filings.toolsItem 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, 2021, 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 earn revenues from co-investment ventures, 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, including the integration of the operations of significant real estate portfolios; (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, 2021. 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. We make operating decisions based on our total O&M portfolio, as we manage the properties without regard to their 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.
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, Canadian dollar, 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.
MANAGEMENT’S OVERVIEW
Prologis is 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 portfolio focuses on the world’s most vibrant centers of commerce and our scale across these locations allows us to respond to our customers’ diverse logistics requirements. Our teams actively manage our portfolio and provide comprehensive real estate services, including leasing, property management, development, acquisitions and dispositions. We invest in new logistics properties principally through our development activity and third-party acquisitions. Our property dispositions and contributions allow us to recycle capital and contribute to self-funding our development and acquisition activities. While the majority of our properties in the United States (“U.S.”) are wholly owned, we hold a significant ownership interest in co-investment ventures in both the U.S. and internationally. Partnering with the world’s largest institutional
investors through co-investment ventures allows us to enhance and diversify our real estate returns as well as mitigate our exposure to foreign currency movements.
The long-term trends of e-commerce adoption and supply chain resiliency are driving requirements for increased warehouse space to store and distribute goods. This has led to customer demand that has outpaced supply and driven meaningful rent growth in our markets. We believe this demand is driven by three primary factors: (i) customer supply chains re-positioning to address the significant shift to e-commerce and service expectations; (ii) overall consumption and household growth; and (iii) our customers’ desire for more supply chain resiliency. With the inventory-to-sales ratio below pre-pandemic levels, our customers not only need to build inventories to address this shortfall, but also build additional safety stock. We believe these forces will keep demand strong for the long-term.
The scale of our 1.0 billion square foot portfolio allows us to focus on innovative ways to meet our customers’ needs through Prologis Essentials. This business includes product and service solutions for our customers’ operations, workforce, energy, transportation and digital needs. Our integrated suite of solutions allows our customers to benefit from our global scale, leveraging our strategic partnerships with vendors and local expertise to obtain services and products more efficiently. We use our proprietary data, analytics and our customer experience teams to provide our customers actionable insights that impact their operations.
Our long-standing dedication to Environmental Stewardship, Social Responsibility and Governance (“ESG”) strengthens our relationships with our customers, investors, employees and the communities in which we do business. The principles of ESG are an important aspect of our business strategy, delivering a strategic business advantage while positively impacting the environment. Our investment in sustainable building design and energy solutions allows us to assist our customers with their sustainability performance and make progress on our own goals and objectives. This includes new development and redevelopment of buildings to specifications that align with leading sustainable building standards and implementation of energy solutions such as solar power and LED lighting. We also are facilitating the introduction of electric vehicle (“EV”) fleets in logistics by making long-term investments in our portfolio and talent to provide charging as a service at our facilities. In June 2022, we announced a new commitment to achieve net zero emissions across our entire value chain by 2040, which encompasses scope 1, 2 and 3 emissions. Our commitment uses the Science Based Target initiative’s Net Zero Standard and includes the following interim milestones: (i) 1 gigawatt of solar generation capacity, supported by storage, by 2025; (ii) carbon neutral construction by 2025; and (iii) net zero operations for scope 1 and 2 emissions by 2030.
On October 3, 2022, we acquired Duke Realty Corporation and Duke Realty Limited Partnership (collectively “Duke”) through a merger transaction that we refer to as the “Duke Transaction” and is fully detailed in Note 12 to our Consolidated Financial Statements. The Duke portfolio was primarily comprised of logistics real estate assets, including approximately 480 industrial operating properties, totaling 142 million square feet, which were highly complementary to our U.S. portfolio in terms of product quality, location and growth potential. The portfolio also included properties under development, land for future development and investments in other ventures. The acquisition expanded our presence in target markets such as New Jersey, Chicago, Dallas, Atlanta, South Florida and Southern California. The total acquisition price was approximately $23 billion through the issuance of equity based on the value of the Prologis, Inc. common stock issued using the closing price on September 30, 2022 and the assumption of debt. As a result of the closely aligned portfolios and similar business strategy, we integrated the Duke properties while adding minimal property management and general and administrative (“G&A”) expenses due to our ability to scale. Since the Duke Transaction closed after quarter-end, the following discussion of our financial condition and operating results does not include Duke.
At September 30, 2022, our total O&M portfolio at 100%, including properties and development projects, totaled $108.0 billion (based on gross book value and total expected investment (“TEI”) at completion) across 1.0 billion square feet (97 million square meters) and four continents. Our share of the total O&M portfolio was $68.9 billion. We lease modern logistics facilities to a diverse base of approximately 5,800 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. NOI from Strategic Capital is calculated directly from our Consolidated Financial Statements as Strategic Capital Revenues less Strategic Capital *Expenses.* |
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| (2) | A developed property moves into the operating portfolio when it meets our definition of stabilization, which is the earlier of when a property that was developed has been completed for one year, is contributed to a co-investment venture following completion or is 90% occupied. Amounts represent our TEI, which includes the estimated cost of development or expansion, land, construction and leasing costs. |
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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. For leases that commenced during the nine months ended September 30, 2022, within the consolidated operating portfolio, the weighted average lease term was 68 months. We expect to generate internal growth by increasing rents, maintaining high occupancy rates and controlling expenses. The primary driver of our revenue growth, outside of the Duke Transaction, will be rolling in-place leases to current market rents as leases expire, as discussed further below. 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. Substantially all of our consolidated rental revenue, NOI and cash flows from rental operations are generated in the U.S.
Development. Given the scarcity of modern logistics facilities in our target markets, our development business provides the opportunity to build to the requirements of our current and future customers while deepening our market presence. 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; (iii) the depth of our customer relationships; (iv) our ability to integrate sustainable design features and practices that result in cost-savings and operational efficiencies for our customers; and (v) our procurement capabilities that allow us to secure construction materials that are in high demand at lower cost. 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. Our strategic capital business is capitalized principally through private and public equity of which 95% is either in perpetual open-ended or long-term ventures or our 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 eight unconsolidated co-investment ventures (ranging from 15% to 50%). This structure allows us to reduce our exposure to foreign currency movements for investments outside the U.S.
This segment produces durable, long-term cash flows and generally contributes 10% to 15% of our recurring consolidated revenues, earnings and FFO, all while requiring minimal capital other than our investment in the venture. We generate strategic capital revenues from our unconsolidated co-investment ventures, principally through asset management and property management services. Asset management fees are primarily driven by the quarterly valuation of the real estate properties owned by the respective ventures. We earn additional revenues by providing leasing, acquisition, construction management, development 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, upon liquidation of a venture or upon stabilization of individual venture assets based primarily on the total return of the investments over certain financial hurdles. We plan to grow this business and increase revenues by increasing our assets under management in existing or new ventures. The majority of strategic capital revenues are generated outside the U.S.
FUTURE GROWTH
We believe that the quality and scale of our global portfolio, our ability to build out our global land bank, our strategic capital business, the expertise of our team, the depth of our customer relationships and the strength of our balance sheet are differentiators that allow us to drive organic growth in revenues, NOI, earnings, FFO and cash flows.
| (1) | Calculated using the trailing twelve months immediately prior to the period ended. |
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| • | Rent Growth*.* We expect rents in our markets to continue to grow due to the increasing demand for well-located logistics real estate. Due to strong market rent growth over the last several years, our in-place leases have considerable upside potential to drive future organic NOI growth. We estimate that our net effective lease mark-to-market is approximately 62%, which represents the growth rate from in-place rents to current market rents based on our weighted average ownership of the O&M portfolio at September 30, 2022. Therefore, even if there was no additional rent growth in the future, we expect our lease renewals to translate into significant increases in future income. 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) in every quarter since 2013. |
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| • | Value Creation from Development. A successful development and redevelopment program requires sourcing well-located land and redevelopment sites through acquisition opportunities, including our innovative approach with Covered Land Plays, which are income-producing assets acquired with the intention to redevelop for higher and better use as industrial properties. Our investment in the development portfolio was $3.4 billion at September 30, 2022. We believe that the carrying value of our global land bank is meaningfully below its current fair value. Based on our current estimates, our consolidated land, including options and Covered Land Plays, has the potential to support the development of $29.7 billion ($33.2 billion on an O&M basis) of TEI of new logistics space. The global nature of our development program provides a wide landscape of opportunities to pursue based on our judgement of market conditions, opportunities and risks. |
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Due to the strategic nature of our global 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 stabilized value above our TEI. As properties are completed and leased, we expect to realize the value creation principally through gains realized through contributions of these properties to unconsolidated co-investment ventures and increases in the NOI of the consolidated portfolio.
| • | Strategic Capital Advantages. We continue to raise capital to support the long-term growth of the co-investment ventures while maintaining our own substantial investments in these vehicles. At September 30, 2022, the gross book value of the operating portfolio held by our eight unconsolidated co-investment ventures was $45.9 billion across 481 million square feet. |
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| • | Balance Sheet Strength. At September 30, 2022, the weighted average remaining maturity of our consolidated debt was 10 years and the weighted average effective interest rate was 1.8%, primarily as a result of our refinancing activities over the last several years. Through our refinancing activities we have substantially addressed all our debt maturities through 2026 and have taken advantage of previously low interest rates. At September 30, 2022, we had total available liquidity of $5.3 billion. We 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 as they arise. |
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| • | Economies of Scale from Growth. 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. The acquisition of the Duke portfolio is a key example of this where we increased our O&M portfolio and expect minimal increases to G&A expenses. |
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| • | Staying “Ahead of What’s Next™”. We are focused on creating value beyond real estate by enhancing our customers’ experience, leveraging our scale to obtain procurement savings and innovating through data analytics and digitization efforts. Through Prologis Essentials we support our customers through service and product offerings, including innovative solutions to operations, transport, digital, energy, and workforce challenges that can make our customers’ decision process easier and their enterprise more efficient. Additionally, we invest in sustainable logistics building design features and practices, such as the addition of solar panels, energy storage, LED lighting and EV charging, that also allows us to assist our customers with their sustainability objectives. |
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SUMMARY OF 2022
Our financial condition and operating results were strong during the nine months ended September 30, 2022. Our customers continue to seek available space across our markets and our teams report healthy demand. Our O&M operating portfolio occupancy was 97.8% at September 30, 2022 and rent change on leases commenced was 47.1% based on our ownership share during the nine months ended September 30, 2022. We are closely monitoring the macro environment where ongoing inflation, steeply rising interest rates and the war and energy crisis in Europe are pressuring the global economy. We expect to be prudent as we evaluate capital deployment activities, including a focus on build-to-suit developments and a pause on contributions into our open-ended funds in the near term. We believe we are well-positioned in our portfolio to organically grow revenues given the increase in market rents and our high lease mark-to-market. However, we will be cautious as we manage our business in this uncertain environment.
During the nine months ended September 30, 2022, we completed the following significant activities as previously described in the Notes to the Consolidated Financial Statements:
| • | We generated net proceeds of $2.1 billion and realized net gains of $977 million, principally from the contribution of properties to our unconsolidated co-investment venture in Europe and dispositions of non-strategic assets to third parties in the U.S. |
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| • | We earned promotes aggregating $476 million ($372 million net of related strategic capital expenses), primarily during the third quarter of 2022 from the third-party investors in Prologis European Logistics Fund (“PELF”) in Europe. |
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| • | With the strengthening of the U.S. dollar against the foreign currencies in which we operate, we realized net gains upon settlement of undesignated derivative instruments that offset the negative impact of the translation of our earnings to U.S. dollars. |
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| • | In June, we terminated our global senior credit facility (the “2019 Global Facility”) and entered into the 2022 Global Facility with a borrowing capacity of up to $3.0 billion and an extended initial maturity date of June 2026. We also upsized our second global senior credit facility (the “2021 Global Facility”), increasing its borrowing capacity up to $2.0 billion. This resulted in increasing our total borrowing capacity under both facilities to $5.0 billion and modifying the base rate of the aggregate lender commitments in U.S. dollars from the U.S. dollar London Inter-bank Offered Rate to the Secured Overnight Financing Rate. At September 30, 2022, we had total available liquidity of $5.3 billion, with aggregate availability under our credit facilities of $4.7 billion and unrestricted cash balances of $636 million. |
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| • | We issued $2.7 billion of senior notes (principal in millions): |
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| Aggregate Principal | Issuance Date Weighted Average | |||||||||||||||||
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| Issuance Date | Borrowing Currency | USD (1) | Interest Rate (2) | Term (3) | Maturity Dates | |||||||||||||
| January | £ | 60 | $ | 81 | 2.1% | 20.0 | December 2041 | |||||||||||
| February (4) | € | 1,550 | $ | 1,768 | 1.0% | 8.5 | February 2024 – 2034 | |||||||||||
| July | ¥ | 30,965 | $ | 227 | 1.4% | 15.5 | July 2027 – 2042 | |||||||||||
| September (4) | $ | 650 | $ | 650 | 4.6% | 10.3 | January 2033 | |||||||||||
| Total | $ | 2,726 | 2.0% | 9.8 |
| (1) | The exchange rate used to calculate into U.S. dollars was the spot rate at the settlement date. |
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| (2) | The weighted average interest rate represents the fixed or variable interest rates of the related debt at the issuance date. |
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| (3) | The weighted average term represents the remaining maturity in years on the related debt at the issuance date. |
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| (4) | A portion of the net proceeds from the issuance of these notes were used to finance green projects eligible under our green bond framework. |
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On October 3, 2022, we completed the Duke Transaction for approximately $23 billion through the issuance of equity and the assumption of debt. See Note 12 to our Consolidated Financial Statements for more information on this transaction.
RESULTS OF OPERATIONS – NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
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.
| 2022 | 2021 | |||||||
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| Real Estate Operations – NOI | $ | 2,478 | $ | 2,297 | ||||
| Strategic Capital – NOI | 645 | 244 | ||||||
| General and administrative expenses | (246 | ) | (219 | ) | ||||
| Depreciation and amortization expenses | (1,200 | ) | (1,181 | ) | ||||
| Operating income before gains on real estate transactions, net | 1,677 | 1,141 | ||||||
| Gains on dispositions of development properties and land, net | 391 | 500 | ||||||
| Gains on other dispositions of investments in real estate, net | 586 | 358 | ||||||
| Operating income | $ | 2,654 | $ | 1,999 |
See Note 10 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):
| 2022 | 2021 | |||||||
|---|---|---|---|---|---|---|---|---|
| Rental revenues | $ | 3,322 | $ | 3,074 | ||||
| Development management and other revenues | 15 | 18 | ||||||
| Rental expenses | (831 | ) | (780 | ) | ||||
| Other expenses | (28 | ) | (15 | ) | ||||
| Real Estate Operations – NOI | $ | 2,478 | $ | 2,297 | ||||
The change in Real Estate Operations (“REO”) NOI for the nine months ended September 30, 2022 compared to the same period in 2021 of $181 million was impacted by the following activities (in millions):
| (1) | 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. |
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| (2) | 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, 2021 through September 30, 2022. |
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Below are key operating metrics of our consolidated operating portfolio.
| (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. |
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| (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):
| 2022 | 2021 | |||||||
|---|---|---|---|---|---|---|---|---|
| Starts: | ||||||||
| Number of new development buildings during the period | 75 | 57 | ||||||
| Square feet | 26 | 20 | ||||||
| TEI | $ | 3,838 | $ | 2,576 | ||||
| Percentage of build-to-suits based on TEI | 36.4 | % | 49.4 | % | ||||
| Stabilizations: | ||||||||
| Number of development buildings stabilized during the period | 52 | 44 | ||||||
| Square feet | 16 | 12 | ||||||
| TEI | $ | 2,004 | $ | 1,371 | ||||
| Percentage of build-to-suits based on TEI | 46.8 | % | 40.1 | % | ||||
| Weighted average stabilized yield (1) | 6.0 | % | 5.9 | % | ||||
| Estimated value at completion | $ | 3,159 | $ | 1,958 | ||||
| Estimated weighted average margin (2) | 57.6 | % | 42.8 | % | ||||
| Estimated value creation | $ | 1,155 | $ | 587 |
| (1) | We calculate the weighted average stabilized yield as estimated NOI assuming stabilized occupancy divided by TEI. |
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| (2) | Estimated weighted average margin is calculated on development properties as estimated value creation, less estimated closing costs and taxes, if any, on properties expected to be sold or contributed, divided by TEI. |
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At September 30, 2022, the consolidated development portfolio, including properties under development and pre-stabilized properties, was expected to be completed before May 2024 with a TEI of $6.2 billion and was 45.8% leased. Our investment in the development portfolio was $3.4 billion at September 30, 2022, leaving $2.8 billion remaining to be spent.
Capital Expenditures
We capitalize costs incurred in improving and leasing our operating properties as part of the investment basis or within other assets. The following graph summarizes capitalized expenditures, excluding development costs, and property improvements per average square foot of our consolidated operating properties during each quarter:
Strategic Capital
This operating segment includes revenues from asset management 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 3 to the Consolidated Financial Statements.
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):
| 2022 | 2021 | |||||||
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| Strategic capital revenues | $ | 885 | $ | 391 | ||||
| Strategic capital expenses | (240 | ) | (147 | ) | ||||
| Strategic Capital – NOI | $ | 645 | $ | 244 |
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 Americas | Europe | Asia | Total | ||||||||||||||||||||||||||||||||||||
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| 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||||||||
| Strategic capital revenues ($) | ||||||||||||||||||||||||||||||||||||||||
| Recurring fees (2) | 133 | 99 | 33 | 28 | 129 | 114 | 59 | 58 | 354 | 299 | ||||||||||||||||||||||||||||||
| Transactional fees (3) | 17 | 9 | 7 | 5 | 17 | 18 | 14 | 25 | 55 | 57 | ||||||||||||||||||||||||||||||
| Promote revenue (4) | 5 | 22 | 18 | 8 | 453 | 5 | - | - | 476 | 35 | ||||||||||||||||||||||||||||||
| Total strategic capital revenues ($) | 155 | 130 | 58 | 41 | 599 | 137 | 73 | 83 | 885 | 391 | ||||||||||||||||||||||||||||||
| Strategic capital expenses ($) (4) | (121 | ) | (75 | ) | (14 | ) | (9 | ) | (71 | ) | (34 | ) | (34 | ) | (29 | ) | (240 | ) | (147 | ) | ||||||||||||||||||||
| Strategic Capital – NOI ($) | 34 | 55 | 44 | 32 | 528 | 103 | 39 | 54 | 645 | 244 | ||||||||||||||||||||||||||||||
| (1) | The U.S. expenses include compensation and personnel costs for employees who are based in the U.S. but also support other geographies. |
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| (2) | Recurring fees include asset management and property management fees. The increase in fees is primarily due to higher asset management fees driven by the increases in the fair value of the properties based on third party valuations. |
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| (3) | Transactional fees include leasing commissions and acquisition, disposition, development and other fees. |
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| (4) | We generally earn promote revenue directly from third-party investors in the co-investment ventures based on the cumulative returns of the venture over a three-year period or the stabilization of individual development projects owned by the venture. An increase in asset valuations in the co-investment ventures is one of the significant drivers of returns that can translate into earning future promote revenues. Included above is promote revenue earned from PELF in September 2022. Approximately 40% of the promote earned by us from the co-investment ventures is paid to our employees as a combination of cash and stock-based awards pursuant to the terms of the PPP and expensed through Strategic Capital Expenses, as vested. |
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G&A Expenses
G&A expenses were $246 million and $219 million for the nine months ended September 30, 2022 and 2021, respectively. G&A expenses increased in 2022 as compared to 2021, primarily due to higher compensation expenses. We capitalize certain internal costs, including salaries and related expenses, that are incremental and directly related to our development and building improvement activities.
The following table summarizes capitalized G&A for the nine months ended September 30 (dollars in millions):
| 2022 | 2021 | |||||||
|---|---|---|---|---|---|---|---|---|
| Building and land development activities | $ | 79 | $ | 70 | ||||
| Operating building improvements and other | 32 | 21 | ||||||
| Total capitalized G&A expenses | $ | 111 | $ | 91 | ||||
| Capitalized salaries and related costs as a percent of total salaries and related costs | 23.0 | % | 21.6 | % |
Depreciation and Amortization Expenses
Depreciation and amortization expenses were $1.2 billion for the nine months ended September 30, 2022 and 2021.
The change in depreciation and amortization expenses during the nine months ended September 30, 2022 from the same period in 2021 of approximately $19 million was impacted by the following activities (in millions):
Gains on Real Estate Transactions, Net
Gains on the disposition of development properties and land were $391 million and $500 million for the nine months ended September 30, 2022 and 2021, 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 $586 million and $358 million for the nine months ended September 30, 2022 and 2021, respectively, which included sales of non-strategic operating properties both in 2022 and 2021. Sales of non-strategic operating properties for 2022 primarily occurred in the U.S. in the first quarter and 2021 included 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 2 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 we have either acquired at a discount and believe we could provide greater returns post-stabilization or properties we expect to repurpose to a higher and better use. See below for information on our O&M operating portfolio (square feet in millions):
| September 30, 2022 | December 31, 2021 | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Number of Properties | Square Feet | Percentage Occupied | Number of Properties | Square Feet | Percentage Occupied | ||||||||||||||||||
| Consolidated | 2,361 | 463 | 97.8 | % | 2,300 | 446 | 98.2 | % | |||||||||||||||
| Unconsolidated | 2,167 | 481 | 97.8 | % | 1,987 | 456 | 97.3 | % | |||||||||||||||
| Total | 4,528 | 944 | 97.8 | % | 4,287 | 902 | 97.7 | % |
Below are the key leasing metrics 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. |
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| (2) | Calculated using the trailing twelve months immediately prior to the period ended. |
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| (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. |
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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, 2022 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, 2021 and owned throughout the same three-month period in both 2021 and 2022. 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, 2021) 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.
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 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | Change | |||||||||
| Reconciliation of Consolidated Property NOI to Same Store Property NOI measures: | |||||||||||
| Rental revenues | $ | 1,152 | $ | 1,037 | |||||||
| Rental expenses | (285 | ) | (256 | ) | |||||||
| Consolidated Property NOI | 867 | 781 | |||||||||
| Adjustments to derive same store results: | |||||||||||
| Property NOI from consolidated properties not included in same store portfolio and other adjustments (1) | (144 | ) | (106 | ) | |||||||
| Property NOI from unconsolidated co-investment ventures included in same store portfolio (1)(2) | 615 | 565 | |||||||||
| Third parties' share of Property NOI from properties included in same store portfolio (1)(2) | (502 | ) | (467 | ) | |||||||
| Prologis Share of Same Store Property NOI – Net Effective (2) | $ | 836 | $ | 772 | 8.3 | % | |||||
| Consolidated properties straight-line rent and fair value lease adjustments included in same store portfolio (3) | (17 | ) | (21 | ) | |||||||
| Unconsolidated co-investment ventures straight-line rent and fair value lease adjustments included in same store portfolio (3) | (9 | ) | (13 | ) | |||||||
| Third parties' share of straight-line rent and fair value lease adjustments included in same store portfolio (2)(3) | 8 | 10 | |||||||||
| Prologis Share of Same Store Property NOI – Cash (2)(3) | $ | 818 | $ | 748 | 9.3 | % |
| (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. |
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| (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, 2022 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. |
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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 $241 million and $231 million for the nine months ended September 30, 2022 and 2021, 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 3 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):
| 2022 | 2021 | |||||||
|---|---|---|---|---|---|---|---|---|
| Gross interest expense | $ | 223 | $ | 227 | ||||
| Amortization of debt discount and debt issuance costs, net | 6 | 6 | ||||||
| Capitalized amounts | (41 | ) | (30 | ) | ||||
| Net interest expense | $ | 188 | $ | 203 | ||||
| Weighted average effective interest rate during the period | 1.6 | % | 1.7 | % |
See Note 5 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 and Interest and Other Income, Net
We recognized foreign currency and derivative gains and interest and other income, net, of $365 million and $143 million for the nine months ended September 30, 2022 and 2021, respectively.
We are exposed to foreign currency exchange risk related to investments in and earnings from our foreign investments. 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. 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.
The following table details our foreign currency and derivative gains (losses), net for the nine months ended September 30 (in millions):
| 2022 | 2021 | |||||||
|---|---|---|---|---|---|---|---|---|
| Realized foreign currency and derivative gains (losses), net: | ||||||||
| Gains (losses) on the settlement of undesignated derivatives | $ | 124 | $ | (11 | ) | |||
| Gains (losses) on the settlement of transactions with third parties | 1 | (1 | ) | |||||
| Total realized foreign currency and derivative gains (losses), net | 125 | (12 | ) | |||||
| Unrealized foreign currency and derivative gains, net: | ||||||||
| Gains on the change in fair value of undesignated derivatives and unhedged debt | 235 | 148 | ||||||
| Gains on remeasurement of certain assets and liabilities | 5 | 2 | ||||||
| Total unrealized foreign currency and derivative gains, net | 240 | 150 | ||||||
| Total foreign currency and derivative gains, net | $ | 365 | $ | 138 | ||||
See Note 9 to the Consolidated Financial Statements for more information about our derivative and nonderivative transactions.
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 (benefit) 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):
| 2022 | 2021 | |||||||
|---|---|---|---|---|---|---|---|---|
| Current income tax expense: | ||||||||
| Income tax expense | $ | 93 | $ | 65 | ||||
| Income tax expense on dispositions | 1 | 56 | ||||||
| Income tax expense on dispositions related to acquired tax liabilities | - | 3 | ||||||
| Total current income tax expense | 94 | 124 | ||||||
| Deferred income tax expense (benefit): | ||||||||
| Income tax expense | 24 | 13 | ||||||
| Income tax benefit on dispositions related to acquired tax liabilities | - | (3 | ) | |||||
| Total deferred income tax expense | 24 | 10 | ||||||
| Total income tax expense | $ | 118 | $ | 134 |
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 $158 million and $157 million for the nine months ended September 30, 2022 and 2021, respectively. Included in these amounts were $78 million and $47 million for the nine months ended September 30, 2022 and 2021, of net earnings attributable to the common limited partnership unitholders of Prologis, L.P. The third quarter of 2021 included the sale of non-strategic operating properties in our consolidated co-investment venture in the U.S.
See Note 6 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, 2022 and 2021, 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 9 to the Consolidated Financial Statements for more information on changes in other comprehensive income (loss) and about our derivative and nonderivative transactions.
RESULTS OF OPERATIONS – THREE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
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, 2022, as compared to the three months ended September 30, 2021, 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.
Given the uncertain macro environment and the impact on real estate valuations, we expect to be cautious as we evaluate capital deployment activities, including a focus on build-to-suit developments and a pause on contributions in the near term.
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, 2022, 122 properties in our development portfolio were 45.8% leased with a current investment of $3.4 billion and a TEI of $6.2 billion when completed and leased, leaving $2.8 billion of estimated additional required investment); |
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| • | 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; |
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| • | the acquisition of other real estate investments that we acquire with the intention of redeveloping into industrial properties; |
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| • | capital expenditures and leasing costs on properties in our operating portfolio; |
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| • | repayment of debt and scheduled principal payments of $294 million in the remainder of 2022 and $178 million in 2023; |
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| • | additional investments in current and future unconsolidated co-investment ventures and other ventures; and |
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| • | the 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). In October 2022, we completed the Duke Transaction for approximately $23 billion through the issuance of equity and the assumption of debt. |
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We expect to fund our cash needs principally from the following sources (subject to market conditions):
| • | net cash flow from property operations; |
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| • | fees earned for services performed on behalf of co-investment ventures, including promotes like the one we earned as of September 30, 2022 that we will receive in the fourth quarter; |
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| • | distributions received from co-investment ventures; |
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| • | proceeds from contributions of properties to current or future co-investment ventures; |
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| • | proceeds from the disposition of properties or other investments to third parties; |
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| • | available unrestricted cash balances ($636 million at September 30, 2022); |
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| • | borrowing capacity under our current credit facility arrangements ($4.7 billion available at September 30, 2022); and |
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| • | proceeds from the issuance of debt. |
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Long-term, we may also voluntarily repurchase 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 may also fund our cash needs from the issuance of equity securities, subject to market conditions, and through the sale of a portion of our investments in co-investment ventures.
Debt
The following table summarizes information about our consolidated debt by currency (dollars in millions):
| September 30, 2022 | December 31, 2021 | |||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Weighted Average Interest Rate | Amount Outstanding | % of Total | Weighted Average Interest Rate | Amount Outstanding | % of Total | |||||||||||||||||||
| British pound sterling | 2.2 | % | $ | 1,144 | 6.3 | % | 2.1 | % | $ | 1,377 | 7.8 | % | ||||||||||||
| Canadian dollar | 3.9 | % | 441 | 2.4 | % | 2.7 | % | 284 | 1.6 | % | ||||||||||||||
| Euro | 1.2 | % | 7,618 | 42.0 | % | 1.0 | % | 7,408 | 41.8 | % | ||||||||||||||
| Japanese yen | 0.9 | % | 2,858 | 15.8 | % | 0.9 | % | 2,879 | 16.2 | % | ||||||||||||||
| U.S. dollar | 2.7 | % | 6,078 | 33.5 | % | 2.6 | % | 5,767 | 32.6 | % | ||||||||||||||
| Total debt (1) | 1.8 | % | $ | 18,139 | 100.0 | % | 1.6 | % | $ | 17,715 | 100.0 | % |
| (1) | The weighted average remaining maturity for total debt outstanding at September 30, 2022 and December 31, 2021 was 10 years. |
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Our credit ratings at September 30, 2022, were A3 from Moody’s with a stable outlook and A from Standard & Poor’s with a 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, 2022, we were in compliance with all of our financial debt covenants. These covenants include a number of customary financial covenants, such as maintaining debt service coverage ratios, leverage ratios and fixed charge coverage ratios.
See Note 5 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, 2022 (dollars in millions):
| Equity Commitments (1) | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Prologis | Venture Partners | Total | Expiration Date | ||||||||||
| Prologis Targeted U.S. Logistics Fund | $ | - | $ | 1,644 | $ | 1,644 | 2024 – 2025 (2) | ||||||
| Prologis European Logistics Fund | - | 193 | 193 | 2025 (2) | |||||||||
| Prologis China Logistics Venture | 262 | 1,372 | 1,634 | 2023 – 2028 | |||||||||
| Prologis Brazil Logistics Venture | 33 | 133 | 166 | 2026 | |||||||||
| Total | $ | 295 | $ | 3,342 | $ | 3,637 |
| (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, 2022. |
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| (2) | Venture partners have the option to cancel their equity commitment starting 18 months after the initial commitment date. |
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See the Cash Flow Summary below for more information about our investment activity in our co-investment ventures.
Cash Flow Summary
The following table summarizes our cash flow activity for the nine months ended September 30 (in millions):
| 2022 | 2021 | |||||||
|---|---|---|---|---|---|---|---|---|
| Net cash provided by operating activities | $ | 2,849 | $ | 2,280 | ||||
| Net cash used in investing activities | $ | (3,211 | ) | $ | (897 | ) | ||
| Net cash provided by (used in) financing activities | $ | 487 | $ | (1,359 | ) | |||
| Net increase (decrease) in cash and cash equivalents, including the effect of foreign currency exchange rates on cash | $ | 80 | $ | (13 | ) |
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, 2022 and 2021:
| • | 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. 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 $108 million and $109 million in 2022 and 2021, respectively. |
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| • | Strategic capital. We also generate operating cash through our Strategic Capital segment by providing asset management 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 |
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| third-party investors’ share that is owed for promotes, which is recognized in operating activities in the period the cash is received, generally the quarter after the revenue is recognized. We expect to receive cash for the promote we earned as of September 30, 2022 in the fourth quarter. |
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| • | G&A expenses and equity-based compensation awards. We incurred $246 million and $219 million of G&A expenses in 2022 and 2021, respectively. We recognized equity-based, noncash compensation expenses of $140 million and $84 million in 2022 and 2021, 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. |
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| • | Operating distributions from unconsolidated entities. We received $316 million and $311 million of distributions as a return on our investment from the cash flows generated from the operations of our unconsolidated entities in 2022 and 2021, respectively. |
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| • | Cash paid for interest, net of amounts capitalized. We paid interest, net of amounts capitalized, of $189 million and $225 million in 2022 and 2021, respectively. |
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| • | Cash paid for income taxes, net of refunds. We paid income taxes, net of refunds, of $85 million in both 2022 and 2021. |
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Investing Activities
Cash provided by investing activities is driven by proceeds from the sale of real estate assets that include the contribution of properties we developed to our unconsolidated co-investment ventures as well as the sale of operating properties. Cash used in investing activities is primarily driven by our capital deployment activities of investing in real estate development, acquisitions and capital expenditures as discussed above. Acquisition activity includes land for future development, operating properties and other real estate assets. See Note 2 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, 2022 and 2021:
| • | Investments in and advances to our unconsolidated entities. We invested cash in our unconsolidated entities that represented our proportionate share, of $192 million and $455 million in 2022 and 2021, respectively. The ventures used the funds for the acquisition of properties, development and repayment of debt. See Note 3 to the Consolidated Financial Statements for more detail on our unconsolidated co-investment ventures. |
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| • | Return of investment from unconsolidated entities. We received distributions from unconsolidated entities as a return of investment of $59 million and $57 million in 2022 and 2021, 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. |
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| • | Net proceeds from (payments on) the settlement of net investment hedges. We received $44 million and paid $17 million for the settlement of net investment hedges in 2022 and 2021, respectively. See Note 9 to the Consolidated Financial Statements for further information on our derivative transactions. |
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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.
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):
| 2022 | 2021 | |||||||
|---|---|---|---|---|---|---|---|---|
| Repurchase of and payments on debt (including extinguishment costs) | ||||||||
| Regularly scheduled debt principal payments and payments at maturity | $ | 594 | $ | 6 | ||||
| Secured mortgage debt | 159 | 301 | ||||||
| Senior notes | - | 1,644 | ||||||
| Term loans | 134 | 250 | ||||||
| Total | $ | 887 | $ | 2,201 | ||||
| Proceeds from the issuance of debt | ||||||||
| Secured mortgage debt | $ | 259 | $ | 207 | ||||
| Senior notes | 2,716 | 2,618 | ||||||
| Term loans | 419 | - | ||||||
| Total | $ | 3,394 | $ | 2,825 |
Unconsolidated Co-Investment Venture Debt
We had investments in and advances to our unconsolidated co-investment ventures of $7.9 billion at September 30, 2022. These ventures had total third-party debt of $12.9 billion at September 30, 2022 with a weighted average remaining maturity of 7 years and weighted average interest rate of 2.8%. The weighted average loan-to-value ratio for all unconsolidated co-investment ventures was 26.7% at September 30, 2022 based on gross book value. Loan-to-value, a non-GAAP measure, was 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, 2022, 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 our capital deployment 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 $0.79 and $0.63 per common share in each of the first three quarters of 2022 and 2021, 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 2022 and 2021.
At September 30, 2022, 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 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; |
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| • | 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 |
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| • | 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. |
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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; |
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| • | income tax expense related to the sale of investments in real estate; |
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| • | 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; |
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| • | gains or losses from the early extinguishment of debt and redemption and repurchase of preferred stock; and |
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| • | expenses related to natural disasters. |
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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. |
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| • | Depreciation and amortization of real estate assets are economic costs that are excluded from FFO. FFO is limited, as it does not reflect the cash requirements that may be necessary for future replacements of the real estate assets. Furthermore, the amortization of capital expenditures and leasing costs necessary to maintain the operating performance of logistics facilities are not reflected in FFO. |
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| • | Gains or losses from 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. |
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| • | The deferred income tax benefits and expenses that are excluded from our modified FFO measures result from the creation of a deferred income tax asset or liability that may have to be settled at some future point. Our modified FFO measures do not currently reflect any income or expense that may result from such settlement. |
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| • | The foreign currency exchange gains and losses that are excluded from our modified FFO measures are generally recognized based on movements in foreign currency exchange rates through a specific point in time. The ultimate settlement of our foreign currency-denominated net assets is indefinite as to timing and amount. Our FFO measures are limited in that they do not reflect the current period changes in these net assets that result from periodic foreign currency exchange rate movements. |
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| • | The gains and losses on extinguishment of debt 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. |
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| • | The natural disaster expenses that we exclude from Core FFO are costs that we have incurred. |
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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):
| 2022 | 2021 | |||||||
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| Reconciliation of net earnings attributable to common stockholders to FFO measures: | ||||||||
| Net earnings attributable to common stockholders | $ | 2,773 | $ | 1,686 | ||||
| Add (deduct) NAREIT defined adjustments: | ||||||||
| Real estate related depreciation and amortization | 1,163 | 1,149 | ||||||
| Gains on other dispositions of investments in real estate, net of taxes | (591 | ) | (331 | ) | ||||
| Reconciling items related to noncontrolling interests | 4 | - | ||||||
| Our share of reconciling items included in earnings related to unconsolidated entities | 241 | 223 | ||||||
| NAREIT defined FFO attributable to common stockholders/unitholders | 3,590 | 2,727 | ||||||
| Add (deduct) our modified adjustments: | ||||||||
| Unrealized foreign currency and derivative gains, net | (232 | ) | (150 | ) | ||||
| Deferred income tax expense | 24 | 10 | ||||||
| Current income tax expense on dispositions related to acquired tax liabilities | - | 3 | ||||||
| Reconciling items related to noncontrolling interests | - | 1 | ||||||
| Our share of reconciling items included in earnings related to unconsolidated entities | (14 | ) | (2 | ) | ||||
| FFO, as modified by Prologis attributable to common stockholders/unitholders | 3,368 | 2,589 | ||||||
| Adjustments to arrive at Core FFO: | ||||||||
| Gains on dispositions of development properties and land, net | (391 | ) | (500 | ) | ||||
| Current income tax expense on dispositions | 7 | 29 | ||||||
| Losses on early extinguishment of debt and other, net | 19 | 187 | ||||||
| Reconciling items related to noncontrolling interests | 5 | 7 | ||||||
| Our share of reconciling items included in earnings related to unconsolidated entities | 2 | - | ||||||
| Core FFO attributable to common stockholders/unitholders | $ | 3,010 | $ | 2,312 |
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