ProLogis Reports 36.5 Percent Year-Over-Year Growth in FFO for 2006
- Record CDFS Development Profits, Improving Operating Fundamentals and Higher FFO From Funds and Joint Ventures Drive Growth -
DENVER, Feb. 6 /PRNewswire-FirstCall/ -- ProLogis (NYSE: PLD), the world's largest owner, manager and developer of distribution facilities, today reported adjusted funds from operations as defined by ProLogis (FFO) for the year ended December 31, 2006, of $3.70 per diluted share, up 36.5 percent from $2.71 in 2005. After $0.01 of merger integration expenses, FFO per diluted share was $3.69 for the year ended December 31, 2006, compared with $2.51 in 2005, which included $0.20 related to merger integration and relocation expenses and cumulative translation losses and impairment charges related to the sale of ProLogis' temperature-controlled business. For the year, net earnings per diluted share were $3.32, compared with $1.76 in 2005. The increase was primarily due to improvement in each of the company's business segments, as well as gains on the sale of assets that are recognized under GAAP but are not included in ProLogis' definition of FFO.
For the fourth quarter ended December 31, 2006, FFO was $1.11 per diluted share. This compares with $0.58 in the fourth quarter of 2005, which was before $0.01 of merger integration charges. Net earnings per diluted share were $1.28 for the fourth quarter of 2006, compared with $0.43 for the same period in 2005.
"This past year was one of significant achievement for ProLogis around the world," said Jeffrey H. Schwartz, chief executive officer. "We delivered strong financial performance by leveraging our global platform, crystallizing value in our property fund business, and maintaining a diversified development pipeline with exceptional margins. In addition, we successfully completed a number of acquisitions and other investments that enhanced our ability to meet the future needs of global customers."
Schwartz noted that growth in world trade continues to drive customer demand across Asia, Europe and North America, resulting in positive net absorption of new development deliveries and improved operating property performance. Rental rates on ProLogis lease turnovers increased by 5.6 percent in the fourth quarter. In the company's same-store pool, net operating income increased 3.1 percent and both average occupancy and rent growth were up 2.6 percent for the full year.
"Overall market dynamics in our industry remain sound," said Walter C. Rakowich, president and chief operating officer of ProLogis. "We are beginning to see the rent growth we have long been anticipating, and we believe we are well positioned to capture a leading share of the opportunity created through continued strong growth in global trade."
Fund Transactions Boost Growth
During the year, ProLogis completed two fund-related transactions that resulted in total FFO of approximately $172 million. In the first quarter, ProLogis purchased its partner's 80% interest in North American Property Funds II, III and IV and subsequently contributed those assets to its open-end North American Industrial Fund, generating FFO of approximately $62.8 million. In the fourth quarter, ProLogis recognized an incentive return of $109.2 million related to the IPO of ProLogis European Properties (Euronext: PEPR).
"These transactions exemplify the strength of ProLogis' property fund strategy, which leverages strong institutional demand for industrial facilities and serves as a powerful growth engine for our company," Rakowich added.
Global Development Pipeline Grows, Supported by Solid Market Fundamentals
During the year, ProLogis began construction of more than $2.5 billion of new development and completed more than $2.2 billion, including development activity within its industrial joint ventures. Projects completed in 2006 were 69 percent leased at year end. The company's Corporate Distribution Facilities Services (CDFS) pipeline stood at $5.3 billion at the end of the year, a 63 percent increase over the prior-year level.
"Given our expanded platform and strong customer relationships, we plan to increase 2007 development starts by 20 to 30 percent," said Ted Antenucci, president - global development. "Leasing of newly developed assets is even stronger than a year ago. This customer demand, coupled with good visibility on development margins and a geographically diverse development pipeline, gives us a high level of confidence in our ability to grow CDFS income in 2007 and beyond."
Antenucci noted that the top 30 logistics markets in North America absorbed nearly 149 million square feet of space during 2006, compared with development deliveries of just over 135 million square feet. In Europe and Asia, demand and supply also remain well balanced, supporting additional development activity.
"Our ability to address global customers' distribution space needs in the world's top logistics markets is unique in the industry," Antenucci said. "During 2006, approximately half of our 27.3 million square feet of new CDFS leases were with repeat customers, including: Schenker in Le Havre, France; Whirlpool in Monterrey, Mexico; Nippon Express in Tokyo and Amazon.com in Washington, DC."
Selected Financial and Operating Information * Achieved adjusted FFO per share growth of 36.5 percent year over year. * Improved average year-to-date, same-store net operating income by 3.1 percent (a 3.5 percent increase when straight-lined rents and lease amortization are excluded) while same-store occupancies increased by 2.6 percent for the year. Same-store rent growth for the year was 2.6 percent. * Redeployed a total of $2.31 billion of capital through contributions and dispositions during the year. Of that, $1.58 billion was CDFS, with an additional $726.6 million in non-CDFS contributions and dispositions. This included $388.3 million of proceeds from dispositions of non-core assets remaining from the Catellus merger. * Realized FFO from CDFS transactions of $326.9 million for the year, including recognition of previously deferred proceeds from the first quarter contribution of properties from North American Property Funds II, III and IV to ProLogis North American Industrial Fund, up from $233.3 million in 2005. FFO amounts do not include unrecognized deferred gains of $65.5 million related to CDFS development contributions for 2006 and $52.8 million for 2005. Post-deferral, post-tax CDFS margins were 24.3% for dispositions completed during the year. * Recognized income (non-FFO) from non-CDFS dispositions and contributions of $185.2 million for the year. * Started new developments with total expected investment of $792.4 million during the quarter and $2.54 billion for the year, including industrial joint venture development. For the year, starts include $96.6 million of retail development. * Increased ProLogis' share of FFO from property funds to $127.9 million for the year, including earnings from the North American property fund transaction noted above, up 32.8 percent from $96.3 million in the prior year. * Grew fee income from property funds for the year to $211.9 million, including the incentive fees from the PEPR and North American fund transactions noted above, up from $66.9 million in 2005. * Achieved combined development management fees, FFO from CDFS joint ventures and other unconsolidated investees and interest income on long-term notes receivable of $112.0 million for the year. * Increased total assets owned and under management to $26.7 billion, up from $22.1 billion at December 31, 2005, a 20.8 percent increase.
Copies of ProLogis' fourth quarter 2006 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 am Eastern Time on Tuesday, February 6, 2007. A replay of the webcast will be available on the company's website until February 20, 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.
About ProLogis
ProLogis is the world's largest owner, manager and developer of distribution facilities, with operations in 80 markets across North America, Europe and Asia. The company has $26.7 billion of assets owned, managed and under development, comprising 422.0 million square feet (39.2 million square meters) in 2,466 properties as of December 31, 2006. 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 1,250 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 statement. 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, 2005.
ProLogis Fourth Quarter 2006 Unaudited Financial Results Selected Financial Information (in thousands, except per share amounts and percentages) Three Months Ended December 31, 2006 2005(1) % Change Net earnings attributable to common shares: Net earnings attributable to common shares $331,090 $109,102 203.5% Net earnings per diluted share attributable to common shares $1.28 $0.43 197.7% FFO and FFO, as adjusted (see definition of FFO) FFO attributable to common shares $288,885 $142,868 102.2% Add back: Merger integration expenses(3) -- 3,864 Relocation expenses(4) -- 402 Cumulative translation losses and impairment charges related to temperature- controlled distribution assets(5) -- -- FFO attributable to common shares, as adjusted $288,885 $147,134 96.3% FFO per diluted share attributable to common shares $1.11 $0.57 94.7% Add back: Merger integration expenses(3) -- 0.01 Relocation expenses (4) -- -- Cumulative translation losses and impairment charges related to temperature- controlled distribution assets(5) -- -- FFO per diluted share attributable to common shares, as adjusted $1.11 $0.58 91.4% EBITDA: EBITDA $407,786 $245,595 66.0% Distributions: Actual distributions per common share(6) $0.40 $0.37 8.1% Twelve Months Ended December 31, 2006(2) 2005(1) % Change Net earnings attributable to common shares: Net earnings attributable to common shares $848,951 $370,747 129.0% Net earnings per diluted share attributable to common shares $3.32 $1.76 88.6% FFO and FFO, as adjusted (see definition of FFO) FFO attributable to common shares $945,148 $530,472 78.2% Add back: Merger integration expenses(3) 2,630 12,152 Relocation expenses(4) 93 4,451 Cumulative translation losses and impairment charges related to temperature-controlled distribution assets(5) -- 26,864 FFO attributable to common shares, as adjusted $947,871 $573,939 65.2% FFO per diluted share attributable to common shares $3.69 $2.51 47.0% Add back: Merger integration expenses(3) 0.01 0.05 Relocation expenses(4) -- 0.02 Cumulative translation losses and impairment charges related to temperature-controlled distribution assets(5) -- 0.13 FFO per diluted share attributable to common shares, as adjusted $3.70 $2.71 36.5% EBITDA: EBITDA $1,424,836 $889,239 60.2% Distributions: Actual distributions per common share (6) $1.60 $1.48 8.1% See our definition of FFO and our definition of EBITDA. Footnotes follow Consolidated Balance Sheets. ProLogis Fourth Quarter 2006 Unaudited Financial Results Consolidated Statements of Earnings (in thousands) Three Months Ended Twelve Months Ended December 31, December 31, 2006 2005(1) 2006(2) 2005(1) Revenues: Rental income(8)(9)(10) $245,278 $200,143 $927,719 $600,869 CDFS disposition proceeds (11)(12)(13)(15) 236,137 184,347 1,286,841 1,140,457 Property management and other fees and incentives(14)(15) 132,611 16,608 211,929 66,934 Development management and other income(11) 10,895 13,725 37,420 25,464 Total revenues 624,921 414,823 2,463,909 1,833,724 Expenses: Rental expenses(8)(10) 64,197 53,729 239,545 161,680 Cost of CDFS dispositions(11) 172,872 154,827 993,926 917,782 General and administrative 46,527 34,433 156,889 107,164 Depreciation and amortization(10) 81,122 65,186 293,027 191,945 Merger integration expenses(3) -- 3,864 2,630 12,152 Relocation expenses(4) -- 402 93 4,451 Other expenses 4,089 2,321 13,013 8,633 Total expenses 368,807 314,762 1,699,123 1,403,807 Operating income 256,114 100,061 764,786 429,917 Other income (expense): Earnings from unconsolidated property funds(15) 14,426 11,086 93,055 46,078 Earnings from CDFS joint ventures and other unconsolidated investees(7)(11) 3,692 5,753 50,703 6,421 Interest expense(10)(16) (77,470) (63,759) (294,403) (177,562) Interest income on long-term notes receivable(11) 3,494 5,940 16,730 6,781 Interest and other income, net 7,652 3,226 18,248 10,724 Total other income (expense) (48,206) (37,754) (115,667) (107,558) Earnings before minority interest 207,908 62,307 649,119 322,359 Minority interest (916) (1,314) (3,457) (5,243) Earnings before certain net gains 206,992 60,993 645,662 317,116 Gains recognized on dispositions of certain non-CDFS business assets(17) 67,761 -- 81,470 -- Foreign currency exchange gains, net(18) 4,637 7,656 21,086 15,979 Earnings before income taxes 279,390 68,649 748,218 333,095 Income taxes(7)(14)(19): Current income tax expense 8,337 7,662 84,250 14,847 Deferred income tax (benefit) expense (36,942) 3,855 (53,722) 12,045 Total income taxes (28,605) 11,517 30,528 26,892 Earnings from continuing operations 307,995 57,132 717,690 306,203 Discontinued operations(10): Income attributable to disposed properties and assets held for sale 2,421 6,487 19,434 18,050 Losses related to temperature controlled distribution assets(5) -- -- -- (25,150) Gains recognized on dispositions: Non-CDFS business assets 23,692 47,604 103,729 86,444 CDFS business assets 3,336 4,233 33,514 10,616 Total discontinued operations 29,449 58,324 156,677 89,960 Net earnings 337,444 115,456 874,367 396,163 Less preferred share dividends 6,354 6,354 25,416 25,416 Net earnings attributable to common shares $331,090 $109,102 $848,951 $370,747 Footnotes follow Consolidated Balance Sheets. ProLogis Fourth Quarter 2006 Unaudited Financial Results Consolidated Statements of Earnings (Continued) (in thousands, except per share amounts) Three Months Twelve Months Ended Ended December 31, December 31, 2006 2005(1) 2006(2) 2005(1) Weighted average common shares outstanding - Basic 249,021 243,601 245,952 203,337 Weighted average common shares outstanding - Diluted 260,218 254,010 256,852 213,713 Net earnings per share attributable to common shares - Basic: Continuing operations $1.21 $0.21 $2.81 $1.38 Discontinued operations 0.12 0.24 0.64 0.44 Net earnings per share attributable to common shares - Basic $1.33 $0.45 $3.45 $1.82 Net earnings per share attributable to common shares - Diluted: Continuing operations $1.17 $0.20 $2.71 $1.34 Discontinued operations 0.11 0.23 0.61 0.42 Net earnings per share attributable to common shares - Diluted $1.28 $0.43 $3.32 $1.76
Calculation of Net Earnings per Share Attributable to Common Shares - Diluted
(in thousands, except per share amounts) Three Months Ended Twelve Months Ended December 31, December 31, 2006 2005(1) 2006(2) 2005(1) Net earnings attributable to common shares - Basic $331,090 $109,102 $848,951 $370,747 Minority interest(a) 916 1,314 3,457 5,243 Adjusted net earnings attributable to common shares - Diluted $332,006 $110,416 $852,408 $375,990 Weighted average common shares outstanding - Basic 249,021 243,601 245,952 203,337 Incremental weighted average effect of conversion of limited partnership units 5,139 5,539 5,198 5,540 Incremental weighted average effect of potentially dilutive instruments(a) 6,058 4,870 5,702 4,836 Weighted average common shares outstanding - Diluted 260,218 254,010 256,852 213,713 Net earnings per share attributable to common shares - Diluted $1.28 $0.43 $3.32 $1.76 (a) Total weighted average potentially dilutive instruments outstanding were 10,679 and 10,442 for the three months ended December 31, 2006 and 2005, respectively, and 10,909 and 10,783 for the twelve months ended December 31, 2006 and 2005, respectively. Footnotes follow Consolidated Balance Sheets. ProLogis Fourth Quarter 2006 Unaudited Financial Results Consolidated Statements of Funds From Operations (FFO) (in thousands, except per share amounts) Three Months Ended Twelve Months Ended December 31, December 31, 2006 2005(1) 2006(2) 2005(1) Revenues: Rental income(8) $249,706 $222,231 $973,062 $649,530 CDFS disposition proceeds (10)(11)(12)(13)(15) 259,024 241,650 1,532,807 1,240,950 Property management and other fees and incentives(14)(15) 132,611 16,608 211,929 66,934 Development management and other income(11) 10,895 13,725 37,420 25,464 Total revenues 652,236 494,214 2,755,218 1,982,878 Expenses: Rental expenses(8) 66,008 64,133 259,265 179,815 Cost of CDFS dispositions(10)(11) 192,423 207,897 1,205,912 1,007,659 General and administrative 46,527 34,433 156,889 107,164 Depreciation of corporate assets 2,310 2,047 9,326 7,153 Merger integration expenses(3) -- 3,864 2,630 12,152 Relocation expenses(4) -- 402 93 4,451 Other expenses 4,089 2,321 13,013 8,633 Total expenses 311,357 315,097 1,647,128 1,327,027 340,879 179,117 1,108,090 655,851 Other income (expense): FFO from unconsolidated property funds(15) 29,438 26,710 127,905 96,261 FFO from CDFS joint ventures and other unconsolidated investees(7)(11) 6,302 6,432 57,853 8,449 Interest expense (77,470) (64,567) (295,277) (178,639) Interest income on long-term notes receivable(11) 3,494 5,940 16,730 6,781 Interest and other income, net 7,652 3,226 18,248 10,724 Foreign currency exchange (expenses/losses) gains, net(18) (5,803) 1,340 1,531 1,914 Current income tax expense(7)(19) (8,337) (7,662) (61,059) (14,847) Losses related to temperature controlled distribution assets(5) -- -- -- (25,363) Total other income (expense) (44,724) (28,581) (134,069) (94,720) FFO 296,155 150,536 974,021 561,131 Less preferred share dividends 6,354 6,354 25,416 25,416 Less minority interest 916 1,314 3,457 5,243 FFO attributable to common shares $288,885 $142,868 $945,148 $530,472 Weighted average common shares outstanding - Basic 249,021 243,601 245,952 203,337 Weighted average common shares outstanding - Diluted 260,218 254,010 256,852 213,713 FFO per share attributable to common shares: Basic $1.16 $0.59 $3.84 $2.61 Diluted $1.11 $0.57 $3.69 $2.51 See Consolidated Statements of Earnings, our definition of FFO and the Reconciliations of Net Earnings to FFO. Footnotes follow Consolidated Balance Sheets. ProLogis Fourth Quarter 2006 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 Twelve Months Ended December 31, December 31, 2006 2005(1) 2006(2) 2005(1) FFO attributable to common shares - Basic $288,885 $142,868 $945,148 $530,472 Minority interest 916 1,314 3,457 5,243 FFO attributable to common shares - Diluted $289,801 $144,182 $948,605 $535,715 Merger integration expenses(3) -- 3,864 2,630 12,152 Relocation expenses(4) -- 402 93 4,451 Cumulative translation losses and impairment charges related to temperature-controlled distribution assets(5) -- -- -- 26,864 FFO attributable to common shares, as adjusted - Diluted $289,801 $148,448 $951,328 $579,182 Weighted average common shares outstanding - Basic 249,021 243,601 245,952 203,337 Incremental weighted average effect of conversion of limited partnership units 5,139 5,539 5,198 5,540 Incremental weighted average effect of potentially dilutive instruments 6,058 4,870 5,702 4,836 Weighted average common shares outstanding - Diluted 260,218 254,010 256,852 213,713 FFO per share attributable to common shares - Diluted $1.11 $0.57 $3.69 $2.51 FFO per share attributable to common shares, as adjusted - Diluted $1.11 $0.58 $3.70 $2.71 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 Fourth Quarter 2006 Unaudited Financial Results Reconciliations of Net Earnings to FFO (in thousands) Three Months Ended Twelve Months Ended December 31, December 31, 2006 2005(1) 2006(2) 2005(1) Reconciliation of net earnings to FFO: Net earnings attributable to common shares $331,090 $109,102 $848,951 $370,747 Add (deduct) NAREIT defined adjustments: Real estate related depreciation and amortization 78,812 63,139 283,701 184,792 Additional CDFS proceeds recognized(15) -- -- 466 -- Gains recognized on dispositions of certain non-CDFS business assets(17) (67,761) -- (81,470) -- Reconciling items attributable to discontinued operations(10): Gains recognized on dispositions of non-CDFS business assets (23,692) (47,604) (103,729) (86,444) Real estate related depreciation and amortization 196 4,389 5,315 11,399 Totals discontinued operations (23,496) (43,215) (98,414) (75,045) Our share of reconciling items from unconsolidated investees(20): Real estate related depreciation and amortization 20,317 17,819 68,151 57,766 Gains on dispositions of non-CDFS business assets (371) (309) (7,124) (1,114) Other amortization items(15)(21) (1,801) (1,073) (16,000) (5,134) Totals unconsolidated investees 18,145 16,437 45,027 51,518 Totals NAREIT defined adjustments 5,700 36,361 149,310 161,265 Subtotals-NAREIT defined FFO 336,790 145,463 998,261 532,012 Add (deduct) our defined adjustments: Foreign currency exchange gains, net(18) (10,440) (6,316) (19,555) (14,065) Current income tax expense(19) -- -- 23,191 -- Deferred income tax (benefit) expense(19) (36,942) 3,855 (53,722) 12,045 Reconciling items attributable to discontinued operations: Assets disposed of - deferred income tax benefit(5) -- -- -- (213) Our share of reconciling items from unconsolidated investees(20): Foreign currency exchange expenses/losses (gains), net(18) (175) 561 (45) 298 Deferred income tax (benefit) expense (348) (695) (2,982) 395 Totals unconsolidated investees (523) (134) (3,027) 693 Totals our defined adjustments (47,905) (2,595) (53,113) (1,540) FFO attributable to common shares $288,885 $142,868 $945,148 $530,472 See Consolidated Statements of Earnings, Consolidated Statements of FFO and the definition of FFO. Footnotes follow Consolidated Balance Sheets. ProLogis Fourth Quarter 2006 Unaudited Financial Results Reconciliations of Net Earnings to EBITDA (in thousands) Three Months Ended Twelve Months Ended December 31, December 31, 2006 2005(1) 2006(2) 2005(1) Reconciliation of net earnings to EBITDA: Net earnings attributable to common shares $331,090 $109,102 $848,951 $370,747 Add (deduct): NAREIT defined adjustments to compute FFO 5,700 36,361 149,310 161,265 Our defined adjustments to compute FFO (47,905) (2,595) (53,113) (1,540) Add: Interest expense 77,470 63,759 294,403 177,562 Depreciation of corporate assets, including amounts reported in relocation expense 2,310 2,239 9,326 8,187 Current income tax expense included in FFO(19) 8,337 7,662 61,059 14,847 Adjustments to CDFS gains on dispositions for interest capitalized 3,164 4,250 28,591 32,735 Preferred share dividends 6,354 6,354 25,416 25,416 Reconciling items attributable to discontinued operations -- 808 874 28,113 Impairment charges 1,947 -- 6,121 180 Share of reconciling items from unconsolidated investees(20) 19,319 17,655 53,898 71,727 EBITDA $407,786 $245,595 $1,424,836 $889,239 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 Fourth Quarter 2006 Unaudited Financial Results Consolidated Balance Sheets (in thousands) December 31, December 31, 2006 2005(1) Assets: Investments in real estate assets: Industrial operating properties $10,423,249 $8,730,906 Retail operating properties 305,188 288,253 Land subject to ground leases and other 472,412 792,668 Properties under development (including cost of land) 964,842 884,345 Land held for development 1,397,081 1,045,042 Other investments 391,227 133,916 13,953,999 11,875,130 Less accumulated depreciation 1,280,206 1,118,547 Net investments in real estate assets 12,673,793 10,756,583 Investments in and advances to unconsolidated investees: Property funds(14)(15)(22) 981,840 755,320 CDFS joint ventures and other unconsolidated investees(7) 317,857 294,423 Total investments in and advances to unconsolidated investees 1,299,697 1,049,743 Cash and cash equivalents 475,791 203,800 Accounts and notes receivable 439,791 327,214 Other assets 957,295 788,840 Discontinued operations-assets held for sale(10) 57,158 -- Total assets $15,903,525 $13,126,180 Liabilities and Shareholders' Equity: Liabilities: Lines of credit and short-term borrowings $2,462,796 $2,240,054 Senior notes 4,445,092 2,759,675 Secured debt and assessment bonds 1,478,998 1,678,151 Accounts payable and accrued expenses 518,651 344,423 Other liabilities 546,129 557,210 Discontinued operations-assets held for sale(10) 1,012 -- Total liabilities 9,452,678 7,579,513 Minority interest 52,268 58,644 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 2,509 2,438 Additional paid-in capital 6,000,119 5,606,017 Accumulated other comprehensive income 216,922 149,586 Distributions in excess of net earnings (170,971) (620,018) Total shareholders' equity 6,398,579 5,488,023 Total liabilities and shareholders' equity $15,903,525 $13,126,180 Footnotes follow Consolidated Balance Sheets. ProLogis Fourth Quarter 2006 Unaudited Financial Results Notes to Consolidated Financial Statements (1) Certain 2005 amounts included in this Supplemental Information package have been reclassified to conform to the 2006 presentation. (2) On September 15, 2005, we completed a merger with Catellus Development Corporation ("Catellus Merger"). This transaction was accounted for using the purchase method of accounting and, accordingly, the purchase price of $5.3 billion has been allocated to the net assets acquired based on their estimated fair values at the date of acquisition. (3) Represents costs incurred related to the Catellus Merger. These costs included merger integration and employee transition costs as well as severance costs for certain of our employees whose responsibilities became redundant after the Catellus Merger. (4) We completed the relocation of our information technology and corporate accounting functions from El Paso, Texas to Denver, Colorado in the first quarter of 2005. We moved our corporate headquarters, which is located in Denver, to a recently constructed building in February 2006. Relocation costs included (i) employee termination costs; (ii) costs associated with the hiring and training of new personnel and other costs including travel, moving and temporary facility costs; and (iii) accelerated depreciation associated with non-real estate assets whose useful life was shortened due to the relocations. (5) In July 2005, we sold our temperature-controlled distribution operations in France and accordingly, the results of operations for 2005 are included in discontinued operations. Due to the sale and liquidation of the business, we recognized impairment charges and cumulative translation losses of $26.9 million in 2005. (6) The annual distribution rate for 2006 was $1.60 per common share. In December 2006, the Board of Trustees approved an increase in the annual distribution to $1.84 per common share. The amount of the common share distribution is declared quarterly and may be adjusted at the discretion of the Board of Trustees. (7) We have varying ownership interests in unconsolidated investees. The investees primarily engage in activities similar to our corporate distribution facilities services business ("CDFS business") segment activities (as discussed in note 11) and own operating properties in China, Europe and North America. We refer to the joint ventures engaged in industrial property development 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 30% to 50%. We also have varying ownership interests in other unconsolidated investees that primarily own and operate industrial, office and hotel properties. During the second and third quarters of 2006, we recognized an aggregate of $35.0 million, representing our proportionate share of the net earnings of a CDFS joint venture, "LAAFB JV". The LAAFB JV was formed to redevelop a U.S. Air Force base in Los Angeles, California in exchange for land parcels and certain rights to receive tax increment financing ("TIF") proceeds over a period of time. As our investment in LAAFB JV is held in a taxable subsidiary that was acquired in the Catellus Merger, we also recognized the associated current income tax expense of $27.0 million and a deferred tax benefit of $12.4 million during these same periods. See note 19 for further explanation of our taxes. The operations of the LAAFB JV are now substantially complete. (8) 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 direct expenses associated with our management of the property funds' operations. 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. (9) Rental income includes the following (in thousands): Three Months Ended Twelve Months Ended December 31, December 31, 2006 2005(1) 2006(2) 2005(1) Rental income $184,735 $155,799 $707,808 $473,671 Rental expense recoveries 49,808 38,229 183,493 115,787 Straight-lined rents 10,735 6,115 36,418 11,411 $245,278 $200,143 $927,719 $600,869 (10) Properties disposed of to third parties are considered to be discontinued operations unless such properties were developed under a pre-sale agreement. During 2006, we disposed of 89 such properties to third parties, 15 of which were CDFS business assets. The operations of the properties disposed of to third parties during 2006 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 the 72 properties disposed of during 2005 (eight of which were CDFS business assets) are presented as discontinued operations. As of December 31, 2006, we had eight properties 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 Sheet. 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 Twelve Months Ended Ended December 31, December 31, 2006 2005(1) 2006(2) 2005(1) Rental income $4,428 $22,088 $45,343 $48,661 Rental expenses (1,811) (10,404) (19,720) (18,135) Depreciation and amortization (196) (4,389) (5,315) (11,399) Interest expense -- (808) (874) (1,077) $2,421 $6,487 $19,434 $18,050 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. (11) 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 when our development plans no longer include these parcels; 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. (12) When we contribute properties 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 real estate assets rather than on the entity's basis in the contributed real estate assets. If a loss is recognized when a property is contributed, the entire loss is recognized. See note 13 for the amount of cumulative gross proceeds that have not been recognized as of December 31, 2006. 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. (13) As of December 31, 2006, 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 $123,609 $9,338 $132,947 ProLogis California LLC 5,394 26,129 31,523 ProLogis North American Properties Fund I 8,271 862 9,133 ProLogis North American Properties Fund V 25,359 2,939 28,298 ProLogis North American Properties Funds VI-X 2,766 -- 2,766 ProLogis North American Industrial Fund 32,506 16,870 49,376 ProLogis Japan Properties Fund I 44,878 -- 44,878 ProLogis Japan Properties Fund II 22,939 -- 22,939 CDFS joint ventures 4,590 -- 4,590 Totals $270,312 $56,138 $326,450 (14) In September 2006, ProLogis European Properties ("PEPR") completed an initial public offering ("IPO") on an Amsterdam stock exchange in which the selling unitholders offered 49.8 million ordinary units. As the manager of the property fund, we received an initial incentive allocation of 53.5 million Euros paid in additional ordinary units from the pre-IPO unitholders based on the internal rate of return that such unitholders earned during their pre-IPO holding period. The incentive return was adjusted through a cash settlement in October based on the average closing price of the ordinary units during the 30-day, post-IPO period. In the fourth quarter of 2006, we recognized the incentive return of $109.2 million, as income, which is included in Property Management and Other Fees and Incentives in our Statements of Earnings and FFO. In addition, we recognized a deferred tax benefit of $36.8 million due to the reversal of a tax indemnification liability as we no longer have an obligation to the pre-IPO unitholders under this tax indemnification agreement. Subsequent to the IPO, our ownership in PEPR is 24%. (15) On January 4, 2006, we purchased the 80% ownership interests in each of ProLogis North American Properties Funds II, III and IV (collectively "the Funds") held by our fund partner, an affiliate of Arcapita Bank B.S.C.(c) ("Arcapita"). On March 1, 2006, we contributed substantially all of the assets and associated liabilities to the ProLogis North American Industrial Fund, which was finalized in February 2006. See note 22. In connection with these transactions, we recognized the following amounts in the respective line items, during the first quarter of 2006 (in thousands): Statements of Earnings Statements 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 income upon the initial contributions of the properties to the Funds. See note 12. (b) Represents an incentive return we earned due to certain return levels achieved by Arcapita upon the liquidation of the Funds. (c) Represents our proportionate share of the gain on termination recognized by the Funds on a depreciated basis (earnings) and on an undepreciated basis (FFO). All of the above amounts are net of an aggregate deferred amount of $17.9 million, due to our 20% continuing ownership interest in the property fund that purchased the assets. (16) 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 Catellus Merger and other property acquisitions, as well as our increased development activities, which also accounts for the increase in capitalized interest. Three Months Ended Twelve Months Ended December 31, December 31, 2006 2005(1) 2006(2) 2005(1) Gross interest expense $106,061 $87,846 $398,066 $239,832 Net premium recognized (3,040) (3,116) (12,564) (3,980) Amortization of deferred loan costs 1,945 1,379 6,198 5,595 Interest expense before capitalization 104,966 86,109 391,700 241,447 Less: capitalized amounts (27,496) (22,350) (97,297) (63,885) Net interest expense $77,470 $63,759 $294,403 $177,562 (17) 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 and twelve months ended December 31, 2006, we contributed 27 and 39 properties, respectively, 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. See our definition of FFO. (18) 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. See our definition of FFO and our definition of EBITDA. (19) 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. See note 14. In connection with the Catellus Merger and in accordance with purchase accounting, we recorded all of the acquired assets and liabilities at the estimated fair values at the date of acquisition. For our taxable subsidiaries, we recognized 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. (20) 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. See our definition of FFO and our definition of EBITDA. (21) 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 12. 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. (22) In February, 2006, we formed a new property fund with several institutional investors, the North American Industrial Fund, which currently owns industrial distribution properties in the United States and may own properties in Canada. The North American Industrial Fund, in which we have a 20% ownership interest, is an open-end fund. See note 15 for further discussion about the initial contribution of assets to the North American Industrial Fund in the first quarter of 2006. In addition, in January 2006, we made the first contribution of assets to ProLogis Japan Properties Fund II, which was formed in late 2005.
SOURCE ProLogis
Released February 6, 2007