         10,604         4,096   

Strategic capital expenses

     (29,283)         (22,531)         (15,348)   
  

 

 

    

 

 

    

 

 

 

Subtotal Europe

     57,266         41,263         21,699   

Asia:

        

Asset management and other fees

     32,252         29,861         19,026   

Leasing commissions, acquisition and other transaction fees

     5,902         13,343         1,284   

Strategic capital expenses

     (14,087)         (13,059)         (10,687)   
  

 

 

    

 

 

    

 

 

 

Subtotal Asia

     24,067         30,145         9,623   
  

 

 

    

 

 

    

 

 

 

Strategic Capital - NOI

   $ 123,375       $ 90,193       $ 62,959   

 

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We had the following assets under management held through our unconsolidated co-investment ventures at December 31 as follows (dollars and square feet in millions):

 

      2014      2013      2012  

Americas:

        

Number of ventures

     3         4         6   

Square feet

     87.1         108.5         127.5   

Total assets

   $ 7,063       $ 8,014       $ 9,070   

Europe:

        

Number of ventures

     4         4         3   

Square feet

     147.4         132.9         70.3   

Total assets

   $ 11,463       $ 11,819       $ 6,605   

Asia:

        

Number of ventures

     2         2         2   

Square feet

     26.2         22.9         11.0   

Total assets

   $ 4,135       $ 4,032       $ 1,937   

Total:

        

Number of ventures

     9         10         11   

Square feet

     260.7         264.3         208.8   

Total assets

   $         22,661       $         23,865       $         17,612   

Below are the key drivers of Strategic Capital NOI:

 

   

We acquired a controlling interest in our co-investment venture NAIF in the fourth quarter of 2014 and began consolidating the venture.

 

   

We formed the co-investment venture FIBRA Prologis in Mexico in June 2014 and in connection with this transaction, we concluded the Mexico Industrial Fund.

 

   

We acquired a controlling interest in Prologis SGP Mexico and purchased our partner’s interest in Prologis North American Industrial Fund III in 2013.

 

   

We formed two co-investment ventures in early 2013 (one in Europe and one in Japan). In connection with the formation of the Japan co-investment venture, we concluded Japan Fund I.

 

   

We contributed 126, 254 and 25 properties to several co-investment ventures during 2014, 2013 and 2012, respectively.

 

   

In June 2014, we earned a promote of $42.1 million from our co-investment venture USLF. Of that amount, $31.3 million represented the third-party investors’ portion and is reflected in Strategic Capital Income in the Consolidated Statements of Operations.

The direct costs associated with Strategic Capital totaled $96.5 million, $89.3 million and $63.8 million for the years ended December 31, 2014, 2013 and 2012, respectively, and are included in the line item Strategic Capital Expenses in the Consolidated Statements of Operations. These expenses include the direct expenses associated with asset management of the unconsolidated co-investment ventures and the property management expenses associated with the property-level management of the properties owned by these ventures.

The increase in Strategic Capital Expenses in 2014 from 2013 was due to the increased size of our co-investment ventures and additional expense that represents the associated bonus paid pursuant to the terms of the Prologis Promote Plan for the promote we earned, offset partially by the conclusion of several ventures. The increase in Strategic Capital Expenses in 2013 from 2012 was due to the addition of the two co-investment ventures in Europe and Asia and additional expense related to the promote we earned, offset somewhat by the conclusion of several ventures.

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

Our Owned and Managed Portfolio

We manage our business on an owned and managed basis without regard to whether a particular property is wholly-owned by us or owned by one of our co-investment ventures. As further discussed below, we believe that the operating fundamentals of our owned and managed portfolio are consistent with those of our consolidated portfolio. The activity in our owned and managed portfolio impacts Real Estate Operations NOI, Strategic Capital revenues and the net earnings we recognize from our unconsolidated co-investment ventures.

 

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

 

     2014      2013      2012  
      Number of
Properties
    

Square

Feet

     Occupancy      Number of
Properties
    

Square

Feet

     Occupancy      Number of
Properties
    

Square

Feet

     Occupancy  

Consolidated

     1,607         282.3         96.3%         1,610         267.1         94.9%         1,853         316.3         93.7%   

Unconsolidated

     1,278         260.7         95.0%         1,323         264.3         94.7%         1,163         208.8         93.8%   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Totals

     2,885         543.0         95.6%         2,933         531.4         94.8%         3,016         525.1         93.8%   

Operating Activity

Information on our operating activity for the years ended December 31 is summarized below (square feet in millions):

 

      2014      2013      2012  

Aggregate leased square feet

     130.3         151.9         145.3   

Average turnover costs per square foot

   $ 1.46       $ 1.42       $ 1.38   

Rent change on rollover (range of each quarter during the year)

     6.2 - 9.7%         2.0 - 6.1%         (1.1) - (3.9)%   

Retention percentage on aggregate leased square feet

     85.5%         82.6%         87.3%   

Development Start Activity

Information on our development starts for the years ended December 31 is summarized below (dollars and square feet in millions):

 

      2014 (1)      2013      2012  

Number of properties

     76         68         40   

Aggregated square feet

     26.0         23.0         17.0   

Total expected investment (“TEI”)

   $ 2,034       $ 1,771       $ 1,553   

Our proportionate share of TEI based on ownership

   $ 1,792       $ 1,473       $ 1,359   

Percentage of build-to-suits based on TEI

     32.6%         41.8%         63.8%   

Weighted average expected yield on TEI

     7.2%         7.6%         7.9%   

Estimated value at completion

   $ 2,441       $ 2,109       $ 1,834   

Estimated margin

     20.0%         19.1%         18.1%   

 

(1) We expect these developments to be completed on or before July 2016.

For information on our development portfolio at December 31, 2014, see Item 2. Properties.

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, as well as properties owned by the unconsolidated co-investment ventures that are managed by us, in our same store analysis. We have defined the same store portfolio, for the three months ended December 31, 2014, as those properties that were in operation at January 1, 2013, and have been in operation throughout the same three-month periods in both 2014 and 2013. 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 NOI 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.

We calculate our same store results on a quarterly basis and provide a reconciliation of those results to our Consolidated Statements of Operations. The following is a summary of same store NOI and the change from prior period for the four quarters of 2014 and on a cumulative year-to-date basis and the square feet of the portfolio used in the calculation (dollars and square feet in thousands):

 

     Three Months Ended         
     March 31 (1)      June 30 (1)      September 30 (1)      December 31      Full Year  

2014 NOI - same store portfolio

   $ 586,579       $ 584,422       $ 581,912       $ 568,742       $ 2,321,655   

2013 NOI - same store portfolio

   $ 569,596       $ 562,899       $ 561,270       $ 546,214       $ 2,239,979   

Percentage change

     2.98%         3.82%         3.68%         4.12%         3.65%   

Square feet of portfolio

     505.6         496.9         490.6         487.2            

 

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(1) A reconciliation of our same store results for these fiscal quarters to our Consolidated Statements of Operations is provided in our previously filed quarterly reports on Form 10-Q for the respective quarter.

The following is a reconciliation of our consolidated rental income, rental expenses and NOI (calculated as rental income and recoveries less rental expenses) for the full year, as included in the Consolidated Statements of Operations, 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  
 

 

 

 

2014

             

Rental income and rental recoveries

  $ 388,240       $ 381,273       $ 355,822       $ 402,014       $   1,527,349   

Rental expenses

    110,517         109,576         102,324         108,370         430,787   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

NOI

  $ 277,723       $   271,697       $ 253,498       $ 293,644       $ 1,096,562   
 

 

 

 

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   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

NOI

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

 

     For the Three Months Ended December 31,  
          2014              2013              Percentage    
Change
 

Rental Income (1)(2)

        

Consolidated:

        

Rental income per the Consolidated Statements of Operations

   $ 307,584       $ 301,627      

Rental recoveries per the Consolidated Statements of Operations

     94,430         77,581      

Consolidated 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

     (45,387)         (41,562)      

Effect of changes in foreign currency exchange rates and other

     112         (4,467)      

Unconsolidated co-investment ventures – rental income

     412,873         402,185      
  

 

 

    

 

 

    

Same store portfolio – rental income (2)

   $ 769,612       $ 735,364         4.7%   

Rental Expenses (1)(3)

        

Consolidated:

        

Rental expenses per the Consolidated Statements of Operations

   $ 108,370       $ 104,936      

Consolidated 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

     (13,699)         (12,996)      

Effect of changes in foreign currency exchange rates and other

     10,139         3,830      

Unconsolidated co-investment ventures — rental expenses

     96,060         93,380      
  

 

 

    

 

 

    

Same store portfolio – rental expenses (3)

   $ 200,870       $ 189,150         6.2%   

NOI (1)

        

Consolidated:

        

NOI per the Consolidated Statements of Operations

   $ 293,644       $ 274,272      

Consolidated adjustments to derive same store results:

        

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

     (31,688)         (28,566)      

Effect of changes in foreign currency exchange rates and other

     (10,027)         (8,297)      

Unconsolidated co-investment ventures — NOI

     316,813         308,805      
  

 

 

    

 

 

    

Same store portfolio – NOI

   $ 568,742       $ 546,214         4.1%   

 

(1)

As discussed above, our same store portfolio includes industrial properties from our consolidated portfolio and owned by the unconsolidated co-investment ventures that are managed by us. During the periods presented, certain properties owned by us were

 

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  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 co-investment ventures, 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 above table.

 

(3) Rental expenses 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 services provided to each property (generally, based on a percentage of revenues). On consolidation, these amounts 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.

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):

 

      2014      2013      2012  

Gross overhead

   $   461,647       $   434,933       $   394,845   

Reported as rental expenses

     (30,075)         (32,918)         (35,954)   

Reported as strategic capital expenses

     (96,496)         (89,278)         (63,820)   

Capitalized amounts

     (87,308)         (83,530)         (67,003)   
  

 

 

    

 

 

    

 

 

 

G&A expenses

   $   247,768       $   229,207       $   228,068   

Gross overhead includes all costs related to our business, including the Real Estate Operations and Strategic Capital segments. We allocate a portion of our gross overhead that relates to property management functions to both segments based on the size of the respective portfolios. Costs directly associated to Strategic Capital are allocated to that segment.

The increase in gross overhead from 2013 to 2014 was principally due to increased compensation. The increase in gross overhead from 2012 to 2013 was primarily 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.

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):

 

      2014      2013      2012  

Development activities

   $   68,008       $   64,113       $   42,417   

Leasing activities

     17,888         18,301         23,183   

Costs related to internally developed software

     1,412         1,116         1,403   
  

 

 

    

 

 

    

 

 

 

Total capitalized G&A expenses

   $   87,308       $   83,530       $   67,003   

In 2014, 2013 and 2012, the capitalized salaries and related costs represented 23.9%, 23.7% and 20.3%, respectively, of our total salaries and related costs, which includes cash and equity compensation and other employee-related expenses.

Depreciation and Amortization

Depreciation and amortization was $642.5 million, $648.7 million and $724.3 million for 2014, 2013 and 2012, respectively. The decrease over the last two years was principally a result of the disposition and contribution of properties, offset slightly by additional depreciation and amortization from completed development and acquired properties.

 

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Merger, Acquisition and Other Integration Expenses

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

Impairment of Real Estate Properties

During 2012, we recognized impairment charges of real estate properties in continuing operations due to our change of intent to no longer hold certain assets for long-term investment. See Notes 2 and 15 to the Consolidated Financial Statements 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 that are accounted for under the equity method of $134.3 million, $97.2 million and $31.7 million for 2014, 2013 and 2012, respectively. The earnings we recognize are impacted by: (i) changes in revenues and expenses of each venture; (ii) the size and occupancy rate of the portfolio of properties owned by each venture; (iii) our ownership interest in each venture; and (iv) fluctuations in foreign currency exchange rates used to translate our share of net earnings to U.S. dollars, if applicable. See the discussion of our co-investment ventures above in the Strategic Capital segment discussion and in Note 5 to the Consolidated Financial Statements for a further breakdown of our share of net earnings recognized.

Interest Expense

Gross interest expense decreased in 2014, compared to 2013, due to lower average debt levels and a decrease in interest rates. Although our debt levels were consistent at year ends ($9.4 billion at December 31, 2014 compared to $9.0 billion at December 31, 2013), we had higher debt outstanding during the first quarter of 2013. We decreased our debt by $2.7 billion near the end of the first quarter of 2013, primarily from the proceeds received from the contributions made to our unconsolidated co-investment ventures.

Gross interest expense decreased in 2013 compared to 2012 due to lower debt levels.

Our weighted average effective interest rate was 4.2%, 4.7% and 4.6% for 2014, 2013 and 2012, respectively. During 2014, 2013 and 2012, we issued new debt with lower borrowing costs and used the proceeds to pay down or buy back our higher cost debt.

See Note 9 to the Consolidated Financial Statements for a further breakdown of gross interest expense, amortization and capitalized amounts included in net interest expense.

See also Liquidity and Capital Resources for further discussion of our debt and borrowing costs.

Gains on Dispositions of Investments in Real Estate and Revaluation of Equity Investments upon Acquisition of a Controlling Interest, Net

We recognized $0.7 billion, $0.6 billion and $0.3 billion in continuing operations during 2014, 2013 and 2012, respectively. In 2014, these also included gains on the dispositions of properties to third parties due to the change in reporting under the new accounting standard. We expect to have contributions to co-investments in the future, primarily in Europe, Japan and Mexico, as well as the disposition of properties to third parties, primarily in the U.S., all depending on market conditions and other factors. See Note 4 to the Consolidated Financial Statements for further information on the gains we recognized.

Foreign Currency and Derivative Gains (Losses), Net

To mitigate our foreign currency exchange exposure, we borrow in the functional currency of the borrowing entity when appropriate. However, we and certain of our foreign consolidated subsidiaries 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. Certain of our third-party and intercompany debt is remeasured with the resulting adjustment recognized as a cumulative translation adjustment in Foreign Currency Translation Losses, 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 third-party debt is not designated as a hedge or the intercompany debt is deemed short-term in nature we recognize a gain or loss in earnings when the debt is remeasured. We recognized net foreign currency exchange losses of $4.5 million in 2014 and exchange gains of $9.2 million and $7.4 million in 2013 and 2012, respectively, 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, $0.6 million and $5.6 million from the settlement of transactions with third parties of certain assets or liabilities that are denominated in a currency other than an entity’s functional currency in 2014, 2013 and 2012, respectively.

We recognized unrealized losses of $13.3 million, $42.2 million and $22.3 million in 2014, 2013 and 2012, respectively on the derivative instrument (exchange feature) related to our exchangeable senior notes, which are due in March 2015.

 

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Gains (Losses) on Early Extinguishment of Debt, Net

During 2014, 2013 and 2012, 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 $165.3 million, $277.0 million and $14.1 million in 2014, 2013 and 2012, respectively. See Note 9 to the Consolidated Financial Statements for more information regarding our debt repurchases.

Income Tax Benefit (Expense)

During 2014, 2013 and 2012, our current income tax expense was $61.6 million, $126.2 million and $17.9 million, respectively. We recognize current income tax expense for income taxes incurred by our taxable REIT subsidiaries (“TRSs”), state and local income taxes and taxes incurred in our foreign jurisdictions. Our current income tax expense fluctuates from period to period based primarily on the timing of our taxable income. Current income tax expense recognized during 2014 is principally due to tax triggered upon the contribution of the initial portfolio of properties by certain wholly-owned entities and Mexico Fondo Logistico (“AFORES”) to FIBRA Prologis, as the transaction was structured as an asset sale for Mexican tax purposes. The tax expense was offset slightly by the net current tax benefit from the operating losses generated by our United States TRS. The current tax expense recognized during 2013 was due to the initial contribution of certain properties to PELP and NPR that were previously held in foreign jurisdictions and United States TRSs.

During 2014, 2013 and 2012, we recognized a deferred tax benefit of $87.2 million, $19.4 million and $14.3 million, respectively. Deferred income tax benefit (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. During 2014, the majority of the deferred tax benefit we recognized was a result of the reversal of deferred tax liabilities of $62.8 million as part of the FIBRA Prologis transaction ($30.4 million was offset by current income tax expense) and $27.1 million due to the expiration of the holding period on properties previously acquired with existing built-in gains.

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

Discontinued Operations

As discussed above, we adopted a new accounting standard regarding discontinued operations effective January 1, 2014, and none of our property dispositions in 2014 met the criteria to be classified as discontinued operations. In 2014, 2013 and 2012, earnings from discontinued operations were $123.5 million and $75.9 million, respectively. Discontinued operations under the previous standard represent the results of operations of properties that were sold to third parties along with the related gain or loss on sale.

Net Earnings Attributable to Noncontrolling Interests

This amount represents the third-party investors’ share of the earnings generated in consolidated ventures in which we do not own 100% of the equity, as well as the limited partners’ interests in the Operating Partnership. In 2014, we recognized net earnings attributable to noncontrolling interests in AFORES of $64.8 million due to the FIBRA Prologis transaction, primarily related to the third-party investors’ share of the gain on disposition and the net deferred income tax benefit.

In 2013, we earned a promote of $18.8 million from the cumulative returns of the investors of our consolidated co-investment venture, Prologis Institutional Alliance Fund II, over the life of the venture. Of that amount, $13.5 million represents the third-party investors’ portion and is reflected as a component of noncontrolling interest.

See Note 12 to the Consolidated Financial Statements for further information on our consolidated co-investment ventures.

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

We recognized unrealized gains or losses related to the translation of our foreign subsidiaries’ assets and liabilities into U.S. dollars, along with realized and unrealized gains or losses associated with the changes in the fair value of derivative and non-derivative financial instruments that are designated and qualify as hedges of net investments in foreign operations. During 2014, we recorded net losses of $171.4 million principally due to the weakening of the Japanese yen, euro and British pound sterling to the U.S. dollar, from the beginning of the period to the end of the period. In 2013, we recorded net losses of $234.7 million, which 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. Also in 2013, we recorded net unrealized losses due to the weakening of the Japanese yen to the U.S. dollar, from the beginning of the period to the end of the period. During 2012, we recorded net losses of $79.0 million as the Japanese yen weakened relative to the U.S. dollar, offset slightly by the euro and British pound sterling slightly strengthening against the U.S. dollar, from the beginning of the period to the end of the period. See Note 18 in the Consolidated Financial Statements for further detail.

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.

See Note 19 in the Consolidated Financial Statements for further information about environmental liabilities.

 

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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 and other partnerships, 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 2015 of $599 million (which includes $460 million due March 15, 2015, on exchangeable/convertible notes that are exchangeable/convertible at a rate of 25.8244 shares of our common stock per $1,000 principal amount of notes (equivalent to an exchange or conversion price of $38.72));

 

   

completion of the development and leasing of the properties in our consolidated development portfolio (we had 79 properties at December 31, 2014, in our development portfolio that were 46.7% leased with a current investment of $1.5 billion and a total expected investment of $2.5 billion when completed and leased, leaving $1.0 billion remaining to be spent);

 

   

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 in our consolidated portfolio (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.

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

 

   

available unrestricted cash balances ($350.7 million at December 31, 2014);

 

   

property operations;

 

   

fees 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;

 

   

borrowing capacity under our current credit facility arrangements discussed below ($2.7 billion available at December 31, 2014), other facilities or borrowing arrangements;

 

   

proceeds from the issuance of equity securities, including through the ATM program (we issued 3.3 million shares of common stock in 2014, generating net proceeds of $140.1 million – see Note 10 to the Consolidated Financial Statements for details on this program); and

 

   

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

Debt

Debt balances at December 31 consisted of the following (dollars in millions):

 

      2014      2013  

Debt outstanding

   $ 9,380       $ 9,011   

Weighted average interest rate

     3.6%         4.2%   

Weighted average maturity (in months)

     70         58   

 

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In order to economically hedge our investment in Europe, reduce our borrowing costs and extend our maturities, during 2014 we issued several series of notes denominated in euro, as follows (dollars and euros in thousands):

 

2014   

Principal

Amount

     Interest
Rate
     Effective
Interest Rate
     Maturity
Date
 

February 2014

   700,000       $ 959,420         3.375%         3.52%         February 2024   

June 2014

   500,000       $ 680,550         3.000%         3.10%         June 2026   

October 2014

   600,000       $ 756,420         1.375%         1.40%         October 2020   

We used the proceeds from these issuances to repay or redeem $1.3 billion of outstanding senior notes scheduled to mature in 2015 through 2022, secured mortgage debt of $528.0 million, fund additional investments in our co-investment ventures and general corporate purposes.

In 2014, we terminated our existing senior term loan agreement and entered into a new agreement under which loans can be obtained in U.S. dollars, euro, Japanese yen and British pounds sterling in an aggregate amount not to exceed €500 million ($607.1 million at December 31, 2014). We may pay down and re-borrow under this arrangement. We had borrowings of €190 million ($230.7 million at December 31, 2014). We also entered into a Japanese yen term loan under which we may obtain loans in an aggregate amount not to exceed ¥40.9 billion ($342.1 million at December 31, 2014). We had fully drawn this term loan at December 31, 2014.

At December 31, 2014, we had credit facilities with an aggregate borrowing capacity of $2.7 billion, all of which was available for borrowing.

At December 31, 2014, we were in compliance with all of our debt covenants, which include customary financial covenants for total debt ratios, encumbered debt ratios and fixed charge coverage ratios.

See Note 9 to the Consolidated Financial Statements 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. For more information on equity commitments for our unconsolidated co-investment ventures, see Note 5 to the Consolidated Financial Statements. We have one consolidated co-investment venture, the Brazil Fund, with equity commitments at December 31, 2014, of $75.4 million, of which $37.7 million is our share and expires in December 2017. The equity commitments are denominated in Brazilian real and called and reported in U.S. dollars.

Cash Provided by Operating Activities

Net cash provided by operating activities was $704.5 million, $485.0 million and $463.5 million for the years ended December 31, 2014, 2013 and 2012, respectively. In 2013 and 2012, cash provided by operating activities was less than the cash dividends paid on common and preferred stock by $88.9 million and $104.3 million, respectively. In both years, we used a portion of the cash proceeds from the disposition of real estate properties ($5.4 billion in 2013 and $2.0 billion in 2012) to fund dividends not covered by cash flows from operating activities.

Cash Investing and Cash Financing Activities

For the years ended December 31, 2014, 2013 and 2012, investing activities used net cash of $488.3 million and provided net cash of $2.3 billion and $529.6 million, respectively. The following are the significant activities for all periods presented:

 

   

Real estate development. In 2014, 2013 and 2012, we invested $1.1 billion, $845.2 million and $793.3 million, respectively, in real estate development and leasing costs for first generation leases. We have 55 properties under development and 24 properties that were completed but not stabilized at December 31, 2014, and we expect to continue to develop new properties as the opportunities arise.

 

   

Real estate acquisitions. In 2014, we acquired total real estate of $612.3 million, which included 1,055 acres of land and eight operating properties. 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.

 

   

Capital expenditures. We invested $212.6 million, $228.0 million and $214.2 million in our operating properties during 2014, 2013 and 2012, respectively, which included recurring capital expenditures, tenant improvements and leasing commissions on existing operating properties that were previously leased.

 

   

Investments in and advances to. In 2014, 2013 and 2012, we invested cash of $739.6 million, $1.2 billion and $165.0 million, respectively, in our unconsolidated co-investment ventures and other ventures, net of repayment of advances. Our investment in 2014 principally relates to additional investments in PELP of $461.2 million, Brazil Fund and related joint ventures of $66.3 million, Prologis Targeted Europe Logistics Fund of $72.9 million, NPR of $56.6 million and Prologis European Properties Fund II of $53.1 million, in each case, representing our proportionate share. The co-investment ventures used these investments for the acquisition of operating properties, the repayment of debt by the ventures and development costs. Our investment in 2013

 

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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, 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.

 

   

Return of investment. We received distributions from unconsolidated co-investment ventures and other ventures as a return of investment of $244.3 million, $411.9 million and $291.7 million during 2014, 2013 and 2012, respectively. In 2013, we received $106.3 million in connection with the wind down of Prologis Japan Fund I. 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.

 

   

Proceeds from dispositions and contributions. We generated cash from dispositions and contributions of real estate properties of $2.3 billion in 2014, $5.4 billion in 2013 and $2.0 billion in 2012. In 2014, we contributed 115 real estate properties owned on a consolidated basis to FIBRA Prologis and received cash proceeds of $390.6 million, primarily attributable to the third-party partners in AFORES and subsequently distributed the proceeds to them. We also disposed of land, ground leases and 145 operating properties to third parties and contributed 11 operating properties to unconsolidated co-investment ventures. In 2013, we disposed of land and 89 operating properties to third parties and contributed 254 operating properties to unconsolidated co-investment ventures. The activity in 2013 primarily included the contribution of real estate properties to our co-investment ventures, PELP and NPR of $1.3 billion and $1.9 billion, respectively. In 2012, we disposed of land and 200 operating properties to third parties and contributed 25 operating properties to unconsolidated co-investment ventures.

 

   

Purchase of a controlling interest. In 2014, we paid net cash of $590.4 million to acquire a controlling interest in NAIF. In 2013, we paid net cash of $678.6 million to acquire our partners’ interest in Prologis North American Industrial Fund III and SGP Mexico. In connection with the acquisition of Prologis North American Industrial Fund II (“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.

 

   

Proceeds from repayment of notes receivable. In June 2014, we received $188.0 million for the payment in full of the notes receivable backed by real estate that originated in 2010 through the sale of a portfolio of industrial properties. 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.

For the years ended December 31, 2014, 2013 and 2012, financing activities used net cash of $337.8 million and $2.4 billion and $1.1 billion, respectively. The following are the significant activities for all periods presented:

 

   

Proceeds from issuance of common stock.

 

   

In December 2014, we received gross proceeds of $142.1 million from the issuance of 3.3 million shares of common stock from our ATM program. In April 2013, we received net proceeds of $1.4 billion from the issuance of 35.65 million shares of common stock.

 

   

In December 2014, Norges Bank Investment Management exercised a warrant for $213.8 million in exchange for six million shares of Prologis common stock. See Note 4 to the Consolidated Financial Statements for more detail.

 

   

We generated proceeds from the issuance of common stock under our incentive plans, primarily from the exercise of stock options, of $22.3 million, $22.4 million and $31.0 million in 2014, 2013 and 2012, respectively.

 

   

Dividends paid on common and preferred stock. We paid dividends of $672.2 million, $573.9 million and $567.8 million to our common and preferred stockholders during 2014, 2013 and 2012, respectively.

 

   

Redemption and repurchase of preferred stock. In 2014, we paid $27.6 million to repurchase shares of series Q preferred stock. In 2013, we paid $482.5 million to redeem all of the outstanding series L, M, O, P, R and S of preferred stock.

 

   

Noncontrolling interest contributions. In 2014, 2013 and 2012, partners in consolidated co-investment ventures made contributions of $468.3 million, $145.5 million and $70.8 million, respectively. In 2014, the contributions were primarily related to the newly formed co-investment venture USLV. In 2013 and 2012, contributions from noncontrolling interest partners were primarily for the purchase of real estate properties by AFORES and development within Brazil Fund and related joint ventures.

 

   

Noncontrolling interest distributions. We distributed $315.4 million, $116.0 million and $44.1 million to various noncontrolling interests in 2014, 2013 and 2012, respectively. The distributions in 2014 were principally related to a cash distribution of $249.9 million to our partners in AFORES due to buildings contributed to FIBRA Prologis and $28.6 million to our partners in Prologis AMS due to the disposition of the remaining properties of the venture. Distributions in 2013 include cash distributions of $40.6 million to our partners in Prologis AMS due to the disposition of a portfolio of properties.

 

   

Purchase of noncontrolling interest. In 2013, we purchased our partner’s interest in Prologis Alliance Fund II (“Fund II”), a consolidated co-investment venture, for $245.8 million. In 2012, we purchased an additional interest in ProLogis European Properties (“PEPR”) for $117.3 million and Fund II for $14.1 million.

 

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Net proceeds from (payments on) credit facilities. We made net payments of $717.4 million and $93.1 million in 2014 and 2013 respectively, on our credit facilities and received net proceeds of $9.1 million in 2012 from our credit facilities.

 

   

Repurchase and payment of debt. During 2014, we made payments of $2.2 billion on our previous term loan, $0.1 billion on regularly scheduled debt principal payments and payments at maturity and repurchased and extinguished exchangeable senior notes and secured mortgage debt of $1.9 billion. During 2013, we repurchased and extinguished exchangeable senior notes, secured mortgage debt, senior term loans and other debt of consolidated entities and made regularly scheduled debt principal payments and payments at maturity for a combined total of $6.0 billion. During 2012, we extinguished certain senior notes, exchangeable senior notes, secured mortgage debt, senior term loans, other debt and made regularly scheduled debt principal payments and payments at maturity for a combined total of $1.9 billion.

 

   

Proceeds from the issuance of debt. In 2014, we issued €1.8 billion ($2.4 billion) of senior notes, $2.3 billion of term loans and $70.7 million of secured debt. In 2013, we issued senior notes, secured mortgage debt, term loan debt and other debt of $3.6 billion. In 2012, we issued $1.4 billion of debt, principally secured mortgage debt and senior term loan debt. See Note 9 to the Consolidated Financial Statements for more detail on the senior note issuances in 2014.

Off-Balance Sheet Arrangements

Unconsolidated Co-Investment Ventures Debt

We had investments in and advances to our unconsolidated co-investment ventures, at December 31, 2014, of $4.7 billion. These ventures had total third-party debt of $6.6 billion (of which $1.9 billion was our proportionate share) at December 31, 2014. This debt is primarily secured, is non-recourse to Prologis or the other investors in the co-investment ventures and matures as follows (dollars in millions):

 

                                       

Weighted
Average
Interest Rate

    Prologis
Share
 
     2015     2016     2017     Thereafter     Disc/
Prem
    Total       $     %  

Prologis Targeted U.S. Logistics Fund

  $ 149      $ 158      $ 14      $ 1,268      $ 9      $ 1,598        4.6%      $ 389        24.3

FIBRA Prologis

    9        252        216        172        32        681        5.3%        312        45.9

Prologis Targeted Europe Logistics Fund

    4        4        4        468               480        2.6%        207        43.2

Prologis European Properties Fund II

    270        195        76        1,421        (6)        1,956        3.8%        608        31.1

Prologis European Logistics Partners Sàrl

    3        203                      2        208        3.8%        104        50.0

Nippon Prologis REIT

           195        19        1,142        3        1,359        1.1%        205        15.1

Prologis China Logistics Venture

    173                      120               293        3.1%        44        15.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total co-investment ventures

  $ 608      $ 1,007      $ 329      $ 4,591      $ 40      $ 6,575        3.5%      $ 1,869           

At December 31, 2014, 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.

Contractual Obligations

Long-Term Contractual Obligations

We had long-term contractual obligations at December 31, 2014 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

   $ 139       $ 1,712       $ 1,520       $ 5,462       $ 8,833   

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

     352         623         471                 1,446   

Exchangeable debt

     460                                 460   

Interest on exchangeable debt

     3                                 3   

Unfunded commitments on the development portfolio (1)

     746         193                         939   

Operating lease payments

     32         58         51         392         533   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,732       $ 2,586       $ 2,042       $ 5,854       $ 12,214   

 

(1) We had properties in our development portfolio (completed and under development) at December 31, 2014, with a total expected investment of $2.5 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.

 

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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 real estate investment trust status, while still allowing us to retain cash to meet other needs such as capital improvements and other investment activities.

In 2014 and 2013, we paid a quarterly cash dividend of $0.33 and $0.28 per common share, respectively. Our future common stock dividends may vary and will be determined by our board of directors upon the circumstances prevailing at the time, including our financial condition, operating results and real estate investment trust distribution requirements, and may be adjusted at the discretion of the board of directors during the year.

At December 31, 2014, we had one series of preferred stock outstanding – 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.

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.

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, those presented below have been identified by us as critical accounting policies.

Consolidation

We consolidate all entities that are wholly-owned and those in which we own less than 100% of the equity 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 that 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. Our ability to correctly assess our influence and/or control over an entity affects the presentation of these investments in the Consolidated Financial Statements.

Business Combinations

Upon acquisition of real estate that constitutes a business, which includes acquiring a controlling interest in an entity previously accounted for under the equity method of accounting, 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 liability 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 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, not to exceed one year.

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. Capitalized costs are included in the investment basis of real estate assets.

 

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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.

Revenue Recognition – Gains on Disposition of Real Estate and Strategic Capital Income

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 equity investment 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. In addition, we 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.

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.

Derivative Financial Instruments

Derivatives instruments can be designated as fair value hedges, cash flow hedges or hedges of net investments in foreign operations. We do not use derivatives for trading or speculative purposes. Accounting for derivatives as hedges requires that at inception, and over the term of the instruments, the hedged item and derivative qualify for hedge accounting. The rules and interpretations for derivatives are complex. Failure to apply this guidance correctly may result in all changes in fair value of the derivative being recognized in earnings.

We 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 to manage our exposure to foreign currency fluctuations and variable interest rates but do not meet the strict hedge accounting requirements.

See Note 18 to the Consolidated Financial Statements for additional information about our derivative financial instrument policy.

Income Taxes

As part of the process of preparing our consolidated financial statements, significant management judgment is required to estimate our income tax liability for each taxable entity, the liability associated with open tax years that are under review, our REIT taxable income 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, international 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.

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 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 NOI 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.

 

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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.

New Accounting Pronouncements

See Note 2 to the Consolidated Financial Statements.

Funds from Operations (“FFO”)

FFO is a financial measure that is not determined in accordance with U.S. generally accepted accounting principles (“GAAP”), but is a 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 real estate investment trusts, 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.

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 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. We exclude the gain on revaluation of equity investments upon acquisition of a controlling interest from 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, defined below, 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.

 

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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) unhedged 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.

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 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 and redemption and repurchase of preferred stock;

 

(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 costs of our investment. Also, we 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 2012 associated with the Merger between AMB and ProLogis, the acquisition of ProLogis European Properties 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 strategic capital 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. Although these items discussed above 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

 

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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.

 

(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.

 

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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).

 

      2014      2013      2012  

FFO

        

Reconciliation of net earnings (loss) to FFO measures:

        

Net earnings (loss) attributable to common stockholders

   $ 622,235       $ 315,422       $ (80,946)   

Add (deduct) NAREIT–defined adjustments:

        

Real estate related depreciation and amortization

     617,814         624,573         705,717   

Impairment charges on certain real estate properties

                     34,801   

Gains on dispositions of non-development properties and revaluation of equity investments upon acquisition of a controlling interest, net

     (553,298)         (271,315)         (207,033)   

Reconciling items related to noncontrolling interests

     47,939         (8,993)         (27,680)   

Our share of reconciling items included in earnings from unconsolidated entities

     186,540         159,792         127,323   
  

 

 

    

 

 

    

 

 

 

Subtotal–NAREIT–defined FFO

     921,230         819,479         552,182   

Add (deduct) our defined adjustments:

        

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

     18,984         32,870         14,892   

Deferred income tax expense (benefit)

     (56,720)         656         (8,804)   

Our share of reconciling items included in earnings from unconsolidated entities

     4,015         2,168         (5,835)   
  

 

 

    

 

 

    

 

 

 

FFO, as defined by Prologis

     887,509         855,173         552,435   

Adjustments to arrive at Core FFO:

        

Net gains on dispositions of development properties and land, net

     (152,798)         (336,815)         (121,303)   

Losses on early extinguishment of debt and redemption / repurchase of preferred stock, net

     171,817         286,122         14,114   

Our share of reconciling items included in earnings from unconsolidated entities less third-party share of consolidated entities

     46,619         8,744         23,097   

Impairment charges

                     264,844   

Merger, acquisition and other integration expenses

                     80,676   
  

 

 

    

 

 

    

 

 

 

Core FFO

   $ 953,147       $ 813,224       $ 813,863   

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. See our risk factors in Item 1A. Risk Factors, specifically: 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 and We face risks associated with the use of debt to fund our business activities, including refinancing and interest rate risks, which may adversely affect our operating results and financial condition if we are unable to make required payments on our debt or are unable to refinance our debt. See also Notes 2 and 18 in the Consolidated Financial Statements in Item 8 for more information about our foreign operations and derivative financial instruments.

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 exchange or interest rates at December 31, 2014. The results of the sensitivity analysis are 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.

Foreign Currency Risk

We are exposed to foreign exchange-related variability and earnings volatility on our foreign investments. Foreign currency market risk is the possibility that our financial results or financial position could be better or worse than planned because of changes in foreign currency exchange rates. At December 31, 2014, we had net equity of approximately $1.5 billion, or 11% of total net equity, denominated in a currency other than the U.S. dollar, after consideration of our derivative and non-derivative financial instruments. Based on our sensitivity analysis, a 10% reduction in exchange rates would cause a reduction of $150 million to our net equity.

At December 31, 2014, we had foreign currency forward contracts, which were designated and qualify as net investment hedges, with an aggregate notional amount of $1.1 billion to hedge a portion of our investments in Europe, including the United Kingdom, and Japan. Based on our sensitivity analysis, a weakening of the U.S. dollar against each of the euro, British pound sterling and Japanese yen by 10% would

 

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result in a $105 million negative change in our cash flows upon settlement. In addition, we also have euro option contracts, which were not designated as hedges, with an aggregate notional amount of $0.4 billion to mitigate risk associated with the translation of projected net income of our subsidiaries in Europe. A weakening of the U.S. dollar against the euro by 10% would result in a $35 million negative change in our cash flows upon settlement.

Interest Rate Risk

We are exposed to the impact of interest rate changes on future earnings and cash flows. At December 31, 2014, we had $572.7 million of variable rate debt outstanding, all of which was on our term loans. At December 31, 2014, we had entered into interest rate swap agreements to fix $342.1 million of our Japanese yen term loan. During the year ended December 31, 2014, we had weighted average daily outstanding borrowings of $181.6 million on our variable rate credit facilities 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 $0.5 million, which equates to a change in interest rates of 13 basis points.

ITEM 8. Financial Statements and Supplementary Data

The Consolidated Balance Sheets at December 31, 2014 and 2013, 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, 2014, 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 22 of the Consolidated Financial Statements.

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) at December 31, 2014. 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, 2014, 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, 2014, 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 at December 31, 2014, 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, at December 31, 2014, the internal control over financial reporting was effective.

Our internal control over financial reporting at December 31, 2014, 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.

 

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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) at December 31, 2014. 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, 2014, 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, 2014, 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 at December 31, 2014, 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, at December 31, 2014, 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 2015 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 2015 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 2015 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 2015 Proxy Statement or will be provided in an amendment filed on Form 10-K/A.

 

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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 2015 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 44 of this report, which is incorporated herein by reference.

2. Financial Statement Schedules:

Schedule III — Real Estate and Accumulated Depreciation

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 115 to 120 of this report, which is incorporated herein by reference.

(c) Financial Statements: See Index to Consolidated Financial Statements and Schedule III on page 44 of this report, which is incorporated by reference.

 

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE III

 

     Page  

Prologis, Inc. and Prologis L.P.:

  

Reports of Independent Registered Public Accounting Firm

     45   

Prologis, Inc.:

  

Consolidated Balance Sheets

     48   

Consolidated Statements of Operations

     49   

Consolidated Statements of Comprehensive Income (Loss)

     50   

Consolidated Statements of Equity

     51   

Consolidated Statements of Cash Flows

     52   

Prologis, L.P.:

  

Consolidated Balance Sheets

     53   

Consolidated Statements of Operations

     54   

Consolidated Statements of Comprehensive Income (Loss)

     55   

Consolidated Statements of Capital

     56   

Consolidated Statements of Cash Flows

     57   

Prologis, Inc. and Prologis L.P.:

  

Notes to Consolidated Financial Statements

     58   

Reports of Independent Registered Public Accounting Firm

     97   

Schedule III — Real Estate and Accumulated Depreciation

     99   

 

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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 (the “Company”) as of December 31, 2014 and 2013, 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, 2014. 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, 2014 and 2013, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for discontinued operations as of January 1, 2014, on a prospective basis, due to the adoption of Accounting Standards Update 2014-08.

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, 2014, 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 25, 2015 expressed an unqualified opinion on the effectiveness of Prologis, Inc.’s internal control over financial reporting.

KPMG LLP

Denver, Colorado

February 25, 2015

 

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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 (the “Company”) as of December 31, 2014 and 2013, 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, 2014. 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.

As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for discontinued operations as of January 1, 2014, on a prospective basis, due to the adoption of Accounting Standards Update 2014-08.

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, 2014 and 2013, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles.

KPMG LLP

Denver, Colorado

February 25, 2015

 

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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, 2014, 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, 2014, 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, 2014 and 2013, 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, 2014, and our report dated February 25, 2015 expressed an unqualified opinion on those consolidated financial statements.

KPMG LLP

Denver, Colorado

February 25, 2015

 

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PROLOGIS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

 

     December 31,  
      2014      2013  

ASSETS

  

Investments in real estate properties

   $ 22,190,145       $ 20,824,477   

Less accumulated depreciation

     2,790,781         2,568,998   
  

 

 

    

 

 

 

Net investments in real estate properties

     19,399,364         18,255,479   

Investments in and advances to unconsolidated entities

     4,824,724         4,430,239   

Assets held for sale

     43,934         4,042   

Notes receivable backed by real estate

             188,000   
  

 

 

    

 

 

 

Net investments in real estate

     24,268,022         22,877,760   

Cash and cash equivalents