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

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

The following should be read in conjunction with the Consolidated Financial Statements and related Notes included in Item 1 of this report and our Annual Report on Form 10-K for the year ended December 31, 2020, as filed with the United States (“U.S.”) Securities and Exchange Commission (“SEC”).

The statements in this report that are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are based on current expectations, estimates and projections about the industry and markets in which we operate as well as management’s beliefs and assumptions. Such statements involve uncertainties that could significantly impact our financial results. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” and “estimates” including variations of such words and similar expressions are intended to identify such forward-looking statements, which generally are not historical in nature. All statements that address operating performance, events or developments that we expect or anticipate will occur in the future — including statements relating to rent and occupancy growth, acquisition and development activity, contribution and disposition activity, general conditions in the geographic areas where we operate, our debt, capital structure and financial position, our ability to form new co-investment ventures and the availability of capital in existing or new co-investment ventures — are forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Although we believe the expectations reflected in any forward-looking statements are based on reasonable assumptions, we can give no assurance that our expectations will be attained, and therefore actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. Some of the factors that may affect outcomes and results include, but are not limited to: (i) international, national, regional and local economic and political climates and conditions; (ii) changes in global financial markets, interest rates and foreign currency exchange rates; (iii) increased or unanticipated competition for our properties; (iv) risks associated with acquisitions, dispositions and development of properties; (v) maintenance of Real Estate Investment Trust (“REIT”) status, tax structuring and changes in income tax laws and rates; (vi) availability of financing and capital, the levels of debt that we maintain and our credit ratings; (vii) risks related to our investments in our co-investment ventures, including our ability to establish new co-investment ventures; (viii) risks of doing business internationally, including currency risks; (ix) environmental uncertainties, including risks of natural disasters; (x) risks related to the coronavirus (“COVID-19”) pandemic; and (xi) those additional factors discussed under Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2020. We undertake no duty to update any forward-looking statements appearing in this report except as may be required by law.

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

We operate and manage our business on an owned and managed (“O&M”) basis and therefore evaluate the operating performance of the properties for our O&M portfolio, which includes our consolidated properties and properties owned by our unconsolidated co-investment ventures which we manage. We make operating decisions based on our total O&M portfolio, as we manage the properties similarly regardless of ownership. We also evaluate our results based on our proportionate economic ownership of each property included in the O&M portfolio (“our share”) to reflect our share of the financial results of the O&M portfolio.

Included in our discussion below are references to funds from operations (“FFO”) and net operating income (“NOI”), neither of which are U.S. generally accepted accounting principles (“GAAP”). See below for a reconciliation of Net Earnings Attributable to Common Stockholders/Unitholders in the Consolidated Statements of Income to our FFO measures and a reconciliation of NOI to Operating Income, the most directly comparable GAAP measures.

MANAGEMENT’S OVERVIEW

We are the global leader in logistics real estate with a focus on high-barrier, high-growth markets. We own, manage and develop well-located, high-quality logistics facilities in 19 countries across four continents. Our local teams actively manage our portfolio, which encompasses leasing, property management, capital deployment and opportunistic dispositions. Our disposition activities allow us to recycle capital and largely self-fund our development and acquisition activities. The majority of our properties in the United States (“U.S.”) are wholly owned, while our international properties are primarily held in co-investment ventures, which has the benefit of mitigating our exposure to foreign currency movements.

Our portfolio is focused on the world’s most vibrant centers of commerce and our scale allows us to respond to our customers’ needs for the highest-quality buildings across these locations. There is an emergence of two new structural demand drivers for our real estate: (i) the need for more inventory as supply chains emphasize resilience over efficiency and (ii) the acceleration of e-commerce adoption.

As improved service time increasingly moves to the forefront of the global supply chain, it drives demand for logistics real estate close to the end-consumer. We have invested in properties located within infill and urban areas in our largest global markets with same day access (defined as Last Touch®) and next day access (defined as city distribution), to the consumer population. This positioning gives

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us the unique ability to provide our customers with the right real estate solutions for their supply chains that, in turn, allows them to meet end-consumer delivery expectations.

As we look to the future of logistics real estate, we are focused on solving our customers’ pain points, innovating in pursuit of creative solutions and operational excellence. We are listening and responding to our customers’ needs for skilled labor through initiatives to create community workforce programs to develop their talent pool, utilize our proprietary data and analytics to ensure efficient distribution solutions and leverage our scale to negotiate better pricing on common products and services that our customers need. Our customers turn to us because they know that a strategic partnership with Prologis is a competitive advantage. We accomplish all of this by employing individuals who continue to grow, embrace change and draw strength from inclusion and diversity.

At September 30, 2021, our total O&M portfolio at 100%, including properties and development projects, totaled $101.0 billion (based on gross book value and total expected investment (“TEI”)) across 994 million square feet (92 million square meters) and four continents. Our share of the total O&M portfolio was $63.6 billion. We lease modern logistics facilities to a diverse base of approximately 5,500 customers.

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

Below is information summarizing consolidated activity within our segments (in millions):

(1)NOI from Real Estate Operations is calculated directly from our Consolidated Financial Statements as Rental Revenues and Development Management and Other Revenues less Rental Expenses and Other Expenses.
(2)A developed property moves into the operating portfolio when it meets our definition of stabilization, which is the earlier of one year after completion or 90% occupancy. Amounts represent our TEI, which includes the estimated cost of development or expansion, land, construction and leasing costs.

Real Estate Operations

Rental. Rental operations comprise the largest component of our operating segments and generally contribute 85% to 90% of our consolidated revenues, earnings and FFO. We collect rent from our customers through operating leases, including reimbursements for the majority of our property operating costs. We expect to generate internal growth by increasing rents, maintaining high occupancy rates and controlling expenses. The primary driver of our revenue growth will be rolling in-place leases to current market rents as leases expire. We believe our active portfolio management, combined with the skills of our property, leasing, maintenance, capital, energy, sustainability and risk management teams allow us to maximize NOI across our portfolio. A majority of our consolidated rental revenue, NOI and cash flows are generated in the U.S.

Development. Given the scarcity of modern logistics facilities in our target markets, our development business provides us the opportunity to build what our customers need. We develop properties to meet these needs, deepen our market presence and maintain a modern portfolio. We believe we have a competitive advantage due to (i) the strategic locations of our global land bank and redevelopment sites; (ii) the development expertise of our local teams; and (iii) the depth of our customer relationships. Successful development and redevelopment efforts provide significant earnings growth as projects are leased, generate income and increase the net asset value of our Real Estate Operations segment. Generally, we develop properties in the U.S. for long-term hold and outside the U.S. for contribution to our unconsolidated co-investment ventures.

Strategic Capital

Our strategic capital segment allows us to partner with many of the world’s largest institutional investors and capitalize our business through private equity, principally perpetual open-ended or long-term ventures, which allows us to reduce our exposure to foreign currency movements for investments outside the U.S. We also access capital in this segment through two publicly traded vehicles: Nippon Prologis REIT, Inc. in Japan and FIBRA Prologis in Mexico. We align our interests with our partners by holding significant ownership interests in all of our 9 unconsolidated co-investment ventures (ranging from 15% to 50%).

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This segment produces durable, long-term cash flows and generally contributes 10% to 15% of our recurring consolidated revenues, earnings and FFO. We generate strategic capital revenues from our unconsolidated co-investment ventures, principally through property and asset management services. Asset management fees are primarily driven by the real estate valuation of the venture. We earn additional revenues by providing leasing, acquisition, construction, development, financing, legal and disposition services. In certain ventures, we also have the ability to earn revenues through incentive fees (“promotes” or “promote revenues”) periodically during the life of a venture or upon liquidation based on the appreciation of the portfolio. We plan to profitably grow this business by increasing our assets under management in existing or new ventures. Most of the strategic capital revenues are generated outside the U.S. NOI in this segment is calculated directly from our Consolidated Financial Statements as Strategic Capital Revenues less Strategic Capital Expenses and excludes property-related NOI.

FUTURE GROWTH

We believe the quality and scale of our global portfolio, our diversified and complimentary businesses, the expertise of our team, the depth of our customer relationships and the strength of our balance sheet give us unique competitive advantages to grow revenues, NOI, earnings, FFO and cash flows.

(1)Calculated using the trailing twelve months immediately prior to the period ended.
(2)General and Administrative (“G&A”) Expenses is a line item in the Consolidated Financial Statements. Adjusted G&A expenses is calculated from our Consolidated Financial Statements as G&A Expenses and Strategic Capital Expenses, less expenses under the Prologis Promote Plan (“PPP”) and property-level management expenses for the properties owned by the ventures. Annualized 2021 represents G&A and adjusted G&A expenses for the year ended December 31, 2021 based on the nine months ended September 30, 2021.
•Rent Growth*.* Due to the demand for the location and quality of our properties, we expect rents in our markets to continue to increase. In addition, due to strong market rent growth over the last several years, our in-place leases have considerable upside potential to drive future incremental organic NOI growth. We estimated that the rental rates of our leases are 21.9% below current market on the basis of our weighted average ownership at September 30, 2021. Therefore, even if market rent growth is flat, a lease renewal will translate into increased future rental income, on a consolidated basis or through the earnings we recognize from our unconsolidated co-investment ventures based on our ownership. We have experienced positive rent change on rollover (comparing the net effective rent (“NER”) of the new lease to the prior lease for the same space) every quarter since 2013.
•Value Creation from Development. A successful development and redevelopment program involves maintaining control of well-located and entitled land and redevelopment sites and sourcing a future pipeline through acquisition opportunities, including our innovative approach with Covered Land Plays. We believe that the carrying value of our global land bank is below its current fair value. Due to the strategic nature of our land bank, development expertise of our teams and strength of our customer relationships, we expect to create value as we build new properties. We measure the estimated value creation of a development project as the margin above our anticipated cost to develop or TEI. Based on our current estimates, our consolidated land, including options, has the potential to support the development of $14.8 billion of TEI of new logistics space. In addition to our land portfolio, we have also made investments in income generating assets with the intention to redevelop them into logistics facilities, which we define as Covered Land Plays, with a TEI of $3.1 billion. As properties stabilize, we expect to realize the value creation principally through contributions to unconsolidated co-investment ventures and increases in NOI.
•Economies of Scale from Growth. We use adjusted G&A expenses as a percentage of the O&M portfolio to measure and evaluate our overhead costs. We have scalable systems and infrastructure in place to grow both our consolidated and O&M portfolios with limited incremental G&A expense. We believe we can continue to grow NOI and strategic capital revenues organically and through accretive development and acquisition activity while further reducing G&A as a percentage of our investments in real estate. As noted in the graph above, the acquisitions of Liberty Property Trust and Liberty Property Limited Partnership (collectively “Liberty” or the “Liberty Transaction”) and Industrial Property Trust Inc. (“IPT” or the “IPT Transaction”) in the first quarter of 2020 are key examples of this effort, where we increased our investments in real estate in the O&M portfolio by

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over 20% and had minimal increases to G&A expenses, which resulted in lower G&A expenses as a percentage of investments in real estate.
•Balance Sheet Strength. We have continued to seek and execute on opportunities to refinance debt at historically low rates which resulted in extending our consolidated weighted average remaining maturity to 11 years and lowering our weighted average effective interest rate to 1.6%. At September 30, 2021, we had total available liquidity of $5.5 billion and continue to maintain low leverage as a percentage of our real estate investments and our market capitalization. As a result of our low leverage, available liquidity and investment capacity in the co-investment ventures, we have significant capacity to capitalize on value-added investment opportunities that will translate into future earnings growth.
•Staying “Ahead of What’s Next™”. We are executing initiatives to create value beyond the real estate by enhancing our customers’ experience, utilizing our scale to streamline our procurement activities and negotiating better pricing on products and services for us and our customers, as well as delivering improvements to our business through innovation, data analytics and digitization efforts. Underlying our future strategy for growth is our ongoing commitment to, and initiatives in, environmental stewardship, social responsibility and governance.

SUMMARY OF 2021

Our financial condition and operating results were strong during the nine months ended September 30, 2021. E-commerce continues to grow well above its historical average and demand for space is robust based on our proprietary data. As demand surges, having the right logistics real estate in the right location is mission critical for our customers, which is evident with our O&M occupancy at 97.1% at September 30, 2021. Leasing activity accelerated for our portfolio during the nine-month period ending September 30, 2021. Our outlook for the remainder of 2021 is equally as promising as we expect increases in market rents and asset valuations to drive our operating results as well as our execution of profitable deployment activities. Despite the COVID-19 pandemic, our operating fundamentals have remained strong and market conditions for logistics real estate are healthy with the acceleration of e-commerce adoption, however, we cannot fully predict negative trends due to the continued uncertainty of COVID-19 across the globe.

During the nine months ended September 30, 2021, we generated net proceeds of $3.1 billion and realized net gains of $859 million, primarily from the contribution of properties to our unconsolidated co-investment ventures in Japan and Europe and dispositions to third parties.

We completed the following consolidated financing activities that included the issuance of $2.6 billion and redemption of $1.5 billion of senior notes, with aggregate principal amounts in U.S. dollars. This resulted in extending our consolidated weighted average remaining maturity to 11 years and lowering our weighted average effective interest rate to 1.6% (principal in millions):

Aggregate PrincipalIssuance Date Weighted Average
Issuance DateBorrowing CurrencyUSD (1)Interest Rate (2)Term (3)Maturity Dates
February€1,350$1,6390.7%14.3February 2032 – 2041
February$400$4001.6%10.1March 2031
June¥ 65,000$5870.8%15.4June 2028 – 2061
Total$2,6260.9%13.9
Aggregate PrincipalRedemption Date Weighted Average
Redemption DateBorrowing CurrencyUSD (1)Interest Rate (2)Term (3)Maturity Date
March€600$7163.4%3.0February 2024
March$750$7503.8%4.7November 2025
Total$1,4663.6%3.8
(1)The exchange rate used to calculate into U.S. dollars was the spot rate at the settlement date.
(2)The weighted average interest rate represents the fixed or variable interest rates of the related debt at the issuance or redemption date.
(3)The weighted average term represents the remaining maturity in years on the related debt at the issuance or redemption date.

At September 30, 2021, we had total available liquidity of $5.5 billion, principally due to aggregate availability under our credit facilities of $4.9 billion and unrestricted cash balances of $585 million. In April 2021, we increased our available liquidity by entering into a second global senior credit facility with an available borrowing capacity of $1.0 billion and we terminated the $500 million multi-currency term loan.

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

RESULTS OF OPERATIONS – NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020

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

Below is a reconciliation of our NOI by segment to Operating Income per the Consolidated Financial Statements for the nine months ended September 30 (in millions). Each segment’s NOI is reconciled to line items in the Consolidated Financial Statements as provided in the related discussion below.

20212020
Real Estate Operations – NOI$2,297$2,080
Strategic Capital – NOI244342
General and administrative expenses(219)(208)
Depreciation and amortization expenses(1,181)(1,145)
Operating income before gains on real estate transactions, net1,1411,069
Gains on dispositions of development properties and land, net500384
Gains on other dispositions of investments in real estate, net358184
Operating income$1,999$1,637

See Note 11 to the Consolidated Financial Statements for more information on our segments and a reconciliation of each business segment’s NOI to Operating Income and Earnings Before Income Taxes.

Real Estate Operations

This operating segment principally includes rental revenue and rental expenses recognized from our consolidated properties. We allocate the costs of our property management and leasing functions to the Real Estate Operations segment through Rental Expenses and the Strategic Capital segment through Strategic Capital Expenses based on the square footage of the relative portfolios. In addition, this segment is impacted by our development, acquisition and disposition activities.

Below are the components of Real Estate Operations NOI for the nine months ended September 30, derived directly from line items in the Consolidated Financial Statements (in millions):

20212020
Rental revenues$3,074$2,803
Development management and other revenues188
Rental expenses(780)(705)
Other expenses(15)(26)
Real Estate Operations – NOI$2,297$2,080

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The change in Real Estate Operations NOI for the nine months ended September 30, 2021 from the same period in 2020, was impacted by the following items (in millions):

(1)Acquisition activity increased NOI in 2021, compared to 2020, primarily due to the Liberty Transaction on February 4, 2020. We acquired 519 industrial operating properties, aggregating 100 million square feet, and increased our consolidated investments in real estate by approximately $13 billion.
(2)During both periods, we experienced positive rental rate growth. Rental rate growth is a combination of higher rental rates on rollover of leases (or rent change) and contractual rent increases on existing leases. If a lease has a contractual rent increase driven by a metric that is not known at the time the lease commences, such as the consumer price index or a similar metric, the rent increase is not included in rent leveling and therefore, impacts the rental revenue we recognize. Significant rent change during both periods continues to be a key driver in increasing rental income. See below for key metrics on rent change on rollover and occupancy for the consolidated operating portfolio.
(3)We calculate changes in NOI from development completions period over period by comparing the change in NOI generated on the pool of developments that completed on or after January 1, 2020 through September 30, 2021.

Below are key operating metrics of our consolidated operating portfolio, which excludes non-strategic industrial properties.

(1)Consolidated square feet of leases commenced and weighted average net effective rent change were calculated for leases with initial terms of one year or greater.
(2)Calculated using the trailing twelve months immediately prior to the period ended.

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Development Activity

The following table summarizes consolidated development activity for the nine months ended September 30 (dollars and square feet in millions):

20212020
Starts:
Number of new development projects during the period5715
Square feet205
TEI$2,576$708
Percentage of build-to-suits based on TEI49.4%61.9%
Stabilizations:
Number of development projects stabilized during the period4445
Square feet1216
TEI$1,371$1,539
Percentage of build-to-suits based on TEI40.1%37.4%
Weighted average stabilized yield (1)5.9%6.5%
Estimated value at completion$1,958$2,172
Estimated weighted average margin42.8%41.2%
(1)We calculate the weighted average stabilized yield as estimated NOI assuming stabilized occupancy divided by TEI.

During the first quarter of 2020, we suspended several speculative development projects for the short term based on the market conditions at that time and government restrictions due to COVID-19. By the fourth quarter of 2020, most suspended projects were restarted and by March 2021, the entire development portfolio consisted of active projects. At September 30, 2021, the consolidated development portfolio, including properties under development and pre-stabilized properties, was expected to be completed before June 2023 with a TEI of $4.8 billion, leaving $2.0 billion remaining to be spent and was 58.8% leased. While construction costs increased during the period, we continue to maintain high margins as a result of low vacancy rates and high market rent growth.

Capital Expenditures

We capitalize costs incurred in renovating, improving and leasing our operating properties as part of the investment basis or within other assets. The following graph summarizes capital expenditures, excluding development costs, and property improvements per square foot of our consolidated operating properties during each quarter:

Strategic Capital

This operating segment includes revenues from asset and property management services performed, transactional services for acquisition, disposition and leasing activity and promote revenue earned from the unconsolidated entities. Revenues associated with the Strategic Capital segment fluctuate because of changes in the size of the portfolios through acquisitions and dispositions, the fair value of the properties and other transactional activity including foreign currency exchange rates and timing of promotes. These revenues are reduced by the direct costs associated with the asset and property-level management expenses for the properties owned by these ventures. We allocate the costs of our property management and leasing functions to the Strategic Capital segment through Strategic Capital Expenses and to the Real Estate Operations segment through Rental Expenses based on the square footage of the relative portfolios. For further details regarding the key property information and summarized financial condition and operating results of our unconsolidated co-investment ventures, refer to Note 4 to the Consolidated Financial Statements.

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Below are the components of Strategic Capital NOI for the nine months ended September 30, derived directly from the line items in the Consolidated Financial Statements (in millions):

20212020
Strategic capital revenues$391$516
Strategic capital expenses(147)(174)
Strategic Capital – NOI$244$342

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

U.S. (1)Other AmericasEuropeAsiaTotal
2021202020212020202120202021202020212020
Strategic capital revenues ($)
Recurring fees (2)99792824114875849299239
Transactional fees (3)91454181325185749
Promote revenue (4)222278-51--35228
Total strategic capital revenues ($)13032041281371018367391516
Strategic capital expenses ($)(75)(98)(9)(10)(34)(35)(29)(31)(147)(174)
Strategic Capital – NOI ($)552223218103665436244342
(1)The U.S. expenses include compensation and personnel costs for employees who are based in the U.S. but also support other geographies.
(2)Recurring fees include asset and property management fees. The increase in fees is due primarily to higher asset management fees driven by the increases in the fair value of the properties based on third party valuations.
(3)Transactional fees include leasing commissions and acquisition, disposition, development and other fees.
(4)We generally earn promote revenue directly from third-party investors in the co-investment ventures based on cumulative returns over a three-year period or based on development returns. An increase in asset valuations in the co-investment ventures, as we have experienced in 2021, is one of the significant drivers of returns that can translate into earning future promote revenues. Approximately 40% of the promote earned by us is paid to our employees as a combination of cash and stock awards pursuant to the terms of the PPP and expensed through Strategic Capital Expenses, as vested.

G&A Expenses

G&A expenses were $219 million and $208 million for the nine months ended September 30, 2021 and 2020, respectively. G&A expenses increased in 2021 as compared to 2020, due to higher compensation expenses based largely on our outperformance and the increase in our share price. We capitalize certain internal costs, including salaries and related expenses, directly related primarily to our development activities. For discussion on our long-term incentive plans refer to the proxy statement for our 2021 annual meeting of stockholders.

The following table summarizes capitalized G&A for the nine months ended September 30 (dollars in millions):

20212020
Building and land development activities$70$57
Operating building improvements and other2117
Total capitalized G&A expenses$91$74
Capitalized salaries and related costs as a percent of total salaries and related costs21.6%20.2%

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Depreciation and Amortization Expenses

Depreciation and amortization expenses were $1.2 billion and $1.1 billion for the nine months ended September 30, 2021 and 2020, respectively.

The following table highlights the key changes in depreciation and amortization expenses during the nine months ended September 30, 2021 from the same period in 2020 (in millions):

(1)Included in acquisitions are the operating properties and related intangible assets acquired in the Liberty Transaction.

Gains on Real Estate Transactions, Net

Gains on the disposition of development properties and land were $500 million and $384 million for the nine months ended September 30, 2021 and 2020, respectively, and primarily included gains from the contribution of properties we developed to our unconsolidated co-investment ventures in Europe and Japan. Gains on other dispositions of investments in real estate were $358 million and $184 million for the nine months ended September 30, 2021 and 2020, respectively, which included sales of operating properties, including certain non-strategic assets acquired in the Liberty Transaction and the IPT Transaction and the sale of our ownership interest in one of our other unconsolidated ventures. We utilized the proceeds from these transactions primarily to fund our development activities during both periods. See Note 3 to the Consolidated Financial Statements for further information on these transactions.

Our Owned and Managed (“O&M”) Operating Portfolio

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

Our O&M operating portfolio does not include our development portfolio, value-added properties, non-industrial properties or properties we do not have the intent to hold long-term that are classified as either held for sale or within other real estate investments. Value-added properties are properties that are expected to be repurposed or redeveloped to a higher and better use and recently acquired properties that present opportunities to create greater value. See below for information on our O&M operating portfolio (square feet in millions):

September 30, 2021December 31, 2020
Number of PropertiesSquare FeetPercentage OccupiedNumber of PropertiesSquare FeetPercentage Occupied
Consolidated2,27244497.4%2,25244196.6%
Unconsolidated1,92043896.7%1,84941695.9%
Total4,19288297.1%4,10185796.2%

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Below are the key operating metrics summarizing the leasing activity of our O&M operating portfolio.

(1)Square feet of leases commenced and weighted average net effective rent change were calculated for leases with initial terms of one year or greater. We retained approximately 70% or more of our customers, based on the total square feet of leases commenced during these periods.
(2)Calculated using the trailing twelve months immediately prior to the period ended.
(3)Turnover costs include external leasing commissions and tenant improvements and represent the obligations incurred in connection with the lease commencement for leases greater than one year. As a result of higher rents on leases that commenced during the nine months ended September 30, 2021, leasing commissions on a per square foot basis have continued to increase as commissions are based on the contractual rent we receive over the lease term.

Same Store Analysis

Our same store metrics are non-GAAP financial measures, which are commonly used in the real estate industry and expected from the financial community, on both a net effective and cash basis. We evaluate the performance of the operating properties we own and manage using a “same store” analysis because the population of properties in this analysis is consistent from period to period, which allows us and investors to analyze our ongoing business operations. We determine our same store metrics on property NOI, which is calculated as rental revenue less rental expense for the applicable properties in the same store population for both consolidated and unconsolidated properties based on our ownership interest, as further defined below.

We define our same store population for the three months ended September 30, 2021 as the properties in our O&M operating portfolio, including the property NOI for both consolidated properties and properties owned by the unconsolidated co-investment ventures, at January 1, 2020 and owned throughout the same three-month period in both 2020 and 2021. We believe the drivers of property NOI for the consolidated portfolio are generally the same for the properties owned by the ventures in which we invest and therefore we evaluate the same store metrics of the O&M portfolio based on Prologis’ ownership in the properties (“Prologis Share”). The same store population excludes properties held for sale to third parties, along with development properties that were not stabilized at the beginning of the period (January 1, 2020) and properties acquired or disposed of to third parties during the period. To derive an appropriate measure of period-to-period operating performance, we remove the effects of foreign currency exchange rate movements by using the reported period-end exchange rate to translate from local currency into the U.S. dollar for both periods.

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As non-GAAP financial measures, the same store metrics have certain limitations as an analytical tool and may vary among real estate companies. As a result, we provide a reconciliation of Rental Revenues less Rental Expenses (“Property NOI”) (from our Consolidated Financial Statements prepared in accordance with U.S. GAAP) to our Same Store Property NOI measures, as follows for the three months ended September 30 (dollars in millions):

Percentage
20212020Change
Reconciliation of Consolidated Property NOI to Same Store Property NOI measures:
Rental revenues$1,037$980
Rental expenses(256)(245)
Consolidated Property NOI781735
Adjustments to derive same store results:
Property NOI from consolidated properties not included in same store portfolio and other adjustments (1)(243)(224)
Property NOI from unconsolidated co-investment ventures included in same store portfolio (1)(2)568538
Third parties' share of Property NOI from properties included in same store portfolio (1)(2)(458)(439)
Prologis Share of Same Store Property NOI – Net Effective (2)$648$6106.2%
Consolidated properties straight-line rent and fair value lease adjustments included in same store portfolio (3)(11)(14)
Unconsolidated co-investment ventures straight-line rent and fair value lease adjustments included in same store portfolio (3)(9)(15)
Third parties' share of straight-line rent and fair value lease adjustments included in same store portfolio (2)(3)613
Prologis Share of Same Store Property NOI – Cash (2)(3)$634$5946.7%
(1)We exclude properties held for sale to third parties, along with development properties that were not stabilized at the beginning of the period and properties acquired or disposed of to third parties during the period. We also exclude net termination and renegotiation fees to allow us to evaluate the growth or decline in each property’s rental revenues without regard to one-time items that are not indicative of the property’s recurring operating performance. Net termination and renegotiation fees represent the gross fee negotiated to allow a customer to terminate or renegotiate their lease, offset by the write-off of the asset recorded due to the adjustment to straight-line rents over the lease term. Same Store Property NOI is adjusted to include an allocation of property management expenses for our consolidated properties based on the property management services provided to each property (generally, based on a percentage of revenues). On consolidation, these amounts are eliminated and the actual costs of providing property management and leasing services are recognized as part of our consolidated rental expense.
(2)We include the Property NOI for the same store portfolio for both consolidated properties and properties owned by the co-investment ventures based on our investment in the underlying properties. In order to calculate our share of Same Store Property NOI from the co-investment ventures in which we own less than 100%, we use the co-investment ventures’ underlying Property NOI for the same store portfolio and apply our ownership percentage at September 30, 2021 to the Property NOI for both periods, including the properties contributed during the period. We adjust the total Property NOI from the same store portfolio of the co-investment ventures by subtracting the third parties’ share of both consolidated and unconsolidated co-investment ventures.

During the periods presented, certain wholly owned properties were contributed to a co-investment venture and are included in the same store portfolio. Neither our consolidated results nor those of the co-investment ventures, when viewed individually, would be comparable on a same store basis because of the changes in composition of the respective portfolios from period to period (e.g. the results of a contributed property are included in our consolidated results through the contribution date and in the results of the venture subsequent to the contribution date based on our ownership interest at the end of the period). As a result, only line items labeled “Prologis Share of Same Store Property NOI” are comparable period over period.

(3)We further remove certain noncash items (straight-line rent and amortization of fair value lease adjustments) included in the financial statements prepared in accordance with U.S. GAAP to reflect a Same Store Property NOI – Cash measure.

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We manage our business and compensate our executives based on the same store results of our O&M portfolio at 100% as we manage our portfolio on an ownership blind basis. We calculate those results by including 100% of the properties included in our same store portfolio.

Other Components of Income (Expense)

Earnings from Unconsolidated Entities, Net

We recognized net earnings from unconsolidated entities, which are accounted for using the equity method, of $231 million and $217 million for the nine months ended September 30, 2021 and 2020, respectively. The earnings we recognize can be impacted by: (i) variances in revenues and expenses of each venture; (ii) the size and occupancy rate of the portfolio of properties owned by each venture; (iii) gains or losses from the dispositions of properties and extinguishment of debt; (iv) our ownership interest in each venture; and (v) fluctuations in foreign currency exchange rates used to translate our share of net earnings to U.S. dollars.

See the discussion of our unconsolidated entities above in the Strategic Capital segment discussion and in Note 4 to the Consolidated Financial Statements for a further breakdown of our share of net earnings recognized.

Interest Expense

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

20212020
Gross interest expense$227$264
Amortization of debt discount and debt issuance costs, net65
Capitalized amounts(30)(31)
Net interest expense$203$238
Weighted average effective interest rate during the period1.7%2.2%

Interest expense decreased during the nine months ended September 30, 2021, as compared to the same period in 2020, principally due to the use of proceeds from the issuance of senior notes throughout 2020 and during the first quarter of 2021 to redeem higher interest rate senior notes before their stated maturity. As a result of our refinancing activities, we lowered the consolidated weighted average effective interest rate on our senior notes from 2.4% on January 1, 2020 to 1.6% on September 30, 2021.

See Note 6 to the Consolidated Financial Statements and the Liquidity and Capital Resources section below, for further discussion of our debt and borrowing costs.

Foreign Currency and Derivative Gains (Losses), Net

We are exposed to foreign currency exchange risk related to investments in and earnings from our foreign investments. We may use derivative financial instruments to manage foreign currency exchange rate risk related to our earnings. We recognize the change in fair value of the undesignated derivative contracts in unrealized gains and losses. Upon settlement of these transactions, we recognize realized gains or losses.

We primarily hedge our foreign currency risk related to our investments by borrowing in the currencies in which we invest thereby providing a natural hedge. We have issued debt in a currency that is not the same functional currency of the borrowing entity and have designated a portion of the debt as a nonderivative net investment hedge. We recognize the remeasurement and settlement of the translation adjustment on the unhedged portion of the debt and accrued interest in unrealized gains or losses.

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

20212020
Realized foreign currency and derivative gains (losses), net:
Gains (losses) on the settlement of undesignated derivatives$(11)$11
Losses on the settlement of transactions with third parties(1)-
Total realized foreign currency and derivative gains (losses), net(12)11
Unrealized foreign currency and derivative gains (losses), net:
Gains (losses) on the change in fair value of undesignated derivatives and unhedged debt148(44)
Gains (losses) on remeasurement of certain assets and liabilities2(15)
Total unrealized foreign currency and derivative gains (losses), net150(59)
Total foreign currency and derivative gains (losses), net$138$(48)

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See Note 10 to the Consolidated Financial Statements for more information about our derivative and nonderivative transactions.

Losses on Early Extinguishment of Debt, Net

During the nine months ended September 30, 2021 and 2020, we recognized $187 million and $165 million of losses on the early extinguishment of debt, respectively. The losses during both periods were driven by the redemption of certain higher interest rate senior notes before their stated maturity. We compare any prepayment penalties incurred from the early redemption of the borrowings to the potential interest savings over the term, and make a decision to refinance the debt when it is economically viable. We redeemed $1.5 billion of senior notes with stated maturities of 2024 and 2025, and $2.0 billion of senior notes with stated maturities between 2021 and 2024, during the nine months ended September 30, 2021 and 2020, respectively. The losses in 2020 included the extinguishment of debt assumed in the Liberty Transaction and the IPT Transaction, which represented the excess of the prepayment penalties over the premium recorded upon assumption of the debt. See Note 6 to the Consolidated Financial Statements and the Liquidity and Capital Resources section, for more information regarding our debt repurchases.

Income Tax Expense

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

The following table summarizes our income tax expense (benefit) for the nine months ended September 30 (in millions):

20212020
Current income tax expense:
Income tax expense$65$63
Income tax expense on dispositions5630
Income tax expense on dispositions related to acquired tax liabilities34
Total current income tax expense12497
Deferred income tax expense (benefit):
Income tax expense (benefit)13(3)
Income tax benefit on dispositions related to acquired tax liabilities(3)(4)
Total deferred income tax expense (benefit)10(7)
Total income tax expense$134$90

Net Earnings Attributable to Noncontrolling Interests

This amount represents the third-party investors’ share of the earnings generated in consolidated entities in which we do not own 100% of the equity, reduced by the third-party share of fees or promotes payable to us and earned during the period. We had net earnings attributable to noncontrolling interests of $157 million and $109 million for the nine months ended September 30, 2021 and 2020, respectively. Included in these amounts were $47 million and $34 million for the nine months ended September 30, 2021 and 2020, of net earnings attributable to the common limited partnership unitholders of Prologis, L.P. The recognition of net gains on the sale of the non-strategic assets identified for disposition in the IPT Transaction also increased the net earnings attributable to noncontrolling interests during the three months ended September 30, 2021.

See Note 7 to the Consolidated Financial Statements for further information on our noncontrolling interests.

Other Comprehensive Income (Loss)

The key driver of changes in Accumulated Other Comprehensive Income (Loss) (“AOCI/L”) during the nine months ended September 30, 2021 and 2020, was the currency translation adjustment derived from changes in exchange rates during both periods primarily on our net investments in real estate outside the U.S. and the borrowings we issue in the functional currencies of the countries where we invest. These borrowings serve as a natural hedge of our foreign investments. In addition, we use derivative financial instruments, such as foreign currency forward and option contracts to manage foreign currency exchange rate risk related to our foreign investments, that when designated the change in fair value is included in AOCI/L. See Note 10 to the Consolidated Financial Statements for more information on changes in other comprehensive income (loss) and about our derivative and nonderivative transactions.

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RESULTS OF OPERATIONS – THREE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020

Except as separately discussed above, the changes in comprehensive income attributable to common stockholders and unitholders and its components for the three months ended September 30, 2021, as compared to the three months ended September 30, 2020, are similar to the changes for the nine-month periods ended on the same dates.

LIQUIDITY AND CAPITAL RESOURCES

Overview

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

Near-Term Principal Cash Sources and Uses

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

•completion of the development and leasing of the properties in our consolidated development portfolio (at September 30, 2021, 96 properties in our development portfolio were 58.8% leased with a current investment of $2.8 billion and a TEI of $4.8 billion when completed and leased, leaving $2.0 billion of estimated additional required investment);
•development of new properties that we may hold for long-term investment or subsequently contribute to unconsolidated co-investment ventures, including the acquisition of land in certain markets;
•capital expenditures and leasing costs on properties in our operating portfolio;
•repayment of debt and scheduled principal payments of $95 million in the remainder of 2021 and $734 million in 2022;
•additional investments in current and future unconsolidated co-investment ventures and other ventures;
•acquisition of operating properties or portfolios of operating properties (depending on market and other conditions) for direct, long-term investment in our consolidated portfolio (this might include acquisitions from our co-investment ventures); and
•repurchase of our outstanding debt or equity securities (depending on prevailing market conditions, our liquidity, contractual restrictions and other factors) through cash purchases, open-market purchases, privately negotiated transactions, tender offers or otherwise.

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

•net cash flow from property operations;
•fees earned for services performed on behalf of co-investment ventures, including promotes;
•distributions received from co-investment ventures;
•proceeds from disposition of properties, land parcels or other investments to third parties;
•proceeds from the contributions of properties to current or future co-investment ventures;
•available unrestricted cash balances ($585 million at September 30, 2021);
•borrowing capacity under our current credit facility arrangements ($4.9 billion available at September 30, 2021);
•proceeds from the issuance of debt; and
•proceeds from the sale of a portion of our investments in co-investment ventures to achieve long-term ownership targets.

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

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Debt

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

September 30, 2021December 31, 2020
Weighted Average Interest RateAmount Outstanding% of TotalWeighted Average Interest RateAmount Outstanding% of Total
British pound sterling2.2%$1,0055.9%2.2%$1,0196.1%
Canadian dollar2.7%2841.7%2.7%2861.7%
Euro1.1%6,87840.0%1.4%6,55038.8%
Japanese yen0.8%3,14718.4%0.8%2,87717.1%
U.S. dollar2.6%5,82234.0%2.8%6,11736.3%
Total debt (1)1.6%$17,136100.0%1.9%$16,849100.0%
(1)The weighted average maturity for total debt outstanding at September 30, 2021 and December 31, 2020 was 11 years and 10 years, respectively.

Our credit ratings at September 30, 2021, were A3 from Moody’s and A- from Standard & Poor’s, both with stable outlook. These ratings allow us to borrow at an advantageous interest rate. Adverse changes in our credit ratings could negatively impact our business and, in particular, our refinancing and other capital market activities, our ability to manage debt maturities, our future growth and our development and acquisition activity. A securities rating is not a recommendation to buy, sell or hold securities and is subject to revision or withdrawal at any time by the rating organization.

At September 30, 2021, we were in compliance with all of our financial debt covenants. These covenants include customary financial covenants for total debt, encumbered debt and fixed charge coverage ratios.

See Note 6 to the Consolidated Financial Statements for further discussion on our debt.

Equity Commitments Related to Certain Co-Investment Ventures

Certain co-investment ventures have equity commitments from us and our venture partners. Our venture partners fulfill their equity commitment with cash. We may fulfill our equity commitment through contributions of properties or cash.

The following table summarizes the remaining equity commitments at September 30, 2021 (dollars in millions):

Equity Commitments (1)
PrologisVenture PartnersTotalExpiration Date
Prologis Targeted U.S. Logistics Fund$-$1,454$1,4542023 – 2024 (2)
Prologis European Logistics Fund-1,7791,7792023 – 2024 (2)
Prologis UK Logistics Venture948572024
Prologis China Core Logistics Fund-1311312022 – 2024 (2)
Prologis China Logistics Venture2781,5751,8532021 – 2028
Prologis Brazil Logistics Venture471892362026
Total$334$5,176$5,510
(1)The equity commitments for the co-investment ventures that operate in a different functional currency than the U.S. dollar were calculated using the foreign currency exchange rate at September 30, 2021.
(2)Venture partners have the option to cancel their equity commitment starting 18 months after the initial commitment date.

See the Cash Flow Summary below for more information about our investment activity in our co-investment ventures.

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Cash Flow Summary

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

20212020
Net cash provided by operating activities$2,280$2,333
Net cash used in investing activities$(897)$(2,580)
Net cash provided by (used in) financing activities$(1,359)$94
Net decrease in cash and cash equivalents, including the effect of foreign currency exchange rates on cash$(13)$(149)

Operating Activities

Cash provided by and used in operating activities, exclusive of changes in receivables and payables, was impacted by the following significant activities during the nine months ended September 30, 2021 and 2020:

•Real estate operations. We receive the majority of our operating cash through the net revenues of our Real Estate Operations segment, including the recovery of our operating costs. Cash flows generated by the Real Estate Operations segment are impacted by our acquisition, development and disposition activities which are drivers of NOI recognized during each period. See the Results of Operations section above for further explanation of our Real Estate Operations segment. The revenues from this segment include noncash adjustments for straight-lined rents and amortization of above and below market leases of $109 million and $89 million for 2021 and 2020, respectively.
•Strategic capital. We also generate operating cash through our Strategic Capital segment by providing asset and property management and other services to our unconsolidated co-investment ventures. See the Results of Operations section above for the key drivers of the net revenues from our Strategic Capital segment. Included in Strategic Capital Revenues is the third-party investors’ share that is owed for promotes, which is recognized in operating activities in the period the cash is received.
•G&A expenses and equity-based compensation awards. We incurred $219 million and $208 million of G&A expenses in 2021 and 2020, respectively. We recognized equity-based, noncash compensation expenses of $84 million and $86 million in 2021 and 2020, respectively, which were recorded to Rental Expenses in the Real Estate Operations segment, Strategic Capital Expenses in the Strategic Capital segment and G&A Expenses.
•Operating distributions from unconsolidated entities. We received $311 million and $355 million of distributions as a return on our investment from the cash flows generated from the operations of our unconsolidated entities in 2021 and 2020, respectively.
•Cash paid for interest, net of amounts capitalized. We paid interest, net of amounts capitalized, of $225 million and $231 million in 2021 and 2020, respectively.
•Cash paid for income taxes, net of refunds. We paid income taxes, net of refunds, of $85 million and $82 million in 2021 and 2020, respectively.

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Investing Activities

Cash provided by investing activities is driven by proceeds from contributions and dispositions of real estate. Cash used in investing activities is primarily driven by our capital deployment activities of investing in real estate development, acquisitions and capital expenditures. See Note 3 to the Consolidated Financial Statements for further information on these activities. In addition, the following significant transactions also impacted our cash used in and provided by investing activities during the nine months ended September 30, 2021 and 2020:

•Liberty Transaction, net of cash acquired. We paid net cash of $25 million to complete the Liberty Transaction in 2020, primarily due to transaction costs. The acquisition was financed through the issuance of equity and the assumption of debt. A portion of this debt was paid down subsequent to the acquisition, see the Financing Activities section below. See Note 2 to the Consolidated Financial Statements for more information on this transaction.
•IPT Transaction, net of cash acquired. Our consolidated co-investment venture, USLV, acquired real estate assets from IPT for a cash purchase price of $1.7 billion in 2020. Our partner in USLV contributed their share of the purchase price, $917 million, which is presented in Noncontrolling Interests Contributions in financing activities. All of the debt assumed was paid down subsequent to the acquisition, see the Financing Activities section below. See Note 3 to the Consolidated Financial Statements for more information on this transaction.
•Investments in and advances to our unconsolidated entities. We invested cash in our unconsolidated entities that represented our proportionate share, of $455 million and $345 million in 2021 and 2020, respectively. The ventures used the funds for the acquisition of properties, development and repayment of debt. See Note 4 to the Consolidated Financial Statements for more detail on our unconsolidated co-investment ventures.
•Return of investment from unconsolidated entities. We received distributions from unconsolidated entities as a return of investment of $57 million and $207 million in 2021 and 2020, respectively. Included in these amounts were distributions from venture activities including proceeds from property sales, debt refinancing and the redemption of our investment in certain unconsolidated entities.

Financing Activities

Cash provided by and used in financing activities is principally driven by proceeds from and payments on credit facilities and other debt, along with dividends paid on common and preferred stock and noncontrolling interest contributions and distributions.

•Repurchase of preferred stock. We paid $7 million to repurchase shares of series Q preferred stock during 2020.

Our repurchase of and payments on debt and proceeds from the issuance of debt consisted of the following activity for the nine months ended September 30 (in millions):

20212020 (1)
Repurchase of and payments on debt (including extinguishment costs)
Regularly scheduled debt principal payments and payments at maturity$6$7
Secured mortgage debt301561
Senior notes1,6444,237
Term loans2501,351
Total$2,201$6,156
Proceeds from the issuance of debt
Secured mortgage debt$207$1
Senior notes2,6185,803
Term loans-1,500
Total$2,825$7,304
(1)We completed the Liberty Transaction in 2020 and assumed $2.8 billion of debt, of which $1.8 billion was paid off with the proceeds from the issuance of senior notes. USLV assumed $342 million of debt in the IPT Transaction, all of which was paid off at closing. The assumption of debt was excluded from the table above.

Unconsolidated Co-Investment Venture Debt

We had investments in and advances to unconsolidated co-investment ventures of $6.9 billion at September 30, 2021. These ventures had total third-party debt of $11.7 billion at September 30, 2021. The weighted average loan-to-value ratio for all unconsolidated co-investment ventures was 25.9% at September 30, 2021 based on gross book value. Loan-to-value, a non-GAAP measure, was

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calculated as the percentage of total third-party debt to the gross book value of real estate for each venture and weighted based on the cumulative gross book value of all unconsolidated co-investment ventures.

At September 30, 2021, we did not guarantee any third-party debt of the unconsolidated co-investment ventures.

Dividend and Distribution Requirements

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

Under the IRC, REITs may be subject to certain federal income and excise taxes on undistributed taxable income.

We paid quarterly cash dividends of $0.63 and $0.58 per common share in each of the first three quarters of 2021 and 2020, respectively. Our future common stock dividends, if and as declared, may vary and will be determined by the Board based upon the circumstances prevailing at the time, including our financial condition, operating results and REIT distribution requirements, and may be adjusted at the discretion of the Board during the year.

We make distributions on the common limited partnership units outstanding at the same per unit amount as our common stock dividend. The Class A Units in the OP are entitled to a quarterly distribution equal to $0.64665 per unit so long as the common units receive a quarterly distribution of at least $0.40 per unit. We paid a quarterly cash distribution of $0.64665 per Class A Unit in each of the first three quarters of 2021 and 2020.

At September 30, 2021, our Series Q preferred stock had an annual dividend rate of 8.54% per share and the dividends are payable quarterly in arrears.

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

Other Commitments

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

NEW ACCOUNTING PRONOUNCEMENTS

See Note 1 to the Consolidated Financial Statements.

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

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

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

Our FFO Measures

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

We calculate our FFO measures, as defined below, based on our proportionate ownership share of both our unconsolidated and consolidated ventures. We reflect our share of our FFO measures for unconsolidated ventures by applying our average ownership percentage for the period to the applicable reconciling items on an entity by entity basis. We reflect our share for consolidated ventures

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in which we do not own 100% of the equity by adjusting our FFO measures to remove the noncontrolling interests share of the applicable reconciling items based on our average ownership percentage for the applicable periods.

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

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

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

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

•deferred income tax benefits and deferred income tax expenses recognized by our subsidiaries;
•current income tax expense related to acquired tax liabilities that were recorded as deferred tax liabilities in an acquisition, to the extent the expense is offset with a deferred income tax benefit in earnings that is excluded from our defined FFO measure; and
•foreign currency exchange gains and losses resulting from (i) debt transactions between us and our foreign entities, (ii) third-party debt that is used to hedge our investment in foreign entities, (iii) derivative financial instruments related to any such debt transactions, and (iv) mark-to-market adjustments associated with other derivative financial instruments.

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

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

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

•gains or losses from the disposition of land and development properties that were developed with the intent to contribute or sell;
•income tax expense related to the sale of investments in real estate;
•impairment charges recognized related to our investments in real estate generally as a result of our change in intent to contribute or sell these properties;
•gains or losses from the early extinguishment of debt and redemption and repurchase of preferred stock; and
•expenses related to natural disasters.

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

Limitations on the use of our FFO measures

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

•The current income tax expenses that are excluded from our modified FFO measures represent the taxes that are payable.
•Depreciation and amortization of real estate assets are economic costs that are excluded from FFO. FFO is limited, as it does not reflect the cash requirements that may be necessary for future replacements of the real estate assets. Furthermore, the

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amortization of capital expenditures and leasing costs necessary to maintain the operating performance of logistics facilities are not reflected in FFO.
•Gains or losses from property dispositions and impairment charges related to expected dispositions represent changes in value of the properties. By excluding these gains and losses, FFO does not capture realized changes in the value of disposed properties arising from changes in market conditions.
•The deferred income tax benefits and expenses that are excluded from our modified FFO measures result from the creation of a deferred income tax asset or liability that may have to be settled at some future point. Our modified FFO measures do not currently reflect any income or expense that may result from such settlement.
•The foreign currency exchange gains and losses that are excluded from our modified FFO measures are generally recognized based on movements in foreign currency exchange rates through a specific point in time. The ultimate settlement of our foreign currency-denominated net assets is indefinite as to timing and amount. Our FFO measures are limited in that they do not reflect the current period changes in these net assets that result from periodic foreign currency exchange rate movements.
•The gains and losses on extinguishment of debt or preferred stock that we exclude from our Core FFO, may provide a benefit or cost to us as we may be settling our obligation at less or more than our future obligation.
•The natural disaster expenses that we exclude from Core FFO are costs that we have incurred.

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

20212020
Reconciliation of net earnings attributable to common stockholders to FFO measures:
Net earnings attributable to common stockholders$1,686$1,193
Add (deduct) NAREIT defined adjustments:
Real estate related depreciation and amortization1,1491,116
Gains on other dispositions of investments in real estate, net of taxes(331)(184)
Reconciling items related to noncontrolling interests-(35)
Our share of reconciling items included in earnings related to unconsolidated entities223204
NAREIT defined FFO attributable to common stockholders/unitholders2,7272,294
Add (deduct) our modified adjustments:
Unrealized foreign currency and derivative losses (gains), net(150)59
Deferred income tax expense (benefit)10(7)
Current income tax expense on dispositions related to acquired tax liabilities34
Reconciling items related to noncontrolling interests1(1)
Our share of reconciling items included in earnings related to unconsolidated entities(2)3
FFO, as modified by Prologis attributable to common stockholders/unitholders2,5892,352
Adjustments to arrive at Core FFO:
Gains on dispositions of development properties and land, net(500)(383)
Current income tax expense on dispositions2930
Losses on early extinguishment of debt, preferred stock repurchase and other, net187175
Reconciling items related to noncontrolling interests7(3)
Our share of reconciling items included in earnings related to unconsolidated entities-(30)
Core FFO attributable to common stockholders/unitholders$2,312$2,141

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