DENVER, April 29 /PRNewswire-FirstCall/ -- ProLogis , a leading global provider of distribution facilities, today reported first quarter 2009 funds from operations as defined by ProLogis (FFO), excluding significant non-cash items, of $0.86 per diluted share, compared with $1.34 in 2008. Net earnings per diluted share for the first quarter were $0.66 in 2009, compared with $0.69 in 2008.
FFO, including significant non-cash items, was $0.90 per diluted share for the first quarter of 2009, primarily due to gains from early extinguishment of debt, partially offset by ProLogis' share of property fund losses resulting from derivative activity. Net earnings and FFO per diluted share as previously reported for the first quarter of 2008 were reduced by $10.5 million, or $0.04 per diluted share, for the company's retroactive adoption of APB 14-1 and related additional interest expense.
"We have accomplished a great deal in the first part of 2009, making significant progress on our objectives to de-leverage and de-risk the company," said Walter C. Rakowich, chief executive officer. "As a result of our recent equity offering, the sale of certain operations and property fund interests in Asia and property fund contributions, we have generated nearly $2.7 billion of cash in just the past few weeks.
"Taking into consideration additional asset sale and refinancing agreements and the remaining capital requirements related to our development pipeline, we believe we have substantially addressed our anticipated cash needs through 2012. Our swift execution of these de-leveraging initiatives enables us to further enhance our focus on operating property performance, completing and leasing properties in our development portfolio and pursuing opportunities to generate value from our land bank," Rakowich said.
Property Market Fundamentals Soft
During the quarter, industrial property fundamentals continued to reflect global economic weakness and the slowdown in global trade. Throughout the majority of the company's markets, activity levels were reduced and leasing concessions are on the rise. Partially offsetting these trends are higher-than-average customer retention and sharply reduced levels of new supply. ProLogis' same-store net operating income (excluding same-store assets associated with the company's development portfolio), decreased 1.9 percent, reflecting a 1.8 percent decrease in leased percentage and negative rent growth of 4.2 percent for the quarter. Including development portfolio assets, in line with previous reporting, same-store net operating income for the period increased 0.78 percent, with a 0.16 percent increase in leased percentage and negative rent growth of 4.2 percent.
"On average, the company's non-development portfolio was 93.0 percent leased at the end of the first quarter, down from 94.7 percent at year-end 2008, in line with our expectations," Rakowich added. "We have been actively addressing our lease turnovers for the remainder of the year as well as the continued lease up of our development portfolio. Despite the challenging environment, we improved leasing within our development portfolio by 500 basis points, prior to contributions and reflecting the reversal of previous starts."
Asset Sales, Fund Contributions and Debt Repurchases Support De-leveraging Goal
In November 2008, ProLogis outlined a series of actions to achieve a reduction of roughly $2 billion in direct debt by the end of 2009. The plan included reducing the company's development pipeline through fund contributions, asset sales and a halt in all but previously committed development starts, as well as cash savings through a reduction of the common dividend and G&A expenses.
During the first quarter, ProLogis completed dispositions with aggregate proceeds of $1.49 billion, including the previously announced sale of its China operations and Japan property fund interests for $1.35 billion and fund contributions and asset sales of $136 million. Ted R. Antenucci, president and chief investment officer, said, "In addition to these completed transactions at quarter end, we had approximately $700 million of direct-owned assets for sale, 85 percent of which were under contract or letter of intent. In addition, we had another $585 million of development properties greater than 93 percent leased that are available for contribution to our Europe and Mexico property funds throughout the remainder of 2009. Given the significant improvement in our liquidity, we will continue to evaluate the level of asset sales and contributions throughout the year."
William E. Sullivan, chief financial officer, said, "In light of our successful equity offering, we anticipate substantially exceeding our $2 billion de-leveraging goal by the end of 2009 and will continue to pursue opportunities to further de-leverage the company." Between October 1, 2008 and March 31, 2009, the company reduced its outstanding debt by $1.7 billion. "Since the end of the first quarter, we have created incremental de-leveraging of $1.2 billion from the equity offering as well as from additional bond and convertible note buybacks.
"In addition, we have a sizeable base of unencumbered assets on our balance sheet, which provides secured debt financing capacity," said Sullivan. "As such, we intend to utilize the secured debt market to provide additional liquidity to re-finance near-term maturities and have $344 million of such financings in documentation."
Company Declares Common Dividend
Earlier this month, following the issuance of approximately 175 million shares of common stock, the company's Board reduced the 2009 annualized dividend rate to $0.70 per share, including the $0.25 per share paid in February 2009. Sullivan noted, "Our projected annual dividend rate is generally tied to our anticipated taxable income for that same year. While the new dividend level represents approximately the same cash expenditure as the previous dividend amount, the quarterly amount per share for the remainder of the year of $0.15 was established to adjust for the additional shares outstanding."
Also today, the company declared its second quarter common dividend of $0.15 per share, which will be payable on May 29, 2009, to shareholders of record on May 15, 2009.
Selected Updates to Business Drivers that Support 2009 Guidance Same-Store Same-store NOI is still expected to decrease by 1.5 to NOI 3 percent; however, adjusted same-store NOI (excluding same-store assets associated with the development portfolio) is expected to decrease 2.5 to 3.5 percent. Direct Owned Gross proceeds from third-party dispositions and Dispositions contributions to property funds are expected to range and from $1.5 to $1.7 billion, of which $135.7 million had Contributions closed by the end of the first quarter. Common Following the issuance of an additional 175 million Dividend shares, the quarterly dividend for each of the second, third and fourth quarters of 2009 is expected to be $0.15 per share. Revised 2009 FFO for the full year 2009 is expected to be FFO between $1.31 and $1.48 per share, with full-year and EPS earnings per share of $1.45 to $1.67. Guidance Reconciliation of EPS to FFO: Low High Initial FFO guidance per diluted share $1.85 $2.05 Shares outstanding (pre-equity issuance) 268 268 ------ ------ FFO $495 $550 Impact of equity issuance: Reduction in interest expense 26 40 ------ ------ Revised FFO, excluding significant non-cash items $521 $590 ------ ------ Revised weighted average shares outstanding 398 398 ------ ------ Revised FFO/diluted share $1.31 $1.48 ====== ====== Adjustments for net earnings: Gain from debt repurchase 0.34 0.34 Depreciation and amortization (0.85) (0.92) Foreign exchange, deferred taxes and other 0.15 0.17 Gain on sale of assets 0.50 0.60 ------ ------ Revised net earnings per share, after share issuance $1.45 $1.67 ====== ======
Copies of ProLogis' first quarter 2009 supplemental information will be available from the company's website at http://ir.prologis.com/ in the "Annual & Supplemental Reports" section after market close on Wednesday, April 29, 2009. The company will host both an in-person meeting and a webcast/conference call on Thursday, April 30, 2009, at 8:30 a.m. Eastern Time. The live webcast will be available on the company's website at http://ir.prologis.com/. A replay of the webcast will be available on the company's website until June 30, 2009.
The in-person meeting will be at The Hudson Theatre at the Millennium Broadway Hotel, located at 145 West 44th Street in New York. The meeting will start promptly at 8:30 a.m. Eastern Time. Those who are unable to attend in person but plan to participate in the Q&A session are encouraged to access the live webcast by clicking the microphone icon located on the opening page of the ProLogis Investor Relations website at http://ir.prologis.com/. Interested parties can also listen via conference call by dialing (866) 393-6450 in the United States or internationally by dialing (660) 422-4873.
About ProLogis
ProLogis is a leading global provider of distribution facilities, with more than 475 million square feet of industrial space (44 million square meters) in markets across North America, Europe and Asia. The company leases its industrial facilities to more than 4,500 customers, including manufacturers, retailers, transportation companies, third-party logistics providers and other enterprises with large-scale distribution needs. For additional information about the company, go to http://www.prologis.com/.
The statements above that are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are based on current expectations, estimates and projections about the industry and markets in which ProLogis operates, management's beliefs and assumptions made by management, they involve uncertainties that could significantly impact ProLogis' financial results. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," variations of such words and similar expressions are intended to identify such forward-looking statements, which generally are not historical in nature. All statements that address operating performance, events or developments that we expect or anticipate will occur in the future - including statements relating to rent and occupancy growth, development activity and changes in sales or contribution volume of developed properties, general conditions in the geographic areas where we operate and the availability of capital in existing or new property funds - are forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Although we believe the expectations reflected in any forward-looking statements are based on reasonable assumptions, we can give no assurance that our expectations will be attained and therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. Some of the factors that may affect outcomes and results include, but are not limited to: (i) national, international, regional and local economic climates, (ii) changes in financial markets, interest rates and foreign currency exchange rates, (iii) increased or unanticipated competition for our properties, (iv) risks associated with acquisitions, (v) maintenance of real estate investment trust ("REIT") status, (vi) availability of financing and capital, (vii) changes in demand for developed properties, and (viii) those additional factors discussed in "Item 1A. Risk Factors" of ProLogis' Annual Report on Form 10-K for the year ended December 31, 2008. ProLogis undertakes no duty to update any forward-looking statements appearing in this press release.
Overview (in thousands, except per share amounts) Summary of Results Three Months Ended March 31, ------------------ 2009 2008 (1) ---- -------- Revenues $455,094 $1,645,927 Net earnings (a) $178,732 $183,521 Net earnings per share - Diluted (a) $0.66 $0.69 FFO, including significant non-cash items (a) $242,265 $358,637 Add (deduct) significant non-cash items: Our share of losses on derivative activity recognized by the property funds 11,283 - Net gain related to disposed assets - China operations (3,315) - Gain on early extinguishment of debt (17,928) - ------- --- Total adjustments for significant non-cash items (9,960) - ------ --- FFO, excluding significant non-cash items (a) $232,305 $358,637 ======== ======== FFO per share - Diluted, including significant non-cash items (a) $0.90 $1.34 Deduct - summarized significant non-cash adjustments - per share (0.04) - ----- --- FFO per share - Diluted, excluding significant non-cash items (a) $0.86 $1.34 ===== ===== Distributions per common share (b) $0.25 $0.5175 ===== ====== ----------- (a) These amounts are attributable to common shares. (b) In April 2009, in connection with the expected issuance of common shares in a registered public offering and recognizing the need to maintain maximum financial flexibility in light of the current state of the capital markets and considering the impact of the proposed offering, our Board of Trustees ("Board") set our 2009 annualized distribution level at $0.70 per common share (including the $0.25 per share already paid in the first quarter of 2009). The payment of distributions is subject to authorization by the Board out of funds legally available for the payment of distributions and is subject to market conditions and Real Estate Investment Trust ("REIT") distribution requirements. The payment of common share distributions and its composition between cash and stock is dependent upon our financial condition and operating results and may be adjusted at the discretion of the Board during the year. Footnotes follow Financial Statements Consolidated Balance Sheets (in thousands, except per share data) March 31, December 31, 2009 2008 (1) ---- -------- Assets: Investments in real estate assets (1): Industrial properties: Core $7,946,714 $7,944,245 Completed development 3,328,027 3,031,449 Properties under development 861,169 1,181,344 Land held for development 2,528,675 2,482,582 Retail and mixed use properties 387,117 358,992 Land subject to ground leases and other 400,061 405,263 Other investments 249,192 321,397 ------- ------- 15,700,955 15,725,272 Less accumulated depreciation 1,652,743 1,583,299 --------- --------- Net investments in real estate assets 14,048,212 14,141,973 Investments in and advances to unconsolidated investees: Property funds (2) 1,564,978 1,957,977 Other investees 297,226 312,016 ------- ------- Total investments in and advances to unconsolidated investees 1,862,204 2,269,993 Cash and cash equivalents 123,779 174,636 Accounts and notes receivable 155,066 244,778 Other assets (1) 1,026,016 1,126,993 Discontinued operations - assets held for sale (2) 121,582 1,310,754 ------- --------- Total assets $17,336,859 $19,269,127 =========== =========== Liabilities and Equity: Liabilities: Debt (1)(3) $9,327,737 $10,711,368 Accounts payable and accrued expenses 702,934 658,868 Other liabilities 652,162 751,238 Discontinued operations - assets held for sale (2) 112,546 389,884 ------- ------- Total liabilities 10,795,379 12,511,358 ---------- ---------- Equity (4): ProLogis shareholders' equity: Series C preferred shares at stated liquidation preference of $50 per share 100,000 100,000 Series F preferred shares at stated liquidation preference of $25 per share 125,000 125,000 Series G preferred shares at stated liquidation preference of $25 per share 125,000 125,000 Common shares at $.01 par value per share 2,678 2,670 Additional paid-in capital (1) 7,076,296 7,070,108 Accumulated other comprehensive loss (5) (363,531) (29,374) Distributions in excess of net earnings (1) (543,681) (655,513) -------- -------- Total ProLogis shareholders' equity 6,521,762 6,737,891 Noncontrolling interests (6) 19,718 19,878 ------ ------ Total equity 6,541,480 6,757,769 --------- --------- Total liabilities and equity $17,336,859 $19,269,127 =========== =========== Footnotes follow Financial Statements Consolidated Statements of Operations (in thousands, except per share amounts) Three Months Ended March 31, --------- 2009 2008 (1) ---- -------- Revenues: Rental income (7) $238,462 $262,559 Property management and other fees and incentives 33,634 29,490 CDFS disposition proceeds (8): Developed and repositioned properties (2) 180,237 1,263,413 Acquired property portfolios - 83,332 Development management and other income 2,761 7,133 ----- ----- Total revenues 455,094 1,645,927 ------- --------- Expenses: Rental expenses 73,301 83,014 Investment management expenses (9) 10,576 11,229 Cost of CDFS dispositions (1)(8): Developed and repositioned properties - 985,433 Acquired property portfolios - 83,332 General and administrative (10) 48,243 46,264 Reduction in workforce (10) 4,462 - Depreciation and amortization 79,750 75,774 Other expenses 6,419 2,470 ----- ----- Total expenses 222,751 1,287,516 ------- --------- Operating income 232,343 358,411 Other income (expense): Earnings (loss) from unconsolidated property funds, net (11) 2,098 (18,567) Earnings from other unconsolidated investees, net 2,201 1,970 Interest expense (1)(12) (92,932) (95,626) Interest and other income, net 1,693 4,733 Net gains on dispositions of development properties to property funds (8) 2,511 - Foreign currency exchange gains (losses), net (13) 30,537 (35,853) Gain on early extinguishment of debt (3) 17,928 - ------ --- Total other income (expense) (35,964) (143,343) ------- -------- Earnings before income taxes 196,379 215,068 ------- ------- Current income tax expense (2) 22,189 24,404 Deferred income tax expense (benefit) (6,828) 2,500 ------ ----- Total income taxes 15,361 26,904 ------ ------ Earnings from continuing operations 181,018 188,164 Discontinued operations (14): Income (loss) attributable to assets held for sale and disposed properties 1,267 (1,082) Net gain related to disposed assets - China operations (2) 3,315 - Net gains (impairment) on dispositions: Non-development properties - 3,813 Development properties and land (189) 130 ---- --- Total discontinued operations 4,393 2,861 ----- ----- Consolidated net earnings 185,411 191,025 Net earnings attributable to noncontrolling interests (6) (310) (1,150) ---- ------ Net earnings attributable to controlling interests 185,101 189,875 Less preferred share dividends 6,369 6,354 ----- ----- Net earnings attributable to common shares $178,732 $183,521 ======== ======== Weighted average common shares outstanding - Basic (4) 267,716 258,946 Weighted average common shares outstanding - Diluted (4) 270,278 268,131 Net earnings per share attributable to common shares - Basic: Continuing operations $0.65 $0.70 Discontinued operations 0.02 0.01 ---- ---- Net earnings per share attributable to common shares - Basic $0.67 $0.71 ===== ===== Net earnings per share attributable to common shares - Diluted: Continuing operations $0.64 $0.68 Discontinued operations 0.02 0.01 ---- ---- Net earnings per share attributable to common shares - Diluted $0.66 $0.69 ===== ===== Footnotes follow Financial Statements Consolidated Statements of Funds From Operations (FFO) (in thousands, except per share amounts) Three Months Ended March 31, --------- 2009 2008 (1) ---- -------- Revenues: Rental income $243,535 $269,476 Property management and other fees and incentives 33,727 29,490 CDFS disposition proceeds (8): Developed and repositioned properties (2) 180,237 1,263,413 Acquired property portfolios - 83,332 Development management and other income 2,761 7,157 ----- ----- Total revenues 460,260 1,652,868 ------- --------- Expenses: Rental expenses 75,369 85,524 Investment management expenses (9) 10,576 11,229 Cost of CDFS dispositions (1)(8): Developed and repositioned properties - 985,303 Acquired property portfolios - 83,332 General and administrative (10) 49,548 51,070 Reduction in workforce (10) 4,462 - Depreciation of corporate assets 4,118 3,420 Other expenses 6,456 2,470 ----- ----- Total expenses 150,529 1,222,348 ------- --------- 309,731 430,520 Other income (expense): FFO from unconsolidated property funds (11) 36,743 37,312 FFO from other unconsolidated investees 5,013 5,165 Interest expense (1)(12) (92,762) (95,482) Net gain related to disposed assets - China operations (2) 3,315 - Gain on early extinguishment of debt (3) 17,928 - Interest and other income, net 3,419 5,616 Net gains on dispositions of development properties to property funds (8) 1,760 - Net impairment on dispositions of land - third parties (8) (189) - Foreign currency exchange losses, net (13,480) (1,860) Current income tax expense (2)(15) (22,390) (15,174) ------- ------- Total other income (expense) (60,643) (64,423) ------- ------- FFO 249,088 366,097 Less preferred share dividends 6,369 6,354 Less net earnings attributable to noncontrolling interests (6) 454 1,106 --- ----- FFO attributable to common shares, including significant non-cash items $242,265 $358,637 -------- -------- Adjustments for significant non-cash items (9,960) - ------ --- FFO attributable to common shares, excluding significant non-cash items $232,305 $358,637 ======== ======== Weighted average common shares outstanding - Basic (4) 267,716 258,946 Weighted average common shares outstanding - Diluted (4) 270,278 268,131 FFO per share attributable to common shares, including significant non-cash items: Basic $0.90 $1.38 ===== ===== Diluted $0.90 $1.34 ===== ===== FFO per share attributable to common shares, excluding significant non-cash items: Basic $0.87 $1.38 ===== ===== Diluted $0.86 $1.34 ===== ===== Footnotes follow Financial Statements Reconciliations of Net Earnings to FFO and EBITDA (in thousands) Reconciliation of net earnings to FFO, including significant non-cash items Three Months Ended March 31, --------- 2009 2008 (1) ---- -------- Net earnings (a) $178,732 $183,521 Add (deduct) NAREIT defined adjustments: Real estate related depreciation and amortization 75,632 72,354 Adjustments to gains on dispositions for depreciation (751) - Adjustments to gains on dispositions of non-development properties 1,621 - Reconciling items attributable to discontinued operations (14): Gains on dispositions of non-CDFS properties - (3,813) Real estate related depreciation and amortization 1,164 1,804 ----- ----- Total discontinued operations 1,164 (2,009) Our share of reconciling items from unconsolidated investees: Real estate related depreciation and amortization 38,317 32,818 Gains on dispositions of non-CDFS properties - (54) Other amortization items (3,590) (4,210) ------ ------ Total unconsolidated investees 34,727 28,554 ------- ------ Total NAREIT defined adjustments 112,393 98,899 ------- ------ Subtotal-NAREIT defined FFO 291,125 282,420 Add (deduct) our defined adjustments: Foreign currency exchange losses (gains), net (43,948) 34,841 Current income tax expense (15) - 9,658 Deferred income tax expense (benefit) (6,840) 2,500 Our share of reconciling items from unconsolidated investees: Foreign currency exchange losses, net 1,651 517 Unrealized losses (gains) on derivative contracts, net (1,854) 28,632 Deferred income tax expense 2,131 69 ----- -- Total unconsolidated investees 1,928 29,218 ----- ------ Total our defined adjustments (48,860) 76,217 ------- ------ FFO, including significant non-cash items (a) $242,265 $358,637 ======== ======== Reconciliation of FFO, including significant non-cash items, to FFO, excluding significant non-cash items Three Months Ended March 31, --------- 2009 2008 (1) ---- -------- FFO, including significant non-cash items (a) $242,265 $358,637 Add (deduct) significant non-cash items: Our share of losses on derivative activity recognized by the property funds (11) 11,283 - Gain related to disposed assets - China operations (2) (3,315) - Gain on early extinguishment of debt (3) (17,928) - ------- --- Total adjustments for significant non-cash items (9,960) - ------ --- FFO, excluding significant non-cash items (a) $232,305 $358,637 ======== ======== Reconciliation of FFO, excluding significant non-cash items, to EBITDA Three Months Ended March 31, --------- 2009 2008 (1) ---- -------- FFO, excluding significant non-cash items (a) $232,305 $358,637 Interest expense 92,762 95,482 Depreciation of corporate assets 4,118 3,420 Current income tax expense included in FFO 22,390 15,174 Adjustments to gains on dispositions for interest capitalized 2,758 16,666 Preferred share dividends 6,369 6,354 Impairment charges 189 - Share of reconciling items from unconsolidated investees 51,888 40,403 ------ ------ Earnings before interest, taxes, depreciation and amortization (EBITDA) $412,779 $536,136 ======== ======== See Consolidated Statements of Operations and Consolidated Statements of FFO. Footnotes follow Financial Statements (a) Attributable to common shares. Calculation of Per Share Amounts (in thousands, except per share amounts) Net Earnings Per Share Three Months Ended March 31, --------- 2009 2008 ---- ---- Net earnings - Basic (a) $178,732 $183,521 Noncontrolling interest attributable to convertible limited partnership units 310 1,150 --- ----- Adjusted net earnings - Diluted (a) $179,042 $184,671 ======== ======== Weighted average common shares outstanding - Basic 267,716 258,946 Incremental weighted average effect of conversion of limited partnership units 1,235 5,053 Incremental weighted average effect of stock awards (b) 1,327 4,132 ----- ----- Weighted average common shares outstanding - Diluted 270,278 268,131 ======= ======= Net earnings per share - Diluted (a) $0.66 $0.69 ===== ===== FFO Per Share, including significant non-cash items Three Months Ended March 31, --------- 2009 2008 ---- ---- FFO - Basic, including significant non-cash items (a) $242,265 $358,637 Noncontrolling interest attributable to convertible limited partnership units 310 1,150 --- ----- FFO - Diluted, including significant non-cash items (a) $242,575 $359,787 ======== ======== Weighted average common shares outstanding - Basic 267,716 258,946 Incremental weighted average effect of conversion of limited partnership units 1,235 5,053 Incremental weighted average effect of stock awards (b) 1,327 4,132 ----- ----- Weighted average common shares outstanding - Diluted 270,278 268,131 ======= ======= FFO per share - Diluted, including significant non-cash items (a) $0.90 $1.34 ===== ===== FFO Per Share, excluding significant non-cash items Three Months Ended March 31, --------- 2009 2008 ---- ---- FFO - Diluted, including significant non-cash items (a) $242,575 $359,787 Adjustments for significant non-cash items (9,960) - ------ --- FFO - Diluted, excluding significant non-cash items (a) $232,615 $359,787 ======== ======== Weighted average common shares outstanding - Basic 267,716 258,946 Incremental weighted average effect of conversion of limited partnership units 1,235 5,053 Incremental weighted average effect of stock awards (b) 1,327 4,132 ----- ----- Weighted average common shares outstanding - Diluted 270,278 268,131 ======= ======= FFO per share - Diluted, excluding significant non-cash items (a) $0.86 $1.34 ===== ===== ------- (a) Attributable to common shares. (b) Total weighted average potentially dilutive awards outstanding were 11,515 and 10,438 for the three months ended March 31, 2009 and 2008, respectively. Of the potentially dilutive instruments, 8,924 were anti-dilutive for the three months ended March 31, 2009 and substantially all were dilutive for the three months ended March 31, 2008. Notes to Financial Statements Please also refer to our annual and quarterly financial statements filed with the Securities and Exchange Commission on Forms 10-K and 10-Q for further information about us and our business. Certain 2008 amounts in our financial statements have been reclassified to conform to the 2009 presentation. (1) In May 2008, the Financial Accounting Standards Board ("FASB") issued FASB Staff Position APB 14-1 "Accounting for Convertible Debt Instruments that May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement)" ("FSP APB 14-1"), that requires separate accounting for the debt and equity components of convertible debt. The value assigned to the debt component is the estimated fair value of a similar bond without the conversion feature at the time of issuance, which would result in the debt being recorded at a discount. The resulting debt discount is amortized through the first redeemable option date as additional non-cash interest expense. We adopted FSP APB 14-1 on January 1, 2009, as required, on a retrospective basis to the convertible notes we issued in 2007 and 2008. As a result, we restated our 2008 results to reflect the additional interest expense and the additional capitalized interest related to our development activities for both properties we currently own, as well as properties that were contributed during the applicable periods. This restatement impacted earnings and FFO. The following tables illustrate the impact of the restatement on our Consolidated Balance Sheets and Consolidated Statements of Operations and FFO for these periods (in thousands): As of December 31, 2008 ----------------------- FSP APB 14-1 As Reported adjustments As Adjusted ----------- ------------ ----------- Consolidated Balance Sheet: --------------------------- Real estate $15,706,172 $19,100 $15,725,272 Other assets $1,129,182 $(2,189) $1,126,993 Debt $11,007,636 $(296,268) $10,711,368 Additional paid in capital $6,688,615 $381,493 $7,070,108 Distributions in excess of net earnings $(587,199) $(68,314) $(655,513) For the three months ended March 31, 2008 FSP APB 14-1 As Reported adjustments As Adjusted ----------- ----------- ----------- (before 2009 discontinued operations adjustment) Consolidated Statements of Operations and FFO: -------------------------- Cost of CDFS dispositions $1,068,639 $126 $1,068,765 Interest expense, net of capitalization $85,124 $10,358 $95,482 Net earnings attributable to controlling interests $200,359 $(10,484) $189,875 (2) On February 9, 2009, we sold our operations in China and our property fund interests in Japan to affiliates of GIC Real Estate, the real estate investment company of the Government of Singapore Investment Corporation ("GIC RE"), for total cash consideration of $1.3 billion ($845 million related to China and $500 million related to the Japan investments). The proceeds were used primarily to pay down borrowings on our credit facilities. All of the assets and liabilities associated with our China operations were classified as Assets and Liabilities Held for Sale in our accompanying Consolidated Balance Sheet as of December 31, 2008. In the fourth quarter of 2008, based on the carrying values of these assets and liabilities, as compared with the estimated sales proceeds less costs to sell, we recognized an impairment of $198.2 million. In connection with the sale in the first quarter of 2009, we recognized a $3.3 million gain on sale. In addition, the results of our China operations are presented as discontinued operations in our accompanying Consolidated Statements of Operations for all periods. All operating information presented throughout this report excludes China operations. In connection with the sale of our investments in the Japan property funds, we recognized a gain of $180.2 million, which is reflected as CDFS Proceeds in our Consolidated Statements of Operations and FFO, as it represents the recapture of previously deferred gains on the contribution of properties to the property funds based on our ownership interests in the property funds at the time of original contribution of properties. We also recognized $20.5 million in current income tax expense related to the Japan portion of the transaction. In addition, we have entered into an agreement to sell one property in Japan to GIC RE. This property is classified as Held for Sale in our accompanying Consolidated Balance Sheets as of March 31, 2009 and December 31, 2008, along with borrowings of $108.6 million under our credit facilities, and its operations have been included in Discontinued Operations for all periods presented in our accompanying Consolidated Statements of Operations. See note 14 for more information on this and other properties classified as discontinued operations. (3) During March and April 2009, we repurchased several series of notes outstanding, as follows: -- In March 2009, we repurchased $16.7 million original principal amount of our 2.25% convertible senior notes due 2037 (which have a cash put right in 2012) for approximately $9.2 million and $31.5 million of our 1.875% convertible senior notes due 2037 (which have a cash put right in 2013) for approximately $15.6 million. In connection with these transactions, we recognized a gain of $17.9 million that is reported as "Gain on Early Extinguishment of Debt" in our Consolidated Statements of Operations and FFO. The gain represents the discount related to that portion of the original principal amount that was reflected as "Debt" at the time of the buyback (see note 1 above). -- During April 2009, we repurchased an additional $7.5 million original principal amount of our 2.25% convertible senior notes due 2037 for approximately $4.4 million, an additional $190.1 million original principal amount of our 1.875% convertible senior notes due 2037 for approximately $107.0 million and $27.4 million original principal amount of our 2.625% convertible senior notes due 2038 (which have a cash put right in 2013) for approximately $17.0 million. -- Also during April 2009, we repurchased euro 42.65 million (approximately $58.3 million at March 31, 2009) original principal amount of our 4.375% senior notes due April 2011 for approximately euro 32.0 million (approximately $43.7 million at March 31, 2009). The repurchase of certain of our debt is in line with our announced initiatives to reduce debt. We expect to continue to repurchase our debt depending on market conditions and other factors. (4) In April 2009, we completed a public offering of 174.8 million common shares at a price of $6.60 per share, including an overallotment option of 22.8 million shares that was exercised by the underwriters prior to closing. On April 14, 2009, we closed on the offering and received net proceeds, after underwriters discount but prior to offering expenses, of $1.1 billion. The proceeds were used to repay borrowings under our credit facilities, which includes borrowings that were made on our credit facilities in April 2009 to repurchase certain convertible and senior notes (see note 13). (5) The additional losses recognized in Accumulated Other Comprehensive Loss in the first quarter of 2009 in our Consolidated Balance Sheet are principally the result of the sale of our China operations and investments in the Japan property funds in February 2009 and the strengthening of the US dollar against the euro, yen and pound sterling during this time. The strengthening US dollar results in lower net assets upon translation of our international operations into US dollars. (6) We adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 160 "Noncontrolling Interests in Consolidated Financial Statements -- An Amendment of ARB No. 51" ("SFAS 160") on January 1, 2009. SFAS 160 requires noncontrolling interests (previously referred to as minority interests) to be reported as a component of equity and changes the accounting for transactions with noncontrolling interest holders. (7) In our Consolidated Statements of Operations, rental income includes the following (in thousands): Three Months Ended March 31, ------------------ 2009 2008 ------------------ Rental income $175,650 $196,916 Rental expense recoveries 53,930 58,827 Straight-lined rents 8,882 6,816 ----- ----- $238,462 $262,559 ======= ======= (8) During the fourth quarter of 2008, in response to the current market conditions, we modified our business strategy. As a result, as of December 31, 2008, we have two operating segments - Direct Owned and Investment Management, and we no longer have a CDFS Business segment. We presented the results of operations of our CDFS Business segment separately in 2008. Our direct owned segment represents the direct, long-term ownership of industrial properties. Our investment strategy in this segment focuses primarily on the ownership and leasing of industrial properties in key distribution markets. We consider these properties to be our Core Portfolio. Also included in this segment are operating properties we developed with the intent to contribute the properties to an unconsolidated property fund that we previously referred to as our "CDFS Pipeline" and, beginning December 31, 2008, we now refer to as our Completed Development Portfolio. We may contribute either Core or Development properties to the property funds, to the extent there is fund capacity, or sell them to third parties. When we contribute or sell Development properties, we recognize FFO to the extent the proceeds received exceed our original investment (i.e. prior to depreciation). However, beginning January 1, 2009, we now present the results as Net Gains on Dispositions, rather than as CDFS Proceeds and Cost of CDFS Dispositions. In addition, we have industrial properties that are currently under development (also included in our Development Portfolio) and land available for development that are part of this segment as well. The investment management segment represents the investment management of unconsolidated property funds and joint ventures and the properties they own. (9) Beginning in 2009, we are reporting the direct costs associated with our investment management segment for all periods presented as a separate line item "Investment Management Expenses" in our Consolidated Statements of Operations and FFO. These costs include the property management expenses associated with the property- level management of the properties owned by the property funds (previously included in Rental Expenses) and the investment management expenses associated with the asset management of the property funds (previously included in General and Administrative Expenses). In order to allocate the property management expenses between the properties owned by us and the properties owned by the property funds, we use the square feet owned at the beginning of the period by the respective portfolios. (10) As we previously announced in the fourth quarter of 2008, in response to the difficult economic climate, we initiated general and administrative expense ("G&A") reductions with a near-term target of a 20 to 25% reduction in G&A prior to capitalization or allocation. These initiatives include a Reduction in Workforce ("RIF") and reductions to other expenses through various cost savings measures. Due to the changes in our business strategy in the fourth quarter of 2008, we have halted the majority of our new development activities, which, along with lower gross G&A, has resulted in lower capitalized G&A. Our G&A included in our Statements of Operations consisted of the following (in thousands): Three Months Ended March 31, ------------------ 2009 2008 ------------------ Gross G&A expense $77,840 $95,374 Capitalized amounts and amounts reported as rental and investment management expenses (29,597) (49,110) ------ ------ Net G&A $48,243 $46,264 ====== ====== In the fourth quarter of 2008 and the first quarter of 2009, we recognized $23.1 million and $4.5 million, respectively, of expenses related to the RIF program. We may have additional RIF charges in the future. (11) For the three months ended March 31, 2009 and 2008, included in Earnings/Loss from Unconsolidated Property Funds in our Consolidated Statements of Operations was a loss of $9.7 million and $31.6 million, respectively, related to our share of derivative activity within the property funds (see note 4 to section IV for additional information). Included in FFO from unconsolidated property funds for 2009 and 2008 was $11.6 million and $3.0 million, respectively, of our share of realized losses that we include in our calculation of FFO. In 2009, $11.3 million of this amount relates to contracts that were settled in previous periods and, therefore, we are being added back to our calculation of FFO, excluding significant non-cash items. (12) The following table presents the components of interest expense as reflected in our Consolidated Statements of Operations (in thousands): Three Months Ended March 31, ------------------ 2009 2008 ------------------ Interest expense $101,859 $121,970 Amortization of FSP APB 14-1 discount 17,838 13,759 Amortization of discount (premium), net 874 (593) Amortization of deferred loan costs 3,378 2,809 ----- ----- Interest expense before capitalization 123,949 137,945 Capitalized amounts (31,017) (42,319) ------ ------ Net interest expense $92,932 $95,626 ====== ====== The decrease in interest expense in 2009 over 2008 is due to lower debt levels and lower borrowing rates, offset by lower capitalization due to less development activity. (13) During the first quarter of 2009 and 2008, we recognized net foreign currency exchange gains and losses, respectively, related to the remeasurement of inter-company loans between the U.S. and our consolidated subsidiaries in Japan and Europe due to the fluctuations in the exchange rates of US dollars to the yen, the euro and pound sterling between December 31st and March 31st of the applicable years. These gains and losses related to inter- company loans are not included in our calculation of FFO. (14) The operations of the properties held for sale or disposed of to third parties and the aggregate net gains recognized upon their disposition are presented as discontinued operations in our Consolidated Statements of Operations for all periods presented, unless the property was developed under a pre-sale agreement. As discussed in Note 2 above, all of the assets and liabilities associated with our China operations and the one property in Japan that we expect to sell to GIC RE in the second quarter of 2009 were classified as Assets and Liabilities Held for Sale in our accompanying Consolidated Balance Sheet as of December 31, 2008. As of March 31, 2009, the Japan building and one other property that met the criteria were classified as held for sale on our Consolidated Balance Sheets. During 2009, other than our China operations, we did not sell any properties to third parties. During 2008, we disposed of 15 properties to third parties, six of which were development properties, as well as land subject to ground leases. The income (loss) attributable to these properties and our China operations were as follows (in thousands): Three Months Ended March 31, ------------------ 2009 2008 ------------------ Rental income $5,073 $6,917 Rental expenses (2,068) (2,510) Depreciation and amortization (1,164) (1,804) Other expenses, net (574) (3,685) --- ----- Income (loss) attributable to disposed properties $1,267 $(1,082) ===== ===== For purposes of our Consolidated Statements of FFO, we do not segregate discontinued operations. In addition, we include the gains from disposition of development properties (2009) and CDFS properties (2008) in the calculation of FFO, including those classified as discontinued operations. (15) In connection with purchase accounting, we record all of the acquired assets and liabilities at the estimated fair values at the date of acquisition. For our taxable subsidiaries, we generally recognize the deferred tax liabilities that represent the tax effect of the difference between the tax basis carried over and the fair values of these assets at the date of acquisition. As taxable income is generated in these subsidiaries, we recognize a deferred tax benefit in earnings as a result of the reversal of the deferred tax liability previously recorded at the acquisition date and we record current income tax expense representing the entire current income tax liability. In our calculation of FFO, we only include the current income tax expense to the extent the associated income is recognized for financial reporting purposes.
ProLogis
CONTACT: Investor Relations, Melissa Marsden, +1-303-567-5622,
mmarsden@prologis.com, or Media, Krista Shepard, +1-303-567-5907,
kshepard@prologis.com, both of ProLogis; or Financial Media, Suzanne Dawson of
Linden Alschuler & Kaplan, Inc, +1-212-329-1420, sdawson@lakpr.com, for
ProLogis
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