Prologis, Inc. - FORM 10-Q - October 27, 2017

Attached files

file	filename
EX-32.2 - EX-32.2 - Prologis, Inc.	pld-ex322_6.htm
EX-32.1 - EX-32.1 - Prologis, Inc.	pld-ex321_10.htm
EX-31.4 - EX-31.4 - Prologis, Inc.	pld-ex314_11.htm
EX-31.3 - EX-31.3 - Prologis, Inc.	pld-ex313_12.htm
EX-31.2 - EX-31.2 - Prologis, Inc.	pld-ex312_7.htm
EX-31.1 - EX-31.1 - Prologis, Inc.	pld-ex311_9.htm
EX-15.2 - EX-15.2 - Prologis, Inc.	pld-ex152_8.htm
EX-15.1 - EX-15.1 - Prologis, Inc.	pld-ex151_13.htm
EX-12.2 - EX-12.2 - Prologis, Inc.	pld-ex122_14.htm
EX-12.1 - EX-12.1 - Prologis, Inc.	pld-ex121_15.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2017

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______________ to ______________

Commission File Number: 001-13545 (Prologis, Inc.) 001-14245 (Prologis, L.P.)

Prologis, Inc.

Prologis, L.P.

(Exact name of registrant as specified in its charter)

Maryland (Prologis, Inc.) Delaware (Prologis, L.P.)		94-3281941 (Prologis, Inc.) 94-3285362 (Prologis, L.P.)
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

Pier 1, Bay 1, San Francisco, California		94111
(Address or principal executive offices)		(Zip Code)

(415) 394-9000

(Registrants’ telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing for the past 90 days.

Prologis, Inc.	Yes	☒	No	☐
Prologis, L.P.	Yes	☒	No	☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website; if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter periods that the registrant was required to submit and post such files).

Prologis, Inc.	Yes	☒	No	☐
Prologis, L.P.	Yes	☒	No	☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act (check one):

Prologis, Inc.:
Large accelerated filer ☒	Accelerated filer ☐	Non-accelerated filer ☐	Smaller reporting company ☐	Emerging growth company ☐
	(Do not check if a smaller reporting company)

Prologis, L.P.:
Large accelerated filer ☐	Accelerated filer ☐	Non-accelerated filer ☒	Smaller reporting company ☐	Emerging growth company ☐
	(Do not check if a smaller reporting company)

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).

Prologis, Inc.	Yes	☐	No	☒
Prologis, L.P.	Yes	☐	No	☒

The number of shares of Prologis, Inc.’s common stock outstanding at October 25, 2017, was approximately 532,082,000.

EXPLANATORY NOTE

This report combines the quarterly reports on Form 10-Q for the period ended September 30, 2017, of Prologis, Inc. and Prologis, L.P. Unless stated otherwise or the context otherwise requires, references to “Prologis, Inc.” or the “Parent” mean Prologis, Inc. and its consolidated subsidiaries; and references to “Prologis, L.P.” or the “Operating Partnership” mean Prologis, L.P., and its consolidated subsidiaries. The terms “the Company,” “Prologis,” “we,” “our” or “us” means the Parent and the Operating Partnership collectively.

The Parent is a real estate investment trust (“REIT”) and the general partner of the Operating Partnership. At September 30, 2017, the Parent owned an approximate 97.33% common general partnership interest in the Operating Partnership and 100% of the preferred units in the Operating Partnership. The remaining approximate 2.67% common limited partnership interests are owned by nonaffiliated investors and certain current and former directors and officers of the Parent. As the sole general partner of the Operating Partnership, the Parent has complete responsibility and discretion in the day-to-day management and control of the Operating Partnership.

We operate the Parent and the Operating Partnership as one enterprise. The management of the Parent consists of the same members as the management of the Operating Partnership. These members are officers of the Parent and employees of the Operating Partnership or one of its subsidiaries. As general partner with control of the Operating Partnership, the Parent consolidates the Operating Partnership for financial reporting purposes. Because the only significant asset of the Parent is its investment in the Operating Partnership, the assets and liabilities of the Parent and the Operating Partnership are the same on their respective financial statements.

We believe combining the quarterly reports on Form 10-Q of the Parent and the Operating Partnership into this single report results in the following benefits:

•	enhances investors’ understanding of the Parent and the Operating Partnership by enabling investors to view the business as a whole in the same manner as management views and operates the business;

•	eliminates duplicative disclosure and provides a more streamlined and readable presentation as a substantial portion of the Company’s disclosure applies to both the Parent and the Operating Partnership; and

•	creates time and cost efficiencies through the preparation of one combined report instead of two separate reports.

It is important to understand the few differences between the Parent and the Operating Partnership in the context of how we operate the Company. The Parent does not conduct business itself, other than acting as the sole general partner of the Operating Partnership and issuing public equity from time to time. The Parent itself does not incur any indebtedness, but it guarantees the unsecured debt of the Operating Partnership. The Operating Partnership holds substantially all the assets of the business, directly or indirectly, and holds the ownership interests in the Company’s investment in certain entities. The Operating Partnership conducts the operations of the business and is structured as a partnership with no publicly traded equity. Except for net proceeds from equity issuances by the Parent, which are contributed to the Operating Partnership in exchange for partnership units, the Operating Partnership generates capital required by the business through the Operating Partnership’s operations, incurrence of indebtedness and issuance of partnership units to third parties.

The presentation of noncontrolling interests, stockholders’ equity and partners’ capital are the main areas of difference between the consolidated financial statements of the Parent and those of the Operating Partnership. The preferred stock, common stock, additional paid-in capital, accumulated other comprehensive loss and distributions in excess of net earnings of the Parent are presented as stockholders’ equity in the Parent’s consolidated financial statements. These items represent the common and preferred general partnership interests held by the Parent in the Operating Partnership and are presented as general partner’s capital within partners’ capital in the Operating Partnership’s consolidated financial statements. The common limited partnership interests held by the limited partners in the Operating Partnership are presented as noncontrolling interest within equity in the Parent’s consolidated financial statements and as limited partners’ capital within partners’ capital in the Operating Partnership’s consolidated financial statements. The differences in the presentations between stockholders’ equity and partners’ capital result from the differences in the equity and capital issuances at the Parent and Operating Partnership levels.

To highlight the differences between the Parent and the Operating Partnership, separate sections in this report, as applicable, individually discuss the Parent and the Operating Partnership, including separate financial statements and separate Exhibit 31 and 32 certifications. In the sections that combine disclosure of the Parent and the Operating Partnership, this report refers to actions or holdings as being actions or holdings of Prologis.

PROLOGIS

INDEX

			Page Number
PART I.	Financial Information
	Item 1.	Financial Statements		1
	Prologis, Inc.:
		Consolidated Balance Sheets – September 30, 2017, and December 31, 2016		1
		Consolidated Statements of Income – Three and Nine Months Ended September 30, 2017, and 2016		2
		Consolidated Statements of Comprehensive Income – Three and Nine Months Ended September 30, 2017, and 2016		3
		Consolidated Statement of Equity – Nine Months Ended September 30, 2017		3
		Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2017, and 2016		4
	Prologis, L.P.:
		Consolidated Balance Sheets – September 30, 2017, and December 31, 2016		5
		Consolidated Statements of Income – Three and Nine Months Ended September 30, 2017, and 2016		6
		Consolidated Statements of Comprehensive Income – Three and Nine Months Ended September 30, 2017, and 2016		7
		Consolidated Statement of Capital – Nine Months Ended September 30, 2017		7
		Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2017, and 2016		8
	Prologis, Inc. and Prologis, L.P.:
		Notes to the Consolidated Financial Statements		9
		Note 1. General		9
		Note 2. Real Estate		11
		Note 3. Unconsolidated Entities		12
		Note 4. Assets Held for Sale or Contribution		16
		Note 5. Debt		16
		Note 6. Noncontrolling Interests		18
		Note 7. Long-Term Compensation		19
		Note 8. Earnings Per Common Share or Unit		20
		Note 9. Financial Instruments and Fair Value Measurements		21
		Note 10. Business Segments		25
		Note 11. Supplemental Cash Flow Information		27
		Reports of Independent Registered Public Accounting Firm		28
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		30
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		49
	Item 4.	Controls and Procedures		50
PART II.	Other Information
	Item 1.	Legal Proceedings		50
	Item 1A.	Risk Factors		50
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		50
	Item 3.	Defaults Upon Senior Securities		50
	Item 4.	Mine Safety Disclosures		50
	Item 5.	Other Information		51
	Item 6.	Exhibits		51

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

PROLOGIS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)


	September 30, 2017			December 31,
	(Unaudited)			2016
ASSETS
Investments in real estate properties	$	25,977,157		$	27,119,330
Less accumulated depreciation		3,977,667			3,758,372
Net investments in real estate properties		21,999,490			23,360,958
Investments in and advances to unconsolidated entities		5,371,758			4,230,429
Assets held for sale or contribution		321,905			322,139
Notes receivable backed by real estate		-			32,100
Net investments in real estate		27,693,153			27,945,626

Cash and cash equivalents		568,726			807,316
Other assets		1,392,271			1,496,990
Total assets	$	29,654,150		$	30,249,932

LIABILITIES AND EQUITY
Liabilities:
Debt	$	9,721,065		$	10,608,294
Accounts payable and accrued expenses		707,049			556,179
Other liabilities		666,780			627,319
Total liabilities		11,094,894			11,791,792

Equity:
Prologis, Inc. stockholders’ equity:
Series Q preferred stock at stated liquidation preference of $50 per share: $0.01 par value; 1,565 shares issued and outstanding and 100,000 preferred shares authorized at September 30, 2017, and December 31, 2016		78,235			78,235
Common stock: $0.01 par value; 532,081 shares and 528,671 shares issued and outstanding at September 30, 2017, and December 31, 2016, respectively		5,321			5,287
Additional paid-in capital		19,350,643			19,455,039
Accumulated other comprehensive loss		(924,620	)		(937,473	)
Distributions in excess of net earnings		(2,965,828	)		(3,610,007	)
Total Prologis, Inc. stockholders’ equity		15,543,751			14,991,081
Noncontrolling interests		3,015,505			3,467,059
Total equity		18,559,256			18,458,140
Total liabilities and equity	$	29,654,150		$	30,249,932

The accompanying notes are an integral part of these Consolidated Financial Statements.

PROLOGIS, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands, except per share amounts)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2017			2016			2017			2016
Revenues:
Rental	$	416,427		$	435,868		$	1,304,271		$	1,299,122
Rental recoveries		114,755			124,409			370,221			361,402
Strategic capital		68,042			142,581			305,741			247,119
Development management and other		3,650			1,707			17,979			5,377
Total revenues		602,874			704,565			1,998,212			1,913,020
Expenses:
Rental		128,735			140,514			429,185			427,820
Strategic capital		35,996			44,624			119,781			97,783
General and administrative		57,656			58,157			171,350			165,634
Depreciation and amortization		201,903			224,867			656,639			705,249
Other		3,093			3,779			8,608			12,364
Total expenses		427,383			471,941			1,385,563			1,408,850

Operating income		175,491			232,624			612,649			504,170

Other income (expense):
Earnings from unconsolidated entities, net		55,066			45,857			172,267			145,622
Interest expense		(64,190	)		(75,310	)		(212,456	)		(232,577	)
Interest and other income, net		4,816			2,932			9,493			7,051
Gains on dispositions of investments in real estate and revaluation of equity investments upon acquisition of a controlling interest, net		779,053			117,296			959,384			461,963
Foreign currency and derivative losses, net		(18,872	)		(1,730	)		(46,327	)		(26,277	)
Gains (losses) on early extinguishment of debt, net		-			1,492			(30,596	)		2,484
Total other income		755,873			90,537			851,765			358,266
Earnings before income taxes		931,364			323,161			1,464,414			862,436
Total income tax expense		17,947			15,919			42,328			36,598
Consolidated net earnings		913,417			307,242			1,422,086			825,838
Less net earnings attributable to noncontrolling interests		35,524			26,316			70,647			58,103
Net earnings attributable to controlling interests		877,893			280,926			1,351,439			767,735
Less preferred stock dividends		1,675			1,671			5,023			5,056
Net earnings attributable to common stockholders	$	876,218		$	279,255		$	1,346,416		$	762,679

Weighted average common shares outstanding – Basic		531,288			527,288			530,036			525,462
Weighted average common shares outstanding – Diluted		554,163			547,200			551,618			545,228

Net earnings per share attributable to common stockholders – Basic	$	1.65		$	0.53		$	2.54		$	1.45

Net earnings per share attributable to common stockholders – Diluted	$	1.63		$	0.52		$	2.51		$	1.44

Dividends per common share	$	0.44		$	0.42		$	1.32		$	1.26

The accompanying notes are an integral part of these Consolidated Financial Statements.

PROLOGIS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2017			2016			2017			2016
Consolidated net earnings	$	913,417		$	307,242		$	1,422,086		$	825,838
Other comprehensive income (loss):
Foreign currency translation gains (losses), net		4,061			(48,232	)		46,890			(69,832	)
Unrealized gains (losses) on derivative contracts, net		6,091			4,696			15,457			(17,122	)
Comprehensive income		923,569			263,706			1,484,433			738,884
Net earnings attributable to noncontrolling interests		(35,524	)		(26,316	)		(70,647	)		(58,103	)
Other comprehensive loss (income) attributable to noncontrolling interests		(576	)		2,392			(49,494	)		(10,840	)
Comprehensive income attributable to common stockholders	$	887,469		$	239,782		$	1,364,292		$	669,941

The accompanying notes are an integral part of these Consolidated Financial Statements.

PROLOGIS, INC.

CONSOLIDATED STATEMENT OF EQUITY

Nine Months Ended September 30, 2017

(Unaudited)

(In thousands)

			Common Stock							Accumulated			Distributions
			Number				Additional			Other			in Excess of			Non-
	Preferred		of		Par		Paid-in			Comprehensive			Net			controlling			Total
	Stock		Shares		Value		Capital			Loss			Earnings			Interests			Equity
Balance at January 1, 2017	$	78,235		528,671	$	5,287	$	19,455,039		$	(937,473	)	$	(3,610,007	)	$	3,467,059		$	18,458,140
Consolidated net earnings		-		-		-		-			-			1,351,439			70,647			1,422,086
Effect of equity compensation plans		-		1,895		19		58,679			-			-			29,980			88,678
Capital contributions		-		-		-		-			-			-			150,076			150,076
Settlement of noncontrolling interests		-		-		-		(202,040	)		-			-			(587,976	)		(790,016	)
Conversion of noncontrolling interests		-		1,515		15		47,711			-			-			(47,726	)		-
Foreign currency translation gains (losses), net		-		-		-		-			(2,191	)		-			49,081			46,890
Unrealized gains on derivative contracts, net		-		-		-		-			15,044			-			413			15,457
Reallocation of equity		-		-		-		(8,712	)		-			-			8,712			-
Distributions and other		-		-		-		(34	)		-			(707,260	)		(124,761	)		(832,055	)
Balance at September 30, 2017	$	78,235		532,081	$	5,321	$	19,350,643		$	(924,620	)	$	(2,965,828	)	$	3,015,505		$	18,559,256

The accompanying notes are an integral part of these Consolidated Financial Statements.

PROLOGIS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

	Nine Months Ended
	September 30,
	2017			2016
Operating activities:
Consolidated net earnings	$	1,422,086		$	825,838
Adjustments to reconcile net earnings to net cash provided by operating activities:
Straight-lined rents and amortization of above and below market leases		(66,234	)		(74,664	)
Equity-based compensation awards		58,091			43,658
Depreciation and amortization		656,639			705,249
Earnings from unconsolidated entities, net		(172,267	)		(145,622	)
Distributions from unconsolidated entities		231,441			210,439
Net increase in operating receivables from unconsolidated entities		(19,530	)		(56,992	)
Amortization of debt premiums, net of debt issuance costs		(1,585	)		(13,047	)
Gains on dispositions of investments in real estate, net		(959,384	)		(461,963	)
Unrealized foreign currency and derivative losses, net		55,646			21,266
Losses (gains) on early extinguishment of debt, net		30,596			(2,484	)
Deferred income tax benefit		(197	)		(1,737	)
Decrease (increase) in accounts receivable and other assets		76,170			(48,231	)
Increase (decrease) in accounts payable and accrued expenses and other liabilities		48,841			(4,699	)
Net cash provided by operating activities		1,360,313			997,011
Investing activities:
Real estate development		(1,095,623	)		(1,225,613	)
Real estate acquisitions		(295,178	)		(280,797	)
Tenant improvements and lease commissions on previously leased space		(112,442	)		(125,041	)
Nondevelopment capital expenditures		(68,698	)		(66,298	)
Proceeds from dispositions and contributions of real estate properties		2,354,547			1,859,317
Investments in and advances to unconsolidated entities		(244,301	)		(228,588	)
Acquisition of a controlling interest in an unconsolidated venture, net of cash received		(374,605	)		-
Return of investment from unconsolidated entities		143,604			579,134
Proceeds from repayment of notes receivable backed by real estate		32,100			201,250
Proceeds from the settlement of net investment hedges		7,541			16,768
Payments on the settlement of net investment hedges		(5,058	)		-
Net cash provided by investing activities		341,887			730,132
Financing activities:
Proceeds from issuance of common stock		30,684			38,101
Dividends paid on common and preferred stock		(707,260	)		(669,384	)
Noncontrolling interests contributions		135,857			1,026
Noncontrolling interests distributions		(132,004	)		(301,268	)
Purchase of noncontrolling interests		(790,016	)		(2,979	)
Tax paid for shares withheld		(19,626	)		(7,862	)
Debt and equity issuance costs paid		(7,020	)		(19,265	)
Net payments on credit facilities		(33,745	)		(3,545	)
Repurchase and payments of debt		(2,728,198	)		(1,675,818	)
Proceeds from issuance of debt		2,294,041			1,012,331
Net cash used in financing activities		(1,957,287	)		(1,628,663	)

Effect of foreign currency exchange rate changes on cash		16,497			12,560
Net increase (decrease) in cash and cash equivalents		(238,590	)		111,040
Cash and cash equivalents, beginning of period		807,316			264,080
Cash and cash equivalents, end of period	$	568,726		$	375,120

See Note 11 for information on noncash investing and financing activities and other information.

The accompanying notes are an integral part of these Consolidated Financial Statements.

PROLOGIS, L.P.

CONSOLIDATED BALANCE SHEETS

(In thousands)


	September 30, 2017		December 31,
	(Unaudited)		2016
ASSETS
Investments in real estate properties	$	25,977,157	$	27,119,330
Less accumulated depreciation		3,977,667		3,758,372
Net investments in real estate properties		21,999,490		23,360,958
Investments in and advances to unconsolidated entities		5,371,758		4,230,429
Assets held for sale or contribution		321,905		322,139
Notes receivable backed by real estate		-		32,100
Net investments in real estate		27,693,153		27,945,626

Cash and cash equivalents		568,726		807,316
Other assets		1,392,271		1,496,990
Total assets	$	29,654,150	$	30,249,932

LIABILITIES AND CAPITAL