ProLogis Reports Growth In Third Quarter FFO and Earnings Per Share
- 78.5 Percent Increase in FFO per Share Driven by Investment Management Business Gains, Strong Operating Property Performance and Solid Development Profits -
- Company Sets Range of $4.65 to $4.85 for 2008 FFO per Share -
DENVER, Oct. 25 /PRNewswire-FirstCall/ -- ProLogis (NYSE: PLD), the world's largest owner, manager and developer of distribution facilities, today reported third quarter funds from operations as defined by ProLogis (FFO) of $1.41 per diluted share, up 78.5 percent from $0.79 in the same period in 2006. Net earnings per diluted share were $1.12 for the third quarter of 2007, compared with $0.65 for the same period in 2006.
For the nine months ended September 30, 2007, FFO was $3.81 per diluted share, up 47.1 percent from $2.59 in the first nine months of 2006. Net earnings per diluted share for the nine months ended September 30, 2007, were $3.51, compared with $2.04 in the comparable period of 2006.
"We're pleased to report another quarter of strong financial and operating performance," said Jeffrey H. Schwartz, ProLogis chairman and chief executive officer. "Our results reflect high occupancy levels with strong growth in rental rates, above-average development margins and the value we are creating through our Investment Management business."
Schwartz noted that global market supply and demand remain generally well balanced, while international trade continues to support customer requirements for modern distribution space in key logistics markets. "We have significant opportunities to further expand our global platform due to the ongoing reconfiguration of supply chains, functional obsolescence of a large portion of existing facilities throughout Europe and Asia and growing customer demand for more energy-efficient buildings.
"We believe these trends are secular, rather than cyclical, in nature and will support favorable industrial market fundamentals for the foreseeable future," Schwartz said. "Given the industry-leading scale and quality of our portfolio and the strength of our customer relationships, we are exceptionally well positioned to benefit from this long-term environment."
2007 Guidance Increased; Guidance Set for 2008 FFO per Share at $4.65 to $4.85
The company increased full-year guidance for FFO per share to $4.40 - $4.50. The increase is due to the third quarter recognition in FFO of $0.36 per share related to ProLogis' previously announced acquisition of the shares of Macquarie ProLogis Trust (MPR) and subsequent contribution to a new property fund. The transaction resulted in the recognition of deferred proceeds on prior property contributions to ProLogis North American Properties Fund V, the subsequent gain on contribution of the MPR assets into the newly formed ProLogis North American Industrial Fund II (NAIF II) and a gain related to the settlement of foreign currency forward contracts used to manage the fluctuation of the purchase price as denominated in Australian dollars. The company's previous guidance, which included an estimated $0.30 per share of income related to the MPR transaction, was $4.25 - $4.40 in FFO per share. The company's guidance related to earnings per share remains at its most recent estimate of $3.80 - $4.00 per share.
The company also set a range for 2008 FFO guidance of $4.65 to $4.85 per share and will provide business drivers to support that guidance in early 2008. "As a result of continued strong market fundamentals and customer demand driven by growth in global trade, we anticipate another year of solid growth in FFO per share," Schwartz said.
New Funds Expand Investment Management Platform and Support Growth in Fee Income
During the third quarter, the company announced four new property funds, in addition to NAIF II, with a combined capitalization of over $14 billion that will own distribution centers in Europe, the United States, Mexico and South Korea. Together with the capacity in ProLogis' existing funds, the company now has agreements in place to support $33 billion of assets in its Investment Management business, compared with $18.2 billion at September 30, 2007, and expects to recognize a corresponding increase in management fee income as these new funds are fully invested. At its October 10, 2007 Investor Day, the company outlined an objective to grow its Investment Management business to $37 to $40 billion by the end of 2010.
"Our new property funds were oversubscribed despite the recent credit crunch, which has begun to slow competitive development activity and caused investors to look towards more secure investments," Schwartz said. "Having committed equity capital in place to support our growing development business will prove to be a significant benefit to us as the environment for smaller, less well-capitalized developers becomes more challenging."
Solid Market Fundamentals Support Increased Expectations for New Development
"In North America, net absorption in the top 30 logistics markets remained healthy at over 32 million square feet during the third quarter," said Walter C. Rakowich, ProLogis president and chief operating officer. "While there are indications of a potential slowdown in the North American economy, our U.S. portfolio remains well occupied, and we are capturing a significant number of new build-to-suit opportunities.
"Our build-to-suit business also is accelerating in Europe. In Germany, for example, we signed agreements for roughly 1.8 million square feet of new development on a pre-committed basis. In Asia, where markets remain chronically undersupplied, net absorption remains healthy and leasing activity in the company's new inventory development is brisk," Rakowich said. "Additionally, with 79 percent of our year-to-date construction starts outside North America, we are well diversified and positioned to sustain growth."
During the third quarter, ProLogis began construction of $797.9 million of new industrial development, including development activity within its industrial joint ventures. The company's total CDFS pipeline stood at $6.2 billion at the end of the quarter, a 16.1 percent increase over December 31, 2006. Of this amount, total expected investment in projects currently under construction is $2.8 billion, while the remaining $3.4 billion of completed developments and repositioned properties was 65 percent leased at quarter end.
"We continue to achieve strong lease up in our pipeline of recently completed projects and properties under development," said Ted R. Antenucci, ProLogis chief investment officer. "As a result of strong customer demand and leasing, we have increased our guidance for expected 2007 development starts to between $3.8 and $4.0 billion, up from our guidance of $3.4 to $3.6 billion just last quarter."
During the quarter, the company signed roughly 10.2 million square feet of new CDFS leases, including those with repeat customers such as: Hitachi Transport in Fukuoka, Japan; DHL in Venlo, The Netherlands and GE Commercial in Monterrey, Mexico. "Existing customers continue to drive our new development, representing 73 percent of the new CDFS leases signed during the quarter," Antenucci said.
Selected Financial and Operating Information -- Increased same-store net operating income in the quarter by 5.4 percent (a 5.9 percent increase when straight-lined rents and lease amortization are excluded), driven by 2.7 percent growth in average same-store occupancies and same-store rent growth of 9.6 percent. -- Maintained strong occupancy in the stabilized portfolio of 95.5 percent, compared with 95.2 percent at June 30, 2007. -- Recycled $3.2 billion of capital from CDFS contributions and dispositions during the quarter. Including non-CDFS disposition activity, total dispositions and contributions were $3.3 billion for the quarter. -- Realized FFO from CDFS transactions of $230.1 million for the quarter, up from $92.8 million in the third quarter of 2006. For the third quarter, post-deferral, post-tax margins for all CDFS dispositions averaged 7.7%, with Developed and Repositioned Properties averaging 27.3 percent and Acquired Property Portfolios (including the MPR transaction noted above) averaging 2.9 percent. Year-to-date, post- deferral, post-tax margins for all CDFS dispositions averaged 16.8 percent, with Developed and Repositioned Properties averaging 36.4%. -- Started new developments with a total expected investment of $2.1 billion in the first nine months, including joint venture developments. -- Grew ProLogis' share of FFO from property funds to $39.9 million for the quarter, compared with $19.4 million in the same quarter of 2006, an increase of 105.7 percent. -- Recognized fee income from property funds for the quarter of $27.1 million, compared with $20.4 million in the same quarter of 2006, an increase of 32.8 percent. -- Increased total assets owned and under management to $34.4 billion, up from $26.7 billion at December 31, 2006, a year-to-date increase of 28.8 percent.
Copies of ProLogis' third quarter 2007 supplemental information will be available from the company's website at http://ir.prologis.com or by request at 800-820-0181. 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 25, 2007. A replay of the webcast will be available on the company's website until November 8, 2007. 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 105 markets across North America, Europe and Asia. The company has $34.4 billion of assets owned, managed and under development, comprising 483.0 million square feet (44.9 million square meters) in 2,669 properties as of September 30, 2007. 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 more than 1,300 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, 2006.
ProLogis Third Quarter 2007 Unaudited Financial Results Selected Financial Information (in thousands, except per share amounts and percentages) Three Months Ended September 30, 2007 2006 % Change Net earnings attributable to common shares: Net earnings attributable to common shares $299,445 $166,305 80.1% Net earnings per diluted share attributable to common shares $1.12 $0.65 72.3% FFO and FFO, as adjusted see definition of FFO FFO attributable to common shares $376,155 $202,054 86.2% Add back: Merger integration and relocation expenses (1) - - FFO attributable to common shares, as adjusted $376,155 $202,054 86.2% FFO per diluted share attributable to common shares $1.41 $0.79 78.5% Add back: Merger integration and relocation expenses(1) - - FFO per diluted share attributable to common shares, as adjusted $1.41 $0.79 78.5% EBITDA: EBITDA $556,029 $329,837 68.6% Distributions: Actual distributions per common share (2) $0.46 $0.40 15.0% Nine Months Ended September 30, 2007 2006 %Change Net earnings attributable to common shares: Net earnings attributable to common shares $935,639 $517,861 80.7% Net earnings per diluted share attributable to common shares $3.51 $2.04 72.1% FFO and FFO, as adjusted see definition of FFO FFO attributable to common shares Add back: $1,015,773 $656,263 54.8% Merger integration and relocation expenses (1) - 2,723 FFO attributable to common shares, as adjusted 1,015,773 $658,986 54.1% FFO per diluted share attributable to common shares $3.81 $2.58 47.7% Add back: Merger integration and relocation expenses(1) - 0.01 FFO per diluted share attributable to common shares, as adjusted $3.81 $2.59 47.1% EBITDA: EBITDA $1,515,398 $1,036,369 46.2% Distributions: Actual distributions per common share (2) $1.38 $1.20 15.0% See our definition of FFO and our definition of EBITDA. Footnotes follow Consolidated Balance Sheets. ProLogis Third Quarter 2007 Unaudited Financial Results Consolidated Statements of Earnings (in thousands) Three Months Ended Nine Months Ended September 30, September 30, 2007 2006 2007 2006 Revenues: Rental income (7)(8) $282,579 $232,495 $813,114 $673,040 CDFS disposition proceeds (9)(10)(11): Developed and repositioned properties 735,428 311,840 2,092,081 1,050,704 Acquired property portfolios 2,406,795 - 2,406,795 - Property management and other fees and incentives (11) 27,095 20,421 72,679 79,318 Development management and other income 10,321 11,099 23,936 26,525 Total revenues 3,462,218 575,855 5,408,605 1,829,587 Expenses: Rental expenses (7) 73,473 58,547 212,664 170,723 Cost of CDFS dispositions (9): Developed and repositioned properties 572,668 234,216 1,488,343 821,054 Acquired property portfolios 2,338,186 - 2,338,186 - General and administrative (1)(12) 52,326 37,787 152,971 113,085 Depreciation and amortization 72,497 69,634 225,206 207,876 Other expenses (13) 3,550 2,977 21,484 8,924 Total expenses 3,112,700 403,161 4,438,854 1,321,662 Operating income 349,518 172,694 969,751 507,925 Other income (expense): Earnings from unconsolidated property funds (11) 46,688 11,215 81,456 78,629 Earnings from CDFS joint ventures and other unconsolidated investees (6) 4,679 9,590 6,996 47,011 Interest expense (14) (107,964) (77,417) (287,255) (216,933) Interest income on notes receivable 2,950 3,914 9,107 13,236 Interest and other income, net 8,663 5,313 23,415 10,596 Total other income (expense) (44,984) (47,385) (166,281) (67,461) Earnings before minority interest 304,534 125,309 803,470 440,464 Minority interest (1,855) (565) (2,751) (2,541) Earnings before certain net gains 302,679 124,744 800,719 437,923 Gains recognized on dispositions of certain non- CDFS business assets (15) 21,289 - 145,374 13,709 Foreign currency exchange gains, net (16) 991 9,202 10,145 16,449 Earnings before income taxes 324,959 133,946 956,238 468,081 Income taxes (17): Current income tax expense 14,204 34,824 58,949 75,913 Deferred income tax (benefit) expense 11,892 (22,362) 5,710 (16,780) Total income taxes 26,096 12,462 64,659 59,133 Earnings from continuing operations 298,863 121,484 891,579 408,948 Discontinued operations (18): Income attributable to disposed properties and assets held for sale 329 6,601 1,856 17,760 Gains recognized on dispositions: Non-CDFS business assets 6,607 29,386 38,732 80,037 CDFS business assets - 15,188 22,537 30,178 Total discontinued operations 6,936 51,175 63,125 127,975 Net earnings 305,799 172,659 954,704 536,923 Less preferred share dividends 6,354 6,354 19,065 19,062 Net earnings attributable to common shares $299,445 $166,305 $935,639 $517,861 Weighted average common shares outstanding - Basic 257,435 245,460 256,270 244,918 Weighted average common shares outstanding - Diluted 267,871 256,233 267,177 255,559 Net earnings per share attributable to common shares - Basic: Continuing operations $1.13 $0.47 $3.40 $1.59 Discontinued operations 0.03 0.21 0.25 0.52 Net earnings per share attributable to common shares - Basic $1.16 $0.68 $3.65 $2.11 Net earnings per share attributable to common shares - Diluted: Continuing operations $1.09 $0.45 $3.27 $1.54 Discontinued operations 0.03 0.20 0.24 0.50 Net earnings per share attributable to common shares - Diluted $1.12 $0.65 $3.51 $2.04 Footnotes follow Consolidated Balance Sheets. 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, 2007 2006 2007 2006 Net earnings attributable to common shares - Basic $299,445 $166,305 $935,639 $517,861 Minority interest (a) 947 565 3,409 2,541 Adjusted net earnings attributable to common shares - Diluted $300,392 $166,870 $939,048 $520,402 Weighted average common shares outstanding - Basic 257,435 245,460 256,270 244,918 Incremental weighted average effect of conversion of limited partnership units 5,011 5,142 5,086 5,218 Incremental weighted average effect of potentially dilutive instruments (b) 5,425 5,631 5,821 5,423 Weighted average common shares outstanding - Diluted 267,871 256,233 267,177 255,559 Net earnings per share attributable to common shares - Diluted $1.12 $0.65 $3.51 $2.04 COMMENTS (a) Includes only the minority interest related to the convertible limited partnership units. (b) Total weighted average potentially dilutive instruments outstanding were 10,062 and 10,966 for the three months ended September 30, 2007 and 2006, respectively, and 10,393 and 10,987 for the nine months ended September 30, 2007 and 2006 respectively. Subtantially all were dilutive for both periods. ProLogis Third Quarter 2007 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, 2007 2006 2007 2006 Revenues: Rental income (7)(18) $283,127 $243,907 $820,179 $723,356 CDFS disposition proceeds (9)(10)(11)(18): Developed and repositioned properties 735,428 429,002 2,265,379 1,273,783 Acquired property portfolios 2,406,795 - 2,406,795 - Property management and other fees and incentives (11) 27,095 20,421 72,679 79,318 Development management and other income 10,321 11,099 23,936 26,525 Total revenues 3,462,766 704,429 5,588,968 2,102,982 Expenses: Rental expenses (7)(18) 73,686 61,271 215,634 193,257 Cost of CDFS dispositions (9)(18): Developed and repositioned properties 573,914 336,190 1,642,687 1,013,489 Acquired property portfolios 2,338,186 - 2,338,186 - General and administrative (1)(12) 52,326 37,787 152,971 113,085 Depreciation of corporate assets 2,706 2,201 7,997 7,016 Other expenses (13) 3,550 2,977 21,484 8,924 Total expenses 3,044,368 440,426 4,378,959 1,335,771 418,398 264,003 1,210,009 767,211 Other income (expense): FFO from unconsolidated property funds (11) 39,931 19,420 103,800 98,467 FFO from CDFS joint ventures and other unconsolidated investees(6) 6,628 10,937 12,684 51,551 Interest expense (18) (107,964) (77,417) (287,255) (217,807) Interest income on notes receivable 2,950 3,914 9,107 13,236 Interest and other income, net 8,663 5,313 23,415 10,596 Foreign currency exchange gains (expenses and losses), net (16) 29,962 (840) 21,740 7,334 Current income tax expense (17) (14,204) (16,357) (55,911) (52,722) Total other income (expense) (34,034) (55,030) (172,420) (89,345) FFO 384,364 208,973 1,037,589 677,866 Less preferred share dividends 6,354 6,354 19,065 19,062 Less minority interest 1,855 565 2,751 2,541 FFO attributable to common shares $376,155 $202,054 $1,015,773 $656,263 Weighted average common shares outstanding - Basic 257,435 245,460 256,270 244,918 Weighted average common shares outstanding - Diluted 267,871 256,233 267,177 255,559 FFO per share attributable to common shares: Basic $1.46 $0.82 $3.96 $2.68 Diluted $1.41 $0.79 $3.81 $2.58 FFO attributable to common shares - Basic $376,155 $202,054 $1,015,773 $656,263 Minority interest attributable to convertible limited partnership units 947 565 3,409 2,541 FFO attributable to common shares - Diluted $377,102 $202,619 $1,019,182 $658,804 Merger integration and relocation expenses (1) - - - 2,723 FFO attributable to common shares, as adjusted - Diluted $377,102 $202,619 $1,019,182 $661,527 Weighted average common shares outstanding - Basic 257,435 245,460 256,270 244,918 Incremental weighted average effect of conversion of limited partnership units 5,011 5,142 5,086 5,218 Incremental weighted average effect of potentially dilutive instruments 5,425 5,631 5,821 5,423 Weighted average common shares outstanding - Diluted 267,871 256,233 267,177 255,559 FFO per share attributable to common shares - Diluted $1.41 $0.79 $3.81 $2.58 FFO per share attributable to common shares, as adjusted - Diluted $1.41 $0.79 $3.81 $2.59 See Consolidated Statements of Earnings and the Reconciliations of Net Earnings to FFO. 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 and losses from the sales of previously depreciated properties. We agree that these two NAREIT adjustments are useful to investors for the following reasons:
(a) historical cost accounting for real estate assets in accordance with GAAP assumes, through depreciation charges, that the value of real estate assets diminishes predictably over time. NAREIT stated in its White Paper on FFO "since real estate asset values have historically risen or fallen with market conditions, many industry investors have considered presentations of operating results for real estate companies that use historical cost accounting to be insufficient by themselves." Consequently, NAREIT's definition of FFO reflects the fact that real estate, as an asset class, generally appreciates over time and depreciation charges required by GAAP do not reflect the underlying economic realities. (b) REITs were created as a legal form of organization in order to encourage public ownership of real estate as an asset class through investment in firms that were in the business of long-term ownership and management of real estate. The exclusion, in NAREIT's definition of FFO, of gains and losses from the sales of previously depreciated operating real estate assets allows investors and analysts to readily identify the operating results of the long-term assets that form the core of a REIT's activities and assists in comparing those operating results between periods. We include the gains and losses from dispositions of properties acquired or developed in our CDFS business segment and our proportionate share of the gains and losses from dispositions recognized by the property funds in our definition of FFO.
At the same time that NAREIT created and defined its FFO concept for the REIT industry, it also recognized that ''management of each of its member companies has the responsibility and authority to publish financial information that it regards as useful to the financial community.'' We believe that financial analysts, potential investors and shareholders who review our operating results are best served by a defined FFO measure that includes other adjustments to GAAP net earnings in addition to those included in the NAREIT defined measure of FFO.
Our defined FFO measure excludes the following items from GAAP net earnings that are not excluded in the NAREIT defined FFO measure:
(i) deferred income tax benefits and deferred income tax expenses recognized by our subsidiaries; (ii) current income tax expense related to acquired tax liabilities that were recorded as deferred tax liabilities in an acquisition, to the extent the expense is offset with a deferred income tax benefit in GAAP earnings that is excluded from our defined FFO measure; (iii) certain foreign currency exchange gains and losses resulting from certain debt transactions between us and our foreign consolidated subsidiaries and our foreign unconsolidated investees; (iv) foreign currency exchange gains and losses from the remeasurement (based on current foreign currency exchange rates) of certain third party debt of our foreign consolidated subsidiaries and our foreign unconsolidated investees; and (v) mark-to-market adjustments associated with derivative financial instruments utilized to manage our foreign currency risks. FFO of our unconsolidated investees is calculated on the same basis.
The items that we exclude from GAAP net earnings, while not infrequent or unusual, 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. Most importantly, the economics underlying the items that we exclude from GAAP net earnings are not the primary drivers in management's decision-making process and capital investment decisions. Period to period fluctuations in these items can be driven by accounting for short-term factors that are not relevant to long-term investment decisions, long-term capital structures or to long-term tax planning and tax structuring decisions. Accordingly, we believe that investors are best served if the information that is made available to them allows them to align their analysis and evaluation of our operating results along the same lines that our management uses in planning and executing our business strategy.
Real estate is a capital-intensive business. Investors' analyses of the performance of real estate companies tend to be centered on understanding the asset value created by real estate investment decisions and understanding current operating returns that are being generated by those same investment decisions. The 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 that 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. Some of the limitations are:
-- The current income tax expenses that are excluded from our defined FFO measure represent taxes 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. Further, the amortization of capital expenditures and leasing costs necessary to maintain the operating performance of distribution properties are not reflected in FFO. -- Gains or losses from property dispositions represent changes in the value of the disposed properties. FFO, by excluding these gains and losses, 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 defined FFO measure result from the creation of a deferred income tax asset or liability that may have to be settled at some future point. Our defined FFO measure does 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 defined FFO measure 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 defined FFO measure is limited in that it does not reflect the current period changes in these net assets that result from periodic foreign currency exchange rate movements.
We compensate for these limitations by using our FFO measure only in conjunction with GAAP net earnings. To further compensate, we always reconcile our defined FFO measure to GAAP net earnings in our financial reports. Additionally, we provide investors with our complete financial statements prepared under GAAP, our definition of FFO, which includes a discussion of the limitations of using our non-GAAP measure, and a reconciliation of our GAAP measure (net earnings) to our non-GAAP measure (FFO, as we define it) so that investors can appropriately incorporate this measure and its limitations into their analyses.
ProLogis Third Quarter 2007 Unaudited Financial Results Reconciliations of Net Earnings to FFO (in thousands) Three Months Ended Nine Months Ended September 30, September 30, 2007 2006 2007 2006 Reconciliation of net earnings to FFO: Net earnings attributable to common shares $299,445 $166,305 $935,639 $517,861 Add (deduct) NAREIT defined adjustments: Real estate related depreciation and amortization 69,791 67,433 217,209 200,860 Adjustments to CDFS dispositions for depreciation (1,246) - (3,583) 466 Gains recognized on dispositions of certain non-CDFS business assets (15) (21,289) - (145,374) (13,709) Reconciling items attributable to discontinued operations (18): Gains recognized on dispositions of non-CDFS business assets (6,607) (29,386) (38,732) (80,037) Real estate related depreciation and amortization 7 2,087 2,240 9,148 Totals discontinued operations (6,600) (27,299) (36,492) (70,889) Our share of reconciling items from unconsolidated investees (19): Real estate related depreciation and amortization 24,460 18,010 63,669 47,834 Gains on dispositions of non-CDFS business assets (32,603) (6,642) (34,491) (6,753) Other amortization items (20) (2,427) (2,067) (6,376) (14,199) Totals unconsolidated investees (10,570) 9,301 22,802 26,882 Totals NAREIT defined adjustments 30,086 49,435 54,562 143,610 Subtotals-NAREIT defined FFO 329,531 215,740 990,201 661,471 Add (deduct) our defined adjustments: Foreign currency exchange losses (gains), net (16) 28,971 (10,042) 11,595 (9,115) Current income tax expense (17) - 18,467 3,038 23,191 Deferred income tax expense (benefit) (17) 11,892 (22,362) 5,710 (16,780) Our share of reconciling items from unconsolidated investees (19): Foreign currency exchange losses, net 6,001 1,143 5,828 130 Deferred income tax benefit (240) (892) (599) (2,634) Totals unconsolidated investees 5,761 251 5,229 (2,504) Totals our defined adjustments 46,624 (13,686) 25,572 (5,208) FFO attributable to common shares $376,155 $202,054 $1,015,773 $656,263 ProLogis Third Quarter 2007 Unaudited Financial Results Reconciliations of Net Earnings to EBITDA (in thousands) Three Months Ended Nine Months Ended September 30, September 30, 2007 2006 2007 2006 Reconciliation of net earnings to EBITDA: Net earnings attributable to common shares $299,445 $166,305 $935,639 $517,861 Add (deduct): NAREIT defined adjustments to compute FFO 30,086 49,435 54,562 143,610 Our defined adjustments to compute FFO 46,624 (13,686) 25,572 (5,208) Add: Interest expense 107,964 77,417 287,255 216,933 Depreciation of corporate assets 2,706 2,201 7,997 7,016 Current income tax expense included in FFO (17) 14,204 16,357 55,911 52,722 Adjustments to CDFS gains on dispositions for interest capitalized 14,458 5,521 32,632 25,427 Preferred share dividends 6,354 6,354 19,065 19,062 Reconciling items attributable to discontinued operations - - - 874 Impairment charges (13) - 614 12,600 4,174 Share of reconciling items from unconsolidated investees (19) 34,188 19,319 84,165 53,898 EBITDA $556,029 $329,837 $1,515,398 $1,036,369 See Consolidated Statements of Earnings and the Reconciliations of Net Earnings to FFO. Footnotes follow Consolidated Balance Sheets. Definition of EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization): We believe that EBITDA is a useful supplemental measure, although it does not represent net earnings or cash from operating activities that are computed in accordance with GAAP and is not indicative of cash available to fund cash needs, which we present in our Consolidated Statements of Cash Flows and include in our Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q that are filed with the Securities and Exchange Commission. Accordingly, the EBITDA measure presented should not be considered as an alternative to net earnings as an indicator of our operating performance, or as an alternative to cash flows from operating, investing, or financing activities as a measure of liquidity. The EBITDA measure presented may not be comparable to similarly titled measures of other REITs. EBITDA generally represents net earnings computed in accordance with GAAP adjusted to exclude: (i) interest expense; (ii) income tax expenses and benefits; and (iii) depreciation and amortization expenses. In our computation of EBITDA the following items are also excluded: (i) preferred dividends and charges related to the redemption of preferred shares; (ii) the foreign currency exchange gains and losses that are also excluded in our definition of FFO; (iii) impairment charges; and (iv) gains from the dispositions of non-CDFS business assets. 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 (i.e. the gains are larger since capitalized interest is not included in the basis of the assets contributed and sold). EBITDA of our unconsolidated investees is calculated on the same basis. ProLogis Third Quarter 2007 Unaudited Financial Results Consolidated Balance Sheets (in thousands, except per share data) September 30, December 31, 2007 (3) 2006 Assets: Investments in real estate assets: Industrial operating properties $10,770,280 $10,423,249 Retail operating properties 327,220 305,188 Land subject to ground leases and other 466,800 472,412 Properties under development (including cost of land) 1,242,359 964,842 Land held for development 2,241,569 1,397,081 Other investments 454,756 391,227 15,502,984 13,953,999 Less accumulated depreciation 1,340,046 1,280,206 Net investments in real estate assets 14,162,938 12,673,793 Investments in and advances to unconsolidated investees Property funds (4)(5) 1,722,778 981,840 CDFS joint ventures and other unconsolidated investees (6) 486,476 317,857 Total investments in and advances to unconsolidated investees 2,209,254 1,299,697 Cash and cash equivalents 550,272 475,791 Accounts and notes receivable 400,993 439,791 Other assets 1,309,096 957,295 Discontinued operations-assets held for sale (18) 18,519 57,158 Total assets $18,651,072 $15,903,525 Liabilities and Shareholders' Equity: Liabilities: Lines of credit $2,533,087 $2,462,796 Senior notes and other unsecured debt 4,490,765 4,445,092 Convertible debt 1,230,356 - Secured debt and assessment bonds 1,320,427 1,478,998 Accounts payable and accrued expenses 790,791 518,651 Other liabilities 774,314 546,129 Discontinued operations-assets held for sale (18) 385 1,012 Total liabilities 11,140,125 9,452,678 Minority interest 69,102 52,268 Shareholders' equity: Series C preferred shares at stated liquidation preference of $50.00 per share 100,000 100,000 Series F preferred shares at stated liquidation preference of $25.00 per share 125,000 125,000 Series G preferred shares at stated liquidation preference of $25.00 per share 125,000 125,000 Common shares at $.01 par value per share 2,573 2,509 Additional paid-in capital 6,386,977 6,000,119 Accumulated other comprehensive income 301,054 216,922 Retained earnings/(distributions in excess of net earnings) (21) 401,241 (170,971) Total shareholders' equity 7,441,845 6,398,579 Total liabilities and shareholders' equity $18,651,072 $15,903,525 ProLogis Third Quarter 2007 Unaudited Financial Results Notes to Consolidated Financial Statements *** Certain 2006 amounts included in this Supplemental Information package have been reclassified to conform to the 2007 presentation. (1) In September 2005, we completed a merger with Catellus Development Corporation and incurred certain costs including merger integration, employee transition costs and severance costs for certain of our employees whose responsibilities became redundant after the merger. In February 2006, we moved our corporate headquarters, which is located in Denver, to a recently constructed building. Relocation costs included moving, temporary facility costs and accelerated depreciation associated with non-real estate assets whose useful life was shortened due to the relocation. These amounts are included in general and administrative expenses in our Consolidated Financial Statements. (2) The annual distribution rate for 2007 is $1.84 per common share. The distribution is declared quarterly and may be adjusted at the discretion of the Board of Trustees. (3) In February 2007, we purchased the industrial business and made an investment in the retail business of Parkridge Holdings Limited (''Parkridge''), a European developer. The total purchase price was $1.3 billion, which was financed with $741.2 million in cash, the issuance of 4.8 million shares of our common stock (valued for accounting purposes at $71.01 per share for a total of $339.5 million) and the assumption of $194.9 million of debt and other liabilities. The cash portion of the acquisition was funded with borrowings under our Global Line and $600 million from a new senior unsecured facility, which was partially repaid with proceeds from contributions this quarter. We allocated the purchase price based on estimated fair values and recorded approximately $739.3 million of real estate assets, $156.3 million in investments in CDFS joint ventures and other unconsolidated investees, $58.1 million of cash and other tangible assets and $321.9 million of goodwill and other intangible assets included in Other Assets in our Consolidated Balance Sheets. The allocation of the purchase price was based upon preliminary estimates and assumptions and, accordingly, these allocations are subject to revision when final information is available. Revisions to the fair value allocations, which may be significant, will be recorded as adjustments to the purchase price allocations in subsequent periods and should not have a significant impact on our overall financial position or results of operations. (4) During the third quarter of 2007, we formed five new unconsolidated property funds in North America, Europe and Asia. We will serve as external manager of the funds and receive property and asset management fees and may also have the potential for incentive performance fees. See note 5 below for further information on the new property funds. (5) On July 11, 2007, we completed the previously announced acquisition of all of the units in Macquarie ProLogis Trust, an Australian listed property trust ("MPR"). At the time of acquisition, MPR owned approximately 89% of ProLogis North American Properties Fund V and certain other assets. 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. The cash portion of the transaction was financed primarily with borrowings under a credit agreement (the ''Credit Agreement'') among certain subsidiaries of ProLogis and certain lenders and an affiliate of Citigroup USA, Inc ("Citigroup"). The Credit Agreement provided for a $473.1 million term loan and a $646.2 million convertible loan. On August 27, 2007, Citigroup converted $546 million of the loan into equity of a newly created property fund, ProLogis North American Industrial Fund II, which resulted in Citigroup owning 63.1% and us owning 36.9% of the equity of the property fund. We contributed the real estate assets that we owned 100% after the acquisition of MPR, and associated debt, to ProLogis North American Industrial Fund II. These transactions resulted in a net gain on contribution of $52.0 million and the recognition of $16.6 million of previously deferred proceeds from the initial contribution of the assets to ProLogis North American Properties Fund V and are reflected in CDFS Acquired Property Portfolios (see note 9) in our Statements of Earnings and FFO. In addition, during the second quarter, we entered into foreign currency forward contracts to manage the foreign currency fluctuations of the purchase price of MPR and recognized gains of $9.3 million included in earnings. These contracts settled in July and resulted in gains of $17.3 million and $26.6 million for earnings and FFO, respectively, and are reflected in Foreign Currency Exchange Gains in our Consolidated Statements. (6) We have varying ownership interests in unconsolidated investees. The investees primarily engage in activities similar to our CDFS business segment activities and own operating properties in China, Europe and North America. We refer to the joint ventures engaged in industrial property development and management as industrial CDFS joint ventures. In addition, certain of the CDFS joint ventures engage in land, retail and commercial development and management and we refer to these joint ventures as non-industrial CDFS joint ventures. We have ownership interests in all of the CDFS joint ventures ranging from 15% to 50%. We also have varying ownership interests in other unconsolidated investees that primarily own and operate industrial, office and hotel properties. (7) Represents rental income earned and rental expenses incurred while we own a property directly. Under the terms of the respective lease agreements, some or all of our rental expenses are recovered from our customers. Amounts recovered are included as a component of rental income. Rental expenses also include our direct expenses associated with the management of the properties owned by the property funds. For properties that have been contributed to property funds, we recognize our share of the total operations of the property funds under the equity method and present these amounts below operating income in our Consolidated Statements of Earnings and FFO. (8) In our Consolidated Statements of Earnings, rental income includes the following (in thousands): Three Months Nine Months Ended Ended September 30, September 30, 2007 2006 2007 2006 Rental income $213,839 $176,436 $615,877 $515,886 Rental expense recoveries 58,187 46,471 163,359 131,666 Straight-lined rents 10,553 9,588 33,878 25,488 $282,579 $232,495 $813,114 $673,040 (9) In our CDFS business segment, we develop real estate properties primarily with the intent to contribute to a property fund in which we have an ownership interest and act as manager, or to sell to third parties. Additionally, we acquire properties with the intent to rehabilitate and/or reposition the property in the CDFS business segment prior to contributing to a property fund. This includes us acquiring a portfolio of properties with the intent of contributing the portfolio to an existing or future property fund. We include the income generated in the CDFS business segment in our computation of FFO and EBITDA. During the third quarter of 2007, we made contributions to three of the newly formed property funds; ProLogis North American Industrial Fund II (see note 5), ProLogis Mexico Industrial Fund and ProLogis European Properties Fund II. Each of these contributions included a portfolio of assets that were acquired with the intention of contributing to future property funds at or slightly above our acquisition cost. We have segregated the proceeds and costs and included them in Acquired Property Portfolios in our Statements of Earnings and FFO. (10) When we contribute a property to an entity in which we have an ownership interest, we do not recognize a portion of the proceeds in our computation of the gain resulting from the contribution. The amount of the proceeds that we defer is based on our continuing ownership interest in the contributed property that arises due to our ownership interest in the entity acquiring the property. We defer this portion of the proceeds by recognizing a reduction to our investment in the applicable unconsolidated investee. We adjust our proportionate share of the earnings or losses that we recognize under the equity method in later periods to reflect the entity's depreciation expense as if the depreciation expense was computed on our lower basis in the contributed assets rather than on the entity's basis in the contributed assets. If a loss results when a property is contributed, the entire loss is recognized when it is known. When a property that we originally contributed to an unconsolidated investee is disposed of to a third party, we recognize a gain during the period that the disposition occurs related to the proceeds we had previously deferred, in addition to our proportionate share of the gain or loss recognized by the entity. Further, during periods when our ownership interest in an unconsolidated investee decreases, we recognize gains to the extent that proceeds were previously deferred to coincide with our new ownership interest in the unconsolidated investee. As of September 30, 2007, the cumulative gross proceeds that we have not recognized in computing gains was $456.5 million on CDFS property dispositions and $79.2 million on non-CDFS property dispositions. (11) On January 4, 2006, we purchased the 80% ownership interests in each of ProLogis North American Properties Funds II, III and IV (collectively "Funds II-IV") from our fund partner. On March 1, 2006, we contributed substantially all of the assets and associated liabilities to the ProLogis North American Industrial Fund, which was formed in February 2006. In connection with these transactions, we recognized the following amounts in the respective financial statement line items, during the first quarter of 2006 (in thousands) after deferral of $17.9 million, due to our continuing ownership interest in the ProLogis North American Industrial Fund: Statements of Statements of Earnings FFO CDFS disposition proceeds - developed and repositioned properties (a) $12,492 $12,958 Property management and other fees and incentives (b) $21,958 $21,958 Earnings from unconsolidated property funds (c) $37,113 $27,916 (a) Represents the recognition of the proceeds that we had previously deferred as part of CDFS proceeds upon the initial contributions of the properties to Funds II-IV. (b) Represents an incentive return we earned due to certain return levels achieved by our fund partner upon the termination of Funds II-IV. (c) Represents our proportionate share of the gain on termination recognized by Funds II-IV on a depreciated basis (earnings) and on an undepreciated basis (FFO). (12) During the first quarter of 2007, we recorded $8.0 million of employee departure costs, including $5.0 million related to the departure of our Chief Financial Officer in March 2007 and $3.0 million related to employees whose responsibilities became redundant after the acquisition of Parkridge (see note 3). (13) During the second quarter of 2007, we recognized an impairment charge of $12.6 million related to certain properties in our property operations segment. (14) The following table presents the components of interest expense (in thousands). The increase in interest expense before capitalization is primarily the result of increased debt levels due to the acquisitions of Parkridge and MPR and property acquisitions, as well as our increased development activities, which also accounts for the increase in capitalized interest. Three Months Ended Nine Months Ended September 30, September 30, 2007 2006 2007 2006 Gross interest expense $137,262 $101,859 $370,138 $291,826 Net premium recognized (1,126) (3,471) (6,813) (10,574) Amortization of deferred loan costs 2,536 2,124 7,827 5,482 Interest expense before capitalization 138,672 100,512 371,152 286,734 Less: capitalized amounts (30,708) (23,095) (83,897) (69,801) Net interest expense 107,964 77,417 287,255 216,933 (15) In addition to contributions of CDFS properties, we occasionally contribute properties from our property operations segment to unconsolidated property funds in which we have continuing interests through our equity ownership. During the third quarter of 2007, we contributed 11 such properties to ProLogis Mexico Industrial Fund, as well as recognized previously deferred proceeds related to properties sold to a third party by a property fund. During the second quarter of 2007, we contributed 66 properties to ProLogis North American Industrial Fund. During the nine months ended September 30, 2006, we contributed 12 properties to unconsolidated property funds. 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. (16) Foreign currency exchange gains and losses that are recognized as a component of net earnings generally result from: (i) remeasurement and/or settlement of certain debt transactions between us and our foreign consolidated subsidiaries and foreign unconsolidated investees (depending on the type of loan, the currency in which the loan is denominated and the form of our investment); (ii) remeasurement and/or settlement of certain third party debt of our foreign consolidated subsidiaries (depending on the currency in which the loan is denominated); and (iii) mark-to-market adjustments related to derivative financial instruments utilized to manage foreign currency risks. We generally exclude these types of foreign currency exchange gains and losses from our defined FFO measure and also from our computation of EBITDA. Foreign currency exchange gains and losses that result from transactions (including certain intercompany debt and equity investments) that are settled in a currency other than the reporting entity's functional currency and from the settlement of derivative financial instruments utilized to manage foreign currency risks are included in our defined FFO measure and in our computation of EBITDA. (17) Current income tax is generally a function of the level of income recognized by our taxable subsidiaries operating primarily in the CDFS business segment, state income taxes, taxes incurred in foreign jurisdictions and interest associated with our income tax liabilities. Deferred income tax is generally a function of the period's temporary differences (items that are treated differently for tax purposes than for financial reporting purposes), the utilization of tax net operating losses generated in prior years that had been previously recognized as deferred tax assets and deferred tax liabilities related to indemnification agreements related to contributions to certain property funds. 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. (18) Properties disposed of to third parties are considered to be discontinued operations unless such properties were developed under a pre-sale agreement. During the nine months ended September 30, 2007, we disposed of 71 such properties to third parties, four of which were CDFS, as well as land subject to a ground lease. The operations of the properties disposed of to third parties during 2007 and the aggregate gains recognized upon their dispositions are presented as discontinued operations in our Consolidated Statements of Earnings for all periods presented. In addition, the operations of 89 properties disposed of during 2006 (15 of which were CDFS business assets) are presented as discontinued operations. As of September 30, 2007 and December 31, 2006, we had one property and eight properties, respectively, that were classified as held for sale and accordingly, the operations of these properties are included in discontinued operations and the respective assets and liabilities are presented separately in our Consolidated Balance Sheets. Interest expense included in discontinued operations represents interest directly attributable to these properties. 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, 2007 2006 2007 2006 Rental income $549 $11,412 $7,066 $50,316 Rental expenses (213) (2,724) (2,970) (22,534) Depreciation and amortization (7) (2,087) (2,240) (9,148) Interest expense - - - (874) $329 $6,601 $1,856 $17,760 For purposes of our Consolidated Statements of FFO, we do not segregate discontinued operations. In addition, in the calculation of FFO we include the CDFS disposition proceeds and the cost of CDFS dispositions for all CDFS properties disposed of during the period, including those classified as discontinued operations. (19) We report our investments in the property funds, CDFS joint ventures and other unconsolidated investees under the equity method. For purposes of calculating FFO and EBITDA, the net earnings of each of our unconsolidated investees is adjusted to be consistent with our calculation of these measures. (20) Consists primarily of adjustments to the amounts we recognize under the equity method that are necessary to recognize the amount of gains not recognized at the contribution date due to the deferral of certain proceeds based on our ownership interest in the unconsolidated investee acquiring the property. See note 10. In addition, this amount represents the adjustment to the amounts we recognize under the equity method on dispositions made by the unconsolidated investees to reflect the gain on sale on an undepreciated basis for FFO. (21) Effective January 1, 2007, we implemented Financial Accounting Standards Board Interpretation No. 48, "Accounting for Uncertainty in Income Taxes -- an Interpretation of FASB Statement No. 109" ("FIN 48"), which resulted in an increase to our income tax liabilities and a reduction to the January 1, 2007 balance of Retained Earnings of $9.3 million.
Released October 25, 2007