Document/ExhibitDescriptionPagesSize 1: 10-K Annual Report HTML 2.88M
2: EX-10.25 Material Contract HTML 25K
3: EX-10.26 Material Contract HTML 35K
4: EX-10.27 Material Contract HTML 28K
7: EX-21.1 Subsidiaries List HTML 44K
8: EX-23.1 Consent of Experts or Counsel HTML 17K
5: EX-12.1 Statement re: Computation of Ratios HTML 23K
6: EX-12.2 Statement re: Computation of Ratios HTML 25K
9: EX-31.1 Certification -- §302 - SOA'02 HTML 21K
10: EX-31.2 Certification -- §302 - SOA'02 HTML 21K
11: EX-32.1 Certification -- §906 - SOA'02 HTML 17K
41: XML IDEA XML File -- Definitions and References XML 115K
47: XML IDEA XML File -- Filing Summary XML 74K
45: XML.R1 Consolidated Balance Sheets XML 243K
46: XML.R2 Consolidated Balance Sheets (Parenthetical) XML 166K
28: XML.R3 Consolidated Statements of Operations XML 472K
33: XML.R4 Consolidated Statements of Comprehensive Income XML 80K
(Loss)
39: XML.R5 Consolidated Statements of Shareholders' Equity XML 617K
38: XML.R6 Consolidated Statements of Cash Flows XML 465K
50: XML.R7 Description of Business XML 33K
23: XML.R8 Summary of Significant Accounting Policies XML 124K
37: XML.R9 Sale of China Operations and Property Fund XML 36K
Interest in Japan Disclosure
21: XML.R10 Real Estate XML 66K
20: XML.R11 Acquisitions XML 34K
27: XML.R12 Unconsolidated Investees XML 183K
43: XML.R13 Other Assets and Other Liabilities XML 60K
29: XML.R14 Assets Held for Sale and Discontinued Operations XML 78K
30: XML.R15 Debt XML 176K
35: XML.R16 Noncontrolling Interest XML 46K
51: XML.R17 ProLogis Shareholders' Equity XML 96K
26: XML.R18 Long-Term Compensation XML 112K
18: XML.R19 Reduction in Workforce XML 33K
32: XML.R20 Impairment Charges XML 58K
42: XML.R21 Income Taxes XML 99K
24: XML.R22 Earnings Per Common Share XML 48K
40: XML.R23 Related Party Transactions XML 35K
31: XML.R24 Financial Instruments and Fair Value Measurements XML 90K
49: XML.R25 Commitments and Contingencies XML 41K
44: XML.R26 Business Segments XML 140K
34: XML.R27 Supplemental Cash Flow Information XML 38K
36: XML.R28 Selected Quarterly Financial Data (Unaudited) XML 62K
19: XML.R29 Schedule III - Real Estate and Accumulated XML 1.86M
Depreciation
22: XML.R30 Document Information XML 41K
25: XML.R31 Entity Information XML 105K
48: EXCEL IDEA Workbook of Financial Reports (.xls) XLS 175K
12: EX-101.INS XBRL Instance -- pld-20091231 XML 3.17M
14: EX-101.CAL XBRL Calculations -- pld-20091231_cal XML 190K
17: EX-101.DEF XBRL Definitions -- pld-20091231_def XML 635K
15: EX-101.LAB XBRL Labels -- pld-20091231_lab XML 548K
16: EX-101.PRE XBRL Presentations -- pld-20091231_pre XML 369K
13: EX-101.SCH XBRL Schema -- pld-20091231 XSD 90K
(Registrant’s telephone
number, including area code)
Securities registered pursuant to
Section 12(b) of the Act:
Name of each exchange
Title of Each Class
on which registered
Common Shares of Beneficial Interest, par value $0.01 per share
New York Stock Exchange
Series F Cumulative Redeemable Preferred Shares of
Beneficial Interest, par value $0.01 per share
New York Stock Exchange
Series G Cumulative Redeemable Preferred Shares of
Beneficial Interest par value $0.01 per share
New York Stock Exchange
Securities registered pursuant to
Section 12(g) of the Act: NONE
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act.
Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act.
Yes o No þ
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.
Yes þ No o
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).
Yes þ No o
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. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
“large accelerated filer,”“accelerated
filer” and “smaller reporting company” in
Rule 12b-2
of the Exchange Act.
(Check one)
þ Large
accelerated filer
o Accelerated
filer
o Non-accelerated
filer (do not check if a smaller reporting company)
o 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). Yes o No þ
Based on the closing price of the registrant’s shares on
June 30, 2009, the aggregate market value of the voting
common equity held by non-affiliates of the registrant was
$3,563,239,800.
At February 19, 2010, there were outstanding approximately
474,204,900 common shares of beneficial interest of the
registrant.
Portions of the registrant’s definitive proxy statement for
the 2010 annual meeting of its shareholders are incorporated by
reference in Part III of this report.
Certain statements contained in this discussion or elsewhere in
this report may be deemed “forward-looking statements”
within the meaning of the Private Securities Litigation Reform
Act of 1995 and Section 27A of the Securities Act of 1933
and Section 21E of the Securities Exchange Act of 1934.
Words and phrases such as “expects”,
“anticipates”, “intends”, “plans”,
“believes”, “seeks”, “estimates”,
“designed to achieve”, 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 or profitability of developed properties,
economic and market 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. Many of the factors that may affect
outcomes and results are beyond our ability to control. For
further discussion of these factors see “Item 1A Risk
Factors” in this annual report on
Form 10-K.
All references to “we”, “us” and
“our” refer to ProLogis and our consolidated
subsidiaries.
ProLogis is a leading global provider of industrial distribution
facilities. We are a Maryland real estate investment trust
(“REIT”) and have elected to be taxed as such under
the Internal Revenue Code of 1986, as amended (the
“Code”). Our world headquarters is located in Denver,
Colorado. Our European headquarters is located in the Grand
Duchy of Luxembourg with our European customer service
headquarters located in Amsterdam, the Netherlands. Our primary
office in Asia is located in Tokyo, Japan.
Our Internet website address is www.prologis.com. All reports
required to be filed with the Securities and Exchange Commission
(the “SEC”) are available or may be accessed free of
charge through the Investor Relations section of our Internet
website as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the
SEC. Our Internet website and the information contained therein
or connected thereto are not intended to be incorporated into
this Annual Report on
Form 10-K.
Our common shares trade under the ticker symbol “PLD”
on the New York Stock Exchange (“NYSE”).
We were formed in 1991, primarily as a long-term owner of
industrial distribution space operating in the United States.
Over time, our business strategy evolved to include the
development of properties for contribution to property funds in
which we maintain an ownership interest and the management of
those property funds and the properties they own. Originally, we
sought to differentiate ourselves from our competition by
focusing on our corporate customers’ distribution space
requirements on a national, regional and local basis and
providing customers with consistent levels of service throughout
the United States. However, as our customers’ needs
expanded to markets outside the United States, so did our
portfolio and our management team. Today, we are an
international real estate company with operations in North
America, Europe and Asia. Our business strategy is to integrate
international scope and expertise with a strong local presence
in our markets, thereby becoming an attractive choice for our
targeted customer base, the largest global users of distribution
space, while achieving long-term sustainable growth in cash flow.
Industrial distribution facilities are a crucial link in the
modern supply chain, and they serve three primary purposes for
supply-chain participants: (i) support accurate and
seamless flow of goods to their appointed destinations;
(ii) function as processing centers for goods; and
(iii) enable companies to store enough inventory to meet
surges in demand and to cushion themselves from the impact of a
break in the supply chain.
At December 31, 2009, our total portfolio of properties
owned, managed, and under development includes direct-owned
properties and properties owned by property funds and joint
ventures that we manage. These properties are located in North
America, Europe and Asia and are broken down as follows:
Number of
Properties
Square Feet
Investment
(in thousands)
(in thousands)
Total owned, managed and under development:
Industrial properties:
Operating properties
1,188
191,623
$
11,545,501
Properties under development
5
2,930
191,127
Retail and mixed use properties
29
1,150
291,038
Land held for development
n/a
n/a
2,569,343
Other real estate investments
n/a
n/a
618,887
Total
1,222
195,703
15,215,896
Investment management-industrial properties(1)
1,379
284,262
19,913,874
Total properties owned and under management
2,601
479,965
$
35,129,770
(1)
Amounts represent the entity’s investment in the operating
property, not our proportionate share.
In late 2008, we modified our business strategy to adjust to the
global financial market and economic disruptions. This new
strategy entailed limiting our development activities to
conserve capital and focus on strengthening our balance sheet.
Narrowing our focus allowed us to work on specific goals we set
forth for 2009, which were to:
•
reduce debt by $2.0 billion;
•
recast our global line of credit;
•
complete the properties under development as of the end of 2008
and focus on leasing our total development portfolio;
•
manage our core portfolio of industrial distribution properties
to maintain and improve our net operating income stream from
these assets;
•
generate liquidity through contributions of properties to our
property funds and through sales of real estate to third
parties; and
•
reduce gross general and administrative expenses
(“G&A”) by 20% to 25%.
In 2009, we generated liquidity through the issuance of nearly
$1.5 billion of common equity as well as nearly
$2.9 billion of asset dispositions and property fund
contributions, including $1.3 billion from the sale of
certain Asian operations. These transactions allowed us to
reduce our debt by $2.7 billion from December 31,2008. In addition, we renegotiated and extended our global line
of credit, simplified the debt covenants related to our senior
notes and extended the maturities of our debt. See further
discussion in “Item 7 Management’s Discussion and
Analysis of Financial Condition and Results of
Operations — Liquidity and Capital Resources.”
We reduced our gross G&A by 26.5% in 2009 from 2008,
through various cost savings initiatives, including a reduction
in workforce (“RIF”) program. We executed leasing in
our development portfolio in 2009, increasing the leased
percentage to 64.3% at December 31, 2009 from 41.4% at the
beginning of the year.
Now that we have achieved our goals for 2009, we believe we are
in a better liquidity position and can focus on our longer-term
strategy of conservative growth through the ownership,
management and development of industrial properties with a
concentrated focus on customer service. Included in our
objectives for 2010 and beyond are to:
•
retain more of our development assets in order to improve the
geographic diversification of our direct owned properties, as
most of our planned developments are in international markets;
•
monetize our investment in land of $2.6 billion at
December 31, 2009; and
•
continue to focus on staggering and extending our debt
maturities.
We plan to accomplish these objectives by generating proceeds
through selective sales of real estate properties (primarily
located in the U.S.) and land parcels, and limited contribution
of development properties to the property funds. We will use the
proceeds to fund our development activities, which will allow us
to respond to new
build-to-suit
(pre-leased) opportunities to better serve our customers and to
transition our non-income producing land into income producing
properties. We will continue to focus on leasing the development
portfolio (representing 53.5 million square feet at
December 31, 2009 that was 64.3% leased).
The following discussion of our business segments should be read
in conjunction with “Item 1A Risk Factors”, our
property information presented in “Item 2
Properties”, “Item 7 Management’s Discussion
and Analysis of Financial Condition and Results of
Operations” and our segment footnote - Note 20 to our
Consolidated Financial Statements in Item 8.
Our current business strategy includes two operating segments:
(i) direct owned and (ii) investment management. Our
direct owned segment represents the direct long-term ownership
of industrial and retail properties. Our investment management
segment represents the long-term investment management of
property funds, other unconsolidated investees and the
properties they own.
Operating
Segments - Direct Owned
Our direct owned segment represents the long-term ownership of
industrial and retail properties. Our investment strategy
focuses primarily on the ownership and leasing of these
properties in key distribution markets. We divide our operating
properties into two categories, properties that we developed
(“completed development properties”) and all other
operating properties (“core properties”). Prior to
December 31, 2008, the completed development properties
were referred to as our CDFS properties.
Also included in this segment are industrial properties that are
currently under development, land available for development and
land subject to ground leases.
At December 31, 2009, the following properties are in the
direct owned segment and located in North America, Europe and
Asia (square feet and investment in thousands):
We earn rent from our customers, including reimbursement of
certain operating costs, under long-term operating leases (with
an average lease term of five to six years at December 31,2009). The revenue in this segment decreased in 2009 principally
due to the contributions of properties (generally completed and
fully leased development properties) to the unconsolidated
property funds and decreases in rental rates on turnovers,
offset partially by new leasing activity in our completed
development properties. However, rental revenues generated by
the lease-up
of newly developed properties have not been adequate to offset
the loss of rental revenues from fully leased property
contributions. We expect our total revenues from this segment to
increase slightly in 2010 through increases in occupied square
feet predominantly in our development portfolio, offset
partially with decreases from contributions of properties we
made in 2009 or may make in 2010. We anticipate the increases in
occupied square feet to come from leases that were signed in
2009, but have not commenced occupancy, and future leasing
activity in 2010.
Market
Presence
At December 31, 2009, our 1,188 industrial operating
properties in this segment aggregating 191.6 million square
feet were located in 39 markets in 3 countries in North America
(1 market in Canada, 6 markets in Mexico and 32 markets in the
United States), 28 markets in 12 countries in Europe (Czech
Republic, France, Germany, Hungary, Italy, the Netherlands,
Poland, Romania, Slovakia, Spain, Sweden and the United Kingdom)
and 6 markets in 2 countries in Asia (Japan and South
Korea). Our largest markets for this segment in North America
(based on our investment in the properties) are Atlanta,
Chicago, Dallas/Fort Worth, Inland Empire, Los Angeles,
New Jersey and San Francisco — South Bay.
Our largest investments in Europe are in Poland and the United
Kingdom and our largest investment in Asia is in Japan. Our 5
properties under development at December 31, 2009
aggregated 2.9 million square feet and were located in 1
market in North America, 3 markets in Europe and 1 market in
Asia. At December 31, 2009, we owned 10,360 acres of
land with an investment of $2.6 billion and located in
North America (6,275 acres, $1.1 billion investment),
Europe (3,959 acres, $1.2 billion investment) and Asia
(126 acres, $0.3 billion investment). The retail
properties and land subject to ground leases are all located in
the United States. See further detail in “Item 2
Properties”.
Competition
The existence of competitively priced distribution space
available in any market could have a material impact on our
ability to rent space and on the rents that we can charge. To
the extent we wish to acquire land for future development of
properties in our direct owned segment, we may compete with
local, regional, and national developers. We also face
competition from other investment managers in attracting capital
for our property funds to be utilized to acquire properties from
us or third parties.
We believe we have competitive advantages due to (i) our
ability to quickly respond to customer’s needs for
high-quality distribution space in key global distribution
markets; (ii) our established relationships with key
customers serviced by our local personnel; (iii) our
ability to leverage our organizational structure to provide a
single point of contact for our global customers; (iv) our
property management and leasing expertise; (v) our
relationships and proven track record with current and
prospective investors in the property funds; (vi) our
global experience in the development and management of
industrial properties; (vii) the strategic locations of our
land positions; and (viii) our personnel who are
experienced in the land acquisition and entitlement process.
Property
Management
Our business strategy includes a customer service focus that
enables us to provide responsive, professional and effective
property management services at the local level. To enhance our
management services, we have developed and implemented
proprietary operating and training systems to achieve consistent
levels of performance and professionalism and to enable our
property management team to give the proper level of attention
to our customers. We manage substantially all of our operating
properties.
Customers
We have developed a customer base that is diverse in terms of
industry concentration and represents a broad spectrum of
international, national, regional and local distribution space
users. At December 31, 2009, in our direct owned segment,
we had 2,468 customers occupying 155.2 million square feet
of industrial and retail space. Our largest customer and 25
largest customers accounted for 2.3% and 21.4%, respectively, of
our annualized collected base rents at December 31, 2009.
Employees
We employ 1,135 persons in our entire business. Our
employees work in 3 countries in North America
(725 persons), in 13 countries in Europe (310 persons)
and in 2 countries in Asia (100 persons). Of the total, we
have assigned 645 employees to our direct owned segment and
40 employees to our investment management segment. We have
450 employees who work in corporate positions who are not
assigned to a segment who may assist with segment activities. We
believe our relationships with our employees are good. Our
employees are not organized under collective bargaining
agreements, although some of our employees in Europe are
represented by statutory Works Councils and benefit from
applicable labor agreements.
Future
Plans
Our current business plan allows for the selective development
of industrial properties (generally pre-leased) to:
(i) address the specific expansion needs of customers;
(ii) enhance our market presence in a specific country,
market or submarket; (iii) take advantage of opportunities
where we believe we have the ability to achieve favorable
returns; (iv) monetize our existing land positions through
pre-committed development of industrial properties to primarily
hold for long-term investment; and (v) improve the
geographic diversification of our portfolio. In addition, we
expect to complete the development of the properties we have
under development, focus on leasing the properties in our
development portfolio and complete the properties under
development in joint ventures in which we have an ownership
interest.
In 2010, we intend to fund our investment activities in the
direct owned segment by generating proceeds through selective
sales of completed real estate properties and land parcels.
Additionally, depending on market conditions and the capital
available from our fund partners, we may contribute core
properties
and/or
completed development properties to the property funds.
Operating
Segments — Investment Management
The investment management segment represents the investment
management of unconsolidated property funds and certain joint
ventures and the properties they own. We utilize our investment
management expertise to
manage the property funds and joint ventures and we utilize our
leasing and property management expertise to manage the
properties owned by these entities.
Our property fund strategy:
•
allows us, as the manager of the property funds, to maintain and
expand our market presence and customer relationships;
•
allows us to maintain a long-term ownership position in the
properties;
•
allows us to earn fees for providing services to the property
funds; and
•
provides us an opportunity to earn incentive performance
participation income based on the investors’ returns over a
specified period.
Investments
As of December 31, 2009, we had investments in and advances
to 15 property funds totaling $1.9 billion with ownership
interests ranging from 20% to 50%. These investments are in
North America — 12 aggregating $1,010.2 million;
Europe — 2 aggregating $845.0 million; and
Asia — 1 with $21.4 million. These property funds
own, on a combined basis, 1,287 distribution properties
aggregating 274.2 million square feet with a total entity
investment (not our proportionate share) in operating properties
of $19.5 billion. Also included in this segment are certain
industrial joint ventures, which we manage and that own 92
operating properties with 10.0 million square feet all
located in North America.
Results
of Operations
We recognize our proportionate share of the earnings or losses
from our investments in unconsolidated property funds and
certain joint ventures that are accounted for under the equity
method. In addition, we recognize fees and incentives earned for
services performed on behalf of these and other entities. We
provide services to these entities, which may include property
management, asset management, leasing, acquisition, financing
and development services. We may also earn incentives from our
property funds depending on the return provided to the fund
partners over a specified period.
We report the costs associated with our investment management
segment as a separate line item Investment Management
Expenses in our Consolidated Statements of Operations. These
costs include the direct expenses associated with the asset
management of the property funds provided by 40 individuals (as
of December 31, 2009 and as discussed below) who are
assigned to our investment management segment. In addition, in
order to achieve efficiencies and economies of scale, all of our
property management functions are provided by a team of
professionals who are assigned to our direct owned segment.
These individuals perform the property-level management of the
properties we own and the properties we manage that are owned by
the unconsolidated investees. We allocate the costs of our
property management function to the properties we own (reported
in Rental Expenses) and the properties owned by the
unconsolidated investees (included in Investment Management
Expenses), by using the square feet owned at the beginning of
the period by the respective portfolios. For 2009, we allocated
approximately 55% of our total property management costs to the
investment management segment.
Market
Presence
At December 31, 2009, the property funds on a combined
basis owned 1,287 properties aggregating 274.2 million
square feet located in 45 markets in 3 countries in North
America (Canada, Mexico and the United States), 35 markets in 12
countries in Europe (Belgium, the Czech Republic, France,
Germany, Hungary, Italy, the Netherlands, Poland, Slovakia,
Spain, Sweden, and the United Kingdom) and 2 markets in 1
country in Asia (South Korea). The industrial joint ventures
included in this segment are located in the United States and
operate 92 industrial properties with 10.0 million square
feet that we manage, including one joint venture that is not
accounted for on the equity method. See further detail in
“Item 2 Unconsolidated Investees”.
As the manager of the property funds, we compete with other fund
managers for institutional capital. As the manager of the
properties owned by the property funds, we compete with other
industrial properties located in close proximity to the
properties owned by the property funds. The amount of rentable
distribution space available and its current occupancy in any
market could have a material effect on the ability to rent space
and on the rents that can be charged by the fund properties. We
believe we have competitive advantages as discussed above in
“Operating Segments — Direct Owned”.
Property
Management
We manage the properties owned by unconsolidated investees
utilizing our leasing and property management experience from
the employees who are in our direct owned segment. Our business
strategy includes a customer service focus that enables us to
provide responsive, professional and effective property
management services at the local level. To enhance our
management services, we have developed and implemented
proprietary operating and training systems to achieve consistent
levels of performance and professionalism and to enable our
property management team to give the proper level of attention
to our customers.
Customers
As in our direct owned segment, we have developed a customer
base in the property funds and joint ventures that is diverse in
terms of industry concentration and represents a broad spectrum
of international, national, regional and local distribution
space users. At December 31, 2009, our unconsolidated
investees, on a combined basis, had 2,153 customers occupying
254.9 million square feet of distribution space. The
largest customer, and 25 largest customers of our unconsolidated
investees, on a combined basis, accounted for 4.0% and 27.3%,
respectively, of the total combined annualized collected base
rents at December 31, 2009. In addition, in this segment we
consider our fund partners to also be our customers. As of
December 31, 2009 in our private property funds, we
partnered with 42 investors, several of which invest in multiple
funds.
Employees
The property funds generally have no employees of their own. We
have assigned 40 employees directly to the asset management
of the property funds in our investment management segment. As
discussed above, we have employees in our direct owned segment
that are responsible for the property management functions we
provide for the properties owned by the property funds, as well
as the properties we own. We have 450 employees who work in
corporate positions and are not assigned to a segment who also
assist with these activities as well.
Future
Plans
We expect to continue to increase our investments in property
funds. We expect to achieve these increases through the existing
property funds’ acquisition of properties from us, or from
third parties, depending on market factors and available
capacity, or through the creation of new property funds. We
expect the fee income we earn from the property funds and our
proportionate share of net earnings of the property funds will
increase as the size and value of the portfolios owned by the
property funds grows and as more equity is deployed in the
funds. We will continue to explore our options related to both
new and existing property funds.
Our executive team is led by our Chief Executive Officer, Walter
C. Rakowich, who also serves as a member of our Board of
Trustees (the “Board”) and an Executive Committee of
eleven people, as follows:
Executive
Committee
Walter C. Rakowich* — 52 — Chief
Executive Officer of ProLogis since November 2008.
Mr. Rakowich was ProLogis’ President and Chief
Operating Officer from January 2005 to November 2008 and
ProLogis’ Chief
Financial Officer from December 1998 to September 2005.
Mr. Rakowich has been with ProLogis in various capacities
since July 1994. Prior to joining ProLogis, Mr. Rakowich
was a consultant to ProLogis in the area of due diligence and
acquisitions, and he was a principal with Trammell Crow Company,
a diversified commercial real estate company in North America.
Mr. Rakowich served on the Board from August 2004 to May
2008 and was reappointed to the Board in November 2008.
Gary E. Anderson — 44 — Head of
Global Investment Management since March 2009, where he is
responsible for managing ProLogis’ property funds as well
as raising additional private capital for our investment
management business. Mr. Anderson also serves on the board
of directors of ProLogis European Properties (“PEPR”),
one of our unconsolidated investees that is publicly traded on
the Euronext stock exchange in Amsterdam. Mr. Anderson was
President of Europe and the Middle East, as well as Chairman of
ProLogis’ European Operating Committee from November 2006
to March 2009. Mr. Anderson was the Managing Director
responsible for investments and development in ProLogis’
Central and Mexico Regions from May 2003 to November 2006 and
has been with ProLogis in various capacities since August 1994.
Prior to joining ProLogis, Mr. Anderson was in the
management development program of Security Capital Group, a real
estate holding company.
Ted R. Antenucci* — 45 — President
and Chief Investment Officer since May 2007. Mr. Antenucci
also serves on the board of directors of PEPR, one of our
unconsolidated investees that is publicly traded on the Euronext
stock exchange in Amsterdam. Mr. Antenucci was
ProLogis’ President of Global Development from September
2005 to May 2007. From September 2001 to September 2005,
Mr. Antenucci was president of Catellus Commercial
Development Corporation, an industrial and retail real estate
company that was merged with ProLogis in September 2005.
Mr. Antenucci was with affiliates of Catellus Commercial
Development Corporation in various capacities from April 1999 to
September 2001.
Philip N. Dunne — 41 —
President — Europe since July 2009, where he is
responsible for all aspects of ProLogis’ business
performance in Continental Europe and the United Kingdom,
including investments and development. He is also Chairman of
ProLogis’ European Management Executive Committee. Prior to
this, Mr. Dunne was Chief Operating Officer, Europe and the
Middle East. Prior to joining ProLogis on December 1, 2008,
Mr. Dunne was the Chief Operating Officer — EMEA
at Jones Lang LaSalle, a global financial and professional
services firm specializing in real estate services and
investment management.
Larry H. Harmsen — 47 —
President — United States and Canada since February
2009, where he is responsible for all aspects of business
performance for ProLogis’ U.S. and Canada operations.
He has been responsible for capital deployment in North America
since July 2005. Previous to this and since 2003,
Mr. Harmsen had been responsible for capital deployment in
North America’s Pacific Region. Prior to this and since
1995, Mr. Harmsen oversaw ProLogis’ Southern
California market. Prior to joining ProLogis, Mr. Harmsen
was a vice president and general partner of Lincoln Property
Company for 10 years.
John P. Morland — 51 — Managing
Director — Global Human Resources since October
2006, where he is responsible for strategic human
resources initiatives to align ProLogis’ human capital
strategy with overall business activities. Prior to joining
ProLogis, Mr. Morland was the Global Head of Compensation
at Barclays Global Investors at its San Francisco
headquarters from April 2000 to March 2005.
Edward S. Nekritz* — 44 — General
Counsel of ProLogis since December 1998, Secretary of ProLogis
since March 1999 and Head of Global Strategic Risk Management
since March 2009. Mr. Nekritz oversees the provision of all
legal services and strategic risk management for ProLogis.
Mr. Nekritz is also responsible for ProLogis Investment
Services Group, which handles all aspects of contract
negotiations, real estate and corporate due diligence and
closings on acquisitions, dispositions and financings.
Mr. Nekritz has been with ProLogis in various capacities
since September 1995. Prior to joining ProLogis,
Mr. Nekritz was an attorney with Mayer, Brown &
Platt (now Mayer Brown LLP).
John R. “Jack” Rizzo — 60 —
Chief Sustainability Officer and Head of Global Construction for
ProLogis since 2009, where he is responsible for implementing
our global sustainability initiatives and for maintaining our
leadership position in business excellence, environmental
stewardship and corporate social responsibility.
Mr. Rizzo is also responsible for all new industrial
development projects worldwide. Mr. Rizzo has been with
ProLogis since 1999. Prior to joining ProLogis, Mr. Rizzo
was Senior Vice President and Chief Operating Officer of Perini
Management Services, Inc., an affiliate of Perini Corporation, a
global construction management and general contracting firm, and
was responsible for international construction operations.
Charles E. Sullivan — 52 — Head of
Global Operations since February 2009 where he has overall
responsibility for global operations, including property
management, leasing, information technology and marketing.
Mr. Sullivan was Managing Director of ProLogis with overall
responsibility for operations in North America from October 2006
to February 2009 and has been with ProLogis in various
capacities since October 1994. Prior to joining ProLogis,
Mr. Sullivan was an industrial broker with
Cushman & Wakefield of Florida, a real estate
brokerage and services company.
William E. Sullivan* — 55 — Chief
Financial Officer since April 2007. Prior to joining ProLogis,
Mr. Sullivan was the founder and president of Greenwood
Advisors, Inc., a financial consulting and advisory firm focused
on providing strategic planning and implementation services to
small and mid-cap companies since 2005. From 2001 to 2005,
Mr. Sullivan was chairman and chief executive officer of
SiteStuff, an online procurement company serving the real estate
industry and he continued as their chairman through June 2007.
Mike Yamada — 56 — President-Japan
since February 2009 where he is responsible for all aspects of
business performance for ProLogis’ Japan operations.
Mr. Yamada was Japan Co-President from March 2006 to
February 2009, where he was responsible for development and
leasing activities in Japan and a Managing Director with
ProLogis from December 2004 to March 2006 with similar
responsibilities in Japan. He has been with ProLogis in various
capacities since April 2002. Prior to joining ProLogis,
Mr. Yamada was a senior officer of Fujita Corporation, a
construction company in Japan.
* These individuals are our Executive Officers under
Item 401 of
Regulation S-K.
In addition to the leadership and oversight provided by our
executive committee, in the United States, a regional director
leads each of our four regions (Midwest, East, West and
Southwest), and is responsible for both operations and capital
deployment. In Europe, each of the four regions (Northern
Europe, Central and Eastern Europe, Southern Europe and the
United Kingdom) are led by either one or two individuals
responsible for operations and capital deployment. Japan, Mexico
and South Korea each have one individual who is responsible for
operations and capital deployment.
We maintain a Code of Ethics and Business Conduct applicable to
our Board and all of our officers and employees, including the
principal executive officer, the principal financial officer and
the principal accounting officer, or persons 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, 4545 Airport Way, Denver,
Colorado80239. 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 persons performing similar
functions, and that relate to any matter enumerated in
Item 406(b) of
Regulation S-K,
will be disclosed on our website.
Capital
Management, Customer Service and Capital Deployment
We have a team of professionals dedicated to managing and
leasing all the properties in our portfolio, which includes both
direct-owned properties and those owned by the property funds
that we manage. Our marketing team comprises a network of
regional directors, market officers and property managers who
are directly responsible for understanding and meeting the needs
of existing and prospective customers in their respective
markets.
Our marketing team works closely with our Global Solutions Group
to identify and accommodate customers with multiple market
requirements. The Global Solutions Group’s primary focus is
to position us as the preferred provider of distribution space
to large users of industrial distribution space. The
professionals in our
Global Solutions Group also seek to build long-term
relationships with our existing customers by addressing their
international distribution and logistics needs. The Global
Solutions Group provides our customers with outsourcing options
for network optimization tools, strategic site selection
assistance, business location services, material handling
equipment and design consulting services. The integration of our
local market expertise with our global platform enables us to
better serve customers throughout all of our markets.
Our network of regional directors and market officers also leads
our capital deployment efforts. They are responsible for
deploying our capital resources in an efficient and productive
manner that will best serve our long-term objective of
increasing shareholder value. They evaluate acquisition,
disposition and development opportunities in light of market
conditions in their respective markets and regions, and they
work closely with the Global Development Group to, among other
things, create master-planned distribution parks utilizing the
extensive experience of the Global Development Group. The Global
Development Group incorporates the latest technology with
respect to building design and systems and has developed
standards and procedures to which we strictly adhere in the
development of all properties to ensure that properties we
develop are of a consistent quality.
We strive to build in accordance with the accepted green
building rating system in all of our regions of operation.
Beginning in 2008, all of our new developments in the United
States comply with the U.S. Green Building Council’s
standards for Leadership in Energy and Environmental Design
(LEED®).
In the United Kingdom, since 2008, we have been committed to
developing any new properties to achieve at least a “Very
Good” rating in accordance with the Building Research
Establishment’s Environmental Assessment Method (BREEAM).
In Japan, many of our facilities comply with the Comprehensive
Assessment System for Building Environmental Efficiency
(CASBEE). Where rating systems do not exist, we implement best
practices learned from developing sustainable buildings across
our global portfolio. In total, counting all three rating
systems, ProLogis has 55 buildings with 23.8 million square
feet (2.2 million square meters) of development registered
or certified as green buildings.
We are exposed to various environmental risks that may result in
unanticipated losses that could affect our operating results and
financial condition. Either the previous owners or we subjected
a majority of the properties we have acquired, including land,
to environmental reviews. 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 Note 19 to our Consolidated Financial Statements in
Item 8 and “Item 1A Risk Factors”.
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
coverages include property damage and rental loss insurance
resulting from such perils as fire, additional perils as covered
under an extended coverage policy, named windstorm, flood,
earthquake and terrorism; commercial general liability
insurance; and environmental insurance. Insurance is maintained
through a combination of commercial insurance, self insurance
and through a wholly-owned captive insurance entity. 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. However, an uninsured loss could result
in loss of capital investment and anticipated profits.
Our operations and structure involve various risks that could
adversely affect our financial condition, results of operations,
distributable cash flow and the value of our common shares.
These risks include, among others:
General
The
current market disruptions may adversely affect our operating
results and financial condition.
The global financial markets have been undergoing pervasive and
fundamental disruptions since the third quarter of 2008. The
continuation or intensification of such volatility may lead to
additional adverse impacts on the general availability of credit
to businesses and could lead to a further weakening of the
U.S. and global economies. To the extent that turmoil in
the financial markets continues
and/or
intensifies, it has the potential to materially affect the value
of our properties and our investments in our unconsolidated
investees, the availability or the terms of financing that we
and our unconsolidated investees have or may anticipate
utilizing, our ability and that of our unconsolidated investees
to make principal and interest payments on, or refinance, any
outstanding debt when due
and/or may
impact the ability of our customers to enter into new leasing
transactions or satisfy rental payments under existing leases.
The market volatility has made the valuation of our properties
and those of our unconsolidated investees more difficult. There
may be significant uncertainty in the valuation, or in the
stability of the value, of our properties and those of our
unconsolidated investees, that could result in a substantial
decrease in the value of our properties and those of our
unconsolidated investees.
As a result, we may not be able to recover the current carrying
amount of our properties, our investments in and advances to our
unconsolidated investees
and/or
goodwill, which may require us to recognize an impairment charge
in earnings in addition to the charges we recognized in 2009 and
2008. Additionally, certain of the fees we generate from our
unconsolidated investees are dependent upon the value of the
properties held by the investees or the level of contributions
we make to the investees. Therefore, property value decreases
have impacted and may continue to impact certain fees paid to us
by our unconsolidated investees.
The pervasive and fundamental disruptions that the global
financial markets have been experiencing has led to extensive
and unprecedented governmental intervention. It is impossible to
predict what, if any, additional interim or permanent
governmental restrictions
and/or
increased regulation may be imposed on the financial markets
and/or the
effect of such restrictions and regulations on us and our
results of operations.
General Real Estate Risks
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 the general economic conditions, the 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. Approximately 24.3% of our direct
owned operating properties (based on our investment before
depreciation) are located in California. Properties in
California may be more susceptible to certain types of natural
disasters, such as earthquakes, brush fires, flooding and
mudslides, than properties located in other markets and a major
natural disaster in California could have a material adverse
effect on our operating results. We also have significant
holdings (defined as more than 3.0% of our total investment
before depreciation in direct owned operating properties), in
certain markets located in Atlanta, Chicago,
Dallas/Fort Worth, New Jersey and Japan. 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
distribution space or a reduction in demand for distribution
space, among other factors, may impact operating conditions. Any
material oversupply of distribution space or material reduction
in
demand for distribution space could adversely affect our results
of operations, distributable cash flow and the value of our
securities. In addition, the property funds and joint ventures
in which we have an ownership interest have concentrations of
properties in the same markets mentioned above, as well as
Pennsylvania, Reno, France, Germany, Poland and the United
Kingdom and are subject to the economic conditions in those
markets.
Real
property investments are subject to risks that could adversely
affect our business.
Real property investments are subject to varying degrees of
risk. While we seek to minimize these risks through geographic
diversification of our portfolio, market research and our
property management capabilities, these risks cannot be
eliminated. Some of the factors that may affect real estate
values include:
•
local conditions, such as an oversupply of distribution space or
a reduction in demand for distribution space in an area;
•
the attractiveness of our properties to potential customers;
•
competition from other available properties;
•
our ability to provide adequate maintenance of, and insurance
on, our properties;
•
our ability to control rents and variable operating costs;
•
governmental regulations, including zoning, usage and tax laws
and changes in these laws; and
•
potential liability under, and changes in, environmental, zoning
and other laws.
Our
investments are concentrated in the industrial distribution
sector and our business would be adversely affected by an
economic downturn in that sector or an unanticipated change in
the supply chain dynamics.
Our investments in real estate assets are primarily concentrated
in the industrial distribution 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.
Our real
estate development strategies may not be successful.
We have developed a significant number of industrial properties
since our inception. In late 2008, we scaled back our
development activities in response to current economic
conditions and, in 2009, we have resumed development activity in
a selective manner through
build-to-suit
transactions on our land, including opportunities to use
development capital or take out commitments from one of our
partners or customers.
As of December 31, 2009, we had 163 completed development
properties that were 62.2% leased (19.1 million square feet
of unleased space) and we had 5 industrial properties under
development that were 100.0% leased. As of December 31,2009, we had approximately $307.8 million of costs
remaining to be spent related to our development portfolio to
complete the development and lease the space in these properties.
Additionally as of December 31, 2009, we had
10,360 acres of land with a current investment of
$2.6 billion for potential future development of industrial
properties or other commercial real estate projects or for sale
to third parties. Within our land positions, we have
concentrations in many of the same markets as our operating
properties. Approximately 16.8% of our land (based on the
current investment balance) is in the United Kingdom. During
2009, we recorded impairment charges of $137.0 million, due
to the decrease in current estimated fair value of the land and
increased probability that we will dispose of certain land
parcels rather than develop as previously planned. We will look
to monetize the land in the future through sale to third
parties, development of industrial properties to hold for
long-term investment or sale to an unconsolidated investee for
development, depending on market conditions, our liquidity needs
and other factors.
We will be subject to risks associated with such development,
leasing and disposition activities, all of which may adversely
affect our results of operations and available cash flow,
including, but not limited to:
•
the risk that we may not be able to lease the available space in
our recently completed developments at rents that are sufficient
to be profitable;
•
the risk that we will seek to sell certain land parcels and we
will not be able to find a third party to acquire such land or
that the sales price will not allow us to recover our
investment, resulting in additional impairment charges;
•
the risk that development opportunities explored by us may be
abandoned and the related investment will be impaired;
•
the risk that we may not be able to obtain, or may experience
delays in obtaining, all necessary zoning, building, occupancy
and other governmental permits and authorizations;
•
the risk that due to the increased cost of land, our activities
may not be as profitable;
•
the risk that construction costs of a property may exceed the
original estimates, or that construction may not be concluded on
schedule, making the project less profitable than originally
estimated or not profitable at all; including the possibility of
contract default, the effects of local weather conditions, the
possibility of local or national strikes by construction-related
labor and the possibility of shortages in materials, building
supplies or energy and fuel for equipment; and
•
the risk that occupancy levels and the rents that can be earned
for a completed project will not be sufficient to make the
project profitable.
Our
business strategy to provide liquidity to reduce debt by
contributing properties to property funds or disposing of
properties to third parties may not be successful.
Our ability to contribute or sell properties on advantageous
terms is affected by competition from other owners of properties
that are trying to dispose of their properties; current market
conditions, including the capitalization rates applicable to our
properties; and other factors beyond our control. The property
funds 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
the property funds or third parties have limited or no access to
capital on favorable terms, then contributions and dispositions
could be delayed resulting in adverse effects on our liquidity,
results of operations, distributable cash flow, debt covenant
ratios, and the value of our securities.
We may
acquire properties, which involves risks that could adversely
affect our operating results and the value of our
securities.
We may acquire industrial properties in our direct owned
segment. 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.
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.
Our
operating results and distributable cash flow will depend on the
continued generation of lease revenues from customers.
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. 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. 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.
Our
ability to renew leases or re-lease space on favorable terms as
leases expire significantly affects our business.
Our results of operations, distributable cash flow and the value
of our securities would be adversely affected if we were unable
to lease, on economically favorable terms, a significant amount
of space in our operating properties. We have 28.4 million
square feet of industrial and retail space (out of a total of
155.2 million occupied square feet representing 15.3% of
total annual base rents) with leases that expire in 2010,
including 4.4 million square feet of leases that are on a
month-to-month
basis. In addition, our unconsolidated investees have a combined
37.4 million square feet of industrial space (out of a
total 254.9 million occupied square feet representing 13.0%
of total annual base rent) with leases that expire in 2010,
including 5.5 million square feet of leases that are on a
month-to-month
basis. The number of industrial and retail properties in a
market or submarket could adversely affect both our ability to
re-lease the space and the rental rates that can be obtained in
new leases.
Real
estate investments are not as liquid as other types of assets,
which may reduce economic returns to investors.
Real estate investments are not as liquid as other types of
investments and this lack of liquidity may limit our ability to
react promptly to changes in economic or other conditions. In
addition, significant expenditures associated with real estate
investments, such as mortgage payments, real estate taxes and
maintenance costs, are generally not reduced when circumstances
cause a reduction in income from the investments. Like other
companies qualifying as REITs under the Code, we are only able
to hold property for sale in the ordinary course of business
through taxable REIT subsidiaries in order to avoid punitive
taxation on the gain from the sale of such property. While we
are planning to dispose of certain properties that have been
held for investment in order to generate liquidity, if we do not
satisfy certain safe harbors or if we believe there is too much
risk of incurring the punitive tax on the gain from the sale, we
may not pursue such sales.
Our
insurance coverage does not include all potential
losses.
We and our unconsolidated investees currently carry insurance
coverage including property damage and rental loss insurance
resulting from such perils as fire, additional perils as covered
under an extended coverage policy, named 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 unconsolidated investees, including the
property funds, are adequately insured. However, there are
certain losses, including losses from floods, earthquakes, acts
of war, acts of terrorism or riots, that are not generally
insured against or that are not generally 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 potential
revenues in these properties and could potentially remain
obligated under any recourse debt associated with the property.
We are
exposed to various environmental risks that may result in
unanticipated losses that could affect our operating results 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.
A majority of the properties we acquire are subjected to
environmental reviews either by us or by the predecessor owners.
In addition, we may incur environmental remediation costs
associated with certain land parcels we acquire in connection
with the development of the land. In connection with the merger
in 2005 with Catellus Development Corporation
(“Catellus”), we acquired certain properties in urban
and industrial areas that may have been leased to, or previously
owned by, commercial and industrial companies that discharged
hazardous materials. We established a liability at the time of
acquisition to cover such costs. We adjust the liabilities, as
appropriate, when additional information becomes available. We
purchase various environmental insurance policies to mitigate
our exposure to environmental liabilities. We are not aware of
any environmental liability that we believe would have a
material adverse effect on our business, financial condition or
results of operations.
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 or sell such properties or to borrow using
such properties as collateral and may have an adverse effect on
our distributable cash flow.
We are
exposed to the potential impacts of future climate change and
climate-change related risks
We consider that we are exposed to potential physical risks from
possible future changes in climate. Our distribution facilities
may be exposed to rare catastrophic weather events, such as
severe storms
and/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 our company to be exposed to
regulatory risks related to climate change, as our operations do
not emit a significant amount of greenhouse gases. However, we
may be adversely impacted as a real estate developer in the
future by stricter energy efficiency standards for buildings.
Risks Related to Financing and Capital
Our
operating results and financial condition could be adversely
affected if we are unable to make required payments on our debt
or are unable to refinance our debt.
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 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, the amount of our distributable cash flow
and our financial condition would be adversely affected 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. In addition, our unconsolidated investees have
short-term debt that was used to acquire properties from us or
third parties and other maturing indebtedness. If these
investees are unable to refinance their indebtedness or meet
their payment obligations, it may impact our distributable cash
flow and our financial condition and/or we may be required to
recognize impairment charges to our investments similar to those
we recognized in 2009.
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 indenture 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. In addition, our
credit facility contains various covenants and certain borrowing
limitations based on the value of our unencumbered property pool
(as defined in the agreement). These covenants may limit our
flexibility in our operations, and breaches of these covenants
could result in defaults under the instruments governing the
applicable indebtedness. If we default under our covenant
provisions and are unable to cure the default, refinance our
indebtedness or meet our payment obligations, the amount of our
distributable cash flow and our financial condition would be
adversely affected.
Federal Income Tax Risks
Failure
to qualify as a REIT could adversely affect our cash
flows.
We have elected to be taxed as a REIT under the Code commencing
with our taxable year ended December 31, 1993. In addition,
we have a consolidated subsidiary that has elected to be taxed
as a REIT and certain unconsolidated investees that are REITs
and are subject to all the risks pertaining to the REIT
structure, discussed herein. To maintain REIT status, we must
meet a number of highly technical requirements on a continuing
basis. Those requirements seek to ensure, among other things,
that the gross income and investments of a REIT are largely real
estate related, that a REIT distributes substantially all of its
ordinary taxable income to shareholders on a current basis and
that the REIT’s equity ownership is not overly
concentrated. Due to the complex nature of these rules, the
available guidance concerning interpretation of the rules, the
importance of ongoing factual determinations and the possibility
of adverse changes in the law, administrative interpretations of
the law and changes in our business, no assurance can be given
that we, or our REIT subsidiaries, will qualify as a REIT for
any particular period.
If we fail to qualify as a REIT, we will be taxed as a regular
corporation, and distributions to shareholders will not be
deductible in computing our taxable income. The resulting
corporate income tax liabilities could materially reduce our
cash flow and funds available for dividends
and/or
reinvestment. Moreover, we might not be able to elect to be
treated as a REIT for the four taxable years after the year
during which we ceased to qualify as a REIT. In addition, if we
later requalified as a REIT, we might be required to pay a full
corporate-level tax on any unrealized gains in our assets as of
the date of requalification, or upon subsequent disposition, and
to make distributions to our shareholders equal to any earnings
accumulated during the period of non-REIT status.
REIT distribution requirements could adversely affect our
financial condition.
To maintain qualification as a REIT under the Code, generally a
REIT must annually distribute to its shareholders at least 90%
of its REIT taxable income, computed without regard to the
dividends paid deduction and net capital gains. This requirement
limits our ability to accumulate capital and, therefore, we may
not have sufficient cash or other liquid assets to meet the
distribution requirements. Difficulties in meeting the
distribution requirements might arise due to competing demands
for our funds or to timing differences between tax reporting and
cash receipts and disbursements, because income may have to be
reported before cash is received or because expenses may have to
be paid before a deduction is allowed. In addition, the Internal
Revenue Service (the “IRS”) may make a determination
in connection with the settlement of an audit by the IRS that
increases taxable income or disallows or limits deductions taken
thereby increasing the distribution we are required to make. In
those situations, we might be required to borrow funds or sell
properties on adverse terms in order to meet the distribution
requirements and interest and penalties could apply, which could
adversely affect our financial condition. If we fail to make a
required distribution, we would cease to qualify as a REIT.
Prohibited
transaction income could result from certain property
transfers.
We contribute properties to property funds and sell properties
to third parties from the REIT and from taxable REIT
subsidiaries (“TRS”). Under the Code, a disposition of
a property from other than a TRS could be deemed a prohibited
transaction. In such case, a 100% penalty tax on the resulting
gain could be assessed. The determination that a transaction
constitutes a prohibited transaction is based on the facts and
circumstances
surrounding each transaction. The IRS could contend that certain
contributions or sales of properties by us are prohibited
transactions. While we do not believe the IRS would prevail in
such a dispute, if the IRS successfully argued the matter, the
100% penalty tax could be assessed against the gains from these
transactions, which may be significant.
Additionally, any gain from a prohibited transaction may
adversely affect our ability to satisfy the income tests for
qualification as a REIT.
Liabilities
recorded for pre-existing tax audits may not be
sufficient.
We are subject to a pending audit by the IRS for the 2003
through 2005 income tax returns of Catellus, including certain
of its subsidiaries and partnerships. We have recorded an
accrual for the liabilities that may arise from these audits.
See Note 15 to our Consolidated Financial Statements in
Item 8. The finalization of the remaining audits may result
in an adjustment in which the actual liabilities or settlement
costs, including interest and potential penalties, if any, may
prove to be more than the liability we have recorded.
Uncertainties
relating to Catellus’ estimate of its “earnings and
profits” attributable to C-corporation taxable years may
have an adverse effect on our distributable cash flow.
In order to qualify as a REIT, a REIT cannot have at the end of
any REIT taxable year any undistributed earnings and profits
that are attributable to a C-corporation taxable year. A REIT
has until the close of its first full taxable year as a REIT in
which it has non-REIT earnings and profits to distribute these
accumulated earnings and profits. Because Catellus’ first
full taxable year as a REIT was 2004, Catellus was required to
distribute these earnings and profits prior to the end of 2004.
Failure to meet this requirement would result in Catellus’
disqualification as a REIT. Catellus distributed its accumulated
non-REIT earnings and profits in December 2003, well in advance
of the 2004 year-end deadline, and believed that this
distribution was sufficient to distribute all of its non-REIT
earnings and profits. However, the determination of non-REIT
earnings and profits is complicated and depends upon facts with
respect to which Catellus may have less than complete
information or the application of the law governing earnings and
profits, which is subject to differing interpretations, or both.
Consequently, there are substantial uncertainties relating to
the estimate of Catellus’ non-REIT earnings and profits,
and we cannot be assured that the earnings and profits
distribution requirement has been met. These uncertainties
include the possibility that the IRS could upon audit, as
discussed above, increase the taxable income of Catellus, which
would increase the non-REIT earnings and profits of Catellus.
There can be no assurances that we have satisfied the
requirement that Catellus distribute all of its non-REIT
earnings and profits by the close of its first taxable year as a
REIT, and therefore, this may have an adverse effect on our
distributable cash flow.
There are
potential deferred and contingent tax liabilities that could
affect our operating results or financial condition.
Palmtree Acquisition Corporation, our subsidiary that was the
surviving corporation in the merger with Catellus in 2005, is
subject to a federal corporate level tax at the highest regular
corporate rate (currently 35%) and potential state taxes on any
gain recognized within ten years of Catellus’ conversion to
a REIT from a disposition of any assets that Catellus held at
the effective time of its election to be a REIT, but only to the
extent of the
built-in-gain
based on the fair market value of those assets on the effective
date of the REIT election (which was January 1, 2004). Gain
from a sale of an asset occurring more than 10 years after
the REIT conversion will not be subject to this corporate-level
tax. We do not currently expect to dispose of any asset of the
surviving corporation in the merger if such disposition would
result in the imposition of a material tax liability unless we
can affect a tax-deferred exchange of the property. However,
certain assets are subject to third party purchase options that
may require us to sell such assets, and those assets may carry
deferred tax liabilities that would be triggered on such sales.
We have recorded deferred tax liabilities related to these
built-in-gains.
There can be no assurances that our plans in this regard will
not change and, if such plans do change or if a purchase option
is exercised, that we will be successful in structuring a
tax-deferred exchange.
Our executive and other senior officers have a significant role
in our success. Our ability to retain our management group or to
attract suitable replacements should any members of the
management group leave is dependent on the competitive nature of
the employment market. The loss of services from key members of
the management group or a limitation in their availability could
adversely affect our financial condition and cash flow. Further,
such a loss could be negatively perceived in the capital markets.
Share
prices may be affected by market interest rates.
Our current quarterly distribution is $0.15 per common share.
The annual distribution rate on common shares as a percentage of
our market price may influence the trading price of such common
shares. An increase in market interest rates may lead investors
to demand a higher annual distribution rate than we have set,
which could adversely affect the value of our common shares.
As a
global company, we are subject to social, political and economic
risks of doing business in foreign countries.
We conduct a significant portion of our business and employ a
substantial number of people outside of the United States.
During 2009, we generated approximately 34% of our revenue from
operations outside the United States, primarily due to proceeds
from the sale of our investments in the Japan funds.
Circumstances and developments related to international
operations that could negatively affect our business, financial
condition or results of operations include, but are not limited
to, the following factors:
•
difficulties and costs of staffing and managing international
operations in certain regions;
•
currency restrictions, which may prevent the transfer of capital
and profits to the United States;
•
unexpected changes in regulatory requirements;
•
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, civil unrest, drug trafficking, political
activism or the continuation or escalation of terrorist or gang
activities (particularly with respect to our operations in
Mexico); and
•
foreign ownership restrictions with respect to operations in
countries.
Although we have committed substantial resources to expand our
global development platform, if we are unable to successfully
manage the risks associated with our global business or to
adequately manage operational fluctuations, our business,
financial condition and results of operations could be harmed.
In addition, our international operations and, specifically, 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, may be affected by currency exchange control regulations,
transfer pricing regulations and potentially adverse tax
consequences, among other things.
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 have pursued, and intend to continue to pursue, growth
opportunities in international markets where the
U.S. dollar is not the national currency. At
December 31, 2009, approximately 42% of our total assets
are invested in a currency other than the U.S. dollar,
primarily the euro, Japanese yen and British pound sterling. 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 results of operations and financial position. Although we
attempt to mitigate adverse effects by borrowing under debt
agreements denominated in foreign currencies and, on occasion
and when deemed appropriate, using derivative contracts, there
can be no assurance that those attempts to mitigate foreign
currency risk will be successful.
We are
subject to governmental regulations and actions that affect
operating results and financial condition.
Many laws, including tax laws, and governmental regulations
apply to us, our unconsolidated investees and our properties.
Changes in these laws and governmental regulations, or their
interpretation by agencies or the courts, could occur, which
might affect our ability to conduct business.
We have directly invested in real estate assets that are
primarily generic industrial properties. In Japan, our
industrial properties are generally multi-level centers, which
is common in Japan due to the high cost and limited availability
of land. Our properties are typically used for storage,
packaging, assembly, distribution, and light manufacturing of
consumer and industrial products. Based on the square footage of
our operating properties in the direct owned segment at
December 31, 2009, our properties are 99.5% industrial
properties; including 92.1% used for bulk distribution, 6.5%
used for light manufacturing and assembly, and 0.9% used for
other purposes, primarily service centers, while the remaining
0.5% of our properties are retail.
At December 31, 2009, we owned 1,215 operating properties
in our direct owned segment; including 1,188 industrial
properties located in North America, Europe, and Asia and 27
retail properties in North America. In North America, our
properties are located in 32 markets in 19 states in the
United States and the District of Columbia, 6 markets in Mexico
and 1 market in Canada. Our properties are located in 28 markets
in 12 countries in Europe and 6 markets in 2 countries in Asia.
For this presentation, we define our markets based on the
concentration of properties in a specific area. A market, as
defined by us, can be a metropolitan area, a city, a subsection
of a metropolitan area, a subsection of a city or a region of a
state or country.
The information in the following tables is as of
December 31, 2009 for the operating properties, properties
under development and land we own, including 84 buildings owned
by entities we consolidate but of which we own less than 100%.
All of these assets are included in our direct owned segment.
This includes our development portfolio of operating properties
we developed or are currently developing. 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, 2009. No individual property or group of
properties operating as a single business unit generated income
equal to 10% or more of our consolidated gross revenues for the
year
ended December 31, 2009. These tables do not include
properties that are owned by property funds or other
unconsolidated investees, which are discussed under
“— Unconsolidated Investees”.
Rentable
Investment
No. of
Percentage
Square
Before
Bldgs.
Leased (1)
Footage
Depreciation
Encumbrances (2)
Operating properties owned in the direct owned segment at
December 31, 2009 (dollars and rentable square footage in
thousands):
Industrial properties:
North America — by Country, by Market (39
markets)(3):
Total land held for development and properties under
development in the direct owned segment at December 31,2009
10,360
$
2,569,343
5
100.00
%
2,930
$
191,127
$
295,699
The following is a summary of our direct-owned investments in
real estate assets at December 31, 2009:
Investment
Before Depreciation
(in thousands)
Industrial and retail properties
$
11,797,449
Land subject to ground leases and other (7)
385,222
Properties under development
191,127
Land held for development
2,569,343
Mixed use properties
39,090
Other investments (8)
233,665
Total
$
15,215,896
(1)
Represents the percentage leased at December 31, 2009.
Operating properties at December 31, 2009 include completed
development properties that may be in the initial
lease-up
phase, which reduces the overall leased percentage (see
notes 3, 4 and 5 below for information regarding developed
properties).
(2)
Certain properties are pledged as security under our secured
mortgage debt and assessment bonds at December 31, 2009.
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 $1.1 million of encumbrances
related to other real estate assets not included in the direct
owned segment. See Schedule III — Real Estate and
Accumulated Depreciation to our Consolidated Financial
Statements in Item 8 for additional identification of the
properties pledged.
(3)
In North America, includes 67 completed development properties
aggregating 21.3 million square feet at a total investment
of $1.1 billion that are 76.1% leased and in our
development portfolio.
(4)
In Europe, includes 84 completed development properties
aggregating 20.9 million square feet at a total investment
of $1.5 billion that are 44.1% leased and in our
development portfolio.
(5)
In Asia, includes 12 completed development properties
aggregating 8.4 million square feet at a total investment
of $1.5 billion that are 71.8% leased and in our
development portfolio.
(6)
Represents the total expected cost to complete a property under
development and may include the cost of land, fees, permits,
payments to contractors, architectural and engineering fees,
interest, project management costs and other appropriate costs
to be capitalized during construction and also leasing costs,
rather than the total actual costs incurred to date.
(7)
Amount represents investments of $314.9 million in land
subject to ground leases, an investment of $36.1 million in
railway depots, an investment of $29.9 million in parking
lots and $4.3 million in solar panels.
(8)
Other investments include: (i) restricted funds that are
held in escrow pending the completion of tax-deferred exchange
transactions involving operating properties
($45.6 million); (ii) certain infrastructure costs
related to projects we are developing on behalf of others;
(iii) costs incurred related to future development
projects, including purchase options on land; (iv) costs
related to our corporate office buildings, which we occupy; and
(v) earnest money deposits associated with potential
acquisitions.
At December 31, 2009, our investments in and advances to
unconsolidated investees totaled $2.2 billion. The property
funds totaled $1.9 billion and the industrial and retail
joint ventures totaled $134.0 million at December 31,2009 and are all included in our investment management segment.
The remaining unconsolidated investees totaled
$141.1 million at December 31, 2009 and are not
included in either of our reportable segments.
Investment
Management Segment
At December 31, 2009, our ownership interests range from
20% to 50% in 15 property funds and several other entities that
are presented under the equity method. We act as manager of each
of these entities. We also have an ownership interest in a joint
venture that we manage and do not account for under the equity
method. These entities primarily own or are developing
industrial properties.
The information provided in the table below (dollars and square
footage in thousands) is only for our unconsolidated entities
included in this segment with operating industrial properties
and represents the total entity, not just our proportionate
share. See “Item 1 Business” and Note 6 to
our Consolidated Financial Statements in Item 8.
From time to time, we and our unconsolidated investees are
parties 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 result in a material
adverse effect on our business, financial position or results of
operations.
Our common shares are listed on the NYSE under the symbol
“PLD”. The following table sets forth the high and low
sale prices, as reported in the NYSE Composite Tape, and
distributions per common share, for the periods indicated.
In order to comply with the REIT requirements of the Code, we
are generally required to make common share distributions and
preferred share dividends (other than capital gain
distributions) to our shareholders in amounts that together at
least equal (i) the sum of (a) 90% of our “REIT
taxable income” computed without regard to the dividends
paid deduction and net capital gains and (b) 90% of the net
income (after tax), if any, from foreclosure property, minus
(ii) certain excess non-cash income. Our common share
distribution policy is to distribute a percentage of our cash
flow that ensures that we will meet the distribution
requirements of the Code and that allows us to maximize the cash
retained to meet other cash needs, such as capital improvements
and other investment activities.
The payment of common share distributions is dependent upon our
financial condition, operating results and REIT distribution
requirements and may be adjusted at the discretion of the Board
during the year.
In addition to common shares, we have issued cumulative
redeemable preferred shares of beneficial interest. At
December 31, 2009, we had three series of preferred shares
outstanding (“Series C Preferred Shares”,
“Series F Preferred Shares” and
“Series G Preferred Shares”). Holders of each
series of preferred shares outstanding have limited voting
rights, subject to certain conditions, and are entitled to
receive cumulative preferential dividends based upon each
series’ respective liquidation preference. Such dividends
are payable quarterly in arrears on the last day of March, June,
September and December. Dividends on preferred shares are
payable when, and if, they have been declared by the Board, out
of funds legally available for payment of dividends. After the
respective redemption dates, each series of preferred shares can
be redeemed at our
option. The cash redemption price (other than the portion
consisting of accrued and unpaid dividends) with respect to
Series C Preferred Shares is payable solely out of the
cumulative sales proceeds of other capital shares of ours, which
may include shares of other series of preferred shares. With
respect to the payment of dividends, each series of preferred
shares ranks on parity with our other series of preferred
shares. Annual per share dividends paid on each series of
preferred shares were as follows for the periods indicated:
Pursuant to the terms of our preferred shares, we are restricted
from declaring or paying any distribution with respect to our
common shares unless and until all cumulative dividends with
respect to the preferred shares have been paid and sufficient
funds have been set aside for dividends that have been declared
for the then-current dividend period with respect to the
preferred shares.
For more information regarding our distributions and dividends,
see Note 11 to our Consolidated Financial Statements in
Item 8.
For information regarding securities authorized for issuance
under our equity compensation plans see Notes 11 and 12 to
our Consolidated Financial Statements in Item 8.
In 2009, we issued 413,500 common shares, upon exchange of
limited partnership units in our majority-owned and consolidated
real estate partnerships. These common shares were issued in
transactions exempt from registration under Section 4(2) of
the Securities Act of 1933.
Common
Share Plans
We have approximately $84.1 million remaining on our Board
authorization to repurchase common shares that began in 2001. We
have not repurchased our common shares since 2003.
See our 2010 Proxy Statement for further information relative to
our equity compensation plans.
The following table sets forth selected financial data relating
to our historical financial condition and results of operations
for 2009 and the four preceding years. Certain amounts for the
years prior to 2009 presented in the table below have been
reclassified to conform to the 2009 financial statement
presentation and to reflect discontinued operations. The amounts
in the table below are in millions, except for per share amounts.
Real estate owned, excluding land held for development, before
depreciation
$
12,647
$
13,243
$
14,428
$
12,500
$
10,830
Land held for development
$
2,569
$
2,483
$
2,153
$
1,397
$
1,045
Investments in and advances to unconsolidated investees
$
2,152
$
2,270
$
2,345
$
1,300
$
1,050
Total assets
$
16,885
$
19,269
$
19,724
$
15,904
$
13,126
Total debt
$
7,978
$
10,711
$
10,217
$
8,387
$
6,678
Total liabilities
$
8,878
$
12,511
$
11,920
$
9,453
$
7,580
Noncontrolling interests
$
20
$
20
$
79
$
52
$
58
ProLogis shareholders’ equity
$
7,987
$
6,738
$
7,725
$
6,399
$
5,488
Number of common shares outstanding
474
267
258
251
244
(1)
Effective January 1, 2009, we adopted a new accounting
standard related to our convertible debt that resulted in the
restatement of 2008 and 2007 amounts. See Note 2 to our
Consolidated Financial Statements in Item 8 for more
information.
Changes in global economic conditions in late 2008 resulted in
changes to our business strategy, including the elimination of
our CDFS segment. During 2009, we contributed and sold certain
properties. However, they are now reflected as net gains, rather
than revenues, in our Consolidated Statements of Operations and
as cash provided by investing activities, rather than operating.
See our Consolidated Financial Statements in Item 8 for
more information.
(3)
During 2009, we recognized impairment charges of
$331.6 million on certain of our real estate properties,
$143.6 million on certain of our unconsolidated
investments, and $20.0 million related to other assets.
During 2008, we recognized impairment charges of
$274.7 million on certain of our real estate properties,
$175.4 million related to goodwill, $113.7 million on
certain of our unconsolidated investments, $31.5 million
related to other assets, and our share of impairment charges
recorded by an unconsolidated investee of $108.2 million.
See our Consolidated Financial Statements in Item 8 for
more information.
(4)
Discontinued operations include income (loss) attributable to
assets held for sale and disposed properties, net gains
recognized on the disposition of properties to third parties
and, in 2008, an impairment charge of $198.2 million as a
result of our sale in February 2009 of our China operations.
Amounts in 2005 include impairment charges related to
temperature controlled distribution assets of $25.2 million.
(5)
Funds from operations (“FFO”) is a
non-U.S.
generally accepted accounting principle (“GAAP”)
measure that is commonly used in the real estate industry. The
most directly comparable GAAP measure to FFO is net earnings.
Although the National Association of Real Estate Investment
Trusts (“NAREIT”) has published a definition of FFO,
modifications to the NAREIT calculation of FFO are common among
REITs, as companies seek to provide financial measures that
meaningfully reflect their business. FFO, as we define it, is
presented as a supplemental financial measure. FFO is not used
by us as, nor should it be considered to be, an alternative to
net earnings computed under GAAP as an indicator of our
operating performance or as an alternative to cash from
operating activities computed under GAAP as an indicator of our
ability to fund our cash needs.
FFO is not meant to represent a comprehensive system of
financial reporting and does not present, nor do we intend it to
present, a complete picture of our financial condition and
operating performance. We believe 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 that our consolidated
financial statements, prepared in accordance with GAAP, provide
the most meaningful picture of our financial condition and our
operating performance.
At the same time that NAREIT created and defined its FFO concept
for the REIT industry, it also recognized that “management
of each of its member companies has the responsibility and
authority to publish financial information that it regards as
useful to the financial community.” We believe that
financial analysts, potential investors and shareholders who
review our operating results are best served by a defined FFO
measure that includes other adjustments to net earnings computed
under GAAP in addition to those included in the NAREIT defined
measure of FFO. Our FFO measures are discussed in
“Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations — Funds
From Operations”.
You should read the following discussion in conjunction with our
Consolidated Financial Statements included in Item 8 of
this report and the matters described under “Item 1A.
Risk Factors”.
We are a self-administered and self-managed REIT that owns,
operates and develops real estate properties, primarily
industrial properties, in North America, Europe and Asia
(directly and through our unconsolidated investees). Our
business is primarily driven by requirements for modern,
well-located industrial space in key global distribution
locations. Our focus on our customers’ needs has enabled us
to become a leading global provider of industrial distribution
properties.
Our business strategy currently includes two operating segments:
direct owned and investment management. Our direct owned segment
represents the direct long-term ownership of industrial and
retail properties. Our investment management segment represents
the long-term investment management of property funds and
certain other unconsolidated investees, and the properties they
own. We generate revenues; earnings; FFO, as defined at the end
of Item 7; and cash flows through our segments primarily as
follows:
•
Direct Owned Segment-We earn rent from our customers, including
reimbursements of certain operating costs, under long-term
operating leases for the properties that we own. The revenue in
this segment has decreased due to contribution of properties to
property funds and a decrease in rental rates on turnover,
offset partially with increases in occupancy levels within our
development portfolio. Rental revenues generated by the
lease-up of
newly developed properties have not been adequate to offset the
loss of rental revenues from the decrease in the property
portfolio. We expect our total revenues from this segment to
increase slightly in 2010 through increases in occupied square
feet predominantly in our development portfolio, offset
partially with decreases from contributions of properties we
made in 2009 or may make in 2010. We anticipate the increases in
occupied square feet to come from leases that were signed in
2009, but have not commenced occupancy, and future leasing
activity in 2010. Our development portfolio, including completed
development properties and those currently under development,
was 64.3% leased at December 31, 2009 and 41.4% leased at
December 31, 2008. Our intent is to hold the properties in
our direct owned segment for long-term investment, including the
development of new properties utilizing our existing land.
However, we may contribute certain properties to a property fund
or sell land or properties to third parties, depending on market
conditions and liquidity needs.
•
Investment Management Segment — We recognize our
proportionate share of the earnings or losses from our
investments in unconsolidated property funds and certain joint
ventures that are accounted for under the equity method. In
addition, we recognize fees and incentives earned for services
performed on behalf of these and other entities. We provide
services to these entities, which may include property
management, asset management, leasing, acquisition, financing
and development. We may also earn incentives from our property
funds depending on the return provided to the fund partners over
a specified period.
As discussed earlier, on December 31, 2008, all of the
assets and liabilities in the CDFS business segment were
transferred into our two remaining segments. In 2009, we
recognized income from the previously deferred gains from the
Japan property funds that were deferred upon original
contributions and triggered with the sale of our investments.
During 2008 and 2007, our CDFS business segment primarily
encompassed our development or acquisition of real estate
properties that were subsequently contributed to a property fund
in which we had an ownership interest and managed, or sold to
third parties.
Summary
of 2009
In late 2008, we modified our business strategy to adjust to the
global financial market and economic disruptions at that time.
This new strategy entailed limiting our development activities
to conserve capital and focus on strengthening our balance sheet.
Narrowing our focus allowed us to work on specific goals we set
forth for 2009, which were to:
•
reduce debt by $2.0 billion;
•
recast our global line of credit;
•
complete the properties under development as of the end of 2008
and focus on leasing our total development portfolio;
•
manage our core portfolio of industrial distribution properties
to maintain and improve our net operating income stream from
these assets;
•
generate liquidity through contributions of properties to our
property funds and through sales of real estate to third
parties; and
Since December 31, 2008, we have achieved each of these
goals, including reducing our debt by $2.7 billion, through
the following activities:
Debt activity (all are discussed in further detail below under
“- Liquidity and Capital Resources”):
•
In August 2009, we amended and restated our global line of
credit (“Global Line”), extending the maturity to
August 2012 and reducing the size of our aggregate commitments
to $2.25 billion (subject to currency fluctuations), after
October 2010.
•
On October 1, 2009, pursuant to a consent solicitation and
to support our objective of simplifying our debt structure, we
amended certain covenants and events of default related to
certain of our senior notes.
•
During 2009, we issued five- and ten-year senior notes for a
total of $950.0 million.
•
During 2009, we closed on $499.9 million of secured
mortgage debt in five separate transactions.
•
In 2009, we repurchased certain senior and other notes and
secured mortgage debt that resulted in the recognition of a gain
of $172.3 million and reduced our debt obligations by
$242.1 million.
Equity issuances:
•
On April 14, 2009, we completed a public offering of
174.8 million common shares at a price of $6.60 per share
and received net proceeds of $1.1 billion (“Equity
Offering”).
•
During the third quarter, we generated net proceeds of
$325.1 million from the issuance of 29.8 million
common shares under our
at-the-market
equity issuance program, after payment of $6.9 million of
commissions to the sales agent.
Asset dispositions and contributions:
•
We generated $1.3 billion of cash from the sale of our
China operations ($845.5 million) and our investments in
the Japan property funds ($500.0 million) in the first
quarter of 2009. We entered into a sale agreement in December
2008, at which time we recorded an impairment charge of
$198.2 million on our China operations and classified the
assets and liabilities as held for sale.
•
In connection with the sale of our investments in the Japan
property funds, we recognized a net gain of $180.2 million
and $20.5 million of current income tax expense. The gain
is reflected as CDFS proceeds as it represents the recognition
of previously deferred gains on the contributions of properties
to the property funds based on our ownership interest in the
property fund at the time of original contributions.
•
During 2009, we generated aggregate proceeds of
$1.5 billion from the contribution of 43 properties to
ProLogis European Properties Fund II, and the sale of land
parcels and 140 properties to third parties.
Other:
•
We reduced our gross G&A by 26.5% in 2009 from 2008,
through various cost savings initiatives, including a RIF
program.
•
We executed leasing in our development portfolio in 2009,
including completed properties and properties under development,
increasing the leased percentage to 64.3% at December 31,2009 from 41.4% at the beginning of the year.
Objectives
for 2010
Now that we have achieved our goals for 2009, we believe we are
in a better liquidity position and can focus on our longer-term
strategy of conservative growth through the ownership,
management and development of industrial properties with a
concentrated focus on customer service. Included in our
objectives for 2010 and beyond are to:
•
retain more of our development assets in order to improve the
geographic diversification of our direct owned properties as
most of our planned developments are in international markets;
monetize our investment in land of $2.6 billion at
December 31, 2009; and
•
continue to focus on staggering and extending our debt
maturities.
We plan to accomplish these objectives by generating proceeds
through selective sales of completed real estate properties
(primarily located in the U.S.) and land parcels, and limited
contribution of development properties to the property funds. We
will use these proceeds to fund our development activities,
which will allow us to respond to new
build-to-suit
opportunities to better serve our customers and to transition
our non-income producing land into income producing properties.
We will continue to focus on leasing the unleased portion of our
development portfolio (representing 53.5 million square
feet at December 31, 2009 that was 64.3% leased).
The following table illustrates the net operating income for
each of our segments, along with the reconciling items to Income
(Loss) from Continuing Operations on our Consolidated Statements
of Operations (dollars in thousands):
Years Ended December 31,
Percentage Change
2009
2008
2007
2009 vs 2008
2008 vs 2007
Net operating income — direct owned segment
$
606,561
$
634,542
$
734,707
(4
)%
(14)%
Net operating income — investment management segment
122,694
15,680
162,003
682
%
(90)%
Net operating income — CDFS business segment
180,237
654,746
763,695
(72
)%
(14)%
General and administrative expenses
(180,486
)
(177,350
)
(170,398
)
2
%
4%
Reduction in workforce
(11,745
)
(23,131
)
—
(49
)%
N/A
Impairment of real estate properties
(331,592
)
(274,705
)
(12,600
)
21
%
2,080%
Depreciation and amortization expense
(315,807
)
(317,315
)
(286,279
)
—
11%
Earnings from certain other unconsolidated investees, net
4,712
8,796
7,794
(46
)%
13%
Interest expense
(373,305
)
(385,065
)
(389,844
)
(3
)%
(1)%
Impairment of goodwill and other assets
(163,644
)
(320,636
)
—
(49
)%
N/A
Other income (expense), net
(39,809
)
16,063
31,686
(348
)%
(49)%
Net gains on dispositions of real estate properties
35,262
11,668
146,667
202
%
(92)%
Foreign currency exchange gains (losses), net
35,626
(148,281
)
8,132
124
%
(1,923)%
Gain on early extinguishment of debt
172,258
90,719
—
90
%
N/A
Income tax expense
(5,975
)
(68,011
)
(66,855
)
(91
)%
2%
Earnings (loss) from continuing operations
$
(265,013
)
$
(282,280
)
$
928,708
(6
)%
(130)%
Effective January 1, 2009, we adopted a new accounting
standard related to our convertible debt that resulted in the
restatement of 2008 and 2007 amounts (see Note 2 to our
Consolidated Financial Statements in Item 8 for more
information). Also, see Note 20 to our Consolidated
Financial Statements in Item 8 for additional information
regarding our segments and a reconciliation of net operating
income to earnings (loss) before income taxes.
We began to experience the effects from the global financial
market and economic disruptions in late 2008, which resulted in
changes to our business strategy. In order to generate
liquidity, we identified certain real estate properties that we
no longer expected to hold for long-term investment. We
recognized impairment charges in 2009 and 2008 due to the change
in our intent and based on valuations of that real estate, which
had declined due to market conditions. The impairment charges
related to goodwill and other assets that we recognized in 2009
and 2008 were similarly caused by the decline in the real estate
markets. The decline in the real estate markets has also led to
lower profit margins on contributions and sales. The financial
market disruption also provided us the opportunity to repurchase
some of our debt at a discount, resulting in a net gain.
Our direct owned portfolio has decreased each year since 2007,
principally from the contributions of properties to the
unconsolidated property funds. This portfolio decrease impacts
our direct owned segment through the
decrease in net operating income. Occupancy levels also affect
net operating income for this segment. We have begun to see an
increase in leasing activity in 2009, after declines in 2008.
In February 2009, we sold our investment in the Japan funds,
which were included in the Investment Management segment, and
continued to manage the properties until July 2009. In
connection with the termination of the management agreement, we
earned a termination fee of $16.3 million. In 2008, we
recognized a loss of $108.2 million representing our share
of the loss recognized by PEPR upon the sale and impairment of
its ownership interests in ProLogis European Properties
Fund II (“PEPF II”). We also recognized our share
of realized and unrealized losses of $32.3 million related
to interest rate derivative contracts held by certain property
funds. In 2007, we recognized $38.2 million that
represented our proportionate share of a gain recognized by PEPR
from the sale of certain properties. Without these items in
2009, 2008 and 2007, net operating income from this segment in
2009 decreased $17.2 million from 2008 and increased
$32.4 million in 2008 compared to 2007.
As discussed earlier, we changed our business strategy in late
2008 and discontinued the CDFS business segment. In 2009, the
only transaction in this segment is the gain from the sale of
our investments in the Japan property funds in February 2009.
The decrease in net operating income from this segment in 2008
compared to 2007 is due to decreased contribution levels and
lower profit margins.
Direct
Owned Segment
The net operating income of the direct owned segment consists of
rental income and rental expenses from industrial and retail
properties that we own and land subject to ground leases. The
size and leased percentage of our direct owned operating
portfolio fluctuates due to the timing of development and
contributions and affects the net operating income we recognize
in this segment. Also included in this segment is land we own
and lease to customers under ground leases, development
management and other income and land holding and acquisition
costs. The net operating income from the direct owned segment,
excluding amounts presented as discontinued operations in our
Consolidated Financial Statements, was as follows (in thousands):
We had a direct owned operating portfolio at December 31,2009 and 2008, as follows (square feet in thousands):
2009
2008
Number of
Number of
Properties
Square Feet
Leased %
Properties
Square Feet
Leased %
Core industrial properties
1,025
141,019
90.1
%
1,157
154,947
92.2
%
Retail properties
27
1,014
91.5
%
34
1,404
94.5
%
Subtotal non-development properties
1,052
142,033
90.1
%
1,191
156,351
92.2
%
Completed development properties (1)
163
50,604
62.2
%
140
40,763
43.5
%
Total
1,215
192,637
82.8
%
1,331
197,114
82.1
%
(1)
Included at December 31, 2009 are 51 properties with
14.7 million square feet on which development was completed
in 2009. Included as of December 31, 2008 are 42 properties
with 9.0 million square feet that were contributed to PEPF
II during 2009 and therefore, are no longer in our portfolio as
of December 31, 2009. The leased percentage fluctuates
based on the composition of properties.
The decrease in rental income in 2009 from 2008, and in 2008
from 2007, is due to the decrease in the property portfolio,
which is a result of contributions of properties to the
unconsolidated property funds and decreases in rental rates on
turnovers, offset partially by increased occupancy in our
development properties;
and changes in rental recoveries. Under the terms of our lease
agreements, we are able to recover the majority of our rental
expenses from customers. Rental expense recoveries, included in
both rental income and expenses, were $194.8 million,
$210.9 million and $197.9 million for the years ended
December 31, 2009, 2008 and 2007 respectively. The decrease
from 2008 to 2009 is primarily due to the decrease in the
property portfolio. In addition to the decreased recoverable
expenses, property management costs and certain non-recoverable
costs have decreased as well. The non-recoverable costs in 2008
include a $6.0 million insurance adjustment due to a
tornado that struck certain properties owned by us and owned by
the property funds and insured by us through our insurance
company.
Investment
Management Segment
The net operating income of the investment management segment
consists of: (i) earnings or losses recognized under the
equity method from our investments in property funds and certain
joint ventures; (ii) fees and incentives earned for
services performed; and (iii) interest earned on advances;
offset by (iv) our direct costs of managing these entities
and the properties they own.
The net earnings or losses of the unconsolidated investees may
include the following income and expense items, in addition to
rental income and rental expenses: (i) interest income and
interest expense; (ii) depreciation and amortization
expenses; (iii) general and administrative expenses;
(iv) income tax expense; (v) foreign currency exchange
gains and losses; (vi) gains or losses on dispositions of
properties or investments; and (vii) impairment charges.
The fluctuations in income we recognize in any given period are
generally the result of: (i) variances in the income and
expense items of the unconsolidated investees; (ii) the
size of the portfolio and occupancy levels; (iii) changes
in our ownership interest; and (iv) fluctuations in foreign
currency exchange rates at which we translate our share of net
earnings to U.S. dollars, if applicable.
We report the 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 of $43.4 million,
$50.8 million and $33.9 million in 2009, 2008 and
2007, respectively. These costs include the direct expenses
associated with the asset management of the property funds
provided individuals who are assigned to our investment
management segment. In addition, in order to achieve
efficiencies and economies of scale, all of our property
management functions are provided by a team of professionals who
are assigned to our direct owned segment. These individuals
perform the property-level management of the properties we own
and the properties we manage that are owned by the
unconsolidated investees. We allocate the costs of our property
management function to the properties we own (reported in Rental
Expenses) and the properties owned by the unconsolidated
investees (included in Investment Management Expenses), by using
the square feet owned at the beginning of the period by the
respective portfolios. The increases in 2008 were due to the
increased size of our investment management portfolio, while the
decrease in 2009 was due to the sale of our Japan investments.
See Note 6 to our Consolidated Financial Statements in
Item 8 for additional information on our unconsolidated
investees.
The net operating income from the investment management segment
for the years ended December 31 was as follows (in thousands):
2009
2008
2007
Unconsolidated property funds:
North America (1)
$
29,996
$
40,982
$
50,140
Europe (2)
67,651
(60,488
)
90,617
Asia (3)
6,188
30,640
24,467
Other (4)
18,859
4,546
(3,221
)
Total net operating income - investment management
segment
Represents the income earned by us from our investments in 12
property funds in North America. Our ownership interests ranged
from 20% to 50% at December 31, 2009. These property funds
on a combined basis owned 847, 854 and 777 properties that were
91.9%, 94.7% and 96.1% leased at December 31, 2009, 2008
and 2007, respectively. The fluctuation in properties is
primarily due to contributions we made to two of the funds
(North American Industrial Fund and Mexico Industrial Fund) in
2007 and 2008, offset by the sale of properties to third parties
by certain funds in 2009.
Included in 2009 are $15.8 million of expenses that
represent our share of deferred tax expense recognized by the
Mexico Industrial Fund and $6.3 million of losses that
represents our share of realized and unrealized losses that were
recognized by certain of the property funds related to
derivative contracts that no longer met the requirements for
hedge accounting. These expenses are offset by $7.2 million
that represents our share of the gain from the early
extinguishment of debt by the North American Industrial Fund.
Included in 2008 are $28.2 million of losses that relate to
the change in value and settlement of derivative contracts.
(2)
Represents the income earned by us from our investments in two
property funds in Europe, PEPR and PEPF II. On a combined basis,
these funds owned 428, 399 and 288 properties that were 96.3%,
97.6% and 97.7% leased at December 31, 2009, 2008 and 2007,
respectively. The increase in properties for all three years is
due primarily to contributions we made to PEPF II, offset
somewhat by the sale of properties by PEPR to third parties.
Our common ownership interest in PEPR and PEPF II was 24.8% and
32.1%, respectively, at December 31, 2009. At
December 31, 2008, our ownership interest in PEPR was 24.9%
and our ownership interest in PEPF II included our direct
ownership interest of 34.3% and our indirect 2.6% interest
through our ownership in PEPR.
Included in 2008 are $108.2 million of losses representing
our share of losses recognized by PEPR on the sale of its 20%
investment in PEPF II to us and an impairment charge related to
the sale of its remaining 10% interest. In February 2009, PEPR
sold its 10% interest to a third party, which decreased our
ownership interest in PEPF II to 34.3%.
(3)
Represents the income earned by us from our 20% ownership
interest in one property fund in South Korea and two property
funds in Japan through February 2009, at which time we sold our
investments in Japan. These property funds on a combined basis
owned 12, 83 and 66 properties that were 97.8%, 99.6% and 99.3%
leased at December 31, 2009, 2008 and 2007.
(4)
Includes property management fees from joint ventures and other
entities offset by investment management expenses. 2009 includes
fees earned from the Japan property funds after February 2009
through July 2009 and, in connection with the termination of the
property management agreement for these properties, we earned a
termination fee of $16.3 million.
CDFS
Business Segment
Net operating income of the CDFS business segment for 2009, 2008
and 2007 was $180.2 million, $654.7 million and
$763.7 million, respectively. As previously discussed, our
business strategy no longer includes the CDFS business segment.
The amount in 2009 is the gain from the sale of our investments
in the Japan property funds in February 2009, while the amounts
in 2008 and 2007 consisted of gains recognized principally from
the contributions of 180 properties and 262 properties,
respectively, to the property funds.
Operational
Outlook
During 2009, industrial property fundamentals continued to
mirror the global economic weakness. We are experiencing a very
challenging leasing environment throughout the majority of our
markets with increased leasing costs and lower rental rates due
to the competitive markets. Partially offsetting the impact of
these market trends on our business is our continued strong
customer retention.
However, during the third quarter of 2009 and into the fourth
quarter, the global market fundamentals began to show signs of
stability. Globally, industrial demand is still soft, but we are
seeing signs of increased customer activity. Market occupancy
declines are slowing globally and leasing activity has
increased. Market rents remain lower than a year ago and we
expect this to remain the case in the near future. However, we
believe this situation will reverse itself when market
occupancies trend upward.
The industry as a whole has had sharply reduced levels of new
supply. We expect demand in the U.S. to improve as Gross
Domestic Product (“GDP”) growth returns. We believe
significant obsolescence and ownership shifts in Europe and Asia
will continue to drive demand in those regions.
In our total operating portfolio, including properties managed
by us and owned by our unconsolidated investees that are
accounted for under the equity method, we leased
108.1 million square feet, 121.5 million square feet,
and 108.6 million square feet of space during 2009, 2008
and 2007, respectively. The total operating portfolio was 89.2%
leased at December 31, 2009, as compared to 88.4% leased at
December 31, 2008.
In our direct owned portfolio, we leased 57.9 million
square feet, including 21.1 million square feet of leases
in our development portfolio (both completed properties and
those under development) in 2009. Repeat business with our
global customers is important to our long-term growth. During
2009, 57.4% of the space leased in our newly developed
properties was with repeat customers. Although leasing activity
was slower on expiring leases during 2009, existing customers
renewed their leases 75.1% of the time in 2009 as compared with
79.3% in 2008. As of December 31, 2009, our total direct
owned operating portfolio of industrial and retail properties
was 82.8% leased, as compared with 82.1% at December 31,2008. Excluding the development portfolio, our direct owned
operating portfolio was 90.1% leased at December 31, 2009,
as compared to 92.2% leased at December 31, 2008.
As we previously disclosed, we have significantly reduced our
development activity. During 2009, we started development of
seven properties totaling 2.3 million square feet that were
all 100% leased prior to the commencement of development. We are
receiving an increase in requests for
build-to-suit
(pre-leased) proposals. In an effort to monetize our land
holdings, we have begun to take advantage of opportunities to
develop principally pre-leased buildings on our land, including
opportunities to use development capital or take out commitments
from one of our partners or customers. We will continue to
evaluate future opportunities for such developments directly and
within unconsolidated investees.
In addition during 2009, we completed the development of 67
buildings aggregating 19.1 million square feet that were
66.9% leased at December 31, 2009, contributed 43
development properties to PEPF II aggregating 9.2 million
square feet that were 97.6% leased, and sold 2 development
properties to a third party. As of December 31, 2009, our
development portfolio consisted of 163 completed properties that
were 62.2% leased and 5 properties under development that were
100% leased, resulting in the development portfolio being 64.3%
leased at December 31, 2009, as compared to 41.4% leased at
December 31, 2008. As of December 31, 2009, we expect
to incur an additional $307.8 million of development and
leasing costs related to our development portfolio.
General and Administrative Expenses (“G&A”)
— and — Reduction in Workforce
(“RIF”)
Net G&A expenses for the years ended December 31,
consisted of the following (in thousands):
2009
2008
2007
Gross G&A
$
294,598
$
400,648
$
359,792
Reclassed to discontinued operations, net of capitalized amounts
(1,305
)
(21,721
)
(11,354
)
Reported as rental expenses
(19,446
)
(25,306
)
(27,460
)
Reported as investment management expenses
(43,416
)
(50,761
)
(33,948
)
Capitalized amounts
(49,945
)
(125,510
)
(116,632
)
Reported as net G&A
$
180,486
$
177,350
$
170,398
In response to the difficult economic environment, in late 2008
we implemented G&A cost cutting initiatives with a
near-term target of a 20% to 25% reduction in G&A, prior to
capitalization or allocations for 2009. These initiatives
included a RIF program and reductions to other expenses through
various cost saving measures.
Due to the changes in our business strategy in the fourth
quarter of 2008, we significantly reduced our new development
activities, which, along with lower gross G&A, resulted in
lower capitalized G&A in 2009.
We recognized $2.0 million in 2009 and $5.0 million in
2007 of expense related to a contribution to our charitable
foundation.
Impairment of Real Estate Properties
During 2009, 2008 and 2007, we recognized impairment charges of
real estate properties of $331.6 million,
$274.7 million and $12.6 million, respectively. During
2009 and 2008, as a result of significant adverse changes in
market conditions, we reviewed our assets for potential
impairment under the appropriate accounting literature. We
considered current market conditions, as well as our intent with
regard to owning or disposing of the asset, and recognized
impairments of certain operating buildings, land and
predevelopment costs, all included in our direct owned segment.
In 2007, the impairment charge related to a portfolio of
buildings we had decided to sell. See Note 14 to our
Consolidated Financial Statements in Item 8 for more
information.
Depreciation and Amortization
Depreciation and amortization expenses were $315.8 million,
$317.3 million, and $286.3 million in 2009, 2008, and
2007, respectively. The increase in 2008 over 2007 is due
primarily to an adjustment in depreciation expense and a higher
level of amortization expense related to leasing commissions and
other leasing costs. As of September 30, 2008, we had
classified a group of properties that we had developed or
acquired with the intent to contribute to a property fund or
sell to a third party. Our policy was to not depreciate these
properties during the period from completion until contribution,
provided they met certain criteria. With the changes in our
business segments and the uncertainty as to when, or if, these
properties will be contributed, in the fourth quarter of 2008,
we recorded an adjustment of $30.9 million to depreciate
these buildings through December 31, 2008 based on our
depreciation policy for buildings we expect to hold for
long-term investment.
Interest expense for the years ended December 31, includes
the following components (in thousands):
2009
2008
2007
Interest expense
$
382,899
$
477,933
$
487,410
Amortization of discount, net
67,542
63,676
15,952
Amortization of deferred loan costs
17,069
12,238
10,362
Interest expense before capitalization
467,510
553,847
513,724
Capitalized amounts
(94,205
)
(168,782
)
(123,880
)
Net interest expense
$
373,305
$
385,065
$
389,844
As previously discussed, on January 1, 2009, we adopted a
new accounting standard that required separate accounting for
the debt and equity components of certain convertible debt. As a
result, we restated 2008 and 2007 amounts 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 we
contributed during the applicable periods.
The decrease in interest expense in 2009 over 2008 is due to
significantly lower debt levels, offset by higher average
borrowing rates and lower capitalization due to less development
activity in 2009. Our future interest expense, both gross and
the portion capitalized, will vary depending on, among other
things, the level of our development activities.
Impairment of Goodwill and Other Assets
We performed our annual impairment review of the goodwill
allocated to the direct owned segment in North America and the
investment management segment in Europe during the fourth
quarter of 2009 and no impairment was indicated. We own a
substantial portfolio of operating real estate properties within
our direct owned segment in North America and the carrying value
of this segment, including goodwill, was significantly lower
than the estimated net asset value. The fair value of the
investment management segment in Europe was also significantly
in excess of the carrying value, including goodwill. Within our
investment management segment, we include our investments in
property funds, as well as the fee income that is generated from
the management of the property funds and the properties they own.
During the fourth quarter of 2009 we also performed our annual
impairment review of the goodwill allocated to the direct owned
segment in Europe. First, we estimated the fair value of this
segment using a combination of net asset value analyses,
discounted cash flows and market based valuation methodologies.
The carrying value of this segment, including goodwill, was in
excess of the estimated fair value so in accordance with our
accounting policy we performed further analysis. As part of this
analysis the estimated fair value of the segment was allocated
to all of the identifiable assets and liabilities, with any
residual value being the implied fair value of goodwill. As the
implied fair value of the goodwill was in excess of the carrying
value of the goodwill, we concluded that goodwill was
recoverable and that no impairment was necessary.
In connection with our review of goodwill in 2008, which was
triggered by the significant decrease in our common stock price
and the decline in fair value of certain of our real estate
properties, specifically investments in land in the United
Kingdom, we recognized an impairment charge of
$175.4 million related to goodwill allocated to the direct
owned segment in the Europe reporting unit. This goodwill
related to an acquisition made in 2007.
In 2009 and 2008, we recorded impairment charges of
$163.6 million and $145.2 million, respectively, on
certain of our investments in and advances to unconsolidated
investees, notes receivable and other assets, as we did not
believe these amounts to be recoverable based on the present
value of the estimated future cash flows associated with these
assets.
See Notes 6 and 14 to our Consolidated Financial Statements
in Item 8 for further information on the impairment of our
investments in and advances to unconsolidated investees,
goodwill and other assets.
Other Income (Expense), Net
We recognized other expense not allocated to a segment of
$39.8 million in 2009 and income of $16.0 million and
$31.7 million in 2008 and 2007, respectively. The primary
components in 2009 were adjustments of $20.3 million to
accruals we had related to rent indemnifications we had made to
certain property funds due to changes in leasing and other
assumptions and settlement costs of $13.0 million related
to an obligation we assumed in the 2005 acquisition of Catellus.
The income in 2008 and 2007 was primarily interest income.
Net Gains on Dispositions of Real Estate Properties
During 2009, we recognized net gains of $35.3 million
related to the contribution of properties ($13.0 million),
the recognition of previously deferred gains from PEPR and
ProLogis Korea Fund on properties they sold to third parties
($9.9 million), the sale of land parcels
($6.4 million), and a gain on settlement of an obligation
to our fund partner in connection with the restructure of the
North American Industrial Fund II ($6.0 million). The
contribution activity resulted in total cash proceeds of
$643.7 million and included 43 properties aggregating
9.2 million square feet to PEPF II.
In 2008 and 2007, we recognized gains of $11.7 million and
$146.7 million on the contribution of 2 properties and 77
properties, respectively, from our direct owned segment
(non-CDFS properties) to certain of the unconsolidated property
funds. If we realize a gain on contribution of a property, we
recognize the portion attributable to the third party ownership
in the property fund. If we realize a loss on contribution, we
recognize the full amount of the impairment as soon as it is
known. Due to our continuing involvement through our ownership
in the property fund, these dispositions are not included in
discontinued operations.
As discussed earlier, in 2008 and 2007, contribution activity of
CDFS/development properties and land was reported as CDFS
Proceeds and Cost of CDFS Dispositions within our CDFS business
segment.
Foreign Currency Exchange Gains (Losses), Net
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 mitigate our foreign currency exchange exposure,
we borrow in the functional currency of the borrowing entity
when appropriate. Certain of our intercompany debt is remeasured
with the resulting adjustment recognized as a cumulative
translation adjustment in Other Comprehensive Income (Loss).
This treatment is applicable to intercompany debt that is deemed
to be long-term in nature. If the intercompany debt is deemed
short-term in nature, when the debt is remeasured, we recognize
a gain or loss in earnings.
We recognized net foreign currency exchange gains of
$35.6 million in 2009, losses of $148.3 million in
2008, and gains of $8.1 million in 2007. Predominantly, the
gains or losses recognized in earnings relate to intercompany
loans between the U.S. parent and our consolidated
subsidiaries in Japan and Europe due to the fluctuations in the
exchange rates of U.S. dollars to the yen, euro and British
pound sterling.
Additionally, we may utilize derivative financial instruments to
manage certain foreign currency exchange risks. During 2009, we
entered into and settled forward contracts to buy yen to manage
the foreign currency fluctuations related to the sale of our
investments in the Japan property funds and recognized losses of
$5.7 million. During the year ended December 31, 2008,
we recognized net losses of $3.1 million associated with
forward contracts on certain intercompany loans. Included in our
2007 foreign currency exchange gains was $26.6 million from
the settlement of several foreign currency forward contracts we
purchased to manage the foreign currency fluctuations of an
acquisition price, which was denominated in Australian dollars.
See Note 18 to our Consolidated Financial Statements in
Item 8 for more information on our derivative financial
instruments.
During late 2008 and all of 2009, in connection with our
announced initiatives discussed earlier, we purchased portions
of several series of notes outstanding at a discount and
extinguished some secured mortgage debt prior to maturity, which
resulted in the recognition of gains of $172.3 million in
2009 and $90.7 million in 2008. The gain represents the
difference between the recorded debt, including related debt
issuance costs, premiums and discounts, and the consideration we
paid to retire the debt. See Note 9 to our Consolidated
Financial Statements in Item 8 for more information.
Income Tax Expense
During 2009, 2008 and 2007, our current income tax expense was
$29.3 million, $63.4 million and $66.3 million,
respectively. We recognize current income tax expense for income
taxes incurred by our taxable REIT subsidiaries and in certain
foreign jurisdictions, as well as certain state taxes. We also
include in current income tax expense the interest accrual
associated with our unrecognized tax benefit liabilities. Our
current income tax expense fluctuates from period to period
based primarily on the timing of our taxable income and changes
in tax and interest rates. In the first quarter of 2009, in
connection with the sale of our investments in the Japan
property funds, we recognized current tax expense of
$20.5 million.
Certain 1999 through 2005 federal and state income tax returns
of Catellus have been under audit by the Internal Revenue
Service (“IRS”) and various state taxing authorities.
In November 2008, we agreed to enter into a closing agreement
with the IRS for the settlement of the 1999 through 2002 audits.
As a result, in 2008, we increased our unrecognized tax
liability by $85.4 million, including interest and
penalties. As this liability was an income tax uncertainty
related to an acquired company, we increased goodwill by
$66.9 million related to the liability that existed at the
acquisition date. The remaining amount is included in current
income tax expense in 2008. We made cash payments of
$226.6 million in 2009 in connection with this closing
agreement and settlement of certain state tax audits.
In 2009, we recognized a deferred tax benefit of
$23.3 million, and in 2008 and 2007, we recognized deferred
tax expense of $4.6 million and $0.5 million,
respectively. Deferred income tax expense 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 certain of our taxable subsidiaries operating in the
U.S. or in foreign jurisdictions. Deferred income tax
liabilities also relate to indemnification agreements for
contributions to certain property funds.
Our income taxes and the current tax indemnification agreements
are discussed in more detail in Note 15 to our Consolidated
Financial Statements in Item 8.
Discontinued Operations
Discontinued operations represent a component of an entity that
has either been disposed of or is classified as held for sale if
both the operations and cash flows of the component have been or
will be eliminated from ongoing operations of the entity as a
result of the disposal transaction and the entity will not have
any significant continuing involvement in the operations of the
component after the disposal transaction. The results of
operations of the component of the entity that has been
classified as discontinued operations are reported separately in
our consolidated financial statements.
In February 2009, we sold our operations in China. Accordingly,
we classified our China operations as held for sale at
December 31, 2008 and included the results in discontinued
operations for all periods presented in our Consolidated
Statements of Operations. Based on the carrying values of the
assets and liabilities to be sold as compared with the estimated
sales proceeds, less costs to sell, we recognized an impairment
charge of $198.2 million in 2008, which is included in
discontinued operations. See additional information on the China
sale in Note 3 to our Consolidated Financial Statements in
Item 8. In addition to our China operations, we had one and
two properties classified as held for sale as of
December 31, 2008 and 2007 and the results of these
properties are also included in discontinued operations.
During 2009, 2008 and 2007, in addition to our China operations,
we disposed of land subject to ground leases and 140, 15 and 80
properties, respectively, to third parties. These properties met
the requirements to be classified as discontinued operations.
Therefore, the results of operations for these properties, as
well as the gain recognized upon disposition, are included in
discontinued operations.
Other Comprehensive Income (Loss) — Foreign Currency
Translation Gains (Losses), Net
For our consolidated subsidiaries whose functional currency is
not the U.S. dollar, we translate their financial
statements into U.S. dollars at the time we consolidate
those subsidiaries’ financial statements. Generally, assets
and liabilities are translated at the exchange rate in effect as
of the balance sheet date. The resulting translation
adjustments, due to the fluctuations in exchange rates from the
beginning of the period to the end of the period, are included
in Other Comprehensive Income (Loss).
During 2009, we recognized net gains in Other Comprehensive
Income (Loss) of $59.9 million. This includes
$209.2 million in gains related to foreign currency
translations of our international business units into
U.S. dollars upon consolidation, mainly as a result of the
strengthening of the British pound sterling to the
U.S. dollar offset partially by the strengthening of the
U.S. dollar to the euro and yen, from the beginning of the
year to December 31, 2009. These gains were offset by a
decrease in other comprehensive income of $149.3 million,
as a result of the sale of our China operations and our
investments in the Japan property funds in February 2009, and
represents the gains previously included as currency translation
adjustments. During 2008, we recognized $279.6 million of
net losses due to the strengthening of the U.S dollar to the
euro and British pound sterling, offset partially by the
strengthening of the yen to the U.S. dollar. During 2007,
we recognized net gains of $90.0 million due primarily to
the strengthening of the euro and British pound sterling to the
U.S. dollar.
Our total operating portfolio of properties includes industrial
and retail properties owned by us and industrial properties
owned by the property funds and joint ventures we manage and
account for on the equity method. The operating portfolio does
not include properties under development, properties held for
sale or any other properties owned by unconsolidated investees,
and was as follows (square feet in thousands):
We evaluate the performance of the operating properties we own
and manage using a “same store” analysis because the
population of properties in this analysis is consistent from
period to period, thereby eliminating the effects of changes in
the composition of the portfolio on performance measures. We
include properties owned by us, and properties owned by the
unconsolidated investees (accounted for on the equity method)
that are managed by us (referred to as “unconsolidated
investees”), in our same store analysis. We have defined
the same store portfolio for the three months ended
December 31, 2009 as those properties that were in
operation at October 1, 2008 and have been in operation
throughout the three-month periods in both 2009 and 2008,
including completed development properties. We have removed all
properties that were disposed of to a third party or were
classified as held for sale from the population for both
periods. We believe the factors that impact rental income,
rental expenses and net operating income in the same store
portfolio are generally the same as for the total 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, to derive the same store results. The same store
portfolio, for the three months ended December 31, 2009,
included 2,402 properties that aggregated 436.2 million
square feet.
The following is a reconciliation of our consolidated rental
income, rental expenses and net operating income (calculated as
rental income less rental expenses), for the full year as
included in our Consolidated Statements of Operations in
Item 8, to the respective amounts in our same store
portfolio analysis for the fourth quarter.
Three Months Ended
March 31,
June 30,
September 30,
December 31,
Full Year
2009
Rental income
$
216,662
$
225,455
$
221,616
$
227,362
$
891,095
Rental expenses
66,974
69,154
68,233
65,595
269,956
Net operating income
$
149,688
$
156,301
$
153,383
$
161,767
$
621,139
2008
Rental income
$
241,663
$
234,689
$
222,102
$
215,196
$
913,650
Rental expenses
77,639
72,014
67,343
60,324
277,320
Net operating income
$
164,024
$
162,675
$
154,759
$
154,872
$
636,330
For the Three Months Ended
December 31,
Percentage
2009
2008
Change
Rental Income (1)(2)
Consolidated:
Rental income per our Consolidated Statements of Operations
(see above)
$
227,362
$
215,196
Adjustments to derive same store results:
Rental income of properties not in the same store
portfolio — properties developed and acquired during
the period and land subject to ground leases
(31,703
)
(15,144
)
Effect of changes in foreign currency exchange rates and other
(1,803
)
2,869
Unconsolidated investees :
Rental income of properties managed by us and owned by our
unconsolidated investees
395,410
386,907
Same store portfolio — rental income (2)(3)
589,266
589,828
(0.10
)%
Less completed development properties (4)
(49,644
)
(35,425
)
Adjusted same store portfolio — rental income (2)(3)(4)
$
539,622
$
554,403
(2.67
)%
Rental Expenses (1)(5)
Consolidated:
Rental expenses per our Consolidated Statements of Operations
(see above)
$
65,595
$
60,324
Adjustments to derive same store results:
Rental expenses of properties not in the same store
portfolio — properties developed and acquired during
the period and land subject to ground leases
(15,220
)
(7,959
)
Effect of changes in foreign currency exchange rates and other
5,596
4,773
Unconsolidated investees :
Rental expenses of properties managed by us and owned by our
unconsolidated investees
94,727
84,659
Same store portfolio — rental expenses (3)(5)
150,698
141,797
6.28
%
Less completed development properties (4)
(19,325
)
(13,320
)
Adjusted same store portfolio — rental expenses
(3)(4)(5)
Net operating income per our Consolidated Statements of
Operations (see above)
$
161,767
$
154,872
Adjustments to derive same store results:
Net operating income of properties not in the same store
portfolio — properties developed and acquired during
the period and land subject to ground leases
(16,483
)
(7,185
)
Effect of changes in foreign currency exchange rates and other
(7,399
)
(1,904
)
Unconsolidated investees :
Net operating income of properties managed by us and owned by
our unconsolidated investees
300,683
302,248
Same store portfolio — net operating income (3)
438,568
448,031
(2.11
)%
Less completed development properties (4)
(30,319
)
(22,105
)
Adjusted same store portfolio — rental expenses (3)(4)
$
408,249
$
425,926
(4.15
)%
(1)
As discussed above, our same store portfolio aggregates
industrial and retail properties from our consolidated portfolio
and industrial properties owned by the unconsolidated investees
(accounted for on the equity method) that are managed by us.
During the periods presented, certain properties owned by us
were contributed to a property fund and are included in the same
store portfolio on an aggregate basis. Neither our consolidated
results nor that of the unconsolidated investees, when viewed
individually, would be comparable on a same store basis due to
the changes in composition of the respective portfolios from
period to period (for example, the results of a contributed
property would be included in our consolidated results through
the contribution date and in the results of the unconsolidated
investee subsequent to the contribution date).
(2)
Rental income in the same store portfolio includes straight-line
rents and rental recoveries, as well as base rent. We exclude
the net termination and renegotiation fees from our same store
rental income 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. 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
recognized due to the adjustment to straight-line rents over the
lease term. The adjustments to remove these items are included
as “effect of changes in foreign currency exchange rates
and other” in the tables above.
(3)
These amounts include rental income, rental expenses and net
operating income of both our consolidated industrial and retail
properties and those industrial properties owned by our
unconsolidated investees (accounted for on the equity method)
and managed by us.
(4)
The same store portfolio results include the benefit of leasing
in certain of our completed development properties that meet our
definition. We have also presented the results for the adjusted
same store portfolio, for core properties only, by excluding the
156 completed development properties in operation that we owned
as of October 1, 2008 and that are still included in the
same store portfolio (either owned by us or our unconsolidated
investees that we manage).
(5)
Rental expenses in the same store portfolio include the direct
operating expenses of the property such as property taxes,
insurance, utilities, etc. In addition, we include an allocation
of the property management expenses for our direct-owned
properties based on the property management fee that is provided
for in the individual management agreements under which our
wholly owned management companies provides property management
services to each property (generally, the fee is based on a
percentage of revenues). On consolidation, the management fee
income earned by the management company and the management fee
expense recognized by the properties 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 the above
table.
We consider our ability to generate cash from operating
activities, contributions and dispositions of properties and
from available financing sources to be adequate to meet our
anticipated future development, acquisition, operating, debt
service and shareholder distribution requirements.
As discussed earlier, our focus in 2009 placed significant
emphasis on liquidity. During the fourth quarter of 2008, we set
a goal to simplify our debt structure and reduce our total debt
by at least $2.0 billion by December 31, 2009. As of
December 31, 2009, we have exceeded this goal and reduced
debt since December 31, 2008 by $2.7 billion through
the following actions:
• generated cash through contributions of
properties to the unconsolidated property funds or sales of
assets to third parties;
— During 2009, we received $1.3 billion in proceeds from
the sale of our China operations and investments in the Japan
property funds. In addition, we generated $1.5 billion in
proceeds during 2009 from the contributions of properties to the
property funds and sales of land and properties to third parties.
• repurchased our senior notes and
convertible notes at a discount and extinguished certain secured
mortgage debt prior to maturity;
— We purchased $1.2 billion notional amount of portions of
several series of senior and other notes and extinguished $227.0
million of secured mortgage debt during 2009. This resulted in
the reduction of $242.1 million in debt and a gain of $172.3
million in 2009.
• recasted our Global Line and simplified
our debt structure;
— In August 2009, we amended and extended our Global Line,
and in October 2009 we amended the financial covenants of our
senior notes --both discussed below.
• issued equity;
— In April 2009, we completed the Equity Offering that
resulted in net proceeds to us of $1.1 billion. During 2009, we
generated net proceeds of $325.1 million through the issuance of
29.8 million common shares under our at-the-market equity
issuance program.
• reduced cash needs;
— We halted early-stage infrastructure on development
projects and implemented G&A cost savings initiatives and a
RIF program with a target to reduce gross G&A in 2009 by
20% to 25%. Our gross G&A in 2009 was 26.5% lower than 2008.
• and lowered our common share
distribution.
— We reduced our annual distributions on our common shares
in 2009 from $542.8 million to $271.8 million.
During 2009, we focused on staggering and extending our debt
maturities through the following activities:
•
We issued $350.0 million of 7.625% senior notes due
August 2014, at 99.489% of par, for an
all-in-rate
of 7.75%.
•
We issued $600.0 million of 7.375% senior notes due
October 2019, at 99.728% of par value for an
all-in-rate
of 7.414%.
•
We closed on $499.9 million in secured mortgage debt, which
includes $101.8 million at 6.5% due July 2014,
$245.5 million at 7.55% due July 2019,
¥4.3 billion of 4.09% TMK bonds ($44.4 million)
that matures in June 2012, and ¥10.0 billion of 2.74%
TMK bonds ($108.2 million) that matures in December 2012.
Both TMK bonds have variable interest rates, but were fixed
using derivative swap contracts. TMK bonds are a financing
vehicle in Japan for special purpose companies known as TMKs.
The proceeds from the issuance of the senior notes and secured
mortgage debt were used to repay borrowings on our credit
facilities or other debt. See Note 9 to our Consolidated
Financial Statements in Item 8 for further information.
Credit
Facilities
Information related to our Global Line as of December 31,2009 (dollars in millions):
Borrowing base
$
3,907.7
Borrowing capacity (1)
$
2,149.2
Less:
Borrowings outstanding
736.6
Outstanding letters of credit
99.3
Debt due within one year
232.9
Current availability
$
1,080.4
(1)
Borrowing capacity represents 55% of the borrowing base related
to the Global Line.
In August 2009, we amended our Global Line to, among other
things, extend the maturity to August 21, 2012 and reduce
the size of the aggregate commitments to $2.25 billion,
after October 2010, from the current level of $3.7 billion
(in each case subject to currency fluctuations). The Global Line
includes covenants that may limit the amount of indebtedness
that we and our subsidiaries can incur to an amount that may be
less than the aggregate lender commitments under the Global
Line, depending on the timing and use of proceeds of the
borrowings. The borrowing base covenant in the Global Line
limits the aggregate amount of indebtedness (including
obligations under the Global Line and other recourse
indebtedness maturing within one year) to no more than 55% of
the value (determined by a formula as of the end of each fiscal
quarter) of our unencumbered property pool, as defined in the
Global Line.
Our current availability to borrow under the Global Line is
calculated as the lesser of (i) the aggregate lender
commitments and (ii) the borrowing capacity, in each case
reduced by the outstanding borrowings, letters of credit and
recourse debt due within one year; resulting in current
availability of $1.1 billion at December 31, 2009.
Therefore, the amount of funds that we may borrow under the
Global Line will vary from time to time based upon the
outstanding amount of such specified indebtedness and the
quarterly formulaic valuation of our unencumbered property pool.
Our current availability to borrow would remain
$1.1 billion at December 31, 2009, even if the
aggregate lender commitments were reduced to $2.25 billion.
We may draw funds from a syndicate of banks in
U.S. dollars, euros, Japanese yen, British pound sterling
and Canadian dollars, and until October 2010, South Korean won.
Lenders who did not participate in the amended and extended
facility will be subject to the
pre-amendment
pricing structure through October 2010, while the new pricing
structure is effective immediately to extending lenders. Based
on our public debt ratings and a pricing grid, interest on the
borrowings under the Global Line accrues at a variable rate
based upon the
interbank offered rate in each respective jurisdiction in which
the borrowings are outstanding and we pay utilization fees that
are calculated on the outstanding balance. The interest and
utilization fees result in a weighted average borrowing rate of
2.27% per annum at December 31, 2009 using local currency
rates.
In connection with the amendment of the Global Line, we repaid
the balance outstanding and terminated our existing
multi-currency credit facility, which was scheduled to mature in
October, 2009, with borrowings under the Global Line. We have a
9.7 million British pound sterling facility, which matures
December 31, 2010 and is equal to the outstanding letters
of credit under the facility.
Near-Term
Principal Cash Sources and Uses
In addition to common share distributions and preferred share
dividend requirements, we expect our primary short and long-term
cash needs will consist of the following:
•
completion of the development and leasing of the properties in
our development portfolio (a);
•
selective development of new operating properties, that are
generally pre-leased, for long-term investment utilizing our
existing land;
•
repayment of debt, including payments on our credit facilities
or opportunistic repurchases of convertible, senior or other
notes;
•
scheduled principal payments in 2010 of $232.9 million;
•
capital expenditures and leasing costs on properties;
•
investments in current or future unconsolidated property funds,
including the purchase of additional common units in PEPR (at
this time, we do not intend to increase our equity ownership of
PEPR beyond 33.33 percent) and our expected remaining
capital commitments of $280.0 million (b); and
•
depending on market conditions, direct acquisition of operating
properties
and/or
portfolios of operating properties in key distribution markets
for direct, long-term investment.
(a) As of December 31, 2009, we had 5
properties under development with a current investment of
$192.0 million and a total expected investment of
$295.7 million when completed and leased, with
$103.7 million remaining to be spent. We also had 163
completed development properties with a current investment of
$4.1 billion and a total expected investment of
$4.3 billion when leased, with $204.1 million
remaining to be spent.
(b) We may fulfill our equity commitment with
properties we contribute to the property funds or cash,
depending on the property fund as discussed below. However, to
the extent a property fund acquires properties from a third
party or requires cash to retire debt or has other cash needs,
we may be required or agree to contribute our proportionate
share of the equity component in cash to the property fund.
During the year ended December 31, 2009, we used cash for
investments in or advances to our unconsolidated investees of
approximately $401.4 million, as discussed below.
We expect to fund cash needs for 2010 and future years primarily
with cash from the following sources, all subject to market
conditions:
cash proceeds from the contributions of properties to property
funds;
•
borrowing capacity under existing credit facilities
($1.1 billion available as of December 31, 2009),
other future facilities or borrowing arrangements;
•
proceeds from the issuance of equity securities, including sales
under our
at-the-market
equity issuance program, under which we have 10.2 million
common shares remaining; and
•
proceeds from the issuance of debt securities, including secured
mortgage debt.
We may seek to retire or purchase our outstanding debt or equity
securities through cash purchases, in open market purchases,
privately negotiated transactions or otherwise. Such repurchases
or exchanges, if any, will depend on prevailing market
conditions, our liquidity requirements, contractual restrictions
and other factors. The amounts involved may be material. We have
approximately $84.1 million remaining on authorization to
repurchase common shares that was approved by our Board in 2001.
We have not repurchased our common shares since 2003.
Debt
Covenants
On October 1, 2009, we completed a consent solicitation
with regard to our senior notes, other than our convertible
notes, to amend certain covenants and events of default
contained in the indenture governing the notes and to provide
that all series of the senior notes issued under the indenture,
other than convertible notes, will have the same financial
covenants and events of default. Due to the terms of the
convertible notes, they are not subject to financial covenants.
We are also subject to covenants under our Global Line. The
financial covenants include leverage ratios, fixed charge and
debt service coverage ratios, investments and indebtedness to
total asset value ratios, minimum consolidated net worth and
restrictions on distributions, redemptions and borrowing
limitations.
The most restrictive covenants relate to the total leverage
ratio, the fixed charge coverage ratio and the borrowing
limitations. All covenants are calculated based on the
definitions and calculations included in the respective debt
agreements.
As of December 31, 2009, we were in compliance with all of
our debt covenants.
Equity
Commitments Related to Certain Property Funds
Certain property funds have equity commitments from us and our
fund partners. We may fulfill our equity commitment through
contributions of properties or cash or we may not be required to
fulfill them before expiration. Our fund partners fulfill their
equity commitment with cash. We are committed to offer to
contribute substantially all of the properties that we develop
and stabilize in Europe and Mexico to these respective funds.
These property funds are committed to acquire such properties,
subject to certain exceptions, including that the properties
meet certain specified leasing and other criteria, and that the
property funds have available capital. We are not obligated to
contribute properties at a loss. Depending on market conditions,
our liquidity needs and other factors, we may make contributions
of properties to these property funds through the remaining
commitment period in 2010.
During 2009, the ProLogis North American Industrial Fund called
capital to repay borrowings outstanding under its credit
facility and to repay certain secured mortgage debt, which
resulted in a gain on early extinguishment of
$31.1 million. In February 2010, the property fund called
$23.2 million of capital, including $0.8 million in
cash from ProLogis, to acquire one property from us. The
remaining equity commitments expire at the end of February 2010.
(2)
ProLogis Mexico Industrial Fund may use the remaining equity
commitments to pay down existing debt or other liabilities,
including amounts due to us, or to make acquisitions of
properties from us or third parties depending on market
conditions and other factors.
(3)
PEPF II’s equity commitments are denominated in euro. The
ProLogis commitments include a commitment on the Series B
units we acquired from PEPR in December 2008 that we are
required to fund with cash. During 2009, we contributed 43
properties to PEPF II for gross proceeds of $643.7 million
that were financed by PEPF II with all equity, including our
co-investment of $152.7 million in cash under this
commitment. We did not make any contributions in 2009 under the
Series A commitment. We are not required to fund the
remaining Series A commitment in cash and we anticipate it
will expire unused.
(4)
Excludes commitments related to the ProLogis Korea Fund as the
agreements were amended and there are no longer any remaining
commitments.
Generally, the properties are contributed based on third-party
appraised value, other than PEPF II in 2009. For contributions
we made in 2009 to PEPF II, the capitalization rate was
determined based on a third party appraisal then a margin of
0.25 to 0.75 percentage points was added to the
capitalization rate, depending on the quarter the properties
were contributed. We may receive additional proceeds for the
2009 contributions if values at the end of 2010 are higher than
those used to determine contribution values.
In addition to the capital contributions we made under these
commitments, we also made additional discretionary investments
in the property funds of $173.5 million in 2009. These
investments included the purchase of preferred convertible units
in PEPR ($59.4 million), a preferred investment in ProLogis
North American Industrial Fund II ($85.0 million),
contributions to ProLogis North American Properties Fund XI
and ProLogis North American Properties Fund I to repay debt
($3.7 million) and advances to ProLogis North American
Industrial Fund III ($25.4 million).
For more information on the property funds, see Note 6 to
our Consolidated Financial Statements in Item 8.
Cash
Provided by Operating Activities
Net cash provided by operating activities was
$116.0 million for 2009, $884.2 million for 2008, and
$1.2 billion for 2007. The decrease is due primarily to
gains of $654.7 million and $763.7 million recognized
in 2008 and 2007, respectively, on the contributions of CDFS
properties. These gains were lower in 2009 and, due to the
changes in our business strategy, no longer included in cash
provided by operating activities.
In addition in 2009, we paid $226.6 million in taxes
related to the settlement of audits that were in process at the
time of our acquisition of Catellus Development Corporation in
2005. Prior to payment, these amounts were included in the
liability for unrecognized tax benefits. Excluding these
payments, cash provided by operating activities exceeded the
cash distributions paid on common shares and dividends paid on
preferred shares in all three periods.
Cash
Investing and Cash Financing Activities
For 2009, investing activities provided net cash of
$1.2 billion. For 2008 and 2007, investing activities used
net cash of $1.3 billion and $4.1 billion,
respectively. The following are the more significant activities
for all periods presented:
•
In 2009, we received $1.3 billion in proceeds from the sale
of our China operations and our property fund interests in
Japan. The proceeds were used to pay down borrowings on our
credit facilities.
•
We generated net cash from contributions and dispositions of
properties and land parcels of $1.5 billion,
$4.5 billion and $3.6 billion in 2009, 2008 and 2007,
respectively.
•
We invested $1.3 billion in real estate during the year
ended December 31, 2009, $5.6 billion for the same
period in 2008, and $5.3 billion for the same period in
2007, excluding Macquarie ProLogis Trust (“MPR”),
which owned 88.7% of a property fund, and Parkridge Holdings
Limited (“Parkridge”) acquisitions (see below). The
real estate investment amounts include costs for current and
future development projects; the acquisition of operating
properties (25 properties and 41 properties with an aggregate
purchase price of $324.0 million and $351.6 million in
2008 and 2007, respectively); acquisitions of land or land use
rights for future development; and recurring capital
expenditures and tenant improvements on existing operating
properties. At December 31, 2009, we had 5 properties
aggregating 2.9 million square feet under development, with
a total expected investment of $295.7 million.
•
We invested cash of $401.4 million, $329.6 million and
$661.8 million in 2009, 2008 and 2007, respectively, in
unconsolidated investees in connection with property
contributions we made, repayment of debt by the investees and
two new preferred investments in existing property funds. In
2009, our investments principally include $152.7 million in
PEPF II, $59.4 million in PEPR, $85.0 million in North
American Industrial Fund II and $54.1 million in the
North American Industrial Fund. In 2008, our investments
principally include $167.3 million in PEPF II and
$68.5 million in joint ventures operating in China. In
2007, our investments principally include $100.0 million in
ProLogis North American Industrial Fund II (discussed
below), $360.0 million in ProLogis North American
Industrial Fund III, and excludes the initial investment in
the Parkridge retail business, which is detailed separately.
•
We received distributions from unconsolidated investees as a
return of investment of $78.1 million, $127.0 million
and $50.2 million in 2009, 2008 and 2007, respectively.
•
We generated net cash proceeds from payments on notes receivable
of $10.7 million, $4.2 million, and $97.4 million
in 2009, 2008 and 2007, respectively.
•
In February 2007, we purchased the industrial business and made
a 25% investment in the retail business of Parkridge. The total
purchase price was $1.3 billion of which we paid cash of
$733.9 million and the balance in common shares or
assumption of liabilities.
•
On July 11, 2007, we completed the acquisition of MPR for
total consideration of approximately $2.0 billion,
consisting of $1.2 billion of cash and the assumption of
debt and other liabilities of $0.8 billion. The cash
portion was financed by the issuance of a $473.1 million
term loan and a $646.2 million convertible loan with an
affiliate of Citigroup. On August 27, 2007, when Citigroup
converted $546.2 million of the convertible loan into
equity of a newly created property fund, ProLogis
North American Industrial Fund II, we made a
$100.0 million cash equity contribution to the property
fund, which it used to repay the remaining balance on the
convertible loan.
For 2009, financing activities used net cash of
$1.5 billion. For 2008 and 2007, financing activities
provided net cash of $358.1 million and $2.7 billion,
respectively. The following are the more significant activities
for all periods presented as summarized below:
•
In April 2009, we closed on the Equity Offering and received net
proceeds of $1.1 billion. In addition to the Equity
Offering, we generated proceeds from the sale and issuance of
common shares of $337.4 million, $222.2 million and
$46.9 million in 2009, 2008 and 2007, respectively. The
proceeds in 2009 include $331.9 million from our
at-the-market
equity issuance program.
•
In 2009, we purchased and extinguished $1.5 billion
original principal amount of our senior, convertible senior and
other notes, along with certain secured mortgage debt, for a
total of $1.2 billion. In 2008, we purchased and
extinguished $309.7 million original principal amount of
our senior notes for a total of $216.8 million.
•
In 2009, we issued $950.0 million of senior notes and
closed on $499.9 million of secured mortgage debt, which
includes ¥14.3 billion in TMK bonds. In 2008, we
issued $550.0 million convertible senior notes and
$600.0 million of senior notes. In 2007, we issued
$2.4 billion convertible senior notes and
$781.8 million of senior notes.
•
During 2007, we received proceeds of $1.1 billion and
$600.1 million under facilities used to partially finance
the MPR and Parkridge acquisitions, respectively (see
Note 5 and Note 6 to our Consolidated Financial
Statements in Item 8).
•
We had net payments on our credit facilities of
$2.4 billion and $431.5 million in 2009 and 2007,
respectively and net borrowings of $743.9 million in 2008.
•
We had net payments on our other debt of $351.8 million,
$985.2 million and $1.2 billion for the years ended
December 31, 2009, 2008 and 2007, respectively.
•
We paid distributions to holders of common shares of
$271.8 million, $542.8 million and $472.6 million
in 2009, 2008 and 2007, respectively. We paid dividends on
preferred shares of $25.4 million, $25.4 million and
$31.8 million in 2009, 2008 and 2007, respectively.
We had investments in and advances to property funds at
December 31, 2009 of $2.2 billion. The property funds
had total third party debt of $9.3 billion (for the entire
entity, not our proportionate share) at December 31, 2009
that matures as follows (dollars in millions):
As of December 31, 2009, we had not guaranteed any of the
third party debt. See note (4) below. In our role as the
manager of the property funds, we work with the property funds
to refinance their maturing debt. We are in various stages of
discussions with banks on extending or refinancing the 2010
maturities. As noted below, a majority of the 2010 maturities
have been substantially addressed. There can be no assurance
that the property funds will be able to refinance any maturing
indebtedness at terms as favorable as the maturing debt, or at
all. If the property funds are unable to refinance the maturing
indebtedness with newly issued debt, they may be able to
otherwise obtain funds by capital contributions from us and our
fund partners, or by selling assets. Certain of the property
funds also have credit facilities, which may be used to obtain
funds. Generally, the property funds issue long-term debt and
utilize the proceeds to repay borrowings under the credit
facilities. Information on remaining equity commitments of the
property funds is presented above.
(2)
The debt included in 2010 maturities is due December 2010. The
property fund is in discussions about a re-financing or
extending the term of this debt.
(3)
ProLogis North American Industrial Fund has a $50.0 million
credit facility that matures July 17, 2010, and was
completely available at December 31, 2009.
(4)
We have pledged properties we own directly, valued at
approximately $275.0 million, to serve as additional
collateral on a loan payable to an affiliate of our fund partner
that is due in 2014 and outstanding derivative contracts. Of the
$157.5 million due in 2010, $85.0 million matures in
June and the remaining amount matures in September. The property
fund has a loan commitment for $71.0 million of new secured
mortgage debt with a seven year maturity and a commitment to
refinance $81 million with the current lender for five
years. The remaining balance will be paid with cash.
(5)
During the first quarter of 2009, we and our fund partner each
loaned the property fund $25.4 million that is payable with
operating cash flow, matures at dissolution of the partnership
and bears interest at LIBOR plus 8%. The outstanding balance at
December 31, 2009 was $22.6 million and is not
included in the maturities above as it is not third party debt.
(6)
In addition to its existing third party debt, this property fund
has a note payable to us for $14.3 million at
December 31, 2009.
(7)
PEPR has three credit facilities with aggregate borrowing
capacity of €867 million (approximately
$1.2 billion). As of December 31, 2009, two facilities
had outstanding borrowings of $535.0 million due December
2010 and another facility had outstanding borrowings of
$384.1 million due December 2012. The aggregate remaining
capacity at December 31, 2009 was $325.6 million. In
January 2010, PEPR issued €392.7 million
($553.3 million) of secured mortgage debt due 2014, the
proceeds of which were used to repay outstanding debt that was
scheduled to mature in 2010, including a portion of the credit
facility.
As of December 31, 2009, PEPF II had a
€600 million credit facility (approximately
$860.6 million) due May 2010, under which
$627.1 million was outstanding and $233.5 million was
available to borrow under this facility. In January 2010, PEPF
II issued €181 million ($255.0 million) of
secured mortgage debt due 2014; the proceeds of which were used
to pay down the outstanding balance on the credit facility that
is scheduled to mature in 2010. In February 2010, PEPF II
decreased the commitments under the facility to €300
million.
We had long-term contractual obligations at December 31,2009 as follows (in millions):
Payments Due By Period
Less than
1 to 3
3 to 5
More than
Total
1 year
years
years
5 years
Debt obligations, other than credit facilities
$
7,420
$
233
$
1,758
$
2,011
$
3,418
Interest on debt obligations, other than credit facilities
2,262
373
674
513
702
Unfunded commitments on development projects (1)
104
104
—
—
—
Unfunded capital commitments to unconsolidated investees (2)
280
280
—
—
—
Amounts due on credit facilities
737
—
737
—
—
Interest on lines of credit
45
17
28
—
—
Tax liabilities (3)
65
16
48
1
—
Totals
$
10,913
$
1,023
$
3,245
$
2,525
$
4,120
(1)
We had properties under development at December 31, 2009
with a total expected investment of $295.7 million. The
unfunded commitments presented include not only those costs that
we are obligated to fund under construction contracts, but all
costs necessary to place the property into service, including
the costs of tenant improvements, marketing and leasing costs.
(2)
Generally, we fulfill our equity commitment with a portion of
the proceeds from properties we contribute to the property fund.
However, to the extent a property fund acquires properties from
a third party or requires cash to pay-off debt or has other cash
needs, we may be required to contribute our proportionate share
of the equity component in cash to the property fund. See
discussion above in “- Off-Balance Sheet Arrangements”.
(3)
These amounts represent an estimate of our income tax
liabilities, including an estimate of the period of settlement.
See Note 15 to our Consolidated Financial Statements in
Item 8.
Other Commitments
On a continuing basis, we are engaged in various stages of
negotiations for the acquisition
and/or
disposition of individual properties or portfolios of properties.
Distribution and Dividend Requirements
Our common share distribution policy is to distribute a
percentage of our cash flow to ensure we will meet the
distribution requirements of the Code, relative to maintaining
our REIT status, while still allowing us to maximize the cash
retained to meet other cash needs such as capital improvements
and other investment activities.
Cash distributions per common share paid in 2009, 2008 and 2007
were $0.70, $2.07 and $1.84, respectively. Our 2009 dividend was
$0.25 for the first quarter and $0.15 for each of the second,
third and fourth quarters. The payment of common share
distributions is dependent upon our financial condition,
operating results and
REIT distribution requirements and may be adjusted at the
discretion of the Board during the year. A cash distribution of
$0.15 per common share for the first quarter of 2010 was
declared on February 1, 2010. This distribution will be
paid on February 26, 2010 to holders of common shares on
February 12, 2010.
At December 31, 2009, we had three series of preferred
shares outstanding. The annual dividend rates on preferred
shares are $4.27 per Series C Preferred Share, $1.69 per
Series F Preferred Share and $1.69 per Series G
Preferred Share.
Pursuant to the terms of our preferred shares, we are restricted
from declaring or paying any distribution with respect to our
common shares unless and until all cumulative dividends with
respect to the preferred shares have been paid and sufficient
funds have been set aside for dividends that have been declared
for the then current dividend period with respect to the
preferred shares.
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. The
current economic environment has increased the degree of
uncertainty inherent in these estimates and assumptions. Changes
in estimates could affect our financial position and specific
items in our results of operations that are used by
shareholders, potential investors, industry analysts and lenders
in their evaluation of our performance. Of the accounting
policies discussed in Note 2 to our Consolidated Financial
Statements in Item 8, those presented below have been
identified by us as critical accounting policies.
Impairment
of Long-Lived Assets and Goodwill
We assess the carrying values of our respective long-lived
assets, including goodwill, 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. In order 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. Fair value is determined through various
valuation techniques; including discounted cash flow models,
quoted market values and third party appraisals, where
considered necessary. If our analysis indicates that the
carrying value of the real estate asset 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 use a two step approach to our goodwill impairment
evaluation. The first step of the goodwill impairment test is
used to identify whether there is any potential impairment. If
the fair value of a reporting unit exceeds its corresponding
book value, including goodwill, the goodwill of the reporting
unit is not considered to be impaired and the second step of the
impairment test is unnecessary. If the carrying amount of the
reporting unit exceeds its fair value, the second step of the
impairment test is performed. The second step requires that we
compare the implied fair value of the reporting unit goodwill
with the carrying amount of that goodwill to measure the amount
of impairment loss, if any.
Generally, we use net asset value analyses to estimate the fair
value of the reporting unit where the goodwill is allocated. We
estimate the current fair value of the assets and liabilities in
the reporting unit through various valuation techniques;
including discounted cash flow models, applying a capitalization
rate to estimated net operating income of a property, quoted
market values and third-party appraisals, as considered
necessary. The fair value of the reporting unit also includes an
enterprise value premium that we estimate a third party would be
willing to pay for the particular reporting unit. 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. However, assumptions and
estimates about future cash flows, discount rates and
capitalization rates are complex and subjective. Changes in
economic and operating conditions that occur subsequent to our
impairment analyses could impact these assumptions and result in
future impairment of our goodwill.
The use of projected future cash flows and other estimates of
fair value are based on assumptions that are consistent with our
estimates of future expectations and the strategic plan we use
to manage our underlying business. However, assumptions and
estimates about future cash flows, discount rates and
capitalization rates are complex and subjective. Use of other
estimates and assumptions may result in changes in the
impairment charges recognized. Changes in economic and operating
conditions that occur subsequent to our impairment analyses
could impact these assumptions and result in future impairment
charges of our real estate properties
and/or
goodwill. In addition, our intent with regard to the underlying
assets might change as market conditions change, as well as
other factors, especially in the current global economic
environment.
Investments
in Unconsolidated Investees
When circumstances indicate there may have been a reduction in
the value of an equity investment, we evaluate the equity
investment and any advances made to the investee for impairment
by estimating our ability to recover our investment from future
expected cash flows. If we determine the 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 that occur subsequent to our
review could impact these assumptions and result in future
impairment charges of our equity investments.
Revenue
Recognition
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 ownership interest
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 investee that acquires the assets. We also
make judgments regarding the timing of recognition in earnings
of certain fees and incentives when they are fixed and
determinable.
Business
Combinations
We acquire individual properties, as well as portfolios of
properties or businesses. When we acquire a business or
individual operating properties, with the intention to hold the
investment for the long-term, we allocate the purchase price to
the various components of the acquisition based upon the fair
value of each component. The components typically include land,
building, debt and other assumed liabilities, intangible assets
related to above and below market leases, value of costs to
obtain tenants and goodwill, deferred tax liabilities and other
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 times based upon the expected future cash
flows of the property and various characteristics of the markets
where the property is located. 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, which
typically does not exceed one year.
Consolidation
We consolidate all entities that are wholly owned and those in
which we own less than 100% but control, as well as any variable
interest entities in which we are the primary beneficiary. We
evaluate our ability to
control an entity and whether the entity is a variable interest
entity and we are the primary beneficiary through the
consideration of various factors, including: the form of our
ownership interest and legal structure; our representation on
the entity’s governing body; the size of our investment
(including loans); estimates of future cash flows; our ability
and the rights of other investors to participate in significant
decisions; and the ability of other investors or partners to
replace us as manager or general partner
and/or
liquidate the entity, if applicable. Investments in entities in
which we do not control but over which we have the ability to
exercise significant influence over operating and financial
policies are presented under the equity method. Investments in
entities that we do not control and over which we do not
exercise significant influence are carried at the lower of cost
or fair value, as appropriate. Our ability to correctly assess
our influence
and/or
control over an entity affects the presentation of these
investments in our consolidated financial statements.
Capitalization
of Costs and Depreciation
We capitalize costs incurred in developing, renovating,
acquiring and rehabilitating real estate assets as part of the
investment basis. Costs incurred in making certain other
improvements are also capitalized. During the land development
and construction periods, we capitalize interest costs,
insurance, real estate taxes and certain general and
administrative costs of the personnel performing development,
renovations, rehabilitation and leasing activities if such costs
are incremental and identifiable to a specific activity.
Capitalized costs are included in the investment basis of real
estate assets except for the costs capitalized related to
leasing activities, which are presented as a component of other
assets. We estimate the depreciable portion of our real estate
assets and related useful lives in order to record depreciation
expense. Prior to 2008, if we developed properties with the
intent to contribute the property to a property fund, we did not
depreciate these properties during the period from completion of
the development through the date the property was contributed.
With the changes in our business strategy, and the uncertainty
with respect to the timing of future contributions to the
property funds, we expect to hold these properties long-term and
have begun to depreciate them. Our ability to accurately assess
the properties to depreciate and to estimate the depreciable
portions of our real estate assets and useful lives is critical
to the determination of the appropriate amount of depreciation
expense recorded and the carrying value of the underlying
assets. Any change to the assets to be depreciated and the
estimated depreciable lives of these assets would have an impact
on the depreciation expense recognized.
Income
Taxes
As part of the process of preparing our consolidated financial
statements, significant management judgment is required to
estimate our income tax liability, the liability associated with
open tax years that are under review 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 non-routine transactions, changes due to audit
adjustments by federal 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 TRSs 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.
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 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 of previously depreciated properties. We
agree that these two 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 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 from dispositions of land, development properties and
properties acquired in our CDFS business segment, as well as our
proportionate share of the gains and losses from dispositions
recognized by the property funds, 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
shareholders, 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 shareholders, potential
investors and financial analysts understand the measures
management uses.
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,
including significant non-cash items
To arrive at FFO, including significant non-cash items,
we adjust the NAREIT defined FFO measure to exclude:
(i)
deferred income tax benefits and deferred income tax expenses
recognized by our subsidiaries;
current income tax expense related to acquired tax liabilities
that were recorded as deferred tax liabilities in an
acquisition, to the extent the expense is offset with a deferred
income tax benefit in GAAP earnings that is excluded from our
defined FFO measure;
(iii)
certain foreign currency exchange gains and losses resulting
from certain debt transactions between us and our foreign
consolidated subsidiaries and our foreign unconsolidated
investees;
(iv)
foreign currency exchange gains and losses from the
remeasurement (based on current foreign currency exchange rates)
of certain third party debt of our foreign consolidated
subsidiaries and our foreign unconsolidated investees; and
(v)
mark-to-market
adjustments associated with derivative financial instruments
utilized to manage foreign currency and interest rate risks.
We
calculate FFO, including significant non-cash items for our
unconsolidated investees on the same basis as we calculate our
FFO, including significant non-cash items.
We use this FFO measure, 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, including significant non-cash
items, 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 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.
FFO,
excluding significant non-cash items
When we began to experience the effects of the global economic
crises in the fourth quarter of 2008, we decided that FFO,
including significant non-cash items, did not provide all of
the information we needed to evaluate our business in this
environment. As a result, we developed FFO, excluding
significant non-cash items to provide additional information
that allows us to better evaluate our operating performance in
this unprecedented economic time.
To arrive at
FFO, excluding significant non-cash items, we adjust
FFO, including significant non-cash items, to exclude the
following items that we recognized directly or our share
recognized by our unconsolidated investees:
Non-recurring
items
(i)
impairment charges related to the sale of our China operations;
(ii)
impairment charges of goodwill; and
(iii)
our share of the losses recognized by PEPR on the sale of its
investment in PEPF II.
impairment charges of completed development properties that we
contributed or expect to contribute to a property fund;
(ii)
impairment charges of land or other real estate properties that
we sold or expect to sell;
(iii)
impairment charges of other non-real estate assets, including
equity investments;
(iv)
our share of impairment charges of real estate that is sold or
expected to be sold by an unconsolidated investee; and
(v)
gains from the early extinguishment of debt.
We believe that these items, both recurring and non-recurring
are driven by factors relating to the fundamental disruption in
the global financial and real estate markets, rather than
factors specific to the company or the performance of our
properties or investments.
The impairment charges of real estate properties that we
recognized in 2008 and 2009 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. In
order to generate liquidity, we decided to sell our China
operations in the fourth quarter of 2008 at a loss and,
therefore, we recognized an impairment charge. Also, to generate
liquidity, we have contributed or intend to contribute certain
completed properties to property funds and sold or intend to
sell certain land parcels or properties to third parties. To the
extent these properties are expected to be sold at a loss, we
record an impairment charge when the loss is known. The
impairment charges related to goodwill and other assets that we
recognized in 2009 and the fourth quarter of 2008 were similarly
caused by the decline in the real estate markets. All of these
impairment charges are discussed in further detail in
Note 14 to our Consolidated Financial Statements in
Item 8.
Also, PEPR sold its entire equity investment in PEPF II in order
to generate liquidity, which resulted in the recognition of a
loss in the fourth quarter of 2008. Certain of our
unconsolidated investees have recognized and may continue to
recognize similar impairment charges of real estate that they
expect to sell, which impacts our equity in earnings of such
investees.
In connection with our announced initiatives to reduce debt, we
have purchased portions of our debt securities in 2008 and 2009.
The substantial decrease in the market price of our debt
securities presented us with an opportunity to acquire our
outstanding indebtedness at a cost less than the principal
amount of that indebtedness. As a result, we recognized net
gains on the early extinguishment of this debt. Certain of our
unconsolidated investees have recognized or may recognize
similar gains or losses, which impacts our equity in earnings of
such investees.
During this turbulent time, we have recognized certain of these
recurring charges and gains over several quarters in 2008 and
2009 and we believe it is reasonably likely that we will
recognize similar charges and gains in the near future, which we
anticipate to be through the second or third quarter of 2010. As
we continue to focus on generating liquidity, we believe it is
likely that we will recognize additional impairment charges of
land, completed properties and certain other non-real estate
assets that we or our unconsolidated investees will sell in the
near future. However, we believe that as the financial markets
stabilize, our liquidity needs change and the capital available
to the existing unconsolidated property funds to acquire our
completed development properties is expended, the potential for
impairment charges of real estate properties or other non-real
estate assets will disappear or become immaterial in the near
future. We may purchase more of our outstanding debt securities,
which could result in us recognizing additional gains from the
early extinguishment of debt, although given the recovery that
has already occurred in the market price of these securities, we
would expect the gains to become immaterial in the near future.
We analyze our operating performance primarily by the rental
income of our real estate, net of operating, administrative and
financing expenses, which is not directly impacted by short-term
fluctuations in the market
value of our real estate or debt securities. As a result,
although these significant non-cash 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.
As described above, in the fourth quarter of 2008, we began
using FFO, excluding significant non-cash items,
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 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.
As the impact of these recurring items dissipates, we expect
that the usefulness of FFO, excluding significant non-cash
items will similarly dissipate and we will go back to using
only FFO, including significant non-cash items.
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 they are
two of many measures we use when analyzing our business. Some of
these limitations are:
•
The current income tax expenses that are excluded from our
defined FFO measures represent the taxes that are payable.
•
Depreciation and amortization of real estate assets are economic
costs that are excluded from FFO. FFO is limited, as it does not
reflect the cash requirements that may be necessary for future
replacements of the real estate assets. Further, the
amortization of capital expenditures and leasing costs necessary
to maintain the operating performance of industrial properties
are not reflected in FFO.
•
Gains or losses from property dispositions represent changes in
the value of the disposed properties. By excluding these gains
and losses, FFO does not capture realized changes in the value
of disposed properties arising from changes in market conditions.
•
The deferred income tax benefits and expenses that are excluded
from our 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 non-cash impairment charges that we exclude from our FFO,
excluding significant non-cash items, have been or may be
realized as a loss in the future upon the ultimate disposition
of the related real estate properties or other assets through
the form of lower cash proceeds.
The gains on extinguishment of debt that we exclude from our
FFO, excluding significant non-cash items, provides a
benefit to us as we are settling our debt at less than our
future obligation.
We compensate for these limitations by using our FFO measures
only in conjunction with net earnings computed under GAAP when
making our decisions. To assist investors in compensating for
these limitations, following is a reconciliation of our defined
FFO measures to our net earnings computed under GAAP. This
information should be read with our complete financial
statements prepared under GAAP and the rest of the disclosures
we file with the SEC to fully understand our FFO measures and
the limitations on its use.
FFO, including significant non-cash items, attributable to
common shares as defined by us was $138.9 million,
$133.8 million and $1,205.7 million for the years
ended December 31, 2009, 2008 and 2007, respectively. FFO,
excluding significant non-cash items, attributable to common
shares as defined by us was $467.8 million,
$944.9 million and $1,205.7 million for the years
ended December 31, 2009, 2008 and 2007, respectively. The
reconciliations of FFO attributable to common shares as defined
by us to net earnings attributable to common shares computed
under GAAP are as follows for the periods indicated (in
thousands):
We are exposed to the impact of interest rate changes and
foreign-exchange related variability and earnings volatility on
our foreign investments. We have used certain derivative
financial instruments, primarily foreign currency put option and
forward contracts, to reduce our foreign currency market risk,
as we deem appropriate. We have also used interest rate swap
agreements to reduce our interest rate market risk. We do not
use
financial instruments for trading or speculative purposes and
all financial instruments are entered into in accordance with
established polices and procedures.
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 year end interest rates. The results of the
sensitivity analysis are summarized below. The sensitivity
analysis is of limited predictive value. As a result, 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.
Interest
Rate Risk
Our interest rate risk management objective is to limit the
impact of future interest rate changes on earnings and cash
flows. To achieve this objective, we primarily borrow on a fixed
rate basis for longer-term debt issuances. In 2009, we entered
into two three-year TMK bond agreements totaling
¥14.3 billion ($153.8 million as of
December 31, 2009) with variable interest rates and
concurrently entered into interest rate swap agreements to fix
the interest rate for the term of the notes. We have no other
derivative contracts outstanding at December 31, 2009.
Our primary interest rate risk is created by our variable rate
lines of credit. During the year ended December 31, 2009,
we had weighted average daily outstanding borrowings of
$1.6 billion on our variable rate lines of credit. Based on
the results of the sensitivity analysis, which assumed a 10%
adverse change in interest rates, the estimated market risk
exposure for the variable rate lines of credit was approximately
$2.7 million of cash flow for the year ended
December 31, 2009.
As a result of a change in accounting effective January 1,2009, our non-cash interest expense for the year ended
December 31, 2009 increased $63.0 million, prior to
capitalization of interest related to our development
activities. See Note 2 to our Consolidated Financial
Statements in Item 8 for further information.
The unconsolidated property funds that we manage, and in which
we have an equity ownership, may enter into interest rate swap
contracts. See Note 6 to our Consolidated Financial
Statements in Item 8 for further information on these
derivatives.
Foreign
Currency Risk
Foreign currency risk is the possibility that our financial
results could be better or worse than planned because of changes
in foreign currency exchange rates.
Our primary exposure to foreign currency exchange rates relates
to the translation of the net income of our foreign subsidiaries
into U.S. dollars, principally euro, British pound sterling
and yen. To mitigate our foreign currency exchange exposure, we
borrow in the functional currency of the borrowing entity, when
appropriate. We also may use foreign currency put option
contracts to manage foreign currency exchange rate risk
associated with the projected net operating income of our
foreign consolidated subsidiaries and unconsolidated investees.
At December 31, 2009, we had no put option contracts
outstanding and, therefore, we may experience fluctuations in
our earnings as a result of changes in foreign currency exchange
rates.
We also have some exposure to movements in exchange rates
related to certain intercompany loans we issue from time to time
and we may use foreign currency forward contracts to manage
these risks. At December 31, 2009, we had no forward
contracts outstanding and, therefore, we may experience
fluctuations in our earnings from the remeasurement of these
intercompany loans due to changes in foreign currency exchange
rates.
Fair
Value of Financial Instruments
See Note 17 to our Consolidated Financial Statements in
Item 8.
Our Consolidated Balance Sheets as of December 31, 2009 and
2008, our Consolidated Statements of Operations, Comprehensive
Income (Loss), Equity and Cash Flows for each of the years in
the three-year period ended December 31, 2009, 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 is
presented in Note 22 of our Consolidated Financial
Statements.
An evaluation was carried out under the supervision and with the
participation of our management, including our Chief Executive
Officer and our Chief Financial Officer, of the effectiveness of
the disclosure controls and procedures (as defined in
Rule 13a-15(e)
under the Securities Exchange Act of 1934 (the “Exchange
Act”)) as of December 31, 2009. Based on this
evaluation, the Chief Executive Officer and the Chief Financial
Officer have concluded that our 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, 2009, there were no significant
changes in our internal controls or in other factors that could
significantly affect these controls, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
Management’s
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 Securities Exchange Act of 1934.
Under the supervision and with the participation of management,
including our Chief Executive Officer and Chief Financial
Officer, an evaluation of the effectiveness of our internal
control over financial reporting was conducted as of
December 31, 2009 based on the criteria described in
“Internal Control — Integrated Framework”
issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on this assessment, management
determined that, as of December 31, 2009, our internal
control over financial reporting was effective.
The effectiveness of our internal control over financial
reporting as of December 31, 2009 has been audited by KPMG
LLP, an independent registered public accounting firm, as stated
in their report which is included herein.
Limitations
of the Effectiveness of Controls
Management’s assessment included an evaluation of the
design of our internal control over financial reporting and
testing of the operational effectiveness of our internal control
over financial reporting. Our 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.
On February 25, 2010, William D. Zollars notified ProLogis
of his decision to retire from the board of trustees of ProLogis
effective following the meeting of the board of trustees on
May 14, 2010. He will not stand for re-election as trustee
at the next annual meeting of the shareholders of ProLogis on
May 14, 2010.
The information required by this item is incorporated herein by
reference to the description under Item 1 — Our
Management — Executive Committee (but only with
respect to Walter C. Rakowich, Ted R. Antenucci, Edward S.
Nekritz and William E. Sullivan), and to the descriptions under
the captions “Election of Trustees —
Nominees,”“Additional Information —
Section 16(a) Beneficial Ownership Reporting
Compliance,”“Corporate Governance — Code of
Ethics and Business Conduct,” and “Board of Trustees
and Committees — Audit Committee” in our 2010
Proxy Statement.
The information required by this item is incorporated herein by
reference to the descriptions under the captions
“Compensation Matters” and “Board of Trustees and
Committees — Management Development and Compensation
Committee — Compensation Committee Interlocks and
Insider Participation” in our 2010 Proxy Statement.
The information required by this item is incorporated herein by
reference to the descriptions under the captions
“Information Relating to Trustees, Nominees and Executive
Officers — Common Shares Beneficially Owned”
and “Compensations Matters — Equity Compensation
Plans” in our 2010 Proxy Statement.
The information required by this item is incorporated herein by
reference to the descriptions under the captions
“Information Relating to Trustees, Nominees and Executive
Officers — Certain Relationships and Related
Transactions” and “Corporate Governance —
Trustee Independence” in our 2010 Proxy Statement.
The information required by this item is incorporated herein by
reference to the description under the caption “Independent
Registered Public Accounting Firm” in our 2010 Proxy
Statement.
The following documents are filed as a part of this report:
(a) Financial Statements and Schedules:
1. Financial Statements:
See Index to Consolidated Financial Statements and
Schedule III on page 133 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 Notes or is not applicable.
(c) Financial Statements: See Index to Consolidated
Financial Statements and Schedule III on page 133 of this
report, which is incorporated by reference.
65
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS AND
SCHEDULE III
We have audited the accompanying consolidated balance sheets of
ProLogis and subsidiaries as of December 31, 2009 and 2008,
and the related consolidated statements of operations,
comprehensive income (loss), equity, and cash flows for each of
the years in the three-year period ended December 31, 2009.
These consolidated financial statements are the responsibility
of ProLogis’ 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). 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 and subsidiaries as of December 31,2009 and 2008, and the results of their operations and their
cash flows for each of the years in the three-year period ended
December 31, 2009, in conformity with U.S. generally
accepted accounting principles.
As discussed in Note 2 to the consolidated financial
statements, the Company adopted FSP APB
14-1,
Accounting for Convertible Debt Instruments That May Be
Settled in Cash Upon Conversion (Including Partial Cash
Settlement), included in ASC subtopic
470-20,
Debt with Conversion and Other Options, as of
January 1, 2009.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
ProLogis’ internal control over financial reporting as of
December 31, 2009, based on criteria established in
Internal Control — Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), and our report dated February 26, 2010
expressed an unqualified opinion on the effectiveness of
ProLogis’ internal control over financial reporting.
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders
ProLogis:
We have audited ProLogis’ internal control over financial
reporting as of December 31, 2009, based on criteria
established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). ProLogis’
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 Report on
Internal Control over Financial Reporting. Our responsibility is
to express an opinion on ProLogis’ internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). 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 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.
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 maintained, in all material respects,
effective internal control over financial reporting as of
December 31, 2009, based on criteria established in
Internal Control — Integrated Framework 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 and subsidiaries as of
December 31, 2009 and 2008, and the related consolidated
statements of operations, comprehensive income (loss), equity,
and cash flows for each of the years in the three-year period
ended December 31, 2009, and our report dated
February 26, 2010 expressed an unqualified opinion on those
consolidated financial statements.
Investments in and advances to unconsolidated investees
2,151,723
2,269,993
Cash and cash equivalents
34,362
174,636
Accounts and notes receivable
136,754
244,778
Other assets
1,017,780
1,126,993
Discontinued operations-assets held for sale
—
1,310,754
Total assets
$
16,885,415
$
19,269,127
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Debt
$
7,977,778
$
10,711,368
Accounts payable and accrued expenses
455,919
658,868
Other liabilities
444,432
751,238
Discontinued operations — assets held for sale
—
389,884
Total liabilities
8,878,129
12,511,358
Equity:
ProLogis shareholders’ equity:
Series C preferred shares at stated liquidation preference
of $50 per share; $0.01 par value; 2,000 shares issued
and outstanding at December 31, 2009 and 2008
100,000
100,000
Series F preferred shares at stated liquidation preference
of $25 per share; $0.01 par value; 5,000 shares issued
and outstanding at December 31, 2009 and 2008
125,000
125,000
Series G preferred shares at stated liquidation preference
of $25 per share; $0.01 par value; 5,000 shares issued
and outstanding at December 31, 2009 and 2008
125,000
125,000
Common shares; $0.01 par value; 474,162 shares issued
and outstanding at December 31, 2009 and
267,005 shares issued and outstanding at December 31,2008
4,742
2,670
Additional paid-in capital
8,524,867
7,070,108
Accumulated other comprehensive income (loss)
42,298
(29,374
)
Distributions in excess of net earnings
(934,583
)
(655,513
)
Total ProLogis shareholders’ equity
7,987,324
6,737,891
Noncontrolling interests
19,962
19,878
Total equity
8,007,286
6,757,769
Total liabilities and equity
$
16,885,415
$
19,269,127
The accompanying notes are an integral part of these
Consolidated Financial Statements.
ProLogis, collectively with our consolidated subsidiaries
(“we”, “our”, “us”, “the
Company” or “ProLogis”), is a publicly held real
estate investment trust (“REIT”) that owns, operates
and develops (directly and through our unconsolidated investees)
primarily industrial properties in North America, Europe and
Asia. Through 2008, our business consisted of three reportable
business segments: (i) direct owned; (ii) investment
management; and (iii) CDFS business. Our direct owned
segment represents the direct long-term ownership of industrial
properties. Our investment management segment represents the
long-term investment management of property funds and joint
ventures and the properties they own. Our CDFS business segment
primarily encompassed our development or acquisition of real
estate properties that were generally contributed to a property
fund in which we had an ownership interest and managed or sold
to third parties. Changes in global economic conditions resulted
in changes in our business strategy in late 2008 and therefore,
as of December 31, 2008, our business strategy no longer
includes the CDFS business segment. See Note 20 for further
discussion of our business segments.
2.
Summary
of Significant Accounting Policies:
Basis of Presentation and Consolidation. The
accompanying consolidated financial statements 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% but control, as well as any variable
interest entities in which we are the primary beneficiary. We
evaluate our ability to control an entity and whether the entity
is a variable interest entity and we are the primary beneficiary
through the consideration of the following factors:
(i)
the form of our ownership interest and legal structure;
(ii)
our representation on the entity’s governing body;
(iii)
the size of our investment (including loans);
(iv)
estimates of future cash flows;
(v)
our ability to participate in policy making decisions, including
but not limited to, the acquisition or disposition of investment
properties and the incurrence or refinancing of debt;
(vi)
the rights of other investors to participate in the decision
making process; and
(vii)
the ability for other partners or owners to replace us as
manager
and/or
liquidate the venture, if applicable.
Adjustments and Reclassifications. Certain
amounts included in the accompanying consolidated financial
statements for 2008 and 2007 have been adjusted due to the
required retroactive application of a new accounting standard
that we adopted as of January 1, 2009, as further discussed
below. In addition in 2009, we began reporting the costs
associated with our investment management segment as Investment
Management Expenses in our Consolidated Statements of
Operations. These costs include the property-level management
expenses associated with the properties owned by the
unconsolidated investees (previously included in Rental
Expenses) and the direct expenses associated with the asset
management of the property funds (previously included in General
and Administrative Expenses). Therefore, we have reclassified
these expenses in 2008 and 2007, as well as certain other 2008
and 2007 amounts, to conform to the 2009 financial statement
presentation. We have evaluated all subsequent events for
adjustment to or disclosure in these financial statements
through the issuance of these financial statements.
Use of Estimates. The accompanying
consolidated financial statements are prepared in accordance
with U.S. generally accepted accounting principles
(“GAAP”). GAAP requires us to make estimates and
assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities as
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
of the date of the financial statements, and revenue and
expenses during the reporting period. Our actual results could
differ from those estimates and assumptions. Although we believe
the assumptions and estimates we made are reasonable and
appropriate, as discussed in the applicable sections throughout
these Consolidated Financial Statements, different assumptions
and estimates could materially impact our reported results. The
current economic environment has increased the degree of
uncertainty inherent in these estimates and assumptions and
changes in market conditions could impact our future operating
results.
Foreign Operations. The U.S. dollar is
the functional currency for our consolidated subsidiaries and
unconsolidated investees operating in the United States 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
investees operating in countries other than the United States
and Mexico 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 the country where the entity conducts its
operations.
The functional currencies of our consolidated subsidiaries and
unconsolidated investees generally include the British pound
sterling, Canadian dollar, euro, Japanese yen and Korean won.
The Chinese remnimbi was also a functional currency through
February 2009 and is included in discontinued operations. We are
parties to business transactions denominated in these and other
currencies.
For our consolidated subsidiaries whose functional currency is
not the U.S. dollar, we translate their financial
statements into U.S. dollars at the time we consolidate
those subsidiaries’ financial statements. Generally, assets
and liabilities are translated at the exchange rate in effect as
of the balance sheet date. The resulting translation adjustments
are included in the Accumulated Other Comprehensive Income
(Loss) in ProLogis Shareholders’ Equity. Certain balance
sheet items, primarily equity-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
non-recurring transactions are translated at the rate in effect
as of the date of the transaction. We translate our share of the
net earnings or losses of our unconsolidated investees whose
functional currency is not the U.S. dollar at the average
exchange rate for the period.
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 generally reflected in
results of operations, unless it is intercompany debt that is
deemed to be long-term in nature. The remeasurement of such
long-term debt results in the recognition of a cumulative
translation adjustment in Accumulated Other Comprehensive Income
(Loss) in ProLogis Shareholders’ Equity.
Gains or losses are included in results of operations when
transactions with a third party, denominated in a currency other
than the entity’s functional currency, are settled. We
occasionally utilize derivative financial instruments to manage
certain foreign currency exchange risks.
We are subject to foreign currency risk due to potential
fluctuations in exchange rates between certain 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 would have an effect on our
reported results of operations and financial position. Although
we attempt to mitigate adverse effects by borrowing under debt
agreements denominated in the same functional currency as the
investment and, on occasion and when deemed appropriate, through
the use of derivative contracts, there can be no assurance that
those attempts to mitigate foreign currency risk will be
successful.
See our policy footnote on financial instruments and
Note 18 for more information related to our derivative
financial instruments.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Business Combinations. In December 2007, the
Financial Standards Accounting Board (“FASB”) issued a
new accounting standard for business combinations that we
adopted January 1, 2009. This accounting standard requires
most identifiable assets, liabilities, noncontrolling interests,
and goodwill acquired in a business combination to be recorded
at “full fair value”. This accounting standard
broadened the scope of what qualifies as a business combination
to include the acquisition of an operating property by us and
our unconsolidated investees. Transaction costs related to the
acquisition of a business that were previously capitalized are
expensed under this new standard. The transaction costs related
to the acquisition of land and equity method investments
continue to be capitalized. This accounting standard requires
subsequent adjustments of tax uncertainties that occur after the
purchase price allocation period to be recognized in earnings.
Previously, these adjustments were recognized in the purchase
price as an adjustment to goodwill. The initial adoption of this
accounting standard did not have a material impact on our
financial position or results of operations, although it may
have a more significant impact in the future depending on our
acquisition activity.
When we acquire a business or individual operating properties,
with the intention to hold the investment for the long-term,
we allocate the purchase price to the various components of
the acquisition based upon the fair value of each component. We
estimate the following:
• the
fair value of the buildings as if vacant;
— The fair value allocated to land is generally based on
relevant market data.
• the
market value of above and below market leases based upon our
best estimate of current market rents;
— The value of each lease is recorded in either other
assets or other liabilities, as appropriate.
• the
value of costs to obtain tenants, primarily leasing commissions;
— These costs are recorded in other assets.
• the
value of debt based on quoted market rates for the same or
similar issues, or by discounting future cash flows using rates
currently available for debt with similar terms and maturities;
— Any discount or premium is included in the principal
amount.
• the
value of any management contracts by discounting future expected
cash flows under these contracts; and
• the
value of all other assumed assets and liabilities based on the
best information available.
We amortize the acquired assets or liabilities as follows:
•
Above and below market leases are charged to rental income over
the average remaining estimated life of the lease.
•
Leasing commissions are charged to amortization expense over the
average remaining estimated life of the lease.
•
Debt discount or premium is charged to interest expense using
the effective interest method over the remaining term of the
related debt.
•
Management contracts are charged against income over the
remaining term of the contract.
Goodwill represents the excess of the purchase price over the
fair value of net tangible and intangible assets acquired in a
business combination. A gain may be recognized to the extent the
purchase price is less than the fair value of net tangible and
intangible assets acquired.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Long-Lived
Assets
Real Estate Assets. Real estate assets are
carried at depreciated cost. Costs incurred that are directly
associated with the successful acquisition of real estate assets
were capitalized as part of the investment basis of the real
estate assets through December 31, 2008. Beginning
January 1, 2009, these costs are now expensed as discussed
above, other than as they relate to the acquisition of land.
Costs incurred in developing, renovating, rehabilitating and
improving real estate assets are capitalized as part of the
investment basis of the real estate assets. Costs incurred in
making repairs and maintaining real estate assets are expensed
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, rehabilitation
and leasing activities; if such costs are incremental and
identifiable to a specific activity. Capitalized costs are
included in the investment basis of real estate assets, except
for the costs capitalized related to leasing activities that are
included in other assets. When a municipal district finances
costs we incur for public infrastructure improvements, we record
the costs in real estate until we are reimbursed.
The depreciable portions of real estate assets are charged to
depreciation expense on a straight-line basis over their
respective estimated useful lives. Depreciation commences at the
earlier of stabilization (defined as 93% 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 on developed buildings,
30 years for industrial properties acquired, 40 years
for office and retail properties acquired and 40 years for
properties we develop. Capitalized leasing costs are amortized
over the respective lease term. Our average lease term for all
leases in effect at December 31, 2009 was between five and
six years. Prior to 2008, if we developed properties with the
intent to contribute the property to a property fund, we did not
depreciate these properties during the period from the
completion of the development through the date the property was
contributed. With the changes in our business strategy, and the
uncertainty with respect to the timing of future contributions
to the property funds, we expect to hold these properties
long-term and began to depreciate them in 2008.
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 the assets is measured by
comparison of the carrying amount of the asset to the estimated
future undiscounted cash flows. In order to review our assets
for recoverability, we consider current market conditions, as
well as our intent with respect to holding or disposing of the
asset. Fair value is determined through various valuation
techniques; including discounted cash flow models; quoted market
values; and third party appraisals, where considered necessary.
If our analysis indicates that the carrying value of the
long-lived asset 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 based on our
intent as follows:
(i)
for real estate properties that we intend to hold long-term,
including land held for development, properties currently under
development and operating buildings, recoverability is assessed
based on the estimated future net rental income from operating
the property;
(ii)
for land parcels we intend to sell, recoverability is assessed
based on estimated fair value, less costs to sell;
(iii)
for real estate properties currently under development and
operating buildings we intend to sell, recoverability is
assessed based on proceeds from disposition that are estimated
based on future net rental income of the property and expected
market capitalization rates; and
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(iv)
for costs incurred related to the potential acquisition of land
or development of a real estate property, recoverability is
assessed based on the probability that the acquisition or
development is likely to occur as of the measurement date.
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.
However, assumptions and estimates about future cash flows,
discount rates and capitalization rates are complex and
subjective. Changes in economic and operating conditions and our
ultimate investment intent that occur subsequent to our
impairment analyses could impact these assumptions and result in
future impairment of our real estate properties.
Goodwill. Goodwill represents the excess of the
purchase price over the fair value of net tangible and
intangible assets acquired in a business combination. We perform
an annual impairment test for goodwill at the reporting unit
level. The annual review is performed during the fourth quarter
for all our reporting units. Additionally, we evaluate the
recoverability of goodwill whenever events or changes in
circumstances indicate that the carrying amounts of goodwill may
not be fully recoverable.
We use a two step approach to our goodwill impairment
evaluation. The first step of the goodwill impairment test is
used to identify whether there is any potential impairment. If
the fair value of a reporting unit exceeds its corresponding
book value, including goodwill, the goodwill of the reporting
unit is not considered to be impaired and the second step of the
impairment test is unnecessary. If the carrying amount of the
reporting unit exceeds its fair value, the second step of the
impairment test is performed. The second step requires that we
compare the implied fair value of the reporting unit goodwill
with the carrying amount of that goodwill to measure the amount
of impairment loss, if any.
Generally, we use net asset value analyses to estimate the fair
value of the reporting unit where the goodwill is allocated. We
estimate the current fair value of the assets and liabilities in
the reporting unit through various valuation techniques;
including discounted cash flow models, applying a capitalization
rate to estimated net operating income of a property, quoted
market values and third-party appraisals, as considered
necessary. The fair value of the reporting unit also includes an
enterprise value premium that we estimate a third party would be
willing to pay for the particular reporting unit. 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.
However, assumptions and estimates about future cash flows,
discount rates and capitalization rates are complex and
subjective. Changes in economic and operating conditions that
occur subsequent to our impairment analyses could impact these
assumptions and result in future impairment of our goodwill.
Assets Held for Sale and Discontinued
Operations. Discontinued operations represent a
component of an entity that has either been disposed of or is
classified as held for sale if both the operations and cash
flows of the component have been or will be eliminated from
ongoing operations of the entity as a result of the disposal
transaction and the entity will not have any significant
continuing involvement in the operations of the component after
the disposal transaction. The results of operations of a
component of our business or properties that have been
classified as discontinued operations are also reported as
discontinued operations for all periods presented. We classify a
component of our business or property as held for sale when
certain criteria are met. At such time, the respective assets
and liabilities are presented separately on our Consolidated
Balance Sheets and depreciation is no longer recognized. Assets
held for sale are reported at the lower of their carrying amount
or their estimated fair value less the costs to sell the assets.
Properties disposed of to third parties are considered
discontinued operations unless such properties were developed
under a pre-sale agreement. Properties contributed to property
funds in which we maintain an
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
ownership interest, act as manager and account for the property
fund under the equity method are not considered discontinued
operations due to our continuing involvement with the properties.
Investments in Unconsolidated Investees. Our
investments in certain entities are presented under the equity
method. The equity method is used when we have the ability to
exercise significant influence over operating and financial
policies of the investee but do not have control of the
investee. Under the equity method, these investments (including
advances to the investee) are initially recognized in the
balance sheet at our cost and are subsequently adjusted to
reflect our proportionate share of net earnings or losses of the
investee, distributions received, deferred gains from the
contribution of properties and certain other adjustments, as
appropriate. When circumstances indicate there may have been a
reduction in the value of an equity investment, we evaluate the
equity investment and any advances made for impairment by
estimating our ability to recover our investment from future
expected cash flows. If we determine the loss in value is other
than temporary, we recognize an impairment charge to reflect the
equity investment and any advances made at fair value.
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.
Convertible Debt. In May 2008, the FASB
issued an accounting standard that required separate accounting
for the debt and equity components of certain convertible debt,
such as the debt we have issued. The value assigned to the debt
component is the estimated fair value at the date of issuance of
a similar bond without the conversion feature, which results in
the debt being recorded at a discount. The resulting debt
discount is amortized over the estimated remaining life of the
debt (the first cash redemption date in 2012 and 2013 for our
outstanding convertible notes) as additional non-cash interest
expense. We adopted this accounting standard on January 1,2009 on a retroactive basis to the convertible notes we issued
in 2007 and 2008. As a result, we adjusted 2008 and 2007 amounts
to reflect the adjustments to debt and equity, as well as the
additional interest expense. This adjustment also impacted the
interest we would have capitalized related to our development
activities for both properties we currently own, as well as
properties that were contributed or sold during the periods the
convertible notes were outstanding.
The following tables illustrate the impact of this accounting
standard on our Consolidated Balance Sheets and Consolidated
Statements of Operations for these periods (in thousands):
Net earnings attributable to controlling interests
$
1,074,340
$
(21,282
)
$
1,053,058
Net earnings per share attributable to common shares —
Basic
$
4.08
$
(0.08
)
$
4.00
Net earnings per share attributable to common shares —
Diluted
$
3.94
$
(0.08
)
$
3.86
See Note 9 for additional information on our convertible
notes.
Noncontrolling Interests. In December 2007,
the FASB issued a new accounting standard for noncontrolling
interests in consolidated financial statements. We adopted this
accounting standard on January 1, 2009, which required
noncontrolling interests (previously referred to as minority
interests) to be reported as a component of equity, and changed
the accounting for transactions with noncontrolling interest
holders. The adoption of the accounting standard changed the
classification and reporting of our noncontrolling interests.
We recognize the noncontrolling interests in real estate
partnerships in which we consolidate using each noncontrolling
holder’s respective share of the estimated fair value of
the real estate as of the date of formation. Noncontrolling
interest that was created or assumed as a part of a business
combination is recognized at fair value as of the date of the
transaction. Noncontrolling interest is subsequently adjusted
for additional contributions, distributions to noncontrolling
holders and the noncontrolling holders’ proportionate share
of the net earnings or losses of each respective entity.
Certain limited partnership interests issued by us in connection
with the formation of a real estate partnership and as
consideration in a business combination are exchangeable into
our common shares. Common shares issued upon exchange of a
holder’s noncontrolling interest are accounted for at our
carrying value of the surrendered noncontrolling interest.
Costs of Raising Capital. Costs incurred in
connection with the issuance of both common shares and preferred
shares are treated as a reduction to additional paid-in capital.
Costs incurred in connection with the issuance or renewal of
debt are capitalized in other assets, and amortized to interest
expense over the term of the related debt.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Revenue
Recognition.
Rental and other income. 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, some or
all of our rental expenses are recovered from our customers. We
reflect amounts recovered from customers as a component of
rental income. A provision for possible loss is made if the
collection of a receivable balance is considered doubtful. Some
of our retail and ground leases provide for additional rent
based on sales over a stated base amount during the lease year.
We recognize this additional rent when each customer’s
sales exceed their sales threshold. We recognize interest income
and management, development and other fees and incentives when
earned, fixed and determinable.
Gains on Disposition of Real Estate. Gains on the
disposition of real estate are recorded when the recognition
criteria have been met, generally at the time title is
transferred, and we no longer have substantial continuing
involvement with the real estate sold.
When we contribute a property to a property fund or joint
venture in which we have an ownership interest, we do not
recognize a portion of the gain realized. If a loss is realized
it is recognized when known. 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 investee. We adjust
our proportionate share of net earnings or losses recognized in
future periods to reflect the investees’ recorded
depreciation expense as if it were computed on our lower basis
in the contributed properties rather than on the entity’s
basis. Through 2008, we reflected the gains recognized from
contributions of CDFS properties to property funds and joint
ventures in operating cash flows. As a result of the changes in
our segments in 2009, these gains are now included in investing
activities.
When a property that we originally contributed to a property
fund or joint venture is disposed of to a third party, we
recognize the amount of the gain we had previously deferred,
along with our proportionate share of the gain recognized by the
investee. During periods when our ownership interest in an
investee decreases, we recognize gains relating to previously
deferred gains to coincide with our new ownership interest in
the investee.
Rental Expenses. Rental expenses primarily
include the cost of
on-site
property management personnel, utilities, repairs and
maintenance, property insurance and real estate taxes.
Investment Management Expenses. These costs
include the property management expenses associated with the
property-level management of the properties owned by our
unconsolidated investees (previously included in Rental
Expenses) and the direct investment management expenses
associated with the asset management of the property funds
(previously included in General and Administrative Expenses).
Share-Based Compensation. We account for
stock-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 over the period during which an
employee is required to provide service in exchange for the
award, generally the vesting period. We treat dividend
equivalent units (“DEUs”) as dividends, which are
charged to retained earnings and factored into the computation
of the fair value of the underlying share award at grant date.
See Note 12 for more information on our stock based
compensation.
Income Taxes. ProLogis was formed as a
Maryland REIT in January 1993 and we have, along with our
consolidated REIT subsidiary, elected to be taxed as a REIT
under the Internal Revenue Code of 1986, as amended (the
“Code”). Under the 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
shareholder 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
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(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 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, 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.
In July 2006, the FASB issued an interpretation of the existing
accounting standard for accounting for income taxes. The
interpretation clarifies the accounting for uncertainty in
income taxes recognized in an enterprise’s financial
statements. The interpretation prescribes a recognition
threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected
to be taken in a tax return and provides guidance on various
income tax accounting issues, including derecognition,
classification, interest and penalties, accounting in interim
periods, disclosure and transition. As a result, we may
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. We
adopted the provisions of this interpretation in 2007 and, as a
result, we recognized a $9.3 million increase in the
liability for unrecognized tax benefits, which was accounted for
as a reduction to the January 1, 2007 balance of
distributions in excess of net earnings.
Deferred income taxes are recognized in certain taxable
entities. Deferred income tax is generally a function of the
period’s temporary differences (items that are treated
differently for tax purposes than for financial reporting
purposes), the utilization of tax net operating losses generated
in prior years that had been previously recognized as deferred
income tax assets and deferred income tax liabilities related to
indemnification agreements related to certain contributions to
property funds. A valuation allowance for deferred income tax
assets is provided 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
realizability of the related deferred income tax asset is
included in deferred tax expense. See Note 15 for further
discussion of income taxes.
Financial Instruments. We may use certain
types of derivative financial instruments for the purpose of
managing certain foreign currency exchange rate and interest
rate risk. We reflect our derivative financial instruments at
fair value and record changes in the fair value of these
derivatives each period in earnings, unless specific hedge
accounting criteria are met. To qualify for hedge accounting
treatment, generally the derivative instruments used for risk
management purposes must effectively reduce the risk exposure
that they are designed to hedge (primarily interest rate swaps)
and, if a derivative instrument is utilized to hedge an
anticipated transaction, the anticipated transaction must be
probable of occurring. Derivative instruments meeting these
hedging criteria are formally designated as hedges at the
inception of the contract.
The unrealized gains and losses resulting from changes in fair
value of an effective hedge are recorded in Accumulated Other
Comprehensive Income (Loss) and are amortized to earnings over
the remaining term of the hedged items. The ineffective portion
of a hedge, if any, is immediately recognized in earnings to the
extent that the change in value of the derivative instrument
does not perfectly offset the change in value of the item being
hedged. We estimate the fair value of our financial instruments
through a variety of methods and assumptions that are based on
market conditions and risks existing at each balance sheet date.
Primarily, we use quoted market prices or quotes from brokers or
dealers for the same or similar instruments. These values
represent a general approximation of possible value and may
never actually be realized.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In March 2008, the FASB issued an accounting standard that
required enhanced disclosures related to derivative instruments
and hedging activities. This accounting standard required
disclosures relating to: (i) how and why an entity uses
derivative instruments; (ii) how derivative instruments and
related hedge items are accounted for; and (iii) how
derivative instruments and related hedged items affect an
entity’s financial position, financial performance and cash
flows. We adopted this accounting standard on January 1,2009 and as it only required enhanced disclosures, the adoption
did not have a significant impact on our consolidated financial
statements. See Note 18 for information on our financial
instruments.
Fair value measurements. On January 1,2008, we adopted a new accounting standard for our financial
assets and liabilities, primarily derivative instruments, to
which either we or our unconsolidated investees are a party.
This accounting standard established a framework for measuring
fair value and disclosures about fair value measurements. On
January 1, 2009, we adopted the provisions of this
accounting standard for our non-financial assets and liabilities.
We have estimated 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 upon disposition. The fair value hierarchy
consists of three broad levels, which are described below:
•
Level 1 — Quoted prices in active markets for
identical assets or liabilities that the entity has the ability
to access.
•
Level 2 — Observable inputs, other than quoted
prices included in Level 1, such as quoted prices for
similar assets and liabilities in active markets; quoted prices
for identical or similar assets and liabilities in markets that
are not active; or other inputs that are observable or can be
corroborated by observable market data.
•
Level 3 — Unobservable inputs that are supported
by little or no market activity and that are significant to the
fair value of the assets and liabilities. This includes certain
pricing models, discounted cash flow methodologies and similar
techniques that use significant unobservable inputs.
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. Costs incurred in connection with operating properties
and properties previously sold are expensed. Costs related to
undeveloped land are capitalized as development costs. Costs
incurred for properties to be disposed are included 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.
Recent Accounting Pronouncements. In June
2009, the FASB issued a new accounting standard that will be
effective on January 1, 2010. This accounting standard is a
revision to a previous FASB interpretation and changes how a
reporting entity evaluates whether an entity is a variable
interest entity (“VIE”) and which entity is considered
the primary beneficiary of a VIE and is therefore required to
consolidate such VIE. This accounting standard will also require
continuous reassessments of which party within the VIE is
considered the primary beneficiary and will require a number of
new disclosures related to VIE’s. We are still evaluating
this accounting standard but do not believe that it will have a
material impact on our financial position and results of
operations upon adoption.
On July 1, 2009, the FASB issued the FASB Accounting
Standards Codification (“ASC” or the
“Codification”) that establishes the exclusive
authoritative reference for U.S. GAAP for use in financial
statements, except for Securities and Exchange Commission
(“SEC”) rules and interpretive releases, which are
also authoritative
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
GAAP for SEC registrants. The Codification supersedes all
existing non-SEC accounting and reporting standards.
3.
Sale of
China Operations and Property Fund Interest in
Japan
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 ($845.5 million
related to China and $500.0 million related to the Japan
investments). We used these proceeds primarily to pay down
borrowings on our credit facilities.
All of the assets and liabilities associated with our China
operations were classified as Discontinued
Operations — Assets and Liabilities Held for Sale in
our accompanying Consolidated Balance Sheet as of
December 31, 2008, at which time we recognized an
impairment of $198.2 million. At the completion of the sale
in 2009, we recognized a net gain of $3.3 million. The
results of our China operations, including the impairment and
gain on sale, are presented as discontinued operations in our
accompanying Consolidated Statements of Operations for all
periods.
In connection with the sale of our investments in the Japan
property funds, we recognized a net gain of $180.2 million.
The gain is reflected as CDFS Proceeds in our Consolidated
Statements of Operations, as it represents the recognition of
previously deferred gains on the contribution of properties to
these property funds based on our ownership interest in the
property funds at the time of original contribution. We also
recognized $20.5 million in current income tax expense
related to a portion of the transaction.
In addition, as part of this transaction, we entered into an
agreement to sell one property in Japan to GIC RE. Therefore,
this property was classified as held for sale as of
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. In April 2009, we sold the Japan property for
proceeds of $128.1 million, resulting in a gain of
$13.1 million. See Note 8 for detail of all amounts
included in discontinued operations.
Properties under development, including cost of land (3)
191,127
1,181,344
Land held for development (4)
2,569,343
2,482,582
Land subject to ground leases and other (5)
385,222
425,001
Other investments (6)
233,665
321,397
Total real estate assets
15,215,896
15,725,272
Less accumulated depreciation
1,671,100
1,583,299
Net real estate assets
$
13,544,796
$
14,141,973
(1)
At December 31, 2009 and 2008, we had 1,188 and 1,297
distribution properties consisting of 191.6 million square
feet and 195.7 million square feet, respectively.
(2)
At December 31, 2009 and 2008, we had 29 and 34 retail
properties consisting of 1.2 million square feet and
1.4 million square feet, respectively. We also owned two
office properties with aggregate cost of $39.1 million at
December 31, 2009 and one office property with a cost of
$7.9 million at December 31, 2008.
(3)
Properties under development consisted of 5 properties
aggregating 2.9 million square feet at December 31,2009 and 65 properties aggregating 19.8 million square feet
at December 31, 2008. Our total expected investment upon
completion of the properties under development at
December 31, 2009 was $295.7 million, including
development and leasing costs.
(4)
Land held for development consisted of 10,360 acres and
10,134 acres at December 31, 2009 and 2008,
respectively, and includes land parcels that we may develop or
sell depending on market conditions and other factors.
(5)
At December 31, 2009 and 2008, amount represents
investments of $314.9 million and $367.9 million in
land we own and lease to our customers under long-term ground
leases, an investment of $36.1 million and
$35.3 million in railway depots and $29.9 million and
$21.8 million in parking lots, respectively. At
December 31, 2009, this amount also includes
$4.3 million in solar panels.
(6)
Other investments include: (i) restricted funds that are
held in escrow pending the completion of tax-deferred exchange
transactions involving operating properties ($45.6 million
and $9.0 million at December 31, 2009 and 2008,
respectively); (ii) certain infrastructure costs related to
projects we are developing on behalf of others; (iii) costs
incurred related to future development projects, including
purchase options on land; (iv) costs related to our
corporate office buildings, which we occupy; and
(v) earnest money deposits associated with potential
acquisitions.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
At December 31, 2009, we owned real estate assets in North
America (Canada, Mexico and the United States), Europe (Austria,
Belgium, the Czech Republic, France, Germany, Hungary, Italy,
the Netherlands, Poland, Romania, Slovakia, Spain, Sweden, and
the United Kingdom) and Asia (Japan and South Korea).
During 2008 and 2007, we completed individual and portfolio
acquisitions of industrial properties, other than those
discussed in Note 5, as follows (aggregated, dollars and
square feet in thousands). No such acquisitions were made in
2009:
Number of
Aggregate
Aggregate
Properties
Square Feet
Purchase Price
Debt Assumed
2008
25
5,812
$
324,029
$
6,599
2007
41
7,347
$
351,639
$
27,305
During 2009, we recognized net gains of $35.3 million
related to the contribution of properties ($13.0 million),
the recognition of previously deferred gains from PEPR and
ProLogis Korea Fund on properties they sold to third parties
($9.9 million), the sale of land parcels
($6.4 million), and a gain on settlement of an obligation
to our fund partner in connection with the restructure of the
North American Industrial Fund II ($6.0 million). The
contribution activity resulted in total cash proceeds of
$643.7 million and included 43 properties aggregating
9.2 million square feet to ProLogis European Property
Fund II (“PEPF II”).
If we realize a gain on contribution of a property, we recognize
the portion attributable to the third party ownership in the
property fund until the property is sold to a third party. If we
realize a loss on contribution, we recognize the full amount of
the impairment as soon as it is known. Due to our continuing
involvement through our ownership in the property fund, these
dispositions are not included in discontinued operations. As
discussed earlier, in 2008 and 2007, contribution activity was
reported as CDFS Proceeds and Cost of CDFS Dispositions within
our CDFS business segment. See Note 8 for further
discussion of properties we sold to third parties that are
reported in discontinued operations.
During the years ended December 31, 2009 and 2008, we
recorded impairment charges of $331.6 and $274.7 million,
respectively, related to our real estate. See Note 14 for
further discussion of these impairment charges.
Prior to 2008, we identified properties that we developed or
acquired with the intent to contribute to an unconsolidated
property fund. Our policy was to not depreciate these properties
during the period from completion or acquisition until their
contribution to the property fund. In 2008, in connection with
the changes in our business strategy discussed earlier,
including uncertainty as to when, or if, these properties will
be contributed and our intent to hold and operate these
properties for our own use, we no longer identify specific
properties for contribution to property funds. As a result, we
recorded a $30.9 million adjustment to depreciation expense
to depreciate these properties through December 31, 2008.
Operating
Lease Agreements
We lease our operating properties and certain land parcels to
customers under agreements that are generally classified as
operating leases. Our largest customer and 25 largest customers
accounted for 2.28% and 21.39%, respectively, of our annualized
collected base rents at December 31, 2009. At
December 31, 2009, minimum lease payments on leases with
lease periods greater than one year for space in our operating
properties and
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
leases of land subject to ground leases, during each of the
years in the five-year period ending December 31, 2014 and
thereafter are as follows (in thousands):
2010
$
673,599
2011
605,827
2012
495,619
2013
389,026
2014
298,730
Thereafter
1,705,610
$
4,168,411
These amounts do not reflect future rental revenues from the
renewal or replacement of existing leases and exclude
reimbursements of operating expenses. In addition to minimum
rental payments, our customers pay reimbursements for their pro
rata share of specified operating expenses, which amounted to
$194.8 million, $210.9 million and $197.3 million
for the years ended December 31, 2009, 2008 and 2007,
respectively. These reimbursements are reflected as rental
income and rental expenses in the accompanying Consolidated
Statements of Operations.
5.
Acquisitions:
In February 2007, we purchased the industrial business and made
a 25% investment in the retail business of Parkridge Holdings
Limited (“Parkridge”), a European developer. The total
purchase price was $1.3 billion, which was financed with
$733.9 million in cash, including amounts settled in cash
subsequent to the purchase date, the issuance of
4.8 million common shares (valued for accounting purposes
at $71.01 per share for a total of $339.5 million) and the
assumption of $191.5 million in debt and other liabilities.
The cash portion of the acquisition was funded with borrowings
under our credit facilities.
The acquisition included 6.3 million square feet of
operating distribution properties, including developments under
construction, and 1,139 acres of land, primarily in Central
Europe and the United Kingdom. We allocated the purchase price
based on estimated fair values and recorded approximately
$724.7 million of real estate assets, $156.3 million
of investments in joint ventures and other unconsolidated
investees, $58.1 million of cash and other tangible assets
and $325.8 million of goodwill and other intangible assets,
which are included in Other Assets in our Consolidated Balance
Sheet. During 2008, we recognized an impairment charge of
$175.4 million related to this allocated goodwill (see
Note 14). The Parkridge acquisition would not have had a
material impact on our consolidated results of operations for
the year ended December 31, 2007, and as such, we have not
presented any pro forma financial information.
See also Note 4 for information on real estate property
acquisitions.
6.
Unconsolidated
Investees:
Our investments in and advances to these unconsolidated
investees, which are accounted for under the equity method, are
summarized by type of investee as follows (in thousands):
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Property
Funds
We have investments in several property funds that own
portfolios of operating industrial properties. Many of these
properties were originally developed by ProLogis and contributed
to these property funds, although certain of the property funds
have also acquired properties from third parties. When we
contribute a property to a property fund, we may receive
ownership interests as part of the proceeds generated by the
contribution. We earn fees for acting as manager of the property
funds and the properties they own. We may earn additional fees
by providing other services including, but not limited to,
acquisition, development, construction management, leasing and
financing activities. We may also earn incentive performance
returns based on the investors’ returns over a specified
period.
Summarized information regarding our investments in property
funds is as follows (in thousands):
Earnings (loss) from unconsolidated property funds:
North America
$
(12,085
)
$
3,271
$
17,161
Europe
33,141
(94,429
)
60,913
Asia
3,852
22,042
16,379
Total earnings (loss) from unconsolidated property funds
$
24,908
$
(69,116
)
$
94,453
Property management and other fees and incentives:
North America
$
63,413
$
61,753
$
47,164
Europe
50,814
51,969
43,752
Asia
2,542
17,289
13,803
Total property management and other fees and incentives
$
116,769
$
131,011
$
104,719
We also earned property management fees from joint ventures and
other entities of $26.0 million during the year ended
December 31, 2009. This included fees earned from the Japan
property funds after February 2009, which is the date we sold
our investments in the funds, through July 2009. In connection
with the termination of the property management agreement for
these properties, we earned a termination fee of
$16.3 million that is included within Property Management
and Other Fees and Incentives in our Consolidated Statements of
Operations for the year ended December 31, 2009.
Included within Other Income (Expense), in our Consolidated
Statements of Operations for the year ended December 31,2009 is $20.3 million of expense due to an increase in
accruals related to rent indemnifications we had provided to
certain property funds because of changes in leasing and other
assumptions.
ProLogis Korea Fund (ProLogis Korea Properties Trust) (1)
12
1.7
20.0
%
20.0
%
21,426
21,867
ProLogis Japan properties funds (1) (8)
—
—
—
20.0
%
—
359,809
Totals
1,287
274.2
$
1,876,650
$
1,957,977
(1)
We have one fund partner in each of these property funds.
(2)
During 2009, we recognized an aggregate impairment charge of
$28.5 million, representing the carrying value of our
investments in ProLogis North American Properties Fund IX
and X. We recorded the impairment charge due to recent events,
which indicated that we may not be able to recover our
investment balances. The impairment charge was included in
Impairment of Goodwill and Other Assets in our Consolidated
Statements of Operations.
(3)
We refer to the combined entities in which we have ownership
interests with ten institutional investors as one property fund
named ProLogis North American Industrial Fund. Our ownership
percentage is based on our levels of ownership interest in these
different entities. During 2009, we made capital contributions
of $54.1 million, representing our share of the additional
capital called by this property fund to repay outstanding
borrowings on its credit facilities and secured mortgage debt.
(4)
In July 2007, we acquired all of the units in Macquarie ProLogis
Trust, an Australian listed property trust (“MPR”)
which had an 88.7% ownership interest in ProLogis North American
Properties Fund V. The total consideration was
approximately $2.0 billion consisting of cash in the amount
of $1.2 billion and assumed liabilities of
$0.8 billion. We entered into foreign currency forward
contracts to economically hedge the purchase price of MPR. As
this type of contract does not qualify for hedge accounting
treatment, we
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
recognized gains of $26.6 million in 2007 when the contract
settled that are included in Foreign Currency Exchange Gains
(Losses), Net in our Consolidated Statements of Operations.
As a result of the MPR acquisition, we owned 100% and
consolidated the results of the assets for approximately two
months in 2007, at which time the lender converted certain of
the bridge debt into equity of a new property fund, ProLogis
North American Industrial Fund II, in which we have a 37.0%
equity interest at December 31, 2009. Upon conversion by
the lender in the third quarter of 2007, we recognized net gains
of $68.6 million that are reflected in proceeds from and
costs of CDFS Acquired Property Portfolios in our Consolidated
Statements of Operations.
On July 1, 2009, we and our fund partner amended a loan
agreement and the governing documents of this property fund. The
property fund extended the term of a $411.3 million loan
payable to an affiliate of our fund partner, which was scheduled
to mature in July 2009, until 2014 with an option for an
additional extension until 2016. As part of the restructuring,
we made an $85.0 million cash capital contribution to the
property fund and we may be required to make an additional cash
contribution in the future of up to $25.0 million for the
repayment of debt or other obligations. In addition, we pledged
properties we own directly, valued at approximately
$275.0 million, to serve as additional collateral on the
loan and related interest rate swap contract. As a result, we
are entitled to receive a 10% preferred distribution on all new
contributions paid out of operating cash flow prior to other
distributions. Upon liquidation of the property fund, we are
entitled to receive a 10% preferred return per annum on our
initial equity investment and the return of our total investment
prior to any other distributions.
(5)
We refer to the combined entities in which we have ownership
interests as one property fund named ProLogis Mexico Industrial
Fund, which was formed with several institutional investors in
September 2007. During 2008, we loaned this property fund
$153.1 million that was used to repay bridge financing that
had matured and for a portion of the costs related to a third
party acquisition. Through December 31, 2009 and 2008, the
fund had repaid $138.7 million and $137.9 million,
respectively, of this loan primarily with proceeds obtained from
third party financing. The loan bears interest at LIBOR plus a
margin and is payable upon demand.
(6)
In December 2008, we purchased units in PEPF II from PEPR that
represented a 20% interest for €43 million
($61.1 million) and assumed €348 million of
PEPR’s future equity commitments related to these units.
The units were purchased at a discount to net asset value due to
PEPR’s near-term liquidity needs. In January 2009, PEPR
received offers for their remaining 10.4% interest in PEPF II
for €10.5 million. As a result of the sale of units to
us and the impairment of their remaining ownership (based on
offers received), PEPR recognized a total loss of
€310.9 million ($434.3 million) in 2008. Our
share of this loss, reflected as Earnings (Loss) from
Unconsolidated Property Funds in our Consolidated Statements of
Operations, was $108.2 million.
In December 2009, PEPR issued €61 million of preferred
units with a 10.5% dividend that were offered to its current
investors. We invested €41.6 million
($59.4 million) in 7.0 million preferred units that
are included in our investment balance. The preferred units are
convertible into common units at a rate of one for one at our
option. PEPR has the option to redeem the units after seven
years or in certain limited circumstances.
(7)
PEPF II was formed with several third party investors in July
2007. From July 2007 through December 2008, we owned
approximately 24% of PEPF II, which included an indirect
interest through PEPR’s 30% interest. Our ownership
interest has changed based on PEPR’s sale of its 10.4%
interest in PEPF II in January 2009 and due to the contributions
of properties we made to PEPR II in 2009.
(8)
On February 9, 2009, we sold our interests in the Japan
property funds (see Note 3).
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Equity
Commitments Related to Certain Property Funds
Certain property funds have equity commitments from us and our
fund partners. We may fulfill our equity commitment through
contributions of properties or cash or we may not be required to
fulfill them before expiration. Our fund partners fulfill their
equity commitment with cash. We are committed to offer to
contribute substantially all of the properties that we develop
and stabilize in Europe and Mexico to these respective funds.
These property funds are committed to acquire such properties,
subject to certain exceptions, including that the properties
meet certain specified leasing and other criteria, and that the
property funds have available capital. We are not obligated to
contribute properties at a loss. Depending on market conditions,
our liquidity needs and other factors, we may make contributions
of properties to these property funds through the remaining
commitment period in 2010.
The following table outlines the activity of these commitments
in 2009 (in millions):
During 2009, the ProLogis North American Industrial Fund called
capital to repay borrowings outstanding under its credit
facility and to repay certain secured mortgage debt, which
resulted in a gain on early extinguishment of
$31.1 million. In February 2010, the property fund called
$23.2 million of capital, including $0.8 million in
cash from ProLogis, to acquire one property from us. The
remaining equity commitments expire at the end of February 2010.
(2)
ProLogis Mexico Industrial Fund may use the remaining equity
commitments to pay down existing debt or other liabilities,
including amounts due to us, or to make acquisitions of
properties from us or third parties depending on market
conditions and other factors.
(3)
PEPF II’s equity commitments are denominated in euro. The
ProLogis commitments include a commitment on the Series B
units we acquired from PEPR in December 2008 that we are
required to fund with cash. During 2009, we contributed 43
properties to PEPF II for gross proceeds of $643.7 million
that were financed by PEPF II with all equity, including our
co-investment of $152.7 million in cash under this
commitment. We did not make any contributions in 2009 under the
Series A commitment. We are not required to fund the
remaining Series A commitment in cash and we anticipate it
will expire unused.
(4)
Excludes commitments related to the ProLogis Korea Fund as the
agreements were amended and there are no longer any remaining
commitments.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Generally, the properties are contributed based on third-party
appraised value, other than PEPF II in 2009. For contributions
we made in 2009 to PEPF II, the capitalization rate was
determined based on a third party appraisal then a margin of
0.25 to 0.75 percentage points was added to the
capitalization rate, depending on the quarter the properties
were contributed. We may receive additional proceeds for the
2009 contributions if values at the end of 2010 are higher than
those used to determine contribution values.
In addition to the capital contributions we made under these
commitments, we also made additional discretionary investments
in the property funds of $173.5 million in 2009. These
investments included the purchase of preferred convertible units
in PEPR ($59.4 million), a preferred investment in ProLogis
North American Industrial Fund II ($85.0 million),
contributions to ProLogis North American Properties Fund XI
and ProLogis North American Properties Fund I to repay debt
($3.7 million) and advances to ProLogis North American
Industrial Fund III ($25.4 million).
Summarized financial information of the property funds on a
combined basis (for the entire entity, not our proportionate
share) and our investments in such funds is presented below
(dollars in millions):
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following transactions impacted the results and financial
position of the property funds during 2009 and 2008:
(1)
The variances in the revenues, total assets, third party debt
and total liabilities of the European property funds between
2008 and 2009 are mainly as a result of changes in the size of
the property portfolios due to contributions of properties to
PEPF II and fluctuations in foreign currency exchange rates,
which we use to translate the assets and liabilities to U.S.
dollars.
(2)
The reduction in revenues, net earnings, total assets, third
party debt and total liabilities relating to the Asian property
funds between 2008 and 2009 was due to the sale of our interests
in the Japan property funds in February 2009 (see Note 3).
(3)
In 2007, two of the North America property funds entered into
interest rate forward swap contracts and designated them as cash
flow hedges. Certain of these derivative contracts no longer met
the requirements for hedge accounting and, therefore, the change
in fair value of these contracts was recognized within earnings,
along with the gain or loss upon settlement. As a result,
included in net earnings (loss) from North America for 2009 and
2008 are net losses of $17.1 million and
$77.0 million, respectively.
During 2009, the North American Funds that own properties in
Mexico recognized $79.5 million of deferred tax expense. In
2009, two North American property funds recorded impairment
charges aggregating $11.1 million related to properties
they planned to sell. In 2009, ProLogis North American
Industrial Fund repaid debt scheduled to mature in 2011 and 2012
at a discount that resulted in the recognition of a
$31.1 million gain on early extinguishment of debt.
(4)
During 2009, PEPR sold 14 properties to unrelated third parties
resulting in a loss of $15.3 million. The Europe results
include properties that we contributed to PEPF II during 2009.
Included in the net loss for Europe in 2008 was the loss on sale
and impairment of PEPR’s investment in PEPF II, as
discussed above, of $434.3 million.
(5)
During 2009, we and our fund partner each loaned
$25.4 million to ProLogis North American Industrial
Fund III that was used to repay maturing debt of the
property fund. These notes will be paid with operating cash
flow, mature at dissolution of the property fund and bear
interest at LIBOR plus 8%. As of December 31, 2009, the
outstanding balance was $22.6 million. In addition, as of
December 31, 2009 and 2008, ProLogis Mexico Industrial Fund
had a note payable to us for $14.3 million and
$15.3 million, respectively. The remaining amounts
represent current balances from services provided by us.
(6)
As of December 31, 2009 and 2008, we had not guaranteed any
of the third party debt of the property funds. On July 1,2009, in connection with the restructuring and amendment of the
partnership and loan agreements discussed earlier, we pledged
direct owned properties, valued at approximately
$275 million, to serve as additional collateral for the
loan of ProLogis North American Industrial Fund II that is
payable to an affiliate of our fund partner and for the related
interest rate swap contract.
(7)
Represents our weighted average ownership interest in all
property funds combined based on each entity’s contribution
to total assets, before depreciation, net of other liabilities.
(8)
The difference between our percentage ownership interest in the
property fund’s equity and our investment balance results
principally from three types of transactions: (i) deferring
a portion of the gains we recognized from a contribution of one
of our properties to a property fund as a result of our
continuing ownership in the property (see next footnote);
(ii) recording additional costs associated with our
investment in the property fund; and (iii) advances to the
property fund.
(9)
This amount is recorded as a reduction to our investment and
represents the gains that were deferred when we contributed a
property to a property fund due to our continuing ownership in
the property.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Other
unconsolidated investees
We have investments in entities that develop and own industrial
and retail properties, perform land and mixed-use development
activity, own a hotel and office properties. The amounts we have
recognized as our proportionate share of the earnings (loss)
from our investments in these entities are summarized as follows
(in thousands):
Total earnings from other unconsolidated investees
$
3,151
$
13,342
$
4,573
Our investments in and advances to these entities were as
follows as of December 31 (in thousands):
2009
2008
North America
$
148,137
$
150,963
Europe
96,191
161,053
Asia
30,745
—
Total
$
275,073
$
312,016
The investment in Europe includes our 25% ownership interest in
and advances to an entity that develops retail and mixed use
properties. As a result of the decline in global market
conditions during the fourth quarter of 2008, we evaluated the
recoverability of our investment in and advances to this entity,
and recognized an impairment charge of $113.7 million. We
also began evaluating our options associated with this
investment. During the second quarter of 2009, the entity’s
shareholders and lenders approved a restructuring plan that
included using the proceeds received from the orderly
disposition of assets to repay debt. During the fourth quarter
of 2009, we reviewed the entity’s progress with executing
this plan, the cash generated from asset sales and estimated
future cash flows. As a result of this review, we evaluated the
recoverability of our investment in and advances to the entity
and recognized a further impairment charge of
$115.1 million during the fourth quarter of 2009. Included
in the 2009 impairment charge is $25.1 million that
represents the cumulative translation losses we had recognized
on this investment that were previously included as a component
of equity. At December 31, 2009, we have a remaining
balance of $45.0 million of advances that we expect to
recover based on estimated future cash flows from the
entity’s disposition of assets.
The investment in Asia relates to a new joint venture in Japan
to which we contributed land. The joint venture is with one
partner and is accounted for under the equity method, as we do
not have majority voting rights and all substantive decisions
require unanimous consent of both us and our partner. Our
partner is responsible for funding 51% of the costs of
construction and we are responsible for 49%. The joint venture
intends to obtain secured financing and use the proceeds to
reimburse our costs of construction. After the financing is in
place, our total investment in this joint venture is expected to
equal our land investment balance and represent 60% of the joint
venture equity.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7.
Other
Assets and Other Liabilities:
Our other assets consisted of the following, net of amortization
and depreciation, if applicable, as of December 31 (in
thousands):
2009
2008
Goodwill
$
399,037
$
395,626
Value added taxes receivable
125,768
250,707
Leasing commissions
119,496
115,194
Rent leveling assets and above market leases
106,009
81,558
Fixed assets
39,637
80,323
Loan fees
76,994
37,138
Non-qualified savings plan assets
699
24,901
Other
150,140
141,546
Totals
$
1,017,780
$
1,126,993
Our other liabilities consisted of the following, net of
amortization, if applicable, as of December 31 (in thousands):
2009
2008
Income tax liabilities
$
171,602
$
367,626
Tenant security deposits
56,529
120,590
Accrued disposition costs
41,526
91,476
Unearned rents
43,388
60,331
Non-qualified savings plan liabilities
886
27,206
Value added taxes payable
24,690
10,571
Below market leases
6,908
7,332
Other
98,903
66,106
Totals
$
444,432
$
751,238
The expected future amortization of leasing commissions assets
is summarized in the table below. We also expect our above and
below market leases and rent leveling assets, which total
$99.1 million at December 31, 2009, to be amortized
into rental income as follows (in thousands):
Amortization
Net Charge (Increase) to
Expense
Rental Income
2010
$
33,060
$
(2,408
)
2011
27,865
16,909
2012
21,293
17,380
2013
14,328
14,191
2014
8,726
11,793
Thereafter
14,224
41,236
Total
$
119,496
$
99,101
As of December 31, 2009 and 2008, total accumulated
impairment of goodwill was $175.4 million, all of which was
recorded in 2008.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During 2009 and 2008, we recorded impairment charges on certain
other assets of $20.0 million and $13.6 million,
respectively. See Note 14 for additional information.
8. Assets
Held for Sale and Discontinued Operations:
Held for
Sale
As discussed in Note 3 above, 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, as well
as one property in Japan that we sold in April 2009. We had no
properties classified as held for sale at December 31, 2009.
A summary of the amounts included in Assets Held for Sale, at
December 31, 2008 was as follows (in thousands):
Assets — discontinued operations — assets
held for sale:
Investments in real estate assets:
Industrial properties
$
471,221
Properties under development
225,971
Land held for development
245,965
Other investments
147,356
1,090,513
Accumulated depreciation
(15,463
)
Net investments in real estate assets
1,075,050
Investments in and advances to unconsolidated investees:
Property funds
32,952
Other investees
247,507
Total investments in and advances to unconsolidated investees
280,459
Cash and cash equivalents
111,136
Other assets
42,345
Total assets before impairment
1,508,990
Impairment of assets
(198,236
)
Total assets — discontinued operations —
assets held for sale
$
1,310,754
Liabilities — discontinued operations —
assets held for sale:
Debt
$
218,463
Other liabilities
104,547
Noncontrolling interests
66,874
Total liabilities — discontinued
operations — assets held for sale
$
389,884
Discontinued
Operations
The operations of the properties held for sale or disposed of to
third parties, including our China operations, 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
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
pre-sale agreement. Interest expense is included in discontinued
operations only if it is directly attributable to these
operations or properties.
During 2009, other than our China operations, we disposed of
land subject to ground leases and 140 properties to third
parties aggregating 14.8 million square feet, 3 of which
were development properties. This includes a portfolio of 90
properties aggregating 9.6 million square feet that we
continue to manage that were sold to a single venture during the
second quarter. During 2008, we disposed of land subject to
ground leases and 15 properties to third parties, 6 of which
were development properties.
Income attributable to discontinued operations for the years
ended December 31 is summarized as follows (in thousands):
Cost of CDFS dispositions — acquired property
portfolios
—
83,648
—
General and administrative
1,305
21,721
11,354
Reduction in workforce
—
3,300
—
Depreciation and amortization
11,319
33,661
25,588
Other expenses
7
5,088
—
Total expenses
27,065
189,476
68,151
Operating income
23,520
17,371
42,139
Total other income (expense)
787
(16,390
)
6,717
Net (earnings) loss attributable to noncontrolling interest
(144
)
10,068
(1,189
)
Income attributable to assets held for sale and disposed
properties
24,163
11,049
47,667
Net gain (impairment) related to disposed assets —
China operations
3,315
(198,236
)
—
Net gains recognized on property dispositions
261,464
19,501
81,497
Total discontinued operations
$
288,942
$
(167,686
)
$
129,164
The following information relates to properties disposed of and
recorded as discontinued operations, excluding the China
operations and including minor adjustments to previous
dispositions, during each of the years ended December 31
(dollars in thousands):
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9.
Debt:
Our debt consisted of the following as of December 31 (dollars
in thousands):
2009
2008
Weighted
Weighted
Average
Amount
Average
Amount
Interest Rate
Outstanding
Interest Rate
Outstanding
Global Line
2.27%
$
736,591
2.38%
$
2,617,764
Credit Facility (1)
—
—
2.81%
600,519
Senior and other notes
6.31%
4,047,905
5.60%
3,995,410
Convertible senior notes (2)
5.55%
2,078,441
5.56%
2,590,133
Secured mortgage debt
6.40%
1,090,126
6.79%
877,916
Assessment bonds
6.49%
24,715
6.55%
29,626
Totals
5.75%
$
7,977,778
4.75%
$
10,711,368
(1)
In 2009, we repaid the balance outstanding and terminated our
existing multi-currency credit facility (the “Credit
Facility”), which was scheduled to mature on
October 6, 2009, with borrowings under our global line of
credit (the “Global Line”).
(2)
The weighted average interest rate reflects the effective rate
after the adoption of the new accounting standard for
convertible debt (see Note 2 for more information on the
adoption). The weighted coupon interest rate was 2.2% for both
periods.
Beginning in the fourth quarter of 2008 and throughout 2009, in
connection with our announced initiatives to reduce debt, we
purchased portions of several series of notes outstanding, the
majority of which were at a discount, and extinguished some
secured mortgage debt prior to maturity, as follows (in
thousands):
Included in the year ended December 31, 2009 is the
repurchase of €248.7 million ($356.4 million)
original principal amount of our other notes for
€235.1 million ($338.7 million).
(2)
In addition, there was an unamortized premium of
$11.4 million (recorded at acquisition) that was included
in the calculation of the gain on early extinguishment.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(3)
Although we reduced our debt obligations by $242.1 million
and $92.9 million in 2009 and 2008, respectively, the gain
is calculated based on the recorded debt balance, which may
include unamortized related debt issuance costs, premiums, and
discounts.
Credit
Facilities
Information related to our combined credit facilities are
summarized below (dollars in millions):
2009
2008
2007
For the years ended December 31:
Weighted average daily interest rate
1.62
%
3.26
%
3.72
%
Weighted average daily borrowings
$
1,641.9
$
3,248.4
$
3,075.9
Maximum borrowings outstanding at any month-end
$
3,285.3
$
3,663.6
$
3,538.2
As of December 31:
Aggregate borrowing capacity (1)
$
2,164.8
$
4,432.1
$
4,354.9
Borrowings outstanding
$
736.6
$
3,218.3
$
2,564.4
Outstanding letters of credit (1)
$
114.9
$
142.4
$
148.2
Aggregate remaining capacity available
$
1,080.4
$
1,071.5
$
1,642.4
(1)
At December 31, 2009, included in this borrowing capacity
and letters of credit is a credit facility with outstanding
commitments equal to the outstanding letters of credit of
9.7 million British pound sterling ($15.6 million).
Information related to our Global Line as of December 31,2009 (dollars in millions):
Borrowing base
$
3,907.7
Borrowing capacity (1)
$
2,149.2
Less:
Borrowings outstanding
736.6
Outstanding letters of credit
99.3
Debt due within one year
232.9
Current availability
$
1,080.4
(1)
Borrowing capacity represents 55% of the borrowing base related
to the Global Line.
In August 2009, we amended our Global Line to, among other
things, extend the maturity to August 21, 2012 and reduce
the size of the aggregate commitments to $2.25 billion,
after October 2010, from the current level of $3.7 billion
(in each case subject to currency fluctuations). The Global Line
includes covenants that may limit the amount of indebtedness
that we and our subsidiaries can incur to an amount that may be
less than the aggregate lender commitments under the Global
Line, depending on the timing and use of proceeds of the
borrowings. The borrowing base covenant in the Global Line
limits the aggregate amount of indebtedness (including
obligations under the Global Line and other recourse
indebtedness maturing within one year) to no more than 55% of
the value (determined by a formula as of the end of each fiscal
quarter) of our unencumbered property pool, as defined in the
Global Line.
Our current availability to borrow under the Global Line is
calculated as the lesser of (i) the aggregate lender
commitments and (ii) the borrowing capacity, in each case
reduced by the outstanding borrowings, letters of credit and
recourse debt due within one year; resulting in current
availability of $1.1 billion at December 31, 2009.
Therefore, the amount of funds that we may borrow under the
Global Line will vary from time to time
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
based upon the outstanding amount of such specified indebtedness
and the quarterly formulaic valuation of our unencumbered
property pool. Our current availability to borrow would remain
$1.1 billion at December 31, 2009, even if the
aggregate lender commitments were reduced to $2.25 billion.
We may draw funds from a syndicate of banks in
U.S. dollars, euros, Japanese yen, British pound sterling
and Canadian dollars, and until October 2010, South Korean won.
Lenders who did not participate in the amended and extended
facility will be subject to the
pre-amendment
pricing structure through October 2010, while the new pricing
structure is effective immediately to extending lenders. Based
on our public debt ratings and a pricing grid, interest on the
borrowings under the Global Line accrues at a variable rate
based upon the interbank offered rate in each respective
jurisdiction in which the borrowings are outstanding and we pay
utilization fees that are calculated on the outstanding balance.
The interest and utilization fees result in a weighted average
borrowing rate of 2.27% per annum at December 31, 2009
using local currency rates.
Senior
and Other Notes
On August 14, 2009, we issued $350.0 million of
7.625% senior notes maturing in 2014, at 99.489% of par
value for an
all-in-rate
of 7.75%. On October 30, 2009 we issued $600.0 million
of 7.375% senior notes maturing October 2019, at 99.728% of
par value for an
all-in-rate
of 7.414%. We used the proceeds from both issuances to repay
borrowings under our Global Line and other debt.
During 2009, we repaid maturing notes of $303.1 million
primarily with borrowings under our Global Line.
Our senior and other notes outstanding at December 31, 2009
are summarized as follows (dollars in thousands):
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(1)
Principal due at maturity.
(2)
We issued these notes in August 2009.
(3)
Beginning on February 1, 2010, and through February 1,2015, requires annual principal payments ranging from
$10.0 million to $20.0 million.
(4)
Beginning on March 1, 2010, and through March 1, 2015,
requires annual principal payments ranging from
$3.0 million to $7.5 million.
(5)
Beginning on May 15, 2010, and through May 15, 2016,
requires annual principal payments ranging from
$5.0 million to $12.5 million.
(6)
We issued these notes in October 2009.
(7)
Represents notes with principal outstanding of
€101.3 million.
Our obligations under the senior notes are effectively
subordinated in certain respects to any of our debt that is
secured by a lien on real property, to the extent of the value
of such real property. The senior notes require interest
payments be made quarterly, semi-annually or annually.
We have designated the senior and other notes and our credit
facilities as “Designated Senior Debt” under and as
defined in the Amended and Restated Security Agency Agreement
dated as of October 6, 2005 (the “Security Agency
Agreement”) among various creditors (or their
representatives) and Bank of America, N.A., as Collateral Agent.
The Security Agency Agreement provides that all Designated
Senior Debt holders will, subject to certain exceptions and
limitations, have the benefit of certain pledged intercompany
receivables and share payments and other recoveries received
post default/post acceleration so that all Designated Senior
Debt holders receive payment of substantially the same
percentage of their respective credit obligations. In connection
with the amendments to our Global Line described above, we
amended the terms of the Security Agency Agreement to permit us
to pledge collateral (“Specified Collateral”) to the
holders of certain Designated Senior Debt (“Specified DS
Debt”) without subjecting that collateral to the sharing
arrangements with other holders of Designated Senior Debt. The
Specified Collateral may include any property owned by us or any
of our consolidated subsidiaries, except that no property that
constitutes pledged collateral for all Designated Senior Debt
may become Specified Collateral. No proceeds from Specified
Collateral received by holders of Specified DS Debt will be
deducted or otherwise taken into consideration when allocating
proceeds among the credit parties pursuant to the Security
Agency Agreement unless the holder of such Designated Senior
Debt has been paid in full.
All of the senior and other notes are redeemable at any time at
our option, subject to certain prepayment penalties. Such
redemption and other terms are governed by the provisions of
indenture agreements, various note purchase agreements and a
trust deed.
Convertible
Notes
We have issued three series of convertible senior notes
($550 million issued May 2008, $1.25 billion issued
March 2007 and $1.12 billion issued November 2007). We
refer to the three convertible senior note issuances as
“Convertible Notes”. During 2009, we repurchased
portions of the Convertible Notes with an aggregate principal
amount of $654.0 million, as discussed above.
The Convertible Notes are senior obligations of ProLogis and are
convertible, under certain circumstances, for cash, our common
shares or a combination of cash and our common shares, at our
option, at a conversion rate per $1,000 of principal amount of
the notes of 13.1614 shares for the March 2007 issuance,
12.2926 shares for
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
the November 2007 issuance and 13.1203 shares for the May
2008 issuance. The initial conversion price ($76.58 for the
March 2007 issuance, $82.00 for the November 2007 issuance and
$76.22 for the May 2008 issuance) represented a premium of
approximately 20% over the closing price of our common shares at
the date of first sale and is subject to adjustment under
certain circumstances. The Convertible Notes, issued in 2007 and
2008, are redeemable at our option beginning in 2012 and 2013,
respectively, for the principal amount plus accrued and unpaid
interest and at any time prior to maturity to the extent
necessary to preserve our status as a REIT. Holders of the
Convertible Notes have the right to require us to repurchase
their Convertible Notes for cash on specific dates approximately
every five years beginning in 2012 and 2013 and at any time
prior to their maturity upon certain limited circumstances.
Therefore, we have reflected these amounts in 2012 and 2013 in
the schedule of debt maturities below based on the first put
date and we will amortize the discount through these dates.
While we have the legal right to settle the conversion in either
cash or shares, we intend to settle the principal balance of the
Convertible Notes in cash and, therefore, we have not included
the effect of the conversion of these notes in our computation
of diluted earnings per share. Based on the current conversion
rates, 29.2 million shares would be required to settle the
principal amount in shares. Such potentially dilutive shares,
and the corresponding adjustment to interest expense, are not
included in our computation of diluted earnings per share. The
amount in excess of the principal balance of the notes (the
“Conversion Spread”) will be settled in cash or, at
our option, ProLogis common shares. If the Conversion Spread
becomes dilutive to our earnings per share, (i.e., if our share
price exceeds $75.98 for the March 2007 issuance, $81.35 for the
November 2007 issuance or $76.22 for the May 2008 issuance) we
will include the shares required to satisfy the conversion
spread in our computation of diluted earnings per share.
After the adoption of the new accounting standard on
January 1, 2009 related to convertible debt with terms
similar to our Convertible Notes, as discussed in Note 2,
below is information related to the Convertible Notes (in
thousands):
Net carrying balance required to satisfy the conversion spread
$
2,078,441
$
2,590,133
$
2,044,008
Additional paid-in capital — conversion option
$
381,493
$
381,493
$
310,575
Interest expense related to the Convertible Notes for the years
ended December 31 included the following components (in
thousands):
2009
2008
2007
Coupon rate
$
55,951
$
58,420
$
24,505
Amortization of discount
71,662
73,374
27,638
Amortization of deferred loan costs
3,801
3,470
1,373
Interest expense
$
131,414
$
135,264
$
53,516
Effective interest rate
5.55
%
5.70
%
5.38
%
Secured
Mortgage Debt
During 2009, we issued a total of ¥14.3 billion in TMK
bonds, including ¥10 billion ($108.2 million at
December 31, 2009) at 2.74% due December 2012, and
¥4.3 billion ($45.6 million at December 31,2009) at
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4.09% due June 2012. TMK bonds are a financing vehicle in Japan
for special purpose companies known as TMKs. We also issued
$347.3 million of secured mortgage debt including
$101.8 million at 6.5% due July 2014 and
$245.5 million at 7.55% due July 2019. These 2009
financings are secured by 66 real estate properties with an
aggregate undepreciated cost of $1.4 billion at
December 31, 2009.
Our secured mortgage debt outstanding includes any premium or
discount recorded at acquisition and consisted of the following
at December 31, 2009 (dollars in thousands):
The weighted average annual interest rate for our total secured
mortgage debt was 6.4% at December 31, 2009.
(2)
Represents the effective fixed interest rates including interest
rate swap contracts.
(3)
Principal due at maturity.
(4)
Monthly amortization with a balloon payment due at maturity.
(5)
Includes six mortgage notes with interest rates ranging from
4.7% to 7.23%, maturing from 2011 to 2025, primarily requiring
monthly amortization with a balloon payment at maturity. The
combined balloon payment for all of the notes is
$71.2 million.
(6)
The debt is secured by 216 real estate properties with an
aggregate undepreciated cost of $2.6 billion at
December 31, 2009.
Assessment
Bonds
The assessment bonds are issued by municipalities and guaranteed
by us as a means of financing infrastructure and are secured by
assessments (similar to property taxes) on various underlying
real estate properties with an aggregate undepreciated cost of
$953.0 million at December 31, 2009. Interest rates
range from 5.78% per annum to 8.75% per annum. Maturity dates
range from 2011 to 2033.
Debt
Covenants
We have approximately $6.0 billion of senior notes
outstanding as of December 31, 2009, that have been issued
under the 1995 indenture (“Original Indenture”) or
supplemental indentures. We refer to the Original Indenture, as
amended by supplemental indentures, collectively as the
“Indenture”. These senior notes are subject to certain
financial covenants. The Convertible Notes, although issued
under the Indenture, are not subject to financial covenants.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On October 1, 2009, at the completion of a consent
solicitation with regard to the senior notes, other than the
Convertible Notes, we and the trustee under the Indenture
entered into a Ninth Supplemental Indenture (the “Ninth
Supplemental Indenture”) giving effect to the Indenture
amendments described in the solicitation statement dated
September 21, 2009. The Ninth Supplemental Indenture became
operative upon payment of a consent fee. The Indenture
amendments are binding on all holders of the senior notes, other
than the Convertible Notes, including non-consenting holders.
The amended covenants, defined terms and thresholds for certain
events of default, as included in the Ninth Supplemental
Indenture, are consistent with the Eighth Supplemental
Indenture, which was entered into with the trustee in August
2009 in connection with the issuance of $350.0 million of
senior notes. Therefore, as of October 1, 2009, all senior
notes, other than the Convertible Notes, issued under the
Indenture are now subject to one consistent set of financial
covenants, defined terms and thresholds for certain events of
default.
In consideration for the consents from the record holders of the
solicited notes to the proposed amendments, in October 2009, we
paid to each record holder $2.50 for each $1,000 in principal
amount of solicited notes as to which we had received a valid
(and unrevoked) consent on or prior to the consent solicitation
expiration date from such record holder. These costs were
deferred and will be amortized into interest expense over the
remaining life of the notes. In addition, we recognized
$14.5 million in fees and expenses related to the consent
solicitation that are included in General and Administrative
Expenses in our Consolidated Statements of Operations.
As of December 31, 2009, we were in compliance with all of
our debt covenants.
Long-Term
Debt Maturities
Principal payments due on our debt, excluding the Global Line,
during each of the years in the five-year period ending
December 31, 2014 and thereafter are as follows (in
thousands):
2010 (1)
$
232,854
2011 (1)
188,441
2012 (2)
1,569,352
2013 (2) (3)
1,497,740
2014
513,653
Thereafter
3,417,667
Total principal due
7,419,707
Discount, net
(178,520
)
Total carrying value
$
7,241,187
(1)
We expect to repay the amounts maturing in 2010 and 2011 with
borrowings under our Global Line or with proceeds from the
issuance of debt or equity securities, depending on market
conditions.
(2)
The maturities in 2012 and 2013 include the aggregate principal
amounts of the convertible notes of $1,103.7 million and
$1,162.8 million, respectively, based on the year in which
the holders first have the right to require us to repurchase
their notes.
(3)
The convertible notes issued in November 2007 are included as
2013 maturities since the holders have the right to require us
to repurchase their notes for cash in January 2013. The holders
of these notes also have the option to convert their notes in
November 2012, which we may settle in cash or common shares, at
our option.
The amount of interest paid in cash, net of amounts capitalized,
for the years ended December 31, 2009, 2008 and 2007 was
$290.2 million, $339.5 million and
$356.8 million, respectively.
10.
Noncontrolling
Interests:
We have reported noncontrolling interests related to two real
estate partnerships in North America and other entities we
consolidate but do not wholly own. The real estate partnerships
have limited partnership units, held by noncontrolling interest
holders, that are convertible into our common shares generally
at a rate of one common share to one unit. Information at
December 31 is as follows (dollars in thousands):
2009
2008
Noncontrolling
Noncontrolling
Type of Entity
Balance
Interests
Balance
Interests
North America limited partnerships (1)(2)(3)(4)
$
12,608
3-7
%
$
14,396
4-7
%
North America — joint ventures
611
1-25
%
676
1-25
%
Europe joint venture
6,743
50
%
4,806
50
%
$
19,962
$
19,878
(1)
At December 31, 2009 and 2008, an aggregate of 810,163 and
1,233,566 limited partnership units, respectively, held by
noncontrolling interest holders are convertible into an equal
number of common shares. The majority of the outstanding limited
partnership units are entitled to receive cumulative
preferential quarterly cash distributions equal to the quarterly
distributions paid on our common shares.
(2)
Certain properties owned by one of these partnerships cannot be
sold, other than in tax-deferred exchanges, prior to the
occurrence of certain events and without the consent of the
limited partners. The partnership agreement provides that a
minimum level of debt must be maintained within the partnership,
which can include intercompany debt to us.
(3)
In 2009 and 2008, outstanding limited partnership units of
413,500 and 3,911,923, respectively, were converted into an
equal number of common shares.
(4)
In 2009, outstanding limited partnership units of 9,903 were
converted to cash in exchange for the sale of the property that
was in the partnership.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. ProLogis
Shareholders’ Equity:
Shares Authorized
On February 27, 2009, the Board of Trustees (the
“Board”) approved Articles of Amendment (the
“Amendment”) to our Amended and Restated Declaration
of Trust. The Amendment increased the total number of shares of
beneficial interest that we have the authority to issue from
375 million to 750 million shares, including an
increase in the number of common shares from 363 million to
738 million shares. The Board may, without shareholder
approval, increase the number of authorized shares and may
classify or reclassify any unissued shares of our stock from
time to time by setting or changing the preferences, conversion
or other rights, voting powers, restrictions, limitations as to
distributions, qualifications and terms or conditions of
redemption of such shares.
Common
Shares
On April 14, 2009, we completed a public offering of
174.8 million common shares at a price of $6.60 per share
(“Equity Offering”). We received net proceeds of
$1.1 billion that were used to repay borrowings under our
credit facilities.
In February 2007, we issued 4.8 million common shares in
connection with the Parkridge acquisition (see Note 5).
We sell
and/or issue
common shares under various common share plans, including
share-based compensation plans as follows:
•
1999 Dividend Reinvestment and Share Purchase Plan, as
amended (the “1999 Dividend Reinvestment Plan”):
Allows holders of common shares to automatically reinvest
distributions and certain holders and persons who are not
holders of common shares to purchase a limited number of
additional common shares by making optional cash payments,
without payment of any brokerage commission or service charge.
Common shares that are acquired under the 1999 Dividend
Reinvestment Plan through reinvestment of distributions are
acquired at a price we determine ranging from 98% to 100% of the
market price of such common shares.
•
Controlled Offering Program: Currently allows us to
sell up to 40 million common shares through one designated
agent who earns a fee up to 2% of the gross proceeds, as agreed
on a
transaction-by-transaction
basis. In 2009, we issued 29.8 million shares, resulting in
10.2 million shares available for future issuance.
•
The Incentive Plan and Outside Trustees
Plan: Certain of our employees and outside trustees
participate in share-based compensation plans that provide
compensation, generally in the form of common shares. See
Note 12 for additional information on these plans.
•
ProLogis Trust Employee Share Purchase Plan (the
“Employee Share Plan”): Certain of our employees
may purchase common shares, through payroll deductions only, at
a discounted price of 85% of the market price of the common
shares. The aggregate fair value of common shares that an
individual employee can acquire in a calendar year under the
Employee Share Plan is $25,000. Subject to certain provisions,
the aggregate number of common shares that may be issued under
the Employee Share Plan may not exceed 5.0 million common
shares. As of December 31, 2009, we have 4.5 million
shares available under this plan.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Under the plans discussed above, we issued shares and received
gross proceeds as follows (in thousands):
2009
2008
2007
Shares
Proceeds
Shares
Proceeds
Shares
Proceeds
1999 Dividend Reinvestment Plan
224
$
1,901
335
$
4,376
66
$
4,145
Controlled Offering Program
29,757
331,942
3,367
196,381
—
—
Incentive Plan and Outside Trustees Plan
1,767
2,192
1,603
19,455
1,781
40,570
Employee Share Plan
195
1,362
76
1,950
44
2,140
Total
31,943
$
337,397
5,381
$
222,162
1,891
$
46,855
Limited partnership units were redeemed into 0.4 million
common shares in 2009, 3.9 million common shares in 2008,
and 128,000 common shares in 2007 (see Note 10).
We have approximately $84.1 million remaining on our Board
authorization to repurchase common shares that began in 2001. We
have not repurchased our common shares since 2003.
Preferred
Shares
At December 31, 2009, we had three series of preferred
shares outstanding (“Series C Preferred Shares”,
“Series F Preferred Shares”, and
“Series G Preferred Shares”). Holders of each
series of preferred shares have, subject to certain conditions,
limited voting rights and all holders are entitled to receive
cumulative preferential dividends based upon each series’
respective liquidation preference. Such dividends are payable
quarterly in arrears on the last day of March, June, September
and December. Dividends on preferred shares are payable when,
and if, they have been declared by the Board, out of funds
legally available for the payment of dividends. After the
respective redemption dates, each series of preferred shares can
be redeemed at our option. The cash redemption price (other than
the portion consisting of accrued and unpaid dividends) with
respect to Series C Preferred Shares is payable solely out
of the cumulative sales proceeds of our other capital shares,
which may include shares of other series of preferred shares.
With respect to the payment of dividends, each series of
preferred shares ranks on parity with the other series of
preferred shares.
Our preferred shares outstanding at December 31, 2009 are
summarized as follows:
Dividend
Equivalent Based
Optional
Dividend
on Liquidation
Redemption
Rate
Preference
Date
Series C Preferred Shares
8.54
%
$
4.27 per share
11/13/26
Series F Preferred Shares
6.75
%
$
1.69 per share
(a)
Series G Preferred Shares
6.75
%
$
1.69 per share
(a)
(a)
These shares are currently redeemable at our option.
Ownership
Restrictions
For us to qualify as a REIT under the Code, five or fewer
individuals may not own more than 50% of the value of our
outstanding shares of beneficial interest at any time during the
last half of our taxable year. Therefore, our Declaration of
Trust restricts beneficial ownership (or ownership generally
attributed to a person under the REIT tax rules) of our
outstanding shares of beneficial interest by a single person, or
persons acting as a group, to 9.8% of our outstanding shares.
This provision assists us in protecting and preserving our
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
REIT status and protects the interests of shareholders in
takeover transactions by preventing the acquisition of a
substantial block of outstanding shares.
Shares of beneficial interest owned by a person or group of
persons in excess of these limits are subject to redemption by
us. The provision does not apply where a majority of the Board,
in its sole and absolute discretion, waives such limit after
determining that the status of us as a REIT for federal income
tax purposes will not be jeopardized or the disqualification of
us as a REIT is advantageous to our shareholders.
Distributions
and Dividends
The following summarizes the taxability of our common share
distributions and preferred share dividends (taxability for 2009
is estimated):
In order to comply with the REIT requirements of the Code, we
are generally required to make common share distributions (other
than capital gain distributions) to our shareholders at least
equal to (i) the sum of (a) 90% of our “REIT
taxable income” computed without regard to the dividends
paid deduction and net capital gains and (b) 90% of the net
income (after tax), if any, from foreclosure property, minus
(ii) certain excess non-cash income. Our common share
distribution policy is to distribute a percentage of our cash
flow to ensure we will meet the distribution requirements of the
Code, while allowing us to maximize the cash retained to meet
other cash needs, such as capital improvements and other
investment activities.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Common share distributions are characterized for federal income
tax purposes as ordinary income, qualified dividend, capital
gains, non-taxable return of capital or a combination of the
four. Common share distributions that exceed our current and
accumulated earnings and profits (calculated for tax purposes)
constitute a return of capital rather than a dividend and
generally reduce the shareholder’s basis in the common
shares. To the extent that a distribution exceeds both current
and accumulated earnings and profits and the shareholder’s
basis in the common shares, it will generally be treated as a
gain from the sale or exchange of that shareholder’s common
shares. At the beginning of each year, we notify our
shareholders of the taxability of the common share distributions
paid during the preceding year.
Our 2009 dividend was $0.25 for the first quarter and $0.15 for
each of the second, third and fourth quarters. The payment of
common share distributions is dependent upon our financial
condition, operating results and REIT distribution requirements
and may be adjusted at the discretion of the Board during the
year. A cash distribution of $0.15 per common share for the
first quarter of 2010 was declared on February 1, 2010.
This distribution will be paid on February 26, 2010 to
holders of common shares on February 12, 2010.
Pursuant to the terms of our preferred shares, we are restricted
from declaring or paying any distribution with respect to our
common shares unless and until all cumulative dividends with
respect to the preferred shares have been paid and sufficient
funds have been set aside for dividends that have been declared
for the then-current dividend period with respect to the
preferred shares.
Our tax return for the year ended December 31, 2009 has not
been filed. The taxability information presented for our
distributions and dividends paid in 2009 is based upon
management’s estimate. Our tax returns for previous tax
years have not been examined by the Internal Revenue Service
(“IRS”) other than those discussed in Note 15.
Consequently, the taxability of distributions and dividends is
subject to change.
12. Long-Term
Compensation:
The 2006 long-term incentive plan together with our 1997
long-term incentive plan and outside trustees plan (the
“Incentive Plan”) have been approved by our
shareholders and provides for grants of share options, stock
appreciation rights (“SARs”), full value awards and
cash incentive awards to employees and other persons providing
services to us and our subsidiaries, including outside trustees.
No more than 28,560,000 common shares in the aggregate may be
awarded under the Incentive Plan. In any one calendar-year
period, no participant shall be granted: (i) more than
500,000 share options and SARs; (ii) more than 200,000
full value performance based awards; or (iii) more than
$10,000,000 in cash incentive awards. Common shares may be
awarded under the Incentive Plan until it is terminated by the
Board. At December 31, 2009, 3.7 million common shares
were available for future issuance under the Incentive Plan.
Share
Options
We have granted various share options to our employees and
trustees, subject to certain conditions. Each share option is
exercisable into one common share. The holders of share options
granted before 2001 earn dividend equivalent units
(“DEUs”) on December 31st of each year until
the earlier of the date the underlying share option is exercised
or the expiration date of the underlying share option. At
December 31, 2009, there were 491,169 share options
with a weighted average exercise price and remaining life of
$24.12 and 0.7 years, respectively, that will earn DEUs in
the future. Share options granted to employees generally have
graded vesting over a four-year period and have an exercise
price equal to the market price on the date of grant. Share
options granted to outside trustees generally vest immediately.
There were no share options granted in 2009.
We recognize the value of the share options granted as
compensation expense over the applicable vesting period using
the grant-date fair value. The weighted-average grant-date fair
value of options granted during 2008 and 2007 was $2.38 and
$11.42, respectively. Total remaining compensation cost related
to unvested share options as of December 31, 2009 was
$5.5 million, prior to adjustments for forfeited awards and
capitalized amounts due to our development and leasing
activities.
The activity for the year ended December 31, 2009, with
respect to our non-vested share options, is presented below:
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Full
Value Awards
Restricted Share Units
Restricted share units (“RSUs”) are granted to certain
employees at a rate of one common share per RSU. The RSUs are
valued on the grant date based upon the market price of a common
share on that date. We recognize the value of the RSUs granted
as compensation expense over the applicable vesting period,
which is generally four or five years. The RSUs do not carry
voting rights during the vesting period, but do generally earn
DEUs that vest according to the underlying RSU. The
weighted-average fair value of RSUs granted during the years
2009, 2008 and 2007 was $6.52, $10.51 and $63.25, respectively.
In addition, annually we issue fully vested deferred share units
to our outside trustees, which are expensed at the time of grant
and earn DEUs.
Contingent Performance Shares
Certain employees are granted contingent performance shares
(“CPSs”). There were grants of CPSs each year
beginning in 2005 through 2008. No CPSs were granted in 2009.
The CPSs are earned based on our ranking in a defined subset of
companies in the National Association of Real Estate Investment
Trust’s (“NAREIT’s”) published index. These
CPSs generally vest over a three-year period. The amount of CPSs
to be issued will be based on our ranking at the end of the
three-year period, and may range from zero to twice the targeted
award, or a maximum of 394,000 shares at December 31,2009. For purposes of calculating compensation expense, we
consider the CPSs to have a market condition and, therefore, we
have estimated the grant date fair value of the CPSs using a
pricing valuation model. We recognize the value of the CPSs
granted as compensation expense utilizing the grant date fair
value and the target shares over the vesting period. The amount
of compensation expense is not adjusted based on the CPSs paid
out at the end of the vesting period, but is adjusted for
forfeited awards. The CPSs issued in 2008 were all to our former
Chief Executive Officer, had different terms in connection with
his employment agreement and were forfeited when he resigned in
November 2008.
Performance Share Awards
Certain employees were granted Performance Share Awards
(“PSAs”) that are earned based on individual and
company performance criteria. The PSAs are valued based upon the
market price of a common share on grant date. We recognize the
value of the PSAs granted as compensation expense over the
vesting period.
PSAs were granted through 2005 that had a two year vesting
period. In 2009, we granted 829,571 PSAs to certain employees
that vest over three years. The ultimate number of shares to be
issued varied from 50% — 150% of the original award
based on the attainment of certain individual and company goals
for 2009. At the end of 2009, 190,313 shares were earned.
These awards carry no voting rights during the vesting period,
but do earn DEUs that are vested at the end of the vesting
period of the underlying award. The weighted-average fair value
of PSAs and CPSs granted during the years 2009, 2008 and 2007
was $6.93, $22.72, and $71.48, respectively.
Dividend Equivalent Units
RSUs, CPSs, PSAs and certain share options granted through 2000
earn DEUs in the form of common shares at a rate of one common
share per DEU. Beginning in 2010, RSUs will earn quarterly cash
dividends, rather than DEUs. We treat the DEUs as dividends,
which are charged to retained earnings and factored into the
computation of the fair value of the underlying share award at
grant date.
Total remaining compensation cost related to unvested RSUs, CPSs
and PSAs as of December 31, 2009 was $30.8 million,
prior to adjustments for forfeited awards and capitalized
amounts due to our development and leasing activities. The
remaining expense will be recognized through 2013, which equates
to a weighted average period of 1.6 years.
The activity for the year ended December 31, 2009, with
respect to our non-vested RSUs, CPSs and PSAs is presented below:
During the years ended December 31, 2009, 2008 and 2007, we
recognized $17.2 million, $28.3 million and
$23.9 million, respectively, of compensation expense
including awards granted to our outside trustees and net of
forfeited awards. These amounts include expense reported as
General and Administrative Expenses, RIF charges and
Discontinued Operations and are net of $5.8 million,
$12.1 million and $10.8 million, respectively, that
was capitalized due to our development and leasing activities.
We calculated the fair value of the share options granted in
each of the following years (no share options were granted in
2009) using a Black-Scholes pricing model and the following
weighted average assumptions:
We use historical data to estimate dividend yield, share option
exercises, expected term and employee departure behavior used in
the Black-Scholes pricing model. The risk-free interest rate for
periods within the expected term of the share option is based on
the U.S. Treasury yield curve in effect at the time of
grant. To
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
calculate expected volatility, we use historical volatility of
our common stock and implied volatility of traded options on our
common stock.
Other
Plans
We have a 401(k) Savings Plan and Trust (“401(k)
Plan”), that provides for matching employer contributions
in common shares of 50 cents for every dollar contributed by an
employee, up to 6% of the employee’s annual compensation
(within the statutory compensation limit). A total of 190,000
common shares have been authorized for issuance under the 401(k)
Plan. The vesting of contributed common shares is based on the
employee’s years of service, with 20% vesting each year of
service, over a five-year period. Through December 31,2009, no common shares have been issued under the 401(k) Plan.
All of our matching contributions have been made with common
shares purchased by us in the open market.
We have a nonqualified savings plan to provide benefits for
certain employees. The purpose of this plan is to allow 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. We match
the lesser of (a) 50% of the sum of deferrals under both
the 401(k) Plan and this plan, and (b) 3% of total
compensation up to certain levels. The matching contributions
vest in the same manner as the 401(k) Plan. On a combined basis
for both plans, our contributions under the matching provisions
were $1.1 million, $1.4 million and $1.1 million
for 2009, 2008 and 2007, respectively.
13. Reduction
in Workforce:
During the fourth quarter of 2008, in response to the difficult
economic climate, we initiated General and Administrative
expense reductions with a near-term target of a 20% to 25%
reduction in gross expense. These initiatives included a
reduction in workforce (“RIF”) plan that had a total
cost of $11.7 million and $26.4 million in the years
ended December 31, 2009 and 2008, respectively, including
$3.3 million for China that is presented as discontinued
operations in our Consolidated Statements of Operations.
14.
Impairment
Charges:
Impairment of Real Estate Properties
During 2009, 2008 and 2007 we recognized impairment charges
related to certain of our real estate properties as outlined
below (in thousands):
Industrial properties — properties under development
—
19,814
—
Industrial properties — completed properties
126,205
15,026
—
Retail and mixed use properties
46,137
—
—
Ground leases and other
17,630
—
—
Other real estate investments
4,624
45,728
—
Total
$
331,592
$
274,705
$
12,600
The impairment charges related to real estate properties that we
recognized during 2009 and 2008 were based primarily on
valuations of real estate, which had declined due to market
conditions, that we no longer expected
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
to hold for long term investment. Included in the 2009
impairment charges is $9.2 million that should have been
recorded in 2008. This amount, along with an additional
$3.0 million of deferred tax expense, was recorded in 2009
and relates to a revision of our estimated deferred income tax
liabilities associated with our international operations. In
order to generate liquidity, we have contributed, or intend to
contribute, certain industrial properties to property funds
(primarily in Europe) and sold or intend to sell certain land
parcels or completed properties to third parties. In 2007, the
impairment charge related to a portfolio of buildings we had
decided to sell.
These impairment charges represent the difference between the
estimated proceeds from disposition and our cost basis at the
time of contribution/sale and were due to our intent to
contribute or sell these properties at the time of the
impairment charge. We estimated the proceeds from contribution
of these properties based on the future net rental income of the
property and the expected market capitalization rates or on
third party appraisals. In the case of properties to be
contributed to PEPF II, we further adjusted the capitalization
rates based on our contribution agreement with PEPF II.
The estimate of proceeds from disposition is based on
assumptions that are consistent with our estimates of future
expectations and the strategic plan we use to manage our
underlying business and represents primarily Level 3 input,
as discussed in our summary of significant accounting policies.
However, assumptions and estimates about future rental income,
market capitalization rates and the timing of the
contribution/sale are complex and subjective. Changes in
economic and operating conditions and the ultimate investment
intent that may occur in the future could impact these
assumptions and result in additional impairment charges of these
or other real estate properties.
Impairment of Goodwill and Other Assets
During the years ended December 31, 2009 and 2008, we
recognized impairment charges related to goodwill, investments
in and advances to unconsolidated investees and other assets as
outlined below (in thousands):
2009
2008
Goodwill
$
—
$
175,419
Investment in and advances to unconsolidated investees
143,640
113,724
Notes Receivable
—
17,893
Other Assets
20,004
13,600
Total
$
163,644
$
320,636
We performed our annual impairment review of the goodwill
allocated to the direct owned segments in North America and
Europe, and the investment management segment in Europe during
the fourth quarter of 2009 and no impairment was indicated.
During the fourth quarter of 2008, we changed our business
strategy in response to the deterioration in the global economy
to no longer focus on CDFS business activities. As a result, the
investment and development activities previously included in the
CDFS business segment were transferred, along with the related
assets, to the direct owned and investment management segments
(Europe reporting unit). The related goodwill was transferred to
the respective segments based on the relative fair value of the
assets transferred. Due to the economic conditions, including
the significant decrease in our common stock price and the
decline in fair value of certain of our real estate properties,
specifically investments in land in the United Kingdom, we
performed an additional review of goodwill as of
December 31, 2008. In connection with this review, we
recognized an impairment charge of $175.4 million relating
to the goodwill allocated to the direct owned segment in the
Europe reporting unit. This goodwill related to an acquisition
made in 2007.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In 2009 and 2008, we recorded impairment charges on certain of
our investments in and advances to unconsolidated investees,
notes receivable and other assets as we did not believe these
amounts to be recoverable based on the prevent value of the
estimated future cash flows associated with these assets. See
Note 6 for discussion relating to the impairment of our
investment in and advances to two property funds and an entity
that develops retail and mixed use properties in Europe.
15.
Income
Taxes:
Components of Earnings (Loss) before Income Taxes
Components of earnings (loss) before income taxes for the years
ended December 31, are as follows (in thousands):
2009
2008
2007
Domestic
$
(224,032
)
$
(39,724
)
$
214,845
International
(35,006
)
(174,545
)
780,718
Total
$
(259,038
)
$
(214,269
)
$
995,563
Summary
of Current and Deferred Income Taxes
Components of the provision for income taxes for the years ended
December 31, are as follows (in thousands):
2009
2008
2007
Current income tax expense
Federal
$
13,586
$
30,020
$
28,264
Non-U.S.
14,610
32,283
35,423
State and local
1,066
1,138
2,652
Total Current
29,262
63,441
66,339
Deferred income tax expense(benefit)
Federal
(22,529
)
9,637
(16,197
)
Non-U.S.
(758
)
(5,067
)
16,713
Total Deferred
(23,287
)
4,570
516
Total income tax expense
$
5,975
$
68,011
$
66,855
Current
Income Taxes
Current income tax expense is generally a function of the level
of income recognized by our TRSs, state income taxes, taxes
incurred in foreign jurisdictions and interest and penalties
associated with our income tax liabilities. For the year ended
December 31, 2009, we recognized a $3.7 million
benefit due to the release of accruals for interest and
penalties associated with our uncertain tax positions. For the
years ended December 31, 2008 and 2007, we recognized
expenses of $37.7 million and $22.0 million related to
interest and penalties on our uncertain tax positions. During
the years ended December 31, 2009, 2008 and 2007, cash paid
for income taxes was $234.6 million, $67.3 million and
$35.9 million, respectively.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Deferred
Income Taxes
Deferred income tax expense is generally a function of the
period’s temporary differences, the utilization of tax net
operating losses generated in prior years that had been
previously recognized as deferred income tax assets and deferred
income tax liabilities related to indemnification agreements for
contributions to certain property funds.
For federal income tax purposes, certain acquisitions have been
treated as tax-free transactions resulting in a carry-over basis
for tax purposes. For financial reporting purposes and in
accordance 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
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 assets at the date of
acquisition. If taxable income is generated in these
subsidiaries, we recognize a deferred income tax 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. Any increases or decreases to the
deferred income tax liability recorded in connection with these
acquisitions, related to tax uncertainties acquired, was
reflected as an adjustment to goodwill through December 31,2008. During the year ended December 31, 2008, we decreased
deferred tax liabilities and goodwill by $8.8 million. Due
to the issuance of a new accounting standard, beginning in 2009,
any increases or decreases related to tax uncertainties will be
reflected in earnings.
Deferred income tax assets and liabilities as of
December 31, were as follows (in thousands):
2009
2008
Deferred income tax assets:
Net operating loss carryforwards(1)
$
107,236
$
57,387
Basis difference — real estate properties
67,090
6,378
Basis difference — equity investees
9,994
5,838
Alternative minimum tax credit carryforward
1,050
921
Other — temporary differences
11,790
8,916
Total deferred income tax assets
197,160
79,440
Valuation allowance
(141,068
)
(39,612
)
Net deferred income tax assets
56,092
39,828
Deferred income tax liabilities:
Basis difference — real estate properties
49,860
5,009
Built-in gains — real estate properties
22,666
23,279
Basis difference — equity investees
5,606
11,210
Built-in gains — equity investees
24,741
24,741
Indemnification liabilities
37,903
38,412
Other — temporary differences
21,748
20,105
Total deferred income tax liabilities
162,524
122,756
Net deferred income tax liabilities
$
106,432
$
82,928
(1)
At December 31, 2009, we had net operating loss
(“NOL”) carryforwards as follows:
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
U.S.
Europe
Mexico
Gross NOL carryforward
$
53.4
$
220.9
$
152.8
Tax-effected NOL
19.5
$
44.1
43.6
Valuation allowance
—
(44.1
)
(43.6
)
Net deferred tax asset-NOL carryforward
$
19.5
$
—
$
—
Expiration periods
2022 — 2029
2014 — indefinite
2010 — 2018
The deferred tax asset valuation allowance is adequate to reduce
the total deferred tax asset to an amount that will
“more-likely-than-not” be realized.
Liability for Unrecognized Tax Benefits
For 2009, 2008 and 2007, we believe we and our consolidated REIT
subsidiary have complied with the REIT requirements of the Code.
The statute of limitations for our tax returns is generally
three years, with our major tax jurisdictions being the United
States, Japan, Mexico, Poland, Luxembourg and the United
Kingdom. As such, our tax returns that remain subject to
examination would be primarily from 2006 and thereafter, except
for Catellus, a subsidiary we acquired in 2005.
Certain 1999 through 2005 federal and state income tax returns
of Catellus have been under audit by the IRS and various state
taxing authorities. In November 2008, we agreed to enter into a
closing agreement with the IRS for the settlement of the 1999
through 2002 audits. As a result, in 2008, we increased our
unrecognized tax liability by $85.4 million, including
interest and penalties. As this liability was an income tax
uncertainty related to an acquired company, we increased
goodwill by $66.6 million related to the liability that
existed at the acquisition date. The remaining amount was
included in current income tax expense in 2008. We made cash
payments of $226.6 million in 2009 in connection with this
closing agreement and settlement of certain state tax audits.
Certain federal income tax returns for Catellus for 2003 through
2005 are still under audit by the IRS.
The liability for unrecognized tax benefits principally consists
of estimated federal and state income tax liabilities associated
with acquired companies and includes accrued interest and
penalties of $34.4 million and $114.4 million at
December 31, 2009 and 2008, respectively. A reconciliation
of the liability for unrecognized tax benefits is as follows (in
thousands):
2009
2008
Balance at January 1,
$
284,698
$
192,438
Additions based on tax positions related to the current year
7,207
4,785
Additions for tax positions of prior years
15,746
143,045
Reductions for tax positions of prior years
(6,886
)
(49,168
)
Settlements on tax positions of prior years
(226,601
)
—
Reductions due to lapse of applicable statute of limitations
(8,994
)
(6,402
)
Balance at December 31,
$
65,170
$
284,698
Indemnification Agreements
We have indemnification agreements related to most property
funds operating outside of the United States for the
contribution of certain properties. We enter into agreements
whereby we indemnify the funds, or our fund partners, for taxes
that may be assessed with respect to certain properties we
contribute to these funds. Our
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
contributions to these funds 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 to the funds at
contribution. We have generally indemnified these funds to the
extent that the funds: (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
funds transferring the embedded capital gain tax liability to
the buyer of the shares in the transaction. The agreements
generally 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 funds at the time of the
initial contribution less any deferred tax assets transferred
with the property.
In 2007, we recognized a deferred tax benefit of
$6.3 million for the reversal of the obligation related to
ProLogis North American Properties Fund V.
The ultimate outcome under these agreements is uncertain as it
is dependent on the method and timing of dissolution of the
related property fund or disposition of any properties by the
property fund. Two of our previous agreements were terminated
without any amounts being due or payable by us. We consider the
probability, timing and amounts in estimating our potential
liability under the agreements, which we have estimated as
$37.9 million and $38.4 million at December 31,2009 and 2008, respectively. 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.
16.
Earnings
Per Common Share:
We determine basic earnings per share based on the weighted
average number of common shares outstanding during the period.
We compute diluted earnings per share based on the weighted
average number of common shares outstanding combined with the
incremental weighted average effect from all outstanding
potentially dilutive instruments.
The following table sets forth the computation of our basic and
diluted earnings (loss) per share (in thousands, except per
share amounts):
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(1)
In periods with a net loss, the inclusion of any incremental
shares is anti-dilutive, and therefore, both basic and diluted
shares are the same.
(2)
Includes the noncontrolling interest related to the convertible
limited partnership units, which are included in incremental
shares. If the impact of the conversion of limited partnership
units is anti-dilutive, the income and shares are not included
in the per share calculation.
(3)
Total weighted average potentially dilutive share awards
outstanding for 2007 (in thousands) were 10,098 and the majority
were dilutive.
17.
Related
Party Transactions:
In September 2009, Irving F. Lyons, III, trustee and former
Chief Investment Officer and Trustee converted limited
partnership units, in the limited partnerships in which we own a
majority interest and consolidate, into 410,000 of our common
shares. As of December 31, 2009, Mr. Lyons owns
226,613 of the outstanding partnership units. On June 8,2007, Jeffrey H. Schwartz, our former Chief Executive Officer,
also converted similar limited partnership units into 128,000 of
our common shares. See Note 10 for more information
regarding these limited partnerships in North America.
Also see Note 6 for a discussion of transactions between us
and the property funds.
18.
Financial
Instruments and Fair Value Measurements:
Derivative Financial Instruments
In the normal course of business, our operations are exposed to
global market risks, including the effect of changes in foreign
currency exchange rates and interest rates. To manage these
risks, we may enter into various derivatives contracts. Foreign
currency contracts, including forwards and options, may be used
to manage foreign currency exposure. We may use interest rate
swaps to manage the effect of interest rate fluctuations. We do
not use derivative financial instruments for trading purposes.
The majority of our derivative financial instruments are
customized derivative transactions and are not exchange-traded.
Management reviews our hedging program, derivative positions,
and overall risk management strategy 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 does generate the risk that
counterparties may default on a derivative contract. We
establish exposure limits for each counterparty to minimize this
risk and provide counterparty diversification. Substantially all
of our derivative exposures are with counterparties that have
long-term credit ratings of single-A or better. We enter into
master agreements with counterparties that generally allow for
netting of certain exposures; therefore, the actual loss we
would recognize if all counterparties failed to perform as
contracted would be significantly lower. To mitigate
pre-settlement risk, minimum credit standards become more
stringent as the duration of the derivative financial instrument
increases. To minimize the concentration of credit risk, we
enter into derivative transactions with a portfolio of financial
institutions. Based on these factors, we consider the risk of
counterparty default to be minimal.
All derivatives are recognized at fair value in the Consolidated
Balance Sheets within the line items Other Assets or
Accounts Payable and Accrued Expenses, as applicable. We do not
net our derivative position by counterparty for purposes of
balance sheet presentation and disclosure. The accounting for
gains and losses
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
that result from changes in the fair values of derivative
instruments depends on whether the derivatives are designated as
and qualify as hedging instruments. Derivatives can be
designated as fair value hedges, cash flow hedges or hedges of
net investments in foreign operations. We do not typically
designate derivatives as fair value hedges or hedges of net
investments.
Changes in the fair value of derivatives that are designated and
qualify as cash flow hedges are recorded in Accumulated Other
Comprehensive Income (Loss). We reclassify changes in the fair
value of derivatives into the applicable line item in our
Consolidated Statements of Operations in which the hedged items
are recorded in the same period that the underlying hedged items
affect earnings. Due to the high degree of effectiveness between
the hedging instruments and the underlying exposures hedged,
fluctuations in the value of the derivative instruments will
generally be offset by changes in the fair values or cash flows
of the underlying exposures being hedged. The changes in fair
values of derivatives that were not designated
and/or did
not qualify as hedging instruments are immediately recognized
into earnings.
For derivatives that will be accounted for as hedging
instruments in accordance with the accounting standards, we
formally designate and document, at inception, the financial
instrument as a hedge of a specific underlying exposure, the
risk management objective and the strategy for undertaking the
hedge transaction. In addition, we formally assess both at
inception and at least quarterly thereafter, whether the
derivatives used in hedging transactions are effective at
offsetting changes in either the fair values or cash flows of
the related underlying exposures. Any ineffective portion of a
derivative financial instrument’s change in fair value is
immediately recognized into earnings. Derivatives not designated
as hedges are not speculative and are used to manage our
exposure to foreign currency fluctuations but do not meet the
strict hedge accounting requirements.
Our interest rate risk management strategy is to limit the
impact of future interest rate changes on earnings and cash
flows. To achieve this objective, we primarily borrow on a fixed
rate basis for longer-term debt issuances. The maximum length of
time that we hedge our exposure to future cash flows is
typically less than 10 years. We use cash flow hedges to
minimize the variability in cash flows of assets or liabilities
or forecasted transactions caused by fluctuations in interest
rates. We typically designate our interest rate swap 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 a variable rate debt
issuance. The effective portion of the gain or loss on the
derivative is reported as a component of Accumulated Other
Comprehensive Income (Loss) in our Consolidated Balance Sheets,
and reclassified into the line item, Interest Expense in the
Consolidated Statements of Operations over the corresponding
period of the hedged item. Losses on the derivative representing
hedge ineffectiveness are recognized in Interest Expense at the
time the ineffectiveness occurred.
There was no ineffectiveness recorded during the years ended
December 31, 2009 and 2008. The amount reclassified to
interest expense for the years ended December 31, 2009 and
2008 is not considered material.
We generally do not designate the following derivative contracts
as hedges:
•
Foreign currency forwards — we may use foreign
currency forward contracts to manage the foreign currency
fluctuations of intercompany loans not deemed to be a long-term
investment and certain transactions denominated in a currency
other than the entity’s functional currency. These
contracts are
marked-to-market
through earnings, as they are not designated as hedges. The
gains or losses resulting from these derivative instruments are
included in Foreign Currency Exchange Gains (Losses), Net in our
Consolidated Statements of Operations. For contracts associated
with intercompany loans, the impact on
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
earnings is generally offset by the remeasurement gains and
losses recognized on the related intercompany loans. We had no
outstanding foreign currency forwards at December 31, 2009.
•
Foreign currency put options — we may use foreign
currency put option contracts to manage foreign currency
exchange rate risk associated with the projected net operating
income of our foreign consolidated subsidiaries and
unconsolidated investees. These contracts are
marked-to-market
through earnings in Foreign Currency Exchange Gains (Losses),
Net, as they do not qualify for hedge accounting treatment. We
had no outstanding foreign currency put options at
December 31, 2009.
The following table summarizes the activity in our derivative
contracts for the years ended December 31, 2009, 2008 and
2007 (in millions):
The foreign currency put option contracts are paid in full at
execution and are related to our operations in Europe and Japan.
The put option contracts provide us with the option to exchange
euros, pounds sterling and yen for U.S. dollars at a fixed
exchange rate such that, if the euro, British pound sterling or
yen were to depreciate against the U.S. dollar to predetermined
levels as set by the contracts, we could exercise our options
and mitigate our foreign currency exchange losses. We did not
recognize any expense in 2009, 2008 or 2007.
(2)
Certain of the foreign currency forward contracts outstanding in
2008 and 2007 were designed to manage the foreign currency
fluctuations of intercompany loans and allowed us to sell
British pounds sterling and euros at a fixed exchange rate to
the U.S. dollar. We had no forward contracts related to
intercompany loans outstanding at December 31, 2009. We
recognized net losses of $5.7 million, $3.1 million
and $95.9 million for the years ended December 31,2009, 2008 and 2007, respectively, related to these contracts.
During 2009, we entered into and settled forward contracts to
buy yen to manage the foreign currency fluctuations related to
the sale of our investments in the Japan property funds and
recognized losses of $5.7 million in Foreign Currency
Exchange Gains (Losses), Net in our Consolidated Statements of
Operations.
During the second quarter of 2007, we purchased several foreign
currency forward contracts to manage the foreign currency
fluctuations of the purchase price of MPR (see Note 6).
These contracts allowed us to buy Australian dollars at a fixed
exchange rate to the U.S. dollar. Derivative instruments used to
manage the foreign currency fluctuations of an anticipated
business combination do not qualify for hedge accounting
treatment and are included in earnings. The contracts settled in
July 2007 in connection with
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
the completed acquisition and resulted in the recognition of a
net gain of $26.6 million in Foreign Currency Exchange
Gains (Losses), Net for the year ended December 31, 2007.
(3)
During 2009, 2008 and 2007, we entered into several contracts
with total notional amounts of $157.7 million,
$250.0 million, and $959.2 million, respectively,
associated with anticipated debt issuances.
•
In 2009, we entered into two interest rate swap contracts to fix
the interest rate on our variable rate TMK bonds
(¥4.3 billion and ¥10.0 billion,
respectively) that mature in June 2012 and December 2012,
respectively. We designated the contracts as cash flow hedges
and they qualify for hedge accounting treatment. We have
recorded a liability of $0.9 million in Accounts Payable
and Accrued Expenses in our Consolidated Balance Sheets at
December 31, 2009.
•
During 2008, in connection with the issuance of senior notes and
convertible senior notes, we entered into contracts that
qualified as cash flow hedges and recognized a decrease in value
of $3.3 million, associated with the unwinding of these
contracts, in Accumulated Other Comprehensive Income (Loss) and
began amortizing as an increase to interest expense as interest
payments are made on the related notes.
•
In 2007, we entered into contracts with notional amounts of
$188.0 million and $271.2 million and which
represented our share of future debt issuances by ProLogis North
American Industrial Fund III, ProLogis North American
Industrial Fund II respectively. These contracts were
transferred into the funds at formation, at which time the
contracts qualified for hedge accounting treatment by the funds.
We also entered into contracts with an aggregate notional amount
of $500.0 million associated with a future debt issuance.
All of these contracts qualified for hedge accounting treatment
and allowed us to fix a portion of the interest rate associated
with the anticipated issuance of senior notes. In connection
with the issuance of the convertible notes, we unwound these
contracts, recognized a decrease in value of $1.4 million
in Accumulated Other Comprehensive Income (Loss) and began
amortizing as an increase to interest expense as interest
payments are made on the senior notes.
Fair
Value Measurements
Fair
Value Measurements on a Recurring Basis
At December 31, 2009 and 2008, we do not have any
significant financial assets or financial liabilities that are
measured at fair value on a recurring basis in our consolidated
financial statements.
Fair
Value Measurements on a Non-Recurring Basis
Non-financial assets measured at fair value on a non-recurring
basis in our consolidated financial statements consist of real
estate assets and investments in and advances to unconsolidated
investees that were subject to impairment charges to write them
down to their estimated fair values during 2009 due to changes
in market conditions and/or our intent with regard to these
assets. See Notes 6 and 14 for additional information
related to inputs and valuation techniques used to measure these
impairments. The table below aggregates the fair values of these
assets at December 31, 2009 by the levels in the fair value
hierarchy (in thousands):
Level 1
Level 2
Level 3
Total
Real estate assets
$
—
$
—
$
409,944
$
409,944
Investments in and advances to other unconsolidated investees
$
—
$
—
$
45,000
$
45,000
Financial
Assets and Liabilities not Measured at Fair Value
At December 31, 2009 and 2008, the carrying amounts of
certain of our financial instruments, including cash and cash
equivalents, accounts and notes receivable, and accounts payable
and accrued expenses were
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
representative of their fair values due to the short-term nature
of these instruments or, the recent acquisition of these items.
At December 31, 2009 and 2008, we estimated the fair value
of our senior and other notes and convertible notes, based upon
quoted market prices for the same (Level 1) or similar
(Level 2) issues when current quoted market prices are
available. We estimated the fair value of our credit facilities
by discounting the future cash flows using rates and borrowing
spreads currently available to us (Level 3). We estimated
the fair value of our secured mortgage debt and assessment bonds
that does not have current quoted market prices available by
discounting the future cash flows using rates currently
available to us for debt with similar terms and maturities
(Level 3). The differences in the fair value of our debt
from the carrying value are the result of differences in
interest rates
and/or
borrowing spreads that were available to us at December 31,2009 and 2008, as compared with those in effect when the debt
was issued or acquired. In addition, based on debt market
conditions as of December 31, 2008, many of our public debt
issuances were trading at a significant discount to par value.
The senior notes and many of the issues of secured mortgage debt
contain pre-payment penalties or yield maintenance provisions
that could make the cost of refinancing the debt at the lower
rates exceed the benefit that would be derived from doing so.
The following table reflects the carrying amounts and estimated
fair values of our debt (in thousands):
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 in urban and industrial areas that may have
been leased to or previously owned by commercial and industrial
companies that discharged hazardous materials. We establish a
liability at the time of acquisition to cover such costs. We
adjust the liabilities as appropriate when additional
information becomes available. We purchase various environmental
insurance policies to mitigate our exposure to environmental
liabilities. We are not aware of any environmental liability
that we believe would have a material adverse effect on our
business, financial condition or results of operations.
Off-Balance Sheet Liabilities
We have issued performance and surety bonds and standby letters
of credit in connection with certain development projects, to
guarantee certain tax obligations and the construction of
certain real property improvements and infrastructure, such as
grading, sewers and streets. Performance and surety bonds are
commonly required by public agencies from real estate
developers. Performance and surety bonds are renewable and
expire upon the payment of the taxes due or the completion of
the improvements and
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
infrastructure. As of December 31, 2009, we had
approximately $71.6 million outstanding under such
arrangements.
At December 31, 2009, we had made debt guarantees to
certain of our unconsolidated investees that, based on the
investee’s outstanding balance, totaled $1.3 million.
None of these guarantees were provided to the unconsolidated
property funds. See Note 6 for further discussion related
to the property funds.
We may be required to make additional capital contributions to
certain of our unconsolidated investees, 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 6.
From time to time we enter into Special Limited Contribution
Agreements (“SLCA”) in connection with certain
contributions of properties to certain of our property funds.
Under the SLCAs, we are obligated to make an additional capital
contribution to the respective property fund under certain
circumstances, the occurrence of which we believe to be remote.
Specifically, we would be required to make an additional capital
contribution to the property fund if the property fund is in
default on third-party debt, the default remains uncured, and
the third-party lender does not receive a specified minimum
level of repayment after pursuing all contractual and legal
remedies against the property fund. To the extent that a
third-party lender receives repayment of principal and to the
extent that the property fund liquidates its assets to satisfy
any remaining repayment deficit, our obligations under the SLCA
are reduced on a
dollar-for-dollar
basis. Our potential obligations under the respective SLCAs, as
a percentage of the fair value of the real estate assets in the
property funds, range from 5% to 37%. Given the respective
year-end capital structures of the various funds impacted by
SLCAs and structural provisions within the SLCAs, we estimate
that the minimum level of fund devaluation required to trigger
an SLCA liability ranges between 79% and 27% of fund value. We
believe that the likelihood of declines in the values of the
assets that support the third-party loans of the magnitude
necessary to require an additional capital contribution is
generally remote, especially in light of the geographically
diversified portfolios of properties owned by the property
funds. The potential obligations under the SLCAs aggregated
$348.9 million and $352.6 million at December 31,2009 and December 31, 2008, respectively. The combined
value of the assets in the property funds that are subject to
the provisions of the SLCAs was approximately $4.0 billion
at December 31, 2009. Based on our assessment of the
probability and range of loss, we have estimated the fair value
and recognized a liability of $1.3 million related to our
potential obligations at December 31, 2009.
As of December 31, 2009, $9.1 million of Community
Facility District bonds were outstanding that were originally
issued to finance public infrastructure improvements at one of
our development projects. We are required to satisfy any
shortfall in annual debt service obligation for these bonds if
tax revenues generated by the project are insufficient. As of
December 31, 2009, we have not been required to, nor do we
expect to be required to, satisfy any shortfall in annual debt
service obligation for these bonds other than through our
payment of normal project and special district taxes.
Settlement Costs
Included within Other Income (Expense) in our Consolidated
Statements of Operations for the year ended December 31,2009 are settlement costs of $13.0 million related to an
obligation we assumed in the 2005 acquisition of Catellus.
20.
Business
Segments:
As discussed in Note 1, we modified our business strategy
during the fourth quarter of 2008 to no longer focus on the CDFS
business segment. We made contributions and dispositions of CDFS
properties through December 2008 and have reported the results
of operations of this activity within this business segment. As
of December 31, 2008, we transferred all of the assets from
the CDFS business segment into our two remaining
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
segments. We now intend to principally hold the properties we
had previously planned to contribute, and, therefore, we have
transferred these assets to our direct owned segment. The
investments we have in joint ventures have been transferred to
our investment management segment. Our current segments are as
follows:
•
Direct Owned — representing the direct long-term
ownership of industrial distribution and retail properties. Each
operating property is considered to be an individual operating
segment having similar economic characteristics that are
combined within the reportable segment based upon geographic
location. We own real estate in North America (Canada, Mexico
and the United States), Europe (Austria, Belgium, the Czech
Republic, France, Germany, Hungary, Italy, the Netherlands,
Poland, Romania, Slovakia, Spain, Sweden and the United Kingdom)
and Asia (Japan and South Korea). Also included in this segment
is the development of properties for continued direct ownership,
including land held for development and properties currently
under development. Beginning in 2009, we also include the land
we own and lease to customers under ground leases that was
previously included in our other operating segments. Therefore,
we have reclassified 2008 amounts to conform to the 2009
presentation.
•
Investment Management — representing the long-term
investment management of property funds and industrial and
retail joint ventures and the properties they own. We recognize
our proportionate share of the earnings or losses from our
investments in unconsolidated property funds and joint ventures
operating in North America, Europe and Asia. Along with the
income recognized under the equity method, we include fees and
incentives earned for services performed on behalf of the
unconsolidated investees and interest income earned on advances
to unconsolidated investees, if any. We utilize our leasing and
property management expertise to efficiently manage the
properties and our unconsolidated investees, and we allocate the
costs as Investment Management Expenses in this segment. Each
investment in a property fund or joint venture is considered to
be an individual operating segment having similar economic
characteristics that are combined within the reportable segment
based upon geographic location. Our operations in the investment
management segment are in North America (Canada, Mexico and the
United States), Europe (Belgium, the Czech Republic, France,
Germany, Hungary, Italy, the Netherlands, Poland, Slovakia,
Spain, Sweden, and the United Kingdom), and Asia (Japan, through
July 2009, and South Korea).
In addition, throughout 2008, we operated a third segment. As
discussed above, due to changes in our business strategy, we no
longer have a CDFS business segment in 2009, other than as
discussed below for the sale of our investments in Japan.
•
CDFS business — primarily encompassed our development
of real estate properties that were subsequently contributed to
a property fund in which we had an ownership interest and acted
as manager, or sold to third parties. Additionally, we acquired
properties with the intent to rehabilitate
and/or
reposition the property prior to contributing to a property
fund. The proceeds and related costs of these dispositions are
presented as Developed and Repositioned Properties in the
Consolidated Statements of Operations. In addition, we
occasionally acquired a portfolio of properties with the intent
of contributing the portfolio to an existing or future property
fund. The proceeds and related costs of these dispositions are
presented as Acquired Property Portfolios in the Consolidated
Statements of Operations. During the period between the
completion of development or acquisition of a property and the
date the property is contributed to a property fund or sold to a
third party, the property and its associated rental income and
rental expenses were included in the direct owned segment
because the primary activity associated with the property during
that period is leasing. Upon contribution or sale, the resulting
gain or loss was included in the income of the CDFS business
segment. The separate activities in this segment were considered
to be individual operating segments having similar economic
characteristics that are combined within the reportable segment
based upon geographic location. When a property that we
originally contributed to a property fund
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
was sold to a third party, we recognized any gain that was
deferred due to our ownership interest in the property fund at
the time of contribution as CDFS proceeds. In 2009, the only
activity being reported in the CDFS segment is the gain on sale
of our investments in the Japan property funds as it is
essentially the recognition of gains from this segment that were
deferred due to our ownership interests at the time of the
original contributions.
During 2009, we contributed some completed industrial properties
to PEPF II and sold some land and properties to third parties.
We now present the results as Net Gains on Dispositions, either
in continuing operations (in the case of contributions to a
property fund or sales of land) or discontinued operations. We
present the operations and net gains associated with properties
sold to third parties, including land subject to ground leases,
or classified as held for sale as discontinued operations, which
results in the restatement of prior years operating results to
exclude the items presented as discontinued operations.
Reconciliations are presented below for: (i) each
reportable business segment’s revenue from external
customers to our total revenues; (ii) each reportable
business segment’s net operating income from external
customers to our earnings before income taxes; and
(iii) each reportable business segment’s assets to our
total assets. Our chief operating decision makers rely primarily
on net operating income and similar measures to make decisions
about allocating resources and assessing segment performance.
The applicable components of our revenues, earnings (loss)
before income taxes and total assets are allocated to each
reportable business segment’s revenues, net operating
income and assets. Items that are not directly assignable to a
segment, such
Investments in and advances to other unconsolidated investees
141,107
150,681
Cash and cash equivalents
34,362
174,636
Accounts and notes receivable
1,574
2,253
Other assets
108,821
190,231
Discontinued operations — assets held for sale
—
1,310,754
Total reconciling items
285,864
1,828,555
Total assets
$
16,885,415
$
19,269,127
(1)
Includes revenues attributable to the United States for the
years ended December 31, 2009, 2008 and 2007 of
$811.1 million, $1,610.6 million and
$3,489.7 million, respectively.
(2)
Includes rental income of our industrial and retail properties
and land subject to ground leases, as well as development
management and other income.
(3)
Includes investment management fees and incentive returns and
our share of the earnings or losses recognized under the equity
method from our investments in unconsolidated property funds and
certain industrial and retail joint ventures along with interest
earned on advances to these unconsolidated investees. In 2008,
the revenues and net operating income of this segment were
reduced by $108.2 million representing our proportionate
share of the loss on sale/impairment recognized by one of the
property funds in Europe. See Note 6 for more information.
(4)
In 2009, includes the recognition of gains previously deferred
from CDFS contributions to the Japan property funds due to the
sale of our investments in the property funds in February 2009.
In 2008 and 2007, includes proceeds received on CDFS property
dispositions, fees earned from customers and third parties for
development activities and interest income on notes receivable
related to asset dispositions.
(5)
Amount represents the earnings or losses recognized under the
equity method from our investments in unconsolidated investees
that are reflected in the revenues of the investment management
segment and interest income on notes receivable related to asset
dispositions that are reflected in revenues of the CDFS business
segment. These items are not presented as a component of
revenues in our Consolidated Statements of Operations.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(6)
Includes rental income less rental expenses of our distribution
and retail properties and land subject to ground leases, as well
as development management and other income less related expenses.
(7)
Also includes the costs we incur to manage the unconsolidated
investees and the properties they own.
(8)
In 2009, includes the recognition of gains previously deferred
from CDFS contributions to the Japan property funds due to the
sale of our investment’s in the Japan property funds in
February 2009. In 2008 and 2007 includes net gains on CDFS
property dispositions, fees earned from customers and third
parties for development activities and interest income on notes
receivable related to asset dispositions, offset partially by
land holding costs and the write-off of previously capitalized
pursuit costs associated with potential CDFS business assets
when it became likely the assets would not be acquired.
(9)
During 2009, we recognized impairment charges related to our
real estate properties in our Direct Owned segment
($157.9 million in North America and $173.7 million in
Europe). During 2008, we recognized impairment charges related
to our real estate properties in our Direct Owned segment
($21.0 million in North America and $253.7 million in
Europe). See Note 14 for more discussion of these charges.
(10)
During 2009, we recognized impairment charges of
$28.5 million to write-off our investments in ProLogis
North American Properties Fund IX and X. During 2009 and
2008 we recognized impairment charges of $115.1 million and
$113.7 million, respectively, related to our investment in
and advances to an unconsolidated investee in Europe. These
impairments related to our Investment Management segment and are
discussed further in Note 6.
During 2008, in connection with changes made to our business
strategy, we transferred the investment and development
activities previously included in the CDFS business segment,
along with the related assets, to the direct owned and
investment management segments (Europe reporting unit). The
related goodwill was transferred to the respective segments
based on the relative fair value of the assets transferred. In
connection with our review of goodwill for recoverability in the
fourth quarter of 2008, we recognized an impairment charge of
$175.4 million related to goodwill in the direct owned
segment in Europe. See Note 14 for additional information.
The goodwill allocated to a segment, subsequent to impairment
and reallocation, was as follows at December 31 (in thousands).
Segment/Reporting
Unit
2009
2008
Direct
Owned:
North
America
$
235,519
$
235,519
Europe
130,758
127,347
Total
direct owned segment
366,277
362,866
Investment
management:
Europe
25,286
25,286
Total
allocated
391,563
388,152
Not
allocated to a segment/reporting unit
7,474
7,474
Total
goodwill
$
399,037
$
395,626
(11)
Includes long-lived assets attributable to the United States as
of December 31, 2009 and 2008 of $9.7 billion and
$10.3 billion, respectively.
(12)
Represents our investments in and advances to the property funds
and certain investments in industrial and retail joint ventures.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
21.
Supplemental
Cash Flow Information:
Non-cash investing and financing activities for the years ended
December 31, 2009, 2008 and 2007 were as follows:
•
We received $30.3 million, $455.0 million and
$351.3 million of ownership interests in certain
unconsolidated investees as a portion of our proceeds from the
contribution of properties to these property funds during 2009,
2008 and 2007, respectively. In 2007, in connection with these
contributions, we recorded $51.6 million in potential
liabilities for future obligations we may have associated with
these transactions, which have subsequently been settled or
adjusted.
•
We capitalized portions of the total cost of our share-based
compensation awards of $5.8 million, $12.1 million and
$10.8 million to the investment basis of our real estate
and other assets during the years ended December 31, 2009,
2008, and 2007, respectively.
•
We settled $1.6 million, $21.3 million and
$4.4 million of noncontrolling interest liabilities with
the conversion of limited partnership units into 413,500 common
shares, 3.9 million common shares and 128,000 common shares
in 2009, 2008 and 2007, respectively.
•
We recorded $6.7 million and $27.8 million of
noncontrolling interest liabilities associated with investments
made in entities that we consolidate and own less that 100% in
2008 and 2007, respectively.
•
We assumed $6.6 million and $27.3 million of debt and
other liabilities in 2008 and 2007, respectively, in connection
with the acquisition of properties.
•
As partial consideration for property contributions in 2008, the
China property fund assumed $47.9 million in construction
liabilities.
•
We recognized a $9.3 million increase in the liability for
unrecognized tax benefits, which was accounted for as a
reduction to the January 1, 2007 balance of distributions
in excess of earnings in connection with the adoption of the
provisions of a new accounting standard.
•
In connection with the acquisition of all of the units in MPR in
July 2007 (see Note 6), we assumed $828.3 million of
debt and reallocated our equity investment of $47.7 million
to assets acquired.
•
As a result of the conversion by Citigroup of its convertible
loan into equity of ProLogis North American Industrial
Fund II in August 2007, we began accounting for our
investment in this property fund under the equity method of
accounting. This transaction resulted in a disposition of
$2.0 billion of real estate assets and $1.9 billion of
associated debt in exchange for an equity investment of
$219.1 million and the recognition of a gain.
See also the discussion of non-cash items related to the
Parkridge acquisition in 2007 in Note 5 and the discussion
of uncertain tax positions and other income tax matters in
Note 15.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
22.
Selected
Quarterly Financial Data (Unaudited):
Selected quarterly 2009 and 2008 data has been adjusted from
previously disclosed amounts due to the disposal of properties
in 2009 whose results of operations were reclassified to
discontinued operations in our Consolidated Statements of
Operations. The selected quarterly data was as follows:
Net earnings (loss) per share attributable to common
shares — Basic (1)
$
0.67
$
0.59
$
(0.03
)
$
(0.86
)
Net earnings (loss) per share attributable to common
shares — Diluted (1)(2)
$
0.66
$
0.58
$
(0.03
)
$
(0.86
)
2008:
Total revenues
$
1,625,028
$
1,487,129
$
985,491
$
1,468,335
Operating income (loss)
$
349,024
$
256,222
$
130,300
$
(158,968
)
Earnings (loss) from continuing operations
$
178,782
$
210,628
$
29,435
$
(701,125
)
Net earnings (loss) attributable to common shares
$
183,521
$
206,332
$
32,153
$
(901,232
)
Net earnings (loss) per share attributable to common
shares — Basic (1)
$
0.71
$
0.79
$
0.12
$
(3.39
)
Net earnings (loss) per share attributable to common
shares — Diluted (1)(2)
$
0.69
$
0.76
$
0.12
$
(3.39
)
(1)
Quarterly earnings per common share amounts may not total to the
annual amounts due to rounding and the changes in the number of
weighted common shares outstanding and included in the
calculation of diluted shares.
(2)
In periods with a net loss, the inclusion of any incremental
shares is anti-dilutive, and therefore, both basic and diluted
loss per share is the same.
Under date of February 26, 2010, we reported on the
consolidated balance sheets of ProLogis and subsidiaries as of
December 31, 2009 and 2008, and the related consolidated
statements of operations, comprehensive income (loss), equity,
and cash flows for each of the years in the three-year period
ended December 31, 2009. In connection with our audits of
the aforementioned consolidated financial statements, we also
audited the related financial statement schedule,
Schedule III — Real Estate and Accumulated
Depreciation (Schedule III). Schedule III is the
responsibility of ProLogis’ management. Our responsibility
is to express an opinion on Schedule III based on our
audits.
In our opinion, Schedule III — Real Estate and
Accumulated Depreciation, when considered in relation to the
basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set
forth therein.
As discussed in Note 2 to the consolidated financial
statements, the Company adopted FSP APB
14-1,
Accounting for Convertible Debt Instruments That May Be
Settled in Cash Upon Conversion (Including Partial Cash
Settlement), included in ASC subtopic
470-20,
Debt with Conversion and Other Options, as of
January 1, 2009.
PROLOGIS
SCHEDULE III CONSOLIDATED REAL ESTATE
AND ACCUMULATED DEPRECIATION (Continued)
(a)
Reconciliation of real estate assets per Schedule III to
our Consolidated Balance Sheet as of December 31, 2009 (in
thousands):
Total per Schedule III
$
12,027,666
Land held for development
2,569,343
Land subject to ground leases and other
385,222
(e)(g)
Other investments
233,665
Total per consolidated balance sheet
$
15,215,896
(h)
(b)
The aggregate cost for Federal tax purposes at December 31,2009 of our real estate assets was approximately $12,197,275,000
(c)
Real estate assets (excluding land balances) are depreciated
over their estimated useful lives. These useful lives are
generally 7 years for capital improvements, 10 years
for standard tenant improvements, 30 years for acquired
industrial properties, 40 years for office and retail
properties acquired and 40 years for properties we develop.
Reconciliation of accumulated depreciation per Schedule III
to our Consolidated Balance Sheets as of December 31, 2009
(in thousands):
Total accumulated depreciation per Schedule III
$
1,663,944
Accumulated depreciation on other investments
7,156
Total per Consolidated Balance Sheet
$
1,671,100
(d)
Total industrial properties include 163 properties developed in
the completed development portfolio aggregating
50.6 million square feet at a total investment of
$4.1 billion. See “Item 1. Business -
Operating Segments - Direct Owned”.
(e)
Properties with an aggregate undepreciated cost of
$2,643,037,300 secure $1,090,126,300 of mortgage notes. See
Note 9 to our Consolidated Financial Statements in
Item 8.
(f)
Properties with an aggregate undepreciated cost of $277,268,800
serve as collateral for a loan of the ProLogis American
Industrial Fund II. See Note 6 to our Consolidated
Financial Statements in Item 8.
(g)
Assessment bonds of $24,715,300 are secured by assessments
(similar to property taxes) on various underlying real estate
properties with an aggregate undepreciated cost of $953,045,100.
See Note 9 to our Consolidated Financial Statements in
Item 8.
(h)
A summary of activity for our real estate assets and accumulated
depreciation for the years ended December 31 (in thousands):
2009
2008
2007
Real estate assets:
Balance at beginning of year
$
12,496,292
$
13,370,979
$
11,615,735
Acquisitions of operating properties, transfers of development
completions from CIP and improvements to operating properties
1,857,947
4,154,685
5,437,923
Basis of operating properties disposed of
(1,145,256
)
(3,993,178
)
(4,693,606
)
Change in properties under development balance
(990,217
)
(807,025
)
1,023,527
Impairment of real estate properties (1)
(191,100
)
(36,942
)
(12,600
)
Assets transferred to
held-for-sale
-
(192,227
)
-
Balance at end of year
$
12,027,666
$
12,496,292
$
13,370,979
Accumulated Depreciation:
Balance at beginning of year
$
1,581,672
$
1,366,637
$
1,278,693
Depreciation expense
276,400
261,614
211,887
Balances retired upon disposition of operating properties
(194,128
)
(40,326
)
(123,943
)
Assets transferred to
held-for-sale
-
(6,253
)
-
Balance at end of year
$
1,663,944
$
1,581,672
$
1,366,637
(1)
The impairment charges relating to
real estate properties that we recognized during 2009 and 2008
were based primarily on valuations of real estate, which had
declined due to market conditions, that we no longer expected to
hold for long term investment. The 2007 impairment charge
related to a portfolio of buildings we had decided to sell. See
Note 14 to our Consolidated Financial Statements in
Item 8 for more information related to our impairment
charges.
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.
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.
Equity Distribution Agreement, dated June 2, 2009, between
ProLogis and Citigroup Global Markets Inc. (incorporated by
reference to exhibit 1.1 to ProLogis’ Form 8-K filed on
June 2, 2009).
3
.1
—
Articles of Amendment and Restatement of Declaration of Trust of
ProLogis (incorporated by reference to exhibit 4.1 to
ProLogis’ Form 10-Q for the quarter ended June 30, 1999).
3
.2
—
Certificate of Amendment, dated as of May 22, 2002, to Amended
and Restated of Declaration of Trust of ProLogis (incorporated
by reference to exhibit 99.1 to ProLogis’ Form 8-K dated
May 30, 2002).
3
.3
—
Articles of Amendment to Amended and Restated Declaration of
Trust of ProLogis dated as of May 19, 2005 (incorporated by
reference to exhibit 3.1 to ProLogis’ Form 8-K filed on May20, 2005).
3
.4
—
Articles of Amendment to Amended and Restated Declaration of
Trust of ProLogis dated as of July 12, 2005 (incorporated by
reference to exhibit 3.1 to ProLogis’ Form 8-K filed on
July 13, 2005).
3
.5
—
Articles of Amendment to Amended and Restated Declaration of
Trust of ProLogis dated as of February 27, 2009 (incorporated by
reference to exhibit 3.5 to ProLogis’ Form 10-K for the
year ended December 31, 2008).
Articles Supplementary Classifying and Designating the Series F
Cumulative Redeemable Preferred Shares of Beneficial Interest
(incorporated by reference to exhibit 4.2 to ProLogis’ Form
8-K dated December 24, 2003).
3
.10
—
Articles Supplementary Classifying and Designating the Series G
Cumulative Redeemable Preferred Shares of Beneficial Interest
(incorporated by reference to exhibit 4.3 to ProLogis’ Form
8-K dated December 24, 2003).
3
.11
—
Articles Supplementary Reclassifying and Designating Shares of
Beneficial Interest of ProLogis as Common Shares of Beneficial
Interest (incorporated by reference to exhibit 3.2 to
ProLogis’ Form 8-K filed on July 13, 2005).
4
.1
—
Form of share certificate for common shares of Beneficial
Interest of ProLogis (incorporated by reference to exhibit 4.4
to ProLogis’ registration statement No. 33-73382).
4
.2
—
Form of share certificate for Series C Cumulative Redeemable
Preferred Shares of Beneficial Interest of ProLogis
(incorporated by reference to exhibit 4.8 to ProLogis’ Form
10-K for the year ended December 31, 1996).
4
.3
—
Form of share certificate for Series F Cumulative Redeemable
Preferred Shares of Beneficial Interest of ProLogis
(incorporated by reference to exhibit 4.1 to ProLogis’ Form
8-K dated November 26, 2003).
4
.4
—
Form of share certificate for Series G Cumulative Redeemable
Preferred Shares of Beneficial Interest of ProLogis
(incorporated by reference to exhibit 4.1 to ProLogis’ Form
8-K dated December 24, 2003).
Indenture, dated as of March 1, 1995, between ProLogis and State
Street Bank and Trust Company, as Trustee (incorporated by
reference to Exhibit 4.9 to ProLogis’ Form 10-K for the
year ended December 31, 1994).
4
.7
—
First Supplemental Indenture, dated as of February 9, 2005, by
and between ProLogis and U.S. Bank National Association, as
Trustee (as successor in interest to State Street Bank and Trust
Company) (incorporated by reference to exhibit 4.1 to
ProLogis’ Form 8-K dated February 9, 2005).
4
.8
—
Second Supplemental Indenture dated as of November 2, 2005 by
and between ProLogis and U.S. Bank National Association, as
Trustee (as successor in interest to State Street Bank and Trust
Company) (incorporated by reference to Exhibit 4.1 to
ProLogis’ Form 8-K filed on November 4, 2005).
4
.9
—
Third Supplemental Indenture dated as of November 2, 2005 by and
between ProLogis and U.S. Bank National Association, as Trustee
(as successor in interest to State Street Bank and Trust
Company) (incorporated by reference to Exhibit 4.2 to
ProLogis’ Form 8-K filed on November 4, 2005).
4
.10
—
Fourth Supplemental Indenture dated as of March 26, 2007 by and
between ProLogis and U.S. Bank National Association, as Trustee
(as successor in interest to State Street Bank and Trust
Company) (incorporated by reference to exhibit 4.1 to
ProLogis’ form 8-K filed on March 26, 2007).
4
.11
—
Fifth Supplemental Indenture dated as of November 8, 2007 by and
between ProLogis and U.S. Bank National Association, as Trustee
(as successor in interest to State Street Bank and Trust
Company) (incorporated by reference to exhibit 4.1 to
ProLogis’ form 8-K filed on November 7, 2007).
4
.12
—
Sixth Supplemental Indenture dated as of May 7, 2008 by and
between ProLogis and U.S. Bank National Association, as Trustee
(as successor in interest to State Street Bank and Trust
Company) (incorporated by reference to exhibit 4.1 to
ProLogis’ form 10-Q for the quarter ended June 30, 2008).
4
.13
—
Seventh Supplemental Indenture dated as of May 7, 2008 by and
between ProLogis and U.S. Bank National Association, as Trustee
(as successor in interest to State Street Bank and Trust
Company) (incorporated by reference to exhibit 4.2 to
ProLogis’ form 10-Q for the quarter ended June 30, 2008).
4
.14
—
Eighth Supplemental Indenture dated as of August 14, 2009 by and
between ProLogis and U.S. Bank National Association, as Trustee
(as successor in interest to State Street Bank and Trust
Company) (incorporated by reference to exhibit 4.1 to
ProLogis’ form 8-K filed on August 14, 2009).
4
.15
—
Ninth Supplemental Indenture dated as of October 1, 2009 by and
between ProLogis and U.S. Bank National Association, as Trustee
(as successor in interest to State Street Bank and Trust
Company) (incorporated by reference to exhibit 4.1 to
ProLogis’ form 8-K filed on October 2, 2009).
Form of 5.50% Promissory Note due March 1, 2013 (incorporated by
reference to exhibit 4.26 to ProLogis’ Form10-K for the
year ended December 31, 2002).
Agreement of Limited Partnership of ProLogis Limited
Partnership-I, dated as of December 22, 1993, by and among
ProLogis, as general partner, and the limited partners set forth
therein (incorporated by reference to exhibit 10.4 to
ProLogis’ Registration Statement No. 33-73382).
10
.2
—
Agreement of Limited Partnership of Meridian Realty Partners,
L.P. (incorporated by reference to exhibit 99.1 to
ProLogis’ Registration Statement No. 333-86081).
10
.3
—
Amended and Restated Agreement of Limited Partnership of
ProLogis Fraser, L.P. dated as of August 4, 2004 (incorporated
by reference to exhibit 10.1 to ProLogis’ Form 10-Q for the
quarter ended September 30, 2004).
10
.4
—
Form of Indemnification Agreement entered into between ProLogis
and its Trustees and executive officers (incorporated by
reference to exhibit 10.16 to ProLogis’ Registration
Statement No. 33-73382).
10
.5
—
Indemnification Agreement between ProLogis and each of its
independent Trustees (incorporated by reference to exhibit 10.16
to ProLogis’ Form 10-K for the year ended December 31,1995).
10
.6
—
Declaration of Trust for the benefit of ProLogis’
independent Trustees (incorporated by reference to exhibit
10.17 to ProLogis’ Form 10-K for the year ended December31, 1995).
10
.7
—
Amended and Restated Security Agency Agreement dated as of
October 6, 2005, among Bank of America, N.A., as global
administrative agent under the Global Senior Credit Agreement
referred to therein, certain other creditors of ProLogis and
Bank of America, N.A., as collateral agent (incorporated by
reference to Exhibit 10.2 to ProLogis’ Form 8-K filed on
November 4, 2005).
10
.8
Amendment and Supplement No 1 dated as of August 21, 2009 to the
Amended And Restated Security Agency Agreement dated as of
October 6, 2005 among Bank of America, N.A., as Global
Administrative Agent on behalf of the Global Lenders defined
therein, certain Other Creditors of ProLogis and Bank of
America, as Collateral Agent (incorporated by reference to
Exhibit 10.2 to ProLogis Form 8-K filed on August 26, 2009).
10
.9
Third Amendment to Global Senior Credit Agreement dated as of
August 21, 2009 among ProLogis and certain affiliate borrowers,
as borrowers, Bank of America, N.A., as Global Administrative
Agent, Collateral Agent, U.S. Funding Agent, U.S. Swing Line
Lender, and a U.S. L/C Issuer, Bank of America, N.A., acting
through its Canada branch, as Canadian Funding Agent and a
Canadian L/C Issuer, ABN Amro Bank N.V., as Euro Funding Agent,
Euro Swing Line Lender, and a Euro L/C issuer, Sumitomo Mitsui
Banking Corporation, as a Global Co-Syndication Agent, Yen
Funding Agent, KRW Funding Agent, and a Yen L/C Issuer, The
Royal Bank of Scotland plc and JPMorgan Chase Bank, N.A., as
Global Co-Syndication Agents, and the other lenders party
thereto (incorporated by reference to Exhibit 10.1 to ProLogis
Form 8-K filed on August 26, 2009).
10
.10
—
1999 Dividend Reinvestment and Share Purchase Plan (incorporated
by reference to the Prospectus filed January 5, 2007 pursuant to
Rule 424(b)(3) with respect to Registration Statement No.
333-102166).
ProLogis Trust 1997 Long-Term Incentive Plan (as Amended and
Restated Effective as of September 26, 2002 (incorporated by
reference to exhibit 10.1 to ProLogis’ Form 8-K dated
February 19, 2003).
Third Amended and Restated Employment Agreement, dated January7, 2009, entered into between ProLogis and Walter C. Rakowich
(incorporated by reference to exhibit 10.19 to ProLogis’
Form 10-K for the year ended December 31, 2008).
Form of Executive Protection Agreements entered into between
ProLogis and Edward S. Nekritz and William E. Sullivan,
effective as of December 31, 2009 (incorporated by reference to
exhibit 10.23 to ProLogis’ Form 10-K for the year ended
December 31, 2008).
Advisory Agreement, dated May 15, 2007, entered into between
ProLogis and K. Dane Brooksher (incorporated by reference to
exhibit 10.1 to ProLogis’ Form 10-Q for the quarter ended
June 30, 2007). [TBD whether material]
10
.22
—
Master Implementation Agreement, dated December 23, 2008,
entered into between ProLogis and Reco China Logistics Pte Ltd,
relating to the sale and purchase of ProLogis’ interest in:
(i) PRC Holdco; (ii) the Japan Trusts; (iii) Master Lessees;
(iv) Barbados Managementco; (v) HK Managementco; (vi) Barbados
Targetcos; (vii) Targetco (each as defined therein)
(incorporated by reference to exhibit 10.29 to ProLogis’
Form 10-K for the year ended December 31, 2008).
10
.23
—
Supplemental Agreement, dated February 9, 2009, entered into
between ProLogis and Reco China Logistics Pte Ltd (incorporated
by reference to exhibit 10.30 to ProLogis’ Form 10-K for
the year ended December 31, 2008).
The following materials from ProLogis’ Annual Report on
Form 10-K for the year ended December 31, 2009 formatted in XBRL
(eXtensible Business Reporting Language): (i) the Consolidated
Balance Sheets, (ii) the Consolidated Statements of Operations,
(iii) the Consolidated Statements of Comprehensive Income
(Loss), (iv) the Consolidated Statements of Equity (v) the
Consolidated Statements of Cash Flows, and (vi) related notes to
these financial statements, tagged as blocks of text.
*
Management Contract or Compensatory Plan or Arrangement
158
Dates Referenced Herein and Documents Incorporated by Reference