UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
| ANNUAL REPORT PURSUANT TO SECTION 13OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20152017
or
| TRANSITION REPORT PURSUANT TOSECTION 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.) |
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Pier 1, Bay 1, San Francisco, California | 94111 |
(Address or principal executive offices) | (Zip Code) |
(415) 394-9000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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| Title of Each Class |
| Name of Each Exchange on Which Registered |
Prologis, Inc. |
| Common Stock, $0.01 par value |
| New York Stock Exchange |
Prologis, L.P. |
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| |
| 1.375% Notes due 2020 |
| New York Stock Exchange | |
Prologis, L.P. |
| 1.375% Notes due 2021 |
| New York Stock Exchange |
Prologis, L.P. |
| 3.000% Notes due 2022 |
| New York Stock Exchange |
Prologis, L.P. |
| 3.375% Notes due 2024 |
| New York Stock Exchange |
Prologis, L.P. | 3.000% Notes due 2026 | New York Stock Exchange | ||
Prologis, L.P. | 2.250% Notes due 2029 | New York Stock Exchange | ||
Prologis, L.P. | Floating Rate Notes due 2020 | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
Prologis, Inc. – NONE
Prologis, L.P. – NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Prologis, Inc.: Yes þ No o
Prologis, Inc.: Yes ☑ No ☐ Prologis, L.P.: Yes ☑ No ☐ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Prologis, Inc.: Yes ☐ No ☑ Prologis, L.P.: Yes ☐ No ☑ 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 requirements 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 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, Prologis, Inc.: ☐ Smaller reporting company Prologis, L.P.: ☐ Smaller reporting company 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 ☑ Based on the closing price of Prologis, Inc.’s common stock on June 30, The number of shares of Prologis, Inc.’s common stock outstanding at February 12, DOCUMENTS INCORPORATED BY REFERENCE Portions of Part III of this report are incorporated by reference to the registrant’s definitive proxy statement for the This report combines the annual reports on Form 10-K for the year ended December 31, We operate We believe combining the annual reports on Form 10-K of 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 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 To highlight the differences between 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, Prologis, Inc. is a self-administered and self-managed REIT and is the sole general partner of Prologis, L.P. We Americas (4 countries) Europe (13 countries) Asia (3 countries) Total Operating portfolio (number of buildings) 2,403 714 86 3,203 Operating portfolio (square feet) 407 165 35 607 Development portfolio (square feet) 21 9 17 47 Other real estate properties (square feet) 10 4 1 15 Total 438 178 53 669 Operating portfolio (gross book value) $ 29,586 $ 12,243 $ 4,328 $ 46,157 Development portfolio (TEI) (1) 1,557 727 1,531 3,815 Land portfolio (book value) 922 445 199 1,566 Total $ 32,065 $ 13,415 $ 6,058 $ 51,538 Prologis, Inc. began operating as a fully integrated real estate company in 1997 and elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (“Internal Revenue Code”). We believe the current organization and method of operation will enable Prologis, Inc. to maintain its status as a REIT. 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, therefore we generally evaluate operating metrics on an owned and managed basis. Our Our Internet address is www.prologis.com. All reports required to be filed with the Securities and Exchange Commission (“SEC”) are available and can be accessed free of charge through the Investor Relations section of our website, 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 fund our development and acquisition 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 At December 31, 2017, 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 $57.5 billion across 684 million square feet (64 million square meters) across four continents. Our investment totals $32.9 billion and consists of our wholly-owned properties and our pro rata (or ownership) share of the properties owned by our co-investment ventures. We lease modern logistics Throughout this document, we reflect amounts in U.S. dollars, our reporting currency. Included in these amounts are consolidated and unconsolidated investments denominated in foreign currencies, primarily the British pound sterling, euro and Japanese yen that are impacted by fluctuations in exchange rates when translated into U.S. dollars. We mitigate our exposure to Our business comprises two operating segments: Real Estate Operations and Strategic Capital. REAL ESTATE OPERATIONS – RENTAL Generate revenues, net operating income (“NOI”) and cash flows by increasing rents and maintaining high occupancy rates REAL ESTATE OPERATIONS – DEVELOPMENT Provide significant earnings growth as projects lease up and generate income STRATEGIC CAPITAL Access third-party capital to grow our business and earn fees and promotes through long-term co-investment ventures Rental. Rental operations comprise the largest component of our operating segments and generally contributes 90% of our consolidated revenues, earnings and funds from operations (“FFO”) (see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 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 drivers 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. Most of our rental revenues and NOI are generated in the U.S. 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. 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 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. 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 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 (also referred to as “perpetual vehicles”). We also access alternative sources of equity through two publicly traded vehicles: Nippon Prologis REIT, Inc. in Japan and FIBRA Prologis in Mexico. We hold significant ownership interests in all of our unconsolidated co-investment ventures (approximately 29% weighted average ownership based on each entity’s contribution of total assets, before depreciation, net of other liabilities at December 31, 2017), aligning our interests with those of our partners. 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, primarily through asset and property management services, of which 90% are 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”) 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. 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 across our owned and managed portfolio, our leases on an aggregate basis are more than 14% below current market rent. Therefore, even if market rents remain flat, a lease renewal will translate into increased future rental income, both on a consolidated basis and through the earnings we recognize from our unconsolidated co-investment ventures based on our ownership. This is reflected in the positive rent change on rollover (comparing the net effective rent of the new lease to the prior lease for the same space) in our owned and managed portfolio. We have experienced positive rent change on rollover for every quarter since 2013 and we expect this to continue for several more years. For 2017, our net effective rents increased 15.4% on lease rollover that represented approximately 23% of our owned and managed portfolio. 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 land bank, excluding land we have under an option contract, has the potential to support the development of $7.8 billion of TEI of new logistics space. TEI is the total estimated cost of development or expansion, including land, development and leasing costs without depreciation. 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 2017, we stabilized development projects with a TEI of $1.9 billion, and we estimate the value of these buildings to be 28.8% 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. Competition Competitively priced logistics space could impact our occupancy rates and have an adverse effect on how much rent we can charge, which in turn could affect our operating segments. We may face competition regarding our capital deployment activities, including local, regional and national operators or developers. We also face competition from investment managers for institutional capital within our strategic capital business. We believe we have competitive advantages due to our: properties in markets characterized by large population densities and consumption and typically offer proximity to large labor pools and are supported by extensive transportation infrastructure; ability to quickly respond to customers’ needs for high-quality logistics facilities; established relationships with key customers served by our local teams; ability to leverage our organizational scale and structure to provide a single point of contact for our focus customers through our global customer solutions team; property management and leasing expertise; relationships and proven track record with current and prospective investors in our strategic capital business; strategic locations of our land bank; local teams with development expertise; and balance sheet strength, credit ratings and significant liquidity. Customers Our broad customer base represents a spectrum of international, national, regional and local logistics users. At December 31, 2017, in our Real Estate Operations segment representing our consolidated properties, we had more than 2,800 customers occupying 299 million square feet of logistics operating properties. On an owned and managed basis, we had approximately 5,000 customers occupying 630 million square feet of logistics operating properties. The following table details our top 25 customers at December 31, 2017 (square feet in millions): Consolidated – Real Estate Operations Owned and Managed Top Customers % of NER (1) Total Occupied Square Feet Top Customers % of NER (1) Total Occupied Square Feet 1. Amazon.com 4.9 13 1. Amazon.com 3.0 17 2. Home Depot 1.8 6 2. DHL 1.5 11 3. FedEx 1.6 3 3. Geodis 1.2 9 4. Wal-Mart 1.3 4 4. XPO Logistics 1.2 10 5. XPO Logistics 0.9 3 5. Kuehne + Nagel 1.1 7 6. UPS 0.9 2 6. DSV Air and Sea Inc. 1.0 5 7. NFI 0.8 2 7. Home Depot 1.0 7 8. U.S. Government 0.8 1 8. FedEx 0.9 3 9. Geodis 0.8 2 9. Wal-Mart 0.8 5 10. DHL 0.7 2 10. CEVA Logistics 0.7 5 Top 10 Customers 14.5 38 Top 10 Customers 12.4 79 11. Kimberly-Clark Corporation 0.7 3 11. Nippon Express 0.7 3 12. PepsiCo 0.7 3 12. UPS 0.6 4 13. Office Depot 0.6 2 13. BMW 0.6 4 14. DSV Air and Sea Inc. 0.5 2 14. DB Schenker 0.6 4 15. Ingram Micro 0.5 2 15. Hitachi 0.6 2 16. Best Buy 0.5 1 16. Ingram Micro 0.5 4 17. Kuehne + Nagel 0.5 1 17. U.S. Government 0.5 1 18. APL Logistics 0.5 2 18. Panalpina 0.4 3 19. Georgia-Pacific Corporation 0.4 1 19. PepsiCo 0.3 3 20. Kohler 0.4 3 20. Office Depot 0.3 2 21. C&S Wholesale Grocers 0.4 1 21. Best Buy 0.3 2 22. Kellogg's 0.4 2 22. APL Logistics 0.3 3 23. Essendant 0.4 2 23. Kimberly-Clark Corporation 0.3 3 24. Ford Motor Company 0.3 1 24. Tesco 0.3 2 25. Mondelez International 0.3 1 25. Schneider Electric 0.3 1 Top 25 Customers 21.6 65 Top 25 Customers 19.0 120 (1) Net effective rent (“NER”) is calculated using the estimated total cash to be received over the term of the lease (including base rent and expense reimbursements) divided by the lease term to determine the amount of rent and expense reimbursements received per year. Amounts derived in a currency other than the U.S. dollar have been translated using the average rate from the previous twelve months. In our Strategic Capital segment, we view our partners and investors as our customers. At December 31, 2017, in our private ventures, we partnered with approximately 100 investors, several of which invest in multiple ventures. Employees The following table summarizes our employee base at December 31, 2017: Regions Number of Employees U.S. (1) 835 Other Americas 130 Europe 370 Asia 230 Total 1,565 (1) This includes employees who were employed in the U.S. but also support other regions. We allocate our employees who perform property management functions to our Real Estate Operations segment and Strategic Capital segment based on the square footage of the respective portfolios. Employees who perform only Strategic Capital functions are allocated directly to that segment. We believe we have good relationships with our employees. Prologis employees are not organized under collective bargaining agreements, although some employees in Europe are represented by statutory Works Councils and as such, benefit from applicable labor agreements. CODE OF ETHICS AND BUSINESS CONDUCT We maintain a Code of Ethics and Business Conduct applicable to our board of directors (the “Board”) and all of our officers and employees, including the principal executive officer, the principal financial officer and the principal accounting officer, and other people performing similar functions. A copy of our Code of Ethics and Business Conduct is available on our website, www.prologis.com. In addition to being accessible through our website, copies of our Code of Ethics and Business Conduct can be obtained, free of charge, upon written request to Investor Relations, Pier 1, Bay 1, San Francisco, California 94111. Any amendments to or waivers of our Code of Ethics and Business Conduct that apply to the principal executive officer, the principal financial officer, the principal accounting officer, or other people performing similar functions, and that relate to any matter enumerated in Item 406(b) of Regulation S-K, will be disclosed on our website. We are exposed to various environmental risks that may result in unanticipated losses and affect our operating results and financial condition. Either the previous owners or we have conducted environmental reviews on a majority of the properties we have acquired, including land. While some of these assessments have led to further investigation and sampling, none of the environmental assessments has revealed an environmental liability that we believe would have a material adverse effect on our business, financial condition or results of operations. See further discussion in Item 1A. Risk Factors and Note 17 to the Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data. We carry insurance coverage on our properties. We determine the type of coverage and the policy specifications and limits based on what we deem to be the risks associated with our ownership of properties and our business operations in specific markets. Such coverage typically includes property damage and rental loss insurance resulting from such perils as fire, windstorm, flood, earthquake and terrorism; commercial general liability insurance; and environmental insurance. Insurance is maintained through a combination of commercial insurance, self-insurance and a wholly-owned captive insurance entity. The costs to insure our properties are primarily covered through reimbursements from our customers. We believe our insurance coverage contains policy specifications and insured limits that are customary for similar properties, business activities and markets and we believe our properties are adequately insured. See further discussion in Item 1A. Risk Factors. Our operations and structure involve various risks that could adversely affect our business and financial condition, including but not limited to, our financial position, results of operations, cash flow, ability to make distributions and payments to security holders and the market value of our securities. These risks relate to Prologis as well as our investments in consolidated and unconsolidated entities and include among others, (i) general risks; (ii) risks related to our business; (iii) risks related to financing and capital; and (iv) income tax risks. General Risks As a global company, we are subject to social, political and economic risks of doing business in many countries. We conduct a significant portion of our business and employ a substantial number of people outside of the U.S. During 2017, we generated approximately $416 million or 15.9% of our revenues from operations outside the U.S. Circumstances and developments related to international and U.S. operations that could negatively affect us include, but are not limited to, the following factors: difficulties and costs of staffing and managing international operations in certain regions, including differing employment practices and labor issues; local businesses and cultural factors that differ from our usual standards and practices; volatility in currencies and currency restrictions, which may prevent the transfer of capital and profits to the U.S.; challenges in establishing effective controls and procedures to regulate operations in different regions and to monitor compliance with applicable regulations, such as the Foreign Corrupt Practices Act, the United Kingdom (“U.K.”) Bribery Act and other similar laws; unexpected changes in regulatory requirements, tax, tariffs and other laws within the countries in which we operate; potentially adverse tax consequences; the responsibility of complying with multiple and potentially conflicting laws, e.g., with respect to corrupt practices, employment and licensing; the impact of regional or country-specific business cycles and economic instability, including instability in, or further withdrawals from, the European Union or other international trade alliances or agreements; political instability, uncertainty over property rights, civil unrest, drug trafficking, political activism or the continuation or escalation of terrorist or gang activities; access to capital may be more restricted, or unavailable on favorable terms or at all in certain locations. In addition, we may be impacted by the ability of our non-U.S. subsidiaries to dividend or otherwise transfer cash among our subsidiaries, including transfers of cash to pay interest and principal on our debt, due to currency exchange control regulations, transfer pricing regulations and potentially adverse tax consequences, among other factors. Disruptions in the global capital and credit markets may adversely affect our operating results and financial condition. To the extent there is turmoil in the global financial markets, this turmoil has the potential to adversely affect (i) the value of our properties; (ii) the availability or the terms of financing that we have or may anticipate utilizing; (iii) our ability to make principal and interest payments on, or refinance any outstanding debt when due; and (iv) the ability of our customers to enter into new leasing transactions or satisfy rental payments under existing leases. Disruptions in the capital and credit markets may also adversely affect our ability to make distributions and payments to our security holders and the market price of our securities. Our business and operations could suffer in the event of system failures or cyber security attacks. Despite system redundancy, the implementation of security measures and the existence of a disaster recovery plan for our internal and hosted information technology systems, our systems are vulnerable to damages from any number of sources, including energy blackouts, natural disasters, terrorism, war, telecommunication failures and cyber security attacks, such as computer viruses or unauthorized access. Any system failure or accident that causes interruptions in our operations could result in a material disruption to our business. We may also incur additional costs to remedy damages caused by such disruptions. Any compromise of our security could result in a violation of applicable privacy and other laws, unauthorized access to information of ours and others, significant legal and financial exposure, damage to our reputation, loss or misuse of the information and a loss of confidence in our security measures, which could harm our business. Risks associated with our dependence on key personnel. We depend on the deep industry knowledge and the efforts of our executive officers and other key employees. From time to time, our personnel and their roles may change. While we believe that we are able to retain our key talent and find suitable employees to meet our personnel needs, the loss of key personnel, any change in their roles or the limitation of their availability could adversely affect our business. If we are unable to continue to attract and retain our executive officers, or if compensation costs required to attract and retain key employees become more expensive, our performance and competitive position could be materially adversely affected. Our business could be adversely impacted if we have deficiencies in our disclosure controls and procedures or internal control over financial reporting. The design and effectiveness of our disclosure controls and procedures and internal control over financial reporting may not prevent all errors, misstatements or misrepresentations. While management continually reviews the effectiveness of our disclosure controls and procedures and internal control over financial reporting, there can be no guarantee that our internal control over financial reporting will be effective in accomplishing all control objectives all of the time. Deficiencies, including any material weakness, in our internal control over financial reporting that may occur in the future could result in misstatements or restatements of our financial statements or a decline in the price of our securities. The depreciation in the value of the foreign currency in countries where we have a significant investment may adversely affect our results of operations and financial position. We pursue growth opportunities in international markets where the U.S. dollar is not the functional currency. At December 31, 2017, approximately $7.4 billion or 25.1% of our total consolidated assets were invested in a currency other than the U.S. dollar, primarily the Brazilian real, British pound sterling, Canadian dollar, euro and Japanese yen. As a result, we are subject to foreign currency risk due to potential fluctuations in exchange rates between foreign currencies and the U.S. dollar. A significant change in the value of the foreign currency of one or more countries where we have a significant investment may have a material adverse effect on our business and, specifically, our U.S. dollar reported financial position and results of operations and debt covenant ratios. Although we attempt to mitigate adverse effects by borrowing under debt agreements denominated in foreign currencies and using derivative contracts, there can be no assurance that those attempts to mitigate foreign currency risk will be successful. Our hedging of foreign currency and interest rate risk may not effectively limit our exposure to other risks. Hedging arrangements involve risks, such as the risk of fluctuation in the relative value of the foreign currency or interest rates and the risk that counterparties may fail to honor their obligations under these arrangements. The funds required to settle such arrangements could be significant depending on the stability and movement of the hedged foreign currency or the size of the underlying financing and the applicable interest rates at the time of the breakage. The failure to hedge effectively against foreign exchange changes or interest rate changes may adversely affect our business. Compliance or failure to comply with regulatory requirements could result in substantial costs. We are required to comply with many regulations in different countries, including (but not limited to) the Foreign Corrupt Practices Act, the U.K Bribery Act and similar laws and regulations. Our properties are also subject to various federal, state and local regulatory requirements, such as the Americans with Disabilities Act and state and local fire and life-safety requirements. Noncompliance could result in the imposition of governmental fines or the award of damages to private litigants. While we believe that we are currently in material compliance with these regulatory requirements, the requirements may change or new requirements may be imposed that could require significant unanticipated expenditures by us. If we are required to make unanticipated expenditures to comply with these regulations, we may be adversely affected. Risks Related to our Business Real estate investments are not as liquid as certain other types of assets, which may reduce economic returns to investors. Real estate investments are not as liquid as certain other types of investments and this lack of liquidity may limit our ability to react promptly to changes in economic or other conditions. Significant expenditures associated with real estate investments, such as secured mortgage payments, real estate taxes and maintenance costs, are generally not reduced when circumstances cause a reduction in income from the investments. As a REIT, under the Internal Revenue Code, we are only able to hold property for sale in the ordinary course of business through taxable REIT subsidiaries in order to not incur punitive taxation on any tax gain from the sale of such property. We may dispose of certain properties that have been held for investment to generate liquidity. If we do not satisfy certain safe harbors or we believe there is too much risk of incurring the punitive tax on any tax gain from the sale, we may not pursue such sales. We may decide to sell properties to certain of our unconsolidated co-investment ventures or third parties to generate proceeds to fund our capital deployment activities. Our ability to sell properties on advantageous terms is affected by: (i) competition from other owners of properties that are trying to dispose of their properties; (ii) market conditions, including the capitalization rates applicable to our properties; and (iii) other factors beyond our control. If our competitors sell assets similar to assets we intend to divest in the same markets or at valuations below our valuations for comparable assets, we may be unable to divest our assets at favorable pricing or at all. The unconsolidated co-investment ventures or third parties who might acquire our properties may need to have access to debt and equity capital, in the private and public markets, in order to acquire properties from us. Should they have limited or no access to capital on favorable terms, then dispositions could be delayed. If we do not have sufficient cash available to us through our operations, sales or contributions of properties or available credit facilities to continue operating our business as usual, we may need to find alternative ways to increase our liquidity. Such alternatives may include, without limitation, divesting ourselves of properties, whether or not they otherwise meet our strategic objectives to keep in the long term, at less than optimal terms, incurring debt, entering into leases with new customers at lower rental rates or less than optimal terms or entering into lease renewals with our existing customers without an increase in rental rates. There can be no assurance, however, that such alternative ways to increase our liquidity will be available to us. Additionally, taking such measures to increase our liquidity may adversely affect our business, and in particular, our distributable cash flow and debt covenants. Our investments are concentrated in the logistics sector and our business would be adversely affected by an economic downturn in that sector. Our investments in real estate assets are concentrated in the logistics sector. This concentration may expose us to the risk of economic downturns in this sector to a greater extent than if our business activities were more diversified. General economic conditions and other events or occurrences that affect areas in which our properties are geographically concentrated, may impact financial results. We are exposed to general economic conditions, local, regional, national and international economic conditions and other events and occurrences that affect the markets in which we own properties. Our operating performance is further impacted by the economic conditions of the specific markets in which we have concentrations of properties. At December 31, 2017, 33.7% of our consolidated operating properties or $7.7 billion (based on consolidated gross book value, or investment before depreciation) were located in California, which represented 27.4% of the aggregate square footage of our operating properties and 34.1% of our NOI. Our revenues from, and the value of, our properties located in California may be affected by local real estate conditions (such as an oversupply of or reduced demand for logistics properties) and the local economic climate. Business layoffs, downsizing, industry slowdowns, changing demographics and other factors may adversely impact California’s economic climate. Because of the number of properties we have located in California, a downturn in California’s economy or real estate conditions could adversely affect our business. In addition to California, we also have significant holdings (defined as more than 3% of total consolidated investment before depreciation) in operating properties in certain markets located in Atlanta, Central and Eastern Pennsylvania, Chicago, Dallas/Fort Worth, New Jersey/New York City, Seattle and South Florida. Our operating performance could be adversely affected if conditions become less favorable in any of the markets in which we have a concentration of properties. Conditions such as an oversupply of logistics space or a reduction in demand for logistics space, among other factors, may impact operating conditions. Any material oversupply of logistics space or material reduction in demand for logistics space could adversely affect our overall business. Our owned and managed portfolio, which includes our wholly-owned properties and properties included in our co-investment ventures, has concentrations of properties in the same markets mentioned above, as well as in markets in France, Germany, Japan, Mexico, Netherlands, Poland and the U.K., and are subject to the economic conditions in those markets. A number of our investments, both wholly-owned and owned through co-investment ventures, are located in areas that are known to be subject to earthquake activity. U.S. properties located in active seismic areas include properties in our markets in California and Seattle. International properties located in active seismic areas include Japan and Mexico. We generally carry earthquake insurance on our properties located in areas historically subject to seismic activity, subject to coverage limitations and deductibles, if we believe it is commercially reasonable. We evaluate our earthquake insurance coverage annually in light of current industry practice through an analysis prepared by outside consultants and in some specific instances have elected to self-insure our earthquake exposure based on this analysis. We have elected not to carry earthquake insurance for our assets in Japan based on this analysis. Furthermore, a number of our properties are located in areas that are known to be subject to hurricane or flood risk. We carry hurricane and flood hazard insurance on all of our properties located in areas historically subject to such activity, subject to coverage limitations and deductibles, if we believe it is commercially reasonable. We evaluate our insurance coverage annually in light of current industry practice through an analysis prepared by outside consultants. Investments in real estate properties are subject to risks that could adversely affect our business. Investments in real estate properties are subject to varying degrees of risk. While we seek to minimize these risks through geographic diversification of our portfolio, market research and our asset management capabilities, these risks cannot be eliminated. Factors that may affect real estate values and cash flows include: local conditions, such as oversupply or a reduction in demand; technological changes, such as reconfiguration of supply chains, autonomous vehicles, robotics, 3D printing or other technologies; the attractiveness of our properties to potential customers and competition from other available properties; increasing costs of maintaining, insuring, renovating and making improvements to our properties; our ability to rehabilitate and reposition our properties due to changes in the business and logistics needs of our customers; our ability to control rents and variable operating costs; and governmental regulations and the associated potential liability under, and changes in, environmental, zoning, usage, tax, tariffs and other laws. We may be unable to lease vacant space or renew leases or re-lease space on favorable terms as leases expire. Our operating results and distributable cash flow would be adversely affected if a significant number of our customers were unable to meet their lease obligations. We are also subject to the risk that, upon the expiration of leases for space located in our properties, leases may not be renewed by existing customers, the space may not be re-leased to new customers or the terms of renewal or re-leasing (including the cost of required renovations or concessions to customers) may be less favorable to us than current lease terms. Our competitors may offer space at rental rates below current market rates or below the rental rates we currently charge our customers, we may lose potential customers, and we may be pressured to reduce our rental rates below those we currently charge to retain customers when our customers’ leases expire. In the event of default by a significant number of customers, we may experience delays and incur substantial costs in enforcing our rights as landlord, and we may be unable to re-lease spaces. A customer may experience a downturn in its business, which may cause the loss of the customer or may weaken its financial condition, resulting in the customer’s failure to make rental payments when due or requiring a restructuring that might reduce cash flow from the lease. In addition, a customer may seek the protection of bankruptcy, insolvency or similar laws, which could result in the rejection and termination of such customer’s lease and thereby cause a reduction in our available cash flow. We may acquire properties, which involves risks that could adversely affect our business and financial condition. We have acquired properties and will continue to acquire properties, both through the direct acquisition of real estate and through the acquisition of entities that own the real estate and through additional investments in co-investment ventures that acquire properties. The acquisition of properties involves risks, including the risk that the acquired property will not perform as anticipated and that any actual costs for rehabilitation, repositioning, renovation and improvements identified in the pre-acquisition due diligence process will exceed estimates. When we acquire properties, we may face risks associated with a lack of market knowledge or understanding of the local economy, forging new business relationships in the area and unfamiliarity with local government and permitting procedures. Additionally, there is, and it is expected there will continue to be, significant competition for properties that meet our investment criteria as well as risks associated with obtaining financing for acquisition activities. The acquired properties or entities may be subject to liabilities, which may be without any recourse, or with only limited recourse, with respect to unknown liabilities. As a result, if a liability were asserted against us based on ownership of any of these entities or properties, then we may have to pay substantial sums to settle it. Our real estate development strategies may not be successful. Our real estate development strategy is focused on monetizing land in the future through development of logistics facilities to hold for long-term investment, contribution or sale to a co-investment venture or third party, depending on market conditions, our liquidity needs and other factors. We may increase our investment in the development, renovation and redevelopment business and we expect to complete the build-out and leasing of our current development portfolio. We may also develop, renovate and redevelop properties within existing or newly formed co-investment ventures. The real estate development, renovation and redevelopment business includes the following significant risks: we may not be able to obtain financing for development projects on favorable terms or at all; we may explore development opportunities that may be abandoned and the related investment impaired; we may not be able to obtain, or may experience delays in obtaining, all necessary zoning, land-use, building, occupancy and other governmental permits and authorizations; we may have construction costs, total investment amounts and our share of remaining funding that exceed our estimates and projects may not be completed, delivered or stabilized as planned due to defects or other issues; we may not be able to attract third-party investment in new development co-investment ventures or sufficient customer demand for our product; we may have properties that perform below anticipated levels, producing cash flow below budgeted amounts; we may seek to sell certain land parcels and not be able to find a third party to acquire such land or the sales price will not allow us to recover our investment, resulting in impairment charges; we may not be able to lease properties we develop on favorable terms or at all; we may not be able to capture the anticipated enhanced value created by our value-added properties on expected timetables or at all; we may experience delays (temporary or permanent) if there is public or government opposition to our activities; and we may have substantial renovation, new development and redevelopment activities, regardless of their ultimate success, that require a significant amount of management’s time and attention, diverting their attention from our day-to-day operations. We are subject to risks and liabilities in connection with forming co-investment ventures, investing in new or existing co-investment ventures, attracting third-party investment and investing in and managing properties through co-investment ventures. At December 31, 2017, we had investments in real estate containing approximately 399 million square feet held through co-investment ventures, both public and private. Our organizational documents do not limit the amount of available funds that we may invest in these ventures, and we may and currently intend to develop and acquire properties through co-investment ventures and investments in other entities when warranted by the circumstances. However, there can be no assurance that we will be able to form new co-investment ventures, or attract third-party investment or that additional investments in new or existing ventures to develop or acquire properties will be successful. Further, there can be no assurance that we are able to realize value from such investments. Our co-investment ventures involve certain additional risks that we do not otherwise face, including: our partners may share certain approval rights over major decisions made on behalf of the ventures; if our partners fail to fund their share of any required capital contributions, then we may choose to contribute such capital; our partners might have economic or other business interests or goals that are inconsistent with our business interests or goals that would affect our ability to operate the property; the venture or other governing agreements often restrict the transfer of an interest in the co-investment venture or may otherwise restrict our ability to sell the interest when we desire or on advantageous terms; disputes between us and our partners may result in litigation or arbitration that would increase our expenses and prevent our officers and directors from focusing their time and effort on our business and result in subjecting the properties owned by the applicable co-investment venture to additional risk. We generally seek to maintain sufficient influence over our co-investment ventures to permit us to achieve our business objectives; however, we may not be able to continue to do so indefinitely. We have formed publicly traded investment vehicles, such as NPR and FIBRA Prologis, for which we serve as sponsor or manager. We have contributed, and may continue to contribute, assets into such vehicles. There is a risk that our managerial relationship may be terminated. We are exposed to various environmental risks, including the potential impacts of future climate change, which may result in unanticipated losses that could affect our business and financial condition. Under various federal, state and local laws, ordinances and regulations, a current or previous owner, developer or operator of real estate may be liable for the costs of removal or remediation of certain hazardous or toxic substances. The costs of removal or remediation of such substances could be substantial. Such laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the release or presence of such hazardous substances. In addition, third parties may sue the owner or operator of a site for damages based on personal injury, property damage or other costs, including investigation and clean-up costs, resulting from the environmental contamination. Environmental laws in some countries, including the U.S., also require that owners or operators of buildings containing asbestos properly manage and maintain the asbestos, adequately inform or train those who may come into contact with asbestos and undertake special precautions, including removal or other abatement, in the event that asbestos is disturbed during building renovation or demolition. These laws may impose fines and penalties on building owners or operators who fail to comply with these requirements and may allow third parties to seek recovery from owners or operators for personal injury associated with exposure to asbestos. Some of our properties are known to contain asbestos-containing building materials. In addition, some of our properties are leased or have been leased, in part, to owners and operators of businesses that use, store or otherwise handle petroleum products or other hazardous or toxic substances, creating a potential for the release of such hazardous or toxic substances. Furthermore, certain of our properties are on, adjacent to or near other properties that have contained or currently contain petroleum products or other hazardous or toxic substances, or upon which others have engaged, are engaged or may engage in activities that may release such hazardous or toxic substances. From time to time, we may acquire properties, or interests in properties, with known adverse environmental conditions for which we believe that the environmental liabilities associated with these conditions are quantifiable and that the acquisition will yield a superior risk-adjusted return. In connection with certain divested properties, we have agreed to remain responsible for, and to bear the cost of, remediating or monitoring certain environmental conditions on the properties. We are also exposed to potential physical risks from possible future changes in climate. Our logistics facilities may be exposed to rare catastrophic weather events, such as severe storms or floods. If the frequency of extreme weather events increases due to climate change, our exposure to these events could increase. We do not currently consider ourselves to be exposed to regulatory risks related to climate change, as our operations generally do not emit a significant amount of greenhouse gases. However, we may be adversely impacted as a real estate developer in the future by potential impacts to the supply chain or stricter energy efficiency standards for buildings. We cannot give any assurance that other such conditions do not exist or may not arise in the future. The presence of such substances on our real estate properties could adversely affect our ability to lease, develop or sell such properties or to borrow using such properties as collateral. Our insurance coverage does not include all potential losses. We and our unconsolidated co-investment ventures carry insurance coverage including property damage and rental loss insurance resulting from certain perils such as fire and additional perils as covered under an extended coverage policy, namely windstorm, flood, earthquake and terrorism; commercial general liability insurance; and environmental insurance, as appropriate for the markets where each of our properties and business operations are located. The insurance coverage contains policy specifications and insured limits customarily carried for similar properties, business activities and markets. We believe our properties and the properties of our co-investment ventures are adequately insured. Certain losses, however, including losses from floods, earthquakes, acts of war, acts of terrorism or riots, generally are not insured against or not fully insured against because it is not deemed economically feasible or prudent to do so. If an uninsured loss or a loss in excess of insured limits occurs with respect to one or more of our properties, we could experience a significant loss of capital invested and future revenues in these properties and could potentially remain obligated under any recourse debt associated with the property. Furthermore, we cannot be sure that the insurance companies will be able to continue to offer products with sufficient coverage at commercially reasonable rates. If we experience a loss that is uninsured or that exceeds insured limits with respect to one or more of our properties or if the insurance companies fail to meet their coverage commitments to us in the event of an insured loss, then we could lose the capital invested in the damaged properties, as well as the anticipated future revenues from those properties and, if there is recourse debt, then we would remain obligated for any mortgage debt or other financial obligations related to the properties. Any such losses or higher insurance costs could adversely affect our business. Risks Related to Financing and Capital We may be unable to refinance our debt or our cash flow may be insufficient to make required debt payments. We are subject to risks normally associated with debt financing, including the risk that our cash flow will be insufficient to meet required payments of principal and interest. There can be no assurance that we will be able to refinance any maturing indebtedness, that such refinancing would be on terms as favorable as the terms of the maturing indebtedness, or that we will be able to otherwise obtain funds by selling assets or raising equity to make required payments on maturing indebtedness. If we are unable to refinance our indebtedness at maturity or meet our payment obligations, our business and financial condition will be negatively impacted and, if the maturing debt is secured, the lender may foreclose on the property securing such indebtedness. Our credit facilities and certain other debt bears interest at variable rates. Increases in interest rates would increase our interest expense under these agreements. Covenants in our credit agreements could limit our flexibility and breaches of these covenants could adversely affect our financial condition. The terms of our various credit agreements, including our credit facilities, the indentures under which our senior notes are issued and other note agreements, require us to comply with a number of customary financial covenants, such as maintaining debt service coverage, leverage ratios, fixed charge ratios and other operating covenants including maintaining insurance coverage. These covenants may limit our flexibility to run our business, and breaches of these covenants could result in defaults under the instruments governing the applicable indebtedness. If we default under the covenant provisions and are unable to cure the default, refinance the indebtedness or meet payment obligations, our business and financial condition generally and, in particular, the amount of our distributable cash flow could be adversely affected. Adverse changes in our credit ratings could negatively affect our financing activity. The credit ratings of our senior unsecured notes and preferred stock are based on our operating performance, liquidity and leverage ratios, overall financial position and other factors employed by the credit rating agencies in their rating analyses of us. Our credit ratings can affect the amount of capital we can access, as well as the terms and pricing of any debt we may incur. There can be no assurance that we will be able to maintain our current credit ratings, and in the event our credit ratings are downgraded, we would likely incur higher borrowing costs and may encounter difficulty in obtaining additional financing. Also, a downgrade in our credit ratings may trigger additional payments or other negative consequences under our credit facilities and other debt instruments. 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. At December 31, 2017, our credit ratings were A3 from Moody’s and A- from S&P, both with stable outlook. 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. We depend on external sources of capital. To qualify as a REIT, we are required each year to distribute at least 90% of our REIT taxable income (determined without regard to the dividends-paid deduction and by excluding any net capital gain) to our stockholders and we may be subject to tax to the extent our taxable income is not fully distributed. Historically, we have satisfied these distribution requirements by making cash distributions to our stockholders, but we may choose to satisfy these requirements by making distributions of cash or other property, including, in limited circumstances, our own stock. For distributions with respect to taxable years that end on or before December 31, and in some cases declared as late as December 31, a REIT can satisfy up to 90% of the distribution requirements discussed above through the distribution of shares of our stock if certain conditions are met. Assuming we continue to satisfy these distribution requirements with cash, we may not be able to fund all future capital needs, including acquisition and development activities, from cash retained from operations and may have to rely on third-party sources of capital. Furthermore, to maintain our REIT status and not have to pay federal income and excise taxes, we may need to borrow funds on a short-term basis to meet the REIT distribution requirements even if the then-prevailing market conditions are not favorable for these borrowings. These short-term borrowing needs could result from differences in timing between the actual receipt of cash and inclusion of income for federal income tax purposes, or the effect of nondeductible capital expenditures, the creation of reserves or required debt or amortization payments. Our ability to access debt and equity capital on favorable terms or at all depends on a number of factors, including general market conditions, the market’s perception of our growth potential, our current and potential future earnings and cash distributions and the market price of our securities. Our stockholders may experience dilution if we issue additional common stock or units in the OP. Any additional future issuance of common stock or OP units will reduce the percentage of our common stock and units owned by investors. In most circumstances, stockholders and unitholders will not be entitled to vote on whether or not we issue additional common stock or units. In addition, depending on the terms and pricing of any additional offering of our common stock or units and the value of the properties, our stockholders and unitholders may experience dilution in both book value and fair value of their common stock or units. The failure of Prologis, Inc. to qualify as a REIT would have serious adverse consequences. Prologis, Inc. elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code commencing with the taxable year ended December 31, 1997. We believe Prologis, Inc. has been organized and operated to qualify as a REIT under the Internal Revenue Code and believe that the current organization and method of operation comply with the rules and regulations promulgated under the Internal Revenue Code to enable Prologis, Inc. to continue to qualify as a REIT. However, it is possible that we are organized or have operated in a manner that would not allow Prologis, Inc. to qualify as a REIT, or that our future operations could cause Prologis, Inc. to fail to qualify. Qualification as a REIT requires us to satisfy numerous requirements (some annually and others on a quarterly basis) established under highly technical and complex sections of the Internal Revenue Code for which there are only limited judicial and administrative interpretations, and involves the determination of various factual matters and circumstances not entirely within our control. For example, to qualify as a REIT, Prologis, Inc. must derive at least 95% of its gross income in any year from qualifying sources. In addition, Prologis, Inc. must pay dividends to its stockholders aggregating annually at least 90% of its taxable income (determined without regard to the dividends paid deduction and by excluding capital gains) and must satisfy specified asset tests on a quarterly basis. The provisions of the Internal Revenue Code and applicable Treasury regulations regarding qualification as a REIT are more complicated for Prologis, Inc. because we hold assets through the OP. If Prologis, Inc. fails to qualify as a REIT in any taxable year, we will be required to pay federal income tax (including, for taxable years prior to 2018, any applicable alternative minimum tax) on taxable income at regular corporate rates. Unless we are entitled to relief under certain statutory provisions, Prologis, Inc. would be disqualified from treatment as a REIT for the four taxable years following the year in which it lost the qualification. If Prologis, Inc. lost its REIT status, our net earnings would be significantly reduced for each of the years involved. Furthermore, we own a direct or indirect interest in certain subsidiary REITs that elected to be taxed as REITs under Sections 856 through 860 of the Internal Revenue Code. Provided that each subsidiary REIT qualifies as a REIT, our interest in such subsidiary REIT will be treated as a qualifying real estate asset for purposes of the REIT asset tests, and any dividend income or gains derived by us from such subsidiary REIT will generally be treated as income that qualifies for purposes of the REIT 95% gross income test. To qualify as a REIT, the subsidiary REIT must independently satisfy all of the REIT qualification requirements. If such subsidiary REIT were to fail to qualify as a REIT, and certain relief provisions did not apply, it would be treated as a regular taxable corporation and its income would be subject to U.S. federal income tax. In addition, a failure of the subsidiary REIT to qualify as a REIT would have an adverse effect on the ability of Prologis, Inc. to comply with the REIT income and asset tests, and thus its ability to qualify as a REIT. Certain property transfers may generate prohibited transaction income, resulting in a penalty tax on gain attributable to the transaction. From time to time, we may transfer or otherwise dispose of some of our properties, including by contributing properties to our co-investment ventures. Under the Internal Revenue Code, any gain resulting from transfers of properties we hold as inventory or primarily for sale to customers in the ordinary course of business is treated as income from a prohibited transaction subject to a 100% penalty tax. We do not believe that our transfers or disposals of property or our contributions of properties into our co-investment ventures are prohibited transactions. However, whether property is held for investment purposes is a question of fact that depends on all the facts and circumstances surrounding the particular transaction. The Internal Revenue Service may contend that certain transfers or dispositions of properties by us or contributions of properties into our co-investment ventures are prohibited transactions. While we believe that the Internal Revenue Service would not prevail in any such dispute, if the Internal Revenue Service were to argue successfully that a transfer, disposition or contribution of property constituted a prohibited transaction, we would be required to pay a 100% penalty tax on any gain allocable to us from the prohibited transaction. In addition, income from a prohibited transaction might adversely affect our ability to satisfy the income tests for qualification as a REIT. Legislative or regulatory action could adversely affect us. In recent years, numerous legislative, judicial and administrative changes have been made to the U.S. and foreign income tax laws applicable to investments in real estate, REITs, similar entities and investments. Additional changes are likely to continue to occur in the future, both in and outside of the U.S. and may impact our taxation or that of our stockholders. New tax legislation was enacted on December 22, 2017 and provides for significant changes to the U.S. federal income tax laws, including the reduction of the corporate tax rate, a reduction or elimination of certain deductions (including new limitations on the deductibility of interest expense) and significant changes in the taxation of earnings from non-U.S. sources. Some of these changes could have an adverse impact on us, our business, and the results of our operations. The new rules are complex and lack developed administrative guidance; thus, the impact of certain aspects of these provisions on us is currently unclear. Technical corrections or other amendments to the new rules, and administrative guidance interpreting the new rules, may be forthcoming at any time or may be significantly delayed. ITEM 1B. Unresolved Staff Comments None. We predominately invest in logistics facilities. Our properties are typically used for distribution, storage, packaging, assembly and light manufacturing of consumer products. The vast majority of our operating properties are used by our customers for bulk distribution. The following tables provide details of our consolidated operating properties, investment in land and development portfolio. We have also included operating property information for our owned and managed portfolio. The owned and managed portfolio includes the properties we consolidate and the properties owned by our unconsolidated co-investment ventures reflected at 100% of the amount included in the ventures’ financial statements as calculated on a GAAP basis, not our proportionate share. Included in the operating property information below for our consolidated operating properties are 404 buildings owned primarily by one co-investment venture that we consolidate but of which we own less than 100% of the equity. No individual property or group of properties operating as a single business unit amounted to 10% or more of our consolidated total assets at December 31, 2017, or generated income equal to 10% or more of our consolidated gross revenues for the year ended December 31, 2017. Dollars and square feet in the following tables are in millions and items notated by ‘0‘ indicate an amount that rounds to less than one million: Consolidated Operating Properties Owned and Managed Region Rentable Square Footage Gross Book Value Encumbrances (1) Rentable Square Footage Gross Book Value U.S.: Atlanta 15 $ 710 $ 76 18 $ 872 Baltimore/Washington D.C. 4 327 30 7 679 Central and Eastern Pennsylvania 14 917 - 17 1,115 Central Valley California 10 573 11 12 725 Chicago 28 1,894 50 36 2,481 Dallas/Fort Worth 21 1,121 132 26 1,538 Houston 7 425 20 14 916 Las Vegas 7 511 18 8 629 New Jersey/New York City 26 2,553 167 32 3,286 San Francisco Bay Area 16 1,737 10 20 2,095 Seattle 9 856 42 16 1,571 South Florida 9 1,026 34 15 1,541 Southern California 56 5,411 106 73 7,160 Remaining Markets - U.S. (17 markets) (2) 46 2,340 126 62 3,292 Subtotal U.S. 268 20,401 822 356 27,900 Other Americas: Brazil 7 517 - 10 718 Canada 9 745 156 9 745 Mexico 2 113 - 36 2,165 Subtotal Other Americas 18 1,375 156 55 3,628 Europe: Belgium - - - 3 208 Czech Republic - - - 11 822 France 1 64 - 33 2,551 Germany 1 50 - 24 2,003 Hungary 0 4 - 7 443 Italy - - - 9 576 Netherlands 0 24 - 19 1,675 Poland 1 62 - 25 1,572 Slovakia 0 12 - 4 254 Spain 1 60 - 9 697 Sweden 1 47 - 5 420 U.K. 1 79 - 23 3,214 Subtotal Europe 6 402 - 172 14,435 Asia: China 1 43 - 15 774 Japan 3 340 - 29 4,965 Singapore 1 140 - 1 140 Subtotal Asia 5 523 - 45 5,879 Total operating portfolio (3) 297 22,701 978 628 51,842 Value-added properties (4) 2 181 - 2 245 Total operating properties 299 $ 22,882 $ 978 630 $ 52,087 Consolidated – Investment in Land Consolidated – Development Portfolio Region Acres Estimated Build Out Potential (square feet) (5) Current Investment Rentable Square Footage Upon Completion TEI (6) U.S.: Atlanta 54 1 $ 6 1 $ 34 Baltimore/Washington D.C. 41 1 16 - - Central and Eastern Pennsylvania 29 0 8 - - Central Valley California 1,046 21 103 3 246 Chicago 151 3 15 0 36 Dallas/Fort Worth 38 1 8 2 139 Houston 185 3 17 - - Las Vegas 50 1 7 1 93 New Jersey/New York City 56 1 28 1 186 San Francisco Bay Area - - - 0 31 Seattle 9 0 14 1 186 South Florida 175 3 122 1 54 Southern California 93 1 32 2 166 Remaining Markets - U.S. (17 markets) 283 4 35 2 120 Subtotal U.S. 2,210 40 411 14 1,291 Other Americas: Brazil 531 12 166 - - Canada 159 3 45 0 27 Mexico 508 10 111 2 160 Subtotal Other Americas 1,198 25 322 2 187 Europe: Belgium 45 1 14 - - Czech Republic 117 2 22 1 49 France 262 5 45 1 87 Germany 36 1 12 1 80 Hungary 281 5 19 - - Italy 70 1 8 1 93 Netherlands 39 1 25 1 92 Poland 447 8 45 0 4 Slovakia 204 4 25 1 62 Spain 64 2 28 1 79 Sweden - - - 0 30 U.K. 137 2 47 1 86 Subtotal Europe 1,702 32 290 8 662 Asia: China - - - - - Japan 81 5 131 4 701 Singapore - - - - - Subtotal Asia 81 5 131 4 701 Total land and development portfolio 5,191 102 $ 1,154 28 $ 2,841 (1) Certain of our consolidated properties are pledged as security under secured mortgage debt and assessment bonds. For purposes of this table, the total principal balance of a debt issuance that is secured by a pool of properties is allocated among the properties in the pool based on each property’s investment balance. In addition to the amounts reflected here, we also have $2 million of encumbrances related to other real estate properties not included in Real Estate Operations. See Schedule III – Real Estate and Accumulated Depreciation to the Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data for additional identification of the properties pledged. (2) No remaining market within the U.S. represented more than 2% of the total gross book value of the consolidated operating properties. (4) Value-added properties are properties we have either acquired at a discount and believe we could provide greater returns post-stabilization or properties we expect to repurpose to a higher and better use. (5) Represents the estimated finished square feet available for lease upon completion of a building on existing parcels of land. properties under development in the development portfolio were expected to be completed by December 31, 2018, and approximately 22% of the properties in the development portfolio were already completed but not yet stabilized. The remainder of our properties under development were expected to be completed before July 2019. The following table summarizes our investment in consolidated real estate properties at December 31, 2017 (in millions): Investment Before Depreciation Operating properties, excluding assets held for sale or contribution $ 22,586 Development portfolio, including cost of land 1,594 Land 1,154 Other real estate investments (1) 505 Total consolidated real estate properties $ 25,839 (1) 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 office buildings; (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. We generally lease our properties on a long-term basis (the average term for leases signed in 2017 was 54 months). The following table summarizes the lease expirations of our consolidated operating portfolio for leases in place at December 31, 2017 (dollars and square feet in millions): NER Number of Leases Occupied Square Feet Dollars Percent of Total Dollars Per Square Foot 2018 566 31 $ 168 10.6 % $ 5.34 2019 639 47 231 14.6 % 4.92 2020 607 33 182 11.5 % 5.55 2021 585 44 237 14.9 % 5.42 2022 517 42 236 14.8 % 5.60 2023 243 25 142 9.0 % 5.79 2024 118 13 80 5.1 % 6.05 2025 87 14 85 5.3 % 5.98 2026 35 7 46 2.9 % 6.46 2027 57 9 54 3.4 % 6.03 Thereafter 55 20 126 7.9 % 6.42 3,509 285 $ 1,587 100.0 % $ 5.57 Month to month 107 4 Total Consolidated 3,616 289 Included in our owned and managed portfolio are consolidated and unconsolidated co-investment ventures that hold investments in real estate properties, primarily logistics facilities that we also manage. Our unconsolidated co-investment ventures are accounted for under the equity method. The amounts included for the unconsolidated ventures are reflected at 100% of the amount included in the ventures’ financial statements as calculated on a GAAP basis, not our proportionate share. The following table summarizes our consolidated and unconsolidated co-investment ventures at December 31, 2017 (in millions): Operating Properties Square Feet Gross Book Value Investment in Land Development Portfolio – TEI Consolidated Co-Investment Ventures U.S.: Prologis U.S. Logistics Venture (“USLV”) 67 $ 5,931 $ 31 $ 106 Total 67 $ 5,931 $ 31 $ 106 Unconsolidated Co-Investment Ventures U.S.: Prologis Targeted U.S. Logistics Fund (“USLF”) 88 $ 7,543 $ - $ 34 Other Americas: FIBRA Prologis 35 2,052 4 - Europe: Prologis European Logistics Fund (“PELF”) 106 9,565 11 59 Prologis European Logistics Partners Sàrl (“PELP”) 58 4,203 30 6 Prologis UK Logistics Venture (“UKLV”) 2 285 110 �� 220 Subtotal Europe 166 14,053 151 285 Asia: Nippon Prologis REIT (“NPR”) 26 4,625 - - Prologis China Logistics Venture 14 731 80 879 Subtotal Asia 40 5,356 80 879 Other: Brazil joint ventures 3 201 - - Total 332 $ 29,205 $ 235 $ 1,198 For more information regarding our unconsolidated and consolidated co-investment ventures, see Notes 5 and 12 to the Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data. From time to time, we and our co-investment ventures are parties to a variety of legal proceedings arising in the ordinary course of business. We believe that, with respect to any such matters to which we are currently a party, the ultimate disposition of any such matter will not result in a material adverse effect on our business, financial position or results of operations. ITEM 4. Mine Safety Disclosures Not Applicable. ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities MARKET INFORMATION AND HOLDERS Our common stock is listed on the NYSE under the symbol “PLD.” The following table sets forth the high and low sale price of our common stock, as reported in the NYSE Composite Tape, and the declared dividends per share, for the periods indicated. High Low Dividends 2017 Fourth Quarter $ 67.53 $ 62.99 $ 0.44 Third Quarter $ 65.49 $ 56.59 $ 0.44 Second Quarter $ 59.49 $ 51.66 $ 0.44 First Quarter $ 54.25 $ 48.33 $ 0.44 2016 Fourth Quarter $ 53.51 $ 45.93 $ 0.42 Third Quarter $ 54.87 $ 48.46 $ 0.42 Second Quarter $ 50.74 $ 43.45 $ 0.42 First Quarter $ 44.26 $ 35.25 $ 0.42 Our future common stock dividends, if and as declared, may vary and will be determined by the Board upon the circumstances prevailing at the time, including our financial condition, operating results, estimated taxable income and REIT distribution requirements. These dividends, if and as declared, may be adjusted at the discretion of the Board during the year. On February 12, 2018, we had approximately 533,054,000 shares of common stock outstanding, which were held of record by approximately 4,400 stockholders. Stock Performance Graph The following line graph compares the change in Prologis, Inc. cumulative total stockholder’s return on shares of its common stock from December 31, 2012, to the cumulative total return of the S&P 500 Stock Index and the Financial Times and Stock Exchange NAREIT Equity REITs Index from December 31, 2012, to December 31, 2017. The graph assumes an initial investment of $100 in our common stock and each of the indices on December 31, 2012, and, as required by the SEC, the reinvestment of all dividends. The return shown on the graph is not necessarily indicative of future performance. This graph and the accompanying text are not “soliciting material,” are not deemed filed with the SEC and are not to be incorporated by reference in any filing by the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing. At December 31, 2017, and 2016, we had 1.4 million and 1.6 million shares of the Series Q preferred stock with a liquidation preference of $50 per share. Dividends payable per share were $4.27 for the years ended December 31, 2017, and 2016. For more information regarding dividends, see Note 10 to the Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data. SALES OF UNREGISTERED SECURITIES During 2017, we issued an aggregate of 1.5 million shares of common stock of Prologis, Inc. in connection with the redemption of common units of Prologis, L.P. See Note 11 to the Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data for more information. The issuance of the shares of common stock was undertaken in reliance upon the exemption from registration requirements of the Securities Act of 1933, as amended, afforded by Section 4(a)(2) thereof. SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS For information regarding securities authorized for issuance under our equity compensation plans, see Notes 10 and 13 to the Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data. Common Stock Plans Further information relative to our equity compensation plans will be provided in our 2018 Proxy Statement or in an amendment filed on Form 10-K/A. ITEM 6. Selected Financial Data The following table summarizes selected financial data related to our historical financial condition and results of operations for both Prologis, Inc. and Prologis, L.P. (in millions, except for per share and unit amounts): 2017 2016 2015 2014 2013 Operating Data: Total revenues $ 2,618 $ 2,533 $ 2,197 $ 1,761 $ 1,750 Gains on dispositions of investments in real estate and revaluation of equity investments upon acquisition of a controlling interest, net $ 1,183 $ 757 $ 759 $ 726 $ 715 Consolidated net earnings $ 1,761 $ 1,293 $ 926 $ 739 $ 230 Net earnings per share attributable to common stockholders and unitholders – Basic (1) $ 3.10 $ 2.29 $ 1.66 $ 1.25 $ 0.65 Net earnings per share attributable to common stockholders and unitholders – Diluted (1) $ 3.06 $ 2.27 $ 1.64 $ 1.24 $ 0.64 Dividends per common share and distributions per common unit $ 1.76 $ 1.68 $ 1.52 $ 1.32 $ 1.12 Consolidated Balance Sheet Data: Total assets $ 29,481 $ 30,250 $ 31,395 $ 25,775 $ 24,534 Total debt $ 9,413 $ 10,608 $ 11,627 $ 9,337 $ 8,973 FFO (2): Reconciliation of net earnings to FFO: Net earnings attributable to common stockholders $ 1,642 $ 1,203 $ 863 $ 622 $ 315 Total NAREIT defined adjustments 101 534 461 299 504 Total our defined adjustments 52 (35 ) (15 ) (33 ) 36 FFO, as modified by Prologis (2) $ 1,795 $ 1,702 $ 1,309 $ 888 $ 855 Total core defined adjustments (244 ) (302 ) (128 ) 65 (42 ) Core FFO (2) $ 1,551 $ 1,400 $ 1,181 $ 953 $ 813 (1) In 2014, the accounting standard changed for classifying and reporting discontinued operations and none of our dispositions since adoption met the qualifications to be reported as discontinued operations. In 2013, our net earnings per share attributable to common stockholders and unitholders for basic and diluted included $0.25 per share attributable to discontinued operations. ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data of this report and the matters described under Item 1A. Risk Factors. Summary of 2017 During the year ended December 31, 2017, operating fundamentals remained strong for our owned and managed portfolio and we ended the year with occupancy of 97.2%. See below for the results of our two business segments and details of operating activity of our owned and managed portfolio. In 2017, we completed the following significant activities as further described in the accompanying notes to the Consolidated Financial Statements: We completed several transactions that repositioned our portfolio and streamlined our co-investment ventures, including: o In January, we sold our investment in Europe Logistics Venture 1 (“ELV”) to our venture partner for $84 million and ELV contributed its properties to Prologis Targeted Europe Logistics Fund (“PTELF”) in exchange for equity interests. o In February, we formed UKLV, in which we have a 15.0% ownership interest. This unconsolidated co-investment venture was formed for investment in the U.K. and currently holds stabilized properties, properties under development and land. o In October, the assets and related liabilities of PTELF were contributed to Prologis European Properties Fund II (“PEPF II”) in exchange for units, and PEPF II was renamed PELF. In connection with the transaction, we exchanged our units in PTELF for new units in PELF resulting in our ownership interest decreasing to 25.6%, however, our economic investment did not substantially change. o As a result of these activities, we had eight unconsolidated co-investment ventures at December 31, 2017. o In addition to the transactions discussed above, we also contributed properties to existing co-investment ventures in Europe, Japan and Mexico and we disposed of non-strategic operating properties to third parties, primarily in the U.S. o These transactions generated proceeds of $4.5 billion and realized net gains of $1.2 billion. In February, we amended our Japanese yen revolver and increased the total borrowing capacity to ¥50.0 billion ($444 million at December 31, 2017). In June, we issued £500 million ($645 million) of senior notes with an effective interest rate of 2.3%, maturing in June 2029, at 99.9% of par value. Following the issuance, we used the cash proceeds to redeem $618 million of previously issued senior notes, maturing in 2019, with an average coupon rate of 5.4%. 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. Below is a reconciliation of our NOI by segment to Operating Income per the Consolidated Financial Statements (in millions). Each segment’s NOI is reconciled to a line item in the Consolidated Financial Statements in the respective segment discussion below. 2017 2016 2015 Real Estate Operations – NOI $ 1,662 $ 1,646 $ 1,368 Strategic Capital – NOI 219 175 109 General and administrative expenses (231 ) (222 ) (217 ) Depreciation and amortization expenses (879 ) (931 ) (880 ) Operating income $ 771 $ 668 $ 380 See Note 18 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. We conduct a significant portion of our business and employ a substantial number of people outside of the U.S. During 2017, we generated approximately $416 million or 15.9% of our revenues from operations outside the U.S. Circumstances and developments related to international and U.S. operations that could negatively affect us include, but are not limited to, the following factors: difficulties and costs of staffing and managing international operations in certain regions, including differing employment practices and labor issues; local businesses and cultural factors that differ from our usual standards and practices; volatility in currencies and currency restrictions, which may prevent the transfer of capital and profits to the U.S.; challenges in establishing effective controls and procedures to regulate operations in different regions and to monitor compliance with applicable regulations, such as the Foreign Corrupt Practices Act, the United Kingdom (“U.K.”) Bribery Act and other similar laws; unexpected changes in regulatory requirements, tax, tariffs and other laws within the countries in which we operate; potentially adverse tax consequences; the responsibility of complying with multiple and potentially conflicting laws, e.g., with respect to corrupt practices, employment and licensing; the impact of regional or country-specific business cycles and economic instability, including instability in, or further withdrawals from, the European Union or other international trade alliances or agreements; political instability, uncertainty over property rights, civil unrest, drug trafficking, political activism or the continuation or escalation of terrorist or gang activities; access to capital may be more restricted, or unavailable on favorable terms or at all in certain locations. In addition, we may be impacted by the ability of our non-U.S. subsidiaries to dividend or otherwise transfer cash among our subsidiaries, including transfers of cash to pay interest and principal on our debt, due to currency exchange control regulations, transfer pricing regulations and potentially adverse tax consequences, among other factors. Disruptions in the global capital and credit markets may adversely affect our operating results and financial condition. To the extent there is turmoil in the Our business and operations could suffer in the event of system failures or cyber security attacks. Despite system redundancy, the implementation of security measures and the existence of a disaster recovery plan for our internal and hosted information technology systems, our systems are vulnerable to damages from any number of sources, including energy blackouts, natural disasters, terrorism, war, telecommunication failures and cyber security attacks, such as computer viruses or unauthorized access. Any system failure or accident that causes interruptions in our operations could result in a material disruption to our business. We may also incur additional costs to remedy damages caused by such disruptions. Any compromise of our security could result in a violation of applicable privacy and other laws, unauthorized access to information of ours and others, significant legal and financial exposure, damage to our reputation, loss or misuse of the information and a loss of confidence in our security measures, which could harm our business. Risks associated with our dependence on key personnel. We depend on the deep industry knowledge and the efforts of our executive officers and other key employees. From time to time, our personnel and their roles may change. While we believe that we are able to retain our key talent and find suitable employees to meet our personnel needs, the loss of key personnel, any change in their roles or the limitation of their availability could adversely affect our business. If we are unable to continue to attract and retain our executive officers, or if compensation costs required to attract and retain key employees become more expensive, our performance and competitive position could be materially adversely affected. Our business could be adversely impacted if we have deficiencies in our disclosure controls and procedures or internal control over financial reporting. The design and effectiveness of our disclosure controls and procedures and internal control over financial reporting may not prevent all errors, misstatements or misrepresentations. While management continually reviews the effectiveness of our disclosure controls and procedures and internal control over financial reporting, there can be no guarantee that our internal control over financial reporting will be effective in accomplishing all control objectives all of the time. Deficiencies, including any material weakness, in our internal control over financial reporting that may occur in the future could result in misstatements or restatements of our financial statements or a decline in the price of our securities. The depreciation in the value of the foreign currency in countries where we have a significant investment may adversely affect our results of operations and financial position. We pursue growth opportunities in international markets where the U.S. dollar is not the functional currency. At December 31, 2017, approximately $7.4 billion or 25.1% of our total consolidated assets were invested in a currency other than the U.S. dollar, primarily the Brazilian real, British pound sterling, Canadian dollar, euro and Japanese yen. As a result, we are subject to foreign currency risk due to potential fluctuations in exchange rates between foreign currencies and the U.S. dollar. A significant change in the value of the foreign currency of one or more countries where we have a significant investment may have a material adverse effect on our business and, specifically, our U.S. dollar reported financial position and results of operations and debt covenant ratios. Although we attempt to mitigate adverse effects by borrowing under debt agreements denominated in foreign currencies and using derivative contracts, there can be no assurance that those attempts to mitigate foreign currency risk will be successful. Our hedging of foreign currency and interest rate risk may not effectively limit our exposure to other risks. Hedging arrangements involve risks, such as the risk of fluctuation in the relative value of the foreign currency or interest rates and the risk that counterparties may fail to honor their obligations under these arrangements. The funds required to settle such arrangements could be significant depending on the stability and movement of the hedged foreign currency or the size of the underlying financing and the applicable interest rates at the time of the breakage. The failure to hedge effectively against foreign exchange changes or interest rate changes may adversely affect our business. Compliance or failure to comply with regulatory requirements could result in substantial costs. We are required to comply with many regulations in different countries, including (but not limited to) the Foreign Corrupt Practices Act, the U.K Bribery Act and similar laws and regulations. Our properties are also subject to various federal, state and local regulatory requirements, such as the Americans with Disabilities Act and state and local fire and life-safety requirements. Noncompliance could result in the imposition of governmental fines or the award of damages to private litigants. While we believe that we are currently in material compliance with these regulatory requirements, the requirements may change or new requirements may be imposed that could require significant unanticipated expenditures by us. If we are required to make unanticipated expenditures to comply with these regulations, we may be adversely affected. Risks Related to our Business Real estate investments are not as liquid as certain other types of assets, which may reduce economic returns to investors. Real estate investments are not as liquid as certain other types of investments and this lack of liquidity may limit our ability to react promptly to changes in economic or other conditions. Significant expenditures associated with real estate investments, such as secured mortgage payments, real estate taxes and maintenance costs, are generally not reduced when circumstances cause a reduction in income from the investments. As a REIT, under the Internal Revenue Code, we are only able to hold property for sale in the ordinary course of business through taxable REIT subsidiaries in order to not incur punitive taxation on any tax gain from the sale of such property. We may dispose of certain properties that have been held for investment to generate liquidity. If we do not satisfy certain safe harbors or we believe there is too much risk of incurring the punitive tax on any tax gain from the sale, we may not pursue such sales. We may decide to sell properties to certain of our unconsolidated co-investment ventures or third parties to generate proceeds to fund our capital deployment activities. Our ability to sell properties on advantageous terms is affected by: (i) competition from other owners of properties that are trying to dispose of their properties; (ii) market conditions, including the capitalization rates applicable to our properties; and (iii) other factors beyond our control. If our competitors sell assets similar to assets we intend to divest in the same markets or at valuations below our valuations for comparable assets, we may be unable to divest our assets at favorable pricing or at all. The unconsolidated co-investment ventures or third parties who might acquire our properties may need to have access to debt and equity capital, in the private and public markets, in order to acquire properties from us. Should they have limited or no access to capital on favorable terms, then dispositions could be delayed. If we do not have sufficient cash available to us through our operations, sales or contributions of properties or available credit facilities to continue operating our business as usual, we may need to find alternative ways to increase our liquidity. Such alternatives may include, without limitation, divesting ourselves of properties, whether or not they otherwise meet our strategic objectives to keep in the long term, at less than optimal terms, incurring debt, entering into leases with new customers at lower rental rates or less than optimal terms or entering into lease renewals with our existing customers without an increase in rental rates. There can be no assurance, however, that such alternative ways to increase our liquidity will be available to us. Additionally, taking such measures to increase our liquidity may adversely affect our business, and in particular, our distributable cash flow and debt covenants. Our investments are concentrated in the logistics sector and our business would be adversely affected by an economic downturn in that sector. Our investments in real estate assets are concentrated in the logistics sector. This concentration may expose us to the risk of economic downturns in this sector to a greater extent than if our business activities were more diversified. General economic conditions and other events or occurrences that affect areas in which our properties are geographically concentrated, may impact financial results. We are exposed to general economic conditions, local, regional, national and international economic conditions and other events and occurrences that affect the markets in which we own properties. Our operating performance is further impacted by the economic conditions of the specific markets in which we have concentrations of properties. At December 31, 2017, 33.7% of our consolidated operating properties or $7.7 billion (based on consolidated gross book value, or investment before depreciation) were located in California, which represented 27.4% of the aggregate square footage of our operating properties and 34.1% of our NOI. Our revenues from, and the value of, our properties located in California may be affected by local real estate conditions (such as an oversupply of or reduced demand for logistics properties) and the local economic climate. Business layoffs, downsizing, industry slowdowns, changing demographics and other factors may adversely impact California’s economic climate. Because of the number of properties we have located in California, a downturn in California’s economy or real estate conditions could adversely affect our business. In addition to California, we also have significant holdings (defined as more than 3% of total consolidated investment before depreciation) in operating properties in certain markets located in Atlanta, Central and Eastern Pennsylvania, Chicago, Dallas/Fort Worth, New Jersey/New York City, Seattle and South Florida. Our operating performance could be adversely affected if conditions become less favorable in any of the markets in which we have a concentration of properties. Conditions such as an oversupply of logistics space or a reduction in demand for logistics space, among other factors, may impact operating conditions. Any material oversupply of logistics space or material reduction in demand for logistics space could adversely affect our overall business. Our owned and managed portfolio, which includes our wholly-owned properties and properties included in our co-investment ventures, has concentrations of properties in the same markets mentioned above, as well as in markets in France, Germany, Japan, Mexico, Netherlands, Poland and the U.K., and are subject to the economic conditions in those markets. A number of our investments, both wholly-owned and owned through co-investment ventures, are located in areas that are known to be subject to earthquake activity. U.S. properties located in active seismic areas include properties in our markets in California and Seattle. International properties located in active seismic areas include Japan and Mexico. We generally carry earthquake insurance on our properties located in areas historically subject to seismic activity, subject to coverage limitations and deductibles, if we believe it is commercially reasonable. We evaluate our earthquake insurance coverage annually in light of current industry practice through an analysis prepared by outside consultants and in some specific instances have elected to self-insure our earthquake exposure based on this analysis. We have elected not to carry earthquake insurance for our assets in Japan based on this analysis. Furthermore, a number of our properties are located in areas that are known to be subject to hurricane or flood risk. We carry hurricane and flood hazard insurance on all of our properties located in areas historically subject to such activity, subject to coverage limitations and deductibles, if we believe it is commercially reasonable. We evaluate our insurance coverage annually in light of current industry practice through an analysis prepared by outside consultants. Investments in real estate properties are subject to risks that could adversely affect our business. Investments in real estate properties are subject to varying degrees of risk. While we seek to minimize these risks through geographic diversification of our portfolio, market research and our asset management capabilities, these risks cannot be eliminated. Factors that may affect real estate values and cash flows include: local conditions, such as oversupply or a reduction in demand; technological changes, such as reconfiguration of supply chains, autonomous vehicles, robotics, 3D printing or other technologies; the attractiveness of our properties to potential customers and competition from other available properties; increasing costs of maintaining, insuring, renovating and making improvements to our properties; our ability to rehabilitate and reposition our properties due to changes in the business and logistics needs of our customers; our ability to control rents and variable operating costs; and governmental regulations and the associated potential liability under, and changes in, environmental, zoning, usage, tax, tariffs and other laws. We may be unable to lease vacant space or renew leases or re-lease space on favorable terms as leases expire. Our operating results and distributable cash flow would be adversely affected if a significant number of our customers were unable to meet their lease obligations. We are also subject to the risk that, upon the expiration of leases for space located in our properties, leases may not be renewed by existing customers, the space may not be re-leased to new customers or the terms of renewal or re-leasing (including the cost of required renovations or concessions to customers) may be less favorable to us than current lease terms. Our competitors may offer space at rental rates below current market rates or below the rental rates we currently charge our customers, we may lose potential customers, and we may be pressured to reduce our rental rates below those we currently charge to retain customers when our customers’ leases expire. In the event of default by a significant number of customers, we may experience delays and incur substantial costs in enforcing our rights as landlord, and we may be unable to re-lease spaces. A customer may experience a downturn in its business, which may cause the loss of the customer or may weaken its financial condition, resulting in the customer’s failure to make rental payments when due or requiring a restructuring that might reduce cash flow from the lease. In addition, a customer may seek the protection of bankruptcy, insolvency or similar laws, which could result in the rejection and termination of such customer’s lease and thereby cause a reduction in our available cash flow. We may acquire properties, which involves risks that could adversely affect our business and financial condition. We have acquired properties and will continue to acquire properties, both through the direct acquisition of real estate and through the acquisition of entities that own the real estate and through additional investments in co-investment ventures that acquire properties. The acquisition of properties involves risks, including the risk that the acquired property will not perform as anticipated and that any actual costs for rehabilitation, repositioning, renovation and improvements identified in the pre-acquisition due diligence process will exceed estimates. When we acquire properties, we may face risks associated with a lack of market knowledge or understanding of the local economy, forging new business relationships in the area and unfamiliarity with local government and permitting procedures. Additionally, there is, and it is expected there will continue to be, significant competition for properties that meet our investment criteria as well as risks associated with obtaining financing for acquisition activities. The acquired properties or entities may be subject to liabilities, which may be without any recourse, or with only limited recourse, with respect to unknown liabilities. As a result, if a liability were asserted against us based on ownership of any of these entities or properties, then we may have to pay substantial sums to settle it. Our real estate development strategies may not be successful. Our real estate development strategy is focused on monetizing land in the future through development of logistics facilities to hold for long-term investment, contribution or sale to a co-investment venture or third party, depending on market conditions, our liquidity needs and other factors. We may increase our investment in the development, renovation and redevelopment business and we expect to complete the build-out and leasing of our current development portfolio. We may also develop, renovate and redevelop properties within existing or newly formed co-investment ventures. The real estate development, renovation and redevelopment business includes the following significant risks: we may not be able to obtain financing for development projects on favorable terms or at all; we may explore development opportunities that may be abandoned and the related investment impaired; we may not be able to obtain, or may experience delays in obtaining, all necessary zoning, land-use, building, occupancy and other governmental permits and authorizations; we may have construction costs, total investment amounts and our share of remaining funding that exceed our estimates and projects may not be completed, delivered or stabilized as planned due to defects or other issues; we may not be able to attract third-party investment in new development co-investment ventures or sufficient customer demand for our product; we may have properties that perform below anticipated levels, producing cash flow below budgeted amounts; we may seek to sell certain land parcels and not be able to find a third party to acquire such land or the sales price will not allow us to recover our investment, resulting in impairment charges; we may not be able to lease properties we develop on favorable terms or at all; we may not be able to capture the anticipated enhanced value created by our value-added properties on expected timetables or at all; we may experience delays (temporary or permanent) if there is public or government opposition to our activities; and we may have substantial renovation, new development and redevelopment activities, regardless of their ultimate success, that require a significant amount of management’s time and attention, diverting their attention from our day-to-day operations. We are subject to risks and liabilities in connection with forming co-investment ventures, investing in new or existing co-investment ventures, attracting third-party investment and investing in and managing properties through co-investment ventures. At December 31, 2017, we had investments in real estate containing approximately 399 million square feet held through co-investment ventures, both public and private. Our organizational documents do not limit the amount of available funds that we may invest in these ventures, and we may and currently intend to develop and acquire properties through co-investment ventures and investments in other entities when warranted by the circumstances. However, there can be no assurance that we will be able to form new co-investment ventures, or attract third-party investment or that additional investments in new or existing ventures to develop or acquire properties will be successful. Further, there can be no assurance that we are able to realize value from such investments. Our co-investment ventures involve certain additional risks that we do not otherwise face, including: our partners may share certain approval rights over major decisions made on behalf of the ventures; if our partners fail to fund their share of any required capital contributions, then we may choose to contribute such capital; our partners might have economic or other business interests or goals that are inconsistent with our business interests or goals that would affect our ability to operate the property; the venture or other governing agreements often restrict the transfer of an interest in the co-investment venture or may otherwise restrict our ability to sell the interest when we desire or on advantageous terms; disputes between us and our partners may result in litigation or arbitration that would increase our expenses and prevent our officers and directors from focusing their time and effort on our business and result in subjecting the properties owned by the applicable co-investment venture to additional risk. We generally seek to maintain sufficient influence over our co-investment ventures to permit us to achieve our business objectives; however, we may not be able to continue to do so indefinitely. We have formed publicly traded investment vehicles, such as NPR and FIBRA Prologis, for which we serve as sponsor or manager. We have contributed, We are exposed to various environmental risks, including the potential impacts of future climate change, which may result in unanticipated losses that could affect our business and financial condition. Under various federal, state and local laws, ordinances and regulations, a current or previous owner, developer or operator of real estate may be liable for the costs of removal or remediation of certain hazardous or toxic substances. The costs of removal or remediation of such substances could be substantial. Such laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the release or presence of such hazardous substances. In addition, third parties may sue the owner or operator of a site for damages based on personal injury, property damage or other costs, including investigation and clean-up costs, resulting from the environmental contamination. Environmental laws in some countries, including the U.S., also require that owners or operators of buildings containing asbestos properly manage and maintain the asbestos, adequately inform or train those who may come into contact with asbestos and undertake special precautions, including removal or other abatement, in the event that asbestos is disturbed during building renovation or demolition. These laws may impose fines and penalties on building owners or operators who fail to comply with these requirements and may allow third parties to seek recovery from owners or operators for personal injury associated with exposure to asbestos. Some of our properties are known to contain asbestos-containing building materials. In addition, some of our properties are leased or have been leased, in part, to owners and operators of businesses that use, store or otherwise handle petroleum products or other hazardous or toxic substances, creating a potential for the release of such hazardous or toxic substances. Furthermore, certain of our properties are on, adjacent to or near other properties that have contained or currently contain petroleum products or other hazardous or toxic substances, or upon which others have engaged, are engaged or may engage in activities that may release such hazardous or toxic substances. From time to time, we may acquire properties, or interests in properties, with known adverse environmental conditions for which we believe that the environmental liabilities associated with these conditions are quantifiable and that the acquisition will yield a superior risk-adjusted return. In connection with certain divested properties, we have agreed to remain responsible for, and to bear the cost of, remediating or monitoring certain environmental conditions on the properties. We are also exposed to potential physical risks from possible future changes in climate. Our logistics facilities may be exposed to rare catastrophic weather events, such as severe storms or floods. If the frequency of extreme weather events increases due to climate change, our exposure to these events could increase. We do not currently consider ourselves to be exposed to regulatory risks related to climate change, as our operations generally do not emit a significant amount of greenhouse gases. However, we may be adversely impacted as a real estate developer in the future by potential impacts to the supply chain or stricter energy efficiency standards for buildings. We cannot give any assurance that other such conditions do not exist or may not arise in the future. The presence of such substances on our real estate properties could adversely affect our ability to lease, develop or sell such properties or to borrow using such properties as collateral. Our insurance coverage does not include all potential losses. We and our unconsolidated co-investment ventures carry insurance coverage including property damage and rental loss insurance resulting from certain perils such as fire and additional perils as covered under an extended coverage policy, namely windstorm, flood, earthquake and terrorism; commercial general liability insurance; and environmental insurance, as appropriate for the markets where each of our properties and business operations are located. The insurance coverage contains policy specifications and insured limits customarily carried for similar properties, business activities and markets. We believe our properties and the properties of our co-investment ventures are adequately insured. Certain losses, however, including losses from floods, earthquakes, acts of war, acts of terrorism or riots, generally are not insured against or not fully insured against because it is not deemed economically feasible or prudent to do so. If an uninsured loss or a loss in excess of insured limits occurs with respect to one or more of our properties, we could experience a significant loss of capital invested and future revenues in these properties and could potentially remain obligated under any recourse debt associated with the property. Furthermore, we cannot be sure that the insurance companies will be able to continue to offer products with sufficient coverage at commercially reasonable rates. If we experience a loss that is uninsured or that exceeds insured limits with respect to one or more of our properties or if the insurance companies fail to meet their coverage commitments to us in the event of an insured loss, then we could lose the capital invested in the damaged properties, as well as the anticipated future revenues from those properties and, if there is recourse debt, then we would remain obligated for any mortgage debt or other financial obligations related to the properties. Any such losses or higher insurance costs could adversely affect our business. Risks Related to Financing and Capital We may be unable to refinance our debt or our cash flow may be insufficient to make required debt payments. We are subject to risks normally associated with debt financing, including the risk that our cash flow will be insufficient to meet required payments of principal and interest. There can be no assurance that we will be able to refinance any maturing indebtedness, that such refinancing would be on terms as favorable as the terms of the maturing indebtedness, or that we will be able to otherwise obtain funds by selling assets or raising equity to make required payments on maturing indebtedness. If we are unable to refinance our indebtedness at maturity or meet our payment obligations, our business and financial condition will be negatively impacted and, if the maturing debt is secured, the lender may foreclose on the property securing such indebtedness. Our credit facilities and certain other debt bears interest at variable rates. Increases in interest rates would increase our interest expense under these agreements. Covenants in our credit agreements could limit our flexibility and breaches of these covenants could adversely affect our financial condition. The terms of our various credit agreements, including our credit facilities, the indentures under which our senior notes are issued and other note agreements, require us to comply with a number of customary financial covenants, such as maintaining debt service coverage, leverage ratios, fixed charge ratios and other operating covenants including maintaining insurance coverage. These covenants may limit our flexibility to run our business, and breaches of these covenants could result in defaults under the instruments governing the applicable indebtedness. If we default under the covenant provisions and are unable to cure the default, refinance the indebtedness or meet payment obligations, our business and financial condition generally and, in particular, the amount of our distributable cash flow could be adversely affected. Adverse changes in our credit ratings could negatively affect our financing activity. The credit ratings of our senior unsecured notes and preferred stock are based on our operating performance, liquidity and leverage ratios, overall financial position and other factors employed by the credit rating agencies in their rating analyses of us. Our credit ratings can affect the amount of capital we can access, as well as the terms and pricing of any debt we may incur. There can be no assurance that we will be able to maintain our current credit ratings, and in the event our credit ratings are downgraded, we would likely incur higher borrowing costs and may encounter difficulty in obtaining additional financing. Also, a downgrade in our credit ratings may trigger additional payments or other negative consequences under our credit facilities and other debt instruments. 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. At December 31, 2017, our credit ratings were A3 from Moody’s and A- from S&P, both with stable outlook. 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. We depend on external sources of capital. To qualify as a REIT, we are required each year to distribute at least 90% of our Our stockholders may experience dilution if we issue additional common stock or units in the OP. Any additional future issuance of common stock or OP units will reduce the percentage of our common stock and units owned by investors. In most circumstances, stockholders and unitholders will not be entitled to vote on whether or not we issue additional common stock or units. In addition, depending on the terms and pricing of any additional offering of our common stock or units and the value of the properties, our stockholders and unitholders may experience dilution in both book value and fair value of their common stock or units. The failure of Prologis, Inc. to qualify as a REIT would have serious adverse consequences. Prologis, Inc. elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code commencing with the taxable year ended December 31, 1997. We believe Prologis, Inc. has been organized and operated to qualify as a REIT under the Internal Revenue Code and believe that the current organization and method of operation comply with the rules and regulations promulgated under the Internal Revenue Code to enable Prologis, Inc. to continue to qualify as a REIT. However, it is possible that we are organized or have operated in a manner that would not allow Prologis, Inc. to qualify as a REIT, or that our future operations could cause Prologis, Inc. to fail to qualify. Qualification as a REIT requires us to satisfy numerous requirements (some annually and others on a quarterly basis) established under highly technical and complex sections of the Internal Revenue Code for which there are only limited judicial and administrative interpretations, and involves the determination of various factual matters and circumstances not entirely within our control. For example, to qualify as a REIT, Prologis, Inc. must derive at least 95% of its gross income in any year from If Prologis, Inc. fails to qualify as a REIT in Furthermore, we own a direct or indirect interest in certain subsidiary REITs that elected to be taxed as REITs under Sections 856 through 860 of the Internal Revenue Code. Provided that each subsidiary REIT qualifies as a REIT, our interest in such subsidiary REIT will be treated as a qualifying real estate asset for purposes of the REIT asset tests, and any dividend income or gains derived by us from such subsidiary REIT will generally be treated as income that qualifies for purposes of the REIT 95% gross income test. To qualify as a REIT, the subsidiary REIT must independently satisfy all of the REIT qualification requirements. If such subsidiary REIT were to fail to qualify as a REIT, and certain relief provisions did not apply, it would be treated as a regular taxable corporation and its income would be subject to U.S. federal income tax. In addition, a failure of the subsidiary REIT to qualify as a REIT would have an adverse effect on the ability of Prologis, Inc. to comply with the REIT income and asset tests, and thus its ability to qualify as a REIT. Certain property transfers may generate prohibited transaction income, resulting in a penalty tax on gain attributable to the transaction. From time to time, we may transfer or otherwise dispose of some of our properties, including by contributing properties to our co-investment ventures. Under the Internal Revenue Code, any gain resulting from transfers of properties we hold as inventory or primarily for sale to customers in the ordinary course of business is treated as income from a prohibited transaction subject to a 100% penalty tax. We do not believe that our transfers or disposals of property or our contributions of properties into our co-investment ventures are prohibited transactions. However, whether property is held for investment purposes is a question of fact that depends on all the facts and circumstances surrounding the particular transaction. The Internal Revenue Service may contend that certain transfers or dispositions of properties by us or contributions of properties into our co-investment ventures are prohibited transactions. While we believe that the Internal Revenue Service would not prevail in any such dispute, if the Internal Revenue Service were to argue successfully that a transfer, disposition or contribution of property constituted a prohibited transaction, we would be required to pay a 100% penalty tax on any gain allocable to us from the prohibited transaction. In addition, income from a prohibited transaction might adversely affect our ability to satisfy the income tests for qualification as a REIT. Legislative or regulatory action could adversely affect us. In recent years, numerous legislative, judicial and administrative changes have been made to the U.S. and foreign income tax laws applicable to investments in real estate, REITs, similar entities and investments. Additional changes are likely to continue to occur in the future, both in and outside of the U.S. and may impact our taxation or that of our stockholders. New tax legislation was enacted on December 22, 2017 and provides for significant changes to the U.S. federal income tax laws, including the reduction of the corporate tax rate, a reduction or elimination of certain deductions (including new limitations on the deductibility of interest expense) and significant changes in the taxation of earnings from non-U.S. sources. Some of these changes could have an adverse impact on us, our business, and the results of our operations. The new rules are complex and lack developed administrative guidance; thus, the impact of certain aspects of these provisions on us is currently unclear. Technical corrections or other amendments to the new rules, and administrative guidance interpreting the new rules, may be forthcoming at any time or may be significantly delayed. ITEM 1B. Unresolved Staff Comments None. We predominately invest in logistics facilities. Our properties are typically used for distribution, storage, packaging, assembly and light manufacturing of consumer products. The vast majority of our operating properties are used by our customers for bulk distribution. The following tables provide details of our consolidated operating properties, investment in land and development portfolio. We have also included operating property information for our owned and managed portfolio. The owned and managed portfolio includes the properties we consolidate and the properties owned by our unconsolidated co-investment ventures reflected at 100% of the amount included in the ventures’ financial statements as calculated on a GAAP basis, not our proportionate share. Included in the operating property information below for our Dollars and square feet in the following tables are in millions and items notated by ‘0‘ indicate an amount that rounds to less than one million: Consolidated Operating Properties Owned and Managed Region Rentable Square Footage Gross Book Value Encumbrances (1) Rentable Square Footage Gross Book Value U.S.: Atlanta 15 $ 710 $ 76 18 $ 872 Baltimore/Washington D.C. 4 327 30 7 679 Central and Eastern Pennsylvania 14 917 - 17 1,115 Central Valley California 10 573 11 12 725 Chicago 28 1,894 50 36 2,481 Dallas/Fort Worth 21 1,121 132 26 1,538 Houston 7 425 20 14 916 Las Vegas 7 511 18 8 629 New Jersey/New York City 26 2,553 167 32 3,286 San Francisco Bay Area 16 1,737 10 20 2,095 Seattle 9 856 42 16 1,571 South Florida 9 1,026 34 15 1,541 Southern California 56 5,411 106 73 7,160 Remaining Markets - U.S. (17 markets) (2) 46 2,340 126 62 3,292 Subtotal U.S. 268 20,401 822 356 27,900 Other Americas: Brazil 7 517 - 10 718 Canada 9 745 156 9 745 Mexico 2 113 - 36 2,165 Subtotal Other Americas 18 1,375 156 55 3,628 Europe: Belgium - - - 3 208 Czech Republic - - - 11 822 France 1 64 - 33 2,551 Germany 1 50 - 24 2,003 Hungary 0 4 - 7 443 Italy - - - 9 576 Netherlands 0 24 - 19 1,675 Poland 1 62 - 25 1,572 Slovakia 0 12 - 4 254 Spain 1 60 - 9 697 Sweden 1 47 - 5 420 U.K. 1 79 - 23 3,214 Subtotal Europe 6 402 - 172 14,435 Asia: China 1 43 - 15 774 Japan 3 340 - 29 4,965 Singapore 1 140 - 1 140 Subtotal Asia 5 523 - 45 5,879 Total operating portfolio (3) 297 22,701 978 628 51,842 Value-added properties (4) 2 181 - 2 245 Total operating properties 299 $ 22,882 $ 978 630 $ 52,087 Consolidated – Investment in Land Consolidated – Development Portfolio Region Acres Estimated Build Out Potential (square feet) (5) Current Investment Rentable Square Footage Upon Completion TEI (6) U.S.: Atlanta 54 1 $ 6 1 $ 34 Baltimore/Washington D.C. 41 1 16 - - Central and Eastern Pennsylvania 29 0 8 - - Central Valley California 1,046 21 103 3 246 Chicago 151 3 15 0 36 Dallas/Fort Worth 38 1 8 2 139 Houston 185 3 17 - - Las Vegas 50 1 7 1 93 New Jersey/New York City 56 1 28 1 186 San Francisco Bay Area - - - 0 31 Seattle 9 0 14 1 186 South Florida 175 3 122 1 54 Southern California 93 1 32 2 166 Remaining Markets - U.S. (17 markets) 283 4 35 2 120 Subtotal U.S. 2,210 40 411 14 1,291 Other Americas: Brazil 531 12 166 - - Canada 159 3 45 0 27 Mexico 508 10 111 2 160 Subtotal Other Americas 1,198 25 322 2 187 Europe: Belgium 45 1 14 - - Czech Republic 117 2 22 1 49 France 262 5 45 1 87 Germany 36 1 12 1 80 Hungary 281 5 19 - - Italy 70 1 8 1 93 Netherlands 39 1 25 1 92 Poland 447 8 45 0 4 Slovakia 204 4 25 1 62 Spain 64 2 28 1 79 Sweden - - - 0 30 U.K. 137 2 47 1 86 Subtotal Europe 1,702 32 290 8 662 Asia: China - - - - - Japan 81 5 131 4 701 Singapore - - - - - Subtotal Asia 81 5 131 4 701 Total land and development portfolio 5,191 102 $ 1,154 28 $ 2,841 (1) Certain of our consolidated properties are pledged as security under secured mortgage debt and assessment bonds. For purposes of this table, the total principal balance of a debt issuance that is secured by a pool of properties is allocated among the properties in the pool based on each property’s investment balance. In addition to the amounts reflected here, we also have $2 million of encumbrances related to other real estate properties not included in Real Estate Operations. See Schedule III – Real Estate and Accumulated Depreciation to the Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data for additional identification of the properties pledged. (2) No remaining market within the U.S. represented more than 2% of the total gross book value of the consolidated operating properties. (4) Value-added properties are properties we have either acquired at a discount and believe we could provide greater returns post-stabilization or properties we expect to repurpose to a higher and better use. (5) Represents the estimated finished square feet available for lease upon completion of a building on existing parcels of land. properties under development in the development portfolio were expected to be completed by December 31, 2018, and approximately 22% of the properties in the development portfolio were already completed but not yet stabilized. The remainder of our properties under development were expected to be completed before July 2019. The following table summarizes our investment in consolidated real estate properties at December 31, 2017 (in millions): Investment Before Depreciation Operating properties, excluding assets held for sale or contribution $ 22,586 Development portfolio, including cost of land 1,594 Land 1,154 Other real estate investments (1) 505 Total consolidated real estate properties $ 25,839 (1) 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 office buildings; (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. We generally lease our properties on a long-term basis (the average term for leases signed in 2017 was 54 months). The following table summarizes the lease expirations of our consolidated operating portfolio for leases in place at December 31, 2017 (dollars and square feet in millions): NER Number of Leases Occupied Square Feet Dollars Percent of Total Dollars Per Square Foot 2018 566 31 $ 168 10.6 % $ 5.34 2019 639 47 231 14.6 % 4.92 2020 607 33 182 11.5 % 5.55 2021 585 44 237 14.9 % 5.42 2022 517 42 236 14.8 % 5.60 2023 243 25 142 9.0 % 5.79 2024 118 13 80 5.1 % 6.05 2025 87 14 85 5.3 % 5.98 2026 35 7 46 2.9 % 6.46 2027 57 9 54 3.4 % 6.03 Thereafter 55 20 126 7.9 % 6.42 3,509 285 $ 1,587 100.0 % $ 5.57 Month to month 107 4 Total Consolidated 3,616 289 Included in our owned and managed portfolio are consolidated and unconsolidated co-investment ventures that hold investments in real estate properties, primarily logistics facilities that we also manage. Our unconsolidated co-investment ventures are accounted for under the equity method. The amounts included for the unconsolidated ventures are reflected at 100% of the amount included in the ventures’ financial statements as calculated on a GAAP basis, not our proportionate share. The following table summarizes our consolidated and unconsolidated co-investment ventures at December 31, 2017 (in millions): Operating Properties Square Feet Gross Book Value Investment in Land Development Portfolio – TEI Consolidated Co-Investment Ventures U.S.: Prologis U.S. Logistics Venture (“USLV”) 67 $ 5,931 $ 31 $ 106 Total 67 $ 5,931 $ 31 $ 106 Unconsolidated Co-Investment Ventures U.S.: Prologis Targeted U.S. Logistics Fund (“USLF”) 88 $ 7,543 $ - $ 34 Other Americas: FIBRA Prologis 35 2,052 4 - Europe: Prologis European Logistics Fund (“PELF”) 106 9,565 11 59 Prologis European Logistics Partners Sàrl (“PELP”) 58 4,203 30 6 Prologis UK Logistics Venture (“UKLV”) 2 285 110 �� 220 Subtotal Europe 166 14,053 151 285 Asia: Nippon Prologis REIT (“NPR”) 26 4,625 - - Prologis China Logistics Venture 14 731 80 879 Subtotal Asia 40 5,356 80 879 Other: Brazil joint ventures 3 201 - - Total 332 $ 29,205 $ 235 $ 1,198 For more information regarding our unconsolidated and consolidated co-investment ventures, see Notes 5 and 12 to the Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data. From time to time, we and our co-investment ventures are parties to a variety of legal proceedings arising in the ordinary course of business. We believe that, with respect to any such matters to which we are currently a party, the ultimate disposition of any such matter will not result in a material adverse effect on our business, financial position or results of operations. ITEM 4. Mine Safety Disclosures Not Applicable. ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities MARKET INFORMATION AND HOLDERS Our common stock is listed on the NYSE under the symbol “PLD.” The following table sets forth the high and low sale price of our common stock, as reported in the NYSE Composite Tape, and the declared dividends per share, for the periods indicated. High Low Dividends 2017 Fourth Quarter $ 67.53 $ 62.99 $ 0.44 Third Quarter $ 65.49 $ 56.59 $ 0.44 Second Quarter $ 59.49 $ 51.66 $ 0.44 First Quarter $ 54.25 $ 48.33 $ 0.44 2016 Fourth Quarter $ 53.51 $ 45.93 $ 0.42 Third Quarter $ 54.87 $ 48.46 $ 0.42 Second Quarter $ 50.74 $ 43.45 $ 0.42 First Quarter $ 44.26 $ 35.25 $ 0.42 Our future common stock dividends, if and as declared, may vary and will be determined by the Board upon the circumstances prevailing at the time, including our financial condition, operating results, estimated taxable income and REIT distribution requirements. These dividends, if and as declared, may be adjusted at the discretion of the Board during the year. On February 12, 2018, we had approximately 533,054,000 shares of common stock outstanding, which were held of record by approximately 4,400 stockholders. Stock Performance Graph The following line graph compares the change in Prologis, Inc. cumulative total stockholder’s return on shares of its common stock from This graph and the accompanying text are not “soliciting material,” are not deemed filed with the SEC and are not to be incorporated by reference in any filing by the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing. At December 31, 2017, and 2016, we had 1.4 million and 1.6 million shares of the Series Q preferred stock with a For more information regarding dividends, see Note 10 to SALES OF UNREGISTERED SECURITIES During 2017, we issued an aggregate of 1.5 million shares of common stock of Prologis, Inc. in connection with the redemption of common units of Prologis, L.P. See Note 11 to the Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data for more information. The issuance of the shares of common stock was undertaken in reliance upon the exemption from registration requirements of the Securities Act of 1933, as amended, afforded by Section 4(a)(2) thereof. SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS For information regarding securities authorized for issuance under our equity compensation plans, see Notes 10 and 13 to the Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data. Common Stock Plans Further information relative to our equity compensation plans will be provided in our 2018 Proxy Statement or in an amendment filed on Form 10-K/A. ITEM 6. Selected Financial Data The following table summarizes selected financial data related to our historical financial condition and results of operations for both Prologis, Inc. and Prologis, L.P. (in millions, except for per share and unit amounts): 2017 2016 2015 2014 2013 Operating Data: Total revenues $ 2,618 $ 2,533 $ 2,197 $ 1,761 $ 1,750 Gains on dispositions of investments in real estate and revaluation of equity investments upon acquisition of a controlling interest, net $ 1,183 $ 757 $ 759 $ 726 $ 715 Consolidated net earnings $ 1,761 $ 1,293 $ 926 $ 739 $ 230 Net earnings per share attributable to common stockholders and unitholders – Basic (1) $ 3.10 $ 2.29 $ 1.66 $ 1.25 $ 0.65 Net earnings per share attributable to common stockholders and unitholders – Diluted (1) $ 3.06 $ 2.27 $ 1.64 $ 1.24 $ 0.64 Dividends per common share and distributions per common unit $ 1.76 $ 1.68 $ 1.52 $ 1.32 $ 1.12 Consolidated Balance Sheet Data: Total assets $ 29,481 $ 30,250 $ 31,395 $ 25,775 $ 24,534 Total debt $ 9,413 $ 10,608 $ 11,627 $ 9,337 $ 8,973 FFO (2): Reconciliation of net earnings to FFO: Net earnings attributable to common stockholders $ 1,642 $ 1,203 $ 863 $ 622 $ 315 Total NAREIT defined adjustments 101 534 461 299 504 Total our defined adjustments 52 (35 ) (15 ) (33 ) 36 FFO, as modified by Prologis (2) $ 1,795 $ 1,702 $ 1,309 $ 888 $ 855 Total core defined adjustments (244 ) (302 ) (128 ) 65 (42 ) Core FFO (2) $ 1,551 $ 1,400 $ 1,181 $ 953 $ 813 (1) In 2014, the accounting standard changed for classifying and reporting discontinued operations and none of our dispositions since adoption met the qualifications to be reported as discontinued operations. In 2013, our net earnings per share attributable to common stockholders and unitholders for basic and diluted included $0.25 per share attributable to discontinued operations. ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of The following Consolidated – Real Estate Operations Owned and Managed Top Customers % of NER (1) Total Occupied Square Feet Top Customers % of NER (1) Total Occupied Square Feet 1. Amazon.com 4.5 11,626 1. Amazon.com 2.8 13,001 2. Home Depot 1.8 5,431 2. DHL 1.6 10,401 3. FedEx Corporation 1.5 2,686 3. Geodis 1.2 7,914 4. XPO Logistics 1.0 4,099 4. XPO Logistics 1.1 8,282 5. United States Government 1.0 645 5. Kuehne + Nagel 1.1 6,195 6. Wal-Mart Stores 0.8 2,886 6. CEVA Logistics 1.1 6,735 7. Ingram Micro 0.8 2,524 7. Home Depot 1.0 5,441 8. PepsiCo 0.7 2,618 8. FedEx Corporation 0.9 3,105 9. DHL 0.7 2,200 9. Nippon Express Group 0.6 2,665 10. Cal Cartage Company 0.6 1,325 10. Wal-Mart Stores 0.6 4,915 Top 10 Customers 13.4 36,040 Top 10 Customers 12.0 68,654 11. Best Buy 0.6 1,562 11. United States Government 0.6 1,243 12. Kimberly-Clark 0.5 2,091 12. Tesco 0.6 3,172 13. Sears 0.5 2,273 13. DB Schenker 0.6 3,786 14. Anixter 0.5 1,629 14. UPS 0.5 3,191 15. Geodis 0.5 2,004 15. Ingram Micro 0.5 3,181 16. Bayerische Motoren Werke AG (BMW) 0.5 1,503 16. Hitachi 0.5 1,907 17. UPS 0.5 1,606 17. Panalpina 0.5 2,237 18. APL 0.5 2,047 18. LG 0.4 2,567 19. Office Depot 0.4 1,592 19. PepsiCo 0.4 2,618 20. Kuehne + Nagel 0.4 1,508 20. Bayerische Motoren Werke AG (BMW) 0.4 1,991 21. Mohawk Industries 0.4 1,204 21. Samsung Electronics 0.3 2,103 22. Georgia-Pacific 0.4 1,292 22. La Poste 0.3 1,673 23. Kellogg's 0.4 1,750 23. Best Buy 0.3 1,827 24. C&S Wholesale Grocers 0.4 1,285 24. UTi 0.3 2,116 25. LG 0.4 1,333 25. Rhenus AG & CO KG 0.3 2,122 Top 25 Customers 20.3 60,719 Top 25 Customers 18.5 104,388 Number of Employees Region Real Estate Operations Strategic Capital Corporate and Support Total Americas 625 30 300 955 Europe 220 20 130 370 Asia 155 30 45 230 Total 1,000 80 475 1,555 During the year ended December 31, 2017, operating fundamentals remained strong for our owned and In 2017, we completed the following significant activities as further described in the accompanying notes to the Consolidated Financial Statements: We completed several transactions that o In January, we sold our investment in Europe Logistics Venture 1 (“ELV”) to our venture partner for $84 million and ELV contributed its properties to Prologis Targeted Europe Logistics Fund (“PTELF”) in exchange for equity interests. o In February, we formed UKLV, in which we have a 15.0% ownership interest. This unconsolidated co-investment venture was formed for investment in the U.K. and currently holds stabilized properties, properties under development and land. o In October, the assets and related liabilities of PTELF were contributed to Prologis European Properties Fund II (“PEPF II”) in exchange for units, and PEPF II was renamed PELF. In connection with the transaction, we exchanged our units in PTELF for new units in PELF resulting in our ownership interest decreasing to 25.6%, however, our economic investment did not substantially change. o As a result of these activities, we had eight unconsolidated co-investment ventures at December 31, 2017. o In addition to the transactions discussed above, we also contributed properties to existing co-investment ventures in Europe, Japan and Mexico and we disposed of non-strategic operating properties to third parties, primarily in the U.S. o These transactions generated proceeds of $4.5 billion and realized net gains of $1.2 billion. In February, we amended our Japanese yen revolver and increased the total borrowing capacity to ¥50.0 billion ($444 million at December 31, 2017). In June, we issued £500 million ($645 million) of senior notes with an effective interest rate of 2.3%, maturing in June 2029, at 99.9% of par value. Following the issuance, we used the cash proceeds to redeem $618 million of previously issued senior notes, maturing in 2019, with an average coupon rate of 5.4%. 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 Below is a reconciliation of our NOI by segment to Operating Income per the Consolidated Financial Statements (in millions). Each segment’s NOI is reconciled to a line item in the Consolidated Financial Statements in the respective segment discussion below. 2017 2016 2015 Real Estate Operations – NOI $ 1,662 $ 1,646 $ 1,368 Strategic Capital – NOI 219 175 109 General and administrative expenses (231 ) (222 ) (217 ) Depreciation and amortization expenses (879 ) (931 ) (880 ) Operating income $ 771 $ 668 $ 380 See Note 18 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. General Risks As a global company, we are subject to social, political and economic risks of doing business in many countries. We conduct a significant portion of our business and employ a substantial number of people outside of the U.S. During difficulties and costs of staffing and managing international operations in certain regions, including differing employment practices and labor issues; local businesses and cultural factors that differ from our usual standards and practices; volatility in currencies and currency restrictions, which may prevent the transfer of capital and profits to the U.S.; challenges in establishing effective controls and procedures to regulate operations in different regions and to monitor compliance with applicable regulations, such as the Foreign Corrupt Practices Act, the United Kingdom (“U.K.”) Bribery Act and other similar laws; unexpected changes in regulatory requirements, tax, tariffs and other laws within the countries in which we operate; potentially adverse tax consequences; the responsibility of complying with multiple and potentially conflicting laws, e.g., with respect to corrupt practices, employment and licensing; the impact of regional or country-specific business cycles and economic instability, including instability in, or further withdrawals from, the European Union or other international trade alliances or agreements; political instability, uncertainty over property rights, civil unrest, drug trafficking, political activism or the continuation or escalation of terrorist or gang activities; access to capital may be more restricted, or unavailable on favorable terms or at all in certain locations. In addition, we may be impacted by the ability of our non-U.S. subsidiaries to dividend or otherwise transfer cash among our subsidiaries, including transfers of cash to pay interest and principal on our debt, due to currency exchange control regulations, transfer pricing regulations and potentially adverse tax consequences, among other factors. Disruptions in the global capital and credit markets may adversely affect our operating results and financial condition. To the extent there is turmoil in the global financial markets, this turmoil has the potential to adversely affect (i) the value of our properties; (ii) the availability or the terms of financing that we have or may anticipate utilizing; (iii) our ability to make principal and interest payments on, or refinance any outstanding debt when due; and (iv) the ability of our customers to enter into new leasing transactions or satisfy rental payments under existing leases. Disruptions in the capital and credit markets may also adversely affect our ability to make distributions and payments to our security holders and the market price of our securities. Our business and operations could suffer in the event of system failures or cyber security attacks. Despite system redundancy, the implementation of security measures and the existence of a disaster recovery plan for our internal and hosted information technology systems, our systems are vulnerable to damages from any number of sources, including energy blackouts, natural disasters, terrorism, war, telecommunication failures and cyber security attacks, such as computer viruses or unauthorized access. Any system failure or accident that causes interruptions in our operations could result in a material disruption to our business. We may also incur additional costs to remedy damages caused by such disruptions. Any compromise of our security could result in a violation of applicable privacy and other laws, unauthorized access to information of ours and others, significant legal and financial exposure, damage to our reputation, loss or misuse of the information and a loss of confidence in our security measures, which could harm our business. Risks associated with our dependence on key personnel. We depend on the deep industry knowledge and the efforts of our executive officers and other key employees. From time to time, our personnel and their roles may change. While we believe that we are able to retain our key talent and find suitable employees to meet our personnel needs, the loss of key personnel, any change in their roles or the limitation of their availability could adversely affect our business. If we are unable to continue to attract and retain our executive officers, or if compensation costs required to attract and retain key employees become more expensive, our performance and competitive position could be materially adversely affected. Our business could be adversely impacted if we have deficiencies in our disclosure controls and procedures or internal control over financial reporting. The design and effectiveness of our disclosure controls and procedures and internal control over financial reporting may not prevent all errors, misstatements or misrepresentations. While management continually reviews the effectiveness of our disclosure controls and procedures and internal control over financial reporting, there can be no guarantee that our internal control over financial reporting will be effective in accomplishing all control objectives all of the time. Deficiencies, including any material weakness, in our internal control over financial reporting that may occur in the future could result in misstatements or restatements of our financial statements or a decline in the price of our securities. The depreciation in the value of the foreign currency in countries where we have a significant investment may adversely affect our results of operations and financial position. We pursue growth opportunities in international markets where the U.S. dollar is not the functional currency. At December 31, Our hedging of foreign currency and interest rate risk may not effectively limit our exposure to other risks. Hedging arrangements involve risks, such as the risk of fluctuation in the relative value of the foreign currency or interest rates and the risk that counterparties may fail to honor their obligations under these arrangements. The funds required to settle such arrangements could be significant depending on the stability and movement of the hedged foreign currency or the size of the underlying financing and the applicable interest rates at the time of the breakage. The failure to hedge effectively against foreign exchange Compliance or failure to comply with regulatory requirements could result in substantial costs. We are required to comply with many regulations in different countries, including (but not limited to) the Foreign Corrupt Practices Act, the Risks Related to our Business Real estate investments are not as liquid as certain other types of assets, which may reduce economic returns to investors. Real estate investments are not as liquid as certain other types of investments and this lack of liquidity may limit our ability to react promptly to changes in economic or other conditions. Significant expenditures associated with real estate investments, such as secured mortgage payments, real estate taxes and maintenance costs, are generally not reduced when circumstances cause a reduction in income from the investments. As a REIT, under the Internal Revenue Code, we are only able to hold property for sale in the ordinary course of business through taxable REIT subsidiaries in order to not incur punitive taxation on any tax gain from the sale of such property. We may dispose of certain properties that have been held for investment to generate liquidity. If we do not satisfy certain safe harbors or we believe there is too much risk of incurring the punitive tax on any tax gain from the sale, we may not pursue such sales. We may decide to sell properties to certain of our unconsolidated co-investment ventures or third parties to generate proceeds to fund our capital deployment activities. Our ability to sell properties on advantageous terms is affected by: (i) competition from other owners of properties that are trying to dispose of their properties; (ii) market conditions, including the capitalization rates applicable to our properties; and (iii) other factors beyond our control. If our competitors sell assets similar to assets we intend to divest in the same markets or at valuations below our valuations for comparable assets, we may be unable to divest our assets at favorable pricing or at all. The unconsolidated co-investment If we do not have sufficient cash available to us through our operations, sales or contributions of properties or available credit facilities to continue operating our business as usual, we may need to find alternative ways to increase our liquidity. Such alternatives may include, without limitation, divesting ourselves of properties, whether or not they otherwise meet our strategic objectives to keep in the long term, at less than optimal terms, incurring debt, entering into leases with new customers at lower rental rates or less than optimal terms or entering into lease renewals with our existing customers without an increase in rental rates. There can be no assurance, however, that such alternative ways to increase our liquidity will be available to us. Additionally, taking such measures to increase our liquidity may adversely affect our business, and in particular, our distributable cash flow and debt covenants. Our investments are concentrated in the Our investments in real estate assets are General economic conditions and other events or occurrences that affect areas in which our properties are geographically concentrated, may impact financial results. We are exposed to general economic conditions, local, regional, national and international economic conditions and other events and occurrences that affect the markets in which we own properties. Our operating performance is further impacted by the economic conditions of the specific markets in which we have concentrations of properties. At December 31, In addition to California, we also have significant holdings (defined as more than A number of our investments, both wholly-owned and owned through co-investment ventures, are located in areas that are known to be subject to earthquake activity. U.S. properties located in active seismic areas include properties in Furthermore, a number of our properties are located in areas that are known to be subject to hurricane or flood risk. We carry hurricane and flood hazard insurance on all of our properties located in areas historically subject to such activity, subject to coverage limitations and deductibles, if we believe it is commercially reasonable. We evaluate our insurance coverage annually in light of current industry practice through an analysis prepared by outside consultants. Investments in real estate properties are subject to risks that could adversely affect our business. Investments in real estate properties are subject to varying degrees of risk. While we seek to minimize these risks through geographic diversification of our portfolio, market research and our asset management capabilities, these risks cannot be eliminated. Factors that may affect real estate values and cash flows include: local conditions, such as oversupply or a reduction in demand; technological changes, such as reconfiguration of supply chains, autonomous vehicles, robotics, 3D printing or other technologies; the attractiveness of our properties to potential customers and competition from other available properties; increasing costs of maintaining, insuring, renovating and making improvements to our properties; our ability to rehabilitate and reposition our properties due to changes in the business and logistics needs of our customers; our ability to control rents and variable operating costs; and governmental regulations and the associated potential liability under, and changes in, environmental, zoning, usage, tax, tariffs and other laws. We may be unable to lease vacant space or renew leases or re-lease space on favorable terms as leases expire. Our operating results and distributable cash flow would be adversely affected if a significant number of our customers were unable to meet their lease obligations. We are also subject to the risk that, upon the expiration of leases for space located in our properties, leases may not be renewed by existing customers, the space may not be re-leased to new customers or the terms of renewal or re-leasing (including the cost of required renovations or concessions to customers) may be less favorable to us than current lease terms. Our competitors may offer space at rental rates below current market rates or below the rental rates we currently charge our customers, we may lose potential customers, and we may be pressured to reduce our rental rates below those we currently charge to retain customers when our customers’ leases expire. In the event of default by a significant number of customers, we may experience delays and incur substantial costs in enforcing our rights as landlord, and we may be unable to re-lease spaces. A customer may experience a downturn in its business, which may cause the loss of the customer or may weaken its financial condition, resulting in the customer’s failure to make rental payments when due or requiring a restructuring that might reduce cash flow from the lease. In addition, a customer may seek the protection of bankruptcy, insolvency or similar laws, which could result in the rejection and termination of such customer’s lease and thereby cause a reduction in our available cash flow. We may acquire properties, which involves risks that could adversely affect our business and financial condition. We have acquired properties and will continue to acquire properties, both through the direct acquisition of real estate and through the acquisition of entities that own the real estate and through additional investments in co-investment ventures that acquire properties. The acquisition of properties involves risks, including the risk that the acquired property will not perform as anticipated and that any actual costs for rehabilitation, repositioning, renovation and improvements identified in the pre-acquisition due diligence process will exceed estimates. When we acquire properties, we may face risks associated with a lack of market knowledge or understanding of the local economy, forging new business relationships in the area and unfamiliarity with local government and permitting procedures. Additionally, there is, and it is expected there will continue to be, significant competition for properties that meet our investment criteria as well as risks associated with obtaining financing for acquisition activities. The acquired properties or entities may be subject to liabilities, which may be without any recourse, or with only limited recourse, with respect to unknown liabilities. As a result, if a liability were asserted against us based on ownership of any of these entities or properties, then we may have to pay substantial sums to settle it. Our real estate development strategies may not be successful. Our real estate development strategy is focused on monetizing land in the future through we may not be able to obtain financing for development projects on favorable terms or at all; we may explore development opportunities that may be abandoned and the related investment impaired; we may not be able to obtain, or may experience delays in obtaining, all necessary zoning, land-use, building, occupancy and other governmental permits and authorizations; we may have construction costs, total investment amounts and our share of remaining funding that exceed our estimates and projects may not be completed, delivered or stabilized as planned due to defects or other issues; we may not be able to attract third-party investment in new development co-investment ventures or sufficient customer demand for our product; we may have properties that perform below anticipated levels, producing cash flow below budgeted amounts; we may seek to sell certain land parcels and not be able to find a third party to acquire such land or the sales price will not allow us to recover our investment, resulting in impairment charges; we may not be able to lease properties we develop on favorable terms or at all; we may not be able to capture the anticipated enhanced value created by our value-added properties on expected timetables or at all; we may experience delays (temporary or permanent) if there is public or government opposition to our activities; and we may have substantial renovation, new development and redevelopment activities, regardless of their ultimate success, that require a significant amount of management’s time and attention, diverting their attention from our day-to-day operations. We are subject to risks and liabilities in connection with forming co-investment ventures, investing in new or existing co-investment ventures, attracting third-party investment and investing in and managing properties through co-investment ventures. At December 31, Our co-investment ventures involve certain additional risks that we do not otherwise face, including: our partners may share certain approval rights over major decisions made on behalf of the ventures; if our partners fail to fund their share of any required capital contributions, then we may choose to contribute such capital; our partners might have economic or other business interests or goals that are inconsistent with our business interests or goals that would affect our ability to operate the property; the venture or other governing agreements often restrict the transfer of an interest in the co-investment venture or may otherwise restrict our ability to sell the interest when we desire or on advantageous terms; disputes between us and our partners may result in litigation or arbitration that would increase our expenses and prevent our officers and directors from focusing their time and effort on our business and result in subjecting the properties owned by the applicable co-investment venture to additional risk. We generally seek to maintain sufficient influence over our co-investment ventures to permit us to achieve our business objectives; however, we may not be able to continue to do so indefinitely. We have formed publicly traded investment vehicles, such as NPR and FIBRA Prologis, for which we serve as sponsor or manager. We have contributed, and may continue to contribute, assets into such vehicles. There is a risk that our managerial relationship may be terminated. We are exposed to various environmental risks, including the potential impacts of future climate change, which may result in unanticipated losses that could affect our business and financial condition. Under various federal, state and local laws, ordinances and regulations, a current or previous owner, developer or operator of real estate may be liable for the costs of removal or remediation of certain hazardous or toxic substances. The costs of removal or remediation of such substances could be substantial. Such laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the release or presence of such hazardous substances. In addition, third parties may sue the owner or operator of a site for damages based on personal injury, property damage or other costs, including investigation and clean-up costs, resulting from the environmental contamination. Environmental laws in some countries, including the U.S., also require that owners or operators of buildings containing asbestos properly manage and maintain the asbestos, adequately inform or train those who may come into contact with asbestos and undertake special precautions, including removal or other abatement, in the event that asbestos is disturbed during building renovation or demolition. These laws may impose fines and penalties on building owners or operators who fail to comply with these requirements and may allow third parties to seek recovery from owners or operators for personal injury associated with exposure to asbestos. Some of our properties are known to contain asbestos-containing building materials. In addition, some of our properties are leased or have been leased, in part, to owners and operators of businesses that use, store or otherwise handle petroleum products or other hazardous or toxic substances, creating a potential for the release of such hazardous or toxic substances. Furthermore, certain of our properties are on, adjacent to or near other properties that have contained or currently contain petroleum products or other hazardous or toxic substances, or upon which others have engaged, are engaged or may engage in activities that may release such hazardous or toxic substances. From time to time, we may acquire properties, or interests in properties, with known adverse environmental conditions for which we believe that the environmental liabilities associated with these conditions are quantifiable and that the acquisition will yield a superior risk-adjusted return. In connection with certain divested properties, we have agreed to remain responsible for, and to bear the cost of, remediating or monitoring certain environmental conditions on the properties. We are also exposed to potential physical risks from possible future changes in climate. Our Our insurance coverage does not include all potential losses. We and our unconsolidated co-investment ventures carry insurance coverage including property damage and rental loss insurance resulting from certain perils such as fire and additional perils as covered under an extended coverage policy, namely windstorm, flood, earthquake and terrorism; commercial general liability insurance; and environmental insurance, as appropriate for the markets where each of our properties and business operations are located. The insurance coverage contains policy specifications and insured limits customarily carried for similar properties, business activities and markets. We believe our properties and the properties of our Furthermore, we cannot be sure that the insurance companies will be able to continue to offer products with sufficient coverage at commercially reasonable rates. If we experience a loss that is uninsured or that exceeds insured limits with respect to one or more of our properties or if the insurance companies fail to meet their coverage commitments to us in the event of an insured loss, then we could lose the capital invested in the damaged properties, as well as the anticipated future is recourse debt, then we would remain obligated for any mortgage debt or other financial obligations related to the properties. Any such losses or higher insurance costs could adversely affect our business. Risks Related to Financing and Capital We may be unable to refinance our debt or our cash flow may be insufficient to make required debt payments. We are subject to risks normally associated with debt financing, including the risk that our cash flow will be insufficient to meet required payments of principal and interest. There can be no assurance that we will be able to refinance any maturing indebtedness, that such refinancing would be on terms as favorable as the terms of the maturing indebtedness, or that we will be able to otherwise obtain funds by selling assets or raising equity to make required payments on maturing indebtedness. If we are unable to refinance our indebtedness at maturity or meet our payment obligations, our business and financial condition will be negatively impacted and, if the maturing debt is secured, the lender may foreclose on the property securing such indebtedness. Our credit facilities and certain other debt bears interest at variable rates. Increases in interest rates would increase our interest expense under these agreements. Covenants in our credit agreements could limit our flexibility and breaches of these covenants could adversely affect our financial condition. The terms of our various credit agreements, including our credit facilities, the indentures under which our senior notes are issued and other note agreements, require us to comply with a number of customary financial covenants, such as maintaining debt service coverage, leverage ratios, fixed charge ratios and other operating covenants including maintaining insurance coverage. These covenants may limit our flexibility to run our business, and breaches of these covenants could result in defaults under the instruments governing the applicable indebtedness. If we default under the covenant provisions and are unable to cure the default, refinance the indebtedness or meet payment obligations, our business and financial condition generally and, in particular, the amount of our distributable cash flow could be adversely affected. Adverse changes in our credit ratings could negatively affect our financing activity. The credit ratings of our senior unsecured notes and preferred stock are based on our operating performance, liquidity and leverage ratios, overall financial position and other factors employed by the credit rating agencies in their rating analyses of us. Our credit ratings can affect the amount of capital we can access, as well as the terms and pricing of any debt we may incur. There can be no assurance that we will be able to maintain our current credit ratings, and in the event our credit ratings are downgraded, we would likely incur higher borrowing costs and may encounter difficulty in obtaining additional financing. Also, a downgrade in our credit ratings may trigger additional payments or other negative consequences under our credit facilities and other debt instruments. 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. At December 31, We depend on external sources of capital. To qualify as a REIT, we are required each year to distribute Our stockholders may experience dilution if we issue additional common stock or units in the Any additional future issuance of common stock or The failure of Prologis, Inc. to qualify as a REIT would have serious adverse consequences. Prologis, Inc. elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code commencing with the taxable year ended December 31, 1997. We believe If Prologis, Inc. fails to qualify as a REIT in any taxable year, we will be required to pay federal income tax (including, for taxable years prior to 2018, any applicable alternative minimum tax) on taxable income at regular corporate rates. Unless we are entitled to relief under certain statutory provisions, Prologis, Inc. would be disqualified from treatment as a REIT for the four taxable years following the year in which it lost the qualification. If Prologis, Inc. lost its REIT status, our net earnings would be significantly reduced for each of the years involved. Furthermore, we own a direct or indirect interest in certain subsidiary REITs that elected to be taxed as REITs under Sections 856 through 860 of the Internal Revenue Code. Provided that each subsidiary REIT qualifies as a REIT, our interest in such subsidiary REIT will be treated as a qualifying real estate asset for purposes of the REIT asset tests, and any dividend income or gains derived by us from such subsidiary REIT will generally be treated as income that qualifies for purposes of the REIT 95% gross income Certain property transfers may generate prohibited transaction income, resulting in a penalty tax on gain attributable to the transaction. From time to time, we may transfer or otherwise dispose of some of our properties, including by contributing properties to our co-investment ventures. Under the Internal Revenue Code, any gain resulting from transfers of properties we hold as inventory or primarily for sale to customers in the ordinary course of business is treated as income from a prohibited transaction subject to a 100% penalty tax. We do not believe that our transfers or disposals of property or our contributions of properties into our co-investment ventures are prohibited transactions. However, whether property is held for investment purposes is a question of fact that depends on all the facts and circumstances surrounding the particular transaction. The Internal Revenue Service may contend that certain transfers or dispositions of properties by us or contributions of properties into our co-investment ventures are prohibited transactions. While we believe that the Internal Revenue Service would not prevail in any such dispute, if the Internal Revenue Legislative or regulatory action could adversely affect us. In recent years, numerous legislative, judicial and administrative changes have been made to the U.S. and foreign income tax laws applicable to investments in real estate, REITs, similar entities and investments. Additional changes are likely to continue to occur in the future, both in and outside of the U.S. and may impact our taxation or that of our stockholders. New tax legislation was enacted on December 22, 2017 and provides for significant changes to the U.S. federal income tax laws, including the reduction of the corporate tax rate, a reduction or elimination of certain deductions (including new limitations on the deductibility of interest expense) and significant changes in the taxation of earnings from non-U.S. sources. Some of these changes could have an adverse impact on us, our business, and the results of our operations. The new rules are complex and lack developed administrative guidance; thus, the impact of certain aspects of these provisions on us is currently unclear. Technical corrections or other amendments to the new rules, and administrative guidance interpreting the new rules, may be forthcoming at any time or may be significantly delayed. ITEM 1B. Unresolved Staff Comments None. We Included in Dollars and square feet in the following tables are in Consolidated – Real Estate Operations Owned and Managed Operating properties Rentable Square Footage Gross Book Value Encumbrances (1) Rentable Square Footage Gross Book Value Global Markets – Americas: United States: Atlanta 16,230 $ 722,676 $ 132,507 18,114 $ 831,839 Baltimore/Washington D.C. 6,101 539,482 80,705 8,208 723,546 Central Valley California 10,093 551,860 44,168 10,640 580,839 Central and Eastern Pennsylvania 16,243 1,017,318 55,708 16,243 1,017,318 Chicago 38,455 2,300,227 235,910 44,670 2,779,501 Dallas/Fort Worth 21,481 1,103,577 244,606 25,171 1,381,382 Houston 8,862 511,306 70,604 12,661 820,736 New Jersey/New York City 28,691 2,765,626 360,750 33,213 3,359,465 San Francisco Bay Area 16,172 1,671,409 46,876 19,836 2,033,053 Seattle 7,126 672,340 52,775 14,228 1,364,780 South Florida 10,996 1,161,357 129,286 14,700 1,500,384 Southern California 58,537 5,453,129 542,791 69,493 6,586,265 Canada 7,751 589,494 140,449 7,751 589,494 Mexico: Guadalajara 291 16,759 - 5,897 315,366 Mexico City 308 17,204 - 11,476 799,521 Monterrey - - - 3,915 236,275 Brazil - - - 6,705 360,697 Regional Markets – Americas: United States: Austin 2,313 154,594 34,945 2,313 154,594 Charlotte 2,527 117,130 30,124 2,527 117,130 Cincinnati 5,899 250,696 68,686 5,899 250,696 Columbus 7,793 278,382 55,663 7,793 278,382 Denver 5,286 314,169 50,654 5,286 314,169 Indianapolis 5,321 238,137 58,497 5,321 238,137 Las Vegas 6,088 419,074 28,124 6,088 419,074 Louisville 6,108 314,272 - 6,108 314,272 Memphis 3,360 121,054 3,391 3,360 121,054 Nashville 5,189 203,193 60,944 5,189 203,193 Orlando 3,770 251,982 18,327 4,176 279,014 Phoenix 2,137 116,775 12,560 2,137 116,775 Portland 2,896 216,283 50,965 2,896 216,283 Reno 4,678 230,734 35,735 4,678 230,734 San Antonio 5,462 250,555 49,840 5,462 250,555 Mexico: Juarez - - - 3,106 137,501 Reynosa 163 7,491 - 4,548 214,931 Tijuana - - - 4,217 206,873 Other Markets – United States 2,885 195,884 - 3,261 242,427 Subtotal Americas 319,212 22,774,169 2,695,590 407,286 29,586,255 Global Markets – Europe: Belgium 439 28,914 - 2,499 161,424 Czech Republic 752 39,028 - 9,683 578,923 France 1,766 77,928 - 34,636 2,263,133 Germany 681 32,873 - 21,266 1,560,515 Italy 1,277 69,230 - 9,801 509,152 Netherlands - - - 16,202 1,198,617 Poland 1,665 63,616 - 23,794 1,322,646 Spain 449 36,120 - 8,658 563,436 United Kingdom 950 98,786 - 22,591 3,118,419 Regional Markets – Europe: Hungary - - - 6,312 339,076 Slovakia 287 14,043 - 5,151 299,549 Sweden 806 47,611 - 4,255 318,760 Other Markets – Europe 115 8,947 - 115 8,947 Subtotal Europe 9,187 517,096 - 164,963 12,242,597 Global Markets – Asia: China 2,324 74,210 - 10,634 499,884 Japan 2,646 324,128 118,779 23,553 3,696,737 Singapore 959 131,134 - 959 131,134 Subtotal Asia 5,929 529,472 118,779 35,146 4,327,755 Total operating portfolio (2) 334,328 23,820,737 2,814,369 607,395 46,156,607 Value-added properties 3,930 260,275 32,176 7,341 443,171 Total operating properties 338,258 $ 24,081,012 $ 2,846,545 614,736 $ 46,599,778 Consolidated Operating Properties Owned and Managed Region Rentable Square Footage Gross Book Value Encumbrances (1) Rentable Square Footage Gross Book Value U.S.: Atlanta 15 $ 710 $ 76 18 $ 872 Baltimore/Washington D.C. 4 327 30 7 679 Central and Eastern Pennsylvania 14 917 - 17 1,115 Central Valley California 10 573 11 12 725 Chicago 28 1,894 50 36 2,481 Dallas/Fort Worth 21 1,121 132 26 1,538 Houston 7 425 20 14 916 Las Vegas 7 511 18 8 629 New Jersey/New York City 26 2,553 167 32 3,286 San Francisco Bay Area 16 1,737 10 20 2,095 Seattle 9 856 42 16 1,571 South Florida 9 1,026 34 15 1,541 Southern California 56 5,411 106 73 7,160 Remaining Markets - U.S. (17 markets) (2) 46 2,340 126 62 3,292 Subtotal U.S. 268 20,401 822 356 27,900 Other Americas: Brazil 7 517 - 10 718 Canada 9 745 156 9 745 Mexico 2 113 - 36 2,165 Subtotal Other Americas 18 1,375 156 55 3,628 Europe: Belgium - - - 3 208 Czech Republic - - - 11 822 France 1 64 - 33 2,551 Germany 1 50 - 24 2,003 Hungary 0 4 - 7 443 Italy - - - 9 576 Netherlands 0 24 - 19 1,675 Poland 1 62 - 25 1,572 Slovakia 0 12 - 4 254 Spain 1 60 - 9 697 Sweden 1 47 - 5 420 U.K. 1 79 - 23 3,214 Subtotal Europe 6 402 - 172 14,435 Asia: China 1 43 - 15 774 Japan 3 340 - 29 4,965 Singapore 1 140 - 1 140 Subtotal Asia 5 523 - 45 5,879 Total operating portfolio (3) 297 22,701 978 628 51,842 Value-added properties (4) 2 181 - 2 245 Total operating properties 299 $ 22,882 $ 978 630 $ 52,087 Consolidated – Investment in Land Consolidated – Development Portfolio Region Acres Estimated Build Out Potential (sq. ft.) (3) Current Investment Rentable Square Footage TEI (4) Global Markets – Americas: United States: Atlanta 232 3,271 $ 12,742 - $ - Baltimore/Washington D.C. 39 400 1,568 - - Central Valley California 1,178 23,312 82,109 1,405 94,544 Central and Eastern Pennsylvania 309 3,941 39,763 1,514 92,322 Chicago 470 8,896 26,521 277 19,303 Dallas/Fort Worth 238 4,111 31,447 3,492 214,445 Houston 78 1,427 10,991 213 16,710 New Jersey/New York City 164 2,417 64,031 1,219 161,895 San Francisco Bay Area - - - 1,155 134,234 South Florida 306 5,914 152,797 - - Southern California 269 5,476 79,729 1,792 178,150 Canada 184 3,292 46,967 483 37,777 Mexico: Guadalajara 45 918 11,430 - - Mexico City 262 4,950 124,351 1,328 93,352 Monterrey 166 2,622 31,626 - - Regional Markets – Americas: United States: Charlotte 7 103 739 205 12,095 Cincinnati - - - 520 23,959 Columbus 25 450 1,760 855 79,116 Denver 11 196 2,212 252 19,386 Indianapolis 13 231 981 - - Las Vegas 58 1,199 9,594 608 49,427 Memphis 145 2,482 7,296 - - Nashville - - - 299 19,246 Orlando 48 702 12,055 421 33,235 Phoenix 56 1,018 4,840 - - Portland 2 33 61 - - Reno 108 1,781 4,663 567 39,536 San Antonio - - - 306 17,797 Mexico: Juarez 124 2,442 12,675 461 25,865 Reynosa 194 3,422 12,144 127 7,004 Tijuana 34 626 5,723 - - Other Markets – United States 373 5,611 24,331 - - Subtotal Americas 5,138 91,243 815,146 17,499 1,369,398 Global Markets – Europe: Belgium 27 526 8,744 - - Czech Republic 226 3,713 41,275 627 35,708 France 381 7,115 66,475 1,467 85,590 Germany 65 1,308 16,433 1,990 135,992 Italy 91 2,450 20,813 - - Netherlands 46 1,538 28,678 1,075 79,375 Poland 599 11,645 64,175 669 33,231 Spain 100 2,021 19,336 - - United Kingdom 259 4,372 122,578 1,434 229,158 Regional Markets – Europe: Hungary 330 5,604 31,624 88 3,694 Slovakia 67 1,413 10,251 274 14,825 Subtotal Europe 2,191 41,705 430,382 7,624 617,573 Global Markets – Asia: China 18 172 5,617 - - Japan 57 2,597 108,649 7,109 948,555 Subtotal Asia 75 2,769 114,266 7,109 948,555 Total land and development portfolio 7,404 135,717 $ 1,359,794 32,232 $ 2,935,526 Consolidated – Investment in Land Consolidated – Development Portfolio Region Acres Estimated Build Out Potential (square feet) (5) Current Investment Rentable Square Footage Upon Completion TEI (6) U.S.: Atlanta 54 1 $ 6 1 $ 34 Baltimore/Washington D.C. 41 1 16 - - Central and Eastern Pennsylvania 29 0 8 - - Central Valley California 1,046 21 103 3 246 Chicago 151 3 15 0 36 Dallas/Fort Worth 38 1 8 2 139 Houston 185 3 17 - - Las Vegas 50 1 7 1 93 New Jersey/New York City 56 1 28 1 186 San Francisco Bay Area - - - 0 31 Seattle 9 0 14 1 186 South Florida 175 3 122 1 54 Southern California 93 1 32 2 166 Remaining Markets - U.S. (17 markets) 283 4 35 2 120 Subtotal U.S. 2,210 40 411 14 1,291 Other Americas: Brazil 531 12 166 - - Canada 159 3 45 0 27 Mexico 508 10 111 2 160 Subtotal Other Americas 1,198 25 322 2 187 Europe: Belgium 45 1 14 - - Czech Republic 117 2 22 1 49 France 262 5 45 1 87 Germany 36 1 12 1 80 Hungary 281 5 19 - - Italy 70 1 8 1 93 Netherlands 39 1 25 1 92 Poland 447 8 45 0 4 Slovakia 204 4 25 1 62 Spain 64 2 28 1 79 Sweden - - - 0 30 U.K. 137 2 47 1 86 Subtotal Europe 1,702 32 290 8 662 Asia: China - - - - - Japan 81 5 131 4 701 Singapore - - - - - Subtotal Asia 81 5 131 4 701 Total land and development portfolio 5,191 102 $ 1,154 28 $ 2,841 (1) Certain of our consolidated properties are pledged as security under secured mortgage debt and assessment (2) No remaining market within the U.S. represented more than 2% of the total gross book value of the consolidated operating properties. Value-added properties are properties we have either acquired at a discount and believe we could provide greater returns post-stabilization or properties we expect to repurpose to a higher and better use. (5) Represents the estimated finished square feet available for properties under development in the development portfolio were expected to be The following table summarizes our investment in consolidated real estate properties at December 31, Investment Before Depreciation Investment Before Depreciation Industrial operating properties $ 23,735,745 Development portfolio, including cost of land (book value) 1,872,903 Operating properties, excluding assets held for sale or contribution $ 22,586 Development portfolio, including cost of land 1,594 Land 1,359,794 1,154 Other real estate investments (1) 552,926 505 Total consolidated real estate properties $ 27,521,368 $ 25,839 (1) Included in other real estate investments We generally lease our properties on a long-term basis NER NER Number of Leases Occupied Square Feet Dollars Percent of Total Dollars Per Square Foot Number of Leases Occupied Square Feet Dollars Percent of Total Dollars Per Square Foot 2016 936 43,424 $ 190,025 12.2 % $ 4.42 2017 1,037 61,727 275,698 17.8 % 4.48 2018 884 54,531 262,764 16.9 % 4.83 566 31 $ 168 10.6 % $ 5.34 2019 567 40,040 191,063 12.3 % 4.80 639 47 231 14.6 % 4.92 2020 525 30,860 159,540 10.3 % 5.20 607 33 182 11.5 % 5.55 2021 289 29,746 138,775 8.9 % 4.77 585 44 237 14.9 % 5.42 2022 125 14,495 67,487 4.3 % 4.68 517 42 236 14.8 % 5.60 2023 70 7,522 41,400 2.7 % 5.50 243 25 142 9.0 % 5.79 2024 52 7,335 44,148 2.8 % 6.09 118 13 80 5.1 % 6.05 2025 61 11,808 68,310 4.4 % 5.79 87 14 85 5.3 % 5.98 2026 35 7 46 2.9 % 6.46 2027 57 9 54 3.4 % 6.03 Thereafter 90 17,417 115,147 7.4 % 6.61 55 20 126 7.9 % 6.42 4,636 318,905 $ 1,554,357 100 % $ 4.90 3,509 285 $ 1,587 100.0 % $ 5.57 Month to month 188 5,765 107 4 Total 4,824 324,670 Total Consolidated 3,616 289 Included in our owned and managed portfolio are consolidated and unconsolidated co-investment ventures that hold investments in real estate properties, primarily Operating Properties Square Feet Gross Book Value Investment in Land Development Portfolio – TEI Consolidated Co-Investment Ventures Americas: Prologis U.S. Logistics Venture 72,733 6,155,605 69,194 55,676 Prologis North American Industrial Fund 43,577 2,569,330 - - Totals 116,310 $ 8,724,935 $ 69,194 $ 55,676 Unconsolidated Co-Investment Ventures Americas: Prologis Targeted U.S. Logistics Fund 49,935 4,669,237 - - FIBRA Prologis 32,396 1,869,013 2,435 12,954 Prologis Brazil Logistics Partners Fund I (“Brazil Fund”) and related joint ventures (1) 6,705 360,697 104,700 174,913 Subtotal Americas 89,036 6,898,947 107,135 187,867 Europe: Prologis Targeted Europe Logistics Fund 21,830 2,212,909 1,739 - Prologis European Properties Fund II 70,577 5,166,146 1,127 52,469 Europe Logistics Venture 1 5,623 386,691 - - Prologis European Logistics Partners Sàrl 60,195 4,055,790 12,251 6,145 Subtotal Europe 158,225 11,821,536 15,117 58,614 Asia: Nippon Prologis REIT 20,907 3,372,609 - - Prologis China Logistics Venture 8,310 425,674 84,557 582,157 Subtotal Asia 29,217 3,798,283 84,557 582,157 Totals 276,478 $ 22,518,766 $ 206,809 $ 828,638 Operating Properties Square Feet Gross Book Value Investment in Land Development Portfolio – TEI Consolidated Co-Investment Ventures U.S.: Prologis U.S. Logistics Venture (“USLV”) 67 $ 5,931 $ 31 $ 106 Total 67 $ 5,931 $ 31 $ 106 Unconsolidated Co-Investment Ventures U.S.: Prologis Targeted U.S. Logistics Fund (“USLF”) 88 $ 7,543 $ - $ 34 Other Americas: FIBRA Prologis 35 2,052 4 - Europe: Prologis European Logistics Fund (“PELF”) 106 9,565 11 59 Prologis European Logistics Partners Sàrl (“PELP”) 58 4,203 30 6 Prologis UK Logistics Venture (“UKLV”) 2 285 110 �� 220 Subtotal Europe 166 14,053 151 285 Asia: Nippon Prologis REIT (“NPR”) 26 4,625 - - Prologis China Logistics Venture 14 731 80 879 Subtotal Asia 40 5,356 80 879 Other: Brazil joint ventures 3 201 - - Total 332 $ 29,205 $ 235 $ 1,198 For more information regarding our unconsolidated and consolidated co-investment ventures, see From time to time, we and our ITEM 4. Mine Safety Disclosures Not ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Our common stock is listed on the NYSE under the symbol “PLD.” The following table sets forth the high and low sale price of our common stock, as reported in the NYSE Composite Tape, and the declared dividends per share, for the periods indicated. High Low Dividends High Low Dividends 2015 2017 Fourth Quarter $ 67.53 $ 62.99 $ 0.44 Third Quarter $ 65.49 $ 56.59 $ 0.44 Second Quarter $ 59.49 $ 51.66 $ 0.44 First Quarter $ 47.56 $ 41.15 $ 0.36 $ 54.25 $ 48.33 $ 0.44 2016 Fourth Quarter $ 53.51 $ 45.93 $ 0.42 Third Quarter $ 54.87 $ 48.46 $ 0.42 Second Quarter 44.48 37.03 0.36 $ 50.74 $ 43.45 $ 0.42 Third Quarter 42.49 36.26 0.40 Fourth Quarter 43.69 38.66 0.40 2014 First Quarter $ 42.10 $ 36.33 $ 0.33 $ 44.26 $ 35.25 $ 0.42 Second Quarter 42.66 39.72 0.33 Third Quarter 42.38 37.28 0.33 Fourth Quarter 44.05 37.12 0.33 Our future common stock dividends, if and as declared, may vary and will be determined by the Board upon the circumstances prevailing at the time, including our financial condition, operating results, estimated taxable income and REIT distribution On February 12, Stock Performance Graph The following line graph compares the change in Prologis, Inc. cumulative total stockholder’s return on shares of its common stock from December 31, This graph and the accompanying text are not “soliciting material,” are not deemed filed with the SEC and are not to be incorporated by reference in any filing by the At December 31, For more information regarding dividends, see Note 10 to the Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data. During For information regarding securities authorized for issuance under our equity compensation plans, see Notes 10 and 13 to the Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data. Common Stock Plans Further information relative to our equity compensation plans will be provided in our ITEM 6. Selected Financial Data The following table summarizes selected financial data related to our historical financial condition and results of operations for both Prologis, Inc. and Years Ended December 31, 2015 2014 2013 2012 2011 (1) Operating Data: Total revenues $ 2,197 $ 1,761 $ 1,750 $ 1,961 $ 1,422 Gains on dispositions of investments in real estate and revaluation of equity investments upon acquisition of a controlling interest, net of impairment charges $ 759 $ 726 $ 715 $ 72 $ 26 Consolidated net earnings (loss) $ 926 $ 739 $ 230 $ (106 ) $ (275 ) Net earnings (loss) per share attributable to common stockholders and unitholders – Basic: Continuing operations (2) $ 1.66 $ 1.25 $ 0.40 $ (0.35 ) $ (0.83 ) Discontinued operations (2) (3) $ - $ - $ 0.25 $ 0.17 $ 0.32 Net earnings (loss) per share attributable to common stockholders and unitholders – Basic $ 1.66 $ 1.25 $ 0.65 $ (0.18 ) $ (0.51 ) Net earnings (loss) per share attributable to common stockholders and unitholders – Diluted: Continuing operations $ 1.64 $ 1.24 $ 0.39 $ (0.34 ) $ (0.82 ) Discontinued operations (3) $ - $ - $ 0.25 $ 0.16 $ 0.31 Net earnings (loss) per share attributable to common stockholders and unitholders – Diluted $ 1.64 $ 1.24 $ 0.64 $ (0.18 ) $ (0.51 ) Dividends per common share and distributions per common unit $ 1.52 $ 1.32 $ 1.12 $ 1.12 $ 1.06 Balance Sheet Data: Total assets (4) $ 31,395 $ 25,775 $ 24,534 $ 27,268 $ 27,676 Total debt (4) $ 11,627 $ 9,337 $ 8,973 $ 11,749 $ 11,334 FFO (5): Reconciliation of net earnings (loss) to FFO: Net earnings (loss) attributable to common shares $ 863 $ 622 $ 315 $ (81 ) $ (188 ) Total NAREIT defined adjustments 461 299 504 633 660 Total our defined adjustments (15 ) (33 ) 36 - (60 ) FFO, as defined by Prologis (5) $ 1,309 $ 888 $ 855 $ 552 $ 412 Total core defined adjustments (128 ) 65 (42 ) 262 182 Core FFO (5) $ 1,181 $ 953 $ 813 $ 814 $ 594 2017 2016 2015 2014 2013 Operating Data: Total revenues $ 2,618 $ 2,533 $ 2,197 $ 1,761 $ 1,750 Gains on dispositions of investments in real estate and revaluation of equity investments upon acquisition of a controlling interest, net $ 1,183 $ 757 $ 759 $ 726 $ 715 Consolidated net earnings $ 1,761 $ 1,293 $ 926 $ 739 $ 230 Net earnings per share attributable to common stockholders and unitholders – Basic (1) $ 3.10 $ 2.29 $ 1.66 $ 1.25 $ 0.65 Net earnings per share attributable to common stockholders and unitholders – Diluted (1) $ 3.06 $ 2.27 $ 1.64 $ 1.24 $ 0.64 Dividends per common share and distributions per common unit $ 1.76 $ 1.68 $ 1.52 $ 1.32 $ 1.12 Consolidated Balance Sheet Data: Total assets $ 29,481 $ 30,250 $ 31,395 $ 25,775 $ 24,534 Total debt $ 9,413 $ 10,608 $ 11,627 $ 9,337 $ 8,973 FFO (2): Reconciliation of net earnings to FFO: Net earnings attributable to common stockholders $ 1,642 $ 1,203 $ 863 $ 622 $ 315 Total NAREIT defined adjustments 101 534 461 299 504 Total our defined adjustments 52 (35 ) (15 ) (33 ) 36 FFO, as modified by Prologis (2) $ 1,795 $ 1,702 $ 1,309 $ 888 $ 855 Total core defined adjustments (244 ) (302 ) (128 ) 65 (42 ) Core FFO (2) $ 1,551 $ 1,400 $ 1,181 $ 953 $ 813 (1) In 2014, the accounting standard changed for classifying and reporting discontinued operations and ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the Consolidated Financial Statements included in Item Summary of During the year ended December 31, In 2017, we completed the following significant activities as further described in the accompanying notes to the Consolidated Financial Statements: We completed several transactions that repositioned our portfolio and streamlined our co-investment ventures, including: o In o In o In o As a result of these activities, we had eight unconsolidated co-investment ventures at December 31, 2017. o In addition to the transactions discussed above, we also contributed properties to existing co-investment ventures in Europe, Japan and Mexico and we disposed of non-strategic operating properties to third parties, primarily in the U.S. o These transactions generated proceeds of $4.5 billion and realized net gains of $1.2 billion. In February, we amended our Japanese yen revolver and In June, we issued £500 million ($645 million) of senior notes with an effective interest rate of 2.3%, maturing in 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. Below is a reconciliation of our NOI by segment to Operating Income per the Consolidated Financial Statements (in millions). Each segment’s NOI is reconciled to a line item in the Consolidated Financial Statements in the respective segment discussion below. 2017 2016 2015 Real Estate Operations – NOI $ 1,662 $ 1,646 $ 1,368 Strategic Capital – NOI 219 175 109 General and administrative expenses (231 ) (222 ) (217 ) Depreciation and amortization expenses (879 ) (931 ) (880 ) Operating income $ 771 $ 668 $ 380 See Note 18 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 Below are the components of Real Estate Operations revenues, expenses and NOI (in millions), derived directly from line items in the Consolidated Financial Statements. 2017 2016 2015 Rental revenues $ 1,738 $ 1,735 $ 1,536 Rental recoveries 487 486 437 Development management and other revenues 19 8 6 Rental expenses (570 ) (569 ) (544 ) Other expenses (12 ) (14 ) (67 ) Real Estate Operations – NOI $ 1,662 $ 1,646 $ 1,368 The change in Real Estate Operations NOI 2015 2014 2013 Rental and other revenues $ 1,549.6 $ 1,192.2 $ 1,239.5 Rental recoveries 437.1 348.7 331.5 Rental and other expenses (609.9 ) (454.2 ) (478.9 ) Real Estate Operations – NOI $ 1,376.8 $ 1,086.7 $ 1,092.1 Operating margin 69.3 % 70.5 % 69.5 % Average occupancy 95.3 % 94.5 % 93.6 % 2015 2014 2013 Number of properties 1,886 1,607 1,610 Square feet 338.3 282.3 267.1 Percentage occupied 96.4 % 96.3 % 94.9 % The impact from acquisitions in 2016 from 2015 was primarily due to the acquisition of the real estate assets and operating platform of KTR Capital (4) Contribution and disposition activity increased in Below are key operating metrics of our consolidated operating portfolio over the last three years: Development Start Activity The following table summarizes consolidated development starts (dollars and square feet in millions): 2017 (1) 2016 2015 Number of new development projects during the period 74 73 62 Estimated build out potential (square feet) 25 22 18 TEI $ 2,261 $ 1,754 $ 1,643 Percentage of build-to-suits based on TEI 48.5 % 42.2 % 47.2 % We Development Stabilization Activity The following table summarizes consolidated development stabilization activity (dollars and square feet in millions): 2017 2016 2015 Number of development projects stabilized during the period 76 75 63 Square feet upon completion 24 27 21 TEI $ 1,949 $ 2,178 $ 1,595 Weighted average expected yield on TEI (1) 6.5 % 6.6 % 7.2 % Estimated value at completion $ 2,509 $ 2,723 $ 2,109 Estimated weighted average margin 28.8 % 25.0 % 32.2 % (1) We calculate the weighted average expected yield on TEI as estimated NOI assuming stabilized occupancy divided by TEI. For information on our development portfolio at December 31, 2017, see Item 2. Properties. We capitalize costs incurred in renovating, rehabilitating 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 (in millions): Strategic Capital This operating segment includes Below are the components of Strategic Capital revenues, expenses and NOI, 2015 2014 2013 Americas: Asset management and other fees $ 50.8 $ 51.5 $ 52.0 Leasing commissions, acquisition and other transaction fees 10.9 12.3 14.1 Promotes - 31.3 6.4 Strategic capital expenses (1) (47.5 ) (53.1 ) (53.7 ) Subtotal Americas 14.2 42.0 18.8 Europe: Asset management and other fees 71.3 70.5 53.2 Leasing commissions, acquisition and other transaction fees 12.0 16.0 10.6 Promotes 29.5 - - Strategic capital expenses (26.1 ) (29.2 ) (22.5 ) Subtotal Europe 86.7 57.3 41.3 Asia: Asset management and other fees 31.8 32.3 29.9 Leasing commissions, acquisition and other transaction fees 4.1 5.9 13.3 Strategic capital expenses (14.9 ) (14.1 ) (13.1 ) Subtotal Asia 21.0 24.1 30.1 Strategic Capital – NOI $ 121.9 $ 123.4 $ 90.2 2017 2016 2015 Strategic capital revenues $ 374 $ 304 $ 217 Strategic capital expenses (155 ) (129 ) (108 ) Strategic Capital – NOI $ 219 $ 175 $ 109 Below is additional detail of our Strategic Capital revenues, expenses and NOI (in millions): U.S. (1) Other Americas Europe Asia Total 2017 2016 2015 2017 2016 2015 2017 2016 2015 2017 2016 2015 2017 2016 2015 Strategic capital revenues ($) Recurring fees (2) 47 33 31 23 21 20 88 84 71 39 38 32 197 176 154 Non-recurring fees (3) 10 6 8 2 2 2 15 14 12 22 17 11 49 39 33 Promote revenues (4) 120 - - 4 - - 4 89 30 - - - 128 89 30 Strategic capital expense ($) (70 ) (41 ) (41 ) (12 ) (10 ) (9 ) (39 ) (43 ) (27 ) (34 ) (35 ) (31 ) (155 ) (129 ) (108 ) Strategic Capital - NOI ($) 107 (2 ) (2 ) 17 13 13 68 144 86 27 20 12 219 175 109 (1) (2) Recurring fees include asset and property management fees. (3) Non-recurring fees include leasing commission, acquisition and other transactional 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. The following 2015 2014 2013 Americas: Number of ventures 3 3 4 Square feet 89.0 87.1 108.5 Total assets $ 6,890 $ 7,056 $ 8,004 Europe: Number of ventures 4 4 4 Square feet 158.3 147.4 132.9 Total assets $ 11,343 $ 11,440 $ 11,800 Asia: Number of ventures 2 2 2 Square feet 29.2 26.2 22.9 Total assets $ 4,320 $ 4,120 $ 4,014 Total: Number of ventures 9 9 10 Square feet 276.5 260.7 264.3 Total assets $ 22,553 $ 22,616 $ 23,818 U.S. (1) Other Americas (2) Europe (3) Asia Total 2017 2016 2015 2017 2016 2015 2017 2016 2015 2017 2016 2015 2017 2016 2015 Ventures 1 1 1 2 2 2 3 4 4 2 2 2 8 9 9 Operating properties 552 369 391 205 213 205 707 700 688 95 85 66 1,559 1,367 1,350 Square feet 88 50 50 37 42 39 166 163 159 41 36 29 332 291 277 Total assets ($) 7,062 4,238 4,408 2,118 2,793 2,482 13,586 10,853 11,343 6,133 5,173 4,320 28,899 23,057 22,553 We acquired our partner’s interest in NAIF, a consolidated co-investment venture, and contributed In See Note 5 to the Consolidated Financial Statements for additional information on our unconsolidated co-investment ventures. G&A expenses remained relatively flat at $231 million, $222 million and $217 million for 2017, 2016 and 2015, respectively. 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 (in millions): 2017 2016 2015 Building and land development activities $ 63 $ 61 $ 63 Leasing activities (1) 24 24 21 Operating building improvements and other 15 16 16 Total capitalized G&A expenses $ 102 $ 101 $ 100 Capitalized salaries and related costs as a percent of total salaries and related costs 24.4 % 26.0 % 27.6 % (1) Due to a new accounting standard effective January 1, 2019, we expect a change in capitalized leasing activities. See Note 2 to the Consolidated Financial Statements for additional information. Depreciation and Amortization Expenses The following table highlights the key changes in depreciation and amortization expenses during these periods (in millions of dollars): (1) The increase in depreciation and amortization expense in 2016 from 2015 related to acquisitions was primarily due to the KTR transaction in 2015. (2) The decrease in depreciation and amortization expense in 2017 from 2016 was primarily due to the contribution of the NAIF operating properties to USLF in 2017. Our Owned and Managed Properties We manage our business on an owned and managed basis, Our owned and managed 2015 2014 2013 2017 2016 2015 Number of Properties Square Feet Percentage Occupied Number of Properties Square Feet Percentage Occupied Number of Properties Square Feet Percentage Occupied Number of Properties Square Feet Percentage Occupied Number of Properties Square Feet Percentage Occupied Number of Properties Square Feet Percentage Occupied Consolidated 1,886 338.3 96.4 % 1,607 282.3 96.3 % 1,610 267.1 94.9 % 1,532 297 97.3 % 1,777 332 97.0 % 1,872 334 97.1 % Unconsolidated 1,350 276.5 96.2 % 1,278 260.7 95.0 % 1,323 264.3 94.7 % 1,557 331 97.1 % 1,359 290 97.2 % 1,331 273 96.7 % Totals 3,236 614.8 96.3 % 2,885 543.0 95.6 % 2,933 531.4 94.8 % Total 3,089 628 97.2 % 3,136 622 97.1 % 3,203 607 96.9 % Operating Activity 2015 2014 2013 Leased square feet 143.1 130.3 135.7 Average turnover costs per square foot $ 1.66 $ 1.46 $ 1.42 Rent change on rollover (low – high) 9.5% – 14.4% 6.2% – 9.7% 2.0% – 6.1% Weighted average retention percentage on leased square feet 84.5 % 84.7 % 83.1 % Weighted average lease term in months 43 42 46 2015 (1) 2014 2013 Number of new property development during the period 96 76 68 Square feet 28.1 26.0 23.0 TEI $ 2,247.0 $ 2,033.5 $ 1,770.5 Our proportionate share of TEI based on ownership $ 1,814.7 $ 1,791.7 $ 1,473.4 Percentage of build-to-suits based on TEI 43.6 % 32.6 % 41.8 % Weighted average expected yield on TEI 7.2 % 7.2 % 7.6 % Estimated value at completion $ 2,713.3 $ 2,439.5 $ 2,109.2 Estimated margin 20.7 % 20.0 % 19.1 % (1) We 2015 2014 2013 Number of development properties stabilized during the period 81 47 41 Square feet 25.5 16.5 15.2 TEI $ 1,847.8 $ 1,105.5 $ 1,400.7 Our proportionate share of TEI based on ownership $ 1,639.8 $ 955.2 $ 1,199.6 Estimated margin 31.8 % 23.0 % 30.4 % (2) Turnover costs are defined as leasing commissions and tenant improvements and represent the obligations incurred in connection with the signing of a lease. Same Store Analysis We evaluate the operating 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, We Three Months Ended March 31, (1) June 30, (1) September 30, (1) December 31, Full Year 2015 NOI – same store portfolio $ 578.6 $ 584.8 $ 591.8 $ 587.2 $ 2,342.4 2014 NOI – same store portfolio $ 558.8 $ 559.4 $ 565.4 $ 561.7 $ 2,245.3 Percentage change 3.5 % 4.5 % 4.7 % 4.5 % 4.3 % Square feet of portfolio 511.7 508.2 504.8 491.7 basis. The following is a reconciliation of our consolidated rental Prologis, L.P.: Yes þ No oPrologis, Inc.: Yes o No þPrologis, L.P.: Yes o No þIndicate 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 requirements for the past 90 days. Prologis, Inc.: Yes þ No o Prologis, L.P.: Yes þ No oIndicate 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 during the preceding 12 months (or for such shorter periods that the registrant was required to submit and post such files). Prologis, Inc.: Yes þ No o Prologis, L.P.: Yes þ No oþ☐or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act (check one):þ☑ Large accelerated filero☐ Accelerated filero☐ Non-accelerated filer (do not check if a smaller reporting company)o☐ Smaller reportingEmerging growth companyo☐ Large accelerated filero☐ Accelerated filerþ☑ Non-accelerated filer (do not check if a smaller reporting company)o☐ Smaller reportingEmerging growth companyPrologis, Inc.: Yes o No þPrologis, L.P.: Yes o No þ2015,2017, the aggregate market value of the voting common equity held by nonaffiliates of Prologis, Inc. was $19,266,497,534.$30,903,505,295.2016,2018, was approximately 524,774,000.533,054,000.20162018 annual meeting of its stockholders or will be provided in an amendment filed on Form 10-K/A.2015,2017, 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 Prologis, Inc.the Parent and the Operating PartnershipOP collectively.Prologis, Inc.The Parent is a real estate investment trust (a “REIT”) and the general partner of the Operating Partnership.OP. At December 31, 2015, Prologis, Inc.2017, the Parent owned an approximate 97.12%97.41% common general partnership interest in the Operating PartnershipOP and 100% of the preferred units in the Operating Partnership.OP. The remaining approximate 2.88%2.59% common limited partnership interests are owned by nonaffiliatedunaffiliated investors and certain current and former directors and officers of Prologis, Inc. As the sole general partner of the Operating Partnership, Prologis, Inc. has complete responsibility and discretion in the day-to-day management and control of the Operating Partnership.Parent.Prologis, Inc.the Parent and the Operating PartnershipOP as one enterprise. The management of Prologis, Inc.the Parent consists of the same members as the management of the Operating Partnership.OP. These members are officers of Prologis, Inc.the Parent and employees of the Operating PartnershipOP or one of its subsidiaries. As sole general partner, withthe Parent has control of the Operating Partnership, Prologis, Inc.OP through complete responsibility and discretion in the day-to-day management and therefore, consolidates the Operating PartnershipOP for financial reporting purposes. Because the only significant asset of Prologis, Inc.the Parent is its investment in the Operating Partnership,OP, the assets and liabilities of Prologis, Inc.the Parent and the Operating PartnershipOP are the same on their respective financial statements.Prologis, Inc.the Parent and the Operating PartnershipOP into this single report results in the following benefits:·enhances investors’ understanding of Prologis, Inc. and the Operating Partnership 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 Prologis, Inc. and the Operating Partnership; and·creates time and cost efficiencies through the preparation of one combined report instead of two separate reports.Prologis, Inc.the Parent and the Operating PartnershipOP in the context of how we operate the Company. Prologis, Inc.The Parent does not conduct business itself, other than acting as the sole general partner of the Operating PartnershipOP and issuing public equity from time to time. Prologis, Inc.The Parent itself does not incur any indebtedness, but it guarantees the unsecured debt of the Operating Partnership.OP. The Operating PartnershipOP holds substantially all the assets of the business, directly or indirectly, and holds the ownership interests in the Company’s investment in certain entities.indirectly. The Operating PartnershipOP 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 Prologis, Inc.,the Parent, which are contributed to the Operating PartnershipOP in exchange for partnership units, the Operating PartnershipOP generates capital required by the business through the Operating Partnership’sOP’s operations, incurrence of indebtedness and issuance of partnership units to third parties.NoncontrollingThe presentation of noncontrolling interests, stockholders’ equity and partners’ capital are the main areas of difference between the consolidated financial statements of Prologis, Inc.the Parent and those of the Operating Partnership.OP. The noncontrolling interestsdifferences in the Operating Partnership’spresentations between stockholders’ equity and partners’ capital result from the differences in the equity and capital issuances in the Parent and in the OP.statements includestatements. These items represent the common and preferred general partnership interests in consolidated entities not ownedheld by the Operating Partnership. The noncontrolling interestsParent in Prologis, Inc.’sthe OP and are presented as general partner’s capital within partners’ capital in the OP’s consolidated financial statements include the same noncontrolling interests at the Operating Partnership level, as well as thestatements. The common limited partnership interests held by the limited partners in the Operating Partnership, not owned by Prologis, Inc., whichOP are accounted forpresented as noncontrolling interest within equity in the Parent’s consolidated financial statements and as limited partners’ capital bywithin partners’ capital in the Operating Partnership.OP’s consolidated financial statements.Prologis, Inc.the Parent and the Operating Partnership,OP, separate sections in this report, as applicable, individually discuss Prologis, Inc.the Parent and the Operating Partnership,OP, including separate financial statements and separate Exhibit 31 and 32 certifications. In the sections that combine disclosure of Prologis, Inc.the Parent and the Operating Partnership,OP, this report refers to actions or holdings as being actions or holdings of Prologis.2and changes in sales or contribution volume of properties,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 climates,and political climates; (ii) changes in global financial markets, interest rates and foreign currency exchange rates,rates; (iii) increased or unanticipated competition for our properties,properties; (iv) risks associated with acquisitions, dispositions and development of properties,properties; (v) maintenance of REIT status, tax structuring and changes in income tax rates,laws and rates; (vi) availability of financing and capital, the levels of debt that we maintain and our credit ratings,ratings; (vii) risks related to our investments in our co-investment ventures, including our ability to establish new co-investment ventures,ventures; (viii) risks of doing business internationally, including currency risks,risks; (ix) environmental uncertainties, including risks of natural disasters,disasters; and (x) those additional factors discussed under Item 1A. Risk Factors in this report. We undertake no duty to update any forward-looking statements appearing in this report except as may be required by law.are the global leaderoperate 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 logistics real estate focused on high-barrier, high-growth markets across the Americas, Europe and Asia. At December 31, 2015, we owned or had investments in, on athrough wholly owned basis orsubsidiaries and other entities through which we co-invest with partners and investors. We maintain a significant level of ownership in these co-investment ventures, properties and development projects expected to total approximately 669 million square feet (62 million square meters) in 20 countries. We lease modern distribution facilities to a diverse basewhich may be consolidated or unconsolidated based on our level of more than 5,200 customers across two major categories: business-to-business and retail/online fulfillment. For business-to-business enterprises, our buildings serve a variety of sectors, including automotive, transportation, pharmaceuticals and general consumer goods. In the area of retail/online fulfillment, our state-of-the-art logistics facilities foster the seamless flow of goods around the world.Detailscontrol of the 669 million square feet at December 31, 2015 was as follows (dollars and square feet in millions):(1)Total expected investment (“TEI”) represents total estimated cost of development or expansion, including land, development and leasing costs. TEI is based on current projections and is subject to change. Non-U.S. dollar investments are translated to U.S. dollars using the exchange rate at period end or the date of development start for purposes of calculating development starts in any period.Our operating portfolio includes stabilized industrial properties in our owned and managed portfolio. A developed property moves into the operating portfolio when it meets stabilization. The property is considered stabilized when a development project has been completed for one year or is at least 90% occupied whichever occurs first. Our other real estate properties include properties in which we have an ownership interest but do not manage, and other properties we own, such as value-added3properties and assets held for sale to third parties. Value-added properties are those which are expected to be repurposed or redeveloped to a higher and better use. They also include newly acquired properties that present opportunities to create greater value.entity.The Operating PartnershipPrologis, L.P. was also was formed in 1997. global corporate headquarters areis located at Pier 1, Bay 1, San Francisco, California 94111, and our other principal officesoffice locations are in Amsterdam, Denver, Luxembourg, Mexico City, Sao Paulo, Shanghai, Singapore and Tokyo.after we electronically submit material to the SEC.www.prologis.com. The common stock of Prologis, Inc. is listed on the New York Stock Exchange (“NYSE”) under the ticker “PLD” and is a component of the Standard & Poor’s (“S&P”) 500.Investment StrategyTHE COMPANYinvestment strategy focuses on providing high-quality distribution facilities to customers whose businesses are tied to consumption and global trade and as such depend on the efficient movement of goods through the supply chain. We have a significant worldwide presence of $51.5 billion of real estate assets in our owned and managed portfolio which spans 20 countries on four continents. We focus our investments in large population centers with high per-capita consumption rates located near major airports, seaports and rail and highway systems. We classify our properties into two main market categories: global and regional. Global markets comprise approximately 30 of the largest markets tied to global trade and consumption. Regional markets benefitbenefits from large population centers but typically are not as tied to the global supply chain; instead, they serve local consumption and are less supply constrained.We intend to hold primarily Class-A product in global and regional markets. At December 31, 2015, global and regional markets represented approximately 89% and 11%, respectively, of our owned and managed portfolio (based on our share, as determined by our ownership percentage for consolidated and unconsolidated entities, of the properties’ gross book value).We have deep knowledge of our local markets, extensive construction expertise and a demonstrated commitment to sustainable design across our portfolio. We are supported by a diverse customer base and our relationships with multinational corporations bring us repeat business across our global portfolio. See below for information on our customers. For more detail on our properties, see Item 2. Properties.Both macroeconomics and demographics are importantkey drivers of our business; these drivers include population growth,economic activity, including consumption, supply chain modernization, e-commerce and rising affluence.urbanization. In the developed markets of the United States (or “U.S.”)U.S., Europe and Japan, key factors are the reconfiguration of supply chains which is strongly(strongly influenced by e-commerce trends, as well astrends), and the operational efficiencies that can be realized from our modern logistics facilities, are key factors.facilities. In emerging markets, such as Brazil, China and Mexico, new affluence and the rise of a new consumer class have increased the consumer classes together have prompted demand asneed 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 and 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 chains are constructed. Taken together,chain will make their businesses run better, and that a strategic relationship with Prologis will create a competitive advantage.real estate markets benefit from economic growth, as well as from the modernizationfacilities to a diverse base of supply chains around the world.approximately 5,000 customers.In additionour wholly owned investments we also have investments in a variety of ventures. We co-invest with partners and investors in entities that own multiple properties. We refer to these entities asforeign currency fluctuations by investing outside the U.S. through co-investment ventures, (consolidated or unconsolidated).borrowing in local currency and utilizing derivative financial instruments. At December 31, 2017, 94.4% of our net equity (calculated on a gross book value basis) is denominated in U.S. dollars including our proportionate share of our unconsolidated co-investment ventures and derivative financial instruments.Business Strategy and Operating SegmentsOPERATING SEGMENTSReal Estate OperationsGeneral RisksRental Operations. RentalAs a global company, we are subject to social, political and economic risks of doing business in many countries.largest segmentglobal financial markets, this turmoil has the potential to adversely affect (i) the value of our properties; (ii) the availability or the terms of financing that we have or may anticipate utilizing; (iii) our ability to make principal and interest payments on, or refinance any outstanding debt when due; and (iv) the ability of our customers to enter into new leasing transactions or satisfy rental payments under existing leases. Disruptions in the capital and credit markets may also adversely affect our ability to make distributions and payments to our security holders and the market price of our securities.approximatelyand may continue to contribute, assets into such vehicles. There is a risk that our managerial relationship may be terminated. revenues,REIT taxable income (determined without regard to the dividends-paid deduction and by excluding any net capital gain) to our stockholders and we may be subject to tax to the extent our taxable income is not fully distributed. Historically, we have satisfied these distribution requirements by making cash distributions to our stockholders, but we may choose to satisfy these requirements by making distributions of cash or other property, including, in limited circumstances, our own stock. For distributions with respect to taxable years that end on or before December 31, and in some cases declared as late as December 31, a REIT can satisfy up to 90% of the distribution requirements discussed above through the distribution of shares of our stock if certain conditions are met. Assuming we continue to satisfy these distribution requirements with cash, we may not be able to fund all future capital needs, including acquisition and development activities, from cash retained from operations and may have to rely on third-party sources of capital. Furthermore, to maintain our REIT status and not have to pay federal income and excise taxes, we may need to borrow funds on a short-term basis to meet the REIT distribution requirements even if the then-prevailing market conditions are not favorable for these borrowings. These short-term borrowing needs could result from differences in timing between the actual receipt of cash and inclusion of income for federal income tax purposes, or the effect of nondeductible capital expenditures, the creation of reserves or required debt or amortization payments. Our ability to access debt and equity capital on favorable terms or at all depends on a number of factors, including general market conditions, the market’s perception of our growth potential, our current and potential future earnings and fundscash distributions and the market price of our securities.operationsqualifying sources. In addition, Prologis, Inc. must pay dividends to its stockholders aggregating annually at least 90% of its taxable income (determined without regard to the dividends paid deduction and by excluding capital gains) and must satisfy specified asset tests on a quarterly basis. The provisions of the Internal Revenue Code and applicable Treasury regulations regarding qualification as a REIT are more complicated for Prologis, Inc. because we hold assets through the OP.2015 (seeany taxable year, we will be required to pay federal income tax (including, for taxable years prior to 2018, any applicable alternative minimum tax) on taxable income at regular corporate rates. Unless we are entitled to relief under certain statutory provisions, Prologis, Inc. would be disqualified from treatment as a REIT for the four taxable years following the year in which it lost the qualification. If Prologis, Inc. lost its REIT status, our net earnings would be significantly reduced for each of the years involved.definitionconsolidated operating properties are 404 buildings owned primarily by one co-investment venture that we consolidate but of fundswhich we own less than 100% of the equity. No individual property or group of properties operating as a single business unit amounted to 10% or more of our consolidated total assets at December 31, 2017, or generated income equal to 10% or more of our consolidated gross revenues for the year ended December 31, 2017.operationsDecember 31, 2012, to the cumulative total return of the S&P 500 Stock Index and the Financial Times and Stock Exchange NAREIT Equity REITs Index from December 31, 2012, to December 31, 2017. The graph assumes an initial investment of $100 in our common stock and each of the indices on December 31, 2012, and, as required by the SEC, the reinvestment of all dividends. The return shown on the graph is not necessarily indicative of future performance.complete reconciliationliquidation preference of $50 per share. Dividends payable per share were $4.27 for the years ended December 31, 2017, and 2016.net earningsthe Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data.Operations). 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 maintaining high occupancy rates, controlling expenses and increasing rents. Our rental revenue is diversified by customer segment and geography. We believe our property management, leasing and maintenance teams, together with our capital expenditure, energy and risk management programs, create cost efficiencies that allow us to capitalize on the economies of scale inherent in owning, operating and growing a global portfolio.Capital Deployment. Capital deployment includes the development, redevelopment and acquisition of industrial properties to increase rental income and therefore is reported with rental operations. We primarily deploy capital in global and regional markets to serve our customers’ requirements. We capitalize on the following: (i) our land bank, (ii) the development expertise of our local teams, (iii) our customer relationships, and (iv) the demand for high-quality distribution facilities. We aim to increase our rental revenue and our net asset value by leasing newly developed space and acquiring operating properties. We develop properties for long-term hold, for contribution to our co-investment ventures and, occasionally, for sale to third parties. In 2015, we stabilized $1.6 billion of development projects with an estimated gross margin of 32%, creating $515 million in value for Prologis.Strategic CapitalReal estate is a capital intensive business that requires growth capital. We manage third-party capital on behalf of the world’s largest institutional partners in order to grow our business, provide incremental revenues, and align our assets and liabilities in local currencies thereby mitigating foreign currency risk associated with our international investments. We tailor logistics portfolios to meet our partners’ specific needs, with a focus on long-term ventures and open-ended funds. We also access alternative sources of equity through the publicly traded vehicles Nippon Prologis REIT, Inc. (“NPR”) and FIBRA Prologis. We hold a significant ownership interest in these ventures, aligning our interests with those of our partners. We generate strategic capital revenues from our unconsolidated ventures through asset management and property management services and we earn additional revenues by providing leasing, acquisition, construction, development, financing and disposition services. At December 31, 2015, we managed 276.5 million square feet of operating properties in nine unconsolidated co-investment ventures. For more detail of our co-investment ventures, see Item 2. Properties. Depending on the structure of the venture and the returns provided to our partners, we also earn revenues through incentive fees during the life of a venture or upon liquidation (called “promotes”). In 2015, this segment contributed approximately 10% of our revenues, earnings and our funds from operations. We plan to grow this business generally through our existing ventures.CompetitionCompetitively priced distribution space could impact our occupancy rates and have an adverse effect on how much rent we can charge, which in turn could affect both of our operating segments. We may face competition with regard to our capital deployment activities, including local, regional and national operators or developers. We also face competition from investment managers for institutional capital within our strategic capital business.4We believe we have competitive advantages due to our:·ability to respond quickly to customers’ needs for high-quality distribution space in key global and regional markets;·established relationships with key customers served by our local teams;·ability to leverage our organizational scale and structure to provide a single point of contact for global customers through the Prologis global customer solutions team;·property management and leasing expertise;·relationships and proven track record with current and prospective investors in our strategic capital business;·global experience developing and managing industrial properties;·well-positioned land bank; and·team members with experience in the land entitlement and development processes.CustomersOur broad customer base represents a spectrum of international, national, regional and local distribution users. At December 31, 2015, in Real Estate Operations we had more than 4,600 customers occupying 338.3 million square feet of distribution space. On an owned and managed basis, we had more than 5,200 customers occupying 614.7 million square feet of distribution space.In Strategic Capital, we view our partners and investors as our customers. At December 31, 2015, in our private ventures, we partnered with approximately 100 investors, several of which invest in multiple ventures.table details our top 25 customers at December 31, 2015 (square feetdiscussion should be read in thousands):(1)Net effective rent (or “NER”) is calculated using the estimated total cash to be received over the term of the lease (including base rent and expense reimbursements) divided by the lease term to determine the amount of rent and expense reimbursements received per year. Amounts derived in a currency other than the U.S. dollar have been translated using the average rate from the previous twelve months.5The following table summarizes our global employee base at December 31, 2015:We believe we have good relationshipsconjunction with our employees. Prologis employees are not organized under collective bargaining agreements, although some employees in Europe are represented by statutory Works Councils and as such they benefit from applicable labor agreements.Code of Ethics and Business ConductWe maintain a Code of Ethics and Business Conduct applicable to our board of directors (the “Board”) and all of our officers and employees, including the principal executive officer, the principal financial officer and the principal accounting officer, or other people performing similar functions. A copy of our Code of Ethics and Business Conduct is available on our website, www.prologis.com. In addition to being accessible through our website, copies of our Code of Ethics and Business Conduct can be obtained, free of charge, upon written request to Investor Relations, Pier 1, Bay 1, San Francisco, California 94111. Any amendments to or waivers of our Code of Ethics and Business Conduct that apply to the principal executive officer, the principal financial officer, or the principal accounting officer, or other people performing similar functions, and that relate to any matter enumerated in Item 406(b) of Regulation S-K, will be disclosed on our website.We are exposed to various environmental risks that may result in unanticipated losses and affect our operating results and financial condition. Either the previous owners or we have conducted environmental reviews on a majority of the properties we have acquired, including land. While some of these assessments have led to further investigation and sampling, none of the environmental assessments has revealed an environmental liability that we believe would have a material adverse effect on our business, financial condition or results of operations. See Item 1A. Risk Factors and Note 17 to the Consolidated Financial Statements included in Item 8.We carry insurance coverage on our properties. We determine the type Financial Statements and Supplementary Data of coveragethis report and the policy specifications and limits based on what we deem to be the risks associated with our ownership of properties and our business operations in specific markets. Such coverage typically includes property damage and rental loss insurance resulting from such perils as fire, windstorm, flood, earthquake and terrorism; commercial general liability insurance; and environmental insurance. Insurance is maintained through a combination of commercial insurance, self-insurance and a wholly-owned captive insurance entity. The costs to insure our properties are primarily covered through reimbursements from our customers. We believe that our insurance coverage contains policy specifications and insured limits that are customary for similar properties, business activities and markets and we believe our properties are adequately insured. See further discussion inmatters described under Item 1A. Risk Factors.ITEM 1A. Risk FactorsMANAGEMENT’S OVERVIEWOur operationsSummary of 2017structure involve various risksmanaged portfolio and we ended the year with occupancy of 97.2%. See below for the results of our two business segments and details of operating activity of our owned and managed portfolio.could adversely affectrepositioned our portfolio and streamlined our co-investment ventures, including:condition, including but not limited to,measure that is calculated using revenues and expenses directly from our financial position, results of operations, cash flow, abilitystatements. We consider NOI by segment to make distributions and payments to security holders and the market valuebe an appropriate supplemental measure of our securities. These risks relate toperformance because it helps management and investors understand the core operations of our consolidated company as well as our investments in unconsolidated entities and include among others, (i) general risks; (ii) risks related to our business; (iii) risks related to financing and capital and (iv) income tax risks.real estate assets.2015,2017, we generated approximately $335.3$416 million or 15.3%15.9% of our revenuerevenues from operations outside the U.S. Circumstances and developments related to international and U.S. operations that could negatively affect us include, but are not limited to, the following factors:·difficulties and costs of staffing and managing international operations in certain regions, including differing employment practices and labor issues;·local businesses and cultural factors that differ from our usual standards and practices;·volatility in currencies and currency restrictions, which may prevent the transfer of capital and profits to the U.S.;·challenges in establishing effective controls and procedures to regulate operations in different regions and to monitor compliance with applicable regulations, such as the Foreign Corrupt Practices Act, the United Kingdom Bribery Act and other similar laws; ·unexpected changes in regulatory requirements, tax and other laws;·potentially adverse tax consequences;·the responsibility of complying with multiple and potentially conflicting laws, e.g., with respect to corrupt practices, employment and licensing;·the impact of regional or country-specific business cycles and economic instability;·political instability, uncertainty over property rights, civil unrest, drug trafficking, political activism or the continuation or escalation of terrorist or gang activities;6·access to capital may be more restricted, or unavailable on favorable terms or at all in certain locations.2015,2017, approximately $6.3$7.4 billion or 20.1%25.1% of our total consolidated assets arewere invested in a currency other than the U.S. dollar, primarily the Brazilian real, British pound sterling, Canadian dollar, euro and Japanese yen. As a result, we are subject to foreign currency risk due to potential fluctuations in exchange rates between foreign currencies and the U.S. dollar. A significant change in the value of the foreign currency of one or more countries where we have a significant investment may have a material adverse effect on our business and, in particular,specifically, our U.S. dollar reported financial position and results of operations and debt covenant ratios. Although we attempt to mitigate adverse effects by borrowing under debt agreements denominated in foreign currencies and using derivative contracts, there can be no assurance that those attempts to mitigate foreign currency risk will be successful. rate changes or interest rate changes may adversely affect our business.United KingdomU.K Bribery Act and similar laws and regulations. Our properties are also subject to various federal, state and local regulatory requirements, such as the Americans with Disabilities Act and state and local fire and life-safety requirements. Noncompliance could result in the imposition of governmental fines or the award of damages to private litigants. While we believe that we are currently in material compliance with these regulatory requirements, the requirements may change or new requirements may be imposed that could require significant unanticipated expenditures by us. If we are required to make unanticipated expenditures to comply with these regulations, we may be adversely affected.7ventureventures or third partyparties who might acquire our properties may need to have access to debt and equity capital, in the private and public markets, in order to acquire properties from us. Should they have limited or no access to capital on favorable terms, then dispositions could be delayed.industrial distributionlogistics sector and our business would be adversely affected by an economic downturn in that sector.primarily concentrated in the industrial distributionlogistics sector. This concentration may expose us to the risk of economic downturns in this sector to a greater extent than if our business activities were more diversified.2015, approximately 31.9%2017, 33.7% of our consolidated operating properties or $7.7 billion (based on consolidated gross book value, or investment before depreciation) arewere located in California, which represented 25.1%27.4% of the aggregate square footage of our operating properties and 31.0%34.1% of our net operating income.NOI. Our revenuerevenues from, and the value of, our properties located in California may be affected by local real estate conditions (such as an oversupply of or reduced demand for industriallogistics properties) and the local economic climate. Business layoffs, downsizing, industry slowdowns, changing demographics and other factors may adversely impact California’s economic climate. Because of the number of properties we have located in California, a downturn in California’s economy or real estate conditions could adversely affect our business. 3.0%3% of total consolidated investment before depreciation) in operating properties in certain global and regional markets located in Atlanta, Central and Eastern Pennsylvania, Chicago, Dallas/Fort Worth, New Jersey/New York City, Seattle and South Florida. Our operating performance could be adversely affected if conditions become less favorable in any of the markets in which we have a concentration of properties. Conditions such as an oversupply of distributionlogistics space or a reduction in demand for distributionlogistics space, among other factors, may impact operating conditions. Any material oversupply of distributionlogistics space or material reduction in demand for distributionlogistics space could adversely affect our overall business. In addition, ourOur owned and managed portfolio, including the unconsolidatedwhich includes our wholly-owned properties and properties included in our co-investment ventures, in which we invest, has concentrations of properties in the same markets mentioned above, as well as in markets in France, Germany, Japan, Mexico, Netherlands, Poland and the United Kingdom,U.K., and are subject to the economic conditions in those markets.the San Francisco Bay Area, Los Angeles,our markets in California and Seattle. International properties located in active seismic areas include Japan and Mexico. We generally carry earthquake insurance on our properties located in areas historically subject to seismic activity, subject to coverage limitations and deductibles, if we believe it is commercially reasonable. We evaluate our earthquake insurance coverage annually in light of current industry practice through an analysis prepared by outside consultants and in some specific instances have elected to self-insure our earthquake exposure based on this analysis. We have elected not to carry earthquake insurance for our assets in Japan based on this analysis.·local conditions, such as a reduction in demand for distribution space in an area due to oversupply and obsolescence, such as changes in technology, may impact the supply chain for ourselves and our customers;·the attractiveness of our properties to potential customers and competition from other available properties;·increasing costs of maintaining, insuring, renovating and making improvements to our properties;·our ability to rehabilitate and reposition our properties due to changes in the business needs of our customers;·our ability to control rents and variable operating costs; and·governmental regulations and the associated potential liability under, and changes in, environmental, zoning, usage, tax and other laws.8sales to third parties, development of industrial propertieslogistics facilities to hold for long-term investment, or contribution or sale to a co-investment venture or third party, depending on market conditions, our liquidity needs and other factors. We may increase our investment in the development, renovation and redevelopment business and we expect to complete the build-out and leasing of our current development portfolio. We may also develop, renovate and redevelop properties within existing or newly formed co-investment ventures. The real estate development, renovation and redevelopment business includes the following significant risks:·we may not be able to obtain financing for development projects on favorable terms or at all;·we may explore development opportunities that may be abandoned and the related investment impaired;·we may not be able to obtain, or may experience delays in obtaining, all necessary zoning, land-use, building, occupancy and other governmental permits and authorizations;·we may have construction costs, total investment amounts and our share of remaining funding that exceed our estimates and projects may not be completed, delivered or stabilized as planned due to defects or other issues;·we may not be able to attract third-party investment in new development co-investment ventures or sufficient customer demand for our product;·we may have properties that perform below anticipated levels, producing cash flow below budgeted amounts;·we may seek to sell certain land parcels and not be able to find a third party to acquire such land or the sales price will not allow us to recover our investment, resulting in impairment charges;·we may not be able to lease properties we develop on favorable terms or at all;·we may not be able to capture the anticipated enhanced value created by our value-added properties on expected timetables or at all;·we may experience delays (temporary or permanent) if there is public or government opposition to our activities; and·we may have substantial renovation, new development and redevelopment activities, regardless of their ultimate success, that require a significant amount of management’s time and attention, diverting their attention from our day-to-day operations.2015,2017, we had investments in real estate containing approximately 393399 million square feet held through co-investment ventures, both public and private. Our organizational documents do not limit the amount of available funds that we may invest in these ventures, and we may and currently intend to develop and acquire properties through co-investment ventures and investments in other entities when warranted by the circumstances. However, there can be no assurance that we will be able to form new co-investment ventures, or attract third-party investment or that additional investments in new or existing ventures to develop or acquire properties will be successful. Further, there can be no assurance that we are able to realize value from such investments.·our partners may share certain approval rights over major decisions made on behalf of the ventures;·if our partners fail to fund their share of any required capital contributions, then we may choose to contribute such capital;·our partners might have economic or other business interests or goals that are inconsistent with our business interests or goals that would affect our ability to operate the property;·the venture or other governing agreements often restrict the transfer of an interest in the co-investment venture or may otherwise restrict our ability to sell the interest when we desire or on advantageous terms;9·disputes between us and our partners may result in litigation or arbitration that would increase our expenses and prevent our officers and directors from focusing their time and effort on our business and result in subjecting the properties owned by the applicable co-investment venture to additional risk.distributionlogistics facilities may be exposed to rare catastrophic weather events, such as severe storms or floods. If the frequency of extreme weather events increases due to climate change, our exposure to these events could increase. We do not currently consider ourselves to be exposed to regulatory risks related to climate change, as our operations generally do not emit a significant amount of greenhouse gases. However, we may be adversely impacted as a real estate developer in the future by potential impacts to the supply chain or stricter energy efficiency standards for buildings. We cannot give any assurance that other such conditions do not exist or may not arise in the future. The presence of such substances on our real estate properties could adversely affect our ability to lease, develop or sell such properties or to borrow using such properties as collateral, and this may have an adverse effect on our business and financial condition, and in particular, our distributable cash flow.collateral.unconsolidated co-investment ventures are adequately insured. Certain losses, however, including losses from floods, earthquakes, acts of war, acts of terrorism or riots, generally are not insured against or generally are not fully insured against because it is not deemed economically feasible or prudent to do so. If an uninsured loss or a loss in excess of insured limits occurs with respect to one or more of our properties, we could experience a significant loss of capital invested and future revenues in these properties and could potentially remain obligated under any recourse debt associated with the property.revenuerevenues from those properties and, if there102015,2017, our credit ratings were Baa1A3 from Moody’s and BBB+A- from S&P, both with outlook stable.stable outlook. 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.to our stockholders at least 90% of our REIT taxable income (determined without regard to the dividends-paid deduction and by excluding any net capital gain) to our stockholders and we may be subject to tax to the extent our taxable income is not fully distributed. Historically, we have satisfied these distribution requirements by making cash distributions to our stockholders, but we may choose to satisfy these requirements by making distributions of cash or other property, including, in limited circumstances, our own stock. For distributions with respect to taxable years that endedend on or before December 31, 2015, and in some cases declared as late as December 31, 2016, a REIT can satisfy up to 90% of the distribution requirements discussed above through the distribution of shares of our stock if certain conditions are met. Assuming we continue to satisfy these distribution requirements with cash, we may not be able to fund all future capital needs, including acquisition and development activities, from cash retained from operations and may have to rely on third-party sources of capital. Furthermore, to maintain our REIT status and not have to pay federal income and excise taxes, we may need to borrow funds on a short-term basis to meet the REIT distribution requirements even if the then-prevailing market conditions are not favorable for these borrowings. These short-term borrowing needs could result from differences in timing between the actual receipt of cash and inclusion of income for federal income tax purposes, or the effect of nondeductible capital expenditures, the creation of reserves or required debt or amortization payments. Our ability to access debt and equity capital on favorable terms or at all depends on a number of factors, including general market conditions, the market’s perception of our growth potential, our current and potential future earnings and cash distributions and the market price of our securities.Operating Partnership.OP.operating partnershipOP units will reduce the percentage of our common stock and units owned by investors. In most circumstances, stockholders and unitholders will not be entitled to vote on whether or not we issue additional common stock or units. In addition, depending on the terms and pricing of any additional offering of our common stock or units and the value of the properties, our stockholders and unitholders may experience dilution in both book value and fair value of their common stock or units.we have operated Prologis, Inc. has been organized and operated to qualify as a REIT under the Internal Revenue Code and believe that the current organization and method of operation comply with the rules and regulations promulgated under the Internal Revenue Code to enable Prologis, Inc. to continue to qualify as a REIT. However, it is possible that we are organized or have operated in a manner that would not allow Prologis, Inc. to qualify as a REIT, or that our future operations could cause Prologis, Inc. to fail to qualify. Qualification as a REIT requires us to satisfy numerous requirements (some annually and others on a quarterly basis) established under highly technical and complex sections of the Internal Revenue Code for which there are only limited judicial and administrative interpretations, and involves the determination of various factual matters and circumstances not entirely within our control. For example, to qualify as a REIT, Prologis, Inc. must derive at least 95% of its gross income in any year from qualifying sources. In addition, Prologis, Inc. must pay dividends to its stockholders aggregating annually at least 90% of its taxable income (determined without regard to the dividends paid deduction and by excluding capital gains) and must satisfy specified asset tests on a quarterly basis. The provisions of the Internal Revenue Code and applicable Treasury regulations regarding qualification as a REIT are more complicated for Prologis, Inc. because we hold assets through the Operating Partnership.OP.tests.test. To qualify as a REIT, the subsidiary REIT must independently satisfy all of the REIT qualification requirements. If such subsidiary REIT were to fail to qualify as a REIT, and certain relief provisions did not apply, it would be treated as a regular taxable corporation and its income would be subject to U.S. federal income tax. In addition, a failure of the subsidiary REIT to qualify as a REIT would have an adverse effect on the ability of Prologis, Inc. to comply with the REIT income and asset tests, and thus its ability to qualify as a REIT.CodeService were to argue successfully that a transfer, disposition or contribution of property constituted a prohibited transaction, we would be required to pay a 100% penalty tax on any gain allocable to us from the prohibited transaction. In addition, income from a prohibited transaction might adversely affect our ability to satisfy the income tests for qualification as a REIT.11Geographic DistributionGEOGRAPHIC DISTRIBUTIONare investedpredominately invest in real estate properties that are predominately industrial properties.logistics facilities. Our properties are typically used for distribution, storage, packaging, assembly and light manufacturing of consumer and industrial products. The vast majority of our operating properties are used by our customers for bulk distribution.We manage our business on an owned and managed basis whether a property is wholly owned by us or owned by one of our co-investment ventures. We believe that the operating fundamentals of our owned and managed portfolio are consistent with thoseThe following tables provide details of our consolidated portfoliooperating properties, investment in land and therefore allow us to make business decisions based on the property operations versus our ownership. As such, wedevelopment portfolio. We have also included operating property information for Real Estate Operations and our owned and managed portfolio. The owned and managed portfolio includes the properties we consolidate and the properties owned by our unconsolidated co-investment ventures reflected at 100% of the ventures,amount included in the ventures’ financial statements as calculated on a GAAP basis, not our proportionate share.Real Estate Operationsthe operating property information below for our consolidated operating properties are 628404 buildings owned primarily by twoone co-investment venturesventure that we consolidate but of which we own less than 100% of the equity. No individual property or group of properties operating as a single business unit amounted to 10% or more of our consolidated total assets at December 31, 2015,2017, or generated income equal to 10% or more of our consolidated gross revenues for the year ended December 31, 2015.2017.12thousands:millions and items notated by ‘0‘ indicate an amount that rounds to less than one million: 13bonds at December 31, 2015.bonds. For purposes of this table, the total principal balance of a debt issuance that is secured by a pool of properties is allocated among the properties in the pool based on each property’s investment balance. In addition to the amounts reflected here, we also have $76.2$2 million of encumbrances related to other real estate properties not included in Real Estate Operations. See Schedule III – Real Estate and Accumulated Depreciation to the Consolidated Financial Statements in Item 88. Financial Statements and Supplementary Data for additional identification of the properties pledged.14(3)(4)rentlease upon developmentcompletion of an industriala building on existing parcels of land included in this table.land.completecompleted by December 31, 2016,2018, and 36%approximately 22% of the properties in the development portfolio were already completed but not yet stabilized. The remainder of our properties under development were expected to be completed before July 2019.20152017 (in thousands)millions):are:were: (i) certain non-industrialnon-logistics real estate; (ii) land parcels that are ground leased to third parties; (iii) our corporate office buildings; (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; (v)and (vi) earnest money deposits associated with potential acquisitions and (vi) costs related to future development projects, including purchase options on land.acquisitions.Lease ExpirationsLEASE EXPIRATIONS(with a weighted(the average lease term of six years)for leases signed in 2017 was 54 months). The following table summarizes the lease expirations of our consolidated operating portfolio for leases in place at December 31, 2015, without giving effect to the exercise of renewal options or termination rights, if any2017 (dollars and square feet in thousands)millions):15Co-Investment VenturesCO-INVESTMENT VENTURESindustrial propertieslogistics facilities that we also manage. Our unconsolidated co-investment ventures are accounted for under the equity method. The amounts included for the unconsolidated ventures are reflected at 100% of the amount included in the ventures’ financial statements as calculated on a GAAP basis, not our proportionate share. The following table summarizes our consolidated and unconsolidated co-investment ventures and represents 100% of the ventures, not our proportionate share, at December 31, 20152017 (in thousands)millions):(1)We have a 50% ownerships interest in and consolidate an entity that in turn owns 50% of several entities that we account for on the equity method. Also, we have additional investments in other unconsolidated entities in Brazil that we account for on the equity method with various ownership interests ranging from 5 to 50%.NoteNotes 5 and 12 to the Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data. unconsolidated co-investment ventures are parties to a variety of legal proceedings arising in the ordinary course of business. We believe that, with respect to any such matters to which we are currently a party, the ultimate disposition of any such matter will not result in a material adverse effect on our business, financial position or results of operations.ApplicableApplicable.Market Information and HoldersMARKET INFORMATION AND HOLDERS16requirements, and theserequirements. These dividends, if and as declared, may be adjusted at the discretion of the Board during the year.2016,2018, we had approximately 524,774,000533,054,000 shares of common stock outstanding, which were held of record by approximately 4,9404,400 stockholders.2010,2012, to the cumulative total return of the S&P 500 Stock Index and the Financial Times and Stock Exchange NAREIT Equity REITs Index from December 31, 2010,2012, to December 31, 2015.2017. The graph assumes an initial investment of $100 in our common stock and each of the indices on December 31, 2010,2012, and, as required by the SEC, the reinvestment of all dividends. The return shown on the graph is not necessarily indicative of future performance.companyCompany under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing.Preferred Stock DividendsPREFERRED STOCK DIVIDENDS2015,2017, and 2014,2016, we had one series1.4 million and 1.6 million shares of the Series Q preferred stock outstanding – the “Series Q preferred stock.”with a liquidation preference of $50 per share. Dividends payable per share were $4.27 for the years ended December 31, 2015,2017, and 2014.2016.Sales of Unregistered SecuritiesSALES OF UNREGISTERED SECURITIESthe fourth quarter of 2015,2017, we issued an aggregate of 1.5 million shares of common stock of Prologis, Inc. in connection with the redemption of common units and Class A Units of the Operating Partnership (seePrologis, L.P. See Note 11 to the Consolidated Financial Statements in Item 8).8. Financial Statements and Supplementary Data for more information. The issuance of the shares of common units and Class A Unitsstock was undertaken in reliance upon the exemption from the registration requirements of the Securities Act of 1933, as amended, afforded by Section 4(a)(2) thereof.Securities Authorized for Issuance Under Equity Compensation PlansSECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANSOther Stockholder MattersOTHER STOCKHOLDER MATTERS20162018 Proxy Statement or in an amendment filed on Form 10-K/A.17the Operating PartnershipPrologis, L.P. (in millions, except for per share and unit amounts):In 2011, AMB Property Corporation (“AMB”) completed a merger (the “Merger”) with ProLogis, a Maryland REIT (“ProLogis”). In the Merger, AMB was the legal acquirer and ProLogis was the accounting acquirer. Following the Merger, AMB changed its name to Prologis, Inc. In 2011, we also completed an acquisition of one of our unconsolidated ventures in Europe. Activity in 2011 included five months of results of ProLogis, as it was the accounting acquirer in the Merger and seven months of results of the combined company resulting from the Merger and the acquisition in Europe.(2)For 2015, 2014 and 2013, the amounts for the Operating Partnership were the same as Prologis, Inc. Net earnings (loss) attributable to common unitholders for the Operating Partnership was $(0.34) and $0.16 for continuing operations and discontinued operations, respectively, in 2012, and was $(0.82) and $0.31 for continuing operations and discontinued operations, respectively, in 2011.(3)as such, none of our dispositions in 2015 or 2014since adoption met the qualifications to be reported as discontinued operations. In 2013, our net earnings per share attributable to common stockholders and unitholders for basic and diluted included $0.25 per share attributable to discontinued operations.(4)In 2015, we early adopted an accounting standard that required the presentation of debt issuance costs in the balance sheet to be shown as a deduction from the carrying amount of the related debt liability rather than as a deferred charge included in assets and we began presenting debt issuance costs in the Consolidated Balance Sheets as a deduction from the carrying amount of the related debt liability. At December 31, 2015, we have $52.3 million of unamortized debt issuance costs included in Debt in the Consolidated Balance Sheets. This adoption resulted in the reclassification of $43.2 million, $37.7 million, $42.4 million and $47.6 million of unamortized debt issuance costs for the years ended December 31, 2014, 2013, 2012 and 2011, respectively.88. Financial Statements and Supplementary Data of this report and the matters described under Item 1A. Risk Factors.Management’s OverviewMANAGEMENT’S OVERVIEWWe believe the scale and quality of our operating platform, the skills of our team and the strength of our balance sheet gives us unique competitive advantages. Our plan to grow revenue, earnings, net operating income (“NOI”), cash flows and Core FFO (see below for definition of Core FFO and a complete reconciliation to net earnings) is based on the following:·Rising Rents. Market rents are increasing across many of our markets. We expect rent growth to continue as demand for logistics facilities is strong in many markets across the globe. Because many of our leases originated during low rent periods following the global financial crisis, in-place leases have room for growth, which translates into increased earnings, NOI and cash flow both on a consolidated basis and through the amounts we recognize from our unconsolidated co-investment ventures based on our ownership share. We had positive rent change on rollovers (when comparing the net effective rent of the new lease to the prior lease for the same space) on our owned and managed operating portfolio every quarter for the last three years. We had quarterly increases from 9.5% to 14.4% during 2015.18·Economies of Scale from Growth in Assets Under Management. We believe we have the infrastructure that will allow us to increase our investments in real estate, with minimal increases to general and administrative (“G&A”) expenses. During 2015, our owned and managed real estate assets increased through the acquisition of 73.7 million square feet of operating properties, principally through the acquisition of the real estate portfolio of KTR Capital Partners and its affiliates (“KTR”). We completed and integrated this acquisition with minimal increases in gross overhead that were related to property management functions.201520172015,2017, operating fundamentals remained strong for our owned and managed portfolio and we ended the year with occupancy of 97.2%. See below for the results of our two business segments and details of operating activity of our owned and managed portfolio.·May,January, we acquired the real estate assets and operating platform of KTR. The portfolio consisted of 315 operating properties aggregating 59 million square feet, 3.6 million square feet of properties under development and land parcels that will support an estimated build out of 6.8 million square feet. The total assets were valued at $5.8 billion. The properties were acquired bysold our consolidated co-investment venture Prologis U.S.investment in Europe Logistics Venture 1 (“USLV”ELV”), of which we own 55%. The acquisition was funded through cash, the assumption of debt to our venture partner for $84 million and the issuance of 4.5 million common limited partnership unitsELV contributed its properties to Prologis Targeted Europe Logistics Fund (“PTELF”) in the Operating Partnership.exchange for equity interests. ·connection with an acquisition ofFebruary, we formed UKLV, in which we have a portfolio of properties in October, we issued 9.1 million units15.0% ownership interest. This unconsolidated co-investment venture was formed for investment in the Operating Partnership, which included 8.9 million units of a new class of common limited partnership units in the Operating Partnership designated as Class A convertible common limited partnership units (“Class A Units”) in connection with an acquisition, for a total value of $371.6 million.U.K. and currently holds stabilized properties, properties under development and land.·March,October, the holdersassets and related liabilities of PTELF were contributed to Prologis European Properties Fund II (“PEPF II”) in exchange for units, and PEPF II was renamed PELF. In connection with the exchangeable notestransaction, we exchanged $459.8 million of their notesour units in PTELF for 11.9 million shares of common stock of the Parent and $0.2 million of their notes for cash.new units in PELF resulting in our ownership interest decreasing to 25.6%, however, our economic investment did not substantially change.We had significant development activitystrong operating metricsincreased the total borrowing capacity to ¥50.0 billion ($444 million at December 31, 2017).2015. See below,June 2029, at 99.9% of par value. Following the issuance, we used the cash proceeds to redeem $618 million of previously issued senior notes, maturing in Our Owned and Managed Portfolio section, for details2019, with an average coupon rate of our development and operating activity.5.4%.Results of OperationsRESULTS OF OPERATIONSrevenuerevenues, rental recoveries and rental expenseexpenses recognized from our consolidated operating properties. We had significant real estate activity during 2015 and 2014 that impactedallocate the sizecosts of our consolidated portfolio. The 2015 results include approximately seven months of NOI from the properties acquired in the KTR acquisition (see Note 3property management functions to the Consolidated Financial Statements for further detailReal Estate Operations segment through Rental Expenses and the Strategic Capital segment through Strategic Capital Expenses based on this transaction).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 have been improving,continue to be strong, which has positively affected both the occupancydriven rents higher, kept occupancies high and rental rates we have experienced and also has fueled development activity. This operating segment also includes revenue from land we ownis impacted by our development, acquisition and lease to customers and development management and other revenue, net of acquisition, disposition and land holding costs.activities.forduring these periods were impacted by the years ended December 31 was as follows (dollars in millions)following items (in millions of dollars):Detail of our consolidated operating properties for the years ended December 31 was as follows (square feet in millions):19The following were the key drivers of Real Estate Operations NOI:·(1)deployment activity within the portfolio,Partners and its affiliates (“KTR”) in May 2015, which included acquisitions, development stabilizations, contributions to co-investment ventures and dispositions to third parties, affected NOI as follows:2015 as compared with 2014 ($236.9generated an additional $152 million net increase)oKTR acquisition during the second quarter of 2015:§$175.7net revenues, including a decrease of $25 million increase from property operations,§$24.7 million decrease fromin acquisition costs, associated with the transaction,§approximatelyin 2016. Approximately 45% of all KTR activity is offset inLess Net Earnings Attributable to Noncontrolling Interestsfor our venture partner’s share. See Note 3 in the Consolidated Financial Statements of Income attributable to our venture partner’s share;oconsolidation of Prologis North American Industrial Fund (“NAIF”) duringfor further detail on the fourth quarter of 2014: $153.1 million increase; of which approximately 34% of all activity is offset in Less Net Earnings Attributable to Noncontrolling Interests;oother acquisitions and development activity: $53.3 million increase;ocontribution activity: $56.4 million decrease;odisposition activity: $41.8 million decrease; ando$22.3 million decrease from increased acquisition costs, excluding KTR.2014 as compared with 2013 ($63.7 million net decrease)oacquisitions and development activity: $84.8 million increase;oconsolidation of NAIF: $35.8 million increase;ocontribution activity: $140.3 million decrease; andodisposition activity: $44.0 million decrease.KTR transaction.·(2)NOIDuring these periods, we experienced increased due to an increase in average occupancy in our operating properties of 80 basis points in 2015 from 2014 and 90 basis points in 2014 from 2013. The KTR properties were 89.2% occupied at the timepositive rent rate growth. Rent rate growth (or rent change) is a combination of the acquisition, which decreased our averagerollover of existing leases and period-end occupancy slightly.·We leased a total of 94.7 million square feet, or 29.7% of our average portfolio; 72.9 million square feet, or 27.5% of our average portfolio and 87.6 million square feet, or 32.1% of our average portfolio; during 2015, 2014 and 2013, respectively.·We recognize changesincreases in certain rental revenuerates from contractual rent increases on existing leases. We recognize the total rental revenue under the lease on a straight-line basis over the term of the lease which includes all known contractual changes. If a lease has a contractual rent increase that is not known at the time the lease is signed, such as the consumer price index or a similar metric, the rent increase is not included in rent leveling;leveling and therefore, any rent increase willwould impact the rental revenuerevenues we recognize. See below for key metrics on occupancy and rent change on rollover for the consolidated operating portfolio.·(3)We experienced an increaseA developed property moves into the operating portfolio when it meets stabilization. The property is considered stabilized when a development project has been completed for one year or at least 90% occupied, whichever occurs first. During these periods, NOI increased as developments stabilized. See below for key metrics on our development stabilizations for our consolidated properties.rental rates on2017, compared to 2016, primarily due to the turnovercontribution of existing leases every quarter since 2012 that has resulted in higher average rental rates in our portfolio and increased rental revenue and NOI as those leases commenced.the NAIF operating properties to USLF.·(5)Under the terms of our lease agreements, we are able to recover the majority of our rental expenses from customers. RentalOther items include property tax expense recoveries, included in both rental revenue and rental expenses, were 80.5%, 81.0% and 73.4% of total rental expensesnoncash adjustments for the years ended December 31, 2015, 2014amortization of above or below market leases, non-recoverable expenses, termination fees and 2013, respectively.changes in foreign currency exchange rates.·(1)adopted a new accounting standard, effective January 1, 2014, that changed the criteria for classifying and reporting discontinued operations. The results of the third-party dispositions remained in continuing operations in 2015 and 2014, whereas in 2013, the results were reclassifiedexpect our properties under development at December 31, 2017, to discontinued operations and not included in Real Estate Operations.be completed before July 2019.revenuerevenues from feesasset and promotes earnedproperty management and other fees for services performed, for ouras well as promotes earned from the unconsolidated co-investment ventures. This revenue is reduced generally by the direct costs associated with the asset management of these ventures and allocated property-level management costs for the properties owned by the ventures. RevenueRevenues associated with the Strategic Capital segment fluctuatesfluctuate because of the size of co-investment ventures under management, the transactional activity in the ventureventures and the timing of promotes. These revenues are reduced generally by the direct costs associated with the asset 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.20forderived directly from the years ended December 31 was as followsline items in the Consolidated Financial Statements (in millions):Strategic Capital expensesThis includes compensation and personnel costs for the Americas include employees who are employed in an officewere located in the Americas who mayU.S. but also support other regions.assets under managementreal estate investments were held through our unconsolidated co-investment ventures at December 31 (dollars and square feet in millions):The following were the key drivers of Strategic Capital NOI:·(1)31, 126 and 254190 operating properties owned by NAIF to several co-investment ventures during 2015, 2014 and 2013, respectively.USLF in 2017.·(2)The unconsolidated co-investmentWe acquired our partner’s interest in certain joint ventures acquired 43, 81 and 57 properties from third parties during 2015, 2014 and 2013, respectively.in Brazil in 2017.·(3)December 2015,2017, we earned two promotes aggregating $56.6 million, principally fromhad the following activity in Europe: (i) sold our co-investmentinvestment in ELV to our venture Prologis European Logistics Partners Sàrl (“PELP”). Of that amount, $29.5 million representedpartner and ELV contributed its properties to PTELF; (ii) the third-party investors’ portionassets and is reflectedrelated liabilities of PTELF were contributed to PEPF II in Strategic Capital Revenue in the Consolidated Statements of Income.·In June 2014,exchange for units; and PEPF II was renamed PELF; and (iii) we earned a promote of $42.1 million from our co-investment venture Prologis Targeted U.S. Logistics Fund (“USLF”). Of that amount, $31.3 million represented the third-party investors’ portion and is reflected in Strategic Capital Revenue.·We acquired a controlling interest in our co-investment venture NAIF in the fourth quarter of 2014 and began consolidating the venture.·We formed the co-investment venture FIBRA Prologis in Mexico in June 2014, and in connection with this transaction, we concluded the Prologis Mexico Industrial Fund.UKLV.·The amounts presented for Europe and Asia are shown in U.S. dollars and were impacted by fluctuations in exchange rates, primarily the euro, British pound sterling and Japanese yen to U.S. dollar. We have hedged the majority of our investment in euro, British pound sterling, and Japanese yen through outstanding debt and derivative instruments that offset the majority of these fluctuations.The direct costs associated with Strategic Capital totaled $88.4 million, $96.5 million and $89.3 million for the years ended December 31, 2015, 2014 and 2013, respectively, and are included in the line item Strategic Capital Expenses in the Consolidated Statements of Income. The fluctuations in Strategic Capital Expenses were due to the timing of promotes and the payment of the related bonus pursuant to the terms of the Prologis Promote Plan and due to the size of our co-investment ventures.21G&A Expensesincludingwhich includes properties wholly owned by us or owned by one of our co-investment ventures. As further discussed, we believe that theWe review our operating fundamentals of ouron an owned and managed portfolio are consistent with those of our consolidated portfolio. The activity in our owned and managed portfolio affectsbasis. We believe reviewing these fundamentals this way allows management to understand the entire impact to the financial statements, as it will affect both ourthe 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.properties includes operating industrial properties andportfolio does not include value-added properties under development or properties held for sale to third parties and was as follows at December 31 (square feet in millions):The following table summarizesBelow is information summarizing the leasing activity of our owned and managed operating activity forportfolio over the years ended December 31 (square feet in millions):Average turnover costs per square foot have increased in 2015, however the turnover costs as a percentage of the total value of the lease is in line or lower than previous periods. The total value of the leases signed have increased due to higher rents on rollover.last three years:Retention is the square footage of all leases renewed by existing tenants divided by the square footage of all expiring and renewed leases during the reporting period, excluding the square footage of tenants that default or buy-out prior to expiration of their lease and the square footage of short-term leases.Development Starts and Stabilization ActivityThe following table summarizes development starts for the years ended December 31 (dollars and square feet in millions):expect these developments to be completed before Julyretained more than 75% of our customers, based on the total square feet of leases signed, for each year during the three-year period ended December 31, 2017.The following table summarizes development stabilization activity for the years ended December 31 (dollars and square feet in millions):For information on our development portfolio at December 31, 2015, see Item 2. Properties.thereby eliminatingwhich eliminates the effects of changes in the composition of the portfolio on performance measures. We include properties from our consolidated portfolio, as well as properties owned by the unconsolidated co-investment ventures that we manage in our same store analysis.portfolio. We have defined the same store portfolio, for each quarter in 2015,the three months ended December 31, 2017, as those owned and managed properties that were in operation at January 1, 2014,2016, and have been in operation throughout the same three-month periods in both 20152017 and 2014.2016 (including development properties that have been completed and available for lease). We have removed all properties that were disposed of to a third party or were classified as held for sale to a third party from the population for both periods. We believe the factors that affect rental revenue,revenues, rental recoveries, rental expenses and NOI in the same store portfolio are generally the same as for the total operating portfolio. To derive an appropriate measure of period-to-period operating performance, we remove the effects of foreign currency exchange rate movements by using the recent period end exchange rate to translate from local currency into the U.S. dollar, for both periods.22Same store is a commonly used measure in the real estate industry. Our same store measures are non-GAAP financial measures that are calculated beginning with rental revenues, rental recoveries and rental expenses from the financial statements prepared in accordance with GAAP. 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 from our financial statements prepared in accordance with GAAP to same store property NOI with explanations of how these metrics are calculated.calculateevaluate the results of our same store resultsportfolio on a quarterly basis and provide a reconciliation of those results to the Consolidated Statements of Income. The following table summarizes same store NOI and the change from prior period for the four quarters of 2015 and on a cumulative annual basis and the square feet of the portfolio used in the calculation (dollars and square feet in millions):(1)A reconciliation of our same store results for these fiscal quarters to the Consolidated Statements of Income is provided in our previously filed quarterly reports on Form 10-Q for the respective quarter.revenue,revenues, rental recoveries, rental expenses and property NOI (calculated as rental revenuefor each quarter in 2017 and recoveries less rental expenses) for2016 to the full year, as included in the Consolidated Statements of Income and within Note 20 to the Consolidated Financial Statements and to the respective amounts in our same store portfolio analysis for the three months ended December 31 (dollars in millions):
|
| Three Months Ended |
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| |||||||||||||
|
| March 31, |
|
| June 30, |
|
| September 30, |
|
| December 31, |
|
| Full Year |
| |||||
2015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental revenue and recoveries |
| $ | 418.8 |
|
| $ | 461.4 |
|
| $ | 532.8 |
|
| $ | 560.2 |
|
| $ | 1,973.2 |
|
Rental expenses |
|
| 126.9 |
|
|
| 125.6 |
|
|
| 139.9 |
|
|
| 150.8 |
|
|
| 543.2 |
|
NOI |
| $ | 291.9 |
|
| $ | 335.8 |
|
| $ | 392.9 |
|
| $ | 409.4 |
|
| $ | 1,430.0 |
|
2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental revenue and recoveries |
| $ | 388.2 |
|
| $ | 381.3 |
|
| $ | 355.8 |
|
| $ | 402.0 |
|
| $ | 1,527.3 |
|
Rental expenses |
|
| 110.5 |
|
|
| 109.6 |
|
|
| 102.3 |
|
|
| 108.4 |
|
|
| 430.8 |
|
NOI |
| $ | 277.7 |
|
| $ | 271.7 |
|
| $ | 253.5 |
|
| $ | 293.6 |
|
| $ | 1,096.5 |
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|
| Three Months Ended |
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| March 31, |
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| June 30, |
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| September 30, |
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| December 31, |
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| Full Year |
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2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental revenues |
| $ | 440 |
|
| $ | 448 |
|
| $ | 416 |
|
| $ | 434 |
|
| $ | 1,738 |
|
Rental recoveries |
|
| 127 |
|
|
| 128 |
|
|
| 115 |
|
|
| 117 |
|
|
| 487 |
|
Rental expenses |
|
| (153 | ) |
|
| (148 | ) |
|
| (129 | ) |
|
| (140 | ) |
|
| (570 | ) |
Property NOI |
| $ | 414 |
|
| $ | 428 |
|
| $ | 402 |
|
| $ | 411 |
|
| $ | 1,655 |
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2016 |
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|
|
|
|
|
|
|
|
|
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|
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|
|
|
|
|
|
Rental revenues |
| $ | 437 |
|
| $ | 426 |
|
| $ | 436 |
|
| $ | 436 |
|
| $ | 1,735 |
|
Rental recoveries |
|
| 117 |
|
|
| 120 |
|
|
| 124 |
|
|
| 125 |
|
|
| 486 |
|
Rental expenses |
|
| (146 | ) |
|
| (141 | ) |
|
| (141 | ) |
|
| (141 | ) |
|
| (569 | ) |
Property NOI |
| $ | 408 |
|
| $ | 405 |
|
| $ | 419 |
|
| $ | 420 |
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| $ | 1,652 |
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| Three Months Ended December 31, |
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| 2015 |
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| 2014 |
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| Percentage Change |
| |||
Rental Revenue (1) (2) |
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Consolidated: |
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Rental revenue as included in the Consolidated Statements of Income |
| $ | 435.6 |
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| $ | 307.6 |
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|
|
Rental recoveries as included in the Consolidated Statements of Income |
|
| 124.6 |
|
|
| 94.4 |
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|
|
|
|
Consolidated adjustments to derive same store results: |
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|
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|
|
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Rental revenue and recoveries of properties not in the same store portfolio – properties developed, acquired and sold to third parties during the period and land subject to ground leases |
|
| (177.3 | ) |
|
| (50.7 | ) |
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Effect of changes in foreign currency exchange rates and other |
|
| (1.2 | ) |
|
| (3.1 | ) |
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Unconsolidated co-investment ventures – rental revenue |
|
| 404.9 |
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|
| 408.3 |
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Same store portfolio – rental revenue (2) |
| $ | 786.6 |
|
| $ | 756.5 |
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|
| 4.0 | % |
Rental Expenses (1) (3) |
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Consolidated: |
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Rental expenses as included in the Consolidated Statements of Income |
| $ | 150.8 |
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| $ | 108.4 |
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Consolidated adjustments to derive same store results: |
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|
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|
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Rental expenses of properties not in the same store portfolio – properties developed, acquired and sold to third parties during the period and land subject to ground leases |
|
| (51.5 | ) |
|
| (16.4 | ) |
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Effect of changes in foreign currency exchange rates and other |
|
| 7.7 |
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|
| 9.0 |
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Unconsolidated co-investment ventures – rental expenses |
|
| 92.4 |
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|
| 93.8 |
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Same store portfolio – rental expenses (3) |
| $ | 199.4 |
|
| $ | 194.8 |
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|
| 2.4 | % |
NOI (1) |
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Consolidated: |
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NOI as included in the Consolidated Statements of Income |
| $ | 409.4 |
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| $ | 293.6 |
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Consolidated adjustments to derive same store results: |
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|
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NOI of properties not in the same store portfolio – properties developed, acquired and sold to third parties during the period and land subject to ground leases |
|
| (125.8 | ) |
|
| (34.3 | ) |
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Effect of changes in foreign currency exchange rates and other |
|
| (8.9 | ) |
|
| (12.1 | ) |
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Unconsolidated co-investment ventures – NOI |
|
| 312.5 |
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|
| 314.5 |
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Same store portfolio – NOI |
| $ | 587.2 |
|
| $ | 561.7 |
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|
| 4.5 | % |
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| Three Months Ended December 31, |
| |||||||||
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| 2017 |
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| 2016 |
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| Percentage Change |
| |||
Rental revenues (1) (2) |
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Consolidated: |
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Rental revenues (per the quarterly information table above) |
| $ | 434 |
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| $ | 436 |
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|
|
Rental recoveries (per the quarterly information table above) |
|
| 117 |
|
|
| 125 |
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|
|
Consolidated adjustments to derive same store results: |
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|
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|
|
|
|
|
|
|
|
Rental revenues and recoveries of properties not in the same store portfolio – properties developed, acquired and sold to third parties during the period and land subject to ground leases |
|
| (74 | ) |
|
| (66 | ) |
|
|
|
|
Effect of changes in foreign currency exchange rates and other |
|
| (9 | ) |
|
| - |
|
|
|
|
|
Unconsolidated co-investment ventures – rental revenues |
|
| 525 |
|
|
| 463 |
|
|
|
|
|
Owned and managed same store portfolio – rental revenues (2) |
| $ | 993 |
|
| $ | 958 |
|
|
| 3.7 | % |
Rental expenses (1) (3) |
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated: |
|
|
|
|
|
|
|
|
|
|
|
|
Rental expenses (per the quarterly information table above) |
| $ | 140 |
|
| $ | 141 |
|
|
|
|
|
Consolidated adjustments to derive same store results: |
|
|
|
|
|
|
|
|
|
|
|
|
Rental expenses of properties not in the same store portfolio – properties developed, acquired and sold to third parties during the period and land subject to ground leases |
|
| (32 | ) |
|
| (22 | ) |
|
|
|
|
Effect of changes in foreign currency exchange rates and other |
|
| 18 |
|
|
| 13 |
|
|
|
|
|
Unconsolidated co-investment ventures – rental expenses |
|
| 124 |
|
|
| 105 |
|
|
|
|
|
Owned and managed same store portfolio – rental expenses (3) |
| $ | 250 |
|
| $ | 237 |
|
|
| 5.3 | % |
NOI (1) |
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated: |
|
|
|
|
|
|
|
|
|
|
|
|
Property NOI (per the quarterly information table above) |
| $ | 411 |
|
| $ | 420 |
|
|
|
|
|
Consolidated adjustments to derive same store results: |
|
|
|
|
|
|
|
|
|
|
|
|
Property NOI of properties not in the same store portfolio – properties developed, acquired and sold to third parties during the period and land subject to ground leases |
|
| (42 | ) |
|
| (44 | ) |
|
|
|
|
Effect of changes in foreign currency exchange rates and other |
|
| (27 | ) |
|
| (13 | ) |
|
|
|
|
Unconsolidated co-investment ventures – property NOI |
|
| 401 |
|
|
| 358 |
|
|
|
|
|
Owned and managed same store portfolio – NOI |
| $ | 743 |
|
| $ | 721 |
|
|
| 3.2 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
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. The adjustments to remove these items are included in “effect of changes in foreign currency exchange rates and other” in this table. |
23
(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 direct-owned 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. These expenses fluctuate based on the level of properties included in the same store portfolio and any adjustment is included as “effect of changes in foreign currency exchange rates and other” in this table. |
Other Components of Income (Expense)
G&A Expenses
The following table summarizes G&A expenses for the years ended December 31 (in millions):
|
| 2015 |
|
| 2014 |
|
| 2013 |
| |||
Gross overhead |
| $ | 461.1 |
|
| $ | 461.6 |
|
| $ | 434.9 |
|
Reported as rental expenses |
|
| (34.1 | ) |
|
| (30.0 | ) |
|
| (32.9 | ) |
Reported as strategic capital expenses |
|
| (88.4 | ) |
|
| (96.5 | ) |
|
| (89.3 | ) |
Capitalized amounts |
|
| (100.4 | ) |
|
| (87.3 | ) |
|
| (83.5 | ) |
G&A expenses |
| $ | 238.2 |
|
| $ | 247.8 |
|
| $ | 229.2 |
|
Gross overhead includes all costs related to our business, including those attributable to the Real Estate Operations and Strategic Capital segments. We allocate a portion of our gross overhead that relates to property management functions to both segments based on the size of the respective portfolios. Costs directly associated with Strategic Capital also are allocated to that segment. The decrease in gross overhead from 2014 to 2015 was primarily due to fluctuations in foreign currency exchange rates between the U.S. dollar and the euro, British pound sterling and Japanese yen. The increase in gross overhead from 2013 to 2014 was principally due to increased compensation.
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 costs for the years ended December 31 (in millions):
|
| 2015 |
|
| 2014 |
|
| 2013 |
| |||
Building development activities |
| $ | 47.3 |
|
| $ | 40.4 |
|
| $ | 39.7 |
|
Leasing activities |
|
| 21.3 |
|
|
| 17.9 |
|
|
| 18.3 |
|
Building and land improvements, and other |
|
| 31.8 |
|
|
| 29.0 |
|
|
| 25.5 |
|
Total capitalized G&A expenses |
| $ | 100.4 |
|
| $ | 87.3 |
|
| $ | 83.5 |
|
Capitalized salaries and related costs as a percent of total salaries and related costs |
|
| 27.6 | % |
|
| 23.9 | % |
|
| 23.7 | % |
Depreciation and Amortization Expenses
Depreciation and amortization expenses were $880.4 million, $642.5 million and $648.7 million for 2015, 2014 and 2013, respectively. The increase in depreciation and amortization expenses from 2014 to 2015 principally resulted from an increased investment in real estate properties from the KTR acquisition in May 2015, the consolidation of NAIF in the fourth quarter of 2014, other acquired properties and completed developments. This is offset slightly by the disposition of properties. The decrease from 2013 to 2014 was principally a result of the disposition and contribution of properties, offset slightly by additional depreciation and amortization from completed development, acquired properties and the consolidation of NAIF in the fourth quarter of 2014.
Earnings from Unconsolidated Entities, Net
We recognized net earnings from unconsolidated entities, thatwhich are accounted for underusing the equity method, of $159.3$249 million, $134.3$206 million and $97.2$159 million forduring 2017, 2016 and 2015, 2014 and 2013, respectively. The earnings we recognize arecan be impacted by: (i) variances in 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 when applicable;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, if applicable. dollars.
See the discussion of our co-investment ventures above in the Strategic Capital segment discussion and in Note 5 to the Consolidated Financial Statements for a further breakdown of our share of net earnings recognized.
Interest Expense
GrossThe following table details our net interest expense increased(dollars in 2015, comparedmillions):
|
| 2017 |
|
| 2016 |
|
| 2015 |
| |||
Gross interest expense |
| $ | 328 |
|
| $ | 383 |
|
| $ | 394 |
|
Amortization of discount (premium) and debt issuance costs, net |
|
| 1 |
|
|
| (15 | ) |
|
| (32 | ) |
Capitalized amounts |
|
| (55 | ) |
|
| (65 | ) |
|
| (61 | ) |
Net interest expense |
| $ | 274 |
|
| $ | 303 |
|
| $ | 301 |
|
Weighted average effective interest rate during the year |
|
| 3.2 | % |
|
| 3.3 | % |
|
| 3.3 | % |
Our overall debt decreased by $1.2 billion from December 31, 2016 to December 31, 2017, primarily from USLF assuming secured debt in conjunction with 2014, due to higher debt driven by the KTR acquisition offset somewhat by a decrease in interest rates and fluctuations in foreign currency exchange rates. During 2015 and 2014, we issued new debt with lower borrowing costs and used the proceeds to invest inour contribution of real estate and pay down or buy back our higher cost debt.properties. Gross interest expense decreased in 2014,2017, compared to the same period in 2016, principally due to decreased secured debt as a result of the USLF contribution and pay downs, and lower interest rates due to the change in the composition of our senior notes. Gross interest expense decreased in 2016, compared with 2013, due2015, principally from lower outstanding debt balances from the repayment of the senior term loan related to the KTR acquisition and lower average debt levels and decreased interest rates. Our weighted average effective interest rate was 3.3%, 4.2% and 4.7% for 2015, 2014 and 2013, respectively. borrowing costs during 2016.
See Note 9 to the Consolidated Financial Statements for a further breakdown of gross interest expense, amortization and capitalized amounts included in net interest expense. See also the Liquidity and Capital Resources section for further discussion of our debt and borrowing costs.
Gains on Dispositions of Investments in Real Estate and Revaluation of Equity Investments uponUpon Acquisition of a Controlling Interest, Net
WeDuring 2017, 2016 and 2015, we recognized gains on dispositions of $758.9 million, $725.8 millioninvestments in real estate and $597.7 million in continuing operations during 2015, 2014 and 2013, respectively. In 2015, the gains were driven primarily from dispositions to third parties in the U.S. In 2014, the gains were driven from third party dispositions mainly in the U.S., gains from the revaluation of our equity investment in NAIFinvestments upon acquisition of a controlling interest, net of $1.2 billion, $757 million, and $759 million. We utilized the proceeds from both contributions and dispositions to fund our capital investments.
Over the last three years, we contributed properties, generally that we developed, to our co-investment ventures in Europe, Japan and Mexico. In 2013, the gains were driven2017, we also contributed a significant portfolio of operating properties to USLF. We have also sold properties to third parties, primarily from contributions to our co-investment venturesoperating portfolio in Europe.the U.S. These dispositions have supported our strategic objective of owning a portfolio of high-quality properties in the most active centers of commerce. We expect to continue to have contributions to co-investment ventures in the future, primarily in Europe, Japandevelop and Mexico, as well as make dispositions ofcontribute properties to third parties, primarily in the U.S., allthese ventures, depending on market conditions and other factors. We expect
For the three-year period ended December 31, 2017, we recognized a gain in connection with contributions to use the proceeds from such contributions and dispositions to pay down the remaining balance of $400.0 million on the term loan that was used to finance a portionextent of the KTR acquisition andthird-party ownership in the venture acquiring the property. Beginning in 2018, we will recognize the entire gain under the new revenue recognition standard, as discussed in Note 2 to fund our capital deployment activities in 2016. the Consolidated Financial Statements.
See Note 4 and 5 to the Consolidated Financial Statements for further information on the gains we recognized.
24
Foreign Currency and Derivative Gains (Losses) and Related Amortization,, Net
To mitigate our foreign currency exchange exposure, we borrow in the functional currency of the borrowing entity when appropriate. However, we and certain of our foreign consolidated subsidiaries have intercompany or third-party debt that is not denominated in the entity’s functional currency. When the debt is remeasured against the functional currency of the entity, a gain or loss may result. To a lesser degree, we also have transactions with third parties of certain assets or liabilities that are denominated in a currency other than the entities’ functional currency. Certain of our third-party and intercompany debt is remeasured with the resulting adjustment recognized as a cumulative translation adjustment in Foreign Currency Translation Losses, Net in the Consolidated Statements of Comprehensive Income. This treatment is applicable to third-party debt that is designated as a hedge of our net investment and intercompany debt that is deemed to be long-term in nature.
If the third-party debt is not designated as a hedge or the intercompany debt is deemed short-term in nature, we recognize a gain or loss in earnings when the debt is remeasured. We also recognized the change in fair value of derivative transactions not designated as hedges. To a lesser degree, we also have transactions with third parties of certain assets or liabilities that are denominated in a currency other than the entities’ functional currency.
The following table details our foreign currency and derivative gains (losses) and related amortization,, net for the year ended December 31included in earnings (in millions):
|
| 2015 |
|
| 2014 |
|
| 2013 |
| |||
Gains on the change in fair value and settlement of unhedged derivative transactions (1) |
| $ | 29.4 |
|
| $ | 14.6 |
|
| $ | - |
|
Gains (losses) on settlement and remeasurement of intercompany payables and debt (2) |
|
| (21.7 | ) |
|
| (5.6 | ) |
|
| 10.5 |
|
Unrealized gains (losses) on embedded derivative, including amortization (3) |
|
| 5.1 |
|
|
| (27.7 | ) |
|
| (42.5 | ) |
Gains (losses) on the settlement of transactions with third parties |
|
| (0.3 | ) |
|
| 0.9 |
|
|
| (1.6 | ) |
Total foreign currency and derivative gains (losses) and related amortization, net |
| $ | 12.5 |
|
| $ | (17.8 | ) |
| $ | (33.6 | ) |
|
| 2017 |
|
| 2016 |
|
| 2015 |
| |||
Realized foreign currency and derivative gains (losses): |
|
|
|
|
|
|
|
|
|
|
|
|
Gains on the settlement of unhedged derivative transactions |
| $ | 13 |
|
| $ | 3 |
|
| $ | 15 |
|
Losses on the settlement of transactions |
|
| (2 | ) |
|
| (3 | ) |
|
| (4 | ) |
Total realized foreign currency and derivative gains |
|
| 11 |
|
|
| - |
|
|
| 11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized foreign currency and derivative gains (losses): |
|
|
|
|
|
|
|
|
|
|
|
|
Gains (losses) on the change in fair value of unhedged derivative transactions |
|
| (74 | ) |
|
| 10 |
|
|
| 16 |
|
Gains (losses) on remeasurement of certain assets and liabilities (1) |
|
| 5 |
|
|
| (2 | ) |
|
| (20 | ) |
Gains on embedded derivative, including amortization (settled March 2015) |
|
| - |
|
|
| - |
|
|
| 5 |
|
Total unrealized foreign currency and derivative gains (losses) |
|
| (69 | ) |
|
| 8 |
|
|
| 1 |
|
Total foreign currency and derivative gains (losses), net |
| $ | (58 | ) |
| $ | 8 |
|
| $ | 12 |
|
(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, |
|
|
LossesSee Note 2 to the Consolidated Financial Statements for more information about our foreign currency and derivative policies and Note 16 to the Consolidated Financial Statements for more information about our derivative transactions.
Gains (Losses) on Early Extinguishment of Debt, Net
We repurchased and redeemed portions of several series of senior notes, senior exchangeable notesterm loans and secured mortgage debt whichthat resulted in the recognition of losses of $86.3 million, $165.3$68 million and $277.0$86 million in 2017 and 2015, 2014respectively, and 2013, respectively.a gain of $2 million in 2016. As a result of these transactions, we have reduced our effective interest rate and lengthened the maturities of our debt. See Note 9 to the Consolidated Financial Statements for more information regarding our debt repurchase.repurchases.
Income Tax Expense (Benefit)
We recognize current income tax expense for income taxes incurred byrelated to our taxable REIT subsidiaries and the local, state and local income taxes and taxes incurredforeign jurisdictions in our foreign jurisdictions.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 (benefit) for the year ended December 31 (in millions):
|
| 2015 |
|
| 2014 |
|
| 2013 |
| |||
Current income tax expense (benefit): |
|
|
|
|
|
|
|
|
|
|
|
|
Current income tax expense |
| $ | 24.9 |
|
| $ | 15.6 |
|
| $ | 18.3 |
|
Current income tax expense (benefit) on dispositions |
|
| (0.2 | ) |
|
| 15.4 |
|
|
| 87.8 |
|
Current income tax expense on dispositions related to acquired tax liabilities |
|
| 3.5 |
|
|
| 30.5 |
|
|
| 20.1 |
|
Total current income tax expense |
|
| 28.2 |
|
|
| 61.5 |
|
|
| 126.2 |
|
Deferred income tax expense (benefit): |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax expense (benefit) |
|
| (1.6 | ) |
|
| (56.7 | ) |
|
| 0.6 |
|
Deferred income tax benefit on dispositions related to acquired tax liabilities |
|
| (3.5 | ) |
|
| (30.5 | ) |
|
| (20.1 | ) |
Total deferred income tax benefit |
|
| (5.1 | ) |
|
| (87.2 | ) |
|
| (19.5 | ) |
Total income tax expense (benefit) |
| $ | 23.1 |
|
| $ | (25.7 | ) |
| $ | 106.7 |
|
|
| 2017 |
|
| 2016 |
|
| 2015 |
| |||
Current income tax expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense |
| $ | 39 |
|
| $ | 36 |
|
| $ | 24 |
|
Income tax expense on dispositions |
|
| 19 |
|
|
| 24 |
|
|
| - |
|
Income tax expense on dispositions related to acquired tax liabilities |
|
| 2 |
|
|
| - |
|
|
| 4 |
|
Total current income tax expense |
|
| 60 |
|
|
| 60 |
|
|
| 28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax benefit: |
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit |
|
| (3 | ) |
|
| (5 | ) |
|
| (1 | ) |
Income tax benefit on dispositions related to acquired tax liabilities |
|
| (2 | ) |
|
| - |
|
|
| (4 | ) |
Total deferred income tax benefit |
|
| (5 | ) |
|
| (5 | ) |
|
| (5 | ) |
Total income tax expense |
| $ | 55 |
|
| $ | 55 |
|
| $ | 23 |
|
Our income taxes are discussed in more detail in Note 14 to the Consolidated Financial Statements.
Discontinued Operations
As discussed above, we adopted a new accounting standard regarding discontinued operations effective January 1, 2014, and none of our property dispositions in 2015 or 2014 met the criteria to be classified as discontinued operations. In 2013, earnings from discontinued operations were $123.5 million. Discontinued operations under the previous standard represent the results of operations of properties that were sold to third parties along with the related gain on sale.
Net Earnings Attributable to Noncontrolling Interests
This amount represents the third-party investors’ share of the earnings generated infrom consolidated entities in which we do not own 100% of the equity, reduced by the third partythird-party share of fees or promotes payable to us. In 2015, 2014us and 2013, we recognizedearned during the period.
The following table summarizes net earnings attributable to noncontrolling interests for Prologis, Inc. of $56.1 million, $103.1 million and $10.1 million, respectively. In 2015, this is primarily related to operating activity in our consolidated co-investment ventures, NAIF and USLV. USLV completed the KTR acquisition in May 2015, so approximately seven months of the operating activity were included, offset by third-party share of acquisition costs and an acquisition fee payable to us. We acquired a controlling interest in NAIF in the fourth quarter of 2014 and began consolidating the venture. In 2014, we recognized net earnings attributable to noncontrolling interests in Prologis Mexico Fondo Logistico (“AFORES”) of $64.8 million because of the FIBRA(in millions):
25
|
| 2017 |
|
| 2016 |
|
| 2015 |
| |||
Prologis U.S. Logistics Venture (1) |
| $ | 60 |
|
| $ | 18 |
|
| $ | 38 |
|
Prologis North American Industrial Fund (2) |
|
| 3 |
|
|
| 23 |
|
|
| 4 |
|
Other consolidated entities |
|
| 1 |
|
|
| 7 |
|
|
| 3 |
|
Prologis, L.P. |
|
| 64 |
|
|
| 48 |
|
|
| 45 |
|
Limited partners in Prologis, L.P. |
|
| 45 |
|
|
| 35 |
|
|
| 11 |
|
Prologis, Inc. |
| $ | 109 |
|
| $ | 83 |
|
| $ | 56 |
|
Prologis transaction, primarily related to the third-party investors’ share of the gain on disposition and the net deferred income tax benefit.
(1) | The third-party share of the promote earned from USLV is included in 2016. |
(2) | We acquired our remaining partner’s interest in NAIF in 2017. |
See Note 12 to the Consolidated Financial Statements for further information on our consolidated co-investment ventures.noncontrolling interests.
Other Comprehensive Income (Loss) – Foreign Currency Translation Losses, Net
We recognize unrealizedrecorded net gains orof $63 million in 2017 and net losses of $136 million and $209 million in 2016 and 2015, respectively, in the Consolidated Statements of Comprehensive Income related to the foreign currency translation of our foreign subsidiaries’ assets and liabilitiessubsidiaries into U.S. dollars along with realizedupon consolidation and unrealized gains or losses associated with the changes in the fair valuetranslation of our derivative and nonderivative financial instruments that are designatednet investment hedges. These net gains and qualify as hedgeslosses were primarily due to the strengthening and weakening of net investmentsthe currencies in foreign operations.which we operate to the U.S. dollar.
During 2015, 2014 and 2013,2017, we recorded net lossesunrealized gains of $208.9 million, $171.4$23 million and $234.7 million, respectively. Duringduring 2016 and 2015, and 2014, the unrealized losses were principally due to the weakening of the euro, British pound sterling, Japanese yen and Brazilian real to the U.S. dollar from the beginning of the period to the end of the period. In 2013, the unrealized losses included approximately $190.0 million of foreign currency translation losses on the properties contributed to PELP and NPR due to the weakening of the euro and Japanese yen, respectively, to the U.S. dollar from December 31, 2012, through the date of the contributions. Also in 2013, we recorded unrealized losses dueof $1 million and $17 million, respectively, in our Consolidated Statements of Comprehensive Income, related to the weakeningchange in fair value of the Japanese yen to the U.S. dollar, from the beginningour cash flow hedges and our share of the period to the end of the period. derivatives in our unconsolidated co-investment ventures.
See Note 16 in2 to the Consolidated Financial Statements for further detail.more information about our foreign currency and derivative policies and Note 16 to the Consolidated Financial Statements for more information about our derivative transactions and other comprehensive income (loss).
Environmental MattersENVIRONMENTAL MATTERS
A majority of the properties we acquired were subjected to environmental reviews either by us or the previous owners. While some of these assessments have led to further investigation and sampling, none of the environmental assessments have revealed an environmental liability that we believe would have a material adverse effect on our business, financial condition or results of operations. See Note 17 in the Consolidated Financial Statements for further information about environmental liabilities.
Liquidity and Capital ResourcesLIQUIDITY 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 from 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 to the common and preferred stockholders of Prologis, Inc. and distributions to the holders of limited partnership units of the Operating PartnershipPrologis, L.P. and our partnerspartner in theour consolidated co-investment ventures,venture, 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 December 31, 2017, 85 properties in our development portfolio were 59.8% leased with a current investment of $1.6 billion and a TEI of $2.8 billion when completed and leased, leaving $1.2 billion of additional required funding);
|
|
development of new properties for long-term investment, 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 $169 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); and
|
|
We expect to fund our cash needs principally from the following sources all subject(subject to market conditions:conditions):
|
|
available unrestricted cash balances ($447 million at December 31, 2017);
|
|
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; |
|
26
|
|
|
|
borrowing capacity under our current credit facility arrangements, other facilities or borrowing arrangements ($3.1 billion available at December 31, 2017); and
proceeds from the issuance of debt.
We may also generate proceeds from the issuance of equity securities, subject to market conditions.
Debt
The following table summarizes information about our debt at December 31 (in(dollars in millions):
|
| 2015 |
|
| 2014 |
|
| 2017 |
|
| 2016 |
| ||||
Debt outstanding |
| $ | 11,627 |
|
| $ | 9,337 |
|
| $ | 9,413 |
|
| $ | 10,608 |
|
Weighted average interest rate |
|
| 3.2 | % |
|
| 3.7 | % |
|
| 2.9 | % |
|
| 3.2 | % |
Weighted average maturity in months |
| 67 |
|
| 70 |
|
| 67 |
|
| 60 |
|
As discussed earlier and in Note 3 to the Consolidated Financial Statements, we completed the KTR acquisition on May 29, 2015. To fund our share of the cash portion, approximately $2.6 billion, as well as our other net cash requirements, we borrowed $440.2 million under our credit facilities and entered intoWe had the following significant debt arrangements during the second quarter of 2015:activity for 2017, which resulted in lowering our average borrowing rate and extending our maturities:
| •In February, we renewed and amended our Japanese yen revolver (“Revolver”) and increased our availability under the Revolver to ¥50.0 billion ($444 million at December 31, 2017). |
Senior Notes | •In June, we issued |
| •In March, we entered into an unsecured senior term loan •In May, we renewed and amended our existing senior term loan agreement (“2017 Term Loan”) under which loans can be obtained in British pounds sterling, euro, Japanese yen and U.S. dollars in an aggregate amount not to exceed $500 million. We may increase the borrowings up to $1.0 billion, subject to obtaining additional lender commitments. We paid down $1.2 billion and reborrowed $1.5 billion in 2017. The 2017 Term Loan was fully drawn at December 31, 2017. |
| •In October, we entered into an unsecured senior term loan agreement (“October 2017 Yen Term Loan”) under which we can draw |
We expect to repay the $400.0 million remaining balance on the senior term loan that was used to fund the KTR acquisition with proceeds generated from the contributions of certain development properties to our co-investment ventures in Europe, Japan and Mexico and proceeds generated from the disposition of certain nonstrategic properties to third parties.
In October 2015, we issued $750.0 million in principal amount of senior notes with an interest rate of 3.8% maturing in 2025. We used a portion of the net proceeds to repurchase approximately $512 million of our senior unsecured notes, including fees, with an average interest rate of 5.6% maturing in 2017 and 2018. We also commenced a tender offer through which we utilized a portion of the net proceeds to repurchase a portion of our senior notes that mature in 2019 and 2020 for an aggregate purchase price of approximately $289 million, including fees and accrued interest, which had an average interest rate of 7.0%. A portion of the remaining proceeds was used for other corporate purposes, including other debt repayment and repurchases.
In December 2015, we entered into an unsecured senior term loan under which we can draw in Canadian dollars in an aggregate amount not to exceed CAD $371.9 million ($267.9 million at December 31, 2015) that matures in 2023 (which was fully drawn at December 31, 2015). We used the proceeds to pay down our credit facilities and for general corporate purposes.
At December 31, 2015,2017, we had credit facilities with an aggregate borrowing capacity of $2.6$3.5 billion, all of which $3.1 billion was available for borrowing.
In January 2018, we issued €400 million ($495 million) senior notes bearing a floating rate of Euribor plus 0.3%, maturing in January 2020 and used the cash proceeds to repay borrowings under our 2017 Term Loan.
Our credit ratings at December 31, 2017, were A3 from Moody’s and A- from S&P, both with stable outlook. These ratings allow us to borrow at an advantageous rate. 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 December 31, 2015,2017, we were in compliance with all of our debt covenants. These covenants include customary financial covenants for total debt, encumbered debt and fixed charge coverage ratios.
See Note 9 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 5 to the Consolidated Financial Statements. We have one consolidated co-investment venture, the Brazil Fund, with equity commitments at December 31, 2015, of $44.8 million, of which $22.4 million is our share and expires in December 2017. The equity commitments are denominated in Brazilian real and called and reported in U.S. dollars.
Cash Flow Summary
The following table summarizes our cash flow activity for the years ended December 31 (in millions):
|
| 2015 |
|
| 2014 |
|
| 2013 |
|
| 2017 |
|
| 2016 |
|
| 2015 |
| ||||||
Net cash provided by operating activities |
| $ | 963.4 |
|
| $ | 704.5 |
|
| $ | 485.0 |
|
| $ | 1,687 |
|
| $ | 1,417 |
|
| $ | 1,116 |
|
Net cash provided by (used in) investing activities |
| $ | (4,648.6 | ) |
| $ | (488.3 | ) |
| $ | 2,333.9 |
|
| $ | 543 |
|
| $ | 1,252 |
|
| $ | (4,789 | ) |
Net cash provided by (used in) financing activities |
| $ | 3,608.2 |
|
| $ | (337.8 | ) |
| $ | (2,365.6 | ) |
| $ | (2,607 | ) |
| $ | (2,125 | ) |
| $ | 3,596 |
|
Cash Provided by Operating Activities
In 2015 and 2014, cash provided by operating activities was more than the cash dividends paid on common and preferred stock by $158.7 million and $32.3 million, respectively. In 2013, cash provided by operating activities was less than the cash dividends paid on common and preferred stock by $88.9 million. In 2013, we had other sources of cash that we used, including proceeds from dispositions to third parties and contributions of real estate properties ($5.4 billion) and distributions from our co-investment ventures classified for a return of investment for reporting purposes ($411.9 million) both of which are included in investing activities. We used some of this cash to fund dividends not covered by cash provided by operating activities. As disclosed in Note 9 and Note 14 to the Consolidated Financial Statements, we paid combined amounts for interest and income taxes of $370.0 million, $363.8 million and $526.0 million, respectively, in 2015, 2014 and 2013. In addition, our cashCash provided by operating activities, exclusive of changes in receivables and payables, iswas impacted by the following significant activity:activities:
27
|
|
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 on 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 $81 million, $94 million and $60 million for 2017, 2016 and 2015, 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 $231 million, $222 million and $217 million of G&A costs in 2017, 2016 and 2015, 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 $77 million, $60 million and $54 million in 2017, 2016 and 2015, respectively.
Distributions from unconsolidated entities.We received $307 million, $287 million and $285 million of distributions from our unconsolidated entities in 2017, 2016 and 2015, 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.We paid combined amounts for interest and income taxes of $325 million, $352 million and $370 million in 2017, 2016 and 2015, respectively. See Note 9 and Note 14 to the Consolidated Financial Statements for further information on this activity.
Cash Provided by (Used in) 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 4 to the Consolidated Financial Statements for further information on these real estate activities. In addition, the following significant transactions also impacted our cash provided by or used in investing activities:
|
|
Real estate development. We invested $1.6 billion during both 2017 and 2016 and $1.3 billion during 2015 in real estate development and leasing costs for first generation space. We have 63 properties under development and 22 properties that were completed but not stabilized at December 31, 2017, and we expect to continue to develop new properties as the opportunities arise.
|
|
|
|
Real estate acquisitions. In 2017, we acquired total real estate of $443 million, which included 861 acres of land and four operating properties.In 2016, we acquired total real estate of $459 million, which included 776 acres of land and nine operating properties. In 2015, we acquired total real estate of $890 million, which included 690 acres of land and 52 operating properties, excluding the KTR transaction.
|
|
KTR transaction. We acquired the real estate assets of KTR for a net cash purchase price of $4.8 billion through our consolidated co-investment venture USLV in 2015. See Note 3 to the Consolidated Financial Statements for more detail on the transaction.
|
|
|
|
| 2015 |
|
| 2014 (1) |
|
| 2013 (2) |
| |||
| Third party dispositions |
|
| 136 |
|
|
| 145 |
|
|
| 89 |
|
| Contributions to unconsolidated co-investment ventures |
|
| 31 |
|
|
| 126 |
|
|
| 254 |
|
|
|
|
|
|
|
|
|
|
|
| 2015 |
|
| 2014 |
|
| 2013 |
| |||
| Prologis European Logistics Partners Sàrl |
| $ | 222.5 |
|
| $ | 461.2 |
|
| $ | 162.3 |
|
| Prologis Targeted Europe Logistics Fund |
| $ | 90.7 |
|
| $ | 72.9 |
|
| $ | 210.2 |
|
| Prologis Brazil Logistics Partners Fund I and related joint ventures |
| $ | 56.7 |
|
| $ | 66.3 |
|
| $ | 111.5 |
|
| Prologis European Properties Fund II |
| $ | 16.5 |
|
| $ | 53.1 |
|
| $ | 167.2 |
|
| Nippon Prologis REIT |
| $ | - |
|
| $ | 56.6 |
|
| $ | 411.5 |
|
| Prologis Targeted U.S. Logistics Fund |
| $ | - |
|
| $ | - |
|
| $ | 104.8 |
|
See Note 5 to the Consolidated Financial Statements for more detail on our unconsolidated co-investment ventures.
28
|
|
|
Acquisition of a controlling interest. We paid net cash of $375 million to acquire a controlling interest in certain joint ventures in Brazil in 2017. See Note 4 to the Consolidated Financial Statements for more detail on this transaction.
|
|
Return of investment. We received distributions from unconsolidated co-investment ventures and other ventures as a return of investment of $209 million, $777 million and $29 million during 2017, 2016 and 2015, respectively. Included in this amount for 2017 was $125 million from property dispositions within our unconsolidated co-investment ventures and $84 million from the disposition of our investment in ELV. Included in this amount for 2016 was $611 million from the redemption of a portion of our investments in PTELF and USLF and the remaining amount was from property dispositions within our unconsolidated co-investment ventures, primarily $68 million from Prologis European Logistics Partners Sàrl.
Repayment of notes receivable.We received $32 million and $203 million for the payment of notes receivable received in connection with dispositions of real estate to third parties in 2017 and 2016, respectively. See Note 7 to the Consolidated Financial Statements for further information about notes receivable.
Settlement of net investment hedges. We received net proceeds of $2 million, $80 million and $128 million from the settlement of net investment hedges during 2017, 2016 and 2015, respectively. See Note 16 to the Consolidated Financial Statements for further information on our derivative activity.
Cash Provided by (Used in) Financing Activities
Cash provided by financing activities is primarily driven by proceeds from the issuance of debt. Cash used in financing activities is primarily driven by dividends paid on common and preferred units, noncontrolling interest distributions and payments of debt and credit facilities. In addition, the following significant transactions also impacted our cash provided by or used in financing activities:
Issuance of common stock. In addition to the net proceeds generated from the issuance of common stock under our incentive plans, we also generated net proceeds of $72 million from the issuance of 1.7 million shares of common stock under our at-the-market program in 2015.
Noncontrolling interests contributions. Our partner in USLV made contributions of $240 million for the pay down of secured mortgage debt in 2017 and $2.4 billion in 2015 primarily for the KTR transaction.
Noncontrolling interests distributions. Our consolidated ventures distributed $208 million, $344 million and $216 million to various noncontrolling interests in 2017, 2016 and 2015, respectively, primarily due to operating results and dispositions of real estate. Included in these amounts were $37 million in both 2017 and 2016, and $16 million in 2015 of distributions to common limited partnership unitholders of Prologis, L.P.
Purchase 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 Brazil Fund in 2017.
|
|
| (payments on) credit facilities.We generated net proceeds of |
|
|
|
|
|
|
|
|
Other debt activity. Our repurchase and payments of debt and proceeds from issuance of debt consisted of the following activity (in millions):
|
|
|
|
| 2017 |
|
| 2016 |
|
| 2015 |
| |||
| Repurchase and payments of debt (including extinguishment costs) |
|
|
|
|
|
|
|
|
|
|
|
|
| Regularly scheduled debt principal payments and payments at maturity |
| $ | 238 |
|
| $ | 233 |
|
| $ | 128 |
|
| Senior notes |
|
| 1,567 |
|
|
| - |
|
|
| 789 |
|
| Term loans |
|
| 1,236 |
|
|
| 1,612 |
|
|
| 1,643 |
|
| Secured mortgage debt |
|
| 538 |
|
|
| 457 |
|
|
| 596 |
|
| Total repurchase and payments of debt (including extinguishment costs) |
| $ | 3,579 |
|
| $ | 2,302 |
|
| $ | 3,156 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Proceeds from issuance of debt |
|
|
|
|
|
|
|
|
|
|
|
|
| Senior notes |
| $ | 645 |
|
| $ | - |
|
| $ | 1,524 |
|
| Term loans |
|
| 1,735 |
|
|
| 973 |
|
|
| 3,195 |
|
| Secured mortgage debt |
|
| 40 |
|
|
| 397 |
|
|
| 663 |
|
| Total proceeds from issuance of debt |
| $ | 2,420 |
|
| $ | 1,370 |
|
| $ | 5,382 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Note 9 to the Consolidated Financial Statements for more detail on debt.
|
|
|
|
|
|
|
|
|
|
29
Off-Balance Sheet ArrangementsOFF-BALANCE SHEET ARRANGEMENTS
Unconsolidated Co-Investment Venture Debt
We had investments in and advances to our unconsolidated co-investment ventures, at December 31, 2015,2017, of $4.6$5.3 billion. TheseThe ventures listed below had total third-party debt of $6.2$8.1 billion (of which $1.8 billion was our proportionate share) at December 31, 2015.2017. Certain of our ventures do not have third-party debt and are therefore excluded. This debt is primarily secured, is non-recourse to Prologis or the other investors in the co-investment ventures, matures and maturesbears interest as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted |
|
| Gross |
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
| There- |
|
| Disc/ |
|
|
|
|
|
| Average |
|
| Prologis’ Share |
|
|
|
|
|
|
|
|
|
|
|
|
| There- |
|
| Disc/ |
|
|
|
|
|
| Average |
|
| Book |
|
| Ownership |
| |||||||||||||
|
| 2016 |
|
| 2017 |
|
| 2018 |
|
| after |
|
| Prem |
|
| Total |
|
| Interest Rate |
|
| $ |
|
| % |
| 2018 |
|
| 2019 |
|
| 2020 |
|
| after |
|
| (Prem) |
|
| Total |
|
| Interest Rate |
|
| Value |
|
| % |
| ||||||||||||||||||
Prologis Targeted U.S. Logistics Fund |
| $ | 138.0 |
|
| $ | 19.4 |
|
| $ | 449.0 |
|
| $ | 822.4 |
|
| $ | 4.2 |
|
| $ | 1,433.0 |
|
|
| 4.5 | % |
| $ | 322.9 |
|
|
| 22.5 | % | $ | 163 |
|
| $ | 14 |
|
| $ | 490 |
|
| $ | 1,626 |
|
| $ | 19 |
|
| $ | 2,312 |
|
| 3.9% |
|
| $ | 7,543 |
|
| 28.2% |
| ||
FIBRA Prologis |
|
| 107.5 |
|
|
| 216.4 |
|
|
| 72.5 |
|
|
| 250.0 |
|
|
| 10.9 |
|
|
| 657.3 |
|
|
| 4.8 | % |
|
| 301.5 |
|
|
| 45.9 | % |
| 72 |
|
|
| 254 |
|
|
| 175 |
|
|
| 254 |
|
|
| 1 |
|
|
| 756 |
|
| 4.0% |
|
|
| 2,052 |
|
| 46.3% |
| ||
Prologis Targeted Europe Logistics Fund |
|
| 7.2 |
|
|
| 7.5 |
|
|
| 80.9 |
|
|
| 562.7 |
|
|
| (5.5 | ) |
|
| 652.8 |
|
|
| 2.4 | % |
|
| 271.6 |
|
|
| 41.6 | % | |||||||||||||||||||||||||||||||||||
Prologis European Properties Fund II |
|
| 139.9 |
|
|
| 60.6 |
|
|
| 327.8 |
|
|
| 1,374.9 |
|
|
| (15.2 | ) |
|
| 1,888.0 |
|
|
| 3.4 | % |
|
| 591.1 |
|
|
| 31.3 | % | |||||||||||||||||||||||||||||||||||
Prologis European Logistics Partners Sàrl |
|
| 98.9 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 0.1 |
|
|
| 99.0 |
|
|
| 5.0 | % |
|
| 49.5 |
|
|
| 50.0 | % | |||||||||||||||||||||||||||||||||||
Prologis European Logistics Fund |
| 365 |
|
|
| 289 |
|
|
| 425 |
|
|
| 1,401 |
|
|
| (5 | ) |
|
| 2,475 |
|
| 3.1% |
|
|
| 9,565 |
|
| 26.3% |
| ||||||||||||||||||||||||||||||||||||||
Prologis UK Logistics Venture |
| - |
|
|
| - |
|
|
| - |
|
|
| 208 |
|
|
| - |
|
|
| 208 |
|
| 3.3% |
|
|
| 285 |
|
| 15.0% |
| ||||||||||||||||||||||||||||||||||||||
Nippon Prologis REIT |
|
| 193.5 |
|
|
| 16.6 |
|
|
| 246.7 |
|
|
| 890.4 |
|
|
| (8.0 | ) |
|
| 1,339.2 |
|
|
| 1.0 | % |
|
| 202.2 |
|
|
| 15.1 | % |
| 113 |
|
|
| 27 |
|
|
| - |
|
|
| 1,565 |
|
|
| - |
|
|
| 1,705 |
|
| 0.7% |
|
|
| 4,625 |
|
| 15.1% |
| ||
Prologis China Logistics Venture |
|
| - |
|
|
| - |
|
|
| 89.6 |
|
|
| 96.3 |
|
|
| (5.2 | ) |
|
| 180.7 |
|
|
| 3.9 | % |
|
| 27.1 |
|
|
| 15.0 | % |
| 1 |
|
|
| 325 |
|
|
| 152 |
|
|
| 145 |
|
|
| - |
|
|
| 623 |
|
| 5.0% |
|
|
| 731 |
|
| 15.0% |
| ||
Totals |
| $ | 685.0 |
|
| $ | 320.5 |
|
| $ | 1,266.5 |
|
| $ | 3,996.7 |
|
| $ | (18.7 | ) |
| $ | 6,250.0 |
|
|
|
|
|
| $ | 1,765.9 |
|
|
|
|
| |||||||||||||||||||||||||||||||||||
Total | $ | 714 |
|
| $ | 909 |
|
| $ | 1,242 |
|
| $ | 5,199 |
|
| $ | 15 |
|
| $ | 8,079 |
|
|
|
|
|
| $ | 24,801 |
|
|
|
|
| ||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2015,2017, we did not guarantee any third-party debt of the unconsolidated co-investment ventures. In our role as the manager or sponsor, we work with the co-investment ventures to maintain sufficient liquidity and refinance their maturing debt. There can be no assurance that the co-investment ventures will be able to refinance any maturing indebtedness on terms as favorable as the maturing debt, or at all. If the ventures are unable to refinance the maturing indebtedness with newly issued debt, they may be able to obtain funds by voluntary capital contributions from us and our partners or by selling assets. Certain of our ventures also have credit facilities, or unencumbered properties, both of which may be used to obtain funds.
Contractual ObligationsCONTRACTUAL OBLIGATIONS
Long-Term Contractual Obligations
The following table summarizes our long-term contractual obligations at December 31, 20152017 (in millions):
|
| Payments Due by Period |
| Payments Due by Period |
| ||||||||||||||||||||||||||||||||||
|
| Less than 1 Year |
|
| 1 to 3 Years |
|
| 3 to 5 Years |
|
| More than 5 Years |
|
| Total |
| Less than 1 Year |
|
| 1 to 3 Years |
|
| 3 to 5 Years |
|
| More than 5 Years |
|
| Total |
| ||||||||||
Debt obligations, other than credit facilities |
| $ | 934 |
|
| $ | 1,833 |
|
| $ | 2,175 |
|
| $ | 6,679 |
|
| $ | 11,621 |
| $ | 169 |
|
| $ | 1,680 |
|
| $ | 2,151 |
|
| $ | 5,152 |
|
| $ | 9,152 |
|
Interest on debt obligations, other than credit facilities |
|
| 377 |
|
|
| 653 |
|
|
| 490 |
|
|
| 554 |
|
|
| 2,074 |
|
| 249 |
|
|
| 435 |
|
|
| 355 |
|
|
| 351 |
|
|
| 1,390 |
|
Unfunded commitments on the development portfolio (1) |
|
| 855 |
|
|
| 22 |
|
|
| - |
|
|
| - |
|
|
| 877 |
|
| 1,121 |
|
|
| 59 |
|
|
| - |
|
|
| - |
|
|
| 1,180 |
|
Operating lease payments |
|
| 32 |
|
|
| 57 |
|
|
| 49 |
|
|
| 221 |
|
|
| 359 |
|
| 34 |
|
|
| 62 |
|
|
| 51 |
|
|
| 311 |
|
|
| 458 |
|
Totals |
| $ | 2,198 |
|
| $ | 2,565 |
|
| $ | 2,714 |
|
| $ | 7,454 |
|
| $ | 14,931 |
| |||||||||||||||||||
Total | $ | 1,573 |
|
| $ | 2,236 |
|
| $ | 2,557 |
|
| $ | 5,814 |
|
| $ | 12,180 |
|
(1) | We had properties in our consolidated development portfolio (completed and under development) at December 31, |
Distribution and Dividend 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 meet other needs such asfund 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.
In 2015,2017, we paid a quarterly cash dividend of $0.36 for the first two quarters of 2015 and $0.40 per common share for the last two quarters of 2015. In the fourth quarter of 2015, we issued a new class of common limited partnership units in the Operating Partnership that 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 (see Note 11 in the Consolidated Financial Statements for more information on this new partnership unit). We paid a dividend of $0.64665 in December 2015 related to this new partnership unit. We paid quarterly cash dividends of $0.33$0.44 per common share for all four quartersshare. In 2016, we paid quarterly cash dividends of 2014.$0.42 per common share. Our future common stock dividends, if and as declared, may vary and will be determined by the 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 2017 and 2016.
At December 31, 2015,2017, we had one series1.4 million shares of Series Q preferred stock outstanding – the “Series Q preferred stock.”with a liquidation preference of $50 per share. 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.
Critical Accounting PoliciesCRITICAL ACCOUNTING POLICIES
A critical accounting policy is one that is both important to the portrayal of an entity’s financial condition and results of operations and requires judgment on the part of management. Generally, the judgment requires management to make estimates and assumptions about the effect of matters that are inherently uncertain. Estimates are prepared using management’s best judgment, after considering past and current economic conditions and expectations for the future. Changes in estimates could affect our financial position and specific items in our results of operations that are used by stockholders, potential investors, industry analysts and lenders in their evaluation of
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our performance. Of the accounting policies discussed in Note 2 to the Consolidated Financial Statements, those presented below have been identified by us as critical accounting policies.
Consolidation
We consolidate all entities that are wholly owned and those in which we own less than 100% of the equity but control, as well as any variable interest entities in which we are the primary beneficiary. We evaluate our ability to control an entity including whether the entity is a variable interest entity and whether we are the primary beneficiary. We consider the substantive terms of the arrangement to
identify which enterprise has the power to direct the activities of the entity that most significantly impacts the entity’s economic performance and the obligation to absorb losses of the entity or the right to receive benefits from the entity. Investments in entities that we do not control but over which we have the ability to exercise significant influence over operating and financial policies are accounted for using the equity method. Our ability to correctly assess our influence or control over an entity affects the presentation of these investments in the Consolidated Financial Statements.
Business Combinations
Upon acquisition of real estate that constitutes a business, which includes acquiring a controlling interest in an entity previously accounted for using the equity method of accounting, we allocate the purchase price to the various components of the acquisition based on the fair value of each component. The components typically include land, building, intangible assets related to the acquired leases, debt, deferred tax liability and other assumed assets and liabilities in the case of an acquisition of a business. In an acquisition of multiple properties, we must also allocate the purchase price among the properties. The allocation of the purchase price is based on our assessment of estimated fair value and often is based on the expected future cash flows of the property and various characteristics of the markets where the property is located. The fair value may also include an enterprise value premium that we estimate a third party would be willing to pay for a portfolio of properties. In the case of an acquisition of a controlling interest in an entity previously accounted for under the equity method of accounting, this allocation may result in a gain or a loss. The initial allocation of the purchase price is based on management’s preliminary assessment, which may differ when final information becomes available. Subsequent adjustments made to the initial purchase price allocation are made within the allocation period, not to exceed one year. The use of different assumptions in the allocation of the purchase price of the acquired properties and liabilities assumed could affect the timing of recognition of the related revenue and expenses.
Revenue Recognition – Gains (Losses) on Dispositions of Investments in Real Estate and Strategic Capital Revenue
We recognize gains from the contributions and sales of real estate assets, generally at the time the title is transferred, consideration is received and we no longer have substantial continuing involvement with the real estate sold. In many of our transactions, an entity in which we have an equity investment will acquire a real estate asset from us. We make judgments based on the specific terms of each transaction as to the amount of the total profit from the transaction that we recognize given our continuing ownership interest and our level of future involvement with the entity that acquires the assets. In addition, we make judgments regarding recognition in earnings of certain fees and incentives earned for services provided to these entities based on when they are earned, fixed and determinable.
Derivative Financial InstrumentsAcquisitions
Derivative financial instruments can be designated as fair value hedges, cash flow hedgesUpon acquisition of real estate that constitutes a business or hedgesan asset, which includes acquiring a controlling interest in an entity previously accounted for using the equity method of net investments in foreign operations. We do not use derivatives for trading or speculative purposes. Accounting for derivatives as hedges requires that at inception, and overaccounting, we allocate the termpurchase price to the various components of the instruments,acquisition based on the hedged item and derivative qualify for hedge accounting. The rules and interpretations for derivatives are complex. Failure to apply this guidance correctly may result in all changes in fair value of each component. The components typically include buildings, land, intangible assets related to the hedged derivative being recognized in earnings.
We assess both at inception,acquired leases, debt, deferred tax liabilities and at least quarterly thereafter, whetherother assumed assets and liabilities. In an acquisition of multiple properties, we allocate the derivatives used in hedging transactions are effective at offsetting changes in eitherpurchase price among the properties. The allocation of the purchase price is based on our assessment of estimated fair values orvalue and often is based on the expected future cash flows of the related underlying exposures. Any ineffective portionproperty and various characteristics of the markets where the property is located. The fair value may also include an enterprise value premium that we estimate a third party would be willing to pay for a portfolio of properties for acquisitions that qualify as a business. In the case of an acquisition of a derivative financial instrument's changecontrolling interest in fair valuean entity previously accounted for under the equity method (a step-acquisition under the business combination rules), this allocation may result in a gain or a loss. The initial allocation of the purchase price is immediately recognizedbased on management’s preliminary assessment, which may differ when final information becomes available. The use of different assumptions in earnings. Derivatives not designated as hedges are used to manage our exposure to foreign currency fluctuationsthe allocation of the purchase price of the acquired properties and variable interest rates but do not meetliabilities assumed could affect the strict hedge accounting requirements. See Note 16 totiming of recognition of the Consolidated Financial Statements for additional information about our derivative financial instrument policy.related revenues and expenses.
Income Taxes
As part of the process of preparing our Consolidated Financial Statements, significantSignificant management judgment is required to estimate our income tax liability for each taxable entity, the liability associated with open tax years that are under review, our REIT taxable income and our compliance with REIT requirements. Our estimates are based on interpretation of tax laws. We estimate our actual current income tax due and assess temporary differences resulting from differing treatment of items for book and tax purposes resulting in the recognition of deferred income tax assets and liabilities. These estimates may have an impact on the income tax expense recognized. Adjustments may be required by a change in assessment of our deferred income tax assets and liabilities; changes in assessments of the recognition of income tax benefits for certain nonroutinenon-routine transactions; changes due to audit adjustments by federal, international and state tax authorities; our inability to qualify as a REIT; the potential for built-in gain recognition; changes in the assessment of properties to be contributed to taxable REIT subsidiaries and changes in tax laws. Adjustments required in any given period are included within income tax expense. We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by taxing authorities.
Other than Temporary ImpairmentRecoverability of Investments in Unconsolidated Entities
When circumstances indicate the value of an equity investment may be reduced, we evaluate whether the loss in value is other than temporary. If we determine that a loss in value is other than temporary, we recognize an impairment charge to reflect the investment at fair value. The use of projected future cash flows and other estimates of fair value, the determination of when a loss is other than temporary and the calculation of the amount of the loss is complex and subjective. Use of other estimates and assumptions may result in different conclusions. Changes in economic and operating conditions, as well as changes in our intent with regard to our investment that occur subsequent to our review, could impact these assumptions and result in future impairment charges of our equity investments.
Impairment of Long-LivedReal Estate Assets
We assess the carrying values of our respective long-lived assets whenever events or changes in circumstances indicate that the carrying amounts of these assets may not be fully recoverable.
Recoverability of real estate assets is measured by comparison of the carrying amount of the asset to the estimated future undiscounted cash flows. To review our real estate assets for recoverability, we consider current market conditions, as well as our intent with respect to holding or disposing of the asset. Our intent with regard to the underlying assets might change as market conditions change. Fair value is determined through various valuation techniques, including discounted cash flow models, applying a capitalization rate to estimated NOI of a property, quoted market values and third-party appraisals, where considered necessary. The use of projected future cash flows is based on assumptions that are consistent with our estimates of future expectations and the strategic plan we use to manage our underlying business. If our analysis indicates that the carrying value of a real estate property that we expect to hold is not recoverable on an undiscounted cash flow basis, we recognize an impairment charge for the amount by which the carrying value exceeds the current estimated fair value of the real estate property. Assumptions and estimates used in
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the recoverability analyses for future cash flows, including market rents, discount rates and capitalization rates are complex and subjective. Changes in economic and operating conditions or our intent with regard to our investment that occurs subsequent to our impairment analyses could impact these assumptions and result in future impairment of our long-lived assets.impairment.
Capitalization of Costs
We capitalize costs incurred in developing, renovating, rehabilitating and improving real estate assets as part of the investment basis. Costs incurred in making repairs and maintaining real estate assets are expensed as incurred. During the land development and construction periods (including renovating and rehabilitating), we capitalize interest, costs, insurance, real estate taxes and certain general and administrative costs of the personnel performing development, renovations and rehabilitation if such costs are incremental and identifiable to a specific activity to get the asset ready for its intended use. The ability to specifically
identify internal personnel costs associated with development and the determination of when a development project is substantially complete and capitalization must cease, requires a high degree of judgment and failure to accurately assess these costs and timing could result in the misstatement of asset values and expenses. Capitalized costs are included in the investment basis of real estate assets.
New Accounting PronouncementsNEW ACCOUNTING PRONOUNCEMENTS
See Note 2 to the Consolidated Financial Statements.
Funds from Operations attributable to common stockholders and unitholders (“FFO”)FUNDS FROM OPERATIONS ATTRIBUTABLE TO COMMON STOCKHOLDERS/UNITHOLDERS
FFO is a non-GAAP financial measure that is not determined in accordance with GAAP, but is a measure that is commonly used in the real estate industry. The most directly comparable GAAP measure to FFO is net earnings. Although the
The National Association of Real Estate Investment Trusts (“NAREIT”) has published a definition ofdefines FFO modifications to the NAREIT calculation of FFO are common among REITs, as companies seek to provide financial measures that meaningfully reflect their business.
FFO is not meant to represent a comprehensive system of financial reporting and does not present, nor do we intend it to present, a complete picture of our financial condition and operating performance. We believe that FFO is only meaningful when it is used in conjunction with net earnings computed under GAAP. Furthermore, we believe our consolidated financial statements, prepared in accordance with GAAP, provide the most meaningful picture of our financial condition.
NAREIT’s FFO measure adjusts net 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 agree thatalso 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 NAREITare similar to gains from the sales of previously depreciated properties. We exclude similar adjustments are useful to investors forfrom our unconsolidated entities and the following reasons:
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Our FFO Measures
At the same time that NAREIT created and defined its FFO measure for the REIT industry, it also recognized that “management of each of its member companies has the responsibility and authority to publish financial information that it regards as useful to the financial community.” We believe stockholders, potential investors and financial analysts who review our operating results are best served by a defined FFO measure that includes other adjustments to net earnings computed under GAAP in addition to those included in the NAREIT defined measure of FFO. Our FFO measures are used by management in analyzingbegin 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 we believenegative short-term effects on our results of operations in inconsistent and unpredictable directions that it is important that stockholders, potential investors and financial analysts understand the measures management uses.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 third party ownershipnoncontrolling interests share of the applicable reconciling items based on our average ownership percentage for the applicable periods.
We use theseThese FFO measures includingare used by segment and region, to: (i) evaluate our performance and the performance of our properties in comparison with expected results and results of previous periods, relative to resource allocation decisions; (ii) evaluate the performance of our management; (iii) budget and forecast future results to assist in the allocation of resources; (iv) assess our performance as compared with similar real estate companies and the industry in general; and (v) evaluate how a specific potential investment will impact our future results. Because we make decisions with regard to our performance with a long-term outlook, we believe it is appropriate to remove the effects of short-term items that we do not expect to affect the underlying long-term performance of the properties. The long-term performance of our properties is principally driven by rental revenue. While not infrequent or unusual, these additional items we exclude in calculating FFO, as defined by Prologis, defined below, are subject to significant fluctuations from period to period that cause 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 use our FFO measuresmanagement as supplemental financial measures of operating performance.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.
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FFO, as defined by Prologis attributable to common stockholders and unitholders (“FFO, as defined by Prologis”)
To arrive at FFO, as defined by Prologis, we adjust the NAREIT defined FFO measure to exclude:
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We believe investors are best served if the information that is made available to them allows them to align their analysis and evaluation of our operating results along the same lines that our management uses in planning and executing our business strategy.
Core FFO attributable to common stockholders and unitholders (“Core FFO”)
In addition to FFO, as defined by Prologis, we also use Core FFO. To arrive at Core FFO, we adjust FFO, as defined by Prologis, to exclude the following recurring and nonrecurring items that we recognized directly in FFO, as defined by Prologis:
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We believe it is appropriate to further adjust our FFO, as defined by Prologis for certain recurring items as they were driven by transactional activity and factors relating to the financial and real estate markets, rather than factors specific to the on-going operating performance of our properties or investments. The impairment charges we have recognized were primarily based on valuations of real estate, which had declined due to market conditions, that we no longer expected to hold for long-term investment. Over the last few years, we made it a priority to strengthen our financial position by reducing our debt, our investment in certain low yielding assets and our exposure to foreign currency exchange fluctuations. As a result, we changed our intent to sell or contribute certain of our real estate properties and recorded impairment charges when we did not expect to recover the costs of our investment. Also, we purchased portions of our debt securities when we believed it was advantageous to do so, which was based on market conditions, and in an effort to lower our borrowing costs and extend our debt maturities. As a result, we have recognized net gains or losses on the early extinguishment of certain debt due to the financial market conditions at that time.
We analyze our operating performance primarily by the rental revenuerevenues of our real estate and the revenue driven byrevenues 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. Although these
FFO, as modified by Prologis attributable to common stockholders and 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 discussed above have hadand 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 material impactdeferred 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;
foreign currency exchange gains and losses from the remeasurement (based on our operations and are reflected in our financial statements, the removalcurrent foreign currency exchange rates) of the effects of these items allows us to better understand the core operating performancecertain 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 and 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 overthat were developed with the long term.intent to contribute or sell;
income tax expense related to the sale of investments in real estate and third-party acquisition costs related to the acquisition of 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 towith expected results and results of previous periods, relative to resource allocation decisions; (ii)periods; (iii) evaluate the performance of our management; (iii)(iv) budget and forecast future results to assist in the allocation of resources; (iv)(v) provide guidance to the financial markets to understand our expected operating performance; (v) assess our operating performance as compared to similar real estate companies and the industry in general; and (vi) evaluate how a specific potential investment will impact our future results. Because we make decisions with regard to our performance with a long-term outlook, we believe it is appropriate to remove the effects of items that we do not expect to affect the underlying long-term performance of the properties we own. As noted above, we believe the long-term performance of our properties is principally driven by rental revenue. We believe investors are best served if the information that is made available to them allows them to align their analysis and evaluation of our operating results along the same lines that our management uses in planning and executing our business strategy.
Limitations on the use of our FFO measures
While we believe our definedmodified 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 thesethe limitations are:
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The current income tax expenses and acquisition costs that are excluded from our modified FFO measures represent the taxes and transaction costs that are payable.
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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.
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Gains or losses from non-development property and dispositions or 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.
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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. |
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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.
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The gains and losses on extinguishment of debt that we exclude from our Core FFO, may provide a benefit or cost to us as we may be settling our debt at less or more than our future obligation.
The natural disaster expenses that we exclude from Core FFO are costs that we have incurred.
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 statementsConsolidated Financial Statements prepared under GAAP. To assist investors in compensating for these limitations, we reconcile our definedmodified FFO measures to our net earnings computed under GAAP for the years ended December 31 as follows (in millions):.
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| 2015 |
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FFO |
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Reconciliation of net earnings to FFO measures: |
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Net earnings attributable to common stockholders |
| $ | 862.8 |
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| $ | 622.2 |
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| $ | 315.4 |
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| $ | 1,642 |
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| $ | 1,203 |
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| $ | 863 |
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Add (deduct) NAREIT defined adjustments: |
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Real estate related depreciation and amortization |
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| 854.5 |
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| 617.8 |
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| 624.6 |
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| 848 |
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| 900 |
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| 855 |
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Gains on dispositions of investments in real estate properties, net |
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| (500.8 | ) |
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Gains on dispositions of investments in real estate properties and revaluation of equity investments upon acquisition of a controlling interest, net |
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| (855 | ) |
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Reconciling items related to noncontrolling interests |
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| (78.1 | ) |
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| 47.9 |
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| (39 | ) |
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| (105 | ) |
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Our share of reconciling items included in earnings from unconsolidated entities |
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| 185.6 |
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| 186.5 |
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| 159.8 |
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| 147 |
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| 162 |
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| 185 |
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Subtotal – NAREIT defined FFO |
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| 1,324.0 |
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| 921.2 |
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NAREIT defined FFO |
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| 1,743 |
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| 1,737 |
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Add (deduct) our defined adjustments: |
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Unrealized foreign currency and derivative losses (gains) and related amortization, net |
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Deferred income tax expense (benefit), net |
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Add (deduct) our modified adjustments: |
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Unrealized foreign currency and derivative losses (gains), net |
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| 69 |
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Current income tax expense related to acquired tax liabilities |
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| 3.5 |
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| 30.5 |
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| 20.7 |
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Reconciling items related to noncontrolling interests |
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Our share of reconciling items included in earnings from unconsolidated entities |
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| 4.0 |
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| (23 | ) |
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FFO, as defined by Prologis |
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| 1,308.5 |
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| 887.5 |
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FFO, as modified by Prologis |
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| 1,795 |
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| 1,702 |
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Adjustments to arrive at Core FFO: |
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Gains on dispositions of development properties and land, net |
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| (258.1 | ) |
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| (427.6 | ) |
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| (328 | ) |
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| (334 | ) |
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Current income tax expense (benefit) on dispositions |
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| (0.2 | ) |
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| 15.4 |
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Current income tax expense on dispositions |
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| 19 |
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| 24 |
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Acquisition expenses |
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| 47.0 |
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| 4.2 |
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| 47 |
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Losses on early extinguishment of debt and repurchase of preferred stock, net |
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| 86.3 |
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| 171.8 |
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|
| 286.1 |
| ||||||||||||
Losses (gains) on early extinguishment of debt and repurchase of preferred stock, net |
|
| 72 |
|
|
| (2 | ) |
|
| 86 |
| ||||||||||||
Reconciling items related to noncontrolling interests |
|
| (11.1 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 4 |
|
|
| (11 | ) |
Our share of reconciling items included in earnings from unconsolidated entities |
|
| 8.9 |
|
|
| 46.6 |
|
|
| 8.7 |
|
|
| (7 | ) |
|
| 2 |
|
|
| 8 |
|
Core FFO |
| $ | 1,181.3 |
|
| $ | 953.1 |
|
| $ | 813.2 |
|
| $ | 1,551 |
|
| $ | 1,400 |
|
| $ | 1,181 |
|
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to the impact of foreign-exchange relatedforeign exchange-related variability and earnings volatility on our foreign investments and interest rate changes. See our risk factors in Item 1A. Risk Factors, specifically the following:specifically: The depreciation in the value of the foreign currency in countries where we have a significant investment may adversely affect our results of operations and financial position and We may be unable to refinance our debt or our cash flow may be insufficient to make required debt payments. See also Notes 2 and 16 in the Consolidated Financial Statements in Item 88. Financial Statements and Supplementary Data for more information about our foreign operations and 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 December 31, 2015.2017. 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 interest rate and foreign currency exchange rate fluctuations will depend on the exposures that arise during a future period, hedging strategies at the time and the prevailing interest and foreign currency exchange rates.
We are exposed to foreign exchange-relatedcurrency exchange variability related to investments in and earnings volatility onfrom our foreign investments. Foreign currency market risk is the possibility that our financial 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 the OP and may designate this borrowing as a nonderivative financial instrument. We 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.
At December 31, 2015,2017, after consideration of our nonderivative and derivative financial instruments, we had net equity of approximately $1.6$1.0 billion or 8.5% of total net equity, denominated in a currency other than the U.S. dollar after considerationrepresenting 5.6% of our derivative and nonderivative financial instruments.total net equity. Based on our sensitivity analysis, a 10% reduction in exchange ratesstrengthening of the U.S. dollar against other currencies would cause a reduction of $162.1$105 million to our net equity.
At December 31, 2015,2017, we had foreign currency forward contracts, which were designated and qualify as net investment hedges, with an aggregate notional amount of $386.1$99 million to hedge a portion of our investments in the United Kingdom. We also have foreign currency forward contracts, which were designated and qualify as cash flow hedges, with an aggregate notional amount of $4.8 million to hedge cash payments for development in Mexico.Canada. On the basis of our sensitivity analysis, a weakening of the U.S. dollar against the British pound sterling or Mexican pesoCanadian dollar by 10% would result in a $39.1$10 million negative change in our cash flows on settlement.settlement of these contracts. In addition, we also have British pound sterling, Canadian dollar, euro and Japanese yen forward and option contracts, which were not designated as hedges, and have an aggregate notional amount of $611.7$574 million to mitigate risk associated with the translation of the projected financial resultsearnings of our subsidiaries in Canada, Europe Canada and Japan. A weakening of the U.S. dollar against these currencies by 10% would result in a $61.2$57 million negative change in our net income and cash flows on settlement.settlement of these contracts.
34
We also are exposed to the impact of interest rate changes on future earnings and cash flows. At December 31, 2015,2017, we had $2.4$2.3 billion of variable rate debt outstanding, of which $2.1$1.9 billion was outstanding on our term loans, and $298.7$317 million was outstanding oncredit facilities and $50 million was secured mortgage debt. We had no outstanding balances on our credit facilities. At December 31, 2015,2017, we had entered into interest rate swap agreements to fix $1.1 billion$297 million (CAD $372 million) of our Japanese yen term loans (¥105.9 billion) and our Canadian term loan (CAD $371.9 million). During the year ended December 31, 2015, we had weighted average daily outstanding borrowings of $257.3 million on our variable rate credit facilities.loan. 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 $2.9$2 million, which equates to a change in interest rates of 2012 basis points.
ITEM 8. Financial Statements and Supplementary Data
The Consolidated Balance Sheets of Prologis, Inc. and Prologis, L.P. at December 31, 2015,2017 and 2014,2016, the Consolidated Statements of Income of Prologis, Inc. and Prologis, L.P., the Consolidated Statements of Comprehensive Income of Prologis, Inc. and Prologis, L.P., the Consolidated Statements of Equity of Prologis, Inc., the Consolidated Statements of Capital of Prologis, L.P. and the Consolidated Statements Cash Flows of Prologis, Inc. and Prologis, L.P. for each of the years in the three-year period ended December 31, 2015,2017, Notes to Consolidated Financial Statements and Schedule III — Real Estate and Accumulated Depreciation, together with the reports of KPMG LLP, independent registered public accounting firm, are included under Item 15 of this report and are incorporated herein by reference. Selected unaudited quarterly financial data are presented in Note 20 of the Consolidated Financial Statements.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
ITEM 9A. Controls and Procedures
Controls and Procedures (The Parent)
Prologis, Inc. 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-15(e) under the Securities and Exchange Act of 1934 (the “Exchange Act”)) at December 31, 2015.2017. Based on this evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms. Subsequent to December 31, 2015,2017, there were no significant changes in the internal controls or in other factors that could significantly affect these controls, including any corrective actions with regard to significant deficiencies and material weaknesses.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15(d)-15(f) under the Exchange Act) that occurred during the quarter ended December 31, 2015,2017, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Management’s Annual Report on Internal Control over Financial Reporting
We are responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act.
Under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of the internal control over financial reporting was conducted at December 31, 2015,2017, based on the criteria described in “Internal Control — Integrated Framework” (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management determined that, at December 31, 2015,2017, the internal control over financial reporting was effective.
Our internal control over financial reporting at December 31, 2015,2017, has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their attestation report which is included herein.
Limitations of the Effectiveness of Controls
Management’s assessment included an evaluation of the design of the internal control over financial reporting and testing of the operational effectiveness of the internal control over financial reporting. The internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with United States GAAP. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Controls and Procedures (The Operating Partnership)OP)
Prologis, L.P. 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-15(e) under the Exchange Act) at December 31, 2015.2017. Based on this evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms. Subsequent to December 31, 2015,2017, there were no significant changes in the internal controls or in other factors that could significantly affect these controls, including any corrective actions with regard to significant deficiencies and material weaknesses.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15(d)-15(f) under the Exchange Act) that occurred during the quarter ended December 31, 2015,2017, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
35
Management’s Annual Report on Internal Control over Financial Reporting
We are responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act.
Under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of the internal control over financial reporting was conducted at December 31, 2015,2017, based on the criteria described in “Internal Control — Integrated Framework” (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management determined that, at December 31, 2015,2017, the internal control over financial reporting was effective.
Limitations of the Effectiveness of Controls
Management’s assessment included an evaluation of the design of the internal control over financial reporting and testing of the operational effectiveness of the internal control over financial reporting. The internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
None.
ITEM 10. Directors, Executive Officers and Corporate Governance
The information required by this item is incorporated herein by reference to, the descriptionsincluding relevant sections in our 2018 Proxy Statement, under the captions “Electionentitled Board of Directors — Nominees,”and Corporate Governance; Executive Officers; Executive Compensation; Director Compensation; Security Ownership; Equity Compensation Plans and Additional Information Relating to Stockholders, Directors, Nominees and Executive Officers — Certain Information with Respect to Executive Officers, “Additional Information — Section 16(a) Beneficial Ownership Reporting Compliance,” “Corporate Governance ” and “Board of Directors” in our 2016 Proxy Statement or will be provided in an amendment filed on Form 10-K/A.
ITEM 11. Executive Compensation
The information required by this item is incorporated herein by reference to the descriptionsrelevant sections in our 2018 Proxy Statement, under the captions “Executive Compensation Matters” and “Boardentitled Board of Directors and Committees” in our 2016 Proxy StatementCorporate Governance; Executive Officers; Executive Compensation and Director Compensation or will be provided in an amendment filed on Form 10-K/A.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item is incorporated herein by reference to the descriptionsrelevant sections in our 2018 Proxy Statement, under the captions “Information Relating to Stockholders, Directors, Nominees,entitled Security Ownership and Executive Officers — Security Ownership” and “EquityEquity Compensation Plans” in our 2016 Proxy StatementPlans or will be provided in an amendment filed on Form 10-K/A.
ITEM 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item is incorporated herein by reference to the descriptionsrelevant sections in our 2018 Proxy Statement, under the captions “Information Relating to Stockholders,caption entitled Board of Directors Nominees and Executive Officers — Certain Relationships and Related Transactions” and “Corporate Governance” in our 2016 Proxy StatementCorporate Governance or will be provided in an amendment filed on Form 10-K/A.
ITEM 14. Principal Accounting Fees and Services
The information required by this item is incorporated herein by reference to the descriptionrelevant sections in our 2018 Proxy Statement, under the caption “Independent Registered Public Accounting Firm” in our 2016 Proxy Statemententitled Audit Matters or will be provided in an amendment filed on Form 10-K/A.
ITEM 15. Exhibits, Financial Statements and Schedules
The following documents are filed as a part of this report:
(a) Financial Statements and Schedules:
1. Financial Statements:
See Index to the Consolidated Financial Statements and Schedule III on page 8444 of this report, which is incorporated herein by reference.
2. Financial Statement Schedules:
Schedule III — Real Estate and Accumulated Depreciation
All other schedules have been omitted since the required information is presented in the Consolidated Financial Statements and the related Notesnotes or is not applicable.
(b) Exhibits: The Exhibits required by Item 601 of Regulation S-K are listed in the Index to the Exhibits on pages 100104 to 104110 of this report, which is incorporated herein by reference.
(c) Financial Statements: See Index to the Consolidated Financial Statements and Schedule III on page 8444 of this report, which is incorporated by reference.
36
Not Applicable.
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE III
| Page Number |
Prologis, Inc. and Prologis, L.P.: |
|
| |
Prologis, Inc.: |
|
| |
| |
| |
| |
| |
Prologis, L.P.: |
|
| |
| |
| |
| |
| |
Prologis, Inc. and Prologis, L.P.: |
|
| |
| 58 |
58 | |
65 | |
66 | |
68 | |
71 | |
71 | |
71 | |
72 | |
75 | |
77 | |
77 | |
78 | |
81 | |
82 | |
84 | |
87 | |
88 | |
90 | |
91 | |
|
37
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TheTo the Stockholders and Board of Directors and Stockholders
Prologis, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Prologis, Inc. and subsidiaries (the “Company”)Company) as of December 31, 20152017 and 2014, and2016, the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the years in the three-year period ended December 31, 2015. These2017, and the related notes and financial statement schedule III (collectively, the consolidated financial statements are the responsibility of Prologis, Inc.’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States)statements). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Prologis, Inc. and subsidiariesthe Company as of December 31, 20152017 and 2014,2016, and the results of theirits operations and theirits cash flows for each of the years in the three-year period ended December 31, 2015,2017, in conformity with U.S. generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for discontinued operations as of January 1, 2014, on a prospective basis, due to the adoption of Accounting Standards Update 2014-08.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), Prologis, Inc.’sthe Company’s internal control over financial reporting as of December 31, 2015,2017, based on criteria established inInternal Control —– Integrated Framework (2013) (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, (COSO), and our report dated February 19, 201615, 2018 expressed an unqualified opinion on the effectiveness of Prologis, Inc.’sthe Company’s internal control over financial reporting.
Adoption of a New Accounting Pronouncement
As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for evaluating whether a transaction qualifies as an acquisition of an asset or a business in 2017 due to the adoption of Accounting Standards Update No. 2017-01.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. 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 audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ KPMG LLP
We have served as the Company’s auditor since 2002.
Denver, Colorado
February 19, 201615, 2018
38
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TheTo the Partners
Prologis, L.P.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Prologis, L.P. and subsidiaries (the “Company”)Company) as of December 31, 20152017 and 2014, and2016, the related consolidated statements of income, comprehensive income, capital, and cash flows for each of the years in the three-year period ended December 31, 2015. 2017, and the related notes to the consolidated financial statements and financial statement schedule III (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.
Adoption of a New Accounting Pronouncement
As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for evaluating whether a transaction qualifies as an acquisition of an asset or a business in 2017 due to the adoption of Accounting Standards Update No. 2017-01.
Basis for Opinion
These consolidated financial statements are the responsibility of Prologis, L.P.’sthe Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (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 audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. Anmisstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit includesof its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the consolidated financial statements. An auditOur audits also includes assessingincluded evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 2 to/s/ KPMG LLP
We have served as the consolidatedCompany’s auditor since 2002.
Denver, Colorado
February 15, 2018
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
Prologis, Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited Prologis, Inc. and subsidiaries (the Company) internal control over financial statements, the Company changed its method of accounting for discontinued operationsreporting as of January 1, 2014,December 31, 2017, based on a prospective basis, due tocriteria established in Internal Control – Integrated Framework (2013) issued by the adoptionCommittee of Accounting Standards Update 2014-08.
Sponsoring Organizations of the Treadway Commission. In our opinion, the consolidated financial statements referred to above present fairly,Company maintained, in all material respects, theeffective internal control over financial position of Prologis, L.P. and subsidiariesreporting as of December 31, 20152017, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2017 and 2014,2016, the related consolidated statements of income, comprehensive income, equity, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles.2017, and the related notes and financial statement schedule III (collectively, the consolidated financial statements), and our report dated February 15, 2018 expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
Denver, Colorado
February 19, 2016
39
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMBasis for Opinion
The Board of Directors and Stockholders
Prologis, Inc.:
We have audited Prologis, Inc.’s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Prologis, Inc.’sCompany’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on Prologis, Inc.’sthe Company’s internal control over financial reporting based on our audit. 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 audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Prologis, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Prologis, Inc. and subsidiaries as of December 31, 2015 and 2014, and the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the years in the three-year period ended December 31, 2015, and our report dated February 19, 2016 expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
Denver, Colorado
February 19, 201615, 2018
40
(In thousands, except per share data)
| December 31, |
| December 31, |
| ||||||||||
| 2015 |
|
| 2014 |
| 2017 |
|
| 2016 |
| ||||
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in real estate properties | $ | 27,521,368 |
|
| $ | 22,190,145 |
| $ | 25,838,644 |
|
| $ | 27,119,330 |
|
Less accumulated depreciation |
| 3,274,284 |
|
|
| 2,790,781 |
|
| 4,059,348 |
|
|
| 3,758,372 |
|
Net investments in real estate properties |
| 24,247,084 |
|
|
| 19,399,364 |
|
| 21,779,296 |
|
|
| 23,360,958 |
|
Investments in and advances to unconsolidated entities |
| 4,755,620 |
|
|
| 4,824,724 |
|
| 5,496,450 |
|
|
| 4,230,429 |
|
Assets held for sale or contribution |
| 378,423 |
|
|
| 43,934 |
|
| 342,060 |
|
|
| 322,139 |
|
Notes receivable backed by real estate |
| 235,050 |
|
|
| - |
|
| 34,260 |
|
|
| 32,100 |
|
Net investments in real estate |
| 29,616,177 |
|
|
| 24,268,022 |
|
| 27,652,066 |
|
|
| 27,945,626 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| 264,080 |
|
|
| 350,692 |
|
| 447,046 |
|
|
| 807,316 |
|
Other assets |
| 1,514,510 |
|
|
| 1,156,287 |
|
| 1,381,963 |
|
|
| 1,496,990 |
|
Total assets | $ | 31,394,767 |
|
| $ | 25,775,001 |
| $ | 29,481,075 |
|
| $ | 30,249,932 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt | $ | 11,626,831 |
|
| $ | 9,336,977 |
| $ | 9,412,631 |
|
| $ | 10,608,294 |
|
Accounts payable and accrued expenses |
| 712,725 |
|
|
| 627,999 |
|
| 702,804 |
|
|
| 556,179 |
|
Other liabilities |
| 634,375 |
|
|
| 626,426 |
|
| 659,899 |
|
|
| 627,319 |
|
Total liabilities |
| 12,973,931 |
|
|
| 10,591,402 |
|
| 10,775,334 |
|
|
| 11,791,792 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prologis, Inc. stockholders’ equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series Q preferred stock at stated liquidation preference of $50 per share; $0.01 par value; 1,565 shares issued and outstanding and 100,000 preferred shares authorized at December 31, 2015, and 2014 |
| 78,235 |
|
|
| 78,235 |
| |||||||
Common stock; $0.01 par value; 524,512 shares and 509,498 shares issued and outstanding at December 31, 2015, and 2014, respectively |
| 5,245 |
|
|
| 5,095 |
| |||||||
Series Q preferred stock at stated liquidation preference of $50 per share; $0.01 par value; 1,379 and 1,565 shares issued and outstanding and 100,000 preferred shares authorized at December 31, 2017, and 2016, respectively |
| 68,948 |
|
|
| 78,235 |
| |||||||
Common stock; $0.01 par value; 532,186 shares and 528,671 shares issued and outstanding at December 31, 2017, and 2016, respectively |
| 5,322 |
|
|
| 5,287 |
| |||||||
Additional paid-in capital |
| 19,302,367 |
|
|
| 18,467,009 |
|
| 19,363,007 |
|
|
| 19,455,039 |
|
Accumulated other comprehensive loss |
| (791,429 | ) |
|
| (600,337 | ) |
| (901,658 | ) |
|
| (937,473 | ) |
Distributions in excess of net earnings |
| (3,926,483 | ) |
|
| (3,974,493 | ) |
| (2,904,461 | ) |
|
| (3,610,007 | ) |
Total Prologis, Inc. stockholders’ equity |
| 14,667,935 |
|
|
| 13,975,509 |
|
| 15,631,158 |
|
|
| 14,991,081 |
|
Noncontrolling interests |
| 3,752,901 |
|
|
| 1,208,090 |
|
| 3,074,583 |
|
|
| 3,467,059 |
|
Total equity |
| 18,420,836 |
|
|
| 15,183,599 |
|
| 18,705,741 |
|
|
| 18,458,140 |
|
Total liabilities and equity | $ | 31,394,767 |
|
| $ | 25,775,001 |
| $ | 29,481,075 |
|
| $ | 30,249,932 |
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
41
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
|
| Years Ended December 31, |
|
| Year Ended December 31, |
| ||||||||||||||||||
|
| 2015 |
|
| 2014 |
|
| 2013 |
|
| 2017 |
|
| 2016 |
|
| 2015 |
| ||||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental |
| $ | 1,536,117 |
|
| $ | 1,178,609 |
|
| $ | 1,227,975 |
|
| $ | 1,737,839 |
|
| $ | 1,734,844 |
|
| $ | 1,536,117 |
|
Rental recoveries |
|
| 437,070 |
|
|
| 348,740 |
|
|
| 331,518 |
|
|
| 487,302 |
|
|
| 485,565 |
|
|
| 437,070 |
|
Strategic capital |
|
| 210,362 |
|
|
| 219,871 |
|
|
| 179,472 |
|
|
| 373,889 |
|
|
| 303,562 |
|
|
| 217,829 |
|
Development management and other |
|
| 13,525 |
|
|
| 13,567 |
|
|
| 11,521 |
|
|
| 19,104 |
|
|
| 9,164 |
|
|
| 6,058 |
|
Total revenues |
|
| 2,197,074 |
|
|
| 1,760,787 |
|
|
| 1,750,486 |
|
|
| 2,618,134 |
|
|
| 2,533,135 |
|
|
| 2,197,074 |
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental |
|
| 543,214 |
|
|
| 430,787 |
|
|
| 451,938 |
|
|
| 569,523 |
|
|
| 568,870 |
|
|
| 544,182 |
|
Strategic capital |
|
| 88,418 |
|
|
| 96,496 |
|
|
| 89,279 |
|
|
| 155,141 |
|
|
| 128,506 |
|
|
| 108,422 |
|
General and administrative |
|
| 238,199 |
|
|
| 247,768 |
|
|
| 229,207 |
|
|
| 231,059 |
|
|
| 222,067 |
|
|
| 217,227 |
|
Depreciation and amortization |
|
| 880,373 |
|
|
| 642,461 |
|
|
| 648,668 |
|
|
| 879,140 |
|
|
| 930,985 |
|
|
| 880,373 |
|
Other |
|
| 66,698 |
|
|
| 23,467 |
|
|
| 26,982 |
|
|
| 12,205 |
|
|
| 14,329 |
|
|
| 66,698 |
|
Total expenses |
|
| 1,816,902 |
|
|
| 1,440,979 |
|
|
| 1,446,074 |
|
|
| 1,847,068 |
|
|
| 1,864,757 |
|
|
| 1,816,902 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
| 380,172 |
|
|
| 319,808 |
|
|
| 304,412 |
|
|
| 771,066 |
|
|
| 668,378 |
|
|
| 380,172 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from unconsolidated entities, net |
|
| 159,262 |
|
|
| 134,288 |
|
|
| 97,220 |
|
|
| 248,567 |
|
|
| 206,307 |
|
|
| 159,262 |
|
Interest expense |
|
| (301,363 | ) |
|
| (308,885 | ) |
|
| (379,327 | ) |
|
| (274,486 | ) |
|
| (303,146 | ) |
|
| (301,363 | ) |
Interest and other income, net |
|
| 25,484 |
|
|
| 25,768 |
|
|
| 26,948 |
|
|
| 13,731 |
|
|
| 8,101 |
|
|
| 25,484 |
|
Gains on dispositions of investments in real estate and revaluation of equity investments upon acquisition of a controlling interest, net |
|
| 758,887 |
|
|
| 725,790 |
|
|
| 597,656 |
|
|
| 1,182,965 |
|
|
| 757,398 |
|
|
| 758,887 |
|
Foreign currency and derivative gains (losses) and related amortization, net |
|
| 12,466 |
|
|
| (17,841 | ) |
|
| (33,633 | ) | ||||||||||||
Losses on early extinguishment of debt, net |
|
| (86,303 | ) |
|
| (165,300 | ) |
|
| (277,014 | ) | ||||||||||||
Foreign currency and derivative gains (losses), net |
|
| (57,896 | ) |
|
| 7,582 |
|
|
| 12,466 |
| ||||||||||||
Gains (losses) on early extinguishment of debt, net |
|
| (68,379 | ) |
|
| 2,484 |
|
|
| (86,303 | ) | ||||||||||||
Total other income |
|
| 568,433 |
|
|
| 393,820 |
|
|
| 31,850 |
|
|
| 1,044,502 |
|
|
| 678,726 |
|
|
| 568,433 |
|
Earnings before income taxes |
|
| 948,605 |
|
|
| 713,628 |
|
|
| 336,262 |
|
|
| 1,815,568 |
|
|
| 1,347,104 |
|
|
| 948,605 |
|
Total income tax expense (benefit) |
|
| 23,090 |
|
|
| (25,656 | ) |
|
| 106,733 |
| ||||||||||||
Earnings from continuing operations |
|
| 925,515 |
|
|
| 739,284 |
|
|
| 229,529 |
| ||||||||||||
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Income attributable to disposed properties and assets held for sale |
|
| - |
|
|
| - |
|
|
| 6,970 |
| ||||||||||||
Net gains on dispositions, including taxes |
|
| - |
|
|
| - |
|
|
| 116,550 |
| ||||||||||||
Total discontinued operations |
|
| - |
|
|
| - |
|
|
| 123,520 |
| ||||||||||||
Total income tax expense |
|
| 54,609 |
|
|
| 54,564 |
|
|
| 23,090 |
| ||||||||||||
Consolidated net earnings |
|
| 925,515 |
|
|
| 739,284 |
|
|
| 353,049 |
|
|
| 1,760,959 |
|
|
| 1,292,540 |
|
|
| 925,515 |
|
Less net earnings attributable to noncontrolling interests |
|
| 56,076 |
|
|
| 103,101 |
|
|
| 10,128 |
|
|
| 108,634 |
|
|
| 82,608 |
|
|
| 56,076 |
|
Net earnings attributable to controlling interests |
|
| 869,439 |
|
|
| 636,183 |
|
|
| 342,921 |
|
|
| 1,652,325 |
|
|
| 1,209,932 |
|
|
| 869,439 |
|
Less preferred stock dividends |
|
| 6,651 |
|
|
| 7,431 |
|
|
| 18,391 |
|
|
| 6,499 |
|
|
| 6,714 |
|
|
| 6,651 |
|
Loss on preferred stock redemption/repurchase |
|
| - |
|
|
| 6,517 |
|
|
| 9,108 |
| ||||||||||||
Loss on preferred stock repurchase |
|
| 3,895 |
|
|
| - |
|
|
| - |
| ||||||||||||
Net earnings attributable to common stockholders |
| $ | 862,788 |
|
| $ | 622,235 |
|
| $ | 315,422 |
|
| $ | 1,641,931 |
|
| $ | 1,203,218 |
|
| $ | 862,788 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Weighted average common shares outstanding – Basic |
|
| 521,241 |
|
|
| 499,583 |
|
|
| 486,076 |
|
|
| 530,400 |
|
|
| 526,103 |
|
|
| 521,241 |
|
Weighted average common shares outstanding – Diluted |
|
| 533,944 |
|
|
| 506,391 |
|
|
| 491,546 |
|
|
| 552,300 |
|
|
| 546,666 |
|
|
| 533,944 |
|
Net earnings per share attributable to common stockholders – Basic: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Continuing operations |
| $ | 1.66 |
|
| $ | 1.25 |
|
| $ | 0.40 |
| ||||||||||||
Discontinued operations |
|
| - |
|
|
| - |
|
|
| 0.25 |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Net earnings per share attributable to common stockholders – Basic |
| $ | 1.66 |
|
| $ | 1.25 |
|
| $ | 0.65 |
|
| $ | 3.10 |
|
| $ | 2.29 |
|
| $ | 1.66 |
|
Net earnings per share attributable to common stockholders – Diluted: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Continuing operations |
| $ | 1.64 |
|
| $ | 1.24 |
|
| $ | 0.39 |
| ||||||||||||
Discontinued operations |
|
| - |
|
|
| - |
|
|
| 0.25 |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Net earnings per share attributable to common stockholders – Diluted |
| $ | 1.64 |
|
| $ | 1.24 |
|
| $ | 0.64 |
|
| $ | 3.06 |
|
| $ | 2.27 |
|
| $ | 1.64 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends per common share |
| $ | 1.52 |
|
| $ | 1.32 |
|
| $ | 1.12 |
|
| $ | 1.76 |
|
| $ | 1.68 |
|
| $ | 1.52 |
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
42
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
|
| Years Ended December 31, |
|
| Year Ended December 31, |
| ||||||||||||||||||
|
| 2015 |
|
| 2014 |
|
| 2013 |
|
| 2017 |
|
| 2016 |
|
| 2015 |
| ||||||
Consolidated net earnings |
| $ | 925,515 |
|
| $ | 739,284 |
|
| $ | 353,049 |
|
| $ | 1,760,959 |
|
| $ | 1,292,540 |
|
| $ | 925,515 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation losses, net |
|
| (208,901 | ) |
|
| (171,401 | ) |
|
| (234,680 | ) | ||||||||||||
Unrealized gains (losses) and amortization on derivative contracts, net |
|
| (17,457 | ) |
|
| (6,498 | ) |
|
| 19,590 |
| ||||||||||||
Foreign currency translation gains (losses), net |
|
| 63,455 |
|
|
| (135,958 | ) |
|
| (208,901 | ) | ||||||||||||
Unrealized gains (losses) on derivative contracts, net |
|
| 22,591 |
|
|
| (1,349 | ) |
|
| (17,457 | ) | ||||||||||||
Comprehensive income |
|
| 699,157 |
|
|
| 561,385 |
|
|
| 137,959 |
|
|
| 1,847,005 |
|
|
| 1,155,233 |
|
|
| 699,157 |
|
Net earnings attributable to noncontrolling interests |
|
| (56,076 | ) |
|
| (103,101 | ) |
|
| (10,128 | ) |
|
| (108,634 | ) |
|
| (82,608 | ) |
|
| (56,076 | ) |
Other comprehensive loss attributable to noncontrolling interest |
|
| 35,266 |
|
|
| 13,237 |
|
|
| 12,978 |
| ||||||||||||
Other comprehensive loss (gain) attributable to noncontrolling interests |
|
| (50,231 | ) |
|
| (8,737 | ) |
|
| 35,266 |
| ||||||||||||
Comprehensive income attributable to common stockholders |
| $ | 678,347 |
|
| $ | 471,521 |
|
| $ | 140,809 |
|
| $ | 1,688,140 |
|
| $ | 1,063,888 |
|
| $ | 678,347 |
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
43
CONSOLIDATED STATEMENTS OF EQUITY
(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 |
|
| Income (Loss) |
|
| Earnings |
|
| interests |
|
| Equity |
| ||||||||
Balance at January 1, 2013 |
| $ | 582,200 |
|
|
| 461,770 |
|
| $ | 4,618 |
|
| $ | 16,411,855 |
|
| $ | (233,563 | ) |
| $ | (3,696,093 | ) |
| $ | 704,319 |
|
| $ | 13,773,336 |
|
Consolidated net earnings |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 342,921 |
|
|
| 10,128 |
|
|
| 353,049 |
|
Effect of equity compensation plans |
|
| - |
|
|
| 1,351 |
|
|
| 13 |
|
|
| 93,692 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 93,705 |
|
Issuance of stock in equity offering, net of issuance costs |
|
| - |
|
|
| 35,650 |
|
|
| 357 |
|
|
| 1,437,340 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 1,437,697 |
|
Redemption of preferred stock |
|
| (482,200 | ) |
|
| - |
|
|
| - |
|
|
| 8,593 |
|
|
| - |
|
|
| (9,108 | ) |
|
| - |
|
|
| (482,715 | ) |
Issuance of warrant |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 32,359 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 32,359 |
|
Capital contributions |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 146,130 |
|
|
| 146,130 |
|
Settlement of noncontrolling interests |
|
| - |
|
|
| 28 |
|
|
| - |
|
|
| (7,868 | ) |
|
| - |
|
|
| - |
|
|
| (247,683 | ) |
|
| (255,551 | ) |
Foreign currency translation losses, net |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (221,633 | ) |
|
| - |
|
|
| (13,047 | ) |
|
| (234,680 | ) |
Unrealized gains and amortization on derivative contracts, net |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 19,521 |
|
|
| - |
|
|
| 69 |
|
|
| 19,590 |
|
Distributions and allocations |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (1,462 | ) |
|
| - |
|
|
| (570,384 | ) |
|
| (134,621 | ) |
|
| (706,467 | ) |
Balance at December 31, 2013 |
| $ | 100,000 |
|
|
| 498,799 |
|
| $ | 4,988 |
|
| $ | 17,974,509 |
|
| $ | (435,675 | ) |
| $ | (3,932,664 | ) |
| $ | 465,295 |
|
| $ | 14,176,453 |
|
Consolidated net earnings |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 636,183 |
|
|
| 103,101 |
|
|
| 739,284 |
|
Effect of equity compensation plans |
|
| - |
|
|
| 1,383 |
|
|
| 14 |
|
|
| 88,424 |
|
|
| - |
|
|
| - |
|
|
| 450 |
|
|
| 88,888 |
|
Issuance of stock in at-the-market program, net of issuance costs |
|
| - |
|
|
| 3,316 |
|
|
| 33 |
|
|
| 140,102 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 140,135 |
|
Repurchase of preferred sock |
|
| (21,765 | ) |
|
| - |
|
|
| - |
|
|
| 639 |
|
|
| - |
|
|
| (6,517 | ) |
|
| - |
|
|
| (27,643 | ) |
Issuance of stock from exercise of warrant |
|
| - |
|
|
| 6,000 |
|
|
| 60 |
|
|
| 213,780 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 213,840 |
|
Formation of Prologis U.S. Logistics Venture |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 13,721 |
|
|
| - |
|
|
| - |
|
|
| 442,251 |
|
|
| 455,972 |
|
Consolidation of Prologis North American Industrial Fund |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 12,507 |
|
|
| - |
|
|
| 554,493 |
|
|
| 567,000 |
|
Capital contributions |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 14,464 |
|
|
| 14,464 |
|
Settlement of noncontrolling interests |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 33,803 |
|
|
| - |
|
|
| - |
|
|
| (36,243 | ) |
|
| (2,440 | ) |
Foreign currency translation losses, net |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (167,950 | ) |
|
| - |
|
|
| (13,214 | ) |
|
| (181,164 | ) |
Unrealized losses and amortization on derivative contracts, net |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (9,219 | ) |
|
| - |
|
|
| (23 | ) |
|
| (9,242 | ) |
Distributions and allocations |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 2,031 |
|
|
| - |
|
|
| (671,495 | ) |
|
| (322,484 | ) |
|
| (991,948 | ) |
Balance at December 31, 2014 |
| $ | 78,235 |
|
|
| 509,498 |
|
| $ | 5,095 |
|
| $ | 18,467,009 |
|
| $ | (600,337 | ) |
| $ | (3,974,493 | ) |
| $ | 1,208,090 |
|
| $ | 15,183,599 |
|
Consolidated net earnings |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 869,439 |
|
|
| 56,076 |
|
|
| 925,515 |
|
Effect of equity compensation plans |
|
| - |
|
|
| 1,475 |
|
|
| 15 |
|
|
| 57,454 |
|
|
| - |
|
|
| - |
|
|
| 26,234 |
|
|
| 83,703 |
|
Issuance of stock in at-the-market program, net of issuance costs |
|
| - |
|
|
| 1,662 |
|
|
| 16 |
|
|
| 71,532 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 71,548 |
|
Issuance of stock upon conversion of exchangeable debt |
|
| - |
|
|
| 11,872 |
|
|
| 119 |
|
|
| 502,613 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 502,732 |
|
Issuance of units related to KTR acquisition |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 181,170 |
|
|
| 181,170 |
|
Issuance of units related to other acquisitions |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 371,570 |
|
|
| 371,570 |
|
Capital contributions |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 2,355,596 |
|
|
| 2,355,596 |
|
Foreign currency translation losses, net |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (173,852 | ) |
|
| - |
|
|
| (35,049 | ) |
|
| (208,901 | ) |
Unrealized losses and amortization on derivative contracts, net |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (17,240 | ) |
|
| - |
|
|
| (217 | ) |
|
| (17,457 | ) |
Reallocation of equity |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 202,812 |
|
|
| - |
|
|
| (15,894 | ) |
|
| (186,918 | ) |
|
| - |
|
Distributions and other |
|
| - |
|
|
| 5 |
|
|
| - |
|
|
| 947 |
|
|
| - |
|
|
| (805,535 | ) |
|
| (223,651 | ) |
|
| (1,028,239 | ) |
Balance at December 31, 2015 |
| $ | 78,235 |
|
|
| 524,512 |
|
| $ | 5,245 |
|
| $ | 19,302,367 |
|
| $ | (791,429 | ) |
| $ | (3,926,483 | ) |
| $ | 3,752,901 |
|
| $ | 18,420,836 |
|
|
|
|
|
| Common Stock |
|
|
|
|
|
| Accumulated |
|
| Distributions |
|
|
|
|
|
|
|
|
| |||||||
|
|
|
|
| Number |
|
|
|
|
|
| Additional |
|
| Other |
|
| in Excess of |
|
| Non- |
|
|
|
|
| |||||
| Preferred |
|
| of |
|
| Par |
|
| Paid-in |
|
| Comprehensive |
|
| Net |
|
| controlling |
|
| Total |
| ||||||||
| Stock |
|
| Shares |
|
| Value |
|
| Capital |
|
| Income (Loss) |
|
| Earnings |
|
| Interests |
|
| Equity |
| ||||||||
Balance at January 1, 2015 | $ | 78,235 |
|
|
| 509,498 |
|
| $ | 5,095 |
|
| $ | 18,467,009 |
|
| $ | (600,337 | ) |
| $ | (3,974,493 | ) |
| $ | 1,208,090 |
|
| $ | 15,183,599 |
|
Consolidated net earnings |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 869,439 |
|
|
| 56,076 |
|
|
| 925,515 |
|
Effect of equity compensation plans |
| - |
|
|
| 1,475 |
|
|
| 15 |
|
|
| 57,454 |
|
|
| - |
|
|
| - |
|
|
| 26,234 |
|
|
| 83,703 |
|
Issuance of stock in at-the-market program, net of issuance costs |
| - |
|
|
| 1,662 |
|
|
| 16 |
|
|
| 71,532 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 71,548 |
|
Issuance of stock upon conversion of exchangeable debt |
| - |
|
|
| 11,872 |
|
|
| 119 |
|
|
| 502,613 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 502,732 |
|
Issuance of units related to KTR transaction |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 181,170 |
|
|
| 181,170 |
|
Issuance of units related to other acquisitions |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 371,570 |
|
|
| 371,570 |
|
Capital contributions |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 2,355,596 |
|
|
| 2,355,596 |
|
Foreign currency translation losses, net |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (173,852 | ) |
|
| - |
|
|
| (35,049 | ) |
|
| (208,901 | ) |
Unrealized losses on derivative contracts, net |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (17,240 | ) |
|
| - |
|
|
| (217 | ) |
|
| (17,457 | ) |
Reallocation of equity |
| - |
|
|
| - |
|
|
| - |
|
|
| 202,812 |
|
|
| - |
|
|
| (15,894 | ) |
|
| (186,918 | ) |
|
| - |
|
Distributions and other |
| - |
|
|
| 5 |
|
|
| - |
|
|
| 947 |
|
|
| - |
|
|
| (805,535 | ) |
|
| (223,651 | ) |
|
| (1,028,239 | ) |
Balance at December 31, 2015 | $ | 78,235 |
|
|
| 524,512 |
|
| $ | 5,245 |
|
| $ | 19,302,367 |
|
| $ | (791,429 | ) |
| $ | (3,926,483 | ) |
| $ | 3,752,901 |
|
| $ | 18,420,836 |
|
Consolidated net earnings |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 1,209,932 |
|
|
| 82,608 |
|
|
| 1,292,540 |
|
Effect of equity compensation plans |
| - |
|
|
| 2,282 |
|
|
| 23 |
|
|
| 91,191 |
|
|
| - |
|
|
| - |
|
|
| 26,483 |
|
|
| 117,697 |
|
Issuance of units related to acquisitions |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 3,162 |
|
|
| 3,162 |
|
Conversion of noncontrolling interests |
| - |
|
|
| 1,877 |
|
|
| 19 |
|
|
| 52,237 |
|
|
| - |
|
|
| - |
|
|
| (52,256 | ) |
|
| - |
|
Foreign currency translation gains (losses), net |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (144,730 | ) |
|
| - |
|
|
| 8,772 |
|
|
| (135,958 | ) |
Unrealized losses on derivative contracts, net |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (1,314 | ) |
|
| - |
|
|
| (35 | ) |
|
| (1,349 | ) |
Reallocation of equity |
| - |
|
|
| - |
|
|
| - |
|
|
| 8,657 |
|
|
| - |
|
|
| - |
|
|
| (8,657 | ) |
|
| - |
|
Distributions and other |
| - |
|
|
| - |
|
|
| - |
|
|
| 587 |
|
|
| - |
|
|
| (893,456 | ) |
|
| (345,919 | ) |
|
| (1,238,788 | ) |
Balance at December 31, 2016 | $ | 78,235 |
|
|
| 528,671 |
|
| $ | 5,287 |
|
| $ | 19,455,039 |
|
| $ | (937,473 | ) |
| $ | (3,610,007 | ) |
| $ | 3,467,059 |
|
| $ | 18,458,140 |
|
Consolidated net earnings |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 1,652,325 |
|
|
| 108,634 |
|
|
| 1,760,959 |
|
Effect of equity compensation plans |
| - |
|
|
| 2,000 |
|
|
| 20 |
|
|
| 74,506 |
|
|
| - |
|
|
| - |
|
|
| 41,446 |
|
|
| 115,972 |
|
Capital contributions |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 254,214 |
|
|
| 254,214 |
|
Repurchase of preferred stock |
| (9,287 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (3,895 | ) |
|
| - |
|
|
| (13,182 | ) |
Purchase of noncontrolling interests |
| - |
|
|
| - |
|
|
| - |
|
|
| (202,040 | ) |
|
| - |
|
|
| - |
|
|
| (611,807 | ) |
|
| (813,847 | ) |
Conversion of noncontrolling interests |
| - |
|
|
| 1,515 |
|
|
| 15 |
|
|
| 47,711 |
|
|
| - |
|
|
| - |
|
|
| (47,726 | ) |
|
| - |
|
Foreign currency translation gains, net |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 13,810 |
|
|
| - |
|
|
| 49,645 |
|
|
| 63,455 |
|
Unrealized gains on derivative contracts, net |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 22,005 |
|
|
| - |
|
|
| 586 |
|
|
| 22,591 |
|
Reallocation of equity |
| - |
|
|
| - |
|
|
| - |
|
|
| (12,143 | ) |
|
| - |
|
|
| - |
|
|
| 12,143 |
|
|
| - |
|
Distributions and other |
| - |
|
|
| - |
|
|
| - |
|
|
| (66 | ) |
|
| - |
|
|
| (942,884 | ) |
|
| (199,611 | ) |
|
| (1,142,561 | ) |
Balance at December 31, 2017 | $ | 68,948 |
|
|
| 532,186 |
|
| $ | 5,322 |
|
| $ | 19,363,007 |
|
| $ | (901,658 | ) |
| $ | (2,904,461 | ) |
| $ | 3,074,583 |
|
| $ | 18,705,741 |
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
44
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
| Years Ended December 31, |
|
| Years Ended December 31, |
| ||||||||||||||||||
|
| 2015 |
|
| 2014 |
|
| 2013 |
|
| 2017 |
|
| 2016 |
|
| 2015 |
| ||||||
Operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net earnings |
| $ | 925,515 |
|
| $ | 739,284 |
|
| $ | 353,049 |
|
| $ | 1,760,959 |
|
| $ | 1,292,540 |
|
| $ | 925,515 |
|
Adjustments to reconcile net earnings to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Straight-lined rents and amortization of above and below market leases |
|
| (59,619 | ) |
|
| (14,392 | ) |
|
| (12,080 | ) |
|
| (81,021 | ) |
|
| (93,608 | ) |
|
| (59,619 | ) |
Equity-based compensation awards |
|
| 53,665 |
|
|
| 57,478 |
|
|
| 49,239 |
|
|
| 76,640 |
|
|
| 60,341 |
|
|
| 53,665 |
|
Depreciation and amortization |
|
| 880,373 |
|
|
| 642,461 |
|
|
| 664,007 |
|
|
| 879,140 |
|
|
| 930,985 |
|
|
| 880,373 |
|
Earnings from unconsolidated entities, net |
|
| (159,262 | ) |
|
| (134,288 | ) |
|
| (97,220 | ) |
|
| (248,567 | ) |
|
| (206,307 | ) |
|
| (159,262 | ) |
Distributions from unconsolidated entities |
|
| 144,045 |
|
|
| 117,938 |
|
|
| 68,319 |
|
|
| 307,220 |
|
|
| 286,651 |
|
|
| 284,664 |
|
Net changes in operating receivables from unconsolidated entities |
|
| (38,185 | ) |
|
| (7,503 | ) |
|
| 7,540 |
| ||||||||||||
Amortization of debt and deferred financing costs |
|
| (31,841 | ) |
|
| (7,324 | ) |
|
| (24,641 | ) | ||||||||||||
Decrease (increase) in operating receivables from unconsolidated entities |
|
| (30,893 | ) |
|
| 14,823 |
|
|
| (38,185 | ) | ||||||||||||
Amortization of debt discounts (premiums), net of debt issuance costs |
|
| 751 |
|
|
| (15,137 | ) |
|
| (31,841 | ) | ||||||||||||
Gains on dispositions of investments in real estate and revaluation of equity investments upon acquisition of a controlling interest, net |
|
| (758,887 | ) |
|
| (725,790 | ) |
|
| (715,758 | ) |
|
| (1,182,965 | ) |
|
| (757,398 | ) |
|
| (758,887 | ) |
Losses on early extinguishment of debt, net |
|
| 86,303 |
|
|
| 165,300 |
|
|
| 277,014 |
| ||||||||||||
Unrealized foreign currency and derivative losses (gains) and related amortization, net |
|
| (1,019 | ) |
|
| 22,571 |
|
|
| 28,619 |
| ||||||||||||
Unrealized foreign currency and derivative losses (gains), net |
|
| 68,956 |
|
|
| (8,052 | ) |
|
| (1,019 | ) | ||||||||||||
Losses (gains) on early extinguishment of debt, net |
|
| 68,379 |
|
|
| (2,484 | ) |
|
| 86,303 |
| ||||||||||||
Deferred income tax benefit |
|
| (5,057 | ) |
|
| (87,240 | ) |
|
| (20,067 | ) |
|
| (5,005 | ) |
|
| (5,525 | ) |
|
| (5,057 | ) |
Increase in accounts receivable and other assets |
|
| (64,749 | ) |
|
| (93 | ) |
|
| (12,912 | ) | ||||||||||||
Increase (decrease) in accounts payable and accrued expenses and other liabilities |
|
| (7,872 | ) |
|
| (63,871 | ) |
|
| (80,120 | ) | ||||||||||||
Decrease (increase) in accounts receivable and other assets |
|
| 37,278 |
|
|
| (106,337 | ) |
|
| (64,749 | ) | ||||||||||||
Increase in accounts payable and accrued expenses and other liabilities |
|
| 36,374 |
|
|
| 26,513 |
|
|
| 4,426 |
| ||||||||||||
Net cash provided by operating activities |
|
| 963,410 |
|
|
| 704,531 |
|
|
| 484,989 |
|
|
| 1,687,246 |
|
|
| 1,417,005 |
|
|
| 1,116,327 |
|
Investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate development activity |
|
| (1,339,904 | ) |
|
| (1,064,220 | ) |
|
| (853,082 | ) | ||||||||||||
Real estate development |
|
| (1,606,133 | ) |
|
| (1,641,560 | ) |
|
| (1,339,904 | ) | ||||||||||||
Real estate acquisitions |
|
| (890,183 | ) |
|
| (612,330 | ) |
|
| (514,611 | ) |
|
| (442,696 | ) |
|
| (458,516 | ) |
|
| (890,183 | ) |
KTR acquisition, net of cash received |
|
| (4,809,499 | ) |
|
| - |
|
|
| - |
| ||||||||||||
KTR transaction, net of cash received |
|
| - |
|
|
| - |
|
|
| (4,809,499 | ) | ||||||||||||
Tenant improvements and lease commissions on previously leased space |
|
| (154,564 | ) |
|
| (133,957 | ) |
|
| (145,424 | ) |
|
| (153,255 | ) |
|
| (165,933 | ) |
|
| (154,564 | ) |
Nondevelopment capital expenditures |
|
| (83,351 | ) |
|
| (78,610 | ) |
|
| (82,610 | ) |
|
| (110,635 | ) |
|
| (101,677 | ) |
|
| (83,351 | ) |
Proceeds from dispositions and contributions of real estate properties |
|
| 2,795,249 |
|
|
| 2,285,488 |
|
|
| 5,409,745 |
|
|
| 3,236,603 |
|
|
| 2,826,408 |
|
|
| 2,795,249 |
|
Investments in and advances to unconsolidated entities |
|
| (474,420 | ) |
|
| (739,635 | ) |
|
| (1,221,155 | ) |
|
| (249,735 | ) |
|
| (265,951 | ) |
|
| (474,420 | ) |
Acquisition of a controlling interest in unconsolidated co-investment ventures, net of cash received |
|
| - |
|
|
| (590,390 | ) |
|
| (678,642 | ) | ||||||||||||
Acquisition of a controlling interest in an unconsolidated venture, net of cash received |
|
| (374,605 | ) |
|
| - |
|
|
| - |
| ||||||||||||
Return of investment from unconsolidated entities |
|
| 170,025 |
|
|
| 244,306 |
|
|
| 411,853 |
|
|
| 209,151 |
|
|
| 776,550 |
|
|
| 29,406 |
|
Proceeds from repayment of notes receivable backed by real estate |
|
| 9,866 |
|
|
| 188,000 |
|
|
| - |
|
|
| 32,100 |
|
|
| 202,950 |
|
|
| 9,866 |
|
Proceeds from the settlement of net investment hedges |
|
| 129,149 |
|
|
| 31,409 |
|
|
| 8,842 |
|
|
| 7,541 |
|
|
| 79,767 |
|
|
| 129,149 |
|
Payments on the settlement of net investment hedges |
|
| (981 | ) |
|
| (18,370 | ) |
|
| (994 | ) |
|
| (5,058 | ) |
|
| - |
|
|
| (981 | ) |
Net cash provided by (used in) investing activities |
|
| (4,648,613 | ) |
|
| (488,309 | ) |
|
| 2,333,922 |
|
|
| 543,278 |
|
|
| 1,252,038 |
|
|
| (4,789,232 | ) |
Financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock |
|
| 90,258 |
|
|
| 378,247 |
|
|
| 1,505,791 |
|
|
| 32,858 |
|
|
| 39,470 |
|
|
| 90,258 |
|
Distributions paid on common and preferred stock |
|
| (804,697 | ) |
|
| (672,190 | ) |
|
| (573,854 | ) | ||||||||||||
Repurchase and redemption of preferred stock |
|
| - |
|
|
| (27,643 | ) |
|
| (482,500 | ) | ||||||||||||
Dividends paid on common and preferred stock |
|
| (942,884 | ) |
|
| (893,455 | ) |
|
| (804,697 | ) | ||||||||||||
Repurchase of preferred stock |
|
| (13,182 | ) |
|
| - |
|
|
| - |
| ||||||||||||
Noncontrolling interests contributions |
|
| 2,355,367 |
|
|
| 468,280 |
|
|
| 145,522 |
|
|
| 240,925 |
|
|
| 2,168 |
|
|
| 2,355,367 |
|
Noncontrolling interests distributions |
|
| (215,740 | ) |
|
| (315,426 | ) |
|
| (115,999 | ) |
|
| (207,788 | ) |
|
| (343,550 | ) |
|
| (215,740 | ) |
Purchase of noncontrolling interests |
|
| (2,560 | ) |
|
| (2,440 | ) |
|
| (250,740 | ) |
|
| (813,847 | ) |
|
| (3,083 | ) |
|
| (2,560 | ) |
Tax paid for shares withheld |
|
| (19,775 | ) |
|
| (8,570 | ) |
|
| (12,298 | ) | ||||||||||||
Debt and equity issuance costs paid |
|
| (32,012 | ) |
|
| (23,420 | ) |
|
| (77,017 | ) |
|
| (7,054 | ) |
|
| (20,123 | ) |
|
| (32,012 | ) |
Net payments on credit facilities |
|
| (7,970 | ) |
|
| (717,369 | ) |
|
| (93,075 | ) | ||||||||||||
Net proceeds from (payments on) credit facilities |
|
| 283,255 |
|
|
| 33,435 |
|
|
| (7,970 | ) | ||||||||||||
Repurchase and payments of debt |
|
| (3,156,294 | ) |
|
| (4,205,806 | ) |
|
| (6,012,433 | ) |
|
| (3,578,889 | ) |
|
| (2,301,647 | ) |
|
| (3,156,294 | ) |
Proceeds from issuance of debt |
|
| 5,381,862 |
|
|
| 4,779,950 |
|
|
| 3,588,683 |
|
|
| 2,419,797 |
|
|
| 1,369,890 |
|
|
| 5,381,862 |
|
Net cash provided by (used in) financing activities |
|
| 3,608,214 |
|
|
| (337,817 | ) |
|
| (2,365,622 | ) |
|
| (2,606,584 | ) |
|
| (2,125,465 | ) |
|
| 3,595,916 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign currency exchange rate changes on cash |
|
| (9,623 | ) |
|
| (18,842 | ) |
|
| (62,970 | ) |
|
| 15,790 |
|
|
| (342 | ) |
|
| (9,623 | ) |
Net increase (decrease) in cash and cash equivalents |
|
| (86,612 | ) |
|
| (140,437 | ) |
|
| 390,319 |
|
|
| (360,270 | ) |
|
| 543,236 |
|
|
| (86,612 | ) |
Cash and cash equivalents, beginning of year |
|
| 350,692 |
|
|
| 491,129 |
|
|
| 100,810 |
|
|
| 807,316 |
|
|
| 264,080 |
|
|
| 350,692 |
|
Cash and cash equivalents, end of year |
| $ | 264,080 |
|
| $ | 350,692 |
|
| $ | 491,129 |
|
| $ | 447,046 |
|
| $ | 807,316 |
|
| $ | 264,080 |
|
See Note 19 for information on noncash investing and financing activities and other information.
The accompanying notes are an integral part of these Consolidated Financial Statements.
45
(In thousands)
| December 31, |
| December 31, |
| ||||||||||
| 2015 |
|
| 2014 |
| 2017 |
|
| 2016 |
| ||||
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in real estate properties | $ | 27,521,368 |
|
| $ | 22,190,145 |
| $ | 25,838,644 |
|
| $ | 27,119,330 |
|
Less accumulated depreciation |
| 3,274,284 |
|
|
| 2,790,781 |
|
| 4,059,348 |
|
|
| 3,758,372 |
|
Net investments in real estate properties |
| 24,247,084 |
|
|
| 19,399,364 |
|
| 21,779,296 |
|
|
| 23,360,958 |
|
Investments in and advances to unconsolidated entities |
| 4,755,620 |
|
|
| 4,824,724 |
|
| 5,496,450 |
|
|
| 4,230,429 |
|
Assets held for sale or contribution |
| 378,423 |
|
|
| 43,934 |
|
| 342,060 |
|
|
| 322,139 |
|
Notes receivable backed by real estate |
| 235,050 |
|
|
| - |
|
| 34,260 |
|
|
| 32,100 |
|
Net investments in real estate |
| 29,616,177 |
|
|
| 24,268,022 |
|
| 27,652,066 |
|
|
| 27,945,626 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| 264,080 |
|
|
| 350,692 |
|
| 447,046 |
|
|
| 807,316 |
|
Other assets |
| 1,514,510 |
|
|
| 1,156,287 |
|
| 1,381,963 |
|
|
| 1,496,990 |
|
Total assets | $ | 31,394,767 |
|
| $ | 25,775,001 |
| $ | 29,481,075 |
|
| $ | 30,249,932 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND CAPITAL |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt | $ | 11,626,831 |
|
| $ | 9,336,977 |
| $ | 9,412,631 |
|
| $ | 10,608,294 |
|
Accounts payable and accrued expenses |
| 712,725 |
|
|
| 627,999 |
|
| 702,804 |
|
|
| 556,179 |
|
Other liabilities |
| 634,375 |
|
|
| 626,426 |
|
| 659,899 |
|
|
| 627,319 |
|
Total liabilities |
| 12,973,931 |
|
|
| 10,591,402 |
|
| 10,775,334 |
|
|
| 11,791,792 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partners’ capital: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General partner – preferred |
| 78,235 |
|
|
| 78,235 |
|
| 68,948 |
|
|
| 78,235 |
|
General partner – common |
| 14,589,700 |
|
|
| 13,897,274 |
|
| 15,562,210 |
|
|
| 14,912,846 |
|
Limited partners – common |
| 186,683 |
|
|
| 48,189 |
|
| 165,401 |
|
|
| 150,173 |
|
Limited partners – Class A common |
| 245,991 |
|
|
| - |
|
| 248,940 |
|
|
| 244,417 |
|
Total partners’ capital |
| 15,100,609 |
|
|
| 14,023,698 |
|
| 16,045,499 |
|
|
| 15,385,671 |
|
Noncontrolling interests |
| 3,320,227 |
|
|
| 1,159,901 |
|
| 2,660,242 |
|
|
| 3,072,469 |
|
Total capital |
| 18,420,836 |
|
|
| 15,183,599 |
|
| 18,705,741 |
|
|
| 18,458,140 |
|
Total liabilities and capital | $ | 31,394,767 |
|
| $ | 25,775,001 |
| $ | 29,481,075 |
|
| $ | 30,249,932 |
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
46
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per unit amounts)
|
| Years Ended December 31, |
|
| Year Ended December 31, |
| ||||||||||||||||||
|
| 2015 |
|
| 2014 |
|
| 2013 |
|
| 2017 |
|
| 2016 |
|
| 2015 |
| ||||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental |
| $ | 1,536,117 |
|
| $ | 1,178,609 |
|
| $ | 1,227,975 |
|
| $ | 1,737,839 |
|
| $ | 1,734,844 |
|
| $ | 1,536,117 |
|
Rental recoveries |
|
| 437,070 |
|
|
| 348,740 |
|
|
| 331,518 |
|
|
| 487,302 |
|
|
| 485,565 |
|
|
| 437,070 |
|
Strategic capital |
|
| 210,362 |
|
|
| 219,871 |
|
|
| 179,472 |
|
|
| 373,889 |
|
|
| 303,562 |
|
|
| 217,829 |
|
Development management and other |
|
| 13,525 |
|
|
| 13,567 |
|
|
| 11,521 |
|
|
| 19,104 |
|
|
| 9,164 |
|
|
| 6,058 |
|
Total revenues |
|
| 2,197,074 |
|
|
| 1,760,787 |
|
|
| 1,750,486 |
|
|
| 2,618,134 |
|
|
| 2,533,135 |
|
|
| 2,197,074 |
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental |
|
| 543,214 |
|
|
| 430,787 |
|
|
| 451,938 |
|
|
| 569,523 |
|
|
| 568,870 |
|
|
| 544,182 |
|
Strategic capital |
|
| 88,418 |
|
|
| 96,496 |
|
|
| 89,279 |
|
|
| 155,141 |
|
|
| 128,506 |
|
|
| 108,422 |
|
General and administrative |
|
| 238,199 |
|
|
| 247,768 |
|
|
| 229,207 |
|
|
| 231,059 |
|
|
| 222,067 |
|
|
| 217,227 |
|
Depreciation and amortization |
|
| 880,373 |
|
|
| 642,461 |
|
|
| 648,668 |
|
|
| 879,140 |
|
|
| 930,985 |
|
|
| 880,373 |
|
Other |
|
| 66,698 |
|
|
| 23,467 |
|
|
| 26,982 |
|
|
| 12,205 |
|
|
| 14,329 |
|
|
| 66,698 |
|
Total expenses |
|
| 1,816,902 |
|
|
| 1,440,979 |
|
|
| 1,446,074 |
|
|
| 1,847,068 |
|
|
| 1,864,757 |
|
|
| 1,816,902 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
| 380,172 |
|
|
| 319,808 |
|
|
| 304,412 |
|
|
| 771,066 |
|
|
| 668,378 |
|
|
| 380,172 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from unconsolidated entities, net |
|
| 159,262 |
|
|
| 134,288 |
|
|
| 97,220 |
|
|
| 248,567 |
|
|
| 206,307 |
|
|
| 159,262 |
|
Interest expense |
|
| (301,363 | ) |
|
| (308,885 | ) |
|
| (379,327 | ) |
|
| (274,486 | ) |
|
| (303,146 | ) |
|
| (301,363 | ) |
Interest and other income, net |
|
| 25,484 |
|
|
| 25,768 |
|
|
| 26,948 |
|
|
| 13,731 |
|
|
| 8,101 |
|
|
| 25,484 |
|
Gains on dispositions of investments in real estate and revaluation of equity investments upon acquisition of a controlling interest, net |
|
| 758,887 |
|
|
| 725,790 |
|
|
| 597,656 |
|
|
| 1,182,965 |
|
|
| 757,398 |
|
|
| 758,887 |
|
Foreign currency and derivative gains (losses) and related amortization, net |
|
| 12,466 |
|
|
| (17,841 | ) |
|
| (33,633 | ) | ||||||||||||
Losses on early extinguishment of debt, net |
|
| (86,303 | ) |
|
| (165,300 | ) |
|
| (277,014 | ) | ||||||||||||
Foreign currency and derivative gains (losses), net |
|
| (57,896 | ) |
|
| 7,582 |
|
|
| 12,466 |
| ||||||||||||
Gains (losses) on early extinguishment of debt, net |
|
| (68,379 | ) |
|
| 2,484 |
|
|
| (86,303 | ) | ||||||||||||
Total other income |
|
| 568,433 |
|
|
| 393,820 |
|
|
| 31,850 |
|
|
| 1,044,502 |
|
|
| 678,726 |
|
|
| 568,433 |
|
Earnings before income taxes |
|
| 948,605 |
|
|
| 713,628 |
|
|
| 336,262 |
|
|
| 1,815,568 |
|
|
| 1,347,104 |
|
|
| 948,605 |
|
Total income tax expense (benefit) |
|
| 23,090 |
|
|
| (25,656 | ) |
|
| 106,733 |
| ||||||||||||
Earnings from continuing operations |
|
| 925,515 |
|
|
| 739,284 |
|
|
| 229,529 |
| ||||||||||||
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Income attributable to disposed properties and assets held for sale |
|
| - |
|
|
| - |
|
|
| 6,970 |
| ||||||||||||
Net gains on dispositions, including taxes |
|
| - |
|
|
| - |
|
|
| 116,550 |
| ||||||||||||
Total discontinued operations |
|
| - |
|
|
| - |
|
|
| 123,520 |
| ||||||||||||
Total income tax expense |
|
| 54,609 |
|
|
| 54,564 |
|
|
| 23,090 |
| ||||||||||||
Consolidated net earnings |
|
| 925,515 |
|
|
| 739,284 |
|
|
| 353,049 |
|
|
| 1,760,959 |
|
|
| 1,292,540 |
|
|
| 925,515 |
|
Less net earnings attributable to noncontrolling interests |
|
| 44,950 |
|
|
| 100,900 |
|
|
| 8,920 |
|
|
| 63,620 |
|
|
| 48,307 |
|
|
| 44,950 |
|
Net earnings attributable to controlling interests |
|
| 880,565 |
|
|
| 638,384 |
|
|
| 344,129 |
|
|
| 1,697,339 |
|
|
| 1,244,233 |
|
|
| 880,565 |
|
Less preferred unit distributions |
|
| 6,651 |
|
|
| 7,431 |
|
|
| 18,391 |
|
|
| 6,499 |
|
|
| 6,714 |
|
|
| 6,651 |
|
Loss on preferred unit redemption/repurchase |
|
| - |
|
|
| 6,517 |
|
|
| 9,108 |
| ||||||||||||
Loss on preferred unit repurchase |
|
| 3,895 |
|
|
| - |
|
|
| - |
| ||||||||||||
Net earnings attributable to common unitholders |
| $ | 873,914 |
|
| $ | 624,436 |
|
| $ | 316,630 |
|
| $ | 1,686,945 |
|
| $ | 1,237,519 |
|
| $ | 873,914 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Weighted average common units outstanding – Basic |
|
| 525,912 |
|
|
| 501,349 |
|
|
| 487,936 |
|
|
| 536,335 |
|
|
| 532,326 |
|
|
| 525,912 |
|
Weighted average common units outstanding – Diluted |
|
| 533,944 |
|
|
| 506,391 |
|
|
| 491,546 |
|
|
| 552,300 |
|
|
| 546,666 |
|
|
| 533,944 |
|
Net earnings per unit attributable to common unitholders – Basic: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Continuing operations |
| $ | 1.66 |
|
| $ | 1.25 |
|
| $ | 0.40 |
| ||||||||||||
Discontinued operations |
|
| - |
|
|
| - |
|
|
| 0.25 |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Net earnings per unit attributable to common unitholders – Basic |
| $ | 1.66 |
|
| $ | 1.25 |
|
| $ | 0.65 |
|
| $ | 3.10 |
|
| $ | 2.29 |
|
| $ | 1.66 |
|
Net earnings per unit attributable to common unitholders – Diluted: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Continuing operations |
| $ | 1.64 |
|
| $ | 1.24 |
|
| $ | 0.39 |
| ||||||||||||
Discontinued operations |
|
| - |
|
|
| - |
|
|
| 0.25 |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Net earnings per unit attributable to common unitholders – Diluted |
| $ | 1.64 |
|
| $ | 1.24 |
|
| $ | 0.64 |
|
| $ | 3.06 |
|
| $ | 2.27 |
|
| $ | 1.64 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions per common unit |
| $ | 1.52 |
|
| $ | 1.32 |
|
| $ | 1.12 |
|
| $ | 1.76 |
|
| $ | 1.68 |
|
| $ | 1.52 |
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
47
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
|
| Years Ended December 31, |
|
| Year Ended December 31, |
| ||||||||||||||||||
|
| 2015 |
|
| 2014 |
|
| 2013 |
|
| 2017 |
|
| 2016 |
|
| 2015 |
| ||||||
Consolidated net earnings |
| $ | 925,515 |
|
| $ | 739,284 |
|
| $ | 353,049 |
|
| $ | 1,760,959 |
|
| $ | 1,292,540 |
|
| $ | 925,515 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation losses, net |
|
| (208,901 | ) |
|
| (171,401 | ) |
|
| (234,680 | ) | ||||||||||||
Unrealized gains (losses) and amortization on derivative contracts, net |
|
| (17,457 | ) |
|
| (6,498 | ) |
|
| 19,590 |
| ||||||||||||
Foreign currency translation gains (losses), net |
|
| 63,455 |
|
|
| (135,958 | ) |
|
| (208,901 | ) | ||||||||||||
Unrealized gains (losses) on derivative contracts, net |
|
| 22,591 |
|
|
| (1,349 | ) |
|
| (17,457 | ) | ||||||||||||
Comprehensive income |
|
| 699,157 |
|
|
| 561,385 |
|
|
| 137,959 |
|
|
| 1,847,005 |
|
|
| 1,155,233 |
|
|
| 699,157 |
|
Net earnings attributable to noncontrolling interests |
|
| (44,950 | ) |
|
| (100,900 | ) |
|
| (8,920 | ) |
|
| (63,620 | ) |
|
| (48,307 | ) |
|
| (44,950 | ) |
Other comprehensive loss attributable to noncontrolling interest |
|
| 32,862 |
|
|
| 12,666 |
|
|
| 12,261 |
| ||||||||||||
Other comprehensive loss (gain) attributable to noncontrolling interests |
|
| (49,278 | ) |
|
| (12,601 | ) |
|
| 32,862 |
| ||||||||||||
Comprehensive income attributable to common unitholders |
| $ | 687,069 |
|
| $ | 473,151 |
|
| $ | 141,300 |
|
| $ | 1,734,107 |
|
| $ | 1,094,325 |
|
| $ | 687,069 |
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
48
CONSOLIDATED STATEMENTS OF CAPITAL
(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, 2013 |
|
| 21,300 |
|
| $ | 582,200 |
|
|
| 461,770 |
|
| $ | 12,486,817 |
|
|
| 1,893 |
|
| $ | 51,194 |
|
|
| - |
|
| $ | - |
|
| $ | 653,125 |
|
| $ | 13,773,336 |
|
Consolidated net earnings |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 342,921 |
|
|
| - |
|
|
| 1,208 |
|
|
| - |
|
|
| - |
|
|
| 8,920 |
|
|
| 353,049 |
|
Effect of equity compensation plans |
|
| - |
|
|
| - |
|
|
| 1,351 |
|
|
| 93,705 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 93,705 |
|
Issuance of units in exchange for contribution of equity offering proceeds |
|
| - |
|
|
| - |
|
|
| 35,650 |
|
|
| 1,437,697 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 1,437,697 |
|
Redemption of preferred units |
|
| (19,300 | ) |
|
| (482,200 | ) |
|
| - |
|
|
| (515 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (482,715 | ) |
Issuance of warrant by Prologis, Inc. |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 32,359 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 32,359 |
|
Capital contributions |
|
| - |
|
|
| - |
|
|
| - |
|
|
|
|
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 146,130 |
|
|
| 146,130 |
|
Settlement of noncontrolling interests |
|
| - |
|
|
| - |
|
|
| 28 |
|
|
| (7,868 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (242,745 | ) |
|
| (250,613 | ) |
Foreign currency translation losses, net |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (221,633 | ) |
|
| - |
|
|
| (786 | ) |
|
| - |
|
|
| - |
|
|
| (12,261 | ) |
|
| (234,680 | ) |
Unrealized gains and amortization on derivative contracts, net |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 19,521 |
|
|
| - |
|
|
| 69 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 19,590 |
|
Distributions and allocations |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (571,846 | ) |
|
| (126 | ) |
|
| (3,476 | ) |
|
| - |
|
|
| - |
|
|
| (136,083 | ) |
|
| (711,405 | ) |
Balance at December 31, 2013 |
|
| 2,000 |
|
| $ | 100,000 |
|
|
| 498,799 |
|
| $ | 13,611,158 |
|
|
| 1,767 |
|
| $ | 48,209 |
|
|
| - |
|
| $ | - |
|
| $ | 417,086 |
|
| $ | 14,176,453 |
|
Consolidated net earnings |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 636,183 |
|
|
| - |
|
|
| 2,201 |
|
|
| - |
|
|
| - |
|
|
| 100,900 |
|
|
| 739,284 |
|
Effect of equity compensation plans |
|
| - |
|
|
| - |
|
|
| 1,383 |
|
|
| 88,438 |
|
|
| - |
|
|
| 450 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 88,888 |
|
Issuance of units in exchange for contribution of at-the-market offering proceeds |
|
| - |
|
|
| - |
|
|
| 3,316 |
|
|
| 140,135 |
|
|
| - |
|
|
| - |
|
|
| - |
|
| �� | - |
|
|
| - |
|
|
| 140,135 |
|
Repurchase of preferred units |
|
| (435 | ) |
|
| (21,765 | ) |
|
| - |
|
|
| (5,878 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (27,643 | ) |
Issuance of units in exchange for proceeds from exercise of warrant |
|
| - |
|
|
| - |
|
|
| 6,000 |
|
|
| 213,840 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 213,840 |
|
Formation of Prologis U.S. Logistics Venture |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 13,721 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 442,251 |
|
|
| 455,972 |
|
Consolidation of Prologis North American Industrial Fund |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 12,507 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 554,493 |
|
|
| 567,000 |
|
Capital contributions |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 14,464 |
|
|
| 14,464 |
|
Settlement of noncontrolling interests |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 33,803 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (36,243 | ) |
|
| (2,440 | ) |
Foreign currency translation losses, net |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (167,950 | ) |
|
| - |
|
|
| (548 | ) |
|
| - |
|
|
| - |
|
|
| (12,666 | ) |
|
| (181,164 | ) |
Unrealized losses and amortization on derivative contracts, net |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (9,219 | ) |
|
| - |
|
|
| (23 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (9,242 | ) |
Distributions and allocations |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (669,464 | ) |
|
| - |
|
|
| (2,100 | ) |
|
| - |
|
|
| - |
|
|
| (320,384 | ) |
|
| (991,948 | ) |
Balance at December 31, 2014 |
|
| 1,565 |
|
| $ | 78,235 |
|
|
| 509,498 |
|
| $ | 13,897,274 |
|
|
| 1,767 |
|
| $ | 48,189 |
|
|
| - |
|
| $ | - |
|
| $ | 1,159,901 |
|
| $ | 15,183,599 |
|
Consolidated net earnings |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 869,439 |
|
|
| - |
|
|
| 7,733 |
|
|
| - |
|
|
| 3,393 |
|
|
| 44,950 |
|
|
| 925,515 |
|
Effect of equity compensation plans |
|
| - |
|
|
| - |
|
|
| 1,475 |
|
|
| 57,469 |
|
|
| 303 |
|
|
| 26,234 |
|
|
| - |
|
|
|
|
|
|
| - |
|
|
| 83,703 |
|
Issuance of units in exchange for contribution of at-the-market offering proceeds |
|
| - |
|
|
| - |
|
|
| 1,662 |
|
|
| 71,548 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 71,548 |
|
Issuance of units upon conversion of exchangeable debt |
|
| - |
|
|
| - |
|
|
| 11,872 |
|
|
| 502,732 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 502,732 |
|
Issuance of units related to KTR acquisition |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 4,500 |
|
|
| 181,170 |
|
|
| - |
|
|
|
|
|
|
| - |
|
|
| 181,170 |
|
Issuance of units related to other acquisitions |
|
|
|
|
|
|
|
|
|
|
|
|
|
| - |
|
|
| 157 |
|
|
| 6,534 |
|
|
| 8,894 |
|
|
| 365,036 |
|
|
|
|
|
|
| 371,570 |
|
Capital contributions |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 2,355,596 |
|
|
| 2,355,596 |
|
Foreign currency translation losses, net |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (173,852 | ) |
|
| - |
|
|
| (1,520 | ) |
|
| - |
|
|
| (667 | ) |
|
| (32,862 | ) |
|
| (208,901 | ) |
Unrealized losses and amortization on derivative contracts, net |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (17,240 | ) |
|
| - |
|
|
| (151 | ) |
|
| - |
|
|
| (66 | ) |
|
| - |
|
|
| (17,457 | ) |
Reallocation of capital |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 186,918 |
|
|
| - |
|
|
| (70,965 | ) |
|
| - |
|
|
| (115,953 | ) |
|
| - |
|
|
| - |
|
Distributions and other |
|
| - |
|
|
| - |
|
|
| 5 |
|
|
| (804,588 | ) |
|
| (16 | ) |
|
| (10,541 | ) |
|
| - |
|
|
| (5,752 | ) |
|
| (207,358 | ) |
|
| (1,028,239 | ) |
Balance at December 31, 2015 |
|
| 1,565 |
|
| $ | 78,235 |
|
|
| 524,512 |
|
| $ | 14,589,700 |
|
|
| 6,711 |
|
| $ | 186,683 |
|
|
| 8,894 |
|
| $ | 245,991 |
|
| $ | 3,320,227 |
|
| $ | 18,420,836 |
|
| 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, 2015 |
| 1,565 |
|
| $ | 78,235 |
|
|
| 509,498 |
|
| $ | 13,897,274 |
|
|
| 1,767 |
|
| $ | 48,189 |
|
|
| - |
|
| $ | - |
|
| $ | 1,159,901 |
|
| $ | 15,183,599 |
|
Consolidated net earnings |
| - |
|
|
| - |
|
|
| - |
|
|
| 869,439 |
|
|
| - |
|
|
| 7,733 |
|
|
| - |
|
|
| 3,393 |
|
|
| 44,950 |
|
|
| 925,515 |
|
Effect of equity compensation plans |
| - |
|
|
| - |
|
|
| 1,475 |
|
|
| 57,469 |
|
|
| 303 |
|
|
| 26,234 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 83,703 |
|
Issuance of units in exchange for contribution of at-the-market offering proceeds |
| - |
|
|
| - |
|
|
| 1,662 |
|
|
| 71,548 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 71,548 |
|
Issuance of units upon conversion of exchangeable debt |
| - |
|
|
| - |
|
|
| 11,872 |
|
|
| 502,732 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 502,732 |
|
Issuance of units related to KTR transaction |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 4,500 |
|
|
| 181,170 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 181,170 |
|
Issuance of units related to other acquisitions |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 157 |
|
|
| 6,534 |
|
|
| 8,894 |
|
|
| 365,036 |
|
|
| - |
|
|
| 371,570 |
|
Capital contributions |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 2,355,596 |
|
|
| 2,355,596 |
|
Foreign currency translation losses, net |
| - |
|
|
| - |
|
|
| - |
|
|
| (173,852 | ) |
|
| - |
|
|
| (1,520 | ) |
|
| - |
|
|
| (667 | ) |
|
| (32,862 | ) |
|
| (208,901 | ) |
Unrealized losses on derivative contracts, net |
| - |
|
|
| - |
|
|
| - |
|
|
| (17,240 | ) |
|
| - |
|
|
| (151 | ) |
|
| - |
|
|
| (66 | ) |
|
| - |
|
|
| (17,457 | ) |
Reallocation of capital |
| - |
|
|
| - |
|
|
| - |
|
|
| 186,918 |
|
|
| - |
|
|
| (70,965 | ) |
|
| - |
|
|
| (115,953 | ) |
|
| - |
|
|
| - |
|
Distributions and other |
| - |
|
|
| - |
|
|
| 5 |
|
|
| (804,588 | ) |
|
| (16 | ) |
|
| (10,541 | ) |
|
| - |
|
|
| (5,752 | ) |
|
| (207,358 | ) |
|
| (1,028,239 | ) |
Balance at December 31, 2015 |
| 1,565 |
|
| $ | 78,235 |
|
|
| 524,512 |
|
| $ | 14,589,700 |
|
|
| 6,711 |
|
| $ | 186,683 |
|
|
| 8,894 |
|
| $ | 245,991 |
|
| $ | 3,320,227 |
|
| $ | 18,420,836 |
|
Consolidated net earnings |
| - |
|
|
| - |
|
|
| - |
|
|
| 1,209,932 |
|
|
| - |
|
|
| 14,232 |
|
|
| - |
|
|
| 20,069 |
|
|
| 48,307 |
|
|
| 1,292,540 |
|
Effect of equity compensation plans |
| - |
|
|
| - |
|
|
| 2,282 |
|
|
| 91,214 |
|
|
| 440 |
|
|
| 26,483 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 117,697 |
|
Issuance of units related to acquisitions |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 71 |
|
|
| 3,162 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 3,162 |
|
Conversion of limited partners units |
| - |
|
|
| - |
|
|
| 1,877 |
|
|
| 52,256 |
|
|
| (1,877 | ) |
|
| (52,256 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
Foreign currency translation gains (losses), net |
| - |
|
|
| - |
|
|
| - |
|
|
| (144,730 | ) |
|
| - |
|
|
| (1,457 | ) |
|
| - |
|
|
| (2,372 | ) |
|
| 12,601 |
|
|
| (135,958 | ) |
Unrealized losses on derivative contracts, net |
| - |
|
|
| - |
|
|
| - |
|
|
| (1,314 | ) |
|
| - |
|
|
| (13 | ) |
|
| - |
|
|
| (22 | ) |
|
| - |
|
|
| (1,349 | ) |
Reallocation of capital |
| - |
|
|
| - |
|
|
| - |
|
|
| 8,657 |
|
|
| - |
|
|
| (12,414 | ) |
|
| - |
|
|
| 3,757 |
|
|
| - |
|
|
| - |
|
Distributions and other |
| - |
|
|
| - |
|
|
| - |
|
|
| (892,869 | ) |
|
| (22 | ) |
|
| (14,247 | ) |
|
| - |
|
|
| (23,006 | ) |
|
| (308,666 | ) |
|
| (1,238,788 | ) |
Balance at December 31, 2016 |
| 1,565 |
|
| $ | 78,235 |
|
|
| 528,671 |
|
| $ | 14,912,846 |
|
|
| 5,323 |
|
| $ | 150,173 |
|
|
| 8,894 |
|
| $ | 244,417 |
|
| $ | 3,072,469 |
|
| $ | 18,458,140 |
|
Consolidated net earnings |
| - |
|
|
| - |
|
|
| - |
|
|
| 1,652,325 |
|
|
| - |
|
|
| 18,372 |
|
|
| - |
|
|
| 26,642 |
|
|
| 63,620 |
|
|
| 1,760,959 |
|
Effect of equity compensation plans |
| - |
|
|
| - |
|
|
| 2,000 |
|
|
| 74,526 |
|
|
| 1,386 |
|
|
| 41,446 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 115,972 |
|
Capital contributions |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 254,214 |
|
|
| 254,214 |
|
Repurchase of preferred units |
| (186 | ) |
|
| (9,287 | ) |
|
| - |
|
|
| (3,895 | ) |
|
| - |
| �� |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (13,182 | ) |
Purchase of noncontrolling interests |
| - |
|
|
| - |
|
|
| - |
|
|
| (202,040 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (587,976 | ) |
|
| (790,016 | ) |
Redemption of limited partnership units |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (369 | ) |
|
| (23,831 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (23,831 | ) |
Conversion of limited partners units |
| - |
|
|
| - |
|
|
| 1,515 |
|
|
| 47,726 |
|
|
| (684 | ) |
|
| (18,753 | ) |
|
| - |
|
|
| - |
|
|
| (28,973 | ) |
|
| - |
|
Foreign currency translation gains, net |
| - |
|
|
| - |
|
|
| - |
|
|
| 13,810 |
|
|
| - |
|
|
| 146 |
|
|
| - |
|
|
| 221 |
|
|
| 49,278 |
|
|
| 63,455 |
|
Unrealized gains on derivative contracts, net |
| - |
|
|
| - |
|
|
| - |
|
|
| 22,005 |
|
|
| - |
|
|
| 234 |
|
|
| - |
|
|
| 352 |
|
|
| - |
|
|
| 22,591 |
|
Reallocation of capital |
| - |
|
|
| - |
|
|
| - |
|
|
| (12,143 | ) |
|
| - |
|
|
| 11,829 |
|
|
| - |
|
|
| 314 |
|
|
| - |
|
|
| - |
|
Distributions and other |
| - |
|
|
| - |
|
|
| - |
|
|
| (942,950 | ) |
|
| - |
|
|
| (14,215 | ) |
|
| - |
|
|
| (23,006 | ) |
|
| (162,390 | ) |
|
| (1,142,561 | ) |
Balance at December 31, 2017 |
| 1,379 |
|
| $ | 68,948 |
|
|
| 532,186 |
|
| $ | 15,562,210 |
|
|
| 5,656 |
|
| $ | 165,401 |
|
|
| 8,894 |
|
| $ | 248,940 |
|
| $ | 2,660,242 |
|
| $ | 18,705,741 |
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
49
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
| Years Ended December 31, |
|
| Years Ended December 31, |
| ||||||||||||||||||
|
| 2015 |
|
| 2014 |
|
| 2013 |
|
| 2017 |
|
| 2016 |
|
| 2015 |
| ||||||
Operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net earnings |
| $ | 925,515 |
|
| $ | 739,284 |
|
| $ | 353,049 |
|
| $ | 1,760,959 |
|
| $ | 1,292,540 |
|
| $ | 925,515 |
|
Adjustments to reconcile net earnings to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Straight-lined rents and amortization of above and below market leases |
|
| (59,619 | ) |
|
| (14,392 | ) |
|
| (12,080 | ) |
|
| (81,021 | ) |
|
| (93,608 | ) |
|
| (59,619 | ) |
Equity-based compensation awards |
|
| 53,665 |
|
|
| 57,478 |
|
|
| 49,239 |
|
|
| 76,640 |
|
|
| 60,341 |
|
|
| 53,665 |
|
Depreciation and amortization |
|
| 880,373 |
|
|
| 642,461 |
|
|
| 664,007 |
|
|
| 879,140 |
|
|
| 930,985 |
|
|
| 880,373 |
|
Earnings from unconsolidated entities, net |
|
| (159,262 | ) |
|
| (134,288 | ) |
|
| (97,220 | ) |
|
| (248,567 | ) |
|
| (206,307 | ) |
|
| (159,262 | ) |
Distributions from unconsolidated entities |
|
| 144,045 |
|
|
| 117,938 |
|
|
| 68,319 |
|
|
| 307,220 |
|
|
| 286,651 |
|
|
| 284,664 |
|
Net changes in operating receivables from unconsolidated entities |
|
| (38,185 | ) |
|
| (7,503 | ) |
|
| 7,540 |
| ||||||||||||
Amortization of debt and deferred financing costs |
|
| (31,841 | ) |
|
| (7,324 | ) |
|
| (24,641 | ) | ||||||||||||
Decrease (increase) in operating receivables from unconsolidated entities |
|
| (30,893 | ) |
|
| 14,823 |
|
|
| (38,185 | ) | ||||||||||||
Amortization of debt discounts (premiums), net of debt issuance costs |
|
| 751 |
|
|
| (15,137 | ) |
|
| (31,841 | ) | ||||||||||||
Gains on dispositions of investments in real estate and revaluation of equity investments upon acquisition of a controlling interest, net |
|
| (758,887 | ) |
|
| (725,790 | ) |
|
| (715,758 | ) |
|
| (1,182,965 | ) |
|
| (757,398 | ) |
|
| (758,887 | ) |
Losses on early extinguishment of debt, net |
|
| 86,303 |
|
|
| 165,300 |
|
|
| 277,014 |
| ||||||||||||
Unrealized foreign currency and derivative losses (gains) and related amortization, net |
|
| (1,019 | ) |
|
| 22,571 |
|
|
| 28,619 |
| ||||||||||||
Unrealized foreign currency and derivative losses (gains), net |
|
| 68,956 |
|
|
| (8,052 | ) |
|
| (1,019 | ) | ||||||||||||
Losses (gains) on early extinguishment of debt, net |
|
| 68,379 |
|
|
| (2,484 | ) |
|
| 86,303 |
| ||||||||||||
Deferred income tax benefit |
|
| (5,057 | ) |
|
| (87,240 | ) |
|
| (20,067 | ) |
|
| (5,005 | ) |
|
| (5,525 | ) |
|
| (5,057 | ) |
Increase in accounts receivable and other assets |
|
| (64,749 | ) |
|
| (93 | ) |
|
| (12,912 | ) | ||||||||||||
Increase (decrease) in accounts payable and accrued expenses and other liabilities |
|
| (7,872 | ) |
|
| (63,871 | ) |
|
| (80,120 | ) | ||||||||||||
Decrease (increase) in accounts receivable and other assets |
|
| 37,278 |
|
|
| (106,337 | ) |
|
| (64,749 | ) | ||||||||||||
Increase in accounts payable and accrued expenses and other liabilities |
|
| 36,374 |
|
|
| 26,513 |
|
|
| 4,426 |
| ||||||||||||
Net cash provided by operating activities |
|
| 963,410 |
|
|
| 704,531 |
|
|
| 484,989 |
|
|
| 1,687,246 |
|
|
| 1,417,005 |
|
|
| 1,116,327 |
|
Investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate development activity |
|
| (1,339,904 | ) |
|
| (1,064,220 | ) |
|
| (853,082 | ) | ||||||||||||
Real estate development |
|
| (1,606,133 | ) |
|
| (1,641,560 | ) |
|
| (1,339,904 | ) | ||||||||||||
Real estate acquisitions |
|
| (890,183 | ) |
|
| (612,330 | ) |
|
| (514,611 | ) |
|
| (442,696 | ) |
|
| (458,516 | ) |
|
| (890,183 | ) |
KTR acquisition, net of cash received |
|
| (4,809,499 | ) |
|
| - |
|
|
| - |
| ||||||||||||
KTR transaction, net of cash received |
|
| - |
|
|
| - |
|
|
| (4,809,499 | ) | ||||||||||||
Tenant improvements and lease commissions on previously leased space |
|
| (154,564 | ) |
|
| (133,957 | ) |
|
| (145,424 | ) |
|
| (153,255 | ) |
|
| (165,933 | ) |
|
| (154,564 | ) |
Nondevelopment capital expenditures |
|
| (83,351 | ) |
|
| (78,610 | ) |
|
| (82,610 | ) |
|
| (110,635 | ) |
|
| (101,677 | ) |
|
| (83,351 | ) |
Proceeds from dispositions and contributions of real estate properties |
|
| 2,795,249 |
|
|
| 2,285,488 |
|
|
| 5,409,745 |
|
|
| 3,236,603 |
|
|
| 2,826,408 |
|
|
| 2,795,249 |
|
Investments in and advances to unconsolidated entities |
|
| (474,420 | ) |
|
| (739,635 | ) |
|
| (1,221,155 | ) |
|
| (249,735 | ) |
|
| (265,951 | ) |
|
| (474,420 | ) |
Acquisition of a controlling interest in unconsolidated co-investment ventures, net of cash received |
|
| - |
|
|
| (590,390 | ) |
|
| (678,642 | ) | ||||||||||||
Acquisition of a controlling interest in an unconsolidated venture, net of cash received |
|
| (374,605 | ) |
|
| - |
|
|
| - |
| ||||||||||||
Return of investment from unconsolidated entities |
|
| 170,025 |
|
|
| 244,306 |
|
|
| 411,853 |
|
|
| 209,151 |
|
|
| 776,550 |
|
|
| 29,406 |
|
Proceeds from repayment of notes receivable backed by real estate |
|
| 9,866 |
|
|
| 188,000 |
|
|
| - |
|
|
| 32,100 |
|
|
| 202,950 |
|
|
| 9,866 |
|
Proceeds from the settlement of net investment hedges |
|
| 129,149 |
|
|
| 31,409 |
|
|
| 8,842 |
|
|
| 7,541 |
|
|
| 79,767 |
|
|
| 129,149 |
|
Payments on the settlement of net investment hedges |
|
| (981 | ) |
|
| (18,370 | ) |
|
| (994 | ) |
|
| (5,058 | ) |
|
| - |
|
|
| (981 | ) |
Net cash provided by (used in) investing activities |
|
| (4,648,613 | ) |
|
| (488,309 | ) |
|
| 2,333,922 |
|
|
| 543,278 |
|
|
| 1,252,038 |
|
|
| (4,789,232 | ) |
Financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common partnership units in exchange for contributions from Prologis, Inc. |
|
| 90,258 |
|
|
| 378,247 |
|
|
| 1,505,791 |
|
|
| 32,858 |
|
|
| 39,470 |
|
|
| 90,258 |
|
Distributions paid on common and preferred units |
|
| (820,989 | ) |
|
| (674,344 | ) |
|
| (580,862 | ) |
|
| (980,105 | ) |
|
| (931,559 | ) |
|
| (820,989 | ) |
Repurchase and redemption of preferred units |
|
| - |
|
|
| (27,643 | ) |
|
| (482,500 | ) | ||||||||||||
Repurchase of preferred units |
|
| (13,182 | ) |
|
| - |
|
|
| - |
| ||||||||||||
Noncontrolling interests contributions |
|
| 2,355,367 |
|
|
| 468,280 |
|
|
| 145,522 |
|
|
| 240,925 |
|
|
| 2,168 |
|
|
| 2,355,367 |
|
Noncontrolling interests distributions |
|
| (199,845 | ) |
|
| (313,272 | ) |
|
| (113,928 | ) |
|
| (170,567 | ) |
|
| (306,297 | ) |
|
| (199,845 | ) |
Purchase of noncontrolling interests |
|
| (2,163 | ) |
|
| (2,440 | ) |
|
| (245,803 | ) |
|
| (790,016 | ) |
|
| (2,232 | ) |
|
| (2,163 | ) |
Redemption of common limited partnership units |
|
| (23,831 | ) |
|
| - |
|
|
| - |
| ||||||||||||
Tax paid for shares of the Parent withheld |
|
| (19,775 | ) |
|
| (8,570 | ) |
|
| (12,298 | ) | ||||||||||||
Debt and capital issuance costs paid |
|
| (32,012 | ) |
|
| (23,420 | ) |
|
| (77,017 | ) |
|
| (7,054 | ) |
|
| (20,123 | ) |
|
| (32,012 | ) |
Net payments on credit facilities |
|
| (7,970 | ) |
|
| (717,369 | ) |
|
| (93,075 | ) | ||||||||||||
Net proceeds from (payments on) credit facilities |
|
| 283,255 |
|
|
| 33,435 |
|
|
| (7,970 | ) | ||||||||||||
Repurchase and payments of debt |
|
| (3,156,294 | ) |
|
| (4,205,806 | ) |
|
| (6,012,433 | ) |
|
| (3,578,889 | ) |
|
| (2,301,647 | ) |
|
| (3,156,294 | ) |
Proceeds from issuance of debt |
|
| 5,381,862 |
|
|
| 4,779,950 |
|
|
| 3,588,683 |
|
|
| 2,419,797 |
|
|
| 1,369,890 |
|
|
| 5,381,862 |
|
Net cash provided by (used in) financing activities |
|
| 3,608,214 |
|
|
| (337,817 | ) |
|
| (2,365,622 | ) |
|
| (2,606,584 | ) |
|
| (2,125,465 | ) |
|
| 3,595,916 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign currency exchange rate changes on cash |
|
| (9,623 | ) |
|
| (18,842 | ) |
|
| (62,970 | ) |
|
| 15,790 |
|
|
| (342 | ) |
|
| (9,623 | ) |
Net increase (decrease) in cash and cash equivalents |
|
| (86,612 | ) |
|
| (140,437 | ) |
|
| 390,319 |
|
|
| (360,270 | ) |
|
| 543,236 |
|
|
| (86,612 | ) |
Cash and cash equivalents, beginning of year |
|
| 350,692 |
|
|
| 491,129 |
|
|
| 100,810 |
|
|
| 807,316 |
|
|
| 264,080 |
|
|
| 350,692 |
|
Cash and cash equivalents, end of year |
| $ | 264,080 |
|
| $ | 350,692 |
|
| $ | 491,129 |
|
| $ | 447,046 |
|
| $ | 807,316 |
|
| $ | 264,080 |
|
See Note 19 for information on noncash investing and financing activities and other information.
The accompanying notes are an integral part of these Consolidated Financial Statements.
50
PROLOGIS, INC. AND PROLOGIS, L.P.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NoteNOTE 1. Description of BusinessDESCRIPTION OF THE 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 Operating Partnership,OP, we are engaged in the ownership, acquisition, development and management of industriallogistics properties in globalthe world’s primary population centers and regional markets throughoutin those supported by extensive transportation infrastructure. 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 Americas, Europe and Asia.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 industriallogistics properties. Our Strategic Capital segment represents the management of co-investment ventures and other unconsolidated entities. See Note 18 for further discussion of our business segments. Unless otherwise indicated, the Notes to the Consolidated Financial Statements apply to both the Parent and the Operating Partnership.OP. The terms “the Company,” “Prologis,” “we,” “our” or “us” means the Parent and Operating PartnershipOP collectively.
For each share of common stock or preferred stock the Parent issues, the Operating PartnershipOP issues a corresponding common or preferred partnership unit, as applicable, to the Parent in exchange for the contribution of the proceeds from the stock issuance. At December 31, 2015,2017, the Parent owned an approximate 97.12%97.41% common general partnership interest in the Operating PartnershipOP and 100% of the preferred units in the Operating Partnership.OP. The remaining approximate 2.88%2.59% common limited partnership interests, which include 8.9 million units of Class A common limited partnership units (“Class A Units”) in the Operating Partnership,OP, are owned by unaffiliated investors and certain current and former directors and officers of the Parent. Each partner’s percentage interest in the Operating PartnershipOP is determined based on the number of Operating PartnershipOP units owned asheld, including the number of OP units into which Class A Units are convertible, compared to total Operating PartnershipOP units outstanding as ofat 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 Operating PartnershipOP 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.Capital in the Consolidated Statement of Capital of the OP.
As the sole general partner of the Operating Partnership,OP, the Parent has complete responsibility and discretion in the day-to-day management and control of the Operating PartnershipOP and we operate the Parent and the Operating PartnershipOP as one enterprise. The management of the Parent consists of the same members as the management of the Operating Partnership.OP. These members are officers of the Parent and employees of the Operating PartnershipOP or one of its subsidiaries. As general partner with control of the Operating Partnership,OP, the Parent is the primary beneficiary and therefore consolidates the Operating Partnership.OP. Because the Parent’s only significant asset is its investment in the Operating Partnership,OP, the assets and liabilities of the Parent and the Operating PartnershipOP are the same on their respective financial statements.
Information with respect to the square footage, number of buildings and acres of land is unauditedunaudited.
NoteNOTE 2. Summary of Significant Accounting PoliciesSUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Consolidation. 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.
We consolidate all entities that are wholly owned and those in which we own less than 100% of the equity but control, as well as any variable interest entities (“VIEs”) in which we are the primary beneficiary. We evaluate our ability to control an entity and whether the entity is a variable interest entityVIE and we are the primary beneficiary through consideration of substantive terms of the arrangement to identify which enterprise has the power to direct the activities of the entity that most significantly impacts the entity’s economic performance and the obligation to absorb losses of the entity orand the right to receive benefits from the entity.
For entities that are not defined as variable interest entities,VIEs, we first consider whether we are the general partner or the limited partner (or the equivalent in such investments that are not structured as partnerships). We consolidate entities in which we are the general partner and the limited partners in such entities do not have rights that would preclude control. For entities in which we are the general partner but do not control the entity as the other partners hold substantive participating or kick-out rights, we apply the equity method of accounting since, as the general partner, we have the ability to influence the venture. For ventures for which we are a limited partner or our investment is in an entity that is not structured similar to a partnership, we consider factors such as ownership interest, voting control, authority to make decisions, and contractual and substantive participating rights of the partners. In instances where the factors indicate that we controlhave a controlling financial interest in the venture, we consolidate the entity.
Reclassifications. Certain amounts included in the Consolidated Financial Statements for 20142016 and 20132015 have been reclassified to conform to the 20152017 financial statement presentation.
Use of Estimates. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and revenuerevenues and expenses during the reporting
period. Although we believe the assumptions and estimates we made are reasonable and appropriate, as discussed in the applicable sections throughout the Consolidated Financial Statements, different assumptions and estimates could materially impact our reported results.
Foreign Operations. The U.S. dollar is the functional currency for our consolidated subsidiaries and unconsolidated entities operating in the United StatesU.S. and Mexico and certain of our consolidated subsidiaries that operate as holding companies for foreign investments. The functional currency for our consolidated subsidiaries and unconsolidated entities operating in countries other than the United States and Mexicocountries is the principal currency in which the entity’s assets, liabilities, income and expenses are denominated, which may be different from the local currency of the country of incorporation or where the entity conducts its operations.
The functional currencies of our consolidated subsidiariesentities outside of the U.S. and unconsolidated entitiesMexico generally include the Brazilian real, British pound sterling, Canadian dollar, Chinese renminbi,yuan, euro, Japanese yen and Singapore dollar. We take part in business transactions denominated in these and other local currencies where we operate.
For our consolidated subsidiaries whose functional currency is not the U.S. dollar, we translate their financial statements into the U.S. dollar at the time we consolidate those subsidiaries’ financial statements. Generally, assets and liabilities are translated at the exchange rate in effect at the balance sheet date. The resulting translation adjustments are included in Accumulated Other Comprehensive LossIncome (Loss) (“AOCI/L”) in the Consolidated Balance Sheets (“AOCI”).Sheets. Certain balance sheet items, primarily equity and capital-related accounts, are reflected at the historical exchange rate. Income statement accounts are translated using the average exchange rate for the period and income statement accounts that represent significant nonrecurring transactions are translated at the rate in effect at the date of the transaction. We translate our share of the net earningsoperating income or losses of our unconsolidated entities whose functional currency is not the U.S. dollar at the average exchange rate for the period.period and significant nonrecurring transactions of the unconsolidated entities are translated at the rate in effect at the date of the transaction.
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We and certain of our consolidated subsidiaries have intercompany and third-party debt that is not denominated in the entity’s functional currency. When the debt is remeasured against the functional currency of the entity, a gain or loss can result. The resulting adjustment is reflected in resultsForeign Currency and Derivative Gains (Losses), Net in the Consolidated Statements of operations,Income, unless it is intercompany debt that is deemed to be long-term in nature and then the adjustment is reflected as a cumulative translation adjustment in AOCI/LAOCI.
Business Combinations.Acquisitions. WhenBased on new accounting guidance, beginning January 1, 2017, we acquireapply a screen test to evaluate if substantially all the fair value of the acquired property is concentrated in a single identifiable asset or group of similar identifiable assets to determine whether a transaction is accounted for as an asset acquisition or business combination. As most of our real estate acquisitions are concentrated in either a single or a group of similar identifiable assets, our real estate transactions are generally accounted for as asset acquisitions, which permits the capitalization of transaction costs to the basis of the acquired property. For transactions that qualify as a business combination in 2017 and for all acquisitions in 2016 and 2015, transaction costs are expensed as incurred. Whether a transaction is determined to be an acquisition of a business or individual operating properties, asset, we allocate the purchase price to the various components of the acquisition based on the fair value of the acquired assets and assumed liabilities, including an allocation to the individual buildings acquired. We generally acquire operating properties that meet the definition of a business and we expense transaction costs as incurred. The initial allocation of the purchase price is based on management’s preliminary assessment, which may differ when final information becomes available. Subsequent adjustments madeThe transaction costs related to the initial purchase price allocationacquisition of land and the formation of equity method investments are made within the allocation period, not to exceed one year.capitalized.
When we obtain control of an unconsolidated entity and the acquisition qualifies as a business, we account for the acquisition in accordance with the guidance for a business combination achieved in stages. We remeasure our previously held interest in the unconsolidated entity at its acquisition-date fair value and recognize the resulting gain or loss, if any, in earnings at the acquisition date.
We allocate the purchase price using primarily Level 2 and Level 3 inputs (further defined in Fair Value Measurements below) as follows:
Investments in Real Estate PropertiesProperties.. We value operating properties as if vacant. We estimate fair value generally by applying an income approach methodology using a discounted cash flow analysis. Key assumptions in the discounted cash flow analysis include market rents, growth rates and discount and capitalization rates. We determine discount and capitalization rates by market based on recent transactions and other market data. The fair value of land is generally based on relevant market data, such as a comparison of the subject site to similar parcels that have recently been sold or are currently being offered on the market for sale.
Intangible AssetsLease Intangibles. We determine the portion of the purchase price related to intangible assets and liabilities as follows:
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Above and Below Market Leases. We recognize an asset or liability for acquired in-place leases with favorable or unfavorable rents based on our estimate of current market rents of the applicable markets. The value is recorded in either Other Assets or Other Liabilities, as appropriate, and is amortized over the term of the respective leases, including any bargain renewal options, to rental revenues.
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Foregone Rent. We calculate the value of the revenue and recovery of costs foregone during a reasonable lease-up period, as if the space was vacant, in each of the applicable markets. The values are recorded in Other Assets and amortized over the remaining life of the respective leases to amortization expense.
Leasing Commissions. We recognize an asset for leasing commissions upon the acquisition of in-place leases based on our estimate of the cost to lease space in the applicable markets. The value is recorded in Other Assets and amortized over the remaining life of the respective leases to amortization expense.
Debt. We estimate the fair value of debt based on contractual future cash flows discounted using borrowing spreads and market interest rates that would be available to us for the issuance of debt with similar terms and remaining maturities. In the case of publicly traded debt, we estimate the fair value based on available market data. Any discount or premium to the principal amount is included in the carrying value and amortized to interest expense over the remaining term of the related debt using the effective interest method.
Noncontrolling Interests. We estimate the portion of the fair value of the net assets owned by third parties based on the fair value of the consolidated net assets, principally real estate properties and debt.
Working Capital. We estimate the fair value of other acquired assets and assumed liabilities on the best information available.
Fair Value MeasurementsMeasurements.. The objective of fair value is to determine the price that would be received on the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (the exit price). We estimate fair value using available market information and valuation methodologies we believe to be appropriate for these purposes. Considerable judgment and a high degree of subjectivity are involved in developing these estimates and, accordingly, they are not necessarily indicative of amounts that we would realize on disposition. The fair value hierarchy consists of three broad levels:
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Level 1 — Quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date.
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Level 2 — Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
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Level 3 — Unobservable inputs for the asset or liability.
Recurring Fair Value Measurements.Measurements on a Recurring Basis. We estimate the fair value of our financial instruments using available market information and valuation methodologies we believe to be appropriate for these purposes as follows:purposes.
We determine the fair value of our derivative financial instruments using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves, foreign exchange rates, and implied volatilities. We determine the fair values of our interest rate swaps using the market standard methodology of netting the discounted future fixed cash receipts or payments and the discounted expected variable cash payments. We base the variable cash payments on an expectation of future interest rates, or forward curves, derived from observable market interest rate curves. We base the fair values of our net investment hedges on the change in the spot rate at the end of the period as compared with the strike price at inception. |
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We incorporate credit valuation adjustments to appropriately reflect both our nonperformance risk for us and the respective counterparty’s nonperformance riskcounterparty in the fair value measurements. In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we consider the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts and guarantees.
We have determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy. Although the credit valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by us and our counterparties, we assess the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and have determined that the credit valuation adjustments are not significant to the overall valuation of our derivatives.
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Nonrecurring Fair Value Measurements.Measurements on a Nonrecurring Basis. Assets measured at fair value on a nonrecurring basis generally consist of real estate assets and investments in and advances to unconsolidated entities that were subject to impairment charges related to our change of intent to sell the investments and through our recoverability analysis discussed below. We estimate fair value based on expected sales prices in the market (Level 2) or by applying the income approach methodology using a discounted cash flow analysis (Level 3).
Long-Lived Assets.Fair Value of Financial Instruments. We estimate the fair value of our senior notes for disclosure purposes based on quoted market prices for the same (Level 1) or similar (Level 2) issues when current quoted market prices are available. We estimate the fair value of our credit facilities, term loans, secured mortgage debt and assessment bonds by discounting the future cash flows using rates and borrowing spreads currently available to us (Level 3).
Real Estate AssetsAssets.. Real estate assets are carried at depreciated cost. We capitalize costs incurred in developing, renovating, rehabilitating and improving real estate assets as part of the investment basis of real estate assets.basis. We expense costs for repairs and maintenance of the real estate assets as incurred.
During the land development and construction periods of qualifying projects, we capitalize interest costs, insurance, real estate taxes and general and administrative costs of the personnel performing the development, renovation, and rehabilitation; if such costs are incremental and identifiable to a specific activity to ready the asset for its intended use. We capitalize transaction costs relatesrelated to the acquisition of land for future development.development and operating properties that qualify as asset acquisitions. We capitalize costs incurred to successfully originate a lease that result directly from and are essential to acquire that lease, including internal costs that are
incremental and identifiable as leasing activities. Leasing costs that meet the requirements for capitalization are presented as a component of Other Assets.
We charge the depreciable portions of real estate assets to depreciation expense on a straight-line basis over the respective estimated useful lives. Depreciation commences when the asset is ready for its intended use, which we define as the earlier of stabilization (90% occupied) or one year after completion of construction. We generally use the following useful lives: 5 to 7 years for capital improvements, 10 years for standard tenant improvements, 25 years for depreciable land improvements, 30 years for operating properties acquired and 40 years for operating properties we develop. We depreciate building improvements on land parcels subject to ground leases over the shorter of the estimated building improvement life or the contractual term of the underlying ground lease. Capitalized leasing costs are amortized over the estimated remaining lease term. Our weighted average lease term on leases signed during 2017, based on square feet for all leases, in effect at December 31, 2015, was six years.54 months.
We assess the carrying values of our respective long-livedreal estate assets, whenever events or changes in circumstances indicate that the carrying amounts of these assets may not be fully recoverable. We measure the recoverability of the real estate asset by comparison ofcomparing the carrying amount of the asset to the estimated future undiscounted cash flows. If our analysis indicates that the carrying value of the real estate property that we expect to hold is not recoverable on an undiscounted cash flow basis, we recognize an impairment charge for the amount by which the carrying value exceeds the current estimated fair value of the real estate property.
We estimate the future undiscounted cash flows and fair value based on our intent as follows:
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for real estate properties that we intend to hold long-term; including land held for development, properties currently under development and operating properties; recoverability is assessed based on the estimated undiscounted future net rental income from operating the property and the terminal value, including anticipated costs to develop;
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for real estate properties we intend to sell, including properties currently under development and operating properties; recoverability is assessed based on proceeds from disposition that are estimated based on future net rental income of the property, expected market capitalization rates and anticipated costs to develop;
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for land parcels we intend to sell, recoverability is assessed based on estimated proceeds from disposition; and
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for costs incurred related to the potential acquisition of land, operating properties or development of a real estate property, recoverability is assessed based on the probability that the acquisition or development is likely to occur at the measurement date.
Assets Held for Sale or ContributionContribution.. We classify a property as held for sale or contribution when certain criteria are met in accordance with GAAP. Assets classified as held for sale are expected to be sold to a third party and assets classified as held for contribution are newly developed assets we intend to contribute to ouran unconsolidated co-investment venturesventure or to a third party.party within twelve months. At such time, the respective assets and liabilities are presented separately in the Consolidated Balance Sheets and depreciation is no longer recognized. Assets held for sale or contribution are reported at the lower of their carrying amount or their estimated fair value less the costs to sell the assets.
Discontinued Operations. Under new accounting guidance issued in 2014, only disposals of a component of an entity, or a group of components of an entity, representing a strategic shift in operations would be presented as discontinued operations. Under this guidance, none of our property dispositions qualified as discontinued operations in 2015 or 2014. However, the results of operations for real estate properties sold in 2013 or held for sale at the end of the year were shown under Discontinued Operations in the Consolidated Statements of Income following the previous accounting standard.sell.
Investments in Unconsolidated EntitiesEntities.. We present our investments in certain entities under the equity method. We use the equity method when we have the ability to exercise significant influence over operating and financial policies of the venture but do not have control of the entity. Under the equity method, we initially recognize these investments (including advances) in the balance sheet at our cost, including formation costs and net of deferred gains from the contribution of properties, if applicable. We subsequently adjust the accounts to reflect our proportionate share of net earnings or losses recognized and accumulated other comprehensive income or loss, distributions received, contributions made and certain other adjustments, as appropriate. When circumstances indicate there may have been a reduction in the value of an equity investment, we evaluate whether the loss in value is other than temporary. If we conclude it is other than temporary, we recognize an impairment charge to reflect the equity investment at fair value.
With regard to distributions from unconsolidated entities, we have elected the nature of distribution approach as the information is available to us to determine the nature of the underlying activity that generated the distributions. In accordance with the nature of distribution approach, cash flows generated from the operations of an unconsolidated entity are classified as a return on investment (cash inflow from operating activities) and cash flows that are generated from property sales, debt refinancing or sales of our investments are classified as a return of investment (cash inflow from investing activities).
Cash and Cash EquivalentsEquivalents.. We consider all cash on hand, demand deposits with financial institutions and short-term highly liquid investments with original maturities of three months or less to be cash equivalents. Our cash and cash equivalents are financial instruments that are exposed to concentrations of credit risk. We invest our cash with high-credit quality institutions. Cash balances may be invested in money market accounts that are not insured. We have not realized any losses in such cash investments or accounts and believe that we are not exposed to any significant credit risk.
Derivative Financial InstrumentsInstruments. .We primarily hedge our foreign currency risk by borrowing in the currencies in which we invest. Generally, we borrow in the functional currency of our consolidated subsidiaries but we also borrow in currencies other than the U.S. dollar in the OP. We may use derivative financial instruments, for the purpose of managingsuch as foreign currency forward and option contracts to manage foreign currency exchange rate risk related to both our foreign investments and the related earnings. In addition, we occasionally use interest rate risk. swap and forward contracts to manage interest rate risk and limit the impact of future interest rate changes on earnings and cash flows, primarily with variable-rate debt.
We do not use derivative financial instruments for trading or speculative purposes. All ofEach derivative transaction is customized and not exchange-traded. We recognize all derivatives at fair value within the line items Other Assets or Other Liabilities. We do not net our derivative financial instruments are customized derivative transactionsposition by counterparty for purposes of balance sheet presentation and are not exchange-traded.disclosure. Management reviews our hedging program, derivative positions, and overall risk management strategy and hedging program, on a regular basis. We only enter into transactions that we believe will be highly effective at offsetting the underlying risk. Our use of derivatives involves the risk that counterparties may default on a derivative contract. Wecontract; therefore we: (i) establish exposure limits for each counterparty to minimize this risk and provide counterparty diversification. Substantially all of our derivative exposures arediversification; (ii) contract with counterparties that have long-term credit ratings of single-A or better. Webetter; (iii) enter into master agreements with counterparties that generally allow for netting of certain exposures; thereby significantly reducing the actual loss that would be incurred should a counterparty fail to perform its contractual obligations. To
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mitigate pre-settlement risk,obligations; and (iv) set minimum credit standards that become more stringent as the duration of the derivative financial instrument increases. On the basis ofBased on these factors, we consider the risk of counterparty default to be minimal.
Designated Derivatives. We recognize all derivatives at fair value within the line items Other Assets or Other Liabilities, as applicable. We do not netmay choose to designate our derivative position by counterparty for purposes of balance sheet presentation and disclosure. Derivatives can be designatedfinancial instruments, generally foreign currency forwards as fair valuenet investment hedges in foreign operations or interest rate swaps or forwards as cash flow hedges or hedges of net investments in foreign operations. The accounting for gains and losses that result from changes in the fair values of derivative instruments depends on whether the derivatives are designated as, and qualify as, hedging instruments. For derivatives that will be accounted for as hedging instruments, athedges. At inception of the transaction, we formally designate and document the derivative financial instrument as a hedge of a specific underlying exposure, the risk management objective and the strategy for undertaking the hedge transaction. In addition, weWe formally assess both at inception and at least quarterly thereafter, the effectiveness of our hedging transactions. The ineffective portion of a derivative financial instrument's change in fair value, if any, is immediately recognized in earnings. We also use derivatives that are not designated as hedges (and may not meet the hedge accounting requirements) to manage our exposure to foreign currency fluctuations. Changes in the fair value of derivatives that are designated and qualify as cash flow hedges and hedges of net investments in foreign operations are recorded in AOCI. Due to the high degree of effectiveness between the hedging instruments and the underlying exposures hedged, fluctuations in the value of the derivative financial instruments will generally be offset by changes in the cash flows or fair values or cash flows of the underlying exposures being hedged. The changes in fair values of derivatives that were not designated or did not qualify as hedging instruments are immediately recognized in earnings. For cash flow hedges, we reclassify changes
Changes in the fair value of derivatives into the applicable line item in the Consolidated Statements of Income in which the hedged itemsthat are recorded in the same period that the underlying hedged items affect earnings.
Foreign Currency. We primarily manage our foreign currency exposure by borrowing in the currencies in which we invest. In certain circumstances, we may issue debt in a currency that is not the same functional currency of the borrowing entity to offset the translationdesignated and economic exposures related to our net investment in international subsidiaries. To mitigate the impact of the translation from the fluctuations in exchange rates, we may designate the debtqualify as a nonderivative financial instrument hedge. We also hedge our investments in certain international subsidiaries using foreign currency derivative contracts (net investment hedges) to offset the translation and economic exposures related to our investments in these subsidiaries by locking in a forward exchange rate at the inception of the hedge. To the extent we have an effective hedging relationship, we report all changes in fair value of the hedged portion of the nonderivative financial instruments and net investment hedges in equityforeign operations and cash flow hedges are recorded in the foreign currency translation component of AOCI/LAOCI. TheseFor net investment hedges, these amounts offset the translation adjustments on the underlying net assets of our foreign investments, which we also record in AOCI/LAOCI. The changesineffective portion of a derivative financial instrument's change in fair value, if any, is immediately recognized in earnings within the line item Foreign Currency and Derivative Gains (Losses), Net in the Consolidated Statements of Income. For cash flow hedges, we report the effective portion of the gain or loss as a component of AOCI/L and reclassify it to the applicable line item in the Consolidated Statements of Income, generally Interest Expense, over the corresponding period of the underlying hedged item. The ineffective portion of a derivative financial instrument’s change in fair value is recognized in earnings, generally Interest Expense, at the time the ineffectiveness occurred. To the extent the hedged debt related to our interest rate swaps and forwards is paid off early, we write off the remaining balance in AOCI/L and recognize the amount in Interest Expense in the Consolidated Statements of Income.
In addition to the net investment hedges described above, we may issue debt in the OP in a currency that is not the same functional currency of the borrowing entity to hedge our international investments. We designate the debt as a nonderivative financial instrumentsinstrument to offset the translation and economic exposures related to our net investment in international subsidiaries.
Undesignated Derivatives. We also use derivatives, such as foreign currency forwards and option contracts, that are not designated as hedges to manage foreign currency exchange rate risk related to our results of operations. The changes in fair values of these derivatives that were not designated or did not qualify as hedging instruments are recorded directlyimmediately recognized in earnings within the line item Foreign Currency and Derivative Gains (Losses) and Related Amortization,, Net in the Consolidated Statements of Income. We recognize ineffectiveness, if any,These gains or losses are generally offset by lower or higher earnings as a result in earnings at the time the ineffectiveness occurred.exchange rates that were different than our expectations.
WeIn addition, we may use foreign currency option contracts, including puts, callschoose to not designate our interest rate swap and collars to mitigate foreign currency exchange rate risk associated with the translation of our projected net operating income of our international subsidiaries, principally in Canada, Europe and Japan. Put option contracts provide us with the option to exchange foreign currency for U.S. dollars atforward contracts. If a fixed exchange rate if the foreign currency were to depreciate against the U.S. dollar. Call option contracts create an obligation to exchange foreign currency for U.S. dollars at a fixed exchange rate if the foreign currency were to appreciate against the U.S. dollar. Collar option contracts combine the put and call options into oneswap or forward contract to effectively lock in a range around the rate at which net operating income of our subsidiaries will be translated into U.S. dollars. Foreign currency option contracts areis not designated as hedges as they do not meeta hedge, accounting requirements. Changesthe changes in the fair value of non-hedge designated derivatives are recorded directlythese instruments is immediately recognized in earnings within the line itemForeign Currency and Derivative Gains (Losses) and Related Amortization, Net.
We may also use foreign currency forwards designed as cash flow hedges to mitigate foreign currency exchange rate risk associated with payments in a currency that is not the functional currency of our foreign subsidiaries. To the extent we have an effective hedging relationship, we report all changes in fair value of the hedged portion of the foreign currency forwards cash flow hedges in AOCI. We recognize ineffectiveness, if any, in earnings at the time the ineffectiveness occurred.
Interest Rate. Our interest rate risk management strategy is to limit the impact of future interest rate changes on earnings and cash flows as well as to stabilize interest expense and manage our exposure to interest rate movements. We primarily accomplish this by issuing fixed rate debt with staggering maturities. We may enter into interest rate swap agreements, which allow us to borrow on a fixed rate basis for longer-term debt issuances, or interest rate cap agreements, which allow us to minimize the impact of increases in interest rates. We typically designate our interest rate swap and interest rate cap agreements as cash flow hedges as these derivative instruments may be used to manage the interest rate risk on potential future debt issuances or to fix the interest rate on variable rate debt issuances. The maximum length of time that we hedge our exposure to future cash flows is typically 10 years or less. We have entered into interest rate swap agreements that allow us to receive variable-rate amounts from a counterparty in exchange for us making fixed-rate payments over the life of our agreements without the exchange of the underlying notional amount.
We report the effective portion of the gain or loss on the derivative as a component of AOCI, and reclassify it to Interest Expense in the Consolidated Statements of Income over.
Costs of Raising Capital. We treat costs incurred in connection with the corresponding periodissuance of common and preferred stock as a reduction to additional paid-in capital. We capitalize costs incurred in connection with the issuance of debt. Costs related to our credit facilities are included in Other Assets and costs related to all our other debt are recorded as a direct reduction of the hedged item. Toliability.
AOCI/L. For the extent the hedged debt is paid off early,Parent, we write off the remaining balance in include AOCI AOCI/Land we recognize the amount in Gains (Losses) on Early Extinguishment as a separate component of Debt, Netstockholders' equity in the Consolidated StatementsBalance Sheets. For the OP, AOCI/L is included in partners’ capital in the Consolidated Balance Sheets. Any reference to AOCI/L in this document is referring to the component of Income. We recognize losses on a derivative representing hedge ineffectiveness in Interest Expense atstockholders’ equity for the timeParent and partners’ capital for the ineffectiveness occurred.OP.
Noncontrolling Interests. Noncontrolling interests represent the share of consolidated entities owned by third parties. We recognize each noncontrolling holder’s respective share of the estimated fair value of the net assets at the date of formation or acquisition. Noncontrolling interests are subsequently adjusted for the noncontrolling holder’s share of additional contributions, distributions and their share of the net earnings or losses of each respective consolidated entity. We allocate net income to noncontrolling interests based on the weighted-averageweighted average ownership interest during the period. The net income that is not attributable to us is reflected in the line item Less Net Earnings Attributable to Noncontrolling Interests. We do not recognize a gain or loss on transactions with a consolidated entity in which we do not own 100% of the equity, but we reflect the difference in cash received or paid from the noncontrolling interests carrying amount as additional paid-in-capital.
Certain limited partnership interests are exchangeable into our common stock. Common stock issued upon exchange of a holder’s noncontrolling interest is accounted for at the carrying value of the surrendered limited partnership interest.interest and the difference between the carrying value and the fair value of the common stock issued is recorded to additional paid-in-capital.
Costs of Raising Capital. We treat costs incurred in connection with the issuance of common and preferred stock as a reduction to additional paid-in capital. We capitalize costs incurred in connection with the issuance of debt, other than our credit facilities, as a direct deduction of Debt and amortize those costs to interest expense over the term of the related debt. We capitalize costs related to our credit facilities, as defined in Note 9, in Other Assets. Costs associated with debt modifications are expensed when incurred.
AOCI. For the Parent, we include AOCI as a separate component of stockholders' equity in the Consolidated Balance Sheets. For the Operating Partnership, AOCI is included in partners’ capital in the Consolidated Balance Sheets. Any reference to AOCI in this document is referring to the component of stockholders’ equity for the Parent and partners’ capital for the Operating Partnership.
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Rental Revenue.Revenues. We lease our operating properties to customers under agreements that are classified as operating leases. We recognize the total minimum lease payments provided for under the leases on a straight-line basis over the lease term. Generally, under the terms of our leases, the majority of our rental expenses are recovered from our customers. We reflect amounts recovered from customers as revenuerevenues in the period that the applicable expenses are incurred. We make a provision for possible loss if the collection of a receivable balance is considered doubtful.
Strategic Capital Revenue.Revenues. Strategic capital revenue includes revenuerevenues include revenues we earn from the management services we provide to unconsolidated entities. These fees are determined in accordance with the terms specific to each arrangement and may include property and asset management fees or transactional fees for leasing, acquisition, development, construction, financing, legal and tax services provided. We may also earn incentive returns (called “promotes”) based on third-party investor returns over time, which may be during the duration of the venture or at the time of liquidation. We recognize fees when they are earned, fixed and determinable.determinable or on a percentage of completion basis for development fees. We report these fees in Strategic Capital RevenueRevenues. The fees we earn to develop properties within these ventures are reflected in Development Management and Other Revenue also recorded on a percentage of completion basis.
We also earnedearn fees from ventures that we consolidate. Upon consolidation, these fees wereare eliminated from our earnings and the third partythird-party share of these fees wereare recognized as a reduction of Net Earnings Attributable to Noncontrolling Interests.
Gains (Losses) on Dispositions of Investments in Real Estate.Estate and Revaluation of Equity Investments Upon Acquisition of a Controlling Interest, Net. We recognize gains on the disposition of real estate when the recognition criteria have been met, generally at the time the risks and rewards and title have transferred and we no longer have substantial continuing involvement with the real estate sold. We recognize losses from the disposition of real estate when known. We recognize gains or losses on the remeasurement of equity investments to fair value upon acquisition of a controlling interest in any of our previously unconsolidated entities and the transaction is considered the acquisition of a business.
When we contribute a property to an unconsolidated entity in which we have an ownership interest, we do not recognize a portion of the gain realized. The amount of gain not recognized, based on our ownership interest in the entity acquiring the property, is deferred by recognizing a reduction to our investment in the applicable unconsolidated entity. We adjust our proportionate share of net earnings or losses recognized in future periods to reflect the entities’ recorded depreciation expense as if it were computed on our lower basis in the contributed properties rather than on the entity’s basis.
When a property that we originally contributed to an unconsolidated entity is disposed of to a third party, we recognize the amount of the gain we previously deferred, along with our proportionate share of the gain recognized by the unconsolidated entity. If our ownership interest in an unconsolidated entity decreases and the decrease is expected to be permanent, we recognize the amounts relating to previously deferred gains to coincide with our new ownership interest.
Rental Expenses. Rental expenses primarily include the cost of our property management personnel, utilities, repairs and maintenance, property insurance, and real estate taxes.taxes and the other costs of managing the properties.
Strategic Capital Expenses. Strategic capital expenses generally include the direct expenses associated with the asset management of the unconsolidated co-investment ventures provided by our employees who are assigned to our Strategic Capital segment.segment and the costs of our Prologis Promote Plan based on earned promotes. In addition, in order to achieve efficiencies and economies of scale, all of our property management functions are provided by property management personnel who are assigned to our Real Estate Operations segment. These individuals perform the property-level management of the properties in our owned and managed portfolio, which include properties we consolidate and those we manage that are owned by the unconsolidated co-investment ventures. We allocate the costs of our property management to the properties we consolidate (included in Rental Expenses) and the properties owned by the unconsolidated co-investment ventures (included in Strategic Capital Expenses) by using the square feet owned by the respective portfolios.
Equity-Based Compensation. We account for equity-based compensation by measuring the cost of employee services received in exchange for an award of an equity instrument based on the fair value of the award on the grant date. We recognize the cost of the award on a straight-line basis over the period during which an employee is required to provide service in exchange for the award, generally the vesting period.
Income Taxes. Under the Internal Revenue Code, REITs are generally not required to pay federal income taxes if they distribute 100% of their taxable income and meet certain income, asset and stockholder tests. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income taxes at regular corporate rates (including any alternative minimum tax) and may not be able to qualify as a REIT for the four subsequent taxable years. Even as a REIT, we may be subject to certain foreign state and local taxes on our own income and property, and to federal income and excise taxes on our undistributed taxable income.
We have elected taxable REIT subsidiary (“TRS”) status for some of our consolidated subsidiaries. This allows us to provide services that would otherwise be considered impermissible for REITs. Many of the foreign countries in which we have operations do not recognize REITs or do not accord REIT status under their respective tax laws to our entities that operate in their jurisdiction. In the United States,U.S., we are taxed in certain states in which we operate. Accordingly, we recognize income tax expense for the federal and state income taxes incurred by our TRSs, taxes incurred in certain states and foreign jurisdictions, and interest and penalties associated with our unrecognized tax benefit liabilities.
We evaluate tax positions taken in the Consolidated Financial Statements under the interpretation for accounting for uncertainty in income taxes. As a result of this evaluation, we may recognize a tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by taxing authorities.
We recognize deferred income taxes in certain taxable entities. For federal income tax purposes, certain acquisitions have been treated as tax-free transactions resulting in a carry-over basis in assets and liabilities. For financial reporting purposes and in accordance with purchase accounting, we record all of the acquired assets and assumed liabilities at the estimated fair value at the date of acquisition. For our taxable subsidiaries, including certain international jurisdictions, we recognize the deferred income tax liabilities that represent the tax effect of the difference between the tax basis carried over and the fair value of the tangible and intangible assets at the date of acquisition. Any subsequent increases or decreases to the deferred income tax liability recorded in connection with these acquisitions, related to tax uncertainties acquired, are reflected in earnings.
If taxable income is generated in these subsidiaries, we recognize a benefit in earnings as a result of the reversal of the deferred income tax liability previously recorded at the acquisition date and we record current income tax expense representing the entire current income tax liability. If the reversal of the deferred income tax liability results from a sale or contribution of assets, the classification of the reversal to the Consolidated Statement of Income is based on the taxability of the transaction. We record the reversal to deferred income tax benefit as a taxable transaction if we dispose of the asset. We record the reversal as Gains on Dispositions of Investments in Real Estate and Revaluation of Equity Investments Upon Acquisition of a Controlling Interest, Net as a non-taxable transaction if we dispose of the asset along with the entity that owns the asset.
Deferred income tax expense is generally a function of the period’s temporary differences (items that are treated differently for tax purposes than for financial reporting purposes) and the utilization of tax net operating losses (“NOL”) generated in prior years that had been previously recognized as deferred income tax assets. We provide for a valuation allowance for deferred income tax assets if we believe all or some portion of the deferred income tax asset may not be realized. Any increase or decrease in the valuation allowance that results from a change in circumstances that causes a change in the estimated ability to realize the related deferred income tax asset is included in deferred tax expense.
55
PROLOGIS, INC. AND PROLOGIS, L.P.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Environmental Costs. We incur certain environmental remediation costs, including cleanup costs, consulting fees for environmental studies and investigations, monitoring costs, and legal costs relating to cleanup, litigation defense, and the pursuit of responsible third parties. We expense costs incurred in connection with operating properties and properties previously sold. We capitalize costs related to undeveloped land as development costs and include any expected future environmental liabilities at the time of acquisition. We include costs incurred for properties to be disposed in the cost of the properties upon disposition. We maintain a liability for the estimated costs of environmental remediation expected to be incurred in connection with undeveloped land, operating properties and properties previously sold that we adjust as appropriate as information becomes available.
New Accounting Pronouncements.
New Accounting Standards Adopted
In September 2015,January 2017, the Financial Accounting Standards Board (“FASB”) issued an accounting standard update (“ASU”) that amendsclarifies the retroactive requirement to apply adjustments made to provisional amounts recognized indefinition of a business combination.business. The update requiresadded further guidance that the acquirer record,assists preparers in the same period’s financial statements, the effect on earningsevaluating whether a transaction will be accounted for as an acquisition of changes in depreciation, amortization,an asset or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. We earlybusiness. As discussed above, we adopted this standard at September 30, 2015, including business combinations with open measurement periods for which the accounting had not been finalized at September 30, 2015.on January 1, 2017, on a prospective basis. The adoption of this standard did not have a materialsignificant impact on the Consolidated Financial Statements.
In April 2015, the FASB issued an accounting standard update that requires the presentation of debt issuance costs in the balance sheet as a deduction from the carrying amount of the related debt liability instead of a deferred charge. It is effective for annual reporting periods beginning after December 15, 2015,New Accounting Standards Issued but early adoption is permitted. We early adopted this standard at December 31, 2015, and applied its provisions retrospectively. The adoption resulted in the reclassification of $52.3 million and $43.2 million of unamortized debt issuance costs from Other Assets to Debt at December 31, 2015 and December 31, 2014, respectively.not yet Adopted
In February 2015, the FASB issued an accounting standard update that amends the consolidation requirements in existing GAAP. Under the update, all entities, including limited partnerships and similar legal entities, are now within the scope of consolidation guidance, unless a scope exception applies. The presumption that a general partner controls a limited partnership has been eliminated. In addition, fees paid to decision makers that meet certain conditions no longer cause the decision makers to consolidate variable interest entities (“VIEs”)Revenue Recognition. It is effective for annual reporting periods beginning after December 15, 2015, but early adoption is permitted and allows for either a full retrospective or a modified retrospective adoption approach. We plan to adopt the standard on its required effective date of January 1, 2016. We are finalizing our analysis, but we do not expect the adoption to have a material effect on our Consolidated Financial Statements.
In May 2014, the FASB issued an accounting standard updateASU that requires companies to use a five stepfive-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. UnderWe evaluated each of our revenue streams and their related accounting policies under the model, a companystandard. Rental revenues and recoveries earned from leasing our operating properties are excluded from this standard and will identifybe assessed with the contract, identify any separate performance obligationsadoption of the lease ASU discussed below. Our evaluation under the revenue recognition standard includes recurring fees and promotes earned from our co-investment ventures as well as sales to third parties and contributions of properties to unconsolidated co-investment ventures. While we do not expect changes in the contract, determinerecognition of recurring fees earned, we will evaluate promote fees earlier in the transaction price, allocate the transaction priceincentive period and recognize promote fees to the extent it is probable that a revenue whenreversal will not occur in a future period.
For dispositions of real estate to third parties, we do not expect the performance obligation is satisfied.standard to impact the recognition of the sale. In July 2015,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. Upon adoption of this standard, we will recognize, on a prospective basis, the entire gain attributed to contributions of real estate properties to unconsolidated co-investment ventures rather than the third-party share we recognize today. For deferred the effective date by one yeargains from existing partial sales recorded prior to annual reporting periods beginning after December 15, 2017. The FASB also permits earlythe adoption of the standard, we will continue to recognize these gains into earnings over the lives of the underlying real estate properties. In addition to the recognition changes discussed above, expanded quantitative and qualitative disclosures regarding revenue recognition will be required for contracts that are subject to these standards. We will adopt the practical expedient to only assess the recognition of revenue for open contracts during the transition period and do not anticipate any material retained earnings adjustments upon adoption. We adopted the revenue recognition and derecognition of non-financial assets standards on January 1, 2018, on a modified retrospective basis.
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 2017 and 2016, we capitalized $23.8 million and $23.9 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 operating or finance 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 88 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. We continue to evaluate the key drivers in the measurement of the ROU asset and lease liability including the discount rate and lease term. Details of our future minimum rental payments under these ground and office space leases are disclosed in Note 4.
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 expired or 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 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 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 not beforethey will no longer be separately reported. The standard requires the originalpresentation 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 date of December 15, 2016.for us on January 1, 2019, but early adoption is permitted. We are currently evaluating the impact the adoption of this standard will have on the Consolidated Financial Statements.
NoteNOTE 3. Business CombinationsBUSINESS COMBINATIONS
Acquisition of KTR Capital Partners and Its Affiliates
On May 29,In 2015, we acquired the high quality real estate assets and the operating platform with high profile customers and comparable market composition to ours fromof KTR Capital Partners and its affiliates (“KTR”) through our consolidated co-investment venture, Prologis U.S. Logistics Venture (“USLV”). The portfolio consisted of 315 operating properties, aggregating 5959.0 million square feet, 3.6 million square feet of properties under development and land parcels that will support an estimated build outparcels. The total purchase price was $5.0 billion, net of 6.8 million square feet.assumed debt of $735.2 million. The properties were acquired by our consolidated co-investment venture Prologis U.S. Logistics Venture (“USLV”), of which we own 55%. The acquisitionpurchase price was funded through cash (which included the contributioncontributions of $2.6 billion from Prologis and $2.3 billion from our venture partner, and the proceeds of newly issued debt by us, as detailed in Note 9), the assumption of secured mortgage debt and the issuance of 4.5 million common limited partnership units in the Operating Partnership.OP. We incurred $24.7 million of acquisition costs during the second quarter of 2015, whichthat are included in Other ExpenseExpenses. during 2015.
The allocation of the purchase price required a significant amount of judgment and was based on our valuations, estimates and assumptions of the acquisition date fair value of the tangible and intangible assets acquired and liabilities assumed. While the preliminary allocation of the purchase price is substantially complete, the valuation of the real estate properties is still being finalized. We do not expect future revisions, if any, to have a significant impact on our financial position or results of operations.
The allocation of the purchase price was as follows (in thousands):
Investments in real estate properties | �� | $ | 5,440,923 |
|
Intangible assets, net of intangible liabilities |
|
| 332,708 |
|
Accounts receivable and other assets |
|
| 7,632 |
|
Debt, including premium |
|
| (735,172 | ) |
Accounts payable, accrued expenses and other liabilities |
|
| (55,422 | ) |
Total estimated purchase price |
|
| 4,990,669 |
|
Our venture partner’s share of purchase price |
|
| (2,253,234 | ) |
Common limited partnership units issued in the Operating Partnership |
|
| (181,170 | ) |
Prologis share of cash purchase price |
| $ | 2,556,265 |
|
The following unaudited pro forma financial information presents our results as though the KTR acquisitiontransaction had been completed on January 1, 2014.2015. The pro forma information does not reflect the actual results of operations had the transaction actually been completed on January 1, 2014,2015, and it is not indicative of future operating results. The results for the year ended December 31, 2015, include approximately seven months of actual results for the acquisition,transaction, the acquisition expenses, and five months of pro forma adjustments. OurActual results of operations in 2015 include rental revenuerevenues and rental expenses of the properties acquired of $235.7 million and $56.9 million, respectively, representing the period from acquisition through December 31, 2015.
56
PROLOGIS, INC. AND PROLOGIS, L.P.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following amounts are in thousands, except per share amounts:
|
| 2015 |
|
| 2014 |
|
| 2015 |
| |||
Total revenues |
| $ | 2,358,643 |
|
| $ | 2,064,724 |
|
| $ | 2,358,643 |
|
Net earnings attributable to common stockholders |
| $ | 866,753 |
|
| $ | 537,861 |
|
| $ | 866,753 |
|
Net earnings per share attributable to common stockholders – Basic |
| $ | 1.66 |
|
| $ | 1.08 |
|
| $ | 1.66 |
|
Net earnings per share attributable to common stockholders – Diluted |
| $ | 1.65 |
|
| $ | 1.07 |
|
| $ | 1.65 |
|
These results include certain adjustments, primarily: (i) decreased revenues from the amortization of the net assets from the acquired leases with net favorable rents relative to estimated market rents; (ii) increased depreciation and amortization expense resulting from the adjustment of real estate assets to estimated fair value and recognition of intangible assets related to in-place leases; and (iii)
additional interest expense attributable to the debt issued to finance our cash portion of the acquisition offset by lower interest expense due to the accretion of the fair value adjustment of debt assumed.
Acquisition of a Controlling Interest in Prologis North American Industrial Fund
During 2014, we increased our ownership in Prologis North American Industrial Fund (“NAIF”) from 23.1% to 66.1% by acquiring the equity units from all but one partner for an aggregate of $679.0 million. This included the acquisition of $46.8 million of equity units on October 20, 2014, that resulted in our gaining control over NAIF, based on the rights of the limited partners, and therefore we began consolidating NAIF at that date. We recognized a gain of $201.3 million in Gains on Dispositions of Investments in Real Estate and Revaluation of Equity Investments upon Acquisition of a Controlling Interest, Net.
The total purchase price was $1.1 billion, which included our investment in NAIF at the time of consolidation. The adjustments finalizing the purchase price allocation during the measurement period were not considered to be material to our financial position or results of operations.
The allocation of the purchase price was as follows (in thousands):
Investments in real estate properties |
| $ | 2,658,252 |
|
Intangible assets, net of intangible liabilities |
|
| 138,185 |
|
Cash |
|
| 87,780 |
|
Accounts receivable and other assets |
|
| 5,664 |
|
Debt, including premium |
|
| (1,195,213 | ) |
Accounts payable, accrued expenses and other liabilities |
|
| (57,655 | ) |
Noncontrolling interests |
|
| (554,493 | ) |
Total purchase price |
| $ | 1,082,520 |
|
Our results of operations for 2014 included rental revenue and rental expenses of the properties acquired in the NAIF acquisition of $49.2 million and $13.3 million, respectively, offset by the impact of noncontrolling interests.
2013 Acquisitions of Controlling Interests in Unconsolidated Co-Investment Ventures
During 2013, we acquired real estate from three unconsolidated co-investment ventures through the conclusion of the venture or the acquisition of our partner’s interest. In connection with these transactions, we remeasured our equity investment to fair value and recognized gains of $34.8 million in Gains on Dispositions of Investments in Real Estate and Revaluation of Equity Investments upon Acquisition of a Controlling Interest, Net. The fair value was primarily based on external valuations.
|
|
|
|
|
|
The results of operations for these properties were not significant in 2013.
57
PROLOGIS, INC. AND PROLOGIS, L.P.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NoteNOTE 4. Real EstateREAL ESTATE
Investments in real estate properties consisted of the following at December 31 (dollars and square feet in thousands):
|
| Square Feet and Acres (1) |
|
| Number of Buildings (1) |
|
|
|
| Square Feet |
|
| Number of Buildings |
|
|
|
| ||||||||||||||||||||||||||||||
|
| 2015 |
|
| 2014 |
|
| 2015 |
|
| 2014 |
|
| 2015 |
|
| 2014 |
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||||||||||
Industrial operating properties: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
Operating properties: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
Buildings and improvements |
| 294,811 |
|
|
| 331,210 |
|
|
| 1,525 |
|
|
| 1,776 |
|
| $ | 16,849,349 |
|
| $ | 17,905,914 |
| ||||||||||||||||||||||||
Improved land |
| - |
|
| - |
|
| - |
|
| - |
|
| $ | 5,874,052 |
|
| $ | 4,227,637 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 5,735,978 |
|
|
| 6,037,543 |
| ||||
Buildings and improvements |
|
| 333,830 |
|
|
| 282,282 |
|
|
| 1,872 |
|
|
| 1,607 |
|
|
| 17,861,693 |
|
|
| 14,407,815 |
| |||||||||||||||||||||||
Development portfolio, including land costs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prestabilized |
|
| 12,598 |
|
|
| 7,448 |
|
|
| 28 |
|
|
| 24 |
|
|
| 918,099 |
|
|
| 547,982 |
|
| 7,345 |
|
|
| 8,256 |
|
|
| 22 |
|
|
| 29 |
|
|
| 546,173 |
|
|
| 798,233 |
|
Properties under development |
|
| 19,630 |
|
|
| 22,844 |
|
|
| 63 |
|
|
| 55 |
|
|
| 954,804 |
|
|
| 925,998 |
|
| 22,216 |
|
|
| 19,539 |
|
|
| 63 |
|
|
| 60 |
|
|
| 1,047,316 |
|
|
| 633,849 |
|
Land |
|
| 7,404 |
|
|
| 9,017 |
|
| - |
|
| - |
|
|
| 1,359,794 |
|
|
| 1,577,786 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 1,154,383 |
|
|
| 1,218,904 |
| ||
Other real estate investments (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 552,926 |
|
|
| 502,927 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 505,445 |
|
|
| 524,887 |
|
Total investments in real estate properties |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 27,521,368 |
|
|
| 22,190,145 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 25,838,644 |
|
|
| 27,119,330 |
|
Less accumulated depreciation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 3,274,284 |
|
|
| 2,790,781 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 4,059,348 |
|
|
| 3,758,372 |
|
Net investments in real estate properties |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 24,247,084 |
|
| $ | 19,399,364 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 21,779,296 |
|
| $ | 23,360,958 |
|
(1) |
|
(2) | Included in other real estate investments |
At December 31, 2015,2017, we owned real estate assets in the U.S. and other Americas (Canada, Mexico(Brazil, Canada and the United States)Mexico), Europe (Austria, Belgium,(Belgium, the Czech Republic, France, Germany, Hungary, Italy, the Netherlands, Poland, Slovakia, Spain, Sweden and the United Kingdom)Kingdom (“U.K.”)) and Asia (China, Japan and Singapore).
Acquisitions
The following table summarizes our real estate acquisition activity for the years ended December 31 (dollars and square feet in thousands):
|
| 2015 |
|
| 2014 |
|
| 2013 |
| |||
Acquisitions of operating properties from unconsolidated co-investment ventures |
|
|
|
|
|
|
|
|
|
|
|
|
Number of industrial operating properties |
|
| - |
|
|
| 231 |
|
|
| 58 |
|
Square feet |
|
| - |
|
|
| 45,663 |
|
|
| 16,319 |
|
Real estate acquisition value |
| $ | - |
|
| $ | 2,658,252 |
|
| $ | 1,141,128 |
|
Gains on revaluation of equity investments upon acquisition of a controlling interest |
| $ | - |
|
| $ | 201,319 |
|
| $ | 34,787 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions of operating properties from third parties |
|
|
|
|
|
|
|
|
|
|
|
|
Number of industrial operating properties |
|
| 52 |
|
|
| 8 |
|
|
| 12 |
|
Square feet |
|
| 7,375 |
|
|
| 1,004 |
|
|
| 3,262 |
|
Real estate acquisition value |
| $ | 829,598 |
|
| $ | 78,314 |
|
| $ | 146,331 |
|
|
| 2017 |
|
| 2016 |
|
| 2015 |
| |||
Number of operating properties |
|
| 16 |
|
|
| 9 |
|
|
| 52 |
|
Square feet |
|
| 6,859 |
|
|
| 1,823 |
|
|
| 7,375 |
|
Acquisition value of net investments in real estate properties (1) (2) |
| $ | 1,139,410 |
|
| $ | 411,706 |
|
| $ | 1,042,562 |
|
(1) | Value includes the acquisition of 1,392, 776 and 690 acres of land in 2017, 2016 and 2015, respectively. |
(2) | In August 2017, we acquired our partner’s interest in certain joint ventures in Brazil for an aggregate price of R$1.2 billion ($381.7 million). As a result of this transaction, we began consolidating the real estate properties that included twelve operating properties, two prestabilized properties and 531.4 acres of undeveloped land. We accounted for the transaction as a step-acquisition under the business combination rules and recognized a gain. The results of operations for these real estate properties were not significant in 2017. While the preliminary purchase price allocation is substantially complete, the valuation of the real estate properties is still being finalized. |
The table above does not include the properties acquired in the KTR acquisition,transaction in 2015, as this transaction is explained in Note 3.
The following table summarizes our real estate disposition activity for the years ended December 31 (dollars and square feet in thousands):
|
| 2015 |
|
| 2014 |
|
| 2013 |
| |||
Continuing operations |
|
|
|
|
|
|
|
|
|
|
|
|
Contributions to unconsolidated co-investment ventures |
|
|
|
|
|
|
|
|
|
|
|
|
Number of properties |
|
| 31 |
|
|
| 126 |
|
|
| 254 |
|
Square feet |
|
| 8,355 |
|
|
| 25,247 |
|
|
| 71,503 |
|
Net proceeds (1) |
| $ | 835,385 |
|
| $ | 1,825,311 |
|
| $ | 6,479,707 |
|
Net gains on contributions (1) |
| $ | 148,987 |
|
| $ | 188,268 |
|
| $ | 555,196 |
|
Dispositions to third parties |
|
|
|
|
|
|
|
|
|
|
|
|
Number of properties |
|
| 136 |
|
|
| 145 |
|
|
| - |
|
Square feet |
|
| 23,024 |
|
|
| 19,856 |
|
|
| - |
|
Net proceeds (1) |
| $ | 2,352,645 |
|
| $ | 1,365,318 |
|
| $ | 177,273 |
|
Net gains on dispositions (1) |
| $ | 609,900 |
|
| $ | 336,203 |
|
| $ | 7,673 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
Number of properties |
|
| - |
|
|
| - |
|
|
| 89 |
|
Square feet |
|
| - |
|
|
| - |
|
|
| 9,196 |
|
Net proceeds from dispositions |
| $ | - |
|
| $ | - |
|
| $ | 608,286 |
|
Net gains on dispositions, including related impairment charges and taxes (2) |
| $ | - |
|
| $ | - |
|
| $ | 116,550 |
|
| 2017 |
|
| 2016 |
|
| 2015 |
| |||
Contributions to unconsolidated co-investment ventures (1) |
|
|
|
|
|
|
|
|
|
|
|
Number of properties |
| 222 |
|
|
| 35 |
|
|
| 31 |
|
Square feet |
| 48,171 |
|
|
| 11,624 |
|
|
| 8,355 |
|
Net proceeds (2) | $ | 3,201,986 |
|
| $ | 1,231,878 |
|
| $ | 835,385 |
|
Gains on contributions, net (2) | $ | 847,034 |
|
| $ | 267,441 |
|
| $ | 148,987 |
|
Dispositions to third parties |
|
|
|
|
|
|
|
|
|
|
|
Number of properties |
| 110 |
|
|
| 172 |
|
|
| 136 |
|
Square feet |
| 17,147 |
|
|
| 20,360 |
|
|
| 23,024 |
|
Net proceeds (2) (3) | $ | 1,281,501 |
|
| $ | 1,760,048 |
|
| $ | 2,352,645 |
|
Gains on dispositions, net (2) (3) | $ | 274,711 |
|
| $ | 353,668 |
|
| $ | 609,900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gains on contributions and dispositions, net | $ | 1,121,745 |
|
| $ | 621,109 |
|
| $ | 758,887 |
|
Gains on revaluation of equity investments upon acquisition of a controlling interest |
| 61,220 |
|
|
| - |
|
|
| - |
|
Gains on redemptions of investments in co-investment ventures (4) |
| - |
|
|
| 136,289 |
|
|
| - |
|
Total gains on dispositions of investments in real estate and revaluation of equity investments upon acquisition of a controlling interest, net | $ | 1,182,965 |
|
| $ | 757,398 |
|
| $ | 758,887 |
|
(1) |
|
58
PROLOGIS, INC. AND PROLOGIS, L.P.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) |
|
Detail of Significant Transactions with Co-Investment Ventures (Related Parties)
(3) | Includes the sale of our investment in Europe Logistics Venture 1 (“ELV”) in January 2017. See Note 5 for more information on this transaction. |
Below are the significant contributions to our co-investment ventures, which are also included in the table above. We had no significant contributions in 2015.
(4) | In 2016, we redeemed a portion of our investment in two co-investment ventures. |
In the second quarter of 2014, we launched the initial public offering of FIBRA Prologis, a Mexican REIT. In connection with the offering, FIBRA Prologis purchased 177 properties aggregating 29.7 million square feet (12.6 million square feet related to our wholly owned portfolio, 7.6 million square feet from our consolidated co-investment venture Prologis Mexico Fondo Logistico (“AFORES”) and 9.5 million square feet from our unconsolidated co-investment venture Prologis Mexico Industrial Fund). Also in 2014, AFORES contributed its remaining operating properties and the balance of its secured debt to FIBRA Prologis in two separate transactions. The difference between the amount received and the noncontrolling interests balance related to the properties contributed was $34.6 million, and was adjusted through equity with no gain or loss recognized. On the basis of this transaction, we recognized a gain on disposition of investments in real estate of $52.5 million; current tax expense of $32.4 million; deferred tax benefit of $55.5 million; and earnings attributable to noncontrolling interest of $61.0 million.
In the first quarter of 2013, we completed the initial public offering of Nippon Prologis REIT, Inc. (“NPR”), a publicly traded company listed on the Tokyo Stock Exchange. NPR acquired a portfolio of 12 properties totaling 9.6 million square feet from us for an aggregate purchase price of ¥173 billion ($1.9 billion). As a result of this transaction, we recognized a gain on disposition of investments in real estate of $337.9 million, net of a $59.6 million deferral due to our ongoing investment.
Also during the first quarter of 2013, we closed Prologis European Logistics Partners Sàrl (“PELP”), a European joint venture with Norges Bank Investment Management (“NBIM”). The venture acquired a portfolio from us for approximately €2.3 billion ($3.0 billion) consisting of 195 properties and 48.7 million square feet in Europe. As a result of this transaction, we recognized a gain on disposition of investments in real estate of $1.8 million, net of a deferred gain due to our ongoing investment. In connection with the closing, a warrant NBIM received at signing to acquire six million shares of our common stock with a strike price of $35.64 became exercisable. We used a Black-Scholes pricing model to value the warrant and this value was included as consideration in the overall result of the transaction. In the fourth quarter of 2014, NBIM exercised the warrant for an aggregate strike price of $213.8 million.
Operating Lease AgreementsCommon Stock
Accumulated
Distributions
Number
Additional
Other
in Excess of
Non-
Preferred
of
Par
Paid-in
Comprehensive
Net
controlling
Total
Stock
Shares
Value
Capital
Income (Loss)
Earnings
Interests
Equity
Balance at January 1, 2015
$
78,235
509,498
$
5,095
$
18,467,009
$
(600,337
)
$
(3,974,493
)
$
1,208,090
$
15,183,599
Consolidated net earnings
-
-
-
-
-
869,439
56,076
925,515
Effect of equity compensation plans
-
1,475
15
57,454
-
-
26,234
83,703
Issuance of stock in at-the-market
program, net of issuance costs
-
1,662
16
71,532
-
-
-
71,548
Issuance of stock upon conversion
We lease our operating properties of exchangeable debt
-
11,872
119
502,613
-
-
-
502,732
Issuance of units related to KTR
transaction
-
-
-
-
-
-
181,170
181,170
Issuance of units related to other
acquisitions
-
-
-
-
-
-
371,570
371,570
Capital contributions
-
-
-
-
-
-
2,355,596
2,355,596
Foreign currency translation
losses, net
-
-
-
-
(173,852
)
-
(35,049
)
(208,901
)
Unrealized losses on derivative
contracts, net
-
-
-
-
(17,240
)
-
(217
)
(17,457
)
Reallocation of equity
-
-
-
202,812
-
(15,894
)
(186,918
)
-
Distributions and certain land parcels to customers under agreements that are generally classified as operating leases. Our weighted average lease term, based on square feet for all leases in effectother
-
5
-
947
-
(805,535
)
(223,651
)
(1,028,239
)
Balance at December 31, 2015 was six years. Our largest customer
$
78,235
524,512
$
5,245
$
19,302,367
$
(791,429
)
$
(3,926,483
)
$
3,752,901
$
18,420,836
Consolidated net earnings
-
-
-
-
-
1,209,932
82,608
1,292,540
Effect of equity compensation plans
-
2,282
23
91,191
-
-
26,483
117,697
Issuance of units related to
acquisitions
-
-
-
-
-
-
3,162
3,162
Conversion of noncontrolling
interests
-
1,877
19
52,237
-
-
(52,256
)
-
Foreign currency translation gains
(losses), net
-
-
-
-
(144,730
)
-
8,772
(135,958
)
Unrealized losses on derivative
contracts, net
-
-
-
-
(1,314
)
-
(35
)
(1,349
)
Reallocation of equity
-
-
-
8,657
-
-
(8,657
)
-
Distributions and 25 largest customers accounted for 4.5% and 20.0%, respectively, of our net effective rent (“NER”other
-
-
-
587
-
(893,456
)
(345,919
)
(1,238,788
)
Balance at December 31, 2015. We calculate NER using the estimated total cash to be received over the term2016
$
78,235
528,671
$
5,287
$
19,455,039
$
(937,473
)
$
(3,610,007
)
$
3,467,059
$
18,458,140
Consolidated net earnings
-
-
-
-
-
1,652,325
108,634
1,760,959
Effect of the lease (including base rentequity compensation plans
-
2,000
20
74,506
-
-
41,446
115,972
Capital contributions
-
-
-
-
-
-
254,214
254,214
Repurchase of preferred stock
(9,287
)
-
-
-
-
(3,895
)
-
(13,182
)
Purchase of noncontrolling
interests
-
-
-
(202,040
)
-
-
(611,807
)
(813,847
)
Conversion of noncontrolling
interests
-
1,515
15
47,711
-
-
(47,726
)
-
Foreign currency translation gains,
net
-
-
-
-
13,810
-
49,645
63,455
Unrealized gains on derivative
contracts, net
-
-
-
-
22,005
-
586
22,591
Reallocation of equity
-
-
-
(12,143
)
-
-
12,143
-
Distributions and expense reimbursements) divided by the lease term to determine the amount of rent and expense reimbursements received per year.other
The following table summarizes our minimum lease payments on leases with lease periods greater than one year for space in our operating properties, pre-stabilized development properties and leases of land subject to ground leases-
-
-
(66
)
-
(942,884
)
(199,611
)
(1,142,561
)
Balance at December 31, 2015 (in2017
$
68,948
532,186
$
5,322
$
19,363,007
$
(901,658
)
$
(2,904,461
)
$
3,074,583
$
18,705,741
The accompanying notes are an integral part of these Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
| Years Ended December 31, |
| |||||||||
|
| 2017 |
|
| 2016 |
|
| 2015 |
| |||
Operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net earnings |
| $ | 1,760,959 |
|
| $ | 1,292,540 |
|
| $ | 925,515 |
|
Adjustments to reconcile net earnings to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Straight-lined rents and amortization of above and below market leases |
|
| (81,021 | ) |
|
| (93,608 | ) |
|
| (59,619 | ) |
Equity-based compensation awards |
|
| 76,640 |
|
|
| 60,341 |
|
|
| 53,665 |
|
Depreciation and amortization |
|
| 879,140 |
|
|
| 930,985 |
|
|
| 880,373 |
|
Earnings from unconsolidated entities, net |
|
| (248,567 | ) |
|
| (206,307 | ) |
|
| (159,262 | ) |
Distributions from unconsolidated entities |
|
| 307,220 |
|
|
| 286,651 |
|
|
| 284,664 |
|
Decrease (increase) in operating receivables from unconsolidated entities |
|
| (30,893 | ) |
|
| 14,823 |
|
|
| (38,185 | ) |
Amortization of debt discounts (premiums), net of debt issuance costs |
|
| 751 |
|
|
| (15,137 | ) |
|
| (31,841 | ) |
Gains on dispositions of investments in real estate and revaluation of equity investments upon acquisition of a controlling interest, net |
|
| (1,182,965 | ) |
|
| (757,398 | ) |
|
| (758,887 | ) |
Unrealized foreign currency and derivative losses (gains), net |
|
| 68,956 |
|
|
| (8,052 | ) |
|
| (1,019 | ) |
Losses (gains) on early extinguishment of debt, net |
|
| 68,379 |
|
|
| (2,484 | ) |
|
| 86,303 |
|
Deferred income tax benefit |
|
| (5,005 | ) |
|
| (5,525 | ) |
|
| (5,057 | ) |
Decrease (increase) in accounts receivable and other assets |
|
| 37,278 |
|
|
| (106,337 | ) |
|
| (64,749 | ) |
Increase in accounts payable and accrued expenses and other liabilities |
|
| 36,374 |
|
|
| 26,513 |
|
|
| 4,426 |
|
Net cash provided by operating activities |
|
| 1,687,246 |
|
|
| 1,417,005 |
|
|
| 1,116,327 |
|
Investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Real estate development |
|
| (1,606,133 | ) |
|
| (1,641,560 | ) |
|
| (1,339,904 | ) |
Real estate acquisitions |
|
| (442,696 | ) |
|
| (458,516 | ) |
|
| (890,183 | ) |
KTR transaction, net of cash received |
|
| - |
|
|
| - |
|
|
| (4,809,499 | ) |
Tenant improvements and lease commissions on previously leased space |
|
| (153,255 | ) |
|
| (165,933 | ) |
|
| (154,564 | ) |
Nondevelopment capital expenditures |
|
| (110,635 | ) |
|
| (101,677 | ) |
|
| (83,351 | ) |
Proceeds from dispositions and contributions of real estate properties |
|
| 3,236,603 |
|
|
| 2,826,408 |
|
|
| 2,795,249 |
|
Investments in and advances to unconsolidated entities |
|
| (249,735 | ) |
|
| (265,951 | ) |
|
| (474,420 | ) |
Acquisition of a controlling interest in an unconsolidated venture, net of cash received |
|
| (374,605 | ) |
|
| - |
|
|
| - |
|
Return of investment from unconsolidated entities |
|
| 209,151 |
|
|
| 776,550 |
|
|
| 29,406 |
|
Proceeds from repayment of notes receivable backed by real estate |
|
| 32,100 |
|
|
| 202,950 |
|
|
| 9,866 |
|
Proceeds from the settlement of net investment hedges |
|
| 7,541 |
|
|
| 79,767 |
|
|
| 129,149 |
|
Payments on the settlement of net investment hedges |
|
| (5,058 | ) |
|
| - |
|
|
| (981 | ) |
Net cash provided by (used in) investing activities |
|
| 543,278 |
|
|
| 1,252,038 |
|
|
| (4,789,232 | ) |
Financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock |
|
| 32,858 |
|
|
| 39,470 |
|
|
| 90,258 |
|
Dividends paid on common and preferred stock |
|
| (942,884 | ) |
|
| (893,455 | ) |
|
| (804,697 | ) |
Repurchase of preferred stock |
|
| (13,182 | ) |
|
| - |
|
|
| - |
|
Noncontrolling interests contributions |
|
| 240,925 |
|
|
| 2,168 |
|
|
| 2,355,367 |
|
Noncontrolling interests distributions |
|
| (207,788 | ) |
|
| (343,550 | ) |
|
| (215,740 | ) |
Purchase of noncontrolling interests |
|
| (813,847 | ) |
|
| (3,083 | ) |
|
| (2,560 | ) |
Tax paid for shares withheld |
|
| (19,775 | ) |
|
| (8,570 | ) |
|
| (12,298 | ) |
Debt and equity issuance costs paid |
|
| (7,054 | ) |
|
| (20,123 | ) |
|
| (32,012 | ) |
Net proceeds from (payments on) credit facilities |
|
| 283,255 |
|
|
| 33,435 |
|
|
| (7,970 | ) |
Repurchase and payments of debt |
|
| (3,578,889 | ) |
|
| (2,301,647 | ) |
|
| (3,156,294 | ) |
Proceeds from issuance of debt |
|
| 2,419,797 |
|
|
| 1,369,890 |
|
|
| 5,381,862 |
|
Net cash provided by (used in) financing activities |
|
| (2,606,584 | ) |
|
| (2,125,465 | ) |
|
| 3,595,916 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign currency exchange rate changes on cash |
|
| 15,790 |
|
|
| (342 | ) |
|
| (9,623 | ) |
Net increase (decrease) in cash and cash equivalents |
|
| (360,270 | ) |
|
| 543,236 |
|
|
| (86,612 | ) |
Cash and cash equivalents, beginning of year |
|
| 807,316 |
|
|
| 264,080 |
|
|
| 350,692 |
|
Cash and cash equivalents, end of year |
| $ | 447,046 |
|
| $ | 807,316 |
|
| $ | 264,080 |
|
See Note 19 for information on noncash investing and financing activities and other information.
The accompanying notes are an integral part of these Consolidated Financial Statements.
(In thousands)
| December 31, |
| |||||
| 2017 |
|
| 2016 |
| ||
ASSETS |
|
|
|
|
|
|
|
Investments in real estate properties | $ | 25,838,644 |
|
| $ | 27,119,330 |
|
Less accumulated depreciation |
| 4,059,348 |
|
|
| 3,758,372 |
|
Net investments in real estate properties |
| 21,779,296 |
|
|
| 23,360,958 |
|
Investments in and advances to unconsolidated entities |
| 5,496,450 |
|
|
| 4,230,429 |
|
Assets held for sale or contribution |
| 342,060 |
|
|
| 322,139 |
|
Notes receivable backed by real estate |
| 34,260 |
|
|
| 32,100 |
|
Net investments in real estate |
| 27,652,066 |
|
|
| 27,945,626 |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| 447,046 |
|
|
| 807,316 |
|
Other assets |
| 1,381,963 |
|
|
| 1,496,990 |
|
Total assets | $ | 29,481,075 |
|
| $ | 30,249,932 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND CAPITAL |
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
Debt | $ | 9,412,631 |
|
| $ | 10,608,294 |
|
Accounts payable and accrued expenses |
| 702,804 |
|
|
| 556,179 |
|
Other liabilities |
| 659,899 |
|
|
| 627,319 |
|
Total liabilities |
| 10,775,334 |
|
|
| 11,791,792 |
|
|
|
|
|
|
|
|
|
Capital: |
|
|
|
|
|
|
|
Partners’ capital: |
|
|
|
|
|
|
|
General partner – preferred |
| 68,948 |
|
|
| 78,235 |
|
General partner – common |
| 15,562,210 |
|
|
| 14,912,846 |
|
Limited partners – common |
| 165,401 |
|
|
| 150,173 |
|
Limited partners – Class A common |
| 248,940 |
|
|
| 244,417 |
|
Total partners’ capital |
| 16,045,499 |
|
|
| 15,385,671 |
|
Noncontrolling interests |
| 2,660,242 |
|
|
| 3,072,469 |
|
Total capital |
| 18,705,741 |
|
|
| 18,458,140 |
|
Total liabilities and capital | $ | 29,481,075 |
|
| $ | 30,249,932 |
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per unit amounts)
|
| Year Ended December 31, |
| |||||||||
|
| 2017 |
|
| 2016 |
|
| 2015 |
| |||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Rental |
| $ | 1,737,839 |
|
| $ | 1,734,844 |
|
| $ | 1,536,117 |
|
Rental recoveries |
|
| 487,302 |
|
|
| 485,565 |
|
|
| 437,070 |
|
Strategic capital |
|
| 373,889 |
|
|
| 303,562 |
|
|
| 217,829 |
|
Development management and other |
|
| 19,104 |
|
|
| 9,164 |
|
|
| 6,058 |
|
Total revenues |
|
| 2,618,134 |
|
|
| 2,533,135 |
|
|
| 2,197,074 |
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Rental |
|
| 569,523 |
|
|
| 568,870 |
|
|
| 544,182 |
|
Strategic capital |
|
| 155,141 |
|
|
| 128,506 |
|
|
| 108,422 |
|
General and administrative |
|
| 231,059 |
|
|
| 222,067 |
|
|
| 217,227 |
|
Depreciation and amortization |
|
| 879,140 |
|
|
| 930,985 |
|
|
| 880,373 |
|
Other |
|
| 12,205 |
|
|
| 14,329 |
|
|
| 66,698 |
|
Total expenses |
|
| 1,847,068 |
|
|
| 1,864,757 |
|
|
| 1,816,902 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
| 771,066 |
|
|
| 668,378 |
|
|
| 380,172 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from unconsolidated entities, net |
|
| 248,567 |
|
|
| 206,307 |
|
|
| 159,262 |
|
Interest expense |
|
| (274,486 | ) |
|
| (303,146 | ) |
|
| (301,363 | ) |
Interest and other income, net |
|
| 13,731 |
|
|
| 8,101 |
|
|
| 25,484 |
|
Gains on dispositions of investments in real estate and revaluation of equity investments upon acquisition of a controlling interest, net |
|
| 1,182,965 |
|
|
| 757,398 |
|
|
| 758,887 |
|
Foreign currency and derivative gains (losses), net |
|
| (57,896 | ) |
|
| 7,582 |
|
|
| 12,466 |
|
Gains (losses) on early extinguishment of debt, net |
|
| (68,379 | ) |
|
| 2,484 |
|
|
| (86,303 | ) |
Total other income |
|
| 1,044,502 |
|
|
| 678,726 |
|
|
| 568,433 |
|
Earnings before income taxes |
|
| 1,815,568 |
|
|
| 1,347,104 |
|
|
| 948,605 |
|
Total income tax expense |
|
| 54,609 |
|
|
| 54,564 |
|
|
| 23,090 |
|
Consolidated net earnings |
|
| 1,760,959 |
|
|
| 1,292,540 |
|
|
| 925,515 |
|
Less net earnings attributable to noncontrolling interests |
|
| 63,620 |
|
|
| 48,307 |
|
|
| 44,950 |
|
Net earnings attributable to controlling interests |
|
| 1,697,339 |
|
|
| 1,244,233 |
|
|
| 880,565 |
|
Less preferred unit distributions |
|
| 6,499 |
|
|
| 6,714 |
|
|
| 6,651 |
|
Loss on preferred unit repurchase |
|
| 3,895 |
|
|
| - |
|
|
| - |
|
Net earnings attributable to common unitholders |
| $ | 1,686,945 |
|
| $ | 1,237,519 |
|
| $ | 873,914 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common units outstanding – Basic |
|
| 536,335 |
|
|
| 532,326 |
|
|
| 525,912 |
|
Weighted average common units outstanding – Diluted |
|
| 552,300 |
|
|
| 546,666 |
|
|
| 533,944 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per unit attributable to common unitholders – Basic |
| $ | 3.10 |
|
| $ | 2.29 |
|
| $ | 1.66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per unit attributable to common unitholders – Diluted |
| $ | 3.06 |
|
| $ | 2.27 |
|
| $ | 1.64 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions per common unit |
| $ | 1.76 |
|
| $ | 1.68 |
|
| $ | 1.52 |
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
|
| Year Ended December 31, |
| |||||||||
|
| 2017 |
|
| 2016 |
|
| 2015 |
| |||
Consolidated net earnings |
| $ | 1,760,959 |
|
| $ | 1,292,540 |
|
| $ | 925,515 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation gains (losses), net |
|
| 63,455 |
|
|
| (135,958 | ) |
|
| (208,901 | ) |
Unrealized gains (losses) on derivative contracts, net |
|
| 22,591 |
|
|
| (1,349 | ) |
|
| (17,457 | ) |
Comprehensive income |
|
| 1,847,005 |
|
|
| 1,155,233 |
|
|
| 699,157 |
|
Net earnings attributable to noncontrolling interests |
|
| (63,620 | ) |
|
| (48,307 | ) |
|
| (44,950 | ) |
Other comprehensive loss (gain) attributable to noncontrolling interests |
|
| (49,278 | ) |
|
| (12,601 | ) |
|
| 32,862 |
|
Comprehensive income attributable to common unitholders |
| $ | 1,734,107 |
|
| $ | 1,094,325 |
|
| $ | 687,069 |
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CAPITAL
(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, 2015 |
| 1,565 |
|
| $ | 78,235 |
|
|
| 509,498 |
|
| $ | 13,897,274 |
|
|
| 1,767 |
|
| $ | 48,189 |
|
|
| - |
|
| $ | - |
|
| $ | 1,159,901 |
|
| $ | 15,183,599 |
|
Consolidated net earnings |
| - |
|
|
| - |
|
|
| - |
|
|
| 869,439 |
|
|
| - |
|
|
| 7,733 |
|
|
| - |
|
|
| 3,393 |
|
|
| 44,950 |
|
|
| 925,515 |
|
Effect of equity compensation plans |
| - |
|
|
| - |
|
|
| 1,475 |
|
|
| 57,469 |
|
|
| 303 |
|
|
| 26,234 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 83,703 |
|
Issuance of units in exchange for contribution of at-the-market offering proceeds |
| - |
|
|
| - |
|
|
| 1,662 |
|
|
| 71,548 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 71,548 |
|
Issuance of units upon conversion of exchangeable debt |
| - |
|
|
| - |
|
|
| 11,872 |
|
|
| 502,732 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 502,732 |
|
Issuance of units related to KTR transaction |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 4,500 |
|
|
| 181,170 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 181,170 |
|
Issuance of units related to other acquisitions |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 157 |
|
|
| 6,534 |
|
|
| 8,894 |
|
|
| 365,036 |
|
|
| - |
|
|
| 371,570 |
|
Capital contributions |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 2,355,596 |
|
|
| 2,355,596 |
|
Foreign currency translation losses, net |
| - |
|
|
| - |
|
|
| - |
|
|
| (173,852 | ) |
|
| - |
|
|
| (1,520 | ) |
|
| - |
|
|
| (667 | ) |
|
| (32,862 | ) |
|
| (208,901 | ) |
Unrealized losses on derivative contracts, net |
| - |
|
|
| - |
|
|
| - |
|
|
| (17,240 | ) |
|
| - |
|
|
| (151 | ) |
|
| - |
|
|
| (66 | ) |
|
| - |
|
|
| (17,457 | ) |
Reallocation of capital |
| - |
|
|
| - |
|
|
| - |
|
|
| 186,918 |
|
|
| - |
|
|
| (70,965 | ) |
|
| - |
|
|
| (115,953 | ) |
|
| - |
|
|
| - |
|
Distributions and other |
| - |
|
|
| - |
|
|
| 5 |
|
|
| (804,588 | ) |
|
| (16 | ) |
|
| (10,541 | ) |
|
| - |
|
|
| (5,752 | ) |
|
| (207,358 | ) |
|
| (1,028,239 | ) |
Balance at December 31, 2015 |
| 1,565 |
|
| $ | 78,235 |
|
|
| 524,512 |
|
| $ | 14,589,700 |
|
|
| 6,711 |
|
| $ | 186,683 |
|
|
| 8,894 |
|
| $ | 245,991 |
|
| $ | 3,320,227 |
|
| $ | 18,420,836 |
|
Consolidated net earnings |
| - |
|
|
| - |
|
|
| - |
|
|
| 1,209,932 |
|
|
| - |
|
|
| 14,232 |
|
|
| - |
|
|
| 20,069 |
|
|
| 48,307 |
|
|
| 1,292,540 |
|
Effect of equity compensation plans |
| - |
|
|
| - |
|
|
| 2,282 |
|
|
| 91,214 |
|
|
| 440 |
|
|
| 26,483 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 117,697 |
|
Issuance of units related to acquisitions |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 71 |
|
|
| 3,162 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 3,162 |
|
Conversion of limited partners units |
| - |
|
|
| - |
|
|
| 1,877 |
|
|
| 52,256 |
|
|
| (1,877 | ) |
|
| (52,256 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
Foreign currency translation gains (losses), net |
| - |
|
|
| - |
|
|
| - |
|
|
| (144,730 | ) |
|
| - |
|
|
| (1,457 | ) |
|
| - |
|
|
| (2,372 | ) |
|
| 12,601 |
|
|
| (135,958 | ) |
Unrealized losses on derivative contracts, net |
| - |
|
|
| - |
|
|
| - |
|
|
| (1,314 | ) |
|
| - |
|
|
| (13 | ) |
|
| - |
|
|
| (22 | ) |
|
| - |
|
|
| (1,349 | ) |
Reallocation of capital |
| - |
|
|
| - |
|
|
| - |
|
|
| 8,657 |
|
|
| - |
|
|
| (12,414 | ) |
|
| - |
|
|
| 3,757 |
|
|
| - |
|
|
| - |
|
Distributions and other |
| - |
|
|
| - |
|
|
| - |
|
|
| (892,869 | ) |
|
| (22 | ) |
|
| (14,247 | ) |
|
| - |
|
|
| (23,006 | ) |
|
| (308,666 | ) |
|
| (1,238,788 | ) |
Balance at December 31, 2016 |
| 1,565 |
|
| $ | 78,235 |
|
|
| 528,671 |
|
| $ | 14,912,846 |
|
|
| 5,323 |
|
| $ | 150,173 |
|
|
| 8,894 |
|
| $ | 244,417 |
|
| $ | 3,072,469 |
|
| $ | 18,458,140 |
|
Consolidated net earnings |
| - |
|
|
| - |
|
|
| - |
|
|
| 1,652,325 |
|
|
| - |
|
|
| 18,372 |
|
|
| - |
|
|
| 26,642 |
|
|
| 63,620 |
|
|
| 1,760,959 |
|
Effect of equity compensation plans |
| - |
|
|
| - |
|
|
| 2,000 |
|
|
| 74,526 |
|
|
| 1,386 |
|
|
| 41,446 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 115,972 |
|
Capital contributions |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 254,214 |
|
|
| 254,214 |
|
Repurchase of preferred units |
| (186 | ) |
|
| (9,287 | ) |
|
| - |
|
|
| (3,895 | ) |
|
| - |
| �� |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (13,182 | ) |
Purchase of noncontrolling interests |
| - |
|
|
| - |
|
|
| - |
|
|
| (202,040 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (587,976 | ) |
|
| (790,016 | ) |
Redemption of limited partnership units |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (369 | ) |
|
| (23,831 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (23,831 | ) |
Conversion of limited partners units |
| - |
|
|
| - |
|
|
| 1,515 |
|
|
| 47,726 |
|
|
| (684 | ) |
|
| (18,753 | ) |
|
| - |
|
|
| - |
|
|
| (28,973 | ) |
|
| - |
|
Foreign currency translation gains, net |
| - |
|
|
| - |
|
|
| - |
|
|
| 13,810 |
|
|
| - |
|
|
| 146 |
|
|
| - |
|
|
| 221 |
|
|
| 49,278 |
|
|
| 63,455 |
|
Unrealized gains on derivative contracts, net |
| - |
|
|
| - |
|
|
| - |
|
|
| 22,005 |
|
|
| - |
|
|
| 234 |
|
|
| - |
|
|
| 352 |
|
|
| - |
|
|
| 22,591 |
|
Reallocation of capital |
| - |
|
|
| - |
|
|
| - |
|
|
| (12,143 | ) |
|
| - |
|
|
| 11,829 |
|
|
| - |
|
|
| 314 |
|
|
| - |
|
|
| - |
|
Distributions and other |
| - |
|
|
| - |
|
|
| - |
|
|
| (942,950 | ) |
|
| - |
|
|
| (14,215 | ) |
|
| - |
|
|
| (23,006 | ) |
|
| (162,390 | ) |
|
| (1,142,561 | ) |
Balance at December 31, 2017 |
| 1,379 |
|
| $ | 68,948 |
|
|
| 532,186 |
|
| $ | 15,562,210 |
|
|
| 5,656 |
|
| $ | 165,401 |
|
|
| 8,894 |
|
| $ | 248,940 |
|
| $ | 2,660,242 |
|
| $ | 18,705,741 |
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
| Years Ended December 31, |
| |||||||||
|
| 2017 |
|
| 2016 |
|
| 2015 |
| |||
Operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net earnings |
| $ | 1,760,959 |
|
| $ | 1,292,540 |
|
| $ | 925,515 |
|
Adjustments to reconcile net earnings to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Straight-lined rents and amortization of above and below market leases |
|
| (81,021 | ) |
|
| (93,608 | ) |
|
| (59,619 | ) |
Equity-based compensation awards |
|
| 76,640 |
|
|
| 60,341 |
|
|
| 53,665 |
|
Depreciation and amortization |
|
| 879,140 |
|
|
| 930,985 |
|
|
| 880,373 |
|
Earnings from unconsolidated entities, net |
|
| (248,567 | ) |
|
| (206,307 | ) |
|
| (159,262 | ) |
Distributions from unconsolidated entities |
|
| 307,220 |
|
|
| 286,651 |
|
|
| 284,664 |
|
Decrease (increase) in operating receivables from unconsolidated entities |
|
| (30,893 | ) |
|
| 14,823 |
|
|
| (38,185 | ) |
Amortization of debt discounts (premiums), net of debt issuance costs |
|
| 751 |
|
|
| (15,137 | ) |
|
| (31,841 | ) |
Gains on dispositions of investments in real estate and revaluation of equity investments upon acquisition of a controlling interest, net |
|
| (1,182,965 | ) |
|
| (757,398 | ) |
|
| (758,887 | ) |
Unrealized foreign currency and derivative losses (gains), net |
|
| 68,956 |
|
|
| (8,052 | ) |
|
| (1,019 | ) |
Losses (gains) on early extinguishment of debt, net |
|
| 68,379 |
|
|
| (2,484 | ) |
|
| 86,303 |
|
Deferred income tax benefit |
|
| (5,005 | ) |
|
| (5,525 | ) |
|
| (5,057 | ) |
Decrease (increase) in accounts receivable and other assets |
|
| 37,278 |
|
|
| (106,337 | ) |
|
| (64,749 | ) |
Increase in accounts payable and accrued expenses and other liabilities |
|
| 36,374 |
|
|
| 26,513 |
|
|
| 4,426 |
|
Net cash provided by operating activities |
|
| 1,687,246 |
|
|
| 1,417,005 |
|
|
| 1,116,327 |
|
Investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Real estate development |
|
| (1,606,133 | ) |
|
| (1,641,560 | ) |
|
| (1,339,904 | ) |
Real estate acquisitions |
|
| (442,696 | ) |
|
| (458,516 | ) |
|
| (890,183 | ) |
KTR transaction, net of cash received |
|
| - |
|
|
| - |
|
|
| (4,809,499 | ) |
Tenant improvements and lease commissions on previously leased space |
|
| (153,255 | ) |
|
| (165,933 | ) |
|
| (154,564 | ) |
Nondevelopment capital expenditures |
|
| (110,635 | ) |
|
| (101,677 | ) |
|
| (83,351 | ) |
Proceeds from dispositions and contributions of real estate properties |
|
| 3,236,603 |
|
|
| 2,826,408 |
|
|
| 2,795,249 |
|
Investments in and advances to unconsolidated entities |
|
| (249,735 | ) |
|
| (265,951 | ) |
|
| (474,420 | ) |
Acquisition of a controlling interest in an unconsolidated venture, net of cash received |
|
| (374,605 | ) |
|
| - |
|
|
| - |
|
Return of investment from unconsolidated entities |
|
| 209,151 |
|
|
| 776,550 |
|
|
| 29,406 |
|
Proceeds from repayment of notes receivable backed by real estate |
|
| 32,100 |
|
|
| 202,950 |
|
|
| 9,866 |
|
Proceeds from the settlement of net investment hedges |
|
| 7,541 |
|
|
| 79,767 |
|
|
| 129,149 |
|
Payments on the settlement of net investment hedges |
|
| (5,058 | ) |
|
| - |
|
|
| (981 | ) |
Net cash provided by (used in) investing activities |
|
| 543,278 |
|
|
| 1,252,038 |
|
|
| (4,789,232 | ) |
Financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common partnership units in exchange for contributions from Prologis, Inc. |
|
| 32,858 |
|
|
| 39,470 |
|
|
| 90,258 |
|
Distributions paid on common and preferred units |
|
| (980,105 | ) |
|
| (931,559 | ) |
|
| (820,989 | ) |
Repurchase of preferred units |
|
| (13,182 | ) |
|
| - |
|
|
| - |
|
Noncontrolling interests contributions |
|
| 240,925 |
|
|
| 2,168 |
|
|
| 2,355,367 |
|
Noncontrolling interests distributions |
|
| (170,567 | ) |
|
| (306,297 | ) |
|
| (199,845 | ) |
Purchase of noncontrolling interests |
|
| (790,016 | ) |
|
| (2,232 | ) |
|
| (2,163 | ) |
Redemption of common limited partnership units |
|
| (23,831 | ) |
|
| - |
|
|
| - |
|
Tax paid for shares of the Parent withheld |
|
| (19,775 | ) |
|
| (8,570 | ) |
|
| (12,298 | ) |
Debt and capital issuance costs paid |
|
| (7,054 | ) |
|
| (20,123 | ) |
|
| (32,012 | ) |
Net proceeds from (payments on) credit facilities |
|
| 283,255 |
|
|
| 33,435 |
|
|
| (7,970 | ) |
Repurchase and payments of debt |
|
| (3,578,889 | ) |
|
| (2,301,647 | ) |
|
| (3,156,294 | ) |
Proceeds from issuance of debt |
|
| 2,419,797 |
|
|
| 1,369,890 |
|
|
| 5,381,862 |
|
Net cash provided by (used in) financing activities |
|
| (2,606,584 | ) |
|
| (2,125,465 | ) |
|
| 3,595,916 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign currency exchange rate changes on cash |
|
| 15,790 |
|
|
| (342 | ) |
|
| (9,623 | ) |
Net increase (decrease) in cash and cash equivalents |
|
| (360,270 | ) |
|
| 543,236 |
|
|
| (86,612 | ) |
Cash and cash equivalents, beginning of year |
|
| 807,316 |
|
|
| 264,080 |
|
|
| 350,692 |
|
Cash and cash equivalents, end of year |
| $ | 447,046 |
|
| $ | 807,316 |
|
| $ | 264,080 |
|
See Note 19 for information on noncash investing and financing activities and other information.
The accompanying notes are an integral part of these Consolidated Financial Statements.
PROLOGIS, INC. AND PROLOGIS, L.P.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF THE 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 properties in the world’s primary population centers and in those supported by extensive transportation infrastructure. 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 co-investment ventures and other unconsolidated entities. See Note 18 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 common stock or preferred stock the Parent issues, the OP issues a corresponding common or preferred partnership unit, as applicable, to the Parent in exchange for the contribution of the proceeds from the stock issuance. At December 31, 2017, the Parent owned an approximate 97.41% common general partnership interest in the OP and 100% of the preferred units in the OP. The remaining approximate 2.59% common limited partnership interests, which include 8.9 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.
Information with respect to the square footage, number of buildings and acres of land is unaudited.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Consolidation. 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.
We consolidate all entities that are wholly owned and those in which we own less than 100% of the equity but control, as well as any variable interest entities (“VIEs”) in which we are the primary beneficiary. We evaluate our ability to control an entity and whether the entity is a VIE and we are the primary beneficiary through consideration of substantive terms of the arrangement to identify which enterprise has the power to direct the activities of the entity that most significantly impacts the entity’s economic performance and the obligation to absorb losses and the right to receive benefits from the entity.
For entities that are not defined as VIEs, we first consider whether we are the general partner or the limited partner (or the equivalent in such investments that are not structured as partnerships). We consolidate entities in which we are the general partner and the limited partners in such entities do not have rights that would preclude control. For entities in which we are the general partner but do not control the entity as the other partners hold substantive participating or kick-out rights, we apply the equity method of accounting since, as the general partner, we have the ability to influence the venture. For ventures for which we are a limited partner or our investment is in an entity that is not structured similar to a partnership, we consider factors such as ownership interest, voting control, authority to make decisions, and contractual and substantive participating rights of the partners. In instances where the factors indicate that we have a controlling financial interest in the venture, we consolidate the entity.
Reclassifications. Certain amounts included in the Consolidated Financial Statements for 2016 and 2015 have been reclassified to conform to the 2017 financial statement presentation.
Use of Estimates. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the reporting
period. Although we believe the assumptions and estimates we made are reasonable and appropriate, as discussed in the applicable sections throughout the Consolidated Financial Statements, different assumptions and estimates could materially impact our reported results.
Foreign Operations. The U.S. dollar is the functional currency for our consolidated subsidiaries and unconsolidated entities operating in the U.S. and Mexico and certain of our consolidated subsidiaries that operate as holding companies for foreign investments. The functional currency for our consolidated subsidiaries and unconsolidated entities operating in other countries is the principal currency in which the entity’s assets, liabilities, income and expenses are denominated, which may be different from the local currency of the country of incorporation or where the entity conducts its operations. The functional currencies of entities outside of the U.S. and Mexico generally include the Brazilian real, British pound sterling, Canadian dollar, Chinese yuan, euro, Japanese yen and Singapore dollar. We take part in business transactions denominated in these and other local currencies where we operate.
For our consolidated subsidiaries whose functional currency is not the U.S. dollar, we translate their financial statements into the U.S. dollar at the time we consolidate those subsidiaries’ financial statements. Generally, assets and liabilities are translated at the exchange rate in effect at the balance sheet date. The resulting translation adjustments are included in Accumulated Other Comprehensive Income (Loss) (“AOCI/L”) in the Consolidated Balance Sheets. Certain balance sheet items, primarily equity and capital-related accounts, are reflected at the historical exchange rate. Income statement accounts are translated using the average exchange rate for the period and income statement accounts that represent significant nonrecurring transactions are translated at the rate in effect at the date of the transaction. We translate our share of the net operating income or losses of our unconsolidated entities at the average exchange rate for the period and significant nonrecurring transactions of the unconsolidated entities are translated at the rate in effect at the date of the transaction.
We and certain of our consolidated subsidiaries have intercompany and third-party debt that is not denominated in the entity’s functional currency. When the debt is remeasured against the functional currency of the entity, a gain or loss can result. The resulting adjustment is reflected in Foreign Currency and Derivative Gains (Losses), Net in the Consolidated Statements of Income, unless it is intercompany debt that is deemed to be long-term in nature and then the adjustment is reflected as a cumulative translation adjustment in AOCI/L.
Acquisitions. Based on new accounting guidance, beginning January 1, 2017, we apply a screen test to evaluate if substantially all the fair value of the acquired property is concentrated in a single identifiable asset or group of similar identifiable assets to determine whether a transaction is accounted for as an asset acquisition or business combination. As most of our real estate acquisitions are concentrated in either a single or a group of similar identifiable assets, our real estate transactions are generally accounted for as asset acquisitions, which permits the capitalization of transaction costs to the basis of the acquired property. For transactions that qualify as a business combination in 2017 and for all acquisitions in 2016 and 2015, transaction costs are expensed as incurred. Whether a transaction is determined to be an acquisition of a business or asset, we allocate the purchase price to the various components of the acquisition based on the fair value of the acquired assets and assumed liabilities, including an allocation to the individual buildings acquired. The initial allocation of the purchase price is based on management’s preliminary assessment, which may differ when final information becomes available. The transaction costs related to the acquisition of land and the formation of equity method investments are capitalized.
When we obtain control of an unconsolidated entity and the acquisition qualifies as a business, we account for the acquisition in accordance with the guidance for a business combination achieved in stages. We remeasure our previously held interest in the unconsolidated entity at its acquisition-date fair value and recognize the resulting gain or loss, if any, in earnings at the acquisition date.
We allocate the purchase price using primarily Level 2 and Level 3 inputs (further defined in Fair Value Measurements below) as follows:
Investments in Real Estate Properties. We value operating properties as if vacant. We estimate fair value generally by applying an income approach methodology using a discounted cash flow analysis. Key assumptions in the discounted cash flow analysis include market rents, growth rates and discount and capitalization rates. We determine discount and capitalization rates by market based on recent transactions and other market data. The fair value of land is generally based on relevant market data, such as a comparison of the subject site to similar parcels that have recently been sold or are currently being offered on the market for sale.
Lease Intangibles. We determine the portion of the purchase price related to intangible assets and liabilities as follows:
Above and Below Market Leases. We recognize an asset or liability for acquired in-place leases with favorable or unfavorable rents based on our estimate of current market rents of the applicable markets. The value is recorded in either Other Assets or Other Liabilities, as appropriate, and is amortized over the term of the respective leases, including any bargain renewal options, to rental revenues.
Foregone Rent. We calculate the value of the revenue and recovery of costs foregone during a reasonable lease-up period, as if the space was vacant, in each of the applicable markets. The values are recorded in Other Assets and amortized over the remaining life of the respective leases to amortization expense.
Leasing Commissions. We recognize an asset for leasing commissions upon the acquisition of in-place leases based on our estimate of the cost to lease space in the applicable markets. The value is recorded in Other Assets and amortized over the remaining life of the respective leases to amortization expense.
Debt. We estimate the fair value of debt based on contractual future cash flows discounted using borrowing spreads and market interest rates that would be available to us for the issuance of debt with similar terms and remaining maturities. In the case of publicly traded debt, we estimate the fair value based on available market data. Any discount or premium to the principal amount is included in the carrying value and amortized to interest expense over the remaining term of the related debt using the effective interest method.
Noncontrolling Interests. We estimate the portion of the fair value of the net assets owned by third parties based on the fair value of the consolidated net assets, principally real estate properties and debt.
Working Capital. We estimate the fair value of other acquired assets and assumed liabilities on the best information available.
Fair Value Measurements. The objective of fair value is to determine the price that would be received on the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (the exit price). We estimate fair value using available market information and valuation methodologies we believe to be appropriate for these purposes. Considerable judgment and a high degree of subjectivity are involved in developing these estimates and, accordingly, they are not necessarily indicative of amounts that we would realize on disposition. The fair value hierarchy consists of three broad levels:
Level 1 — Quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date.
Level 2 — Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3 — Unobservable inputs for the asset or liability.
Fair Value Measurements on a Recurring Basis. We estimate the fair value of our financial instruments using available market information and valuation methodologies we believe to be appropriate for these purposes.
We determine the fair value of our derivative financial instruments using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves, foreign exchange rates, and implied volatilities. We determine the fair values of our interest rate swaps using the market standard methodology of netting the discounted future fixed cash receipts or payments and the discounted expected variable cash payments. We base the variable cash payments on an expectation of future interest rates, or forward curves, derived from observable market interest rate curves. We base the fair values of our net investment hedges on the change in the spot rate at the end of the period as compared with the strike price at inception.
We incorporate credit valuation adjustments to appropriately reflect nonperformance risk for us and the respective counterparty in the fair value measurements. In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we consider the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts and guarantees.
We have determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy. Although the credit valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by us and our counterparties, we assess the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and have determined that the credit valuation adjustments are not significant to the overall valuation of our derivatives.
Fair Value Measurements on a Nonrecurring Basis. Assets measured at fair value on a nonrecurring basis generally consist of real estate assets and investments in unconsolidated entities that were subject to impairment charges related to our change of intent to sell the investments and through our recoverability analysis discussed below. We estimate fair value based on expected sales prices in the market (Level 2) or by applying the income approach methodology using a discounted cash flow analysis (Level 3).
Fair Value of Financial Instruments. We estimate the fair value of our senior notes for disclosure purposes based on quoted market prices for the same (Level 1) or similar (Level 2) issues when current quoted market prices are available. We estimate the fair value of our credit facilities, term loans, secured mortgage debt and assessment bonds by discounting the future cash flows using rates and borrowing spreads currently available to us (Level 3).
Real Estate Assets. Real estate assets are carried at depreciated cost. We capitalize costs incurred in developing, renovating, rehabilitating and improving real estate assets as part of the investment basis. We expense costs for repairs and maintenance as incurred.
During the land development and construction periods of qualifying projects, we capitalize interest costs, insurance, real estate taxes and general and administrative costs of the personnel performing the development, renovation, and rehabilitation; if such costs are incremental and identifiable to a specific activity to ready the asset for its intended use. We capitalize transaction costs related to the acquisition of land for future development and operating properties that qualify as asset acquisitions. We capitalize costs incurred to successfully originate a lease that result directly from and are essential to acquire that lease, including internal costs that are
incremental and identifiable as leasing activities. Leasing costs that meet the requirements for capitalization are presented as a component of Other Assets.
We charge the depreciable portions of real estate assets to depreciation expense on a straight-line basis over the respective estimated useful lives. Depreciation commences when the asset is ready for its intended use, which we define as the earlier of stabilization (90% occupied) or one year after completion of construction. We generally use the following useful lives: 5 to 7 years for capital improvements, 10 years for standard tenant improvements, 25 years for depreciable land improvements, 30 years for operating properties acquired and 40 years for operating properties we develop. We depreciate building improvements on land parcels subject to ground leases over the shorter of the estimated building improvement life or the contractual term of the underlying ground lease. Capitalized leasing costs are amortized over the estimated remaining lease term. Our weighted average lease term on leases signed during 2017, based on square feet for all leases, was 54 months.
We assess the carrying values of our respective real estate assets, whenever events or changes in circumstances indicate that the carrying amounts of these assets may not be fully recoverable. We measure the recoverability of the asset by comparing the carrying amount of the asset to the estimated future undiscounted cash flows. If our analysis indicates that the carrying value of the real estate property is not recoverable on an undiscounted cash flow basis, we recognize an impairment charge for the amount by which the carrying value exceeds the current estimated fair value of the real estate property.
We estimate the future undiscounted cash flows and fair value based on our intent as follows:
for real estate properties that we intend to hold long-term; including land held for development, properties currently under development and operating properties; recoverability is assessed based on the estimated undiscounted future net rental income from operating the property and the terminal value, including anticipated costs to develop;
for real estate properties we intend to sell, including properties currently under development and operating properties; recoverability is assessed based on proceeds from disposition that are estimated based on future net rental income of the property, expected market capitalization rates and anticipated costs to develop;
for land parcels we intend to sell, recoverability is assessed based on estimated proceeds from disposition; and
for costs incurred related to the potential acquisition of land, operating properties or development of a real estate property, recoverability is assessed based on the probability that the acquisition or development is likely to occur at the measurement date.
Assets Held for Sale or Contribution. We classify a property as held for sale or contribution when certain criteria are met in accordance with GAAP. Assets classified as held for sale are expected to be sold to a third party and assets classified as held for contribution are newly developed assets we intend to contribute to an unconsolidated co-investment venture or to a third party within twelve months. At such time, the respective assets and liabilities are presented separately in the Consolidated Balance Sheets and depreciation is no longer recognized. Assets held for sale or contribution are reported at the lower of their carrying amount or their estimated fair value less the costs to sell.
Investments in Unconsolidated Entities. We present our investments in certain entities under the equity method. We use the equity method when we have the ability to exercise significant influence over operating and financial policies of the venture but do not have control of the entity. Under the equity method, we initially recognize these investments (including advances) in the balance sheet at our cost, including formation costs and net of deferred gains from the contribution of properties, if applicable. We subsequently adjust the accounts to reflect our proportionate share of net earnings or losses recognized and accumulated other comprehensive income or loss, distributions received, contributions made and certain other adjustments, as appropriate. When circumstances indicate there may have been a reduction in the value of an equity investment, we evaluate whether the loss in value is other than temporary. If we conclude it is other than temporary, we recognize an impairment charge to reflect the equity investment at fair value.
With regard to distributions from unconsolidated entities, we have elected the nature of distribution approach as the information is available to us to determine the nature of the underlying activity that generated the distributions. In accordance with the nature of distribution approach, cash flows generated from the operations of an unconsolidated entity are classified as a return on investment (cash inflow from operating activities) and cash flows that are generated from property sales, debt refinancing or sales of our investments are classified as a return of investment (cash inflow from investing activities).
Cash and Cash Equivalents. We consider all cash on hand, demand deposits with financial institutions and short-term highly liquid investments with original maturities of three months or less to be cash equivalents. Our cash and cash equivalents are financial instruments that are exposed to concentrations of credit risk. We invest our cash with high-credit quality institutions. Cash balances may be invested in money market accounts that are not insured. We have not realized any losses in such cash investments or accounts and believe that we are not exposed to any significant credit risk.
Derivative Financial Instruments. We primarily hedge our foreign currency risk by borrowing in the currencies in which we invest. Generally, we borrow in the functional currency of our consolidated subsidiaries but we also borrow in currencies other than the U.S. dollar in the OP. We may use derivative financial instruments, such as foreign currency forward and option contracts to manage foreign currency exchange rate risk related to both our foreign investments and the related earnings. In addition, we occasionally use interest rate swap and forward contracts to manage interest rate risk and limit the impact of future interest rate changes on earnings and cash flows, primarily with variable-rate debt.
We do not use derivative financial instruments for trading or speculative purposes. Each derivative transaction is customized and not exchange-traded. We recognize all derivatives at fair value within the line items Other Assets or Other Liabilities. We do not net our derivative position by counterparty for purposes of balance sheet presentation and disclosure. Management reviews our derivative positions, overall risk management strategy and hedging program, on a regular basis. We only enter into transactions that we believe will be highly effective at offsetting the underlying risk. Our use of derivatives involves the risk that counterparties may default on a derivative contract; therefore we: (i) establish exposure limits for each counterparty to minimize this risk and provide counterparty diversification; (ii) contract with counterparties that have long-term credit ratings of single-A or better; (iii) enter into master agreements that generally allow for netting of certain exposures; thereby significantly reducing the actual loss that would be incurred should a counterparty fail to perform its contractual obligations; and (iv) set minimum credit standards that become more stringent as the duration of the derivative financial instrument increases. Based on these factors, we consider the risk of counterparty default to be minimal.
Designated Derivatives. We may choose to designate our derivative financial instruments, generally foreign currency forwards as net investment hedges in foreign operations or interest rate swaps or forwards as cash flow hedges. At inception of the transaction, we formally designate and document the derivative financial instrument as a hedge of a specific underlying exposure, the risk management objective and the strategy for undertaking the hedge transaction. We formally assess both at inception and at least quarterly thereafter, the effectiveness of our hedging transactions. Due to the high degree of effectiveness between the hedging instruments and the underlying exposures hedged, fluctuations in the value of the derivative financial instruments will generally be offset by changes in the cash flows or fair values of the underlying exposures being hedged.
Changes in the fair value of derivatives that are designated and qualify as net investment hedges in foreign operations and cash flow hedges are recorded in AOCI/L. For net investment hedges, these amounts offset the translation adjustments on the underlying net assets of our foreign investments, which we also record in AOCI/L. The ineffective portion of a derivative financial instrument's change in fair value, if any, is immediately recognized in earnings within the line item Foreign Currency and Derivative Gains (Losses), Net in the Consolidated Statements of Income. For cash flow hedges, we report the effective portion of the gain or loss as a component of AOCI/L and reclassify it to the applicable line item in the Consolidated Statements of Income, generally Interest Expense, over the corresponding period of the underlying hedged item. The ineffective portion of a derivative financial instrument’s change in fair value is recognized in earnings, generally Interest Expense, at the time the ineffectiveness occurred. To the extent the hedged debt related to our interest rate swaps and forwards is paid off early, we write off the remaining balance in AOCI/L and recognize the amount in Interest Expense in the Consolidated Statements of Income.
In addition to the net investment hedges described above, we may issue debt in the OP in a currency that is not the same functional currency of the borrowing entity to hedge our international investments. We designate the debt as a nonderivative financial instrument to offset the translation and economic exposures related to our net investment in international subsidiaries.
Undesignated Derivatives. We also use derivatives, such as foreign currency forwards and option contracts, that are not designated as hedges to manage foreign currency exchange rate risk related to our results of operations. The changes in fair values of these derivatives that were not designated or did not qualify as hedging instruments are immediately recognized in earnings within the line item Foreign Currency and Derivative Gains (Losses), Net in the Consolidated Statements of Income. These gains or losses are generally offset by lower or higher earnings as a result in exchange rates that were different than our expectations.
In addition, we may choose to not designate our interest rate swap and forward contracts. If a swap or forward contract is not designated as a hedge, the changes in fair value of these instruments is immediately recognized in earnings within the line item Interest Expense in the Consolidated Statements of Income.
Costs of Raising Capital. We treat costs incurred in connection with the issuance of common and preferred stock as a reduction to additional paid-in capital. We capitalize costs incurred in connection with the issuance of debt. Costs related to our credit facilities are included in Other Assets and costs related to all our other debt are recorded as a direct reduction of the liability.
AOCI/L. For the Parent, we include AOCI/L as a separate component of stockholders' equity in the Consolidated Balance Sheets. For the OP, AOCI/L is included in partners’ capital in the Consolidated Balance Sheets. Any reference to AOCI/L in this document is referring to the component of stockholders’ equity for the Parent and partners’ capital for the OP.
Noncontrolling Interests. Noncontrolling interests represent the share of consolidated entities owned by third parties. We recognize each noncontrolling holder’s respective share of the estimated fair value of the net assets at the date of formation or acquisition. Noncontrolling interests are subsequently adjusted for the noncontrolling holder’s share of additional contributions, distributions and their share of the net earnings or losses of each respective consolidated entity. We allocate net income to noncontrolling interests based on the weighted average ownership interest during the period. The net income that is not attributable to us is reflected in the line item Net Earnings Attributable to Noncontrolling Interests. We do not recognize a gain or loss on transactions with a consolidated entity in which we do not own 100% of the equity, but we reflect the difference in cash received or paid from the noncontrolling interests carrying amount as additional paid-in-capital.
Certain limited partnership interests are exchangeable into our common stock. Common stock issued upon exchange of a holder’s noncontrolling interest is accounted for at the carrying value of the surrendered limited partnership interest and the difference between the carrying value and the fair value of the common stock issued is recorded to additional paid-in-capital.
Rental Revenues. We lease our operating properties to customers under agreements that are classified as operating leases. We recognize the total minimum lease payments provided for under the leases on a straight-line basis over the lease term. Generally, under the terms of our leases, the majority of our rental expenses are recovered from our customers. We reflect amounts recovered from customers as revenues in the period that the applicable expenses are incurred. We make a provision for possible loss if the collection of a receivable balance is considered doubtful.
Strategic Capital Revenues. Strategic capital revenues include revenues we earn from the management services we provide to unconsolidated entities. These fees are determined in accordance with the terms specific to each arrangement and may include property and asset management fees or transactional fees for leasing, acquisition, development, construction, financing, legal and tax services provided. We may also earn incentive returns (called “promotes”) based on third-party investor returns over time, which may be during the duration of the venture or at the time of liquidation. We recognize fees when they are earned, fixed and determinable or on a percentage of completion basis for development fees. We report these fees in Strategic Capital Revenues. The fees we earn to develop properties within these ventures are also recorded on a percentage of completion basis.
We also earn fees from ventures that we consolidate. Upon consolidation, these fees are eliminated from our earnings and the third-party share of these fees are recognized as a reduction of Net Earnings Attributable to Noncontrolling Interests.
Gains on Dispositions of Investments in Real Estate and Revaluation of Equity Investments Upon Acquisition of a Controlling Interest, Net. We recognize gains on the disposition of real estate when the recognition criteria have been met, generally at the time the risks and rewards and title have transferred and we no longer have substantial continuing involvement with the real estate sold. We recognize losses from the disposition of real estate when known. We recognize gains or losses on the remeasurement of equity investments to fair value upon acquisition of a controlling interest in any of our previously unconsolidated entities and the transaction is considered the acquisition of a business.
When we contribute a property to an unconsolidated entity in which we have an ownership interest, we do not recognize a portion of the gain realized. The amount of gain not recognized, based on our ownership interest in the entity acquiring the property, is deferred by recognizing a reduction to our investment in the applicable unconsolidated entity. We adjust our proportionate share of net earnings or losses recognized in future periods to reflect the entities’ recorded depreciation expense as if it were computed on our lower basis in the contributed properties rather than on the entity’s basis.
When a property that we originally contributed to an unconsolidated entity is disposed of to a third party, we recognize the amount of the gain we previously deferred, along with our proportionate share of the gain recognized by the unconsolidated entity. If our ownership interest in an unconsolidated entity decreases and the decrease is expected to be permanent, we recognize the amounts relating to previously deferred gains to coincide with our new ownership interest.
Rental Expenses. Rental expenses primarily include the cost of our property management personnel, utilities, repairs and maintenance, property insurance, real estate taxes and the other costs of managing the properties.
Strategic Capital Expenses. Strategic capital expenses generally include the direct expenses associated with the asset management of the unconsolidated co-investment ventures provided by our employees who are assigned to our Strategic Capital segment and the costs of our Prologis Promote Plan based on earned promotes. In addition, in order to achieve efficiencies and economies of scale, all of our property management functions are provided by property management personnel who are assigned to our Real Estate Operations segment. These individuals perform the property-level management of the properties in our owned and managed portfolio, which include properties we consolidate and those we manage that are owned by the unconsolidated co-investment ventures. We allocate the costs of our property management to the properties we consolidate (included in Rental Expenses) and the properties owned by the unconsolidated co-investment ventures (included in Strategic Capital Expenses) by using the square feet owned by the respective portfolios.
Equity-Based Compensation. We account for equity-based compensation by measuring the cost of employee services received in exchange for an award of an equity instrument based on the fair value of the award on the grant date. We recognize the cost of the award on a straight-line basis over the period during which an employee is required to provide service in exchange for the award, generally the vesting period.
Income Taxes. Under the Internal Revenue Code, REITs are generally not required to pay federal income taxes if they distribute 100% of their taxable income and meet certain income, asset and stockholder tests. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income taxes at regular corporate rates (including any alternative minimum tax) and may not be able to qualify as a REIT for the four subsequent taxable years. Even as a REIT, we may be subject to certain foreign state and local taxes on our own income and property, and to federal income and excise taxes on our undistributed taxable income.
We have elected taxable REIT subsidiary (“TRS”) status for some of our consolidated subsidiaries. This allows us to provide services that would otherwise be considered impermissible for REITs. Many of the foreign countries in which we have operations do not recognize REITs or do not accord REIT status under their respective tax laws to our entities that operate in their jurisdiction. In the U.S., we are taxed in certain states in which we operate. Accordingly, we recognize income tax expense for the federal and state income taxes incurred by our TRSs, taxes incurred in certain states and foreign jurisdictions, and interest and penalties associated with our unrecognized tax benefit liabilities.
We evaluate tax positions taken in the Consolidated Financial Statements under the interpretation for accounting for uncertainty in income taxes. As a result of this evaluation, we may recognize a tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by taxing authorities.
We recognize deferred income taxes in certain taxable entities. For federal income tax purposes, certain acquisitions have been treated as tax-free transactions resulting in a carry-over basis in assets and liabilities. For financial reporting purposes and in accordance with purchase accounting, we record all of the acquired assets and assumed liabilities at the estimated fair value at the date of acquisition. For our taxable subsidiaries, including certain international jurisdictions, we recognize the deferred income tax liabilities that represent the tax effect of the difference between the tax basis carried over and the fair value of the tangible and intangible assets at the date of acquisition. Any subsequent increases or decreases to the deferred income tax liability recorded in connection with these acquisitions, are reflected in earnings.
If taxable income is generated in these subsidiaries, we recognize a benefit in earnings as a result of the reversal of the deferred income tax liability previously recorded at the acquisition date and we record current income tax expense representing the entire current income tax liability. If the reversal of the deferred income tax liability results from a sale or contribution of assets, the classification of the reversal to the Consolidated Statement of Income is based on the taxability of the transaction. We record the reversal to deferred income tax benefit as a taxable transaction if we dispose of the asset. We record the reversal as Gains on Dispositions of Investments in Real Estate and Revaluation of Equity Investments Upon Acquisition of a Controlling Interest, Net as a non-taxable transaction if we dispose of the asset along with the entity that owns the asset.
Deferred income tax expense is generally a function of the period’s temporary differences (items that are treated differently for tax purposes than for financial reporting purposes) and the utilization of tax net operating losses (“NOL”) generated in prior years that had been previously recognized as deferred income tax assets. We provide for a valuation allowance for deferred income tax assets if we believe all or some portion of the deferred income tax asset may not be realized. Any increase or decrease in the valuation allowance that results from a change in circumstances that causes a change in the estimated ability to realize the related deferred income tax asset is included in deferred tax expense.
Environmental Costs. We incur certain environmental remediation costs, including cleanup costs, consulting fees for environmental studies and investigations, monitoring costs, and legal costs relating to cleanup, litigation defense, and the pursuit of responsible third parties. We expense costs incurred in connection with operating properties and properties previously sold. We capitalize costs related to undeveloped land as development costs and include any expected future environmental liabilities at the time of acquisition. We include costs incurred for properties to be disposed in the cost of the properties upon disposition. We maintain a liability for the estimated costs of environmental remediation expected to be incurred in connection with undeveloped land, operating properties and properties previously sold that we adjust as appropriate as information becomes available.
New Accounting Pronouncements.
New Accounting Standards Adopted
In January 2017, the Financial Accounting Standards Board (“FASB”) issued an accounting standard update (“ASU”) that clarifies the definition of a business. The update added further guidance that assists preparers in evaluating whether a transaction will be accounted for as an acquisition of an asset or a business. As discussed above, we adopted this standard on January 1, 2017, on a prospective basis. The adoption did not have a significant impact on the Consolidated Financial Statements.
New Accounting Standards Issued but not yet Adopted
Revenue Recognition. In May 2014, the FASB issued an 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. We evaluated each of our revenue streams and their related accounting policies under the standard. 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 revenue recognition standard includes recurring fees and promotes earned from our co-investment ventures as well as sales to third parties and contributions of properties to unconsolidated co-investment ventures. While we do not expect changes in the recognition of recurring fees earned, we will evaluate promote fees earlier in the incentive period and recognize promote fees to the extent it is probable that a revenue reversal will not occur in a future period.
For dispositions of real estate to third parties, we do not expect the standard to impact the recognition of the sale. 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. Upon adoption of this standard, we will recognize, on a prospective basis, the entire gain attributed to contributions of real estate properties to unconsolidated co-investment ventures rather than the third-party share we recognize today. For deferred gains from existing partial sales recorded prior to the adoption of the standard, we will continue to recognize these gains into earnings over the lives of the underlying real estate properties. In addition to the recognition changes discussed above, expanded quantitative and qualitative disclosures regarding revenue recognition will be required for contracts that are subject to these standards. We will adopt the practical expedient to only assess the recognition of revenue for open contracts during the transition period and do not anticipate any material retained earnings adjustments upon adoption. We adopted the revenue recognition and derecognition of non-financial assets standards on January 1, 2018, on a modified retrospective basis.
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 2017 and 2016, we capitalized $23.8 million and $23.9 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 operating or finance 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 88 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. We continue to evaluate the key drivers in the measurement of the ROU asset and lease liability including the discount rate and lease term. Details of our future minimum rental payments under these ground and office space leases are disclosed in Note 4.
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 expired or 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 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 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 are currently evaluating the impact the adoption of this standard will have on the Consolidated Financial Statements.
KTR Capital Partners and Its Affiliates
In 2015, we acquired high quality real estate assets and the operating platform of KTR Capital Partners and its affiliates (“KTR”) through our consolidated co-investment venture, Prologis U.S. Logistics Venture (“USLV”). The portfolio consisted of 315 operating properties, aggregating 59.0 million square feet, 3.6 million square feet of properties under development and land parcels. The total purchase price was $5.0 billion, net of assumed debt of $735.2 million. The purchase price was funded through cash contributions of $2.6 billion from Prologis and $2.3 billion from our venture partner, and the issuance of 4.5 million common limited partnership units in the OP. We incurred $24.7 million of acquisition costs that are included in Other Expenses during 2015.
The following unaudited pro forma financial information presents our results as though the KTR transaction had been completed on January 1, 2015. The pro forma information does not reflect the actual results of operations had the transaction actually been completed on January 1, 2015, and it is not indicative of future operating results. The results for the year ended December 31, 2015, include approximately seven months of actual results for the transaction, the acquisition expenses, and five months of pro forma adjustments. Actual results in 2015 include rental revenues and rental expenses of the properties acquired of $235.7 million and $56.9 million, respectively, representing the period from acquisition through December 31, 2015.
The following amounts are in thousands, except per share amounts:
|
| 2015 |
| |
Total revenues |
| $ | 2,358,643 |
|
Net earnings attributable to common stockholders |
| $ | 866,753 |
|
Net earnings per share attributable to common stockholders – Basic |
| $ | 1.66 |
|
Net earnings per share attributable to common stockholders – Diluted |
| $ | 1.65 |
|
These results include certain adjustments, primarily: (i) decreased revenues from the amortization of the net assets from the acquired leases with net favorable rents relative to estimated market rents; (ii) increased depreciation and amortization expense resulting from the adjustment of real estate assets to estimated fair value and recognition of intangible assets related to in-place leases; and (iii)
additional interest expense attributable to the debt issued to finance our cash portion of the acquisition offset by lower interest expense due to the accretion of the fair value adjustment of debt.
Investments in real estate properties consisted of the following at December 31 (dollars and square feet in thousands):
| Square Feet |
|
| Number of Buildings |
|
|
|
| |||||||||||||||
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||||
Operating properties: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Buildings and improvements |
| 294,811 |
|
|
| 331,210 |
|
|
| 1,525 |
|
|
| 1,776 |
|
| $ | 16,849,349 |
|
| $ | 17,905,914 |
|
Improved land |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 5,735,978 |
|
|
| 6,037,543 |
|
Development portfolio, including land costs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prestabilized |
| 7,345 |
|
|
| 8,256 |
|
|
| 22 |
|
|
| 29 |
|
|
| 546,173 |
|
|
| 798,233 |
|
Properties under development |
| 22,216 |
|
|
| 19,539 |
|
|
| 63 |
|
|
| 60 |
|
|
| 1,047,316 |
|
|
| 633,849 |
|
Land (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 1,154,383 |
|
|
| 1,218,904 |
|
Other real estate investments (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 505,445 |
|
|
| 524,887 |
|
Total investments in real estate properties |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 25,838,644 |
|
|
| 27,119,330 |
|
Less accumulated depreciation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 4,059,348 |
|
|
| 3,758,372 |
|
Net investments in real estate properties |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 21,779,296 |
|
| $ | 23,360,958 |
|
2016 |
| $ | 1,565,119 |
|
2017 |
|
| 1,372,310 |
|
2018 |
|
| 1,131,572 |
|
2019 |
|
| 886,821 |
|
2020 |
|
| 711,827 |
|
Thereafter |
|
| 2,456,484 |
|
Total |
| $ | 8,124,133 |
|
(1) |
|
2016 |
| $ | 32,183 |
|
2017 |
|
| 29,540 |
|
2018 |
|
| 27,769 |
|
2019 |
|
| 25,144 |
|
2020 |
|
| 24,116 |
|
Thereafter |
|
| 220,625 |
|
Total |
| $ | 359,377 |
|
(2) |
|
At December 31, 2017, we owned real estate assets in the U.S. and other Americas (Brazil, Canada and Mexico), Europe (Belgium, the Czech Republic, France, Germany, Hungary, Italy, the Netherlands, Poland, Slovakia, Spain, Sweden and the United Kingdom (“U.K.”)) and Asia (China, Japan and Singapore).
Acquisitions
The following table summarizes our real estate acquisition activity for the years ended December 31 (dollars and square feet in thousands):
|
| 2017 |
|
| 2016 |
|
| 2015 |
| |||
Number of operating properties |
|
| 16 |
|
|
| 9 |
|
|
| 52 |
|
Square feet |
|
| 6,859 |
|
|
| 1,823 |
|
|
| 7,375 |
|
Acquisition value of net investments in real estate properties (1) (2) |
| $ | 1,139,410 |
|
| $ | 411,706 |
|
| $ | 1,042,562 |
|
(1) |
|
(2) | In August 2017, we |
The table above does not include the properties acquired in the KTR transaction in 2015, as this transaction is explained in Note 3.
The following table summarizes our real estate disposition activity for the years ended December 31 (dollars and square feet in thousands):
| 2017 |
|
| 2016 |
|
| 2015 |
| |||
Contributions to unconsolidated co-investment ventures (1) |
|
|
|
|
|
|
|
|
|
|
|
Number of properties |
| 222 |
|
|
| 35 |
|
|
| 31 |
|
Square feet |
| 48,171 |
|
|
| 11,624 |
|
|
| 8,355 |
|
Net proceeds (2) | $ | 3,201,986 |
|
| $ | 1,231,878 |
|
| $ | 835,385 |
|
Gains on contributions, net (2) | $ | 847,034 |
|
| $ | 267,441 |
|
| $ | 148,987 |
|
Dispositions to third parties |
|
|
|
|
|
|
|
|
|
|
|
Number of properties |
| 110 |
|
|
| 172 |
|
|
| 136 |
|
Square feet |
| 17,147 |
|
|
| 20,360 |
|
|
| 23,024 |
|
Net proceeds (2) (3) | $ | 1,281,501 |
|
| $ | 1,760,048 |
|
| $ | 2,352,645 |
|
Gains on dispositions, net (2) (3) | $ | 274,711 |
|
| $ | 353,668 |
|
| $ | 609,900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gains on contributions and dispositions, net | $ | 1,121,745 |
|
| $ | 621,109 |
|
| $ | 758,887 |
|
Gains on revaluation of equity investments upon acquisition of a controlling interest |
| 61,220 |
|
|
| - |
|
|
| - |
|
Gains on redemptions of investments in co-investment ventures (4) |
| - |
|
|
| 136,289 |
|
|
| - |
|
Total gains on dispositions of investments in real estate and revaluation of equity investments upon acquisition of a controlling interest, net | $ | 1,182,965 |
|
| $ | 757,398 |
|
| $ | 758,887 |
|
(1) | In July 2017, we contributed 190 operating properties totaling 37.1 million square feet owned by Prologis North American Industrial Fund (“NAIF”) to Prologis Targeted U.S. Logistics Fund (“USLF”), our |
(2) | Includes the contribution and disposition of land parcels. |
|
| 2015 |
|
| 2014 |
| ||
Unconsolidated co-investment ventures |
| $ | 4,585,427 |
|
| $ | 4,665,918 |
|
Other ventures |
|
| 170,193 |
|
|
| 158,806 |
|
Totals |
| $ | 4,755,620 |
|
| $ | 4,824,724 |
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
| Years Ended December 31, |
| |||||||||
|
| 2017 |
|
| 2016 |
|
| 2015 |
| |||
Operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net earnings |
| $ | 1,760,959 |
|
| $ | 1,292,540 |
|
| $ | 925,515 |
|
Adjustments to reconcile net earnings to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Straight-lined rents and amortization of above and below market leases |
|
| (81,021 | ) |
|
| (93,608 | ) |
|
| (59,619 | ) |
Equity-based compensation awards |
|
| 76,640 |
|
|
| 60,341 |
|
|
| 53,665 |
|
Depreciation and amortization |
|
| 879,140 |
|
|
| 930,985 |
|
|
| 880,373 |
|
Earnings from unconsolidated entities, net |
|
| (248,567 | ) |
|
| (206,307 | ) |
|
| (159,262 | ) |
Distributions from unconsolidated entities |
|
| 307,220 |
|
|
| 286,651 |
|
|
| 284,664 |
|
Decrease (increase) in operating receivables from unconsolidated entities |
|
| (30,893 | ) |
|
| 14,823 |
|
|
| (38,185 | ) |
Amortization of debt discounts (premiums), net of debt issuance costs |
|
| 751 |
|
|
| (15,137 | ) |
|
| (31,841 | ) |
Gains on dispositions of investments in real estate and revaluation of equity investments upon acquisition of a controlling interest, net |
|
| (1,182,965 | ) |
|
| (757,398 | ) |
|
| (758,887 | ) |
Unrealized foreign currency and derivative losses (gains), net |
|
| 68,956 |
|
|
| (8,052 | ) |
|
| (1,019 | ) |
Losses (gains) on early extinguishment of debt, net |
|
| 68,379 |
|
|
| (2,484 | ) |
|
| 86,303 |
|
Deferred income tax benefit |
|
| (5,005 | ) |
|
| (5,525 | ) |
|
| (5,057 | ) |
Decrease (increase) in accounts receivable and other assets |
|
| 37,278 |
|
|
| (106,337 | ) |
|
| (64,749 | ) |
Increase in accounts payable and accrued expenses and other liabilities |
|
| 36,374 |
|
|
| 26,513 |
|
|
| 4,426 |
|
Net cash provided by operating activities |
|
| 1,687,246 |
|
|
| 1,417,005 |
|
|
| 1,116,327 |
|
Investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Real estate development |
|
| (1,606,133 | ) |
|
| (1,641,560 | ) |
|
| (1,339,904 | ) |
Real estate acquisitions |
|
| (442,696 | ) |
|
| (458,516 | ) |
|
| (890,183 | ) |
KTR transaction, net of cash received |
|
| - |
|
|
| - |
|
|
| (4,809,499 | ) |
Tenant improvements and lease commissions on previously leased space |
|
| (153,255 | ) |
|
| (165,933 | ) |
|
| (154,564 | ) |
Nondevelopment capital expenditures |
|
| (110,635 | ) |
|
| (101,677 | ) |
|
| (83,351 | ) |
Proceeds from dispositions and contributions of real estate properties |
|
| 3,236,603 |
|
|
| 2,826,408 |
|
|
| 2,795,249 |
|
Investments in and advances to unconsolidated entities |
|
| (249,735 | ) |
|
| (265,951 | ) |
|
| (474,420 | ) |
Acquisition of a controlling interest in an unconsolidated venture, net of cash received |
|
| (374,605 | ) |
|
| - |
|
|
| - |
|
Return of investment from unconsolidated entities |
|
| 209,151 |
|
|
| 776,550 |
|
|
| 29,406 |
|
Proceeds from repayment of notes receivable backed by real estate |
|
| 32,100 |
|
|
| 202,950 |
|
|
| 9,866 |
|
Proceeds from the settlement of net investment hedges |
|
| 7,541 |
|
|
| 79,767 |
|
|
| 129,149 |
|
Payments on the settlement of net investment hedges |
|
| (5,058 | ) |
|
| - |
|
|
| (981 | ) |
Net cash provided by (used in) investing activities |
|
| 543,278 |
|
|
| 1,252,038 |
|
|
| (4,789,232 | ) |
Financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock |
|
| 32,858 |
|
|
| 39,470 |
|
|
| 90,258 |
|
Dividends paid on common and preferred stock |
|
| (942,884 | ) |
|
| (893,455 | ) |
|
| (804,697 | ) |
Repurchase of preferred stock |
|
| (13,182 | ) |
|
| - |
|
|
| - |
|
Noncontrolling interests contributions |
|
| 240,925 |
|
|
| 2,168 |
|
|
| 2,355,367 |
|
Noncontrolling interests distributions |
|
| (207,788 | ) |
|
| (343,550 | ) |
|
| (215,740 | ) |
Purchase of noncontrolling interests |
|
| (813,847 | ) |
|
| (3,083 | ) |
|
| (2,560 | ) |
Tax paid for shares withheld |
|
| (19,775 | ) |
|
| (8,570 | ) |
|
| (12,298 | ) |
Debt and equity issuance costs paid |
|
| (7,054 | ) |
|
| (20,123 | ) |
|
| (32,012 | ) |
Net proceeds from (payments on) credit facilities |
|
| 283,255 |
|
|
| 33,435 |
|
|
| (7,970 | ) |
Repurchase and payments of debt |
|
| (3,578,889 | ) |
|
| (2,301,647 | ) |
|
| (3,156,294 | ) |
Proceeds from issuance of debt |
|
| 2,419,797 |
|
|
| 1,369,890 |
|
|
| 5,381,862 |
|
Net cash provided by (used in) financing activities |
|
| (2,606,584 | ) |
|
| (2,125,465 | ) |
|
| 3,595,916 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign currency exchange rate changes on cash |
|
| 15,790 |
|
|
| (342 | ) |
|
| (9,623 | ) |
Net increase (decrease) in cash and cash equivalents |
|
| (360,270 | ) |
|
| 543,236 |
|
|
| (86,612 | ) |
Cash and cash equivalents, beginning of year |
|
| 807,316 |
|
|
| 264,080 |
|
|
| 350,692 |
|
Cash and cash equivalents, end of year |
| $ | 447,046 |
|
| $ | 807,316 |
|
| $ | 264,080 |
|
See Note 19 for information on noncash investing and financing activities and other information.
The accompanying notes are an integral part of these Consolidated Financial Statements.
(In thousands)
| December 31, |
| |||||
| 2017 |
|
| 2016 |
| ||
ASSETS |
|
|
|
|
|
|
|
Investments in real estate properties | $ | 25,838,644 |
|
| $ | 27,119,330 |
|
Less accumulated depreciation |
| 4,059,348 |
|
|
| 3,758,372 |
|
Net investments in real estate properties |
| 21,779,296 |
|
|
| 23,360,958 |
|
Investments in and advances to unconsolidated entities |
| 5,496,450 |
|
|
| 4,230,429 |
|
Assets held for sale or contribution |
| 342,060 |
|
|
| 322,139 |
|
Notes receivable backed by real estate |
| 34,260 |
|
|
| 32,100 |
|
Net investments in real estate |
| 27,652,066 |
|
|
| 27,945,626 |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| 447,046 |
|
|
| 807,316 |
|
Other assets |
| 1,381,963 |
|
|
| 1,496,990 |
|
Total assets | $ | 29,481,075 |
|
| $ | 30,249,932 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND CAPITAL |
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
Debt | $ | 9,412,631 |
|
| $ | 10,608,294 |
|
Accounts payable and accrued expenses |
| 702,804 |
|
|
| 556,179 |
|
Other liabilities |
| 659,899 |
|
|
| 627,319 |
|
Total liabilities |
| 10,775,334 |
|
|
| 11,791,792 |
|
|
|
|
|
|
|
|
|
Capital: |
|
|
|
|
|
|
|
Partners’ capital: |
|
|
|
|
|
|
|
General partner – preferred |
| 68,948 |
|
|
| 78,235 |
|
General partner – common |
| 15,562,210 |
|
|
| 14,912,846 |
|
Limited partners – common |
| 165,401 |
|
|
| 150,173 |
|
Limited partners – Class A common |
| 248,940 |
|
|
| 244,417 |
|
Total partners’ capital |
| 16,045,499 |
|
|
| 15,385,671 |
|
Noncontrolling interests |
| 2,660,242 |
|
|
| 3,072,469 |
|
Total capital |
| 18,705,741 |
|
|
| 18,458,140 |
|
Total liabilities and capital | $ | 29,481,075 |
|
| $ | 30,249,932 |
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per unit amounts)
|
| Year Ended December 31, |
| |||||||||
|
| 2017 |
|
| 2016 |
|
| 2015 |
| |||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Rental |
| $ | 1,737,839 |
|
| $ | 1,734,844 |
|
| $ | 1,536,117 |
|
Rental recoveries |
|
| 487,302 |
|
|
| 485,565 |
|
|
| 437,070 |
|
Strategic capital |
|
| 373,889 |
|
|
| 303,562 |
|
|
| 217,829 |
|
Development management and other |
|
| 19,104 |
|
|
| 9,164 |
|
|
| 6,058 |
|
Total revenues |
|
| 2,618,134 |
|
|
| 2,533,135 |
|
|
| 2,197,074 |
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Rental |
|
| 569,523 |
|
|
| 568,870 |
|
|
| 544,182 |
|
Strategic capital |
|
| 155,141 |
|
|
| 128,506 |
|
|
| 108,422 |
|
General and administrative |
|
| 231,059 |
|
|
| 222,067 |
|
|
| 217,227 |
|
Depreciation and amortization |
|
| 879,140 |
|
|
| 930,985 |
|
|
| 880,373 |
|
Other |
|
| 12,205 |
|
|
| 14,329 |
|
|
| 66,698 |
|
Total expenses |
|
| 1,847,068 |
|
|
| 1,864,757 |
|
|
| 1,816,902 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
| 771,066 |
|
|
| 668,378 |
|
|
| 380,172 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from unconsolidated entities, net |
|
| 248,567 |
|
|
| 206,307 |
|
|
| 159,262 |
|
Interest expense |
|
| (274,486 | ) |
|
| (303,146 | ) |
|
| (301,363 | ) |
Interest and other income, net |
|
| 13,731 |
|
|
| 8,101 |
|
|
| 25,484 |
|
Gains on dispositions of investments in real estate and revaluation of equity investments upon acquisition of a controlling interest, net |
|
| 1,182,965 |
|
|
| 757,398 |
|
|
| 758,887 |
|
Foreign currency and derivative gains (losses), net |
|
| (57,896 | ) |
|
| 7,582 |
|
|
| 12,466 |
|
Gains (losses) on early extinguishment of debt, net |
|
| (68,379 | ) |
|
| 2,484 |
|
|
| (86,303 | ) |
Total other income |
|
| 1,044,502 |
|
|
| 678,726 |
|
|
| 568,433 |
|
Earnings before income taxes |
|
| 1,815,568 |
|
|
| 1,347,104 |
|
|
| 948,605 |
|
Total income tax expense |
|
| 54,609 |
|
|
| 54,564 |
|
|
| 23,090 |
|
Consolidated net earnings |
|
| 1,760,959 |
|
|
| 1,292,540 |
|
|
| 925,515 |
|
Less net earnings attributable to noncontrolling interests |
|
| 63,620 |
|
|
| 48,307 |
|
|
| 44,950 |
|
Net earnings attributable to controlling interests |
|
| 1,697,339 |
|
|
| 1,244,233 |
|
|
| 880,565 |
|
Less preferred unit distributions |
|
| 6,499 |
|
|
| 6,714 |
|
|
| 6,651 |
|
Loss on preferred unit repurchase |
|
| 3,895 |
|
|
| - |
|
|
| - |
|
Net earnings attributable to common unitholders |
| $ | 1,686,945 |
|
| $ | 1,237,519 |
|
| $ | 873,914 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common units outstanding – Basic |
|
| 536,335 |
|
|
| 532,326 |
|
|
| 525,912 |
|
Weighted average common units outstanding – Diluted |
|
| 552,300 |
|
|
| 546,666 |
|
|
| 533,944 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per unit attributable to common unitholders – Basic |
| $ | 3.10 |
|
| $ | 2.29 |
|
| $ | 1.66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per unit attributable to common unitholders – Diluted |
| $ | 3.06 |
|
| $ | 2.27 |
|
| $ | 1.64 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions per common unit |
| $ | 1.76 |
|
| $ | 1.68 |
|
| $ | 1.52 |
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
|
| Year Ended December 31, |
| |||||||||
|
| 2017 |
|
| 2016 |
|
| 2015 |
| |||
Consolidated net earnings |
| $ | 1,760,959 |
|
| $ | 1,292,540 |
|
| $ | 925,515 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation gains (losses), net |
|
| 63,455 |
|
|
| (135,958 | ) |
|
| (208,901 | ) |
Unrealized gains (losses) on derivative contracts, net |
|
| 22,591 |
|
|
| (1,349 | ) |
|
| (17,457 | ) |
Comprehensive income |
|
| 1,847,005 |
|
|
| 1,155,233 |
|
|
| 699,157 |
|
Net earnings attributable to noncontrolling interests |
|
| (63,620 | ) |
|
| (48,307 | ) |
|
| (44,950 | ) |
Other comprehensive loss (gain) attributable to noncontrolling interests |
|
| (49,278 | ) |
|
| (12,601 | ) |
|
| 32,862 |
|
Comprehensive income attributable to common unitholders |
| $ | 1,734,107 |
|
| $ | 1,094,325 |
|
| $ | 687,069 |
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CAPITAL
(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, 2015 |
| 1,565 |
|
| $ | 78,235 |
|
|
| 509,498 |
|
| $ | 13,897,274 |
|
|
| 1,767 |
|
| $ | 48,189 |
|
|
| - |
|
| $ | - |
|
| $ | 1,159,901 |
|
| $ | 15,183,599 |
|
Consolidated net earnings |
| - |
|
|
| - |
|
|
| - |
|
|
| 869,439 |
|
|
| - |
|
|
| 7,733 |
|
|
| - |
|
|
| 3,393 |
|
|
| 44,950 |
|
|
| 925,515 |
|
Effect of equity compensation plans |
| - |
|
|
| - |
|
|
| 1,475 |
|
|
| 57,469 |
|
|
| 303 |
|
|
| 26,234 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 83,703 |
|
Issuance of units in exchange for contribution of at-the-market offering proceeds |
| - |
|
|
| - |
|
|
| 1,662 |
|
|
| 71,548 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 71,548 |
|
Issuance of units upon conversion of exchangeable debt |
| - |
|
|
| - |
|
|
| 11,872 |
|
|
| 502,732 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 502,732 |
|
Issuance of units related to KTR transaction |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 4,500 |
|
|
| 181,170 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 181,170 |
|
Issuance of units related to other acquisitions |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 157 |
|
|
| 6,534 |
|
|
| 8,894 |
|
|
| 365,036 |
|
|
| - |
|
|
| 371,570 |
|
Capital contributions |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 2,355,596 |
|
|
| 2,355,596 |
|
Foreign currency translation losses, net |
| - |
|
|
| - |
|
|
| - |
|
|
| (173,852 | ) |
|
| - |
|
|
| (1,520 | ) |
|
| - |
|
|
| (667 | ) |
|
| (32,862 | ) |
|
| (208,901 | ) |
Unrealized losses on derivative contracts, net |
| - |
|
|
| - |
|
|
| - |
|
|
| (17,240 | ) |
|
| - |
|
|
| (151 | ) |
|
| - |
|
|
| (66 | ) |
|
| - |
|
|
| (17,457 | ) |
Reallocation of capital |
| - |
|
|
| - |
|
|
| - |
|
|
| 186,918 |
|
|
| - |
|
|
| (70,965 | ) |
|
| - |
|
|
| (115,953 | ) |
|
| - |
|
|
| - |
|
Distributions and other |
| - |
|
|
| - |
|
|
| 5 |
|
|
| (804,588 | ) |
|
| (16 | ) |
|
| (10,541 | ) |
|
| - |
|
|
| (5,752 | ) |
|
| (207,358 | ) |
|
| (1,028,239 | ) |
Balance at December 31, 2015 |
| 1,565 |
|
| $ | 78,235 |
|
|
| 524,512 |
|
| $ | 14,589,700 |
|
|
| 6,711 |
|
| $ | 186,683 |
|
|
| 8,894 |
|
| $ | 245,991 |
|
| $ | 3,320,227 |
|
| $ | 18,420,836 |
|
Consolidated net earnings |
| - |
|
|
| - |
|
|
| - |
|
|
| 1,209,932 |
|
|
| - |
|
|
| 14,232 |
|
|
| - |
|
|
| 20,069 |
|
|
| 48,307 |
|
|
| 1,292,540 |
|
Effect of equity compensation plans |
| - |
|
|
| - |
|
|
| 2,282 |
|
|
| 91,214 |
|
|
| 440 |
|
|
| 26,483 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 117,697 |
|
Issuance of units related to acquisitions |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 71 |
|
|
| 3,162 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 3,162 |
|
Conversion of limited partners units |
| - |
|
|
| - |
|
|
| 1,877 |
|
|
| 52,256 |
|
|
| (1,877 | ) |
|
| (52,256 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
Foreign currency translation gains (losses), net |
| - |
|
|
| - |
|
|
| - |
|
|
| (144,730 | ) |
|
| - |
|
|
| (1,457 | ) |
|
| - |
|
|
| (2,372 | ) |
|
| 12,601 |
|
|
| (135,958 | ) |
Unrealized losses on derivative contracts, net |
| - |
|
|
| - |
|
|
| - |
|
|
| (1,314 | ) |
|
| - |
|
|
| (13 | ) |
|
| - |
|
|
| (22 | ) |
|
| - |
|
|
| (1,349 | ) |
Reallocation of capital |
| - |
|
|
| - |
|
|
| - |
|
|
| 8,657 |
|
|
| - |
|
|
| (12,414 | ) |
|
| - |
|
|
| 3,757 |
|
|
| - |
|
|
| - |
|
Distributions and other |
| - |
|
|
| - |
|
|
| - |
|
|
| (892,869 | ) |
|
| (22 | ) |
|
| (14,247 | ) |
|
| - |
|
|
| (23,006 | ) |
|
| (308,666 | ) |
|
| (1,238,788 | ) |
Balance at December 31, 2016 |
| 1,565 |
|
| $ | 78,235 |
|
|
| 528,671 |
|
| $ | 14,912,846 |
|
|
| 5,323 |
|
| $ | 150,173 |
|
|
| 8,894 |
|
| $ | 244,417 |
|
| $ | 3,072,469 |
|
| $ | 18,458,140 |
|
Consolidated net earnings |
| - |
|
|
| - |
|
|
| - |
|
|
| 1,652,325 |
|
|
| - |
|
|
| 18,372 |
|
|
| - |
|
|
| 26,642 |
|
|
| 63,620 |
|
|
| 1,760,959 |
|
Effect of equity compensation plans |
| - |
|
|
| - |
|
|
| 2,000 |
|
|
| 74,526 |
|
|
| 1,386 |
|
|
| 41,446 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 115,972 |
|
Capital contributions |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 254,214 |
|
|
| 254,214 |
|
Repurchase of preferred units |
| (186 | ) |
|
| (9,287 | ) |
|
| - |
|
|
| (3,895 | ) |
|
| - |
| �� |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (13,182 | ) |
Purchase of noncontrolling interests |
| - |
|
|
| - |
|
|
| - |
|
|
| (202,040 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (587,976 | ) |
|
| (790,016 | ) |
Redemption of limited partnership units |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (369 | ) |
|
| (23,831 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (23,831 | ) |
Conversion of limited partners units |
| - |
|
|
| - |
|
|
| 1,515 |
|
|
| 47,726 |
|
|
| (684 | ) |
|
| (18,753 | ) |
|
| - |
|
|
| - |
|
|
| (28,973 | ) |
|
| - |
|
Foreign currency translation gains, net |
| - |
|
|
| - |
|
|
| - |
|
|
| 13,810 |
|
|
| - |
|
|
| 146 |
|
|
| - |
|
|
| 221 |
|
|
| 49,278 |
|
|
| 63,455 |
|
Unrealized gains on derivative contracts, net |
| - |
|
|
| - |
|
|
| - |
|
|
| 22,005 |
|
|
| - |
|
|
| 234 |
|
|
| - |
|
|
| 352 |
|
|
| - |
|
|
| 22,591 |
|
Reallocation of capital |
| - |
|
|
| - |
|
|
| - |
|
|
| (12,143 | ) |
|
| - |
|
|
| 11,829 |
|
|
| - |
|
|
| 314 |
|
|
| - |
|
|
| - |
|
Distributions and other |
| - |
|
|
| - |
|
|
| - |
|
|
| (942,950 | ) |
|
| - |
|
|
| (14,215 | ) |
|
| - |
|
|
| (23,006 | ) |
|
| (162,390 | ) |
|
| (1,142,561 | ) |
Balance at December 31, 2017 |
| 1,379 |
|
| $ | 68,948 |
|
|
| 532,186 |
|
| $ | 15,562,210 |
|
|
| 5,656 |
|
| $ | 165,401 |
|
|
| 8,894 |
|
| $ | 248,940 |
|
| $ | 2,660,242 |
|
| $ | 18,705,741 |
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
| Years Ended December 31, |
| |||||||||
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| 2017 |
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| 2016 |
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| 2015 |
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Operating activities: |
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Consolidated net earnings |
| $ | 1,760,959 |
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| $ | 1,292,540 |
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| $ | 925,515 |
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Adjustments to reconcile net earnings to net cash provided by operating activities: |
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Straight-lined rents and amortization of above and below market leases |
|
| (81,021 | ) |
|
| (93,608 | ) |
|
| (59,619 | ) |
Equity-based compensation awards |
|
| 76,640 |
|
|
| 60,341 |
|
|
| 53,665 |
|
Depreciation and amortization |
|
| 879,140 |
|
|
| 930,985 |
|
|
| 880,373 |
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Earnings from unconsolidated entities, net |
|
| (248,567 | ) |
|
| (206,307 | ) |
|
| (159,262 | ) |
Distributions from unconsolidated entities |
|
| 307,220 |
|
|
| 286,651 |
|
|
| 284,664 |
|
Decrease (increase) in operating receivables from unconsolidated entities |
|
| (30,893 | ) |
|
| 14,823 |
|
|
| (38,185 | ) |
Amortization of debt discounts (premiums), net of debt issuance costs |
|
| 751 |
|
|
| (15,137 | ) |
|
| (31,841 | ) |
Gains on dispositions of investments in real estate and revaluation of equity investments upon acquisition of a controlling interest, net |
|
| (1,182,965 | ) |
|
| (757,398 | ) |
|
| (758,887 | ) |
Unrealized foreign currency and derivative losses (gains), net |
|
| 68,956 |
|
|
| (8,052 | ) |
|
| (1,019 | ) |
Losses (gains) on early extinguishment of debt, net |
|
| 68,379 |
|
|
| (2,484 | ) |
|
| 86,303 |
|
Deferred income tax benefit |
|
| (5,005 | ) |
|
| (5,525 | ) |
|
| (5,057 | ) |
Decrease (increase) in accounts receivable and other assets |
|
| 37,278 |
|
|
| (106,337 | ) |
|
| (64,749 | ) |
Increase in accounts payable and accrued expenses and other liabilities |
|
| 36,374 |
|
|
| 26,513 |
|
|
| 4,426 |
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Net cash provided by operating activities |
|
| 1,687,246 |
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|
| 1,417,005 |
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|
| 1,116,327 |
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Investing activities: |
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Real estate development |
|
| (1,606,133 | ) |
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| (1,641,560 | ) |
|
| (1,339,904 | ) |
Real estate acquisitions |
|
| (442,696 | ) |
|
| (458,516 | ) |
|
| (890,183 | ) |
KTR transaction, net of cash received |
|
| - |
|
|
| - |
|
|
| (4,809,499 | ) |
Tenant improvements and lease commissions on previously leased space |
|
| (153,255 | ) |
|
| (165,933 | ) |
|
| (154,564 | ) |
Nondevelopment capital expenditures |
|
| (110,635 | ) |
|
| (101,677 | ) |
|
| (83,351 | ) |
Proceeds from dispositions and contributions of real estate properties |
|
| 3,236,603 |
|
|
| 2,826,408 |
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|
| 2,795,249 |
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Investments in and advances to unconsolidated entities |
|
| (249,735 | ) |
|
| (265,951 | ) |
|
| (474,420 | ) |
Acquisition of a controlling interest in an unconsolidated venture, net of cash received |
|
| (374,605 | ) |
|
| - |
|
|
| - |
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Return of investment from unconsolidated entities |
|
| 209,151 |
|
|
| 776,550 |
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|
| 29,406 |
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Proceeds from repayment of notes receivable backed by real estate |
|
| 32,100 |
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|
| 202,950 |
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|
| 9,866 |
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Proceeds from the settlement of net investment hedges |
|
| 7,541 |
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|
| 79,767 |
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|
| 129,149 |
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Payments on the settlement of net investment hedges |
|
| (5,058 | ) |
|
| - |
|
|
| (981 | ) |
Net cash provided by (used in) investing activities |
|
| 543,278 |
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|
| 1,252,038 |
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|
| (4,789,232 | ) |
Financing activities: |
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|
|
|
|
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|
|
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Proceeds from issuance of common partnership units in exchange for contributions from Prologis, Inc. |
|
| 32,858 |
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|
| 39,470 |
|
|
| 90,258 |
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Distributions paid on common and preferred units |
|
| (980,105 | ) |
|
| (931,559 | ) |
|
| (820,989 | ) |
Repurchase of preferred units |
|
| (13,182 | ) |
|
| - |
|
|
| - |
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Noncontrolling interests contributions |
|
| 240,925 |
|
|
| 2,168 |
|
|
| 2,355,367 |
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Noncontrolling interests distributions |
|
| (170,567 | ) |
|
| (306,297 | ) |
|
| (199,845 | ) |
Purchase of noncontrolling interests |
|
| (790,016 | ) |
|
| (2,232 | ) |
|
| (2,163 | ) |
Redemption of common limited partnership units |
|
| (23,831 | ) |
|
| - |
|
|
| - |
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Tax paid for shares of the Parent withheld |
|
| (19,775 | ) |
|
| (8,570 | ) |
|
| (12,298 | ) |
Debt and capital issuance costs paid |
|
| (7,054 | ) |
|
| (20,123 | ) |
|
| (32,012 | ) |
Net proceeds from (payments on) credit facilities |
|
| 283,255 |
|
|
| 33,435 |
|
|
| (7,970 | ) |
Repurchase and payments of debt |
|
| (3,578,889 | ) |
|
| (2,301,647 | ) |
|
| (3,156,294 | ) |
Proceeds from issuance of debt |
|
| 2,419,797 |
|
|
| 1,369,890 |
|
|
| 5,381,862 |
|
Net cash provided by (used in) financing activities |
|
| (2,606,584 | ) |
|
| (2,125,465 | ) |
|
| 3,595,916 |
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|
|
|
|
|
|
|
|
|
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Effect of foreign currency exchange rate changes on cash |
|
| 15,790 |
|
|
| (342 | ) |
|
| (9,623 | ) |
Net increase (decrease) in cash and cash equivalents |
|
| (360,270 | ) |
|
| 543,236 |
|
|
| (86,612 | ) |
Cash and cash equivalents, beginning of year |
|
| 807,316 |
|
|
| 264,080 |
|
|
| 350,692 |
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Cash and cash equivalents, end of year |
| $ | 447,046 |
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| $ | 807,316 |
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| $ | 264,080 |
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See Note 19 for information on noncash investing and financing activities and other information.
The accompanying notes are an integral part of these Consolidated Financial Statements.
PROLOGIS, INC. AND PROLOGIS, L.P.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF THE 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 properties in the world’s primary population centers and in those supported by extensive transportation infrastructure. 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 co-investment ventures and other unconsolidated entities. See Note 18 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 common stock or preferred stock the Parent issues, the OP issues a corresponding common or preferred partnership unit, as applicable, to the Parent in exchange for the contribution of the proceeds from the stock issuance. At December 31, 2017, the Parent owned an approximate 97.41% common general partnership interest in the OP and 100% of the preferred units in the OP. The remaining approximate 2.59% common limited partnership interests, which include 8.9 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.
Information with respect to the square footage, number of buildings and acres of land is unaudited.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Consolidation. 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.
We consolidate all entities that are wholly owned and those in which we own less than 100% of the equity but control, as well as any variable interest entities (“VIEs”) in which we are the primary beneficiary. We evaluate our ability to control an entity and whether the entity is a VIE and we are the primary beneficiary through consideration of substantive terms of the arrangement to identify which enterprise has the power to direct the activities of the entity that most significantly impacts the entity’s economic performance and the obligation to absorb losses and the right to receive benefits from the entity.
For entities that are not defined as VIEs, we first consider whether we are the general partner or the limited partner (or the equivalent in such investments that are not structured as partnerships). We consolidate entities in which we are the general partner and the limited partners in such entities do not have rights that would preclude control. For entities in which we are the general partner but do not control the entity as the other partners hold substantive participating or kick-out rights, we apply the equity method of accounting since, as the general partner, we have the ability to influence the venture. For ventures for which we are a limited partner or our investment is in an entity that is not structured similar to a partnership, we consider factors such as ownership interest, voting control, authority to make decisions, and contractual and substantive participating rights of the partners. In instances where the factors indicate that we have a controlling financial interest in the venture, we consolidate the entity.
Reclassifications. Certain amounts included in the Consolidated Financial Statements for 2016 and 2015 have been reclassified to conform to the 2017 financial statement presentation.
Use of Estimates. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the reporting
period. Although we believe the assumptions and estimates we made are reasonable and appropriate, as discussed in the applicable sections throughout the Consolidated Financial Statements, different assumptions and estimates could materially impact our reported results.
Foreign Operations. The U.S. dollar is the functional currency for our consolidated subsidiaries and unconsolidated entities operating in the U.S. and Mexico and certain of our consolidated subsidiaries that operate as holding companies for foreign investments. The functional currency for our consolidated subsidiaries and unconsolidated entities operating in other countries is the principal currency in which the entity’s assets, liabilities, income and expenses are denominated, which may be different from the local currency of the country of incorporation or where the entity conducts its operations. The functional currencies of entities outside of the U.S. and Mexico generally include the Brazilian real, British pound sterling, Canadian dollar, Chinese yuan, euro, Japanese yen and Singapore dollar. We take part in business transactions denominated in these and other local currencies where we operate.
For our consolidated subsidiaries whose functional currency is not the U.S. dollar, we translate their financial statements into the U.S. dollar at the time we consolidate those subsidiaries’ financial statements. Generally, assets and liabilities are translated at the exchange rate in effect at the balance sheet date. The resulting translation adjustments are included in Accumulated Other Comprehensive Income (Loss) (“AOCI/L”) in the Consolidated Balance Sheets. Certain balance sheet items, primarily equity and capital-related accounts, are reflected at the historical exchange rate. Income statement accounts are translated using the average exchange rate for the period and income statement accounts that represent significant nonrecurring transactions are translated at the rate in effect at the date of the transaction. We translate our share of the net operating income or losses of our unconsolidated entities at the average exchange rate for the period and significant nonrecurring transactions of the unconsolidated entities are translated at the rate in effect at the date of the transaction.
We and certain of our consolidated subsidiaries have intercompany and third-party debt that is not denominated in the entity’s functional currency. When the debt is remeasured against the functional currency of the entity, a gain or loss can result. The resulting adjustment is reflected in Foreign Currency and Derivative Gains (Losses), Net in the Consolidated Statements of Income, unless it is intercompany debt that is deemed to be long-term in nature and then the adjustment is reflected as a cumulative translation adjustment in AOCI/L.
Acquisitions. Based on new accounting guidance, beginning January 1, 2017, we apply a screen test to evaluate if substantially all the fair value of the acquired property is concentrated in a single identifiable asset or group of similar identifiable assets to determine whether a transaction is accounted for as an asset acquisition or business combination. As most of our real estate acquisitions are concentrated in either a single or a group of similar identifiable assets, our real estate transactions are generally accounted for as asset acquisitions, which permits the capitalization of transaction costs to the basis of the acquired property. For transactions that qualify as a business combination in 2017 and for all acquisitions in 2016 and 2015, transaction costs are expensed as incurred. Whether a transaction is determined to be an acquisition of a business or asset, we allocate the purchase price to the various components of the acquisition based on the fair value of the acquired assets and assumed liabilities, including an allocation to the individual buildings acquired. The initial allocation of the purchase price is based on management’s preliminary assessment, which may differ when final information becomes available. The transaction costs related to the acquisition of land and the formation of equity method investments are capitalized.
When we obtain control of an unconsolidated entity and the acquisition qualifies as a business, we account for the acquisition in accordance with the guidance for a business combination achieved in stages. We remeasure our previously held interest in the unconsolidated entity at its acquisition-date fair value and recognize the resulting gain or loss, if any, in earnings at the acquisition date.
We allocate the purchase price using primarily Level 2 and Level 3 inputs (further defined in Fair Value Measurements below) as follows:
Investments in Real Estate Properties. We value operating properties as if vacant. We estimate fair value generally by applying an income approach methodology using a discounted cash flow analysis. Key assumptions in the discounted cash flow analysis include market rents, growth rates and discount and capitalization rates. We determine discount and capitalization rates by market based on recent transactions and other market data. The fair value of land is generally based on relevant market data, such as a comparison of the subject site to similar parcels that have recently been sold or are currently being offered on the market for sale.
Lease Intangibles. We determine the portion of the purchase price related to intangible assets and liabilities as follows:
Above and Below Market Leases. We recognize an asset or liability for acquired in-place leases with favorable or unfavorable rents based on our estimate of current market rents of the applicable markets. The value is recorded in either Other Assets or Other Liabilities, as appropriate, and is amortized over the term of the respective leases, including any bargain renewal options, to rental revenues.
Foregone Rent. We calculate the value of the revenue and recovery of costs foregone during a reasonable lease-up period, as if the space was vacant, in each of the applicable markets. The values are recorded in Other Assets and amortized over the remaining life of the respective leases to amortization expense.
Leasing Commissions. We recognize an asset for leasing commissions upon the acquisition of in-place leases based on our estimate of the cost to lease space in the applicable markets. The value is recorded in Other Assets and amortized over the remaining life of the respective leases to amortization expense.
Debt. We estimate the fair value of debt based on contractual future cash flows discounted using borrowing spreads and market interest rates that would be available to us for the issuance of debt with similar terms and remaining maturities. In the case of publicly traded debt, we estimate the fair value based on available market data. Any discount or premium to the principal amount is included in the carrying value and amortized to interest expense over the remaining term of the related debt using the effective interest method.
Noncontrolling Interests. We estimate the portion of the fair value of the net assets owned by third parties based on the fair value of the consolidated net assets, principally real estate properties and debt.
Working Capital. We estimate the fair value of other acquired assets and assumed liabilities on the best information available.
Fair Value Measurements. The objective of fair value is to determine the price that would be received on the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (the exit price). We estimate fair value using available market information and valuation methodologies we believe to be appropriate for these purposes. Considerable judgment and a high degree of subjectivity are involved in developing these estimates and, accordingly, they are not necessarily indicative of amounts that we would realize on disposition. The fair value hierarchy consists of three broad levels:
Level 1 — Quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date.
Level 2 — Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3 — Unobservable inputs for the asset or liability.
Fair Value Measurements on a Recurring Basis. We estimate the fair value of our financial instruments using available market information and valuation methodologies we believe to be appropriate for these purposes.
We determine the fair value of our derivative financial instruments using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves, foreign exchange rates, and implied volatilities. We determine the fair values of our interest rate swaps using the market standard methodology of netting the discounted future fixed cash receipts or payments and the discounted expected variable cash payments. We base the variable cash payments on an expectation of future interest rates, or forward curves, derived from observable market interest rate curves. We base the fair values of our net investment hedges on the change in the spot rate at the end of the period as compared with the strike price at inception.
We incorporate credit valuation adjustments to appropriately reflect nonperformance risk for us and the respective counterparty in the fair value measurements. In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we consider the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts and guarantees.
We have determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy. Although the credit valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by us and our counterparties, we assess the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and have determined that the credit valuation adjustments are not significant to the overall valuation of our derivatives.
Fair Value Measurements on a Nonrecurring Basis. Assets measured at fair value on a nonrecurring basis generally consist of real estate assets and investments in unconsolidated entities that were subject to impairment charges related to our change of intent to sell the investments and through our recoverability analysis discussed below. We estimate fair value based on expected sales prices in the market (Level 2) or by applying the income approach methodology using a discounted cash flow analysis (Level 3).
Fair Value of Financial Instruments. We estimate the fair value of our senior notes for disclosure purposes based on quoted market prices for the same (Level 1) or similar (Level 2) issues when current quoted market prices are available. We estimate the fair value of our credit facilities, term loans, secured mortgage debt and assessment bonds by discounting the future cash flows using rates and borrowing spreads currently available to us (Level 3).
Real Estate Assets. Real estate assets are carried at depreciated cost. We capitalize costs incurred in developing, renovating, rehabilitating and improving real estate assets as part of the investment basis. We expense costs for repairs and maintenance as incurred.
During the land development and construction periods of qualifying projects, we capitalize interest costs, insurance, real estate taxes and general and administrative costs of the personnel performing the development, renovation, and rehabilitation; if such costs are incremental and identifiable to a specific activity to ready the asset for its intended use. We capitalize transaction costs related to the acquisition of land for future development and operating properties that qualify as asset acquisitions. We capitalize costs incurred to successfully originate a lease that result directly from and are essential to acquire that lease, including internal costs that are
incremental and identifiable as leasing activities. Leasing costs that meet the requirements for capitalization are presented as a component of Other Assets.
We charge the depreciable portions of real estate assets to depreciation expense on a straight-line basis over the respective estimated useful lives. Depreciation commences when the asset is ready for its intended use, which we define as the earlier of stabilization (90% occupied) or one year after completion of construction. We generally use the following useful lives: 5 to 7 years for capital improvements, 10 years for standard tenant improvements, 25 years for depreciable land improvements, 30 years for operating properties acquired and 40 years for operating properties we develop. We depreciate building improvements on land parcels subject to ground leases over the shorter of the estimated building improvement life or the contractual term of the underlying ground lease. Capitalized leasing costs are amortized over the estimated remaining lease term. Our weighted average lease term on leases signed during 2017, based on square feet for all leases, was 54 months.
We assess the carrying values of our respective real estate assets, whenever events or changes in circumstances indicate that the carrying amounts of these assets may not be fully recoverable. We measure the recoverability of the asset by comparing the carrying amount of the asset to the estimated future undiscounted cash flows. If our analysis indicates that the carrying value of the real estate property is not recoverable on an undiscounted cash flow basis, we recognize an impairment charge for the amount by which the carrying value exceeds the current estimated fair value of the real estate property.
We estimate the future undiscounted cash flows and fair value based on our intent as follows:
for real estate properties that we intend to hold long-term; including land held for development, properties currently under development and operating properties; recoverability is assessed based on the estimated undiscounted future net rental income from operating the property and the terminal value, including anticipated costs to develop;
for real estate properties we intend to sell, including properties currently under development and operating properties; recoverability is assessed based on proceeds from disposition that are estimated based on future net rental income of the property, expected market capitalization rates and anticipated costs to develop;
for land parcels we intend to sell, recoverability is assessed based on estimated proceeds from disposition; and
for costs incurred related to the potential acquisition of land, operating properties or development of a real estate property, recoverability is assessed based on the probability that the acquisition or development is likely to occur at the measurement date.
Assets Held for Sale or Contribution. We classify a property as held for sale or contribution when certain criteria are met in accordance with GAAP. Assets classified as held for sale are expected to be sold to a third party and assets classified as held for contribution are newly developed assets we intend to contribute to an unconsolidated co-investment venture or to a third party within twelve months. At such time, the respective assets and liabilities are presented separately in the Consolidated Balance Sheets and depreciation is no longer recognized. Assets held for sale or contribution are reported at the lower of their carrying amount or their estimated fair value less the costs to sell.
Investments in Unconsolidated Entities. We present our investments in certain entities under the equity method. We use the equity method when we have the ability to exercise significant influence over operating and financial policies of the venture but do not have control of the entity. Under the equity method, we initially recognize these investments (including advances) in the balance sheet at our cost, including formation costs and net of deferred gains from the contribution of properties, if applicable. We subsequently adjust the accounts to reflect our proportionate share of net earnings or losses recognized and accumulated other comprehensive income or loss, distributions received, contributions made and certain other adjustments, as appropriate. When circumstances indicate there may have been a reduction in the value of an equity investment, we evaluate whether the loss in value is other than temporary. If we conclude it is other than temporary, we recognize an impairment charge to reflect the equity investment at fair value.
With regard to distributions from unconsolidated entities, we have elected the nature of distribution approach as the information is available to us to determine the nature of the underlying activity that generated the distributions. In accordance with the nature of distribution approach, cash flows generated from the operations of an unconsolidated entity are classified as a return on investment (cash inflow from operating activities) and cash flows that are generated from property sales, debt refinancing or sales of our investments are classified as a return of investment (cash inflow from investing activities).
Cash and Cash Equivalents. We consider all cash on hand, demand deposits with financial institutions and short-term highly liquid investments with original maturities of three months or less to be cash equivalents. Our cash and cash equivalents are financial instruments that are exposed to concentrations of credit risk. We invest our cash with high-credit quality institutions. Cash balances may be invested in money market accounts that are not insured. We have not realized any losses in such cash investments or accounts and believe that we are not exposed to any significant credit risk.
Derivative Financial Instruments. We primarily hedge our foreign currency risk by borrowing in the currencies in which we invest. Generally, we borrow in the functional currency of our consolidated subsidiaries but we also borrow in currencies other than the U.S. dollar in the OP. We may use derivative financial instruments, such as foreign currency forward and option contracts to manage foreign currency exchange rate risk related to both our foreign investments and the related earnings. In addition, we occasionally use interest rate swap and forward contracts to manage interest rate risk and limit the impact of future interest rate changes on earnings and cash flows, primarily with variable-rate debt.
We do not use derivative financial instruments for trading or speculative purposes. Each derivative transaction is customized and not exchange-traded. We recognize all derivatives at fair value within the line items Other Assets or Other Liabilities. We do not net our derivative position by counterparty for purposes of balance sheet presentation and disclosure. Management reviews our derivative positions, overall risk management strategy and hedging program, on a regular basis. We only enter into transactions that we believe will be highly effective at offsetting the underlying risk. Our use of derivatives involves the risk that counterparties may default on a derivative contract; therefore we: (i) establish exposure limits for each counterparty to minimize this risk and provide counterparty diversification; (ii) contract with counterparties that have long-term credit ratings of single-A or better; (iii) enter into master agreements that generally allow for netting of certain exposures; thereby significantly reducing the actual loss that would be incurred should a counterparty fail to perform its contractual obligations; and (iv) set minimum credit standards that become more stringent as the duration of the derivative financial instrument increases. Based on these factors, we consider the risk of counterparty default to be minimal.
Designated Derivatives. We may choose to designate our derivative financial instruments, generally foreign currency forwards as net investment hedges in foreign operations or interest rate swaps or forwards as cash flow hedges. At inception of the transaction, we formally designate and document the derivative financial instrument as a hedge of a specific underlying exposure, the risk management objective and the strategy for undertaking the hedge transaction. We formally assess both at inception and at least quarterly thereafter, the effectiveness of our hedging transactions. Due to the high degree of effectiveness between the hedging instruments and the underlying exposures hedged, fluctuations in the value of the derivative financial instruments will generally be offset by changes in the cash flows or fair values of the underlying exposures being hedged.
Changes in the fair value of derivatives that are designated and qualify as net investment hedges in foreign operations and cash flow hedges are recorded in AOCI/L. For net investment hedges, these amounts offset the translation adjustments on the underlying net assets of our foreign investments, which we also record in AOCI/L. The ineffective portion of a derivative financial instrument's change in fair value, if any, is immediately recognized in earnings within the line item Foreign Currency and Derivative Gains (Losses), Net in the Consolidated Statements of Income. For cash flow hedges, we report the effective portion of the gain or loss as a component of AOCI/L and reclassify it to the applicable line item in the Consolidated Statements of Income, generally Interest Expense, over the corresponding period of the underlying hedged item. The ineffective portion of a derivative financial instrument’s change in fair value is recognized in earnings, generally Interest Expense, at the time the ineffectiveness occurred. To the extent the hedged debt related to our interest rate swaps and forwards is paid off early, we write off the remaining balance in AOCI/L and recognize the amount in Interest Expense in the Consolidated Statements of Income.
In addition to the net investment hedges described above, we may issue debt in the OP in a currency that is not the same functional currency of the borrowing entity to hedge our international investments. We designate the debt as a nonderivative financial instrument to offset the translation and economic exposures related to our net investment in international subsidiaries.
Undesignated Derivatives. We also use derivatives, such as foreign currency forwards and option contracts, that are not designated as hedges to manage foreign currency exchange rate risk related to our results of operations. The changes in fair values of these derivatives that were not designated or did not qualify as hedging instruments are immediately recognized in earnings within the line item Foreign Currency and Derivative Gains (Losses), Net in the Consolidated Statements of Income. These gains or losses are generally offset by lower or higher earnings as a result in exchange rates that were different than our expectations.
In addition, we may choose to not designate our interest rate swap and forward contracts. If a swap or forward contract is not designated as a hedge, the changes in fair value of these instruments is immediately recognized in earnings within the line item Interest Expense in the Consolidated Statements of Income.
Costs of Raising Capital. We treat costs incurred in connection with the issuance of common and preferred stock as a reduction to additional paid-in capital. We capitalize costs incurred in connection with the issuance of debt. Costs related to our credit facilities are included in Other Assets and costs related to all our other debt are recorded as a direct reduction of the liability.
AOCI/L. For the Parent, we include AOCI/L as a separate component of stockholders' equity in the Consolidated Balance Sheets. For the OP, AOCI/L is included in partners’ capital in the Consolidated Balance Sheets. Any reference to AOCI/L in this document is referring to the component of stockholders’ equity for the Parent and partners’ capital for the OP.
Noncontrolling Interests. Noncontrolling interests represent the share of consolidated entities owned by third parties. We recognize each noncontrolling holder’s respective share of the estimated fair value of the net assets at the date of formation or acquisition. Noncontrolling interests are subsequently adjusted for the noncontrolling holder’s share of additional contributions, distributions and their share of the net earnings or losses of each respective consolidated entity. We allocate net income to noncontrolling interests based on the weighted average ownership interest during the period. The net income that is not attributable to us is reflected in the line item Net Earnings Attributable to Noncontrolling Interests. We do not recognize a gain or loss on transactions with a consolidated entity in which we do not own 100% of the equity, but we reflect the difference in cash received or paid from the noncontrolling interests carrying amount as additional paid-in-capital.
Certain limited partnership interests are exchangeable into our common stock. Common stock issued upon exchange of a holder’s noncontrolling interest is accounted for at the carrying value of the surrendered limited partnership interest and the difference between the carrying value and the fair value of the common stock issued is recorded to additional paid-in-capital.
Rental Revenues. We lease our operating properties to customers under agreements that are classified as operating leases. We recognize the total minimum lease payments provided for under the leases on a straight-line basis over the lease term. Generally, under the terms of our leases, the majority of our rental expenses are recovered from our customers. We reflect amounts recovered from customers as revenues in the period that the applicable expenses are incurred. We make a provision for possible loss if the collection of a receivable balance is considered doubtful.
Strategic Capital Revenues. Strategic capital revenues include revenues we earn from the management services we provide to unconsolidated entities. These fees are determined in accordance with the terms specific to each arrangement and may include property and asset management fees or transactional fees for leasing, acquisition, development, construction, financing, legal and tax services provided. We may also earn incentive returns (called “promotes”) based on third-party investor returns over time, which may be during the duration of the venture or at the time of liquidation. We recognize fees when they are earned, fixed and determinable or on a percentage of completion basis for development fees. We report these fees in Strategic Capital Revenues. The fees we earn to develop properties within these ventures are also recorded on a percentage of completion basis.
We also earn fees from ventures that we consolidate. Upon consolidation, these fees are eliminated from our earnings and the third-party share of these fees are recognized as a reduction of Net Earnings Attributable to Noncontrolling Interests.
Gains on Dispositions of Investments in Real Estate and Revaluation of Equity Investments Upon Acquisition of a Controlling Interest, Net. We recognize gains on the disposition of real estate when the recognition criteria have been met, generally at the time the risks and rewards and title have transferred and we no longer have substantial continuing involvement with the real estate sold. We recognize losses from the disposition of real estate when known. We recognize gains or losses on the remeasurement of equity investments to fair value upon acquisition of a controlling interest in any of our previously unconsolidated entities and the transaction is considered the acquisition of a business.
When we contribute a property to an unconsolidated entity in which we have an ownership interest, we do not recognize a portion of the gain realized. The amount of gain not recognized, based on our ownership interest in the entity acquiring the property, is deferred by recognizing a reduction to our investment in the applicable unconsolidated entity. We adjust our proportionate share of net earnings or losses recognized in future periods to reflect the entities’ recorded depreciation expense as if it were computed on our lower basis in the contributed properties rather than on the entity’s basis.
When a property that we originally contributed to an unconsolidated entity is disposed of to a third party, we recognize the amount of the gain we previously deferred, along with our proportionate share of the gain recognized by the unconsolidated entity. If our ownership interest in an unconsolidated entity decreases and the decrease is expected to be permanent, we recognize the amounts relating to previously deferred gains to coincide with our new ownership interest.
Rental Expenses. Rental expenses primarily include the cost of our property management personnel, utilities, repairs and maintenance, property insurance, real estate taxes and the other costs of managing the properties.
Strategic Capital Expenses. Strategic capital expenses generally include the direct expenses associated with the asset management of the unconsolidated co-investment ventures provided by our employees who are assigned to our Strategic Capital segment and the costs of our Prologis Promote Plan based on earned promotes. In addition, in order to achieve efficiencies and economies of scale, all of our property management functions are provided by property management personnel who are assigned to our Real Estate Operations segment. These individuals perform the property-level management of the properties in our owned and managed portfolio, which include properties we consolidate and those we manage that are owned by the unconsolidated co-investment ventures. We allocate the costs of our property management to the properties we consolidate (included in Rental Expenses) and the properties owned by the unconsolidated co-investment ventures (included in Strategic Capital Expenses) by using the square feet owned by the respective portfolios.
Equity-Based Compensation. We account for equity-based compensation by measuring the cost of employee services received in exchange for an award of an equity instrument based on the fair value of the award on the grant date. We recognize the cost of the award on a straight-line basis over the period during which an employee is required to provide service in exchange for the award, generally the vesting period.
Income Taxes. Under the Internal Revenue Code, REITs are generally not required to pay federal income taxes if they distribute 100% of their taxable income and meet certain income, asset and stockholder tests. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income taxes at regular corporate rates (including any alternative minimum tax) and may not be able to qualify as a REIT for the four subsequent taxable years. Even as a REIT, we may be subject to certain foreign state and local taxes on our own income and property, and to federal income and excise taxes on our undistributed taxable income.
We have elected taxable REIT subsidiary (“TRS”) status for some of our consolidated subsidiaries. This allows us to provide services that would otherwise be considered impermissible for REITs. Many of the foreign countries in which we have operations do not recognize REITs or do not accord REIT status under their respective tax laws to our entities that operate in their jurisdiction. In the U.S., we are taxed in certain states in which we operate. Accordingly, we recognize income tax expense for the federal and state income taxes incurred by our TRSs, taxes incurred in certain states and foreign jurisdictions, and interest and penalties associated with our unrecognized tax benefit liabilities.
We evaluate tax positions taken in the Consolidated Financial Statements under the interpretation for accounting for uncertainty in income taxes. As a result of this evaluation, we may recognize a tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by taxing authorities.
We recognize deferred income taxes in certain taxable entities. For federal income tax purposes, certain acquisitions have been treated as tax-free transactions resulting in a carry-over basis in assets and liabilities. For financial reporting purposes and in accordance with purchase accounting, we record all of the acquired assets and assumed liabilities at the estimated fair value at the date of acquisition. For our taxable subsidiaries, including certain international jurisdictions, we recognize the deferred income tax liabilities that represent the tax effect of the difference between the tax basis carried over and the fair value of the tangible and intangible assets at the date of acquisition. Any subsequent increases or decreases to the deferred income tax liability recorded in connection with these acquisitions, are reflected in earnings.
If taxable income is generated in these subsidiaries, we recognize a benefit in earnings as a result of the reversal of the deferred income tax liability previously recorded at the acquisition date and we record current income tax expense representing the entire current income tax liability. If the reversal of the deferred income tax liability results from a sale or contribution of assets, the classification of the reversal to the Consolidated Statement of Income is based on the taxability of the transaction. We record the reversal to deferred income tax benefit as a taxable transaction if we dispose of the asset. We record the reversal as Gains on Dispositions of Investments in Real Estate and Revaluation of Equity Investments Upon Acquisition of a Controlling Interest, Net as a non-taxable transaction if we dispose of the asset along with the entity that owns the asset.
Deferred income tax expense is generally a function of the period’s temporary differences (items that are treated differently for tax purposes than for financial reporting purposes) and the utilization of tax net operating losses (“NOL”) generated in prior years that had been previously recognized as deferred income tax assets. We provide for a valuation allowance for deferred income tax assets if we believe all or some portion of the deferred income tax asset may not be realized. Any increase or decrease in the valuation allowance that results from a change in circumstances that causes a change in the estimated ability to realize the related deferred income tax asset is included in deferred tax expense.
Environmental Costs. We incur certain environmental remediation costs, including cleanup costs, consulting fees for environmental studies and investigations, monitoring costs, and legal costs relating to cleanup, litigation defense, and the pursuit of responsible third parties. We expense costs incurred in connection with operating properties and properties previously sold. We capitalize costs related to undeveloped land as development costs and include any expected future environmental liabilities at the time of acquisition. We include costs incurred for properties to be disposed in the cost of the properties upon disposition. We maintain a liability for the estimated costs of environmental remediation expected to be incurred in connection with undeveloped land, operating properties and properties previously sold that we adjust as appropriate as information becomes available.
New Accounting Pronouncements.
New Accounting Standards Adopted
In January 2017, the Financial Accounting Standards Board (“FASB”) issued an accounting standard update (“ASU”) that clarifies the definition of a business. The update added further guidance that assists preparers in evaluating whether a transaction will be accounted for as an acquisition of an asset or a business. As discussed above, we adopted this standard on January 1, 2017, on a prospective basis. The adoption did not have a significant impact on the Consolidated Financial Statements.
New Accounting Standards Issued but not yet Adopted
Revenue Recognition. In May 2014, the FASB issued an 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. We evaluated each of our revenue streams and their related accounting policies under the standard. 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 revenue recognition standard includes recurring fees and promotes earned from our co-investment ventures as well as sales to third parties and contributions of properties to unconsolidated co-investment ventures. While we do not expect changes in the recognition of recurring fees earned, we will evaluate promote fees earlier in the incentive period and recognize promote fees to the extent it is probable that a revenue reversal will not occur in a future period.
For dispositions of real estate to third parties, we do not expect the standard to impact the recognition of the sale. 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. Upon adoption of this standard, we will recognize, on a prospective basis, the entire gain attributed to contributions of real estate properties to unconsolidated co-investment ventures rather than the third-party share we recognize today. For deferred gains from existing partial sales recorded prior to the adoption of the standard, we will continue to recognize these gains into earnings over the lives of the underlying real estate properties. In addition to the recognition changes discussed above, expanded quantitative and qualitative disclosures regarding revenue recognition will be required for contracts that are subject to these standards. We will adopt the practical expedient to only assess the recognition of revenue for open contracts during the transition period and do not anticipate any material retained earnings adjustments upon adoption. We adopted the revenue recognition and derecognition of non-financial assets standards on January 1, 2018, on a modified retrospective basis.
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 2017 and 2016, we capitalized $23.8 million and $23.9 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 operating or finance 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 88 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. We continue to evaluate the key drivers in the measurement of the ROU asset and lease liability including the discount rate and lease term. Details of our future minimum rental payments under these ground and office space leases are disclosed in Note 4.
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 expired or 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 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 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 are currently evaluating the impact the adoption of this standard will have on the Consolidated Financial Statements.
KTR Capital Partners and Its Affiliates
In 2015, we acquired high quality real estate assets and the operating platform of KTR Capital Partners and its affiliates (“KTR”) through our consolidated co-investment venture, Prologis U.S. Logistics Venture (“USLV”). The portfolio consisted of 315 operating properties, aggregating 59.0 million square feet, 3.6 million square feet of properties under development and land parcels. The total purchase price was $5.0 billion, net of assumed debt of $735.2 million. The purchase price was funded through cash contributions of $2.6 billion from Prologis and $2.3 billion from our venture partner, and the issuance of 4.5 million common limited partnership units in the OP. We incurred $24.7 million of acquisition costs that are included in Other Expenses during 2015.
The following unaudited pro forma financial information presents our results as though the KTR transaction had been completed on January 1, 2015. The pro forma information does not reflect the actual results of operations had the transaction actually been completed on January 1, 2015, and it is not indicative of future operating results. The results for the year ended December 31, 2015, include approximately seven months of actual results for the transaction, the acquisition expenses, and five months of pro forma adjustments. Actual results in 2015 include rental revenues and rental expenses of the properties acquired of $235.7 million and $56.9 million, respectively, representing the period from acquisition through December 31, 2015.
The following amounts are in thousands, except per share amounts:
|
| 2015 |
| |
Total revenues |
| $ | 2,358,643 |
|
Net earnings attributable to common stockholders |
| $ | 866,753 |
|
Net earnings per share attributable to common stockholders – Basic |
| $ | 1.66 |
|
Net earnings per share attributable to common stockholders – Diluted |
| $ | 1.65 |
|
These results include certain adjustments, primarily: (i) decreased revenues from the amortization of the net assets from the acquired leases with net favorable rents relative to estimated market rents; (ii) increased depreciation and amortization expense resulting from the adjustment of real estate assets to estimated fair value and recognition of intangible assets related to in-place leases; and (iii)
additional interest expense attributable to the debt issued to finance our cash portion of the acquisition offset by lower interest expense due to the accretion of the fair value adjustment of debt.
Investments in real estate properties consisted of the following at December 31 (dollars and square feet in thousands):
| Square Feet |
|
| Number of Buildings |
|
|
|
| |||||||||||||||
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||||
Operating properties: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Buildings and improvements |
| 294,811 |
|
|
| 331,210 |
|
|
| 1,525 |
|
|
| 1,776 |
|
| $ | 16,849,349 |
|
| $ | 17,905,914 |
|
Improved land |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 5,735,978 |
|
|
| 6,037,543 |
|
Development portfolio, including land costs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prestabilized |
| 7,345 |
|
|
| 8,256 |
|
|
| 22 |
|
|
| 29 |
|
|
| 546,173 |
|
|
| 798,233 |
|
Properties under development |
| 22,216 |
|
|
| 19,539 |
|
|
| 63 |
|
|
| 60 |
|
|
| 1,047,316 |
|
|
| 633,849 |
|
Land (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 1,154,383 |
|
|
| 1,218,904 |
|
Other real estate investments (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 505,445 |
|
|
| 524,887 |
|
Total investments in real estate properties |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 25,838,644 |
|
|
| 27,119,330 |
|
Less accumulated depreciation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 4,059,348 |
|
|
| 3,758,372 |
|
Net investments in real estate properties |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 21,779,296 |
|
| $ | 23,360,958 |
|
(1) | Included in our investments in real estate at December 31, 2017 and 2016, were 5,191 and 5,892 acres of land, respectively. |
(2) | 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 office buildings; (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. |
At December 31, 2017, we owned real estate assets in the U.S. and other Americas (Brazil, Canada and Mexico), Europe (Belgium, the Czech Republic, France, Germany, Hungary, Italy, the Netherlands, Poland, Slovakia, Spain, Sweden and the United Kingdom (“U.K.”)) and Asia (China, Japan and Singapore).
Acquisitions
The following table summarizes our real estate acquisition activity for the years ended December 31 (dollars and square feet in thousands):
|
| 2017 |
|
| 2016 |
|
| 2015 |
| |||
Number of operating properties |
|
| 16 |
|
|
| 9 |
|
|
| 52 |
|
Square feet |
|
| 6,859 |
|
|
| 1,823 |
|
|
| 7,375 |
|
Acquisition value of net investments in real estate properties (1) (2) |
| $ | 1,139,410 |
|
| $ | 411,706 |
|
| $ | 1,042,562 |
|
(1) | Value includes the acquisition of 1,392, 776 and 690 acres of land in 2017, 2016 and 2015, respectively. |
(2) | In August 2017, we acquired our partner’s interest in certain joint ventures in Brazil for an aggregate price of R$1.2 billion ($381.7 million). As a result of this transaction, we began consolidating the real estate properties that included twelve operating properties, two prestabilized properties and 531.4 acres of undeveloped land. We |
The table above does not include the properties acquired in the KTR transaction in 2015, as this transaction is explained in Note 3.
The following table summarizes our real estate disposition activity for the years ended December 31 (dollars and square feet in thousands):
| 2017 |
|
| 2016 |
|
| 2015 |
| |||
Contributions to unconsolidated co-investment ventures (1) |
|
|
|
|
|
|
|
|
|
|
|
Number of properties |
| 222 |
|
|
| 35 |
|
|
| 31 |
|
Square feet |
| 48,171 |
|
|
| 11,624 |
|
|
| 8,355 |
|
Net proceeds (2) | $ | 3,201,986 |
|
| $ | 1,231,878 |
|
| $ | 835,385 |
|
Gains on contributions, net (2) | $ | 847,034 |
|
| $ | 267,441 |
|
| $ | 148,987 |
|
Dispositions to third parties |
|
|
|
|
|
|
|
|
|
|
|
Number of properties |
| 110 |
|
|
| 172 |
|
|
| 136 |
|
Square feet |
| 17,147 |
|
|
| 20,360 |
|
|
| 23,024 |
|
Net proceeds (2) (3) | $ | 1,281,501 |
|
| $ | 1,760,048 |
|
| $ | 2,352,645 |
|
Gains on dispositions, net (2) (3) | $ | 274,711 |
|
| $ | 353,668 |
|
| $ | 609,900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gains on contributions and dispositions, net | $ | 1,121,745 |
|
| $ | 621,109 |
|
| $ | 758,887 |
|
Gains on revaluation of equity investments upon acquisition of a controlling interest |
| 61,220 |
|
|
| - |
|
|
| - |
|
Gains on redemptions of investments in co-investment ventures (4) |
| - |
|
|
| 136,289 |
|
|
| - |
|
Total gains on dispositions of investments in real estate and revaluation of equity investments upon acquisition of a controlling interest, net | $ | 1,182,965 |
|
| $ | 757,398 |
|
| $ | 758,887 |
|
(1) | In July 2017, we contributed 190 operating properties totaling 37.1 million square feet owned by Prologis North American Industrial Fund (“NAIF”) to
|
(2) | Includes the contribution and disposition of land parcels. |
(3) | Includes the sale of our |
(4) |
|
Operating Lease Agreements
We lease our operating properties and certain land parcels to customers under agreements that are generally classified as operating leases. Our weighted average lease term remaining, based on square feet for all leases in effect at December 31, 2017, was 48 months.
The following table summarizes our minimum lease payments on leases with lease periods greater than one year for space in our operating properties, pre-stabilized development properties and leases of land subject to ground leases at December 31, 2017 (in thousands):
2018 |
| $ | 1,602,708 |
|
2019 |
|
| 1,440,452 |
|
2020 |
|
| 1,255,182 |
|
2021 |
|
| 1,015,212 |
|
2022 |
|
| 770,119 |
|
Thereafter |
|
| 2,312,372 |
|
Total |
| $ | 8,396,045 |
|
These amounts do not reflect future rental revenues from the renewal or replacement of existing leases and exclude reimbursements of operating expenses.
We have entered into operating ground leases as a lessee on certain land parcels, primarily on-tarmac facilities and office space with remaining lease terms of 1 to 65 years. The following table summarizes our future minimum rental payments under non-cancelable operating leases in effect at December 31, 2017 (in thousands):
2018 |
| $ | 34,413 |
|
2019 |
|
| 31,819 |
|
2020 |
|
| 30,420 |
|
2021 |
|
| 25,964 |
|
2022 |
|
| 24,399 |
|
Thereafter |
|
| 311,372 |
|
Total |
| $ | 458,387 |
|
NOTE 5. 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 12 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 at December 31 (in thousands):
|
| 2017 |
|
| 2016 |
| ||
Unconsolidated co-investment ventures |
| $ | 5,274,702 |
|
| $ | 4,057,524 |
|
Other ventures |
|
| 221,748 |
|
|
| 172,905 |
|
Total |
| $ | 5,496,450 |
|
| $ | 4,230,429 |
|
Unconsolidated Co-Investment Ventures
The following table summarizes our investments in the individual co-investment ventures at December 31 (dollars in thousands):
|
| Ownership Percentage |
|
| Investment in and Advances to |
| ||||||||||
Co-Investment Venture |
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||
Prologis Targeted U.S. Logistics Fund, L.P. (“USLF”) (1) |
|
| 28.2 | % |
|
| 14.9 | % |
| $ | 1,383,021 |
|
| $ | 434,818 |
|
FIBRA Prologis (2) (3) |
|
| 46.3 | % |
|
| 45.9 | % |
|
| 533,941 |
|
|
| 547,744 |
|
Prologis European Logistics Partners Sàrl (“PELP”) (4) |
|
| 50.0 | % |
|
| 50.0 | % |
|
| 1,766,075 |
|
|
| 1,623,707 |
|
Prologis European Logistics Fund ("PELF") (5) |
|
| 26.3 | % |
|
| 31.2 | % |
|
| 1,017,361 |
|
|
| 344,200 |
|
Prologis UK Logistics Venture ("UKLV") (4) (6) |
|
| 15.0 | % |
| N/A |
|
|
| 29,382 |
|
|
| - |
| |
Prologis Targeted Europe Logistics Fund, FCP-FIS (“PTELF”) (5) |
| N/A |
|
|
| 23.5 | % |
|
| - |
|
|
| 310,118 |
| |
Europe Logistics Venture 1, FCP-FIS (“ELV”) (7) |
| N/A |
|
|
| 15.0 | % |
|
| - |
|
|
| 48,289 |
| |
Nippon Prologis REIT, Inc. (“NPR”) (8) (9) |
|
| 15.1 | % |
|
| 15.1 | % |
|
| 406,568 |
|
|
| 348,570 |
|
Prologis China Logistics Venture I, LP and II, LP ("Prologis China Logistics Venture") (4) |
|
| 15.0 | % |
|
| 15.0 | % |
|
| 116,890 |
|
|
| 102,778 |
|
Brazil joint ventures (10) |
|
| 10.0 | % |
| various |
|
|
| 21,464 |
|
|
| 297,300 |
| |
Total |
|
|
|
|
|
|
|
|
| $ | 5,274,702 |
|
| $ | 4,057,524 |
|
(1) | In July 2017, we contributed operating properties to USLF. We received cash proceeds and additional units, which increased our ownership interest and USLF assumed secured debt. |
(2) | At December 31, 2017, we owned 295.5 million units of FIBRA Prologis that had a closing price of Ps 34.01 ($1.72) per unit on the Mexican Stock Exchange. |
(3) | We have granted FIBRA Prologis a right of first refusal with respect to stabilized properties that we plan to sell in |
(4) | We have one partner in each of these co-investment ventures. |
(5) | In October, the assets and |
(6) | In February 2017, we formed UKLV, an unconsolidated co-investment venture in which we have a 15.0% ownership interest. UKLV will acquire land, develop buildings and operate and hold logistics real estate assets in the U.K. Upon formation, we, along with our venture partner, committed £380.0 million |
(7) |
|
(8) | At December 31,
|
(9) | For any properties we develop and plan to sell in Japan, we have committed to offer those properties to NPR. |
(10) | In March 2017, we acquired all our partner’s interest in the Prologis Brazil Logistics Partners Fund I, L.P. (“Brazil Fund”). In August 2017, we acquired our partner’s interest in certain joint ventures in Brazil. See Note 4 for more information on this acquisition. The remaining investment balance includes nine properties aggregating 2.8 million square feet held with various partners. |
The amounts recognized in Strategic Capital Revenues and Earnings from Unconsolidated Entities, Net depend on the size and operations of the unconsolidated co-investment ventures, the timing of revenues earned through promotes, as well as fluctuations in foreign currency exchange rates and our ownership interest. We recognized Strategic Capital Expenses for direct costs associated with the asset management of these ventures and allocated property-level management costs for the properties owned by the ventures.
The following table summarizes the amounts we recognized in the Consolidated Statements of Income related to the unconsolidated co-investment ventures for the years ended December 31 (in thousands):
|
| 2017 |
|
| 2016 |
|
| 2015 |
| |||
Strategic capital revenues from unconsolidated co-investment ventures, net: |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. |
| $ | 174,586 |
|
| $ | 37,911 |
|
| $ | 36,964 |
|
Other Americas |
|
| 28,493 |
|
|
| 22,799 |
|
|
| 22,735 |
|
Europe |
|
| 106,768 |
|
|
| 186,113 |
|
|
| 112,626 |
|
Asia |
|
| 61,410 |
|
|
| 54,352 |
|
|
| 42,750 |
|
Total (1) |
| $ | 371,257 |
|
| $ | 301,175 |
|
| $ | 215,075 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from unconsolidated co-investment ventures, net: |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. |
| $ | 32,989 |
|
| $ | 10,441 |
|
| $ | 7,124 |
|
Other Americas |
|
| 26,200 |
|
|
| 27,155 |
|
|
| 28,842 |
|
Europe |
|
| 145,792 |
|
|
| 137,652 |
|
|
| 106,656 |
|
Asia |
|
| 29,187 |
|
|
| 16,629 |
|
|
| 12,780 |
|
Total |
| $ | 234,168 |
|
| $ | 191,877 |
|
| $ | 155,402 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) | We earned promote revenue (third-party share) of
|
The following table summarizes the financial position and operating information of our unconsolidated co-investment ventures (not our proportionate share), at December 31 and for the years ended December 31 as presented at our adjusted basis derived from the ventures’ U.S. GAAP information (dollars and square feet in millions):
| U.S. |
|
| Other Americas |
|
| Europe |
|
| Asia |
|
| Total |
| |||||||||||||||||||||||||||||||||||||||||||||
| 2017 |
|
| 2016 |
|
| 2015 |
|
| 2017 |
|
| 2016 |
|
| 2015 |
|
| 2017 |
|
| 2016 |
|
| 2015 |
|
| 2017 |
|
| 2016 |
|
| 2015 |
|
| 2017 |
|
| 2016 |
|
| 2015 |
| |||||||||||||||
Financial Position: |
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Ventures |
| 1 |
|
|
| 1 |
|
|
| 1 |
|
|
| 2 |
|
|
| 2 |
|
|
| 2 |
|
|
| 3 |
|
|
| 4 |
|
|
| 4 |
|
|
| 2 |
|
|
| 2 |
|
|
| 2 |
|
|
| 8 |
|
|
| 9 |
|
|
| 9 |
|
Operating properties |
| 552 |
|
|
| 369 |
|
|
| 391 |
|
|
| 205 |
|
|
| 213 |
|
|
| 205 |
|
|
| 707 |
|
|
| 700 |
|
|
| 688 |
|
|
| 95 |
|
|
| 85 |
|
|
| 66 |
|
|
| 1,559 |
|
|
| 1,367 |
|
|
| 1,350 |
|
Square feet |
| 88 |
|
|
| 50 |
|
|
| 50 |
|
|
| 37 |
|
|
| 42 |
|
|
| 39 |
|
|
| 166 |
|
|
| 163 |
|
|
| 159 |
|
|
| 41 |
|
|
| 36 |
|
|
| 29 |
|
|
| 332 |
|
|
| 291 |
|
|
| 277 |
|
Total assets ($) |
| 7,062 |
|
|
| 4,238 |
|
|
| 4,408 |
|
|
| 2,118 |
|
|
| 2,793 |
|
|
| 2,482 |
|
|
| 13,586 |
|
|
| 10,853 |
|
|
| 11,343 |
|
|
| 6,133 |
|
|
| 5,173 |
|
|
| 4,320 |
|
|
| 28,899 |
|
|
| 23,057 |
|
|
| 22,553 |
|
Third-party debt ($) |
| 2,313 |
|
|
| 1,414 |
|
|
| 1,433 |
|
|
| 756 |
|
|
| 739 |
|
|
| 657 |
|
|
| 2,682 |
|
|
| 2,446 |
|
|
| 2,640 |
|
|
| 2,328 |
|
|
| 1,947 |
|
|
| 1,520 |
|
|
| 8,079 |
|
|
| 6,546 |
|
|
| 6,250 |
|
Total liabilities ($) |
| 2,520 |
|
|
| 1,540 |
|
|
| 1,550 |
|
|
| 782 |
|
|
| 814 |
|
|
| 708 |
|
|
| 3,655 |
|
|
| 3,283 |
|
|
| 3,584 |
|
|
| 2,685 |
|
|
| 2,239 |
|
|
| 1,751 |
|
|
| 9,642 |
|
|
| 7,876 |
|
|
| 7,593 |
|
Investment balance ($) (1) |
| 1,383 |
|
|
| 435 |
|
|
| 690 |
|
|
| 555 |
|
|
| 845 |
|
|
| 786 |
|
|
| 2,813 |
|
|
| 2,327 |
|
|
| 2,707 |
|
|
| 524 |
|
|
| 451 |
|
|
| 402 |
|
|
| 5,275 |
|
|
| 4,058 |
|
|
| 4,585 |
|
Wtd avg ownership (2) |
| 28.2 | % |
|
| 14.9 | % |
|
| 22.5 | % |
|
| 43.4 | % |
|
| 43.9 | % |
|
| 43.8 | % |
|
| 32.8 | % |
|
| 35.1 | % |
|
| 38.9 | % |
|
| 15.1 | % |
|
| 15.1 | % |
|
| 15.0 | % |
|
| 28.8 | % |
|
| 27.9 | % |
|
| 31.6 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Information: |
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Revenues ($) |
| 533 |
|
|
| 395 |
|
|
| 382 |
|
|
| 245 |
|
|
| 242 |
|
|
| 228 |
|
|
| 1,030 |
|
|
| 964 |
|
|
| 947 |
|
|
| 372 |
|
|
| 342 |
|
|
| 275 |
|
|
| 2,180 |
|
|
| 1,943 |
|
|
| 1,832 |
|
Net earnings ($) |
| 139 |
|
|
| 57 |
|
|
| 35 |
|
|
| 71 |
|
|
| 71 |
|
|
| 78 |
|
|
| 406 |
|
|
| 333 |
|
|
| 261 |
|
|
| 182 |
|
|
| 101 |
|
|
| 77 |
|
|
| 798 |
|
|
| 562 |
|
|
| 451 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) | The difference between our ownership interest of a venture’s equity and our investment balance at December 31, 2017, 2016 and 2015, results principally from three types of transactions: (i) deferring a portion of the
|
|
| 2015 (1) (2) |
|
| 2014 (1) |
|
| 2013 |
| |||
Common Stock: |
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary income |
| $ | 0.36 |
|
| $ | 0.29 |
|
| $ | - |
|
Qualified dividend |
|
| 0.08 |
|
|
| 0.41 |
|
|
| - |
|
Capital gains |
|
| 1.08 |
|
|
| 0.62 |
|
|
| 1.12 |
|
Total distribution |
| $ | 1.52 |
|
| $ | 1.32 |
|
| $ | 1.12 |
|
Preferred Stock – Series L (3): |
|
|
|
|
|
|
|
|
|
|
|
|
Capital gains |
| - - |
|
| - - |
|
| $ | 0.41 |
| ||
Preferred Stock – Series M, R and S (3): |
|
|
|
|
|
|
|
|
|
|
|
|
Capital gains |
| - - |
|
| - - |
|
| $ | 0.42 |
| ||
Preferred Stock – Series O (3): |
|
|
|
|
|
|
|
|
|
|
|
|
Capital gains |
| - - |
|
| - - |
|
| $ | 0.44 |
| ||
Preferred Stock – Series P (3): |
|
|
|
|
|
|
|
|
|
|
|
|
Capital gains |
| - - |
|
| - - |
|
| $ | 0.43 |
| ||
Preferred Stock – Series Q: |
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary income |
| $ | 0.77 |
|
| $ | 0.71 |
|
| $ | - |
|
Qualified dividend |
|
| 0.62 |
|
|
| 1.01 |
|
|
| - |
|
Capital gains |
|
| 2.88 |
|
|
| 2.55 |
|
|
| 4.27 |
|
Total dividend |
| $ | 4.27 |
|
| $ | 4.27 |
|
| $ | 4.27 |
|
(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
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. The equity contributions are generally used for the acquisition or development of properties, but may be used for the repayment of debt or other general uses. The venture may obtain financing for the acquisition of properties and therefore the acquisition price of additional investments that the venture could make may be more than the equity commitment. Depending on market conditions, the investment objectives of the ventures, our liquidity needs and other factors, we may make additional contributions of properties or additional cash investments in these ventures through the remaining commitment period.
The following table summarizes the remaining equity commitments at December 31, 2017 (in millions):
| Equity Commitments Expiration Date for Remaining Commitments Prologis Venture Partners Total Prologis Targeted U.S. Logistics Fund $ - $ 73 $ 73 2019 Prologis European Logistics Fund (1) - 1,061 1,061 2018 – 2019 Prologis UK Logistics Venture (2) 27 151 178 2021 Prologis China Logistics Venture 294 1,665 1,959 2020 – 2024 Total $ 321 $ 2,950 $ 3,271
The fair value of stock awards granted and vested was $38.0 million and $18.8 million for 2016 and $27.3 million and $11.7 million for 2015, respectively, based on the weighted average grant date fair value per unit. Total remaining compensation cost related to LTIP Units at December 31, 2017, was $50.6 million, prior to adjustments for capitalized amounts due to our development and leasing activities. The remaining compensation cost will be recognized through 2020, with a weighted average period of 1.0 year. Stock Options We have 0.7 million stock options outstanding and exercisable at December 31, 2017, with a weighted average exercise price of $24.68 and a weighted average life of 2.0 years. The aggregate intrinsic value of exercised options was $28.6 million, $45.6 million, and $13.7 million for the years ended December 31, 2017, 2016 and 2015, The Prologis 401(k) Plan (the “401(k) Plan”) provides for matching employer contributions of $0.50 for every dollar contributed by an employee, up to 6% of the employee’s annual compensation (within the statutory compensation limit). In the 401(k) Plan, vesting in the matching employer contributions is based on the employee’s years of service, with 100% vesting at the completion of one year of service. Our contributions under the matching provisions were $2.8 million, $2.7 million and $2.5 million for 2017, 2016 and 2015, respectively. We have a non-qualified savings plan that allows highly compensated employees the opportunity to defer the receipt and income taxation of a certain portion of their compensation in excess of the amount permitted under the 401(k) Plan. There has been no employer matching in the three-year period ended December 31, 2017.
Components of Earnings Before Income Taxes
The following table summarizes the components of earnings before income taxes for the years ended December 31 (in thousands):
Summary of Current and Deferred Income Taxes
The following table summarizes the components of the provision for income taxes for the years ended December 31 (in thousands):
For the years ended December 31,
During the years ended December 31,
Deferred Income Taxes
The deferred income tax benefits recognized in 2017, 2016 and 2015
The following table summarizes the deferred income tax assets and liabilities at December 31 (in thousands):
The deferred tax asset valuation allowance at December 31,
Liability for Uncertain Tax Positions
During the years ended December 31,
The liability for uncertain tax positions
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
FAIR VALU
Derivative Financial Instruments
Foreign Currency Contracts
The following
The following table summarizes the activity in our interest rate swaps designated as cash flow hedges for the years ended December 31 (in
In 2016, we entered into the 2016 Yen Term Loan and repaid our 2014, 2015 and 2016 Japanese yen term loans. At that time, we settled the outstanding contracts related to the previously outstanding term loans for $26.3 million. The
During 2015, we entered into two contracts with a notional amount of $526.3 million (¥65.0 billion) to effectively fix the interest rate on the 2015 Japanese Yen term loan (see above for discussion on the settlement of these contracts) and three contracts with a notional amount of CAD $371.9 million ($271.2 million) to effectively fix the interest rate on the Canadian term loan. In the third quarter of 2015,
we entered into two contracts with a notional amount of $360.0 million to effectively fix the interest rate at the three-month LIBOR rate of 2.3% on expected future debt issuances. These contracts were settled in the fourth quarter of 2015 when we entered into $750.0 million of senior notes. We recorded a loss of $11.0 million associated with these derivatives that will be amortized to Interest Expense, in accordance with our policy.
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 The following table presents the gains and (losses) associated with the change in fair value for the effective portion of our derivative and nonderivative hedging instruments included in Other Comprehensive Income for the years ended December 31 (in thousands):
Fair Value Measurements
We have estimated the fair value of our financial instruments using available market information and valuation methodologies we believe to be appropriate for these purposes. Considerable judgment and a high degree of subjectivity are involved in developing these estimates and, accordingly, they are not necessarily indicative of amounts that we would realize on disposition. See Note 2 for more information on our fair value measurements policy.
Fair Value Measurements on a Recurring Basis
At December 31,
Fair Value Measurements on Nonrecurring Basis
Fair Value of Financial Instruments
At December 31,
The differences in the fair value of our debt from the carrying value in the table below
The following table reflects the carrying amounts and estimated fair values of our debt at December 31 (in thousands):
Environmental Matters
A majority of the properties we acquire, including land, are subjected to environmental reviews either by us or the previous owners. In addition, we may incur environmental remediation costs associated with certain land parcels we acquire in connection with the development of the land. We have acquired certain properties that may have been leased to or previously owned by companies that discharged hazardous materials. We establish a liability at the time of acquisition to cover such costs and adjust the liabilities as appropriate when additional information becomes available. We record our environmental liabilities in Other Liabilities. We purchase various environmental insurance policies to mitigate our exposure to environmental liabilities. We are not aware of any environmental liabilities that would have a material adverse effect on our business, financial condition or results of operations.
Indemnification Agreements
We may enter into agreements whereby we indemnify certain co-investment ventures, or our venture partners, outside of the U.S. for taxes that may be assessed with respect to certain properties we contributed to these ventures. Our contributions to these ventures are generally structured as contributions of shares of companies that own the real estate assets. Accordingly, the capital gains associated with the step up in the value of the underlying real estate assets, for tax purposes, are deferred and transferred at contribution. We have generally indemnified these ventures to the extent that the ventures: (i) incur capital gains or withholding tax as a result of a direct sale of the real estate asset, as opposed to a transaction in which the shares of the company owning the real estate asset are transferred or sold or (ii) are required to grant a discount to the buyer of shares under a share transfer transaction as a result of the ventures transferring the embedded capital gain tax liability to the buyer of the shares in the transaction. The agreements limit the amount that is subject to our indemnification with respect to each property to 100% of the actual tax liabilities related to the capital gains that are deferred and transferred by us to the ventures at the time of the initial contribution less any deferred tax assets transferred with the property.
The outcome under these agreements is uncertain as it depends on the method and timing of dissolution of the related venture or disposition of any properties by the venture. We record liabilities related to the indemnification agreements in Other Liabilities. We continue to monitor these agreements and the likelihood of the sale of assets that would result in recognition and will adjust the potential liability in the future as facts and circumstances dictate.
Off-Balance Sheet Liabilities
We have issued performance and surety bonds and standby letters of credit in connection with certain development projects. Performance and surety bonds are commonly required by public agencies from real estate developers. Performance and surety bonds are renewable and expire on the completion of the improvements and infrastructure. At December 31,
We may be required under capital commitments or we may choose to make additional capital contributions to certain of our unconsolidated entities, representing our proportionate ownership interest, should additional capital contributions be necessary to fund development or acquisition costs, repayment of debt or operation shortfalls. See Note 5 for further discussion related to equity commitments to our unconsolidated entities.
From time to time, we are party to a variety of legal proceedings arising in the ordinary course of business. We believe that, with respect to any such matters that we are currently a party to, the ultimate disposition of any such matter will not have material adverse effect on our business, financial position or results of operations.
Our current business strategy includes two operating segments: Real Estate Operations and Strategic Capital. We generate revenues, earnings, net operating income 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 management and property management services and we earn additional revenues by providing leasing, acquisition, construction, development, financing 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
We received $153.3 million, $135.3 million and $65.3 million of ownership interests in certain unconsolidated co-investment ventures as a portion of our proceeds from the contribution of properties to these entities during 2017, 2016 and 2015, respectively, as disclosed in Note 5.
We capitalized $28.8 million, $25.8 million and $22.7 million in 2017, 2016 and 2015, respectively, of equity-based compensation expense resulting from our development and leasing activities.
We issued 1.5 million shares and 1.9 million shares in 2017 and 2016, respectively, of the Parent’s common stock upon redemption of an equal number of common limited partnership units in the OP, as disclosed in Note 12.
We received $53.8 million and $235.1 million of notes receivable backed by real estate in exchange for the disposition of real estate in 2017 and 2015. See Note 7 for more information on our notes receivable backed by real estate.
During 2015, we assumed $290.7 million of secured mortgage debt in connection with the acquisition of real estate properties. Also, as partial consideration for the disposition of some properties acquired during 2015, the buyer assumed debt of $170.1 million.
In 2015, exchangeable senior notes of $459.8 million, that were issued by the OP, were exchanged into 11.9 million shares of common stock of the Parent. In 2015, common limited partnership units were issued as partial consideration for the acquisition of properties as disclosed in Note 11.
The following table details our selected quarterly financial data (in thousands, except per share and unit data):
PROLOGIS, INC. AND PROLOGIS, L.P. SCHEDULE III – REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, (In thousands of U.S. dollars, as applicable)
PROLOGIS, INC. AND PROLOGIS, L.P. SCHEDULE III – REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, (In thousands of U.S. dollars, as applicable)
PROLOGIS, INC. AND PROLOGIS, L.P. SCHEDULE III – REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, (In thousands of U.S. dollars, as applicable)
PROLOGIS, INC. AND PROLOGIS, L.P. SCHEDULE III – REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, (In thousands of U.S. dollars, as applicable)
PROLOGIS, INC. AND PROLOGIS, L.P. SCHEDULE III – REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, (In thousands of U.S. dollars, as applicable)
PROLOGIS, INC. AND PROLOGIS, L.P. SCHEDULE III – REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, (In thousands of U.S. dollars, as applicable)
PROLOGIS, INC. AND PROLOGIS, L.P. SCHEDULE III – REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, (In thousands of U.S. dollars, as applicable)
PROLOGIS, INC. AND PROLOGIS, L.P. SCHEDULE III – REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, (In thousands of U.S. dollars, as applicable)
PROLOGIS, INC. AND PROLOGIS, L.P. SCHEDULE III – REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, (In thousands of U.S. dollars, as applicable)
PROLOGIS, INC. AND PROLOGIS, L.P. SCHEDULE III – REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, (In thousands of U.S. dollars, as applicable)
The following table reconciles accumulated depreciation per Schedule III to the Consolidated Balance Sheet in Item
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 12b-32, are incorporated herein by reference.
Other debt instruments are omitted in accordance with Item 601(b)(4)(iii)(A) of Registration S-K. Copies of such instruments will be furnished to the Securities and Exchange Commission upon request.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: February
KNOW ALL MEN BY THESE PRESENTS, that we, the undersigned officers and directors of Prologis, Inc., hereby severally constitute Hamid R. Moghadam, Thomas S. Olinger and Edward S. Nekritz, and each of them singly, our true and lawful attorneys with full power to them, and each of them singly, to sign for us and in our names in the capacities indicated below, the Form 10-K filed herewith and any and all amendments to said Form 10-K, and generally to do all such things in our names and in our capacities as officers and directors to enable Prologis, Inc. to comply with the provisions of the Securities Exchange Act of 1934, and all requirements of the U.S. Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signed by our said attorneys, or any of them, to said Form 10-K and any and all amendments thereto.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: February
KNOW ALL MEN BY THESE PRESENTS, that we, the undersigned officers and directors of Prologis, L.P., hereby severally constitute Hamid R. Moghadam, Thomas S. Olinger and Edward S. Nekritz, and each of them singly, our true and lawful attorneys with full power to them, and each of them singly, to sign for us and in our names in the capacities indicated below, the Form 10-K filed herewith and any and all amendments to said Form 10-K, and generally to do all such things in our names and in our capacities as officers and directors to enable Prologis, L.P. to comply with the provisions of the Securities Exchange Act of 1934, and all requirements of the U.S. Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signed by our said attorneys, or any of them, to said Form 10-K and any and all amendments thereto.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
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