Prologis Announces Second Quarter 2014 Earnings Results - WFXG FOX54 Augusta - Your News One Hour Earlier

Prologis Announces Second Quarter 2014 Earnings Results

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SOURCE Prologis, Inc.

- GAAP Same-Store Net Operating Income Increased 3.8 percent -

- Stabilized $371.3 Million of Development, Estimated Margin of 22.5 Percent -

- Recognized $25 Million Promote for Prologis Targeted U.S. Logistics Fund -

- Raising Earnings and Capital Deployment Guidance -

SAN FRANCISCO, July 22, 2014 /PRNewswire/ -- Prologis, Inc. (NYSE: PLD), the global leader in industrial real estate, today reported results for the second quarter 2014.

Core funds from operations (Core FFO) per fully diluted share was $0.48 for the second quarter compared to $0.41 for the same period in 2013.

"We're pleased to report a very strong quarter of financial and operating performance," said Hamid R. Moghadam, chairman and CEO, Prologis. "Our results reflect high occupancy levels with strong growth in rental rates, above average development margins, and increased earnings from our Strategic Capital business."

STRONG OPERATING PERFORMANCE
Prologis ended the quarter with 94.6 percent occupancy in the operating portfolio, up 90 basis points over the same period in 2013. The company leased 29.0 million square feet (2.7 million square meters) in its combined operating and development portfolios in the second quarter.

Tenant retention in the quarter was 84.8 percent. GAAP rental rates on leases signed in the quarter increased 6.6 percent from prior rents compared to an increase of 4.0 percent in the same period in 2013.

During the second quarter, GAAP same-store net operating income (NOI) increased 3.8 percent, and 5.3 percent on an adjusted cash basis, compared to 0.7 percent and (0.4) percent, respectively, in the same period in 2013. The increase was principally driven by higher average occupancy and increasing rental rates.

CAPITAL DEPLOYMENT ACTIVITY ACCELERATES
New investments during the second quarter totaled $850.4 million ($765.2 million Prologis' share).

Development Starts & Pipeline
During the quarter, Prologis started $438.7 million ($409.8 million Prologis' share) of new development projects, with an estimated weighted average yield upon stabilization of 7.1 percent and an estimated development margin of 18.8 percent.

The company stabilized $371.3 million ($320.9 million Prologis' share) in development projects, with an estimated development margin of 22.5 percent and $83.4 million ($82.2 million Prologis' share) of estimated value creation.

At quarter end, Prologis' global development pipeline had a total expected investment of $2.4 billion ($2.1 billion Prologis' share). The pipeline had an estimated weighted average yield at stabilization of 7.2 percent, a development margin of 21.2 percent, and an estimated $452.8 million of Prologis' share of value creation upon stabilization.

Acquisitions
The company acquired $137.0 million ($80.7 million Prologis' share) of buildings, principally in Europe and the United States. The weighted average stabilized capitalization rate on building acquisitions was 6.3 percent.

Prologis invested $274.7 million in its North American Industrial Fund, increasing its ownership in the venture to 42 percent from 23 percent.

Dispositions & Contributions
Prologis completed $603.7 million ($499.6 million Prologis' share) of contributions, third-party building, land and other non-strategic real estate dispositions. The contributions and building dispositions had a weighted average stabilized capitalization rate of 6.6 percent.

STREAMLINED STRATEGIC CAPITAL BUSINESS SUPPORTS GROWTH
As previously announced the company successfully completed its initial public offering of FIBRA Prologis and listing on the Mexican Stock Exchange. FIBRA Prologis' $1.6 billion portfolio is comprised of properties previously owned by former Prologis MX Fund LP, the majority of Prologis Mexico Fondo Logistico, and Prologis.

During the second quarter, Prologis raised $777.6 million of third-party equity for its ventures, including: $618.9 million for FIBRA Prologis; $133.5 million for Prologis Targeted U.S. Logistics Fund; and $25.2 million for Prologis Targeted Europe Logistics Fund. Subsequent to quarter end, the company secured a $500 million increase in committed third-party equity to its Prologis China Logistics Venture. The company recognized a promote of $25.1 million for Prologis Targeted U.S. Logistics Fund.

At quarter end, Prologis had $28.7 billion ($9.4 billion Prologis' share) in combined assets under management in 11 major co-investment ventures.

CAPITAL MARKETS ACTIVITY IMPROVES LIQUIDITY
During the second quarter, Prologis completed $3.6 billion of capital markets activity. Notable new financing for Prologis and the co-investment ventures included:

  • $1.1 billion in Eurobond issuances with a blended interest rate of 3.0 percent and weighted average term of 10 years;
  • $1.1 billion across two term facilities denominated in euro and yen; and a
  • $500 million increase in the company's global credit lines, expanding the total capacity to $3.0 billion.

"Favorable credit conditions in this low interest rate environment are providing numerous opportunities for us to lock in lower, long-term rates," said Thomas S. Olinger, chief financial officer, Prologis. "We significantly improved liquidity and further increased our U.S. net equity exposure to 85 percent."

NET EARNINGS
Net earnings per fully diluted share was $0.13 for the second quarter compared to a net loss per share of less than $0.01 for the same period in 2013.

EARNINGS GUIDANCE INCREASED FOR 2014
Prologis increased the midpoint and narrowed its full-year 2014 Core FFO guidance range to $1.82 to $1.86 per diluted share from $1.76 to $1.82 per diluted share. The company also expects to recognize net earnings, for GAAP purposes, of $0.20 to $0.24 per share.

"Given faster than expected rental growth and deployment, as well as lower interest costs from our refinancing activity, we are raising our full-year Core FFO range," said Olinger.

The Core FFO and earnings guidance reflected above excludes any potential future gains (losses) recognized from real estate transactions or early extinguishment of debt. In reconciling from net earnings to Core FFO, Prologis makes certain adjustments, including but not limited to real estate depreciation and amortization expense, gains (losses) recognized from real estate transactions and early extinguishment of debt or redemption of preferred stock, impairment charges, deferred taxes, and unrealized gains or losses on foreign currency or derivative activity.

The difference between the company's Core FFO and net earnings guidance for 2014 predominantly relates to real estate depreciation and recognized gains or losses on real estate transactions and early extinguishment of debt.

WEBCAST & CONFERENCE CALL INFORMATION
The company will host a webcast/conference call to discuss quarterly results, current market conditions and future outlook today, July 22, at 12:00 p.m. U.S. Eastern Time. Interested parties are encouraged to access the live webcast by clicking the microphone icon located near the top of the opening page of the Prologis Investor Relations website (http://ir.prologis.com). Interested parties also can participate via conference call by dialing +1 877-256-7020 (from the U.S. and Canada toll free) or +1 973-409-9692 (from all other countries) and entering conference code 48765449.

A telephonic replay will be available from July 23 through August 23 at +1 855-859-2056 (from the U.S. and Canada) or +1 404-537-3406 (from all other countries), and entering conference code 48765449. The webcast replay will be posted when available in the "Events & Presentations" section of Investor Relations on the Prologis website.

ABOUT PROLOGIS
Prologis, Inc., is the leading owner, operator and developer of industrial real estate, focused on global and regional markets across the Americas, Europe and Asia. As of June 30, 2014, Prologis owned or had investments in, on a wholly owned basis or through co-investment ventures, properties and development projects expected to total approximately 571 million square feet (53 million square meters) in 21 countries. The company leases modern distribution facilities to more than 4,700 customers, including manufacturers, retailers, transportation companies, third-party logistics providers and other enterprises.

The statements in this document that are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are based on current expectations, estimates and projections about the industry and markets in which Prologis operates, management's beliefs and assumptions made by management.  Such statements involve uncertainties that could significantly impact Prologis' financial results. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," variations of such words and similar expressions are intended to identify such forward-looking statements, which generally are not historical in nature.  All statements that address operating performance, events or developments that we expect or anticipate will occur in the future - including statements relating to rent and occupancy growth, development activity and changes in sales or contribution volume of properties, disposition activity, general conditions in the geographic areas where we operate, our debt 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, (ii) changes in financial markets, interest rates and foreign currency exchange rates, (iii) increased or unanticipated competition for our properties, (iv) risks associated with acquisitions, dispositions and development of properties, (v) maintenance of real estate investment trust ("REIT") status and tax structuring, (vi) availability of financing and capital, the levels of debt that we maintain and our credit ratings, (vii) risks related to our investments in our co-investment ventures and funds, including our ability to establish new co-investment ventures and funds, (viii) risks of doing business internationally, including currency risks, (ix) environmental uncertainties, including risks of natural disasters, and (x) those additional factors discussed in reports filed with the Securities and Exchange Commission by Prologis under the heading "Risk Factors." Prologis undertakes no duty to update any forward-looking statements appearing in this document.

 



Three months ended June 30,


Six months ended June 30,

(dollars in thousands, except per share data)


2014


2013


2014


2013


Revenues


$ 460,089


$ 410,693


$ 894,771


$ 890,664


Net earnings (loss) attributable to common stockholders


72,715


(1,517)


77,381


263,899


Core FFO


244,275


203,337


461,830


391,274


Core AFFO


199,662


142,229


371,015


288,290


Adjusted EBITDA


374,039


336,352


728,132


680,981


Value creation from development stabilization - Prologis share


82,218


14,895


132,725


82,307


Common stock dividends paid


166,639


141,083


333,328


271,836













Per common share - diluted:











Net earnings attributable to common stockholders


$       0.13


$      0.00


$       0.15


$       0.55



Core FFO


0.48


0.41


0.91


0.82


Dividends per share


0.33


0.28


0.66


0.56












 

(in thousands)

June 30, 2014


March 31, 2014


December 31, 2013

Assets:







Investments in real estate assets:








Operating properties

$ 16,629,000


$ 17,948,473


$ 17,801,064



Development portfolio

1,119,075


1,051,716


1,021,017



Land

1,579,737


1,544,242


1,516,166



Other real estate investments

454,111


494,359


486,230






19,781,923


21,038,790


20,824,477



Less accumulated depreciation

2,648,866


2,698,043


2,568,998





Net investments in properties

17,133,057


18,340,747


18,255,479


Investments in and advances to unconsolidated entities

5,575,423


4,687,922


4,430,239


Notes receivable backed by real estate and other assets

-


191,703


192,042





Net investments in real estate

22,708,480


23,220,372


22,877,760












Cash and cash equivalents

267,427


188,886


491,129


Accounts receivable

123,961


114,880


128,196


Other assets

1,031,694


1,131,010


1,075,222





Total assets

$ 24,131,562


$ 24,655,148


$ 24,572,307











Liabilities and Equity:







Liabilities:








Debt 

$   8,529,453


$   8,870,635


$   9,011,216



Accounts payable, accrued expenses, and other liabilities

1,325,259


1,291,270


1,384,638





Total liabilities

9,854,712


10,161,905


10,395,854












Equity:








Stockholders' equity:









Preferred stock

78,235


100,000


100,000




Common stock 

4,998


4,997


4,988




Additional paid-in capital 

18,062,370


18,005,321


17,974,452




Accumulated other comprehensive loss

(385,248)


(444,594)


(435,675)




Distributions in excess of net earnings

(4,188,611)


(4,094,689)


(3,932,664)





Total stockholders' equity

13,571,744


13,571,035


13,711,101



Noncontrolling interests

657,411


874,576


417,086



Noncontrolling interests - limited partnership unitholders

47,695


47,632


48,266





Total equity

14,276,850


14,493,243


14,176,453





Total liabilities and equity

$ 24,131,562


$ 24,655,148


$ 24,572,307











 


Three Months Ended


Six Months Ended

(in thousands, except per share amounts)

June 30,


June 30,



2014

2013


2014

2013

Revenues:







Rental income

$ 381,273

$  363,956


$ 769,513

$ 808,100


Strategic capital income

76,334

43,608


121,644

77,243


Development management and other income

2,482

3,129


3,614

5,321


      Total revenues 

460,089

410,693


894,771

890,664








Expenses:







Rental expenses

109,576

109,837


220,093

240,191


Strategic capital expenses

27,837

25,006


52,000

44,915


General and administrative expenses

60,375

54,909


123,578

111,106


Depreciation and amortization

161,577

155,656


321,857

327,776


Other expenses

5,450

6,771


10,503

11,124


     Total expenses

364,815

352,179


728,031

735,112








Operating income

95,274

58,514


166,740

155,552








Other income (expense):







Earnings from unconsolidated entities, net

21,151

8,421


50,897

33,189


Interest expense

(80,184)

(92,214)


(165,707)

(206,854)


Gains on acquisitions and dispositions of investments in real estate, net

169,583

61,035


186,638

399,880


Foreign currency and derivative gains (losses), related amortization and interest and other income (expenses), net

15,246

(3,252)


1,112

9,259


Losses on early extinguishment of debt, net

(77,558)

(32,608)


(77,285)

(49,959)


     Total other income (expense)

48,238

(58,618)


(4,345)

185,515

Earnings (loss) before income taxes

143,512

(104)


162,395

341,067


Income tax expense (benefit) - current and deferred

(8,918)

20,488


(2,038)

72,354

Earnings (loss) from continuing operations

152,430

(20,592)


164,433

268,713

Discontinued operations:







Income attributable to disposed properties and assets held for sale

-

2,140


-

3,933


Net gains on dispositions, including taxes

-

13,467


-

19,301


     Total discontinued operations

-

15,607


-

23,234

Consolidated net earnings (loss)

152,430

(4,985)


164,433

291,947

Net loss (earnings) attributable to noncontrolling interests

(71,250)

7,284


(76,452)

(4,819)

Net earnings attributable to controlling interests

81,180

2,299


87,981

287,128

Preferred stock dividends

(1,948)

(3,816)


(4,083)

(14,121)

Loss on preferred stock redemption

(6,517)

-


(6,517)

(9,108)

Net earnings (loss) attributable to common stockholders

$   72,715

$    (1,517)


$   77,381

$ 263,899

Weighted average common shares outstanding - Diluted

516,619

487,925


504,560

480,009

Net earnings per share attributable to common stockholders - Diluted

$       0.13

$        0.00


$       0.15

$       0.55

 


Three Months Ended


Six Months Ended

(in thousands)

June 30,


June 30,



2014

2013


2014

2013

Reconciliation of net earnings (loss) to FFO



















Net earnings (loss) attributable to common stockholders


$   72,715


$   (1,517)


$   77,381


$ 263,899

Add (deduct) NAREIT defined adjustments:










Real estate related depreciation and amortization


155,842


149,920


310,337


315,791


Net gains on non-FFO acquisitions and dispositions


(140,042)


(4,701)


(149,587)


(102,012)


Reconciling items related to noncontrolling interests


59,945


(719)


53,744


(3,660)


Our share of reconciling items included in earnings from unconsolidated co-investment ventures


49,737


37,250


91,453


51,881


Our share of reconciling items included in earnings from other unconsolidated ventures


1,734


681


3,084


11,533

Subtotal-NAREIT defined FFO


199,931


180,914


386,412


537,432

Add (deduct) our defined adjustments:










Unrealized foreign currency and derivative losses (gains) and related amortization, net


(10,035)


8,133


18,075


7,495


Deferred income tax benefit


(21,446)


(4,350)


(20,415)


(2,216)


Our share of reconciling items included in earnings from unconsolidated co-investment ventures


(4,089)


17,541


(3,860)


17,327

FFO, as defined by Prologis


164,361


202,238


380,212


560,038

Adjustments to arrive at Core FFO:










Net gains on acquisitions and dispositions of investments in real estate, net of expenses


(23,245)


(33,806)


(28,903)


(226,222)


Losses on early extinguishment of debt and redemption of preferred stock, net


84,075


32,608


83,802


59,067


Our share of reconciling items from unconsolidated entities less third party share of consolidated entities


19,084


2,297


26,719


(1,609)

Core FFO


$ 244,275


$ 203,337


$ 461,830


$ 391,274

Adjustments to arrive at Core Adjusted FFO ("Core AFFO"), including our share of unconsolidated entities 
   less third party share of consolidated entities:










Straight-lined rents and amortization of lease intangibles


(6,483)


(4,906)


(15,059)


(12,790)


Property improvements


(15,899)


(19,318)


(27,041)


(33,606)


Tenant improvements


(20,707)


(27,353)


(40,779)


(47,741)


Leasing commissions


(12,376)


(19,224)


(27,936)


(32,624)


Amortization of management contracts


1,092


1,393


2,397


3,008


Amortization of debt premiums, net, and financing costs


(1,259)


(3,839)


(3,528)


(10,841)


Cash received (paid) on net investment hedges


(2,729)


(1,073)


(7,855)


4,311


Stock compensation expense


13,748


13,212


28,986


27,299

Core AFFO


$ 199,662


$ 142,229


$ 371,015


$ 288,290

Common stock dividends


$ 166,639


$ 141,083


$ 333,328


$ 271,836

 

Calculation of Per Share Amounts is as follows (in thousands, except per share amounts):













Three Months Ended


Six Months Ended


June 30,


June 30,


2014

2013


2014


2013

Net earnings (loss)







Net earnings (loss)

$ 72,715

$ (1,517)


$ 77,381


$ 263,899

Noncontrolling interest attributable to exchangeable partnership units

264

(75)


302


1,599

Gain net of expenses associated with exchangeable debt assumed converted

(7,498)

-


-


-

Adjusted net earnings (loss) - Diluted

$ 65,481

$ (1,592)


$ 77,683


$ 265,498

Weighted average common shares outstanding - Basic

499,112

486,032


498,919


473,892

Incremental weighted average effect on exchange of limited partnership units

1,964

1,893


1,964


3,039

Incremental weighted average effect of stock awards

3,664

-


3,677


3,078

Incremental weighted average effect on exchangeable debt assumed converted

11,879

-


-


-

Weighted average common shares outstanding - Diluted

516,619

487,925


504,560


480,009








Net earnings per share - Basic

$ 0.15

$      0.00


$ 0.16


$ 0.56

Net earnings per share - Diluted

$ 0.13

$      0.00


$ 0.15


$ 0.55








Core FFO







Core FFO

$ 244,275

$ 203,337


$ 461,830


$ 391,274

Noncontrolling interest attributable to exchangeable limited partnership units

35

(19)


57


1,599

Interest expense on exchangeable debt assumed converted

4,246

4,235


8,492


8,470

Core FFO - Diluted

$ 248,556

$ 207,553


$ 470,379


$ 401,343

Weighted average common shares outstanding - Basic

499,112

486,032


498,919


473,892

Incremental weighted average effect on exchange of limited partnership units

1,964

2,093


1,964


3,039

Incremental weighted average effect of stock awards

3,664

3,339


3,677


3,078

Incremental weighted average effect on exchangeable debt assumed converted

11,879

11,879


11,879


11,879

Weighted average common shares outstanding - Diluted

516,619

503,343


516,439


491,888

Core FFO per share - Diluted

$ 0.48

$ 0.41


$ 0.91


$ 0.82

 

FFO, as defined by Prologis; Core FFO; Core AFFO (collectively referred to as "FFO"). FFO is a non-GAAP measure that is commonly used in the real estate industry. The most directly comparable GAAP measure to FFO is net earnings. Although the National Association of Real Estate Investment Trusts ("NAREIT") has published a definition of FFO, modifications to the NAREIT calculation of FFO are common among REITs, as companies seek to provide financial measures that meaningfully reflect their business.

FFO 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 net earnings computed under GAAP remains the primary measure of performance and that FFO is only meaningful when it is used in conjunction with net earnings computed under GAAP. Further, we believe our consolidated financial statements, prepared in accordance with GAAP, provide the most meaningful picture of our financial condition and our operating performance.

NAREIT's FFO measure adjusts 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 that these NAREIT adjustments are useful to investors for the following reasons:

(i)

historical cost accounting for real estate assets in accordance with GAAP assumes, through depreciation charges, that the value of real estate assets diminishes predictably over time. NAREIT stated in its White Paper on FFO "since real estate asset values have historically risen or fallen with market conditions, many industry investors have considered presentations of operating results for real estate companies that use historical cost accounting to be insufficient by themselves." Consequently, NAREIT's definition of FFO reflects the fact that real estate, as an asset class, generally appreciates over time and depreciation charges required by GAAP do not reflect the underlying economic realities.

(ii)

REITs were created as a legal form of organization in order to encourage public ownership of real estate as an asset class through investment in firms that were in the business of long-term ownership and management of real estate. The exclusion, in NAREIT's definition of FFO, of gains and losses from the sales, along with impairment charges, of previously depreciated operating real estate assets allows investors and analysts to readily identify the operating results of the long-term assets that form the core of a REIT's activity and assists in comparing those operating results between periods. We include the gains and losses (including impairment charges) from dispositions of land and development properties, as well as our proportionate share of the gains and losses (including impairment charges) from dispositions of development properties recognized by our unconsolidated entities, in our definition of FFO.

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 analyzing our business and the performance of our properties and we believe that it is important that stockholders, potential investors and financial analysts understand the measures management uses.

We use these FFO measures, including by segment and region, to: (i) evaluate our performance and the performance of our properties in comparison to 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 to 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 income. While not infrequent or unusual, these additional items we exclude in calculating FFO, as defined by Prologis, 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 measures as supplemental financial measures of operating performance. 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.

FFO, as defined by Prologis

To arrive at FFO, as defined by Prologis, we adjust the NAREIT defined FFO measure to exclude:

(i)  

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

(ii) 

current income tax expense related to acquired tax liabilities that were recorded as deferred tax liabilities in an acquisition, to the extent the expense is offset with a deferred income tax benefit in GAAP earnings that is excluded from our defined FFO measure;

(iii) 

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

(iv) 

foreign currency exchange gains and losses from the remeasurement (based on current foreign currency exchange rates) of certain third party debt of our foreign consolidated subsidiaries and our foreign unconsolidated entities; and 

(v)  

mark-to-market adjustments and related amortization of debt discounts associated with derivative financial instruments.

We calculate FFO, as defined by Prologis for our unconsolidated entities on the same basis as we calculate our FFO, as defined by Prologis.

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

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 non-recurring items that we recognized directly or our share of these items recognized by our unconsolidated entities to the extent they are included in FFO, as defined by Prologis:

(i)   

gains or losses from acquisition, contribution or sale of land or development properties;

(ii) 

income tax expense related to the sale of investments in real estate and third-party acquisition costs related to the acquisition of real estate;

(iii) 

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;

(iv) 

gains or losses from the early extinguishment of debt;

(v)  

merger, acquisition and other integration expenses; and

(vi) 

expenses related to natural disasters.

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 have 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. In addition, we and our co-investment ventures make acquisitions of real estate and we believe the costs associated with these transactions are transaction based and not part of our core operations.

We analyze our operating performance primarily by the rental income of our real estate and the revenue driven by 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.  As a result, although these items have had 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.

We use Core FFO, including by segment and region, to: (i) evaluate our performance and the performance of our properties in comparison to 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) 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 income. 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 AFFO

To arrive at Core AFFO, we adjust Core FFO to further exclude our share of; (i) straight-line rents; (ii) amortization of above- and below-market lease intangibles; (iii) recurring capital expenditures; (iv) amortization of management contracts; (v) amortization of debt premiums and discounts, net of amounts capitalized, and; (vi) stock compensation expense.

We believe Core AFFO provides a meaningful indicator of our ability to fund cash needs, including cash distributions to our stockholders.

Limitations on Use of our FFO Measures

While we believe our defined 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 these limitations are:

  • The current income tax expenses and acquisition costs that are excluded from our defined FFO measures represent the taxes and transaction costs that are payable.
  • Depreciation and amortization of real estate assets are economic costs that are excluded from FFO. FFO is limited, as it does not reflect the cash requirements that may be necessary for future replacements of the real estate assets. Further, the amortization of capital expenditures and leasing costs necessary to maintain the operating performance of industrial properties are not reflected in FFO.
  • Gains or losses from property acquisitions 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 acquired or disposed properties arising from changes in market conditions.
  • The deferred income tax benefits and expenses that are excluded from our defined 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 defined FFO measures do not currently reflect any income or expense that may result from such settlement.
  • The foreign currency exchange gains and losses that are excluded from our defined FFO measures are generally recognized based on movements in foreign currency exchange rates through a specific point in time. The ultimate settlement of our foreign currency-denominated net assets is indefinite as to timing and amount. Our FFO measures are limited in that they do not reflect the current period changes in these net assets that result from periodic foreign currency exchange rate movements.
  • The gains and losses on extinguishment of debt 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 merger, acquisition and other integration expenses and 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 statements prepared under GAAP. To assist investors in compensating for these limitations, we reconcile our defined FFO measures to our net earnings computed under GAAP.

Same Store. 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, thereby eliminating the effects of changes in the composition of the portfolio on performance measures. We include the properties included in our owned and managed portfolio that were in operation at January 1, 2013 and throughout the full periods in both 2013 and 2014. We have removed all properties that were disposed of to a third party from the population for both periods. We believe the factors that impact rental income, rental expenses and NOI in the Same Store portfolio are generally the same as for the total operating portfolio. In order to derive an appropriate measure of period-to-period operating performance, we remove the effects of foreign currency exchange rate movements by using the current exchange rate to translate from local currency into U.S. dollars, for both periods.

Our same store measures are non-GAAP measures that are commonly used in the real estate industry and are calculated beginning with rental income and rental expenses from the financial statements prepared in accordance with GAAP. It is also common in the real estate industry and expected from the analyst and investor community that these numbers be further adjusted to remove certain non-cash items included in the financial statements prepared in accordance with GAAP to reflect a cash same store number. In order to clearly label these metrics, we call one Same Store NOI- GAAP and one Same Store NOI-Adjusted Cash. As these are non-GAAP measures they have certain limitations as an analytical tool 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 NOI-GAAP and then to Same Store NOI-Adjusted Cash with explanations of how these metrics are calculated and adjusted.

The following is a reconciliation of our consolidated rental income, rental expenses and NOI, as included in the Consolidated Statements of Operations, to the respective amounts in our Same Store portfolio analysis (dollars in thousands):


Three Months Ended


June 30,


2014

2013

Change

(%)

Rental Income:




Per the Consolidated Statements of Operations

$ 381,273

$ 363,956


Properties not included and other adjustments (a)

(43,630)

(25,636)


Unconsolidated Co-Investment Ventures

459,293

434,360


Same Store - Rental Income

$ 796,936

$ 772,680

3.1%

Rental Expense:




Per the Consolidated Statements of Operations

$ 109,576

$ 109,837


Properties not included and other adjustments (b)

(8,114)

(7,499)


Unconsolidated Co-Investment Ventures

111,052

107,443


Same Store - Rental Expense

$ 212,514

$ 209,781

1.3%

NOI-GAAP:




Per the Consolidated Statements of Operations

$ 271,697

$ 254,119


Properties not included and other adjustments

(35,516)

(18,137)


Unconsolidated Co-Investment Ventures

348,241

326,917


Same Store - NOI - GAAP

$ 584,422

$ 562,899

3.8%

NOI-Adjusted Cash:




Same store- NOI - GAAP

$ 584,422

$ 562,899


Adjustments (c)

(1,830)

(9,539)


Same Store - NOI- Adjusted Cash

$ 582,592

$ 553,360

5.3%

 

(a)

To calculate Same Store rental income, we exclude the net termination and renegotiation fees to allow us to evaluate the growth or decline in each property's rental income without regard to items that are not indicative of the property's recurring operating performance.

(b)

To calculate Same Store rental expense, we include an allocation of the property management expenses for our consolidated properties based on the property management fee that is provided for in the individual management agreements under which our wholly owned management companies provide property management services (generally the fee is based on a percentage of revenue). On consolidation, the management fee income and expenses are eliminated and the actual cost of providing property management services is recognized.

(c)

In order to derive Same Store- NOI - Adjusted Cash, we adjust Same Store- NOI- GAAP to exclude non-cash items included in our rental income in our GAAP financial statements, including straight line rent adjustments and adjustments related to purchase accounts to reflect leases at fair value at the time of acquisition.

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