ProLogis Reports Third Quarter FFO of $0.63 Per Share
DENVER, Oct. 23 /PRNewswire-FirstCall/ -- ProLogis (NYSE: PLD), the world's largest owner, manager and developer of distribution facilities, today reported funds from operations as defined by ProLogis (FFO) for the quarter ended September 30, 2008, of $0.63 per diluted share, compared with $1.41 in 2007. Growth in income from the company's Investment Management segment was offset by lower Property Operations and a lower level of development dispositions compared with the third quarter of 2007. The third quarter of 2007 also included $0.36 per share from gains related to the acquisition of shares of Macquarie ProLogis Trust and subsequent contribution of those assets into a newly formed property fund. Net earnings per diluted share for the quarter were $0.16, down from $1.12 in 2007, due to the factors affecting FFO, as well as a higher level of dispositions of non-CDFS properties in 2007 that are not included in FFO.
For the nine months ended September 30, 2008, FFO was $3.07 per diluted share, compared with $3.81 in the first nine months of 2007, while net earnings per diluted share were $1.69, compared with $3.51 for the nine months ended September 30, 2007, primarily due to the items noted above.
"Third quarter property market fundamentals held up reasonably well, notwithstanding the current credit crisis, which has negatively affected the global economy and our business," said Jeffrey H. Schwartz, ProLogis chairman and chief executive officer. "Despite this economic turmoil, we believe ProLogis is well positioned to weather the storm and take advantage of opportunities that may eventually arise."
During the third quarter, the company maintained a high level of leasing activity and achieved growth in net operating income and rental rates on turnovers within its same store pool. "While our operating results for the quarter were in line with our expectations, since the worst of the financial crisis has been felt in recent weeks, we are now seeing customers deferring decisions while assessing the impact of current market conditions on their businesses. Additionally, development margins have come under pressure due to rising cap rates, and we expect this trend to persist into early 2009," Schwartz said.
"As we continue to focus on managing the business for the long-term, our first and foremost objective in these turbulent times is to preserve our balance sheet strength and maintain financial flexibility," Schwartz added. "Our investment strategy over the near term will be governed by extremely conservative capital deployment. As a result of this focus, near-term earnings will be negatively impacted; we believe, however, this is the most appropriate response to today's market conditions."
Market Turmoil Prompts Guidance Revision
"As a result of the substantial dislocation in the credit markets and the related economic turmoil since our previous guidance, we are lowering our guidance for full-year 2008 FFO to a range of $3.60 to $3.70 per share," said William E. Sullivan, chief financial officer. "We are assuming the current economic malaise persists throughout 2009, further impacting cap rates and leasing momentum in those markets where liquidity has been most impacted. Given the turbulent environment, we will revise and update 2009 guidance as we develop more clarity but no later than reporting of fourth quarter results." In connection with the company's reduction in FFO per share guidance, net earnings are anticipated to be $1.75 to $1.85 per share for 2008. The company will expand upon its outlook for the business on its third quarter results webcast/conference call to be held today at 10:00 a.m. ET (see below).
Changing Market Dynamics Impact New Development
ProLogis began construction of $528 million of new development during the third quarter and contributed assets with an aggregate cost of $681 million to its property funds, which together with a strengthening U.S. dollar reduced the company's total CDFS asset pipeline to $8.2 billion at September 30, 2008. "During the quarter we achieved an increase of 530 basis points in leasing of our overall CDFS Asset Pipeline, driven by improved activity in Asia and 65 percent of third quarter starts being preleased," said Ted R. Antenucci, ProLogis president and chief investment officer. "Given today's challenging market conditions, we have decided not to move forward with some early-stage projects and now anticipate development starts for full-year 2008 will be between $2.7 and $2.9 billion," Antenucci added.
During the quarter, the company signed 34.6 million square feet of leases worldwide, bringing total year-to-date leasing activity to 95.4 million square feet. One-third of that total, or 31.6 million square feet, was new CDFS leases, including those for build-to-suit projects under development.
Operating Property Performance Relatively Stable Despite Difficult Economic Conditions
"At September 30, 2008, our stabilized portfolio was 93.4 percent leased, well above market averages," said Diane S. Paddison, executive director of global operations. "Customer relationships are critical in times of economic uncertainty, and our focus in this area is demonstrated by tenant retention during the quarter of nearly 83 percent. We also expanded our relationships with Procter & Gamble, Kraft Foods and CEVA Logistics with additional leases during the quarter. We anticipate fundamentals, particularly in the U.S. and Europe, to weaken further in the coming months but also expect our portfolio to continue to outperform the overall market due to the quality and location of our facilities as well as our commitment to customer service."
Selected Financial and Operating Information -- Increased same-store net operating income in the quarter by 1.85 percent, resulting from 0.55 percent growth in average leasing and rent growth on turnovers of 2.73 percent in the pool. For the first nine months, same-store net operating income increased 2.26 percent, resulting from a 1.17 percent increase in average leasing and rent growth on turnovers of 4.09 percent. -- Reported leasing in the stabilized portfolio of 93.4 percent. -- Recycled a total of $839.6 million of capital through contributions and dispositions during the quarter. Of the total, $828.4 million was from CDFS dispositions, with $190.7 million of that from acquired property portfolios. The remaining $11.2 million was from non-CDFS dispositions. Year-to-date total dispositions were $3.60 billion, with $3.53 billion from CDFS dispositions. -- Realized FFO from CDFS dispositions of $71.2 million for the quarter. Pre-deferral, post-tax margins for developed and repositioned properties during the third quarter averaged 15.5 percent, while post-tax, post-deferral margins were 10.9 percent. -- Increased total assets owned and under management to $40.8 billion, up from $36.3 billion at December 31, 2007, a year-to-date increase of 12.4 percent. -- Grew ProLogis' share of FFO from property funds to $50.1 million for the quarter, compared with $39.9 million for the third quarter of 2007, an increase of 25.6 percent. -- Recognized fee income from property funds of $35.5 million, compared with $27.1 million for the third quarter of 2007, an increase of 31.0 percent. Reconciliation of Guidance for FFO from Net Income for 2008 Low High Projected earnings attributable to common shares $1.75 $1.85 Depreciation and amortization 1.17 1.17 Deferred taxes 0.14 0.14 Gain on sale of non-CDFS assets (0.07) (0.07) Foreign currency exchange gains/(losses) 0.10 0.10 ProLogis' share of reconciling items from unconsolidated entities 0.51 0.51 Projected FFO per share $3.60 $3.70
Copies of ProLogis' third quarter 2008 supplemental information will be available from the company's website at http://ir.prologis.com. The supplemental information also is available on the SEC's website at http://www.sec.gov. The related conference call will be available via a live webcast on the company's website at http://ir.prologis.com at 10:00 a.m. Eastern Time on Thursday, October 23, 2008. A replay of the webcast will be available on the company's website until December 31, 2008. Additionally, a podcast of the company's conference call will be available on the company's website as well as on the REITCafe website located at http://www.REITcafe.com.
ProLogis is the world's largest owner, manager and developer of distribution facilities, with operations in 136 markets across North America, Europe and Asia. The company has $40.8 billion of assets owned, managed and under development, comprising 548 million square feet (51 million square meters) in 2,898 facilities as of September 30, 2008. ProLogis' customers include manufacturers, retailers, transportation companies, third-party logistics providers and other enterprises with large-scale distribution needs. Headquartered in Denver, Colorado, ProLogis employs over 1,500 people worldwide.
The statements above 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 ProLogis operates, management's beliefs and assumptions made by management, they involve uncertainties that could significantly impact ProLogis' financial results. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," variations of such words and similar expressions are intended to identify such forward-looking statements, which generally are not historical in nature. All statements that address operating performance, events or developments that we expect or anticipate will occur in the future -- including statements relating to rent and occupancy growth, development activity and changes in sales or contribution volume of developed properties, general conditions in the geographic areas where we operate and the availability of capital in existing or new property funds -- are forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Although we believe the expectations reflected in any forward-looking statements are based on reasonable assumptions, we can give no assurance that our expectations will be attained and therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. Some of the factors that may affect outcomes and results include, but are not limited to: (i) national, international, regional and local economic climates, (ii) changes in financial markets, interest rates and foreign currency exchange rates, (iii) increased or unanticipated competition for our properties, (iv) risks associated with acquisitions, (v) maintenance of real estate investment trust ("REIT") status, (vi) availability of financing and capital, (vii) changes in demand for developed properties, and (viii) those additional factors discussed under "Item 1A - Risk Factors" in ProLogis' Annual Report on Form 10-K for the year ended December 31, 2007. ProLogis undertakes no duty to update any forward-looking statements appearing in this press release.
ProLogis Third Quarter 2008 Unaudited Financial Results Selected Financial Information (in thousands, except per share amounts and percentages) Three Months Ended Nine Months Ended SUMMARY OF RESULTS September 30, September 30, 2008 2007 2008 2007 Net earnings attributable to common shares: Net earnings attributable to common shares $43,472 $299,444 $454,869 $935,639 Net earnings per share attributable to common shares - diluted $0.16 $1.12 $1.69 $3.51 FFO: FFO attributable to common shares $169,313 $376,155 $826,799 $1,015,773 FFO per share attributable to common shares - diluted $0.63 $1.41 $3.07 $3.81 Distributions declared per common share (1) $0.5175 $0.46 $1.5525 $1.38 OPERATING METRICS Three Months Ended Nine Months Ended September 30, September 30, 2008 2007 2008 2007 Same Store: NOI + 1.85% + 5.38% + 2.26% + 5.67% Rental Rates + 2.73% + 9.61% + 4.09% + 8.35% Average Leasing + 0.55% + 2.21% + 1.17% + 2.68% Total Expected Investment of Development Starts $527,601 $797,851 $2,470,332 $2,101,262 See our definition of FFO and our definition of EBITDA. ProLogis Third Quarter 2008 Unaudited Financial Results Consolidated Statements of Earnings (in thousands) Three Months Ended Nine Months Ended September 30, September 30, 2008 2007 2008 2007 Revenues: Rental income (2) (3) $253,499 $280,514 $784,223 $807,677 CDFS disposition proceeds: Developed and repositioned properties 613,443 735,428 3,013,511 2,092,081 Acquired property portfolios (3) 190,711 2,406,795 353,886 2,406,795 Property management and other fees and incentives 35,502 27,095 97,572 72,679 Development management and other income 7,991 10,321 18,522 23,936 Total revenues 1,101,146 3,460,153 4,267,714 5,403,168 Expenses: Rental expenses 85,822 74,835 262,710 216,658 Cost of CDFS dispositions: Developed and repositioned properties 542,311 572,668 2,464,228 1,488,343 Acquired property portfolios (3) 190,711 2,338,186 353,886 2,338,186 General and administrative (4) 57,836 50,208 173,523 146,973 Depreciation and amortization 81,889 71,852 243,893 223,610 Other expenses 3,689 3,550 11,792 21,484 Total expenses 962,258 3,111,299 3,510,032 4,435,254 Operating income 138,888 348,854 757,682 967,914 Other income (expense): Earnings from unconsolidated property funds (5) 18,299 46,688 36,285 81,456 (Losses) earnings from CDFS joint ventures and other unconsolidated investees 2,192 4,679 (1,414) 6,996 Interest expense (6) (83,327) (107,964) (252,587) (287,255) Interest and other income, net 1,822 11,613 17,082 32,522 Total other income (expense) (61,014) (44,984) (200,634) (166,281) Earnings before minority interest 77,874 303,870 557,048 801,633 Minority interest share in loss (income) 1,031 (1,855) 4,510 (2,751) Earnings before certain net gains 78,905 302,015 561,558 798,882 Gains recognized on dispositions of certain non- CDFS business assets (7) 1,152 21,289 5,814 145,374 Foreign currency exchange gains (losses), net (10,344) 991 (34,950) 10,145 Earnings before income taxes 69,713 324,295 532,422 954,401 Income taxes: Current income tax expense 11,577 14,204 49,101 58,949 Deferred income tax expense 10,742 11,892 19,478 5,710 Total income taxes 22,319 26,096 68,579 64,659 Earnings from continuing operations 47,394 298,199 463,843 889,742 Discontinued operations (8): (Loss) income attributable to disposed properties and assets held for sale (189) 992 (296) 3,693 Gains recognized on dispositions: Non-CDFS business assets 2,492 6,607 8,161 38,732 CDFS business assets 108 - 2,232 22,537 Total discontinued operations 2,411 7,599 10,097 64,962 Net earnings 49,805 305,798 473,940 954,704 Less preferred share dividends 6,333 6,354 19,071 19,065 Net earnings attributable to common shares $43,472 $299,444 $454,869 $935,639 Weighted average common shares outstanding - Basic 263,139 257,435 261,665 256,270 Weighted average common shares outstanding - Diluted 266,133 267,871 270,665 267,177 Net earnings per share attributable to common shares - Basic: Continuing operations $0.16 $1.13 $1.70 $3.40 Discontinued operations 0.01 0.03 0.04 0.25 Net earnings per share attributable to common shares - Basic $0.17 $1.16 $1.74 $3.65 Net earnings per share attributable to common shares - Diluted: Continuing operations $0.15 $1.09 $1.65 $3.27 Discontinued operations 0.01 0.03 0.04 0.24 Net earnings per share attributable to common shares - Diluted $0.16 $1.12 $1.69 $3.51 Calculation of Net Earnings per Share Attributable to Common Shares - Diluted (in thousands, except per share amounts) Three Months Ended Nine Months Ended September 30, September 30, 2008 2007 2008 2007 Net earnings attributable to common shares - Basic $43,472 $299,444 $454,869 $935,639 Minority interest (a) - 947 3,665 3,409 Adjusted net earnings attributable to common shares - Diluted $43,472 $300,391 $458,534 $939,048 Weighted average common shares outstanding - Basic 263,139 257,435 261,665 256,270 Incremental weighted average effect of conversion of limited partnership units (b) - 5,011 5,088 5,086 Incremental weighted average effect of potentially dilutive instruments (c) 2,994 5,425 3,912 5,821 Weighted average common shares outstanding - Diluted 266,133 267,871 270,665 267,177 Net earnings per share attributable to common shares - Diluted $0.16 $1.12 $1.69 $3.51 COMMENTS (a) Includes only the minority interest related to the convertible limited partnership units. (b) For the three months ended September 30, 2008, the impact of the limited partnership units is anti-dilutive and, therefore, not reflected in weighted average common shares outstanding - diluted. (c) Total weighted average potentially dilutive instruments outstanding were 9,603 and 10,062 for the three months ended September 30, 2008 and 2007, respectively, and 9,993 and 10,393 for the nine months ended September 30, 2008 and 2007, respectively. Of the potentially dilutive instruments, 3,112 and 1,769, respectively, were anti-dilutive for the three and nine months ended September 30, 2008. In 2007, the majority of potentially dilutive instruments were dilutive for both periods. ProLogis Third Quarter 2008 Unaudited Financial Results Consolidated Statements of Funds From Operations (FFO) (in thousands, except per share amounts) Three Months Ended Nine Months Ended September 30, September 30, 2008 2007 2008 2007 Revenues: Rental income (3) $253,580 $283,127 $785,557 $820,179 CDFS disposition proceeds: Developed and repositioned properties 617,133 735,428 3,032,408 2,265,379 Acquired property portfolios (3) 190,711 2,406,795 353,886 2,406,795 Property management and other fees and incentives 35,502 27,095 97,572 72,679 Development management and other income 7,991 10,321 18,522 23,936 Total revenues 1,104,917 3,462,766 4,287,945 5,588,968 Expenses: Rental expenses 86,051 75,804 263,704 221,632 Cost of CDFS dispositions: Developed and repositioned properties 545,893 573,914 2,482,603 1,642,687 Acquired property portfolios (3) 190,711 2,338,186 353,886 2,338,186 General and administrative (4) 57,836 50,208 173,523 146,973 Depreciation of corporate assets 4,004 2,706 12,155 7,997 Other expenses 3,689 3,550 11,792 21,484 Total expenses 888,184 3,044,368 3,297,663 4,378,959 216,733 418,398 990,282 1,210,009 Other income (expense): FFO from unconsolidated property funds (5) 50,067 39,931 128,454 103,800 FFO from CDFS joint ventures and other unconsolidated investees 4,824 6,628 5,304 12,684 Interest expense (6) (83,327) (107,964) (252,587) (287,255) Interest and other income, net 1,822 11,613 17,082 32,522 Foreign currency exchange gains (losses), net (3) (3,927) 29,962 (7,732) 21,740 Current income tax expense (11,577) (14,204) (39,443) (55,911) Total other income (expense) (42,118) (34,034) (148,922) (172,420) FFO 174,615 384,364 841,360 1,037,589 Less preferred share dividends 6,333 6,354 19,071 19,065 Less minority interest share in (loss) income (1,031) 1,855 (4,510) 2,751 FFO attributable to common shares $169,313 $376,155 $826,799 $1,015,773 Weighted average common shares outstanding - Basic 263,139 257,435 261,665 256,270 Weighted average common shares outstanding - Diluted 271,279 267,871 270,665 267,177 FFO per share attributable to common shares: Basic $0.64 $1.46 $3.16 $3.96 Diluted $0.63 $1.41 $3.07 $3.81 Calculation of FFO per Share Attributable to Common Shares - Diluted (in thousands, except per share amounts) Three Months Ended Nine Months Ended September 30, September 30, 2008 2007 2008 2007 FFO attributable to common shares - Basic $169,313 $376,155 $826,799 $1,015,773 Minority interest attributable to convertible limited partnership units 1,427 947 3,665 3,409 FFO attributable to common shares - Diluted $170,740 $377,102 $830,464 $1,019,182 Weighted average common shares outstanding - Basic 263,139 257,435 261,665 256,270 Incremental weighted average effect of conversion of limited partnership units 5,146 5,011 5,088 5,086 Incremental weighted average effect of potentially dilutive instruments 2,994 5,425 3,912 5,821 Weighted average common shares outstanding - Diluted 271,279 267,871 270,665 267,177 FFO per share attributable to common shares - Diluted $0.63 $1.41 $3.07 $3.81 See Consolidated Statements of Earnings and the Reconciliations of Net Earnings to FFO. See our definition of FFO and our definition of EBITDA. Definition of FFO FFO is a non-Generally Accepted Accounting Principles (GAAP) measure that is commonly used in the real estate industry. The most directly comparable GAAP measure to FFO is net earnings. Although the National Association of Real Estate Investment Trusts (NAREIT) has published a definition of FFO, modifications to the NAREIT calculation of FFO are common among REITs, as companies seek to provide financial measures that meaningfully reflect their business. FFO, as we define it, is presented as a supplemental financial measure. FFO is not used by us as, nor should it be considered to be, an alternative to net earnings computed under GAAP as an indicator of our operating performance or as an alternative to cash from operating activities computed under GAAP as an indicator of our ability to fund our cash needs. FFO is not meant to represent a comprehensive system of financial reporting and does not present, nor do we intend it to present, a complete picture of our financial condition and operating performance. We believe that GAAP net earnings remains the primary measure of performance and that FFO is only meaningful when it is used in conjunction with GAAP net earnings. Further, we believe that our consolidated financial statements, prepared in accordance with GAAP, provide the most meaningful picture of our financial condition and our operating performance. NAREIT's FFO measure adjusts GAAP net earnings to exclude historical cost depreciation and gains from the sale of previously depreciated properties. In addition to the NAREIT adjustments, we exclude additional items from GAAP net earnings, although not infrequent or unusual, that are subject to significant fluctuations from period to period that cause both positive and negative effects on our results of operations, in inconsistent and unpredictable directions, such as deferred income tax, current income tax related to the reversal of any acquired tax liabilities in an acquisition, foreign currency exchange gains/losses related to certain debt transactions and gains/losses from remeasurement of certain derivative instruments. We include gains from dispositions of properties acquired or developed in our CDFS business segment in our definition of FFO. We calculate FFO from our unconsolidated investees on the same basis. We believe our adjustments to GAAP net earnings that are included in arriving at our FFO measure are helpful to management in making real estate investment decisions and evaluating our current operating performance. We believe these adjustments are also helpful to industry analysts, potential investors and shareholders in their understanding and evaluation of our performance on the key measures of net asset value and current operating returns generated on real estate investments. While we believe that our defined FFO measure is an important supplemental measure, neither NAREIT's nor our measure of FFO should be used alone because they exclude significant economic components of GAAP net earnings and are, therefore, limited as an analytical tool. ProLogis Third Quarter 2008 Unaudited Financial Results Reconciliations of Net Earnings to FFO (in thousands) Three Months Ended Nine Months Ended September 30, September 30, 2008 2007 2008 2007 Reconciliation of net earnings to FFO: Net earnings attributable to common shares $43,472 $299,444 $454,869 $935,639 Add (deduct) NAREIT defined adjustments: Real estate related depreciation and amortization 77,885 69,146 231,738 215,613 Adjustments to gains on CDFS dispositions for depreciation - (1,246) (1,710) (3,583) Gains recognized on dispositions of certain non- CDFS business assets (1,152) (21,289) (5,814) (145,374) Reconciling items attributable to discontinued operations (8): Gains recognized on dispositions of non-CDFS business assets (2,492) (6,607) (8,161) (38,732) Real estate related depreciation and amortization 41 652 636 3,835 Total discontinued operations (2,451) (5,955) (7,525) (34,897) Our share of reconciling items from unconsolidated investees: Real estate related depreciation and amortization 37,596 24,460 103,908 63,669 (Gains) adjustments on dispositions of non-CDFS business assets 2 (32,603) (163) (34,491) Other amortization items (4,433) (2,427) (12,503) (6,376) Total unconsolidated investees 33,165 (10,570) 91,242 22,802 Total NAREIT defined adjustments 107,447 30,086 307,931 54,561 Subtotal-NAREIT defined FFO 150,919 329,530 762,800 990,200 Add (deduct) our defined adjustments: Foreign currency exchange losses, net 6,417 28,971 27,218 11,595 Current income tax expense(9) - - 9,658 3,038 Deferred income tax expense 10,742 11,892 19,478 5,710 Our share of reconciling items from unconsolidated investees: Foreign currency exchange losses, net 953 6,002 2,413 5,829 Unrealized losses on derivative contracts, net(5) 183 - 4,998 - Deferred income tax expense (benefit) 99 (240) 234 (599) Total unconsolidated investees 1,235 5,762 7,645 5,230 Total our defined adjustments 18,394 46,625 63,999 25,573 FFO attributable to common shares $169,313 $376,155 $826,799 $1,015,773 See Consolidated Statements of Earnings, Consolidated Statements of FFO and the definition of FFO. See our definition of FFO and our definition of EBITDA. ProLogis Third Quarter 2008 Unaudited Financial Results Reconciliations of Net Earnings to EBITDA (in thousands) Three Months Ended Nine Months Ended September 30, September 30, 2008 2007 2008 2007 Reconciliation of net earnings to EBITDA: Net earnings attributable to common shares $43,472 $299,444 $454,869 $935,639 Add (deduct): NAREIT defined adjustments to compute FFO 107,447 30,086 307,931 54,561 Our defined adjustments to compute FFO 18,394 46,625 63,999 25,573 Add: Interest expense 83,327 107,964 252,587 287,255 Depreciation of corporate assets 4,004 2,706 12,155 7,997 Current income tax expense included in FFO 11,577 14,204 39,443 55,911 Adjustments to CDFS gains on dispositions for interest capitalized 12,195 14,458 44,995 32,632 Preferred share dividends 6,333 6,354 19,071 19,065 Impairment charges - - - 12,600 Share of reconciling items from unconsolidated investees 52,554 34,188 140,088 84,165 EBITDA $339,303 $556,029 $1,335,138 $1,515,398 See Consolidated Statements of Earnings and the Reconciliations of Net Earnings to FFO. See our definition of FFO and our definition of EBITDA.
Definition of EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization):
We use earnings before interest, taxes, depreciation and amortization, preferred dividends, unrealized foreign currency exchange gains/losses, impairment charges and non-CDFS gains, or EBITDA, to measure both our operating performance and liquidity. In addition, we adjust the gains from the contributions and sales of developed properties recognized as CDFS income to reflect these gains as if no interest cost had been capitalized during the development of the properties. EBITDA of our unconsolidated investees is calculated on the same basis. We consider EBITDA to provide investors relevant and useful information because it permits fixed income investors to view income from operations on an unleveraged basis before the effects of non-operating related items.
By excluding interest expense, EBITDA allows investors to measure our operating performance independent of our capital structure and indebtedness and, therefore, allows for a more meaningful comparison of our operating performance between periods and to compare our operating performance to that of other companies. We consider EBITDA to be a useful supplemental measure for reviewing our comparative performance with other companies because, by excluding non-cash depreciation expense, EBITDA can help the investing public compare the performance of a real estate company to that of companies in other industries. As a liquidity measure, we believe that EBITDA helps investors to analyze our ability to meet debt service obligations and to make quarterly distributions.
We use EBITDA when measuring our operating performance and liquidity; specifically when assessing our operating performance, and comparing that performance to other companies, both in the real estate industry and in other industries, and when evaluating our ability to meet debt service obligations and to make quarterly share distributions. We believe investors should consider EBITDA, which has limitations as an analytical tool, in conjunction with net income (the primary measure of our performance) and other GAAP measures of our performance and liquidity, to improve their understanding of our operating results and liquidity, and to make more meaningful comparisons of the performance of our assets between periods and against other companies.
ProLogis Third Quarter 2008 Unaudited Financial Results Consolidated Balance Sheets (in thousands, except per share data) September 30, December 31, 2008 2007 Assets: Investments in real estate assets: Industrial operating properties $11,356,918 $11,046,331 Retail operating properties 330,681 328,420 Land subject to ground leases and other 404,422 412,530 Properties under development (including cost of land) 1,871,141 1,986,285 Land held for development 2,712,379 2,152,960 Other investments 610,043 652,319 17,285,584 16,578,845 Less accumulated depreciation 1,523,778 1,368,458 Net investments in real estate assets 15,761,806 15,210,387 Investments in and advances to unconsolidated investees: Property funds 1,865,609 1,755,113 CDFS joint ventures and other unconsolidated investees 704,962 590,164 Total investments in and advances to unconsolidated investees 2,570,571 2,345,277 Cash and cash equivalents 341,087 399,910 Accounts and notes receivable 301,116 340,039 Other assets 1,490,996 1,408,814 Discontinued operations - assets held for sale (8) 1,487 19,607 Total assets $20,467,063 $19,724,034 Liabilities and Shareholders' Equity: Liabilities: Lines of credit $2,979,643 $2,564,360 Senior notes and other unsecured debt 4,290,929 4,281,884 Convertible debt 2,884,055 2,332,905 Secured debt and assessment bonds 943,274 1,326,919 Accounts payable and accrued expenses 925,365 933,075 Other liabilities 759,887 769,408 Discontinued operations - assets held for sale (8) 38 424 Total liabilities 12,783,191 12,208,975 Minority interest 111,615 78,661 Shareholders' equity: Series C preferred shares at stated liquidation preference of $50 per share 100,000 100,000 Series F preferred shares at stated liquidation preference of $25 per share 125,000 125,000 Series G preferred shares at stated liquidation preference of $25 per share 125,000 125,000 Common shares at $.01 par value per share 2,627 2,577 Additional paid-in capital 6,660,352 6,412,473 Accumulated other comprehensive income 122,619 275,322 Retained earnings 436,659 396,026 Total shareholders' equity 7,572,257 7,436,398 Total liabilities and shareholders' equity $20,467,063 $19,724,034 Footnotes follow Consolidated Balance Sheets. ProLogis Third Quarter 2008 Unaudited Financial Results Notes to Consolidated Financial Statements *** Please also refer to our annual and quarterly financial statements filed with the Securities and Exchange Commission on Forms 10-K and 10-Q for further information about us and our business. Certain 2007 amounts included in this Supplemental Information package have been reclassified to conform to the 2008 presentation. (1) The annual distribution rate for 2008 is $2.07 per common share. The payment of common share distributions is dependent upon our financial condition and operating results and may be adjusted at the discretion of the Board of Trustees during the year. In September 2008, the Board of Trustees increased the distribution for 2009 to $2.28 per common share. (2) In our Consolidated Statements of Earnings, rental income includes the following (in thousands): Three Months Ended Nine Months Ended September 30, September 30, 2008 2007 2008 2007 Rental income $186,906 $212,196 $579,196 $611,233 Rental expense recoveries 57,684 57,790 180,366 162,655 Straight-lined rents 8,909 10,528 24,661 33,789 $253,499 $280,514 $784,223 $807,677 (3) In the third quarter of 2007, we acquired all of the units in Macquarie ProLogis Trust, an Australian listed property trust ("MPR"), which had an 88.7% ownership interest in ProLogis North American Properties Fund V. The total consideration was approximately $2.0 billion consisting of cash in the amount of $1.2 billion and assumed liabilities of $0.8 billion. We entered into foreign currency forward contracts to economically hedge the purchase price of MPR. As this type of contract does not qualify for hedge accounting treatment, we recognized a gain of $26.6 million upon settlement, which is included in Foreign Currency Exchange Gains and Losses, Net in our Consolidated Statements of Earnings and FFO in 2007. As a result of the MPR transaction, we owned 100% and consolidated the results of the assets for approximately two months, at which time the lender converted certain of the bridge debt into equity of a new property fund, ProLogis North American Industrial Fund II, in which we currently have a 36.9% equity interest. Upon conversion by the lender in the third quarter of 2007, we recognized net gains of $68.6 million that are reflected as Proceeds and Costs of CDFS Acquired Property Portfolios. (4) During the first nine months of 2008 and 2007, we recorded $6.3 million and $8.0 million, respectively, of employee departure costs. In 2008, these costs relate to the planned retirement of our Chief Operating Officer in January 2009. In 2007, these costs include $5.0 million related to the departure of our Chief Financial Officer in March 2007 and $3.0 million related to other employees. (5) In the third quarter of 2007, PEPR disposed of 47 properties resulting in a net gain. We recognized our proportionate share of the gain, which amounted to additional earnings of $38.2 million and additional FFO of $8.0 million. In 2007, certain property funds in North America issued short-term bridge financing to finance their acquisitions of properties from us and third parties and entered into interest rate swap contracts that were designated as cash flow hedges to mitigate the volatility in interest rates. Based on the anticipated refinancing of the bridge financings with long-term debt issuances, certain of these derivative contracts no longer met the requirements for hedge accounting during 2008 and, therefore, the change in the fair value of these contracts was recorded through earnings, along with the gain or loss on settlement of the contracts. Included in earnings from unconsolidated property funds, in our Consolidated Statements of Earnings for the three and nine months ended September 30, 2008, are losses of $0.7 million and $15.4 million, respectively, representing our share of the remeasurement and settlement gains or losses. When the contracts are settled, we include the realized gain or loss in our calculation of FFO, which amounted to losses of $2.3 million and $8.1 million during the three and nine months ended September 30, 2008, respectively. In Japan, the property funds may enter into swap contracts that fix the interest rate of their variable rate debt. As these contracts did not qualify for hedge accounting, any change in value of these contracts is recognized as an unrealized gain or loss on remeasurement. These contracts have no cash settlement at the end of the contract, and therefore, no impact on FFO. Included in earnings from unconsolidated property funds, in our Consolidated Statements of Earnings, are remeasurement losses of $1.7 million and gains of $2.3 million for the three and nine months ended September 30, 2008, respectively, representing our share of the remeasurement gains or losses of these contracts. (6) The following table presents the components of interest expense as reflected in our Consolidated Statements of Earnings (in thousands). The decrease in interest expense before capitalization is primarily the result of additional interest costs in 2007 related to the MPR transaction discussed in note 3 above offset with increased borrowing (a function of increased development activities, partially offset by contribution activity) at lower rates due to the issuance of $2.9 billion of convertible debt in 2007 and 2008. The increase in development activities also accounts for the increased capitalized interest. Three Months Ended Nine Months Ended September 30, September 30, 2008 2007 2008 2007 Gross interest expense $122,170 $137,262 $367,215 $370,138 Net premium amortization 957 (1,126) (1,593) (6,813) Amortization of deferred loan costs 3,187 2,536 9,140 7,827 Interest expense before capitalization 126,314 138,672 374,762 371,152 Less: capitalized amounts (42,987) (30,708) (122,175) (83,897) Net interest expense $83,327 $107,964 $252,587 $287,255 In May 2008, the Financial Accounting Standards Board Staff Position No. APB 14-1 "Accounting for Convertible Debt Instruments that May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement)" that requires separate accounting for the debt and equity components of convertible debt. The value assigned to the debt component is the estimated fair value of a similar bond without the conversion feature, which would result in the debt being recorded at a discount. The resulting debt discount would be amortized over the expected period outstanding (i.e., through the first optional redemption date) as additional non-cash interest expense. The effective date is January 1, 2009 with the application of the new accounting applied retrospectively to both new and existing convertible instruments, including the notes issued in 2007 and 2008. As a result of the new accounting, beginning in 2009, we will recognize an additional non- cash interest expense, for purposes of calculating earnings, of between $64 million and $82 million per annum, prior to the capitalization of interest due to our development activities. Prior periods will be restated for the partial year impact. (7) In addition to contributions of CDFS properties, from time to time, we contribute properties from our property operations segment to unconsolidated property funds in which we have continuing interests through our equity ownership. During the nine months ended September 30, 2008, we contributed one such property to the ProLogis Mexico Industrial Fund. During the nine months ended September 30, 2007, we contributed 66 non-CDFS properties to ProLogis North American Industrial Fund. The gains related to the dispositions of properties from our property operations segment are included in earnings but are not included in our calculation of FFO. See our definition of FFO. (8) The operations of the properties held for sale or disposed of to third parties and the aggregate net gains recognized upon their disposition are presented as discontinued operations in our Consolidated Statements of Earnings for all periods presented, unless the property was developed under a pre-sale agreement. During the first nine months of 2008, we disposed of nine properties to third parties, two of which were CDFS properties, as well as land subject to a ground lease. During the full year of 2007, we disposed of 80 properties to third parties, five of which were CDFS properties, as well as land subject to ground leases. We had one property and two properties classified as held for sale on our Consolidated Balance Sheets as of September 30, 2008 and December 31, 2007, respectively. The two properties classified as held for sale at December 31, 2007 were sold during the first quarter of 2008. The components that are presented as discontinued operations (excluding the gains recognized upon disposition) are as follows (in thousands): Three Months Ended Nine Months Ended September 30, September 30, 2008 2007 2008 2007 Rental income $81 $2,613 $1,334 $12,502 Rental expenses (229) (969) (994) (4,974) Depreciation and amortization (41) (652) (636) (3,835) $(189) $992 $(296) $3,693 For purposes of our Consolidated Statements of FFO, we do not segregate discontinued operations. In addition, we include the disposition proceeds and the cost of dispositions for all CDFS properties disposed of during the period in the calculation of FFO, including those classified as discontinued operations. (9) In connection with purchase accounting, we record all of the acquired assets and liabilities at the estimated fair values at the date of acquisition. For our taxable subsidiaries, we generally recognize the deferred tax liabilities that represent the tax effect of the difference between the tax basis carried over and the fair values of these assets at the date of acquisition. As taxable income is generated in these subsidiaries, we recognize a deferred tax benefit in earnings as a result of the reversal of the deferred tax liability previously recorded at the acquisition date and we record current income tax expense representing the entire current income tax liability. In our calculation of FFO, we only include the current income tax expense to the extent the associated income is recognized for financial reporting purposes.
Released October 23, 2008