Attached files

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EX-32.2 - EX-32.2 - Prologis, Inc.pld-ex322_13.htm
EX-32.1 - EX-32.1 - Prologis, Inc.pld-ex321_6.htm
EX-31.4 - EX-31.4 - Prologis, Inc.pld-ex314_11.htm
EX-31.3 - EX-31.3 - Prologis, Inc.pld-ex313_14.htm
EX-31.2 - EX-31.2 - Prologis, Inc.pld-ex312_12.htm
EX-31.1 - EX-31.1 - Prologis, Inc.pld-ex311_9.htm
EX-15.2 - EX-15.2 - Prologis, Inc.pld-ex152_8.htm
EX-15.1 - EX-15.1 - Prologis, Inc.pld-ex151_15.htm
EX-12.2 - EX-12.2 - Prologis, Inc.pld-ex122_10.htm
EX-12.1 - EX-12.1 - Prologis, Inc.pld-ex121_7.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2018

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ______________ to ______________

 

Commission File Number:  001-13545 (Prologis, Inc.)  001-14245 (Prologis, L.P.)

 

Prologis, Inc.

Prologis, L.P.

(Exact name of registrant as specified in its charter)

 

Maryland (Prologis, Inc.)

Delaware (Prologis, L.P.)

 

94-3281941 (Prologis, Inc.)

94-3285362 (Prologis, L.P.)

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

Pier 1, Bay 1, San Francisco, California

 

94111

(Address or principal executive offices)

 

(Zip Code)

 

(415) 394-9000

(Registrants’ telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing for the past 90 days.

Prologis, Inc.

Yes

No

Prologis, L.P.

Yes

No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website; if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter periods that the registrant was required to submit and post such files).

Prologis, Inc.

Yes

No

Prologis, L.P.

Yes

No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act (check one):

 

Prologis, Inc.:

 

 

 

 

 

Large accelerated filer   

 

Accelerated filer   

Non-accelerated filer   

Smaller reporting company   

Emerging growth company    

 

 

(Do not check if a smaller reporting company)

 

 

 

Prologis, L.P.:

 

 

 

 

 

Large accelerated filer   

 

Accelerated filer   

Non-accelerated filer   

Smaller reporting company   

Emerging growth company    

 

 

(Do not check if a smaller reporting company)

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).

Prologis, Inc.

Yes

No

Prologis, L.P.

Yes

No

 

The number of shares of Prologis, Inc.’s common stock outstanding at July 19, 2018, was approximately 533,307,000.

 

 

 

 


 

EXPLANATORY NOTE

This report combines the quarterly reports on Form 10-Q for the period ended June 30, 2018, of Prologis, Inc. and Prologis, L.P. Unless stated otherwise or the context otherwise requires, references to “Prologis, Inc.” or the “Parent” mean Prologis, Inc. and its consolidated subsidiaries; and references to “Prologis, L.P.” or the “Operating Partnership” or the “OP” mean Prologis, L.P., and its consolidated subsidiaries. The terms “the Company,” “Prologis,” “we,” “our” or “us” means the Parent and the OP collectively.

 

The Parent is a real estate investment trust (a “REIT”) and the general partner of the OP. At June 30, 2018, the Parent owned 97.11% common general partnership interest in the OP and 100% of the preferred units in the OP. The remaining 2.89% common limited partnership interests are owned by unaffiliated investors and certain current and former directors and officers of the Parent.

 

We operate the Parent and the OP as one enterprise. The management of the Parent consists of the same members as the management of the OP. These members are officers of the Parent and employees of the OP or one of its subsidiaries. As sole general partner, the Parent has control of the OP through complete responsibility and discretion in the day-to-day management and therefore, consolidates the OP for financial reporting purposes. Because the only significant asset of the Parent is its investment in the OP, the assets and liabilities of the Parent and the OP are the same on their respective financial statements.

We believe combining the quarterly reports on Form 10-Q of the Parent and the OP into this single report results in the following benefits:

enhances investors’ understanding of the Parent and the OP by enabling investors to view the business as a whole in the same manner as management views and operates the business;

eliminates duplicative disclosure and provides a more streamlined and readable presentation as a substantial portion of the Company’s disclosure applies to both the Parent and the OP; and

creates time and cost efficiencies through the preparation of one combined report instead of two separate reports.

 

It is important to understand the few differences between the Parent and the OP in the context of how we operate the Company. The Parent does not conduct business itself, other than acting as the sole general partner of the OP and issuing public equity from time to time. The Parent itself does not incur any indebtedness, but it guarantees the unsecured debt of the OP. The OP holds substantially all the assets of the business, directly or indirectly. The OP conducts the operations of the business and is structured as a partnership with no publicly traded equity. Except for net proceeds from equity issuances by the Parent, which are contributed to the OP in exchange for partnership units, the OP generates capital required by the business through the OP’s operations, incurrence of indebtedness and issuance of partnership units to third parties.

 

The presentation of noncontrolling interests, stockholders’ equity and partners’ capital are the main areas of difference between the consolidated financial statements of the Parent and those of the OP. The differences in the presentations between stockholders’ equity and partners’ capital result from the differences in the equity and capital issuances in the Parent and in the OP.

                

The preferred stock, common stock, additional paid-in capital, accumulated other comprehensive income (loss) and distributions in excess of net earnings of the Parent are presented as stockholders’ equity in the Parent’s consolidated financial statements. These items represent the common and preferred general partnership interests held by the Parent in the OP and are presented as general partner’s capital within partners’ capital in the OP’s consolidated financial statements. The common limited partnership interests held by the limited partners in the OP are presented as noncontrolling interest within equity in the Parent’s consolidated financial statements and as limited partners’ capital within partners’ capital in the OP’s consolidated financial statements.

                

To highlight the differences between the Parent and the OP, separate sections in this report, as applicable, individually discuss the Parent and the OP, including separate financial statements and separate Exhibit 31 and 32 certifications. In the sections that combine disclosure of the Parent and the OP, this report refers to actions or holdings as being actions or holdings of Prologis.

 

 

 


 

PROLOGIS

INDEX

 

 

 

 

 

Page

Number

 

PART I.

 

Financial Information

 

 

 

 

 

Item 1.

Financial Statements

 

1

 

 

 

            Prologis, Inc.:

 

 

 

 

 

 

Consolidated Balance Sheets – June 30, 2018 and December 31, 2017

 

1

 

 

 

 

Consolidated Statements of Income – Three and Six Months Ended June 30, 2018 and 2017

 

2

 

 

 

 

Consolidated Statements of Comprehensive Income – Three and Six Months Ended June 30, 2018 and 2017

 

3

 

 

 

 

Consolidated Statement of Equity – Six Months Ended June 30, 2018

 

3

 

 

 

 

Consolidated Statements of Cash Flows – Six Months Ended June 30, 2018 and 2017

 

4

 

 

 

            Prologis, L.P.:

 

 

 

 

 

 

Consolidated Balance Sheets – June 30, 2018 and December 31, 2017

 

5

 

 

 

 

Consolidated Statements of Income – Three and Six Months Ended June 30, 2018 and 2017

 

6

 

 

 

 

Consolidated Statements of Comprehensive Income – Three and Six Months Ended June 30, 2018 and 2017

 

7

 

 

 

 

Consolidated Statement of Capital – Six Months Ended June 30, 2018

 

7

 

 

 

 

Consolidated Statements of Cash Flows – Six Months Ended June 30, 2018 and 2017

 

8

 

 

 

            Prologis, Inc. and Prologis, L.P.:

 

 

 

 

 

 

Notes to the Consolidated Financial Statements

 

9

 

 

 

 

Note 1. General

 

9

 

 

 

 

Note 2. Real Estate

 

11

 

 

 

 

Note 3. Unconsolidated Entities

 

12

 

 

 

 

Note 4. Assets Held for Sale or Contribution

 

14

 

 

 

 

Note 5. Debt

 

14

 

 

 

 

Note 6. Noncontrolling Interests

 

16

 

 

 

 

Note 7. Long-Term Compensation

 

17

 

 

 

 

Note 8. Earnings Per Common Share or Unit

 

18

 

 

 

 

Note 9. Financial Instruments and Fair Value Measurements

 

19

 

 

 

 

Note 10. Business Segments

 

23

 

 

 

 

Note 11. Supplemental Cash Flow Information

 

25

 

 

 

 

Note 12. Subsequent Events

 

25

 

 

 

 

Reports of Independent Registered Public Accounting Firm

 

27

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

29

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

46

 

 

 

Item 4.

Controls and Procedures

 

47

 

PART II.

 

Other Information

 

 

 

 

 

Item 1.

Legal Proceedings

 

47

 

 

 

Item 1A.

Risk Factors

 

48

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

48

 

 

 

Item 3.

Defaults Upon Senior Securities

 

48

 

 

 

Item 4.

Mine Safety Disclosures

 

48

 

 

 

Item 5.

Other Information

 

48

 

 

 

Item 6.

Exhibits

 

48

 

 

 

 

 

 


 

PART I. FINANCIAL INFORMATION

 

ITEM 1. Financial Statements

 

PROLOGIS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

June 30, 2018

 

 

December 31,

 

 

(Unaudited)

 

 

2017

 

ASSETS

 

 

 

 

 

 

 

Investments in real estate properties

$

25,555,343

 

 

$

25,838,644

 

Less accumulated depreciation

 

4,283,877

 

 

 

4,059,348

 

Net investments in real estate properties

 

21,271,466

 

 

 

21,779,296

 

Investments in and advances to unconsolidated entities

 

5,414,623

 

 

 

5,496,450

 

Assets held for sale or contribution

 

892,546

 

 

 

342,060

 

Notes receivable backed by real estate

 

-

 

 

 

34,260

 

Net investments in real estate

 

27,578,635

 

 

 

27,652,066

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

527,830

 

 

 

447,046

 

Other assets

 

1,396,417

 

 

 

1,381,963

 

Total assets

$

29,502,882

 

 

$

29,481,075

 

 

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

Debt

$

9,427,124

 

 

$

9,412,631

 

Accounts payable and accrued expenses

 

719,679

 

 

 

702,804

 

Other liabilities

 

629,576

 

 

 

659,899

 

Total liabilities

 

10,776,379

 

 

 

10,775,334

 

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

 

Prologis, Inc. stockholders’ equity:

 

 

 

 

 

 

 

Series Q preferred stock at stated liquidation preference of $50 per share; $0.01 par value; 1,379 shares

     issued and outstanding and 100,000 preferred shares authorized at June 30, 2018 and

          December 31, 2017, respectively

 

68,948

 

 

 

68,948

 

Common stock; $0.01 par value; 533,303 shares and 532,186 shares issued and outstanding at

     June 30, 2018 and December 31, 2017, respectively

 

5,333

 

 

 

5,322

 

Additional paid-in capital

 

19,322,016

 

 

 

19,363,007

 

Accumulated other comprehensive loss

 

(1,041,486

)

 

 

(901,658

)

Distributions in excess of net earnings

 

(2,716,241

)

 

 

(2,904,461

)

Total Prologis, Inc. stockholders’ equity

 

15,638,570

 

 

 

15,631,158

 

Noncontrolling interests

 

3,087,933

 

 

 

3,074,583

 

Total equity

 

18,726,503

 

 

 

18,705,741

 

Total liabilities and equity

$

29,502,882

 

 

$

29,481,075

 

 

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

 

 

1

 


 

PROLOGIS, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands, except per share amounts)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental

 

$

426,549

 

 

$

447,960

 

 

$

854,450

 

 

$

887,844

 

Rental recoveries

 

 

118,130

 

 

 

128,417

 

 

 

246,172

 

 

 

255,466

 

Strategic capital

 

 

75,697

 

 

 

180,654

 

 

 

208,658

 

 

 

237,699

 

Development management and other

 

 

900

 

 

 

9,152

 

 

 

5,652

 

 

 

14,329

 

Total revenues

 

 

621,276

 

 

 

766,183

 

 

 

1,314,932

 

 

 

1,395,338

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental

 

 

133,329

 

 

 

147,794

 

 

 

276,270

 

 

 

300,450

 

Strategic capital

 

 

34,850

 

 

 

51,986

 

 

 

78,710

 

 

 

83,785

 

General and administrative

 

 

57,615

 

 

 

60,077

 

 

 

120,043

 

 

 

113,694

 

Depreciation and amortization

 

 

203,673

 

 

 

228,145

 

 

 

407,754

 

 

 

454,736

 

Other

 

 

4,515

 

 

 

2,909

 

 

 

7,754

 

 

 

5,515

 

Total expenses

 

 

433,982

 

 

 

490,911

 

 

 

890,531

 

 

 

958,180

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

187,294

 

 

 

275,272

 

 

 

424,401

 

 

 

437,158

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings from unconsolidated entities, net

 

 

62,549

 

 

 

68,596

 

 

 

125,205

 

 

 

117,201

 

Interest expense

 

 

(56,314

)

 

 

(75,354

)

 

 

(102,575

)

 

 

(148,266

)

Interest and other income, net

 

 

5,641

 

 

 

1,892

 

 

 

7,617

 

 

 

4,677

 

Gains on dispositions of investments in real estate, net

 

 

94,261

 

 

 

83,006

 

 

 

289,372

 

 

 

180,331

 

Foreign currency and derivative gains (losses), net

 

 

85,382

 

 

 

(20,055

)

 

 

44,288

 

 

 

(27,455

)

Gains (losses) on early extinguishment of debt, net

 

 

282

 

 

 

(30,596

)

 

 

(702

)

 

 

(30,596

)

Total other income

 

 

191,801

 

 

 

27,489

 

 

 

363,205

 

 

 

95,892

 

Earnings before income taxes

 

 

379,095

 

 

 

302,761

 

 

 

787,606

 

 

 

533,050

 

Total income tax expense

 

 

14,104

 

 

 

14,781

 

 

 

30,656

 

 

 

24,381

 

Consolidated net earnings

 

 

364,991

 

 

 

287,980

 

 

 

756,950

 

 

 

508,669

 

Less net earnings attributable to noncontrolling interests

 

 

28,904

 

 

 

19,363

 

 

 

53,485

 

 

 

35,123

 

Net earnings attributable to controlling interests

 

 

336,087

 

 

 

268,617

 

 

 

703,465

 

 

 

473,546

 

Less preferred stock dividends

 

 

1,476

 

 

 

1,674

 

 

 

2,952

 

 

 

3,348

 

Net earnings attributable to common stockholders

 

$

334,611

 

 

$

266,943

 

 

$

700,513

 

 

$

470,198

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding – Basic

 

 

532,639

 

 

 

530,040

 

 

 

532,427

 

 

 

529,400

 

Weighted average common shares outstanding – Diluted

 

 

554,515

 

 

 

552,114

 

 

 

554,066

 

 

 

550,512

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings per share attributable to common stockholders – Basic

 

$

0.63

 

 

$

0.50

 

 

$

1.32

 

 

$

0.89

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings per share attributable to common stockholders – Diluted

 

$

0.62

 

 

$

0.50

 

 

$

1.30

 

 

$

0.88

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends per common share

 

$

0.48

 

 

$

0.44

 

 

$

0.96

 

 

$

0.88

 

 

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

 

 

2

 


 

PROLOGIS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Consolidated net earnings

 

$

364,991

 

 

$

287,980

 

 

$

756,950

 

 

$

508,669

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation gains (losses), net

 

 

(147,813

)

 

 

3,162

 

 

 

(143,043

)

 

 

42,829

 

Unrealized gains (losses) on derivative contracts, net

 

 

2,131

 

 

 

6,735

 

 

 

(4,156

)

 

 

9,366

 

Comprehensive income

 

 

219,309

 

 

 

297,877

 

 

 

609,751

 

 

 

560,864

 

Net earnings attributable to noncontrolling interests

 

 

(28,904

)

 

 

(19,363

)

 

 

(53,485

)

 

 

(35,123

)

Other comprehensive loss (income) attributable to noncontrolling interests

 

 

7,539

 

 

 

(811

)

 

 

7,371

 

 

 

(48,918

)

Comprehensive income attributable to common stockholders

 

$

197,944

 

 

$

277,703

 

 

$

563,637

 

 

$

476,823

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

 

 

 

 

 

 

 

 

 

 

PROLOGIS, INC.

CONSOLIDATED STATEMENT OF EQUITY

Six Months Ended June 30, 2018

(Unaudited)

(In thousands)

 

 

 

 

 

 

Common Stock

 

 

 

 

 

 

Accumulated

 

 

Distributions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number

 

 

 

 

 

 

Additional

 

 

Other

 

 

in Excess of

 

 

Non-

 

 

 

 

 

 

Preferred

 

 

of

 

 

Par

 

 

Paid-in

 

 

Comprehensive

 

 

Net

 

 

controlling

 

 

Total

 

 

Stock

 

 

Shares

 

 

Value

 

 

Capital

 

 

Loss

 

 

Earnings

 

 

Interests

 

 

Equity

 

Balance at January 1, 2018

$

68,948

 

 

 

532,186

 

 

$

5,322

 

 

$

19,363,007

 

 

$

(901,658

)

 

$

(2,904,461

)

 

$

3,074,583

 

 

$

18,705,741

 

Consolidated net earnings

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

703,465

 

 

 

53,485

 

 

 

756,950

 

Effect of equity

     compensation plans

 

-

 

 

 

1,117

 

 

 

11

 

 

 

8,835

 

 

 

-

 

 

 

-

 

 

 

24,835

 

 

 

33,681

 

Capital contributions

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

37,974

 

 

 

37,974

 

Redemption of noncontrolling

     interests

 

-

 

 

 

-

 

 

 

-

 

 

 

(2,792

)

 

 

-

 

 

 

-

 

 

 

(20,976

)

 

 

(23,768

)

Foreign currency translation

     losses, net

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(135,793

)

 

 

-

 

 

 

(7,250

)

 

 

(143,043

)

Unrealized losses on derivative

     contracts, net

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(4,035

)

 

 

-

 

 

 

(121

)

 

 

(4,156

)

Reallocation of equity

 

-

 

 

 

-

 

 

 

-

 

 

 

(46,927

)

 

 

-

 

 

 

-

 

 

 

46,927

 

 

 

-

 

Distributions and other

 

-

 

 

 

-

 

 

 

-

 

 

 

(107

)

 

 

-

 

 

 

(515,245

)

 

 

(121,524

)

 

 

(636,876

)

Balance at June 30, 2018

$

68,948

 

 

 

533,303

 

 

$

5,333

 

 

$

19,322,016

 

 

$

(1,041,486

)

 

$

(2,716,241

)

 

$

3,087,933

 

 

$

18,726,503

 

 

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

 

 

3

 


 

PROLOGIS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2018

 

 

2017

 

Operating activities:

 

 

 

 

 

 

 

 

Consolidated net earnings

 

$

756,950

 

 

$

508,669

 

Adjustments to reconcile net earnings to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Straight-lined rents and amortization of above and below market leases

 

 

(26,369

)

 

 

(48,920

)

Equity-based compensation awards

 

 

39,082

 

 

 

37,604

 

Depreciation and amortization

 

 

407,754

 

 

 

454,736

 

Earnings from unconsolidated entities, net

 

 

(125,205

)

 

 

(117,201

)

Operating distributions from unconsolidated entities

 

 

175,960

 

 

 

141,256

 

Decrease (increase) in operating receivables from unconsolidated entities

 

 

6,589

 

 

 

(117,675

)

Amortization of debt discounts (premiums), net of debt issuance costs

 

 

5,971

 

 

 

(4,445

)

Gains on dispositions of investments in real estate, net

 

 

(289,372

)

 

 

(180,331

)

Unrealized foreign currency and derivative losses (gains), net

 

 

(52,595

)

 

 

35,266

 

Losses on early extinguishment of debt, net

 

 

702

 

 

 

30,596

 

Deferred income tax expense (benefit)

 

 

(1,194

)

 

 

2,268

 

Decrease (increase) in accounts receivable and other assets

 

 

(35,756

)

 

 

61,452

 

Decrease in accounts payable and accrued expenses and other liabilities

 

 

(89,293

)

 

 

(58,115

)

Net cash provided by operating activities

 

 

773,224

 

 

 

745,160

 

Investing activities:

 

 

 

 

 

 

 

 

Real estate development

 

 

(788,604

)

 

 

(715,294

)

Real estate acquisitions

 

 

(289,031

)

 

 

(202,088

)

Tenant improvements and lease commissions on previously leased space

 

 

(59,342

)

 

 

(75,342

)

Property improvements

 

 

(33,289

)

 

 

(37,253

)

Proceeds from dispositions and contributions of real estate properties

 

 

901,808

 

 

 

836,107

 

Investments in and advances to unconsolidated entities

 

 

(83,250

)

 

 

(144,894

)

Return of investment from unconsolidated entities

 

 

134,640

 

 

 

133,677

 

Proceeds from repayment of notes receivable backed by real estate

 

 

34,260

 

 

 

32,100

 

Proceeds from the settlement of net investment hedges

 

 

-

 

 

 

7,541

 

Payments on the settlement of net investment hedges

 

 

(3,966

)

 

 

(5,058

)

Net cash used in investing activities

 

 

(186,774

)

 

 

(170,504

)

Financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock

 

 

4,322

 

 

 

25,374

 

Dividends paid on common and preferred stock

 

 

(515,245

)

 

 

(470,792

)

Noncontrolling interests contributions

 

 

26,174

 

 

 

135,857

 

Noncontrolling interests distributions

 

 

(121,524

)

 

 

(99,896

)

Settlement of noncontrolling interests

 

 

(23,768

)

 

 

(789,626

)

Tax paid for shares withheld

 

 

(26,694

)

 

 

(18,894

)

Debt issuance costs paid

 

 

(6,386

)

 

 

(6,151

)

Net payments on credit facilities

 

 

(307,086

)

 

 

(33,745

)

Repurchase and payments of debt

 

 

(1,251,830

)

 

 

(2,002,519

)

Proceeds from issuance of debt

 

 

1,721,793

 

 

 

2,134,041

 

Net cash used in financing activities

 

 

(500,244

)

 

 

(1,126,351

)

 

 

 

 

 

 

 

 

 

Effect of foreign currency exchange rate changes on cash

 

 

(5,422

)

 

 

15,733

 

Net increase (decrease) in cash and cash equivalents

 

 

80,784

 

 

 

(535,962

)

Cash and cash equivalents, beginning of period

 

 

447,046

 

 

 

807,316

 

Cash and cash equivalents, end of period

 

$

527,830

 

 

$

271,354

 

 

See Note 11 for information on noncash investing and financing activities and other information.

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

 

4

 


 

PROLOGIS, L.P.

CONSOLIDATED BALANCE SHEETS

(In thousands)

 

 

 

 

 

 

 

 

 

 

June 30, 2018

 

 

December 31,

 

 

(Unaudited)

 

 

2017

 

ASSETS

 

 

 

 

 

 

 

Investments in real estate properties

$

25,555,343

 

 

$

25,838,644

 

Less accumulated depreciation

 

4,283,877

 

 

 

4,059,348

 

Net investments in real estate properties

 

21,271,466

 

 

 

21,779,296

 

Investments in and advances to unconsolidated entities

 

5,414,623

 

 

 

5,496,450

 

Assets held for sale or contribution

 

892,546

 

 

 

342,060

 

Notes receivable backed by real estate

 

-

 

 

 

34,260

 

Net investments in real estate

 

27,578,635

 

 

 

27,652,066

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

527,830

 

 

 

447,046

 

Other assets

 

1,396,417

 

 

 

1,381,963

 

Total assets

$

29,502,882

 

 

$

29,481,075

 

 

 

 

 

 

 

 

 

LIABILITIES AND CAPITAL

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

Debt

$

9,427,124

 

 

$

9,412,631

 

Accounts payable and accrued expenses

 

719,679

 

 

 

702,804

 

Other liabilities

 

629,576

 

 

 

659,899

 

Total liabilities

 

10,776,379

 

 

 

10,775,334

 

 

 

 

 

 

 

 

 

Capital:

 

 

 

 

 

 

 

Partners’ capital:

 

 

 

 

 

 

 

General partner – preferred

 

68,948

 

 

 

68,948

 

General partner – common

 

15,569,622

 

 

 

15,562,210

 

Limited partners – common

 

218,162

 

 

 

165,401

 

Limited partners – Class A common

 

245,596

 

 

 

248,940

 

Total partners’ capital

 

16,102,328

 

 

 

16,045,499

 

Noncontrolling interests

 

2,624,175

 

 

 

2,660,242

 

Total capital

 

18,726,503

 

 

 

18,705,741

 

Total liabilities and capital

$

29,502,882

 

 

$

29,481,075

 

 

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

 

 

5

 


 

PROLOGIS, L.P.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands, except per unit amounts)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental

 

$

426,549

 

 

$

447,960

 

 

$

854,450

 

 

$

887,844

 

Rental recoveries

 

 

118,130

 

 

 

128,417

 

 

 

246,172

 

 

 

255,466

 

Strategic capital

 

 

75,697

 

 

 

180,654

 

 

 

208,658

 

 

 

237,699

 

Development management and other

 

 

900

 

 

 

9,152

 

 

 

5,652

 

 

 

14,329

 

Total revenues

 

 

621,276

 

 

 

766,183

 

 

 

1,314,932

 

 

 

1,395,338

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental

 

 

133,329

 

 

 

147,794

 

 

 

276,270

 

 

 

300,450

 

Strategic capital

 

 

34,850

 

 

 

51,986

 

 

 

78,710

 

 

 

83,785

 

General and administrative

 

 

57,615

 

 

 

60,077

 

 

 

120,043

 

 

 

113,694

 

Depreciation and amortization

 

 

203,673

 

 

 

228,145

 

 

 

407,754

 

 

 

454,736

 

Other

 

 

4,515

 

 

 

2,909

 

 

 

7,754

 

 

 

5,515

 

Total expenses

 

 

433,982

 

 

 

490,911

 

 

 

890,531

 

 

 

958,180

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

187,294

 

 

 

275,272

 

 

 

424,401

 

 

 

437,158

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings from unconsolidated entities, net

 

 

62,549

 

 

 

68,596

 

 

 

125,205

 

 

 

117,201

 

Interest expense

 

 

(56,314

)

 

 

(75,354

)

 

 

(102,575

)

 

 

(148,266

)

Interest and other income, net

 

 

5,641

 

 

 

1,892

 

 

 

7,617

 

 

 

4,677

 

Gains on dispositions of investments in real estate, net

 

 

94,261

 

 

 

83,006

 

 

 

289,372

 

 

 

180,331

 

Foreign currency and derivative gains (losses), net

 

 

85,382

 

 

 

(20,055

)

 

 

44,288

 

 

 

(27,455

)

Gains (losses) on early extinguishment of debt, net

 

 

282

 

 

 

(30,596

)

 

 

(702

)

 

 

(30,596

)

Total other income

 

 

191,801

 

 

 

27,489

 

 

 

363,205

 

 

 

95,892

 

Earnings before income taxes

 

 

379,095

 

 

 

302,761

 

 

 

787,606

 

 

 

533,050

 

Total income tax expense

 

 

14,104

 

 

 

14,781

 

 

 

30,656

 

 

 

24,381

 

Consolidated net earnings

 

 

364,991

 

 

 

287,980

 

 

 

756,950

 

 

 

508,669

 

Less net earnings attributable to noncontrolling interests

 

 

18,882

 

 

 

11,986

 

 

 

32,940

 

 

 

22,123

 

Net earnings attributable to controlling interests

 

 

346,109

 

 

 

275,994

 

 

 

724,010

 

 

 

486,546

 

Less preferred unit distributions

 

 

1,476

 

 

 

1,674

 

 

 

2,952

 

 

 

3,348

 

Net earnings attributable to common unitholders

 

$

344,633

 

 

$

274,320

 

 

$

721,058

 

 

$

483,198

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common units outstanding – Basic

 

 

540,084

 

 

 

536,060

 

 

 

539,547

 

 

 

535,392

 

Weighted average common units outstanding – Diluted

 

 

554,515

 

 

 

552,114

 

 

 

554,066

 

 

 

550,512

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings per unit attributable to common unitholders – Basic

 

$

0.63

 

 

$

0.50

 

 

$

1.32

 

 

$

0.89

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings per unit attributable to common unitholders – Diluted

 

$

0.62

 

 

$

0.50

 

 

$

1.30

 

 

$

0.88

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distributions per common unit

 

$

0.48

 

 

$

0.44

 

 

$

0.96

 

 

$

0.88

 

 

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

 

 

6

 


 

PROLOGIS, L.P.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Consolidated net earnings

 

$

364,991

 

 

$

287,980

 

 

$

756,950

 

 

$

508,669

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation gains (losses), net

 

 

(147,813

)

 

 

3,162

 

 

 

(143,043

)

 

 

42,829

 

Unrealized gains (losses) on derivative contracts, net

 

 

2,131

 

 

 

6,735

 

 

 

(4,156

)

 

 

9,366

 

Comprehensive income

 

 

219,309

 

 

 

297,877

 

 

 

609,751

 

 

 

560,864

 

Net earnings attributable to noncontrolling interests

 

 

(18,882

)

 

 

(11,986

)

 

 

(32,940

)

 

 

(22,123

)

Other comprehensive loss (income) attributable to noncontrolling interests

 

 

3,424

 

 

 

(561

)

 

 

3,205

 

 

 

(48,828

)

Comprehensive income attributable to common unitholders

 

$

203,851

 

 

$

285,330

 

 

$

580,016

 

 

$

489,913

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

 

 

 

 

 

 

 

 

 

 

PROLOGIS, L.P.

CONSOLIDATED STATEMENT OF CAPITAL

Six Months Ended June 30, 2018

(Unaudited)

(In thousands)

 

 

General Partner

 

 

Limited Partners

 

 

Non-

 

 

 

 

 

 

Preferred

 

 

Common

 

 

Common

 

 

Class A Common

 

 

controlling

 

 

 

 

 

 

Units

 

 

Amount

 

 

Units

 

 

Amount

 

 

Units

 

 

Amount

 

 

Units

 

 

Amount

 

 

Interests

 

 

Total

 

Balance at January 1, 2018

 

1,379

 

 

$

68,948

 

 

 

532,186

 

 

$

15,562,210

 

 

 

5,656

 

 

$

165,401

 

 

 

8,894

 

 

$

248,940

 

 

$

2,660,242

 

 

$

18,705,741

 

Consolidated net earnings

 

-

 

 

 

-

 

 

 

-

 

 

 

703,465

 

 

 

-

 

 

 

9,368

 

 

 

-

 

 

 

11,177

 

 

 

32,940

 

 

 

756,950

 

Effect of equity

     compensation plans

 

-

 

 

 

-

 

 

 

1,117

 

 

 

8,846

 

 

 

2,057

 

 

 

24,835

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

33,681

 

Capital contributions

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

37,974

 

 

 

37,974

 

Redemption of noncontrolling

     interests

 

-

 

 

 

-

 

 

 

-

 

 

 

(2,792

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(3,157

)

 

 

(5,949

)

Redemption of limited partners

     units

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(240

)

 

 

(15,017

)

 

 

(45

)

 

 

(2,802

)

 

 

-

 

 

 

(17,819

)

Foreign currency translation

      losses, net

 

-

 

 

 

-

 

 

 

-

 

 

 

(135,793

)

 

 

-

 

 

 

(1,903

)

 

 

-

 

 

 

(2,142

)

 

 

(3,205

)

 

 

(143,043

)

Unrealized losses on

     derivative contracts, net

 

-

 

 

 

-

 

 

 

-

 

 

 

(4,035

)

 

 

-

 

 

 

(57

)

 

 

-

 

 

 

(64

)

 

 

-

 

 

 

(4,156

)

Reallocation of capital

 

-

 

 

 

-

 

 

 

-

 

 

 

(46,927

)

 

 

-

 

 

 

44,937

 

 

 

-

 

 

 

1,990

 

 

 

-

 

 

 

-

 

Distributions and other

 

-

 

 

 

-

 

 

 

-

 

 

 

(515,352

)

 

 

-

 

 

 

(9,402

)

 

 

-

 

 

 

(11,503

)

 

 

(100,619

)

 

 

(636,876

)

Balance at June 30, 2018

 

1,379

 

 

$

68,948

 

 

 

533,303

 

 

$

15,569,622

 

 

 

7,473

 

 

$

218,162

 

 

 

8,849

 

 

$

245,596

 

 

$

2,624,175

 

 

$

18,726,503

 

 

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

 

7

 


 

PROLOGIS, L.P.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2018

 

 

2017

 

Operating activities:

 

 

 

 

 

 

 

 

Consolidated net earnings

 

$

756,950

 

 

$

508,669

 

Adjustments to reconcile net earnings to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Straight-lined rents and amortization of above and below market leases

 

 

(26,369

)

 

 

(48,920

)

Equity-based compensation awards

 

 

39,082

 

 

 

37,604

 

Depreciation and amortization

 

 

407,754

 

 

 

454,736

 

Earnings from unconsolidated entities, net

 

 

(125,205

)

 

 

(117,201

)

Operating distributions from unconsolidated entities

 

 

175,960

 

 

 

141,256

 

Decrease (increase) in operating receivables from unconsolidated entities

 

 

6,589

 

 

 

(117,675

)

Amortization of debt discounts (premiums), net of debt issuance costs

 

 

5,971

 

 

 

(4,445

)

Gains on dispositions of investments in real estate, net

 

 

(289,372

)

 

 

(180,331

)

Unrealized foreign currency and derivative losses (gains), net

 

 

(52,595

)

 

 

35,266

 

Losses on early extinguishment of debt, net

 

 

702

 

 

 

30,596

 

Deferred income tax expense (benefit)

 

 

(1,194

)

 

 

2,268

 

Decrease (increase) in accounts receivable and other assets

 

 

(35,756

)

 

 

61,452

 

Decrease in accounts payable and accrued expenses and other liabilities

 

 

(89,293

)

 

 

(58,115

)

Net cash provided by operating activities

 

 

773,224

 

 

 

745,160

 

Investing activities:

 

 

 

 

 

 

 

 

Real estate development

 

 

(788,604

)

 

 

(715,294

)

Real estate acquisitions

 

 

(289,031

)

 

 

(202,088

)

Tenant improvements and lease commissions on previously leased space

 

 

(59,342

)

 

 

(75,342

)

Property improvements

 

 

(33,289

)

 

 

(37,253

)

Proceeds from dispositions and contributions of real estate properties

 

 

901,808

 

 

 

836,107

 

Investments in and advances to unconsolidated entities

 

 

(83,250

)

 

 

(144,894

)

Return of investment from unconsolidated entities

 

 

134,640

 

 

 

133,677

 

Proceeds from repayment of notes receivable backed by real estate

 

 

34,260

 

 

 

32,100

 

Proceeds from the settlement of net investment hedges

 

 

-

 

 

 

7,541

 

Payments on the settlement of net investment hedges

 

 

(3,966

)

 

 

(5,058

)

Net cash used in investing activities

 

 

(186,774

)

 

 

(170,504

)

Financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of common partnership units in exchange for contributions from Prologis, Inc.

 

 

4,322

 

 

 

25,374

 

Distributions paid on common and preferred units

 

 

(536,150

)

 

 

(489,519

)

Noncontrolling interests contributions

 

 

26,174

 

 

 

135,857

 

Noncontrolling interests distributions

 

 

(100,619

)

 

 

(81,169

)

Settlement of noncontrolling interests

 

 

(5,949

)

 

 

(789,626

)

Redemption of common limited partnership units

 

 

(17,819

)

 

 

-

 

Tax paid for shares withheld

 

 

(26,694

)

 

 

(18,894

)

Debt issuance costs paid

 

 

(6,386

)

 

 

(6,151

)

Net payments on credit facilities

 

 

(307,086

)

 

 

(33,745

)

Repurchase and payments of debt

 

 

(1,251,830

)

 

 

(2,002,519

)

Proceeds from issuance of debt

 

 

1,721,793

 

 

 

2,134,041

 

Net cash used in financing activities

 

 

(500,244

)

 

 

(1,126,351

)

 

 

 

 

 

 

 

 

 

Effect of foreign currency exchange rate changes on cash

 

 

(5,422

)

 

 

15,733

 

Net increase (decrease) in cash and cash equivalents

 

 

80,784

 

 

 

(535,962

)

Cash and cash equivalents, beginning of period

 

 

447,046

 

 

 

807,316

 

Cash and cash equivalents, end of period

 

$

527,830

 

 

$

271,354

 

 

See Note 11 for information on noncash investing and financing activities and other information.

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

 

 

8

 


 

PROLOGIS, INC. AND PROLOGIS, L.P.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1. GENERAL

 

Business. Prologis, Inc. (or the “Parent”) commenced operations as a fully integrated real estate company in 1997, elected to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), and believes the current organization and method of operation will enable it to maintain its status as a REIT. The Parent is the general partner of Prologis, L.P. (or the “Operating Partnership” or “OP”). Through the OP, we are engaged in the ownership, acquisition, development and management of logistics facilities with a focus on high-barrier, high-growth markets in 19 countries. We invest in real estate through wholly owned subsidiaries and other entities through which we co-invest with partners and investors. We maintain a significant level of ownership in these co-investment ventures, which may be consolidated or unconsolidated based on our level of control of the entity. Our current business strategy consists of two operating business segments: Real Estate Operations and Strategic Capital. Our Real Estate Operations segment represents the ownership and development of logistics properties. Our Strategic Capital segment represents the management of unconsolidated co-investment ventures. See Note 10 for further discussion of our business segments. Unless otherwise indicated, the Notes to the Consolidated Financial Statements apply to both the Parent and the OP. The terms “the Company,” “Prologis,” “we,” “our” or “us” means the Parent and OP collectively.

 

For each share of preferred or common stock the Parent issues, the OP issues a corresponding preferred or common partnership unit, as applicable, to the Parent in exchange for the contribution of the proceeds from the stock issuance. At June 30, 2018, the Parent owned 97.11% common general partnership interest in the OP and 100% of the preferred units in the OP. The remaining 2.89% common limited partnership interests, which include 8.8 million Class A common limited partnership units (“Class A Units”) in the OP, are owned by unaffiliated investors and certain current and former directors and officers of the Parent. Each partner’s percentage interest in the OP is determined based on the number of OP units held, including the number of OP units into which Class A Units are convertible, compared to total OP units outstanding at each period end and is used as the basis for the allocation of net income or loss to each partner. At the end of each reporting period, a capital adjustment is made in the OP to reflect the appropriate ownership interest for each of the common unitholders. These adjustments are reflected in the line items Reallocation of Equity in the Consolidated Statement of Equity of the Parent and Reallocation of Capital in the Consolidated Statement of Capital of the OP.

 

As the sole general partner of the OP, the Parent has complete responsibility and discretion in the day-to-day management and control of the OP and we operate the Parent and the OP as one enterprise. The management of the Parent consists of the same members as the management of the OP. These members are officers of the Parent and employees of the OP or one of its subsidiaries. As general partner with control of the OP, the Parent is the primary beneficiary and therefore consolidates the OP. Because the Parent’s only significant asset is its investment in the OP, the assets and liabilities of the Parent and the OP are the same on their respective financial statements.

 

Basis of Presentation. The accompanying Consolidated Financial Statements are prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”) and are presented in our reporting currency, the U.S. dollar. All material intercompany transactions with consolidated entities have been eliminated.

 

The accompanying unaudited interim financial information has been prepared according to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Certain information and note disclosures normally included in our annual financial statements prepared in accordance with GAAP have been condensed or omitted in accordance with such rules and regulations. Our management believes that the disclosures presented in these financial statements are adequate to make the information presented not misleading. In our opinion, all adjustments and eliminations, consisting only of normal recurring adjustments, necessary to present fairly the financial position and results of operations for both the Parent and the OP for the reported periods have been included. The results of operations for such interim periods are not necessarily indicative of the results for the full year. The accompanying unaudited interim financial information should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2017, as filed with the SEC, and other public information.

 

New Accounting Pronouncements.

 

New Accounting Standards Adopted

 

Revenue Recognition. In May 2014, the Financial Accounting Standards Board (“FASB”) issued an accounting standard update (“ASU”) that requires companies to use a five-step model to determine when to recognize revenue from customer contracts in an effort to increase consistency and comparability throughout global capital markets and across industries. In February 2017, the FASB issued an additional ASU that provides the accounting treatment for gains and losses from the derecognition of non-financial assets, including the accounting for partial sales of real estate properties.

 

We adopted the revenue recognition and derecognition of non-financial assets standards (collectively “the new revenue recognition standard”) on January 1, 2018, on a modified retrospective basis.

 

Rental revenues and recoveries earned from leasing our operating properties are excluded from this standard and will be assessed with the adoption of the lease ASU discussed below. Our evaluation under the new revenue recognition standard included recurring and

9

 


 

transactional fees and incentive fees (“promotes” or “promote revenues”) earned from our co-investment ventures as well as dispositions and contributions of real estate properties. There is no change in our recognition of recurring and transactional fees as we will continue to recognize these fees as we provide the services. Promote revenues are earned based on a venture’s cumulative returns over a certain time-period and the returns are determined by both the operating performance and real estate valuation of the venture, including highly variable inputs such as capitalization rates, interest rates and foreign currency exchange rates. As these key inputs are highly volatile and out of our control, and such volatility can materially impact our promotes period over period, we expect promote revenues will continue to be recognized at or near the end of the performance period. Accordingly, we do not expect significant changes in promote revenue recognition as a result of this ASU.

 

For dispositions of real estate properties to third parties, the standard will not impact the recognition of the sale. Beginning January 1, 2018, we recognized the entire gain attributed to contributions of real estate properties to unconsolidated entities. We previously recognized a gain on contribution only to the extent of the third-party ownership in the unconsolidated entity acquiring the property and deferred the portion of the gain related to our ownership. For discussion of net gains on contributions to unconsolidated entities recognized during the three and six months ended June 30, 2018 and 2017, see Note 2. For deferred gains from partial sales recorded prior to the adoption, we will continue to recognize these gains over the lives of the underlying real estate properties or at the time of disposition to a third party, as discussed in Note 3.

 

We adopted the practical expedient to only assess the recognition of revenue for open contracts during the transition period and there was no adjustment to the opening balance of retained earnings at January 1, 2018. The comparative information has not been restated and continues to be reported under the accounting standards in effect for that period.

 

New Accounting Standards Issued but not yet Adopted

 

Leases. In February 2016, the FASB issued an ASU that provides the principles for the recognition, measurement, presentation and disclosure of leases.

 

As a lessor. The accounting for lessors will remain largely unchanged from current GAAP; however, the standard requires that lessors expense, on an as-incurred basis, certain initial direct costs that are not incremental in negotiating a lease. Under existing standards, these costs are capitalizable and therefore this new standard will result in certain of these costs being expensed as incurred after adoption. During the six months ended June 30, 2018 and 2017, we capitalized $10.5 million and $12.4 million, respectively, of internal costs related to our leasing activities. This standard may also impact the timing, recognition, presentation and disclosures related to our rental recoveries from tenants earned from leasing our operating properties, although we do not expect a significant impact.

 

As a lessee. Under the standard, lessees apply a dual approach, classifying leases as either finance or operating leases. A lessee is required to record a right-of-use (“ROU”) asset and a lease liability for all leases with a term of greater than 12 months, regardless of their lease classification. We are a lessee of ground leases and office space leases. At December 31, 2017, we had approximately 90 ground and office space leases that will require us to measure and record a ROU asset and a lease liability upon adoption of the standard. There have been no significant changes to our ground and office space leases since December 31, 2017. Details of our future minimum rental payments under these ground and office space leases are disclosed in Note 4 to the Annual Report on Form 10-K for the year ended December 31, 2017.

 

The standard is effective for us on January 1, 2019. We expect to adopt the practical expedients available for implementation under the standard. By adopting these practical expedients, we will not be required to reassess (i) whether an expired or existing contract meets the definition of a lease; (ii) the lease classification at the adoption date for existing leases; and (iii) whether costs previously capitalized as initial direct costs would continue to be amortized. This allows us to continue to account for our ground and office space leases as operating leases, however, any new or renewed ground leases may be classified as financing leases unless they meet certain conditions to be considered a lease involving facilities owned by a government unit or authority. The standard will also require new disclosures within the accompanying notes to the Consolidated Financial Statements. While we are well into our analysis of the adoption, we will continue to evaluate the key drivers in the measurement of the ROU asset and lease liability and assess the impact the adoption will have on the Consolidated Financial Statements based on industry practice and potential updates to the ASU.

 

Derivatives and Hedging. In August 2017, the FASB issued an ASU that simplifies the application of hedge accounting guidance in current GAAP and improves the reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its consolidated financial statements. Among the simplification updates, the standard eliminates the requirement in current GAAP to separately recognize periodic hedge ineffectiveness. Mismatches between the changes in value of the hedged item and hedging instrument may still occur but they will no longer be separately reported. The standard requires the presentation of the earnings effect of the hedging instrument in the same income statement line item in which the earnings effect of the hedged item is reported. The standard is effective for us on January 1, 2019, but early adoption is permitted. We do not expect the adoption of this standard to have a material impact on the Consolidated Financial Statements.

 

10

 


 

NOTE 2. REAL ESTATE

 

Investments in real estate properties consisted of the following (dollars and square feet in thousands):

 

 

Square Feet

 

 

Number of Buildings

 

 

 

 

 

June 30,

 

 

December 31,

 

 

June 30,

 

 

December 31,

 

 

June 30,

 

 

December 31,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Operating properties (1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Buildings and improvements

 

287,393

 

 

 

294,811

 

 

 

1,477

 

 

 

1,525

 

 

$

16,658,627

 

 

$

16,849,349

 

Improved land

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,608,507

 

 

 

5,735,978

 

Development portfolio,

     including land costs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Prestabilized

 

6,024

 

 

 

7,345

 

 

 

20

 

 

 

22

 

 

 

471,491

 

 

 

546,173

 

Properties under development

 

21,317

 

 

 

22,216

 

 

 

63

 

 

 

63

 

 

 

1,184,404

 

 

 

1,047,316

 

Land (1) (2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,111,185

 

 

 

1,154,383

 

Other real estate investments (3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

521,129

 

 

 

505,445

 

Total investments in real estate

     properties

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

25,555,343

 

 

 

25,838,644

 

Less accumulated depreciation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,283,877

 

 

 

4,059,348

 

Net investments in real estate

     properties

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

21,271,466

 

 

$

21,779,296

 

 

(1)

During the six months ended June 30, 2018, we acquired 808 acres of land for $211.2 million and 3 operating properties for $103.1 million.

 

(2)

Included in our investments in real estate at June 30, 2018 and December 31, 2017, were 5,220 and 5,191 acres of land, respectively.

 

(3)

Included in other real estate investments were: (i) non-logistics real estate; (ii) land parcels that are ground leased to third parties; (iii) our corporate headquarters; (iv) costs related to future development projects, including purchase options on land; (v) infrastructure costs related to projects we are developing on behalf of others; and (vi) earnest money deposits associated with potential acquisitions.

 

Dispositions

 

The following table summarizes our real estate disposition activity (dollars and square feet in thousands):

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Contributions to unconsolidated co-investment ventures

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of properties

 

 

3

 

 

 

5

 

 

 

11

 

 

 

10

 

Square feet

 

 

1,164

 

 

 

875

 

 

 

4,242

 

 

 

3,644

 

Net proceeds (1)

 

$

125,917

 

 

$

115,617

 

 

$

665,739

 

 

$

513,106

 

Gains on contributions, net (1) (2)

 

$

33,527

 

 

$

37,702

 

 

$

201,253

 

 

$

126,068

 

Dispositions to third parties

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of properties

 

 

7

 

 

 

20

 

 

 

18

 

 

 

38

 

Square feet

 

 

4,139

 

 

 

3,720

 

 

 

5,442

 

 

 

6,038

 

Net proceeds (1) (3)

 

$

314,141

 

 

$

216,290

 

 

$

402,122

 

 

$

459,679

 

Gains on dispositions, net (1) (3)

 

$

60,734

 

 

$

45,304

 

 

$

88,119

 

 

$

54,263

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total gains on dispositions of investments in real estate, net

 

$

94,261

 

 

$

83,006

 

 

$

289,372

 

 

$

180,331

 

 

(1)

Includes the contribution and disposition of land parcels.

 

(2)

Amounts in 2018 reflect the adoption of the new revenue recognition standard under which we recognized the entire gain attributed to contributions of real estate properties to unconsolidated entities. Amounts in 2017 reflect our prior recognition of the gain to the extent of the third-party ownership in the unconsolidated entity acquiring the property with the deferral of a portion of the gain related to our ownership.

 

(3)

Includes the sale of our investment in Europe Logistics Venture 1 during the six months ended June 30, 2017.

 

11

 


 

NOTE 3. UNCONSOLIDATED ENTITIES

 

Summary of Investments

 

We have investments in entities through a variety of ventures. We co-invest in entities that own multiple properties with partners and investors and we provide asset and property management services to these entities, which we refer to as co-investment ventures. These entities may be consolidated or unconsolidated, depending on the structure, our partner’s participation and other rights and our level of control of the entity. This note details our investments in unconsolidated co-investment ventures, which are accounted for using the equity method of accounting. See Note 6 for more detail regarding our consolidated investments that are not wholly owned.

 

We also have other ventures, generally with one partner and that we do not manage, which we account for using the equity method. We refer to our investments in all entities accounted for using the equity method, both unconsolidated co-investment ventures and other ventures, collectively, as unconsolidated entities.

 

The following table summarizes our investments in and advances to our unconsolidated entities (in thousands):

 

 

 

June 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Unconsolidated co-investment ventures

 

$

5,207,093

 

 

$

5,274,702

 

Other ventures

 

 

207,530

 

 

 

221,748

 

Total

 

$

5,414,623

 

 

$

5,496,450

 

 

 

 

 

 

 

 

 

 

Unconsolidated Co-Investment Ventures

 

The following table summarizes the Strategic Capital Revenues we recognized in the Consolidated Statements of Income related to our unconsolidated co-investment ventures (in thousands):

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Recurring fees

 

$

57,918

 

 

$

43,478

 

 

$

112,562

 

 

$

87,673

 

Transactional fees

 

 

11,828

 

 

 

12,626

 

 

 

27,452

 

 

 

21,219

 

Promote revenues

 

 

5,674

 

 

 

123,946

 

 

 

68,218

 

 

 

127,092

 

Total strategic capital revenues from unconsolidated

     co-investment ventures

 

$

75,420

 

 

$

180,050

 

 

$

208,232

 

 

$

235,984

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12

 


 

The following table summarizes the key property information, financial position and operating information of our unconsolidated co-investment ventures (not our proportionate share) and the amounts we recognized in the Consolidated Financial Statements related to our unconsolidated co-investment ventures (dollars and square feet in millions):

 

 

U.S.

 

 

Other Americas

 

 

Europe

 

 

Asia

 

 

Total

 

As of:

Jun 30,

2018

 

 

Dec 31,

2017

 

 

Jun 30,

2018

 

 

Dec 31,

2017

 

 

Jun 30,

2018

 

 

Dec 31,

2017

 

 

Jun 30,

2018

 

 

Dec 31,

2017

 

 

Jun 30,

2018

 

 

Dec 31,

2017

 

Key property information

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ventures

 

1

 

 

 

1

 

 

 

2

 

 

 

2

 

 

 

3

 

 

 

3

 

 

 

2

 

 

 

2

 

 

 

8

 

 

 

8

 

Operating properties

 

554

 

 

 

552

 

 

 

205

 

 

 

205

 

 

 

653

 

 

 

707

 

 

 

114

 

 

 

95

 

 

 

1,526

 

 

 

1,559

 

Square feet

 

88

 

 

 

88

 

 

 

37

 

 

 

37

 

 

 

154

 

 

 

166

 

 

 

48

 

 

 

41

 

 

 

327

 

 

 

332

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial position

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unconsolidated co-investment ventures:

 

Total assets ($)

 

7,188

 

 

 

7,062

 

 

 

2,073

 

 

 

2,118

 

 

 

13,176

 

 

 

13,586

 

 

 

6,694

 

 

 

6,133

 

 

 

29,131

 

 

 

28,899

 

Third-party debt ($)

 

2,098

 

 

 

2,313

 

 

 

752

 

 

 

756

 

 

 

2,650

 

 

 

2,682

 

 

 

2,577

 

 

 

2,328

 

 

 

8,077

 

 

 

8,079

 

Total liabilities ($)

 

2,307

 

 

 

2,520

 

 

 

788

 

 

 

782

 

 

 

3,689

 

 

 

3,655

 

 

 

2,881

 

 

 

2,685

 

 

 

9,665

 

 

 

9,642

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Our investment balance ($) (1)

 

1,365

 

 

 

1,383

 

 

 

561

 

 

 

555

 

 

 

2,699

 

 

 

2,813

 

 

 

582

 

 

 

524

 

 

 

5,207

 

 

 

5,275

 

Our weighted average ownership (2)

 

26.7

%

 

 

28.2

%

 

 

43.8

%

 

 

43.4

%

 

 

32.9

%

 

 

32.8

%

 

 

15.1

%

 

 

15.1

%

 

 

28.2

%

 

 

28.8

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S.

 

 

Other Americas

 

 

Europe

 

 

Asia

 

 

Total

 

Operating information

Jun 30,

2018

 

 

Jun 30,

2017

 

 

Jun 30,

2018

 

 

Jun 30,

2017

 

 

Jun 30,

2018

 

 

Jun 30,

2017

 

 

Jun 30,

2018

 

 

Jun 30,

2017

 

 

Jun 30,

2018

 

 

Jun 30,

2017

 

For the three months ended:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unconsolidated co-investment ventures:

 

Total revenues ($)

 

168

 

 

 

105

 

 

 

55

 

 

 

66

 

 

 

272

 

 

 

248

 

 

 

114

 

 

 

89

 

 

 

609

 

 

 

508

 

Net earnings ($)

 

24

 

 

 

15

 

 

 

19

 

 

 

22

 

 

 

110

 

 

 

93

 

 

 

6

 

 

 

93

 

 

 

159

 

 

 

223

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Our earnings from unconsolidated

     co-investment ventures, net ($)

 

7

 

 

 

2

 

 

 

8

 

 

 

10

 

 

 

37

 

 

 

36

 

 

 

2

 

 

 

14

 

 

 

54

 

 

 

62

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the six months ended:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unconsolidated co-investment ventures:

 

Total revenues ($)

 

336

 

 

 

209

 

 

 

108

 

 

 

130

 

 

 

560

 

 

 

492

 

 

 

222

 

 

 

177

 

 

 

1,226

 

 

 

1,008

 

Net earnings ($)

 

37

 

 

 

51

 

 

 

33

 

 

 

39

 

 

 

203

 

 

 

166

 

 

 

48

 

 

 

117

 

 

 

321

 

 

 

373

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Our earnings from unconsolidated

     co-investment ventures, net ($)

 

12

 

 

 

7

 

 

 

14

 

 

 

16

 

 

 

74

 

 

 

66

 

 

 

9

 

 

 

18

 

 

 

109

 

 

 

107

 

 

(1)

Prologis’ investment balance is presented at our adjusted basis derived from the ventures’ U.S. GAAP information. The difference between our ownership interest of a venture’s equity and our investment balance at June 30, 2018 and December 31, 2017, results principally from three types of transactions: (i) deferred gains from the contribution of property to a venture prior to January 1, 2018 ($651.8 million and $667.3 million, respectively); (ii) recording additional costs associated with our investment in the venture ($92.4 million and $94.2 million, respectively); and (iii) advances to a venture ($219.9 million and $210.0 million, respectively). For deferred gains from partial sales recorded prior to the adoption the new revenue recognition standard, we will continue to recognize these gains over the lives of the underlying real estate properties or at the time of disposition to a third party.

 

(2)

Represents our weighted average ownership interest in all co-investment ventures based on each entity’s contribution of total assets, before depreciation, net of other liabilities.

 

Equity Commitments Related to Certain Unconsolidated Co-Investment Ventures

 

The following table summarizes the remaining equity commitments at June 30, 2018 (in millions):

 

 

 

Equity Commitments

 

 

Expiration Date

 

 

Prologis

 

 

Venture Partners

 

 

Total

 

 

 

Prologis Targeted U.S. Logistics Fund

 

$

-

 

 

$

178

 

 

$

178

 

 

2019

Prologis European Logistics Fund (1)

 

 

-

 

 

 

1,201

 

 

 

1,201

 

 

2018 – 2019

Prologis UK Logistics Venture (2)

 

 

18

 

 

 

102

 

 

 

120

 

 

2021

Prologis China Logistics Venture

 

 

267

 

 

 

1,510

 

 

 

1,777

 

 

2020 – 2024

Total

 

$

285

 

 

$

2,991

 

 

$

3,276

 

 

 

 

(1)

Equity commitments are denominated in euro and reported in U.S. dollars based on an exchange rate of $1.17 U.S. dollars to the euro.

 

13

 


 

(2)

Equity commitments are denominated in British pounds sterling and reported in U.S. dollars based on an exchange rate of $1.32 U.S. dollars to the British pound sterling.

 

NOTE 4. ASSETS HELD FOR SALE OR CONTRIBUTION

 

We have investments in certain real estate properties that met the criteria to be classified as held for sale or contribution at June 30, 2018 and December 31, 2017. At the time of classification, these properties were expected to be sold to third parties or were recently developed and expected to be contributed to unconsolidated co-investment ventures within twelve months. The amounts included in Assets Held for Sale or Contribution represented real estate investment balances and the related assets for each property.

 

Assets held for sale or contribution consisted of the following (dollars and square feet in thousands):

 

 

 

June 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Number of operating properties

 

 

73

 

 

 

22

 

Square feet

 

 

14,735

 

 

 

5,384

 

Total assets held for sale or contribution

 

$

892,546

 

 

$

342,060

 

Total liabilities associated with assets held for sale or contribution – included in Other Liabilities

 

$

22,829

 

 

$

9,341

 

 

NOTE 5. DEBT

 

All debt is incurred by the OP. The Parent does not have any indebtedness, but guarantees the unsecured debt issued by the OP.

 

The following table summarizes our debt (dollars in thousands):

 

 

 

June 30, 2018

 

 

December 31, 2017

 

 

 

Weighted Average Interest Rate (1)

 

 

Amount Outstanding (2)

 

 

Weighted Average Interest Rate (1)

 

 

Amount Outstanding (2)

 

Credit facilities

 

 

0.9

%

 

$

11,658

 

 

 

1.8

%

 

$

317,392

 

Senior notes

 

 

2.9

%

 

 

7,102,381

 

 

 

3.0

%

 

 

6,067,277

 

Term loans

 

 

1.2

%

 

 

1,402,568

 

 

 

1.7

%

 

 

2,046,945

 

Unsecured other

 

 

6.1

%

 

 

13,093

 

 

 

6.1

%

 

 

13,546

 

Secured mortgages

 

 

5.5

%

 

 

897,424

 

 

 

5.3

%

 

 

967,471

 

Total

 

 

2.9

%

 

$

9,427,124

 

 

 

2.9

%

 

$

9,412,631

 

 

(1)

The interest rates presented represent the effective interest rates (including amortization of debt issuance costs and the noncash premiums or discounts) at the end of the period for the debt outstanding and include the impact of interest rate swaps designated as cash flow hedges, which effectively fix the interest rate on our variable rate debt.

 

(2)

Included in the outstanding balances were borrowings denominated in non-U.S. dollars. The following table summarizes our debt by currency (in thousands):

 

 

 

June 30, 2018

 

 

December 31, 2017

 

 

British pound sterling

 

$

653,632

 

 

$

671,522

 

 

Canadian dollar

 

 

274,180

 

 

 

451,080

 

 

Euro

 

 

4,184,844

 

 

 

3,839,422

 

 

Japanese yen

 

 

1,276,029

 

 

 

1,306,380

 

 

U.S. dollar

 

 

3,038,439

 

 

 

3,144,227

 

 

Total

 

$

9,427,124

 

 

$

9,412,631

 

 

Generally, we borrow in the functional currency of the consolidated subsidiaries but we also borrow in currencies other than the U.S. dollar in the OP and may designate this borrowing as a nonderivative financial instrument. We may also hedge our foreign currency risk by designating derivative financial instruments as net investment hedges, as these amounts offset the translation adjustments on the underlying net assets of our foreign investments. See Note 9 for more information about our nonderivative and derivative financial instruments.

 

14

 


 

Credit Facilities

 

We have a global senior credit facility (the “Global Facility”), under which we may draw in British pounds sterling, Canadian dollars, euro, Japanese yen and U.S. dollars on a revolving basis up to $3.0 billion (subject to currency fluctuations). We have the ability to increase the Global Facility to $3.8 billion, subject to currency fluctuations and obtaining additional lender commitments. Pricing under the Global Facility, including the spread over LIBOR, facility fees and letter of credit fees, varies based on the public debt ratings of the OP. The Global Facility is scheduled to mature in April 2020; however, we may extend the maturity date for six months on two occasions, subject to the satisfaction of certain conditions and payment of extension fees.

 

We also have a Japanese yen revolver (the “Revolver”) with availability of ¥50.0 billion ($451.7 million at June 30, 2018). We have the ability to increase the Revolver to ¥65.0 billion ($587.2 million at June 30, 2018), subject to obtaining additional lender commitments. Pricing under the Revolver, including the spread over LIBOR, facility fees and letter of credit fees, varies based on the public debt ratings of the OP. The Revolver is scheduled to mature in February 2021; however, we may extend the maturity date for one year, subject to the satisfaction of certain conditions and payment of extension fees.

 

We refer to the Global Facility and the Revolver, collectively, as our “Credit Facilities.”

 

The following table summarizes information about our Credit Facilities at June 30, 2018 (in millions):

 

Aggregate lender commitments

 

$

3,479

 

Less:

 

 

 

 

Borrowings outstanding

 

 

12

 

Outstanding letters of credit

 

 

31

 

Current availability

 

$

3,436

 

 

Senior Notes

 

In January 2018, we issued €400.0 million ($494.2 million) of senior notes bearing a floating rate of Euribor plus 0.25%, maturing in January 2020. The exchange rate used to calculate into U.S. dollars was the spot rate at the date of the transaction. The effective interest rate was -0.08% at June 30, 2018, primarily due to the amortization of the net premium on the debt. In association with the issuance, we entered into cash flow hedges to effectively fix the interest rate, as discussed in Note 9. Following the issuance, we used the proceeds to pay down our multi-currency term loan (the “2017 Term Loan”) during the first quarter of 2018.

 

In June 2018, we issued $400.0 million of senior notes that bear an interest rate of 3.88% and mature in September 2028 and $300.0 million of senior notes that bear an interest rate of 4.38% and mature in September 2048. Following the issuance, we used the proceeds to pay down our Global Facility in the second quarter of 2018 and our Canadian term loan (the “2015 Canadian Term Loan”) in July 2018.

 

Term Loans

 

During the six months ended June 30, 2018, we borrowed on our Global Facility and paid down CAD 201.4 million ($158.9 million) on the 2015 Canadian Term Loan, leaving CAD $170.5 million ($128.7 million at June 30, 2018) outstanding. In association with the pay down of the 2015 Canadian Term Loan, we terminated our Canadian denominated cash flow hedges in February 2018. See Note 9 for more information.

 

During the six months ended June 30, 2018 and 2017, we paid down $1.0 billion and $575.7 million, and reborrowed $500.0 million and $877.5 million, on our 2017 Term Loan.

15

 


 

 

Long-Term Debt Maturities

 

Principal payments due on our debt for the remainder of 2018 and for each year through the period ended December 31, 2022, and thereafter were as follows at June 30, 2018 (in thousands):

 

 

 

Unsecured

 

 

 

 

 

 

 

 

 

Credit

 

 

Senior

 

 

Term Loans

 

 

Secured

 

 

 

 

 

Maturity

 

Facilities

 

 

Notes

 

 

and Other

 

 

Mortgages

 

 

Total

 

2018 (1)

 

$

-

 

 

$

-

 

 

$

492

 

 

$

108,137

 

 

$

108,629

 

2019 (1)

 

 

-

 

 

 

-

 

 

 

1,014

 

 

 

446,328

 

 

 

447,342

 

2020 (2)

 

 

11,658

 

 

 

1,165,802

 

 

 

1,077

 

 

 

12,409

 

 

 

1,190,946

 

2021

 

 

-

 

 

 

816,060

 

 

 

910

 

 

 

14,600

 

 

 

831,570

 

2022

 

 

-

 

 

 

816,060

 

 

 

452,455

 

 

 

10,636

 

 

 

1,279,151

 

Thereafter

 

 

-

 

 

 

4,356,824

 

 

 

968,756

 

 

 

306,385

 

 

 

5,631,965

 

Subtotal

 

 

11,658

 

 

 

7,154,746

 

 

 

1,424,704

 

 

 

898,495

 

 

 

9,489,603

 

Premiums (discounts), net

 

 

-

 

 

 

(23,909

)

 

 

-

 

 

 

2,212

 

 

 

(21,697

)

Debt issuance costs, net

 

 

-

 

 

 

(28,456

)

 

 

(9,043

)

 

 

(3,283

)

 

 

(40,782

)

Total

 

$

11,658

 

 

$

7,102,381

 

 

$

1,415,661

 

 

$

897,424

 

 

$

9,427,124

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

We expect to repay the amounts maturing in the next twelve months with cash generated from operations, proceeds from dispositions of real estate properties, or as necessary, with borrowings on our Credit Facilities.

 

(2)

Included in the 2020 maturities was the Global Facility that can be extended until 2021, as discussed above.

 

Financial Debt Covenants

 

We have $7.1 billion of senior notes and $1.4 billion of term loans outstanding at June 30, 2018 under two separate indentures, as supplemented, that were subject to certain financial covenants. We are also subject to financial covenants under our Credit Facilities and certain secured mortgages. At June 30, 2018, we were in compliance with all of our financial debt covenants.

 

Guarantee of Finance Subsidiary Debt

 

In July 2018, we formed a finance subsidiary as part of our European operations, Prologis Euro Finance LLC (“Euro Finance Subsidiary”), that is 100% indirectly owned by the OP. All unsecured debt issued by the Euro Finance Subsidiary will be fully and unconditionally guaranteed by the OP. There are no restrictions or limits on the OP’s ability to obtain funds from its subsidiaries by dividend or loan. In reliance on Rule 3-10 of Regulation S-X, the separate financial statements of the Euro Finance Subsidiary are not provided.

 

NOTE 6. NONCONTROLLING INTERESTS

 

Prologis, L.P.

 

We report noncontrolling interests related to several entities we consolidate but of which we do not own 100% of the equity. These entities include two real estate partnerships that have issued limited partnership units to third parties. Depending on the specific partnership agreements, these limited partnership units are redeemable for cash or, at our option into shares of the Parent’s common stock, generally at a rate of one share of common stock to one unit. We also consolidate certain entities in which we do not own 100% of the equity but the equity of these entities is not exchangeable into our common stock.

 

Prologis, Inc.

 

The noncontrolling interests of the Parent include the noncontrolling interests for the OP, as well as the limited partnership units in the OP that are not owned by the Parent.

 

16

 


 

The following table summarizes our ownership percentages, noncontrolling interests and the consolidated entities’ total assets and liabilities (dollars in thousands):

 

 

Our Ownership Percentage

 

 

Noncontrolling Interests

 

 

Total Assets

 

 

Total Liabilities

 

 

Jun 30,

2018

 

 

Dec 31,

2017

 

 

Jun 30,

2018

 

 

Dec 31,

2017

 

 

Jun 30,

2018

 

 

Dec 31,

2017

 

 

Jun 30,

2018

 

 

Dec 31,

2017

 

Prologis U.S. Logistics Venture

 

55.0

%

 

 

55.0

%

 

$

2,539,930

 

 

$

2,581,629

 

 

$

6,186,215

 

 

$

6,030,819

 

 

$

238,101

 

 

$

284,162

 

Other consolidated entities (1)

various

 

 

various

 

 

 

84,245

 

 

 

78,613

 

 

 

820,113

 

 

 

806,138

 

 

 

29,813

 

 

 

30,330

 

Prologis, L.P.

 

 

 

 

 

 

 

 

 

2,624,175

 

 

 

2,660,242

 

 

 

7,006,328

 

 

 

6,836,957

 

 

 

267,914

 

 

 

314,492

 

Limited partners in Prologis, L.P. (2) (3)

 

 

 

463,758

 

 

 

414,341

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Prologis, Inc.

 

 

 

 

 

 

 

 

$

3,087,933

 

 

$

3,074,583

 

 

$

7,006,328

 

 

$

6,836,957

 

 

$

267,914

 

 

$

314,492

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

This line item includes our two partnerships that have issued limited partnership units to third parties, as discussed above, along with various other consolidated entities. The limited partnership units outstanding at June 30, 2018 and December 31, 2017 were exchangeable into cash or, at our option, 0.9 million and 1.0 million shares of the Parent’s common stock.

 

(2)

We had 8.8 million and 8.9 million Class A Units that were convertible into 8.4 million and 8.5 million limited partnership units of the OP at June 30, 2018 and December 31, 2017, respectively.

 

(3)

At June 30, 2018 and December 31, 2017, excluding the Class A Units, there were limited partnership units in the OP that were exchangeable into cash or, at our option, 3.9 million and 4.1 million shares of the Parent’s common stock, respectively. Also included are the vested OP Long-Term Incentive Plan Units (“LTIP Units”) associated with our long-term compensation plan. See further discussion of LTIP Units in Note 7.

 

NOTE 7. LONG-TERM COMPENSATION

 

Equity-Based Compensation Plans and Programs

 

Prologis Outperformance Plan (“POP”)

 

We allocate participation points to participants under our POP corresponding to three-year performance periods beginning January 1. The fair value of the awards is measured at the grant date and amortized over the period from the grant date to the date at which the awards vest, which range from three to ten years. POP awards are earned to the extent our three-year compound annualized total stockholder return (“TSR”) for the performance period is positive and exceeds the three-year compound annualized TSR for the Morgan Stanley Capital International (“MSCI”) US REIT Index for the same period plus 100 basis points.

 

We granted participation points for the 2018 – 2020 performance period in January 2018, with a fair value of $23.3 million using a Monte Carlo valuation model that assumed a risk-free interest rate of 2.1% and an expected volatility of 16.5%. The 2018 – 2020 performance period has an absolute maximum cap of $100 million. If the award is earned then 20% of the POP award is paid at the end of the performance period and the remaining 80% is subject to additional seven-year cliff vesting. The 20% that is paid at the end of the three-year performance period is subject to an additional three-year holding requirement.

 

The performance criteria were met for the 2015 – 2017 performance period, which resulted in awards being earned at December 31, 2017. An aggregate performance pool of $110.2 million was awarded in January 2018 in the form of 0.6 million shares of common stock and 1.2 million vested LTIP Units.

 

Other Equity-Based Compensation Plans and Programs

 

Our other equity-based compensation plans and programs include (i) the Prologis Promote Plan (“PPP”); (ii) the annual long-term incentive (“LTI”) equity award program (“Annual LTI Award”); and (iii) the annual bonus exchange program. Awards under these plans and programs may be issued in the form of restricted stock units (“RSUs”) or LTIP Units at the participant’s election. RSUs and LTIP Units are valued based on the market price of the Parent’s common stock on the date the award is granted and is charged to compensation expense over the service period. Beginning in February 2018 with awards for PPP and Annual LTI Awards, the service period is four years.

17

 


 

 

Summary of Award Activity

 

RSUs

 

The following table summarizes the activity for RSUs for the six months ended June 30, 2018 (units in thousands):

 

 

 

 

 

 

 

Weighted Average

 

 

 

Unvested RSUs

 

 

Grant Date Fair Value

 

Balance at January 1, 2018

 

 

1,374

 

 

$

45.57

 

Granted

 

 

738

 

 

 

61.01

 

Vested and distributed

 

 

(769

)

 

 

45.36

 

Forfeited

 

 

(31

)

 

 

53.71

 

Balance at June 30, 2018

 

 

1,312

 

 

$

54.21

 

 

 

 

 

 

 

 

 

 

LTIP Units

 

The following table summarizes the activity for LTIP Units for the six months ended June 30, 2018 (units in thousands):

 

 

 

Vested

 

 

Unvested

 

 

Unvested Weighted Average

 

 

 

LTIP Units (1)

 

 

LTIP Units (1)

 

 

Grant Date Fair Value

 

Balance at January 1, 2018

 

 

1,532

 

 

 

1,829

 

 

$

46.48

 

Granted

 

 

-

 

 

 

1,246

 

 

 

60.95

 

Forfeited

 

 

-

 

 

 

(70

)

 

 

47.66

 

Vested LTIP Units

 

 

887

 

 

 

(887

)

 

 

45.25

 

Vested LTIP Units – POP (2)

 

 

1,170

 

 

 

-

 

 

N/A

 

Conversion to common limited partnership units

 

 

(52

)

 

 

-

 

 

N/A

 

Balance at June 30, 2018

 

 

3,537

 

 

 

2,118

 

 

$

55.46

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

The outstanding LTIP Units are exchangeable into limited partnership units of the OP and redeemable for the Parent’s common stock after they vest and other applicable conditions have been met.

 

(2)  

Vested units were based on the POP performance criteria being met for the 2015 – 2017 performance period and represented the earned award amount, as discussed above.

 

NOTE 8. EARNINGS PER COMMON SHARE OR UNIT

 

 

We determine basic earnings per share or unit based on the weighted average number of shares of common stock or units outstanding during the period. We compute diluted earnings per share or unit based on the weighted average number of shares or units outstanding combined with the incremental weighted average effect from all outstanding potentially dilutive instruments.

 

The computation of our basic and diluted earnings per share and unit was as follows (in thousands, except per share and unit amounts):

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

Prologis, Inc.

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net earnings attributable to common stockholders – Basic

 

$

334,611

 

 

$

266,943

 

 

$

700,513

 

 

$

470,198

 

Net earnings attributable to exchangeable limited partnership units (1)

 

 

10,216

 

 

 

7,798

 

 

 

20,909

 

 

 

13,765

 

Adjusted net earnings attributable to common stockholders – Diluted

 

$

344,827

 

 

$

274,741

 

 

$

721,422

 

 

$

483,963

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding – Basic

 

 

532,639

 

 

 

530,040

 

 

 

532,427

 

 

 

529,400

 

Incremental weighted average effect on exchange of limited partnership units (1)

 

 

16,847

 

 

 

16,364

 

 

 

16,560

 

 

 

16,409

 

Incremental weighted average effect of equity awards

 

 

5,029

 

 

 

5,710

 

 

 

5,079

 

 

 

4,703

 

Weighted average common shares outstanding – Diluted (2)

 

 

554,515

 

 

 

552,114

 

 

 

554,066

 

 

 

550,512

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings per share attributable to common stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.63

 

 

$

0.50

 

 

$

1.32

 

 

$

0.89

 

Diluted

 

$

0.62

 

 

$

0.50

 

 

$

1.30

 

 

$

0.88

 

 

18

 


 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

Prologis, L.P.

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net earnings attributable to common unitholders

 

$

344,633

 

 

$

274,320

 

 

$

721,058

 

 

$

483,198

 

Net earnings attributable to Class A Units

 

 

(5,324

)

 

 

(4,347

)

 

 

(11,177

)

 

 

(7,678

)

Net earnings attributable to common unitholders – Basic

 

 

339,309

 

 

 

269,973

 

 

 

709,881

 

 

 

475,520

 

Net earnings attributable to Class A Units

 

 

5,324

 

 

 

4,347

 

 

 

11,177

 

 

 

7,678

 

Net earnings attributable to exchangeable other limited partnership units

 

 

194

 

 

 

421

 

 

 

364

 

 

 

765

 

Adjusted net earnings attributable to common unitholders – Diluted

 

$

344,827

 

 

$

274,741

 

 

$

721,422

 

 

$

483,963

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common partnership units outstanding – Basic

 

 

540,084

 

 

 

536,060

 

 

 

539,547

 

 

 

535,392

 

Incremental weighted average effect on exchange of Class A Units

 

 

8,477

 

 

 

8,626

 

 

 

8,495

 

 

 

8,645

 

Incremental weighted average effect on exchange of other limited partnership units

 

 

925

 

 

 

1,718

 

 

 

945

 

 

 

1,772

 

Incremental weighted average effect of equity awards of Prologis, Inc.

 

 

5,029

 

 

 

5,710

 

 

 

5,079

 

 

 

4,703

 

Weighted average common units outstanding – Diluted (2)

 

 

554,515

 

 

 

552,114

 

 

 

554,066

 

 

 

550,512

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings per unit attributable to common unitholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.63

 

 

$

0.50

 

 

$

1.32

 

 

$

0.89

 

Diluted

 

$

0.62

 

 

$

0.50

 

 

$

1.30

 

 

$

0.88

 

 

(1)

The exchangeable limited partnership units include the units as discussed in Note 6. Earnings allocated to the exchangeable OP units not held by the Parent have been included in the numerator and exchangeable common units have been included in the denominator for the purpose of computing diluted earnings per share for all periods as the per share and unit amount is the same.

 

(2)

Our total weighted average potentially dilutive shares and units outstanding consisted of the following:  

 

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

 

June 30,

 

 

June 30,

 

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

Class A Units

 

 

8,477

 

 

 

8,626

 

 

 

8,495

 

 

 

8,645

 

 

Other limited partnership units

 

 

925

 

 

 

1,718

 

 

 

945

 

 

 

1,772

 

 

Equity awards

 

 

8,432

 

 

 

9,355

 

 

 

8,391

 

 

 

8,583

 

 

Prologis, L.P.

 

 

17,834

 

 

 

19,699

 

 

 

17,831

 

 

 

19,000

 

 

Common limited partnership units

 

 

7,445

 

 

 

6,020

 

 

 

7,120

 

 

 

5,992

 

 

Prologis, Inc.

 

 

25,279

 

 

 

25,719

 

 

 

24,951

 

 

 

24,992

 

 

 

NOTE 9. FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

 

Derivative Financial Instruments

 

In the normal course of business, our operations are exposed to market risks, including the effect of changes in foreign currency exchange rates and interest rates. We enter into derivative financial instruments to offset these underlying market risks. There have been no significant changes in our policy or strategy from what was disclosed in our Annual Report on Form 10-K for the year ended December 31, 2017.

19

 


 

 

The following table presents the fair value of our derivative financial instruments recognized within the line items Other Assets and Other Liabilities on the Consolidated Balance Sheet (in thousands):

 

 

 

June 30, 2018

 

 

December 31, 2017

 

 

 

Asset

 

 

Liability

 

 

Asset

 

 

Liability

 

Undesignated derivatives

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Forwards

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

          British pound sterling

 

$

142

 

 

$

4,017

 

 

$

2,440

 

 

$

8,103

 

          Canadian dollar

 

 

1,469

 

 

 

253

 

 

 

-

 

 

 

1,698

 

          Euro

 

 

3,619

 

 

 

6,380

 

 

 

2

 

 

 

14,234

 

          Japanese yen

 

 

3,992

 

 

 

1,235

 

 

 

6,474

 

 

 

931

 

          Mexican peso

 

 

373

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Designated derivatives

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Net investment hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

          Canadian dollar

 

 

1,871

 

 

 

-

 

 

 

-

 

 

 

7,263

 

          Euro

 

 

-

 

 

 

280

 

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Cash flow hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

          Canadian dollar

 

 

-

 

 

 

-

 

 

 

10,223

 

 

 

-

 

          Euro

 

 

-

 

 

 

555

 

 

 

-

 

 

 

-

 

Total fair value of derivatives

 

$

11,466

 

 

$

12,720

 

 

$

19,139

 

 

$

32,229

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Undesignated Derivative Financial Instruments

 

Foreign Currency Contracts

 

The following table summarizes the activity of our undesignated foreign currency contracts for the six months ended June 30 (in millions, except for weighted average forward rates and number of active contracts):

 

 

 

2018

 

 

2017

 

 

 

CAD

 

 

CNY

 

 

EUR

 

 

GBP

 

 

JPY

 

 

MXN

 

 

CAD

 

 

EUR

 

 

GBP

 

 

JPY

 

Notional amounts at January 1

 

$

56

 

 

$

-

 

 

$

233

 

 

$

132

 

 

$

153

 

 

$

-

 

 

$

38

 

 

$

197

 

 

$

78

 

 

$

144

 

New contracts

 

 

13

 

 

 

80

 

 

 

54

 

 

 

-

 

 

 

28

 

 

 

10

 

 

 

-

 

 

 

63

 

 

 

137

 

 

 

38

 

Matured, expired or settled contracts

 

 

(14

)

 

 

(80

)

 

 

(55

)

 

 

(36

)

 

 

(36

)

 

 

(10

)

 

 

(12

)

 

 

(56

)

 

 

(46

)

 

 

(31

)

Notional amounts at June 30

 

$

55

 

 

$

-

 

 

$

232

 

 

$

96

 

 

$

145

 

 

$

-

 

 

$

26

 

 

$

204

 

 

$

169

 

 

$

151

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average forward rate at June 30

 

 

1.28

 

 

 

-

 

 

 

1.20

 

 

 

1.30

 

 

 

105.53

 

 

 

-

 

 

 

1.32

 

 

 

1.13

 

 

 

1.33

 

 

 

106.51

 

Active contracts at June 30

 

 

24

 

 

 

-

 

 

 

29

 

 

 

16

 

 

 

32

 

 

 

-

 

 

 

12

 

 

 

26

 

 

 

22

 

 

 

32

 

 

During the six months ended June 30, 2018 and 2017, we exercised 31 and 22 forward contracts, respectively. We recognized realized losses of $1.1 million and $7.9 million for the three and six months ended June 30, 2018, respectively, and gains of $3.6 million and $8.9 million for the three and six months ended June 30, 2017, respectively, from contracts that matured, expired or settled in Foreign Currency and Derivative Gain (Losses), Net in the Consolidated Statements of Income.

 

We recognized unrealized gains of $30.1 million and $17.2 million for the three and six months ended June 30, 2018, respectively, and unrealized losses of $18.8 million and $32.5 million for the three and six months ended June 30, 2017, respectively, from the change in value of our outstanding foreign currency contracts within Foreign Currency and Derivative Gains (Losses), Net in the Consolidated Statements of Income.

 

20

 


 

Designated Derivative Financial Instruments

 

Foreign Currency Contracts

 

The following table summarizes the activity of our foreign currency contracts designated as net investment hedges for the six months ended June 30 (in millions, except for weighted average forward rates and number of active contracts):

 

 

 

2018

 

 

2017

 

 

 

CAD

 

 

EUR

 

 

CAD

 

 

GBP

 

Notional amounts at January 1

 

$

99

 

 

$

-

 

 

$

100

 

 

$

46

 

New contracts

 

 

100

 

 

 

35

 

 

 

99

 

 

 

127

 

Matured, expired or settled contracts

 

 

(99

)

 

 

-

 

 

 

(100

)

 

 

(173

)

Notional amounts at June 30

 

$

100

 

 

$

35

 

 

$

99

 

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average forward rate at June 30

 

 

1.28

 

 

 

1.16

 

 

 

1.34

 

 

 

-

 

Active contracts at June 30

 

 

2

 

 

 

1

 

 

 

2

 

 

 

-

 

 

Interest Rate Swaps

 

The following table summarizes the activity of our interest rate swaps designated as cash flow hedges for the six months ended June 30 (in millions):

 

 

 

2018

 

 

2017

 

 

 

CAD

 

 

EUR

 

 

USD

 

 

CAD

 

Notional amounts at January 1

 

$

271

 

 

$

-

 

 

$

-

 

 

$

271

 

New contracts (1)

 

 

-

 

 

 

500

 

 

 

300

 

 

 

-

 

Matured, expired or settled contracts (2)

 

 

(271

)

 

 

-

 

 

 

(300

)

 

 

-

 

Notional amounts at June 30

 

$

-

 

 

$

500

 

 

$

-

 

 

$

271

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

During the six months ended June 30, 2018, we entered into two interest rate swap contracts with an aggregated notional amount of €400.0 million ($499.7 million) to effectively fix the interest rate on our senior notes bearing a floating rate of Euribor plus 0.25% issued in January 2018.

 

(2)

During the six months ended June 30, 2018, we repaid CAD 201.4 million ($158.9 million) on our 2015 Canadian Term Loan, leaving CAD 170.5 million ($128.7 million at June 30, 2018) outstanding. At that time, we settled the interest rate swap contracts related to the 2015 Canadian Term Loan as we determined at that time it was no longer probable that we would continue to have the future cash flows as originally hedged. As a result, the $12.5 million gain in Accumulated Other Comprehensive Income (Loss) “AOCI/L” at the time of settlement was reclassified to Interest Expense during the first quarter of 2018.

 

During the six months ended June 30, 2018 and 2017, we had no losses due to hedge ineffectiveness.

 

Designated Nonderivative Financial Instruments

 

The following table summarizes our debt, net of accrued interest, designated as a nonderivative financial instrument to hedge our net investment in international subsidiaries (in millions):

 

 

 

June 30, 2018

 

 

December 31, 2017

 

British pound sterling

 

$

267

 

 

$

436

 

Euro

 

$

3,550

 

 

$

3,620

 

 

We recognized unrealized gains of $64.6 million and $40.3 million in Foreign Currency and Derivative Losses, Net on the unhedged portion of our debt, net of accrued interest, for the three and six months ended June 30, 2018, respectively. We recognized unrealized losses of $7.2 million and $11.3 million for the three and six months ended June 30, 2017, respectively.

 

Other Comprehensive Income (Loss)

 

The change in Other Comprehensive Income (Loss) in the Consolidated Statements of Comprehensive Income during the periods presented is due to the translation into U.S. dollars on consolidation of the financial statements of our consolidated subsidiaries whose functional currency is not the U.S. dollar. The change in fair value of the effective portion of our derivative financial instruments that have been designated as net investment hedges and cash flow hedges and the translation of our nonderivative financial instruments as discussed above are also included in Other Comprehensive Income (Loss).

 

21

 


 

The following table presents these changes in Other Comprehensive Income (Loss) (in thousands):

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net investment hedges

 

$

1,740

 

 

$

7,197

 

 

$

4,833

 

 

$

9,491

 

Nonderivative financial instruments

 

 

223,739

 

 

 

(229,666

)

 

 

113,862

 

 

 

(274,192

)

Cumulative translation adjustment

 

 

(373,292

)

 

 

225,631

 

 

 

(261,738

)

 

 

307,530

 

Total foreign currency translation gains (losses), net

 

$

(147,813

)

 

$

3,162

 

 

$

(143,043

)

 

$

42,829

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow hedges (1)

 

$

963

 

 

$

4,559

 

 

$

(8,322

)

 

$

4,988

 

Our share of derivatives from unconsolidated co-investment ventures

 

 

1,168

 

 

 

2,176

 

 

 

4,166

 

 

 

4,378

 

Total unrealized gains (losses) on derivative contracts, net

 

$

2,131

 

 

$

6,735

 

 

$

(4,156

)

 

$

9,366

 

Total change in other comprehensive income (loss)

 

$

(145,682

)

 

$

9,897

 

 

$

(147,199

)

 

$

52,195

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

We estimate an additional expense of $4.2 million will be reclassified to Interest Expense over the next 12 months from June 30, 2018, due to the amortization of previously settled derivatives designated as cash flow hedges.

 

Fair Value Measurements

 

There have been no significant changes in our policy from what was disclosed in our Annual Report on Form 10-K for the year ended December 31, 2017.

 

Fair Value Measurements on a Recurring Basis

 

At June 30, 2018, and December 31, 2017, other than the derivatives discussed previously, we did not have any significant financial assets or financial liabilities that were measured at fair value on a recurring basis in the Consolidated Financial Statements. All of our derivatives held at June 30, 2018, and December 31, 2017, were classified as Level 2 of the fair value hierarchy.

 

Fair Value Measurements on Nonrecurring Basis

 

Acquired properties and assets we expect to sell or contribute met the criteria to be measured on a nonrecurring basis at fair value and the lower of their carrying amount or their estimated fair value less the costs to sell, respectively, at June 30, 2018 and December 31, 2017. At June 30, 2018 and December 31, 2017, we estimate the fair value of our properties using Level 2 or Level 3 inputs from the fair value hierarchy. See more information on our acquired properties and assets held for sale or contribution in Notes 2 and 4, respectively.

 

Fair Value of Financial Instruments

 

At June 30, 2018, and December 31, 2017, the carrying amounts of certain financial instruments, including cash and cash equivalents, accounts and notes receivable, accounts payable and accrued expenses were representative of their fair values.

 

The differences in the fair value of our debt from the carrying value in the table below were the result of differences in interest rates or borrowing spreads that were available to us at June 30, 2018 and December 31, 2017, as compared with those in effect when the debt was issued or assumed, including reduced borrowing spreads due to our improved credit ratings. The senior notes and many of the issuances of secured mortgages contain pre-payment penalties or yield maintenance provisions that could make the cost of refinancing the debt at lower rates exceed the benefit that would be derived from doing so.

 

The following table reflects the carrying amounts and estimated fair values of our debt (in thousands):

 

 

 

June 30, 2018

 

 

December 31, 2017

 

 

 

Carrying Value

 

 

Fair Value

 

 

Carrying Value

 

 

Fair Value

 

Credit Facilities

 

$

11,658

 

 

$

11,660

 

 

$

317,392

 

 

$

317,496

 

Senior notes

 

 

7,102,381

 

 

 

7,447,585

 

 

 

6,067,277

 

 

 

6,537,100

 

Term loans and unsecured other

 

 

1,415,661

 

 

 

1,431,793

 

 

 

2,060,491

 

 

 

2,075,002

 

Secured mortgages

 

 

897,424

 

 

 

937,205

 

 

 

967,471

 

 

 

1,026,197

 

Total

 

$

9,427,124

 

 

$

9,828,243

 

 

$

9,412,631

 

 

$

9,955,795

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

22

 


 

NOTE 10. BUSINESS SEGMENTS

 

Our current business strategy consists of two operating segments: Real Estate Operations and Strategic Capital. We generate revenues, net operating income, earnings and cash flows through our segments, as follows:

 

Real Estate Operations. This operating segment represents the ownership and development of operating properties and is the largest component of our revenues and earnings. We collect rent from our customers through operating leases, including reimbursements for the majority of our property operating costs. Each operating property is considered to be an individual operating segment with similar economic characteristics; these properties are combined within the reportable business segment based on geographic location. Our Real Estate Operations segment also includes development activities that lead to rental operations, including land held for development and properties currently under development. Within this line of business, we utilize the following: (i) our land bank; (ii) the development expertise of our local teams; and (iii) our customer relationships. Land we own and lease to customers under ground leases is also included in this segment.

 

Strategic Capital. This operating segment represents the management of unconsolidated co-investment ventures. We generate strategic capital revenues primarily from our unconsolidated co-investment ventures through asset and property management services and we earn additional revenues by providing leasing, acquisition, construction, development, financing, legal and disposition services. Depending on the structure of the venture and the returns provided to our partners, we also earn revenues through promotes periodically during the life of a venture or upon liquidation. Each unconsolidated co-investment venture we manage is considered to be an individual operating segment with similar economic characteristics; these ventures are combined within the reportable business segment based on geographic location.

 

Reconciliations are presented below for: (i) each reportable business segment’s revenues from external customers to Total Revenues; (ii) each reportable business segment’s net operating income from external customers to Operating Income and Earnings Before Income Taxes; and (iii) each reportable business segment’s assets to Total Assets. Our chief operating decision makers rely primarily on net operating income and similar measures to make decisions about allocating resources and assessing segment performance. The applicable components of Total Revenues, Operating Income, Earnings Before Income Taxes and Total Assets are allocated to each reportable business segment’s revenues, net operating income and assets. Items that are not directly assignable to a segment, such as certain corporate income and expenses, are not allocated but reflected as reconciling items. The following reconciliations are presented in thousands:

23

 


 

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

 

2018

 

 

 

2017

 

 

 

2018

 

 

 

2017

 

Segment revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate operations segment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S.

 

$

491,051

 

 

$

529,841

 

 

$

990,308

 

 

$

1,053,988

 

Other Americas

 

 

29,948

 

 

 

16,444

 

 

 

60,379

 

 

 

31,533

 

Europe

 

 

12,908

 

 

 

22,076

 

 

 

30,110

 

 

 

40,307

 

Asia

 

 

11,672

 

 

 

17,168

 

 

 

25,477

 

 

 

31,811

 

Total real estate operations segment

 

 

545,579

 

 

 

585,529

 

 

 

1,106,274

 

 

 

1,157,639

 

Strategic capital segment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S.

 

 

17,905

 

 

 

130,677

 

 

 

33,974

 

 

 

142,585

 

Other Americas

 

 

12,256

 

 

 

9,864

 

 

 

18,409

 

 

 

15,915

 

Europe

 

 

28,488

 

 

 

25,973

 

 

 

67,305

 

 

 

52,235

 

Asia

 

 

17,048

 

 

 

14,140

 

 

 

88,970

 

 

 

26,964

 

Total strategic capital segment

 

 

75,697

 

 

 

180,654

 

 

 

208,658

 

 

 

237,699

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total segment revenues

 

 

621,276

 

 

 

766,183

 

 

 

1,314,932

 

 

 

1,395,338

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment net operating income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate operations segment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. (1)

 

 

367,935

 

 

 

396,274

 

 

 

737,299

 

 

 

780,374

 

Other Americas

 

 

22,488

 

 

 

10,384

 

 

 

45,411

 

 

 

20,366

 

Europe

 

 

8,693

 

 

 

16,401

 

 

 

21,152

 

 

 

29,259

 

Asia

 

 

8,619

 

 

 

11,767

 

 

 

18,388

 

 

 

21,675

 

Total real estate operations segment

 

 

407,735

 

 

 

434,826

 

 

 

822,250

 

 

 

851,674

 

Strategic capital segment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. (1)

 

 

5,893

 

 

 

99,668

 

 

 

1,657

 

 

 

101,607

 

Other Americas

 

 

9,032

 

 

 

7,587

 

 

 

11,939

 

 

 

10,732

 

Europe

 

 

19,382

 

 

 

16,342

 

 

 

47,045

 

 

 

32,732

 

Asia

 

 

6,540

 

 

 

5,071

 

 

 

69,307

 

 

 

8,843

 

Total strategic capital segment

 

 

40,847

 

 

 

128,668

 

 

 

129,948

 

 

 

153,914

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total segment net operating income

 

 

448,582

 

 

 

563,494

 

 

 

952,198

 

 

 

1,005,588

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reconciling items:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative expenses

 

 

57,615

 

 

 

60,077

 

 

 

120,043

 

 

 

113,694

 

Depreciation and amortization expenses

 

 

203,673

 

 

 

228,145

 

 

 

407,754

 

 

 

454,736

 

Operating income

 

 

187,294

 

 

 

275,272

 

 

 

424,401

 

 

 

437,158

 

Earnings from unconsolidated entities, net

 

 

62,549

 

 

 

68,596

 

 

 

125,205

 

 

 

117,201

 

Interest expense

 

 

(56,314

)

 

 

(75,354

)

 

 

(102,575

)

 

 

(148,266

)

Interest and other income, net

 

 

5,641

 

 

 

1,892

 

 

 

7,617

 

 

 

4,677

 

Gains on dispositions of investments in real estate, net

 

 

94,261

 

 

 

83,006

 

 

 

289,372

 

 

 

180,331

 

Foreign currency and derivative gains (losses), net

 

 

85,382

 

 

 

(20,055

)

 

 

44,288

 

 

 

(27,455

)

Gains (losses) on early extinguishment of debt, net

 

 

282

 

 

 

(30,596

)

 

 

(702

)

 

 

(30,596

)

Earnings before income taxes

 

$

379,095

 

 

$

302,761

 

 

$

787,606

 

 

$

533,050

 

 

 

24

 


 

 

 

June 30,

2018

 

 

December 31,

2017

 

Segment assets:

 

 

 

 

 

 

 

 

Real estate operations segment:

 

 

 

 

 

 

 

 

U.S.

 

$

18,807,476

 

 

$

19,058,610

 

Other Americas

 

 

1,618,701

 

 

 

1,767,385

 

Europe

 

 

970,749

 

 

 

1,008,340

 

Asia

 

 

1,023,036

 

 

 

1,083,764

 

Total real estate operations segment

 

 

22,419,962

 

 

 

22,918,099

 

Strategic capital segment:

 

 

 

 

 

 

 

 

U.S.

 

 

16,438

 

 

 

16,818

 

Europe

 

 

25,280

 

 

 

25,280

 

Asia

 

 

341

 

 

 

544

 

Total strategic capital segment

 

 

42,059

 

 

 

42,642

 

Total segment assets

 

 

22,462,021

 

 

 

22,960,741

 

 

 

 

 

 

 

 

 

 

Reconciling items:

 

 

 

 

 

 

 

 

Investments in and advances to unconsolidated entities

 

 

5,414,623

 

 

 

5,496,450

 

Assets held for sale or contribution

 

 

892,546

 

 

 

342,060

 

Notes receivable backed by real estate

 

 

-

 

 

 

34,260

 

Cash and cash equivalents

 

 

527,830

 

 

 

447,046

 

Other assets

 

 

205,862

 

 

 

200,518

 

Total reconciling items

 

 

7,040,861

 

 

 

6,520,334

 

Total assets

 

$

29,502,882

 

 

$

29,481,075

 

 

(1)

This includes compensation and personnel costs for employees who were located in the U.S. but also support other regions.

 

NOTE 11. SUPPLEMENTAL CASH FLOW INFORMATION

 

Our significant noncash investing and financing activities for the six months ended June 30, 2018 and 2017 included the following:

 

We capitalized $14.1 million and $14.0 million in 2018 and 2017, respectively, of equity-based compensation expense resulting from our development and leasing activities.

 

We received $105.4 million and $22.8 million in 2018 and 2017, respectively, of ownership interests in certain unconsolidated co-investment ventures as a portion of our proceeds from the contribution of properties to these entities, as disclosed in Note 2.

 

We formed a consolidated joint venture into which our partner contributed $11.8 million of land in 2018.

 

We issued 0.7 million shares in 2017 of the Parent’s common stock upon redemption of an equal number of common limited partnership units in the OP.

 

We received a $19.5 million note backed by real estate in exchange for the disposition of real estate in 2017.

 

We paid $154.4 million and $188.1 million for interest, net of amounts capitalized, for the six months ended June 30, 2018 and 2017, respectively.

 

We paid $32.3 million and $23.6 million for income taxes, net of refunds, for the six months ended June 30, 2018 and 2017, respectively.

 

NOTE 12. SUBSEQUENT EVENTS

 

Proposed Merger. On April 29, 2018, we entered into a definitive agreement (the “Merger Agreement”) with DCT Industrial Trust Inc. (“DCT”) and DCT Industrial Operating Partnership LP (“DCT OP”), pursuant to which, subject to the terms and conditions set forth in the Merger Agreement, (i) DCT will merge with and into Prologis, with Prologis surviving the merger (the “Company Merger”) and (ii) immediately prior to the effective time of the Company Merger, DCT OP will merge with and into the OP, with the OP surviving the merger (the “Partnership Merger” and, together with the Company Merger, the “Mergers”). The estimated purchase price consideration for the Mergers will be approximately $8.2 billion in a stock-for-stock transaction, including the assumption of debt, and is based on the closing price of Prologis' common stock on July 19, 2018. Under the terms of the Merger Agreement, at the effective time of the Company Merger, each issued and outstanding share of DCT common stock will be converted automatically into the right to receive 1.02 shares of Prologis common stock and each issued and outstanding common unit of DCT OP will be converted automatically into the right to receive 1.02 common units of the OP. This exchange ratio is fixed and will not be adjusted to reflect changes in the Prologis stock price prior to closing. Changes in the price of Prologis common stock prior to the Mergers will affect the market value of the

25

 


 

merger consideration that DCT stockholders and unitholders will receive on the closing date of the Mergers. After consideration of all applicable factors pursuant to the business combination accounting rules, we concluded the Mergers will be treated as an asset acquisition and as a result the transaction costs will be capitalized to the basis of the acquired properties.

 

On July 9, 2018, the SEC declared the registration statement on Form S-4 for the proposed Mergers effective. Subject to DCT stockholder approval and the other closing conditions described in the Form S-4, the Mergers are expected to be consummated in August 2018.

 

In connection with the Mergers, on July 2, 2018, DCT, DCT OP, DCT’s board of directors (the “DCT Board”), Prologis, and the OP were sued in a putative class action lawsuit, the Rosenblatt Action, filed in the United States District Court for the District of Colorado, in connection with DCT's proposed merger with Prologis and the related Form S-4. The complaint in the Rosenblatt Action alleges that DCT, DCT OP, the DCT Board, Prologis, and Prologis OP violated federal securities laws by omitting material information from the Form S-4, rendering the Form S-4 materially deficient. On July 10, 2018, DCT and the DCT Board were sued in another putative class action lawsuit, the Bushansky Action, also filed in the United States District Court for the District of Colorado, and also in connection with DCT's proposed merger with Prologis and the related Form S-4. On July 13, 2018, DCT, DCT OP and the DCT Board were sued in a third putative class action lawsuit, the Aiken Action, filed in the United States District Court for the District of Maryland, also in connection with DCT’s proposed merger with Prologis and the related Form S-4. The complaints in the Bushansky Action and the Aiken Action allege that DCT and the DCT Board violated federal securities laws by omitting from the Form S-4, and/or misrepresenting in the Form S-4, material information, rendering the Form S-4 materially deficient. In all three actions, the plaintiffs seek, among other things, (i) to enjoin the transaction (or rescind it to the extent it is completed), and (ii) attorneys' fees and costs in connection with these lawsuits.

 

Although the ultimate outcome of litigation cannot be predicted with certainty, we believe that these lawsuits are without merit and intend to defend against these actions vigorously.

 

 

 

 


26

 


 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Stockholders and Board of Directors
Prologis, Inc.:

Results of Review of Interim Financial Information

 

We have reviewed the consolidated balance sheet of Prologis, Inc. and subsidiaries (the Company) as of June 30, 2018, the related consolidated statements of income, and consolidated statements of  comprehensive income for the three-month and six-month periods ended June 30, 2018 and 2017, the related consolidated statement of equity for the six-month period ended June 30, 2018, the related consolidated statements of cash flows for the six-month periods ended June 30, 2018 and 2017, and the related notes (collectively, the consolidated interim financial information). Based on our reviews, we are not aware of any material modifications that should be made to the consolidated interim financial information for it to be in conformity with U.S. generally accepted accounting principles.

 

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Company as of December 31, 2017, and the related consolidated statements of income, comprehensive income, equity, and cash flows for the year then ended (not presented herein); and in our report dated February 15, 2018, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2017, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

 

Basis for Review Results

 

This consolidated interim financial information is the responsibility of the Company’s management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our reviews in accordance with the standards of the PCAOB. A review of consolidated interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

/s/ KPMG LLP

Denver, Colorado
July 23, 2018

 

27

 


 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Partners
Prologis, L.P.:

Results of Review of Interim Financial Information

 

We have reviewed the consolidated balance sheet of Prologis, L.P. and subsidiaries (the Operating Partnership) as of June 30, 2018, the related consolidated statements of income, and consolidated statements of comprehensive income for the three-month and six-month periods ended June 30, 2018 and 2017, the related consolidated statement of capital for the six-month period ended June 30, 2018, the related consolidated statements of cash flows for the six-month periods ended June 30, 2018 and 2017, and the related notes (collectively, the consolidated interim financial information). Based on our reviews, we are not aware of any material modifications that should be made to the consolidated interim financial information for it to be in conformity with U.S. generally accepted accounting principles.

 

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Operating Partnership as of December 31, 2017, and the related consolidated statements of income, comprehensive income, capital, and cash flows for the year then ended (not presented herein); and in our report dated February 15, 2018, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2017, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

 

Basis for Review Results

 

This consolidated interim financial information is the responsibility of the Operating Partnership’s management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Operating Partnership in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our reviews in accordance with the standards of the PCAOB. A review of consolidated interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

/s/ KPMG LLP

Denver, Colorado
July 23, 2018

 

 

28

 


 

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following should be read in conjunction with the Consolidated Financial Statements and related Notes included in Item 1 of this report and our Annual Report on Form 10-K for the year ended December 31, 2017, as filed with the Securities and Exchange Commission (“SEC”).

 

The statements in this report 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 we operate as well as management’s beliefs and assumptions. Such statements involve uncertainties that could significantly impact our financial results. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” and “estimates” including 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, contribution and disposition activity, general conditions in the geographic areas where we operate, our debt, capital structure and financial position, our ability to form new co-investment ventures and the availability of capital in existing or new co-investment ventures — 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 and political climates; (ii) changes in global financial markets, interest rates and foreign currency exchange rates; (iii) increased or unanticipated competition for our properties; (iv) risks associated with acquisitions, dispositions and development of properties; (v) maintenance of real estate investment trust (“REIT”) status, tax structuring and changes in income tax laws and rates; (vi) availability of financing and capital, the levels of debt that we maintain and our credit ratings; (vii) risks related to our investments in our co-investment ventures, including our ability to establish new co-investment ventures; (viii) risks of doing business internationally, including currency risks; (ix) environmental uncertainties, including risks of natural disasters; and (x) those additional factors discussed under Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2017. We undertake no duty to update any forward-looking statements appearing in this report except as may be required by law.

 

Prologis, Inc. is a self-administered and self-managed REIT and is the sole general partner of Prologis, L.P. We operate Prologis, Inc. and Prologis, L.P. as one enterprise and, therefore, our discussion and analysis refers to Prologis, Inc. and its consolidated subsidiaries, including Prologis, L.P., collectively. We invest in real estate through wholly owned subsidiaries and other entities through which we co-invest with partners and investors. We maintain a significant level of ownership in these co-investment ventures, which may be consolidated or unconsolidated based on our level of control of the entity.

 

MANAGEMENT’S OVERVIEW

 

Prologis is the global leader in logistics real estate with a focus on high-barrier, high-growth markets in 19 countries. We own, manage and develop well-located, high-quality logistics facilities in the world’s busiest consumption markets. Our local teams actively manage our portfolio, which encompasses leasing and property management, capital deployment and opportunistic dispositions allowing us to recycle capital to self-fund our development activities. The majority of our properties in the United States (“U.S.”) are wholly owned, while our properties outside the U.S. are generally held in co-investment ventures, reducing our exposure to foreign currency movements.

 

Our portfolio benefits from key drivers of economic activity, including consumption, supply chain modernization, e-commerce and urbanization. In the developed markets of the U.S., Europe and Japan, key factors are the reconfiguration of supply chains (strongly influenced by e-commerce trends), and the operational efficiencies that can be realized from our modern logistics facilities. In emerging markets, such as Brazil, China and Mexico, new affluence and the rise of a new consumer class have increased the need for modern distribution networks. Our strategy is to own the highest-quality logistics property portfolio in each of our target markets. These markets are characterized by large population densities and consumption. They typically offer proximity to large labor pools and are supported by extensive transportation infrastructure (major airports, seaports and rail and highway networks). Customers turn to us because they know an efficient supply chain will make their businesses run better, and that a strategic relationship with Prologis will create a competitive advantage.

 

We operate our business on an owned and managed basis, including properties that we wholly own and properties that are owned by one of our co-investment ventures. We make decisions based on the property operations, regardless of our ownership interest, and therefore we generally evaluate operating metrics on an owned and managed basis.

 

At June 30, 2018, we owned or had investments in, on a wholly-owned basis or through co-investment ventures, properties and development projects (based on gross book value and total expected investment (“TEI”)) totaling $58.6 billion across 685 million square feet (64 million square meters) across four continents. Our investment totaled $33.6 billion and consisted of our wholly-owned properties and our pro rata (or ownership) share of the properties owned by our co-investment ventures. We leased modern logistics facilities to a diverse base of approximately 5,000 customers.

 

29

 


 

Our business comprises two operating segments: Real Estate Operations and Strategic Capital.

 

 

REAL ESTATE OPERATIONS

 

STRATEGIC CAPITAL

 

RENTAL

 

Generate revenues, net operating income and cash flows by increasing rents and maintaining high occupancy rates

 

 

DEVELOPMENT

 

Provide significant earnings growth as projects lease up and generate income

 

 

 

Access third-party capital to grow our business and earn fees, including incentive fees, through long-term co-investment ventures

 

 

Real Estate Operations

 

Rental. Rental operations comprise the largest component of our operating segments and generally contribute 90% of our consolidated revenues, earnings and funds from operations (“FFO”) (see below for more information on FFO, a non-GAAP measure). We collect rent from our customers through operating leases, including reimbursements for the majority of our property operating costs. We expect to generate long-term internal growth by increasing rents, maintaining high occupancy rates and controlling expenses. The primary driver of our rent growth will be rolling in-place leases to current market rents. We believe our active portfolio management, coupled with the skills of our property, leasing, maintenance, capital, energy and risk management teams, will allow us to maximize rental revenues across our portfolio. A significant amount of our rental revenues and net operating income (“NOI”) are generated in the U.S.

 

Development. We develop properties to meet our customers’ needs, deepen our market presence and refresh our portfolio quality. We believe we have a competitive advantage due to (i) the strategic locations of our land bank; (ii) the development expertise of our local teams; and (iii) the depth of our customer relationships. Successful development and redevelopment efforts increase both the rental revenues and the net asset value of our Real Estate Operations segment. We measure the development value we create based on the increase in estimated fair value of a stabilized development property, as compared to the costs incurred. We develop properties in the U.S. for long-term hold or contribution to our unconsolidated co-investment venture and outside the U.S. we develop primarily for contribution to our co-investment ventures. Occasionally, we develop for sale to third parties.

 

NOI from this segment is calculated directly from our financial statements as Rental Revenues, Rental Recoveries and Development Management and Other Revenues less Rental Expenses and Other Expenses.

 

Strategic Capital

 

Real estate is a capital-intensive business that requires new capital to grow. Our strategic capital business gives us access to third-party capital, both private and public, allowing us to diversify our sources of capital and providing us with a broad range of options to fund our growth, while reducing our exposure to foreign currency movements for investments outside of the U.S. We partner with some of the world’s largest institutional investors to grow our business and provide incremental revenues, with a focus on long-term and open-ended ventures. We also access alternative sources of equity through two publicly traded vehicles: Nippon Prologis REIT, Inc. in Japan and FIBRA Prologis in Mexico. We align interests with those of our partners by holding significant ownership interests in all of our unconsolidated co-investment ventures (ranging from 15% to 50%).

 

This segment produces stable, long-term cash flows and generally contributes 10% of our consolidated revenues, earnings and FFO. We generate strategic capital revenues from our unconsolidated co-investment ventures, principally through asset and property management services, of which 90% are generally earned from long-term and open-ended ventures. We earn additional revenues by providing leasing, acquisition, construction, development, financing, legal and disposition services. In certain ventures, we also have the ability to earn revenues through incentive fees (“promotes” or “promote revenues”) periodically during the life of a venture or upon liquidation. We plan to profitably grow this business by increasing our assets under management in existing or new ventures. Generally, the majority of the strategic capital revenues are generated outside the U.S. NOI in this segment is calculated directly from our financial statements as Strategic Capital Revenues less Strategic Capital Expenses and does not include property-related NOI.

 

FUTURE GROWTH

 

We believe the quality and scale of our global portfolio, the expertise of our team, the depth of our customer relationships and the strength of our balance sheet give us unique competitive advantages. Our plan to grow revenues, NOI, earnings, FFO, and cash flows is based on the following:

 

Rent Growth. We expect market rents to continue to grow over the next few years, driven by demand for the location and quality of our properties. Due to strong market rent growth over the last several years, our in-place leases have considerable upside potential. We estimate that our leases on an aggregate basis are more than 15% below current market rent on the basis of our proportionate economic ownership of each entity included in our owned and managed portfolio at June 30, 2018. Therefore, even if market rents remain flat, a lease renewal will translate into increased future rental income, on a consolidated basis or through the earnings we recognize from our unconsolidated co-investment ventures based on our ownership. This is reflected in the

30

 


 

positive rent change on rollover (comparing the net effective rent of the new lease to the prior lease for the same space) every quarter since 2013. During the first six months of 2018, our net effective rents increased 21.3% on lease rollover that represented approximately 7% of our proportionate economic ownership of each entity included in our owned and managed operating portfolio. We expect this trend to continue for several more years due to our current rents being below market, increasing market rents and the term of our leases.

 

Value Creation from Development. A successful development and redevelopment program involves maintaining control of well-located and entitled land. Based on our current estimates, our consolidated land bank, excluding land we have under an option contract, has the potential to support the development of $7.5 billion of TEI of new logistics space. TEI is the total estimated cost of development or expansion, including land, construction and leasing costs. We believe the carrying value of our land bank is below its current fair value, and we expect to realize this value going forward—primarily through development. During the first six months of 2018, we stabilized consolidated development projects with a TEI of $1.0 billion, and we estimate the value of these buildings to be 35.6% above our cost to develop (defined as estimated margin and calculated using estimated yield and capitalization rates from our underwriting models), while increasing NOI of our operating portfolio. We expect our properties under development at June 30, 2018, to be completed before October 2019.

 

SUMMARY OF 2018

 

During the six months ended June 30, 2018, operating fundamentals remained strong for our owned and managed operating portfolio and we ended the period with occupancy of 97.4%. See below for the results of our two business segments and details of the operating activity of our owned and managed portfolio.

 

In 2018, we completed the following significant activities as previously described in the Notes to the Consolidated Financial Statements:

 

 

We generated net proceeds of $1.1 billion and realized net gains of $289 million from the contribution of properties to our unconsolidated co-investment ventures in Europe and Japan and the disposition of non-strategic operating properties primarily in the U.S. Beginning January 1, 2018, we recognized the entire gain attributed to contributions of real estate assets to our unconsolidated entities under the new revenue recognition standard, as discussed in Note 2 to the Consolidated Financial Statements. We previously recognized gains on contributions to the extent of the third-party ownership in the unconsolidated entity acquiring the property.

 

We recognized promotes aggregating $68 million in Strategic Capital Revenues ($50 million net of expenses in the period), primarily from the Prologis China Logistics Venture, an unconsolidated co-investment venture, in the first quarter of 2018.

 

In January, we issued €400 million ($494 million) of senior notes bearing a floating rate of Euribor plus 0.25%, maturing in January 2020. Following the issuance, we used the proceeds to pay down our multi-currency term loan (the “2017 Term Loan”). The effective interest rate was -0.08% at June 30, 2018, primarily due to the amortization of the net premium on the debt.

 

In June, we issued $400 million of senior notes that bear an interest rate of 3.88% and mature in September 2028 and $300 million of senior notes that bear an interest rate of 4.38% and mature in September 2048. Following the issuance, we used the proceeds to pay down our global senior credit facility in the second quarter of 2018 and our Canadian term loan (the “2015 Canadian Term Loan”) in July 2018.

 

On April 29, 2018, we entered into a definitive agreement (the “Merger Agreement”) with DCT Industrial Trust Inc. (“DCT”) and DCT Industrial Operating Partnership LP (“DCT OP”), pursuant to which, subject to the terms and conditions set forth in the Merger Agreement, (i) DCT will merge with and into Prologis, with Prologis surviving the merger (the “Company Merger”) and (ii) immediately prior to the effective time of the Company Merger, DCT OP will merge with and into the OP, with the OP surviving the merger (the “Partnership Merger” and, together with the Company Merger, the “Mergers”). The estimated purchase price consideration for the Mergers will be approximately $8.2 billion in a stock-for-stock transaction, including the assumption of debt, and is based on the closing price of Prologis' common stock on July 19, 2018. We expect to close on the transaction in August 2018 after the vote of the DCT shareholders. See Note 12 to our Consolidated Financial Statements for more information on this subsequent event.

 

Throughout this discussion, we reflect amounts in U.S. dollars, our reporting currency. Included in these amounts are consolidated and unconsolidated investments denominated in foreign currencies, principally the British pound sterling, euro and Japanese yen that are impacted by fluctuations in exchange rates when translated to U.S. dollars. We mitigate our exposure to foreign currency fluctuations by investing outside the U.S. through co-investment ventures, borrowing in the functional currency of our consolidated subsidiaries, borrowing in currencies other than the U.S. dollar in the OP (designated as a nonderivative financial instrument) and utilizing derivative financial instruments.

 

RESULTS OF OPERATIONS – SIX MONTHS ENDED JUNE 30, 2018 AND 2017

 

We evaluate our business operations based on the NOI of our two operating segments: Real Estate Operations and Strategic Capital. NOI by segment is a non-GAAP financial measure that is calculated using revenues and expenses directly from our financial statements. We consider NOI by segment to be an appropriate supplemental measure of our performance because it helps management and investors understand the core operations of our real estate assets.

31

 


 

 

Below is a reconciliation of our NOI by segment to Operating Income per the Consolidated Financial Statements for the six months ended June 30 (in millions). Each segment’s NOI is reconciled to a line item in the Consolidated Financial Statements in the respective segment discussion below.

 

 

 

2018

 

 

2017

 

Real Estate Operations – NOI

 

$

822

 

 

$

852

 

Strategic Capital – NOI

 

 

130

 

 

 

154

 

General and administrative expenses

 

 

(120

)

 

 

(114

)

Depreciation and amortization expenses

 

 

(408

)

 

 

(455

)

Operating income

 

$

424

 

 

$

437

 

 

 

 

 

 

 

 

 

 

See Note 10 to the Consolidated Financial Statements for more information on our segments and a reconciliation of each business segment’s NOI to Operating Income and Earnings Before Income Taxes.

 

Real Estate Operations

 

This operating segment principally includes rental revenues, rental recoveries and rental expenses recognized from our consolidated properties. We allocate the costs of our property management functions to the Real Estate Operations segment through Rental Expenses and the Strategic Capital segment through Strategic Capital Expenses based on the square footage of the relative portfolios as compared to our total owned and managed portfolio. The operating fundamentals in the markets in which we operate continue to be strong, which has driven rents higher, kept occupancies high and has fueled development activity. This segment is impacted by our development, acquisition and disposition activities.

 

Below are the components of Real Estate Operations revenues, expenses and NOI for the six months ended June 30, derived directly from line items in the Consolidated Financial Statements (in millions):

 

 

 

2018

 

 

2017

 

Rental revenues

 

$

854

 

 

$

888

 

Rental recoveries

 

 

246

 

 

 

255

 

Development management and other revenues

 

 

6

 

 

 

14

 

Rental expenses

 

 

(276

)

 

 

(300

)

Other expenses

 

 

(8

)

 

 

(5

)

Real Estate Operations – NOI

 

$

822

 

 

$

852

 

 

 

 

 

 

 

 

 

 

The change in Real Estate Operations NOI for the six months ended June 30, 2018 from the same period in 2017, was impacted by the following items (in millions):

 

 

(1)

We experienced increased occupancy and positive rent rate growth in 2018 compared to 2017. Rent rate growth (or rent change) is a combination of the rollover of existing leases and increases in certain rental rates from contractual rent increases on existing leases. If a lease has a contractual rent increase that is not known at the time the lease commences, such as the consumer price index or a similar metric, the rent increase is not included in rent leveling and therefore, would impact the rental revenues we recognize. See below for key metrics on occupancy and rent change on rollover for the consolidated operating portfolio.

 

(2)

Contribution and disposition activity decreased NOI from this segment in 2018, compared to 2017, primarily due to the contribution of the Prologis North American Industrial Fund (“NAIF”) operating properties to Prologis Targeted U.S. Logistics Fund (“USLF”) in July 2017.

 

(3)

Other items include recoveries, noncash adjustments for the amortization of above or below market leases, non-recoverable expenses, termination fees and changes in foreign currency rates.

 

32

 


 

Below are key operating metrics of our consolidated operating portfolio. Beginning January 1, 2018, we modified certain definitions of our operating metrics to align methodologies with members of the industrial REIT group. These changes were retroactively applied for all prior periods presented.

 

 

 

(1)

Consolidated square feet of leases commenced and weighted average rent change were calculated for leases with initial terms of one year or greater during each quarter in 2017 and 2018.

 

(2)

Calculated using the trailing twelve months immediately prior to the period ended.  

 

Development Start Activity

 

The following table summarizes consolidated development starts for the six months ended June 30 (dollars and square feet in millions):

  

 

 

2018

 

 

2017

 

Number of new development projects during the period

 

 

32

 

 

 

28

 

Square feet

 

 

11

 

 

 

12

 

TEI

 

$

1,150

 

 

$

1,202

 

Percentage of build-to-suits based on TEI

 

 

38.0

%

 

 

46.7

%

 

Development Stabilization Activity

 

A developed property moves into the operating portfolio when it meets our definition of stabilization. A property is considered stabilized when a development project has been completed for one year or is 90% occupied, whichever occurs first. The following table summarizes consolidated development stabilization activity for the six months ended June 30 (dollars and square feet in millions):

 

 

 

2018

 

 

2017

 

Number of development projects stabilized during the period

 

 

31

 

 

 

37

 

Square feet

 

 

13

 

 

 

12

 

TEI

 

$

1,022

 

 

$

913

 

Weighted average expected yield on TEI (1)

 

 

6.6

%

 

 

6.5

%

Estimated value at completion

 

$

1,386

 

 

$

1,119

 

Estimated weighted average margin

 

 

35.6

%

 

 

22.5

%

 

(1)

We calculate the weighted average expected yield on TEI as estimated NOI assuming stabilized occupancy divided by TEI.

33

 


 

 

Capital Expenditures

 

We capitalize costs incurred in renovating and improving our operating properties as part of the investment basis. The following graph summarizes our capital expenditures on operating properties within our consolidated operating portfolio:

 

 

Strategic Capital

 

This operating segment includes revenues from asset and property management and other fees for services performed, as well as promotes earned, from the unconsolidated co-investment ventures. Revenues associated with the Strategic Capital segment fluctuate because of the size of co-investment ventures under management, the transactional activity in the ventures and the timing of promotes. These revenues are reduced generally by the direct costs associated with the asset management and property-level management expenses for the properties owned by these ventures. We allocate the costs of our property management functions to the Strategic Capital segment through Strategic Capital Expenses and to the Real Estate Operations segment through Rental Expenses based on the square footage of the relative portfolios as compared to our total owned and managed portfolio.

 

Below are the components of Strategic Capital revenues, expenses and NOI for the six months ended June 30, derived directly from the line items in the Consolidated Financial Statements (in millions):

 

 

2018

 

 

2017

 

Strategic capital revenues

 

$

209

 

 

$

238

 

Strategic capital expenses

 

 

(79

)

 

 

(84

)

Strategic Capital – NOI

 

$

130

 

 

$

154

 

 

Below is additional detail of our Strategic Capital revenues, expenses and NOI for the six months ended June 30 (in millions):

 

 

 

U.S. (1)

 

 

Other Americas

 

 

Europe

 

 

Asia

 

 

Total

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Strategic capital revenues ($)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recurring fees (2)

 

 

31

 

 

 

18

 

 

 

12

 

 

 

11

 

 

 

48

 

 

 

42

 

 

 

23

 

 

 

18

 

 

 

114

 

 

 

89

 

Transactional fees (3)

 

 

3

 

 

 

5

 

 

 

1

 

 

 

1

 

 

 

11

 

 

 

7

 

 

 

12

 

 

 

9

 

 

 

27

 

 

 

22

 

Promote revenues (4)

 

 

-

 

 

 

120

 

 

 

5

 

 

 

4

 

 

 

9

 

 

 

3

 

 

 

54

 

 

 

-

 

 

 

68

 

 

 

127

 

Total strategic capital revenues ($)

 

 

34

 

 

 

143

 

 

 

18

 

 

 

16

 

 

 

68

 

 

 

52

 

 

 

89

 

 

 

27

 

 

 

209

 

 

 

238

 

Strategic capital expenses ($)

 

 

(32

)

 

 

(41

)

 

 

(6

)

 

 

(5

)

 

 

(21

)

 

 

(20

)

 

 

(20

)

 

 

(18

)

 

 

(79

)

 

 

(84

)

Strategic Capital – NOI ($)

 

 

2

 

 

 

102

 

 

 

12

 

 

 

11

 

 

 

47

 

 

 

32

 

 

 

69

 

 

 

9

 

 

 

130

 

 

 

154

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

This includes compensation and personnel costs for employees who were located in the U.S. but also support other regions.

 

(2)

Recurring fees include asset and property management fees.

 

(3)

Transactional fees include leasing commission, acquisition and other fees.

 

(4)

The promote revenues represent the third-party partners’ share based on the venture’s cumulative returns to investors over a certain time-period, generally three years. Approximately 40% of promote revenues are paid to our employees as a combination of cash and stock awards pursuant to the terms of the Prologis Promote Plan and expensed through Strategic Capital Expenses, as vested.

 

34

 


 

The following real estate investments were held through our unconsolidated co-investment ventures based on historical cost (dollars and square feet in millions):  

 

 

U.S.

 

 

Other Americas

 

 

Europe

 

 

Asia

 

 

Total

 

 

Jun 30, 2018

 

 

Dec 31, 2017

 

 

Jun 30, 2018

 

 

Dec 31, 2017

 

 

Jun 30, 2018

 

 

Dec 31, 2017

 

 

Jun 30, 2018

 

 

Dec 31, 2017

 

 

Jun 30, 2018

 

 

Dec 31, 2017

 

Ventures

 

1

 

 

 

1

 

 

 

2

 

 

 

2

 

 

 

3

 

 

 

3

 

 

 

2

 

 

 

2

 

 

 

8

 

 

 

8

 

Operating properties

 

554

 

 

 

552

 

 

 

205

 

 

 

205

 

 

 

653

 

 

 

707

 

 

 

114

 

 

 

95

 

 

 

1,526

 

 

 

1,559

 

Square feet

 

88

 

 

 

88

 

 

 

37

 

 

 

37

 

 

 

154

 

 

 

166

 

 

 

48

 

 

 

41

 

 

 

327

 

 

 

332

 

Total assets ($)

 

7,188

 

 

 

7,062

 

 

 

2,073

 

 

 

2,118

 

 

 

13,176

 

 

 

13,586

 

 

 

6,694

 

 

 

6,133

 

 

 

29,131

 

 

 

28,899

 

 

See Note 3 to the Consolidated Financial Statements for additional information on our unconsolidated co-investment ventures.

 

G&A Expenses

 

G&A expenses increased for the six months ended June 30, 2018, from the same period in 2017, principally due to inflationary increases and higher compensation expenses based on the Company’s performance.

 

We capitalize certain costs directly related to our development and leasing activities. Capitalized G&A expenses included salaries and related costs, as well as other G&A costs. The following table summarizes capitalized G&A amounts for the six months ended June 30 (dollars in millions):

 

 

 

2018

 

 

2017

 

Building and land development activities

 

$

31

 

 

$

31

 

Leasing activities (1)

 

 

11

 

 

 

12

 

Operating building improvements and other

 

 

8

 

 

 

8

 

Total capitalized G&A expenses

 

$

50

 

 

$

51

 

Capitalized salaries and related costs as a percent of total salaries and related costs

 

 

23.7

%

 

 

25.5

%

 

(1)

Due to a new accounting standard effective January 1, 2019, we expect a change in capitalized leasing activities. See Note 1 to the Consolidated Financial Statements for additional information.

 

Depreciation and Amortization Expenses

 

The change in depreciation and amortization expenses for the six months ended June 30, 2018 from the same period in 2017, was impacted by the following items (in millions):

 

 

(1)

The decrease in depreciation and amortization expense in 2018 from 2017 was primarily due to the contribution of the NAIF operating properties to USLF in July 2017.

 

Our Owned and Managed Operating Portfolio

 

We manage our business and review our operating fundamentals on an owned and managed basis, which includes properties wholly owned by us or owned by one of our co-investment ventures. We believe reviewing these fundamentals this way allows management to understand the entire impact to the financial statements, as it will affect both the Real Estate Operations and Strategic Capital segments, as well as the net earnings we recognize from our unconsolidated co-investment ventures based on our ownership share. We do not control the unconsolidated co-investment ventures for purposes of GAAP and the presentation of the ventures’ operating information does not represent a legal claim to such items.

 

35

 


 

Our owned and managed operating portfolio does not include our development portfolio, value-added properties or properties held for sale to third parties. Value-added properties are defined as properties that are expected to be repurposed or redeveloped to a higher and better use and recently acquired properties that present opportunities to create greater value.

 

See below for information on our owned and managed operating portfolio (square feet in millions):

 

 

June 30, 2018

 

 

December 31, 2017

 

 

Number of Properties

 

 

Square

Feet

 

 

Percentage Occupied

 

 

Number of Properties

 

 

Square

Feet

 

 

Percentage Occupied

 

Consolidated

 

1,490

 

 

 

291

 

 

 

97.5

%

 

 

1,532

 

 

 

297

 

 

 

97.3

%

Unconsolidated

 

1,523

 

 

 

326

 

 

 

97.3

%

 

 

1,557

 

 

 

331

 

 

 

97.1

%

Total

 

3,013

 

 

 

617

 

 

 

97.4

%

 

 

3,089

 

 

 

628

 

 

 

97.2

%

 

Below are the key operating metrics summarizing the leasing activity of our owned and managed operating portfolio. Beginning January 1, 2018, we modified certain definitions of our operating metrics to align methodologies with members of the industrial REIT group. These changes were retroactively applied for all prior periods presented.

 

 

 

(1)

Square feet of leases commenced and weighted average rent change were calculated for leases with initial terms of one year or greater during each quarter in 2017 and 2018. We retained more than 70% of our customers, based on the total square feet of leases commenced during these periods.

 

(2)

Calculated using the trailing twelve months immediately prior to the period ended.

 

(3)

Turnover costs are defined as leasing commissions and tenant improvements and represent the obligations incurred in connection with the lease commencement for leases greater than one year.

 

Same Store Analysis

 

Our same store metrics are non-GAAP financial measures, which are commonly used in the real estate industry and expected from the financial community, on both a net-effective and cash basis. We evaluate the performance of the operating properties we own and manage using a “same store” analysis because the population of properties in this analysis is consistent from period to period, which allows us to analyze our ongoing business operations.

 

We define our same store population for the three months ended June 30, 2018 as our owned and managed properties that were in the operating portfolio at January 1, 2017 and owned throughout the end of the same three-month period in both 2018 and 2017. The same store population excludes non-industrial real estate properties and properties held for sale, along with development properties that were not stabilized at the beginning of the period (January 1, 2017) and properties acquired or disposed of to third parties during the period. Beginning January 1, 2018, we modified our definition of same store to align methodologies with members of the industrial REIT group. This did not materially change our historical amounts reported. To derive an appropriate measure of period-to-period operating performance, we remove the effects of foreign currency exchange rate movements by using the reported period end exchange rate to translate from local currency into the U.S. dollar, for both periods. We believe the factors that affect rental revenues, rental recoveries, rental expenses and NOI in the same store portfolio are generally the same as for our consolidated portfolio.

 

As our same store measures are non-GAAP financial measures, they have certain limitations as analytical tools and may vary among real estate companies. As a result, we provide a reconciliation of rental revenues, rental recoveries and rental expenses from our Consolidated Financial Statements prepared in accordance with GAAP to same store property NOI with explanations of how these metrics are calculated. In addition, we further remove certain noncash items (straight-line rent adjustments and amortization of lease intangibles) included in the financial statements prepared in accordance with GAAP to reflect a cash same store number. To clearly label these metrics, they are categorized as same store portfolio NOI – net effective and same store portfolio NOI – cash.

 

36

 


 

The following is a reconciliation of our consolidated rental revenues, rental recoveries, rental expenses and property NOI, as included in the Consolidated Statements of Income, to the respective amounts in our same store portfolio analysis for the three months ended June 30 (dollars in millions):

 

 

 

 

 

 

 

 

 

 

 

Percentage

 

 

 

2018

 

 

2017

 

 

Change

 

Rental revenues

 

 

 

 

 

 

 

 

 

 

 

 

Rental revenues per the Consolidated Statements of Income

 

$

427

 

 

$

448

 

 

 

 

 

Rental recoveries per the Consolidated Statements of Income

 

 

118

 

 

 

128

 

 

 

 

 

Total rental revenues (1)

 

 

545

 

 

 

576

 

 

 

 

 

Adjustments to derive same store results:

 

 

 

 

 

 

 

 

 

 

 

 

Properties not included in the same store portfolio and other adjustments (1) (2)

 

 

(59

)

 

 

(67

)

 

 

 

 

Unconsolidated co-investment ventures (1)

 

 

543

 

 

 

479

 

 

 

 

 

Same store portfolio – rental revenues – net effective

 

$

1,029

 

 

$

988

 

 

 

4.1

%

Straight-line rent adjustments

 

 

(8

)

 

 

(18

)

 

 

 

 

Fair value lease adjustments

 

 

-

 

 

 

(1

)

 

 

 

 

Same store portfolio – rental revenues – cash

 

$

1,021

 

 

$

969

 

 

 

5.3

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental expenses

 

 

 

 

 

 

 

 

 

 

 

 

Rental expenses per the Consolidated Statements of Income (1)

 

$

133

 

 

$

148

 

 

 

 

 

Adjustments to derive same store results:

 

 

 

 

 

 

 

 

 

 

 

 

Properties not included in the same store portfolio and other adjustments (1) (3)

 

 

(4

)

 

 

(10

)

 

 

 

 

Unconsolidated co-investment ventures (1)

 

 

116

 

 

 

101

 

 

 

 

 

Same store portfolio – rental expenses – net effective and cash

 

$

245

 

 

$

239

 

 

 

2.4

%

 

 

 

 

 

 

 

 

 

 

 

 

 

NOI

 

 

 

 

 

 

 

 

 

 

 

 

Property NOI (calculated as rental revenues and rental recoveries less rental expenses

     per the Consolidated Statements of Income) (1)

 

$

412

 

 

$

428

 

 

 

 

 

Adjustments to derive same store results:

 

 

 

 

 

 

 

 

 

 

 

 

Properties not included in the same store portfolio and other adjustments (1) (2) (3)

 

 

(55

)

 

 

(57

)

 

 

 

 

Unconsolidated co-investment ventures (1)

 

 

427

 

 

 

378

 

 

 

 

 

Same store portfolio – NOI – net effective

 

$

784

 

 

$

749

 

 

 

4.7

%

Same store portfolio – NOI – cash

 

$

776

 

 

$

730

 

 

 

6.3

%

 

 (1)

We include 100% of the same store NOI from the properties in our same store portfolio. During the periods presented, certain properties owned by us were contributed to a co-investment venture and are included in the same store portfolio. Neither our consolidated results nor those of the co-investment ventures, when viewed individually, would be comparable on a same store basis because of the changes in composition of the respective portfolios from period to period (e.g. the results of a contributed property are included in our consolidated results through the contribution date and in the results of the unconsolidated entities subsequent to the contribution date). As a result, only line items labeled “same store portfolio” are comparable period over period.

 

(2)

We exclude non-industrial real estate properties and properties held for sale, along with development properties that were not stabilized at the beginning of the reporting period and properties acquired or disposed of to third parties during the period. We also exclude net termination and renegotiation fees to allow us to evaluate the growth or decline in each property’s rental revenues without regard to one-time items that are not indicative of the property’s recurring operating performance. Net termination and renegotiation fees represent the gross fee negotiated to allow a customer to terminate or renegotiate their lease, offset by the write-off of the asset recorded due to the adjustment to straight-line rents over the lease term.

 

(3)

Rental expenses include the direct operating expenses of the property such as property taxes, insurance and utilities. In addition, we include an allocation of the property management expenses for our consolidated properties based on the property management services provided to each property (generally, based on a percentage of revenues). On consolidation, these amounts are eliminated and the actual costs of providing property management services are recognized as part of our consolidated rental expenses.

 

Other Components of Income (Expense)

 

Earnings from Unconsolidated Entities, Net

 

We recognized net earnings from unconsolidated entities, which are accounted for using the equity method, of $125 million and $117 million for the six months ended June 30, 2018, and 2017, respectively. The earnings we recognize can be impacted by: (i) variances in NOI and other revenues and expenses of each venture; (ii) the size and occupancy rate of the portfolio of properties owned by each venture; (iii) gains or losses from the dispositions of properties and extinguishment of debt; (iv) our ownership interest in each venture; and (v) fluctuations in foreign currency exchange rates used to translate our share of net earnings to U.S. dollars.

37

 


 

 

See the discussion of our co-investment ventures above in the Strategic Capital segment discussion and in Note 3 to the Consolidated Financial Statements for further breakdown of our share of net earnings recognized.

 

Interest Expense

 

The following table details our net interest expense for the six months ended June 30 (dollars in millions):

 

 

 

2018

 

 

2017

 

Gross interest expense

 

$

120

 

 

$

181

 

Amortization of discounts (premiums), net of debt issuance costs

 

 

6

 

 

 

(5

)

Capitalized amounts

 

 

(23

)

 

 

(28

)

Net interest expense

 

$

103

 

 

$

148

 

Weighted average effective interest rate during the period

 

 

2.9

%

 

 

3.2

%

 

Our overall debt decreased by $1.7 billion from June 30, 2017 to June 30, 2018, primarily from USLF assuming secured debt in conjunction with our contribution of real estate properties in July 2017. Gross interest expense decreased for the six months ended 2018, from the same period in 2017, principally due to decreased secured debt as a result of the USLF contribution, lower interest rates due to the change in the composition of our senior notes and term loans and the settlement of the interest rate swaps on the 2015 Canadian Term Loan.

 

See Note 5 to the Consolidated Financial Statements and the Liquidity and Capital Resources section below, for further discussion of our debt and borrowing costs.

 

Gains on Dispositions of Investments in Real Estate, Net

 

During the six months ended June 30, 2018, and 2017, we recognized net gains on dispositions of investments in real estate of $289 million and $180 million, respectively. We contributed properties, generally that we developed, to our unconsolidated co-investment ventures in Europe in 2018 and 2017 and in Japan in 2018. We also sold properties to third parties, primarily from our operating portfolio in the U.S. During the six months ended June 30, 2017, we sold our investment in Europe Logistics Venture 1 (“ELV”) to our venture partner and contributed properties to our newly formed co-investment venture Prologis UK Logistics Venture. We utilized the proceeds from both contributions and dispositions to fund our capital investments in both periods.

 

Beginning January 1, 2018, we recognized the entire gain attributed to contributions of real estate properties to unconsolidated entities under the new revenue recognition standard, as discussed in Note 1 to the Consolidated Financial Statements. We previously recognized a gain in connection with contributions to the extent of the third-party ownership in the unconsolidated entity acquiring the property. For deferred gains from partial sales recorded prior to the adoption, we will continue to recognize these gains over the lives of the underlying real estate properties or at the time of disposition to a third party.

 

See Notes 2 and 3 to the Consolidated Financial Statements for further information on the gains we recognized.

 

Foreign Currency and Derivative Gains (Losses), Net

 

The following table details our foreign currency and derivative losses, net for the six months ended June 30 (in millions):

 

 

 

2018

 

 

2017

 

Realized foreign currency and derivative gains (losses):

 

 

 

 

 

 

 

 

Gains (losses) on the settlement of unhedged derivative transactions

 

$

(8

)

 

$

9

 

Losses on the settlement of transactions with third parties

 

 

(1

)

 

 

(1

)

Total realized foreign currency and derivative gains (losses)

 

 

(9

)

 

 

8

 

 

 

 

 

 

 

 

 

 

Unrealized foreign currency and derivative gains (losses):

 

 

 

 

 

 

 

 

Gains (losses) on the change in fair value of unhedged derivative and nonderivative transactions

 

 

58

 

 

 

(44

)

Gains (losses) on remeasurement of certain assets and liabilities (1)

 

 

(5

)

 

 

9

 

Total unrealized foreign currency and derivative gains (losses)

 

 

53

 

 

 

(35

)

Total foreign currency and derivative gains (losses), net

 

$

44

 

 

$

(27

)

 

 

 

 

 

 

 

 

 

(1)

These gains or losses were primarily related to the remeasurement of assets and liabilities that are denominated in currencies other than the functional currency of the entity, such as short-term intercompany loans between the U.S. parent and certain foreign consolidated subsidiaries, debt and tax receivables and payables.

 

See Note 9 to the Consolidated Financial Statements for more information about our derivative transactions.

38

 


 

 

Gains (Losses) on Early Extinguishment of Debt, Net

 

During the second quarter of 2017, we redeemed $618 million of senior notes and repaid $302 million of secured mortgage debt prior to maturity, which resulted in a loss of $31 million.

 

Income Tax Expense

 

We recognize income tax expense related to our taxable REIT subsidiaries and the local, state and foreign jurisdictions in which we operate. Our current income tax expense fluctuates from period to period based primarily on the timing of our taxable income. Deferred income tax expense (benefit) is generally a function of the period’s temporary differences and the utilization of net operating losses generated in prior years that had been previously recognized as deferred income tax assets in taxable subsidiaries operating in the U.S. or in foreign jurisdictions.

 

The following table summarizes our income tax expense for the six months ended June 30 (in millions):

 

 

 

2018

 

 

2017

 

Current income tax expense (benefit):

 

 

 

 

 

 

 

 

Income tax expense

 

$

21

 

 

$

22

 

Income tax expense on dispositions

 

 

10

 

 

 

1

 

Income tax expense (benefit) related to acquired tax assets

 

 

1

 

 

 

(1

)

Total current income tax expense

 

 

32

 

 

 

22

 

 

 

 

 

 

 

 

 

 

Deferred income tax expense (benefit):

 

 

 

 

 

 

 

 

Income tax expense

 

 

-

 

 

 

1

 

Income tax expense (benefit) related to acquired tax assets

 

 

(1

)

 

 

1

 

Total deferred income tax expense (benefit)

 

 

(1

)

 

 

2

 

Total income tax expense

 

$

31

 

 

$

24

 

 

 

 

 

 

 

 

 

 

The Tax Cuts and Jobs Act, enacted on December 22, 2017, reduced the corporate federal tax rate in the U.S. to 21.0%, effective upon enactment. As such deferred tax assets and liabilities were remeasured using the lower corporate federal tax rate beginning December 31, 2017. While we do not expect other material impacts, the new rules are complex and lack developed administrative guidance; thus, the impact of certain aspects of these provisions on us is currently unclear.

 

Net Earnings Attributable to Noncontrolling Interests

 

This amount represents the third-party investors’ share of the earnings generated in consolidated entities in which we do not own 100% of the equity, reduced by the third-party share of fees or promotes payable to us and earned during the period. We had net earnings attributable to noncontrolling interests of $53 million and $35 million for the six months ended June 30, 2018 and 2017, respectively. Included in these amounts were $21 million and $13 million for the six months ended June 30, 2018 and 2017, respectively, of net earnings attributable to the common limited partnership unitholders of Prologis, L.P.

 

See Note 6 to the Consolidated Financial Statements for further information on our noncontrolling interests.

 

Other Comprehensive Income (Loss)

 

See Note 9 to the Consolidated Financial Statements for more information about our derivative transactions and other comprehensive income (loss).

 

Other Matters

 

The U.S. government has created the potential for significant changes in trade policies, including tariffs and government regulations affecting trade between the U.S. and other countries where we operate. The foreign trade policies, tariffs and other impositions on imported goods by the U.S. or other countries are beyond our control. We believe that our customers are moving forward with their growth plans and we do not expect these tariffs will materially change the consumption habits that drive our business globally. However, increased sanctions are generally negative for all businesses in the U.S. and abroad, including our business, and could adversely affect economic growth generally and our financial performance.

 

39

 


 

RESULTS OF OPERATIONS – THREE MONTHS ENDED JUNE 30, 2018 AND 2017

 

Except as separately discussed above, the changes in comprehensive income attributable to common stockholders and its components for the three months ended June 30, 2018, as compared to the three months ended June 30, 2017, are similar to the changes for the six-month periods ended on the same dates.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Overview

 

We consider our ability to generate cash from operating activities, distributions from our co-investment ventures, contributions and dispositions of properties and available financing sources to be adequate to meet our anticipated future development, acquisition, operating, debt service, dividend and distribution requirements.

 

Near-Term Principal Cash Sources and Uses

 

In addition to dividends and distributions, we expect our primary cash needs will consist of the following:

 

completion of the development and leasing of the properties in our consolidated development portfolio (at June 30, 2018, 83 properties in our development portfolio were 51.8% leased with a current investment of $1.7 billion and a TEI of $2.9 billion when completed and leased, leaving $1.2 billion of estimated additional required investment);

 

development of new properties for long-term investment or contributions to unconsolidated co-investment ventures, including the acquisition of land in certain markets;

 

capital expenditures and leasing costs on properties in our operating portfolio;

 

repayment of debt and scheduled principal payments of $109 million in 2018;

 

additional investments in current unconsolidated entities or new investments in future unconsolidated entities;

 

acquisition of operating properties or portfolios of operating properties (depending on market and other conditions) for direct, long-term investment in our consolidated portfolio (this might include acquisitions from our co-investment ventures);

 

repurchase of our outstanding debt or equity securities (depending on prevailing market conditions, our liquidity, contractual restrictions and other factors) through cash purchases, open-market purchases, privately negotiated transactions, tender offers or otherwise; and

 

as discussed earlier, we expect to close on the acquisition of DCT in August principally through the issuance of common stock and the assumption of debt. We expect to repay certain of this debt with available cash, borrowings under our credit facilities and proceeds from the issuance of debt.

 

We expect to fund our cash needs principally from the following sources (subject to market conditions):

 

available unrestricted cash balances ($528 million at June 30, 2018);

 

net cash flow from property operations;

 

fees earned for services performed on behalf of the co-investment ventures, including promotes;

 

distributions received from the co-investment ventures;

 

proceeds from the disposition of properties, land parcels or other investments to third parties;

 

proceeds from the contributions of properties to current or future co-investment ventures;

 

proceeds from the sale of a portion of our investments in co-investment ventures to achieve long-term ownership targets;

 

borrowing capacity under our current credit facility arrangements, other facilities or borrowing arrangements ($3.4 billion available at June 30, 2018); and

 

proceeds from the issuance of debt.

 

We may also generate proceeds from the issuance of equity securities, subject to market conditions.

40

 


 

 

Debt

 

The following table summarizes information about our consolidated debt by currency (dollars in millions):

 

 

 

June 30, 2018

 

 

December 31, 2017

 

 

 

Weighted Average

Interest Rate

 

 

Amount Outstanding

 

 

Weighted Average

Interest Rate

 

 

Amount Outstanding

 

British pound sterling

 

 

2.3

%

 

$

654

 

 

 

2.3

%

 

$

672

 

Canadian dollar

 

 

3.4

%

 

 

274

 

 

 

3.3

%

 

 

451

 

Euro

 

 

2.3

%

 

 

4,185

 

 

 

2.6

%

 

 

3,840

 

Japanese yen (1)

 

 

1.0

%

 

 

1,276

 

 

 

0.9

%

 

 

1,306

 

U.S. dollar

 

 

4.6

%

 

 

3,038

 

 

 

4.1

%

 

 

3,144

 

Total debt (2)

 

 

2.9

%

 

$

9,427

 

 

 

2.9

%

 

$

9,413

 

 

(1)

The majority of our Japanese yen denominated debt is variable rate debt.

 

(2)

The weighted average maturity for total debt outstanding at June 30, 2018 and December 31, 2017 was 73 months and 67 months, respectively.

 

During the six months ended June 30, 2018, we had the following significant consolidated debt activity, which resulted in extending our debt maturities (principal in millions):

 

 

 

 

Principal

 

 

 

 

 

 

 

 

 

 

Borrowing Currency

 

Borrowing Currency

 

USD

 

 

Stated Interest Rate

 

 

Fixed/

Variable

 

Maturity

Repurchase and payments of debt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2015 Canadian Term Loan (1)

CAD

 

$

201

 

$

159

 

 

CDOR + 1.50%

 

 

Variable

 

February 2023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of debt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Senior notes

EUR

 

400

 

$

494

 

 

Euribor + 0.25%

 

 

Variable

 

January 2020

Senior notes

USD

 

$

400

 

$

400

 

 

3.88%

 

 

Fixed

 

September 2028

Senior notes

USD

 

$

300

 

$

300

 

 

4.38%

 

 

Fixed

 

September 2048

 

(1)This activity included a partial pay down on the debt outstanding.

 

At June 30, 2018, we had credit facilities with an aggregate borrowing capacity of $3.5 billion, of which $3.4 billion was available for borrowing.

 

Our credit ratings at June 30, 2018, were A3 from Moody’s and A- from S&P, both with stable outlook. These ratings allow us to borrow at an advantageous rate. Adverse changes in our credit ratings could negatively impact our business and, in particular, our refinancing and other capital market activities, our ability to manage debt maturities, our future growth and our development and acquisition activity. A securities rating is not a recommendation to buy, sell or hold securities and is subject to revision or withdrawal at any time by the rating organization.

 

At June 30, 2018, we were in compliance with all of our financial debt covenants. These covenants include customary financial covenants for total debt, encumbered debt and fixed charge coverage ratios.

 

See Note 5 to the Consolidated Financial Statements for further discussion on our debt.

 

Equity Commitments Related to Certain Co-Investment Ventures

 

Certain co-investment ventures have equity commitments from us and our venture partners. Our venture partners fulfill their equity commitment with cash. We may fulfill our equity commitment through contributions of properties or cash. See the Cash Flow Summary below for more information about our investment activity in our co-investment ventures. For more information on equity commitments for our unconsolidated co-investment ventures, see Note 3 to the Consolidated Financial Statements.

 

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Cash Flow Summary

 

The following table summarizes our cash flow activity for the six months ended June 30 (in millions):

 

 

 

2018

 

 

2017

 

Net cash provided by operating activities

 

$

773

 

 

$

745

 

Net cash used in investing activities

 

$

(187

)

 

$

(171

)

Net cash used in financing activities

 

$

(500

)

 

$

(1,126

)

 

Operating Activities

 

Cash provided by operating activities, exclusive of changes in receivables and payables, is impacted by the following significant activity during the six months ended June 30, 2018 and 2017:

 

Real estate operations. We receive the majority of our operating cash through the net revenues of our Real Estate Operations segment. See the Results of Operations section above for further explanation of our Real Estate Operations segment. The revenues from this segment include noncash adjustments for straight-lined rents and amortization of above and below market leases of $26 million and $49 million for 2018 and 2017, respectively.

 

Strategic capital. We also generate operating cash through our Strategic Capital segment by providing management services to our unconsolidated co-investment ventures. See the Strategic Capital Results of Operations section above for the key drivers of our strategic capital revenues and expenses. Included in Strategic Capital Revenues is the third-party investors’ share of the total promote revenue, which is recognized in operating activities in the period it is received.

 

G&A expenses. We incurred $120 million and $114 million of G&A costs in 2018 and 2017, respectively.

 

Equity-based compensation awards. We record equity-based compensation expenses in Rental Expenses in the Real Estate Operations segment, Strategic Capital Expenses in the Strategic Capital segment and G&A expenses. The total amounts expensed were $39 million and $38 million in 2018 and 2017, respectively.

 

Operating distributions from unconsolidated entities. We received $176 million and $141 million of distributions from our unconsolidated entities in 2018 and 2017, respectively. Certain co-investment ventures distribute the total promote (third-party investors’ and our share) and our share is recorded to Investment In and Advances to Unconsolidated Entities, and is recognized in operating activities in the period it is received.

 

Cash paid for interest and income taxes. As disclosed in Note 11 to the Consolidated Financial Statements, we paid combined amounts for interest and income taxes of $187 million and $212 million in 2018 and 2017, respectively.

 

Investing Activities

 

Cash provided by investing activities is primarily driven by proceeds from contributions and dispositions of real estate properties. Cash used in investing activities is principally driven by our investments in real estate development, acquisitions and capital expenditures. See Note 2 to the Consolidated Financial Statements for further information on these real estate activities. The following significant transactions impacted our cash used in investing activities during the six months ended June 30, 2018 and 2017:

 

Real estate development. We invested $789 million and $715 million in 2018 and 2017, respectively, in real estate development and leasing costs for first generation space. We had 63 properties under development and 20 properties that were completed but not stabilized at June 30, 2018.

 

Real estate acquisitions. We acquired total real estate of $289 million, which included 808 acres of land and 3 operating properties in 2018. We acquired total real estate of $202 million, which included 524 acres of land and 2 operating properties in 2017.

 

Investments in and advances to. We invested cash in our unconsolidated co-investment ventures and other ventures, which represents our proportionate share of $83 million and $145 million in 2018 and 2017, respectively. The ventures use the funds for the acquisition of operating properties, development and repayment of debt. See Note 3 to the Consolidated Financial Statements for more detail on our unconsolidated co-investment ventures.

 

Return of investment. We received distributions from unconsolidated co-investment ventures and other ventures as a return of investment of $135 million and $134 million in 2018 and 2017, respectively. Included in these amounts for 2018 and 2017 was $115 million and $49 million from property dispositions within our unconsolidated co-investment ventures. In 2017, we also included $84 million from the disposition of our investment in ELV.

 

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Proceeds from repayment of notes receivable backed by real estate. We received $34 million and $32 million in 2018 and 2017, respectively, for the payment of notes receivable received in connection with dispositions of real estate to third parties.

 

Financing Activities

 

Cash provided by financing activities is primarily driven by proceeds from the issuance of debt. Cash used in financing activities is principally driven by dividends paid on common and preferred units, noncontrolling interest distributions and payments of debt and credit facilities. The following significant transactions impacted our cash used in financing activities during the six months ended June 30, 2018 and 2017:

 

Settlement of noncontrolling interests. We paid net cash of $710 million to acquire our partner’s interest in NAIF and $80 million to acquire our partner’s interest in the Prologis Brazil Logistics Partners Fund I, L.P. in 2017.

 

Other debt activity. Our repurchase of and payments on debt and proceeds from issuance of debt consisted of the following activity for the six months ended June 30 (in millions):

 

 

 

2018

 

 

2017

 

 

Repurchase of and payments on debt (including extinguishment costs)

 

 

 

 

 

 

 

 

 

Regularly scheduled debt principal payments and payments at maturity

 

$

4

 

 

$

9

 

 

Senior notes

 

 

-

 

 

 

652

 

 

Term loans

 

 

1,159

 

 

 

1,040

 

 

Secured mortgages

 

 

89

 

 

 

302

 

 

Total

 

$

1,252

 

 

$

2,003

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from issuance of debt

 

 

 

 

 

 

 

 

 

Senior notes

 

$

1,190

 

 

$

645

 

 

Term loans

 

 

500

 

 

 

1,449

 

 

Secured mortgages

 

 

32

 

 

 

40

 

 

Total

 

$

1,722

 

 

$

2,134

 

 

Off-Balance Sheet Arrangements

 

Unconsolidated Co-Investment Venture Debt

 

We had investments in and advances to unconsolidated co-investment ventures, at June 30, 2018, of $5.2 billion. These ventures had total third-party debt of $8.1 billion at June 30, 2018. The weighted average loan-to-value ratio for all unconsolidated co-investment ventures was 27.8% at June 30, 2018. Loan-to-value, a non-GAAP measure, was calculated as the percentage of total third-party debt to the gross book value of real estate for each venture and weighted based on the cumulative gross book value of all unconsolidated co-investment ventures.

 

At June 30, 2018, we did not guarantee any third-party debt of the unconsolidated co-investment ventures.

 

Contractual Obligations

 

Dividend and Distribution Requirements

 

Our dividend policy on our common stock is to distribute a percentage of our cash flow to ensure that we will meet the dividend requirements of the Internal Revenue Code, relative to maintaining our REIT status, while still allowing us to retain cash to fund capital improvements and other investment activities.

 

Under the Internal Revenue Code, REITs may be subject to certain federal income and excise taxes on our undistributed taxable income. We do not expect the Tax Cuts and Jobs Act, enacted on December 22, 2017, to modify our current distribution policy.

 

We paid a cash dividend of $0.48 per common share in the first two quarters of 2018. Our future common stock dividends, if and as declared, may vary and will be determined by the board of directors (“Board”) upon the circumstances prevailing at the time, including our financial condition, operating results and REIT distribution requirements, and may be adjusted at the discretion of the Board during the year.

 

We make distributions on the common limited partnership units outstanding at the same per unit amount as our common stock dividend. The Class A Units in the OP are entitled to a quarterly distribution equal to $0.64665 per unit so long as the common units receive a quarterly distribution of at least $0.40 per unit. We paid a quarterly distribution of $0.64665 per Class A Unit in the first two quarters of 2018.

 

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At June 30, 2018, we had one series of preferred stock outstanding, the series Q. The annual dividend rate is 8.54% per share and dividends are payable quarterly in arrears.

 

Pursuant to the terms of our preferred stock, we are restricted from declaring or paying any dividend with respect to our common stock unless and until all cumulative dividends with respect to the preferred stock have been paid and sufficient funds have been set aside for dividends that have been declared for the relevant dividend period with respect to the preferred stock.

 

Other Commitments

 

On a continuing basis, we are engaged in various stages of negotiations for the acquisition or disposition of individual properties or portfolios of properties.

 

NEW ACCOUNTING PRONOUNCEMENTS

 

See Note 1 to the Consolidated Financial Statements.

 

FUNDS FROM OPERATIONS ATTRIBUTABLE TO COMMON STOCKHOLDERS/UNITHOLDERS (“FFO”)

 

FFO is a non-GAAP financial measure that is commonly used in the real estate industry. The most directly comparable GAAP measure to FFO is net earnings.

 

The National Association of Real Estate Investment Trusts (“NAREIT”) defines FFO as earnings computed under GAAP to exclude historical cost depreciation and gains and losses from the sales, along with impairment charges, of previously depreciated properties. We also exclude the gains on revaluation of equity investments upon acquisition of a controlling interest and the gain recognized from a partial sale of our investment, as these are similar to gains from the sales of previously depreciated properties. We exclude similar adjustments from our unconsolidated entities and the third parties’ share of our consolidated co-investment ventures.

 

Our FFO Measures

 

Our FFO measures begin with NAREIT’s definition and we make certain adjustments to reflect our business and the way that management plans and executes our business strategy. While not infrequent or unusual, the additional items we adjust for in calculating FFO, as modified by Prologis, and Core FFO, both as defined below, are subject to significant fluctuations from period to period. Although these items may have a material impact on our operations and are reflected in our financial statements, the removal of the effects of these items allows us to better understand the core operating performance of our properties over the long term. These items have both positive and negative short-term effects on our results of operations in inconsistent and unpredictable directions that are not relevant to our long-term outlook.

 

We calculate our FFO measures, as defined below, based on our proportionate ownership share of both our unconsolidated and consolidated ventures. We reflect our share of our FFO measures for unconsolidated ventures by applying our average ownership percentage for the period to the applicable reconciling items on an entity by entity basis. We reflect our share for consolidated ventures in which we do not own 100% of the equity by adjusting our FFO measures to remove the noncontrolling interests share of the applicable reconciling items based on our average ownership percentage for the applicable periods.

 

These FFO measures are used by management as supplemental financial measures of operating performance and we believe that it is important that stockholders, potential investors and financial analysts understand the measures management uses. We do not use our FFO measures as, nor should they be considered to be, alternatives to net earnings computed under GAAP, as indicators of our operating performance, as alternatives to cash from operating activities computed under GAAP or as indicators of our ability to fund our cash needs.

 

We analyze our operating performance principally by the rental revenues of our real estate and the revenues from our strategic capital business, net of operating, administrative and financing expenses. This income stream is not directly impacted by fluctuations in the market value of our investments in real estate or debt securities.

 

FFO, as modified by Prologis attributable to common stockholders/unitholders (“FFO, as modified by Prologis”)

 

To arrive at FFO, as modified by Prologis, we adjust the NAREIT defined FFO measure to exclude the impact of foreign currency related items and deferred tax, specifically:

 

deferred income tax benefits and deferred income tax expenses recognized by our subsidiaries;

 

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 earnings that is excluded from our defined FFO measure;

 

unhedged foreign currency exchange gains and losses resulting from debt transactions between us and our foreign consolidated subsidiaries and our foreign unconsolidated entities;

44

 


 

 

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 and unconsolidated entities; and

 

mark-to-market adjustments associated with derivative financial instruments.

 

We use FFO, as modified by Prologis, so that management, analysts and investors are able to evaluate our performance against other REITs that do not have similar operations or operations in jurisdictions outside the U.S.

 

Core FFO attributable to common stockholders/unitholders (“Core FFO”)

 

In addition to FFO, as modified by Prologis, we also use Core FFO. To arrive at Core FFO, we adjust FFO, as modified by Prologis, to exclude the following recurring and nonrecurring items that we recognized directly in FFO, as modified by Prologis:

 

gains or losses from the disposition of land and development properties that were developed with the intent to contribute or sell;

 

income tax expense related to the sale of investments in real estate;

 

impairment charges recognized related to our investments in real estate generally as a result of our change in intent to contribute or sell these properties;

 

gains or losses from the early extinguishment of debt and redemption and repurchase of preferred stock; and

 

expenses related to natural disasters.

 

We use Core FFO, including by segment and region, to: (i) assess our operating performance as compared to other real estate companies; (ii) evaluate our performance and the performance of our properties in comparison with expected results and results of previous periods; (iii) evaluate the performance of our management; (iv) budget and forecast future results to assist in the allocation of resources; (v) provide guidance to the financial markets to understand our expected operating performance; and (vi) evaluate how a specific potential investment will impact our future results.

 

Limitations on the use of our FFO measures

 

While we believe our modified FFO measures are important supplemental measures, neither NAREIT’s nor our measures of FFO should be used alone because they exclude significant economic components of net earnings computed under GAAP and are, therefore, limited as an analytical tool. Accordingly, these are only a few of the many measures we use when analyzing our business. Some of the limitations are:

 

The current income tax expenses that are excluded from our modified FFO measures represent the taxes and transaction costs 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. Furthermore, the amortization of capital expenditures and leasing costs necessary to maintain the operating performance of logistics facilities are not reflected in FFO.

 

Gains or losses from non-development property dispositions and impairment charges related to expected dispositions represent changes in value of the properties. By excluding these gains and losses, FFO 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 modified FFO measures result from the creation of a deferred income tax asset or liability that may have to be settled at some future point. Our modified FFO measures do 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 modified FFO measures 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 FFO measures are limited in that they do not reflect the current period changes in these net assets that result from periodic foreign currency exchange rate movements.

 

The gains and losses on extinguishment of debt or preferred stock that we exclude from our Core FFO, may provide a benefit or cost to us as we may be settling our obligation at less or more than our future obligation.

 

The natural disaster expenses that we exclude from Core FFO are costs that we have incurred.

45

 


 

 

We compensate for these limitations by using our FFO measures only in conjunction with net earnings computed under GAAP when making our decisions. This information should be read with our complete Consolidated Financial Statements prepared under GAAP. To assist investors in compensating for these limitations, we reconcile our modified FFO measures to our net earnings computed under GAAP for six months ended June 30 as follows (in millions):

 

 

 

 

2018

 

 

2017

 

FFO

 

 

 

 

 

 

 

 

Reconciliation of net earnings to FFO measures:

 

 

 

 

 

 

 

 

Net earnings attributable to common stockholders

 

$

701

 

 

$

470

 

 

 

 

 

 

 

 

 

 

Add (deduct) NAREIT defined adjustments:

 

 

 

 

 

 

 

 

Real estate related depreciation and amortization

 

 

390

 

 

 

439

 

Gains on dispositions of investments in real estate properties, net

 

 

(68

)

 

 

(113

)

Reconciling items related to noncontrolling interests

 

 

(23

)

 

 

(42

)

Our share of reconciling items included in earnings from unconsolidated entities

 

 

104

 

 

 

60

 

NAREIT defined FFO

 

 

1,104

 

 

 

814

 

 

 

 

 

 

 

 

 

 

Add (deduct) our modified adjustments:

 

 

 

 

 

 

 

 

Unrealized foreign currency and derivative (gains) losses, net

 

 

(53

)

 

 

36

 

Deferred income tax expense (benefit)

 

 

(1

)

 

 

2

 

Current income tax expense (benefit) on dispositions related to acquired tax assets

 

 

1

 

 

 

(1

)

Our share of reconciling items included in earnings from unconsolidated entities

 

 

2

 

 

 

(1

)

FFO, as modified by Prologis

 

 

1,053

 

 

 

850

 

 

 

 

 

 

 

 

 

 

Adjustments to arrive at Core FFO:

 

 

 

 

 

 

 

 

Gains on dispositions of development properties and land, net

 

 

(221

)

 

 

(68

)

Current income tax expense on dispositions

 

 

10

 

 

 

1

 

Losses on early extinguishment of debt, net

 

 

1

 

 

 

31

 

Reconciling items related to noncontrolling interests

 

 

5

 

 

 

(1

)

Our share of reconciling items included in earnings from unconsolidated entities

 

 

(14

)

 

 

(5

)

Core FFO

 

$

834

 

 

$

808

 

 

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

 

We are exposed to the impact of foreign exchange-related variability and earnings volatility on our foreign investments and interest rate changes. See our risk factors in Item 1A. Risk Factors, in our Annual Report on Form 10-K for the year ended December 31, 2017. See also Note 9 to the Consolidated Financial Statements in Item 1 for more information about our derivative financial instruments.

 

We monitor our market risk exposures using a sensitivity analysis. Our sensitivity analysis estimates the exposure to market risk sensitive instruments assuming a hypothetical 10% adverse change in foreign currency exchange rates or interest rates at June 30, 2018. The results of the sensitivity analysis are summarized in the following sections. The sensitivity analysis is of limited predictive value. As a result, revenues and expenses, as well as our ultimate realized gains or losses with respect to foreign currency exchange rate and interest rate fluctuations will depend on the exposures that arise during a future period, hedging strategies at the time and the prevailing foreign currency exchange rates and interest rates.

 

Foreign Currency Risk

 

We are exposed to foreign currency exchange variability related to investments in and earnings from our foreign investments. Foreign currency market risk is the possibility that our results of operations or financial position could be better or worse than planned because of changes in foreign currency exchange rates. We primarily hedge our foreign currency risk by borrowing in the currencies in which we invest. Generally, we borrow in the functional currency of the consolidated subsidiaries but we also borrow in currencies other than the U.S. dollar in the OP and may designate this borrowing as a nonderivative financial instrument. We may also hedge our foreign currency risk by designating derivative financial instruments as net investment hedges, as these amounts offset the translation adjustments on the underlying net assets of our foreign investments. Other foreign currency contracts, such as forwards, not designated as hedges reduce fluctuations in foreign currency associated with the translation of our projected net operating income of our international subsidiaries.

 

At June 30, 2018, after consideration of our nonderivative and derivative financial instruments, we had net equity of approximately $694 million denominated in a currency other than the U.S. dollar representing 3.7% of total net equity. Based on our sensitivity analysis, a 10% strengthening of the U.S. dollar against other currencies would cause a reduction of $69 million to our net equity.

 

46

 


 

At June 30, 2018, we had foreign currency forward contracts, which were designated and qualify as net investment hedges, with an aggregate notional amount of $135 million to hedge a portion of our investments in Canada and Europe. On the basis of our sensitivity analysis, a weakening of the U.S. dollar against the Canadian dollar or Euro by 10% would result in a $13 million negative change in our cash flows on settlement. In addition, we also have British pound sterling, Canadian dollar, euro and Japanese yen forward contracts, which were not designated as hedges, and have an aggregate notional amount of $528 million to mitigate risk associated with the translation of the projected earnings of our subsidiaries in Canada, Europe and Japan. A weakening of the U.S. dollar against these currencies by 10% would result in a $53 million negative change in our net income and cash flows on settlement of these contracts.

 

Interest Rate Risk

 

We also are exposed to the impact of interest rate changes on future earnings and cash flows. At June 30, 2018, we had $1.7 billion of variable rate debt outstanding, of which $1.2 billion was term loans, $466 million was senior notes, $12 million was credit facilities and $50 million was secured mortgages. At June 30, 2018, we had interest rate swap agreements to fix our floating rate euro senior notes. On the basis of our sensitivity analysis, a 10% adverse change in interest rates based on our average outstanding variable rate debt balances not subject to interest rate swap agreements during the period would result in additional annual interest expense of $2 million, which equates to a change in interest rates of 12 basis points.

 

ITEM 4. Controls and Procedures

 

Controls and Procedures (The Parent)

 

The Parent carried out an evaluation under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the disclosure controls and procedures (as defined in Rule 13a-14(c)) under the Securities and Exchange Act of 1934 (the “Exchange Act”) at June 30, 2018. On the basis of this evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the disclosure controls and procedures are effective to ensure that the information required to be disclosed in reports that are filed or submitted under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission (“SEC”) rules and forms.

 

Controls and Procedures (The OP)

 

The OP carried out an evaluation under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the disclosure controls and procedures (as defined in Rule 13a-14(c)) under the Exchange Act at June 30, 2018. On the basis of this evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the disclosure controls and procedures are effective to ensure that the information required to be disclosed in reports that are filed or submitted under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms.

 

PART II. OTHER INFORMATION

 

ITEM 1. Legal Proceedings

 

In connection with the Mergers, on July 2, 2018, DCT, DCT OP, DCT’s board of directors (the “DCT Board”), Prologis, and the OP were sued in a putative class action lawsuit, the Rosenblatt Action, filed in the United States District Court for the District of Colorado, in connection with DCT's proposed merger with Prologis and the related Form S-4. The complaint in the Rosenblatt Action alleges that DCT, DCT OP, the DCT Board, Prologis, and Prologis OP violated federal securities laws by omitting material information from the Form S-4, rendering the Form S-4 materially deficient. On July 10, 2018, DCT and the DCT Board were sued in another putative class action lawsuit, the Bushansky Action, also filed in the United States District Court for the District of Colorado, and also in connection with DCT's proposed merger with Prologis and the related Form S-4. On July 13, 2018, DCT, DCT OP and the DCT Board were sued in a third putative class action lawsuit, the Aiken Action, filed in the United States District Court for the District of Maryland, also in connection with DCT’s proposed merger with Prologis and the related Form S-4. The complaints in the Bushansky Action and the Aiken Action allege that DCT and the DCT Board violated federal securities laws by omitting from the Form S-4, and/or misrepresenting in the Form S-4, material information, rendering the Form S-4 materially deficient. In all three actions, the plaintiffs seek, among other things, (i) to enjoin the transaction (or rescind it to the extent it is completed), and (ii) attorneys' fees and costs in connection with these lawsuits.

 

Although the ultimate outcome of litigation cannot be predicted with certainty, we believe that these lawsuits are without merit and intend to defend against these actions vigorously.

 

In addition, Prologis and our unconsolidated investees are party to a variety of other legal proceedings arising in the ordinary course of business. With respect to any such matters to which we are currently a party, the ultimate disposition of any such matters will not result in a material adverse effect on our business, financial position or results of operations.

 

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ITEM 1A. Risk Factors

 

At June 30, 2018, the risk factors discussed under the heading “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2017 and “Risk Factors” in Amendment No. 1 to the Registration Statement on Form S-4 for Prologis, Inc., filed with the SEC on July 6, 2018, and any amendments thereto, continue to apply to our business.

 

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

During the quarter ended June 30, 2018, we did not issue shares of common stock of the Parent in connection with the redemption of common units of the OP. If issued, the shares of common stock would be issued in reliance on the exemption from registration requirements of the Securities Act of 1933, as amended, afforded by Section 4(a)(2) thereof.

 

ITEM 3. Defaults Upon Senior Securities

 

None.

 

ITEM 4. Mine Safety Disclosures

 

Not Applicable.

 

ITEM 5. Other Information

 

None.

 

ITEM 6. Exhibits

 

The exhibits required by this item are set forth on the Exhibit Index attached hereto.


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INDEX TO EXHIBITS

Certain of the following documents are filed herewith. Certain other of the following documents that have been previously filed with the Securities and Exchange Commission and, pursuant to Rule 12-b-32, are incorporated herein by reference.

 

 

2.1

Agreement and Plan of Merger, dated as of April 29, 2018, by and among Prologis, Inc., Prologis, L.P., DCT Industrial Trust Inc., and DCT Industrial Operating Partnership LP (incorporated by reference to Exhibit 2.1 to Prologis’ Current Report on Form 8-K filed April 29, 2018).

 

4.1

Form of 3.875% Notes Due 2028 (incorporated by reference to Exhibit 4.1 to Prologis’ Current Report Form 8-K filed on June 20, 2018).

 

4.2

Form of 4.375% Notes Due 2048 (incorporated by reference to Exhibit 4.2 to Prologis’ Current Report Form 8-K filed on June 20, 2018).

 

 

4.3

Form of Officer’s Certificate related to 3.875% Notes Due 2028 (incorporated by reference to Exhibit 4.3 to Prologis’ Current Report Form 8-K filed on June 20, 2018).

 

 

4.4

Form of Officer’s Certificate related to 4.375% Notes Due 2048 (incorporated by reference to Exhibit 4.4 to Prologis’ Current Report Form 8-K filed on June 20, 2018).

 

 

10.1

Amended and Restated Director Deferred Stock Unit Award Terms (incorporated by reference to Exhibit 10.1 to Prologis’ Current Report on Form 8-K filed May 7, 2018).

 

 

12.1†

Computation of Ratio of Earnings to Fixed Charges of Prologis, Inc. and Prologis, L.P.

 

 

12.2†

Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock/Unit Dividends, of Prologis, Inc. and Prologis, L.P.

 

 

15.1†

KPMG LLP Awareness Letter of Prologis, Inc.

 

 

15.2†

KPMG LLP Awareness Letter of Prologis, L.P.

 

 

31.1†

Certification of Chief Executive Officer of Prologis, Inc.

 

 

31.2†

Certification of Chief Financial Officer of Prologis, Inc.

 

 

31.3†

Certification of Chief Executive Officer for Prologis, L.P.

 

 

31.4†

Certification of Chief Financial Officer for Prologis, L.P.

 

 

32.1†

Certification of Chief Executive Officer and Chief Financial Officer of Prologis, Inc., pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

32.2†

Certification of Chief Executive Officer and Chief Financial Officer for Prologis, L.P., pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

101.INS†

XBRL Instance Document

 

 

101.SCH†

XBRL Taxonomy Extension Schema

 

 

101.CAL†

XBRL Taxonomy Extension Calculation Linkbase

 

 

101.DEF†

XBRL Taxonomy Extension Definition Linkbase

 

 

101.LAB†

XBRL Taxonomy Extension Label Linkbase

 

 

101.PRE†

XBRL Taxonomy Extension Presentation Linkbase

 

 

Filed herewith

 


49

 


 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the registrants have duly caused this report to be signed on their behalf by the undersigned, thereunto duly authorized.

 

PROLOGIS, INC.

 

 

By:

/s/ Thomas S. Olinger

 

Thomas S. Olinger

 

Chief Financial Officer

 

 

By:

/s/ Lori A. Palazzolo

 

Lori A. Palazzolo

 

Managing Director and Chief Accounting Officer

 

 

 

PROLOGIS, L.P.

By:

Prologis, Inc., its general partner

 

 

By:

/s/ Thomas S. Olinger

 

Thomas S. Olinger

 

Chief Financial Officer

 

 

By:

/s/ Lori A. Palazzolo

 

Lori A. Palazzolo

 

Managing Director and Chief Accounting Officer

 

 

Date: July 23, 2018

 

 

 

 

 

 

 

 

50