ProLogis Reports First Quarter Growth in FFO and Earnings Per Share
- Record Development Profits, Improving Operating Fundamentals and Continued Growth in Property Funds Drive 38.9 Percent Increase in FFO per Share -
DENVER, May 1 /PRNewswire-FirstCall/ -- ProLogis (NYSE: PLD), the world's largest owner, manager and developer of distribution facilities, today reported first quarter funds from operations as defined by ProLogis (FFO) of $1.25 per diluted share, up 38.9 percent from $0.90 in the same period in 2006. Net earnings per diluted share were $0.89 for the first quarter of 2007, compared with $0.72 for the same period in 2006.
"Our first quarter results reflect continued strong global market demand and solid improvement in all our business segments," said Jeffrey H. Schwartz, chief executive officer. "Growth in international trade continues to drive customer requirements for modern, well-located logistics facilities at key nodes along the transportation infrastructure. Our focus on investing near major seaports, airports and intermodal terminals provides our customers with efficient supply-chain solutions, while supporting higher average occupancies and excellent long-term rent growth potential."
Schwartz noted that institutional interest in industrial property continues to be strong, leading to further cap rate compression in many parts of the globe. "The related increases in property valuations supported record gains in our development, or CDFS, business and exceptionally strong margins during the quarter," he said. "Our property fund segment also performed well, driven by a 21 percent increase in assets under management since the first quarter of 2006. In addition, our property operations segment benefited from significant rent growth on lease turnovers and occupancies that continue to surpass average market levels."
Walter C. Rakowich, president and chief operating officer of ProLogis, said supply and demand in the industrial property market are well balanced across all three of the company's operating regions. "In North America, overall development remains disciplined, driving continued positive net absorption in the top 30 logistics markets," Rakowich said. "In Europe, leasing activity was brisk in Central Europe, while in the UK and Western Europe, demand remains solid. Market conditions in Asia continue to be very strong driven by growth in global trade, and new projects are leasing up shortly after completion."
Acquisition of Parkridge Furthers Leadership Position in Europe
During the quarter, the company enhanced its European operations with the purchase of Parkridge's industrial business and a 25 percent investment in its retail business for total consideration of $1.3 billion. "This merger with our top competitor in Europe was notable for several reasons," Schwartz said. "It combined Parkridge's talented industrial development team with our own, creating an organization with unparalleled skills and experience. It replenished our land bank in the United Kingdom, where it has always been difficult to obtain entitled land for new development projects. In addition, it added strategically located land and newly completed industrial properties in Central Europe, where customer demand is extremely strong and investment values continue to appreciate. Just as our merger with Catellus in 2005 enabled us to take our North American business to an enhanced level, we believe the combination with Parkridge will have similar benefits in Europe."
Global Development Pipeline Grows, Supported by Solid Market Fundamentals
During the first quarter, ProLogis began construction of $615.6 million of new development and completed $515.0 million, including development activity within its joint ventures. The company's total CDFS asset pipeline stood at $5.8 billion at the end of the quarter, an 8.8 percent increase over December 31, 2006.
Of this amount, expected investment in projects currently under construction is $2.4 billion, while the remaining $3.4 billion of completed developments and repositioned acquisitions were 73.9 percent leased at quarter end.
"The strength of global customer demand and leasing in our development pipeline supports our new development activity," said Ted Antenucci, president -- global development. "With operations in over 100 markets around the world, our network of ProLogis associates enables us to closely monitor market conditions and supports our confidence in growing full-year development starts by 20 to 30 percent over 2006 levels."
"Our ability to address global customers' distribution space needs in the majority of the world's top logistics markets is unique in the industry," Antenucci said. "During the quarter, we signed more than six million square feet of new CDFS leases, including those with repeat customers such as: Schenker Logistics in Shanghai, China; Kuhne & Nagel in Bucharest, Romania; and Exel in Southern California's Inland Empire.
Selected Financial and Operating Information * Increased same-store net operating income by 5.6 percent (a 6.4 percent increase when straight-lined rents and lease amortization are excluded), driven by 3.6 percent growth in average same-store occupancies and same-store rent growth of 6.9 percent. * Increased leasing in stabilized pool to 95.4 percent, up from 95.3 percent at December 31, 2006. * Recycled $782.1 million of capital from CDFS contributions and dispositions during the quarter. * Realized FFO from CDFS transactions of $237.0 million for the quarter, up from $72.2 million in Q1 2006. Post-deferral, post-tax CDFS margins were 45.4 percent for the quarter. Excluding land sales, post-deferral, post-tax CDFS margins were 34.1 percent. * Started new developments with a total expected investment of $615.6 million during the quarter, including industrial joint venture developments. * ProLogis' share of FFO from property funds was $30.6 million for the quarter, compared with $53.9 million in Q1 2006, which included a $27.9 million gain from the liquidation of North American Funds II, III and IV. Excluding this gain, FFO from property funds was up 17.7 percent from Q1 2006. * Fee income from property funds for the quarter was $21.6 million, compared with $38.6 million in the same quarter in 2006, which included a $22.0 million incentive return earned from the transaction noted above. Excluding this incentive return, fund fee income was 30.1 percent higher than Q1 2006. * Increased total assets owned and under management to $28.6 billion, up from $26.7 billion at December 31, 2006, a quarter-over-quarter increase of 7.1 percent.
Copies of ProLogis' first 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 Tuesday, May 1, 2007. A replay of the webcast will be available on the company's website until May 15, 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 103 markets across North America, Europe and Asia. The company has $28.6 billion of assets owned, managed and under development, comprising 436.9 million square feet (40.6 million square meters) in 2,525 properties as of March 31, 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 acquisition, (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 First Quarter 2007 Unaudited Financial Results Selected Financial Information (in thousands, except per share amounts and percentages) Three Months Ended March 31, 2007 2006 % Change Net earnings attributable to common shares: Net earnings attributable to common shares $236,091 $183,159 28.9% Net earnings per diluted share attributable to common shares $0.89 $0.72 23.6% FFO and FFO, as adjusted See definition of FFO FFO attributable to common shares $329,713 $225,298 46.3% Add back: Merger integration and relocation expenses (1) -- 2,372 FFO attributable to common shares, as adjusted $329,713 $227,670 44.8% FFO per diluted share attributable to common shares $1.25 $0.89 40.4% Add back: Merger integration and relocation expenses (1) -- 0.01 FFO per diluted share attributable to common shares, as adjusted $1.25 $0.90 38.9% EBITDA: EBITDA $478,047 $341,180 40.1% Distributions: Actual distributions per common share (2) $0.46 $0.40 15.0% See our definition of FFO and our definition of EBITDA. Footnotes follow Consolidated Balance Sheets. ProLogis First Quarter 2007 Unaudited Financial Results Consolidated Statements of Earnings (in thousands) Three Months Ended March 31, 2007 2006 Revenues: Rental income (5)(6)(7) $259,409 $220,482 CDFS disposition proceeds (8)(9)(10)(11) 669,938 305,010 Property management and other fees and incentives (11) 21,647 38,568 Development management and other income (8) 7,439 4,168 Total revenues 958,433 568,228 Expenses: Rental expenses (5)(7) 66,325 58,425 Cost of CDFS dispositions (8) 438,991 238,286 General and administrative (12) 50,142 33,788 Depreciation and amortization (7) 78,823 70,879 Merger integration and relocation expenses (1) -- 2,372 Other expenses 2,866 2,526 Total expenses 637,147 406,276 Operating income 321,286 161,952 Other income (expense): Earnings from unconsolidated property funds (11) 18,964 56,445 Earnings from CDFS joint ventures and other unconsolidated investees (4)(8) 544 3,517 Interest expense (7)(13) (88,651) (70,853) Interest income on long-term notes receivable (8) 3,266 5,036 Interest and other income, net 7,908 4,574 Total other income (expense) (57,969) (1,281) Earnings before minority interest 263,317 160,671 Minority interest (173) (1,125) Earnings before certain net gains 263,144 159,546 Gains recognized on dispositions of certain non-CDFS business assets (14) -- 13,709 Foreign currency exchange expenses and losses, net (15) (13,552) (1,322) Earnings before income taxes 249,592 171,933 Income taxes (16): Current income tax expense 18,100 13,197 Deferred income tax expense 3,321 169 Total income taxes 21,421 13,366 Earnings from continuing operations 228,171 158,567 Discontinued operations (7): Income attributable to disposed properties and assets held for sale 969 9,499 Gains recognized on dispositions: Non-CDFS business assets 4,964 16,428 CDFS business assets 8,341 5,019 Total discontinued operations 14,274 30,946 Net earnings 242,445 189,513 Less preferred share dividends 6,354 6,354 Net earnings attributable to common shares $236,091 $183,159 Footnotes follow Consolidated Balance Sheets. ProLogis First Quarter 2007 Unaudited Financial Results Consolidated Statements of Earnings (Continued) (in thousands, except per share amounts) Three Months Ended March 31, 2007 2006 Weighted average common shares outstanding - Basic 254,253 244,282 Weighted average common shares outstanding - Diluted 265,019 255,146 Net earnings per share attributable to common shares - Basic: Continuing operations $0.87 $0.62 Discontinued operations 0.06 0.13 Net earnings per share attributable to common shares - Basic $0.93 $0.75 Net earnings per share attributable to common shares - Diluted: Continuing operations $0.84 $0.60 Discontinued operations 0.05 0.12 Net earnings per share attributable to common shares - Diluted $0.89 $0.72 Calculation of Net Earnings per Share Attributable to Common Shares - Diluted (in thousands, except per share amounts) Three Months Ended March 31, 2007 2006 Net earnings attributable to common shares - Basic $236,091 $183,159 Minority interest (a) 988 1,125 Adjusted net earnings attributable to common shares - Diluted $237,079 $184,284 Weighted average common shares outstanding - Basic 254,253 244,282 Incremental weighted average effect of conversion of limited partnership units 5,140 5,363 Incremental weighted average effect of potentially dilutive instruments (b) 5,626 5,501 Weighted average common shares outstanding - Diluted 265,019 255,146 Net earnings per share attributable to common shares - Diluted $0.89 $0.72 (a) Includes only the minority interest related to the convertible limited partnership units. (b) Total weighted average potentially dilutive instruments outstanding were 10,834 and 11,116 for the three months ended March 31, 2007 and 2006, respectively. Substantially all were dilutive for both periods. Footnotes follow Consolidated Balance Sheets. ProLogis First Quarter 2007 Unaudited Financial Results Consolidated Statements of Funds From Operations (FFO) (in thousands, except per share amounts) Three Months Ended March 31, 2007 2006 Revenues: Rental income (5) $262,301 $247,020 CDFS disposition proceeds (7)(8)(9)(10)(11) 737,427 353,241 Property management and other fees and incentives (11) 21,647 38,568 Development management and other income (8) 7,439 4,168 Total revenues 1,028,814 642,997 Expenses: Rental expenses (5) 67,375 70,880 Cost of CDFS dispositions (7)(8) 500,476 281,032 General and administrative (12) 50,142 33,788 Depreciation of corporate assets 2,706 2,883 Merger integration and relocation expenses (1) -- 2,372 Other expenses 2,866 2,526 Total expenses 623,565 393,481 405,249 249,516 Other income (expense): FFO from unconsolidated property funds (11) 30,620 53,931 FFO from CDFS joint ventures and other unconsolidated investees (4)(8) 2,136 4,737 Interest expense (88,651) (71,487) Interest income on long-term notes receivable (8) 3,266 5,036 Interest and other income, net 7,908 4,574 Foreign currency exchange expenses and losses, net (15) (6,188) (333) Current income tax expense (16) (18,100) (13,197) Total other income (expense) (69,009) (16,739) FFO 336,240 232,777 Less preferred share dividends 6,354 6,354 Less minority interest 173 1,125 FFO attributable to common shares $329,713 $225,298 Weighted average common shares outstanding - Basic 254,253 244,282 Weighted average common shares outstanding - Diluted 265,019 255,146 FFO per share attributable to common shares: Basic $1.30 $0.92 Diluted $1.25 $0.89 See Consolidated Statements of Earnings, our definition of FFO and the Reconciliations of Net Earnings to FFO. Footnotes follow Consolidated Balance Sheets. ProLogis First Quarter 2007 Unaudited Financial Results Consolidated Statements of FFO (Continued) Calculation of FFO per Share Attributable to Common Shares - Diluted (in thousands, except per share amounts) Three Months Ended March 31, 2007 2006 FFO attributable to common shares - Basic $329,713 $225,298 Minority interest attributable to convertible limited partnership units 988 1,125 FFO attributable to common shares - Diluted $330,701 $226,423 Merger integration and relocation expenses (1) -- 2,372 FFO attributable to common shares, as adjusted - Diluted $330,701 $228,795 Weighted average common shares outstanding - Basic 254,253 244,282 Incremental weighted average effect of conversion of limited partnership units 5,140 5,363 Incremental weighted average effect of potentially dilutive instruments 5,626 5,501 Weighted average common shares outstanding - Diluted 265,019 255,146 FFO per share attributable to common shares - Diluted $1.25 $0.89 FFO per share attributable to common shares, as adjusted - Diluted $1.25 $0.90 See Consolidated Statements of Earnings and the Reconciliations of Net Earnings to FFO. 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 First Quarter 2007 Unaudited Financial Results Reconciliations of Net Earnings to FFO (in thousands) Three Months Ended March 31, 2007 2006 Reconciliation of net earnings to FFO: Net earnings attributable to common shares $236,091 $183,159 Add (deduct) NAREIT defined adjustments: Real estate related depreciation and amortization 76,117 67,996 Adjustments to CDFS dispositions for depreciation (2,337) 466 Gains recognized on dispositions of certain non-CDFS business assets (14) -- (13,709) Reconciling items attributable to discontinued operations (7): Gains recognized on dispositions of non-CDFS business assets (4,964) (16,428) Real estate related depreciation and amortization 873 3,950 Totals discontinued operations (4,091) (12,478) Our share of reconciling items from unconsolidated investees (17): Real estate related depreciation and amortization 18,841 13,220 Gains on dispositions of non-CDFS business assets (1,899) (109) Other amortization items (18) (1,909) (10,595) Totals unconsolidated investees 15,033 2,516 Totals NAREIT defined adjustments 84,722 44,791 Subtotals-NAREIT defined FFO 320,813 227,950 Add (deduct) our defined adjustments: Foreign currency exchange expenses and losses, net (15) 7,364 989 Deferred income tax expense (16) 3,321 169 Our share of reconciling items from unconsolidated investees (17): Foreign currency exchange gains, net (15) (1,329) (2,223) Deferred income tax benefit (456) (1,587) Totals unconsolidated investees (1,785) (3,810) Totals our defined adjustments 8,900 (2,652) FFO attributable to common shares $329,713 $225,298 See Consolidated Statements of Earnings, Consolidated Statements of FFO and the definition of FFO. Footnotes follow Consolidated Balance Sheets. ProLogis First Quarter 2007 Unaudited Financial Results Reconciliations of Net Earnings to EBITDA (in thousands) Three Months Ended March 31, 2007 2006 Reconciliation of net earnings to EBITDA: Net earnings attributable to common shares $236,091 $183,159 Add (deduct): NAREIT defined adjustments to compute FFO 84,722 44,791 Our defined adjustments to compute FFO 8,900 (2,652) Add: Interest expense 88,651 70,853 Depreciation of corporate assets 2,706 2,883 Current income tax expense included in FFO (16) 18,100 13,197 Adjustments to CDFS gains on dispositions for interest capitalized 8,769 6,552 Preferred share dividends 6,354 6,354 Reconciling items attributable to discontinued operations -- 634 Share of reconciling items from unconsolidated investees (17) 23,754 15,409 EBITDA $478,047 $341,180 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 and losses from the dispositions of non-CDFS business assets.
In addition, we adjust the gains and losses from the contributions and sales of developed properties recognized as CDFS income to reflect these gains and losses 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 First Quarter 2007 Unaudited Financial Results Consolidated Balance Sheets (in thousands) March 31, December 31, 2007 (3) 2006 Assets: Investments in real estate assets: Industrial operating properties $11,062,512 $10,423,249 Retail operating properties 310,266 305,188 Land subject to ground leases and other 441,814 472,412 Properties under development (including cost of land) 1,021,613 964,842 Land held for development 1,792,273 1,397,081 Other investments 320,479 391,227 14,948,957 13,953,999 Less accumulated depreciation 1,322,497 1,280,206 Net investments in real estate assets 13,626,460 12,673,793 Investments in and advances to unconsolidated investees: Property funds 1,048,316 981,840 CDFS joint ventures and other unconsolidated investees (4) 504,522 317,857 Total investments in and advances to unconsolidated investees 1,552,837 1,299,697 Cash and cash equivalents 554,507 475,791 Accounts and notes receivable 338,181 439,791 Other assets 1,315,295 957,295 Discontinued operations-assets held for sale (7) 74,076 57,158 Total assets $17,461,357 $15,903,525 Liabilities and Shareholders' Equity: Liabilities: Lines of credit $1,719,112 $2,462,796 Senior notes and other unsecured debt 4,907,731 4,445,092 Convertible debt 1,228,174 -- Secured debt and assessment bonds 1,478,426 1,478,998 Accounts payable and accrued expenses 584,926 518,651 Other liabilities 617,734 546,129 Discontinued operations-assets held for sale (7) 971 1,012 Total liabilities 10,537,074 9,452,678 Minority interest 62,100 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 2,565 2,509 Additional paid-in capital 6,356,420 6,000,119 Accumulated other comprehensive income 215,112 216,922 Distributions in excess of net earnings (19) (61,914) (170,971) Total shareholders' equity 6,862,183 6,398,579 Total liabilities and shareholders' equity $17,461,357 $15,903,525 Footnotes follow Consolidated Balance Sheets. ProLogis First Quarter 2007 Unaudited Financial Results Notes to Consolidated Financial Statements (1) In September 2005, we completed a merger with Catellus Development Corporation. Certain costs related to this merger included merger integration and employee transition costs as well as 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. (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 $740.5 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 $178.9 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 credit facility. We allocated the purchase price based on estimated fair values and recorded approximately $721.2 million of real estate assets, $193.5 million in investments in CDFS joint ventures and other unconsolidated investees, $54.0 million of cash and other tangible assets and $290.2 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 25% 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 March 31, 2007 2006 Rental income $197,700 $168,865 Rental expense recoveries 48,541 42,795 Straight-lined rents 13,168 8,822 $259,409 $220,482 (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 three months ended March 31, 2007, we disposed of seven such properties to third parties, as well as land subject to a ground lease. The operations of the properties disposed of to third parties during 2007 and the aggregate net 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 March 31, 2007 and December 31, 2006, we had 24 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 net gains or losses recognized upon disposition) are as follows (in thousands): Three Months Ended March 31, 2007 2006 Rental income $2,892 $26,538 Rental expenses (1,050) (12,455) Depreciation and amortization (873) (3,950) Interest expense -- (634) $969 $9,499 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 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 is recognized 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 March 31, 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 a property fund decreases, we recognize gains to the extent that proceeds were previously deferred to coincide with our new ownership interest in the property fund. (10) As of March 31, 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 12. 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 8,265 852 9,117 ProLogis North American Properties Fund V 25,345 2,940 28,285 ProLogis North American Properties Funds VI-X 2,765 -- 2,765 ProLogis North American Industrial Fund 39,015 16,870 55,885 ProLogis Japan Properties Fund I 44,819 -- 44,819 ProLogis Japan Properties Fund II 44,082 -- 44,082 CDFS joint ventures 4,269 -- 4,269 Totals $314,662 $56,129 $370,791 (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 20% continuing ownership interest in the ProLogis North American Industrial Fund: Statements Statements of Earnings of 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) In the three months ended March 31, 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) 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 property acquisitions, as well as our increased development activities, which also accounts for the increase in capitalized interest. Three Months Ended March 31, 2007 2006 Gross interest expense $115,022 $96,485 Net premium recognized (3,025) (3,224) Amortization of deferred loan costs 2,359 998 Interest expense before capitalization 114,356 94,259 Less: capitalized amounts (25,705) (23,406) Net interest expense $88,651 $70,853 (14) In addition to contributions of CDFS properties, from time to time, we contribute properties from our property operations segment to the unconsolidated property funds. During the three months ended March 31, 2006, we contributed 12 properties to unconsolidated property funds in which we have continuing interests through our equity ownership. 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. (15) 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. (16) 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 certain contributions to 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 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. (17) 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. (18) 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. (19) 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. *** Certain 2006 amounts included in this Supplemental Information package have been reclassified to conform to the 2007 presentation.
Released May 1, 2007