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, 2021
☐
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)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol(s)
Name of Each Exchange on Which Registered
Common Stock, $0.01 par value
PLD
New York Stock Exchange
3.000% Notes due 2026
PLD/26
2.250% Notes due 2029
PLD/29
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.
Yes
No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Prologis, Inc.:
Large accelerated filer ☒
Accelerated filer ☐
Non-accelerated filer ☐
Smaller reporting company ☐
Emerging growth company ☐
Prologis, L.P.:
Large accelerated filer ☐
Non-accelerated filer ☒
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).
The number of shares of Prologis, Inc.’s common stock outstanding at October 22, 2021, was approximately 739,327,000.
EXPLANATORY NOTE
This report combines the quarterly reports on Form 10-Q for the period ended September 30, 2021, 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” or the “OP” mean Prologis, L.P., and its consolidated subsidiaries. The terms “the Company,” “Prologis,” “we,” “our” or “us” means the Parent and the OP collectively.
The Parent is a real estate investment trust (a “REIT”) and the general partner of the OP. At September 30, 2021, the Parent owned 97.26% common general partnership interest in the OP and substantially all of the preferred units in the OP. The remaining 2.74% common limited partnership interests are owned by unaffiliated investors and certain current and former directors and officers of the Parent.
We operate the Parent and the OP as one enterprise. The management of the Parent consists of the same members as the management of the OP. These members are officers of the Parent and employees of the OP or one of its subsidiaries. As sole general partner, the Parent has control of the OP through complete responsibility and discretion in the day-to-day management and therefore, consolidates the OP for financial reporting purposes. Because the only significant asset of the Parent is its investment in the OP, the assets and liabilities of the Parent and the OP are the same on their respective financial statements.
We believe combining the quarterly reports on Form 10-Q of the Parent and the OP into this single report results in the following benefits:
•
enhances investors’ understanding of the Parent and the OP 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 OP; 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 OP 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 OP and issuing public equity from time to time. The OP holds substantially all the assets of the business, directly or indirectly. The OP 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 OP in exchange for partnership units, the OP generates capital required by the business through the OP’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 OP. The differences in the presentations between stockholders’ equity and partners’ capital result from the differences in the equity and capital issuances in the Parent and in the OP.
The preferred stock, common stock, additional paid-in capital, accumulated other comprehensive income (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 OP and are presented as general partner’s capital within partners’ capital in the OP’s consolidated financial statements. The common limited partnership interests held by the limited partners in the OP are presented as noncontrolling interest within equity in the Parent’s consolidated financial statements and as limited partners’ capital within partners’ capital in the OP’s consolidated financial statements.
To highlight the differences between the Parent and the OP, separate sections in this report, as applicable, individually discuss the Parent and the OP, including separate financial statements and separate Exhibit 31 and 32 certifications. In the sections that combine disclosure of the Parent and the OP, 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
Consolidated Balance Sheets – September 30, 2021 and December 31, 2020
Consolidated Statements of Income – Three and Nine Months Ended September 30, 2021 and 2020
2
Consolidated Statements of Comprehensive Income – Three and Nine Months Ended September 30, 2021 and 2020
3
Consolidated Statements of Equity – Three and Nine Months Ended September 30, 2021 and 2020
4
Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2021 and 2020
5
6
7
8
Consolidated Statements of Capital – Three and Nine Months Ended September 30, 2021 and 2020
9
10
Prologis, Inc. and Prologis, L.P.:
Notes to the Consolidated Financial Statements
11
Note 1. General
Note 2. Liberty Transaction
12
Note 3. Real Estate
Note 4. Unconsolidated Entities
14
Note 5. Assets Held for Sale or Contribution
15
Note 6. Debt
16
Note 7. Noncontrolling Interests
18
Note 8. Long-Term Compensation
19
Note 9. Earnings Per Common Share or Unit
20
Note 10. Financial Instruments and Fair Value Measurements
22
Note 11. Business Segments
25
Note 12. Supplemental Cash Flow Information
27
Reports of Independent Registered Public Accounting Firm
29
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
31
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
50
Item 4.
Controls and Procedures
52
PART II.
Other Information
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
53
Item 6.
Exhibits
Index
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
PROLOGIS, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except per share data)
September 30, 2021
December 31, 2020
ASSETS
Investments in real estate properties
$
52,458,694
50,384,328
Less accumulated depreciation
7,404,304
6,539,156
Net investments in real estate properties
45,054,390
43,845,172
Investments in and advances to unconsolidated entities
7,652,323
7,602,014
Assets held for sale or contribution
571,671
1,070,724
Net investments in real estate
53,278,384
52,517,910
Cash and cash equivalents
585,071
598,086
Other assets
3,153,215
2,949,009
Total assets
57,016,670
56,065,005
LIABILITIES AND EQUITY
Liabilities:
Debt
17,135,668
16,849,076
Accounts payable and accrued expenses
1,441,776
1,143,372
Other liabilities
1,681,752
1,747,977
Total liabilities
20,259,196
19,740,425
Equity:
Prologis, Inc. stockholders’ equity:
Series Q preferred stock at stated liquidation preference of $50 per share; $0.01 par value;
1,279 shares issued and outstanding and 100,000 preferred shares authorized at
September 30, 2021 and December 31, 2020
63,948
Common stock; $0.01 par value; 739,323 shares and 739,381 shares issued and outstanding at
September 30, 2021 and December 31, 2020, respectively
7,393
7,394
Additional paid-in capital
35,526,671
35,488,634
Accumulated other comprehensive loss
(983,906
)
(1,193,739
Distributions in excess of net earnings
(2,107,989
(2,394,690
Total Prologis, Inc. stockholders’ equity
32,506,117
31,971,547
Noncontrolling interests
4,251,357
4,353,033
Total equity
36,757,474
36,324,580
Total liabilities and equity
The accompanying notes are an integral part of these Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Three Months Ended
Nine Months Ended
September 30,
2021
2020
Revenues:
Rental
1,037,281
980,148
3,073,700
2,803,321
Strategic capital
141,448
98,993
390,796
516,242
Development management and other
4,320
3,632
17,711
7,575
Total revenues
1,183,049
1,082,773
3,482,207
3,327,138
Expenses:
256,607
245,490
779,624
705,217
52,389
45,791
146,938
173,910
General and administrative
66,970
74,348
219,344
208,701
Depreciation and amortization
390,806
400,738
1,181,117
1,144,903
Other
4,413
3,020
15,051
25,573
Total expenses
771,185
769,387
2,342,074
2,258,304
Operating income before gains on real estate transactions, net
411,864
313,386
1,140,133
1,068,834
Gains on dispositions of development properties and land, net
139,406
134,207
500,410
383,373
Gains on other dispositions of investments in real estate, net
214,390
108,927
358,180
184,357
Operating income
765,660
556,520
1,998,723
1,636,564
Other income (expense):
Earnings from unconsolidated entities, net
91,818
73,972
231,286
216,844
Interest expense
(63,638
(80,711
(203,331
(237,651
Interest and other income (expense), net
(846
(5,866
4,615
(4,469
Foreign currency and derivative gains (losses), net
64,172
(100,974
138,244
(48,481
Losses on early extinguishment of debt, net
-
(98,266
(187,453
(164,606
Total other income (expense)
91,506
(211,845
(16,639
(238,363
Earnings before income taxes
857,166
344,675
1,982,084
1,398,201
Total income tax expense
(59,435
(12,154
(134,347
(89,578
Consolidated net earnings
797,731
332,521
1,847,737
1,308,623
Less net earnings attributable to noncontrolling interests
74,193
29,827
156,676
108,703
Net earnings attributable to controlling interests
723,538
302,694
1,691,061
1,199,920
Less preferred stock dividends
1,531
1,652
4,614
4,921
Loss on preferred stock repurchase
2,347
Net earnings attributable to common stockholders
722,007
298,695
1,686,447
1,192,652
Weighted average common shares outstanding – Basic
739,439
738,194
739,217
724,876
Weighted average common shares outstanding – Diluted
764,945
764,619
764,644
750,971
Net earnings per share attributable to common stockholders – Basic
0.98
0.40
2.28
1.65
Net earnings per share attributable to common stockholders – Diluted
0.97
2.27
1.63
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Other comprehensive income (loss):
Foreign currency translation gains (losses), net
48,708
(45,576
201,881
(180,162
Unrealized gains (losses) on derivative contracts, net
3,748
2,379
13,379
(19,696
Comprehensive income
850,187
289,324
2,062,997
1,108,765
Net earnings attributable to noncontrolling interests
(74,193
(29,827
(156,676
(108,703
Other comprehensive loss (income) attributable to noncontrolling interests
(1,242
861
(5,427
5,791
Comprehensive income attributable to common stockholders
774,752
260,358
1,900,894
1,005,853
CONSOLIDATED STATEMENTS OF EQUITY
Three Months Ended September 30, 2021 and 2020
Common Stock
Accumulated
Distributions
Additional
in Excess of
Non-
Preferred
of
Par
Paid-in
Comprehensive
Net
controlling
Total
Stock
Shares
Value
Capital
Income (Loss)
Earnings
Interests
Equity
Balance at July 1, 2021
739,020
7,390
35,432,843
(1,035,120
(2,363,348
4,375,091
36,480,804
Effect of equity compensation plans
17
11,141
17,017
28,158
Capital contributions
3,017
Redemption of noncontrolling interests
286
12,540
(45,149
(32,606
Issuance of units related to acquisitions
130,416
Foreign currency translation gains,
net
47,576
1,132
Unrealized gains on derivative
contracts, net
3,638
110
Reallocation of equity
70,153
(70,153
Dividends ($0.63 per common share)
and other distributions
(6
(468,179
(234,317
(702,502
Balance at September 30, 2021
739,323
Balance at July 1, 2020
68,948
738,732
7,387
35,424,401
(1,142,129
(2,115,679
4,503,281
36,746,209
14,274
20,905
35,180
48,533
Repurchase of preferred stock
(5,000
147
(2,347
(7,200
224
9,698
(78,734
(69,034
Foreign currency translation losses, net
(44,637
(939
2,301
78
7,707
(7,707
Dividends ($0.58 per common share)
(4
(430,589
(123,112
(553,705
Balance at September 30, 2020
738,965
35,456,223
(1,184,465
(2,245,921
4,392,132
36,489,307
Nine Months Ended September 30, 2021 and 2020
Balance at January 1, 2021
739,381
(403
(5
24,443
61,580
86,018
7,378
345
15,135
(153,312
(138,173
Consolidation of other venture
25,759
196,820
5,061
13,013
366
(1,510
1,510
Dividends ($1.89 per common share)
(31
(1,404,360
(337,110
(1,741,501
Balance at January 1, 2020
631,797
6,318
25,719,427
(990,398
(2,151,168
3,418,657
26,071,784
655
21,096
63,905
85,008
Liberty Transaction, net of issuance
costs
106,723
1,067
9,801,373
211,086
10,013,526
Repurchase of common shares
(539
(34,824
(34,829
916,974
329
14,249
(126,029
(111,777
(174,903
(5,259
Unrealized losses on derivative
(19,164
(532
(64,752
64,752
Dividends ($1.74 per common share)
(493
(1,292,326
(308,658
(1,601,477
CONSOLIDATED STATEMENTS OF CASH FLOWS
Operating activities:
Adjustments to reconcile net earnings to net cash provided by operating activities:
Straight-lined rents and amortization of above and below market leases
(109,043
(88,637
Equity-based compensation awards
84,416
86,360
(231,286
(216,844
Operating distributions from unconsolidated entities
311,284
355,395
Decrease in operating receivables from unconsolidated entities
18,036
71,979
Amortization of debt discounts and debt issuance costs, net
6,632
5,568
(500,410
(383,373
(358,180
(184,357
Unrealized foreign currency and derivative losses (gains), net
(150,443
58,645
187,453
164,606
Deferred income tax expense (benefit)
10,049
(6,564
Increase in accounts receivable and other assets
(223,658
(33,189
Increase in accounts payable and accrued expenses and other liabilities
206,272
50,220
Net cash provided by operating activities
2,279,976
2,333,335
Investing activities:
Real estate development
(1,770,353
(1,501,089
Real estate acquisitions
(1,196,994
(700,793
Liberty Transaction, net of cash acquired
(24,550
IPT Transaction, net of cash acquired
(1,665,359
Tenant improvements and lease commissions on previously leased space
(233,853
(142,168
Property improvements
(98,874
(91,355
Proceeds from dispositions and contributions of real estate
2,817,943
1,684,633
(454,918
(345,310
Return of investment from unconsolidated entities
56,993
206,741
Proceeds from repayment of notes receivable backed by real estate
4,312
Proceeds from the settlement of net investment hedges
2,352
Payments on the settlement of net investment hedges
(16,513
(7,236
Net cash used in investing activities
(896,569
(2,579,822
Financing activities:
Proceeds from issuance of common stock
743
1,869
Repurchase and retirement of common stock
Dividends paid on common and preferred stock
Noncontrolling interests contributions
Noncontrolling interests distributions
Settlement of noncontrolling interests
Tax paid with shares withheld
(18,434
(23,227
Debt and equity issuance costs paid
(22,008
(51,723
Net payments on credit facilities
(70,200
(142,498
Repurchase of and payments on debt
(2,201,383
(6,156,328
Proceeds from the issuance of debt
2,824,754
7,303,761
Net cash provided by (used in) financing activities
(1,358,793
94,038
Effect of foreign currency exchange rate changes on cash
(37,629
3,787
Net decrease in cash and cash equivalents
(13,015
(148,662
Cash and cash equivalents, beginning of period
1,088,855
Cash and cash equivalents, end of period
940,193
See Note 12 for information on noncash investing and financing activities and other information.
PROLOGIS, L.P.
LIABILITIES AND CAPITAL
Capital:
Partners’ capital:
General partner – preferred
General partner – common
32,442,169
31,907,599
Limited partners – common
564,480
523,954
Limited partners – Class A common
351,090
345,553
Total partners’ capital
33,421,687
32,841,054
3,335,787
3,483,526
Total capital
Total liabilities and capital
(In thousands, except per unit amounts)
54,406
21,453
109,768
74,709
743,325
311,068
1,737,969
1,233,914
Less preferred unit distributions
Loss on preferred unit repurchase
Net earnings attributable to common unitholders
741,794
307,069
1,733,355
1,226,646
Weighted average common units outstanding – Basic
751,558
751,773
737,489
Weighted average common units outstanding – Diluted
Net earnings per unit attributable to common unitholders – Basic
Net earnings per unit attributable to common unitholders – Diluted
(54,406
(21,453
(109,768
(74,709
336
(217
493
405
Comprehensive income attributable to common unitholders
796,117
267,654
1,953,722
1,034,461
CONSOLIDATED STATEMENTS OF CAPITAL
General Partner
Limited Partners
Common
Class A Common
Units
Amount
1,279
32,041,765
12,231
530,326
8,595
346,967
3,497,798
11,971
7,816
125
Redemption of limited partners units
12,543
(523
1,031
Foreign currency translation gains
(losses), net
954
514
(336
71
39
Reallocation of capital
(71,466
1,313
Distributions ($0.63 per common unit)
and other
(468,185
(9,660
(5,559
(219,098
12,864
1,379
32,173,980
12,914
563,403
8,608
350,078
3,589,800
5,158
3,216
14,275
Issuance of units related to
acquisitions
461
Repurchase of preferred units
(100
(2,200
9,700
(903
(78,215
(13
(519
(676
(480
217
26
(8,454
747
Distributions ($0.58 per common unit)
(430,593
(9,080
(5,558
(108,474
32,033,227
12,494
541,626
347,510
3,502,996
12,142
28,645
18,263
24,438
1,210
15,139
(1,519
3,424
2,130
226
140
(169
1,679
Distributions ($1.89 per common unit)
(1,404,391
(30,284
(16,675
(290,151
22,584,179
9,933
355,076
8,613
288,187
2,775,394
20,752
13,242
21,103
9,802,440
2,288
210,190
896
Repurchase of common units
14,252
(1,467
(125,307
(18
(722
Foreign currency translation
losses, net
(2,957
(1,897
(405
(324
(208
(851
65,603
Distributions ($1.74 per common unit)
(1,292,819
(27,391
(16,695
(264,572
Proceeds from issuance of common partnership units in exchange for contributions from Prologis, Inc.
Repurchase and retirement of common units
Distributions paid on common and preferred units
(1,451,319
(1,336,412
Redemption of common limited partnership units
Tax paid with shares of the Parent withheld
PROLOGIS, INC. AND PROLOGIS, L.P.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. GENERAL
Business. Prologis, Inc. (or the “Parent”) commenced operations as a fully integrated real estate company in 1997, elected to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code” or “IRC”), and believes the current organization and method of operation will enable it to maintain its status as a REIT. The Parent is the general partner of Prologis, L.P. (or the “Operating Partnership” or “OP”). Through the OP, we are engaged in the ownership, acquisition, development and management of logistics facilities with a focus on key markets in 19 countries on four continents. We invest in real estate through wholly owned subsidiaries and other entities through which we co-invest with partners and investors. We maintain a significant level of ownership in these co-investment ventures, which may be consolidated or unconsolidated based on our level of control of the entity. Our current business strategy consists of two operating business segments: Real Estate Operations and Strategic Capital. Our Real Estate Operations segment represents the ownership and development of logistics properties. Our Strategic Capital segment represents the management of unconsolidated co-investment ventures and other ventures. See Note 11 for further discussion of our business segments. Unless otherwise indicated, the Notes to the Consolidated Financial Statements apply to both the Parent and the OP. The terms “the Company,” “Prologis,” “we,” “our” or “us” means the Parent and OP collectively.
For each share of preferred or common stock the Parent issues, the OP issues a corresponding preferred or common partnership unit, as applicable, to the Parent in exchange for the contribution of the proceeds from the stock issuance. At September 30, 2021, the Parent owned a 97.26% common general partnership interest in the OP and substantially all of the preferred units in the OP. The remaining 2.74% common limited partnership interests, which include Class A common limited partnership units (“Class A Units”) in the OP, are owned by unaffiliated investors and certain current and former directors and officers of the Parent. Each partner’s percentage interest in the OP is determined based on the number of OP units held, including the number of OP units into which Class A Units are convertible, compared to total OP units outstanding at each period end and is used as the basis for the allocation of net income or loss to each partner. At the end of each reporting period, a capital adjustment is made in the OP to reflect the appropriate ownership interest for each of the common unitholders. These adjustments are reflected in the line items Reallocation of Equity in the Consolidated Statements of Equity of the Parent and Reallocation of Capital in the Consolidated Statements of Capital of the OP.
As the sole general partner of the OP, the Parent has complete responsibility and discretion in the day-to-day management and control of the OP and we operate the Parent and the OP as one enterprise. The management of the Parent consists of the same members as the management of the OP. These members are officers of the Parent and employees of the OP or one of its subsidiaries. As general partner with control of the OP, the Parent is the primary beneficiary and therefore consolidates the OP. Because the Parent’s only significant asset is its investment in the OP, the assets and liabilities of the Parent and the OP are the same on their respective financial statements.
Basis of Presentation. The accompanying Consolidated Financial Statements are prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”) and are presented in our reporting currency, the U.S. dollar. Intercompany transactions with consolidated entities have been eliminated.
The accompanying unaudited interim financial information has been prepared according to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Certain information and note disclosures normally included in our annual financial statements prepared in accordance with GAAP have been condensed or omitted in accordance with such rules and regulations. Our management believes that the disclosures presented in these financial statements are adequate to make the information presented not misleading. In our opinion, all adjustments and eliminations, consisting only of normal recurring adjustments, necessary to present fairly the financial position and results of operations for both the Parent and the OP for the reported periods have been included. The results of operations for such interim periods are not necessarily indicative of the results for the full year. The accompanying unaudited interim financial information should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2020, as filed with the SEC, and other public information.
Reclassifications. Lease right-of-use assets and lease liabilities have been reclassified in the Consolidated Financial Statements for 2020 to Other Assets and Other Liabilities, respectively, in order to conform to the 2021 financial statement presentation.
Accounting Pronouncements.
Reference Rate Reform. In March 2020, the Financial Accounting Standards Board issued an Accounting Standard Update (“ASU”) that provided practical expedients to address existing guidance on contract modifications and hedge accounting due to the expected market transition from the London Inter-bank Offered Rate (“LIBOR”) and other interbank offered rates (together “IBORs”) to alternative reference rates, such as the Secured Overnight Financing Rate. We refer to this transition as “reference rate reform.”
The ASU was effective upon issuance on a prospective basis beginning January 1, 2020 and we elected to adopt the ASU over time as our reference rate reform activities occurred. In reliance on the relief, we have modified debt contracts during the three months ended September 30, 2021. There were no other changes to the contracts other than the base rate from GBP LIBOR and Yen LIBOR to their alternative reference rates and therefore there was no material impact on our Consolidated Financial Statements due to the adoption of the ASU. We anticipate further modifications to other debt and derivative contracts by the end of 2021.
NOTE 2. LIBERTY TRANSACTION
On February 4, 2020, we acquired Liberty Property Trust and Liberty Property Limited Partnership (collectively “Liberty” or the “Liberty Transaction”).
The Liberty Transaction was completed for $13.0 billion through the issuance of equity based on the value of the Prologis common stock and units issued of $10.0 billion, the assumption of debt of $2.8 billion and transaction costs. In connection with the transaction, each issued and outstanding share or unit held by a Liberty stockholder or unitholder was converted automatically into 0.675 shares of Prologis common stock or common units of Prologis, L.P., respectively, including shares and units under Liberty’s equity incentive plan that became fully vested at closing.
Through the Liberty Transaction, we acquired a portfolio primarily comprised of logistics real estate assets, including 519 industrial operating properties, aggregating 99.6 million square feet, which are highly complementary to our U.S. portfolio in terms of product quality, location and growth potential in our key markets.
The aggregate equity consideration is calculated below (in millions, except price per share):
Number of Prologis shares and units issued upon conversion of Liberty shares and units at February 4, 2020
109.01
Multiplied by price of Prologis' common stock on February 3, 2020
91.87
Fair value of Prologis shares and units issued
10,015
We accounted for the Liberty Transaction as an asset acquisition and as a result, the transaction costs of $115.8 million were capitalized to the basis of the acquired properties. Transaction costs included investment banker advisory fees, legal fees and other costs.
Under acquisition accounting, the total purchase price was allocated to the Liberty real estate properties and related lease intangibles on a relative fair value basis. All other assets acquired and liabilities assumed, including debt, and real estate assets that we do not intend to operate long-term were recorded at fair value as follows (in millions):
12,636
Intangible assets, net of intangible liabilities
491
Cash and other assets
233
(2,845
Accounts payable, accrued expenses and other liabilities
(383
(1
Total purchase price, including transaction costs
10,131
NOTE 3. REAL ESTATE
Investments in real estate properties consisted of the following (dollars and square feet in thousands):
Square Feet
Number of Buildings
Sep 30,
Dec 31,
Operating properties:
Buildings and improvements
444,812
441,336
2,286
2,261
32,064,117
31,489,943
Improved land
12,145,397
12,017,676
Development portfolio, including
land costs:
Prestabilized
3,761
6,076
24
433,391
553,266
Properties under development
31,967
22,004
84
61
2,377,098
1,329,345
Land (1)
2,039,754
1,606,358
Other real estate investments (2)
3,398,937
3,387,740
Total investments in real estate
properties
(1)
At September 30, 2021 and December 31, 2020, our land was comprised of 5,186 and 5,304 acres, respectively.
(2)
Included in other real estate investments were: (i) non-strategic real estate assets acquired in the Liberty Transaction that we do not intend to operate long-term; (ii) real estate assets that we intend to redevelop into industrial properties; (iii) land parcels we own and lease to third parties; and (iv) costs associated with potential acquisitions and future development projects, including purchase options on land.
Acquisitions
The following table summarizes our real estate acquisition activity, excluding the Liberty Transaction as discussed in Note 2 (dollars and square feet in thousands):
2021 (1)
2020 (2)
Number of operating properties
Square feet
3,910
194
6,023
20,470
Acres of land
685
156
1,391
611
Acquisition cost of net investments in real estate (3)
757,711
188,717
1,796,383
2,730,377
During the nine months ended September 30, 2021, we acquired additional ownership interest in unconsolidated other ventures from our partners and began consolidating the real estate assets.
On January 8, 2020, our two U.S. co-investment ventures, Prologis Targeted U.S. Logistics Fund, L.P. (“USLF”) and Prologis U.S. Logistics Venture, LLC (“USLV”), acquired the wholly-owned real estate assets of Industrial Property Trust Inc. (“IPT”) for $2.0 billion each in a cash transaction, including transaction costs and the assumption and repayment of debt (the “IPT Transaction”). As we consolidate USLV, the number of operating properties, square feet and acquisition cost for the properties acquired by USLV are included in the consolidated acquisition activity.
(3)
The acquisition cost of net investments in real estate includes other real estate investments of $50.5 million and $224.3 million during the three and nine months ended September 30, 2021, respectively. Acquisitions of other real estate investments were not material during 2020. This category of real estate is not included within the other metrics in this table.
Dispositions
The following table summarizes our dispositions of net investments in real estate which include contributions to unconsolidated co-investment ventures and dispositions to third parties (dollars and square feet in thousands):
Dispositions of development properties and land, net (2)
Number of properties
32
2,876
3,150
12,337
11,776
Net proceeds
368,131
410,398
1,814,331
1,384,227
Other dispositions of investments in real estate, net
74
38
5,806
2,558
12,060
6,635
738,396
409,303
1,334,168
763,615
13
During the three and nine months ended September 30, 2021, we sold our ownership interest in an unconsolidated other venture.
The gains we recognize in Gains on Dispositions of Development Properties and Land, Net are primarily driven by the contribution of newly developed properties to our unconsolidated co-investment ventures and occasionally sales to a third party.
Leases
We recognized lease right-of-use assets of $425.6 million and $492.8 million within Other Assets and lease liabilities of $419.2 million and $487.0 million within Other Liabilities, for land and office space leases in which we are the lessee, on the Consolidated Balance Sheets at September 30, 2021 and December 31, 2020, respectively.
NOTE 4. UNCONSOLIDATED ENTITIES
Summary of Investments
We have investments in entities through a variety of ventures. We co-invest in entities that own multiple properties with partners and investors and we provide asset and property management services to these entities, which we refer to as co-investment ventures. These entities may be consolidated or unconsolidated depending on the structure, our partner’s participation and other rights and our level of control of the entity. This note details our investments in unconsolidated co-investment ventures, which are related parties and accounted for using the equity method of accounting. See Note 7 for more detail regarding our consolidated investments that are not wholly owned.
We also have investments in other ventures, generally with one partner, which we account for using the equity method. We refer to our investments in both unconsolidated co-investment ventures and other ventures, collectively, as unconsolidated entities.
The following table summarizes our investments in and advances to unconsolidated entities (in thousands):
December 31,
Unconsolidated co-investment ventures
6,896,069
6,685,567
Other ventures (1)
756,254
916,447
During the nine months ended September 30, 2021, we acquired additional ownership interest in unconsolidated other ventures from our partners and began consolidating the real estate assets. We also sold our ownership interest in an unconsolidated other venture.
Unconsolidated Co-Investment Ventures
The following table summarizes the Strategic Capital Revenues we recognized in the Consolidated Statements of Income related to our unconsolidated co-investment ventures (in thousands):
Recurring fees
100,167
80,403
288,049
231,263
Transactional fees
14,399
15,827
53,476
47,879
Promote revenue (1)
1,570
13,821
228,421
Total strategic capital revenues from unconsolidated
co-investment ventures (2)
116,136
96,230
355,346
507,563
Includes promote revenue earned from our unconsolidated co-investment venture in the U.S. in June 2020.
These amounts exclude strategic capital revenues from other ventures.
The following table summarizes the key property information, financial position and operating information of our unconsolidated co-investment ventures (not our proportionate share) and the amounts we recognized in the Consolidated Financial Statements related to these ventures (dollars and square feet in millions):
U.S.
Other Americas (1)
Europe
Asia
As of:
Key property information:
Ventures
Operating properties
716
706
236
229
804
768
184
167
1,940
1,870
119
117
51
195
185
67
441
420
Financial position:
Total assets ($)
10,929
10,840
3,155
3,023
17,747
16,918
10,298
10,209
42,129
40,990
Third-party debt ($)
3,063
3,129
867
854
3,750
4,002
3,992
3,831
11,672
11,816
Total liabilities ($)
3,677
3,722
932
898
5,499
5,607
4,506
4,389
14,614
14,616
Our investment balance ($) (2)
1,883
1,886
832
811
3,363
3,152
818
837
6,896
6,686
Our weighted average ownership (3)
25.3
%
25.6
40.1
40.8
29.7
30.0
15.2
26.0
26.1
Operating Information:
For the three months ended:
Total revenues ($)
260
237
81
70
348
303
164
148
853
758
Net earnings ($)
152
28
23
80
49
313
284
Our earnings from unconsolidated
co-investment ventures, net ($)
40
For the nine months ended:
771
702
234
204
1,029
874
483
429
2,517
2,209
255
103
86
69
253
230
120
210
714
612
68
75
200
161
Prologis Brazil Logistics Venture (“PBLV”) and our other Brazilian joint ventures are combined as one venture for the purpose of this table.
Prologis’ investment balance is presented at our adjusted basis derived from the ventures’ U.S. GAAP information. The difference between our ownership interest of a venture’s equity and our investment balance at September 30, 2021 and December 31, 2020, resulted principally from four types of transactions: (i) deferred gains from the contribution of property to a venture prior to January 1, 2018; (ii) recording additional costs associated with our investment in the venture; (iii) receivables, principally for fees and promotes ($126.9 million and $165.6 million, respectively); and (iv) customer security deposits retained subsequent to property contributions to Nippon Prologis REIT, Inc.
Represents our weighted average ownership interest in all unconsolidated co-investment ventures based on each entity’s contribution of total assets before depreciation, net of other liabilities.
Equity Commitments Related to Certain Unconsolidated Co-Investment Ventures
At September 30, 2021, our outstanding equity commitments were $333.6 million, principally for Prologis China Logistics Venture. The equity commitments expire from 2021 to 2028 if they have not been previously called.
NOTE 5. ASSETS HELD FOR SALE OR CONTRIBUTION
We had investments in certain real estate properties that met the criteria to be classified as held for sale or contribution at September 30, 2021 and December 31, 2020. At the time of classification, these properties were expected to be sold to third parties or were recently stabilized and expected to be contributed to unconsolidated co-investment ventures within twelve months. The amounts included in Assets Held for Sale or Contribution represented real estate investment balances and the related assets and liabilities.
Assets held for sale or contribution consisted of the following (dollars and square feet in thousands):
2020 (1)
66
5,856
12,923
Total assets held for sale or contribution
Total liabilities associated with assets held for sale or contribution – included in Other Liabilities
6,178
16,214
At December 31, 2020, Assets Held for Sale or Contribution included certain properties acquired through the Liberty Transaction and the IPT Transaction that were subsequently sold during 2021.
NOTE 6. DEBT
All debt is incurred by the OP or its consolidated subsidiaries.
The following table summarizes our debt (dollars in thousands):
Weighted Average
Interest Rate (1)
Term (2)
Outstanding (3)
Credit facilities
0.8%
2.5
100,000
2.0
171,794
Senior notes
1.6%
11.7
14,887,589
2.0%
11.2
14,275,870
Term loans and unsecured
other
5.7
1,405,981
0.9%
5.6
1,764,311
Secured mortgage
3.4%
3.2
742,098
3.1%
3.0
637,101
10.8
1.9%
10.2
The weighted average interest rates presented represent the effective interest rates (including amortization of debt issuance costs and the noncash premiums or discounts) at the end of the period for the debt outstanding and include the impact of designated interest rate swaps, which effectively fix the interest rate on certain variable rate debt.
The weighted average term represents the remaining maturity in years on the debt outstanding at period end.
We borrow in the functional currencies of the countries where we invest. Included in the outstanding balances were borrowings denominated in the following currencies:
Weighted Average Interest Rate
Amount Outstanding
% of Total
British pound sterling
2.2
1,005,266
5.9
1,019,480
6.1
Canadian dollar
2.7
283,751
1.7
285,708
Euro
1.1
6,877,873
40.0
1.4
6,549,676
38.8
Japanese yen
0.8
3,146,736
18.4
2,877,247
17.1
U.S. dollar
2.6
5,822,042
34.0
2.8
6,116,965
36.3
1.6
100.0
1.9
Credit Facilities
We have a global senior credit facility (the “2019 Global Facility”) under which we may draw in British pounds sterling, Canadian dollars, euro, Japanese yen, Mexican pesos and U.S. dollars on a revolving basis up to $3.5 billion (subject to currency fluctuations). In April 2021, we entered into a second global senior credit facility (the “2021 Global Facility”) under which we may draw in Canadian dollars, euro, British pounds sterling, Japanese yen, Mexican pesos and U.S. dollars on a revolving basis up to $1.0 billion (subject to currency fluctuations). The 2019 Global Facility is scheduled to initially mature in January 2023 and the 2021 Global Facility in April 2024; however, we may extend the maturity date for both facilities by six months on two occasions, subject to the payment of extension fees. We have the ability to increase the 2019 Global Facility to $4.5 billion and the 2021 Global Facility to $2.0 billion, subject to currency fluctuations and obtaining additional lender commitments.
We also have a Japanese yen revolver (the “Yen Credit Facility”) with total commitments of ¥55.0 billion ($491.1 million at September 30, 2021). We have the ability to increase the borrowing capacity of the Yen Credit Facility to ¥75.0 billion ($669.7 million at September 30, 2021), subject to obtaining additional lender commitments. The Yen Credit Facility is initially scheduled to mature in July 2024; however, we may extend the maturity date for one year, subject to the payment of extension fees.
We refer to the 2019 Global Facility, the 2021 Global Facility and the Yen Credit Facility, collectively, as our “Credit Facilities.” Pricing for the Credit Facilities, including the spread over the applicable benchmark and the rates applicable to facility fees and letter of credit fees, varies based on the public debt ratings of the OP.
Liquidity
The following table summarizes information about our available liquidity at September 30, 2021 (in millions):
Aggregate lender commitments
4,990
Less:
Borrowings outstanding
100
Outstanding letters of credit
Current availability
4,876
585
Total liquidity
5,461
Senior Notes
The following table summarizes the issuances and redemptions of senior notes during the nine months ended September 30, 2021 (principal in thousands):
Aggregate Principal
Issuance Date Weighted Average
Issuance Date
Borrowing Currency
USD (1)
Interest Rate (2)
Term (3)
Maturity Dates
February
€
1,350,000
1,639,305
0.7%
14.3
February 2032 – 2041
400,000
10.1
March 2031
June
¥
65,000,000
587,441
15.4
June 2028 – 2061
2,626,746
13.9
Redemption Date Weighted Average
Redemption Date
March
599,514
715,700
February 2024
750,000
3.8%
4.7
November 2025
1,465,700
3.6%
3.8
The exchange rate used to calculate into U.S. dollars was the spot rate at the settlement date.
The weighted average interest rate represents the fixed or variable interest rates of the related debt at the issuance or redemption date.
The weighted average term represents the remaining maturity in years on the related debt at the issuance or redemption date.
During the nine months ended September 30, 2021, we used the net proceeds from the issuance of the senior notes to fund the senior note redemptions, repay other indebtedness and for general corporate purposes.
Early Extinguishment of Debt
During the nine months ended September 30, 2021 and 2020, we recognized $187.5 million and $164.6 million of losses on the early extinguishment of debt, respectively. The losses during both periods were driven by the redemption of certain higher interest rate senior notes before their stated maturity. We redeemed $1.5 billion of senior notes with stated maturities of 2024 and 2025, and $2.0 billion of senior notes with stated maturities between 2021 and 2024, during the nine months ended September 30, 2021 and 2020, respectively. The losses in 2020 included the extinguishment of debt assumed in the Liberty Transaction and the IPT Transaction, which represented the excess of the prepayment penalties over the premium recorded upon assumption of the debt.
Term Loans
In April 2021, the multi-currency term loan (“2017 Term Loan”) was terminated, the outstanding balance paid down and the interest rate swap contracts associated with the outstanding balance of $250.3 million were settled.
Long-Term Debt Maturities
Scheduled principal payments due on our debt for the remainder of 2021 and for each year through the period ended December 31, 2025, and thereafter were as follows at September 30, 2021 (in thousands):
Unsecured
Credit
Senior
Secured
Maturity
Facilities
Notes
and Other
Mortgage
94,802
2022 (1)
521,055
9,780
203,095
733,930
2023
133,850
36,784
170,634
2024 (2)
174,433
274,433
2025
44,648
144,446
189,094
Thereafter
14,396,288
1,268,001
78,095
15,742,384
Subtotal
14,961,991
1,411,631
731,655
17,205,277
Premiums (discounts), net
3,495
12,319
15,814
Debt issuance costs, net
(77,897
(5,650
(1,876
(85,423
We expect to repay the amounts maturing in the next twelve months with cash generated from operations, proceeds from dispositions of real estate properties, or as necessary, with additional borrowings.
Included in the 2024 maturities is the 2021 Global Facility that can be extended until 2025.
Financial Debt Covenants
Our senior notes and term loans outstanding at September 30, 2021 were subject to certain financial covenants under their related indentures. We are also subject to financial covenants under our Credit Facilities and certain secured mortgage debt. At September 30, 2021, we were in compliance with all of our financial debt covenants.
Guarantee of Finance Subsidiary Debt
We have finance subsidiaries as part of our operations in Europe (Prologis Euro Finance LLC), Japan (Prologis Yen Finance LLC) and the U.K. (Prologis Sterling Finance LLC) in order to mitigate our foreign currency risk by borrowing in the currencies in which we invest. These entities are 100% indirectly owned by the OP and all unsecured debt issued or to be issued by each entity is or will be fully and unconditionally guaranteed by the OP. There are no restrictions or limits on the OP’s ability to obtain funds from its subsidiaries by dividend or loan. In reliance on Rule 13-01 of Regulation S-X, the separate financial statements of Prologis Euro Finance LLC, Prologis Yen Finance LLC and Prologis Sterling Finance LLC are not provided.
NOTE 7. NONCONTROLLING INTERESTS
We report noncontrolling interests related to several entities we consolidate but of which we do not own 100% of the equity. These entities include two real estate partnerships that have issued limited partnership units to third parties. Depending on the specific partnership agreements, these limited partnership units are redeemable for cash or, at our option, shares of the Parent’s common stock, generally at a rate of one share of common stock to one limited partnership unit. We also consolidate certain entities in which we do not own 100% of the equity but the equity of these entities is not exchangeable into our common stock.
The noncontrolling interests of the Parent include the noncontrolling interests described above for the OP, as well as the limited partnership units in the OP that are not owned by the Parent. The outstanding limited partnership units receive quarterly cash distributions equal to the quarterly dividends paid on our common stock pursuant to the terms of the applicable partnership agreements.
The following table summarizes these entities (dollars in thousands):
Our Ownership Percentage
Noncontrolling Interests
Total Assets
Total Liabilities
Prologis U.S. Logistics Venture
55.0
3,204,673
3,385,110
7,272,631
7,663,800
159,883
145,131
Other consolidated entities (1)
various
131,114
98,416
1,395,579
1,066,129
168,807
73,987
8,668,210
8,729,929
328,690
219,118
Limited partners in Prologis, L.P. (2)(3)
915,570
869,507
Includes our two partnerships that have issued limited partnership units to third parties, as discussed above, along with various other consolidated entities. The limited partnership units outstanding at September 30, 2021 and December 31, 2020 were exchangeable into cash or, at our option, 0.3 million shares of the Parent’s common stock.
We had 8.6 million Class A Units that were convertible into 8.0 million limited partnership units of the OP at September 30, 2021 and December 31, 2020.
There were limited partnership units in the OP, excluding the Class A Units, that were exchangeable into cash or, at our option, 8.9 million and 8.2 million shares of the Parent’s common stock at September 30, 2021 and December 31, 2020, respectively. We issued 1.0 million limited partnership units to our partner as partial consideration for the acquisition of additional ownership interest in an unconsolidated other venture in 2021. Also included are the vested OP Long-Term Incentive Plan Units (“LTIP Units”) associated with our long-term compensation plan of 4.0 million at September 30, 2021 and 3.9 million at December 31, 2020. See further discussion of LTIP Units in Note 8.
NOTE 8. LONG-TERM COMPENSATION
Equity-Based Compensation Plans and Programs
Prologis Outperformance Plan (“POP”)
We have allocated participation points or a percentage of the compensation pool to participants under our POP corresponding to three-year performance periods beginning every January 1. The fair value of the awards is measured at the grant date and amortized over the period from the grant date to the date at which the awards vest, which ranges from three to ten years. The performance hurdle (“Outperformance Hurdle”) at the end of the initial three-year performance period requires our three-year compound annualized total stockholder return (“TSR”) to exceed a threshold set at the three-year compound annualized TSR for the Morgan Stanley Capital International (“MSCI”) US REIT Index for the same period plus 100 basis points. If the Outperformance Hurdle is met, a compensation pool will be formed equal to 3% of the excess value created, subject to a maximum as defined by each performance period. POP awards cannot be paid at a time when we meet the outperformance hurdle yet our absolute TSR is negative. If after seven years our absolute TSR has not been positive, the awards will be forfeited.
We granted participation points for the 2021 – 2023 performance period in January 2021, with a fair value of $30.3 million using a Monte Carlo valuation model that assumed a risk-free interest rate of 0.2% and an expected volatility of 32.0% for Prologis and 29.0% for the MSCI US REIT Index. The 2021 – 2023 performance period has an absolute maximum cap of $100 million. If an award is earned at the end of the initial three-year performance period, then 20% of the POP award is paid at the end of the initial performance period and the remaining 80% is subject to additional seven-year cliff vesting. The 20% that is paid at the end of the initial three-year performance period is subject to an additional three-year holding requirement.
The Outperformance Hurdle was met for the 2018 – 2020 performance period, which resulted in awards being earned at December 31, 2020. Additionally, awards were earned at December 31, 2020 for prior performance periods related to the compensation pool in excess of the initial award based on the terms of the POP awards granted prior to 2018. Awards of $100.0 million for the 2018 – 2020 performance period and $35.7 million in the aggregate for the 2016 – 2018 and 2017 – 2019 performance periods were awarded in January 2021 in the form of common stock, restricted stock units, POP LTIP Units and LTIP Units. The tables below include POP awards that were earned but are unvested while any vested awards are reflected within the Consolidated Statements of Equity and Capital. The initial grant date fair value derived using a Monte Carlo valuation model was used in determining the grant date fair value per unit in the tables below.
Other Equity-Based Compensation Plans and Programs
Our other equity-based compensation plans and programs include (i) the Prologis Promote Plan (“PPP”); (ii) the annual long-term incentive (“LTI”) equity award program (“Annual LTI Award”); and (iii) the annual bonus exchange program. Awards under these plans and programs may be issued in the form of restricted stock units (“RSUs”) or LTIP Units at the participant’s election. RSUs and LTIP
Units are valued based on the market price of the Parent’s common stock on the date the award is granted and the grant date value is charged to compensation expense over the service period.
Summary of Award Activity
RSUs
The following table summarizes the activity for RSUs for the nine months ended September 30, 2021 (units in thousands):
Unvested RSUs
Grant Date Fair Value
986
80.32
Granted (1)
691
78.51
Vested and distributed
(392
76.85
Forfeited
(150
75.88
1,135
81.01
Included in granted were unvested units based on the POP performance criteria being met for the 2018 – 2020 performance period and represented the earned award amounts subject to an additional vesting period. Unvested units are included in the award discussion above. These amounts also include awards earned for prior performance periods related to the compensation pool in excess of the initial award.
LTIP Units
The following table summarizes the activity for LTIP Units for the nine months ended September 30, 2021 (units in thousands):
Unvested
3,052
66.50
1,264
59.10
(51
55.66
Vested LTIP Units
(944
79.80
3,321
60.07
NOTE 9. EARNINGS PER COMMON SHARE OR UNIT
We determine basic earnings per share or unit based on the weighted average number of shares of common stock or units outstanding during the period. We compute diluted earnings per share or unit based on the weighted average number of shares or units outstanding combined with the incremental weighted average effect from all outstanding potentially dilutive instruments.
The computation of our basic and diluted earnings per share and unit was as follows (in thousands, except per share and unit amounts):
Net earnings attributable to common stockholders – Basic
Net earnings attributable to exchangeable limited partnership units (1)
19,890
8,440
47,131
34,252
Adjusted net earnings attributable to common stockholders – Diluted
741,897
307,135
1,733,578
1,226,904
Incremental weighted average effect on exchange of limited partnership units (1)
20,421
21,110
20,860
20,960
Incremental weighted average effect of equity awards
5,085
5,315
4,567
5,135
Weighted average common shares outstanding – Diluted (2)
Net earnings per share attributable to common stockholders:
Basic
Diluted
Net earnings attributable to Class A Units
(7,816
(3,216
(18,263
(13,242
Net earnings attributable to common unitholders – Basic
733,978
303,853
1,715,092
1,213,404
Net earnings attributable to exchangeable other limited partnership units
223
258
Adjusted net earnings attributable to common unitholders – Diluted
Weighted average common partnership units outstanding – Basic
Incremental weighted average effect on exchange of Class A Units
8,003
8,034
8,005
8,048
Incremental weighted average effect on exchange of other limited partnership units
299
Incremental weighted average effect of equity awards of Prologis, Inc.
Weighted average common units outstanding – Diluted (2)
Net earnings per unit attributable to common unitholders:
Earnings allocated to the exchangeable OP units not held by the Parent have been included in the numerator and exchangeable common units have been included in the denominator for the purpose of computing diluted earnings per share for all periods as the per share and unit amount is the same.
Our total weighted average potentially dilutive shares and units outstanding consisted of the following:
Class A Units
Other limited partnership units
Equity awards
6,965
7,643
6,863
7,749
15,267
15,976
15,167
16,096
Common limited partnership units
12,119
12,777
12,556
12,613
27,386
28,753
27,723
28,709
21
NOTE 10. FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS
Derivative Financial Instruments
In the normal course of business, our operations are exposed to market risks, including the effect of changes in foreign currency exchange rates and interest rates. We may enter into derivative financial instruments to offset these underlying market risks. There have been no significant changes in our policy or strategy from what was disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020.
The following table presents the fair value of our derivative financial instruments recognized within Other Assets and Other Liabilities on the Consolidated Balance Sheets (in thousands):
Asset
Liability
Undesignated derivatives
Foreign currency contracts
Forwards
Brazilian real
495
620
6,045
1,690
174
7,589
2,970
2,326
5,827
Chinese renminbi
410
717
31,144
73
6,247
17,485
720
1,604
Swedish krona
1,578
397
2,355
Designated derivatives
Net investment hedges
10,463
2,081
5,949
748
9,847
Interest rate swaps
Cash flow hedges
Total fair value of derivatives
76,129
5,598
1,667
36,482
Undesignated Derivative Financial Instruments
Foreign Currency Contracts
The following table summarizes the activity of our undesignated foreign currency contracts for the nine months ended September 30 (in millions, except for weighted average forward rates and number of active contracts):
CAD
EUR
GBP
JPY
SEK
Notional amounts at January 1 ($)
163
474
207
252
1,162
581
178
182
1,107
New contracts ($)
219
362
166
77
871
845
294
82
1,292
Matured, expired or settled contracts ($)
(199
(120
(115
(58
(14
(537
(32
(1,099
(311
(66
(9
(1,548
Notional amounts at September 30 ($)
183
271
44
1,496
327
198
851
Weighted average forward rate at
September 30
1.26
1.23
1.37
103.19
8.47
1.34
1.17
1.31
102.80
9.35
Active contracts at September 30
87
48
55
47
The following table summarizes the undesignated derivative financial instruments exercised and associated realized and unrealized gains (losses) in Foreign Currency and Derivative Gains (Losses), Net in the Consolidated Statements of Income (in millions, except for number of exercised contracts):
Exercised contracts
135
101
Realized gains (losses) on the matured, expired or settled contracts
(2
(11
Unrealized gains (losses) on the change in fair value of outstanding contracts
35
(27
Designated Derivative Financial Instruments
Changes in the fair value of derivatives that are designated as net investment hedges of our foreign operations and cash flow hedges are recorded in Accumulated Other Comprehensive Income (Loss) (“AOCI/L”) and reflected within the Other Comprehensive Income (Loss) table below.
The following table summarizes the activity of our foreign currency contracts designated as net investment hedges for the nine months ended September 30 (in millions, except for weighted average forward rates and number of active contracts):
377
512
97
387
484
535
300
835
298
324
622
(299
(48
(576
(624
613
435
1,048
347
482
Weighted average forward rate at September 30
1.38
1.32
1.35
Interest Rate Swaps
The following table summarizes the activity of our interest rate swaps designated as cash flow hedges for the nine months ended September 30 (in millions):
EUR (1)
USD
165
250
415
1,500
1,665
(250
(1,250
During the year ended December 31, 2020, we entered into interest rate swap contracts to effectively fix the interest rate on our euro senior notes issued in February 2020 and the U.S. dollar outstanding balance on our 2017 Term Loan. In April 2021, the 2017 Term Loan was terminated and the interest rate swap contracts associated with the outstanding balance were settled.
Designated Nonderivative Financial Instruments
The following table summarizes our debt and accrued interest, designated as a hedge of our net investment in international subsidiaries as of the quarter ended (in millions):
396
842
The following table summarizes the unrealized gains (losses) in Foreign Currency and Derivative Gains (Losses), Net on the remeasurement of the unhedged portion of our debt and accrued interest, including euro and British pound sterling denominated debt, for the three and nine months ended September 30 (in millions):
Unrealized gains (losses) on the unhedged portion
30
(77
Other Comprehensive Income (Loss)
The change in Other Comprehensive Income (Loss) in the Consolidated Statements of Comprehensive Income during the periods presented was due to the translation into U.S. dollars from the consolidation of the financial statements of our consolidated subsidiaries whose functional currency is not the U.S. dollar. The change in fair value of the effective portion of our derivative financial instruments that have been designated as net investment hedges and cash flow hedges and the translation of the hedged portion of our debt, as discussed above, are also included in Other Comprehensive Income (Loss).
The following table presents these changes in Other Comprehensive Income (Loss) (in thousands):
Derivative net investment hedges
25,549
(4,234
11,090
18,290
Debt designated as nonderivative net investment hedges
15,118
(46,570
(3,715
2,439
Cumulative translation adjustment
8,041
5,228
194,506
(200,891
Total foreign currency translation gains (losses), net
Cash flow hedges (1) (2)
872
1,581
8,246
(12,857
Our share of derivatives from unconsolidated co-investment ventures
798
5,133
(6,839
Total unrealized gains (losses) on derivative contracts, net
Total change in other comprehensive income (loss)
52,456
(43,197
215,260
(199,858
We estimate an additional expense of $2.7 million will be reclassified to Interest Expense over the next 12 months from September 30, 2021, due to the amortization of previously settled derivatives designated as cash flow hedges.
Included in the nine months ended September 30, 2020 was $16.8 million in losses associated with the termination of four U.S. dollar treasury lock contracts with an aggregate notional amount of $750.0 million that fixed the interest rate on the forecasted issuance of U.S. dollar senior notes issued in February 2020.
Fair Value Measurements
There have been no significant changes in our policy from what was disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020.
Fair Value Measurements on a Recurring Basis
At September 30, 2021 and December 31, 2020, other than the derivatives discussed previously, we had no significant financial assets or financial liabilities that were measured at fair value on a recurring basis in the Consolidated Financial Statements. All of our derivatives held at September 30, 2021 and December 31, 2020, were classified as Level 2 of the fair value hierarchy.
Fair Value Measurements on Nonrecurring Basis
Acquired properties and assets we expect to sell or contribute are significant nonfinancial assets that met the criteria to be measured at fair value on a nonrecurring basis. At September 30, 2021 and December 31, 2020, we estimated the fair value of our properties using Level 2 or Level 3 inputs from the fair value hierarchy. See more information on our acquired properties in Notes 2 and 3 and assets held for sale or contribution in Note 5.
Fair Value of Financial Instruments
At September 30, 2021 and December 31, 2020, the carrying amounts of certain financial instruments, including cash and cash equivalents, accounts and notes receivable, accounts payable and accrued expenses were representative of their fair values.
The differences in the fair value of our debt from the carrying value in the table below were the result of differences in interest rates or borrowing spreads that were available to us at September 30, 2021 and December 31, 2020, as compared with those in effect when the debt was issued or assumed, including reduced borrowing spreads due to our improved credit ratings. The fair value of the senior notes decreased during the nine months ended September 30, 2021 due to the increase in bond yields in the market as compared to the weighted average interest rates on our senior notes. The senior notes and many of the issuances of secured mortgage debt contain prepayment penalties or yield maintenance provisions that could make the cost of refinancing the debt at lower rates exceed the benefit that would be derived from doing so. We evaluate this on an on-going basis and have taken the opportunity to refinance some of our debt at lower rates and longer maturities as discussed in Note 6.
The following table reflects the carrying amounts and estimated fair values of our debt (in thousands):
Carrying Value
Fair Value
15,239,275
15,452,381
Term loans and unsecured other
1,417,333
1,785,706
766,439
673,549
17,523,047
18,083,430
NOTE 11. BUSINESS SEGMENTS
Our current business strategy includes two operating segments: Real Estate Operations and Strategic Capital. We generate revenues, earnings, net operating income and cash flows through our segments, as follows:
Real Estate Operations. This operating segment represents the ownership and development of operating properties and is the largest component of our revenue and earnings. We collect rent from our customers through operating leases, including reimbursements for the majority of our property operating costs. Each operating property is considered to be an individual operating segment with similar economic characteristics; these properties are combined within the reportable business segment based on geographic location. Our Real Estate Operations segment also includes development activities that lead to rental operations, including land held for development and properties currently under development, and other real estate investments. Within this line of business, we utilize the following: (i) our land bank; (ii) the development expertise of our local teams; and (iii) our customer relationships. Land we own and lease to customers under land leases, along with land and buildings we lease, is also included in this segment.
Strategic Capital. This operating segment represents the management of unconsolidated co-investment ventures. We generate strategic capital revenues primarily from our unconsolidated co-investment ventures through asset management and property management services and we earn additional revenues by providing leasing, acquisition, construction, development, financing and disposition services. Depending on the structure of the venture and the returns provided to our partners, we also earn revenues through promotes periodically during the life of a venture or upon liquidation. Each unconsolidated co-investment venture we manage is considered to be an individual operating segment with similar economic characteristics; these ventures are combined within the reportable business segment based on geographic location.
Reconciliations are presented below for: (i) each reportable business segment’s revenues from external customers to Total Revenues; (ii) each reportable business segment’s net operating income from external customers to Operating Income and Earnings Before Income Taxes; and (iii) each reportable business segment’s assets to Total Assets. Our chief operating decision makers rely primarily on net operating income and similar measures to make decisions about allocating resources and assessing segment performance. The applicable components of Total Revenues, Operating Income, Earnings Before Income Taxes and Total Assets are allocated to each reportable business segment’s revenues, net operating income and assets. Items that are not directly assignable to a segment, such as certain corporate income and expenses, are not allocated but reflected as reconciling items.
The following reconciliations are presented in thousands:
Real estate operations segment:
992,583
933,916
2,939,364
2,660,178
Other Americas
24,791
21,132
74,179
66,947
11,912
19,558
44,140
53,048
12,315
9,174
33,728
30,723
Total real estate operations segment
1,041,601
983,780
3,091,411
2,810,896
Strategic capital segment:
60,319
29,322
130,172
320,181
10,679
8,851
40,817
27,558
45,325
36,959
136,589
101,081
25,125
23,861
83,218
67,422
Total strategic capital segment
Segment net operating income:
U.S. (1)
746,710
699,255
2,190,308
1,976,985
18,341
15,288
55,165
48,561
6,089
14,207
26,754
33,017
9,441
6,520
24,509
21,543
780,581
735,270
2,296,736
2,080,106
31,397
5,184
55,051
222,390
7,518
6,276
32,072
17,803
34,088
26,775
102,537
66,483
16,056
14,967
54,198
35,656
89,059
53,202
243,858
342,332
Total segment net operating income
869,640
788,472
2,540,594
2,422,438
Reconciling items:
General and administrative expenses
(66,970
(74,348
(219,344
(208,701
Depreciation and amortization expenses
(390,806
(400,738
(1,181,117
(1,144,903
Segment assets:
43,812,656
42,559,023
1,218,015
1,145,699
1,495,595
1,604,393
1,138,653
1,081,876
47,664,919
46,390,991
Strategic capital segment: (2)
12,302
13,257
25,280
312
354
37,894
38,891
Total segment assets
47,702,813
46,429,882
504,792
364,299
Total reconciling items
9,313,857
9,635,123
This includes compensation and personnel costs for employees who were located in the U.S. but also support other geographies.
Represents management contracts and goodwill recorded in connection with business combinations associated with the Strategic Capital segment. Goodwill was $25.3 million at September 30, 2021 and December 31, 2020.
NOTE 12. SUPPLEMENTAL CASH FLOW INFORMATION
Our significant noncash investing and financing activities for the nine months ended September 30, 2021 and 2020 included the following:
We recognized lease right-of-use assets and lease liabilities related to leases in which we are the lessee within Other Assets and Other Liabilities on the Consolidated Balance Sheets, including any new leases, renewals and modifications of $32.7 million in 2021 and $6.6 million in 2020 for both assets and liabilities.
We capitalized $19.4 million and $18.0 million in 2021 and 2020, respectively, of equity-based compensation expense.
We assumed debt of $93.7 million upon obtaining a controlling financial interest in and consolidating an unconsolidated venture in 2021.
We received $299.4 million and $399.2 million in 2021 and 2020, respectively, of ownership interests in certain unconsolidated co-investment ventures as a portion of our proceeds from the contribution of properties to these entities, as disclosed in Note 4.
We issued 0.3 million shares in both 2021 and 2020 of the Parent’s common stock upon redemption of an equal number of common limited partnership units in the OP.
We issued 1.0 million common limited partnership units for $130.4 million to our partner and assumed debt of $121.6 million in our acquisition of additional ownership interest in an unconsolidated other venture in 2021.
We formed an unconsolidated venture by contributing $10.0 million of land in 2021.
An unconsolidated co-investment venture in the U.S. declared a distribution of $45.6 million, which we subsequently reinvested and increased our ownership in 2020.
We received $23.7 million of equity interests in PCCLF for the contribution of real estate properties from Prologis China Logistics Venture II, LP in 2020.
We issued 0.5 million common limited partnership units for $48.5 million as partial consideration for the acquisition of properties in 2020.
We completed the Liberty Transaction on February 4, 2020 for $13.0 billion through the issuance of equity and the assumption of debt. See Note 2 for more information on this transaction.
We paid $224.7 million and $230.9 million for interest, net of amounts capitalized, during the nine months ended September 30, 2021 and 2020, respectively.
We paid $85.0 million and $82.3 million for income taxes, net of refunds, during the nine months ended September 30, 2021 and 2020, respectively.
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors Prologis, Inc.:
Results of Review of Interim Financial Information
We have reviewed the consolidated balance sheet of Prologis, Inc. and subsidiaries (the Company) as of September 30, 2021, the related consolidated statements of income, comprehensive income, and equity for the three-month and nine-month periods ended September 30, 2021 and 2020, the related consolidated statements of cash flows for the nine-month periods ended September 30, 2021 and 2020, and the related notes (collectively, the consolidated interim financial information). Based on our reviews, we are not aware of any material modifications that should be made to the consolidated interim financial information for it to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Company as of December 31, 2020, and the related consolidated statements of income, comprehensive income, equity, and cash flows for the year then ended (not presented herein); and in our report dated February 10, 2021, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2020, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
Basis for Review Results
This consolidated interim financial information is the responsibility of the Company’s management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our reviews in accordance with the standards of the PCAOB. A review of consolidated interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
/s/ KPMG LLP
Denver, ColoradoOctober 26, 2021
To the Partners of Prologis, L.P. and the Board of Directors of Prologis, Inc.:
We have reviewed the consolidated balance sheet of Prologis, L.P. and subsidiaries (the Operating Partnership) as of September 30, 2021, the related consolidated statements of income, comprehensive income, and capital for the three-month and nine-month periods ended September 30, 2021 and 2020, the related consolidated statements of cash flows for the nine-month periods ended September 30, 2021 and 2020, and the related notes (collectively, the consolidated interim financial information). Based on our reviews, we are not aware of any material modifications that should be made to the consolidated interim financial information for it to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Operating Partnership as of December 31, 2020, and the related consolidated statements of income, comprehensive income, capital, and cash flows for the year then ended (not presented herein); and in our report dated February 10, 2021, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2020, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
This consolidated interim financial information is the responsibility of the Operating Partnership’s management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Operating Partnership in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following should be read in conjunction with the Consolidated Financial Statements and related Notes included in Item 1 of this report and our Annual Report on Form 10-K for the year ended December 31, 2020, as filed with the United States (“U.S.”) Securities and Exchange Commission (“SEC”).
The statements in this report that are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are based on current expectations, estimates and projections about the industry and markets in which we operate as well as management’s beliefs and assumptions. Such statements involve uncertainties that could significantly impact our financial results. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” and “estimates” including variations of such words and similar expressions are intended to identify such forward-looking statements, which generally are not historical in nature. All statements that address operating performance, events or developments that we expect or anticipate will occur in the future — including statements relating to rent and occupancy growth, acquisition and development activity, contribution and disposition activity, general conditions in the geographic areas where we operate, our debt, capital structure and financial position, our ability to form new co-investment ventures and the availability of capital in existing or new co-investment ventures — are forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Although we believe the expectations reflected in any forward-looking statements are based on reasonable assumptions, we can give no assurance that our expectations will be attained, and therefore actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. Some of the factors that may affect outcomes and results include, but are not limited to: (i) international, national, regional and local economic and political climates and conditions; (ii) changes in global financial markets, interest rates and foreign currency exchange rates; (iii) increased or unanticipated competition for our properties; (iv) risks associated with acquisitions, dispositions and development of properties; (v) maintenance of Real Estate Investment Trust (“REIT”) status, tax structuring and changes in income tax laws and rates; (vi) availability of financing and capital, the levels of debt that we maintain and our credit ratings; (vii) risks related to our investments in our co-investment ventures, including our ability to establish new co-investment ventures; (viii) risks of doing business internationally, including currency risks; (ix) environmental uncertainties, including risks of natural disasters; (x) risks related to the coronavirus (“COVID-19”) pandemic; and (xi) those additional factors discussed under Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2020. We undertake no duty to update any forward-looking statements appearing in this report except as may be required by law.
Prologis, Inc. is a self-administered and self-managed REIT and is the sole general partner of Prologis, L.P. through which it holds substantially all of its assets. We operate Prologis, Inc. and Prologis, L.P. as one enterprise and, therefore, our discussion and analysis refers to Prologis, Inc. and its consolidated subsidiaries, including Prologis, L.P. We invest in real estate through wholly owned subsidiaries and other entities through which we co-invest with partners and investors. We have a significant ownership interest in the co-investment ventures, which may be consolidated or unconsolidated based on our level of control of the entity.
We operate and manage our business on an owned and managed (“O&M”) basis and therefore evaluate the operating performance of the properties for our O&M portfolio, which includes our consolidated properties and properties owned by our unconsolidated co-investment ventures which we manage. We make operating decisions based on our total O&M portfolio, as we manage the properties similarly regardless of ownership. We also evaluate our results based on our proportionate economic ownership of each property included in the O&M portfolio (“our share”) to reflect our share of the financial results of the O&M portfolio.
Included in our discussion below are references to funds from operations (“FFO”) and net operating income (“NOI”), neither of which are U.S. generally accepted accounting principles (“GAAP”). See below for a reconciliation of Net Earnings Attributable to Common Stockholders/Unitholders in the Consolidated Statements of Income to our FFO measures and a reconciliation of NOI to Operating Income, the most directly comparable GAAP measures.
MANAGEMENT’S OVERVIEW
We are the global leader in logistics real estate with a focus on high-barrier, high-growth markets. We own, manage and develop well-located, high-quality logistics facilities in 19 countries across four continents. Our local teams actively manage our portfolio, which encompasses leasing, property management, capital deployment and opportunistic dispositions. Our disposition activities allow us to recycle capital and largely self-fund our development and acquisition activities. The majority of our properties in the United States (“U.S.”) are wholly owned, while our international properties are primarily held in co-investment ventures, which has the benefit of mitigating our exposure to foreign currency movements.
Our portfolio is focused on the world’s most vibrant centers of commerce and our scale allows us to respond to our customers’ needs for the highest-quality buildings across these locations. There is an emergence of two new structural demand drivers for our real estate: (i) the need for more inventory as supply chains emphasize resilience over efficiency and (ii) the acceleration of e-commerce adoption.
As improved service time increasingly moves to the forefront of the global supply chain, it drives demand for logistics real estate close to the end-consumer. We have invested in properties located within infill and urban areas in our largest global markets with same day access (defined as Last Touch®) and next day access (defined as city distribution), to the consumer population. This positioning gives
us the unique ability to provide our customers with the right real estate solutions for their supply chains that, in turn, allows them to meet end-consumer delivery expectations.
As we look to the future of logistics real estate, we are focused on solving our customers’ pain points, innovating in pursuit of creative solutions and operational excellence. We are listening and responding to our customers’ needs for skilled labor through initiatives to create community workforce programs to develop their talent pool, utilize our proprietary data and analytics to ensure efficient distribution solutions and leverage our scale to negotiate better pricing on common products and services that our customers need. Our customers turn to us because they know that a strategic partnership with Prologis is a competitive advantage. We accomplish all of this by employing individuals who continue to grow, embrace change and draw strength from inclusion and diversity.
At September 30, 2021, our total O&M portfolio at 100%, including properties and development projects, totaled $101.0 billion (based on gross book value and total expected investment (“TEI”)) across 994 million square feet (92 million square meters) and four continents. Our share of the total O&M portfolio was $63.6 billion. We lease modern logistics facilities to a diverse base of approximately 5,500 customers.
Our business comprises two operating segments: Real Estate Operations and Strategic Capital.
Below is information summarizing consolidated activity within our segments (in millions):
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.
A developed property moves into the operating portfolio when it meets our definition of stabilization, which is the earlier of one year after completion or 90% occupancy. Amounts represent our TEI, which includes the estimated cost of development or expansion, land, construction and leasing costs.
Real Estate Operations
Rental. Rental operations comprise the largest component of our operating segments and generally contribute 85% to 90% of our consolidated revenues, earnings and FFO. We collect rent from our customers through operating leases, including reimbursements for the majority of our property operating costs. We expect to generate internal growth by increasing rents, maintaining high occupancy rates and controlling expenses. The primary driver of our revenue growth will be rolling in-place leases to current market rents as leases expire. We believe our active portfolio management, combined with the skills of our property, leasing, maintenance, capital, energy, sustainability and risk management teams allow us to maximize NOI across our portfolio. A majority of our consolidated rental revenue, NOI and cash flows are generated in the U.S.
Development. Given the scarcity of modern logistics facilities in our target markets, our development business provides us the opportunity to build what our customers need. We develop properties to meet these needs, deepen our market presence and maintain a modern portfolio. We believe we have a competitive advantage due to (i) the strategic locations of our global land bank and redevelopment sites; (ii) the development expertise of our local teams; and (iii) the depth of our customer relationships. Successful development and redevelopment efforts provide significant earnings growth as projects are leased, generate income and increase the net asset value of our Real Estate Operations segment. Generally, we develop properties in the U.S. for long-term hold and outside the U.S. for contribution to our unconsolidated co-investment ventures.
Strategic Capital
Our strategic capital segment allows us to partner with many of the world’s largest institutional investors and capitalize our business through private equity, principally perpetual open-ended or long-term ventures, which allows us to reduce our exposure to foreign currency movements for investments outside the U.S. We also access capital in this segment through two publicly traded vehicles: Nippon Prologis REIT, Inc. in Japan and FIBRA Prologis in Mexico. We align our interests with our partners by holding significant ownership interests in all of our 9 unconsolidated co-investment ventures (ranging from 15% to 50%).
This segment produces durable, long-term cash flows and generally contributes 10% to 15% of our recurring consolidated revenues, earnings and FFO. We generate strategic capital revenues from our unconsolidated co-investment ventures, principally through property and asset management services. Asset management fees are primarily driven by the real estate valuation of the venture. We earn additional revenues by providing leasing, acquisition, construction, development, financing, legal and disposition services. In certain ventures, we also have the ability to earn revenues through incentive fees (“promotes” or “promote revenues”) periodically during the life of a venture or upon liquidation based on the appreciation of the portfolio. We plan to profitably grow this business by increasing our assets under management in existing or new ventures. Most of the strategic capital revenues are generated outside the U.S. NOI in this segment is calculated directly from our Consolidated Financial Statements as Strategic Capital Revenues less Strategic Capital Expenses and excludes property-related NOI.
FUTURE GROWTH
We believe the quality and scale of our global portfolio, our diversified and complimentary businesses, the expertise of our team, the depth of our customer relationships and the strength of our balance sheet give us unique competitive advantages to grow revenues, NOI, earnings, FFO and cash flows.
Calculated using the trailing twelve months immediately prior to the period ended.
General and Administrative (“G&A”) Expenses is a line item in the Consolidated Financial Statements. Adjusted G&A expenses is calculated from our Consolidated Financial Statements as G&A Expenses and Strategic Capital Expenses, less expenses under the Prologis Promote Plan (“PPP”) and property-level management expenses for the properties owned by the ventures. Annualized 2021 represents G&A and adjusted G&A expenses for the year ended December 31, 2021 based on the nine months ended September 30, 2021.
Rent Growth. Due to the demand for the location and quality of our properties, we expect rents in our markets to continue to increase. In addition, due to strong market rent growth over the last several years, our in-place leases have considerable upside potential to drive future incremental organic NOI growth. We estimated that the rental rates of our leases are 21.9% below current market on the basis of our weighted average ownership at September 30, 2021. Therefore, even if market rent growth is flat, a lease renewal will translate into increased future rental income, on a consolidated basis or through the earnings we recognize from our unconsolidated co-investment ventures based on our ownership. We have experienced positive rent change on rollover (comparing the net effective rent (“NER”) of the new lease to the prior lease for the same space) every quarter since 2013.
Value Creation from Development. A successful development and redevelopment program involves maintaining control of well-located and entitled land and redevelopment sites and sourcing a future pipeline through acquisition opportunities, including our innovative approach with Covered Land Plays. We believe that the carrying value of our global land bank is below its current fair value. Due to the strategic nature of our land bank, development expertise of our teams and strength of our customer relationships, we expect to create value as we build new properties. We measure the estimated value creation of a development project as the margin above our anticipated cost to develop or TEI. Based on our current estimates, our consolidated land, including options, has the potential to support the development of $14.8 billion of TEI of new logistics space. In addition to our land portfolio, we have also made investments in income generating assets with the intention to redevelop them into logistics facilities, which we define as Covered Land Plays, with a TEI of $3.1 billion. As properties stabilize, we expect to realize the value creation principally through contributions to unconsolidated co-investment ventures and increases in NOI.
Economies of Scale from Growth. We use adjusted G&A expenses as a percentage of the O&M portfolio to measure and evaluate our overhead costs. We have scalable systems and infrastructure in place to grow both our consolidated and O&M portfolios with limited incremental G&A expense. We believe we can continue to grow NOI and strategic capital revenues organically and through accretive development and acquisition activity while further reducing G&A as a percentage of our investments in real estate. As noted in the graph above, the acquisitions of Liberty Property Trust and Liberty Property Limited Partnership (collectively “Liberty” or the “Liberty Transaction”) and Industrial Property Trust Inc. (“IPT” or the “IPT Transaction”) in the first quarter of 2020 are key examples of this effort, where we increased our investments in real estate in the O&M portfolio by
33
over 20% and had minimal increases to G&A expenses, which resulted in lower G&A expenses as a percentage of investments in real estate.
Balance Sheet Strength. We have continued to seek and execute on opportunities to refinance debt at historically low rates which resulted in extending our consolidated weighted average remaining maturity to 11 years and lowering our weighted average effective interest rate to 1.6%. At September 30, 2021, we had total available liquidity of $5.5 billion and continue to maintain low leverage as a percentage of our real estate investments and our market capitalization. As a result of our low leverage, available liquidity and investment capacity in the co-investment ventures, we have significant capacity to capitalize on value-added investment opportunities that will translate into future earnings growth.
Staying “Ahead of What’s Next™”. We are executing initiatives to create value beyond the real estate by enhancing our customers’ experience, utilizing our scale to streamline our procurement activities and negotiating better pricing on products and services for us and our customers, as well as delivering improvements to our business through innovation, data analytics and digitization efforts. Underlying our future strategy for growth is our ongoing commitment to, and initiatives in, environmental stewardship, social responsibility and governance.
SUMMARY OF 2021
Our financial condition and operating results were strong during the nine months ended September 30, 2021. E-commerce continues to grow well above its historical average and demand for space is robust based on our proprietary data. As demand surges, having the right logistics real estate in the right location is mission critical for our customers, which is evident with our O&M occupancy at 97.1% at September 30, 2021. Leasing activity accelerated for our portfolio during the nine-month period ending September 30, 2021. Our outlook for the remainder of 2021 is equally as promising as we expect increases in market rents and asset valuations to drive our operating results as well as our execution of profitable deployment activities. Despite the COVID-19 pandemic, our operating fundamentals have remained strong and market conditions for logistics real estate are healthy with the acceleration of e-commerce adoption, however, we cannot fully predict negative trends due to the continued uncertainty of COVID-19 across the globe.
During the nine months ended September 30, 2021, we generated net proceeds of $3.1 billion and realized net gains of $859 million, primarily from the contribution of properties to our unconsolidated co-investment ventures in Japan and Europe and dispositions to third parties.
We completed the following consolidated financing activities that included the issuance of $2.6 billion and redemption of $1.5 billion of senior notes, with aggregate principal amounts in U.S. dollars. This resulted in extending our consolidated weighted average remaining maturity to 11 years and lowering our weighted average effective interest rate to 1.6% (principal in millions):
1,350
1,639
400
¥ 65,000
587
2,626
Maturity Date
600
750
1,466
At September 30, 2021, we had total available liquidity of $5.5 billion, principally due to aggregate availability under our credit facilities of $4.9 billion and unrestricted cash balances of $585 million. In April 2021, we increased our available liquidity by entering into a second global senior credit facility with an available borrowing capacity of $1.0 billion and we terminated the $500 million multi-currency term loan.
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Throughout this discussion, we reflect amounts in U.S. dollars, our reporting currency. Included in these amounts are consolidated and unconsolidated investments denominated in foreign currencies, principally the British pound sterling, euro and Japanese yen that are impacted by fluctuations in exchange rates when translated to U.S. dollars. We mitigate our exposure to foreign currency fluctuations by investing outside the U.S. through co-investment ventures, borrowing in the functional currency of our subsidiaries and utilizing derivative financial instruments.
RESULTS OF OPERATIONS – NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020
We evaluate our business operations based on the NOI of our two operating segments: Real Estate Operations and Strategic Capital. NOI by segment is a non-GAAP performance measure that is calculated using revenues and expenses directly from our financial statements. We consider NOI by segment to be an appropriate supplemental measure of our performance because it helps management and investors understand our operating results.
Below is a reconciliation of our NOI by segment to Operating Income per the Consolidated Financial Statements for the nine months ended September 30 (in millions). Each segment’s NOI is reconciled to line items in the Consolidated Financial Statements as provided in the related discussion below.
Real Estate Operations – NOI
2,297
2,080
Strategic Capital – NOI
244
342
(219
(1,181
(1,145
1,141
1,069
500
384
358
1,999
1,637
See Note 11 to the Consolidated Financial Statements for more information on our segments and a reconciliation of each business segment’s NOI to Operating Income and Earnings Before Income Taxes.
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):
Rental revenues
3,074
2,803
Development management and other revenues
Rental expenses
(780
(705
Other expenses
(15
(26
The change in Real Estate Operations NOI for the nine months ended September 30, 2021 from the same period in 2020, was impacted by the following items (in millions):
Acquisition activity increased NOI in 2021, compared to 2020, primarily due to the Liberty Transaction on February 4, 2020. We acquired 519 industrial operating properties, aggregating 100 million square feet, and increased our consolidated investments in real estate by approximately $13 billion.
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.
We calculate changes in NOI from development completions period over period by comparing the change in NOI generated on the pool of developments that completed on or after January 1, 2020 through September 30, 2021.
Below are key operating metrics of our consolidated operating portfolio, which excludes non-strategic industrial properties.
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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Development Activity
The following table summarizes consolidated development activity for the nine months ended September 30 (dollars and square feet in millions):
Starts:
Number of new development projects during the period
57
TEI
2,576
708
Percentage of build-to-suits based on TEI
49.4
61.9
Stabilizations:
Number of development projects stabilized during the period
45
1,371
1,539
37.4
Weighted average stabilized yield (1)
6.5
Estimated value at completion
1,958
2,172
Estimated weighted average margin
42.8
41.2
We calculate the weighted average stabilized yield as estimated NOI assuming stabilized occupancy divided by TEI.
During the first quarter of 2020, we suspended several speculative development projects for the short term based on the market conditions at that time and government restrictions due to COVID-19. By the fourth quarter of 2020, most suspended projects were restarted and by March 2021, the entire development portfolio consisted of active projects. At September 30, 2021, the consolidated development portfolio, including properties under development and pre-stabilized properties, was expected to be completed before June 2023 with a TEI of $4.8 billion, leaving $2.0 billion remaining to be spent and was 58.8% leased. While construction costs increased during the period, we continue to maintain high margins as a result of low vacancy rates and high market rent growth.
Capital Expenditures
We capitalize costs incurred in renovating, improving and leasing our operating properties as part of the investment basis or within other assets. The following graph summarizes capital expenditures, excluding development costs, and property improvements per square foot of our consolidated operating properties during each quarter:
This operating segment includes revenues from asset and property management services performed, transactional services for acquisition, disposition and leasing activity and promote revenue earned from the unconsolidated entities. Revenues associated with the Strategic Capital segment fluctuate because of changes in the size of the portfolios through acquisitions and dispositions, the fair value of the properties and other transactional activity including foreign currency exchange rates and timing of promotes. These revenues are reduced by the direct costs associated with the asset and property-level management expenses for the properties owned by these ventures. We allocate the costs of our property management and leasing functions to the Strategic Capital segment through Strategic Capital Expenses and to the Real Estate Operations segment through Rental Expenses based on the square footage of the relative portfolios. For further details regarding the key property information and summarized financial condition and operating results of our unconsolidated co-investment ventures, refer to Note 4 to the Consolidated Financial Statements.
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Below are the components of Strategic Capital NOI for the nine months ended September 30, derived directly from the line items in the Consolidated Financial Statements (in millions):
Strategic capital revenues
391
516
Strategic capital expenses
(147
(174
Below is additional detail of our Strategic Capital revenues, expenses and NOI for the nine months ended September 30 (in millions):
Strategic capital revenues ($)
Recurring fees (2)
99
79
114
58
239
Transactional fees (3)
Promote revenue (4)
227
228
Total strategic capital revenues ($)
130
320
41
137
83
Strategic capital expenses ($)
(75
(98
(10
(34
(35
(29
Strategic Capital – NOI ($)
222
54
The U.S. expenses include compensation and personnel costs for employees who are based in the U.S. but also support other geographies.
Recurring fees include asset and property management fees. The increase in fees is due primarily to higher asset management fees driven by the increases in the fair value of the properties based on third party valuations.
Transactional fees include leasing commissions and acquisition, disposition, development and other fees.
(4)
We generally earn promote revenue directly from third-party investors in the co-investment ventures based on cumulative returns over a three-year period or based on development returns. An increase in asset valuations in the co-investment ventures, as we have experienced in 2021, is one of the significant drivers of returns that can translate into earning future promote revenues. Approximately 40% of the promote earned by us is paid to our employees as a combination of cash and stock awards pursuant to the terms of the PPP and expensed through Strategic Capital Expenses, as vested.
G&A Expenses
G&A expenses were $219 million and $208 million for the nine months ended September 30, 2021 and 2020, respectively. G&A expenses increased in 2021 as compared to 2020, due to higher compensation expenses based largely on our outperformance and the increase in our share price. We capitalize certain internal costs, including salaries and related expenses, directly related primarily to our development activities. For discussion on our long-term incentive plans refer to the proxy statement for our 2021 annual meeting of stockholders.
The following table summarizes capitalized G&A for the nine months ended September 30 (dollars in millions):
Building and land development activities
Operating building improvements and other
Total capitalized G&A expenses
91
Capitalized salaries and related costs as a percent of total salaries and related costs
21.6
20.2
Depreciation and Amortization Expenses
Depreciation and amortization expenses were $1.2 billion and $1.1 billion for the nine months ended September 30, 2021 and 2020, respectively.
The following table highlights the key changes in depreciation and amortization expenses during the nine months ended September 30, 2021 from the same period in 2020 (in millions):
Included in acquisitions are the operating properties and related intangible assets acquired in the Liberty Transaction.
Gains on Real Estate Transactions, Net
Gains on the disposition of development properties and land were $500 million and $384 million for the nine months ended September 30, 2021 and 2020, respectively, and primarily included gains from the contribution of properties we developed to our unconsolidated co-investment ventures in Europe and Japan. Gains on other dispositions of investments in real estate were $358 million and $184 million for the nine months ended September 30, 2021 and 2020, respectively, which included sales of operating properties, including certain non-strategic assets acquired in the Liberty Transaction and the IPT Transaction and the sale of our ownership interest in one of our other unconsolidated ventures. We utilized the proceeds from these transactions primarily to fund our development activities during both periods. See Note 3 to the Consolidated Financial Statements for further information on these transactions.
Our Owned and Managed (“O&M”) Operating Portfolio
We manage our business and review our operating fundamentals on an O&M basis, which includes our consolidated properties and properties owned by our unconsolidated co-investment ventures. We believe reviewing the fundamentals this way allows management to understand the entire impact to the financial statements, as it will affect both the Real Estate Operations and Strategic Capital segments, as well as the net earnings we recognize from our unconsolidated co-investment ventures based on our ownership. We do not control the unconsolidated co-investment ventures for purposes of GAAP and the presentation of the ventures’ operating information does not represent a legal claim.
Our O&M operating portfolio does not include our development portfolio, value-added properties, non-industrial properties or properties we do not have the intent to hold long-term that are classified as either held for sale or within other real estate investments. Value-added properties are properties that are expected to be repurposed or redeveloped to a higher and better use and recently acquired properties that present opportunities to create greater value. See below for information on our O&M operating portfolio (square feet in millions):
Number of Properties
Square
Feet
Percentage Occupied
Consolidated
2,272
444
97.4
2,252
96.6
Unconsolidated
1,920
438
96.7
1,849
416
95.9
4,192
882
97.1
4,101
857
96.2
Below are the key operating metrics summarizing the leasing activity of our O&M operating portfolio.
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.
Turnover costs include external leasing commissions and tenant improvements and represent the obligations incurred in connection with the lease commencement for leases greater than one year. As a result of higher rents on leases that commenced during the nine months ended September 30, 2021, leasing commissions on a per square foot basis have continued to increase as commissions are based on the contractual rent we receive over the lease term.
Same Store Analysis
Our same store metrics are non-GAAP financial measures, which are commonly used in the real estate industry and expected from the financial community, on both a net effective and cash basis. We evaluate the performance of the operating properties we own and manage using a “same store” analysis because the population of properties in this analysis is consistent from period to period, which allows us and investors to analyze our ongoing business operations. We determine our same store metrics on property NOI, which is calculated as rental revenue less rental expense for the applicable properties in the same store population for both consolidated and unconsolidated properties based on our ownership interest, as further defined below.
We define our same store population for the three months ended September 30, 2021 as the properties in our O&M operating portfolio, including the property NOI for both consolidated properties and properties owned by the unconsolidated co-investment ventures, at January 1, 2020 and owned throughout the same three-month period in both 2020 and 2021. We believe the drivers of property NOI for the consolidated portfolio are generally the same for the properties owned by the ventures in which we invest and therefore we evaluate the same store metrics of the O&M portfolio based on Prologis’ ownership in the properties (“Prologis Share”). The same store population excludes properties held for sale to third parties, along with development properties that were not stabilized at the beginning of the period (January 1, 2020) and properties acquired or disposed of to third parties during the period. To derive an appropriate measure of period-to-period operating performance, we remove the effects of foreign currency exchange rate movements by using the reported period-end exchange rate to translate from local currency into the U.S. dollar for both periods.
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
Change
Reconciliation of Consolidated Property NOI to Same Store Property NOI measures:
1,037
980
(256
(245
Consolidated Property NOI
781
735
Adjustments to derive same store results:
Property NOI from consolidated properties not included in same store portfolio and
other adjustments (1)
(243
(224
Property NOI from unconsolidated co-investment ventures included in same store
portfolio (1)(2)
568
538
Third parties' share of Property NOI from properties included in same store
(458
(439
Prologis Share of Same Store Property NOI – Net Effective (2)
648
610
6.2
Consolidated properties straight-line rent and fair value lease adjustments
included in same store portfolio (3)
Unconsolidated co-investment ventures straight-line rent and fair value lease
adjustments included in same store portfolio (3)
Third parties' share of straight-line rent and fair value lease adjustments included
in same store portfolio (2)(3)
Prologis Share of Same Store Property NOI – Cash (2)(3)
634
594
6.7
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.
We include the Property NOI for the same store portfolio for both consolidated properties and properties owned by the co-investment ventures based on our investment in the underlying properties. In order to calculate our share of Same Store Property NOI from the co-investment ventures in which we own less than 100%, we use the co-investment ventures’ underlying Property NOI for the same store portfolio and apply our ownership percentage at September 30, 2021 to the Property NOI for both periods, including the properties contributed during the period. We adjust the total Property NOI from the same store portfolio of the co-investment ventures by subtracting the third parties’ share of both consolidated and unconsolidated co-investment ventures.
During the periods presented, certain wholly owned properties were contributed to a co-investment venture and are included in the same store portfolio. Neither our consolidated results nor those of the co-investment ventures, when viewed individually, would be comparable on a same store basis because of the changes in composition of the respective portfolios from period to period (e.g. the results of a contributed property are included in our consolidated results through the contribution date and in the results of the venture subsequent to the contribution date based on our ownership interest at the end of the period). As a result, only line items labeled “Prologis Share of Same Store Property NOI” are comparable period over period.
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.
We manage our business and compensate our executives based on the same store results of our O&M portfolio at 100% as we manage our portfolio on an ownership blind basis. We calculate those results by including 100% of the properties included in our same store portfolio.
Other Components of Income (Expense)
Earnings from Unconsolidated Entities, Net
We recognized net earnings from unconsolidated entities, which are accounted for using the equity method, of $231 million and $217 million for the nine months ended September 30, 2021 and 2020, respectively. The earnings we recognize can be impacted by: (i) variances in revenues and expenses of each venture; (ii) the size and occupancy rate of the portfolio of properties owned by each venture; (iii) gains or losses from the dispositions of properties and extinguishment of debt; (iv) our ownership interest in each venture; and (v) fluctuations in foreign currency exchange rates used to translate our share of net earnings to U.S. dollars.
See the discussion of our unconsolidated entities above in the Strategic Capital segment discussion and in Note 4 to the Consolidated Financial Statements for a further breakdown of our share of net earnings recognized.
Interest Expense
The following table details our net interest expense for the nine months ended September 30 (dollars in millions):
Gross interest expense
264
Amortization of debt discount and debt issuance costs, net
Capitalized amounts
(30)
Net interest expense
203
238
Weighted average effective interest rate during the period
Interest expense decreased during the nine months ended September 30, 2021, as compared to the same period in 2020, principally due to the use of proceeds from the issuance of senior notes throughout 2020 and during the first quarter of 2021 to redeem higher interest rate senior notes before their stated maturity. As a result of our refinancing activities, we lowered the consolidated weighted average effective interest rate on our senior notes from 2.4% on January 1, 2020 to 1.6% on September 30, 2021.
See Note 6 to the Consolidated Financial Statements and the Liquidity and Capital Resources section below, for further discussion of our debt and borrowing costs.
Foreign Currency and Derivative Gains (Losses), Net
We are exposed to foreign currency exchange risk related to investments in and earnings from our foreign investments. We may use derivative financial instruments to manage foreign currency exchange rate risk related to our earnings. We recognize the change in fair value of the undesignated derivative contracts in unrealized gains and losses. Upon settlement of these transactions, we recognize realized gains or losses.
We primarily hedge our foreign currency risk related to our investments by borrowing in the currencies in which we invest thereby providing a natural hedge. We have issued debt in a currency that is not the same functional currency of the borrowing entity and have designated a portion of the debt as a nonderivative net investment hedge. We recognize the remeasurement and settlement of the translation adjustment on the unhedged portion of the debt and accrued interest in unrealized gains or losses.
The following table details our foreign currency and derivative gains (losses), net for the nine months ended September 30 (in millions):
Realized foreign currency and derivative gains (losses), net:
Gains (losses) on the settlement of undesignated derivatives
Losses on the settlement of transactions with third parties
Total realized foreign currency and derivative gains (losses), net
(12
Unrealized foreign currency and derivative gains (losses), net:
Gains (losses) on the change in fair value of undesignated derivatives and unhedged debt
(44
Gains (losses) on remeasurement of certain assets and liabilities
Total unrealized foreign currency and derivative gains (losses), net
150
(59
Total foreign currency and derivative gains (losses), net
138
42
See Note 10 to the Consolidated Financial Statements for more information about our derivative and nonderivative transactions.
Losses on Early Extinguishment of Debt, Net
During the nine months ended September 30, 2021 and 2020, we recognized $187 million and $165 million of losses on the early extinguishment of debt, respectively. The losses during both periods were driven by the redemption of certain higher interest rate senior notes before their stated maturity. We compare any prepayment penalties incurred from the early redemption of the borrowings to the potential interest savings over the term, and make a decision to refinance the debt when it is economically viable. We redeemed $1.5 billion of senior notes with stated maturities of 2024 and 2025, and $2.0 billion of senior notes with stated maturities between 2021 and 2024, during the nine months ended September 30, 2021 and 2020, respectively. The losses in 2020 included the extinguishment of debt assumed in the Liberty Transaction and the IPT Transaction, which represented the excess of the prepayment penalties over the premium recorded upon assumption of the debt. See Note 6 to the Consolidated Financial Statements and the Liquidity and Capital Resources section, for more information regarding our debt repurchases.
Income Tax Expense
We recognize income tax expense related to our taxable REIT subsidiaries and in the local, state and foreign jurisdictions in which we operate. Our current income tax expense fluctuates from period to period based primarily on the timing of our taxable income, including gains on the disposition of properties and fees earned from the co-investment ventures. Deferred income tax expense (benefit) is generally a function of the period’s temporary differences and the utilization of net operating losses generated in prior years that had been previously recognized as deferred income tax assets in taxable subsidiaries.
The following table summarizes our income tax expense (benefit) for the nine months ended September 30 (in millions):
Current income tax expense:
Income tax expense
65
63
Income tax expense on dispositions
56
Income tax expense on dispositions related to acquired tax liabilities
Total current income tax expense
124
Deferred income tax expense (benefit):
Income tax expense (benefit)
(3
Income tax benefit on dispositions related to acquired tax liabilities
Total deferred income tax expense (benefit)
(7
134
90
Net Earnings Attributable to Noncontrolling Interests
This amount represents the third-party investors’ share of the earnings generated in consolidated entities in which we do not own 100% of the equity, reduced by the third-party share of fees or promotes payable to us and earned during the period. We had net earnings attributable to noncontrolling interests of $157 million and $109 million for the nine months ended September 30, 2021 and 2020, respectively. Included in these amounts were $47 million and $34 million for the nine months ended September 30, 2021 and 2020, of net earnings attributable to the common limited partnership unitholders of Prologis, L.P. The recognition of net gains on the sale of the non-strategic assets identified for disposition in the IPT Transaction also increased the net earnings attributable to noncontrolling interests during the three months ended September 30, 2021.
See Note 7 to the Consolidated Financial Statements for further information on our noncontrolling interests.
The key driver of changes in Accumulated Other Comprehensive Income (Loss) (“AOCI/L”) during the nine months ended September 30, 2021 and 2020, was the currency translation adjustment derived from changes in exchange rates during both periods primarily on our net investments in real estate outside the U.S. and the borrowings we issue in the functional currencies of the countries where we invest. These borrowings serve as a natural hedge of our foreign investments. In addition, we use derivative financial instruments, such as foreign currency forward and option contracts to manage foreign currency exchange rate risk related to our foreign investments, that when designated the change in fair value is included in AOCI/L. See Note 10 to the Consolidated Financial Statements for more information on changes in other comprehensive income (loss) and about our derivative and nonderivative transactions.
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RESULTS OF OPERATIONS – THREE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020
Except as separately discussed above, the changes in comprehensive income attributable to common stockholders and unitholders and its components for the three months ended September 30, 2021, as compared to the three months ended September 30, 2020, are similar to the changes for the nine-month periods ended on the same dates.
LIQUIDITY AND CAPITAL RESOURCES
Overview
We consider our ability to generate cash from operating activities, distributions from our co-investment ventures, contributions and dispositions of properties and available financing sources to be adequate to meet our anticipated future development, acquisition, operating, debt service, dividend and distribution requirements.
Near-Term Principal Cash Sources and Uses
In addition to dividends and distributions, we expect our primary cash needs will consist of the following:
completion of the development and leasing of the properties in our consolidated development portfolio (at September 30, 2021, 96 properties in our development portfolio were 58.8% leased with a current investment of $2.8 billion and a TEI of $4.8 billion when completed and leased, leaving $2.0 billion of estimated additional required investment);
development of new properties that we may hold for long-term investment or subsequently contribute to unconsolidated co-investment ventures, including the acquisition of land in certain markets;
capital expenditures and leasing costs on properties in our operating portfolio;
repayment of debt and scheduled principal payments of $95 million in the remainder of 2021 and $734 million in 2022;
additional investments in current and future unconsolidated co-investment ventures and other ventures;
acquisition of operating properties or portfolios of operating properties (depending on market and other conditions) for direct, long-term investment in our consolidated portfolio (this might include acquisitions from our co-investment ventures); and
repurchase of our outstanding debt or equity securities (depending on prevailing market conditions, our liquidity, contractual restrictions and other factors) through cash purchases, open-market purchases, privately negotiated transactions, tender offers or otherwise.
We expect to fund our cash needs principally from the following sources (subject to market conditions):
net cash flow from property operations;
fees earned for services performed on behalf of co-investment ventures, including promotes;
distributions received from co-investment ventures;
proceeds from disposition of properties, land parcels or other investments to third parties;
proceeds from the contributions of properties to current or future co-investment ventures;
available unrestricted cash balances ($585 million at September 30, 2021);
borrowing capacity under our current credit facility arrangements ($4.9 billion available at September 30, 2021);
proceeds from the issuance of debt; and
proceeds from the sale of a portion of our investments in co-investment ventures to achieve long-term ownership targets.
We may also generate proceeds from the issuance of equity securities, subject to market conditions.
The following table summarizes information about our consolidated debt by currency (dollars in millions):
Interest Rate
Outstanding
1,005
1,019
6,878
6,550
3,147
2,877
5,822
6,117
Total debt (1)
17,136
16,849
The weighted average maturity for total debt outstanding at September 30, 2021 and December 31, 2020 was 11 years and 10 years, respectively.
Our credit ratings at September 30, 2021, were A3 from Moody’s and A- from Standard & Poor’s, both with stable outlook. These ratings allow us to borrow at an advantageous interest rate. Adverse changes in our credit ratings could negatively impact our business and, in particular, our refinancing and other capital market activities, our ability to manage debt maturities, our future growth and our development and acquisition activity. A securities rating is not a recommendation to buy, sell or hold securities and is subject to revision or withdrawal at any time by the rating organization.
At September 30, 2021, we were in compliance with all of our financial debt covenants. These covenants include customary financial covenants for total debt, encumbered debt and fixed charge coverage ratios.
See Note 6 to the Consolidated Financial Statements for further discussion on our debt.
Equity Commitments Related to Certain Co-Investment Ventures
Certain co-investment ventures have equity commitments from us and our venture partners. Our venture partners fulfill their equity commitment with cash. We may fulfill our equity commitment through contributions of properties or cash.
The following table summarizes the remaining equity commitments at September 30, 2021 (dollars in millions):
Equity Commitments (1)
Prologis
Venture
Partners
Expiration Date
Prologis Targeted U.S. Logistics Fund
1,454
2023 – 2024 (2)
Prologis European Logistics Fund
1,779
Prologis UK Logistics Venture
2024
Prologis China Core Logistics Fund
131
2022 – 2024 (2)
Prologis China Logistics Venture
278
1,575
1,853
2021 – 2028
Prologis Brazil Logistics Venture
189
2026
334
5,176
5,510
The equity commitments for the co-investment ventures that operate in a different functional currency than the U.S. dollar were calculated using the foreign currency exchange rate at September 30, 2021.
Venture partners have the option to cancel their equity commitment starting 18 months after the initial commitment date.
See the Cash Flow Summary below for more information about our investment activity in our co-investment ventures.
Cash Flow Summary
The following table summarizes our cash flow activity for the nine months ended September 30 (in millions):
2,280
2,333
(897
(2,580
(1,359
94
Net decrease in cash and cash equivalents, including the effect of foreign
currency exchange rates on cash
(149
Operating Activities
Cash provided by and used in operating activities, exclusive of changes in receivables and payables, was impacted by the following significant activities during the nine months ended September 30, 2021 and 2020:
Real estate operations. We receive the majority of our operating cash through the net revenues of our Real Estate Operations segment, including the recovery of our operating costs. Cash flows generated by the Real Estate Operations segment are impacted by our acquisition, development and disposition activities which are drivers of NOI recognized during each period. See the Results of Operations section above for further explanation of our Real Estate Operations segment. The revenues from this segment include noncash adjustments for straight-lined rents and amortization of above and below market leases of $109 million and $89 million for 2021 and 2020, respectively.
Strategic capital. We also generate operating cash through our Strategic Capital segment by providing asset and property management and other services to our unconsolidated co-investment ventures. See the Results of Operations section above for the key drivers of the net revenues from our Strategic Capital segment. Included in Strategic Capital Revenues is the third-party investors’ share that is owed for promotes, which is recognized in operating activities in the period the cash is received.
G&A expenses and equity-based compensation awards. We incurred $219 million and $208 million of G&A expenses in 2021 and 2020, respectively. We recognized equity-based, noncash compensation expenses of $84 million and $86 million in 2021 and 2020, respectively, which were recorded to Rental Expenses in the Real Estate Operations segment, Strategic Capital Expenses in the Strategic Capital segment and G&A Expenses.
Operating distributions from unconsolidated entities. We received $311 million and $355 million of distributions as a return on our investment from the cash flows generated from the operations of our unconsolidated entities in 2021 and 2020, respectively.
Cash paid for interest, net of amounts capitalized. We paid interest, net of amounts capitalized, of $225 million and $231 million in 2021 and 2020, respectively.
Cash paid for income taxes, net of refunds. We paid income taxes, net of refunds, of $85 million and $82 million in 2021 and 2020, respectively.
46
Investing Activities
Cash provided by investing activities is driven by proceeds from contributions and dispositions of real estate. Cash used in investing activities is primarily driven by our capital deployment activities of investing in real estate development, acquisitions and capital expenditures. See Note 3 to the Consolidated Financial Statements for further information on these activities. In addition, the following significant transactions also impacted our cash used in and provided by investing activities during the nine months ended September 30, 2021 and 2020:
Liberty Transaction, net of cash acquired. We paid net cash of $25 million to complete the Liberty Transaction in 2020, primarily due to transaction costs. The acquisition was financed through the issuance of equity and the assumption of debt. A portion of this debt was paid down subsequent to the acquisition, see the Financing Activities section below. See Note 2 to the Consolidated Financial Statements for more information on this transaction.
IPT Transaction, net of cash acquired. Our consolidated co-investment venture, USLV, acquired real estate assets from IPT for a cash purchase price of $1.7 billion in 2020. Our partner in USLV contributed their share of the purchase price, $917 million, which is presented in Noncontrolling Interests Contributions in financing activities. All of the debt assumed was paid down subsequent to the acquisition, see the Financing Activities section below. See Note 3 to the Consolidated Financial Statements for more information on this transaction.
Investments in and advances to our unconsolidated entities. We invested cash in our unconsolidated entities that represented our proportionate share, of $455 million and $345 million in 2021 and 2020, respectively. The ventures used the funds for the acquisition of properties, development and repayment of debt. See Note 4 to the Consolidated Financial Statements for more detail on our unconsolidated co-investment ventures.
Return of investment from unconsolidated entities. We received distributions from unconsolidated entities as a return of investment of $57 million and $207 million in 2021 and 2020, respectively. Included in these amounts were distributions from venture activities including proceeds from property sales, debt refinancing and the redemption of our investment in certain unconsolidated entities.
Financing Activities
Cash provided by and used in financing activities is principally driven by proceeds from and payments on credit facilities and other debt, along with dividends paid on common and preferred stock and noncontrolling interest contributions and distributions.
Repurchase of preferred stock. We paid $7 million to repurchase shares of series Q preferred stock during 2020.
Our repurchase of and payments on debt and proceeds from the issuance of debt consisted of the following activity for the nine months ended September 30 (in millions):
Repurchase of and payments on debt (including extinguishment costs)
Regularly scheduled debt principal payments and payments at maturity
Secured mortgage debt
301
561
1,644
4,237
Term loans
1,351
2,201
6,156
2,618
5,803
2,825
7,304
We completed the Liberty Transaction in 2020 and assumed $2.8 billion of debt, of which $1.8 billion was paid off with the proceeds from the issuance of senior notes. USLV assumed $342 million of debt in the IPT Transaction, all of which was paid off at closing. The assumption of debt was excluded from the table above.
Unconsolidated Co-Investment Venture Debt
We had investments in and advances to unconsolidated co-investment ventures of $6.9 billion at September 30, 2021. These ventures had total third-party debt of $11.7 billion at September 30, 2021. The weighted average loan-to-value ratio for all unconsolidated co-investment ventures was 25.9% at September 30, 2021 based on gross book value. Loan-to-value, a non-GAAP measure, was
calculated as the percentage of total third-party debt to the gross book value of real estate for each venture and weighted based on the cumulative gross book value of all unconsolidated co-investment ventures.
At September 30, 2021, we did not guarantee any third-party debt of the unconsolidated co-investment ventures.
Dividend and Distribution Requirements
Our dividend policy on our common stock is to distribute a percentage of our cash flow to ensure that we will meet the dividend requirements of the IRC, relative to maintaining our REIT status, while still allowing us to retain cash to fund capital improvements and other investment activities.
Under the IRC, REITs may be subject to certain federal income and excise taxes on undistributed taxable income.
We paid quarterly cash dividends of $0.63 and $0.58 per common share in each of the first three quarters of 2021 and 2020, respectively. Our future common stock dividends, if and as declared, may vary and will be determined by the Board based upon the circumstances prevailing at the time, including our financial condition, operating results and REIT distribution requirements, and may be adjusted at the discretion of the Board during the year.
We make distributions on the common limited partnership units outstanding at the same per unit amount as our common stock dividend. The Class A Units in the OP are entitled to a quarterly distribution equal to $0.64665 per unit so long as the common units receive a quarterly distribution of at least $0.40 per unit. We paid a quarterly cash distribution of $0.64665 per Class A Unit in each of the first three quarters of 2021 and 2020.
At September 30, 2021, our Series Q preferred stock had an annual dividend rate of 8.54% per share and the dividends are payable quarterly in arrears.
Pursuant to the terms of our preferred stock, we are restricted from declaring or paying any dividend with respect to our common stock unless and until all cumulative dividends with respect to the preferred stock have been paid and sufficient funds have been set aside for dividends that have been declared for the relevant dividend period with respect to the preferred stock.
Other Commitments
On an ongoing basis, we are engaged in various stages of negotiations for the acquisition or disposition of individual properties or portfolios of properties.
NEW ACCOUNTING PRONOUNCEMENTS
See Note 1 to the Consolidated Financial Statements.
FUNDS FROM OPERATIONS ATTRIBUTABLE TO COMMON STOCKHOLDERS/UNITHOLDERS (“FFO”)
FFO is a non-GAAP financial measure that is commonly used in the real estate industry. The most directly comparable GAAP measure to FFO is net earnings.
The National Association of Real Estate Investment Trusts (“NAREIT”) defines FFO as earnings computed under GAAP to exclude historical cost depreciation and gains and losses from the sales net of any related tax, along with impairment charges, of previously depreciated properties. We also exclude the gains on revaluation of equity investments upon acquisition of a controlling interest and the gain recognized from a partial sale of our investment, as these are similar to gains from the sales of previously depreciated properties. We exclude similar adjustments from our unconsolidated entities and the third parties’ share of our consolidated co-investment ventures.
Our FFO Measures
Our FFO measures begin with NAREIT’s definition and we make certain adjustments to reflect our business and the way that management plans and executes our business strategy. While not infrequent or unusual, the additional items we adjust for in calculating FFO, as modified by Prologis and Core FFO, both as defined below, are subject to significant fluctuations from period to period. Although these items may have a material impact on our operations and are reflected in our financial statements, the removal of the effects of these items allows us to better understand the core operating performance of our properties over the long term. These items have both positive and negative short-term effects on our results of operations in inconsistent and unpredictable directions that are not relevant to our long-term outlook.
We calculate our FFO measures, as defined below, based on our proportionate ownership share of both our unconsolidated and consolidated ventures. We reflect our share of our FFO measures for unconsolidated ventures by applying our average ownership percentage for the period to the applicable reconciling items on an entity by entity basis. We reflect our share for consolidated ventures
in which we do not own 100% of the equity by adjusting our FFO measures to remove the noncontrolling interests share of the applicable reconciling items based on our average ownership percentage for the applicable periods.
These FFO measures are used by management as supplemental financial measures of operating performance and we believe that it is important that stockholders, potential investors and financial analysts understand the measures management uses. We do not use our FFO measures as, nor should they be considered to be, alternatives to net earnings computed under GAAP, as indicators of our operating performance, as alternatives to cash from operating activities computed under GAAP or as indicators of our ability to fund our cash needs.
We analyze our operating performance principally by the rental revenue of our real estate and the revenues from our strategic capital business, net of operating, administrative and financing expenses. This income stream is not directly impacted by fluctuations in the market value of our investments in real estate or debt securities.
FFO, as modified by Prologis attributable to common stockholders/unitholders (“FFO, as modified by Prologis”)
To arrive at FFO, as modified by Prologis, we adjust the NAREIT defined FFO measure to exclude the impact of foreign currency related items and deferred tax, specifically:
deferred income tax benefits and deferred income tax expenses recognized by our subsidiaries;
current income tax expense related to acquired tax liabilities that were recorded as deferred tax liabilities in an acquisition, to the extent the expense is offset with a deferred income tax benefit in earnings that is excluded from our defined FFO measure; and
foreign currency exchange gains and losses resulting from (i) debt transactions between us and our foreign entities, (ii) third-party debt that is used to hedge our investment in foreign entities, (iii) derivative financial instruments related to any such debt transactions, and (iv) mark-to-market adjustments associated with other derivative financial instruments.
We use FFO, as modified by Prologis, so that management, analysts and investors are able to evaluate our performance against other REITs that do not have similar operations or operations in jurisdictions outside the U.S.
Core FFO attributable to common stockholders/unitholders (“Core FFO”)
In addition to FFO, as modified by Prologis, we also use Core FFO. To arrive at Core FFO, we adjust FFO, as modified by Prologis, to exclude the following recurring and nonrecurring items that we recognize directly in FFO, as modified by Prologis:
gains or losses from the disposition of land and development properties that were developed with the intent to contribute or sell;
income tax expense related to the sale of investments in real estate;
impairment charges recognized related to our investments in real estate generally as a result of our change in intent to contribute or sell these properties;
gains or losses from the early extinguishment of debt and redemption and repurchase of preferred stock; and
expenses related to natural disasters.
We use Core FFO, including by segment and region, to: (i) assess our operating performance as compared to other real estate companies; (ii) evaluate our performance and the performance of our properties in comparison with expected results and results of previous periods; (iii) evaluate the performance of our management; (iv) budget and forecast future results to assist in the allocation of resources; (v) provide guidance to the financial markets to understand our expected operating performance; and (vi) evaluate how a specific potential investment will impact our future results.
Limitations on the use of our FFO measures
While we believe our modified FFO measures are important supplemental measures, neither NAREIT’s nor our measures of FFO should be used alone because they exclude significant economic components of net earnings computed under GAAP and are, therefore, limited as an analytical tool. Accordingly, these are only a few of the many measures we use when analyzing our business. Some of the limitations are:
The current income tax expenses that are excluded from our modified FFO measures represent the taxes that are payable.
Depreciation and amortization of real estate assets are economic costs that are excluded from FFO. FFO is limited, as it does not reflect the cash requirements that may be necessary for future replacements of the real estate assets. Furthermore, the
amortization of capital expenditures and leasing costs necessary to maintain the operating performance of logistics facilities are not reflected in FFO.
Gains or losses from property dispositions and impairment charges related to expected dispositions represent changes in value of the properties. By excluding these gains and losses, FFO does not capture realized changes in the value of disposed properties arising from changes in market conditions.
The deferred income tax benefits and expenses that are excluded from our modified FFO measures result from the creation of a deferred income tax asset or liability that may have to be settled at some future point. Our modified FFO measures do not currently reflect any income or expense that may result from such settlement.
The foreign currency exchange gains and losses that are excluded from our modified FFO measures are generally recognized based on movements in foreign currency exchange rates through a specific point in time. The ultimate settlement of our foreign currency-denominated net assets is indefinite as to timing and amount. Our FFO measures are limited in that they do not reflect the current period changes in these net assets that result from periodic foreign currency exchange rate movements.
The gains and losses on extinguishment of debt or preferred stock that we exclude from our Core FFO, may provide a benefit or cost to us as we may be settling our obligation at less or more than our future obligation.
The natural disaster expenses that we exclude from Core FFO are costs that we have incurred.
We compensate for these limitations by using our FFO measures only in conjunction with net earnings computed under GAAP when making our decisions. This information should be read with our complete Consolidated Financial Statements prepared under GAAP. To assist investors in compensating for these limitations, we reconcile our modified FFO measures to our net earnings computed under GAAP for nine months ended September 30 as follows (in millions):
Reconciliation of net earnings attributable to common stockholders to FFO measures:
1,686
1,193
Add (deduct) NAREIT defined adjustments:
Real estate related depreciation and amortization
1,149
1,116
Gains on other dispositions of investments in real estate, net of taxes
(331
(184
Reconciling items related to noncontrolling interests
Our share of reconciling items included in earnings related to unconsolidated entities
NAREIT defined FFO attributable to common stockholders/unitholders
2,727
2,294
Add (deduct) our modified adjustments:
59
Current income tax expense on dispositions related to acquired tax liabilities
FFO, as modified by Prologis attributable to common stockholders/unitholders
2,589
Adjustments to arrive at Core FFO:
(500
Current income tax expense on dispositions
Losses on early extinguishment of debt, preferred stock repurchase and other, net
187
175
(30
Core FFO attributable to common stockholders/unitholders
2,312
2,141
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to the impact of foreign exchange-related variability and earnings volatility on our foreign investments and interest rate changes. See our risk factors in Part 1, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2020. See also Note 10 in the Consolidated Financial Statements in Item 1 for more information about our foreign operations and derivative financial instruments.
We monitor our market risk exposures using a sensitivity analysis. Our sensitivity analysis estimates the exposure to market risk sensitive instruments assuming a hypothetical 10% adverse change in foreign currency exchange rates or interest rates at September
30, 2021. The results of the sensitivity analysis are summarized in the following sections. The sensitivity analysis is of limited predictive value. As a result, revenues and expenses, as well as our ultimate realized gains or losses with respect to foreign currency exchange rate and interest rate fluctuations will depend on the exposures that arise during a future period, hedging strategies at the time and the prevailing foreign currency exchange rates and interest rates.
Foreign Currency Risk
We are exposed to foreign currency exchange variability related to investments in and earnings from our foreign investments. Foreign currency market risk is the possibility that our results of operations or financial position could be better or worse than planned because of changes in foreign currency exchange rates. We primarily hedge our foreign currency risk by borrowing in the currencies in which we invest thereby providing a natural hedge. Additionally, we hedge our foreign currency risk by entering into derivative financial instruments that we designate as net investment hedges, as these amounts offset the translation adjustments on the underlying net assets of our foreign investments. At September 30, 2021, after consideration of our ability to borrow in the foreign currencies in which we invest and also derivative and nonderivative financial instruments as discussed in Note 10 to the Consolidated Financial Statements, we had minimal net equity denominated in a currency other than the U.S. dollar.
For the nine months ended September 30, 2021, $376 million or 10.8% of our total consolidated revenue was denominated in foreign currencies. We enter into other foreign currency contracts, such as forwards, to reduce fluctuations in foreign currency associated with the translation of the future earnings of our international subsidiaries. We have forward contracts that were not designated as hedges, denominated principally in British pound sterling, Canadian dollar, euro and Japanese yen and have an aggregate notional amount of $1.5 billion to mitigate risk associated with the translation of the future earnings of our subsidiaries denominated in these currencies. The gain or loss on settlement of these contracts is included in our earnings and offsets the lower or higher translation of earnings from our investments denominated in currencies other than the U.S. dollar. Although the impact to net earnings is mitigated through higher translated U.S. dollar earnings from these currencies, a weakening of the U.S. dollar against these currencies by 10% could result in a $150 million cash payment on settlement of these contracts.
Interest Rate Risk
We are also exposed to the impact of interest rate changes on future earnings and cash flows. To mitigate that risk, we generally borrow with fixed rate debt and we may use derivative instruments to fix the interest rate on our variable rate debt. At September 30, 2021, $15.4 billion of our debt bore interest at fixed rates and therefore the fair value of these instruments was affected by changes in market interest rates. At September 30, 2021, $1.8 billion of our debt bore interest at variable rates. The following table summarizes the future repayment of debt and scheduled principal payments at September 30, 2021 (dollars in millions):
2022
Fixed rate debt (1)
162
14,949
15,392
15,709
Weighted average interest rate (2)
0.7
4.4
6.8
1.8
Variable rate debt
982
Total variable rate debt
536
112
1,813
1,814
At September 30, 2021, we had one interest rate swap agreement to fix €150 million ($165 million) of our floating rate euro senior notes which is included in fixed rate debt.
The weighted average interest rates represent the effective interest rates (including amortization of the debt issuance costs and the noncash premiums and discounts) at September 30, 2021 for the debt outstanding.
At September 30, 2021, the weighted average effective interest rate on our variable rate debt was 0.5%. Changes in interest rates can cause interest expense to fluctuate on our variable rate debt. On the basis of our sensitivity analysis, a 10% increase in interest rates on our average outstanding variable rate debt balances would result in additional annual interest expense of $1 million for the quarter ended September 30, 2021, which equates to a change in interest rates of 5 basis points on our average outstanding variable rate debt balances and 1 basis point on our average total debt portfolio balances.
ITEM 4. Controls and Procedures
Controls and Procedures (Prologis, Inc.)
Prologis, Inc. carried out an evaluation under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the disclosure controls and procedures (as defined in Rule 13a-14(c)) under the Securities and Exchange Act of 1934 (the “Exchange Act”) at September 30, 2021. Based on this evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission (“SEC”) rules and forms.
Changes in Internal Control over Financial Reporting
There have not been any changes in Prologis, Inc.’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the quarter ended September 30, 2021 that have materially affected, or are reasonably likely to materially affect, Prologis, Inc.’s internal control over financial reporting.
Controls and Procedures (Prologis, L.P.)
Prologis, L.P. carried out an evaluation under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the disclosure controls and procedures (as defined in Rule 13a-14(c)) under the Exchange Act at September 30, 2021. Based on this evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms.
There have not been any changes in Prologis, L.P.’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the quarter ended September 30, 2021 that have materially affected, or are reasonably likely to materially affect, Prologis, L.P.’s internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
Prologis and our unconsolidated entities are party to a variety of legal proceedings arising in the ordinary course of business. With respect to any such matters to which we are currently a party, the ultimate disposition of any such matters will not result in a material adverse effect on our business, financial position or results of operations.
ITEM 1A. Risk Factors
At September 30, 2021, no material changes had occurred in our risk factors as discussed in Item 1A. in our Annual Report on Form 10-K for the year ended December 31, 2020.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the quarterly period ended September 30, 2021, we issued 0.3 million shares of common stock of Prologis, Inc. in connection with the redemption of common units of Prologis, L.P. and issued 1.0 million common units in Prologis, L.P. in connection with the acquisition of additional ownership interest in an unconsolidated other venture from our partner in reliance on the exemption from registration requirements of the Securities Act of 1933, as amended, afforded by Section 4(a)(2) thereof.
During the quarterly period ended September 30, 2021, we did not purchase any common stock of Prologis, Inc. in connection with our share purchase program.
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Mine Safety Disclosures
Not Applicable.
ITEM 5. Other Information
ITEM 6. Exhibits
The exhibits required by this item are set forth on the Exhibit Index attached hereto.
INDEX TO EXHIBITS
Certain of the following documents are filed herewith. Certain other of the following documents that have been previously filed with the Securities and Exchange Commission (“SEC”) and, pursuant to Rule 12-b-32, are incorporated herein by reference.
3.1
Ninth Amended and Restated Bylaws of Prologis, Inc. (incorporated by reference to Exhibit 3.1 to Prologis’ Current Report on Form 8-K filed on September 24, 2021).
10.1†
First Amendment to Sixth Amended and Restated Revolving Credit Agreement, dated as of October 1, 2021, among Prologis Marunouchi Finance Investment Limited Partnership, as initial borrower, Prologis, L.P., as guarantor, the lenders listed on the signature pages thereof, and Sumitomo Mitsui Banking Corporation, as Administrative Agent.
10.2†
First Amendment to Term Loan Agreement, dated as of October 1, 2021 among Prologis GK Holdings Y.K, as borrower, Prologis, L.P., as guarantor, the lenders party thereto, and Sumitomo Mitsui Banking Corporation, as Administrative Agent.
10.3†
First Amendment, dated as of September 20, 2021, to the Global Senior Credit Agreement dated as of April 15, 2021, among Prologis, L.P., various affiliates of Prologis, L.P., various lenders and Bank of America, N.A., as Global Administrative Agent.
10.4†
First Amendment, dated as of September 20, 2021, to the Global Senior Credit Agreement dated as of January 16, 2019, among Prologis, L.P., various affiliates of Prologis, L.P., various lenders and Bank of America, N.A., as Administrative Agent.
15.1†
KPMG LLP Awareness Letter of Prologis, Inc.
15.2†
KPMG LLP Awareness Letter of Prologis, L.P.
22.1†
Subsidiary guarantors and issuers of guaranteed securities.
31.1†
Certification of Chief Executive Officer of Prologis, Inc.
31.2†
Certification of Chief Financial Officer of Prologis, Inc.
31.3†
Certification of Chief Executive Officer for Prologis, L.P.
31.4†
Certification of Chief Financial Officer for Prologis, L.P.
32.1†
Certification of Chief Executive Officer and Chief Financial Officer of Prologis, Inc., pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2†
Certification of Chief Executive Officer and Chief Financial Officer for Prologis, L.P., pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS†
Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL Document.
101.SCH†
Inline XBRL Taxonomy Extension Schema
101.CAL†
Inline XBRL Taxonomy Extension Calculation Linkbase
101.DEF†
Inline XBRL Taxonomy Extension Definition Linkbase
101.LAB†
Inline XBRL Taxonomy Extension Label Linkbase
101.PRE†
Inline XBRL Taxonomy Extension Presentation Linkbase
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
†
Filed herewith
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the registrants have duly caused this report to be signed on their behalf by the undersigned, thereunto duly authorized.
By:
/s/ Thomas S. Olinger
Thomas S. Olinger
Chief Financial Officer
/s/ Lori A. Palazzolo
Lori A. Palazzolo
Managing Director and Chief Accounting Officer
Prologis, Inc., its general partner
Date: October 26, 2021