ProLogis Reports Growth in Second Quarter FFO and Earnings Per Share
- Solid Operating Property Performance and Continued Strong Development Profits Drive 28.9 Percent Increase in FFO per Share -
DENVER, Colo., July 26 /PRNewswire-FirstCall/ -- ProLogis (NYSE: PLD), the world's largest owner, manager and developer of distribution facilities, today reported second quarter funds from operations as defined by ProLogis (FFO) of $1.16 per diluted share, up 28.9 percent from $0.90 in the same period in 2006. Net earnings per diluted share were $1.50 for the second quarter of 2007, compared with $0.66 for the same period in 2006.
For the six months ended June 30, 2007, FFO was $2.41 per diluted share, up 33.9 percent from $1.80 in the first six months of 2006. Net earnings per diluted share for the six months ended June 30, 2007, were $2.39, compared with $1.39 in the comparable period of 2006.
"We're very pleased with the performance of the company during the quarter," said Jeffrey H. Schwartz, ProLogis chairman and chief executive officer.
"We continued to deliver growth through our development activity, increases in rental rates, expansion of our investment management business and complementary acquisitions. Generally, market conditions are in good shape, and the scale, quality and diversification of our global platform, combined with solid execution by teams throughout the world, are driving solid financial results.
"Strong markets for logistics facilities continue to support increasing valuations and above-average development margins," Schwartz said. "Meanwhile, the supply and demand of modern, well-located distribution centers remain balanced in most markets. This resulted in greater improvement in same-store net operating income than we've seen in over seven years and is creating a positive environment for rent growth going forward."
The company increased full-year guidance for adjusted FFO per share to $3.95 - $4.10 and earnings per share to $3.50 - $3.70. "This increase in FFO is driven by continued strong margins from our development business and, in the case of earnings, a higher level of non-CDFS contributions and dispositions in which we have created substantial value but which is not recognized as FFO," Schwartz said.
The company's new guidance does not include incremental, potential FFO of $0.30 - $0.35 per share related to ProLogis' previously announced acquisition of the shares of Macquarie ProLogis Trust (MPR). This additional FFO would result from the recognition of previously deferred proceeds on contributions to MPR and the gain on contribution of the MPR assets to a new property fund associated with the potential equity conversion by our bridge financing source. The company's previous guidance was $3.80 - $4.00 in FFO per share and $2.60 - $3.00 in earnings per share.
Acquisition of Dermody Partners/CalSTERS Joint Venture Expands North American Market Presence
On July 12, 2007, ProLogis announced the formation of a new North American property fund to acquire 24.7 million square feet of industrial properties from DP Industrial, a joint venture between Dermody Properties and the California State Teachers Retirement System, for approximately $1.8 billion. "The acquisition expanded our platform in five key U.S. logistics markets and elevates us to the market-leading position in Reno, Las Vegas and Eastern Pennsylvania. These properties are located in markets key to the U.S. logistics infrastructure, and we expect they will experience rent growth that outpaces the national average," said Walter C. Rakowich, ProLogis president and chief operating officer. "We also expect to create value as we integrate these assets into our investment management business and enhance returns through active portfolio management and fee income."
Solid Market Fundamentals Support Increased Expectations for New Development
Rakowich noted that global market conditions remain well balanced. "In North America's top 30 logistics markets, the pace of net absorption remained healthy at over 32 million square feet," Rakowich said. "We continue to see brisk activity in Central Europe, with improved market conditions in Western Europe. Markets in both Japan and China also remain strong due to growth in global trade and a shortage of modern logistics space."
During the second quarter, ProLogis began construction of $687.8 million of new industrial development, including development activity within its joint ventures. The company's total CDFS asset pipeline stood at $6.02 billion at the end of the quarter, a 12.7 percent increase over December 31, 2006. Of this amount, total expected investment in projects currently under construction is $2.4 billion, while the remaining $3.6 billion of completed developments and repositioned acquisitions were 70 percent leased at quarter end.
"Strong customer demand across our global markets has resulted in both a surge in new build-to-suit activity and in new inventory developments being fully leased shortly after completion," said Ted R. Antenucci, ProLogis chief investment officer. "This rapid lease up and chronic undersupply in certain key logistics markets supports our confidence in boosting our expected development starts for 2007 to between $3.4 and $3.6 billion, up from our initial plan of $3.0 to $3.3 billion."
During the quarter, the company signed roughly 6.8 million square feet of new CDFS leases, including those with repeat customers such as: Black & Decker in Reynosa, Mexico; Nokia in Suzhou, China; Wincanton in Warsaw, Poland and Electrolux in both Pennsylvania and Southern California's Inland Empire. "We continue to leverage our leading global operating platform to accommodate customers' needs for logistics facility infrastructure to serve global trade," Antenucci said.
Selected Financial and Operating Information -- Increased same-store net operating income in the quarter by 6.2 percent (a 6.9 percent increase when straight-lined rents and lease amortization are excluded), driven by 3.2 percent growth in average same-store occupancies and same-store rent growth of 8.3 percent. -- Maintained strong leasing in the stabilized portfolio of 95.2 percent, compared with 95.4 percent at March 31, 2007. -- Recycled $858.6 million of capital from CDFS contributions and dispositions during the quarter. Including non-CDFS disposition activity, total dispositions and contributions were $1.3 billion for the quarter. -- Realized FFO from CDFS transactions of $224.2 million for the quarter, up from $95.3 million in the second quarter of 2006. Year-to-date, post-deferral, post-tax CDFS margins averaged 41.4 percent. -- Started new developments with a total expected investment of $1.3 billion in the first half, including industrial joint venture developments. -- Grew ProLogis' share of FFO from property funds to $33.2 million for the quarter, compared with $25.1 million in the same quarter of 2006, an increase of 32.3 percent. -- Recognized fee income from property funds for the quarter of $23.9 million, compared with $20.3 million in the same quarter of 2006, an increase of 17.7 percent. -- Increased total assets owned and under management to $29.9 billion, up from $26.7 billion at December 31, 2006, a year-to-date increase of 12.0 percent.
Copies of ProLogis' second 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, July 26, 2007. A replay of the webcast will be available on the company's website until August 9, 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 $29.9 billion of assets owned, managed and under development, comprising 446.9 million square feet (41.5 million square meters) in 2,523 properties as of June 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 Second Quarter 2007 Unaudited Financial Results Selected Financial Information (in thousands, except per share amounts and percentages) Three Months Ended June 30, 2007 2006 % Change Net earnings attributable to common shares: Net earnings attributable to common shares $400,104 $168,397 137.6% Net earnings per diluted share attributable to common shares $1.50 $0.66 127.3% FFO and FFO, as adjusted See definition of FFO FFO attributable to common shares $309,905 $228,911 35.4% Add back: Merger integration and relocation expenses (1) - 351 FFO attributable to common shares, as adjusted $309,905 $229,262 35.2% FFO per diluted share attributable to common shares $1.16 $0.90 28.9% Add back: Merger integration and relocation expenses (1) - - FFO per diluted share attributable to common shares, as adjusted $1.16 $0.90 28.9% EBITDA: EBITDA $481,484 $364,654 32.0% Distributions: Actual distributions per common share (2) $0.46 $0.40 15.0% Six Months Ended June 30, 2007 2006 % Change Net earnings attributable to common shares: Net earnings attributable to common shares $636,195 $351,556 81.0% Net earnings per diluted share attributable to common shares $2.39 $1.39 71.9% FFO and FFO, as adjusted See definition of FFO FFO attributable to common shares $639,618 $454,209 40.8% Add back: Merger integration and relocation expenses (1) - 2,723 FFO attributable to common shares, as adjusted $639,618 $456,932 40.0% FFO per diluted share attributable to common shares $2.41 $1.79 34.6% Add back: Merger integration and relocation expenses (1) - 0.01 FFO per diluted share attributable to common shares, as adjusted $2.41 $1.80 33.9% EBITDA: EBITDA $959,340 $706,532 35.8% Distributions: Actual distributions per common share (2) $0.92 $0.80 15.0% See our definition of FFO and our definition of EBITDA. Footnotes follow Consolidated Balance Sheets. ProLogis Second Quarter 2007 Unaudited Financial Results Consolidated Statements of Earnings (in thousands) Three Months Ended Six Months Ended June 30, June 30, 2007 2006 2007 2006 Revenues: Rental income (5)(6)(7) $272,529 $215,876 $530,606 $440,644 CDFS disposition proceeds (7)(8)(9)(10)(11) 686,715 433,854 1,356,653 738,864 Property management and other fees and incentives (11) 23,937 20,329 45,584 58,897 Development management and other income (8) 6,176 11,258 13,615 15,426 Total revenues 989,357 681,317 1,946,458 1,253,831 Expenses: Rental expenses (5)(7) 73,705 53,202 139,311 112,236 Cost of CDFS dispositions (7)(8) 476,684 348,552 915,675 586,838 General and administrative (1)(12) 50,503 39,138 100,645 75,298 Depreciation and amortization (7) 74,522 67,943 152,733 138,269 Other expenses (13) 15,068 3,421 17,934 5,947 Total expenses 690,482 512,256 1,326,298 918,588 Operating income 298,875 169,061 620,160 335,243 Other income (expense): Earnings from unconsolidated property funds (11) 15,804 10,969 34,768 67,414 Earnings from CDFS joint ventures and other unconsolidated investees (4)(8) 1,773 33,904 2,317 37,421 Interest expense (7)(14) (90,640) (68,663) (179,291) (139,516) Interest income on notes receivable (8) 2,891 4,286 6,157 9,322 Interest and other income, net 6,844 709 14,752 5,283 Total other income (expense) (63,328) (18,795) (121,297) (20,076) Earnings before minority interest 235,547 150,266 498,863 315,167 Minority interest (723) (851) (896) (1,976) Earnings before certain net gains 234,824 149,415 497,967 313,191 Gains recognized on dispositions of certain non- CDFS business assets (15) 124,085 - 124,085 13,709 Foreign currency exchange gains, net (16) 22,706 8,569 9,154 7,247 Earnings before income taxes 381,615 157,984 631,206 334,147 Income taxes (17): Current income tax expense 26,645 27,892 44,745 41,089 Deferred income tax (benefit) expense (9,503) 5,413 (6,182) 5,582 Total income taxes 17,142 33,305 38,563 46,671 Earnings from continuing operations 364,473 124,679 592,643 287,476 Discontinued operations (7): Income attributable to disposed properties and assets held for sale 631 5,878 1,601 11,147 Gains recognized on dispositions: Non-CDFS business assets 27,161 34,223 32,125 50,651 CDFS business assets 14,196 9,971 22,537 14,990 Total discontinued operations 41,988 50,072 56,263 76,788 Net earnings 406,461 174,751 648,906 364,264 Less preferred share dividends 6,357 6,354 12,711 12,708 Net earnings attributable to common shares $400,104 $168,397 $636,195 $351,556 Footnotes follow Consolidated Balance Sheets. Second Quarter 2007 Unaudited Financial Results Consolidated Statements of Earnings (Continued) (in thousands, except per share amounts) Three Months Ended Six Months Ended June 30, June 30, 2007 2006 2007 2006 Weighted average common shares outstanding - Basic 257,086 244,998 255,677 244,642 Weighted average common shares outstanding - Diluted 267,880 255,196 266,723 255,093 Net earnings per share attributable to common shares - Basic: Continuing operations $1.40 $0.49 $2.27 $1.13 Discontinued operations 0.16 0.20 0.22 0.31 Net earnings per share attributable to common shares - Basic $1.56 $0.69 $2.49 $1.44 Net earnings per share attributable to common shares - Diluted: Continuing operations $1.34 $0.46 $2.18 $1.09 Discontinued operations 0.16 0.20 0.21 0.30 Net earnings per share attributable to common shares - Diluted $1.50 $0.66 $2.39 $1.39 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, 2007 2006 2007 2006 Net earnings attributable to common shares - Basic $400,104 $168,397 $636,195 $351,556 Minority interest (a) 1,474 851 2,462 1,976 Adjusted net earnings attributable to common shares - Diluted $401,578 $169,248 $638,657 $353,532 Weighted average common shares outstanding - Basic 257,086 244,998 255,677 244,642 Incremental weighted average effect of conversion of limited partnership units 5,108 5,154 5,124 5,258 Incremental weighted average effect of potentially dilutive instruments (b) 5,686 5,044 5,922 5,193 Weighted average common shares outstanding - Diluted 267,880 255,196 266,723 255,093 Net earnings per share attributable to common shares - Diluted $1.50 $0.66 $2.39 $1.39 COMMENTS (a)Includes only the minority interest related to the convertible limited partnership units. (b)Total weighted average potentially dilutive instruments outstanding were 10,283 and 10,858 for the three months ended June 30, 2007 and 2006, respectively, and 10,557 and 10,998 for the six months ended June 30, 2007 and 2006 respectively. Substantially all were dilutive for both periods. ProLogis Second Quarter 2007 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, 2007 2006 2007 2006 Revenues: Rental income (5) $274,751 $232,429 $537,052 $479,449 CDFS disposition proceeds (7)(8)(9)(10)(11) 792,524 491,540 1,529,951 844,781 Property management and other fees and incentives (11) 23,937 20,329 45,584 58,897 Development management and other income (8) 6,176 11,258 13,615 15,426 Total revenues 1,097,388 755,556 2,126,202 1,398,553 Expenses: Rental expenses (5) 74,573 61,106 141,948 131,986 Cost of CDFS dispositions (7)(8) 568,297 396,267 1,068,773 677,299 General and administrative (1)(12) 50,503 39,138 100,645 75,298 Depreciation of corporate assets 2,585 1,932 5,291 4,815 Other expenses (13) 15,068 3,421 17,934 5,947 Total expenses 711,026 501,864 1,334,591 895,345 386,362 253,692 791,611 503,208 Other income (expense): FFO from unconsolidated property funds (11) 33,249 25,116 63,869 79,047 FFO from CDFS joint ventures and other unconsolidated investees (4)(8) 3,920 35,877 6,056 40,614 Interest expense (90,640) (68,903) (179,291) (140,390) Interest income on notes receivable (8) 2,891 4,286 6,157 9,322 Interest and other income, net 6,844 709 14,752 5,283 Foreign currency exchange gains (expenses and losses), net (16) (2,034) 8,507 (8,222) 8,174 Current income tax expense (17) (23,607) (23,168) (41,707) (36,365) Total other income (expense) (69,377) (17,576) (138,386) (34,315) FFO 316,985 236,116 653,225 468,893 Less preferred share dividends 6,357 6,354 12,711 12,708 Less minority interest 723 851 896 1,976 FFO attributable to common shares $309,905 $228,911 $639,618 $454,209 Weighted average common shares outstanding - Basic 257,086 244,998 255,677 244,642 Weighted average common shares outstanding - Diluted 267,880 255,196 266,723 255,093 FFO per share attributable to common shares: Basic $1.21 $0.93 $2.50 $1.86 Diluted $1.16 $0.90 $2.41 $1.79 Three Months Ended Six Months Ended June 30, June 30, 2007 2006 2007 2006 FFO attributable to common shares - Basic $309,905 $228,911 $639,618 $454,209 Minority interest attributable to convertible limited partnership units 1,474 851 2,462 1,976 FFO attributable to common shares - Diluted $311,379 $229,762 $642,080 $456,185 Merger integration and relocation expenses (1) - 351 - 2,723 FFO attributable to common shares, as adjusted - Diluted $311,379 $230,113 $642,080 $458,908 Weighted average common shares outstanding - Basic 257,086 244,998 255,677 244,642 Incremental weighted average effect of conversion of limited partnership units 5,108 5,154 5,124 5,258 Incremental weighted average effect of potentially dilutive instruments 5,686 5,044 5,922 5,193 Weighted average common shares outstanding - Diluted 267,880 255,196 266,723 255,093 FFO per share attributable to common shares - Diluted $1.16 $0.90 $2.41 $1.79 FFO per share attributable to common shares, as adjusted - Diluted $1.16 $0.90 $2.41 $1.80 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 Second Quarter 2007 Unaudited Financial Results Reconciliations of Net Earnings to FFO (in thousands) Three Months Ended Six Months Ended June 30, June 30, 2007 2006 2007 2006 Reconciliation of net earnings to FFO: Net earnings attributable to common shares $400,104 $168,397 $636,195 $351,556 Add (deduct) NAREIT defined adjustments: Real estate related depreciation and amortization 71,937 66,011 147,442 133,454 Adjustments to CDFS dispositions for depreciation - - (2,337) 466 Gains recognized on dispositions of certain non-CDFS business assets (15) (124,085) - (124,085) (13,709) Reconciling items attributable to discontinued operations (7): Gains recognized on dispositions of non-CDFS business assets (27,161) (34,223) (32,125) (50,651) Real estate related depreciation and amortization 723 2,531 2,208 7,034 Totals discontinued operations (26,438) (31,692) (29,917) (43,617) Our share of reconciling items from unconsolidated investees (18): Real estate related depreciation and amortization 20,368 16,604 39,209 29,824 Adjustments (gains) on dispositions of non-CDFS business assets 11 (2) (1,888) (111) Other amortization items (19) (2,040) (1,537) (3,949) (12,132) Totals unconsolidated investees 18,339 15,065 33,372 17,581 Totals NAREIT defined adjustments (60,247) 49,384 24,475 94,175 Subtotals-NAREIT defined FFO 339,857 217,781 660,670 445,731 Add (deduct) our defined adjustments: Foreign currency exchange (gains) losses, net (16) (24,740) (62) (17,376) 927 Current income tax expense (17) 3,038 4,724 3,038 4,724 Deferred income tax (benefit) expense (17) (9,503) 5,413 (6,182) 5,582 Our share of reconciling items from unconsolidated investees (18): Foreign currency exchange losses (gains), net 1,156 1,210 (173) (1,013) Deferred income tax expense (benefit) 97 (155) (359) (1,742) Totals unconsolidated investees 1,253 1,055 (532) (2,755) Totals our defined adjustments (29,952) 11,130 (21,052) 8,478 FFO attributable to common shares $309,905 $228,911 $639,618 $454,209 See Consolidated Statements of Earnings, Consolidated Statements of FFO and the definition of FFO. Footnotes follow Consolidated Balance Sheets. ProLogis Second Quarter 2007 Unaudited Financial Results Reconciliations of Net Earnings to EBITDA (in thousands) Three Months Ended Six Months Ended June 30, June 30, 2007 2006 2007 2006 Reconciliation of net earnings to EBITDA: Net earnings attributable to common shares $400,104 $168,397 $636,195 $351,556 Deduct (add): NAREIT defined adjustments to compute FFO (60,247) 49,384 24,475 94,175 Our defined adjustments to compute FFO (29,952) 11,130 (21,052) 8,478 Add: Interest expense 90,640 68,663 179,291 139,516 Depreciation of corporate assets 2,585 1,932 5,291 4,815 Current income tax expense included in FFO (17) 23,607 23,168 41,707 36,365 Adjustments to CDFS gains on dispositions for interest capitalized 9,375 13,354 18,145 19,906 Preferred share dividends 6,357 6,354 12,711 12,708 Reconciling items attributable to discontinued operations - 240 - 874 Impairment charges (13) 12,600 2,862 12,600 3,560 Share of reconciling items from unconsolidated investees (18) 26,415 19,170 49,977 34,579 EBITDA $481,484 $364,654 $959,340 $706,532 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 Second Quarter 2007 Unaudited Financial Results Consolidated Balance Sheets (in thousands, except per share data) June 30, December 31, 2007 (3) 2006 Assets: Investments in real estate assets: Industrial operating properties $10,943,909 $10,423,249 Retail operating properties 322,640 305,188 Land subject to ground leases and other 449,738 472,412 Properties under development (including cost of land) 1,087,133 964,842 Land held for development 2,013,029 1,397,081 Other investments 331,237 391,227 15,147,686 13,953,999 Less accumulated depreciation 1,291,012 1,280,206 Net investments in real estate assets 13,856,674 12,673,793 Investments in and advances to unconsolidated investees: Property funds (20) 1,063,671 981,840 CDFS joint ventures and other unconsolidated investees (4) 459,928 317,857 Total investments in and advances to unconsolidated investees 1,523,599 1,299,697 Cash and cash equivalents 942,204 475,791 Accounts and notes receivable 363,933 439,791 Other assets 1,373,903 957,295 Discontinued operations-assets held for sale (7) 44,114 57,158 Total assets $18,104,427 $15,903,525 Liabilities and Shareholders' Equity: Liabilities: Lines of credit $2,173,242 $2,462,796 Senior notes and other unsecured debt 4,719,033 4,445,092 Convertible debt 1,228,537 - Secured debt and assessment bonds 1,442,341 1,478,998 Accounts payable and accrued expenses 620,900 518,651 Other liabilities 685,799 546,129 Discontinued operations-assets held for sale (7) 844 1,012 Total liabilities 10,870,696 9,452,678 Minority interest 70,359 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 2,569 2,509 Additional paid-in capital 6,368,396 6,000,119 Accumulated other comprehensive income 222,341 216,922 Retained earnings/(distributions in excess of net earnings) (21) 220,066 (170,971) Total shareholders' equity 7,163,372 6,398,579 Total liabilities and shareholders' equity $18,104,427 $15,903,525 Footnotes follow Consolidated Balance Sheets. ProLogis Second 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 a new $600 million senior unsecured facility. 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. 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) We have varying ownership interests in unconsolidated investees. The investees primarily engage in activities similar to our CDFS business segment activities (as discussed in note 8) and own operating properties in China, Europe and North America. We refer to the joint ventures engaged in industrial property development and operation as industrial CDFS joint ventures. In addition, certain of the CDFS joint ventures engage in land, retail and commercial development and operation 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. (5) 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. (6) In our Consolidated Statements of Earnings, rental income includes the following (in thousands): Three Months Ended Six Months Ended June 30, June 30, 2007 2006 2007 2006 Rental income $205,250 $165,925 $401,932 $339,334 Rental expense recoveries 56,963 42,684 105,190 85,222 Straight-lined rents 10,316 7,267 23,484 16,088 $272,529 $215,876 $530,606 $440,644 (7) Properties disposed of to third parties are considered to be discontinued operations unless such properties were developed under a pre-sale agreement. During the six months ended June 30, 2007, we disposed of 55 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 June 30, 2007 and December 31, 2006, we had 14 properties and 8 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 Six Months Ended June 30, June 30, 2007 2006 2007 2006 Rental income $2,222 $16,553 $6,446 $38,805 Rental expenses (868) (7,904) (2,637) (19,750) Depreciation and amortization (723) (2,531) (2,208) (7,034) Interest expense - (240) - (874) $631 $5,878 $1,601 $11,147 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. (8) The CDFS business segment primarily represents the development of properties, the acquisition of properties with the intent to rehabilitate and/or reposition the property before contribution and other land and commercial development activities. It is generally our intent to contribute our CDFS properties to a property fund in which we have an ownership interest and act as manager or sell the properties to a third party. Additionally, we: (i) earn fees for development activities provided on behalf of customers or third parties; (ii) recognize interest income on notes receivable related to previous asset dispositions; (iii) recognize gains or losses on the disposition of land parcels, including land subject to ground leases; and (iv) recognize our proportionate share of the earnings or losses of CDFS joint ventures. We include the income generated in the CDFS business segment in our computation of FFO and EBITDA. (9) 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. See note 10 for the amount of cumulative gross proceeds that have not been recognized as of June 30, 2007. 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. (10)As of June 30, 2007, the cumulative gross proceeds that have not been recognized in computing the gains from our contributions of properties to unconsolidated investees (before subsequent amortization) are presented below (in thousands). See note 9. Gross Proceeds Not Recognized CDFS Non-CDFS Transactions Transactions Totals ProLogis European Properties $140,708 $9,338 $150,046 ProLogis California LLC 5,394 26,129 31,523 ProLogis North American Properties Fund I 8,265 843 9,108 ProLogis North American Properties Fund V (see note 19) 25,533 2,940 28,473 ProLogis North American Properties Funds VI-X 2,767 - 2,767 ProLogis North American Industrial Fund 63,533 49,010 112,543 ProLogis Japan Properties Fund I 44,819 - 44,819 ProLogis Japan Properties Fund II 85,610 - 85,610 CDFS joint ventures 4,269 - 4,269 Totals $380,898 $88,260 $469,158 (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 (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 acquisition of Parkridge and property acquisitions, as well as our increased development activities, which also accounts for the increase in capitalized interest. Three Months Ended Six Months Ended June 30, June 30, 2007 2006 2007 2006 Gross interest expense $117,854 $93,485 $232,876 $189,970 Net premium recognized (2,592) (3,473) (5,687) (7,106) Amortization of deferred loan costs 2,862 1,951 5,291 3,358 Interest expense before capitalization 118,124 91,963 232,480 186,222 Less: capitalized amounts (27,484) (23,300) (53,189) (46,706) Net interest expense $90,640 $68,663 $179,291 $139,516 (15)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, 2007, we contributed 66 properties to ProLogis North American Industrial Fund. During the six months ended June 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) 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. (19) 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 9. 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. (20) 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"). As of June 30, 2007, MPR owned approximately 89% of ProLogis North American Properties Fund V. The total consideration was approximately $2.0 billion consisting of cash in the amount of $1.2 billion and assumed liabilities of $0.8 billion. 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 provides for a $473.1 million term loan and a $646.2 million convertible loan. The term loan matures on the first anniversary of the Credit Agreement, subject to extension at our option. The convertible loan matures on the fifth anniversary of the Credit Agreement and may be converted by Citigroup into equity of one of our subsidiaries at anytime between 21 and 45 days after the date of the Credit Agreement. As a result of this transaction, on July 11, 2007, we own 100% of ProLogis North American Properties Fund V. (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 July 26, 2007