UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☑ |
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2017
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.)
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 |
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Name of Each Exchange on Which Registered |
Prologis, Inc. |
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Common Stock, $0.01 par value |
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New York Stock Exchange |
Prologis, L.P. |
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1.375% Notes due 2020 |
|
New York Stock Exchange |
Prologis, L.P. |
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1.375% Notes due 2021 |
|
New York Stock Exchange |
Prologis, L.P. |
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3.000% Notes due 2022 |
|
New York Stock Exchange |
Prologis, L.P. |
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3.375% Notes due 2024 |
|
New York Stock Exchange |
Prologis, L.P. |
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3.000% Notes due 2026 |
|
New York Stock Exchange |
Prologis, L.P. |
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2.250% Notes due 2029 |
|
New York Stock Exchange |
Prologis, L.P. |
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Floating Rate Notes due 2020 |
|
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 ☑ No ☐ |
Prologis, L.P.: Yes ☑ 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 ☑ |
Prologis, L.P.: Yes ☐ No ☑ |
|
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 ☑ No ☐ Prologis, L.P.: Yes ☑ No ☐
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||
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 ☑ No ☐ Prologis, L.P.: Yes ☑ No ☐
|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act (check one):
Prologis, Inc.: |
☑ Large accelerated filer |
☐ Accelerated filer |
☐ Smaller reporting company |
|
☐ Non-accelerated filer (do not check if a smaller reporting company) |
☐ Emerging growth company |
Prologis, L.P.: |
☐ Large accelerated filer |
☐ Accelerated filer |
☐ Smaller reporting company |
|
☑ Non-accelerated filer (do not check if a smaller reporting company) |
☐ Emerging growth 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 ☑ |
Prologis, L.P.: Yes ☐ No ☑ |
Based on the closing price of Prologis, Inc.’s common stock on June 30, 2017, the aggregate market value of the voting common equity held by nonaffiliates of Prologis, Inc. was $30,903,505,295.
The number of shares of Prologis, Inc.’s common stock outstanding at February 12, 2018, was approximately 533,054,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Part III of this report are incorporated by reference to the registrant’s definitive proxy statement for the 2018 annual meeting of its stockholders or will be provided in an amendment filed on Form 10-K/A.
This report combines the annual reports on Form 10-K for the year ended December 31, 2017, 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” or the “OP” mean Prologis, L.P., and its consolidated subsidiaries. The terms “the Company,” “Prologis,” “we,” “our” or “us” means the Parent and the OP collectively.
The Parent is a real estate investment trust (a “REIT”) and the general partner of the OP. At December 31, 2017, the Parent owned an approximate 97.41% common general partnership interest in the OP and 100% of the preferred units in the OP. The remaining approximate 2.59% common limited partnership interests are owned by unaffiliated investors and certain current and former directors and officers of the Parent.
We operate the Parent and the OP as one enterprise. The management of the Parent consists of the same members as the management of the OP. These members are officers of the Parent and employees of the OP or one of its subsidiaries. As sole general partner, the Parent has control of the OP through complete responsibility and discretion in the day-to-day management and therefore, consolidates the OP for financial reporting purposes. Because the only significant asset of the Parent is its investment in the OP, the assets and liabilities of the Parent and the OP are the same on their respective financial statements.
We believe combining the annual reports on Form 10-K of the Parent and the OP into this single report results in the following benefits:
• |
enhances investors’ understanding of the Parent and the OP 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 as a substantial portion of the Company’s disclosure applies to both the Parent and the OP; and |
• |
creates time and cost efficiencies through the preparation of one combined report instead of two separate reports. |
It is important to understand the few differences between the Parent and the OP in the context of how we operate the Company. The Parent does not conduct business itself, other than acting as the sole general partner of the OP and issuing public equity from time to time. The Parent itself does not incur any indebtedness, but it guarantees the unsecured debt of the OP. The OP holds substantially all the assets of the business, directly or indirectly. The OP conducts the operations of the business and is structured as a partnership with no publicly traded equity. Except for net proceeds from equity issuances by the Parent, which are contributed to the OP in exchange for partnership units, the OP generates capital required by the business through the OP’s operations, incurrence of indebtedness and issuance of partnership units to third parties.
The presentation of noncontrolling interests, stockholders’ equity and partners’ capital are the main areas of difference between the consolidated financial statements of the Parent and those of the OP. The differences in the presentations between stockholders’ equity and partners’ capital result from the differences in the equity and capital issuances in the Parent and in the OP.
The preferred stock, common stock, additional paid-in capital, accumulated other comprehensive income (loss) and distributions in excess of net earnings of the Parent are presented as stockholders’ equity in the Parent’s consolidated financial statements. These items represent the common and preferred general partnership interests held by the Parent in the OP and are presented as general partner’s capital within partners’ capital in the OP’s consolidated financial statements. The common limited partnership interests held by the limited partners in the OP are presented as noncontrolling interest within equity in the Parent’s consolidated financial statements and as limited partners’ capital within partners’ capital in the OP’s consolidated financial statements.
To highlight the differences between the Parent and the OP, separate sections in this report, as applicable, individually discuss the Parent and the OP, including separate financial statements and separate Exhibit 31 and 32 certifications. In the sections that combine disclosure of the Parent and the OP, this report refers to actions or holdings as being actions or holdings of Prologis.
Item |
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Description |
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Page |
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1. |
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3 |
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3 |
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4 |
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5 |
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7 |
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8 |
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8 |
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1A. |
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8 |
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1B. |
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15 |
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2. |
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16 |
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16 |
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18 |
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19 |
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3. |
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19 |
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4. |
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19 |
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5. |
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20 |
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20 |
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21 |
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21 |
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Securities Authorized for Issuance Under Equity Compensation Plans |
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21 |
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21 |
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6. |
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21 |
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7. |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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22 |
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22 |
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22 |
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31 |
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31 |
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35 |
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36 |
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36 |
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38 |
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Funds from Operations Attributable to Common Stockholders/Unitholders |
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38 |
7A. |
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40 |
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8. |
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41 |
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9. |
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Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
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41 |
9A. |
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41 |
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9B. |
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42 |
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10. |
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43 |
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11. |
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43 |
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12. |
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Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
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43 |
13. |
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Certain Relationships and Related Transactions, and Director Independence |
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43 |
14. |
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43 |
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15. |
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43 |
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16. |
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43 |
2
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 as well as management’s beliefs and assumptions. Such statements involve uncertainties that could significantly impact our financial results. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” and “estimates” including 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, contribution and 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 and political climates; (ii) changes in global 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, tax structuring and changes in income tax laws and rates; (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.
Prologis, Inc. is a self-administered and self-managed REIT and is the sole general partner of Prologis, L.P. We operate Prologis, Inc. and Prologis, L.P. as one enterprise and, therefore, our discussion and analysis refers to Prologis, Inc. and its consolidated subsidiaries, including Prologis, L.P., collectively. We invest in real estate through wholly owned subsidiaries and other entities through which we co-invest with partners and investors. We maintain a significant level of ownership in these co-investment ventures, which may be consolidated or unconsolidated based on our level of control of the entity.
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. Prologis, L.P. was also formed in 1997.
We operate our business on an owned and managed basis, including properties that we wholly own and properties that are owned by one of our co-investment ventures. We make decisions based on the property operations, regardless of our ownership interest, therefore we generally evaluate operating metrics on an owned and managed basis.
Our corporate headquarters is located at Pier 1, Bay 1, San Francisco, California 94111, and our other principal office locations are in Amsterdam, Denver, Luxembourg, Mexico City, 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 and can be accessed free of charge through the Investor Relations section of our website, www.prologis.com. 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 & Poor’s (“S&P”) 500.
Prologis is the global leader in logistics real estate with a focus on high-barrier, high-growth markets in 19 countries. We own, manage and develop well-located, high-quality logistics facilities in the world’s busiest consumption markets. Our local teams actively manage our portfolio, which encompasses leasing and property management, capital deployment and opportunistic dispositions allowing us to recycle capital to fund our development and acquisition activities. The majority of our properties in the United States (“U.S.”) are wholly owned, while our properties outside the U.S. are generally held in co-investment ventures, reducing our exposure to foreign currency movements.
Our portfolio benefits from key drivers of economic activity, including consumption, supply chain modernization, e-commerce and urbanization. In the developed markets of the U.S., Europe and Japan, key factors are the reconfiguration of supply chains (strongly influenced by e-commerce trends), and the operational efficiencies that can be realized from our modern logistics facilities. In emerging markets, such as Brazil, China and Mexico, new affluence and the rise of a new consumer class have increased the need for modern distribution networks. Our strategy is to own the highest-quality logistics property portfolio in each of our target markets. These markets are characterized by large population densities and consumption and typically offer proximity to large labor pools and are supported by extensive transportation infrastructure (major airports, seaports and rail and highway networks). Customers turn to us because they know an efficient supply chain will make their businesses run better, and that a strategic relationship with Prologis will create a competitive advantage.
3
At December 31, 2017, we owned or had investments in, on a wholly-owned basis or through co-investment ventures, properties and development projects (based on gross book value and total expected investment (“TEI”)), totaling $57.5 billion across 684 million square feet (64 million square meters) across four continents. Our investment totals $32.9 billion and consists of our wholly-owned properties and our pro rata (or ownership) share of the properties owned by our co-investment ventures. We lease modern logistics facilities to a diverse base of approximately 5,000 customers.
Throughout this document, we reflect amounts in U.S. dollars, our reporting currency. Included in these amounts are consolidated and unconsolidated investments denominated in foreign currencies, primarily the British pound sterling, euro and Japanese yen that are impacted by fluctuations in exchange rates when translated into U.S. dollars. We mitigate our exposure to foreign currency fluctuations by investing outside the U.S. through co-investment ventures, borrowing in local currency and utilizing derivative financial instruments. At December 31, 2017, 94.4% of our net equity (calculated on a gross book value basis) is denominated in U.S. dollars including our proportionate share of our unconsolidated co-investment ventures and derivative financial instruments.
Our business comprises two operating segments: Real Estate Operations and Strategic Capital.
REAL ESTATE OPERATIONS – RENTAL Generate revenues, net operating income (“NOI”) and cash flows by increasing rents and maintaining high occupancy rates |
REAL ESTATE OPERATIONS – DEVELOPMENT Provide significant earnings growth as projects lease up and generate income |
STRATEGIC CAPITAL
Access third-party capital to grow our business and earn fees and promotes through long-term co-investment ventures |
4
Rental. Rental operations comprise the largest component of our operating segments and generally contributes 90% of our consolidated revenues, earnings and funds from operations (“FFO”) (see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations for more information on FFO, a non-GAAP measure). We collect rent from our customers through operating leases, including reimbursements for the majority of our property operating costs. We expect to generate long-term internal growth by increasing rents, maintaining high occupancy rates and controlling expenses. The primary drivers of our rent growth will be rolling in-place leases to current market rents. We believe our active portfolio management, coupled with the skills of our property, leasing, maintenance, capital, energy and risk management teams, will allow us to maximize rental revenues across our portfolio. Most of our rental revenues and NOI are generated in the U.S. NOI from this segment is calculated directly from our financial statements as rental revenues, rental recoveries and development management and other revenues less rental expenses and other expenses.
Development. We develop properties to meet our customers’ needs, deepen our market presence and refresh our portfolio quality. We believe we have a competitive advantage due to (i) the strategic locations of our land bank; (ii) the development expertise of our local teams; and (iii) the depth of our customer relationships. Successful development and redevelopment efforts increase both the rental revenues and the net asset value of our Real Estate Operations segment. We measure the development value we create based on the estimated fair value of a stabilized development property, as compared to the costs incurred. We develop properties in the U.S. for long-term hold or contribution to our unconsolidated co-investment venture and outside the U.S. we develop primarily for contribution to our co-investment ventures. Occasionally, we develop for sale to third parties.
Strategic Capital
Real estate is a capital-intensive business that requires new capital to grow. Our strategic capital business gives us access to third-party capital, both private and public, allowing us to diversify our sources of capital and providing us with a broad range of options to fund our growth, while reducing our exposure to foreign currency movements for investments outside the U.S. We partner with some of the world’s largest institutional investors to grow our business and provide incremental revenues, with a focus on long-term and open-ended ventures (also referred to as “perpetual vehicles”). We also access alternative sources of equity through two publicly traded vehicles: Nippon Prologis REIT, Inc. in Japan and FIBRA Prologis in Mexico. We hold significant ownership interests in all of our unconsolidated co-investment ventures (approximately 29% weighted average ownership based on each entity’s contribution of total assets, before depreciation, net of other liabilities at December 31, 2017), aligning our interests with those of our partners.
This segment produces stable, long-term cash flows and generally contributes 10% of our consolidated revenues, earnings and FFO. We generate strategic capital revenues from our unconsolidated co-investment ventures, primarily through asset and property management services, of which 90% are earned from long-term and open-ended ventures. We earn additional revenues by providing leasing, acquisition, construction, development, financing, legal and disposition services. In certain ventures, we also have the ability to earn revenues through incentive fees (“promotes”) periodically during the life of a venture or upon liquidation. We plan to profitably grow this business by increasing our assets under management in existing or new ventures. Generally, the majority of the strategic capital revenues are generated outside the U.S. NOI in this segment is calculated directly from our financial statements as strategic capital revenues less strategic capital expenses and does not include property-related NOI.
We believe the quality and scale of our global portfolio, the expertise of our team, the depth of our customer relationships, and the strength of our balance sheet give us unique competitive advantages. Our plan to grow revenues, NOI, earnings, FFO and cash flows is based on the following:
• |
Rent Growth. We expect market rents to continue to grow over the next few years, driven by demand for the location and quality of our properties. Due to strong market rent growth over the last several years, our in-place leases have considerable upside potential. We estimate that across our owned and managed portfolio, our leases on an aggregate basis are more than 14% below current market rent. Therefore, even if market rents remain flat, a lease renewal will translate into increased future rental income, both on a consolidated basis and through the earnings we recognize from our unconsolidated co-investment ventures based on our ownership. This is reflected in the positive rent change on rollover (comparing the net effective rent of the new lease to the prior lease for the same space) in our owned and managed portfolio. We have experienced positive rent change on rollover for every quarter since 2013 and we expect this to continue for several more years. For 2017, our net effective rents increased 15.4% on lease rollover that represented approximately 23% of our owned and managed portfolio. |
• |
Value Creation from Development. A successful development and redevelopment program involves maintaining control of well-located and entitled land. Based on our current estimates, our land bank, excluding land we have under an option contract, has the potential to support the development of $7.8 billion of TEI of new logistics space. TEI is the total estimated cost of development or expansion, including land, development and leasing costs without depreciation. We believe the carrying value of our land bank is below its current fair value, and we expect to realize this value going forward—primarily through development. During 2017, we stabilized development projects with a TEI of $1.9 billion, and we estimate the value of these buildings to be 28.8% above our cost to develop (defined as estimated margin and calculated using estimated yield and capitalization rates from our underwriting models), while increasing NOI of our operating portfolio. |
5
Competition
Competitively priced logistics space could impact our occupancy rates and have an adverse effect on how much rent we can charge, which in turn could affect our operating segments. We may face competition regarding our capital deployment activities, including local, regional and national operators 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:
• |
properties in markets characterized by large population densities and consumption and typically offer proximity to large labor pools and are supported by extensive transportation infrastructure; |
• |
ability to quickly respond to customers’ needs for high-quality logistics facilities; |
• |
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 our focus customers through our global customer solutions team; |
• |
property management and leasing expertise; |
• |
relationships and proven track record with current and prospective investors in our strategic capital business; |
• |
strategic locations of our land bank; |
• |
local teams with development expertise; and |
• |
balance sheet strength, credit ratings and significant liquidity. |
Customers
Our broad customer base represents a spectrum of international, national, regional and local logistics users. At December 31, 2017, in our Real Estate Operations segment representing our consolidated properties, we had more than 2,800 customers occupying 299 million square feet of logistics operating properties. On an owned and managed basis, we had approximately 5,000 customers occupying 630 million square feet of logistics operating properties.
6
The following table details our top 25 customers at December 31, 2017 (square feet in millions):
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Consolidated – Real Estate Operations |
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Owned and Managed |
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Top Customers |
% of NER (1) |
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Total Occupied Square Feet |
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Top Customers |
% of NER (1) |
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Total Occupied Square Feet |
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1. Amazon.com |
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4.9 |
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13 |
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1. Amazon.com |
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3.0 |
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17 |
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2. Home Depot |
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1.8 |
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6 |
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2. DHL |
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1.5 |
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11 |
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3. FedEx |
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1.6 |
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3 |
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3. Geodis |
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1.2 |
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9 |
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4. Wal-Mart |
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1.3 |
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4 |
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4. XPO Logistics |
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1.2 |
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10 |
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5. XPO Logistics |
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0.9 |
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3 |
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5. Kuehne + Nagel |
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1.1 |
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7 |
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6. UPS |
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0.9 |
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2 |
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6. DSV Air and Sea Inc. |
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1.0 |
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5 |
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7. NFI |
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0.8 |
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2 |
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7. Home Depot |
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1.0 |
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7 |
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8. U.S. Government |
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0.8 |
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1 |
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8. FedEx |
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0.9 |
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3 |
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9. Geodis |
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0.8 |
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2 |
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9. Wal-Mart |
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0.8 |
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5 |
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10. DHL |
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0.7 |
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2 |
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10. CEVA Logistics |
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0.7 |
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5 |
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Top 10 Customers |
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14.5 |
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38 |
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Top 10 Customers |
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12.4 |
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|
79 |
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11. Kimberly-Clark Corporation |
|
0.7 |
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3 |
|
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11. Nippon Express |
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0.7 |
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3 |
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12. PepsiCo |
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0.7 |
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3 |
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12. UPS |
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0.6 |
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4 |
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13. Office Depot |
|
0.6 |
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2 |
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13. BMW |
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0.6 |
|
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4 |
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14. DSV Air and Sea Inc. |
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0.5 |
|
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2 |
|
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14. DB Schenker |
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0.6 |
|
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|
4 |
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15. Ingram Micro |
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0.5 |
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2 |
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15. Hitachi |
|
0.6 |
|
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2 |
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16. Best Buy |
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0.5 |
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|
1 |
|
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16. Ingram Micro |
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0.5 |
|
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|
4 |
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17. Kuehne + Nagel |
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0.5 |
|
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|
1 |
|
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17. U.S. Government |
|
0.5 |
|
|
|
1 |
|
18. APL Logistics |
|
0.5 |
|
|
|
2 |
|
|
18. Panalpina |
|
0.4 |
|
|
|
3 |
|
19. Georgia-Pacific Corporation |
|
0.4 |
|
|
|
1 |
|
|
19. PepsiCo |
|
0.3 |
|
|
|
3 |
|
20. Kohler |
|
0.4 |
|
|
|
3 |
|
|
20. Office Depot |
|
0.3 |
|
|
|
2 |
|
21. C&S Wholesale Grocers |
|
0.4 |
|
|
|
1 |
|
|
21. Best Buy |
|
0.3 |
|
|
|
2 |
|
22. Kellogg's |
|
0.4 |
|
|
|
2 |
|
|
22. APL Logistics |
|
0.3 |
|
|
|
3 |
|
23. Essendant |
|
0.4 |
|
|
|
2 |
|
|
23. Kimberly-Clark Corporation |
|
0.3 |
|
|
|
3 |
|
24. Ford Motor Company |
|
0.3 |
|
|
|
1 |
|
|
24. Tesco |
|
0.3 |
|
|
|
2 |
|
25. Mondelez International |
|
0.3 |
|
|
|
1 |
|
|
25. Schneider Electric |
|
0.3 |
|
|
|
1 |
|
Top 25 Customers |
|
21.6 |
|
|
|
65 |
|
|
Top 25 Customers |
|
19.0 |
|
|
|
120 |
|
(1) |
Net effective rent (“NER”) is calculated using the estimated total cash to be received over the term of the lease (including base rent and expense reimbursements) divided by the lease term to determine the amount of rent and expense reimbursements received per year. Amounts derived in a currency other than the U.S. dollar have been translated using the average rate from the previous twelve months. |
In our Strategic Capital segment, we view our partners and investors as our customers. At December 31, 2017, in our private ventures, we partnered with approximately 100 investors, several of which invest in multiple ventures.
Employees
The following table summarizes our employee base at December 31, 2017:
Regions |
|
Number of Employees |
|
|
U.S. (1) |
|
|
835 |
|
Other Americas |
|
|
130 |
|
Europe |
|
|
370 |
|
Asia |
|
|
230 |
|
Total |
|
|
1,565 |
|
(1) |
This includes employees who were employed in the U.S. but also support other regions. |
We allocate our employees who perform property management functions to our Real Estate Operations segment and Strategic Capital segment based on the square footage of the respective portfolios. Employees who perform only Strategic Capital functions are allocated directly to that segment.
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, 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 (the “Board”) and all of our officers and employees, including the principal executive officer, the principal financial officer and the principal accounting officer, and other people 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
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of Ethics and Business Conduct that apply to the principal executive officer, the principal financial officer, the principal accounting officer, or other people performing similar functions, and that relate to any matter enumerated in Item 406(b) of Regulation S-K, will be disclosed on our website.
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 conducted environmental reviews on a majority of the properties we have acquired, including land. While some of these assessments have led to further investigation and sampling, none of the environmental assessments has revealed an environmental liability that we believe would have a material adverse effect on our business, financial condition or results of operations. See further discussion in Item 1A. Risk Factors and Note 17 to the Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data.
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 a wholly-owned captive insurance entity. The costs to insure our properties are primarily covered through reimbursements from our customers. We believe 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.
Our operations and structure involve various risks that could adversely affect our business and financial condition, including but not limited to, our financial position, results of operations, cash flow, ability to make distributions and payments to security holders and the market value of our securities. These risks relate to Prologis as well as our investments in consolidated and unconsolidated entities and include among others, (i) general risks; (ii) risks related to our business; (iii) risks related to financing and capital; and (iv) income tax risks.
General Risks
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 U.S. During 2017, we generated approximately $416 million or 15.9% of our revenues from operations outside the U.S. Circumstances and developments related to international and U.S. operations that could negatively affect us include, but are not limited to, the following factors:
• |
difficulties and costs of staffing and managing international operations in certain regions, including differing employment practices and labor issues; |
• |
local businesses and cultural factors that differ from our usual standards and practices; |
• |
volatility in currencies and currency restrictions, which may prevent the transfer of capital and profits to the U.S.; |
• |
challenges in establishing effective controls and procedures to regulate operations in different regions and to monitor compliance with applicable regulations, such as the Foreign Corrupt Practices Act, the United Kingdom (“U.K.”) Bribery Act and other similar laws; |
• |
unexpected changes in regulatory requirements, tax, tariffs and other laws within the countries in which we operate; |
• |
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, including instability in, or further withdrawals from, the European Union or other international trade alliances or agreements; |
• |
political instability, uncertainty over property rights, civil unrest, drug trafficking, political activism or the continuation or escalation of terrorist or gang activities; |
8
• |
access to capital may be more restricted, or unavailable on favorable terms or at all in certain locations. |
In addition, we may be impacted by the ability of our non-U.S. subsidiaries to dividend or otherwise transfer cash among our subsidiaries, including transfers of cash to pay interest and principal on our debt, due to currency exchange control regulations, transfer pricing regulations and potentially adverse tax consequences, among other factors.
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, this turmoil has the potential to adversely affect (i) the value of our properties; (ii) the availability or the terms of financing that we have or may anticipate utilizing; (iii) our ability to make principal and interest payments on, or refinance any outstanding debt when due; and (iv) the ability of our customers to enter into new leasing transactions or satisfy rental payments under existing leases. Disruptions in the capital and credit markets may also adversely affect our ability to make distributions and payments to our security holders and the market price of our securities.
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 and hosted 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 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.
Risks associated with our dependence on key personnel.
We depend on the deep industry knowledge and 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 are able to 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 business. 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.
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 or restatements of our financial statements or a decline in the price of our securities.
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 pursue growth opportunities in international markets where the U.S. dollar is not the functional currency. At December 31, 2017, approximately $7.4 billion or 25.1% of our total consolidated assets were invested in a currency other than the U.S. dollar, primarily the Brazilian real, British pound sterling, Canadian dollar, 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 business and, specifically, our U.S. dollar reported financial position and results of operations and debt covenant ratios. 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.
Our hedging of foreign currency and interest rate risk may not effectively limit our exposure to other risks.
Hedging arrangements involve risks, such as the risk of fluctuation in the relative value of the foreign currency or interest rates and the risk that counterparties may fail to honor their obligations under these arrangements. The funds required to settle such arrangements could be significant depending on the stability and movement of the hedged foreign currency or the size of the underlying financing and the applicable interest rates at the time of the breakage. The failure to hedge effectively against foreign exchange changes or interest rate changes may adversely affect our business.
9
Compliance or failure to comply with regulatory requirements could result in substantial costs.
We are required to comply with many regulations in different countries, including (but not limited to) the Foreign Corrupt Practices Act, the U.K Bribery Act and similar laws and regulations. Our properties are also subject to various federal, state and local regulatory requirements, such as the Americans with Disabilities Act and state and local fire and life-safety requirements. Noncompliance could result in the imposition of governmental fines or the award of damages to private litigants. While we believe that we 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. If we are required to make unanticipated expenditures to comply with these regulations, we may be adversely affected.
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. 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. As a REIT, 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. We may dispose of certain properties that have been held for investment 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.
We may decide to sell properties to certain of our unconsolidated co-investment ventures or third parties to generate proceeds to fund our capital deployment activities. Our ability to sell properties on advantageous terms is affected by: (i) competition from other owners of properties that are trying to dispose of their properties; (ii) market conditions, including the capitalization rates applicable to our properties; and (iii) other factors beyond our control. If our competitors sell assets similar to assets we intend to divest in the same markets 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 ventures or third parties who might acquire our properties may need to have access to debt and equity capital, in the private and public markets, in order to acquire properties from us. Should they have limited or no access to capital on favorable terms, then dispositions could be delayed.
If we do not have sufficient cash available to us through our operations, sales or contributions of properties 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 business, and in particular, our distributable cash flow and debt covenants.
Our investments are concentrated in the logistics sector and our business would be adversely affected by an economic downturn in that sector.
Our investments in real estate assets are concentrated in the logistics 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.
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, 2017, 33.7% of our consolidated operating properties or $7.7 billion (based on consolidated gross book value, or investment before depreciation) were located in California, which represented 27.4% of the aggregate square footage of our operating properties and 34.1% of our NOI. Our revenues 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 logistics 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 business.
In addition to California, we also have significant holdings (defined as more than 3% of total consolidated investment before depreciation) in operating properties in certain markets located in Atlanta, Central and Eastern Pennsylvania, Chicago, Dallas/Fort Worth, New Jersey/New York City, Seattle and South Florida. Our operating performance could be adversely affected if conditions become less favorable in any of the markets in which we have a concentration of properties. Conditions such as an oversupply of logistics space or a reduction in demand for logistics space, among other factors, may impact operating conditions. Any material oversupply of logistics space or material reduction in demand for logistics space could adversely affect our overall business.
10
Our owned and managed portfolio, which includes our wholly-owned properties and properties included in our co-investment ventures, has concentrations of properties in the same markets mentioned above, as well as in markets in France, Germany, Japan, Mexico, Netherlands, Poland and the U.K., and are subject to the economic conditions in those markets.
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. U.S. properties located in active seismic areas include properties in our markets in California 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.
Furthermore, a number of our properties are located in areas that are known to be subject to hurricane 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.
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 asset management capabilities, these risks cannot be eliminated. Factors that may affect real estate values and cash flows include:
• |
local conditions, such as oversupply or a reduction in demand; |
• |
technological changes, such as reconfiguration of supply chains, autonomous vehicles, robotics, 3D printing or other technologies; |
• |
the attractiveness of our properties to potential customers and competition from other available properties; |
• |
increasing costs of maintaining, insuring, renovating and making improvements to our properties; |
• |
our ability to rehabilitate and reposition our properties due to changes in the business and logistics needs of our customers; |
• |
our ability to control rents and variable operating costs; and |
• |
governmental regulations and the associated potential liability under, and changes in, environmental, zoning, usage, tax, tariffs and other laws. |
We may be unable to lease vacant space or renew leases or re-lease space on favorable terms as leases expire.
Our operating results and distributable cash flow would be adversely affected if a significant number of our customers were unable to meet their lease obligations. We are also subject to the risk that, upon the expiration of leases for space located in our properties, leases may not be renewed by existing customers, the space may not be re-leased to new customers or the terms of renewal or re-leasing (including the cost of 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 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 we 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 business and financial condition.
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 and through additional investments in co-investment ventures that acquire properties. The acquisition of properties involves risks, including the risk that the acquired property will not perform as anticipated and that any actual costs for rehabilitation, repositioning, renovation and improvements identified in the pre-acquisition due diligence process will exceed estimates. When we acquire properties, we may face risks associated with a lack of market knowledge or understanding of the local economy, forging new business relationships in the area and unfamiliarity with local government and permitting procedures. Additionally, there is, and it is expected there will continue to be, significant competition for properties that meet our investment criteria as well as risks associated with obtaining financing for acquisition activities. The acquired properties or entities may 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 on ownership of any of these entities or properties, then we may have to pay substantial sums to settle it.
11
Our real estate development strategies may not be successful.
Our real estate development strategy is focused on monetizing land in the future through development of logistics facilities to hold for long-term investment, contribution or sale to a co-investment venture or third party, depending on market conditions, our liquidity needs and other factors. We may increase our investment in the development, renovation and redevelopment business and we expect to complete the build-out and leasing of our current development portfolio. We may also develop, renovate and redevelop properties within existing or newly formed co-investment ventures. The real estate development, renovation and redevelopment business includes the following significant risks:
• |
we may not be able to obtain financing for development projects on favorable terms or at all; |
• |
we may explore development opportunities that may be abandoned and the related investment impaired; |
• |
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 have construction costs, total investment amounts and our share of remaining funding that exceed our estimates and projects may not be completed, delivered or stabilized as planned due to defects or other issues; |
• |
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 have properties that perform below anticipated levels, producing cash flow below budgeted amounts; |
• |
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; |
• |
we may not be able to lease properties we develop on favorable terms or at all; |
• |
we may not be able to capture the anticipated enhanced value created by our value-added properties on expected timetables or at all; |
• |
we may experience delays (temporary or permanent) if there is public or government opposition to our activities; and |
• |
we may have substantial renovation, new development and redevelopment activities, regardless of their ultimate success, that require a significant amount of management’s time and attention, diverting their attention from our day-to-day operations. |
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, 2017, we had investments in real estate containing approximately 399 million square feet held through co-investment ventures, both public and private. Our organizational documents do not limit the amount of available funds that we may invest in these 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, or attract third-party investment or that additional investments in new or existing ventures to develop or acquire properties will be successful. Further, there can be no assurance that we are able to realize value from such investments.
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; |
12
• |
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 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.
We are exposed to various environmental risks, including the potential impacts of future climate change, which may result in unanticipated losses that could affect our business and financial condition.
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.
Environmental laws in some countries, including the U.S., 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. Furthermore, 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 for which 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 are also exposed to potential physical risks from possible future changes in climate. Our logistics facilities may be exposed to rare catastrophic weather events, such as severe storms 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 generally 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 or stricter energy efficiency standards for buildings. 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.
Our insurance coverage does not include all potential losses.
We and our unconsolidated co-investment ventures 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 co-investment ventures are adequately insured. Certain losses, however, including losses from floods, earthquakes, acts of war, acts of terrorism or riots, generally are not insured against or not 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 revenues from those properties and, if there
13
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 business.
Risks Related to Financing and Capital
We may be unable to refinance our debt or our cash flow may be insufficient to make required debt payments.
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, our business and financial condition will be negatively impacted 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.
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 to run our business, 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, our business and financial condition generally and, in particular, the amount of our distributable cash flow 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 credit facilities and other debt instruments. Adverse changes in our credit ratings could negatively impact our business and, in particular, our refinancing and other capital market activities, our ability to manage debt maturities, our future growth and our development and acquisition activity.
At December 31, 2017, our credit ratings were A3 from Moody’s and A- from S&P, both with stable outlook. 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 depend on external sources of capital.
To qualify as a REIT, we are required each year to distribute at least 90% of our REIT taxable income (determined without regard to the dividends-paid deduction and by excluding any net capital gain) to our stockholders and we may be subject to tax to the extent our taxable income is not fully distributed. Historically, we have satisfied these distribution requirements by making cash distributions to our stockholders, but 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 that end on or before December 31, and in some cases declared as late as December 31, a 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. Furthermore, 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 nondeductible 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 depends on a number of factors, including general market conditions, the market’s perception of our growth potential, our current and potential future earnings and cash distributions and the market price of our securities.
Our stockholders may experience dilution if we issue additional common stock or units in the OP.
Any additional future issuance of common stock or OP units will reduce the percentage of our common stock and units owned by investors. In most circumstances, stockholders and unitholders will not be entitled to vote on whether or not we issue additional common stock or units. In addition, depending on the terms and pricing of any additional offering of our common stock or units and the value of the properties, our stockholders and unitholders may experience dilution in both book value and fair value of their common stock or units.
14
The 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 Prologis, Inc. has been organized and operated 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, 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 OP.
If Prologis, Inc. fails to qualify as a REIT in any taxable year, we will be required to pay federal income tax (including, for taxable years prior to 2018, 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 that 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 95% gross income test. 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 U.S. federal income tax. In addition, a failure of the subsidiary REIT to qualify as a REIT would have an adverse effect on 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 Service 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 U.S. and foreign income tax laws applicable to investments in real estate, REITs, similar entities and investments. Additional changes are likely to continue to occur in the future, both in and outside of the U.S. and may impact our taxation or that of our stockholders. New tax legislation was enacted on December 22, 2017 and provides for significant changes to the U.S. federal income tax laws, including the reduction of the corporate tax rate, a reduction or elimination of certain deductions (including new limitations on the deductibility of interest expense) and significant changes in the taxation of earnings from non-U.S. sources. Some of these changes could have an adverse impact on us, our business, and the results of our operations. The new rules are complex and lack developed administrative guidance; thus, the impact of certain aspects of these provisions on us is currently unclear. Technical corrections or other amendments to the new rules, and administrative guidance interpreting the new rules, may be forthcoming at any time or may be significantly delayed.
ITEM 1B. Unresolved Staff Comments
None.
15
We predominately invest in logistics facilities. Our properties are typically used for distribution, storage, packaging, assembly and light manufacturing of consumer products. The vast majority of our operating properties are used by our customers for bulk distribution.
The following tables provide details of our consolidated operating properties, investment in land and development portfolio. We have also included operating property information for 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 amount included in the ventures’ financial statements as calculated on a GAAP basis, not our proportionate share.
Included in the operating property information below for our consolidated operating properties are 404 buildings owned primarily by one co-investment venture that 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, 2017, or generated income equal to 10% or more of our consolidated gross revenues for the year ended December 31, 2017.
Dollars and square feet in the following tables are in millions and items notated by ‘0‘ indicate an amount that rounds to less than one million:
|
|
Consolidated Operating Properties |
|
|
Owned and Managed |
|
||||||||||||||
Region |
|
Rentable Square Footage |
|
|
Gross Book Value |
|
|
Encumbrances (1) |
|
|
Rentable Square Footage |
|
|
Gross Book Value |
|
|||||
U.S.: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Atlanta |
|
|
15 |
|
|
$ |
710 |
|
|
$ |
76 |
|
|
|
18 |
|
|
$ |
872 |
|
Baltimore/Washington D.C. |
|
|
4 |
|
|
|
327 |
|
|
|
30 |
|
|
|
7 |
|
|
|
679 |
|
Central and Eastern Pennsylvania |
|
|
14 |
|
|
|
917 |
|
|
|
- |
|
|
|
17 |
|
|
|
1,115 |
|
Central Valley California |
|
|
10 |
|
|
|
573 |
|
|
|
11 |
|
|
|
12 |
|
|
|
725 |
|
Chicago |
|
|
28 |
|
|
|
1,894 |
|
|
|
50 |
|
|
|
36 |
|
|
|
2,481 |
|
Dallas/Fort Worth |
|
|
21 |
|
|
|
1,121 |
|
|
|
132 |
|
|
|
26 |
|
|
|
1,538 |
|
Houston |
|
|
7 |
|
|
|
425 |
|
|
|
20 |
|
|
|
14 |
|
|
|
916 |
|
Las Vegas |
|
|
7 |
|
|
|
511 |
|
|
|
18 |
|
|
|
8 |
|
|
|
629 |
|
New Jersey/New York City |
|
|
26 |
|
|
|
2,553 |
|
|
|
167 |
|
|
|
32 |
|
|
|
3,286 |
|
San Francisco Bay Area |
|
|
16 |
|
|
|
1,737 |
|
|
|
10 |
|
|
|
20 |
|
|
|
2,095 |
|
Seattle |
|
|
9 |
|
|
|
856 |
|
|
|
42 |
|
|
|
16 |
|
|
|
1,571 |
|
South Florida |
|
|
9 |
|
|
|
1,026 |
|
|
|
34 |
|
|
|
15 |
|
|
|
1,541 |
|
Southern California |
|
|
56 |
|
|
|
5,411 |
|
|
|
106 |
|
|
|
73 |
|
|
|
7,160 |
|
Remaining Markets - U.S. (17 markets) (2) |
|
|
46 |
|
|
|
2,340 |
|
|
|
126 |
|
|
62 |
|
|
|
3,292 |
|
|
Subtotal U.S. |
|
|
268 |
|
|
|
20,401 |
|
|
|
822 |
|
|
|
356 |
|
|
|
27,900 |
|
Other Americas: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brazil |
|
|
7 |
|
|
|
517 |
|
|
|
- |
|
|
|
10 |
|
|
|
718 |
|
Canada |
|
|
9 |
|
|
|
745 |
|
|
|
156 |
|
|
|
9 |
|
|
|
745 |
|
Mexico |
|
|
2 |
|
|
|
113 |
|
|
|
- |
|
|
|
36 |
|
|
|
2,165 |
|
Subtotal Other Americas |
|
|
18 |
|
|
|
1,375 |
|
|
|
156 |
|
|
|
55 |
|
|
|
3,628 |
|
Europe: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Belgium |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3 |
|
|
|
208 |
|
Czech Republic |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
11 |
|
|
|
822 |
|
France |
|
|
1 |
|
|
|
64 |
|
|
|
- |
|
|
|
33 |
|
|
|
2,551 |
|
Germany |
|
|
1 |
|
|
|
50 |
|
|
|
- |
|
|
|
24 |
|
|
|
2,003 |
|
Hungary |
|
|
0 |
|
|
|
4 |
|
|
|
- |
|
|
|
7 |
|
|
|
443 |
|
Italy |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
9 |
|
|
|
576 |
|
Netherlands |
|
|
0 |
|
|
|
24 |
|
|
|
- |
|
|
|
19 |
|
|
|
1,675 |
|
Poland |
|
|
1 |
|
|
|
62 |
|
|
|
- |
|
|
|
25 |
|
|
|
1,572 |
|
Slovakia |
|
|
0 |
|
|
|
12 |
|
|
|
- |
|
|
|
4 |
|
|
|
254 |
|
Spain |
|
|
1 |
|
|
|
60 |
|
|
|
- |
|
|
|
9 |
|
|
|
697 |
|
Sweden |
|
|
1 |
|
|
|
47 |
|
|
|
- |
|
|
|
5 |
|
|
|
420 |
|
U.K. |
|
|
1 |
|
|
|
79 |
|
|
|
- |
|
|
|
23 |
|
|
|
3,214 |
|
Subtotal Europe |
|
|
6 |
|
|
|
402 |
|
|
|
- |
|
|
|
172 |
|
|
|
14,435 |
|
Asia: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
China |
|
|
1 |
|
|
|
43 |
|
|
|
- |
|
|
|
15 |
|
|
|
774 |
|
Japan |
|
|
3 |
|
|
|
340 |
|
|
|
- |
|
|
|
29 |
|
|
|
4,965 |
|
Singapore |
|
|
1 |
|
|
|
140 |
|
|
|
- |
|
|
|
1 |
|
|
|
140 |
|
Subtotal Asia |
|
|
5 |
|
|
|
523 |
|
|
|
- |
|
|
|
45 |
|
|
|
5,879 |
|
Total operating portfolio (3) |
|
|
297 |
|
|
|
22,701 |
|
|
|
978 |
|
|
|
628 |
|
|
|
51,842 |
|
Value-added properties (4) |
|
|
2 |
|
|
|
181 |
|
|
|
- |
|
|
|
2 |
|
|
|
245 |
|
Total operating properties |
|
|
299 |
|
|
$ |
22,882 |
|
|
$ |
978 |
|
|
|
630 |
|
|
$ |
52,087 |
|
16
|
|
Consolidated – Investment in Land |
|
|
Consolidated – Development Portfolio |
|
||||||||||||||
Region |
|
Acres |
|
|
Estimated Build Out Potential (square feet) (5) |
|
|
Current Investment |
|
|
Rentable Square Footage Upon Completion |
|
|
TEI (6) |
|
|||||
U.S.: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Atlanta |
|
|
54 |
|
|
|
1 |
|
|
$ |
6 |
|
|
|
1 |
|
|
$ |
34 |
|
Baltimore/Washington D.C. |
|
|
41 |
|
|
|
1 |
|
|
|
16 |
|
|
|
- |
|
|
|
- |
|
Central and Eastern Pennsylvania |
|
|
29 |
|
|
|
0 |
|
|
|
8 |
|
|
|
- |
|
|
|
- |
|
Central Valley California |
|
|
1,046 |
|
|
|
21 |
|
|
|
103 |
|
|
|
3 |
|
|
|
246 |
|
Chicago |
|
|
151 |
|
|
|
3 |
|
|
|
15 |
|
|
|
0 |
|
|
|
36 |
|
Dallas/Fort Worth |
|
|
38 |
|
|
|
1 |
|
|
|
8 |
|
|
|
2 |
|
|
|
139 |
|
Houston |
|
|
185 |
|
|
|
3 |
|
|
|
17 |
|
|
|
- |
|
|
|
- |
|
Las Vegas |
|
|
50 |
|
|
|
1 |
|
|
|
7 |
|
|
|
1 |
|
|
|
93 |
|
New Jersey/New York City |
|
|
56 |
|
|
|
1 |
|
|
|
28 |
|
|
|
1 |
|
|
|
186 |
|
San Francisco Bay Area |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
0 |
|
|
|
31 |
|
Seattle |
|
|
9 |
|
|
|
0 |
|
|
|
14 |
|
|
|
1 |
|
|
|
186 |
|
South Florida |
|
|
175 |
|
|
|
3 |
|
|
|
122 |
|
|
|
1 |
|
|
|
54 |
|
Southern California |
|
|
93 |
|
|
|
1 |
|
|
|
32 |
|
|
|
2 |
|
|
|
166 |
|
Remaining Markets - U.S. (17 markets) |
|
|
283 |
|
|
|
4 |
|
|
|
35 |
|
|
|
2 |
|
|
|
120 |
|
Subtotal U.S. |
|
|
2,210 |
|
|
|
40 |
|
|
|
411 |
|
|
|
14 |
|
|
|
1,291 |
|
Other Americas: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brazil |
|
|
531 |
|
|
|
12 |
|
|
|
166 |
|
|
|
- |
|
|
|
- |
|
Canada |
|
|
159 |
|
|
|
3 |
|
|
|
45 |
|
|
|
0 |
|
|
|
27 |
|
Mexico |
|
|
508 |
|
|
|
10 |
|
|
|
111 |
|
|
|
2 |
|
|
|
160 |
|
Subtotal Other Americas |
|
|
1,198 |
|
|
|
25 |
|
|
|
322 |
|
|
|
2 |
|
|
|
187 |
|
Europe: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Belgium |
|
|
45 |
|
|
|
1 |
|
|
|
14 |
|
|
|
- |
|
|
|
- |
|
Czech Republic |
|
|
117 |
|
|
|
2 |
|
|
|
22 |
|
|
|
1 |
|
|
|
49 |
|
France |
|
|
262 |
|
|
|
5 |
|
|
|
45 |
|
|
|
1 |
|
|
|
87 |
|
Germany |
|
|
36 |
|
|
|
1 |
|
|
|
12 |
|
|
|
1 |
|
|
|
80 |
|
Hungary |
|
|
281 |
|
|
|
5 |
|
|
|
19 |
|
|
|
- |
|
|
|
- |
|
Italy |
|
|
70 |
|
|
|
1 |
|
|
|
8 |
|
|
|
1 |
|
|
|
93 |
|
Netherlands |
|
|
39 |
|
|
|
1 |
|
|
|
25 |
|
|
|
1 |
|
|
|
92 |
|
Poland |
|
|
447 |
|
|
|
8 |
|
|
|
45 |
|
|
|
0 |
|
|
|
4 |
|
Slovakia |
|
|
204 |
|
|
|
4 |
|
|
|
25 |
|
|
|
1 |
|
|
|
62 |
|
Spain |
|
|
64 |
|
|
|
2 |
|
|
|
28 |
|
|
|
1 |
|
|
|
79 |
|
Sweden |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
0 |
|
|
|
30 |
|
U.K. |
|
|
137 |
|
|
|
2 |
|
|
|
47 |
|
|
|
1 |
|
|
|
86 |
|
Subtotal Europe |
|
|
1,702 |
|
|
|
32 |
|
|
|
290 |
|
|
|
8 |
|
|
|
662 |
|
Asia: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
China |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Japan |
|
|
81 |
|
|
|
5 |
|
|
|
131 |
|
|
|
4 |
|
|
|
701 |
|
Singapore |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Subtotal Asia |
|
|
81 |
|
|
|
5 |
|
|
|
131 |
|
|
|
4 |
|
|
|
701 |
|
Total land and development portfolio |
|
|
5,191 |
|
|
|
102 |
|
|
$ |
1,154 |
|
|
|
28 |
|
|
$ |
2,841 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Certain of our consolidated properties are pledged as security under secured mortgage debt and assessment bonds. 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 $2 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. Financial Statements and Supplementary Data for additional identification of the properties pledged. |
(2) |
No remaining market within the U.S. represented more than 2% of the total gross book value of the consolidated operating properties. |
(4) |
Value-added properties are properties we have either acquired at a discount and believe we could provide greater returns post-stabilization or properties we expect to repurpose to a higher and better use. |
(5) |
Represents the estimated finished square feet available for lease upon completion of a building on existing parcels of land. |
17
properties under development in the development portfolio were expected to be completed by December 31, 2018, and approximately 22% of the properties in the development portfolio were already completed but not yet stabilized. The remainder of our properties under development were expected to be completed before July 2019. |
The following table summarizes our investment in consolidated real estate properties at December 31, 2017 (in millions):
|
|
Investment Before Depreciation |
|
|
Operating properties, excluding assets held for sale or contribution |
|
$ |
22,586 |
|
Development portfolio, including cost of land |
|
|
1,594 |
|
Land |
|
|
1,154 |
|
Other real estate investments (1) |
|
|
505 |
|
Total consolidated real estate properties |
|
$ |
25,839 |
|
(1) |
Included in other real estate investments were: (i) non-logistics real estate; (ii) land parcels that are ground leased to third parties; (iii) our corporate office buildings; (iv) costs related to future development projects, including purchase options on land; (v) infrastructure costs related to projects we are developing on behalf of others; and (vi) earnest money deposits associated with potential acquisitions. |
We generally lease our properties on a long-term basis (the average term for leases signed in 2017 was 54 months). The following table summarizes the lease expirations of our consolidated operating portfolio for leases in place at December 31, 2017 (dollars and square feet in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NER |
|
|||||||||
|
|
Number of Leases |
|
|
Occupied Square Feet |
|
|
Dollars |
|
|
Percent of Total |
|
|
Dollars Per Square Foot |
|
|||||
2018 |
|
|
566 |
|
|
|
31 |
|
|
$ |
168 |
|
|
|
10.6 |
% |
|
$ |
5.34 |
|
2019 |
|
|
639 |
|
|
|
47 |
|
|
|
231 |
|
|
|
14.6 |
% |
|
|
4.92 |
|
2020 |
|
|
607 |
|
|
|
33 |
|
|
|
182 |
|
|
|
11.5 |
% |
|
|
5.55 |
|
2021 |
|
|
585 |
|
|
|
44 |
|
|
|
237 |
|
|
|
14.9 |
% |
|
|
5.42 |
|
2022 |
|
|
517 |
|
|
|
42 |
|
|
|
236 |
|
|
|
14.8 |
% |
|
|
5.60 |
|
2023 |
|
|
243 |
|
|
|
25 |
|
|
|
142 |
|
|
|
9.0 |
% |
|
|
5.79 |
|
2024 |
|
|
118 |
|
|
|
13 |
|
|
|
80 |
|
|
|
5.1 |
% |
|
|
6.05 |
|
2025 |
|
|
87 |
|
|
|
14 |
|
|
|
85 |
|
|
|
5.3 |
% |
|
|
5.98 |
|
2026 |
|
|
35 |
|
|
|
7 |
|
|
|
46 |
|
|
|
2.9 |
% |
|
|
6.46 |
|
2027 |
|
|
57 |
|
|
|
9 |
|
|
|
54 |
|
|
|
3.4 |
% |
|
|
6.03 |
|
Thereafter |
|
|
55 |
|
|
|
20 |
|
|
|
126 |
|
|
|
7.9 |
% |
|
|
6.42 |
|
|
|
|
3,509 |
|
|
|
285 |
|
|
$ |
1,587 |
|
|
|
100.0 |
% |
|
$ |
5.57 |
|
Month to month |
|
|
107 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consolidated |
|
|
3,616 |
|
|
|
289 |
|
|
|
|
|
|
|
|
|
|
|
|
|
18
Included in our owned and managed portfolio are consolidated and unconsolidated co-investment ventures that hold investments in real estate properties, primarily logistics facilities that we also manage. Our unconsolidated co-investment ventures are accounted for under the equity method. The amounts included for the unconsolidated ventures are reflected at 100% of the amount included in the ventures’ financial statements as calculated on a GAAP basis, not our proportionate share. The following table summarizes our consolidated and unconsolidated co-investment ventures at December 31, 2017 (in millions):
|
|
Operating Properties |
|
|
|
|
|
|
|
|
|
|||||
|
|
Square Feet |
|
|
Gross Book Value |
|
|
Investment in Land |
|
|
Development Portfolio – TEI |
|
||||
Consolidated Co-Investment Ventures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prologis U.S. Logistics Venture (“USLV”) |
|
|
67 |
|
|
$ |
5,931 |
|
|
$ |
31 |
|
|
$ |
106 |
|
Total |
|
|
67 |
|
|
$ |
5,931 |
|
|
$ |
31 |
|
|
$ |
106 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unconsolidated Co-Investment Ventures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prologis Targeted U.S. Logistics Fund (“USLF”) |
|
|
88 |
|
|
$ |
7,543 |
|
|
$ |
- |
|
|
$ |
34 |
|
Other Americas: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FIBRA Prologis |
|
|
35 |
|
|
|
2,052 |
|
|
|
4 |
|
|
|
- |
|
Europe: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prologis European Logistics Fund (“PELF”) |
|
|
106 |
|
|
|
9,565 |
|
|
|
11 |
|
|
|
59 |
|
Prologis European Logistics Partners Sàrl (“PELP”) |
|
|
58 |
|
|
|
4,203 |
|
|
|
30 |
|
|
|
6 |
|
Prologis UK Logistics Venture (“UKLV”) |
|
|
2 |
|
|
|
285 |
|
|
|
110 |
|
|
|
220 |
|
Subtotal Europe |
|
|
166 |
|
|
|
14,053 |
|
|
|
151 |
|
|
|
285 |
|
Asia: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nippon Prologis REIT (“NPR”) |
|
|
26 |
|
|
|
4,625 |
|
|
|
- |
|
|
|
- |
|
Prologis China Logistics Venture |
|
|
14 |
|
|
|
731 |
|
|
|
80 |
|
|
|
879 |
|
Subtotal Asia |
|
|
40 |
|
|
|
5,356 |
|
|
|
80 |
|
|
|
879 |
|
Other: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brazil joint ventures |
|
|
3 |
|
|
|
201 |
|
|
|
- |
|
|
|
- |
|
Total |
|
|
332 |
|
|
$ |
29,205 |
|
|
$ |
235 |
|
|
$ |
1,198 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For more information regarding our unconsolidated and consolidated co-investment ventures, see Notes 5 and 12 to the Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data.
From time to time, we and our 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.
19
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 |
|
|||
2017 |
|
|
|
|
|
|
|
|
|
|
|
|
Fourth Quarter |
|
$ |
67.53 |
|
|
$ |
62.99 |
|
|
$ |
0.44 |
|
Third Quarter |
|
$ |
65.49 |
|
|
$ |
56.59 |
|
|
$ |
0.44 |
|
Second Quarter |
|
$ |
59.49 |
|
|
$ |
51.66 |
|
|
$ |
0.44 |
|
First Quarter |
|
$ |
54.25 |
|
|
$ |
48.33 |
|
|
$ |
0.44 |
|
2016 |
|
|
|
|
|
|
|
|
|
|
|
|
Fourth Quarter |
|
$ |
53.51 |
|
|
$ |
45.93 |
|
|
$ |
0.42 |
|
Third Quarter |
|
$ |
54.87 |
|
|
$ |
48.46 |
|
|
$ |
0.42 |
|
Second Quarter |
|
$ |
50.74 |
|
|
$ |
43.45 |
|
|
$ |
0.42 |
|
First Quarter |
|
$ |
44.26 |
|
|
$ |
35.25 |
|
|
$ |
0.42 |
|
Our future common stock dividends, if and as declared, may vary and will be determined by the Board upon the circumstances prevailing at the time, including our financial condition, operating results, estimated taxable income and REIT distribution requirements. These dividends, if and as declared, may be adjusted at the discretion of the Board during the year.
On February 12, 2018, we had approximately 533,054,000 shares of common stock outstanding, which were held of record by approximately 4,400 stockholders.
Stock Performance Graph
The following line graph compares the change in Prologis, Inc. cumulative total stockholder’s return on shares of its common stock from December 31, 2012, to the cumulative total return of the S&P 500 Stock Index and the Financial Times and Stock Exchange NAREIT Equity REITs Index from December 31, 2012, to December 31, 2017. The graph assumes an initial investment of $100 in our common stock and each of the indices on December 31, 2012, and, as required by the SEC, the reinvestment of all dividends. The return shown on the graph is not necessarily indicative of future performance.
20
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.
At December 31, 2017, and 2016, we had 1.4 million and 1.6 million shares of the Series Q preferred stock with a liquidation preference of $50 per share. Dividends payable per share were $4.27 for the years ended December 31, 2017, and 2016.
For more information regarding dividends, see Note 10 to the Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data.
SALES OF UNREGISTERED SECURITIES
During 2017, we issued an aggregate of 1.5 million shares of common stock of Prologis, Inc. in connection with the redemption of common units of Prologis, L.P. See Note 11 to the Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data for more information. The issuance of the shares of common stock was undertaken in reliance upon the exemption from registration requirements of the Securities Act of 1933, as amended, afforded by Section 4(a)(2) thereof.
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. Financial Statements and Supplementary Data.
Common Stock Plans
Further information relative to our equity compensation plans will be provided in our 2018 Proxy Statement or in an amendment filed on Form 10-K/A.
ITEM 6. Selected Financial Data
The following table summarizes selected financial data related to our historical financial condition and results of operations for both Prologis, Inc. and Prologis, L.P. (in millions, except for per share and unit amounts):
|
2017 |
|
|
2016 |
|
|
2015 |
|
|
2014 |
|
|
2013 |
|
|||||
Operating Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
$ |
2,618 |
|
|
$ |
2,533 |
|
|
$ |
2,197 |
|
|
$ |
1,761 |
|
|
$ |
1,750 |
|
Gains on dispositions of investments in real estate and revaluation of equity investments upon acquisition of a controlling interest, net |
$ |
1,183 |
|
|
$ |
757 |
|
|
$ |
759 |
|
|
$ |
726 |
|
|
$ |
715 |
|
Consolidated net earnings |
$ |
1,761 |
|
|
$ |
1,293 |
|
|
$ |
926 |
|
|
$ |
739 |
|
|
$ |
230 |
|
Net earnings per share attributable to common stockholders and unitholders – Basic (1) |
$ |
3.10 |
|
|
$ |
2.29 |
|
|
$ |
1.66 |
|
|
$ |
1.25 |
|
|
$ |
0.65 |
|
Net earnings per share attributable to common stockholders and unitholders – Diluted (1) |
$ |
3.06 |
|
|
$ |
2.27 |
|
|
$ |
1.64 |
|
|
$ |
1.24 |
|
|
$ |
0.64 |
|
Dividends per common share and distributions per common unit |
$ |
1.76 |
|
|
$ |
1.68 |
|
|
$ |
1.52 |
|
|
$ |
1.32 |
|
|
$ |
1.12 |
|
Consolidated Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
$ |
29,481 |
|
|
$ |
30,250 |
|
|
$ |
31,395 |
|
|
$ |
25,775 |
|
|
$ |
24,534 |
|
Total debt |
$ |
9,413 |
|
|
$ |
10,608 |
|
|
$ |
11,627 |
|
|
$ |
9,337 |
|
|
$ |
8,973 |
|
FFO (2): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of net earnings to FFO: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings attributable to common stockholders |
$ |
1,642 |
|
|
$ |
1,203 |
|
|
$ |
863 |
|
|
$ |
622 |
|
|
$ |
315 |
|
Total NAREIT defined adjustments |
|
101 |
|
|
|
534 |
|
|
|
461 |
|
|
|
299 |
|
|
|
504 |
|
Total our defined adjustments |
|
52 |
|
|
|
(35 |
) |
|
|
(15 |
) |
|
|
(33 |
) |
|
|
36 |
|
FFO, as modified by Prologis (2) |
$ |
1,795 |
|
|
$ |
1,702 |
|
|
$ |
1,309 |
|
|
$ |
888 |
|
|
$ |
855 |
|
Total core defined adjustments |
|
(244 |
) |
|
|
(302 |
) |
|
|
(128 |
) |
|
|
65 |
|
|
|
(42 |
) |
Core FFO (2) |
$ |
1,551 |
|
|
$ |
1,400 |
|
|
$ |
1,181 |
|
|
$ |
953 |
|
|
$ |
813 |
|
(1) |
In 2014, the accounting standard changed for classifying and reporting discontinued operations and none of our dispositions since adoption met the qualifications to be reported as discontinued operations. In 2013, our net earnings per share attributable to common stockholders and unitholders for basic and diluted included $0.25 per share attributable to discontinued operations. |
21
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. Financial Statements and Supplementary Data of this report and the matters described under Item 1A. Risk Factors.
Summary of 2017
During the year ended December 31, 2017, operating fundamentals remained strong for our owned and managed portfolio and we ended the year with occupancy of 97.2%. See below for the results of our two business segments and details of operating activity of our owned and managed portfolio.
In 2017, we completed the following significant activities as further described in the accompanying notes to the Consolidated Financial Statements:
• |
We completed several transactions that repositioned our portfolio and streamlined our co-investment ventures, including: |
|
o |
In January, we sold our investment in Europe Logistics Venture 1 (“ELV”) to our venture partner for $84 million and ELV contributed its properties to Prologis Targeted Europe Logistics Fund (“PTELF”) in exchange for equity interests. |
|
o |
In February, we formed UKLV, in which we have a 15.0% ownership interest. This unconsolidated co-investment venture was formed for investment in the U.K. and currently holds stabilized properties, properties under development and land. |
|
o |
In October, the assets and related liabilities of PTELF were contributed to Prologis European Properties Fund II (“PEPF II”) in exchange for units, and PEPF II was renamed PELF. In connection with the transaction, we exchanged our units in PTELF for new units in PELF resulting in our ownership interest decreasing to 25.6%, however, our economic investment did not substantially change. |
|
o |
As a result of these activities, we had eight unconsolidated co-investment ventures at December 31, 2017. |
|
o |
In addition to the transactions discussed above, we also contributed properties to existing co-investment ventures in Europe, Japan and Mexico and we disposed of non-strategic operating properties to third parties, primarily in the U.S. |
|
o |
These transactions generated proceeds of $4.5 billion and realized net gains of $1.2 billion. |
• |
In February, we amended our Japanese yen revolver and increased the total borrowing capacity to ¥50.0 billion ($444 million at December 31, 2017). |
• |
In June, we issued £500 million ($645 million) of senior notes with an effective interest rate of 2.3%, maturing in June 2029, at 99.9% of par value. Following the issuance, we used the cash proceeds to redeem $618 million of previously issued senior notes, maturing in 2019, with an average coupon rate of 5.4%. |
We evaluate our business operations based on the NOI of our two operating segments: Real Estate Operations and Strategic Capital. NOI by segment is a non-GAAP financial measure that is calculated using revenues and expenses directly from our financial statements. We consider NOI by segment to be an appropriate supplemental measure of our performance because it helps management and investors understand the core operations of our real estate assets.
22
Below is a reconciliation of our NOI by segment to Operating Income per the Consolidated Financial Statements (in millions). Each segment’s NOI is reconciled to a line item in the Consolidated Financial Statements in the respective segment discussion below.
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
Real Estate Operations – NOI |
|
$ |
1,662 |
|
|
$ |
1,646 |
|
|
$ |
1,368 |
|
Strategic Capital – NOI |
|
|
219 |
|
|
|
175 |
|
|
|
109 |
|
General and administrative expenses |
|
|
(231 |
) |
|
|
(222 |
) |
|
|
(217 |
) |
Depreciation and amortization expenses |
|
|
(879 |
) |
|
|
(931 |
) |
|
|
(880 |
) |
Operating income |
|
$ |
771 |
|
|
$ |
668 |
|
|
$ |
380 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Note 18 to the Consolidated Financial Statements for more information on our segments and a reconciliation of each business segment’s NOI to Operating Income and Earnings Before Income Taxes.
Real Estate Operations
This operating segment principally includes rental revenues, rental recoveries and rental expenses recognized from our consolidated properties. We allocate the costs of our property management functions to the Real Estate Operations segment through Rental Expenses and the Strategic Capital segment through Strategic Capital Expenses based on the square footage of the relative portfolios as compared to our total owned and managed portfolio. The operating fundamentals in the markets in which we operate continue to be strong, which has driven rents higher, kept occupancies high and has fueled development activity. This segment is impacted by our development, acquisition and disposition activities.
Below are the components of Real Estate Operations revenues, expenses and NOI (in millions), derived directly from line items in the Consolidated Financial Statements.
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
Rental revenues |
|
$ |
1,738 |
|
|
$ |
1,735 |
|
|
$ |
1,536 |
|
Rental recoveries |
|
|
487 |
|
|
|
486 |
|
|
|
437 |
|
Development management and other revenues |
|
|
19 |
|
|
|
8 |
|
|
|
6 |
|
Rental expenses |
|
|
(570 |
) |
|
|
(569 |
) |
|
|
(544 |
) |
Other expenses |
|
|
(12 |
) |
|
|
(14 |
) |
|
|
(67 |
) |
Real Estate Operations – NOI |
|
$ |
1,662 |
|
|
$ |
1,646 |
|
|
$ |
1,368 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The change in Real Estate Operations NOI during these periods were impacted by the following items (in millions of dollars):
(1) |
The impact from acquisitions in 2016 from 2015 was primarily due to the acquisition of the real estate assets and operating platform of KTR Capital Partners and its affiliates (“KTR”) in May 2015, which generated an additional $152 million of net revenues, including a decrease of $25 million in acquisition costs, in 2016. Approximately 45% of KTR activity is offset in Net Earnings Attributable to Noncontrolling Interests for our venture partner’s share. See Note 3 in the Consolidated Financial Statements for further detail on the KTR transaction. |
(2) |
During these periods, we experienced increased occupancy and positive rent rate growth. Rent rate growth (or rent change) is a combination of the rollover of existing leases and increases in certain rental rates from contractual rent increases on existing leases. If a lease has a contractual rent increase that is not known at the time the lease is signed, such as the consumer price index or a similar metric, the rent increase is not included in rent leveling and therefore, would impact the rental revenues we recognize. See below for key metrics on occupancy and rent change on rollover for the consolidated operating portfolio. |
(3) |
A developed property moves into the operating portfolio when it meets stabilization. The property is considered stabilized when a development project has been completed for one year or at least 90% occupied, whichever occurs first. During these periods, NOI increased as developments stabilized. See below for key metrics on our development stabilizations for our consolidated properties. |
23
(4) |
Contribution and disposition activity increased in 2017, compared to 2016, primarily due to the contribution of the NAIF operating properties to USLF. |
(5) |
Other items include property tax expense recoveries, noncash adjustments for the amortization of above or below market leases, non-recoverable expenses, termination fees and changes in foreign currency exchange rates. |
Below are key operating metrics of our consolidated operating portfolio over the last three years:
Development Start Activity
The following table summarizes consolidated development starts (dollars and square feet in millions):
|
|
2017 (1) |
|
|
2016 |
|
|
2015 |
|
|||
Number of new development projects during the period |
|
|
74 |
|
|
|
73 |
|
|
|
62 |
|
Estimated build out potential (square feet) |
|
|
25 |
|
|
|
22 |
|
|
|
18 |
|
TEI |
|
$ |
2,261 |
|
|
$ |
1,754 |
|
|
$ |
1,643 |
|
Percentage of build-to-suits based on TEI |
|
|
48.5 |
% |
|
|
42.2 |
% |
|
|
47.2 |
% |
(1) |
We expect our properties under development at December 31, 2017, to be completed before July 2019. |
Development Stabilization Activity
The following table summarizes consolidated development stabilization activity (dollars and square feet in millions):
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
Number of development projects stabilized during the period |
|
|
76 |
|
|
|
75 |
|
|
|
63 |
|
Square feet upon completion |
|
|
24 |
|
|
|
27 |
|
|
|
21 |
|
TEI |
|
$ |
1,949 |
|
|
$ |
2,178 |
|
|
$ |
1,595 |
|
Weighted average expected yield on TEI (1) |
|
|
6.5 |
% |
|
|
6.6 |
% |
|
|
7.2 |
% |
Estimated value at completion |
|
$ |
2,509 |
|
|
$ |
2,723 |
|
|
$ |
2,109 |
|
Estimated weighted average margin |
|
|
28.8 |
% |
|
|
25.0 |
% |
|
|
32.2 |
% |
(1) |
We calculate the weighted average expected yield on TEI as estimated NOI assuming stabilized occupancy divided by TEI. |
For information on our development portfolio at December 31, 2017, see Item 2. Properties.
24
We capitalize costs incurred in renovating, rehabilitating and improving our operating properties as part of the investment basis. The following graph summarizes our capital expenditures on operating properties within our consolidated operating portfolio (in millions):
Strategic Capital
This operating segment includes revenues from asset and property management and other fees for services performed, as well as promotes earned from the unconsolidated co-investment ventures. Revenues associated with the Strategic Capital segment fluctuate because of the size of co-investment ventures under management, the transactional activity in the ventures and the timing of promotes. These revenues are reduced generally by the direct costs associated with the asset and property-level management expenses for the properties owned by these ventures. We allocate the costs of our property management functions to the Strategic Capital segment through Strategic Capital Expenses and to the Real Estate Operations segment through Rental Expenses based on the square footage of the relative portfolios as compared to our total owned and managed portfolio.
Below are the components of Strategic Capital revenues, expenses and NOI, derived directly from the line items in the Consolidated Financial Statements (in millions):
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
Strategic capital revenues |
|
$ |
374 |
|
|
$ |
304 |
|
|
$ |
217 |
|
Strategic capital expenses |
|
|
(155 |
) |
|
|
(129 |
) |
|
|
(108 |
) |
Strategic Capital – NOI |
|
$ |
219 |
|
|
$ |
175 |
|
|
$ |
109 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Below is additional detail of our Strategic Capital revenues, expenses and NOI (in millions):
|
|
U.S. (1) |
|
|
Other Americas |
|
|
Europe |
|
|
Asia |
|
|
Total |
|
|||||||||||||||||||||||||||||||||||||||||||||
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||||||||||||||
Strategic capital revenues ($) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring fees (2) |
|
|
47 |
|
|
|
33 |
|
|
|
31 |
|
|
|
23 |
|
|
|
21 |
|
|
|
20 |
|
|
|
88 |
|
|
|
84 |
|
|
|
71 |
|
|
|
39 |
|
|
|
38 |
|
|
|
32 |
|
|
|
197 |
|
|
|
176 |
|
|
|
154 |
|
Non-recurring fees (3) |
|
|
10 |
|
|
|
6 |
|
|
|
8 |
|
|
|
2 |
|
|
|
2 |
|
|
|
2 |
|
|
|
15 |
|
|
|
14 |
|
|
|
12 |
|
|
|
22 |
|
|
|
17 |
|
|
|
11 |
|
|
|
49 |
|
|
|
39 |
|
|
|
33 |
|
Promote revenues (4) |
|
|
120 |
|
|
|
- |
|
|
|
- |
|
|
|
4 |
|
|
|
- |
|
|
|
- |
|
|
|
4 |
|
|
|
89 |
|
|
|
30 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
128 |
|
|
|
89 |
|
|
|
30 |
|
Strategic capital expense ($) |
|
|
(70 |
) |
|
|
(41 |
) |
|
|
(41 |
) |
|
|
(12 |
) |
|
|
(10 |
) |
|
|
(9 |
) |
|
|
(39 |
) |
|
|
(43 |
) |
|
|
(27 |
) |
|
|
(34 |
) |
|
|
(35 |
) |
|
|
(31 |
) |
|
|
(155 |
) |
|
|
(129 |
) |
|
|
(108 |
) |
Strategic Capital - NOI ($) |
|
|
107 |
|
|
|
(2 |
) |
|
|
(2 |
) |
|
|
17 |
|
|
|
13 |
|
|
|
13 |
|
|
|
68 |
|
|
|
144 |
|
|
|
86 |
|
|
|
27 |
|
|
|
20 |
|
|
|
12 |
|
|
|
219 |
|
|
|
175 |
|
|
|
109 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
This includes compensation and personnel costs for employees who were located in the U.S. but also support other regions. |
(2) |
Recurring fees include asset and property management fees. |
(3) |
Non-recurring fees include leasing commission, acquisition and other transactional fees. |
(4) |
The promote revenues represent the third-party partners’ share based on the venture’s cumulative returns to investors over a certain time-period, generally three years. Approximately 40% of promote revenues are paid to our employees as a combination of cash and stock awards pursuant to the terms of the Prologis Promote Plan and expensed through Strategic Capital Expenses, as vested. |
25
The following real estate investments were held through our unconsolidated co-investment ventures at December 31 (dollars and square feet in millions):
|
|
U.S. (1) |
|
|
Other Americas (2) |
|
|
Europe (3) |
|
|
Asia |
|
|
Total |
|
|||||||||||||||||||||||||||||||||||||||||||||
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||||||||||||||
Ventures |
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
|
|
2 |
|
|
|
2 |
|
|
|
2 |
|
|
|
3 |
|
|
|
4 |
|
|
|
4 |
|
|
|
2 |
|
|
|
2 |
|
|
|
2 |
|
|
|
8 |
|
|
|
9 |
|
|
|
9 |
|
Operating properties |
|
|
552 |
|
|
|
369 |
|
|
|
391 |
|
|
|
205 |
|
|
|
213 |
|
|
|
205 |
|
|
|
707 |
|
|
|
700 |
|
|
|
688 |
|
|
|
95 |
|
|
|
85 |
|
|
|
66 |
|
|
|
1,559 |
|
|
|
1,367 |
|
|
|
1,350 |
|
Square feet |
|
|
88 |
|
|
|
50 |
|
|
|
50 |
|
|
|
37 |
|
|
|
42 |
|
|
|
39 |
|
|
|
166 |
|
|
|
163 |
|
|
|
159 |
|
|
|
41 |
|
|
|
36 |
|
|
|
29 |
|
|
|
332 |
|
|
|
291 |
|
|
|
277 |
|
Total assets ($) |
|
|
7,062 |
|
|
|
4,238 |
|
|
|
4,408 |
|
|
|
2,118 |
|
|
|
2,793 |
|
|
|
2,482 |
|
|
|
13,586 |
|
|
|
10,853 |
|
|
|
11,343 |
|
|
|
6,133 |
|
|
|
5,173 |
|
|
|
4,320 |
|
|
|
28,899 |
|
|
|
23,057 |
|
|
|
22,553 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
We acquired our partner’s interest in NAIF, a consolidated co-investment venture, and contributed 190 operating properties owned by NAIF to USLF in 2017. |
(2) |
We acquired our partner’s interest in certain joint ventures in Brazil in 2017. |
(3) |
In 2017, we had the following activity in Europe: (i) sold our investment in ELV to our venture partner and ELV contributed its properties to PTELF; (ii) the assets and related liabilities of PTELF were contributed to PEPF II in exchange for units; and PEPF II was renamed PELF; and (iii) we formed the co-investment venture UKLV. |
See Note 5 to the Consolidated Financial Statements for additional information on our unconsolidated co-investment ventures.
G&A Expenses
G&A expenses remained relatively flat at $231 million, $222 million and $217 million for 2017, 2016 and 2015, respectively.
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 G&A costs. The following table summarizes capitalized G&A amounts (in millions):
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
Building and land development activities |
|
$ |
63 |
|
|
$ |
61 |
|
|
$ |
63 |
|
Leasing activities (1) |
|
|
24 |
|
|
|
24 |
|
|
|
21 |
|
Operating building improvements and other |
|
|
15 |
|
|
|
16 |
|
|
|
16 |
|
Total capitalized G&A expenses |
|
$ |
102 |
|
|
$ |
101 |
|
|
$ |
100 |
|
Capitalized salaries and related costs as a percent of total salaries and related costs |
|
|
24.4 |
% |
|
|
26.0 |
% |
|
|
27.6 |
% |
(1) |
Due to a new accounting standard effective January 1, 2019, we expect a change in capitalized leasing activities. See Note 2 to the Consolidated Financial Statements for additional information. |
Depreciation and Amortization Expenses
The following table highlights the key changes in depreciation and amortization expenses during these periods (in millions of dollars):
(1) |
The increase in depreciation and amortization expense in 2016 from 2015 related to acquisitions was primarily due to the KTR transaction in 2015. |
(2) |
The decrease in depreciation and amortization expense in 2017 from 2016 was primarily due to the contribution of the NAIF operating properties to USLF in 2017. |
26
Our Owned and Managed Properties
We manage our business on an owned and managed basis, which includes properties wholly owned by us or owned by one of our co-investment ventures. We review our operating fundamentals on an owned and managed basis. We believe reviewing these fundamentals this way allows management to understand the entire impact to the financial statements, as it will affect both the Real Estate Operations and Strategic Capital segments, as well as the net earnings we recognize from our unconsolidated co-investment ventures based on our ownership share. We do not control the unconsolidated co-investment ventures for purposes of GAAP and the presentation of the ventures’ operating information does not represent a legal claim to such items.
Our owned and managed operating portfolio does not include value-added properties or properties held for sale to third parties and was as follows at December 31 (square feet in millions):
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||||||||||||||||||||||||||
|
Number of Properties |
|
|
Square Feet |
|
|
Percentage Occupied |
|
|
Number of Properties |
|
|
Square Feet |
|
|
Percentage Occupied |
|
|
Number of Properties |
|
|
Square Feet |
|
|
Percentage Occupied |
|
|||||||||
Consolidated |
|
1,532 |
|
|
|
297 |
|
|
|
97.3 |
% |
|
|
1,777 |
|
|
|
332 |
|
|
|
97.0 |
% |
|
|
1,872 |
|
|
|
334 |
|
|
|
97.1 |
% |
Unconsolidated |
|
1,557 |
|
|
|
331 |
|
|
|
97.1 |
% |
|
|
1,359 |
|
|
|
290 |
|
|
|
97.2 |
% |
|
|
1,331 |
|
|
|
273 |
|
|
|
96.7 |
% |
Total |
|
3,089 |
|
|
|
628 |
|
|
|
97.2 |
% |
|
|
3,136 |
|
|
|
622 |
|
|
|
97.1 |
% |
|
|
3,203 |
|
|
|
607 |
|
|
|
96.9 |
% |
Operating Activity
Below is information summarizing the leasing activity of our owned and managed operating portfolio over the last three years:
(1) |
We retained more than 75% of our customers, based on the total square feet of leases signed, for each year during the three-year period ended December 31, 2017. |
(2) |
Turnover costs are defined as leasing commissions and tenant improvements and represent the obligations incurred in connection with the signing of a lease. |
Same Store Analysis
We evaluate the operating 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, which eliminates the effects of changes in the composition of the portfolio. We have defined the same store portfolio, for the three months ended December 31, 2017, as those owned and managed properties that were in operation at January 1, 2016, and have been in operation throughout the same three-month periods in both 2017 and 2016 (including development properties that have been completed and available for lease). We have removed all properties that were disposed of to a third party or were classified as held for sale to a third party from the population for both periods. We believe the factors that affect rental revenues, rental recoveries, rental expenses and NOI in the same store portfolio are generally the same as for the total operating portfolio. To derive an appropriate measure of period-to-period operating performance, we remove the effects of foreign currency exchange rate movements by using the recent period end exchange rate to translate from local currency into the U.S. dollar, for both periods.
Same store is a commonly used measure in the real estate industry. Our same store measures are non-GAAP financial measures that are calculated beginning with rental revenues, rental recoveries and rental expenses from the financial statements prepared in accordance with GAAP. As our same store measures are non-GAAP financial measures, they have certain limitations as analytical tools and may vary among real estate companies. As a result, we provide a reconciliation from our financial statements prepared in accordance with GAAP to same store property NOI with explanations of how these metrics are calculated.
27
We evaluate the results of our same store portfolio on a quarterly basis. The following is a reconciliation of our consolidated rental revenues, rental recoveries, rental expenses and property NOI for each quarter in 2017 and 2016 to the full year, as included in the Consolidated Statements of Income and within Note 20 to the Consolidated Financial Statements and to the respective amounts in our same store portfolio analysis for the three months ended December 31 (dollars in millions):
|
|
Three Months Ended |
|
|
|
|
|
|||||||||||||
|
|
March 31, |
|
|
June 30, |
|
|
September 30, |
|
|
December 31, |
|
|
Full Year |
|
|||||
2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental revenues |
|
$ |
440 |
|
|
$ |
448 |
|
|
$ |
416 |
|
|
$ |
434 |
|
|
$ |
1,738 |
|
Rental recoveries |
|
|
127 |
|
|
|
128 |
|
|
|
115 |
|
|
|
117 |
|
|
|
487 |
|
Rental expenses |
|
|
(153 |
) |
|
|
(148 |
) |
|
|
(129 |
) |
|
|
(140 |
) |
|
|
(570 |
) |
Property NOI |
|
$ |
414 |
|
|
$ |
428 |
|
|
$ |
402 |
|
|
$ |
411 |
|
|
$ |
1,655 |
|
2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental revenues |
|
$ |
437 |
|
|
$ |
426 |
|
|
$ |
436 |
|
|
$ |
436 |
|
|
$ |
1,735 |
|
Rental recoveries |
|
|
117 |
|
|
|
120 |
|
|
|
124 |
|
|
|
125 |
|
|
|
486 |
|
Rental expenses |
|
|
(146 |
) |
|
|
(141 |
) |
|
|
(141 |
) |
|
|
(141 |
) |
|
|
(569 |
) |
Property NOI |
|
$ |
408 |
|
|
$ |
405 |
|
|
$ |
419 |
|
|
$ |
420 |
|
|
$ |
1,652 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31, |
|
|||||||||
|
|
2017 |
|
|
2016 |
|
|
Percentage Change |
|
|||
Rental revenues (1) (2) |
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated: |
|
|
|
|
|
|
|
|
|
|
|
|
Rental revenues (per the quarterly information table above) |
|
$ |
434 |
|
|
$ |
436 |
|
|
|
|
|
Rental recoveries (per the quarterly information table above) |
|
|
117 |
|
|
|
125 |
|
|
|
|
|
Consolidated adjustments to derive same store results: |
|
|
|
|
|
|
|
|
|
|
|
|
Rental revenues and recoveries of properties not in the same store portfolio – properties developed, acquired and sold to third parties during the period and land subject to ground leases |
|
|
(74 |
) |
|
|
(66 |
) |
|
|
|
|
Effect of changes in foreign currency exchange rates and other |
|
|
(9 |
) |
|
|
- |
|
|
|
|
|
Unconsolidated co-investment ventures – rental revenues |
|
|
525 |
|
|
|
463 |
|
|
|
|
|
Owned and managed same store portfolio – rental revenues (2) |
|
$ |
993 |
|
|
$ |
958 |
|
|
|
3.7 |
% |
Rental expenses (1) (3) |
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated: |
|
|
|
|
|
|
|
|
|
|
|
|
Rental expenses (per the quarterly information table above) |
|
$ |
140 |
|
|
$ |
141 |
|
|
|
|
|
Consolidated adjustments to derive same store results: |
|
|
|
|
|
|
|
|
|
|
|
|
Rental expenses of properties not in the same store portfolio – properties developed, acquired and sold to third parties during the period and land subject to ground leases |
|
|
(32 |
) |
|
|
(22 |
) |
|
|
|
|
Effect of changes in foreign currency exchange rates and other |
|
|
18 |
|
|
|
13 |
|
|
|
|
|
Unconsolidated co-investment ventures – rental expenses |
|
|
124 |
|
|
|
105 |
|
|
|
|
|
Owned and managed same store portfolio – rental expenses (3) |
|
$ |
250 |
|
|
$ |
237 |
|
|
|
5.3 |
% |
NOI (1) |
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated: |
|
|
|
|
|
|
|
|
|
|
|
|
Property NOI (per the quarterly information table above) |
|
$ |
411 |
|
|
$ |
420 |
|
|
|
|
|
Consolidated adjustments to derive same store results: |
|
|
|
|
|
|
|
|
|
|
|
|
Property NOI of properties not in the same store portfolio – properties developed, acquired and sold to third parties during the period and land subject to ground leases |
|
|
(42 |
) |
|
|
(44 |
) |
|
|
|
|
Effect of changes in foreign currency exchange rates and other |
|
|
(27 |
) |
|
|
(13 |
) |
|
|
|
|
Unconsolidated co-investment ventures – property NOI |
|
|
401 |
|
|
|
358 |
|
|
|
|
|
Owned and managed same store portfolio – NOI |
|
$ |
743 |
|
|
$ |
721 |
|
|
|
3.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
We include 100% of the same store NOI from the properties in our same store portfolio. During the periods presented, certain properties owned by us were contributed to a co-investment venture and are included in the same store portfolio. Neither our consolidated results nor those of the co-investment ventures, when viewed individually, would be comparable on a same store basis because of the changes in composition of the respective portfolios from period to period (e.g. 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). |
28
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 this table. |
(3) |
Rental expenses include the direct operating expenses of the property such as property taxes, insurance and utilities. 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 this table. |
Other Components of Income (Expense)
Earnings from Unconsolidated Entities, Net
We recognized net earnings from unconsolidated entities, which are accounted for using the equity method, of $249 million, $206 million and $159 million during 2017, 2016 and 2015, respectively. The earnings we recognize can be impacted by: (i) variances in revenues and expenses of each venture; (ii) the size and occupancy rate of the portfolio of properties owned by each venture; (iii) gains or losses from the dispositions of properties and extinguishment of debt; (iv) our ownership interest in each venture; and (v) fluctuations in foreign currency exchange rates used to translate our share of net earnings to U.S. dollars.
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
The following table details our net interest expense (dollars in millions):
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
Gross interest expense |
|
$ |
328 |
|
|
$ |
383 |
|
|
$ |
394 |
|
Amortization of discount (premium) and debt issuance costs, net |
|
|
1 |
|
|
|
(15 |
) |
|
|
(32 |
) |
Capitalized amounts |
|
|
(55 |
) |
|
|
(65 |
) |
|
|
(61 |
) |
Net interest expense |
|
$ |
274 |
|
|
$ |
303 |
|
|
$ |
301 |
|
Weighted average effective interest rate during the year |
|
|
3.2 |
% |
|
|
3.3 |
% |
|
|
3.3 |
% |
Our overall debt decreased by $1.2 billion from December 31, 2016 to December 31, 2017, primarily from USLF assuming secured debt in conjunction with our contribution of real estate properties. Gross interest expense decreased in 2017, compared to the same period in 2016, principally due to decreased secured debt as a result of the USLF contribution and pay downs, and lower interest rates due to the change in the composition of our senior notes. Gross interest expense decreased in 2016, compared with 2015, principally from lower outstanding debt balances from the repayment of the senior term loan related to the KTR acquisition and lower borrowing costs during 2016.
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 the Liquidity and Capital Resources section 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
During 2017, 2016 and 2015, we recognized gains on dispositions of investments in real estate and revaluation of equity investments upon acquisition of a controlling interest, net of $1.2 billion, $757 million, and $759 million. We utilized the proceeds from both contributions and dispositions to fund our capital investments.
Over the last three years, we contributed properties, generally that we developed, to our co-investment ventures in Europe, Japan and Mexico. In 2017, we also contributed a significant portfolio of operating properties to USLF. We have also sold properties to third parties, primarily from our operating portfolio in the U.S. These dispositions have supported our strategic objective of owning a portfolio of high-quality properties in the most active centers of commerce. We expect to continue to develop and contribute properties to these ventures, depending on market conditions and other factors.
For the three-year period ended December 31, 2017, we recognized a gain in connection with contributions to the extent of the third-party ownership in the venture acquiring the property. Beginning in 2018, we will recognize the entire gain under the new revenue recognition standard, as discussed in Note 2 to the Consolidated Financial Statements.
See Note 4 and 5 to the Consolidated Financial Statements for further information on the gains we recognized.
29
Foreign Currency and Derivative Gains (Losses), Net
The following table details our foreign currency and derivative gains (losses), net included in earnings (in millions):
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
Realized foreign currency and derivative gains (losses): |
|
|
|
|
|
|
|
|
|
|
|
|
Gains on the settlement of unhedged derivative transactions |
|
$ |
13 |
|
|
$ |
3 |
|
|
$ |
15 |
|
Losses on the settlement of transactions |
|
|
(2 |
) |
|
|
(3 |
) |
|
|
(4 |
) |
Total realized foreign currency and derivative gains |
|
|
11 |
|
|
|
- |
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized foreign currency and derivative gains (losses): |
|
|
|
|
|
|
|
|
|
|
|
|
Gains (losses) on the change in fair value of unhedged derivative transactions |
|
|
(74 |
) |
|
|
10 |
|
|
|
16 |
|
Gains (losses) on remeasurement of certain assets and liabilities (1) |
|
|
5 |
|
|
|
(2 |
) |
|
|
(20 |
) |
Gains on embedded derivative, including amortization (settled March 2015) |
|
|
- |
|
|
|
- |
|
|
|
5 |
|
Total unrealized foreign currency and derivative gains (losses) |
|
|
(69 |
) |
|
|
8 |
|
|
|
1 |
|
Total foreign currency and derivative gains (losses), net |
|
$ |
(58 |
) |
|
$ |
8 |
|
|
$ |
12 |
|
(1) |
These gains or losses were primarily related to the remeasurement of assets and liabilities that are denominated in currencies other than the functional currency of the entity, such as short-term intercompany loans between the U.S. parent and certain foreign consolidated subsidiaries, debt and tax receivables and payables. |
See Note 2 to the Consolidated Financial Statements for more information about our foreign currency and derivative policies and Note 16 to the Consolidated Financial Statements for more information about our derivative transactions.
Gains (Losses) on Early Extinguishment of Debt, Net
We repurchased and redeemed portions of several series of senior notes, term loans and secured mortgage debt that resulted in the recognition of losses of $68 million and $86 million in 2017 and 2015, respectively, and a gain of $2 million in 2016. As a result of these transactions, we reduced our effective interest rate and lengthened the maturities of our debt. See Note 9 to the Consolidated Financial Statements for more information regarding our debt repurchases.
Income Tax Expense
We recognize income tax expense related to our taxable REIT subsidiaries and the local, state and foreign jurisdictions in which we operate. Our current income tax expense fluctuates from period to period based primarily on the timing of our taxable income. Deferred income tax expense (benefit) 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 U.S. or in foreign jurisdictions.
The following table summarizes our income tax expense (benefit) (in millions):
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
Current income tax expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
$ |
39 |
|
|
$ |
36 |
|
|
$ |
24 |
|
Income tax expense on dispositions |
|
|
19 |
|
|
|
24 |
|
|
|
- |
|
Income tax expense on dispositions related to acquired tax liabilities |
|
|
2 |
|
|
|
- |
|
|
|
4 |
|
Total current income tax expense |
|
|
60 |
|
|
|
60 |
|
|
|
28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax benefit: |
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit |
|
|
(3 |
) |
|
|
(5 |
) |
|
|
(1 |
) |
Income tax benefit on dispositions related to acquired tax liabilities |
|
|
(2 |
) |
|
|
- |
|
|
|
(4 |
) |
Total deferred income tax benefit |
|
|
(5 |
) |
|
|
(5 |
) |
|
|
(5 |
) |
Total income tax expense |
|
$ |
55 |
|
|
$ |
55 |
|
|
$ |
23 |
|
Our income taxes are discussed in more detail in Note 14 to the Consolidated Financial Statements.
Net Earnings Attributable to Noncontrolling Interests
This amount represents the third-party investors’ share of the earnings generated from consolidated entities in which we do not own 100% of the equity, reduced by the third-party share of fees or promotes payable to us and earned during the period.
30
The following table summarizes net earnings attributable to noncontrolling interests (in millions):
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
Prologis U.S. Logistics Venture (1) |
|
$ |
60 |
|
|
$ |
18 |
|
|
$ |
38 |
|
Prologis North American Industrial Fund (2) |
|
|
3 |
|
|
|
23 |
|
|
|
4 |
|
Other consolidated entities |
|
|
1 |
|
|
|
7 |
|
|
|
3 |
|
Prologis, L.P. |
|
|
64 |
|
|
|
48 |
|
|
|
45 |
|
Limited partners in Prologis, L.P. |
|
|
45 |
|
|
|
35 |
|
|
|
11 |
|
Prologis, Inc. |
|
$ |
109 |
|
|
$ |
83 |
|
|
$ |
56 |
|
(1) |
The third-party share of the promote earned from USLV is included in 2016. |
(2) |
We acquired our remaining partner’s interest in NAIF in 2017. |
See Note 12 to the Consolidated Financial Statements for further information on our noncontrolling interests.
Other Comprehensive Income (Loss)
We recorded net gains of $63 million in 2017 and net losses of $136 million and $209 million in 2016 and 2015, respectively, in the Consolidated Statements of Comprehensive Income related to the foreign currency translation of our foreign subsidiaries into U.S. dollars upon consolidation and translation of our derivative and nonderivative net investment hedges. These net gains and losses were primarily due to the strengthening and weakening of the currencies in which we operate to the U.S. dollar.
During 2017, we recorded unrealized gains of $23 million and during 2016 and 2015, we recorded unrealized losses of $1 million and $17 million, respectively, in our Consolidated Statements of Comprehensive Income, related to the change in fair value of our cash flow hedges and our share of derivatives in our unconsolidated co-investment ventures.
See Note 2 to the Consolidated Financial Statements for more information about our foreign currency and derivative policies and Note 16 to the Consolidated Financial Statements for more information about our derivative transactions and other comprehensive income (loss).
See Note 17 in the Consolidated Financial Statements for further information about environmental liabilities.
LIQUIDITY AND CAPITAL RESOURCES
Overview
We consider our ability to generate cash from operating activities, distributions from our co-investment ventures, contributions and dispositions of properties and 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, Inc. and distributions to the holders of limited partnership units of Prologis, L.P. and our partner in our consolidated co-investment venture, we expect our primary cash needs will consist of the following:
• |
completion of the development and leasing of the properties in our consolidated development portfolio (at December 31, 2017, 85 properties in our development portfolio were 59.8% leased with a current investment of $1.6 billion and a TEI of $2.8 billion when completed and leased, leaving $1.2 billion of additional required funding); |
• |
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; |
• |
repayment of debt and scheduled principal payments of $169 million in 2018; |
• |
additional investments in current unconsolidated entities or new investments in future unconsolidated entities; |
• |
acquisition of operating properties or portfolios of operating properties (depending on market and other conditions) for direct, long-term investment in our consolidated portfolio (this might include acquisitions from our co-investment ventures); and |
31
We expect to fund our cash needs principally from the following sources (subject to market conditions):
• |
available unrestricted cash balances ($447 million at December 31, 2017); |
• |
property operations; |
• |
fees earned for services performed on behalf of the co-investment ventures, including promotes; |
• |
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; |
• |
proceeds from the sale of a portion of our investments in co-investment ventures; |
• |
borrowing capacity under our current credit facility arrangements, other facilities or borrowing arrangements ($3.1 billion available at December 31, 2017); and |
• |
proceeds from the issuance of debt. |
We may also generate proceeds from the issuance of equity securities, subject to market conditions.
Debt
The following table summarizes information about our debt at December 31 (dollars in millions):
|
|
2017 |
|
|
2016 |
|
||
Debt outstanding |
|
$ |
9,413 |
|
|
$ |
10,608 |
|
Weighted average interest rate |
|
|
2.9 |
% |
|
|
3.2 |
% |
Weighted average maturity in months |
|
67 |
|
|
60 |
|
We had the following significant debt activity for 2017, which resulted in lowering our average borrowing rate and extending our maturities:
Credit Facilities |
•In February, we renewed and amended our Japanese yen revolver (“Revolver”) and increased our availability under the Revolver to ¥50.0 billion ($444 million at December 31, 2017).
|
Senior Notes
|
•In June, we issued £500 million ($645 million) of senior notes with an effective interest rate of 2.3%, maturing in June 2029. We used the cash proceeds to redeem $618 million of previously issued senior notes with an average coupon rate of 5.4%.
|
Term Loans
|
•In March, we entered into an unsecured senior term loan agreement (“March 2017 Yen Term Loan”) under which we can draw up to ¥12.0 billion ($107 million at December 31, 2017). In the first quarter, we borrowed ¥12.0 billion ($107 million), causing the March 2017 Yen Term Loan to be fully drawn at December 31, 2017.
•In May, we renewed and amended our existing senior term loan agreement (“2017 Term Loan”) under which loans can be obtained in British pounds sterling, euro, Japanese yen and U.S. dollars in an aggregate amount not to exceed $500 million. We may increase the borrowings up to $1.0 billion, subject to obtaining additional lender commitments. We paid down $1.2 billion and reborrowed $1.5 billion in 2017. The 2017 Term Loan was fully drawn at December 31, 2017.
•In October, we entered into an unsecured senior term loan agreement (“October 2017 Yen Term Loan”) under which we can draw up to ¥10.0 billion ($89 million at December 31, 2017). In the fourth quarter of 2017, we borrowed ¥10.0 billion ($89 million), causing the October 2017 Yen Term Loan to be fully drawn at December 31, 2017.
|
32
At December 31, 2017, we had credit facilities with an aggregate borrowing capacity of $3.5 billion, of which $3.1 billion was available for borrowing.
In January 2018, we issued €400 million ($495 million) senior notes bearing a floating rate of Euribor plus 0.3%, maturing in January 2020 and used the cash proceeds to repay borrowings under our 2017 Term Loan.
Our credit ratings at December 31, 2017, were A3 from Moody’s and A- from S&P, both with stable outlook. These ratings allow us to borrow at an advantageous rate. 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.
At December 31, 2017, we were in compliance with all of our debt covenants. These covenants include customary financial covenants for total debt, encumbered debt and fixed charge coverage ratios.
See Note 9 to the Consolidated Financial Statements for further discussion 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. See the Cash Flow Summary below for more information about our investment activity in our co-investment ventures. For more information on equity commitments for our unconsolidated co-investment ventures, see Note 5 to the Consolidated Financial Statements.
Cash Flow Summary
The following table summarizes our cash flow activity for the years ended December 31 (in millions):
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
Net cash provided by operating activities |
|
$ |
1,687 |
|
|
$ |
1,417 |
|
|
$ |
1,116 |
|
Net cash provided by (used in) investing activities |
|
$ |
543 |
|
|
$ |
1,252 |
|
|
$ |
(4,789 |
) |
Net cash provided by (used in) financing activities |
|
$ |
(2,607 |
) |
|
$ |
(2,125 |
) |
|
$ |
3,596 |
|
Cash Provided by Operating Activities
Cash provided by operating activities, exclusive of changes in receivables and payables, was impacted by the following significant activities:
• |
Real estate operations. We receive the majority of our operating cash through the net revenues of our Real Estate Operations segment. See the Results of Operations section above for further explanation on our Real Estate Operations segment. The revenues from this segment include noncash adjustments for straight-lined rents and amortization of above and below market leases of $81 million, $94 million and $60 million for 2017, 2016 and 2015, respectively. |
• |
Strategic capital. We also generate operating cash through our Strategic Capital segment by providing management services to our unconsolidated co-investment ventures. See the Strategic Capital Results of Operations section above for the key drivers of our strategic capital revenues and expenses. Included in Strategic Capital Revenues is the third-party investors’ share of the total promote revenue, which is recognized in operating activities in the period it is received. |
• |
G&A expenses. We incurred $231 million, $222 million and $217 million of G&A costs in 2017, 2016 and 2015, respectively. |
• |
Equity-based compensation awards. We record equity-based compensation expenses in Rental Expenses in the Real Estate Operations segment, Strategic Capital Expenses in the Strategic Capital segment and G&A expenses. The total amounts expensed were $77 million, $60 million and $54 million in 2017, 2016 and 2015, respectively. |
• |
Distributions from unconsolidated entities. We received $307 million, $287 million and $285 million of distributions from our unconsolidated entities in 2017, 2016 and 2015, respectively. Certain co-investment ventures distribute the total promote (third-party investors’ and our share) and our share is recorded to Investment In and Advances to Unconsolidated Entities, and is recognized in operating activities in the period it is received. |
• |
Cash paid for interest and income taxes. We paid combined amounts for interest and income taxes of $325 million, $352 million and $370 million in 2017, 2016 and 2015, respectively. See Note 9 and Note 14 to the Consolidated Financial Statements for further information on this activity. |
33
Cash Provided by (Used in) Investing Activities
Cash provided by investing activities is primarily driven by proceeds from contributions and dispositions of real estate properties. Cash used in investing activities is principally driven by our investments in real estate development, acquisitions and capital expenditures. See Note 4 to the Consolidated Financial Statements for further information on these real estate activities. In addition, the following significant transactions also impacted our cash provided by or used in investing activities:
|
• |
Real estate development. We invested $1.6 billion during both 2017 and 2016 and $1.3 billion during 2015 in real estate development and leasing costs for first generation space. We have 63 properties under development and 22 properties that were completed but not stabilized at December 31, 2017, and we expect to continue to develop new properties as the opportunities arise. |
• |
Real estate acquisitions. In 2017, we acquired total real estate of $443 million, which included 861 acres of land and four operating properties. In 2016, we acquired total real estate of $459 million, which included 776 acres of land and nine operating properties. In 2015, we acquired total real estate of $890 million, which included 690 acres of land and 52 operating properties, excluding the KTR transaction. |
• |
KTR transaction. We acquired the real estate assets of KTR for a net cash purchase price of $4.8 billion through our consolidated co-investment venture USLV in 2015. See Note 3 to the Consolidated Financial Statements for more detail on the transaction. |
• |
Investments in and advances to. We invested cash in our unconsolidated co-investment ventures and other ventures, which represented our proportionate share of $250 million, $266 million and $474 million in 2017, 2016 and 2015, respectively. The ventures use the funds for the acquisition of operating properties, development and repayment of debt. See Note 5 to the Consolidated Financial Statements for more detail on our unconsolidated co-investment ventures. |
• |
Acquisition of a controlling interest. We paid net cash of $375 million to acquire a controlling interest in certain joint ventures in Brazil in 2017. See Note 4 to the Consolidated Financial Statements for more detail on this transaction. |
• |
Return of investment. We received distributions from unconsolidated co-investment ventures and other ventures as a return of investment of $209 million, $777 million and $29 million during 2017, 2016 and 2015, respectively. Included in this amount for 2017 was $125 million from property dispositions within our unconsolidated co-investment ventures and $84 million from the disposition of our investment in ELV. Included in this amount for 2016 was $611 million from the redemption of a portion of our investments in PTELF and USLF and the remaining amount was from property dispositions within our unconsolidated co-investment ventures, primarily $68 million from Prologis European Logistics Partners Sàrl. |
• |
Repayment of notes receivable. We received $32 million and $203 million for the payment of notes receivable received in connection with dispositions of real estate to third parties in 2017 and 2016, respectively. See Note 7 to the Consolidated Financial Statements for further information about notes receivable. |
• |
Settlement of net investment hedges. We received net proceeds of $2 million, $80 million and $128 million from the settlement of net investment hedges during 2017, 2016 and 2015, respectively. See Note 16 to the Consolidated Financial Statements for further information on our derivative activity. |
Cash Provided by (Used in) Financing Activities
Cash provided by financing activities is primarily driven by proceeds from the issuance of debt. Cash used in financing activities is primarily driven by dividends paid on common and preferred units, noncontrolling interest distributions and payments of debt and credit facilities. In addition, the following significant transactions also impacted our cash provided by or used in financing activities:
• |
Issuance of common stock. In addition to the net proceeds generated from the issuance of common stock under our incentive plans, we also generated net proceeds of $72 million from the issuance of 1.7 million shares of common stock under our at-the-market program in 2015. |
• |
Noncontrolling interests contributions. Our partner in USLV made contributions of $240 million for the pay down of secured mortgage debt in 2017 and $2.4 billion in 2015 primarily for the KTR transaction. |
• |
Noncontrolling interests distributions. Our consolidated ventures distributed $208 million, $344 million and $216 million to various noncontrolling interests in 2017, 2016 and 2015, respectively, primarily due to operating results and dispositions of real estate. Included in these amounts were $37 million in both 2017 and 2016, and $16 million in 2015 of distributions to common limited partnership unitholders of Prologis, L.P. |
• |
Purchase of noncontrolling interests. We paid net cash of $710 million to acquire our partner’s interest in NAIF and $80 million to acquire our partner’s interest in the Brazil Fund in 2017. |
34
• |
Other debt activity. Our repurchase and payments of debt and proceeds from issuance of debt consisted of the following activity (in millions): |
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Repurchase and payments of debt (including extinguishment costs) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Regularly scheduled debt principal payments and payments at maturity |
|
$ |
238 |
|
|
$ |
233 |
|
|
$ |
128 |
|
|
Senior notes |
|
|
1,567 |
|
|
|
- |
|
|
|
789 |
|
|
Term loans |
|
|
1,236 |
|
|
|
1,612 |
|
|
|
1,643 |
|
|
Secured mortgage debt |
|
|
538 |
|
|
|
457 |
|
|
|
596 |
|
|
Total repurchase and payments of debt (including extinguishment costs) |
|
$ |
3,579 |
|
|
$ |
2,302 |
|
|
$ |
3,156 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior notes |
|
$ |
645 |
|
|
$ |
- |
|
|
$ |
1,524 |
|
|
Term loans |
|
|
1,735 |
|
|
|
973 |
|
|
|
3,195 |
|
|
Secured mortgage debt |
|
|
40 |
|
|
|
397 |
|
|
|
663 |
|
|
Total proceeds from issuance of debt |
|
$ |
2,420 |
|
|
$ |
1,370 |
|
|
$ |
5,382 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Note 9 to the Consolidated Financial Statements for more detail on debt.
OFF-BALANCE SHEET ARRANGEMENTS
Unconsolidated Co-Investment Venture Debt
We had investments in and advances to our unconsolidated co-investment ventures, at December 31, 2017, of $5.3 billion. The ventures listed below had total third-party debt of $8.1 billion at December 31, 2017. Certain of our ventures do not have third-party debt and are therefore excluded. This debt is non-recourse to Prologis or the other investors in the co-investment ventures, matures and bears interest as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Gross |
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
There- |
|
|
Disc/ |
|
|
|
|
|
|
Average |
|
|
Book |
|
|
Ownership |
|
|||||
|
2018 |
|
|
2019 |
|
|
2020 |
|
|
after |
|
|
(Prem) |
|
|
Total |
|
|
Interest Rate |
|
|
Value |
|
|
% |
|
|||||||||
Prologis Targeted U.S. Logistics Fund |
$ |
163 |
|
|
$ |
14 |
|
|
$ |
490 |
|
|
$ |
1,626 |
|
|
$ |
19 |
|
|
$ |
2,312 |
|
|
3.9% |
|
|
$ |
7,543 |
|
|
28.2% |
|
||
FIBRA Prologis |
|
72 |
|
|
|
254 |
|
|
|
175 |
|
|
|
254 |
|
|
|
1 |
|
|
|
756 |
|
|
4.0% |
|
|
|
2,052 |
|
|
46.3% |
|
||
Prologis European Logistics Fund |
|
365 |
|
|
|
289 |
|
|
|
425 |
|
|
|
1,401 |
|
|
|
(5 |
) |
|
|
2,475 |
|
|
3.1% |
|
|
|
9,565 |
|
|
26.3% |
|
||
Prologis UK Logistics Venture |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
208 |
|
|
|
- |
|
|
|
208 |
|
|
3.3% |
|
|
|
285 |
|
|
15.0% |
|
||
Nippon Prologis REIT |
|
113 |
|
|
|
27 |
|
|
|
- |
|
|
|
1,565 |
|
|
|
- |
|
|
|
1,705 |
|
|
0.7% |
|
|
|
4,625 |
|
|
15.1% |
|
||
Prologis China Logistics Venture |
|
1 |
|
|
|
325 |
|
|
|
152 |
|
|
|
145 |
|
|
|
- |
|
|
|
623 |
|
|
5.0% |
|
|
|
731 |
|
|
15.0% |
|
||
Total |
$ |
714 |
|
|
$ |
909 |
|
|
$ |
1,242 |
|
|
$ |
5,199 |
|
|
$ |
15 |
|
|
$ |
8,079 |
|
|
|
|
|
|
$ |
24,801 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2017, we did not guarantee any third-party debt of the unconsolidated co-investment ventures. In our role as the manager or sponsor, we work with the co-investment ventures to maintain sufficient liquidity and 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 our ventures also have credit facilities, or unencumbered properties, both of which may be used to obtain funds.
35
Long-Term Contractual Obligations
The following table summarizes our long-term contractual obligations at December 31, 2017 (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 |
$ |
169 |
|
|
$ |
1,680 |
|
|
$ |
2,151 |
|
|
$ |
5,152 |
|
|
$ |
9,152 |
|
Interest on debt obligations, other than credit facilities |
|
249 |
|
|
|
435 |
|
|
|
355 |
|
|
|
351 |
|
|
|
1,390 |
|
Unfunded commitments on the development portfolio (1) |
|
1,121 |
|
|
|
59 |
|
|
|
- |
|
|
|
- |
|
|
|
1,180 |
|
Operating lease payments |
|
34 |
|
|
|
62 |
|
|
|
51 |
|
|
|
311 |
|
|
|
458 |
|
Total |
$ |
1,573 |
|
|
$ |
2,236 |
|
|
$ |
2,557 |
|
|
$ |
5,814 |
|
|
$ |
12,180 |
|
(1) |
We had properties in our consolidated development portfolio (completed and under development) at December 31, 2017, with a TEI of $2.8 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 expect to incur as the property is leased. |
Distribution and Dividend Requirements
Our dividend policy on our common stock is to distribute a percentage of our cash flow to ensure that we will meet the dividend requirements of the Internal Revenue Code, relative to maintaining our REIT status, while still allowing us to retain cash to fund capital improvements and other investment activities.
Under the Internal Revenue Code, REITs may be subject to certain federal income and excise taxes on our undistributed taxable income. We do not expect the Tax Cuts and Jobs Act, enacted on December 22, 2017, to modify our current distribution policy.
In 2017, we paid quarterly cash dividends of $0.44 per common share. In 2016, we paid quarterly cash dividends of $0.42 per common share. Our future common stock dividends, if and as declared, may vary and will be determined by the Board upon the circumstances prevailing at the time, including our financial condition, operating results and REIT distribution requirements, and may be adjusted at the discretion of the Board during the year.
We make distributions on the common limited partnership units outstanding at the same per unit amount as our common stock dividend. The Class A Units in the OP are entitled to a quarterly distribution equal to $0.64665 per unit so long as the common units receive a quarterly distribution of at least $0.40 per unit. We paid a quarterly distribution of $0.64665 per Class A Unit in 2017 and 2016.
At December 31, 2017, we had 1.4 million shares of Series Q preferred stock outstanding with a liquidation preference of $50 per share. 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 or disposition of individual properties or portfolios of properties.
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 including whether the entity is a variable interest entity and whether we are the primary beneficiary. We consider the substantive terms of the arrangement to
36
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 accounted for using the equity method. Our ability to correctly assess our influence or control over an entity affects the presentation of these investments in the Consolidated Financial Statements.
Revenue Recognition
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.
Acquisitions
Upon acquisition of real estate that constitutes a business or an asset, which includes acquiring a controlling interest in an entity previously accounted for using the equity method of accounting, we allocate the purchase price to the various components of the acquisition based on the fair value of each component. The components typically include buildings, land, intangible assets related to the acquired leases, debt, deferred tax liabilities and other assumed assets and liabilities. In an acquisition of multiple properties, we 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 on 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 for acquisitions that qualify as a business. In the case of an acquisition of a controlling interest in an entity previously accounted for under the equity method (a step-acquisition under the business combination rules), 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. The use of different assumptions in the allocation of the purchase price of the acquired properties and liabilities assumed could affect the timing of recognition of the related revenues and expenses.
Income Taxes
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.
Recoverability of Real Estate 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. 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 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 property. Assumptions and estimates used in the recoverability analyses for future cash flows, including market rents, 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.
Capitalization of Costs
During the land development and construction periods (including renovating and rehabilitating), we capitalize interest, 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. The ability to specifically
37
identify internal personnel costs associated with development and the determination of when a development project is substantially complete and capitalization must cease, requires a high degree of judgment and failure to accurately assess these costs and timing could result in the misstatement of asset values and expenses. Capitalized costs are included in the investment basis of real estate assets.
See Note 2 to the Consolidated Financial Statements.
FUNDS FROM OPERATIONS ATTRIBUTABLE TO COMMON STOCKHOLDERS/UNITHOLDERS
FFO is a non-GAAP financial measure that is commonly used in the real estate industry. The most directly comparable GAAP measure to FFO is net earnings.
The National Association of Real Estate Investment Trusts (“NAREIT”) defines FFO as 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 also exclude the gains on revaluation of equity investments upon acquisition of a controlling interest and the gain recognized from a partial sale of our investment, as these are similar to gains from the sales of previously depreciated properties. We exclude similar adjustments from our unconsolidated entities and the third parties’ share of our consolidated co-investment ventures.
Our FFO Measures
Our FFO measures begin with NAREIT’s definition and we make certain adjustments to reflect our business and the way that management plans and executes our business strategy. While not infrequent or unusual, the additional items we adjust for in calculating FFO, as modified by Prologis, and Core FFO, both as defined below, are subject to significant fluctuations from period to period. Although these items may have 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. These items have 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 calculate our FFO measures, as defined below, based on our proportionate ownership share of both our unconsolidated and consolidated ventures. We reflect our share of our FFO measures for unconsolidated ventures by applying our average ownership percentage for the period to the applicable reconciling items on an entity by entity basis. We reflect our share for consolidated ventures in which we do not own 100% of the equity by adjusting our FFO measures to remove the noncontrolling interests share of the applicable reconciling items based on our average ownership percentage for the applicable periods.
These FFO measures are used by management as supplemental financial measures of operating performance and we believe that it is important that stockholders, potential investors and financial analysts understand the measures management uses. 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.
We analyze our operating performance primarily by the rental revenues of our real estate and the revenues from 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.
FFO, as modified by Prologis attributable to common stockholders and unitholders (“FFO, as modified by Prologis”)
To arrive at FFO, as modified by Prologis, we adjust the NAREIT defined FFO measure to exclude the impact of foreign currency related items and deferred tax, specifically:
• |
deferred income tax benefits and deferred income tax expenses recognized by our subsidiaries; |
• |
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 earnings that is excluded from our defined FFO measure; |
• |
unhedged foreign currency exchange gains and losses resulting from debt transactions between us and our foreign consolidated subsidiaries and our foreign unconsolidated entities; |
• |
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 and unconsolidated entities; and |
• |
mark-to-market adjustments associated with derivative financial instruments. |
38
We use FFO, as modified by Prologis, so that management, analysts and investors are able to evaluate our performance against other REITs that do not have similar operations or operations in jurisdictions outside the U.S.
Core FFO attributable to common stockholders and unitholders (“Core FFO”)
In addition to FFO, as modified by Prologis, we also use Core FFO. To arrive at Core FFO, we adjust FFO, as modified by Prologis, to exclude the following recurring and nonrecurring items that we recognized directly in FFO, as modified by Prologis:
• |
gains or losses from the disposition of land and development properties that were developed with the intent to contribute or sell; |
• |
income tax expense related to the sale of investments in real estate and third-party acquisition costs related to the acquisition of real estate; |
• |
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; |
• |
gains or losses from the early extinguishment of debt and redemption and repurchase of preferred stock; and |
• |
expenses related to natural disasters. |
We use Core FFO, including by segment and region, to: (i) assess our operating performance as compared to other real estate companies; (ii) evaluate our performance and the performance of our properties in comparison with expected results and results of previous periods; (iii) evaluate the performance of our management; (iv) budget and forecast future results to assist in the allocation of resources; (v) provide guidance to the financial markets to understand our expected operating performance; and (vi) evaluate how a specific potential investment will impact our future results.
Limitations on the use of our FFO measures
While we believe our modified 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 the limitations are:
• |
The current income tax expenses and acquisition costs that are excluded from our modified FFO measures represent the taxes and transaction costs that are payable. |
• |
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. Furthermore, the amortization of capital expenditures and leasing costs necessary to maintain the operating performance of logistics facilities are not reflected in FFO. |
• |
Gains or losses from non-development property 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 disposed properties arising from changes in market conditions. |
• |
The deferred income tax benefits and expenses that are excluded from our modified 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 modified FFO measures do not currently reflect any income or expense that may result from such settlement. |
• |
The foreign currency exchange gains and losses that are excluded from our modified 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. |
• |
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. |
• |
The natural disaster expenses that we exclude from Core FFO are costs that we have incurred. |
39
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 modified FFO measures to our net earnings computed under GAAP as follows (in millions).
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
FFO |
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of net earnings to FFO measures: |
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings attributable to common stockholders |
|
$ |
1,642 |
|
|
$ |
1,203 |
|
|
$ |
863 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add (deduct) NAREIT defined adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
Real estate related depreciation and amortization |
|
|
848 |
|
|
|
900 |
|
|
|
855 |
|
Gains on dispositions of investments in real estate properties and revaluation of equity investments upon acquisition of a controlling interest, net |
|
|
(855 |
) |
|
|
(423 |
) |
|
|
(501 |
) |
Reconciling items related to noncontrolling interests |
|
|
(39 |
) |
|
|
(105 |
) |
|
|
(78 |
) |
Our share of reconciling items included in earnings from unconsolidated entities |
|
|
147 |
|
|
|
162 |
|
|
|
185 |
|
NAREIT defined FFO |
|
|
1,743 |
|
|
|
1,737 |
|
|
|
1,324 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add (deduct) our modified adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized foreign currency and derivative losses (gains), net |
|
|
69 |
|
|
|
(8 |
) |
|
|
1 |
|
Deferred income tax benefit |
|
|
(5 |
) |
|
|
(5 |
) |
|
|
(5 |
) |
Current income tax expense related to acquired tax liabilities |
|
|
2 |
|
|
|
- |
|
|
|
4 |
|
Reconciling items related to noncontrolling interests |
|
|
- |
|
|
|
1 |
|
|
|
(1 |
) |
Our share of reconciling items included in earnings from unconsolidated entities |
|
|
(14 |
) |
|
|
(23 |
) |
|
|
(14 |
) |
FFO, as modified by Prologis |
|
|
1,795 |
|
|
|
1,702 |
|
|
|
1,309 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to arrive at Core FFO: |
|
|
|
|
|
|
|
|
|
|
|
|
Gains on dispositions of development properties and land, net |
|
|
(328 |
) |
|
|
(334 |
) |
|
|
(258 |
) |
Current income tax expense on dispositions |
|
|
19 |
|
|
|
24 |
|
|
|
- |
|
Acquisition expenses |
|
|
- |
|
|
|
4 |
|
|
|
47 |
|
Losses (gains) on early extinguishment of debt and repurchase of preferred stock, net |
|
|
72 |
|
|
|
(2 |
) |
|
|
86 |
|
Reconciling items related to noncontrolling interests |
|
|
- |
|
|
|
4 |
|
|
|
(11 |
) |
Our share of reconciling items included in earnings from unconsolidated entities |
|
|
(7 |
) |
|
|
2 |
|
|
|
8 |
|
Core FFO |
|
$ |
1,551 |
|
|
$ |
1,400 |
|
|
$ |
1,181 |
|
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to the impact of foreign exchange-related variability and earnings volatility on our foreign investments and interest rate changes. 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 may be unable to refinance our debt or our cash flow may be insufficient to make required debt payments. See also Notes 2 and 16 in the Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data 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 foreign currency exchange rates or interest rates at December 31, 2017. The results of the sensitivity analysis are summarized in the following sections. The sensitivity analysis is of limited predictive value. As a result, revenues and expenses, as well as 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.
40
We are exposed to foreign currency exchange variability related to investments in and earnings from our foreign investments. Foreign currency market risk is the possibility that our results of operations or financial position could be better or worse than planned because of changes in foreign currency exchange rates. We primarily hedge our foreign currency risk by borrowing in the currencies in which we invest. Generally, we borrow in the functional currency of the consolidated subsidiaries but we also borrow in the OP and may designate this borrowing as a nonderivative financial instrument. We also hedge our foreign currency risk by designating derivative financial instruments as net investment hedges, as these amounts offset the translation adjustments on the underlying net assets of our foreign investments.
At December 31, 2017, after consideration of our nonderivative and derivative financial instruments, we had net equity of approximately $1.0 billion denominated in a currency other than the U.S. dollar representing 5.6% of total net equity. Based on our sensitivity analysis, a 10% strengthening of the U.S. dollar against other currencies would cause a reduction of $105 million to our net equity.
At December 31, 2017, we had foreign currency forward contracts, which were designated and qualify as net investment hedges, with an aggregate notional amount of $99 million to hedge a portion of our investments in Canada. On the basis of our sensitivity analysis, a weakening of the U.S. dollar against the Canadian dollar by 10% would result in a $10 million negative change in our cash flows on settlement of these contracts. In addition, we also have British pound sterling, Canadian dollar, euro and Japanese yen forward and option contracts, which were not designated as hedges, and have an aggregate notional amount of $574 million to mitigate risk associated with the translation of the projected earnings of our subsidiaries in Canada, Europe and Japan. A weakening of the U.S. dollar against these currencies by 10% would result in a $57 million negative change in our net income and cash flows on settlement of these contracts.
Interest Rate Risk
We also are exposed to the impact of interest rate changes on future earnings and cash flows. At December 31, 2017, we had $2.3 billion of variable rate debt outstanding, of which $1.9 billion was term loans, $317 million was credit facilities and $50 million was secured mortgage debt. At December 31, 2017, we had interest rate swap agreements to fix $297 million (CAD $372 million) of our Canadian term loan. On the basis of our sensitivity analysis, a 10% adverse change in interest rates based on our average outstanding variable rate debt balances not subject to interest rate swap agreements during the period would result in additional annual interest expense of $2 million, which equates to a change in interest rates of 12 basis points.
ITEM 8. Financial Statements and Supplementary Data
The Consolidated Balance Sheets of Prologis, Inc. and Prologis, L.P. at December 31, 2017 and 2016, the Consolidated Statements of Income of Prologis, Inc. and Prologis, L.P., the Consolidated Statements of Comprehensive Income of Prologis, Inc. and Prologis, L.P., the Consolidated Statements of Equity of Prologis, Inc., the Consolidated Statements of Capital of Prologis, L.P. and the Consolidated Statements Cash Flows of Prologis, Inc. and Prologis, L.P. for each of the years in the three-year period ended December 31, 2017, 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 are presented in Note 20 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 (The Parent)
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 Securities and Exchange Act of 1934 (the “Exchange Act”)) at December 31, 2017. 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, 2017, 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, 2017, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
41
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, 2017, based on the criteria described in “Internal Control — Integrated Framework” (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management determined that, at December 31, 2017, the internal control over financial reporting was effective.
Our internal control over financial reporting at December 31, 2017, has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their attestation report which is included herein.
Limitations of the Effectiveness of Controls
Management’s assessment included an evaluation of the design of the internal control over financial reporting and testing of the operational effectiveness of the internal control over financial reporting. The internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Controls and Procedures (The OP)
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, 2017. 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, 2017, 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, 2017, 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, 2017, based on the criteria described in “Internal Control — Integrated Framework” (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management determined that, at December 31, 2017, 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.
None.
42
ITEM 10. Directors, Executive Officers and Corporate Governance
The information required by this item is incorporated herein by reference to, including relevant sections in our 2018 Proxy Statement, under the captions entitled Board of Directors and Corporate Governance; Executive Officers; Executive Compensation; Director Compensation; Security Ownership; Equity Compensation Plans and Additional Information 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 relevant sections in our 2018 Proxy Statement, under the captions entitled Board of Directors and Corporate Governance; Executive Officers; Executive Compensation and Director Compensation 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 relevant sections in our 2018 Proxy Statement, under the captions entitled Security Ownership and Equity Compensation Plans 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 relevant sections in our 2018 Proxy Statement, under the caption entitled Board of Directors and Corporate Governance or will be provided in an amendment filed on Form 10-K/A.
ITEM 14. Principal Accounting Fees and Services
The information required by this item is incorporated herein by reference to the relevant sections in our 2018 Proxy Statement, under the caption entitled Audit Matters or will be provided in an amendment filed on Form 10-K/A.
ITEM 15. Exhibits, Financial Statements and Schedules
The following documents are filed as a part of this report:
(a) Financial Statements and Schedules:
1. Financial Statements:
See Index to the 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 the Exhibits on pages 104 to 110 of this report, which is incorporated herein by reference.
(c) Financial Statements: See Index to the Consolidated Financial Statements and Schedule III on page 44 of this report, which is incorporated by reference.
Not Applicable.
43
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE III
|
Page Number |
Prologis, Inc. and Prologis, L.P.: |
|
45 |
|
Prologis, Inc.: |
|
48 |
|
49 |
|
50 |
|
51 |
|
52 |
|
Prologis, L.P.: |
|
53 |
|
54 |
|
55 |
|
56 |
|
57 |
|
Prologis, Inc. and Prologis, L.P.: |
|
58 |
|
58 |
|
58 |
|
65 |
|
66 |
|
68 |
|
71 |
|
71 |
|
71 |
|
72 |
|
75 |
|
77 |
|
77 |
|
78 |
|
81 |
|
82 |
|
84 |
|
87 |
|
88 |
|
90 |
|
91 |
|
93 |
44
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
Prologis, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Prologis, Inc. and subsidiaries (the Company) as of December 31, 2017 and 2016, the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the years in the three-year period ended December 31, 2017, and the related notes and financial statement schedule III (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 15, 2018 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Adoption of a New Accounting Pronouncement
As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for evaluating whether a transaction qualifies as an acquisition of an asset or a business in 2017 due to the adoption of Accounting Standards Update No. 2017-01.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ KPMG LLP
We have served as the Company’s auditor since 2002.
Denver, Colorado
February 15, 2018
45
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Partners
Prologis, L.P.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Prologis, L.P. and subsidiaries (the Company) as of December 31, 2017 and 2016, the related consolidated statements of income, comprehensive income, capital, and cash flows for each of the years in the three-year period ended December 31, 2017, and the related notes to the consolidated financial statements and financial statement schedule III (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.
Adoption of a New Accounting Pronouncement
As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for evaluating whether a transaction qualifies as an acquisition of an asset or a business in 2017 due to the adoption of Accounting Standards Update No. 2017-01.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ KPMG LLP
We have served as the Company’s auditor since 2002.
Denver, Colorado
February 15, 2018
46
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
Prologis, Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited Prologis, Inc. and subsidiaries (the Company) internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2017 and 2016, the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the years in the three-year period ended December 31, 2017, and the related notes and financial statement schedule III (collectively, the consolidated financial statements), and our report dated February 15, 2018 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’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 the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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 of internal control over financial reporting 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.
Definition and Limitations of Internal Control Over Financial Reporting
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.
/s/ KPMG LLP
Denver, Colorado
February 15, 2018
47
(In thousands, except per share data)
|
December 31, |
|
|||||
|
2017 |
|
|
2016 |
|
||
ASSETS |
|
|
|
|
|
|
|
Investments in real estate properties |
$ |
25,838,644 |
|
|
$ |
27,119,330 |
|
Less accumulated depreciation |
|
4,059,348 |
|
|
|
3,758,372 |
|
Net investments in real estate properties |
|
21,779,296 |
|
|
|
23,360,958 |
|
Investments in and advances to unconsolidated entities |
|
5,496,450 |
|
|
|
4,230,429 |
|
Assets held for sale or contribution |
|
342,060 |
|
|
|
322,139 |
|
Notes receivable backed by real estate |
|
34,260 |
|
|
|
32,100 |
|
Net investments in real estate |
|
27,652,066 |
|
|
|
27,945,626 |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
447,046 |
|
|
|
807,316 |
|
Other assets |
|
1,381,963 |
|
|
|
1,496,990 |
|
Total assets |
$ |
29,481,075 |
|
|
$ |
30,249,932 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY |
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
Debt |
$ |
9,412,631 |
|
|
$ |
10,608,294 |
|
Accounts payable and accrued expenses |
|
702,804 |
|
|
|
556,179 |
|
Other liabilities |
|
659,899 |
|
|
|
627,319 |
|
Total liabilities |
|
10,775,334 |
|
|
|
11,791,792 |
|
|
|
|
|
|
|
|
|
Equity: |
|
|
|
|
|
|
|
Prologis, Inc. stockholders’ equity: |
|
|
|
|
|
|
|
Series Q preferred stock at stated liquidation preference of $50 per share; $0.01 par value; 1,379 and 1,565 shares issued and outstanding and 100,000 preferred shares authorized at December 31, 2017, and 2016, respectively |
|
68,948 |
|
|
|
78,235 |
|
Common stock; $0.01 par value; 532,186 shares and 528,671 shares issued and outstanding at December 31, 2017, and 2016, respectively |
|
5,322 |
|
|
|
5,287 |
|
Additional paid-in capital |
|
19,363,007 |
|
|
|
19,455,039 |
|
Accumulated other comprehensive loss |
|
(901,658 |
) |
|
|
(937,473 |
) |
Distributions in excess of net earnings |
|
(2,904,461 |
) |
|
|
(3,610,007 |
) |
Total Prologis, Inc. stockholders’ equity |
|
15,631,158 |
|
|
|
14,991,081 |
|
Noncontrolling interests |
|
3,074,583 |
|
|
|
3,467,059 |
|
Total equity |
|
18,705,741 |
|
|
|
18,458,140 |
|
Total liabilities and equity |
$ |
29,481,075 |
|
|
$ |
30,249,932 |
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
48
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
|
|
Year Ended December 31, |
|
|||||||||
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Rental |
|
$ |
1,737,839 |
|
|
$ |
1,734,844 |
|
|
$ |
1,536,117 |
|
Rental recoveries |
|
|
487,302 |
|
|
|
485,565 |
|
|
|
437,070 |
|
Strategic capital |
|
|
373,889 |
|
|
|
303,562 |
|
|
|
217,829 |
|
Development management and other |
|
|
19,104 |
|
|
|
9,164 |
|
|
|
6,058 |
|
Total revenues |
|
|
2,618,134 |
|
|
|
2,533,135 |
|
|
|
2,197,074 |
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Rental |
|
|
569,523 |
|
|
|
568,870 |
|
|
|
544,182 |
|
Strategic capital |
|
|
155,141 |
|
|
|
128,506 |
|
|
|
108,422 |
|
General and administrative |
|
|
231,059 |
|
|
|
222,067 |
|
|
|
217,227 |
|
Depreciation and amortization |
|
|
879,140 |
|
|
|
930,985 |
|
|
|
880,373 |
|
Other |
|
|
12,205 |
|
|
|
14,329 |
|
|
|
66,698 |
|
Total expenses |
|
|
1,847,068 |
|
|
|
1,864,757 |
|
|
|
1,816,902 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
771,066 |
|
|
|
668,378 |
|
|
|
380,172 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from unconsolidated entities, net |
|
|
248,567 |
|
|
|
206,307 |
|
|
|
159,262 |
|
Interest expense |
|
|
(274,486 |
) |
|
|
(303,146 |
) |
|
|
(301,363 |
) |
Interest and other income, net |
|
|
13,731 |
|
|
|
8,101 |
|
|
|
25,484 |
|
Gains on dispositions of investments in real estate and revaluation of equity investments upon acquisition of a controlling interest, net |
|
|
1,182,965 |
|
|
|
757,398 |
|
|
|
758,887 |
|
Foreign currency and derivative gains (losses), net |
|
|
(57,896 |
) |
|
|
7,582 |
|
|
|
12,466 |
|
Gains (losses) on early extinguishment of debt, net |
|
|
(68,379 |
) |
|
|
2,484 |
|
|
|
(86,303 |
) |
Total other income |
|
|
1,044,502 |
|
|
|
678,726 |
|
|
|
568,433 |
|
Earnings before income taxes |
|
|
1,815,568 |
|
|
|
1,347,104 |
|
|
|
948,605 |
|
Total income tax expense |
|
|
54,609 |
|
|
|
54,564 |
|
|
|
23,090 |
|
Consolidated net earnings |
|
|
1,760,959 |
|
|
|
1,292,540 |
|
|
|
925,515 |
|
Less net earnings attributable to noncontrolling interests |
|
|
108,634 |
|
|
|
82,608 |
|
|
|
56,076 |
|
Net earnings attributable to controlling interests |
|
|
1,652,325 |
|
|
|
1,209,932 |
|
|
|
869,439 |
|
Less preferred stock dividends |
|
|
6,499 |
|
|
|
6,714 |
|
|
|
6,651 |
|
Loss on preferred stock repurchase |
|
|
3,895 |
|
|
|
- |
|
|
|
- |
|
Net earnings attributable to common stockholders |
|
$ |
1,641,931 |
|
|
$ |
1,203,218 |
|
|
$ |
862,788 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding – Basic |
|
|
530,400 |
|
|
|
526,103 |
|
|
|
521,241 |
|
Weighted average common shares outstanding – Diluted |
|
|
552,300 |
|
|
|
546,666 |
|
|
|
533,944 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share attributable to common stockholders – Basic |
|
$ |
3.10 |
|
|
$ |
2.29 |
|
|
$ |
1.66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share attributable to common stockholders – Diluted |
|
$ |
3.06 |
|
|
$ |
2.27 |
|
|
$ |
1.64 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends per common share |
|
$ |
1.76 |
|
|
$ |
1.68 |
|
|
$ |
1.52 |
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
49
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
|
|
Year Ended December 31, |
|
|||||||||
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
Consolidated net earnings |
|
$ |
1,760,959 |
|
|
$ |
1,292,540 |
|
|
$ |
925,515 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation gains (losses), net |
|
|
63,455 |
|
|
|
(135,958 |
) |
|
|
(208,901 |
) |
Unrealized gains (losses) on derivative contracts, net |
|
|
22,591 |
|
|
|
(1,349 |
) |
|
|
(17,457 |
) |
Comprehensive income |
|
|
1,847,005 |
|
|
|
1,155,233 |
|
|
|
699,157 |
|
Net earnings attributable to noncontrolling interests |
|
|
(108,634 |
) |
|
|
(82,608 |
) |
|
|
(56,076 |
) |
Other comprehensive loss (gain) attributable to noncontrolling interests |
|
|
(50,231 |
) |
|
|
(8,737 |
) |
|
|
35,266 |
|
Comprehensive income attributable to common stockholders |
|
$ |
1,688,140 |
|
|
$ |
1,063,888 |
|
|
$ |
678,347 |
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
50
CONSOLIDATED STATEMENTS OF EQUITY
(In thousands)
|
|
|
|
|
Common Stock |
|
|
|
|
|
|
Accumulated |
|
|
Distributions |
|
|
|
|
|
|
|
|
|
|||||||
|
|
|
|
|
Number |
|
|
|
|
|
|
Additional |
|
|
Other |
|
|
in Excess of |
|
|
Non- |
|
|
|
|
|
|||||
|
Preferred |
|
|
of |
|
|
Par |
|
|
Paid-in |
|
|
Comprehensive |
|
|
Net |
|
|
controlling |
|
|
Total |
|
||||||||
|
Stock |
|
|
Shares |
|
|
Value |
|
|
Capital |
|
|
Income (Loss) |
|
|
Earnings |
|
|
Interests |
|
|
Equity |
|
||||||||
Balance at January 1, 2015 |
$ |
78,235 |
|
|
|
509,498 |
|
|
$ |
5,095 |
|
|
$ |
18,467,009 |
|
|
$ |
(600,337 |
) |
|
$ |
(3,974,493 |
) |
|
$ |
1,208,090 |
|
|
$ |
15,183,599 |
|
Consolidated net earnings |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
869,439 |
|
|
|
56,076 |
|
|
|
925,515 |
|
Effect of equity compensation plans |
|
- |
|
|
|
1,475 |
|
|
|
15 |
|
|
|
57,454 |
|
|
|
- |
|
|
|
- |
|
|
|
26,234 |
|
|
|
83,703 |
|
Issuance of stock in at-the-market program, net of issuance costs |
|
- |
|
|
|
1,662 |
|
|
|
16 |
|
|
|
71,532 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
71,548 |
|
Issuance of stock upon conversion of exchangeable debt |
|
- |
|
|
|
11,872 |
|
|
|
119 |
|
|
|
502,613 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
502,732 |
|
Issuance of units related to KTR transaction |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
181,170 |
|
|
|
181,170 |
|
Issuance of units related to other acquisitions |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
371,570 |
|
|
|
371,570 |
|
Capital contributions |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,355,596 |
|
|
|
2,355,596 |
|
Foreign currency translation losses, net |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(173,852 |
) |
|
|
- |
|
|
|
(35,049 |
) |
|
|
(208,901 |
) |
Unrealized losses on derivative contracts, net |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(17,240 |
) |
|
|
- |
|
|
|
(217 |
) |
|
|
(17,457 |
) |
Reallocation of equity |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
202,812 |
|
|
|
- |
|
|
|
(15,894 |
) |
|
|
(186,918 |
) |
|
|
- |
|
Distributions and other |
|
- |
|
|
|
5 |
|
|
|
- |
|
|
|
947 |
|
|
|
- |
|
|
|
(805,535 |
) |
|
|
(223,651 |
) |
|
|
(1,028,239 |
) |
Balance at December 31, 2015 |
$ |
78,235 |
|
|
|
524,512 |
|
|
$ |
5,245 |
|
|
$ |
19,302,367 |
|
|
$ |
(791,429 |
) |
|
$ |
(3,926,483 |
) |
|
$ |
3,752,901 |
|
|
$ |
18,420,836 |
|
Consolidated net earnings |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,209,932 |
|
|
|
82,608 |
|
|
|
1,292,540 |
|
Effect of equity compensation plans |
|
- |
|
|
|
2,282 |
|
|
|
23 |
|
|
|
91,191 |
|
|
|
- |
|
|
|
- |
|
|
|
26,483 |
|
|
|
117,697 |
|
Issuance of units related to acquisitions |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3,162 |
|
|
|
3,162 |
|
Conversion of noncontrolling interests |
|
- |
|
|
|
1,877 |
|
|
|
19 |
|
|
|
52,237 |
|
|
|
- |
|
|
|
- |
|
|
|
(52,256 |
) |
|
|
- |
|
Foreign currency translation gains (losses), net |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(144,730 |
) |
|
|
- |
|
|
|
8,772 |
|
|
|
(135,958 |
) |
Unrealized losses on derivative contracts, net |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,314 |
) |
|
|
- |
|
|
|
(35 |
) |
|
|
(1,349 |
) |
Reallocation of equity |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
8,657 |
|
|
|
- |
|
|
|
- |
|
|
|
(8,657 |
) |
|
|
- |
|
Distributions and other |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
587 |
|
|
|
- |
|
|
|
(893,456 |
) |
|
|
(345,919 |
) |
|
|
(1,238,788 |
) |
Balance at December 31, 2016 |
$ |
78,235 |
|
|
|
528,671 |
|
|
$ |
5,287 |
|
|
$ |
19,455,039 |
|
|
$ |
(937,473 |
) |
|
$ |
(3,610,007 |
) |
|
$ |
3,467,059 |
|
|
$ |
18,458,140 |
|
Consolidated net earnings |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,652,325 |
|
|
|
108,634 |
|
|
|
1,760,959 |
|
Effect of equity compensation plans |
|
- |
|
|
|
2,000 |
|
|
|
20 |
|
|
|
74,506 |
|
|
|
- |
|
|
|
- |
|
|
|
41,446 |
|
|
|
115,972 |
|
Capital contributions |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
254,214 |
|
|
|
254,214 |
|
Repurchase of preferred stock |
|
(9,287 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(3,895 |
) |
|
|
- |
|
|
|
(13,182 |
) |
Purchase of noncontrolling interests |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(202,040 |
) |
|
|
- |
|
|
|
- |
|
|
|
(611,807 |
) |
|
|
(813,847 |
) |
Conversion of noncontrolling interests |
|
- |
|
|
|
1,515 |
|
|
|
15 |
|
|
|
47,711 |
|
|
|
- |
|
|
|
- |
|
|
|
(47,726 |
) |
|
|
- |
|
Foreign currency translation gains, net |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
13,810 |
|
|
|
- |
|
|
|
49,645 |
|
|
|
63,455 |
|
Unrealized gains on derivative contracts, net |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
22,005 |
|
|
|
- |
|
|
|
586 |
|
|
|
22,591 |
|
Reallocation of equity |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(12,143 |
) |
|
|
- |
|
|
|
- |
|
|
|
12,143 |
|
|
|
- |
|
Distributions and other |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(66 |
) |
|
|
- |
|
|
|
(942,884 |
) |
|
|
(199,611 |
) |
|
|
(1,142,561 |
) |
Balance at December 31, 2017 |
$ |
68,948 |
|
|
|
532,186 |
|
|
$ |
5,322 |
|
|
$ |
19,363,007 |
|
|
$ |
(901,658 |
) |
|
$ |
(2,904,461 |
) |
|
$ |
3,074,583 |
|
|
$ |
18,705,741 |
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
51
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
|
Years Ended December 31, |
|
|||||||||
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
Operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net earnings |
|
$ |
1,760,959 |
|
|
$ |
1,292,540 |
|
|
$ |
925,515 |
|
Adjustments to reconcile net earnings to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Straight-lined rents and amortization of above and below market leases |
|
|
(81,021 |
) |
|
|
(93,608 |
) |
|
|
(59,619 |
) |
Equity-based compensation awards |
|
|
76,640 |
|
|
|
60,341 |
|
|
|
53,665 |
|
Depreciation and amortization |
|
|
879,140 |
|
|
|
930,985 |
|
|
|
880,373 |
|
Earnings from unconsolidated entities, net |
|
|
(248,567 |
) |
|
|
(206,307 |
) |
|
|
(159,262 |
) |
Distributions from unconsolidated entities |
|
|
307,220 |
|
|
|
286,651 |
|
|
|
284,664 |
|
Decrease (increase) in operating receivables from unconsolidated entities |
|
|
(30,893 |
) |
|
|
14,823 |
|
|
|
(38,185 |
) |
Amortization of debt discounts (premiums), net of debt issuance costs |
|
|
751 |
|
|
|
(15,137 |
) |
|
|
(31,841 |
) |
Gains on dispositions of investments in real estate and revaluation of equity investments upon acquisition of a controlling interest, net |
|
|
(1,182,965 |
) |
|
|
(757,398 |
) |
|
|
(758,887 |
) |
Unrealized foreign currency and derivative losses (gains), net |
|
|
68,956 |
|
|
|
(8,052 |
) |
|
|
(1,019 |
) |
Losses (gains) on early extinguishment of debt, net |
|
|
68,379 |
|
|
|
(2,484 |
) |
|
|
86,303 |
|
Deferred income tax benefit |
|
|
(5,005 |
) |
|
|
(5,525 |
) |
|
|
(5,057 |
) |
Decrease (increase) in accounts receivable and other assets |
|
|
37,278 |
|
|
|
(106,337 |
) |
|
|
(64,749 |
) |
Increase in accounts payable and accrued expenses and other liabilities |
|
|
36,374 |
|
|
|
26,513 |
|
|
|
4,426 |
|
Net cash provided by operating activities |
|
|
1,687,246 |
|
|
|
1,417,005 |
|
|
|
1,116,327 |
|
Investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Real estate development |
|
|
(1,606,133 |
) |
|
|
(1,641,560 |
) |
|
|
(1,339,904 |
) |
Real estate acquisitions |
|
|
(442,696 |
) |
|
|
(458,516 |
) |
|
|
(890,183 |
) |
KTR transaction, net of cash received |
|
|
- |
|
|
|
- |
|
|
|
(4,809,499 |
) |
Tenant improvements and lease commissions on previously leased space |
|
|
(153,255 |
) |
|
|
(165,933 |
) |
|
|
(154,564 |
) |
Nondevelopment capital expenditures |
|
|
(110,635 |
) |
|
|
(101,677 |
) |
|
|
(83,351 |
) |
Proceeds from dispositions and contributions of real estate properties |
|
|
3,236,603 |
|
|
|
2,826,408 |
|
|
|
2,795,249 |
|
Investments in and advances to unconsolidated entities |
|
|
(249,735 |
) |
|
|
(265,951 |
) |
|
|
(474,420 |
) |
Acquisition of a controlling interest in an unconsolidated venture, net of cash received |
|
|
(374,605 |
) |
|
|
- |
|
|
|
- |
|
Return of investment from unconsolidated entities |
|
|
209,151 |
|
|
|
776,550 |
|
|
|
29,406 |
|
Proceeds from repayment of notes receivable backed by real estate |
|
|
32,100 |
|
|
|
202,950 |
|
|
|
9,866 |
|
Proceeds from the settlement of net investment hedges |
|
|
7,541 |
|
|
|
79,767 |
|
|
|
129,149 |
|
Payments on the settlement of net investment hedges |
|
|
(5,058 |
) |
|
|
- |
|
|
|
(981 |
) |
Net cash provided by (used in) investing activities |
|
|
543,278 |
|
|
|
1,252,038 |
|
|
|
(4,789,232 |
) |
Financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock |
|
|
32,858 |
|
|
|
39,470 |
|
|
|
90,258 |
|
Dividends paid on common and preferred stock |
|
|
(942,884 |
) |
|
|
(893,455 |
) |
|
|
(804,697 |
) |
Repurchase of preferred stock |
|
|
(13,182 |
) |
|
|
- |
|
|
|
- |
|
Noncontrolling interests contributions |
|
|
240,925 |
|
|
|
2,168 |
|
|
|
2,355,367 |
|
Noncontrolling interests distributions |
|
|
(207,788 |
) |
|
|
(343,550 |
) |
|
|
(215,740 |
) |
Purchase of noncontrolling interests |
|
|
(813,847 |
) |
|
|
(3,083 |
) |
|
|
(2,560 |
) |
Tax paid for shares withheld |
|
|
(19,775 |
) |
|
|
(8,570 |
) |
|
|
(12,298 |
) |
Debt and equity issuance costs paid |
|
|
(7,054 |
) |
|
|
(20,123 |
) |
|
|
(32,012 |
) |
Net proceeds from (payments on) credit facilities |
|
|
283,255 |
|
|
|
33,435 |
|
|
|
(7,970 |
) |
Repurchase and payments of debt |
|
|
(3,578,889 |
) |
|
|
(2,301,647 |
) |
|
|
(3,156,294 |
) |
Proceeds from issuance of debt |
|
|
2,419,797 |
|
|
|
1,369,890 |
|
|
|
5,381,862 |
|
Net cash provided by (used in) financing activities |
|
|
(2,606,584 |
) |
|
|
(2,125,465 |
) |
|
|
3,595,916 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign currency exchange rate changes on cash |
|
|
15,790 |
|
|
|
(342 |
) |
|
|
(9,623 |
) |
Net increase (decrease) in cash and cash equivalents |
|
|
(360,270 |
) |
|
|
543,236 |
|
|
|
(86,612 |
) |
Cash and cash equivalents, beginning of year |
|
|
807,316 |
|
|
|
264,080 |
|
|
|
350,692 |
|
Cash and cash equivalents, end of year |
|
$ |
447,046 |
|
|
$ |
807,316 |
|
|
$ |
264,080 |
|
See Note 19 for information on noncash investing and financing activities and other information.
The accompanying notes are an integral part of these Consolidated Financial Statements.
52
(In thousands)
|
December 31, |
|
|||||
|
2017 |
|
|
2016 |
|
||
ASSETS |
|
|
|
|
|
|
|
Investments in real estate properties |
$ |
25,838,644 |
|
|
$ |
27,119,330 |
|
Less accumulated depreciation |
|
4,059,348 |
|
|
|
3,758,372 |
|
Net investments in real estate properties |
|
21,779,296 |
|
|
|
23,360,958 |
|
Investments in and advances to unconsolidated entities |
|
5,496,450 |
|
|
|
4,230,429 |
|
Assets held for sale or contribution |
|
342,060 |
|
|
|
322,139 |
|
Notes receivable backed by real estate |
|
34,260 |
|
|
|
32,100 |
|
Net investments in real estate |
|
27,652,066 |
|
|
|
27,945,626 |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
447,046 |
|
|
|
807,316 |
|
Other assets |
|
1,381,963 |
|
|
|
1,496,990 |
|
Total assets |
$ |
29,481,075 |
|
|
$ |
30,249,932 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND CAPITAL |
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
Debt |
$ |
9,412,631 |
|
|
$ |
10,608,294 |
|
Accounts payable and accrued expenses |
|
702,804 |
|
|
|
556,179 |
|
Other liabilities |
|
659,899 |
|
|
|
627,319 |
|
Total liabilities |
|
10,775,334 |
|
|
|
11,791,792 |
|
|
|
|
|
|
|
|
|
Capital: |
|
|
|
|
|
|
|
Partners’ capital: |
|
|
|
|
|
|
|
General partner – preferred |
|
68,948 |
|
|
|
78,235 |
|
General partner – common |
|
15,562,210 |
|
|
|
14,912,846 |
|
Limited partners – common |
|
165,401 |
|
|
|
150,173 |
|
Limited partners – Class A common |
|
248,940 |
|
|
|
244,417 |
|
Total partners’ capital |
|
16,045,499 |
|
|
|
15,385,671 |
|
Noncontrolling interests |
|
2,660,242 |
|
|
|
3,072,469 |
|
Total capital |
|
18,705,741 |
|
|
|
18,458,140 |
|
Total liabilities and capital |
$ |
29,481,075 |
|
|
$ |
30,249,932 |
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
53
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per unit amounts)
|
|
Year Ended December 31, |
|
|||||||||
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Rental |
|
$ |
1,737,839 |
|
|
$ |
1,734,844 |
|
|
$ |
1,536,117 |
|
Rental recoveries |
|
|
487,302 |
|
|
|
485,565 |
|
|
|
437,070 |
|
Strategic capital |
|
|
373,889 |
|
|
|
303,562 |
|
|
|
217,829 |
|
Development management and other |
|
|
19,104 |
|
|
|
9,164 |
|
|
|
6,058 |
|
Total revenues |
|
|
2,618,134 |
|
|
|
2,533,135 |
|
|
|
2,197,074 |
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Rental |
|
|
569,523 |
|
|
|
568,870 |
|
|
|
544,182 |
|
Strategic capital |
|
|
155,141 |
|
|
|
128,506 |
|
|
|
108,422 |
|
General and administrative |
|
|
231,059 |
|
|
|
222,067 |
|
|
|
217,227 |
|
Depreciation and amortization |
|
|
879,140 |
|
|
|
930,985 |
|
|
|
880,373 |
|
Other |
|
|
12,205 |
|
|
|
14,329 |
|
|
|
66,698 |
|
Total expenses |
|
|
1,847,068 |
|
|
|
1,864,757 |
|
|
|
1,816,902 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
771,066 |
|
|
|
668,378 |
|
|
|
380,172 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from unconsolidated entities, net |
|
|
248,567 |
|
|
|
206,307 |
|
|
|
159,262 |
|
Interest expense |
|
|
(274,486 |
) |
|
|
(303,146 |
) |
|
|
(301,363 |
) |
Interest and other income, net |
|
|
13,731 |
|
|
|
8,101 |
|
|
|
25,484 |
|
Gains on dispositions of investments in real estate and revaluation of equity investments upon acquisition of a controlling interest, net |
|
|
1,182,965 |
|
|
|
757,398 |
|
|
|
758,887 |
|
Foreign currency and derivative gains (losses), net |
|
|
(57,896 |
) |
|
|
7,582 |
|
|
|
12,466 |
|
Gains (losses) on early extinguishment of debt, net |
|
|
(68,379 |
) |
|
|
2,484 |
|
|
|
(86,303 |
) |
Total other income |
|
|
1,044,502 |
|
|
|
678,726 |
|
|
|
568,433 |
|
Earnings before income taxes |
|
|
1,815,568 |
|
|
|
1,347,104 |
|
|
|
948,605 |
|
Total income tax expense |
|
|
54,609 |
|
|
|
54,564 |
|
|
|
23,090 |
|
Consolidated net earnings |
|
|
1,760,959 |
|
|
|
1,292,540 |
|
|
|
925,515 |
|
Less net earnings attributable to noncontrolling interests |
|
|
63,620 |
|
|
|
48,307 |
|
|
|
44,950 |
|
Net earnings attributable to controlling interests |
|
|
1,697,339 |
|
|
|
1,244,233 |
|
|
|
880,565 |
|
Less preferred unit distributions |
|
|
6,499 |
|
|
|
6,714 |
|
|
|
6,651 |
|
Loss on preferred unit repurchase |
|
|
3,895 |
|
|
|
- |
|
|
|
- |
|
Net earnings attributable to common unitholders |
|
$ |
1,686,945 |
|
|
$ |
1,237,519 |
|
|
$ |
873,914 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common units outstanding – Basic |
|
|
536,335 |
|
|
|
532,326 |
|
|
|
525,912 |
|
Weighted average common units outstanding – Diluted |
|
|
552,300 |
|
|
|
546,666 |
|
|
|
533,944 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per unit attributable to common unitholders – Basic |
|
$ |
3.10 |
|
|
$ |
2.29 |
|
|
$ |
1.66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per unit attributable to common unitholders – Diluted |
|
$ |
3.06 |
|
|
$ |
2.27 |
|
|
$ |
1.64 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions per common unit |
|
$ |
1.76 |
|
|
$ |
1.68 |
|
|
$ |
1.52 |
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
54
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
|
|
Year Ended December 31, |
|
|||||||||
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
Consolidated net earnings |
|
$ |
1,760,959 |
|
|
$ |
1,292,540 |
|
|
$ |
925,515 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation gains (losses), net |
|
|
63,455 |
|
|
|
(135,958 |
) |
|
|
(208,901 |
) |
Unrealized gains (losses) on derivative contracts, net |
|
|
22,591 |
|
|
|
(1,349 |
) |
|
|
(17,457 |
) |
Comprehensive income |
|
|
1,847,005 |
|
|
|
1,155,233 |
|
|
|
699,157 |
|
Net earnings attributable to noncontrolling interests |
|
|
(63,620 |
) |
|
|
(48,307 |
) |
|
|
(44,950 |
) |
Other comprehensive loss (gain) attributable to noncontrolling interests |
|
|
(49,278 |
) |
|
|
(12,601 |
) |
|
|
32,862 |
|
Comprehensive income attributable to common unitholders |
|
$ |
1,734,107 |
|
|
$ |
1,094,325 |
|
|
$ |
687,069 |
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
55
CONSOLIDATED STATEMENTS OF CAPITAL
(In thousands)
|
General Partner |
|
|
Limited Partners |
|
|
Non- |
|
|
|
|
|
|||||||||||||||||||||||||||
|
Preferred |
|
|
Common |
|
|
Common |
|
|
Class A Common |
|
|
controlling |
|
|
|
|
|
|||||||||||||||||||||
|
Units |
|
|
Amount |
|
|
Units |
|
|
Amount |
|
|
Units |
|
|
Amount |
|
|
Units |
|
|
Amount |
|
|
Interests |
|
|
Total |
|
||||||||||
Balance at January 1, 2015 |
|
1,565 |
|
|
$ |
78,235 |
|
|
|
509,498 |
|
|
$ |
13,897,274 |
|
|
|
1,767 |
|
|
$ |
48,189 |
|
|
|
- |
|
|
$ |
- |
|
|
$ |
1,159,901 |
|
|
$ |
15,183,599 |
|
Consolidated net earnings |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
869,439 |
|
|
|
- |
|
|
|
7,733 |
|
|
|
- |
|
|
|
3,393 |
|
|
|
44,950 |
|
|
|
925,515 |
|
Effect of equity compensation plans |
|
- |
|
|
|
- |
|
|
|
1,475 |
|
|
|
57,469 |
|
|
|
303 |
|
|
|
26,234 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
83,703 |
|
Issuance of units in exchange for contribution of at-the-market offering proceeds |
|
- |
|
|
|
- |
|
|
|
1,662 |
|
|
|
71,548 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
71,548 |
|
Issuance of units upon conversion of exchangeable debt |
|
- |
|
|
|
- |
|
|
|
11,872 |
|
|
|
502,732 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
502,732 |
|
Issuance of units related to KTR transaction |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
4,500 |
|
|
|
181,170 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
181,170 |
|
Issuance of units related to other acquisitions |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
157 |
|
|
|
6,534 |
|
|
|
8,894 |
|
|
|
365,036 |
|
|
|
- |
|
|
|
371,570 |
|
Capital contributions |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,355,596 |
|
|
|
2,355,596 |
|
Foreign currency translation losses, net |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(173,852 |
) |
|
|
- |
|
|
|
(1,520 |
) |
|
|
- |
|
|
|
(667 |
) |
|
|
(32,862 |
) |
|
|
(208,901 |
) |
Unrealized losses on derivative contracts, net |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(17,240 |
) |
|
|
- |
|
|
|
(151 |
) |
|
|
- |
|
|
|
(66 |
) |
|
|
- |
|
|
|
(17,457 |
) |
Reallocation of capital |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
186,918 |
|
|
|
- |
|
|
|
(70,965 |
) |
|
|
- |
|
|
|
(115,953 |
) |
|
|
- |
|
|
|
- |
|
Distributions and other |
|
- |
|
|
|
- |
|
|
|
5 |
|
|
|
(804,588 |
) |
|
|
(16 |
) |
|
|
(10,541 |
) |
|
|
- |
|
|
|
(5,752 |
) |
|
|
(207,358 |
) |
|
|
(1,028,239 |
) |
Balance at December 31, 2015 |
|
1,565 |
|
|
$ |
78,235 |
|
|
|
524,512 |
|
|
$ |
14,589,700 |
|
|
|
6,711 |
|
|
$ |
186,683 |
|
|
|
8,894 |
|
|
$ |
245,991 |
|
|
$ |
3,320,227 |
|
|
$ |
18,420,836 |
|
Consolidated net earnings |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,209,932 |
|
|
|
- |
|
|
|
14,232 |
|
|
|
- |
|
|
|
20,069 |
|
|
|
48,307 |
|
|
|
1,292,540 |
|
Effect of equity compensation plans |
|
- |
|
|
|
- |
|
|
|
2,282 |
|
|
|
91,214 |
|
|
|
440 |
|
|
|
26,483 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
117,697 |
|
Issuance of units related to acquisitions |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
71 |
|
|
|
3,162 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3,162 |
|
Conversion of limited partners units |
|
- |
|
|
|
- |
|
|
|
1,877 |
|
|
|
52,256 |
|
|
|
(1,877 |
) |
|
|
(52,256 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Foreign currency translation gains (losses), net |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(144,730 |
) |
|
|
- |
|
|
|
(1,457 |
) |
|
|
- |
|
|
|
(2,372 |
) |
|
|
12,601 |
|
|
|
(135,958 |
) |
Unrealized losses on derivative contracts, net |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,314 |
) |
|
|
- |
|
|
|
(13 |
) |
|
|
- |
|
|
|
(22 |
) |
|
|
- |
|
|
|
(1,349 |
) |
Reallocation of capital |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
8,657 |
|
|
|
- |
|
|
|
(12,414 |
) |
|
|
- |
|
|
|
3,757 |
|
|
|
- |
|
|
|
- |
|
Distributions and other |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(892,869 |
) |
|
|
(22 |
) |
|
|
(14,247 |
) |
|
|
- |
|
|