10-K 1 pld-10k_20161231.htm 10K pld-10k_20161231.htm

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 2016

or

 

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

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

Title of Each Class

 

Name of Each Exchange on Which Registered

Prologis, Inc.

 

Common Stock, $0.01 par value

 

New York Stock Exchange

Prologis, L.P.

 

4.000% Notes due 2018

 

New York Stock Exchange

Prologis, L.P.

 

1.375% Notes due 2020

 

New York Stock Exchange

Prologis, L.P.

 

1.375% Notes due 2021

 

New York Stock Exchange

Prologis, L.P.

 

3.000% Notes due 2022

 

New York Stock Exchange

Prologis, L.P.

 

3.375% Notes due 2024

 

New York Stock Exchange

Prologis, L.P.

 

3.000% Notes due 2026

 

New York Stock Exchange

 

Securities registered pursuant to Section 12(g) of the Act:

Prologis, Inc. – NONE

Prologis, L.P. – NONE

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Prologis, Inc.:  Yes  No

Prologis, L.P.:  Yes  No

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Prologis, Inc.:  Yes No

Prologis, L.P.:  Yes No

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Prologis, Inc.:  Yes  No   Prologis, L.P.:  Yes  No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website; if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter periods that the registrant was required to submit and post such files). Prologis, Inc.:  Yes  No    Prologis, L.P.:  Yes  No

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 

 

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

 

Prologis, Inc.:

   Large accelerated filer

   Accelerated filer

 

   Non-accelerated filer (do not check if a smaller reporting company)

   Smaller reporting company

 

Prologis, L.P.:

   Large accelerated filer

   Accelerated filer

 

   Non-accelerated filer (do not check if a smaller reporting company)

   Smaller reporting company

 

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

Prologis, Inc.:  Yes  No

Prologis, L.P.:  Yes  No

 

Based on the closing price of Prologis, Inc.’s common stock on June 30, 2016, the aggregate market value of the voting common equity held by nonaffiliates of Prologis, Inc. was $25,583,323,441.

 

The number of shares of Prologis, Inc.’s common stock outstanding at February 10, 2017, was approximately 529,345,000.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of Part III of this report are incorporated by reference to the registrant’s definitive proxy statement for the 2017 annual meeting of its stockholders or will be provided in an amendment filed on Form 10-K/A.

 

 

 


EXPLANATORY NOTE

 

This report combines the annual reports on Form 10-K for the year ended December 31, 2016, of Prologis, Inc. and Prologis, L.P. Unless stated otherwise or the context otherwise requires, references to “Prologis, Inc.” or the “Parent” mean Prologis, Inc. and its consolidated subsidiaries; and references to “Prologis, L.P.” or the “Operating Partnership” mean Prologis, L.P., and its consolidated subsidiaries. The terms “the Company,” “Prologis,” “we,” “our” or “us” means the Parent and the Operating Partnership collectively.

 

The Parent is a real estate investment trust (a “REIT”) and the general partner of the Operating Partnership. At December 31, 2016, the Parent owned an approximate 97.42% common general partnership interest in the Operating Partnership and 100% of the preferred units in the Operating Partnership. The remaining approximate 2.58% common limited partnership interests are owned by nonaffiliated investors and certain current and former directors and officers of the Parent. As the sole general partner of the Operating Partnership, the Parent has complete responsibility and discretion in the day-to-day management and control of the Operating Partnership.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 

 

 


TABLE OF CONTENTS

 

Item

 

Description

 

Page

 

 

PART I

 

 

1.

 

Business

 

3

 

 

The Company

 

3

 

 

Business Strategy and Operating Segments

 

5

 

 

Code of Ethics and Business Conduct

 

7

 

 

Environmental Matters

 

8

 

 

Insurance Coverage

 

8

1A.

 

Risk Factors

 

8

1B.

 

Unresolved Staff Comments

 

15

2.

 

Properties

 

15

 

 

Geographic Distribution

 

15

 

 

Lease Expirations

 

18

 

 

Co-Investment Ventures

 

19

3.

 

Legal Proceedings

 

19

4.

 

Mine Safety Disclosures

 

19

 

 

PART II

 

 

5.

 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

20

 

 

Market Information and Holders

 

20

 

 

Preferred Stock Dividends

 

21

 

 

Sale of Unregistered Securities

 

21

 

 

Securities Authorized for Issuance Under Equity Compensation Plans

 

21

 

 

Other Stockholder Matters

 

21

6.

 

Selected Financial Data

 

22

7.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

22

 

 

Management’s Overview

 

22

 

 

Results of Operations

 

23

 

 

Environmental Matters

 

32

 

 

Liquidity and Capital Resources

 

33

 

 

Off-Balance Sheet Arrangements

 

37

 

 

Contractual Obligations

 

38

 

 

Critical Accounting Policies

 

38

 

 

New Accounting Pronouncements

 

40

 

 

Funds from Operations Attributable to Common Stockholders/Unitholders ("FFO")

 

40

7A.

 

Quantitative and Qualitative Disclosures About Market Risk

 

42

8.

 

Financial Statements and Supplementary Data

 

43

9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

43

9A.

 

Controls and Procedures

 

43

9B.

 

Other Information

 

44

 

 

PART III

 

 

10.

 

Directors, Executive Officers and Corporate Governance

 

44

11.

 

Executive Compensation

 

44

12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

44

13.

 

Certain Relationships and Related Transactions, and Director Independence

 

45

14.

 

Principal Accounting Fees and Services

 

45

 

 

PART IV

 

 

15.

 

Exhibits, Financial Statements and Schedules

 

45

16.

 

Form 10-K Summary

 

45

 

2


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, 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) national, international, regional and local economic and political climates, (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 REIT status, tax structuring and changes in income tax 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, and (x) those additional factors discussed under Item 1A. Risk Factors in this report. We undertake no duty to update any forward-looking statements appearing in this report except as may be required by law.

 

PART I

 

ITEM 1. Business

 

Prologis, Inc. is a self-administered REIT and is the sole general partner of Prologis, L.P. 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., collectively.

 

Prologis, Inc. began operating as a fully integrated real estate company in 1997 and elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (“Internal Revenue Code”). We believe the current organization and method of operation will enable Prologis, Inc. to maintain its status as a REIT. Prologis, L.P. also was formed in 1997.

 

Our corporate headquarters are at Pier 1, Bay 1, San Francisco, California 94111, and our other principal offices are located in Amsterdam, Denver, Luxembourg, Mexico City, Shanghai, Singapore and Tokyo.

 

Our Internet address is www.prologis.com. All reports required to be filed with the Securities and Exchange Commission (“SEC”) are available and can be accessed free of charge through the Investor Relations section of our website, www.prologis.com. The common stock of Prologis, Inc. is listed on the New York Stock Exchange (“NYSE”) under the ticker “PLD” and is a component of the Standard & Poor’s (“S&P”) 500.

 

THE COMPANY

 

We are the global leader in logistics real estate with a focus on high-barrier, high-growth markets. We own, manage and develop high-quality logistics facilities in the world’s most active centers of commerce. An investment in Prologis taps into key drivers of economic growth, including consumption, supply chain modernization, e-commerce and urbanization.

 

Customers turn to us because they know an efficient supply chain will make their businesses run better, and that a strategic relationship with Prologis will create a competitive advantage. We lease modern logistics facilities to a diverse base of approximately 5,200 customers. These facilities assist the efficient distribution of goods for the world’s best businesses and brands.

 

We invest in Class-A logistics facilities in the world’s primary population centers with high barriers to entry and supported by extensive transportation infrastructure (major airports, seaports, rail systems and highway systems). We believe our portfolio is the highest-quality logistics property portfolio in the industry because it is focused in those key markets. Our local teams actively manage the portfolio, which encompasses leasing and property management, new capital deployment activities and an opportunistic disposition program. The majority of our consolidated properties are in the United States (or “U.S.”); while outside the U.S., our properties are generally held in co-investment ventures, which reduces our exposure to movements in foreign currency. Therefore, we are principally an owner-operator in the U.S. and a manager-developer outside the U.S.

 

Macroeconomics and demographics are important drivers of our business; these drivers include population growth, consumption and rising affluence. In the developed markets of U.S., Europe and Japan, key factors are the reconfiguration of supply chains (strongly influenced by e-commerce trends), and the operational efficiencies that can be realized from our modern logistics facilities. In emerging markets, such as Brazil, China and Mexico, new affluence and the rise of the consumer classes have prompted demand as supply chains are constructed. Taken together, logistics real estate markets benefit from economic growth, as well as from the modernization of supply chains around the world.

 

3


We manage our business on an owned and managed basis, including properties wholly owned by us or owned by one of our co-investment ventures, which allows us to make decisions based on the property operations versus our ownership. We believe the operating fundamentals of our owned and managed portfolio are consistent with those of our consolidated portfolio, and therefore we generally look at operating metrics on an owned and managed basis.

 

At December 31, 2016, we owned or had investments in, on a wholly owned basis or through co-investment ventures, properties and development projects expected to total $52.1 billion in gross total investment across 676 million square feet (63 million square meters) in 20 countries spanning four continents. Our investment was $30.8 billion, which consisted of our wholly-owned properties and our pro rata (or ownership) share of the properties owned by our co-investment ventures.

 

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

 

 

Details of the 676 million square feet at December 31, 2016, in our owned and managed portfolio were as follows (dollars and square feet in millions):

 

 

 

U.S.

 

 

Other Americas

 

 

Europe

 

 

Asia

 

 

Total

 

Operating portfolio (number of buildings)

 

 

2,058

 

 

 

240

 

 

736

 

 

102

 

 

 

3,136

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating portfolio (square feet)

 

 

358

 

 

 

51

 

 

 

172

 

 

 

41

 

 

 

622

 

Development portfolio (square feet)

 

 

12

 

 

 

4

 

 

 

9

 

 

 

19

 

 

 

44

 

Other real estate properties (square feet)

 

 

7

 

 

 

-

 

 

 

2

 

 

 

1

 

 

 

10

 

Total square feet

 

 

377

 

 

 

55

 

 

 

183

 

 

 

61

 

 

 

676

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating portfolio (gross book value)

 

$

27,148

 

 

$

3,100

 

 

$

12,010

 

 

$

5,021

 

 

$

47,279

 

Development portfolio (TEI) (1)

 

 

924

 

 

 

304

 

 

 

669

 

 

 

1,488

 

 

 

3,385

 

Land portfolio (gross book value)

 

 

474

 

 

 

356

 

 

 

431

 

 

 

164

 

 

 

1,425

 

Total

 

$

28,546

 

 

$

3,760

 

 

$

13,110

 

 

$

6,673

 

 

$

52,089

 

 

4


(1)

Total expected investment (“TEI”) represents total estimated cost of development or expansion, including land, development and leasing costs without any depreciation. TEI is based on current projections and is subject to change. Non-U.S. dollar investments were translated to U.S. dollars using the exchange rate at period end.

 

Our operating portfolio includes stabilized logistics facilities in our owned and managed portfolio. A developed property moves into the operating portfolio when it meets stabilization. The property is considered stabilized when a development project has been completed for one year or is at least 90% occupied, whichever occurs first.

 

BUSINESS STRATEGY AND OPERATING SEGMENTS

 

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

 

REAL ESTATE –

RENTAL OPERATIONS

Generate revenues and net operating income (“NOI”) by maintaining high occupancy rates and increasing rents

REAL ESTATE –

DEVELOPMENT

Generate value from development

STRATEGIC CAPITAL

 

Access third-party capital to grow our business and earn recurring fees and promotes

We have a high-quality logistics portfolio that serves premier companies across the globe. For the year ended December 31, 2016, we:

 

generated over 90% of our consolidated revenues and NOI from our buildings in the U.S.

increased consolidated revenues and NOI over 12% from 2015

ended the year with consolidated occupancy of 97.0%

Development contributes to significant earnings growth as projects lease up and generate revenues and NOI. For the year ended December 31, 2016, we:

 

stabilized a total estimated investment in our owned and managed portfolio of $2.5 billion of development projects with an estimated weighted average margin of 25.5%

created $640 million of value (of which $571 million is our share)

Durable fee stream with more than 90% from perpetual or long-life co-investment ventures with some of the world’s largest institutional partners. For the year ended December 31, 2016, we:

 

generated approximately 90% of our consolidated Strategic Capital revenues from outside the U.S.

increased consolidated Strategic Capital revenues over 40% from 2015

 

Real Estate Operations

 

Rental Operations. Rental operations comprise the largest component of our operating segments and contributed approximately 90% of our consolidated revenues, earnings and funds from operations in 2016 (see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations for more information on funds from operations, a non-GAAP measure). We collect rent from our customers through operating leases, including reimbursements for the majority of our property operating costs. We expect to generate long-term internal growth by maintaining high occupancy rates, increasing rents and controlling expenses. We believe our active portfolio management, coupled with the skills of our property, leasing, maintenance, capital, energy and risk management teams, will allow us to maximize rental revenues across our portfolio. In 2016, over 90% of our consolidated revenues and NOI in this segment were generated in the U.S. NOI from this segment is calculated directly from our financial statements as rental revenues, rental recoveries and development management and other revenues less rental expenses and other expenses.

 

Development. We utilize (i) our land bank, (ii) the development expertise of our local teams, (iii) our customer relationships and (iv) our in-depth local knowledge in connection with our development activities. Successful development and redevelopment efforts increase both the rental revenues and the net asset value of our Real Estate Operations segment. We measure the value we created based on the increase in estimated fair value of a stabilized development property, as compared to the costs incurred. Generally, we develop properties in the U.S. for long-term hold and outside the U.S. for contribution to our co-investment ventures. Occasionally, we develop for sale to third parties.

 

Strategic Capital

 

Real estate is a capital-intensive business that requires growth capital. Our strategic capital business gives us access to third-party capital, both private and public, which allows us to diversify our sources of capital and therefore have a broader range of options to fund our growth. We co-invest with some of the world’s largest institutional partners to grow our business and provide incremental revenues. We also access alternative sources of equity through two publicly traded vehicles: Nippon Prologis REIT, Inc. (“NPR”) in Japan and FIBRA Prologis in Mexico. We tailor logistics portfolios to meet our partners’ specific needs, with a focus on long-term ventures and open-ended funds. We hold significant ownership interests in these ventures, aligning our interests with those of our partners.

5


 

We generate strategic capital revenues from our unconsolidated ventures principally 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 incentive fees (“promotes”) periodically during the life of a venture or upon liquidation. In 2016, we earned promote revenues in Europe of $89 million. Approximately 40% of promote revenues are paid as a combination of cash and stock awards pursuant to the terms of the Prologis Promote Plan and expensed through Strategic Capital Expenses. This segment contributed approximately 10% of our consolidated revenues, earnings and funds from operations in 2016. We plan to grow this business through increasing the assets under management in our existing ventures. In 2016, approximately 90% of the consolidated revenues and NOI in this segment were generated outside the U.S. NOI in this segment is calculated as Strategic Capital Revenues less Strategic Capital Expenses directly from each line item in the Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data and does not include property related NOI.

 

Competition

 

Competitively priced logistics space could impact our occupancy rates and have an adverse effect on how much rent we can charge, which in turn could affect both of our operating segments. We may face competition with regard to our capital deployment activities, including local, regional and national operators or developers. We also face competition from investment managers for institutional capital within our strategic capital business.

 

We believe we have competitive advantages due to our:

 

properties being focused in the world’s primary population centers with high barriers to entry and supported by extensive transportation infrastructure;

 

ability to respond quickly to customers’ needs for high-quality logistics facilities;

 

established relationships with key customers served by our local teams;

 

ability to leverage our organizational scale and structure to provide a single point of contact for our focus customers through our global customer solutions team;

 

property management and leasing expertise;

 

relationships and proven track record with current and prospective investors in our strategic capital business;

 

experience developing and managing logistics facilities;

 

well-positioned land bank; and

 

team members with experience in the land entitlement and development processes.

 

Customers

 

Our broad customer base represents a spectrum of international, national, regional and local logistics users. At December 31, 2016, in our Real Estate Operations segment representing our consolidated properties, we had more than 3,200 customers occupying 334 million square feet of logistics space. On an owned and managed basis, we had more than 5,200 customers occupying 625 million square feet of logistics space.

 

In our Strategic Capital segment, we view our partners and investors as our customers. At December 31, 2016, in our private ventures, we partnered with approximately 100 investors, several of which invest in multiple ventures.

 

6


The following table details our top 25 customers at December 31, 2016 (square feet in millions):

 

 

Consolidated – Real Estate Operations

 

 

 

Owned and Managed

 

Top Customers

% of NER (1)

 

 

Total Occupied Square Feet

 

 

Top Customers

% of NER (1)

 

 

Total Occupied Square Feet

 

1.   Amazon.com

 

5.0

 

 

 

13

 

 

1.   Amazon.com

 

3.1

 

 

 

15

 

2.   Home Depot

 

1.8

 

 

 

5

 

 

2.   DHL

 

1.6

 

 

 

10

 

3.   FedEx

 

1.3

 

 

 

3

 

 

3.   Geodis

 

1.2

 

 

 

9

 

4.   XPO Logistics

 

1.0

 

 

 

4

 

 

4.   XPO Logistics

 

1.2

 

 

 

9

 

5.   Wal-Mart

 

0.9

 

 

 

3

 

 

5.   Kuehne + Nagel

 

1.1

 

 

 

7

 

6.   BMW

 

0.9

 

 

 

3

 

 

6.   FedEx

 

1.0

 

 

 

4

 

7.   U.S. Government

 

0.9

 

 

 

1

 

 

7.   Home Depot

 

0.9

 

 

 

6

 

8.   Ingram Micro

 

0.8

 

 

 

2

 

 

8.   CEVA Logistics

 

0.9

 

 

 

6

 

9.   PepsiCo

 

0.7

 

 

 

3

 

 

9.   Wal-Mart

 

0.8

 

 

 

5

 

10. DSV Air and Sea

 

0.6

 

 

 

2

 

 

10. DSV Air and Sea

 

0.8

 

 

 

5

 

Top 10 Customers

 

13.9

 

 

 

39

 

 

Top 10 Customers

 

12.6

 

 

 

76

 

11. UPS

 

0.6

 

 

 

2

 

 

11. Nippon Express

 

0.7

 

 

 

3

 

12. Kuehne + Nagel

 

0.6

 

 

 

2

 

 

12. BMW

 

0.6

 

 

 

4

 

13. APL Logistics

 

0.6

 

 

 

2

 

 

13. UPS

 

0.6

 

 

 

3

 

14. Best Buy

 

0.6

 

 

 

2

 

 

14. Hitachi

 

0.5

 

 

 

2

 

15. DHL

 

0.5

 

 

 

2

 

 

15. DB Schenker

 

0.5

 

 

 

4

 

16. Cal Cartage Company

 

0.5

 

 

 

1

 

 

16. U.S. Government

 

0.5

 

 

 

1

 

17. Sears

 

0.5

 

 

 

2

 

 

17. Tesco

 

0.5

 

 

 

3

 

18. Kimberly-Clark

 

0.5

 

 

 

2

 

 

18. Ingram Micro

 

0.5

 

 

 

3

 

19. Geodis

 

0.5

 

 

 

2

 

 

19. Panalpina

 

0.4

 

 

 

2

 

20. NFI Industries

 

0.4

 

 

 

2

 

 

20. PepsiCo

 

0.4

 

 

 

3

 

21. Office Depot

 

0.4

 

 

 

1

 

 

21. Samsung Electronics

 

0.3

 

 

 

2

 

22. Kellogg's

 

0.4

 

 

 

2

 

 

22. Best Buy

 

0.3

 

 

 

2

 

23. Mohawk Industries

 

0.4

 

 

 

1

 

 

23. APL Logistics

 

0.3

 

 

 

2

 

24. C&S Wholesale Grocers

 

0.4

 

 

 

1

 

 

24. Under Armour

 

0.3

 

 

 

2

 

25. Anixter

 

0.4

 

 

 

1

 

 

25. La Poste

 

0.3

 

 

 

2

 

Top 25 Customers

 

21.2

 

 

 

64

 

 

Top 25 Customers

 

19.3

 

 

 

114

 

 

(1)

Net effective rent (“NER”) is calculated using the estimated total cash to be received over the term of the lease (including base rent and expense reimbursements) divided by the lease term to determine the amount of rent and expense reimbursements received per year. Amounts derived in a currency other than the U.S. dollar have been translated using the average rate from the previous twelve months.

 

Employees

 

The following table summarizes our employee base at December 31, 2016:

 

Regions

 

Number of Employees

 

U.S. (1)

 

 

830

 

Other Americas

 

 

105

 

Europe

 

 

370

 

Asia

 

 

225

 

Total

 

 

1,530

 

 

(1)

This includes employees who are employed in the U.S. but also support other regions.

 

We allocate our employees who perform property management functions to our Real Estate Operations segment and Strategic Capital segment based on the size of the respective portfolios. Employees who perform only Strategic Capital functions are allocated directly to that segment.

 

We believe we have good relationships with our employees. Prologis employees are not organized under collective bargaining agreements, although some employees in Europe are represented by statutory Works Councils and as such, benefit from applicable labor agreements.

 

CODE OF ETHICS AND BUSINESS CONDUCT

 

We maintain a Code of Ethics and Business Conduct applicable to our board of directors (the “Board”) and all of our officers and employees, including the principal executive officer, the principal financial officer and the principal accounting officer, and other people performing similar functions. A copy of our Code of Ethics and Business Conduct is available on our website, www.prologis.com. In addition to being accessible through our website, copies of our Code of Ethics and Business Conduct can be obtained, free of charge, upon written request to Investor Relations, Pier 1, Bay 1, San Francisco, California 94111. Any amendments to or waivers of our Code of Ethics and Business Conduct that apply to the principal executive officer, the principal financial officer, the principal accounting officer, or other people performing similar functions, and that relate to any matter enumerated in Item 406(b) of Regulation S-K, will be disclosed on our website.

 

7


ENVIRONMENTAL MATTERS

 

We are exposed to various environmental risks that may result in unanticipated losses and affect our operating results and financial condition. Either the previous owners or we have conducted environmental reviews on a majority of the properties we have acquired, including land. While some of these assessments have led to further investigation and sampling, none of the environmental assessments has revealed an environmental liability that we believe would have a material adverse effect on our business, financial condition or results of operations. See further discussion in Item 1A. Risk Factors and Note 17 to the Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data.

 

INSURANCE COVERAGE

 

We carry insurance coverage on our properties. We determine the type of coverage and the policy specifications and limits based on what we deem to be the risks associated with our ownership of properties and our business operations in specific markets. Such coverage typically includes property damage and rental loss insurance resulting from such perils as fire, windstorm, flood, earthquake and terrorism; commercial general liability insurance; and environmental insurance. Insurance is maintained through a combination of commercial insurance, self-insurance and a wholly-owned captive insurance entity. The costs to insure our properties are primarily covered through reimbursements from our customers. We believe that our insurance coverage contains policy specifications and insured limits that are customary for similar properties, business activities and markets and we believe our properties are adequately insured. See further discussion in Item 1A. Risk Factors.

 

ITEM 1A. Risk Factors

 

Our operations and structure involve various risks that could adversely affect our business and financial condition, including but not limited to, our financial position, results of operations, cash flow, ability to make distributions and payments to security holders and the market value of our securities. These risks relate to our consolidated company as well as our investments in unconsolidated entities and include among others, (i) general risks; (ii) risks related to our business; (iii) risks related to financing and capital and (iv) income tax risks.

 

General Risks

 

As a global company, we are subject to social, political and economic risks of doing business in many countries.

 

We conduct a significant portion of our business and employ a substantial number of people outside of the U.S. During 2016, we generated approximately $453 million or 17.9% of our revenues from operations outside the U.S. Circumstances and developments related to international and U.S. operations that could negatively affect us include, but are not limited to, the following factors:

 

difficulties and costs of staffing and managing international operations in certain regions, including differing employment practices and labor issues;

 

local businesses and cultural factors that differ from our usual standards and practices;

 

volatility in currencies and currency restrictions, which may prevent the transfer of capital and profits to the U.S.;

 

challenges in establishing effective controls and procedures to regulate operations in different regions and to monitor compliance with applicable regulations, such as the Foreign Corrupt Practices Act, the United Kingdom (“U.K.”) Bribery Act and other similar laws;  

 

unexpected changes in regulatory requirements, tax, tariffs and other laws within the U.S. or other countries in which we operate;

 

potentially adverse tax consequences;

 

the responsibility of complying with multiple and potentially conflicting laws, e.g., with respect to corrupt practices, employment and licensing;

 

the impact of regional or country-specific business cycles and economic instability, including instability in, or further withdrawals from, the European Union or other international trade alliances or agreements;

 

political instability, uncertainty over property rights, civil unrest, drug trafficking, political activism or the continuation or escalation of terrorist or gang activities;

 

foreign ownership restrictions in operations with the respective countries; and

 

access to capital may be more restricted, or unavailable on favorable terms or at all in certain locations.

 

In addition, we may be impacted by the ability of our non-U.S. subsidiaries to dividend or otherwise transfer cash among our subsidiaries, including transfers of cash to pay interest and principal on our debt, due to currency exchange control regulations, transfer pricing regulations and potentially adverse tax consequences, among other factors.

8


 

Disruptions in the global capital and credit markets may adversely affect our operating results and financial condition.

 

To the extent there is turmoil in the global financial markets, this turmoil has the potential to adversely affect (i) the value of our properties; (ii) the availability or the terms of financing that we have or may anticipate utilizing; (iii) our ability to make principal and interest payments on, or refinance any outstanding debt when due; and (iv) the ability of our customers to enter into new leasing transactions or satisfy rental payments under existing leases. Disruptions in the capital and credit markets may also adversely affect our ability to make distributions and payments to our security holders and the market price of our securities.

 

Our business and operations could suffer in the event of system failures or cyber security attacks.

 

Despite system redundancy, the implementation of security measures and the existence of a disaster recovery plan for our internal and hosted information technology systems, our systems are vulnerable to damages from any number of sources, including energy blackouts, natural disasters, terrorism, war, telecommunication failures and cyber security attacks, such as computer viruses or unauthorized access. Any system failure or accident that causes interruptions in our operations could result in a material disruption to our business. We may also incur additional costs to remedy damages caused by such disruptions. Any compromise of our security could result in a violation of applicable privacy and other laws, unauthorized access to information of ours and others, significant legal and financial exposure, damage to our reputation, loss or misuse of the information and a loss of confidence in our security measures, which could harm our business.

 

Risks associated with our dependence on key personnel.

 

We depend on the deep industry knowledge and the efforts of our executive officers and other key employees. From time to time, our personnel and their roles may change. While we believe that we are able to retain our key talent and find suitable employees to meet our personnel needs, the loss of key personnel, any change in their roles or the limitation of their availability could adversely affect our business. If we are unable to continue to attract and retain our executive officers, or if compensation costs required to attract and retain key employees become more expensive, our performance and competitive position could be materially adversely affected.

 

Our business could be adversely impacted if we have deficiencies in our disclosure controls and procedures or internal control over financial reporting.

 

The design and effectiveness of our disclosure controls and procedures and internal control over financial reporting may not prevent all errors, misstatements or misrepresentations. While management continually reviews the effectiveness of our disclosure controls and procedures and internal control over financial reporting, there can be no guarantee that our internal control over financial reporting will be effective in accomplishing all control objectives all of the time. Deficiencies, including any material weakness, in our internal control over financial reporting that may occur in the future could result in misstatements or restatements of our financial statements or a decline in the price of our securities.

 

The depreciation in the value of the foreign currency in countries where we have a significant investment may adversely affect our results of operations and financial position.

 

We pursue growth opportunities in international markets where the U.S. dollar is not the functional currency. At December 31, 2016, approximately $6.6 billion or 22.0% of our total consolidated assets are invested in a currency other than the U.S. dollar, primarily the British pound sterling, Canadian dollar, euro and Japanese yen. As a result, we are subject to foreign currency risk due to potential fluctuations in exchange rates between foreign currencies and the U.S. dollar. A significant change in the value of the foreign currency of one or more countries where we have a significant investment may have a material adverse effect on our business and, in particular, our U.S. dollar reported financial position and results of operations and debt covenant ratios. Although we attempt to mitigate adverse effects by borrowing under debt agreements denominated in foreign currencies and using derivative contracts, there can be no assurance that those attempts to mitigate foreign currency risk will be successful.

 

Our hedging of foreign currency and interest rate risk may not effectively limit our exposure to other risks.

 

Hedging arrangements involve risks, such as the risk of fluctuation in the relative value of the foreign currency or interest rates and the risk that counterparties may fail to honor their obligations under these arrangements. The funds required to settle such arrangements could be significant depending on the stability and movement of the hedged foreign currency or the size of the underlying financing and the applicable interest rates at the time of the breakage. The failure to hedge effectively against foreign exchange changes or interest rate changes may adversely affect our business.

 

Compliance or failure to comply with regulatory requirements could result in substantial costs.

 

We are required to comply with many regulations in different countries, including (but not limited to) the Foreign Corrupt Practices Act, the U.K Bribery Act and similar laws and regulations. Our properties are also subject to various federal, state and local regulatory requirements, such as the Americans with Disabilities Act and state and local fire and life-safety requirements. Noncompliance could result in the imposition of governmental fines or the award of damages to private litigants. While we believe that we are currently in material compliance with these regulatory requirements, the requirements may change or new requirements may be imposed that could require significant unanticipated expenditures by us. If we are required to make unanticipated expenditures to comply with these regulations, we may be adversely affected.

 

9


Risks Related to our Business

 

Real estate investments are not as liquid as certain other types of assets, which may reduce economic returns to investors.

 

Real estate investments are not as liquid as certain other types of investments and this lack of liquidity may limit our ability to react promptly to changes in economic or other conditions. Significant expenditures associated with real estate investments, such as secured mortgage payments, real estate taxes and maintenance costs, are generally not reduced when circumstances cause a reduction in income from the investments. As a REIT, under the Internal Revenue Code, we are only able to hold property for sale in the ordinary course of business through taxable REIT subsidiaries in order to not incur punitive taxation on any tax gain from the sale of such property. We may dispose of certain properties that have been held for investment to generate liquidity. If we do not satisfy certain safe harbors or we believe there is too much risk of incurring the punitive tax on any tax gain from the sale, we may not pursue such sales.

 

We may decide to sell properties to certain of our unconsolidated co-investment ventures or third parties to generate proceeds to fund our capital deployment activities. Our ability to sell properties on advantageous terms is affected by: (i) competition from other owners of properties that are trying to dispose of their properties; (ii) market conditions, including the capitalization rates applicable to our properties; and (iii) other factors beyond our control. If our competitors sell assets similar to assets we intend to divest in the same markets or at valuations below our valuations for comparable assets, we may be unable to divest our assets at favorable pricing or at all. The unconsolidated co-investment ventures or third parties who might acquire our properties may need to have access to debt and equity capital, in the private and public markets, in order to acquire properties from us. Should they have limited or no access to capital on favorable terms, then dispositions could be delayed.

 

If we do not have sufficient cash available to us through our operations, sales or contributions of properties or available credit facilities to continue operating our business as usual, we may need to find alternative ways to increase our liquidity. Such alternatives may include, without limitation, divesting ourselves of properties, whether or not they otherwise meet our strategic objectives to keep in the long term, at less than optimal terms, incurring debt, entering into leases with new customers at lower rental rates or less than optimal terms or entering into lease renewals with our existing customers without an increase in rental rates. There can be no assurance, however, that such alternative ways to increase our liquidity will be available to us. Additionally, taking such measures to increase our liquidity may adversely affect our business, and in particular, our distributable cash flow and debt covenants.

 

Our investments are concentrated in the logistics sector and our business would be adversely affected by an economic downturn in that sector.

 

Our investments in real estate assets are concentrated in the logistics sector. This concentration may expose us to the risk of economic downturns in this sector to a greater extent than if our business activities were more diversified.

 

General economic conditions and other events or occurrences that affect areas in which our properties are geographically concentrated, may impact financial results.

 

We are exposed to general economic conditions, local, regional, national and international economic conditions and other events and occurrences that affect the markets in which we own properties. Our operating performance is further impacted by the economic conditions of the specific markets in which we have concentrations of properties.

 

At December 31, 2016, approximately 33.0% of our consolidated operating properties or $8.0 billion (based on consolidated gross book value, or investment before depreciation) are located in California, which represented 26.3% of the aggregate square footage of our operating properties and 33.7% of our NOI. Our revenues from, and the value of, our properties located in California may be affected by local real estate conditions (such as an oversupply of or reduced demand for logistics properties) and the local economic climate. Business layoffs, downsizing, industry slowdowns, changing demographics and other factors may adversely impact California’s economic climate. Because of the number of properties, we have located in California, a downturn in California’s economy or real estate conditions could adversely affect our business.  

 

In addition to California, we also have significant holdings (defined as more than 3.0% of total consolidated investment before depreciation) in operating properties in certain markets located in Central and Eastern Pennsylvania, Chicago, Dallas/Fort Worth, New Jersey/New York City, Seattle and South Florida. Our operating performance could be adversely affected if conditions become less favorable in any of the markets in which we have a concentration of properties. Conditions such as an oversupply of logistics space or a reduction in demand for logistics space, among other factors, may impact operating conditions. Any material oversupply of logistics space or material reduction in demand for logistics space could adversely affect our overall business.  

 

In addition, our owned and managed portfolio, including the unconsolidated co-investment ventures in which we invest, has concentrations of properties in the same markets mentioned above, as well as in markets in France, Germany, Japan and the U.K., and are subject to the economic conditions in those markets.

 

A number of our investments, both wholly-owned and owned through co-investment ventures, are located in areas that are known to be subject to earthquake activity. U.S. properties located in active seismic areas include properties in the San Francisco Bay Area, Los Angeles, and Seattle. International properties located in active seismic areas include Japan and Mexico. We generally carry earthquake insurance on our properties located in areas historically subject to seismic activity, subject to coverage limitations and deductibles, if we believe it is commercially reasonable. We evaluate our earthquake insurance coverage annually in light of current industry practice through an analysis prepared by outside consultants and in some specific instances have elected to self-insure our earthquake exposure based on this analysis. We have elected not to carry earthquake insurance for our assets in Japan based on this analysis.

10


 

Furthermore, a number of our properties are located in areas that are known to be subject to hurricane or flood risk. We carry hurricane and flood hazard insurance on all of our properties located in areas historically subject to such activity, subject to coverage limitations and deductibles, if we believe it is commercially reasonable. We evaluate our insurance coverage annually in light of current industry practice through an analysis prepared by outside consultants.

 

Investments in real estate properties are subject to risks that could adversely affect our business.

 

Investments in real estate properties are subject to varying degrees of risk. While we seek to minimize these risks through geographic diversification of our portfolio, market research and our asset management capabilities, these risks cannot be eliminated. Factors that may affect real estate values and cash flows include:

 

local conditions, such as oversupply or a reduction in demand;

 

technological changes, such as reconfiguration of supply chains, autonomous vehicles, robotics, 3D printing or other technologies;

 

the attractiveness of our properties to potential customers and competition from other available properties;

 

increasing costs of maintaining, insuring, renovating and making improvements to our properties;

 

our ability to rehabilitate and reposition our properties due to changes in the business and logistics needs of our customers;

 

our ability to control rents and variable operating costs; and

 

governmental regulations and the associated potential liability under, and changes in, environmental, zoning, usage, tax, tariffs and other laws.

 

We may be unable to lease vacant space or renew leases or re-lease space on favorable terms as leases expire.

 

Our operating results and distributable cash flow would be adversely affected if a significant number of our customers were unable to meet their lease obligations. We are also subject to the risk that, upon the expiration of leases for space located in our properties, leases may not be renewed by existing customers, the space may not be re-leased to new customers or the terms of renewal or re-leasing (including the cost of required renovations or concessions to customers) may be less favorable to us than current lease terms. Our competitors may offer space at rental rates below current market rates or below the rental rates we currently charge our customers, we may lose potential customers, and we may be pressured to reduce our rental rates below those we currently charge to retain customers when our customers’ leases expire. In the event of default by a significant number of customers, we may experience delays and incur substantial costs in enforcing our rights as landlord, and we may be unable to re-lease spaces. A customer may experience a downturn in its business, which may cause the loss of the customer or may weaken its financial condition, resulting in the customer’s failure to make rental payments when due or requiring a restructuring that might reduce cash flow from the lease. In addition, a customer may seek the protection of bankruptcy, insolvency or similar laws, which could result in the rejection and termination of such customer’s lease and thereby cause a reduction in our available cash flow.

 

We may acquire properties, which involves risks that could adversely affect our business and financial condition.  

 

We have acquired properties and will continue to acquire properties, both through the direct acquisition of real estate and through the acquisition of entities that own the real estate and through additional investments in co-investment ventures that acquire properties. The acquisition of properties involves risks, including the risk that the acquired property will not perform as anticipated and that any actual costs for rehabilitation, repositioning, renovation and improvements identified in the pre-acquisition due diligence process will exceed estimates. When we acquire properties, we may face risks associated with a lack of market knowledge or understanding of the local economy, forging new business relationships in the area and unfamiliarity with local government and permitting procedures. Additionally, there is, and it is expected there will continue to be, significant competition for properties that meet our investment criteria as well as risks associated with obtaining financing for acquisition activities. The acquired properties or entities may be subject to liabilities, which may be without any recourse, or with only limited recourse, with respect to unknown liabilities. As a result, if a liability were asserted against us based on ownership of any of these entities or properties, then we may have to pay substantial sums to settle it.

 

Our real estate development strategies may not be successful.

 

Our real estate development strategy is focused on monetizing land in the future through development of logistics facilities to hold for long-term investment, contribution or sale to a co-investment venture or third party, depending on market conditions, our liquidity needs and other factors. We may increase our investment in the development, renovation and redevelopment business and we expect to complete the build-out and leasing of our current development portfolio. We may also develop, renovate and redevelop properties within existing or newly formed co-investment ventures. The real estate development, renovation and redevelopment business includes the following significant risks:

 

we may not be able to obtain financing for development projects on favorable terms or at all;

 

we may explore development opportunities that may be abandoned and the related investment impaired;

11


 

we may not be able to obtain, or may experience delays in obtaining, all necessary zoning, land-use, building, occupancy and other governmental permits and authorizations;

 

we may have construction costs, total investment amounts and our share of remaining funding that exceed our estimates and projects may not be completed, delivered or stabilized as planned due to defects or other issues;

 

we may not be able to attract third-party investment in new development co-investment ventures or sufficient customer demand for our product;

 

we may have properties that perform below anticipated levels, producing cash flow below budgeted amounts;

 

we may seek to sell certain land parcels and not be able to find a third party to acquire such land or the sales price will not allow us to recover our investment, resulting in impairment charges;

 

we may not be able to lease properties we develop on favorable terms or at all;

 

we may not be able to capture the anticipated enhanced value created by our value-added properties on expected timetables or at all;

 

we may experience delays (temporary or permanent) if there is public or government opposition to our activities; and

 

we may have substantial renovation, new development and redevelopment activities, regardless of their ultimate success, that require a significant amount of management’s time and attention, diverting their attention from our day-to-day operations.

 

We are subject to risks and liabilities in connection with forming co-investment ventures, investing in new or existing co-investment ventures, attracting third-party investment and investing in and managing properties through co-investment ventures.

 

At December 31, 2016, we had investments in real estate containing approximately 403 million square feet held through co-investment ventures, both public and private. Our organizational documents do not limit the amount of available funds that we may invest in these ventures, and we may and currently intend to develop and acquire properties through co-investment ventures and investments in other entities when warranted by the circumstances. However, there can be no assurance that we will be able to form new co-investment ventures, or attract third-party investment or that additional investments in new or existing ventures to develop or acquire properties will be successful. Further, there can be no assurance that we are able to realize value from such investments.

 

Our co-investment ventures involve certain additional risks that we do not otherwise face, including:

 

our partners may share certain approval rights over major decisions made on behalf of the ventures;

 

if our partners fail to fund their share of any required capital contributions, then we may choose to contribute such capital;

 

our partners might have economic or other business interests or goals that are inconsistent with our business interests or goals that would affect our ability to operate the property;

 

the venture or other governing agreements often restrict the transfer of an interest in the co-investment venture or may otherwise restrict our ability to sell the interest when we desire or on advantageous terms;

 

our relationships with our partners are generally contractual in nature and may be terminated or dissolved under the terms of the agreements, and in such event, we may not continue to manage or invest in the assets underlying such relationships resulting in reduced fee revenues or causing a need to purchase such interest to continue ownership; and

 

disputes between us and our partners may result in litigation or arbitration that would increase our expenses and prevent our officers and directors from focusing their time and effort on our business and result in subjecting the properties owned by the applicable co-investment venture to additional risk.

 

We generally seek to maintain sufficient influence over our co-investment ventures to permit us to achieve our business objectives; however, we may not be able to continue to do so indefinitely. We have formed publicly traded investment vehicles, such as NPR and FIBRA Prologis, for which we serve as sponsor or manager. We have contributed, and may continue to contribute, assets into such vehicles. There is a risk that our managerial relationship may be terminated. 

 

We are exposed to various environmental risks, including the potential impacts of future climate change, which may result in unanticipated losses that could affect our business and financial condition.

 

Under various federal, state and local laws, ordinances and regulations, a current or previous owner, developer or operator of real estate may be liable for the costs of removal or remediation of certain hazardous or toxic substances. The costs of removal or remediation of such substances could be substantial. Such laws often impose liability without regard to whether the owner or operator

12


knew of, or was responsible for, the release or presence of such hazardous substances. In addition, third parties may sue the owner or operator of a site for damages based on personal injury, property damage or other costs, including investigation and clean-up costs, resulting from the environmental contamination.

 

Environmental laws in some countries, including the U.S., also require that owners or operators of buildings containing asbestos properly manage and maintain the asbestos, adequately inform or train those who may come into contact with asbestos and undertake special precautions, including removal or other abatement, in the event that asbestos is disturbed during building renovation or demolition. These laws may impose fines and penalties on building owners or operators who fail to comply with these requirements and may allow third parties to seek recovery from owners or operators for personal injury associated with exposure to asbestos. Some of our properties are known to contain asbestos-containing building materials.

 

In addition, some of our properties are leased or have been leased, in part, to owners and operators of businesses that use, store or otherwise handle petroleum products or other hazardous or toxic substances, creating a potential for the release of such hazardous or toxic substances. Furthermore, certain of our properties are on, adjacent to or near other properties that have contained or currently contain petroleum products or other hazardous or toxic substances, or upon which others have engaged, are engaged or may engage in activities that may release such hazardous or toxic substances. From time to time, we may acquire properties, or interests in properties, with known adverse environmental conditions for which we believe that the environmental liabilities associated with these conditions are quantifiable and that the acquisition will yield a superior risk-adjusted return. In connection with certain divested properties, we have agreed to remain responsible for, and to bear the cost of, remediating or monitoring certain environmental conditions on the properties.

 

We are also exposed to potential physical risks from possible future changes in climate. Our logistics facilities may be exposed to rare catastrophic weather events, such as severe storms or floods. If the frequency of extreme weather events increases due to climate change, our exposure to these events could increase. We do not currently consider ourselves to be exposed to regulatory risks related to climate change, as our operations generally do not emit a significant amount of greenhouse gases. However, we may be adversely impacted as a real estate developer in the future by potential impacts to the supply chain or stricter energy efficiency standards for buildings. We cannot give any assurance that other such conditions do not exist or may not arise in the future. The presence of such substances on our real estate properties could adversely affect our ability to lease, develop or sell such properties or to borrow using such properties as collateral, and this may have an adverse effect on our business and financial condition, and in particular, our distributable cash flow.

 

Our insurance coverage does not include all potential losses.

 

We and our unconsolidated co-investment ventures carry insurance coverage including property damage and rental loss insurance resulting from certain perils such as fire and additional perils as covered under an extended coverage policy, namely windstorm, flood, earthquake and terrorism; commercial general liability insurance; and environmental insurance, as appropriate for the markets where each of our properties and business operations are located. The insurance coverage contains policy specifications and insured limits customarily carried for similar properties, business activities and markets. We believe our properties and the properties of our unconsolidated co-investment ventures are adequately insured. Certain losses, however, including losses from floods, earthquakes, acts of war, acts of terrorism or riots, generally are not insured against or generally are not fully insured against because it is not deemed economically feasible or prudent to do so. If an uninsured loss or a loss in excess of insured limits occurs with respect to one or more of our properties, we could experience a significant loss of capital invested and future revenues in these properties and could potentially remain obligated under any recourse debt associated with the property.

 

Furthermore, we cannot be sure that the insurance companies will be able to continue to offer products with sufficient coverage at commercially reasonable rates. If we experience a loss that is uninsured or that exceeds insured limits with respect to one or more of our properties or if the insurance companies fail to meet their coverage commitments to us in the event of an insured loss, then we could lose the capital invested in the damaged properties, as well as the anticipated future revenues from those properties and, if there is recourse debt, then we would remain obligated for any mortgage debt or other financial obligations related to the properties. Any such losses or higher insurance costs could adversely affect our business.  

 

Risks Related to Financing and Capital

 

We may be unable to refinance our debt or our cash flow may be insufficient to make required debt payments.

 

We are subject to risks normally associated with debt financing, including the risk that our cash flow will be insufficient to meet required payments of principal and interest. There can be no assurance that we will be able to refinance any maturing indebtedness, that such refinancing would be on terms as favorable as the terms of the maturing indebtedness, or that we will be able to otherwise obtain funds by selling assets or raising equity to make required payments on maturing indebtedness. If we are unable to refinance our indebtedness at maturity or meet our payment obligations, our business and financial condition will be negatively impacted and, if the maturing debt is secured, the lender may foreclose on the property securing such indebtedness. Our credit facilities and certain other debt bears interest at variable rates. Increases in interest rates would increase our interest expense under these agreements.

 

Covenants in our credit agreements could limit our flexibility and breaches of these covenants could adversely affect our financial condition.

 

The terms of our various credit agreements, including our credit facilities, the indentures under which our senior notes are issued and other note agreements, require us to comply with a number of customary financial covenants, such as maintaining debt service

13


coverage, leverage ratios, fixed charge ratios and other operating covenants including maintaining insurance coverage. These covenants may limit our flexibility to run our business, and breaches of these covenants could result in defaults under the instruments governing the applicable indebtedness. If we default under the covenant provisions and are unable to cure the default, refinance the indebtedness or meet payment obligations, our business and financial condition generally and, in particular, the amount of our distributable cash flow could be adversely affected.  

 

Adverse changes in our credit ratings could negatively affect our financing activity.

 

The credit ratings of our senior unsecured notes and preferred stock are based on our operating performance, liquidity and leverage ratios, overall financial position and other factors employed by the credit rating agencies in their rating analyses of us. Our credit ratings can affect the amount of capital we can access, as well as the terms and pricing of any debt we may incur. There can be no assurance that we will be able to maintain our current credit ratings, and in the event our credit ratings are downgraded, we would likely incur higher borrowing costs and may encounter difficulty in obtaining additional financing. Also, a downgrade in our credit ratings may trigger additional payments or other negative consequences under our credit facilities and other debt instruments. 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.

 

At December 31, 2016, our credit ratings were A3 from Moody’s and A- from S&P, both with stable outlook. 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.

 

We depend on external sources of capital.

 

To qualify as a REIT, we are required each year to distribute at least 90% of our REIT taxable income (determined without regard to the dividends-paid deduction and by excluding any net capital gain) to our stockholders and we may be subject to tax to the extent our taxable income is not fully distributed. Historically, we have satisfied these distribution requirements by making cash distributions to our stockholders, but we may choose to satisfy these requirements by making distributions of cash or other property, including, in limited circumstances, our own stock. For distributions with respect to taxable years that ended on or before December 31, 2016, and in some cases declared as late as December 31, 2016, a REIT can satisfy up to 90% of the distribution requirements discussed above through the distribution of shares of our stock if certain conditions are met. Assuming we continue to satisfy these distribution requirements with cash, we may not be able to fund all future capital needs, including acquisition and development activities, from cash retained from operations and may have to rely on third-party sources of capital. Furthermore, to maintain our REIT status and not have to pay federal income and excise taxes, we may need to borrow funds on a short-term basis to meet the REIT distribution requirements even if the then-prevailing market conditions are not favorable for these borrowings. These short-term borrowing needs could result from differences in timing between the actual receipt of cash and inclusion of income for federal income tax purposes, or the effect of nondeductible capital expenditures, the creation of reserves or required debt or amortization payments. Our ability to access debt and equity capital on favorable terms or at all depends on a number of factors, including general market conditions, the market’s perception of our growth potential, our current and potential future earnings and cash distributions and the market price of our securities.

 

Our stockholders may experience dilution if we issue additional common stock or units in the Operating Partnership.

 

Any additional future issuance of common stock or operating partnership units will reduce the percentage of our common stock and units owned by investors. In most circumstances, stockholders and unitholders will not be entitled to vote on whether or not we issue additional common stock or units. In addition, depending on the terms and pricing of any additional offering of our common stock or units and the value of the properties, our stockholders and unitholders may experience dilution in both book value and fair value of their common stock or units.

 

Income Tax Risks

 

The failure of Prologis, Inc. to qualify as a REIT would have serious adverse consequences.

 

Prologis, Inc. elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code commencing with the taxable year ended December 31, 1997. We believe we have operated Prologis, Inc. to qualify as a REIT under the Internal Revenue Code and believe that the current organization and method of operation comply with the rules and regulations promulgated under the Internal Revenue Code to enable Prologis, Inc. to continue to qualify as a REIT. However, it is possible that we are organized or have operated in a manner that would not allow Prologis, Inc. to qualify as a REIT, or that our future operations could cause Prologis, Inc. to fail to qualify. Qualification as a REIT requires us to satisfy numerous requirements (some annually and others on a quarterly basis) established under highly technical and complex sections of the Internal Revenue Code for which there are only limited judicial and administrative interpretations, and involves the determination of various factual matters and circumstances not entirely within our control. For example, to qualify as a REIT, Prologis, Inc. must derive at least 95% of its gross income in any year from qualifying sources. In addition, Prologis, Inc. must pay dividends to its stockholders aggregating annually at least 90% of its taxable income (determined without regard to the dividends paid deduction and by excluding capital gains) and must satisfy specified asset tests on a quarterly basis. The provisions of the Internal Revenue Code and applicable Treasury regulations regarding qualification as a REIT are more complicated for Prologis, Inc. because we hold assets through the Operating Partnership.

 

If Prologis, Inc. fails to qualify as a REIT in any taxable year, we will be required to pay federal income tax (including any applicable alternative minimum tax) on taxable income at regular corporate rates. Unless we are entitled to relief under certain statutory provisions, Prologis, Inc. would be disqualified from treatment as a REIT for the four taxable years following the year in which it lost the qualification. If Prologis, Inc. lost its REIT status, our net earnings would be significantly reduced for each of the years involved.

14


 

Furthermore, we own a direct or indirect interest in certain subsidiary REITs that elected to be taxed as REITs under Sections 856 through 860 of the Internal Revenue Code. Provided that each subsidiary REIT qualifies as a REIT, our interest in such subsidiary REIT will be treated as a qualifying real estate asset for purposes of the REIT asset tests, and any dividend income or gains derived by us from such subsidiary REIT will generally be treated as income that qualifies for purposes of the REIT gross income tests. To qualify as a REIT, the subsidiary REIT must independently satisfy all of the REIT qualification requirements. If such subsidiary REIT were to fail to qualify as a REIT, and certain relief provisions did not apply, it would be treated as a regular taxable corporation and its income would be subject to U.S. federal income tax. In addition, a failure of the subsidiary REIT to qualify as a REIT would have an adverse effect on the ability of Prologis, Inc. to comply with the REIT income and asset tests, and thus its ability to qualify as a REIT.

 

Certain property transfers may generate prohibited transaction income, resulting in a penalty tax on gain attributable to the transaction.

 

From time to time, we may transfer or otherwise dispose of some of our properties, including by contributing properties to our co-investment ventures. Under the Internal Revenue Code, any gain resulting from transfers of properties we hold as inventory or primarily for sale to customers in the ordinary course of business is treated as income from a prohibited transaction subject to a 100% penalty tax. We do not believe that our transfers or disposals of property or our contributions of properties into our co-investment ventures are prohibited transactions. However, whether property is held for investment purposes is a question of fact that depends on all the facts and circumstances surrounding the particular transaction. The Internal Revenue Service may contend that certain transfers or dispositions of properties by us or contributions of properties into our co-investment ventures are prohibited transactions. While we believe that the Internal Revenue Service would not prevail in any such dispute, if the Internal Revenue Service were to argue successfully that a transfer, disposition or contribution of property constituted a prohibited transaction, we would be required to pay a 100% penalty tax on any gain allocable to us from the prohibited transaction. In addition, income from a prohibited transaction might adversely affect our ability to satisfy the income tests for qualification as a REIT.

 

Legislative or regulatory action could adversely affect us.

 

In recent years, numerous legislative, judicial and administrative changes have been made to the U.S. and foreign income tax laws applicable to investments in real estate, REITs, similar entities and investments. Additional changes are likely to continue to occur in the future, both in and outside of the U.S. and may impact our taxation or that of our stockholders.

 

ITEM 1B. Unresolved Staff Comments

 

None.

 

ITEM 2. Properties

 

GEOGRAPHIC DISTRIBUTION

 

We invest in predominately logistics facilities. Our properties are typically used for distribution, storage, packaging, assembly and light manufacturing of consumer products. The vast majority of our operating properties are used by our customers for bulk distribution.

 

The following tables provide details of our consolidated operating properties, investment in land and development portfolio. We have also included operating property information below for our owned and managed portfolio. The owned and managed portfolio includes the properties we consolidate and the properties owned by our unconsolidated co-investment ventures reflected at 100% of the amount included in the ventures’ financial statements as calculated on a GAAP basis, not our proportionate share.

 

Included in the operating property information below for our consolidated operating properties are 646 buildings owned primarily by two co-investment ventures that we consolidate but of which we own less than 100% of the equity. No individual property or group of properties operating as a single business unit amounted to 10% or more of our consolidated total assets at December 31, 2016, or generated income equal to 10% or more of our consolidated gross revenues for the year ended December 31, 2016.

 

15


Dollars and square feet in the following tables are in millions and items notated by ‘0‘ indicate an amount that rounds to less than one million:  

 

 

 

Consolidated Operating Properties

 

 

Owned and Managed

 

Operating properties

 

Rentable Square Footage

 

 

Gross Book Value

 

 

Encumbrances (1)

 

 

Rentable Square Footage

 

 

Gross Book Value

 

Global Markets – U.S.:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Atlanta

 

 

16

 

 

$

712

 

 

$

128

 

 

 

17

 

 

$

812

 

Baltimore/Washington D.C.

 

 

6

 

 

 

518

 

 

 

68

 

 

 

8

 

 

 

704

 

Central Valley California

 

 

11

 

 

 

609

 

 

 

61

 

 

 

11

 

 

 

638

 

Central and Eastern Pennsylvania

 

 

18

 

 

 

1,103

 

 

 

56

 

 

 

18

 

 

 

1,104

 

Chicago

 

 

34

 

 

 

2,137

 

 

 

129

 

 

 

41

 

 

 

2,616

 

Dallas/Fort Worth

 

 

22

 

 

 

1,166

 

 

 

196

 

 

 

25

 

 

 

1,446

 

Houston

 

 

9

 

 

 

519

 

 

 

68

 

 

 

13

 

 

 

832

 

New Jersey/New York City

 

 

28

 

 

 

2,778

 

 

 

357

 

 

 

33

 

 

 

3,372

 

San Francisco Bay Area

 

 

16

 

 

 

1,630

 

 

 

10

 

 

 

19

 

 

 

1,972

 

Seattle

 

 

8

 

 

 

818

 

 

 

59

 

 

 

15

 

 

 

1,515

 

South Florida

 

 

11

 

 

 

1,136

 

 

 

128

 

 

 

15

 

 

 

1,501

 

Southern California

 

 

61

 

 

 

5,727

 

 

 

461

 

 

 

72

 

 

 

6,922

 

Regional Markets – U.S. (15 markets) (2)

 

 

68

 

 

 

3,546

 

 

 

584

 

 

 

70

 

 

 

3,608

 

Other Markets – U.S (5 markets)

 

 

1

 

 

 

59

 

 

 

-

 

 

 

1

 

 

 

106

 

Subtotal U.S.

 

 

309

 

 

 

22,458

 

 

 

2,305

 

 

 

358

 

 

 

27,148

 

Global Markets – Other Americas:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Brazil

 

 

-

 

 

 

-

 

 

 

-

 

 

 

8

 

 

 

505

 

Canada

 

 

8

 

 

 

635

 

 

 

145

 

 

 

8

 

 

 

635

 

Mexico:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Guadalajara

 

0

 

 

 

4

 

 

 

-

 

 

 

6

 

 

 

321

 

Mexico City

 

 

-

 

 

 

-

 

 

 

-

 

 

 

12

 

 

 

819

 

Monterrey

 

 

-

 

 

 

-

 

 

 

-

 

 

 

4

 

 

 

236

 

Regional Markets – Other Americas (3 markets)

 

0

 

 

 

14

 

 

 

-

 

 

 

13

 

 

 

584

 

Subtotal Other Americas

 

 

8

 

 

 

653

 

 

 

145

 

 

 

51

 

 

 

3,100

 

Global Markets – Europe:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Belgium

 

 

-

 

 

 

-

 

 

 

-

 

 

 

3

 

 

 

188

 

Czech Republic

 

 

1

 

 

 

35

 

 

 

-

 

 

 

11

 

 

 

663

 

France

 

 

2

 

 

 

78

 

 

 

-

 

 

 

33

 

 

 

2,141

 

Germany

 

 

2

 

 

 

120

 

 

 

-

 

 

 

23

 

 

 

1,648

 

Italy

 

 

1

 

 

 

68

 

 

 

-

 

 

 

10

 

 

 

528

 

Netherlands

 

0

 

 

 

20

 

 

 

-

 

 

 

18

 

 

 

1,281

 

Poland

 

 

1

 

 

 

51

 

 

 

-

 

 

 

25

 

 

 

1,338

 

Spain

 

 

1

 

 

 

35

 

 

 

-

 

 

 

8

 

 

 

537

 

U.K.

 

 

1

 

 

 

121

 

 

 

-

 

 

 

23

 

 

 

2,718

 

Regional Markets – Europe (3 markets)

 

 

1

 

 

47

 

 

 

-

 

 

 

17

 

 

 

960

 

Other Markets – Europe (1 market)

 

0

 

 

 

9

 

 

 

-

 

 

1

 

 

 

8

 

Subtotal Europe

 

 

10

 

 

 

584

 

 

 

-

 

 

 

172

 

 

 

12,010

 

Global Markets – Asia:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

China

 

 

2

 

 

 

69

 

 

 

-

 

 

 

14

 

 

 

627

 

Japan

 

 

2

 

 

 

165

 

 

 

-

 

 

 

26

 

 

 

4,265

 

Singapore

 

 

1

 

 

 

128

 

 

 

-

 

 

 

1

 

 

 

129

 

Subtotal Asia

 

 

5

 

 

 

362

 

 

 

-

 

 

 

41

 

 

 

5,021

 

Total operating portfolio (3)

 

 

332

 

 

 

24,057

 

 

 

2,450

 

 

 

622

 

 

 

47,279

 

Value-added properties

 

 

2

 

 

 

117

 

 

 

-

 

 

 

3

 

 

 

192

 

Total operating properties

 

 

334

 

 

$

24,174

 

 

$

2,450

 

 

 

625

 

 

$

47,471

 

16


 

 

 

Consolidated – Investment in Land

 

 

Consolidated – Development Portfolio

 

Region

 

Acres

 

 

Estimated Build Out Potential

(square feet) (4)

 

 

Current Investment

 

 

Rentable Square Footage

 

 

TEI (5)

 

Global Markets – U.S.:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Atlanta

 

 

135

 

 

 

2

 

 

$

4

 

 

 

1

 

 

$

49

 

Baltimore/Washington D.C.

 

 

81

 

 

0

 

 

 

21

 

 

 

-

 

 

 

-

 

Central Valley California

 

 

1,090

 

 

 

22

 

 

 

93

 

 

 

1

 

 

 

98

 

Central and Eastern Pennsylvania

 

 

137

 

 

 

2

 

 

 

24

 

 

 

-

 

 

 

-

 

Chicago

 

 

219

 

 

 

4

 

 

 

19

 

 

0

 

 

 

20

 

Dallas/Fort Worth

 

 

178

 

 

 

3

 

 

 

23

 

 

 

1

 

 

 

40

 

Houston

 

 

185

 

 

 

3

 

 

 

15

 

 

0

 

 

 

17

 

New Jersey/New York City

 

 

119

 

 

 

1

 

 

 

38

 

 

 

1

 

 

 

116

 

San Francisco Bay Area

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1

 

 

 

63

 

Seattle

 

 

43