ProLogis Reports Second Quarter 2008 Results
- First Half FFO Results Up from 2007 -
- Company Confirms Full-year 2008 Guidance -
TOKYO, July 24 /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 June 30, 2008, of $1.06 per diluted share, down from $1.16 in 2007. Growth in income from the company's Investment Management business was offset by lower CDFS gains, as well as a reduced level of property income due to disposition activity in the second quarter of 2007. Net earnings per diluted share for the quarter were $0.80, compared with $1.50 in 2007. Net earnings in the second quarter of 2007 included approximately $0.56 of gains associated with the disposition of non-CDFS properties, which are not included in FFO, compared with $0.02 of similar gains during the same period in 2008.
For the six months ended June 30, 2008, FFO was $2.44 per diluted share, up from $2.41 in the first six months of 2007. Net earnings per diluted share for the six months ended June 30, 2008, were $1.53, compared with $2.39 in the same period of 2007, primarily due to the non-CDFS gains noted above.
"Our solid results for the second quarter reflect the geographically diversified nature of our global logistics infrastructure platform," Jeffrey H. Schwartz, ProLogis chairman and chief executive officer, said from Tokyo. "Throughout Asia and Central Europe, growing domestic consumption, exports and the lack of modern distribution space continue to support strong demand. Operating property fundamentals held up well, despite a difficult financial environment, and further signs of moderating demand for industrial space in the United States and the United Kingdom.
"We continue to pursue our disciplined investment strategy, deploying capital in the areas of the world where we see the greatest risk-adjusted returns and the strongest logistics market opportunities. The breadth of our platform allows us to take advantage of these opportunities."
During the second quarter, the company recognized increases in FFO and fees from its Investment Management business and achieved growth in leased space, rents and net operating income in its same-store pool. "Development margins are moving toward more normalized levels, reflecting our sustainable expectations for the business. New supply and the potential for overbuilding have been significantly reduced by the return to historic margin levels and continued capacity constraints in the debt markets. Ultimately, we believe these factors will result in healthier market conditions, and those companies with access to capital will be well positioned to capture opportunities," Schwartz added.
Company Confirms 2008 Guidance
The company confirms its guidance for 2008 FFO of $4.65 to $4.85 per share and net earnings of $3.15 to $3.35 per share. In addition, the company stated that it slightly exceeded its prior expectations for first half 2008 profitability primarily due to the recognition of certain CDFS gains, which had originally been anticipated in the third quarter, as well as lower losses related to the company's share of remeasurement and settlement losses on interest rate derivative contracts entered into by ProLogis' unconsolidated property funds. As a result, the company now anticipates that approximately 47 to 49 percent of full-year FFO per share will be recognized in the second half of the year, with roughly two-thirds of that amount being recognized in the fourth quarter, due to a larger expected volume of CDFS contributions. The weighting of earnings per share is expected to be similar to the distribution of FFO per share for the remaining quarters.
Continued Strength in International Demand
The company noted that global trade continues to be relatively strong, particularly throughout Asia, driving demand for distribution space in key global logistics markets. "Our concentration of existing facilities and land positions near major seaports, inland ports and rail-served locations allows us to address this demand and drives our development business," said Ted R. Antenucci, ProLogis president and chief investment officer. "While there is a greater degree of market uncertainty in the United States and the United Kingdom, over 87 percent of our development starts year to date are in markets outside these countries."
ProLogis began construction of $1.01 billion of new development during the second quarter, including development within its retail and mixed-use and industrial joint ventures, bringing the company's total CDFS asset pipeline to $8.65 billion at June 30, 2008. Of this amount, total expected investment in projects currently under construction is $4.47 billion, while the space associated with the remaining $4.18 billion of completed developments and repositioned properties was 55.1 percent leased at quarter end based on expected investment, up from 53.7 percent at March 31, 2008.
During the quarter, the company signed approximately 34.3 million square feet of leases worldwide, bringing the total for the first half of the year to 60.8 million square feet. Of that total, 14.6 million square feet were new CDFS leases, including those second quarter transactions with repeat customers such as: Amazon.com in Las Vegas, Nippon Express in Nagoya, Volkswagen in Beijing and Schenker in Paris.
Overall US Markets Impacted by Economic Conditions
"Compared with previous US downturns, industrial supply and demand are better balanced, reflecting a significant decrease in new speculative development activity," said Walter C. Rakowich, president and chief operating officer. During the second quarter, the company reported that overall net absorption in the top 30 North American logistics markets declined to roughly 10.8 million square feet, and vacancies in these 30 markets increased to 8.5 percent from 7.9 percent at March 31, 2008.
"Our stabilized North American portfolio remains well leased at 94.4 percent. During the second quarter, all of our US development starts were preleased, while we started two inventory projects outside the United States in Toronto and Mexico City -- both relatively healthy markets," said Diane S. Paddison, executive director of global operations.
Selected Financial and Operating Information
-- Increased same-store net operating income in the quarter by 1.6 percent, resulting from 1.3 percent growth in leased space and rent growth on turnovers of 3.1 percent. For the first six months, same-store net operating income increased 2.4 percent, resulting from a 1.6 percent increase in leased space and rent growth on turnovers of 4.7 percent.
-- Maintained strong occupancy in the global stabilized portfolio of 94.2 percent, compared with 94.6 percent at March 31, 2008.
-- Recycled a total of $1.30 billion of capital through contributions and dispositions during the quarter. Of the total, $1.28 billion was from CDFS dispositions, with $79.8 million of that from acquired property portfolios. The remaining $20.5 million was from non-CDFS dispositions. Year-to-date total dispositions were $2.76 billion, with $2.70 billion from CDFS dispositions.
-- Realized FFO from CDFS dispositions of $200.3 million for the quarter. Pre-deferral, post-tax margins for developed and repositioned properties during the second quarter averaged 24.5 percent, while post-tax, post-deferral margins were 19.6 percent.
-- Increased total assets owned and under management to $40.4 billion, up from $36.3 billion at December 31, 2007, a year-to-date increase of 11.3 percent.
-- Grew ProLogis' share of FFO from property funds to $41.1 million for the quarter, compared with $33.2 million for the second quarter of 2007, an increase of 23.8 percent.
-- Recognized fee income from property funds of $32.6 million, compared with $23.9 million for the second quarter of 2007, an increase of 36.4 percent.
Copies of ProLogis' second 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, July 24, 2008. A replay of the webcast will be available on the company's website until September 30, 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 132 markets across North America, Europe and Asia. The company has $40.4 billion of assets owned, managed and under development, comprising 542.3 million square feet (50.4 million square meters) in 2,884 properties as of June 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 Second Quarter 2008 Unaudited Financial Results Selected Financial Information (in thousands, except per share amounts and percentages) Three Months Ended Six Months Ended SUMMARY OF RESULTS June 30, June 30, 2008 2007 2008 2007 Net earnings attributable to common shares: Net earnings attributable to common shares $217,392 $400,104 $411,397 $636,195 Net earnings per share attributable to common shares - diluted $0.80 $1.50 $1.53 $2.39 FFO: FFO attributable to common shares $288,365 $309,905 $657,486 $639,618 FFO per share attributable to common shares - diluted $1.06 $1.16 $2.44 $2.41 Distributions declared per common share (1) $0.5175 $0.46 $1.035 $0.92 OPERATING METRICS Three Months Ended Six Months Ended June 30, June 30, 2008 2007 2008 2007 Same Store: NOI + 1.62% + 6.16% + 2.43% + 5.89% Rental Rates + 3.06% + 8.26% + 4.65% + 7.80% Average Leasing + 1.29% + 2.66% + 1.58% + 2.92% Total Expected Investment of Development Starts $1,013,127 $687,811 $1,942,731 $1,303,411 See our definition of FFO and our definition of EBITDA. Footnotes follow Consolidated Balance Sheets. ProLogis Second Quarter 2008 Unaudited Financial Results Consolidated Statements of Earnings (in thousands) Three Months Ended Six Months Ended June 30, June 30, 2008 2007 2008 2007 Revenues: Rental income (2) $262,380 $270,840 $531,090 $527,386 CDFS disposition proceeds: Developed and repositioned properties 1,136,655 686,715 2,400,068 1,356,653 Acquired property portfolios 79,843 - 163,175 - Property management and other fees and incentives 32,580 23,937 62,070 45,584 Development management and other income 3,374 6,176 10,531 13,615 Total revenues 1,514,832 987,668 3,166,934 1,943,238 Expenses: Rental expenses 86,186 75,052 177,159 142,180 Cost of CDFS dispositions: Developed and repositioned properties 936,610 476,684 1,921,917 915,675 Acquired property portfolios 79,843 - 163,175 - General and administrative(3) 59,215 48,423 115,687 96,765 Depreciation and amortization 84,866 74,004 162,238 151,973 Other expenses 5,633 15,068 8,103 17,934 Total expenses 1,252,353 689,231 2,548,279 1,324,527 Operating income 262,479 298,437 618,655 618,711 Other income (expense): Earnings from unconsolidated property funds (4) 36,553 15,804 17,986 34,768 (Losses) earnings from CDFS joint ventures and other unconsolidated investees (6,878) 1,773 (3,606) 2,317 Interest expense (5) (84,136) (90,640) (169,260) (179,291) Interest and other income, net 9,644 9,735 15,260 20,909 Total other income(expense) (44,817) (63,328) (139,620) (121,297) Earnings before minority interest 217,662 235,109 479,035 497,414 Minority interest share in loss (income) 4,585 (723) 3,479 (896) Earnings before certain net gains 222,247 234,386 482,514 496,518 Gains recognized on dispositions of certain non- CDFS business assets (6) 4,662 124,085 4,662 124,085 Foreign currency exchange gains (losses), net 12,095 22,706 (24,606) 9,154 Earnings before income taxes 239,004 381,177 462,570 629,757 Income taxes: Current income tax expense 12,692 26,645 37,524 44,745 Deferred income tax expense (benefit) 6,236 (9,503) 8,736 (6,182) Total income taxes 18,928 17,142 46,260 38,563 Earnings from continuing operations 220,076 364,035 416,310 591,194 Discontinued operations (7): (Loss) income attributable to disposed properties and assets held for sale (150) 1,069 32 3,050 Gains recognized on dispositions: Non-CDFS business assets 1,856 27,161 5,669 32,125 CDFS business assets 1,994 14,196 2,124 22,537 Total discontinued operations 3,700 42,426 7,825 57,712 Net earnings 223,776 406,461 424,135 648,906 Less preferred share dividends 6,384 6,357 12,738 12,711 Net earnings attributable to common shares $217,392 $400,104 $411,397 $636,195 Weighted average common shares outstanding - Basic 262,715 257,086 260,827 255,677 Weighted average common shares outstanding - Diluted 272,317 267,880 270,370 266,723 Net earnings per share attributable to common shares - Basic: Continuing operations $0.82 $1.39 $1.55 $2.26 Discontinued operations 0.01 0.17 0.03 0.23 Net earnings per share attributable to common shares - Basic $0.83 $1.56 $1.58 $2.49 Net earnings per share attributable to common shares - Diluted: Continuing operations $0.79 $1.34 $1.50 $2.17 Discontinued operations 0.01 0.16 0.03 0.22 Net earnings per share attributable to common shares - Diluted $0.80 $1.50 $1.53 $2.39 Calculation of Net Earnings per Share Attributable to Common Shares - Diluted (in thousands, except per share amounts) Three Months Ended Six Months Ended June 30, June 30, 2008 2007 2008 2007 Net earnings attributable to common shares - Basic $217,392 $400,104 $411,397 $636,195 Minority interest (a) 1,087 1,474 2,238 2,462 Adjusted net earnings attributable to common shares - Diluted $218,479 $401,578 $413,635 $638,657 Weighted average common shares outstanding - Basic 262,715 257,086 260,827 255,677 Incremental weighted average effect of conversion of limited partnership units 5,053 5,108 5,053 5,124 Incremental weighted average effect of potentially dilutive instruments (b) 4,549 5,686 4,490 5,922 Weighted average common shares outstanding - Diluted 272,317 267,880 270,370 266,723 Net earnings per share attributable to common shares - Diluted $0.80 $1.50 $1.53 $2.39 COMMENTS (a) Includes only the minority interest related to the convertible limited partnership units. (b) Total weighted average potentially dilutive instruments outstanding were 10,276 and 10,283 for the three months ended June 30, 2008 and 2007, respectively, and 10,453 and 10,557 for the six months ended June 30, 2008 and 2007, respectively. Substantially all were dilutive for all periods. Footnotes follow Consolidated Balance Sheets. ProLogis Second Quarter 2008 Unaudited Financial Results Consolidated Statements of Funds From Operations (FFO) (in thousands, except per share amounts) Three Months Ended Six Months Ended June 30, June 30, 2008 2007 2008 2007 Revenues: Rental income $262,501 $274,751 $531,977 $537,052 CDFS disposition proceeds: Developed and repositioned properties 1,151,862 792,524 2,415,275 1,529,951 Acquired property portfolios 79,843 - 163,175 - Property management and other fees and incentives 32,580 23,937 62,070 45,584 Development management and other income 3,374 6,176 10,531 13,615 Total revenues 1,530,160 1,097,388 3,183,028 2,126,202 Expenses: Rental expenses 86,302 76,653 177,653 145,828 Cost of CDFS dispositions: Developed and repositioned properties 951,533 568,297 1,936,710 1,068,773 Acquired property portfolios 79,843 - 163,175 - General and administrative(3) 59,215 48,423 115,687 96,765 Depreciation of corporate assets 4,731 2,585 8,151 5,291 Other expenses 5,633 15,068 8,103 17,934 Total expenses 1,187,257 711,026 2,409,479 1,334,591 342,903 386,362 773,549 791,611 Other income (expense): FFO from unconsolidated property funds (4) 41,075 33,249 78,387 63,869 FFO from CDFS joint ventures and other unconsolidated investees (4,685) 3,920 480 6,056 Interest expense (5) (84,136) (90,640) (169,260) (179,291) Interest and other income, net 9,644 9,735 15,260 20,909 Foreign currency exchange losses, net (1,945) (2,034) (3,805) (8,222) Current income tax expense (12,692) (23,607) (27,866) (41,707) Total other income (expense) (52,739) (69,377) (106,804) (138,386) FFO 290,164 316,985 666,745 653,225 Less preferred share dividends 6,384 6,357 12,738 12,711 Less minority interest share in (loss) income (4,585) 723 (3,479) 896 FFO attributable to common shares $288,365 $309,905 $657,486 $639,618 Weighted average common shares outstanding - Basic 262,715 257,086 260,827 255,677 Weighted average common shares outstanding - Diluted 272,317 267,880 270,370 266,723 FFO per share attributable to common shares: Basic $1.10 $1.21 $2.52 $2.50 Diluted $1.06 $1.16 $2.44 $2.41 Calculation of FFO per Share Attributable to Common Shares - Diluted (in thousands, except per share amounts) Three Months Ended Six Months Ended June 30, June 30, 2008 2007 2008 2007 FFO attributable to common shares - Basic $288,365 $309,905 $657,486 $639,618 Minority interest attributable to convertible limited partnership units 1,087 1,474 2,238 2,462 FFO attributable to common shares - Diluted $289,452 $311,379 659,724 642,080 Weighted average common shares outstanding - Diluted 272,317 267,880 270,370 266,723 FFO per share attributable to common shares - Diluted $1.06 $1.16 $2.44 $2.41 See Consolidated Statements of Earnings and the Reconciliations of Net Earnings to FFO. See our definition of FFO and our definition of EBITDA. Footnotes follow Consolidated Balance Sheets. 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 Second Quarter 2008 Unaudited Financial Results Reconciliations of Net Earnings to FFO (in thousands) Three Months Ended Six Months Ended June 30, June 30, 2008 2007 2008 2007 Reconciliation of net earnings to FFO: Net earnings attributable to common shares $217,392 $400,104 $411,397 $636,195 Add (deduct) NAREIT defined adjustments: Real estate related depreciation and amortization 80,135 71,419 154,087 146,682 Adjustments to gains on CDFS dispositions for depreciation (1,710) - (1,710) (2,337) Gains recognized on dispositions of certain non- CDFS business assets (4,662) (124,085) (4,662) (124,085) Reconciling items attributable to discontinued operations(7): Gains recognized on dispositions of non-CDFS business assets (1,856) (27,161) (5,669) (32,125) Real estate related depreciation and amortization 155 1,241 361 2,968 Total discontinued operations (1,701) (25,920) (5,308) (29,157) Our share of reconciling items from unconsolidated investees: Real estate related depreciation and amortization 33,494 20,368 66,312 39,209 (Gains) adjustments on dispositions of non-CDFS business assets (111) 11 (165) (1,888) Other amortization items (3,860) (2,040) (8,070) (3,949) Total unconsolidated investees 29,523 18,339 58,077 33,372 Total NAREIT defined adjustments 101,585 (60,247) 200,484 24,475 Subtotal-NAREIT defined FFO 318,977 339,857 611,881 660,670 Add (deduct) our defined adjustments: Foreign currency exchange (gains) losses, net (14,040) (24,740) 20,801 (17,376) Current income tax expense (8) - 3,038 9,658 3,038 Deferred income tax expense (benefit) 6,236 (9,503) 8,736 (6,182) Our share of reconciling items from unconsolidated investees: Foreign currency exchange losses (gains), net 943 1,156 1,460 (173) Unrealized (gains) losses on derivative contracts (4) (23,817) - 4,815 - Deferred income tax expense (benefit) 66 97 135 (359) Total unconsolidated investees (22,808) 1,253 6,410 (532) Total our defined adjustments (30,612) (29,952) 45,605 (21,052) FFO attributable to common shares $288,365 $309,905 $657,486 $639,618 See Consolidated Statements of Earnings, Consolidated Statements of FFO and the definition of FFO. See our definition of FFO and our definition of EBITDA. Footnotes follow Consolidated Balance Sheets. ProLogis Second Quarter 2008 Unaudited Financial Results Reconciliations of Net Earnings to EBITDA (in thousands) Three Months Ended Six Months Ended June 30, June 30, 2008 2007 2008 2007 Reconciliation of net earnings to EBITDA: Net earnings attributable to common shares $217,392 $400,104 $411,397 $636,195 Add (deduct): NAREIT defined adjustments to compute FFO 101,585 (60,247) 200,484 24,475 Our defined adjustments to compute FFO (30,612) (29,952) 45,605 (21,052) Add: Interest expense 84,136 90,640 169,260 179,291 Depreciation of corporate assets 4,731 2,585 8,151 5,291 Current income tax expense included in FFO 12,692 23,607 27,866 41,707 Adjustments to CDFS gains on dispositions for interest capitalized 16,134 9,375 32,800 18,145 Preferred share dividends 6,384 6,357 12,738 12,711 Impairment charges - 12,600 - 12,600 Share of reconciling items from unconsolidated investees 47,131 26,415 87,534 49,977 EBITDA $459,573 $481,484 $995,835 $959,340 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 Second Quarter 2008 Unaudited Financial Results Consolidated Balance Sheets (in thousands, except per share data) June 30, December 31, 2008 2007 Assets: Investments in real estate assets: Industrial operating properties $10,986,903 $11,000,079 Retail operating properties 331,497 328,420 Land subject to ground leases and other 453,834 458,782 Properties under development (including cost of land) 2,122,533 1,986,285 Land held for development 2,477,318 2,152,960 Other investments 733,895 652,319 17,105,980 16,578,845 Less accumulated depreciation 1,469,495 1,368,458 Net investments in real estate assets 15,636,485 15,210,387 Investments in and advances to unconsolidated investees: Property funds 1,860,473 1,755,113 CDFS joint ventures and other unconsolidated investees 661,328 590,164 Total investments in and advances to unconsolidated investees 2,521,801 2,345,277 Cash and cash equivalents 523,846 399,910 Accounts and notes receivable 349,791 340,039 Other assets 1,434,482 1,408,814 Discontinued operations - assets held for sale (7) 6,368 19,607 Total assets $20,472,773 $19,724,034 Liabilities and Shareholders' Equity: Liabilities: Lines of credit $2,162,153 $1,955,138 Senior notes and other unsecured debt 4,795,286 4,891,106 Convertible debt 2,881,710 2,332,905 Secured debt and assessment bonds 950,051 1,326,919 Accounts payable and accrued expenses 874,462 933,075 Other liabilities 763,014 769,408 Discontinued operations - assets held for sale (7) 153 424 Total liabilities 12,426,829 12,208,975 Minority interest 115,582 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 2,625 2,577 Additional paid-in capital 6,646,669 6,412,473 Accumulated other comprehensive income 401,228 275,322 Retained earnings 529,840 396,026 Total shareholders' equity 7,930,362 7,436,398 Total liabilities and shareholders' equity $20,472,773 $19,724,034 ProLogis Second 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 on ProLogis 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. (2) In our Consolidated Statements of Earnings, rental income includes the following (in thousands): Three Months Ended Six Months Ended June 30, June 30, 2008 2007 2008 2007 Rental income $189,967 $203,904 $392,560 $399,206 Rental expense recoveries 63,474 56,652 122,777 104,933 Straight-lined rents 8,939 10,284 15,753 23,247 $262,380 $270,840 $531,090 $527,386 (3) During the first six months of 2008 and 2007, we recorded $4.0 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. (4) The unconsolidated property funds that we manage, and in which we have an equity ownership, may enter into interest rate swap contracts that are designated as cash flow hedges to mitigate interest expense volatility associated with movements of interest rates for future debt issuances. In 2007, certain of the property funds in North America issued short-term bridge financing to finance their acquisitions of properties from us and third parties. 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 and, therefore, the change in the fair value of these contracts was recorded through earnings, along with the gain or loss on settlement of certain contracts. Included in earnings from unconsolidated property funds, in our Consolidated Statements of Earnings for the three and six months ended June 30, 2008, are gains of $6.6 million and losses of $14.7 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 $2.8 million and $5.8 million during the three and six months ended June 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 gains of $14.3 million and $4.0 million for the three and six months ended June 30, 2008, respectively, representing our share of the remeasurement gains or losses of these contracts. (5) The following table presents the components of interest expense as reflected in our Consolidated Statements of Earnings (in thousands). The increase in interest expense before capitalization is primarily the result of increased debt levels (a function of increased development activities, partially offset by contribution activity) offset by a decrease in our weighted-average borrowing rate. The increase in development activities also accounts for the increased capitalized interest. Three Months Ended Six Months Ended June 30, June 30, 2008 2007 2008 2007 Gross interest expense $120,903 $117,854 $245,046 $232,876 Net premium amortization (1,958) (2,592) (2,550) (5,687) Amortization of deferred loan costs 3,040 2,862 5,952 5,291 Interest expense before capitalization 121,985 118,124 248,448 232,480 Less: capitalized amounts (37,849) (27,484) (79,188) (53,189) Net interest expense $84,136 $90,640 $169,260 $179,291 In May 2008, the Financial Accounting Standards Board ("FASB") issued FASB 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 period during which the debt is expected to be 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 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. (6) 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 three and six months ended June 30, 2008, we contributed one such property to the ProLogis Mexico Industrial Fund. During the three and six months ended June 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. (7) 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. During the first half of 2008, we disposed of five properties to third parties, one of which was a CDFS property, 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 June 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 Six Months Ended June 30, June 30, 2008 2007 2008 2007 Rental income $121 $3,911 $887 $9,666 Rental expenses (116) (1,601) (494) (3,648) Depreciation and amortization (155) (1,241) (361) (2,968) $(150) $1,069 $32 $3,050 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. (8) 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 July 24, 2008