e10vkza
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10-K/A
Amendment #1
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(Mark One)
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þ
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2007
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OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission File Number 1-12846
PROLOGIS
(Exact name of registrant as
specified in its charter)
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Maryland
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74-2604728
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(State or other jurisdiction
of incorporation or organization)
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(I.R.S. employer
identification no.)
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4545 Airport Way
Denver, CO 80239
(Address of principal executive
offices and zip code)
(303) 567-5000
(Registrants telephone
number, including area code)
Securities registered pursuant to
Section 12(b) of the Act:
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Name of each exchange
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Title of Each Class
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on which registered
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Common Shares of Beneficial Interest, par value $0.01 per share
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New York Stock Exchange
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Series F Cumulative Redeemable Preferred Shares of
Beneficial Interest, par
value $0.01 per share
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New York Stock Exchange
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Series G Cumulative Redeemable Preferred Shares of
Beneficial Interest par
value $0.01 per share
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New York Stock Exchange
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Securities registered pursuant to
Section 12(g) of the Act: NONE
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
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. Yes þ No o
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 registrants 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. Yes o No þ
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):
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Large accelerated filer
þ
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Accelerated filer
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Non-accelerated
filer o
(Do not check if a smaller reporting company)
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Smaller reporting
company o
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Securities Exchange
Act of
1934). Yes o No þ
Based on the closing price of the registrants shares on
June 30, 2007, the aggregate market value of the voting
common equity held by
non-affiliates
of the registrant was $14,561,373,852.
At February 22, 2008, there were outstanding approximately
258,202,700 common shares of beneficial interest of the
registrant.
DOCUMENTS INCORPORATED BY
REFERENCE
Portions of the registrants definitive proxy statement for
the 2008 annual meeting of its shareholders are incorporated by
reference in Part III of this report.
Explanatory Note:
This Annual Report on Form 10-K for
ProLogis for the year ended December 31, 2007 is being amended to
revise Part II, Item 8 and Part IV, Item 15 to
include audited Financial Statements for ProLogis North American
Industrial Fund, LP.
PART II
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ITEM 8.
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Financial
Statements and Supplementary Data
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Our
Consolidated Balance Sheets as of December 31, 2007 and 2006, our
Consolidated Statements of Earnings, Shareholders Equity and
Comprehensive Income and Cash Flows for each of the years in the
three-year period ended December 31, 2007, Notes to Consolidated
Financial Statements, Schedule III Real Estate and Accumulated
Depreciation and Financial Statements of ProLogis North American
Industrial Fund, LP, together with the reports of KPMG LLP,
Independent Registered Public Accounting Firm, are included under
Item 15 of this report and are incorporated herein by reference.
Selected unaudited quarterly financial data is presented in
Note 20 of our Consolidated Financial Statements.
PART IV
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ITEM 15.
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Exhibits,
Financial Statement Schedules
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The following documents are filed as part of this amendment:
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(a) |
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Financial Statements and Schedules: |
1. Financial Statements:
See the financial statements identified below.
2. Financial Statement Schedules:
Schedule III Real Estate and Accumulated Depreciation
All other schedules have been omitted since the required information is
presented in the Consolidated Financial Statements and the related Notes or
is not applicable.
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(b) |
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Exhibits: See the exhibit index on page 94 of this amendment, which is
incorporated herein by reference. |
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(c) |
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Financial Statements: See Index to Consolidated Financial Statements and Schedule III
below, which is incorporated by reference. |
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Page
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Financial Statements of ProLogis:
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3 |
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5 |
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6 |
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7 |
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8 |
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9 |
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58 |
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59 |
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77 |
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78 |
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79 |
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80 |
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81 |
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82 |
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2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders
ProLogis:
We have audited the accompanying consolidated balance sheets of
ProLogis and subsidiaries as of December 31, 2007 and 2006,
and the related consolidated statements of earnings,
shareholders equity and comprehensive income, and cash
flows for each of the years in the three-year period ended
December 31, 2007. These consolidated financial statements
are the responsibility of ProLogis management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of ProLogis and subsidiaries as of December 31,
2007 and 2006, and the results of their operations and their
cash flows for each of the years in the three-year period ended
December 31, 2007, in conformity with U.S. generally
accepted accounting principles.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
ProLogis internal control over financial reporting as of
December 31, 2007, based on criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), and our report dated February 27, 2008
expressed an unqualified opinion on the effectiveness of
ProLogis internal control over financial reporting.
KPMG LLP
Denver, Colorado
February 27, 2008
3
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders
ProLogis:
We have audited ProLogis internal control over financial
reporting as of December 31, 2007, based on criteria
established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO). ProLogis management is
responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness
of internal control over financial reporting. Our responsibility
is to express an opinion on ProLogis internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk. Our audit also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our
opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, ProLogis maintained, in all material respects,
effective internal control over financial reporting as of
December 31, 2007, based on criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of ProLogis and subsidiaries as of
December 31, 2007 and 2006, and the related consolidated
statements of earnings, shareholders equity and
comprehensive income, and cash flows for each of the years in
the three-year period ended December 31, 2007, and our
report dated February 27, 2008 expressed an unqualified
opinion on those consolidated financial statements.
KPMG LLP
Denver, Colorado
February 27, 2008
4
PROLOGIS
CONSOLIDATED STATEMENTS OF EARNINGS
Years Ended December 31, 2007, 2006 and 2005
(In thousands, except per share data)
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2007
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2006
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2005
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Revenues:
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Rental income
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$
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1,067,865
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$
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910,202
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$
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584,352
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CDFS disposition proceeds:
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Developed and repositioned properties
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2,530,377
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1,286,841
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1,140,457
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Acquired property portfolios
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2,475,035
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Property management and other fees and incentives
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104,719
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211,929
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66,934
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Development management and other income
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26,670
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37,420
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25,464
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Total revenues
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6,204,666
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2,446,392
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1,817,207
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Expenses:
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Rental expenses
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288,569
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239,221
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162,245
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Cost of CDFS dispositions:
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Developed and repositioned properties
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1,835,274
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993,926
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917,782
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Acquired property portfolios
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2,406,426
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General and administrative
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204,558
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153,516
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118,166
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Depreciation and amortization
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308,971
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286,807
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186,605
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Other expenses
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24,963
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13,013
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8,633
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Total expenses
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5,068,761
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1,686,483
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1,393,431
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Operating income
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1,135,905
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759,909
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423,776
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Other income (expense):
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Earnings from unconsolidated property funds
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94,453
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93,055
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46,078
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Earnings from CDFS joint ventures and other unconsolidated
investees
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11,165
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50,703
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6,421
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Interest expense
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(368,065
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)
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(294,403
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)
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(177,562
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)
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Interest income on notes receivable
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8,066
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16,730
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6,781
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Interest and other income, net
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25,935
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18,248
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10,724
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Total other income (expense)
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(228,446
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)
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(115,667
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)
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(107,558
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)
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Earnings before minority interest
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907,459
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644,242
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316,218
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Minority interest
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(6,003
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)
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(3,457
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)
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(5,243
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)
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Earnings before certain net gains
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901,456
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640,785
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310,975
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Gains recognized on dispositions of certain non-CDFS business
assets
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146,667
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81,470
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Foreign currency exchange gains, net
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7,915
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21,086
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15,979
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Earnings before income taxes
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1,056,038
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743,341
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326,954
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Income taxes:
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Current income tax expense
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68,349
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84,250
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14,847
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Deferred income tax expense (benefit)
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550
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(53,722
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)
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12,045
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Total income taxes
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68,899
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30,528
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26,892
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Earnings from continuing operations
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987,139
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712,813
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300,062
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Discontinued operations:
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Income attributable to disposed properties and assets held for
sale
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5,704
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24,311
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24,191
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Losses related to temperature-controlled distribution assets
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(25,150
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)
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Gains recognized on dispositions:
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Non-CDFS business assets
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52,776
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103,729
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86,444
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CDFS business assets
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28,721
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33,514
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10,616
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Total discontinued operations
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87,201
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161,554
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96,101
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Net earnings
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1,074,340
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874,367
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396,163
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Less preferred share dividends
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25,423
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25,416
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25,416
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Net earnings attributable to common shares
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$
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1,048,917
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$
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848,951
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$
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370,747
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Weighted average common shares outstanding Basic
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256,873
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245,952
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203,337
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Weighted average common shares outstanding Diluted
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267,226
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256,852
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213,713
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Net earnings per share attributable to common shares
Basic:
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Continuing operations
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$
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3.74
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$
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2.79
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$
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1.35
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Discontinued operations
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0.34
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|
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0.66
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0.47
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Net earnings per share attributable to common shares
Basic
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$
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4.08
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$
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3.45
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$
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1.82
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Net earnings per share attributable to common shares
Diluted:
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Continuing operations
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$
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3.61
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$
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2.69
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$
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1.31
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Discontinued operations
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0.33
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|
|
0.63
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0.45
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Net earnings per share attributable to common shares
Diluted
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$
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3.94
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$
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3.32
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$
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1.76
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Distributions per common share
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$
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1.84
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$
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1.60
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$
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1.48
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The accompanying notes are an integral part of these
Consolidated Financial Statements.
5
PROLOGIS
(In thousands, except per share data)
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December 31,
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2007
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2006
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ASSETS
|
Real estate
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$
|
16,578,845
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$
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13,897,091
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Less accumulated depreciation
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|
1,368,458
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|
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1,264,227
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|
|
|
|
|
|
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|
15,210,387
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12,632,864
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Investments in and advances to unconsolidated investees
|
|
|
2,345,277
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|
|
|
1,299,697
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Cash and cash equivalents
|
|
|
418,991
|
|
|
|
475,791
|
|
Accounts and notes receivable
|
|
|
340,039
|
|
|
|
439,791
|
|
Other assets
|
|
|
1,389,733
|
|
|
|
998,224
|
|
Discontinued operations assets held for sale
|
|
|
19,607
|
|
|
|
57,158
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
19,724,034
|
|
|
$
|
15,903,525
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Liabilities:
|
|
|
|
|
|
|
|
|
Debt
|
|
$
|
10,506,068
|
|
|
$
|
8,386,886
|
|
Accounts payable and accrued expenses
|
|
|
933,075
|
|
|
|
518,651
|
|
Other liabilities
|
|
|
769,408
|
|
|
|
546,129
|
|
Discontinued operations assets held for sale
|
|
|
424
|
|
|
|
1,012
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
12,208,975
|
|
|
|
9,452,678
|
|
|
|
|
|
|
|
|
|
|
Minority interest
|
|
|
78,661
|
|
|
|
52,268
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
Series C preferred shares at stated liquidation preference
of $50 per share; $0.01 par value; 2,000 shares issued
and outstanding at December 31, 2007 and 2006
|
|
|
100,000
|
|
|
|
100,000
|
|
Series F preferred shares at stated liquidation preference
of $25 per share; $0.01 par value; 5,000 shares issued
and outstanding at December 31, 2007 and 2006
|
|
|
125,000
|
|
|
|
125,000
|
|
Series G preferred shares at stated liquidation preference
of $25 per share; $0.01 par value; 5,000 shares issued
and outstanding at December 31, 2007 and 2006
|
|
|
125,000
|
|
|
|
125,000
|
|
Common shares; $0.01 par value; 257,712 shares issued
and outstanding at December 31, 2007 and
250,912 shares issued and outstanding at December 31,
2006
|
|
|
2,577
|
|
|
|
2,509
|
|
Additional paid-in capital
|
|
|
6,412,473
|
|
|
|
6,000,119
|
|
Accumulated other comprehensive income:
|
|
|
|
|
|
|
|
|
Unrealized (losses) gains on derivative contracts
|
|
|
(27,091
|
)
|
|
|
4,524
|
|
Foreign currency translation gains
|
|
|
302,413
|
|
|
|
212,398
|
|
Retained earnings (distributions in excess of net earnings)
|
|
|
396,026
|
|
|
|
(170,971
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
7,436,398
|
|
|
|
6,398,579
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
19,724,034
|
|
|
$
|
15,903,525
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
Consolidated Financial Statements.
6
PROLOGIS
AND COMPREHENSIVE INCOME
Years Ended December 31, 2007, 2006 and 2005
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Common shares number of shares at beginning of year
|
|
|
250,912
|
|
|
|
243,781
|
|
|
|
185,789
|
|
Issuance of common shares in connection with mergers and
acquisitions
|
|
|
4,781
|
|
|
|
|
|
|
|
55,889
|
|
Issuances of common shares under common share plans
|
|
|
1,891
|
|
|
|
6,951
|
|
|
|
2,092
|
|
Conversions of limited partnership units
|
|
|
128
|
|
|
|
180
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares number of shares at end of year
|
|
|
257,712
|
|
|
|
250,912
|
|
|
|
243,781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares par value at beginning of year
|
|
$
|
2,509
|
|
|
$
|
2,438
|
|
|
$
|
1,858
|
|
Issuance of common shares in connection with mergers and
acquisitions
|
|
|
48
|
|
|
|
|
|
|
|
559
|
|
Issuances of common shares under common share plans
|
|
|
19
|
|
|
|
69
|
|
|
|
21
|
|
Conversions of limited partnership units
|
|
|
1
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares par value at end of year
|
|
$
|
2,577
|
|
|
$
|
2,509
|
|
|
$
|
2,438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred shares at stated liquidation preference at beginning
and end of year
|
|
$
|
350,000
|
|
|
$
|
350,000
|
|
|
$
|
350,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital at beginning of year
|
|
$
|
6,000,119
|
|
|
$
|
5,606,017
|
|
|
$
|
3,249,576
|
|
Issuance of common shares in connection with mergers and
acquisitions
|
|
|
339,449
|
|
|
|
|
|
|
|
2,285,029
|
|
Issuances of common shares under common share plans
|
|
|
37,417
|
|
|
|
357,448
|
|
|
|
43,126
|
|
Conversions of limited partnership units
|
|
|
4,444
|
|
|
|
6,475
|
|
|
|
150
|
|
Cost of issuing common shares
|
|
|
(106
|
)
|
|
|
(76
|
)
|
|
|
(1,395
|
)
|
Change in receivable from timing differences on equity
transactions
|
|
|
247
|
|
|
|
244
|
|
|
|
2,494
|
|
Cost of share-based compensation awards
|
|
|
30,903
|
|
|
|
30,011
|
|
|
|
27,037
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital at end of year
|
|
$
|
6,412,473
|
|
|
$
|
6,000,119
|
|
|
$
|
5,606,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income at beginning of year
|
|
$
|
216,922
|
|
|
$
|
149,586
|
|
|
$
|
194,445
|
|
Foreign currency translation gains (losses), net
|
|
|
90,015
|
|
|
|
70,777
|
|
|
|
(70,076
|
)
|
Unrealized (losses) gains on derivative contracts, net
|
|
|
(31,615
|
)
|
|
|
(3,441
|
)
|
|
|
25,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income at end of year
|
|
$
|
275,322
|
|
|
$
|
216,922
|
|
|
$
|
149,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions in excess of net earnings at beginning of year
|
|
$
|
(170,971
|
)
|
|
$
|
(620,018
|
)
|
|
$
|
(693,386
|
)
|
Net earnings
|
|
|
1,074,340
|
|
|
|
874,367
|
|
|
|
396,163
|
|
FIN 48 adoption
|
|
|
(9,272
|
)
|
|
|
|
|
|
|
|
|
Preferred share dividends
|
|
|
(25,423
|
)
|
|
|
(25,416
|
)
|
|
|
(25,416
|
)
|
Common share distributions
|
|
|
(472,648
|
)
|
|
|
(399,904
|
)
|
|
|
(297,379
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings (distributions in excess of net earnings) at
end of year
|
|
$
|
396,026
|
|
|
$
|
(170,971
|
)
|
|
$
|
(620,018
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity at end of year
|
|
$
|
7,436,398
|
|
|
$
|
6,398,579
|
|
|
$
|
5,488,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
1,074,340
|
|
|
$
|
874,367
|
|
|
$
|
396,163
|
|
Preferred share dividends
|
|
|
(25,423
|
)
|
|
|
(25,416
|
)
|
|
|
(25,416
|
)
|
Foreign currency translation gains (losses), net
|
|
|
90,015
|
|
|
|
70,777
|
|
|
|
(70,076
|
)
|
(Losses) gains on derivative contracts, net
|
|
|
(31,615
|
)
|
|
|
(3,441
|
)
|
|
|
25,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to common shares
|
|
$
|
1,107,317
|
|
|
$
|
916,287
|
|
|
$
|
325,888
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
Consolidated Financial Statements.
7
PROLOGIS
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2007, 2006 and
2005
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
1,074,340
|
|
|
$
|
874,367
|
|
|
$
|
396,163
|
|
Minority interest share in earnings
|
|
|
6,003
|
|
|
|
3,457
|
|
|
|
5,243
|
|
Adjustments to reconcile net earnings to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Straight-lined rents
|
|
|
(44,403
|
)
|
|
|
(36,418
|
)
|
|
|
(11,411
|
)
|
Cost of share-based compensation awards
|
|
|
23,934
|
|
|
|
21,567
|
|
|
|
22,615
|
|
Depreciation and amortization
|
|
|
311,867
|
|
|
|
298,342
|
|
|
|
204,378
|
|
Equity in earnings from unconsolidated investees
|
|
|
(105,618
|
)
|
|
|
(143,758
|
)
|
|
|
(52,499
|
)
|
Distributions from unconsolidated investees
|
|
|
74,348
|
|
|
|
99,062
|
|
|
|
47,514
|
|
Amortization of deferred loan costs
|
|
|
10,555
|
|
|
|
7,673
|
|
|
|
5,595
|
|
Amortization of debt premium, net
|
|
|
(7,797
|
)
|
|
|
(13,861
|
)
|
|
|
(3,980
|
)
|
Gains recognized on dispositions of non-CDFS business assets
|
|
|
(199,443
|
)
|
|
|
(185,199
|
)
|
|
|
(86,444
|
)
|
Gains recognized on dispositions of CDFS business assets
included in discontinued operations
|
|
|
(28,721
|
)
|
|
|
(33,514
|
)
|
|
|
(10,616
|
)
|
Cumulative translation losses and impairment charge on disposed
properties
|
|
|
|
|
|
|
|
|
|
|
26,864
|
|
Unrealized foreign currency exchange losses (gains)
|
|
|
16,229
|
|
|
|
(18,774
|
)
|
|
|
(10,288
|
)
|
Deferred income tax expense (benefit)
|
|
|
550
|
|
|
|
(53,722
|
)
|
|
|
12,045
|
|
Impairment charges
|
|
|
13,259
|
|
|
|
|
|
|
|
|
|
Increase in accounts and notes receivable and other assets
|
|
|
(136,405
|
)
|
|
|
(204,096
|
)
|
|
|
(54,091
|
)
|
Increase (decrease) in accounts payable and accrued expenses and
other liabilities
|
|
|
216,338
|
|
|
|
72,201
|
|
|
|
(2,986
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
1,225,036
|
|
|
|
687,327
|
|
|
|
488,102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate investments
|
|
|
(5,213,870
|
)
|
|
|
(3,695,799
|
)
|
|
|
(2,457,780
|
)
|
Purchase of ownership interests in property funds
|
|
|
|
|
|
|
(259,248
|
)
|
|
|
|
|
Tenant improvements and lease commissions on previously leased
space
|
|
|
(67,317
|
)
|
|
|
(66,787
|
)
|
|
|
(53,919
|
)
|
Recurring capital expenditures
|
|
|
(37,948
|
)
|
|
|
(29,437
|
)
|
|
|
(26,989
|
)
|
Cash consideration paid in Parkridge acquisition in 2007 and
Catellus Merger in 2005, net of cash acquired
|
|
|
(700,812
|
)
|
|
|
|
|
|
|
(1,292,644
|
)
|
Purchase of Macquarie ProLogis Trust (MPR), net of
cash acquired
|
|
|
(1,137,028
|
)
|
|
|
|
|
|
|
|
|
Proceeds from dispositions of real estate assets
|
|
|
3,618,622
|
|
|
|
2,095,231
|
|
|
|
1,516,614
|
|
Advances on notes receivable
|
|
|
(18,270
|
)
|
|
|
(115,417
|
)
|
|
|
|
|
Proceeds from repayments of notes receivable
|
|
|
115,620
|
|
|
|
73,723
|
|
|
|
59,991
|
|
Increase in restricted cash for potential investment
|
|
|
|
|
|
|
(42,174
|
)
|
|
|
|
|
Investments in and advances to unconsolidated investees
|
|
|
(661,796
|
)
|
|
|
(175,677
|
)
|
|
|
(16,726
|
)
|
Return of investment from unconsolidated investees
|
|
|
50,243
|
|
|
|
146,206
|
|
|
|
48,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(4,052,556
|
)
|
|
|
(2,069,379
|
)
|
|
|
(2,222,801
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sales and issuances of common shares under various
common share plans
|
|
|
46,855
|
|
|
|
358,038
|
|
|
|
45,641
|
|
Distributions paid on common shares
|
|
|
(472,645
|
)
|
|
|
(393,317
|
)
|
|
|
(297,379
|
)
|
Minority interest distributions
|
|
|
(9,341
|
)
|
|
|
(11,576
|
)
|
|
|
(13,953
|
)
|
Dividends paid on preferred shares
|
|
|
(31,781
|
)
|
|
|
(19,062
|
)
|
|
|
(25,416
|
)
|
Debt and equity issuance costs paid
|
|
|
(15,830
|
)
|
|
|
(13,840
|
)
|
|
|
(8,112
|
)
|
Repayment of debt assumed in Catellus Merger
|
|
|
|
|
|
|
|
|
|
|
(106,356
|
)
|
Net (payments) proceeds from lines of credit and short-term
borrowings
|
|
|
(431,506
|
)
|
|
|
368,158
|
|
|
|
1,348,023
|
|
Proceeds from issuance of debt to finance MPR and Parkridge
acquisitions
|
|
|
1,719,453
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of senior convertible notes
|
|
|
2,329,016
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of senior notes, secured and unsecured
debt
|
|
|
781,802
|
|
|
|
1,945,325
|
|
|
|
890,011
|
|
Payments on senior notes, secured debt, unsecured debt and
assessment bonds
|
|
|
(1,174,335
|
)
|
|
|
(588,844
|
)
|
|
|
(119,067
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
2,741,688
|
|
|
|
1,644,882
|
|
|
|
1,713,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
29,032
|
|
|
|
9,161
|
|
|
|
(11,422
|
)
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(56,800
|
)
|
|
|
271,991
|
|
|
|
(32,729
|
)
|
Cash and cash equivalents, beginning of year
|
|
|
475,791
|
|
|
|
203,800
|
|
|
|
236,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
418,991
|
|
|
$
|
475,791
|
|
|
$
|
203,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Note 19 for information on non-cash
investing and financing activities and other information.
The accompanying notes are an integral part of these
Consolidated Financial Statements.
8
PROLOGIS
|
|
1.
|
Description
of Business:
|
ProLogis, collectively with our consolidated subsidiaries (we,
our, us, the Company or ProLogis), is a publicly held real
estate investment trust (REIT) that owns, operates
and develops (directly and through our unconsolidated investees)
primarily industrial distribution properties in North America,
Europe and Asia. Our business consists of three reportable
business segments: (i) property operations;
(ii) investment management; and (iii) development or
CDFS business. Our property operations segment represents the
direct long-term ownership of industrial distribution and retail
properties. Our investment management segment represents the
long-term investment management of property funds and the
properties they own. Our CDFS business segment primarily
encompasses our development or acquisition of real estate
properties that are generally contributed to a property fund in
which we have an ownership interest and act as manager, or sold
to third parties. See Note 18 for further discussion of our
business segments.
|
|
2.
|
Summary
of Significant Accounting Policies:
|
Basis of Presentation and
Consolidation. The accompanying consolidated
financial statements are presented in our reporting currency,
the U.S. dollar. All material intercompany transactions
with consolidated entities have been eliminated.
We consolidate all entities that are wholly owned or those in
which we own less than 100% but control, as well as any variable
interest entities in which we are the primary beneficiary. We
evaluate our ability to control an entity and whether the entity
is a variable interest entity and we are the primary beneficiary
through the consideration of the following factors:
|
|
|
(i) |
|
the form of our ownership interest and legal structure; |
|
(ii) |
|
our representation on the entitys governing body; |
|
(iii) |
|
the size of our investment (including loans); |
|
(iv) |
|
estimates of future cash flows; |
|
(v) |
|
our ability to participate in policy making decisions, including
but not limited to, the acquisition or disposition of investment
properties and the incurrence or refinancing of debt; |
|
(vi) |
|
the rights of other investors to participate in the decision
making process; and |
|
(vii) |
|
the ability for other partners or owners to replace us as
manager
and/or
liquidate the venture, if applicable. |
Use of Estimates. The accompanying
consolidated financial statements are prepared in accordance
with U.S. generally accepted accounting principles
(GAAP). GAAP requires us to make estimates and
assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities as
of the date of the financial statements and revenue and expenses
during the reporting period. Our actual results could differ
from those estimates and assumptions.
Foreign Operations. The
U.S. dollar is the functional currency for our consolidated
subsidiaries and unconsolidated investees operating in the
United States and Mexico and certain of our consolidated
subsidiaries that operate as holding companies for foreign
investments. The functional currency for our consolidated
subsidiaries and unconsolidated investees operating in countries
other than the United States and Mexico is the principal
currency in which the entitys assets, liabilities, income
and expenses are denominated, which may be different from the
local currency of the country of incorporation or the country
where the entity conducts its operations. The functional
currencies of our consolidated subsidiaries and unconsolidated
investees include the British pound sterling, Canadian dollar,
Chinese renminbi, Czech Republic koruna, euro, Hungarian forint,
Japanese yen, Korean won, Indian rupee, Polish zloty, Slovakia
crown, Swedish krona and Singapore dollar.
9
PROLOGIS
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For our consolidated subsidiaries whose functional currency is
not the U.S. dollar, we translate their financial
statements into U.S. dollars at the time we consolidate
those subsidiaries financial statements. Generally, assets
and liabilities are translated at the exchange rate in effect as
of the balance sheet date. Our initial investments in
unconsolidated investees are reflected at the historical
exchange rate. Income statement accounts are translated using
the average exchange rate for the period and income statement
accounts that represent significant non-recurring transactions
are translated at the rate in effect as of the date of the
transaction. We translate our share of the net earnings or
losses of our unconsolidated investees whose functional currency
is not the U.S. dollar at the average exchange rate for the
period. The resulting translation adjustments are included in
the accumulated other comprehensive income component of
shareholders equity.
We and certain of our consolidated subsidiaries have
intercompany and third party debt that is not denominated in the
entitys functional currency. When the debt is remeasured
against the functional currency of the entity, a gain or loss
can result. The resulting adjustment is generally reflected in
results of operations unless it is intercompany debt that is
deemed to be long-term in nature. If the intercompany debt is
deemed long-term in nature, when the debt is remeasured, the
resulting adjustment is recognized as a cumulative translation
adjustment in accumulated other comprehensive income in
shareholders equity.
Gains or losses are included in results of operations when
transactions with a third party, denominated in a currency other
than the entitys functional currency, are settled.
Additionally, we utilize derivative financial instruments to
manage certain foreign currency exchange risks. See our policy
footnote on financial instruments and Note 16 for more
information related to our derivative financial instruments.
Revenue
Recognition.
Rental and other income. We lease our operating
properties to customers under agreements that are classified as
operating leases. We recognize the total minimum lease payments
provided for under the leases on a straight-line basis over the
lease term. Generally, under the terms of our leases, some or
all of our rental expenses are recovered from our customers. We
reflect amounts recovered from customers as a component of
rental income. A provision for possible loss is made if the
collection of a receivable balance is considered doubtful. Some
of our retail and ground leases provide for additional rent
based on sales over a stated base amount during the lease year.
We recognize this additional rent when each customers
sales exceed their sales threshold. We recognize interest income
and management, development and other fees and incentives when
earned, fixed and determinable.
Gains on Disposition of Real Estate. Gains on the
disposition of real estate are recorded when the recognition
criteria have been met, generally at the time title is
transferred, and we no longer have substantial continuing
involvement with the real estate sold.
When we contribute a property to a property fund or joint
venture in which we have an ownership interest, we do not
recognize a portion of the proceeds in our computation of the
gain resulting from the contribution. The amount of proceeds not
recognized is based on our continuing ownership interest in the
contributed property that arises due to our ownership interest
in the entity acquiring the property. We defer this portion of
the proceeds by recognizing a reduction to our investment in the
applicable unconsolidated investee. We adjust our proportionate
share of net earnings or losses recognized in future periods to
reflect the investees recorded depreciation expense as if
it were computed on our lower basis in the contributed
properties rather than on the entitys basis. We reflect
the gains recognized from contributions of CDFS properties to
property funds and CDFS joint ventures in operating cash flows
and we include the costs related to the CDFS properties and the
recovery of those costs through the proceeds we receive upon
contribution in investing cash flows in our Consolidated
Statements of Cash Flows.
When a property that we originally contributed to a property
fund or joint venture is disposed of to a third party, we
recognize the amount of the proceeds we had previously deferred
during the period, along with
10
PROLOGIS
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
our proportionate share of the gain recognized by the investee.
During periods when our ownership interest in an investee
decreases, we recognize gains relating to previously deferred
proceeds to coincide with our new ownership interest in the
investee.
Rental Expenses. Rental expenses
primarily include the cost of
on-site and
property management personnel, utilities, repairs and
maintenance, property insurance and real estate taxes. Also
included are direct expenses associated with our management of
the property funds operations.
Share-Based Compensation. On
January 1, 2006, we adopted Statement of Financial
Accounting Standards (SFAS) No. 123R
Share Based Payment
(SFAS 123R) using the modified prospective
application. This standard requires companies to measure the
cost of employee services received in exchange for an award of
an equity instrument based on the awards fair value on the
grant date and recognize the cost over the period during which
an employee is required to provide service in exchange for the
award, generally the vesting period. With the adoption of
SFAS 123R, we recognize compensation cost associated with
stock options that was previously disclosed in the notes to our
consolidated financial statements and we treat dividend
equivalent units (DEUs) as dividends, which are
charged to retained earnings and factored into the computation
of the fair value of the underlying share award at grant date.
Prior to January 1, 2006, we recognized the costs of our
share-based compensation plans under SFAS No. 123
Accounting and Disclosure of Stock Based
Compensation that allowed us to continue to account
for these plans under Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to
Employees (APB 25). Under APB 25, if the
exercise price of the share option granted equaled or exceeded
the market price of the underlying share on the date of grant,
no compensation expense was recognized. We grant share options
to employees and members of our Board of Trustees (the
Board) with an exercise price equal to the market
price on the day of grant and therefore, we generally did not
recognize expense related to share options. We recognized the
intrinsic value related to other share awards granted as
compensation expense over the applicable vesting period. We
recognized the value of DEUs issued as compensation expense,
based on the market price of a common share on the grant date,
over the vesting period of the underlying share award.
Had we adopted SFAS 123R on January 1, 2005, our net
earnings attributable to common shares for the years ended
December 31 would have changed as follows (in thousands, except
per share amounts):
|
|
|
|
|
|
|
2005
|
|
|
Net earnings attributable to common shares:
|
|
|
|
|
As reported
|
|
$
|
370,747
|
|
Pro forma
|
|
$
|
373,074
|
|
Net earnings per share attributable to common shares:
|
|
|
|
|
As reported Basic
|
|
$
|
1.82
|
|
As reported Diluted
|
|
$
|
1.76
|
|
Pro forma Basic
|
|
$
|
1.83
|
|
Pro forma Diluted
|
|
$
|
1.77
|
|
Further information regarding stock options can be found in
Note 5, Long-Term Compensation.
Income Taxes. ProLogis was formed as a
Maryland real estate investment trust in January 1993 and we
have, along with our consolidated REIT subsidiary, elected to be
taxed as a REIT under the Internal Revenue Code of 1986, as
amended (the Code). Under the Code, REITs are
generally not required to pay federal income taxes if they
distribute 100% of their taxable income and meet certain income,
asset and shareholder tests. If we fail to qualify as a REIT in
any taxable year, we will be subject to federal income taxes at
regular corporate rates (including any alternative minimum tax)
and may not be able to qualify as a REIT for the four
11
PROLOGIS
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
subsequent taxable years. Even as a REIT, we may be subject to
certain state and local taxes on our own income and property,
and to federal income and excise taxes on our undistributed
taxable income.
We have elected taxable REIT subsidiary (TRS) status
for some of our consolidated subsidiaries, which operate
primarily in the CDFS business segment. This allows us to
provide services that would otherwise be considered
impermissible for REITs. Many of the foreign countries where we
have operations do not recognize REITs or do not accord REIT
status under their respective tax laws to our entities that
operate in their jurisdiction. In the United States, we are
taxed in certain states in which we operate. Accordingly, we
recognize income tax expense for the federal and state income
taxes incurred by our TRSs, taxes incurred in certain states and
foreign jurisdictions and interest and penalties, if any,
associated with our unrecognized tax benefit liabilities.
In July 2006, Financial Accounting Standards Board
(FASB) Interpretation No. 48,
Accounting for Uncertainty in Income Taxes
An Interpretation of FASB Statement No. 109
(FIN 48) was issued. FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in an
enterprises financial statements in accordance with
SFAS No. 109, Accounting for Income
Taxes. FIN 48 prescribes a recognition threshold
and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected
to be taken in a tax return. The new standard also provides
guidance on various income tax accounting issues, including
derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. The
provisions of FIN 48 were effective for our fiscal year
beginning January 1, 2007 and were applied to all tax
positions upon initial adoption. Under FIN 48, we may
recognize the tax benefit from an uncertain tax position only if
it is more-likely-than-not that the tax position
will be sustained on examination by taxing authorities. The
cumulative effect of applying the provisions of FIN 48 was
reported as an adjustment to the opening balance of retained
earnings for the year of adoption. We adopted the provisions of
FIN 48 and, as a result, we recognized a $9.3 million
increase in the liability for unrecognized tax benefits, which
was accounted for as a reduction to the January 1, 2007
balance of distributions in excess of net earnings.
Deferred income tax is generally a function of the periods
temporary differences (items that are treated differently for
tax purposes than for financial reporting purposes), the
utilization of tax net operating losses generated in prior years
that had been previously recognized as deferred income tax
assets and deferred income tax liabilities related to
indemnification agreements related to certain contributions to
property funds. A valuation allowance for deferred income tax
assets is provided if we believe all or some portion of the
deferred income tax asset may not be realized. Any increase or
decrease in the valuation allowance that results from a change
in circumstances that causes a change in the estimated
realizability of the related deferred income tax asset is
included in income. For further information of income taxes, see
Note 7.
Long-Lived
Assets
Real Estate Assets. Real estate assets are carried at
depreciated cost. Costs incurred that are directly associated
with the successful acquisition of real estate assets are
capitalized as part of the investment basis of the real estate
assets. Costs that are associated with unsuccessful acquisition
efforts are expensed at the time the acquisition is abandoned.
Costs incurred in developing, renovating, rehabilitating and
improving real estate assets are capitalized as part of the
investment basis of the real estate assets. Costs incurred in
making repairs and maintaining real estate assets are expensed
as incurred.
During the land development and construction periods of
qualifying projects, we capitalize interest costs, insurance,
real estate taxes and general and administrative costs of the
personnel performing the development, renovation, rehabilitation
and leasing activities; if such costs are incremental and
identifiable to a specific activity. Capitalized costs are
included in the investment basis of real estate assets except
for the costs capitalized related to leasing activities, which
are included in other assets. When a municipality district
12
PROLOGIS
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
finances costs we incur for public infrastructure improvements,
we record the costs in real estate until we are reimbursed.
The depreciable portions of real estate assets are charged to
depreciation expense on a straight-line basis over their
respective estimated useful lives. We generally use the
following useful lives: seven years for capital improvements,
10 years for standard tenant improvements, 30 years
for industrial properties acquired, 40 years for office and
retail properties acquired and 40 years for properties we
develop. Capitalized leasing costs are amortized over the
respective lease term. Our average lease term for all leases in
effect at December 31, 2007 was between six and seven
years. We develop properties in our CDFS business segment
generally with the intent to contribute the properties to
property funds in which we maintain an ownership interest and
act as manager. We may acquire properties or portfolios of
properties in our CDFS business segment that we generally plan
to contribute to a property fund. We generally do not depreciate
properties during the period from the completion of the
development, rehabilitation or repositioning activities through
the date the properties are contributed.
Business Combinations, Goodwill and Intangible Assets.
When we acquire a business or individual properties, with
the intention to hold for long term investment, we
allocate the purchase price to the various components of the
acquisition based upon the fair value of each component. We
estimate:
|
|
|
|
|
the fair value of the buildings on an as-if-vacant basis. The
fair value allocated to land is generally based on relevant
market data;
|
|
|
|
the market value of above and below market leases based upon our
best estimate of current market rents. The value of each lease
is recorded in either other assets or other liabilities, as
appropriate;
|
|
|
|
the value of costs to obtain tenants, primarily leasing
commissions. These costs are recorded in other assets;
|
|
|
|
the value of debt based on quoted market rates for the same or
similar issues, or by discounting future cash flows using rates
currently available for debt with similar terms and maturities.
Any discount or premium is included in the principal amount;
|
|
|
|
the value of any management contracts by discounting future
expected cash flows under these contracts; and
|
|
|
|
the value of all other assumed assets and liabilities based on
the best information available.
|
We amortize the acquired assets or liabilities as follows:
|
|
|
|
|
Above and below market leases are charged to rental income over
the average remaining estimated life of the lease.
|
|
|
|
Leasing commissions are charged to amortization expense over the
average remaining estimated life of the lease.
|
|
|
|
Debt discount or premium is charged to interest expense using
the effective interest method over the remaining term of the
related debt.
|
|
|
|
Management contracts are charged against income over the
remaining term of the contract.
|
Goodwill represents the excess of the purchase price over the
fair value of net tangible and intangible assets acquired in a
business combination. Goodwill amounts are not amortized, but
rather we assess goodwill for impairment annually or when
circumstances indicate goodwill may be impaired.
Investments in Unconsolidated Investees. Our investments
in certain entities are presented under the equity method. The
equity method is used when we have the ability to exercise
significant influence over
13
PROLOGIS
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
operating and financial policies of the investee but do not have
control of the investee. Under the equity method, these
investments (including advances to the investee) are initially
recognized in the balance sheet at our cost and are subsequently
adjusted to reflect our proportionate share of net earnings or
losses of the investee, distributions received, deferred
proceeds on the contribution of properties and certain other
adjustments, as appropriate.
Impairment of Long-Lived Assets. We assess the carrying
values of our respective long-lived assets, including goodwill
and intangible assets, whenever events or changes in
circumstances indicate that the carrying amounts of these assets
may not be fully recoverable. Recoverability of these assets is
measured by comparison of the carrying amount of the asset to
the estimated fair value. For operating buildings that we intend
to hold long-term, the recoverability is based on the future
undiscounted cash flows. If the asset is considered to be
impaired, the amount of any impairment is measured as the
difference between the carrying value and the fair value of the
impaired asset, and the loss would be recognized as other
expense in our Consolidated Statements of Earnings.
Assets Held for Sale and Discontinued Operations.
Discontinued operations represent a component of an entity that
has either been disposed of or is classified as held for sale if
both the operations and cash flows of the component have been or
will be eliminated from ongoing operations of the entity as a
result of the disposal transaction and the entity will not have
any significant continuing involvement in the operations of the
component after the disposal transaction. The results of
operations of properties that have been classified as
discontinued operations are also reported as discontinued
operations for all periods presented. We classify property as
held for sale when certain criteria are met. At such time, the
respective assets and liabilities are presented separately on
our Consolidated Balance Sheets and depreciation is no longer
recognized. Assets held for sale are reported at the lower of
their carrying amount or their estimated fair value less the
estimated costs to sell the assets.
Properties disposed of to third parties are considered
discontinued operations unless such properties were developed
under a pre-sale agreement. Properties contributed to property
funds in which we maintain an ownership interest and act as
manager are not considered discontinued operations due to our
continuing involvement with the properties. The contribution of
properties to the property funds is reflected in our
Consolidated Statements of Earnings based on the nature of the
properties contributed, either CDFS or non-CDFS.
Cash and Cash Equivalents. We consider
all cash on hand, demand deposits with financial institutions
and short-term, highly liquid investments with original
maturities of three months or less to be cash equivalents. Our
cash and cash equivalents are financial instruments that are
exposed to concentrations of credit risk. We invest our cash
with high-credit quality institutions. Cash balances may be
invested in money market accounts that are not insured. We have
not realized any losses in such cash investments or accounts and
believe that we are not exposed to any significant credit risk.
Notes Receivable. The principal balance
of notes receivable from third parties at December 31, 2007
and 2006 was $24.2 million and $237.3 million,
respectively. Interest is recognized as earned and included in
interest income on notes receivable in our Consolidated
Statements of Earnings; however, we discontinue accruing
interest when collection is considered doubtful. We use the
effective interest method for notes receivable with stepped
interest rates. Our weighted average effective annual interest
rate for our notes receivable as of December 31, 2007 and
2006 was 6.9% and 8.6%, respectively. Notes receivable are
generally collateralized by real property or a financing
agreement.
Minority Interest. We recognize the
minority interests in real estate partnerships or joint ventures
in which we consolidate at each minority holders
respective share of the estimated fair value of the real estate
as of the date of formation. Minority interest that was created
or assumed as a part of a business combination is recognized at
the underlying book value as of the date of the transaction.
Minority interest is subsequently
14
PROLOGIS
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
adjusted for additional contributions, distributions to minority
holders and the minority holders proportionate share of
the net earnings or losses of each respective entity.
Certain limited partnership interests issued by us in connection
with the formation of a real estate partnership and as
consideration in a business combination are exchangeable into
our common shares. Common shares issued upon exchange of a
holders minority interest are accounted for at our
carrying value of the surrendered minority interest.
Costs of Raising Capital. Costs
incurred in connection with the issuance of both common shares
and preferred shares are treated as a reduction to additional
paid-in capital. Costs incurred in connection with the issuance
or renewal of debt are capitalized in other assets, and
amortized to interest expense over the remaining term of the
related debt.
Financial Instruments. In the normal
course of business, we use certain types of derivative financial
instruments for the purpose of managing our foreign currency
exchange rate and interest rate risk. We reflect our derivative
financial instruments at fair value and record changes in the
fair value of these derivatives each period in earnings, unless
specific hedge accounting criteria are met. To qualify for hedge
accounting treatment, the derivative instruments used for risk
management purposes must effectively reduce the risk exposure
that they are designed to hedge (primarily interest rate swaps).
For instruments associated with the hedge of anticipated
transactions, hedge effectiveness criteria also require that the
occurrence of the underlying transactions be probable.
Instruments meeting these hedging criteria are formally
designated as hedges at the inception of the contract.
The ineffective portion of a hedge, if any, is immediately
recognized in earnings to the extent that the change in value of
a derivative does not perfectly offset the change in value of
the instrument being hedged. The unrealized gains and losses
recorded in accumulated other comprehensive income are amortized
to earnings over the remaining term of the hedged items.
In estimating the fair value of our financial instruments, we
use a variety of methods and assumptions that are based on
market conditions and risks existing at each balance sheet date.
Primarily, we use quoted market prices or quotes from brokers or
dealers for the same or similar instruments. These values
represent a general approximation of possible value and may
never actually be realized.
Environmental costs. We incur certain
environmental remediation costs, including cleanup costs,
consulting fees for environmental studies and investigations,
monitoring costs, and legal costs relating to cleanup,
litigation defense, and the pursuit of responsible third
parties. Costs incurred in connection with operating properties
and properties previously sold are expensed. Costs related to
undeveloped land are capitalized as development costs. Costs
incurred for properties to be disposed are included in the cost
of disposed assets when the properties are disposed. We maintain
a liability for estimated costs of environmental remediation to
be incurred in connection with undeveloped land, operating
properties and properties previously sold.
Recent Accounting Pronouncements. In
September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
(SFAS 157). SFAS 157 defines fair
value, establishes a framework for measuring fair value in
accordance with GAAP and expands disclosures about fair value
measurements. SFAS 157 applies to other accounting
pronouncements that require or permit fair value measurements
but does not require any new fair value measurements.
SFAS 157 is effective for our fiscal year beginning
January 1, 2008. In February 2008, the FASB issued FASB
Staff Position
No. FAS 157-2,
Effective Date of FASB Statement No. 157
(FSP
FAS 157-2),
that delays the effective date of SFAS 157s fair
value measurement requirements for nonfinancial assets and
liabilities that are not required or permitted to be measured at
fair value on a recurring basis. Fair value measurements
identified in FSP
FAS 157-2
will be effective for our fiscal year beginning January 1,
2009. The adoption of SFAS 157 will primarily impact the
valuation of our financial instruments,
15
PROLOGIS
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
as discussed above, which we do not expect to materially impact
our financial position and results of operations.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and
Financial Liabilities including an Amendment of FASB Statement
No. 115 (SFAS 159).
SFAS 159 provides entities the irrevocable option to
measure many financial instruments and certain other items at
fair value. If the fair value option is elected, changes in the
fair value would be recorded in earnings at each subsequent
reporting date. The provisions of SFAS 159 are effective
for our fiscal year beginning January 1, 2008. We do not
plan to elect the fair value option provided by SFAS 159.
In December 2007, the FASB issued SFAS No. 141R,
Business Combinations
(SFAS 141R) and SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements An Amendment of ARB No. 51
(SFAS 160). SFAS 141R and 160 require
most identifiable assets, liabilities, noncontrolling interests,
and goodwill acquired in a business combination to be recorded
at full fair value and require noncontrolling
interests (previously referred to as minority interests) to be
reported as a component of equity, which changes the accounting
for transactions with noncontrolling interest holders. The
provisions of SFAS 141R and 160 are effective for our
fiscal year beginning January 1, 2009. SFAS 141R will
be applied to business combinations occurring after the
effective date and SFAS 160 will be applied prospectively
to all noncontrolling interests, including any that arose before
the effective date. We are currently assessing what impact the
adoption of SFAS 141R and 160 will have on our financial
position and results of operations.
Proposed Accounting Pronouncements. The
FASB has issued proposed FASB Staff Position
No. APB-14a,
Accounting for Convertible Debt Instruments That May Be
Settled in Cash upon Conversion (Including Partial Cash
Settlement) (the proposed FSP) that would
require, if ratified, separate accounting for the debt and
equity components of convertible instruments. The proposed FSP
would require that the value assigned to the debt component
would be the estimated fair value of a similar bond without the
conversion feature, which would result in the debt being
recorded at a discount. The debt would subsequently be accreted
to its par value over its expected life with a rate of interest
being reflected in earnings that reflects the market rate at
issuance. The proposed FSP, if ratified in the form expected,
would be effective January 1, 2009 and would be applied
retrospectively to both new and existing convertible
instruments, including the convertible notes that we issued in
March 2007 and November 2007, and would result in us recognizing
additional interest expense of between $55.8 million and
$67.1 million per annum.
Reclassifications. Certain amounts
included in our consolidated financial statements for prior
years have been reclassified to conform to the 2007 financial
statement presentation. This includes a reclass of the gains
recognized on the disposition of CDFS business assets included
in discontinued operations of $33.5 million and
$10.6 million for the years ended December 31, 2006
and 2005, respectively, from operating activities to investing
activities in the Consolidated Statements of Cash Flows.
|
|
3.
|
Mergers
and Acquisitions:
|
Parkridge
Holdings Limited
In February 2007, we purchased the industrial business and made
a 25% investment in the retail business of Parkridge Holdings
Limited (Parkridge), a European real estate
development company. The total purchase price was
$1.3 billion, which was financed with $733.9 million
in cash, including amounts settled in cash subsequent to the
purchase date, the issuance of 4.8 million common shares
(valued for accounting purposes at $71.01 per share for a total
of $339.5 million) and the assumption of
$191.5 million in debt and other liabilities. The
assumption of debt included $113.0 million of loans made by
us to certain affiliates of Parkridge in November 2006, which
were included in Accounts and Notes Receivable in our
Consolidated Balance Sheet at December 31, 2006. The cash
portion of the acquisition was funded with borrowings under
16
PROLOGIS
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
our global senior credit facility (Global Line) and
a new senior unsecured facility (see Note 13 for more
information on our credit facilities).
The acquisition included 6.3 million square feet of
operating distribution properties, including developments under
construction, and 1,139 acres of land, primarily in Central
Europe and the United Kingdom. We allocated the purchase price
based on estimated fair values and recorded approximately
$724.7 million of real estate assets, $156.3 million
of investments in CDFS joint ventures and other unconsolidated
investees, $58.1 million of cash and other tangible assets
and $325.8 million of goodwill and other intangible assets,
which are included in Other Assets in our Consolidated Balance
Sheet. The allocation of the purchase price was based upon
preliminary estimates and assumptions and, accordingly, these
allocations are subject to revision when final information is
available. Revisions to the fair value allocations, which may be
significant, will be recorded as adjustments to the purchase
price allocation in subsequent periods and should not have a
significant impact on our overall financial position or results
of operations. The Parkridge acquisition would not have had a
material impact on our consolidated results of operations for
the years ended December 31, 2007, 2006 and 2005, and as
such, we have not presented any pro forma financial information.
We may be required to make additional payments to the selling
shareholders over the next several years (primarily through the
issuance of our common shares) of up to £52.3 million
(the currency equivalent of $105.0 million at
December 31, 2007) upon the successful completion of
pending land entitlements or achievement of certain incremental
development profit targets.
Catellus
Development Corporation
On September 15, 2005, Catellus Development Corporation, a
publicly traded REIT (Catellus), merged with and
into Palmtree Acquisition Corporation, one of our subsidiaries
(the Catellus Merger). The total purchase price was
$5.3 billion, which was financed by $1.3 billion of
cash and the issuance of 55.9 million of our common shares
to former Catellus stockholders (valued at $2.3 billion),
$37.4 million in cash for transaction costs and the
assumption of $1.7 billion in liabilities. In allocating
the purchase price based on estimated fair values, we initially
recorded approximately $4.5 billion of real estate assets,
$661.9 million of other assets, primarily tangible assets,
and $152.9 million of goodwill. The allocation of goodwill
increased by approximately $11.0 million primarily as a
result of changes in the valuation of real estate assets,
partially offset by liabilities recorded for certain pre-merger
contingencies that were deemed to be probable and could be
reasonably estimated.
In connection with the Catellus Merger, we incurred
$2.6 million and $12.2 million of merger integration
costs in 2006 and 2005, respectively, which are included in
General and Administrative Expenses in our Consolidated
Statements of Earnings. These costs were indirect costs
associated with the Catellus Merger, such as employee transition
costs, as well as severance costs for certain of our employees
whose responsibilities became redundant after the merger.
ProLogis
North American Properties Fund XII
On September 30, 2005, we acquired the 80% interest in
ProLogis North American Properties Fund XII owned by our
fund partner. The acquisition resulted in the addition of 12
buildings aggregating 3.4 million square feet with an
aggregate property value of $283.2 million to our
direct-owned industrial portfolio, including assumed debt of
approximately $15.1 million.
See also Note 11 for information on real estate
acquisitions.
17
PROLOGIS
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
4.
|
Unconsolidated
Investees:
|
Summary
of Investments and Income
Our investments in and advances to investees that are accounted
for under the equity method are summarized by type of investee
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Property funds
|
|
$
|
1,755,113
|
|
|
$
|
981,840
|
|
CDFS joint ventures and other unconsolidated investees
|
|
|
590,164
|
|
|
|
317,857
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
2,345,277
|
|
|
$
|
1,299,697
|
|
|
|
|
|
|
|
|
|
|
Property
Funds
We recognize earnings or losses from our investments in
unconsolidated property funds consisting of our proportionate
share of the net earnings or losses of the property funds,
including interest income on advances made to these investees,
if any. In addition, we earn fees and incentives for providing
services to the property funds. The amounts we have recognized
from our investments in property funds are summarized as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Earnings from unconsolidated property funds:
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
17,161
|
|
|
$
|
59,732
|
|
|
$
|
24,224
|
|
Europe
|
|
|
60,913
|
|
|
|
21,605
|
|
|
|
13,938
|
|
Asia
|
|
|
16,379
|
|
|
|
11,718
|
|
|
|
7,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earnings from unconsolidated property funds
|
|
$
|
94,453
|
|
|
$
|
93,055
|
|
|
$
|
46,078
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property management and other fees and incentives:
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
47,164
|
|
|
$
|
57,800
|
|
|
$
|
32,124
|
|
Europe
|
|
|
43,752
|
|
|
|
145,622
|
|
|
|
30,064
|
|
Asia
|
|
|
13,803
|
|
|
|
8,507
|
|
|
|
4,746
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total property management and other fees and incentives
|
|
$
|
104,719
|
|
|
$
|
211,929
|
|
|
$
|
66,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In our CDFS business segment, as further discussed in
Note 18, we develop and acquire real estate properties
primarily with the intent to contribute to a property fund in
which we have an ownership interest and act as manager. Upon
contribution of properties to a property fund, we realize a
portion of the profits from our CDFS activities while at the
same time allowing us to maintain a long-term ownership interest
in our CDFS properties. This business strategy also provides
liquidity to fund our future development activities and enhances
future fee income. We generally receive ownership interests in
the property funds as part of the proceeds generated by the
contributions of properties to maintain our ownership interest.
The property funds generally own operating properties that we
have contributed to them, although certain of the property funds
have also acquired properties from third parties. We recognize
our proportionate share of the earnings or losses of each
property fund, earn fees for acting as the manager, and earn
additional fees by providing other services including, but not
limited to, acquisition, development, construction management,
leasing and financing activities. We may also earn incentive
performance returns based on the investors returns over a
specified period.
18
PROLOGIS
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Information about our property funds (the names in parentheses
represent the legal names of the entities) is as follows as of
December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Square
|
|
|
|
|
|
|
|
Number of
|
|
feet
|
|
|
|
|
|
|
|
properties
|
|
(in
|
|
Ownership
|
|
|
Investment in
|
|
|
owned
|
|
millions)
|
|
Percentage
|
|
|
and advances to
|
Fund Names
|
|
2007
|
|
2007
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
2006
|
|
ProLogis California (ProLogis California I LLC ) (1)
|
|
|
80
|
|
|
14.2
|
|
|
50.0
|
%
|
|
|
50.0
|
%
|
|
$
|
106,630
|
|
$
|
112,915
|
ProLogis North American Properties Fund I ( ProLogis North
American Properties Fund I LLC) (1)
|
|
|
36
|
|
|
9.4
|
|
|
41.3
|
%
|
|
|
41.3
|
%
|
|
|
27,135
|
|
|
30,902
|
ProLogis North American Properties Fund V (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
11.3
|
%
|
|
|
|
|
|
53,331
|
ProLogis North American Properties Fund VI (Allagash
Property Trust) (1)
|
|
|
22
|
|
|
8.6
|
|
|
20.0
|
%
|
|
|
20.0
|
%
|
|
|
37,218
|
|
|
39,149
|
ProLogis North American Properties Fund VII (Brazos
Property Trust) (1)
|
|
|
29
|
|
|
6.1
|
|
|
20.0
|
%
|
|
|
20.0
|
%
|
|
|
31,321
|
|
|
31,816
|
ProLogis North American Properties Fund VIII (Cimmaron
Property Trust) (1)
|
|
|
24
|
|
|
3.1
|
|
|
20.0
|
%
|
|
|
20.0
|
%
|
|
|
14,982
|
|
|
15,397
|
ProLogis North American Properties Fund IX (Deerfield
Property Trust) (1)
|
|
|
20
|
|
|
3.4
|
|
|
20.0
|
%
|
|
|
20.0
|
%
|
|
|
13,986
|
|
|
14,076
|
ProLogis North American Properties Fund X (Elkhorn Property
Trust) (1)
|
|
|
29
|
|
|
4.2
|
|
|
20.0
|
%
|
|
|
20.0
|
%
|
|
|
15,721
|
|
|
15,399
|
ProLogis North American Properties Fund XI (KPJV, LLP) (1)
|
|
|
13
|
|
|
4.1
|
|
|
20.0
|
%
|
|
|
20.0
|
%
|
|
|
30,712
|
|
|
31,871
|
ProLogis North American Industrial Fund (3)
|
|
|
217
|
|
|
37.2
|
|
|
23.2
|
%
|
|
|
20.0
|
%
|
|
|
104,277
|
|
|
72,053
|
ProLogis North American Industrial Fund II (ProLogis NA2
LP) (1)(2)
|
|
|
153
|
|
|
36.1
|
|
|
36.9
|
%
|
|
|
|
|
|
|
274,238
|
|
|
|
ProLogis North American Industrial Fund III (ProLogis NA3
LP) (1)(4)
|
|
|
122
|
|
|
24.7
|
|
|
20.0
|
%
|
|
|
|
|
|
|
123,720
|
|
|
|
ProLogis Mexico Industrial Fund (ProLogis MX Fund LP) (5)
|
|
|
32
|
|
|
4.2
|
|
|
20.0
|
%
|
|
|
|
|
|
|
38,085
|
|
|
|
PEPR (ProLogis European Properties) (6)
|
|
|
247
|
|
|
56.4
|
|
|
24.9
|
%
|
|
|
24.0
|
%
|
|
|
494,593
|
|
|
430,761
|
PEPF II (ProLogis European Properties II) (7)
|
|
|
41
|
|
|
10.4
|
|
|
24.3
|
%
|
|
|
|
|
|
|
158,483
|
|
|
|
ProLogis Japan Properties Fund I (PLD/RECO Japan TMK
Property Trust) (1)
|
|
|
16
|
|
|
7.1
|
|
|
20.0
|
%
|
|
|
20.0
|
%
|
|
|
87,663
|
|
|
87,705
|
ProLogis Japan Properties Fund II (ProLogis Japan
Properties Trust) (1)(8)
|
|
|
44
|
|
|
14.6
|
|
|
20.0
|
%
|
|
|
20.0
|
%
|
|
|
189,584
|
|
|
46,465
|
ProLogis Korea Fund (ProLogis Korea Properties Trust) (1)(9)
|
|
|
6
|
|
|
0.4
|
|
|
20.0
|
%
|
|
|
|
|
|
|
6,765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
|
1,131
|
|
|
244.2
|
|
|
|
|
|
|
|
|
|
$
|
1,755,113
|
|
$
|
981,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
We have one fund partner in each of these property funds. |
|
(2) |
|
We referred to the combined entities in which we had ownership
interests (ProLogis-Macquarie Fund and the management company)
as one property fund named ProLogis North American Properties
Fund V. During 2006, we contributed 20 properties for
aggregate proceeds of $132.4 million to ProLogis North
American Properties Fund V. |
|
|
|
On July 11, 2007, we completed the acquisition of all of
the units in Macquarie ProLogis Trust, an Australian listed
property trust (MPR). At the time of acquisition,
MPR owned approximately 89% of ProLogis North American
Properties Fund V and certain other assets. The total
consideration was approximately $2.0 billion, consisting of
cash of $1.2 billion and assumed liabilities of
$0.8 billion. The cash portion of the acquisition was
financed primarily with borrowings under a credit agreement with
an affiliate of Citigroup USA, Inc. (Citigroup),
consisting of a $473.1 million term loan and a
$646.2 million convertible loan. Prior to the acquisition,
we entered into foreign currency forward contracts to
economically hedge the purchase price of MPR (see Note 16
for additional information regarding these derivatives). As a
result of the MPR transaction, on July 11, 2007, we owned
100% of, and began consolidating, ProLogis North American
Properties Fund V. |
|
|
|
On August 27, 2007, Citigroup converted $546.2 million
of the convertible loan into equity of a newly formed property
fund, which owns all of the real estate assets and debt
obligations that were acquired or issued in connection with the
MPR acquisition. We refer to the combined entities in which we
have ownership interests as one property fund named ProLogis
North American Industrial Fund II. Our ownership percentage
is based on our levels of ownership interest in these different
entities. In addition, we made an equity contribution of
$100.0 million into the fund, which was used to repay the
remaining balance on the convertible loan. The conversion
resulted in Citigroup owning 63.1% and us owning 36.9% of the
equity of ProLogis North American Industrial Fund II. We
account for our investment under the equity method of
accounting. Upon conversion, we recognized net gains of
$68.6 million (including $16.6 million of previously
deferred gains from the initial contribution of the assets to
ProLogis North American Properties |
19
PROLOGIS
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
Fund V) that are reflected in CDFS Acquired Property
Portfolios in our Consolidated Statements of Earnings. |
|
(3) |
|
In February 2006, we formed the North American Industrial Fund,
with ten institutional investors. We refer to the combined
entities in which we have ownership interests as one property
fund named ProLogis North American Industrial Fund. Our
ownership percentage is based on our levels of ownership
interest in these different entities. We are committed to offer
to contribute substantially all of the properties we develop and
stabilize in Canada and the United States to the North American
Industrial Fund, subject to the property meeting certain leasing
and other criteria. ProLogis North American Industrial Fund has
equity commitments, which expire in February 2009, aggregating
approximately $1.4 billion from third party investors, of
which $729.7 million was unfunded at December 31,
2007. In connection with the acquisition of MPR, discussed
above, we acquired an additional 3% ownership interest in
ProLogis North American Industrial Fund and are committed to
fund $25.5 million in cash through February 2009 for our
equity share in future acquisitions of properties, generally
from us. During 2007 and 2006, we contributed 92 properties
(26 CDFS and 66 non-CDFS) and 49 properties (22 CDFS and 27
non-CDFS) for aggregate proceeds of $907.5 million and
$451.8 million, respectively, to ProLogis North American
Industrial Fund in addition to the assets that were acquired
from ProLogis North American Properties Funds II, III
and IV (collectively Funds II-IV), as discussed
below. |
|
(4) |
|
In July 2007, we formed a new property fund, ProLogis North
American Industrial Fund III, to acquire a portfolio of 122
industrial properties from a third party. We refer to the
combined entities in which we have ownership interests as one
property fund named ProLogis North American Industrial
Fund III. The total consideration for the acquisition was
approximately $1.8 billion, including transaction costs.
Our investment was made in cash and represents a 20% ownership
interest in this newly formed property fund. The remaining 80%
of the property fund is owned by an affiliate of Lehman
Brothers, Inc., who provided interim debt financing to the
property fund. |
|
(5) |
|
On September 11, 2007, we contributed properties to a new
property fund formed with several institutional investors,
ProLogis Mexico Industrial Fund. We refer to the combined
entities in which we have ownership interests as one property
fund named ProLogis Mexico Industrial Fund. We are committed to
offer to contribute substantially all of the properties we
develop and stabilize in Mexico, and in certain circumstances
properties we acquire, to ProLogis Mexico Industrial Fund
subject to the property meeting certain leasing and other
criteria. ProLogis Mexico Industrial Fund has equity commitments
of $500.0 million from third party investors that expire in
August 2010 and of which $411.5 million was unfunded at
December 31, 2007. In 2007, we contributed 35 properties
(24 CDFS and 11 non-CDFS) to this property fund for aggregate
proceeds of $251.8 million. This includes nine stabilized
properties that were part of a portfolio of properties we had
previously acquired with the intent to contribute to a new
property fund at, or slightly above, our cost. The proceeds and
costs related to these nine properties are reflected in CDFS
Acquired Property Portfolios in our Consolidated Statements of
Earnings. The proceeds and costs for the remaining 15 CDFS
contributed properties are included in CDFS Developed and
Repositioned Properties in our Consolidated Statements of
Earnings. |
|
(6) |
|
In September 2006, ProLogis European Properties
(PEPR) completed an initial public offering
(IPO) on the Euronext Amsterdam stock exchange in
which the selling unitholders offered 49.8 million ordinary
units. As the manager of the property fund, we were entitled to
an incentive return based on the internal rate of return that
the pre-IPO unitholders earned. The final incentive return of
$109.2 million was determined and recognized in the fourth
quarter of 2006. The return was paid to us by an initial
allocation of 3.9 million ordinary units, which increased
our investment by $68.6 million and our ownership interest
at that time to 24.0%, with the balance received in cash. In
connection with PEPRs IPO, we entered into a property
contribution agreement under which we were committed to offer to
contribute certain stabilized properties to PEPR having an
aggregate contribution value of 200 million. During
2007, we fulfilled our commitment by contributing 16 CDFS
properties to PEPR for aggregate proceeds of
$287.6 million. As a |
20
PROLOGIS
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
result of these contributions, our ownership interest increased
to 24.9% at December 31, 2007. In July 2007, PEPR sold a
portfolio of 47 properties, which resulted in a net gain of
$155.8 million to PEPR and $38.2 million to us as our
proportionate share. In 2006, prior to PEPRs IPO, we
contributed 19 properties to the fund for aggregate proceeds of
$419.6 million. |
|
(7) |
|
In July 2007, we formed a new European property fund, ProLogis
European Properties Fund II (PEPF II) with
several third party investors. Our ownership interest in PEPF II
is 24.3%, including a 16.85% direct interest in PEPF II, along
with a 7.45% indirect interest through our 24.9% investment in
PEPR, which owns approximately 30% of PEPF II. We are committed
to offer to contribute substantially all of the properties we
develop and stabilize in Europe and, in certain circumstances
properties we acquire, to PEPF II, subject to the property
meeting certain leasing and other criteria. PEPF II has equity
commitments from PEPR and third party investors of
2.5 billion ($3.6 billion as of
December 31, 2007), which expire in August 2010, and of
which 2.1 billion ($3.1 billion as of
December 31, 2007) was unfunded at December 31,
2007. In 2007, we contributed 38 properties for aggregate
proceeds of $1.3 billion. This includes 13 stabilized
properties that were part of a portfolio of properties we
acquired in February 2007 as part of the Parkridge acquisition
discussed in Note 3, with the intent to contribute to a new
property fund at, or slightly above, our cost. The proceeds and
costs related to these 13 properties are reflected in CDFS
Acquired Property Portfolios in our Consolidated Statements of
Earnings. The proceeds and costs for the remaining 25 CDFS
properties are included in CDFS Developed and Repositioned
Properties in our Consolidated Statements of Earnings. In
connection with these contributions, we advanced PEPF II
£25.2 million ($51.9 million as of
December 31, 2007), which bears interest at LIBOR plus a
margin and matures on February 26, 2008. |
|
(8) |
|
We are committed to offer to contribute all of the properties
that we develop and stabilize in Japan through September 2010 to
ProLogis Japan Properties Fund II, subject to the property
meeting certain leasing and other criteria. In 2007 and 2006, we
contributed five properties and six properties, all CDFS
properties, to this property fund for aggregate proceeds of
$642.9 and $405.5 million, respectively. In addition in
2007, the property fund acquired nine properties from a third
party and its investors acquired a portfolio of 17 properties
for an aggregate purchase price of $735 million, through a
joint venture in which we own 20% and our current partner in
ProLogis Japan Properties Fund II owns the remaining 80%.
ProLogis Japan Properties Fund II has an equity commitment
of $600.0 million from our fund partner, which expires in
August 2008, of which $28.2 million was unfunded at
December 31, 2007. In February 2008, ProLogis Japan
Properties Fund II received an additional equity commitment
of $400.0 million from our fund partner that expires in
September 2010. |
|
(9) |
|
The ProLogis Korea Fund, which was formed in 2006, acquired six
properties from a third party in 2007. We are committed to offer
to contribute substantially all of the properties we develop and
stabilize in South Korea and, in certain circumstances
properties we acquire, to ProLogis Korea Fund, subject to the
property meeting certain leasing and other criteria. ProLogis
Korea Fund has an equity commitment from our fund partner of
$200.0 million, which expires in June 2010, of which
$179.4 million was unfunded at December 31, 2007. |
21
PROLOGIS
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Summarized financial information of the property funds (for the
entire entity, not our proportionate share) and our investment
in such funds is presented below as of and for the years ended
December 31, 2007 and 2006 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
North
|
|
|
|
|
|
|
|
|
|
|
|
|
America
|
|
|
Europe
|
|
|
Asia
|
|
|
Total
|
|
|
Revenues
|
|
$
|
634.1
|
|
|
$
|
493.2
|
|
|
$
|
180.4
|
|
|
$
|
1,307.7
|
|
Net earnings (1)
|
|
$
|
27.6
|
|
|
$
|
234.1
|
|
|
$
|
64.4
|
|
|
$
|
326.1
|
|
Total assets
|
|
$
|
9,034.7
|
|
|
$
|
6,526.4
|
|
|
$
|
3,810.5
|
|
|
$
|
19,371.6
|
|
Amounts due to us
|
|
$
|
24.8
|
|
|
$
|
70.0
|
|
|
$
|
109.1
|
|
|
$
|
203.9
|
|
Third party debt (2)
|
|
$
|
5,305.2
|
|
|
$
|
3,456.2
|
|
|
$
|
1,889.5
|
|
|
$
|
10,650.9
|
|
Total liabilities
|
|
$
|
5,678.5
|
|
|
$
|
4,057.7
|
|
|
$
|
2,550.7
|
|
|
$
|
12,286.9
|
|
Minority interest
|
|
$
|
17.4
|
|
|
$
|
10.8
|
|
|
$
|
|
|
|
$
|
28.2
|
|
Equity
|
|
$
|
3,338.8
|
|
|
$
|
2,457.8
|
|
|
$
|
1,259.9
|
|
|
$
|
7,056.5
|
|
Our weighted average ownership at end of period (3)
|
|
|
27.9%
|
|
|
|
24.8%
|
|
|
|
20.0%
|
|
|
|
25.5%
|
|
Our investment balance (4)
|
|
$
|
818.0
|
|
|
$
|
653.1
|
|
|
$
|
284.0
|
|
|
$
|
1,755.1
|
|
Deferred proceeds, net of amortization (5)
|
|
$
|
216.4
|
|
|
$
|
193.9
|
|
|
$
|
127.0
|
|
|
$
|
537.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
North
|
|
|
|
|
|
|
|
|
|
|
|
|
America
|
|
|
Europe
|
|
|
Asia
|
|
|
Total
|
|
|
Revenues
|
|
$
|
494.6
|
|
|
$
|
414.4
|
|
|
$
|
120.9
|
|
|
$
|
1,029.9
|
|
Net earnings (6)
|
|
$
|
266.2
|
|
|
$
|
88.2
|
|
|
$
|
47.7
|
|
|
$
|
402.1
|
|
Total assets
|
|
$
|
6,420.7
|
|
|
$
|
4,856.0
|
|
|
$
|
1,958.3
|
|
|
$
|
13,235.0
|
|
Amounts due to us
|
|
$
|
6.7
|
|
|
$
|
14.0
|
|
|
$
|
75.2
|
|
|
$
|
95.9
|
|
Third party debt (2)
|
|
$
|
3,113.8
|
|
|
$
|
2,615.6
|
|
|
$
|
904.2
|
|
|
$
|
6,633.6
|
|
Total liabilities
|
|
$
|
4,360.8
|
|
|
$
|
2,968.0
|
|
|
$
|
1,054.2
|
|
|
$
|
8,383.0
|
|
Minority interest
|
|
$
|
5.7
|
|
|
$
|
6.6
|
|
|
$
|
|
|
|
$
|
12.3
|
|
Equity
|
|
$
|
2,054.2
|
|
|
$
|
1,881.4
|
|
|
$
|
904.1
|
|
|
$
|
4,839.7
|
|
Our weighted average ownership at end of period (3)
|
|
|
23.1%
|
|
|
|
24.0%
|
|
|
|
20.0%
|
|
|
|
23.0%
|
|
Our investment balance (4)
|
|
$
|
416.8
|
|
|
$
|
430.8
|
|
|
$
|
134.2
|
|
|
$
|
981.8
|
|
Deferred proceeds, net of amortization (5)
|
|
$
|
112.8
|
|
|
$
|
123.7
|
|
|
$
|
66.2
|
|
|
$
|
302.7
|
|
|
|
|
(1) |
|
Included in net earnings for Europe is a net gain of
$155.8 million from the disposition of 47 properties by
PEPR. |
|
(2) |
|
As of December 31, 2007, we had not guaranteed any of the
debt of the property funds. As of December 31, 2006, we had
guaranteed $15.0 million of borrowings of ProLogis North
American Properties Fund V. |
|
(3) |
|
Represents the weighted average of our ownership interests in
all property funds at December 31, based on each
entitys contribution to total assets, before depreciation,
net of other liabilities. |
|
(4) |
|
The difference between our percentage ownership interest of the
property funds equity and our investment balance results
principally from three types of transactions: (i) deferring
a portion of the proceeds we receive from a contribution of one
of our properties to a property fund as a result of our
continuing ownership in the property (see below);
(ii) additional costs we incur associated with our
investment in the property fund; and (iii) advances to the
property funds. |
|
(5) |
|
This amount is recorded as a reduction to our investment and
represents the proceeds that we defer when we contribute a
property to a property fund due to our continuing ownership in
the property. |
22
PROLOGIS
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
(6) |
|
Included in net earnings for Europe are expenses of
approximately $43.3 million related to the costs to
complete PEPRs IPO, as this was an offering of existing
units and no new capital was raised by PEPR. Included in net
earnings for North America is $185.7 million representing
the net gain recognized by Funds II-IV upon termination in the
first quarter of 2006 (see below). |
The unconsolidated property funds that we manage, and in which
we have an equity ownership, may enter into interest rate swap
contracts that are designated as cash flow hedges to mitigate
interest expense volatility associated with movements of
interest rates for the debt they expect to issue. In 2007,
certain of the property funds issued short-term bridge financing
to finance their acquisitions of properties from us and third
parties. Based on the anticipated refinancing of these bridge
financings with long-term debt issuances, the property funds
have the following interest rate swap contracts outstanding at
December 31, 2007 (amounts are for the entire entity and
are in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our
|
|
|
Notional
|
|
|
Swap
|
|
|
|
|
|
Entity
|
|
Ownership
|
|
|
Amounts
|
|
|
Rate
|
|
Maturity
|
|
Fair Value
|
|
|
ProLogis North American Industrial Fund II
|
|
|
36.9
|
%
|
|
$
|
1,005,900
|
|
|
5.31 - 5.83%
|
|
2009 - 2018
|
|
($
|
68,757
|
)
|
ProLogis North American Industrial Fund III
|
|
|
20.0
|
%
|
|
$
|
642,000
|
|
|
5.79%
|
|
2017
|
|
($
|
58,577
|
)
|
ProLogis Mexico Industrial Fund
|
|
|
20.0
|
%
|
|
$
|
137,000
|
|
|
5.24 - 5.56%
|
|
2017
|
|
($
|
8,650
|
)
|
We have recorded our proportionate share of the liabilities of
the funds related to these instruments in Other Comprehensive
Income in Shareholders Equity. Once these contracts are
settled, the amount of the gain or loss upon settlement, which
is recorded by the property funds in other comprehensive income,
will be amortized over the life of the hedged debt issuance. We
guarantee our proportionate share of the ProLogis North American
Industrial Fund III contracts.
On January 4, 2006, we purchased the 80% ownership
interests in each of Funds II-IV from our fund partner. On
March 1, 2006, we contributed substantially all of these
assets and associated liabilities to ProLogis
North American Industrial Fund, which was formed in
February 2006 (see above). In connection with these
transactions, after deferral of $17.9 million due to our
continuing ownership interest in ProLogis North American
Industrial Fund, we recognized total earnings of
$71.6 million ($12.5 million in CDFS Disposition
Proceeds Developed and Repositioned Properties,
$22.0 million in Property Management and Other Fees and
Incentives and $37.1 million in Earnings from
Unconsolidated Property Funds).
CDFS
joint ventures and other unconsolidated investees
At December 31, 2007, we had investments in entities that
perform some of our CDFS business activities (the CDFS
joint ventures) and certain other investments. These joint
ventures include entities that develop and own distribution and
retail properties and also include entities that perform land
and mixed-use development activity. The other operating joint
ventures primarily include entities that own a hotel property
and office properties.
The amounts we have recognized as our proportionate share of the
earnings (losses) from our investments in CDFS joint ventures
and other unconsolidated investees, are summarized as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
North America
|
|
$
|
7,428
|
|
|
$
|
45,651
|
|
|
$
|
4,178
|
|
Europe
|
|
|
(2,856
|
)
|
|
|
2,097
|
|
|
|
1,186
|
|
Asia
|
|
|
6,593
|
|
|
|
2,955
|
|
|
|
1,057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earnings from CDFS joint ventures and other unconsolidated
investees
|
|
$
|
11,165
|
|
|
$
|
50,703
|
|
|
$
|
6,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
PROLOGIS
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Included in our earnings from CDFS joint ventures in North
America for 2006 is $35.0 million representing our
proportionate share of the earnings of a CDFS joint venture,
LAAFB JV. The LAAFB JV was formed to redevelop a
U.S. Air Force base in Los Angeles, California in exchange
for land parcels and certain rights to receive tax increment
financing (TIF) proceeds over a period of time. As
our investment in LAAFB JV is held in a taxable subsidiary, we
also recognized a deferred income tax benefit of
$12.4 million and a current income tax expense of
$27.0 million for 2006 in our Consolidated Statements of
Earnings. This entity substantially completed its operations at
the end of 2006.
Our investments in and advances to these entities were as
follows as of December 31 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
CDFS joint ventures:
|
|
|
|
|
|
|
|
|
United States (1)
|
|
$
|
60,502
|
|
|
$
|
75,197
|
|
Europe(2)
|
|
|
228,396
|
|
|
|
8,499
|
|
Asia (3)
|
|
|
194,583
|
|
|
|
119,614
|
|
|
|
|
|
|
|
|
|
|
Total CDFS joint ventures
|
|
$
|
483,481
|
|
|
$
|
203,310
|
|
|
|
|
|
|
|
|
|
|
Other investees:
|
|
|
|
|
|
|
|
|
Operating joint ventures (4)
|
|
$
|
85,720
|
|
|
$
|
88,104
|
|
Other
|
|
|
20,963
|
|
|
|
26,443
|
|
|
|
|
|
|
|
|
|
|
Total other investees
|
|
$
|
106,683
|
|
|
$
|
114,547
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
590,164
|
|
|
$
|
317,857
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes a 50% interest in three mixed-use development entities
and three entities that own or are developing distribution
properties. |
|
(2) |
|
Includes investments in joint ventures that own land for current
and future development of distribution, retail and other
mixed-use properties. In February 2007, in connection with the
Parkridge acquisition, we made a 25% investment in Parkridge
Holdings Limited, which is primarily a retail and mixed-use
development business for $146.9 million (see Note 3).
Also included in this amount is £42.5 million
($91.8 million at December 31, 2007), which represents
a loan we made to this entity during 2007. The loan bears
interest at London Interbank Offered Rate (LIBOR) or
Euro Interbank Offered Rate (EURIBOR) (depending on
currency borrowed) plus a margin, matures February 2012 and
provides for additional borrowing of either euro or pound
sterling up to 25% of the approved budget for development
projects inside the venture, representing our ownership
interest, up to a maximum of 50 million pound sterling. |
|
(3) |
|
Includes investments in three joint ventures that own
distribution properties that were acquired from third parties or
developed by the joint venture. Also includes our investment in
an entity in China that we present on a consolidated basis. This
entity holds an investment interest ($70.3 million at
December 31, 2007) in an entity that primarily
develops retail properties and invests in joint ventures that
own and operate retail properties in China that is accounted for
under the equity method of accounting. As part of this
investment, we may be required to invest an additional
$42 million based primarily on the attainment of certain
performance criteria, which we deposited in escrow in 2006. In
2007, we advanced $24 million of these escrowed funds to
this entity to fund development activities. The advance bears
interest at 7% and matures December 2008. |
|
(4) |
|
Principally includes a 25.16% interest in an entity that owns
and operates a hotel property, a 38.75% interest in an entity
that owns and operates the parking lot adjacent to the hotel
property and a 66.67% interest in an entity that owns and
operates office properties. |
24
PROLOGIS
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
5.
|
Long-Term
Compensation:
|
The 2006 long-term incentive plan together with our 1997
long-term incentive plan (the Incentive Plan) have
been approved by our shareholders and provides for grants of
share options, stock appreciation rights (SARs),
full value awards and cash incentive awards to employees and
other persons providing services to us and our subsidiaries,
including outside trustees. No more than 28,660,000 common
shares in the aggregate may be awarded under the Incentive Plan.
In any one calendar-year period, no participant shall be
granted: (i) more than 500,000 share options and SARs;
(ii) more than 200,000 full value awards; or
(iii) more than $10,000,000 in cash incentive awards.
Common shares may be awarded under the Incentive Plan until it
is terminated by the Board. At December 31, 2007, 4,919,474
common shares were available for future issuance under the
Incentive Plan.
Share
Options
We have granted various share options to our employees and
trustees, subject to certain conditions. Each share option is
exercisable into one common share. The holders of share options
granted before 2001 earn dividend equivalent units
(DEUs) on December 31st of each year until
the earlier of the date the underlying share option is exercised
or the expiration date of the underlying share option. The
holders of share options granted in 2001 earned DEUs through
2005 and the holders of share options granted in 2002 and later
do not earn DEUs. At December 31, 2007, there were
1,750,467 share options with a weighted average exercise
price and remaining life of $21.27 and 1.8 years,
respectively, that will earn DEUs in the future. Share options
granted to employees generally have graded vesting over a
four-year period and have an exercise price equal to the market
price on the date of grant. Share options granted to employees
since September 2006 have an exercise price equal to the closing
market price of our common shares on the date of grant. Prior to
September 2006, the exercise price was based on the average of
the high and low prices on the date of grant. Share options
granted to trustees generally vest immediately.
Share options outstanding at December 31, 2007 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Average
|
|
|
Number of
|
|
|
|
Expiration
|
|
Remaining Life
|
|
|
Options
|
|
Exercise Price
|
|
Date
|
|
(in years)
|
|
Outside Trustees Plan
|
|
|
102,500
|
|
|
$19.75 - $43.80
|
|
2009-2015
|
|
|
4.6
|
Incentive Plan:
|
|
|
|
|
|
|
|
|
|
|
|
1998 grants
|
|
|
539,947
|
|
|
$20.94 - $21.09
|
|
2008
|
|
|
0.9
|
1999 grants
|
|
|
594,498
|
|
|
$17.19 - $18.63
|
|
2009
|
|
|
1.7
|
2000 grants
|
|
|
586,022
|
|
|
$21.75 - $24.25
|
|
2010
|
|
|
2.7
|
2001 grants
|
|
|
391,561
|
|
|
$20.67 - $22.02
|
|
2011
|
|
|
3.7
|
2002 grants
|
|
|
703,092
|
|
|
$22.98 - $24.76
|
|
2012
|
|
|
4.7
|
2003 grants
|
|
|
946,591
|
|
|
$24.90 - $31.26
|
|
2013
|
|
|
5.7
|
2004 grants
|
|
|
1,394,342
|
|
|
$29.41 - $41.50
|
|
2014
|
|
|
6.7
|
2005 grants
|
|
|
936,225
|
|
|
$40.86 - $45.46
|
|
2015
|
|
|
7.9
|
2006 grants
|
|
|
820,454
|
|
|
$53.07 - $59.92
|
|
2016
|
|
|
9.0
|
2007 grants
|
|
|
983,178
|
|
|
$60.60 - $64.82
|
|
2017
|
|
|
10.0
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
7,998,410
|
|
|
|
|
|
|
|
6.0
|
|
|
|
|
|
|
|
|
|
|
|
|
25
PROLOGIS
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The activity for the year ended December 31, 2007, with
respect to our share options, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
|
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
Weighted
|
|
|
|
|
|
Average
|
|
|
|
Average
|
|
Average
|
|
|
Number of
|
|
|
Exercise
|
|
Number of
|
|
Exercise
|
|
Life
|
|
|
Options
|
|
|
Price
|
|
Options
|
|
Price
|
|
(in years)
|
|
Balance at January 1, 2007
|
|
|
8,464,053
|
|
|
$
|
32.50
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
983,178
|
|
|
|
60.62
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(1,342,912
|
)
|
|
|
27.29
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(105,909
|
)
|
|
|
47.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
7,998,410
|
|
|
$
|
36.63
|
|
|
5,504,282
|
|
$
|
29.14
|
|
|
4.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average grant-date fair value of options granted
during the years 2007, 2006 and 2005 was $11.42, $10.40 and
$7.26, respectively. Total remaining compensation cost related
to unvested share options as of December 31, 2007 was
$21.7 million, prior to adjustments for capitalized amounts
due to our development and leasing activities and forfeited
awards.
The activity for the year ended December 31, 2007, with
respect to our non-vested share options, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
Number of
|
|
|
Grant-Date
|
|
|
Shares
|
|
|
Fair Value
|
|
Balance at January 1, 2007
|
|
|
2,940,973
|
|
|
$
|
7.14
|
Granted
|
|
|
983,178
|
|
|
|
11.42
|
Vested
|
|
|
(1,324,114
|
)
|
|
|
6.14
|
Forfeited
|
|
|
(105,909
|
)
|
|
|
7.73
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
2,494,128
|
|
|
$
|
9.33
|
|
|
|
|
|
|
|
|
Full
Value Awards
Restricted Share Units
Restricted share units (RSUs) are granted at a rate
of one common share per RSU to our employees. The RSUs are
valued on the grant date based upon the market price of a common
share on that date. We recognize the value of the RSUs granted
as compensation expense over the applicable vesting period,
which is generally four or five years. The RSUs do not carry
voting rights during the vesting period, but do generally earn
DEUs that vest according to the underlying RSU. The
weighted-average fair value of RSUs granted during the years
2007, 2006 and 2005 was $63.25, $53.86 and $45.29, respectively.
In addition, annually we issue fully vested deferred share units
to our trustees, which are expensed at the time of grant and
earn DEUs.
Contingent Performance Shares and Performance Share Awards
Certain employees are granted contingent performance shares
(CPSs). There were grants of CPSs in 2007, 2006 and
2005 of which the CPSs are earned based on our ranking in a
defined subset of companies in the National Association of Real
Estate Investment Trusts (NAREITs)
published index. These CPSs generally vest over a three-year
period and the recipient must continue to be employed by us
until the end of the vesting period. The amount of CPSs to be
issued will be based on our ranking at the end of the three-year
period, and may range from zero to twice the targeted award, or
a maximum of 840,000 shares at December 31, 2007. For
purposes of calculating compensation expense, we consider the
CPSs to have a
26
PROLOGIS
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
market condition and therefore we have estimated the grant date
fair value of the CPSs using a pricing valuation model. We
recognize the value of the CPSs granted as compensation expense
utilizing the grant date fair value and the target shares over
the vesting period.
Certain employees were granted Performance Share Awards
(PSAs) through December 31, 2005 based on
individual and company performance criteria. If a PSA was earned
based on the performance criteria, the recipient must have
continued to be employed by us until the end of the vesting
period before any portion of the grant is vested, generally two
years. The PSAs were valued based upon the market price of a
common share on grant date. We recognize the value of the PSAs
granted as compensation expense over the vesting period.
These awards carry no voting rights during this vesting period,
but do earn DEUs that are vested at the end of the vesting
period of the underlying award. The weighted-average fair value
of CPSs and PSAs granted during the years 2007, 2006 and 2005
was $71.48, $64.35 and $48.78, respectively.
Dividend Equivalent Units
RSUs, CPSs and certain share options granted through 2001 earn
DEUs in the form of common shares at a rate of one common share
per DEU. We treat the DEUs as dividends, which are charged to
retained earnings and factored into the computation of the fair
value of the underlying share award at grant date. Prior to the
adoption of SFAS 123R on January 1, 2006, we
recognized the value of the DEUs issued as compensation expense,
based on the market price of a common share on the grant date,
over the vesting period of the underlying share award.
Summary of Activity of CPSs, PSAs and RSUs
Activity with respect to our CPSs, PSAs, and RSUs is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Outstanding
|
|
|
|
|
Number of
|
|
|
Weighted Average
|
|
Number of
|
|
|
Shares
|
|
|
Original Value
|
|
Vested Shares
|
|
Balance at January 1, 2007
|
|
|
2,264,876
|
|
|
$
|
44.08
|
|
|
808,544
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
707,443
|
|
|
|
64.91
|
|
|
|
Exercised
|
|
|
(389,476
|
)
|
|
|
38.83
|
|
|
|
Forfeited
|
|
|
(28,057
|
)
|
|
|
57.77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
2,554,786
|
|
|
$
|
50.50
|
|
|
829,689
|
|
|
|
|
|
|
|
|
|
|
|
Total remaining compensation cost related to unvested CPSs and
RSUs as of December 31, 2007 was $79.6 million, prior
to adjustments for forfeited awards and capitalized amounts due
to our development and leasing activities. As of
December 31, 2007, all PSAs were either fully vested or
were forfeited. The remaining expense will be recognized through
2011, which equates to a weighted average period of
2.1 years.
27
PROLOGIS
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The activity for the year ended December 31, 2007, with
respect to our non-vested CPSs, PSAs, and RSUs is presented
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
Number of
|
|
|
Grant-Date
|
|
|
Shares
|
|
|
Fair Value
|
|
Balance at January 1, 2007
|
|
|
1,456,332
|
|
|
$
|
50.31
|
Granted
|
|
|
707,443
|
|
|
|
64.91
|
Vested
|
|
|
(410,621
|
)
|
|
|
44.52
|
Forfeited
|
|
|
(28,057
|
)
|
|
|
57.77
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
1,725,097
|
|
|
$
|
57.55
|
|
|
|
|
|
|
|
|
Compensation
Expense
During the years ended December 31, 2007 and 2006, we
recognized $23.9 million and $21.6 million,
respectively, of compensation expense under the provisions of
SFAS 123R. These amounts are net of $10.8 million and
$8.4 million, respectively, that was capitalized due to our
development and leasing activities and forfeited awards and
includes expense related to awards granted to our outside
trustees. During the year ended December 31, 2005, under
the provisions of APB 25, we recognized $22.6 million of
compensation expense, net of $4.6 million that was
capitalized due to our development and leasing activities.
We calculated the fair value of the options granted in each of
the following years using a Black-Scholes pricing model and the
following weighted average assumptions:
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
|
Risk-free interest rate
|
|
3.78%
|
|
4.51%
|
|
4.33%
|
Dividend yield
|
|
3.44%
|
|
3.40%
|
|
3.92%
|
Volatility
|
|
23.43%
|
|
19.46%
|
|
20.33%
|
Weighted average option life
|
|
5.8 years
|
|
5.8 years
|
|
5.9 years
|
We use historical data to estimate dividend yield, share option
exercises, expected term and employee departure behavior used in
the Black-Scholes pricing model. The risk-free interest rate for
periods within the expected term of the share option is based on
the U.S. Treasury yield curve in effect at the time of
grant. To calculate expected volatility, we use historical
volatility of our common stock and implied volatility of traded
options on our common stock.
Other
Plans
We have a 401(k) Savings Plan and Trust (401(k)
Plan), that provides for matching employer contributions
in common shares of 50 cents for every dollar contributed by an
employee, up to 6% of the employees annual compensation
(within the statutory compensation limit). A total of 190,000
common shares have been authorized for issuance under the 401(k)
Plan. The vesting of contributed common shares is based on the
employees years of service, with 20% vesting each year of
service, over a five-year period. Through December 31,
2007, no common shares have been issued under the 401(k) Plan.
All of our matching contributions have been made with common
shares purchased by us in the open market.
We have a nonqualified savings plan to provide benefits for
certain employees. The purpose of this plan is to allow highly
compensated employees the opportunity to defer the receipt and
income taxation of a certain portion of their compensation in
excess of the amount permitted under the 401(k) Plan. We match
the lesser of (a) 50% of the sum of deferrals under both
the 401(k) Plan and this plan, and (b) 3% of total
compensation up
28
PROLOGIS
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
to certain levels. The matching contributions vest in the same
manner as the 401(k) Plan. On a combined basis for both plans,
our contributions under the matching provisions were
$1.1 million, $1.1 million and $0.8 million for
2007, 2006 and 2005, respectively.
The minority interest associated with real estate partnerships
or joint ventures that we consolidate at December 31 is as
follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
# of
|
|
|
|
|
|
|
|
|
# of
|
|
|
|
|
|
|
|
Continent
|
|
Entities
|
|
|
Balance
|
|
|
Minority Interest
|
|
|
Entities
|
|
|
Balance
|
|
|
Minority Interest
|
|
|
North America (1)(2)(3)
|
|
|
3
|
|
|
$
|
31,192
|
|
|
|
4-31
|
%
|
|
|
5
|
|
|
$
|
37,614
|
|
|
|
1-31
|
%
|
North America other
|
|
|
3
|
|
|
|
537
|
|
|
|
1-25
|
%
|
|
|
1
|
|
|
|
498
|
|
|
|
25
|
%
|
China
|
|
|
6
|
|
|
|
40,646
|
|
|
|
20-49
|
%
|
|
|
4
|
|
|
|
14,156
|
|
|
|
20-40
|
%
|
Europe
|
|
|
1
|
|
|
|
6,286
|
|
|
|
50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
78,661
|
|
|
|
|
|
|
|
|
|
|
$
|
52,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
At December 31, 2007 and 2006, an aggregate of 5,052,197
and 5,138,809, respectively, limited partnership units held by
minority interest holders are convertible into 5,053,187 and
5,139,799, respectively, common shares. |
|
(2) |
|
As of December 31, 2007 and 2006, there were 4,530,435 and
4,658,700, respectively, of outstanding limited partnership
units that were entitled to receive cumulative preferential
quarterly cash distributions equal to the quarterly
distributions paid on common shares. |
|
(3) |
|
Certain properties owned by one of these partnerships cannot be
sold, other than in tax-deferred exchanges, prior to the
occurrence of certain events and without the consent of the
limited partners. The partnership agreement provides that a
minimum level of debt must be maintained within the partnership,
which can include intercompany debt to us. |
For 2007, 2006 and 2005, we, and our consolidated REIT
subsidiary, believe we have complied with the REIT requirements
of the Code. The statute of limitations for our tax returns is
generally three years, with our major tax jurisdictions being
the United States, Japan, Luxembourg and the United Kingdom. As
such, our tax returns that remain subject to examination would
be primarily from 2004 and thereafter, except for Catellus.
Certain 1999 through 2005 federal and state income tax returns
of Catellus are still open for audit or are currently under
audit by the Internal Revenue Service (IRS) and
various state taxing authorities.
The unrecognized tax benefit liability, which is defined in
FIN 48 as the difference between a tax position taken or
expected to be taken in a tax return and the benefit measured
and recognized in the financial statements, at December 31,
2007 and 2006, which includes accrued interest and penalties of
$70.9 million and $45.2 million, respectively,
principally consists of estimated federal and state income tax
liabilities associated with acquired companies. Included in the
December 31, 2007 interest accrual is $3.7 million
associated with our adoption of FIN 48 on January 1,
2007. Any increases or decreases in the liabilities for
unrecognized tax benefits associated with income tax
uncertainties related to an acquired company will be reflected
as an adjustment to goodwill recorded as part of the transaction.
29
PROLOGIS
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A reconciliation of the liability for unrecognized tax benefits
is as follows (in millions):
|
|
|
|
|
Balance at January 1, 2007
|
|
$
|
172.7
|
|
Additions based on tax positions related to the current year
|
|
|
8.5
|
|
Additions for tax positions of prior years
|
|
|
16.0
|
|
Reductions for tax positions of prior years
|
|
|
(2.3
|
)
|
Reductions due to lapse of applicable statute of limitations
|
|
|
(2.5
|
)
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
192.4
|
|
|
|
|
|
|
Components of earnings before income taxes for the years ended
December 31, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Domestic
|
|
$
|
274,528
|
|
$
|
348,532
|
|
$
|
85,175
|
International
|
|
|
781,510
|
|
|
394,809
|
|
|
241,779
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,056,038
|
|
$
|
743,341
|
|
$
|
326,954
|
|
|
|
|
|
|
|
|
|
|
Components of the provision for income taxes for the years ended
December 31, are as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Current income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
28,264
|
|
|
$
|
49,900
|
|
|
$
|
3,379
|
Non-U.S.
|
|
|
37,433
|
|
|
|
20,254
|
|
|
|
10,547
|
State and local
|
|
|
2,652
|
|
|
|
14,096
|
|
|
|
921
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current
|
|
|
68,349
|
|
|
|
84,250
|
|
|
|
14,847
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax (benefit) expense
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(16,197
|
)
|
|
|
(26,382
|
)
|
|
|
5,726
|
Non-U.S.
|
|
|
16,747
|
|
|
|
(27,340
|
)
|
|
|
6,319
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Deferred
|
|
|
550
|
|
|
|
(53,722
|
)
|
|
|
12,045
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense
|
|
$
|
68,899
|
|
|
$
|
30,528
|
|
|
$
|
26,892
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Income Taxes
Current income tax expense is generally a function of the level
of income recognized by our TRSs, state income taxes, taxes
incurred in foreign jurisdictions and interest and penalties
associated with our income tax liabilities. During the years
ended December 31, 2007, 2006 and 2005, we recognized
$22.0 million, $11.1 million, and $2.3 million,
respectively, of interest and penalties related to our
unrecognized tax benefits. During the years ended
December 31, 2007, 2006 and 2005, cash paid for income
taxes was $35.9 million, $74.1 million and
$17.5 million, respectively.
Deferred
Income Taxes
Deferred income tax expense is generally a function of the
periods temporary differences, the utilization of tax net
operating losses generated in prior years that had been
previously recognized as deferred income tax assets and deferred
income tax liabilities related to indemnification agreements for
contributions to certain property funds.
30
PROLOGIS
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For federal income tax purposes, certain acquisitions have been
treated as tax-free transactions resulting in a carry-over basis
for tax purposes. For financial reporting purposes and in
accordance with purchase accounting, we record all of the
acquired assets and liabilities at the estimated fair values at
the date of acquisition. For our TRSs, we recognize the deferred
income tax liabilities that represent the tax effect of the
difference between the tax basis carried over and the fair value
of the tangible assets at the date of acquisition. As taxable
income is generated in these subsidiaries, we recognize a
deferred income tax benefit in earnings as a result of the
reversal of the deferred income tax liability previously
recorded at the acquisition date and we record current income
tax expense representing the entire current income tax
liability. Any increases or decreases to the deferred income tax
liability recorded in connection with these acquisitions,
related to tax uncertainties acquired, will be reflected as an
adjustment to goodwill. During 2007, we reduced deferred tax
liabilities and goodwill by $16.3 million.
Deferred income tax assets and liabilities as of
December 31, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Deferred income tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards(1)
|
|
$
|
22,139
|
|
|
$
|
13,759
|
|
Basis difference real estate properties
|
|
|
8,060
|
|
|
|
8,132
|
|
AMT credit carryforward
|
|
|
786
|
|
|
|
796
|
|
Other temporary differences
|
|
|
15,007
|
|
|
|
16,371
|
|
|
|
|
|
|
|
|
|
|
Total deferred income tax assets
|
|
|
45,992
|
|
|
|
39,058
|
|
Valuation allowance
|
|
|
(675
|
)
|
|
|
(1,711
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred income tax assets
|
|
|
45,317
|
|
|
|
37,347
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax liabilities:
|
|
|
|
|
|
|
|
|
Basis difference real estate properties
|
|
|
(50,698
|
)
|
|
|
(7,944
|
)
|
Built-in gains real estate properties
|
|
|
(29,802
|
)
|
|
|
(47,621
|
)
|
Basis difference equity investees
|
|
|
(11,554
|
)
|
|
|
(9,246
|
)
|
Built-in gains equity investees
|
|
|
(26,597
|
)
|
|
|
(22,781
|
)
|
Indemnification liabilities
|
|
|
(15,451
|
)
|
|
|
(5,916
|
)
|
Other temporary differences
|
|
|
(18,835
|
)
|
|
|
(25,527
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred income tax liabilities
|
|
|
(152,937
|
)
|
|
|
(119,035
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred income tax liabilities
|
|
$
|
(107,620
|
)
|
|
$
|
(81,688
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
At December 31, 2007, we had net operating loss
(NOL) carryforwards for U.S. federal income tax
purposes of $53.4 million and various international
jurisdictions of $0.7 million. If not utilized, the U.S.
NOLs expire between 2022 and 2027 and the international NOLs
expire in 2012. |
Indemnification
Agreements
We have indemnification agreements related to most property
funds operating outside of the United States for the
contribution of certain properties. We enter into agreements
whereby we indemnify the funds, or our fund partners, for taxes
that may be assessed with respect to certain properties we
contribute to these funds. Our contributions to these funds are
generally structured as contributions of shares of companies
that own the real estate assets. Accordingly, the capital gains
associated with the step up in the value of the underlying real
estate assets, for tax purposes, are deferred and transferred to
the funds at contribution. We have generally indemnified these
funds to the extent that the funds: (i) incur capital gains
or withholding tax as a result of a
31
PROLOGIS
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
direct sale of the real estate asset, as opposed to a
transaction in which the shares of the company owning the real
estate asset are transferred or sold or (ii) are required
to grant a discount to the buyer of shares under a share
transfer transaction as a result of the funds transferring the
embedded capital gain tax liability to the buyer of the shares
in the transaction. The agreements generally limit the amount
that is subject to our indemnification with respect to each
property to 100% of the actual tax liabilities related to the
capital gains that are deferred and transferred by us to the
funds at the time of the initial contribution less any deferred
tax assets transferred with the property.
In connection with our acquisition of MPR in 2007, we are no
longer obligated under an indemnification we previously provided
to ProLogis North American Properties Fund V and,
accordingly, we recognized a deferred tax benefit of
$6.3 million in 2007 for the reversal of the obligation. In
2006, we were previously obligated to the pre-IPO unitholders of
PEPR under a tax indemnification agreement entered into in
August 2003 and related to properties contributed to PEPR prior
to its IPO. As we were no longer obligated for indemnification
with respect to those properties, we recognized a deferred
income tax benefit of $36.8 million related to the reversal
of this obligation in 2006.
The ultimate outcome under these agreements is uncertain as it
is dependent on the method and timing of dissolution of the
related property fund or disposition of any properties by the
property fund. As discussed above, two of our previous
agreements were terminated without any amounts being due or
payable by us. We consider the probability, timing and amounts
in estimating our potential liability under the agreements,
which we have estimated as $15.5 million and
$5.9 million at December 31, 2007 and 2006,
respectively. We continue to monitor these agreements and the
likelihood of the sale of assets that would result in
recognition and will adjust the potential liability in the
future as facts and circumstances dictate.
|
|
8.
|
Discontinued
Operations:
|
At December 31, 2007 and 2006, we had two and eight
properties, respectively, that were classified as held for sale
and, accordingly, the respective assets and liabilities are
presented separately in our Consolidated Balance Sheets. The
operations of the properties held for sale or disposed of to
third parties, including land subject to ground leases, and the
aggregate net gains recognized upon their disposition are
presented as discontinued operations in our Consolidated
Statements of Earnings for all periods presented. Interest
expense is included in discontinued operations if it is directly
attributable to these properties.
Income attributable to discontinued operations is summarized as
follows for the years ended December 31 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Rental income
|
|
$
|
12,095
|
|
|
$
|
62,860
|
|
|
$
|
65,178
|
|
Rental expenses
|
|
|
(3,495
|
)
|
|
|
(26,140
|
)
|
|
|
(23,171
|
)
|
Depreciation and amortization
|
|
|
(2,896
|
)
|
|
|
(11,535
|
)
|
|
|
(16,739
|
)
|
Interest expense
|
|
|
|
|
|
|
(874
|
)
|
|
|
(1,077
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income attributable to disposed properties and assets held for
sale
|
|
$
|
5,704
|
|
|
$
|
24,311
|
|
|
$
|
24,191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
PROLOGIS
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following properties were disposed of and included in
discontinued operations during each of the years ended December
31 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Non-CDFS business assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of properties
|
|
|
75
|
|
|
|
74
|
|
|
|
64
|
|
Net proceeds from dispositions
|
|
$
|
221,063
|
|
|
$
|
531,969
|
|
|
$
|
335,610
|
|
Net gains from dispositions
|
|
$
|
52,776
|
|
|
|
103,729
|
|
|
$
|
86,444
|
|
CDFS business assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of properties
|
|
|
5
|
|
|
|
15
|
|
|
|
8
|
|
Net proceeds from dispositions
|
|
$
|
205,775
|
|
|
$
|
245,500
|
|
|
$
|
100,494
|
|
Net gains from dispositions
|
|
$
|
28,721
|
|
|
$
|
33,514
|
|
|
$
|
10,616
|
|
In July 2005, we sold our temperature-controlled distribution
assets in France. In connection with the sale, we received total
proceeds of 30.8 million (the currency equivalent of
approximately $36.6 million as of the sale date) including
a note receivable of 23.9 million. The note was paid
in full in January 2006. We recognized cumulative translation
losses and impairment charges of $26.9 million in 2005 to
reflect our investment in this business at its estimated fair
value less costs to sell. These charges are included in Losses
Related To Temperature-Controlled Distribution Assets in our
Consolidated Statements of Earnings.
33
PROLOGIS
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
9.
|
Distributions
and Dividends:
|
The following summarizes the taxability of our common share
distributions and preferred share dividends (taxability for 2007
is estimated):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary income
|
|
$
|
0.89
|
|
|
$
|
0.95
|
|
|
$
|
0.99
|
|
Qualified dividend
|
|
|
|
|
|
|
0.04
|
|
|
|
0.07
|
|
Capital gains
|
|
|
0.64
|
|
|
|
|
|
|
|
0.15
|
|
Return of capital
|
|
|
0.31
|
|
|
|
0.61
|
|
|
|
0.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total distribution
|
|
$
|
1.84
|
|
|
$
|
1.60
|
|
|
$
|
1.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per preferred share Series C:
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary income
|
|
$
|
2.47
|
|
|
$
|
4.10
|
|
|
$
|
3.49
|
|
Qualified dividend
|
|
|
|
|
|
|
0.17
|
|
|
|
0.24
|
|
Capital gains
|
|
|
1.80
|
|
|
|
|
|
|
|
0.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total dividend
|
|
$
|
4.27
|
|
|
$
|
4.27
|
|
|
$
|
4.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per preferred share Series F:
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary income
|
|
$
|
0.98
|
|
|
$
|
1.62
|
|
|
$
|
1.38
|
|
Qualified dividend
|
|
|
|
|
|
|
0.07
|
|
|
|
0.09
|
|
Capital gains
|
|
|
0.71
|
|
|
|
|
|
|
|
0.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total dividend
|
|
$
|
1.69
|
|
|
$
|
1.69
|
|
|
$
|
1.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per preferred share Series G:
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary income
|
|
$
|
0.98
|
|
|
$
|
1.62
|
|
|
$
|
1.38
|
|
Qualified dividend
|
|
|
|
|
|
|
0.07
|
|
|
|
0.09
|
|
Capital gains
|
|
|
0.71
|
|
|
|
|
|
|
|
0.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total dividend
|
|
$
|
1.69
|
|
|
$
|
1.69
|
|
|
$
|
1.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In order to comply with the REIT requirements of the Code, we
are generally required to make common share distributions (other
than capital gain distributions) to our shareholders at least
equal to (i) the sum of (a) 90% of our REIT
taxable income computed without regard to the dividends
paid deduction and net capital gains and (b) 90% of the net
income (after tax), if any, from foreclosure property, minus
(ii) certain excess non-cash income. Our common share
distribution policy is to distribute a percentage of our cash
flow to ensure we will meet the distribution requirements of the
Code, while allowing us to maximize the cash retained to meet
other cash needs, such as capital improvements and other
investment activities.
Common share distributions are characterized for federal income
tax purposes as ordinary income, qualified dividend, capital
gains, non-taxable return of capital or a combination of the
four. Common share distributions that exceed our current and
accumulated earnings and profits (calculated for tax purposes)
constitute a return of capital rather than a dividend and
generally reduce the shareholders basis in the common
shares. To the extent that a distribution exceeds both current
and accumulated earnings and profits and the shareholders
basis in the common shares, it will generally be treated as a
gain from the sale or exchange of that shareholders common
shares. At the beginning of each year, we notify our
shareholders of the taxability of the common share distributions
paid during the preceding year.
In December 2007, the Board approved an increase in the annual
distribution for 2008 from $1.84 to $2.07 per common share. The
payment of common share distributions is dependent upon our
financial
34
PROLOGIS
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
condition and operating results and may be adjusted at the
discretion of the Board during the year. A distribution of
$0.5175 per common share for the first quarter of 2008 was
declared on February 1, 2008. This distribution will be
paid on February 29, 2008 to holders of common shares on
February 15, 2008.
Pursuant to the terms of our preferred shares, we are restricted
from declaring or paying any distribution with respect to our
common shares unless and until all cumulative dividends with
respect to the preferred shares have been paid and sufficient
funds have been set aside for dividends that have been declared
for the then-current dividend period with respect to the
preferred shares.
Our tax return for the year ended December 31, 2007 has not
been filed. The taxability information presented for our
distributions and dividends paid in 2007 is based upon the best
available data. Our tax returns for previous tax years have not
been examined by the IRS. Consequently, the taxability of
distributions and dividends is subject to change.
|
|
10.
|
Earnings
Per Common Share:
|
We determine basic earnings per share based on the weighted
average number of common shares outstanding during the period.
We determine diluted earnings per share based on the weighted
average number of common shares outstanding combined with the
incremental weighted average effect from all outstanding
potentially dilutive instruments.
The following table sets forth the computation of our basic and
diluted earnings per share (in thousands, except per share
amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Net earnings attributable to common shares
|
|
$
|
1,048,917
|
|
|
$
|
848,951
|
|
|
$
|
370,747
|
|
Minority interest(1)
|
|
|
4,813
|
|
|
|
3,457
|
|
|
|
5,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net earnings attributable to common shares
|
|
$
|
1,053,730
|
|
|
$
|
852,408
|
|
|
$
|
375,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding Basic
|
|
|
256,873
|
|
|
|
245,952
|
|
|
|
203,337
|
|
Incremental weighted average effect of conversion of limited
partnership units
|
|
|
5,078
|
|
|
|
5,198
|
|
|
|
5,540
|
|
Incremental weighted average effect of share options and
awards(2)
|
|
|
5,275
|
|
|
|
5,702
|
|
|
|
4,836
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding Diluted
|
|
|
267,226
|
|
|
|
256,852
|
|
|
|
213,713
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share attributable to common shares
Basic
|
|
$
|
4.08
|
|
|
$
|
3.45
|
|
|
$
|
1.82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share attributable to common shares
Diluted
|
|
$
|
3.94
|
|
|
$
|
3.32
|
|
|
$
|
1.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes only the minority interest related to the convertible
limited partnership units, which are included in incremental
shares. |
|
(2) |
|
Total weighted average potentially dilutive instruments
outstanding (in thousands) were 10,098, 10,909 and 10,783 for
2007, 2006 and 2005, respectively. The majority of these were
dilutive in all periods. |
35
PROLOGIS
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Real
Estate Assets
Real estate assets, including those properties pending
contribution or sale, are presented at cost, and consist of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Industrial distribution operating properties (1):
|
|
|
|
|
|
|
|
|
Improved land
|
|
$
|
2,200,761
|
|
|
$
|
2,207,318
|
|
Buildings and improvements
|
|
|
8,799,318
|
|
|
|
8,138,387
|
|
Retail operating properties (2):
|
|
|
|
|
|
|
|
|
Improved land
|
|
|
77,536
|
|
|
|
77,808
|
|
Buildings and improvements
|
|
|
250,884
|
|
|
|
227,380
|
|
Land subject to ground leases and other (3)
|
|
|
458,782
|
|
|
|
472,412
|
|
Properties under development, including cost of land (4)
|
|
|
1,986,285
|
|
|
|
964,842
|
|
Land held for development (5)
|
|
|
2,152,960
|
|
|
|
1,397,081
|
|
Other investments (6)
|
|
|
652,319
|
|
|
|
411,863
|
|
|
|
|
|
|
|
|
|
|
Total real estate assets
|
|
|
16,578,845
|
|
|
|
13,897,091
|
|
Less accumulated depreciation
|
|
|
1,368,458
|
|
|
|
1,264,227
|
|
|
|
|
|
|
|
|
|
|
Net real estate assets
|
|
$
|
15,210,387
|
|
|
$
|
12,632,864
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
At December 31, 2007 and 2006, we had 1,378 and 1,446
distribution operating properties consisting of
207.3 million square feet and 203.6 million square
feet, respectively. |
|
(2) |
|
At December 31, 2007 and 2006, we had 31 and 27 retail
operating properties consisting of 1.2 million square feet
and 1.1 million square feet, respectively. |
|
(3) |
|
At December 31, 2007 and 2006, amount represents
investments of $414.7 million and $422.7 million in
land we own and lease to our customers under long-term ground
leases, $7.9 million and $20.0 million in office
properties and an investment of $36.2 million and
$29.7 million in railway depots, respectively. |
|
(4) |
|
Properties under development consisted of 180 properties
aggregating 48.8 million square feet at December 31,
2007 and 114 properties aggregating 30.0 million square
feet at December 31, 2006. At December 31, 2007, our
total expected investment upon completion of the properties
under development is approximately $3.9 billion, of which
$2.0 billion was incurred. |
|
(5) |
|
Land held for future development consisted of 9,351 and
6,204 acres of land or land use rights at December 31,
2007 and 2006, respectively. |
|
(6) |
|
Other investments primarily include: (i) restricted funds
that are held in escrow pending the completion of tax-deferred
exchange transactions involving operating properties
($94.5 million and $91.9 million at December 31,
2007 and 2006, respectively.); (ii) earnest money deposits
associated with potential acquisitions; (iii) costs
incurred during the pre-acquisition due diligence process;
(iv) costs incurred during the pre-construction phase
related to future development projects, including purchase
options on land and certain infrastructure costs; (v) cost
of land use rights on operating properties in China; and
(vi) costs related to our corporate office buildings. |
At December 31, 2007, we directly owned real estate assets
in North America (Canada, Mexico and the United States),
Europe (Belgium, the Czech Republic, France, Germany, Hungary,
Italy, the Netherlands, Poland, Romania, Slovakia, Spain,
Sweden, and the United Kingdom) and Asia (China, Japan and
South Korea).
36
PROLOGIS
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During the last three years, we completed individual and
portfolio acquisitions of industrial distribution properties,
other than those discussed in Note 3 and Note 4, as
follows (aggregated, dollars and square feet in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Aggregate
|
|
|
Aggregate
|
|
|
|
|
|
|
Properties
|
|
|
Square Feet
|
|
|
Purchase Price
|
|
|
Debt Assumed
|
|
|
2007
|
|
|
41
|
|
|
|
7,347
|
|
|
$
|
351,639
|
|
|
$
|
30,141
|
|
2006
|
|
|
74
|
|
|
|
13,529
|
|
|
$
|
735,427
|
|
|
$
|
87,919
|
|
2005
|
|
|
13
|
|
|
|
3,783
|
|
|
$
|
170,744
|
|
|
$
|
19,919
|
|
During the years ended December 31, 2007 and 2006, we
recognized gains of $146.7 million and $81.5 million,
respectively, in Gains Recognized on Dispositions of Certain
Non-CDFS Business Assets in our Consolidated Statements of
Earnings for properties contributed to the property funds (77 in
2007 and 39 in 2006), from our property operations segment. In
addition, we recognized previously deferred proceeds related to
non-CDFS properties sold to a third party by a property fund.
Due to our continuing involvement through our ownership in the
property funds, these dispositions are not included in
discontinued operations and the gains recognized include only
the portion attributable to the third party ownership in the
property funds that acquired the properties. No gains were
recognized in 2005.
Included in other expenses for the year ended December 31,
2007, are impairment charges of $13.3 million related
primarily to certain properties held and used in our property
operations segment.
Operating
Lease Agreements
We lease our operating properties and certain land parcels to
customers under agreements that are generally classified as
operating leases. Our largest customer and 25 largest customers
accounted for 2.6% and 19.7%, respectively, of our annualized
collected base rents at December 31, 2007. At
December 31, 2007, minimum lease payments on leases with
lease periods greater than one year for space in our operating
properties, excluding properties held for sale, and including
leases of land under ground leases, during each of the years in
the five-year period ending December 31, 2012 and
thereafter are as follows (in thousands):
|
|
|
|
|
2008
|
|
$
|
733,723
|
|
2009
|
|
|
626,373
|
|
2010
|
|
|
520,116
|
|
2011
|
|
|
405,315
|
|
2012
|
|
|
291,631
|
|
Thereafter
|
|
|
1,390,902
|
|
|
|
|
|
|
|
|
$
|
3,968,060
|
|
|
|
|
|
|
These amounts do not reflect future rental revenues from the
renewal or replacement of existing leases and excludes
reimbursements of property operating expenses. In addition to
minimum rental payments, certain customers pay reimbursements
for their pro rata share of specified operating expenses, which
amounted to $217.8 million, $180.0 million and
$113.6 million for the years ended December 31, 2007,
2006 and 2005, respectively. These amounts are included as
rental income and operating expenses in the accompanying
Consolidated Statements of Earnings.
37
PROLOGIS
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
12.
|
Other
Assets and Other Liabilities:
|
Our other assets consisted of the following, net of amortization
and depreciation, if applicable, as of December 31 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Goodwill
|
|
$
|
530,760
|
|
|
$
|
254,192
|
|
Value added taxes receivable
|
|
|
287,659
|
|
|
|
215,712
|
|
Leasing commissions
|
|
|
135,662
|
|
|
|
139,225
|
|
Rent leveling assets and above market leases
|
|
|
100,263
|
|
|
|
105,478
|
|
Fixed assets
|
|
|
72,509
|
|
|
|
28,623
|
|
Non-qualified savings plan assets
|
|
|
53,113
|
|
|
|
48,579
|
|
Loan fees
|
|
|
40,954
|
|
|
|
35,715
|
|
Other
|
|
|
168,813
|
|
|
|
170,700
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
1,389,733
|
|
|
$
|
998,224
|
|
|
|
|
|
|
|
|
|
|
Our other liabilities consisted of the following, net of
amortization and depreciation, if applicable, as of December 31
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Income tax liabilities
|
|
$
|
192,403
|
|
|
$
|
160,929
|
|
Deferred income taxes
|
|
|
107,620
|
|
|
|
81,688
|
|
Tenant security deposits
|
|
|
94,483
|
|
|
|
79,378
|
|
Accrued disposition costs
|
|
|
90,998
|
|
|
|
33,009
|
|
Value added taxes payable
|
|
|
73,896
|
|
|
|
34,896
|
|
Unearned rents
|
|
|
55,073
|
|
|
|
40,788
|
|
Non-qualified savings plan liabilities
|
|
|
41,558
|
|
|
|
37,180
|
|
Below market leases
|
|
|
12,015
|
|
|
|
18,155
|
|
Other
|
|
|
101,362
|
|
|
|
60,106
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
769,408
|
|
|
$
|
546,129
|
|
|
|
|
|
|
|
|
|
|
The leasing commissions, rent leveling asset and above market
leases, net of below market leases, total $223.9 million at
December 31, 2007, and are expected to be amortized as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
Net Charge to
|
|
|
|
Expense
|
|
|
Rental Income
|
|
|
2008
|
|
$
|
48,477
|
|
|
$
|
12,339
|
|
2009
|
|
|
26,798
|
|
|
|
9,287
|
|
2010
|
|
|
21,614
|
|
|
|
13,470
|
|
2011
|
|
|
17,422
|
|
|
|
12,390
|
|
2012
|
|
|
11,616
|
|
|
|
9,945
|
|
Thereafter
|
|
|
9,735
|
|
|
|
30,817
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
135,662
|
|
|
$
|
88,248
|
|
|
|
|
|
|
|
|
|
|
38
PROLOGIS
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Our debt consisted of the following as of December 31 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Unsecured lines of credit
|
|
$
|
1,955,138
|
|
|
$
|
2,462,796
|
|
Senior and other unsecured debt
|
|
|
4,891,106
|
|
|
|
4,445,092
|
|
Convertible notes
|
|
|
2,332,905
|
|
|
|
|
|
Secured debt
|
|
|
1,294,809
|
|
|
|
1,445,021
|
|
Assessment bonds
|
|
|
32,110
|
|
|
|
33,977
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
10,506,068
|
|
|
$
|
8,386,886
|
|
|
|
|
|
|
|
|
|
|
Unsecured
Lines of Credit
We have a Global Line, which was amended and increased in June
2006. Our Global Line commitment fluctuates in U.S. dollars
based on the underlying currencies and was $3.7 billion at
December 31, 2007. The funds may be drawn in
U.S. dollar, euro, Japanese yen, British pound sterling,
Chinese renminbi, South Korean won and Canadian dollar. Based on
our public debt ratings, interest on the borrowings under the
Global Line primarily accrues at a variable rate based upon the
interbank offered rate in each respective jurisdiction in which
the borrowings are outstanding (3.2% per annum at
December 31, 2007 based on a weighted average using local
currency rates). The majority of the Global Line matures in
October 2009, however it contains provisions for an extension,
at our option subject to certain conditions, to October 2010.
The renminbi tranche accrues interest based upon the
Peoples Bank of China rate and matures in May 2009. In
addition, we also have other credit facilities with total
commitments of $70.6 million at December 31, 2007.
Our lines of credit borrowings are summarized below (dollars in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Weighted average daily interest rate
|
|
|
3.43%
|
|
|
|
3.03%
|
|
|
|
2.77%
|
|
Borrowings outstanding at December 31
|
|
$
|
1,955.1
|
|
|
$
|
2,462.8
|
|
|
$
|
1,850.1
|
|
Weighted average daily borrowings
|
|
$
|
2,519.9
|
|
|
$
|
2,294.7
|
|
|
$
|
1,278.2
|
|
Maximum borrowings outstanding at any month end
|
|
$
|
2,994.2
|
|
|
$
|
2,760.8
|
|
|
$
|
1,850.1
|
|
Aggregate borrowing capacity of all lines of credit at December
31
|
|
$
|
3,745.7
|
|
|
$
|
3,529.3
|
|
|
$
|
2,589.9
|
|
Outstanding letters of credit under the lines of credit
|
|
$
|
148.2
|
|
|
$
|
129.1
|
|
|
$
|
98.0
|
|
Aggregate remaining capacity available to us on all lines of
credit at December 31
|
|
$
|
1,642.4
|
|
|
$
|
937.4
|
|
|
$
|
641.8
|
|
39
PROLOGIS
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Senior
and Other Unsecured Debt
The senior and other unsecured debt outstanding at
December 31, 2007 are summarized as follows
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Principal
|
|
|
Coupon
|
|
Maturity Date
|
|
Balance
|
|
|
Rate
|
|
|
Senior unsecured debt:
|
|
|
|
|
|
|
|
|
April 15, 2008 (1)
|
|
$
|
250,000
|
|
|
|
7.10%
|
|
May 15, 2008 (1)
|
|
|
25,000
|
|
|
|
7.95%
|
|
March 1, 2009 (2)
|
|
|
37,500
|
|
|
|
8.72%
|
|
May 15, 2009 (2)
|
|
|
18,750
|
|
|
|
7.88%
|
|
August 24, 2009 (1)(3)
|
|
|
250,000
|
|
|
|
floating
|
|
November 15, 2010 (1)
|
|
|
500,000
|
|
|
|
5.25%
|
|
April 1, 2012 (1)(4)
|
|
|
450,000
|
|
|
|
5.50%
|
|
March 1, 2013 (1)
|
|
|
300,000
|
|
|
|
5.50%
|
|
February 1, 2015 (5)
|
|
|
100,000
|
|
|
|
7.81%
|
|
March 1, 2015 (6)
|
|
|
50,000
|
|
|
|
9.34%
|
|
November 15, 2015 (1)
|
|
|
400,000
|
|
|
|
5.63%
|
|
April 1, 2016 (1)(4)
|
|
|
400,000
|
|
|
|
5.75%
|
|
May 15, 2016 (7)
|
|
|
50,000
|
|
|
|
8.65%
|
|
November 15, 2016 (1)(8)
|
|
|
550,000
|
|
|
|
5.63%
|
|
July 1, 2017 (1)
|
|
|
100,000
|
|
|
|
7.63%
|
|
|
|
|
|
|
|
|
|
|
Total senior unsecured debt
|
|
|
3,481,250
|
|
|
|
|
|
Other unsecured debt:
|
|
|
|
|
|
|
|
|
July 31, 2008 (1)(9)
|
|
|
17,387
|
|
|
|
floating
|
|
December 19, 2008 (1)(10)
|
|
|
264,191
|
|
|
|
floating
|
|
October 6, 2009 (1)(11)
|
|
|
609,223
|
|
|
|
floating
|
|
November 20, 2009 (1)
|
|
|
25,000
|
|
|
|
7.30%
|
|
April 13, 2011 (1)(12)
|
|
|
504,560
|
|
|
|
4.38%
|
|
|
|
|
|
|
|
|
|
|
Total other unsecured debt
|
|
|
1,420,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total par value
|
|
$
|
4,901,611
|
|
|
|
|
|
Less: discount, net
|
|
|
10,505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total principal balance, net
|
|
$
|
4,891,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Principal due at maturity. |
|
(2) |
|
Annual principal payments ranging from $9.4 million to
$18.8 million are due through 2009. |
|
(3) |
|
On August 24, 2006, we issued $250.0 million of senior
notes that bear interest at a variable rate based on LIBOR plus
a margin (5.28% at December 31, 2007). |
|
(4) |
|
On March 27, 2006, we issued $450.0 million of
5.5% senior notes and $400.0 million of
5.75% senior notes. |
|
(5) |
|
Beginning on February 1, 2010, and through February 1,
2015, requires annual principal payments ranging from
$10.0 million to $20.0 million. |
40
PROLOGIS
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
(6) |
|
Beginning on March 1, 2010, and through March 1, 2015,
requires annual principal payments ranging from
$5.0 million to $12.5 million. |
|
(7) |
|
Beginning on May 15, 2010, and through May 15, 2016,
requires annual principal payments ranging from
$5.0 million to $12.5 million. |
|
(8) |
|
On November 14, 2006, we issued $550.0 million of
5.625% senior notes. |
|
(9) |
|
In July 2007, we entered into a new senior credit facility based
in renminbi. Borrowings under this facility bear interest at the
rate established by the Chinese government. As of
December 31, 2007, we had available capacity to borrow
87.0 million renminbi ($11.9 million) under this
facility. |
|
(10) |
|
In December 2007, we issued ¥29.6 billion in TMK bonds
that bear interest at a variable rate based upon the Tokyo
interbank offered rate plus a margin (1.205% at
December 31, 2007). TMK bonds are a financing vehicle in
Japan for special purpose companies known as TMKs. TMK bonds are
not secured by properties, but do contain negative pledge
security restrictions on the TMKs ability to incur
additional debt or to use property associated with the loan as
security for another loan. The net proceeds were used to repay
borrowings under our Global Line. These bonds will be assumed by
ProLogis Japan Properties Fund II when we contribute the
related properties to the property fund. |
|
(11) |
|
In February 2007 in connection with the Parkridge acquisition,
as discussed in Note 3, we entered into a new
multi-currency senior credit facility. This facility fluctuates
in U.S. dollars based on the underlying currencies and the funds
may be drawn in U.S. dollar, euro, Japanese yen and British
pound sterling. Borrowings under this facility bear interest at
a variable rate based upon the interbank offered rate in each
respective jurisdiction issued in Europe plus a margin (5.22% at
December 31, 2007). The facility provides us the ability to
re-borrow, within a specified period of time, any amounts repaid
on the facility. As of December 31, 2007, we had no
available capacity to borrow under this facility. |
|
(12) |
|
Represents 350.0 million senior notes. |
Our obligations under the senior notes are effectively
subordinated in certain respects to any of our debt that is
secured by a lien on real property, to the extent of the value
of such real property. The senior notes require interest
payments be made quarterly, semi-annually or annually.
We have designated the senior notes, the Global Line and certain
other unsecured debt as Designated Senior Debt under
and as defined in the Amended and Restated Security Agency
Agreement dated as of October 6, 2005 (the Security
Agency Agreement) among various creditors (or their
representatives) and Bank of America, N.A., as Collateral Agent.
The Security Agency Agreement provides that all Designated
Senior Debt holders will, subject to certain exceptions and
limitations, have the benefit of certain pledged intercompany
receivables and share payments and other recoveries received
post default/post acceleration so that all Designated Senior
Debt holders receive payment of substantially the same
percentage of their respective credit obligations.
All of the senior and other unsecured debt, except for the
$250.0 million floating rate notes due August 24,
2009, are redeemable at any time at our option, subject to
certain prepayment penalties. Such redemption and other terms
are governed by the provisions of indenture agreements, various
note purchase agreements and a trust deed.
Convertible
Notes
On March 26, 2007, in a private placement, we issued
$1.25 billion aggregate principal amount of 2.25%
convertible senior notes due 2037, including the exercise of an
over-allotment option. On November 1, 2007, we issued
$1.12 billion aggregate principal amount of 1.875%
convertible senior notes due 2037, including the exercise of an
over-allotment option. We refer to both of these issuances as
Convertible Notes. We used the net proceeds of
approximately $2.33 billion, after underwriters
discounts, to repay a portion of the outstanding
41
PROLOGIS
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
balance under our Global Line to repay our 7.25% senior
notes that matured in November 2007 and for general corporate
purposes.
The Convertible Notes are senior unsecured obligations of
ProLogis and are convertible, under certain circumstances, for
cash, our common shares or a combination of cash and our common
shares, at our option, at a conversion rate per $1,000 of
principal amount of the notes of 13.0576 shares for the
March 2007 issuance and 12.1957 shares for the November
2007 issuance. The initial conversion price represents a 20%
premium over the closing price of our common shares at the date
of first sale ($76.58 for the March 2007 issuance and $82.00 for
the November 2007 issuance). The notes are redeemable at our
option beginning in 2012 for the principal amount plus accrued
and unpaid interest and at any time prior to maturity to the
extent necessary to preserve our status as a REIT. Holders of
the notes have the right to require us to repurchase their notes
every five years beginning in 2012 and at any time prior to
their maturity upon certain limited circumstances. Therefore, we
have reflected these amounts in 2012 in the schedule of debt
maturities below.
While we have the legal right to settle the conversion in either
cash or shares, we intend to settle the principal balance of the
Convertible Notes in cash and, therefore, we have not included
the effect of the conversion of these notes in our computation
of diluted earnings per share. Based on the conversion rates,
30.0 million shares would be required to settle the
principal amount in shares. Such potentially dilutive shares,
and the corresponding adjustment to interest expense, are not
included in our computation of diluted earnings per share. The
amount in excess of the principal balance of the notes (the
Conversion Spread) will be settled in cash or, at
our option, ProLogis common shares. When the Conversion Spread
becomes dilutive to our earnings per share, (i.e., when our
share price exceeds $76.58 for the March issuance and $82.00 for
the November issuance) we will include the shares in our
computation of diluted earnings per share. The conversion option
associated with the notes, when analyzed as a free standing
instrument, meets the criteria under the Emerging Issues Task
Force Issue
No. 00-19
Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Companys own Common
Stock, and therefore, we have accounted for the debt
as a single instrument and not bifurcated the derivative
instrument. See Note 1 for information on a proposed
accounting pronouncement that, if issued in its current form,
would impact our accounting for the Convertible Notes.
Secured
Debt
Our secured debt outstanding at December 31, 2007 includes
any premium or discount recorded at acquisition and consisted of
the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balloon
|
|
|
|
|
|
|
Periodic
|
|
|
|
|
|
Payment
|
|
|
|
Interest
|
|
|
Payment
|
|
|
Principal
|
|
|
Due at
|
|
Maturity Date
|
|
Rate(1)
|
|
|
Date
|
|
|
Balance
|
|
|
Maturity
|
|
|
November 11, 2008
|
|
|
5.96%
|
|
|
|
(2
|
)
|
|
$
|
63,090
|
|
|
$
|
60,646
|
|
November 11, 2008
|
|
|
6.01%
|
|
|
|
(2
|
)
|
|
|
287,694
|
|
|
$
|
276,065
|
|
April 1, 2012
|
|
|
7.05%
|
|
|
|
(2
|
)
|
|
|
244,460
|
|
|
$
|
196,462
|
|
August 1, 2015
|
|
|
5.47%
|
|
|
|
(2
|
)
|
|
|
133,484
|
|
|
$
|
111,690
|
|
April 12, 2016
|
|
|
7.25%
|
|
|
|
(2
|
)
|
|
|
208,083
|
|
|
$
|
149,917
|
|
April 1, 2024
|
|
|
7.58%
|
|
|
|
(2
|
)
|
|
|
195,019
|
|
|
$
|
127,187
|
|
Various
|
|
|
(3)
|
|
|
|
(3
|
)
|
|
|
162,979
|
|
|
|
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total secured debt (4)
|
|
|
|
|
|
|
|
|
|
$
|
1,294,809
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The weighted average annual interest rate for total secured debt
was 6.59% for the year ended December 31, 2007. |
42
PROLOGIS
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
(2) |
|
Monthly amortization with a balloon payment due at maturity. |
|
(3) |
|
Includes 16 mortgage notes with interest rates ranging from
4.12% to 7.23%, maturing from 2008 to 2025, primarily requiring
monthly amortization with a balloon payment at maturity. The
combined balloon payment for all of the notes is $144,418,000. |
|
(4) |
|
Debt is secured by 254 real estate properties with an aggregate
undepreciated cost of $2.9 billion at December 31,
2007. |
Assessment
Bonds
The assessment bonds are issued by municipalities and guaranteed
by us as a means of financing infrastructure and are secured by
assessments (similar to property taxes) on various underlying
real estate properties with an aggregate undepreciated cost of
$1.0 billion at December 31, 2007. Interest rates
range from 4.75% per annum to 8.75% per annum. Maturity dates
range from 2009 to 2033.
Debt
Covenants
Under the terms of certain of our debt agreements, we are
subject to various financial covenants relating to leverage
ratios, fixed charge and debt service coverage ratios,
investments and indebtedness to total asset value ratios,
minimum consolidated net worth and restrictions on distributions
and redemptions. In 2005, in connection with the issuance of
senior notes, we modified certain financial and operating
covenants under the indenture governing the notes. These notes,
and all senior notes issued subsequently, are subject to the
existing covenants until all senior notes outstanding prior to
November 2, 2005 are repaid, at which time the remaining
senior notes will be subject to the modified covenants. As of
December 31, 2007, we were in compliance with all of our
debt covenants.
Long-Term
Debt Maturities
Principal payments due on our debt, excluding unsecured lines of
credit, during each of the years in the five-year period ending
December 31, 2012 and thereafter are as follows (in
thousands):
|
|
|
|
|
2008
|
|
$
|
963,535
|
|
2009
|
|
|
962,400
|
|
2010
|
|
|
559,364
|
|
2011
|
|
|
554,204
|
|
2012
|
|
|
3,081,266
|
|
Thereafter
|
|
|
2,428,762
|
|
|
|
|
|
|
Total principal due
|
|
|
8,549,531
|
|
Add: premium, net
|
|
|
1,399
|
|
|
|
|
|
|
Total carrying value
|
|
$
|
8,550,930
|
|
|
|
|
|
|
43
PROLOGIS
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Interest
Expense
Interest expense includes the following components (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Gross interest expense
|
|
$
|
490,689
|
|
|
$
|
397,888
|
|
|
$
|
239,832
|
|
Amortization of (premium) discount, net
|
|
|
(7,797
|
)
|
|
|
(13,861
|
)
|
|
|
(3,980
|
)
|
Amortization of deferred loan costs
|
|
|
10,555
|
|
|
|
7,673
|
|
|
|
5,595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
493,447
|
|
|
|
391,700
|
|
|
|
241,447
|
|
Less: capitalized amounts
|
|
|
125,382
|
|
|
|
97,297
|
|
|
|
63,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest expense
|
|
$
|
368,065
|
|
|
$
|
294,403
|
|
|
$
|
177,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amount of interest paid in cash, net of amounts capitalized,
for the years ended December 31, 2007, 2006 and 2005 was
$356.8 million, $288.2 million, and
$168.0 million, respectively.
|
|
14.
|
Shareholders
Equity:
|
Shares Authorized
At December 31, 2007, 375.0 million shares were
authorized to be issued. The Board may, without shareholder
approval, increase the number of authorized shares and may
classify or reclassify any unissued shares of our stock from
time to time by setting or changing the preferences, conversion
or other rights, voting powers, restrictions, limitations as to
distributions, qualifications and terms or conditions of
redemption of such shares.
Common
Shares
In February 2007 and September 2005, we issued 4.8 million
and 55.9 million common shares in connection with the
Parkridge acquisition and Catellus Merger, respectively (see
Note 3).
We sell
and/or issue
common shares under various common share plans, including
share-based compensation plans as follows:
|
|
|
|
|
1999 Dividend Reinvestment and Share Purchase Plan, as
amended (the 1999 Dividend Reinvestment Plan):
Allows holders of common shares to automatically reinvest
distributions and certain holders and persons who are not
holders of common shares to purchase a limited number of
additional common shares by making optional cash payments,
without payment of any brokerage commission or service charge.
Common shares that are acquired under the 1999 Dividend
Reinvestment Plan through reinvestment of distributions are
acquired at a price ranging from 98% to 100% of the market price
of such common shares, as we determine.
|
|
|
|
Controlled Equity Offering Program: Allows us to
sell up to 15 million common shares through one designated
agent who earns a fee up to 2.25% of the gross proceeds, as
agreed on a
transaction-by-transaction
basis. No shares were issued under this plan in 2007.
|
|
|
|
The Incentive Plan and Outside Trustees
Plan: Certain of our employees and outside trustees
participate in these share-based compensation plans that provide
compensation, generally in the form of common shares. See
Note 5 for additional information on these plans.
|
|
|
|
ProLogis Trust Employee Share Purchase Plan (the
Employee Share Plan): Certain of our employees
may purchase common shares, through payroll deductions only, at
a discounted price of
|
44
PROLOGIS
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
85% of the market price of the common shares. The aggregate fair
value of common shares that an individual employee can acquire
in a calendar year under the Employee Share Plan is $25,000.
Subject to certain provisions, the aggregate number of common
shares that may be issued under the Employee Share Plan may not
exceed 5.0 million common shares. As of December 31,
2007, we have approximately 4.8 million shares available
under this plan.
|
Under the plans discussed above, we issued shares and received
proceeds as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
Shares
|
|
Proceeds
|
|
Shares
|
|
Proceeds
|
|
Shares
|
|
Proceeds
|
|
1999 Dividend Reinvestment Plan
|
|
|
66
|
|
$
|
4,145
|
|
|
69
|
|
$
|
3,738
|
|
|
412
|
|
$
|
16,197
|
Controlled Equity Offering Program
|
|
|
|
|
|
|
|
|
5,383
|
|
|
320,786
|
|
|
225
|
|
|
8,267
|
Incentive Plan and Outside Trustees Plan
|
|
|
1,781
|
|
|
31,151
|
|
|
1,460
|
|
|
31,350
|
|
|
1,425
|
|
|
17,664
|
Employee Share Plan
|
|
|
44
|
|
|
2,140
|
|
|
39
|
|
|
1,643
|
|
|
30
|
|
|
1,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,891
|
|
$
|
37,436
|
|
|
6,951
|
|
$
|
357,517
|
|
|
2,092
|
|
$
|
43,147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Limited partnership units were redeemed into 128,000 common
shares in 2007, 180,000 common shares in 2006, and 11,000 common
shares in 2005 (see Note 6).
We have approximately $84.1 million remaining on our Board
authorization to repurchase common shares that began in 2001. We
have not repurchased our common shares since 2003.
Preferred
Shares
At December 31, 2007, we had three series of preferred
shares outstanding (Series C Preferred Shares,
Series F Preferred Shares, and
Series G Preferred Shares). Holders of each
series of preferred shares have, subject to certain conditions,
limited voting rights and all holders are entitled to receive
cumulative preferential dividends based upon each series
respective liquidation preference. Such dividends are payable
quarterly in arrears on the last day of March, June, September
and December. Dividends on preferred shares are payable when,
and if, they have been declared by the Board, out of funds
legally available for the payment of dividends. After the
respective redemption dates, each series of preferred shares can
be redeemed at our option. The cash redemption price (other than
the portion consisting of accrued and unpaid dividends) with
respect to Series C Preferred Shares is payable solely out
of the cumulative sales proceeds of our other capital shares,
which may include shares of other series of preferred shares.
With respect to the payment of dividends, each series of
preferred shares ranks on parity with the other series of
preferred shares.
Our preferred shares outstanding at December 31, 2007 are
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend
|
|
|
|
|
|
|
|
|
|
Equivalent Based
|
|
|
Optional
|
|
|
|
Dividend
|
|
|
on Liquidation
|
|
|
Redemption
|
|
|
|
Rate
|
|
|
Preference
|
|
|
Date
|
|
|
Series C Preferred Shares
|
|
|
8.54
|
%
|
|
$
|
4.27 per share
|
|
|
|
11/13/26
|
|
Series F Preferred Shares
|
|
|
6.75
|
%
|
|
$
|
1.69 per share
|
|
|
|
11/28/08
|
|
Series G Preferred Shares
|
|
|
6.75
|
%
|
|
$
|
1.69 per share
|
|
|
|
12/30/08
|
|
Ownership
Restrictions
For us to qualify as a REIT under the Code, five or fewer
individuals may not own more than 50% of the value of our
outstanding shares of beneficial interest at any time during the
last half of our taxable year. Therefore, our Declaration of
Trust restricts beneficial ownership (or ownership generally
attributed to a person under the REIT tax rules) of our
outstanding shares of beneficial interest by a single person, or
persons
45
PROLOGIS
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
acting as a group, to 9.8% of our outstanding shares. This
provision assists us in protecting and preserving our REIT
status and protects the interests of shareholders in takeover
transactions by preventing the acquisition of a substantial
block of outstanding shares.
Shares of beneficial interest owned by a person or group of
persons in excess of these limits are subject to redemption by
us. The provision does not apply where a majority of the Board,
in its sole and absolute discretion, waives such limit after
determining that the status of us as a REIT for federal income
tax purposes will not be jeopardized or the disqualification of
us as a REIT is advantageous to our shareholders.
|
|
15.
|
Related
Party Transactions:
|
On June 8, 2007, Jeffrey H. Schwartz, our Chief Executive
Officer, converted limited partnership units, in the limited
partnerships in which we own a majority interest and
consolidate, into 128,000 of our common shares. See Note 6
for more information regarding these partnerships in North
America. Please also see Note 4 for a discussion of
transactions between us and the property funds.
|
|
16.
|
Financial
Instruments:
|
Derivative
Financial Instruments
We use derivative financial instruments as hedges to manage our
risk associated with interest and foreign currency exchange rate
fluctuations on existing or anticipated obligations and
transactions. We do not use derivative financial instruments for
trading purposes.
The primary risks associated with derivative instruments are
market risk and credit risk. Market risk is defined as the
potential for loss in the value of the derivative due to adverse
changes in market prices (interest rates or foreign currency
exchange rates). The use of derivative financial instruments
allows us to manage the risks of increases in interest rates and
fluctuations in foreign currency exchange rates with respect to
the effects these fluctuations would have on our earnings and
cash flows.
Credit risk is the risk that one of the parties to a derivative
contract fails to perform or meet their financial obligation
under the contract. We do not obtain collateral to support
financial instruments subject to credit risk but we monitor the
credit standing of the counterparties, primarily global
commercial banks. We do not anticipate non-performance by any of
the counterparties to our derivative contracts. However, should
a counterparty fail to perform, we could incur a financial loss
to the extent of the positive fair market value of the
derivative contracts.
46
PROLOGIS
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes the activity in our derivative
contracts for the years ended December 31, 2007, 2006 and
2005 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency
|
|
|
Foreign Currency
|
|
|
Interest
|
|
|
|
Put Options (1)
|
|
|
Forwards (2)
|
|
|
Rate Swaps (3)
|
|
|
Notional amounts at January 1, 2005
|
|
$
|
|
|
|
$
|
|
|
|
$
|
50.0
|
|
New contracts
|
|
|
98.0
|
|
|
|
669.5
|
|
|
|
650.0
|
|
Matured or expired contracts
|
|
|
(98.0
|
)
|
|
|
(669.5
|
)
|
|
|
(700.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amounts at December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
New contracts
|
|
|
169.3
|
|
|
|
900.3
|
|
|
|
350.0
|
|
Matured or expired contracts
|
|
|
(114.6
|
)
|
|
|
(239.3
|
)
|
|
|
(350.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amounts at December 31, 2006
|
|
|
54.7
|
|
|
|
661.0
|
|
|
|
|
|
New contracts
|
|
|
|
|
|
|
2,637.2
|
|
|
|
959.2
|
|
Matured or expired contracts
|
|
|
(54.7
|
)
|
|
|
(2,937.5
|
)
|
|
|
(959.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amounts at December 31, 2007
|
|
$
|
|
|
|
$
|
360.7
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The foreign currency put option contracts are paid in full at
execution and are related to our operations in Europe and Japan.
The put option contracts provide us with the option to exchange
euros, pounds sterling and yen for U.S. dollars at a fixed
exchange rate such that, if the euro, pound sterling or yen were
to depreciate against the U.S. dollar to predetermined levels as
set by the contracts, we could exercise our options and mitigate
our foreign currency exchange losses. |
|
|
|
These contracts generally do not qualify for hedge accounting
treatment and are
marked-to-market
through earnings at the end of each period. On various put
option contracts, we recognized no expense in 2007, net expense
of $1.5 million in 2006 and net gains of $3.6 million
in 2005, which includes
mark-to-market
gains or losses. |
|
(2) |
|
The forward currency forward contracts were designed to manage
the foreign currency fluctuations of intercompany loans
denominated in a currency other than the entitys
functional currency and not deemed to be a long-term investment.
The foreign currency forward contracts allowed us to sell pounds
sterling and euros at a fixed exchange rate to the U.S. dollar.
These contracts were not designated as hedges, were
marked-to-market
through earnings and were substantially offset by the
remeasurement gains and losses recognized on the intercompany
loans. We recognized net losses of $95.9 million and
$13.3 million in 2007 and 2006, respectively and a net gain
of $6.1 million in 2005, including
mark-to-market
gains or losses. These losses/gains were substantially offset by
the net gains recognized on the remeasurement and settlement of
the related intercompany loans of $73.8 million,
$34.9 million and $10.0 million for the years ended
December 31, 2007, 2006 and 2005, respectively. |
|
|
|
During the second quarter of 2007, we purchased several foreign
currency forward contracts to manage the foreign currency
fluctuations of the purchase price of MPR (see Note 4).
These contracts allowed us to buy Australian dollars at a fixed
exchange rate to the U.S. dollar. Derivative instruments used to
manage the foreign currency fluctuations of an anticipated
business combination do not qualify for hedge accounting
treatment and are
marked-to-market
through earnings in Foreign Currency Exchange Gains, Net. The
contracts settled in July 2007 in connection with the completed
acquisition and resulted in the recognition of a net gain of
$26.6 million in earnings for the year ended
December 31, 2007. |
47
PROLOGIS
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
(3) |
|
During 2007, 2006 and 2005, we entered into several contracts
with total notional amounts of $959.2 million,
$350.0 million, and $650.0 million, respectively,
associated with an anticipated debt issuance. |
|
|
|
|
|
In 2006 and 2005, all of these contracts were designated as cash
flow hedges and qualified for hedge accounting treatment, which
allowed us to fix a portion of the interest rate associated with
the issuance of senior notes (see Note 13). All of the
contracts were settled as of December 31, 2006 and we
recognized a decrease in value of $13.1 million and an
increase in value of $20.7 million associated with these
contracts in other comprehensive income as of December 31,
2006 and 2005, respectively. The amount in other comprehensive
income related to these contracts is being amortized as an
increase to interest expense as interest payments are made on
the senior notes.
|
|
|
|
In February 2007, we entered into contracts with an aggregate
notional amount of $500.0 million associated with a future
debt issuance. All of these contracts were designated as cash
flow hedges, qualified for hedge accounting treatment and
allowed us to fix a portion of the interest rate associated with
the anticipated issuance of senior notes. In March 2007, in
connection with the issuance of the convertible notes (see Note
13), we unwound the contracts, recognized a decrease in value of
$1.4 million associated with these contracts in other
comprehensive income in shareholders equity and began
amortizing as an increase to interest expense as interest
payments are made on the senior notes.
|
|
|
|
In June 2007, we entered into a contract with a notional amount
of $188.0 million, which represented our share of future
debt issuances of a new property fund we formed in July 2007,
the ProLogis North American Industrial Fund III. This
contract was transferred into the fund at formation, qualifies
for hedge accounting treatment by the fund and any future
changes in value will be recognized in other comprehensive
income within equity of the fund. We guarantee the property
funds performance on this contract. See Note 4 for
additional information on these contracts.
|
|
|
|
In June 2007, we entered into contracts with an aggregate
notional amount of $271.2 million associated with future
debt issuances of a new property fund we formed in July 2007,
the ProLogis North American Industrial Fund II. These
contracts did not qualify for hedge accounting treatment by us
and were
marked-to-market
resulting in additional interest expense of $0.8 million
for the year ended December 31, 2007. These contracts were
transferred to ProLogis North American Industrial Fund II
following the establishment of the fund, at which time the
contracts qualified for hedge accounting treatment by the fund
and any future changes in value will be recognized in other
comprehensive income within equity of the fund. See Note 4
for additional information on these contracts.
|
We amortized a net amount of $0.1 million, related to the
above forward-starting interest rate swap contracts, from other
comprehensive income as a reduction to interest expense during
2007 and we will amortize a total of $0.1 million as a
reduction to interest expense during 2008.
Fair
Value of Financial Instruments
We have estimated the fair value of our financial instruments
using available market information and valuation methodologies
we believe to be appropriate for these purposes. Considerable
judgment and a high degree of subjectivity are involved in
developing these estimates and, accordingly, they are not
necessarily indicative of amounts that we would realize upon
disposition.
At December 31, 2007 and 2006, the carrying amounts of
certain of our financial instruments, including cash and cash
equivalents, accounts and notes receivable and accounts payable
and accrued expenses were representative of their fair values
due to the short-term nature of these instruments or due to the
recent acquisition of these items. Similarly, the carrying
values of the lines of credit balances outstanding
48
PROLOGIS
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
approximate their fair values as of those dates since the
interest rates on the lines of credit are based on current
market rates. At December 31, 2007 and 2006, the fair value
of our senior and other unsecured debt, convertible notes,
secured debt and assessment bonds have been estimated based upon
quoted market prices for the same or similar issues or by
discounting the future cash flows using rates currently
available to us for debt with similar terms and maturities. The
differences in the fair value of our debt from the carrying
value in the table below are the result of differences in the
interest rates that were available to us at December 31,
2007 and 2006 from the interest rates that were in effect when
the debt was issued or acquired. The senior notes and many of
the issues of secured debt contain pre-payment penalties or
yield maintenance provisions that could make the cost of
refinancing the debt at the lower rates exceed the benefit that
would be derived from doing so.
The fair value of our derivative financial instruments
represents the amount at which they could be settled, based on
quoted market prices or estimates obtained from brokers or
dealers. After January 1, 2008, SFAS 157 changes the
definition of fair value and fair value will no longer equal
where the hedges could be settled. As we mark our derivative
financial instruments to market at each reporting period, their
fair values are the same as their carrying values. At
December 31, 2007 and 2006, the carrying value of the
foreign currency put options and forward contracts are reflected
as components of other assets and other liabilities,
respectively.
The following table reflects the carrying amounts and estimated
fair values of our financial instruments
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Carrying
|
|
|
|
|
|
Carrying
|
|
|
|
|
|
|
Value
|
|
|
Fair Value
|
|
|
Value
|
|
|
Fair Value
|
|
|
Senior and other unsecured debt
|
|
$
|
4,891,106
|
|
|
$
|
4,834,053
|
|
|
$
|
4,445,092
|
|
|
$
|
4,507,182
|
|
Convertible notes
|
|
|
2,332,905
|
|
|
|
2,249,341
|
|
|
|
|
|
|
|
|
|
Secured debt
|
|
|
1,294,809
|
|
|
|
1,283,779
|
|
|
|
1,445,021
|
|
|
|
1,497,790
|
|
Assessment bonds
|
|
|
32,110
|
|
|
|
31,473
|
|
|
|
33,977
|
|
|
|
34,495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
$
|
8,550,930
|
|
|
$
|
8,398,646
|
|
|
$
|
5,924,090
|
|
|
$
|
6,039,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forwards
|
|
$
|
773
|
|
|
$
|
773
|
|
|
$
|
(15,664
|
)
|
|
$
|
(15,664
|
)
|
Foreign currency put options
|
|
|
|
|
|
|
|
|
|
|
249
|
|
|
|
249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivative financial instruments
|
|
$
|
773
|
|
|
$
|
773
|
|
|
$
|
(15,415
|
)
|
|
$
|
(15,415
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49
PROLOGIS
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
17.
|
Commitments
and Contingencies:
|
Environmental
Matters
A majority of the properties we acquire are subjected to
environmental reviews either by us or by the predecessor owners.
In addition, we may incur environmental remediation costs
associated with certain land parcels we acquire in connection
with the development of the land. In connection with the
Catellus Merger, we acquired certain properties in urban and
industrial areas that may have been leased to or previously
owned by commercial and industrial companies that discharged
hazardous materials. We establish a liability at the time of
acquisition to cover such costs. We purchase various
environmental insurance policies to mitigate our exposure to
environmental liabilities. We are not aware of any environmental
liability that we believe would have a material adverse effect
on our business, financial condition or results of operations.
Off-Balance
Sheet Liabilities
We have issued performance and surety bonds and standby letters
of credit in connection with certain development projects, to
guarantee certain tax obligations and the construction of
certain real property improvements and infrastructure, such as
grading, sewers and streets. Performance and surety bonds are
commonly required by public agencies from real estate
developers. Performance and surety bonds are renewable and
expire upon the payment of the taxes due or the completion of
the improvements and infrastructure. As of December 31,
2007, we had approximately $165.6 million outstanding under
such arrangements.
At December 31, 2007, we had made debt guarantees to
certain of our unconsolidated investees that, based on the
investees outstanding balance, totaled $28.3 million.
We may be required to make additional capital contributions to
certain of our unconsolidated investees should additional
capital contributions be necessary to fund development costs or
operation shortfalls. In addition, to the extent a property fund
acquires properties from a third party, we may be required to
contribute our proportionate share of the equity component in
cash to the property fund. See Note 4.
From time to time we enter into Special Limited Contribution
Agreements (SLCA) in connection with certain
contributions of properties to certain of our property funds.
Under the SLCAs, we are obligated to make an additional capital
contribution to the respective property fund under certain
circumstances, the occurrence of which we believe to be remote.
Specifically, we would be required to make an additional capital
contribution to the property fund if the property fund is in
default on third-party debt, the default remains uncured, and
the third-party lender does not receive a specified minimum
level of repayment after pursuing all contractual and legal
remedies against the property fund. To the extent that a
third-party lender receives repayment of principal and to the
extent that the property fund liquidates its assets to satisfy
any remaining repayment deficit, our obligations under the SLCA
are reduced on a
dollar-for-dollar
basis. Our potential obligations under the respective SLCAs, as
a percentage of the undepreciated book value of the assets in
the property funds, range from 5% to 48%. Given the respective
year-end capital structures of the various funds impacted by
SLCAs and structural provisions within the SLCAs, we estimate
that the minimum level of fund devaluation required to trigger
an SLCA liability ranges between 95% and 35% of fund value. We
believe that the likelihood of declines in the values of the
assets that support the third-party loans of the magnitude
necessary to require an additional capital contribution is
generally remote, especially in light of the geographically
diversified portfolios of properties owned by the property
funds. The potential obligations under the SLCAs aggregate
$1.2 billion at December 31, 2007 and the combined
value of the assets in the property fund that are subject to the
provisions of the SLCAs was approximately $6.3 billion at
December 31, 2007. Based on our assessment of the
probability and range of loss, we have estimated the fair value
and recognized a liability of $1.3 million related to our
potential obligations at December 31, 2007.
50
PROLOGIS
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 31, 2007, $9.1 million of Community
Facility District bonds were outstanding that were originally
issued to finance public infrastructure improvements at one of
our development projects. We are required to satisfy any
shortfall in annual debt service obligation for these bonds if
tax revenues generated by the project are insufficient. As of
December 31, 2007, we have not been required to, nor do we
expect to be required to, satisfy any shortfall in annual debt
service obligation for these bonds other than through our
payment of normal project and special district taxes.
We have three reportable business segments:
|
|
|
|
|
Property operations representing the direct
long-term ownership of industrial distribution and retail
properties. Each operating property is considered to be an
individual operating segment having similar economic
characteristics that are combined within the reportable segment
based upon geographic location. Included in this segment are
properties we developed and properties we acquired and
rehabilitated or repositioned within the CDFS business segment
with the intention of contributing the property to a property
fund or selling to a third party. The costs of our property
management function for both our direct-owned portfolio and the
properties owned by the property funds and managed by us are all
reported in rental expenses in the property operations segment.
Our operations in the property operations business segment are
in North America (Canada, Mexico and the United States), Europe
(the Czech Republic, France, Germany, Hungary, Italy, the
Netherlands, Poland, Romania, Slovakia, Sweden and the United
Kingdom) and Asia (China, Japan, and South Korea).
|
|
|
|
Investment management representing the long-term
investment management of property funds and the properties they
own. We recognize our proportionate share of the earnings or
losses from our investments in unconsolidated property funds
operating in North America, Europe and Asia. Along with the
income recognized under the equity method, we include fees and
incentives earned for services performed on behalf of the
property funds and interest earned on advances to the property
funds, if any. We utilize our leasing and property management
expertise to efficiently manage the properties and the funds,
and we report the costs as part of rental expenses in the
property operations segment. Each investment in a property fund
is considered to be an individual operating segment having
similar economic characteristics that are combined within the
reportable segment based upon geographic location. Our
operations in the investment management segment are in North
America (Mexico and the United States), Europe (Belgium, the
Czech Republic, France, Germany, Hungary, Italy, the
Netherlands, Poland, Slovakia, Spain, Sweden, and the United
Kingdom), and Asia (Japan and South Korea).
|
|
|
|
CDFS business primarily encompasses our development
of real estate properties that are subsequently contributed to a
property fund in which we have an ownership interest and act as
manager, or sold to third parties. Additionally, we acquire
properties with the intent to rehabilitate
and/or
reposition the property in the CDFS business segment prior to
contributing to a property fund. The proceeds and related costs
of these dispositions are presented as Developed and
Repositioned Properties in the Consolidated Statements of
Earnings and Comprehensive Income. In addition, we occasionally
acquire a portfolio of properties with the intent of
contributing the portfolio to an existing or future property
fund. The proceeds and related costs of these dispositions are
presented as Acquired Property Portfolios in the Consolidated
Statements of Earnings. We also have investments in several
unconsolidated entities that perform development activities and
we include our proportionate share of their earnings or losses
in this segment. Additionally, we include fees earned for
development activities performed on behalf of customers or third
parties, interest income earned on notes receivable related to
asset sales and gains on the disposition of land parcels,
including land subject to ground leases. The separate activities
in this segment are considered to be individual operating
segments having similar economic characteristics that are
combined within the reportable
|
51
PROLOGIS
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
segment based upon geographic location. Our CDFS business
segment operations are in North America (Canada, Mexico and the
United States), in Europe (Belgium, the Czech Republic, France,
Germany, Hungary, Italy, the Netherlands, Poland, Romania,
Slovakia, Spain, Sweden and the United Kingdom) and in Asia
(China, Japan and South Korea).
|
We have other operating segments that do not meet the threshold
criteria to disclose as a reportable segment, primarily the
management of land subject to ground leases in the United
States. Each ground lease is considered to be an individual
operating segment.
The assets of the CDFS business segment generally include
properties under development, land held for development and our
investments in and advances to CDFS joint ventures. During the
period between the completion of development, rehabilitation or
repositioning of a property and the date the property is
contributed to a property fund or sold to a third party, the
property and its associated rental income and rental expenses
are included in the property operations segment because the
primary activity associated with the property during that period
is leasing. Upon contribution or sale, the resulting gain or
loss is included in the income of the CDFS business segment. The
assets of the investment management segment include our
investments in and advances to the unconsolidated property funds.
We present the operations and net gains associated with
properties sold to third parties generally as discontinued
operations. In addition, as of December 31, 2007, we had
two properties classified as held for sale, whose operations are
included in discontinued operations. Accordingly, the operations
of all of these properties are excluded from the segment
presentation. See Note 8.
52
PROLOGIS
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Reconciliations are presented below for: (i) each
reportable business segments revenue from external
customers to our total revenues; (ii) each reportable
business segments net operating income from external
customers to our earnings before minority interest; and
(iii) each reportable business segments assets to our
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 our revenues, earnings before
minority interest and assets, excluding discontinued operations,
are allocated to each reportable business segments
revenues, net operating income and assets. Items that are not
directly assignable to a segment, such as certain corporate
income and expenses, are reflected as reconciling items. The
following reconciliations are presented in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Revenues (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
Property operations (2):
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
860,795
|
|
|
$
|
805,871
|
|
|
$
|
551,350
|
|
Europe
|
|
|
114,218
|
|
|
|
35,619
|
|
|
|
10,334
|
|
Asia
|
|
|
48,627
|
|
|
|
31,903
|
|
|
|
12,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total property operations segment
|
|
|
1,023,640
|
|
|
|
873,393
|
|
|
|
574,588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment management (3):
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
|
64,325
|
|
|
|
117,532
|
|
|
|
56,348
|
|
Europe
|
|
|
104,665
|
|
|
|
167,227
|
|
|
|
44,002
|
|
Asia
|
|
|
30,182
|
|
|
|
20,225
|
|
|
|
12,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment management segment
|
|
|
199,172
|
|
|
|
304,984
|
|
|
|
113,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CDFS business (4):
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
|
2,887,183
|
|
|
|
549,181
|
|
|
|
291,750
|
|
Europe
|
|
|
1,494,320
|
|
|
|
451,154
|
|
|
|
383,179
|
|
Asia
|
|
|
662,016
|
|
|
|
385,630
|
|
|
|
503,444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total CDFS business segment
|
|
|
5,043,519
|
|
|
|
1,385,965
|
|
|
|
1,178,373
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment revenue
|
|
|
6,266,331
|
|
|
|
2,564,342
|
|
|
|
1,865,973
|
|
Other North America
|
|
|
44,225
|
|
|
|
36,809
|
|
|
|
9,764
|
|
Reconciling item (5)
|
|
|
(105,890
|
)
|
|
|
(154,759
|
)
|
|
|
(58,530
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
6,204,666
|
|
|
$
|
2,446,392
|
|
|
$
|
1,817,207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Property operations (6):
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
623,675
|
|
|
$
|
601,266
|
|
|
$
|
403,290
|
|
Europe
|
|
|
74,950
|
|
|
|
18,865
|
|
|
|
561
|
|
Asia
|
|
|
38,663
|
|
|
|
28,315
|
|
|
|
10,696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total property operations segment
|
|
|
737,288
|
|
|
|
648,446
|
|
|
|
414,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment management (3):
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
|
64,325
|
|
|
|
117,532
|
|
|
|
56,348
|
|
Europe
|
|
|
104,665
|
|
|
|
167,227
|
|
|
|
44,002
|
|
Asia
|
|
|
30,182
|
|
|
|
20,225
|
|
|
|
12,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment management segment
|
|
|
199,172
|
|
|
|
304,984
|
|
|
|
113,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CDFS business (7)(8):
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
|
257,162
|
|
|
|
176,699
|
|
|
|
70,250
|
|
Europe
|
|
|
284,423
|
|
|
|
108,079
|
|
|
|
71,329
|
|
Asia
|
|
|
248,329
|
|
|
|
94,707
|
|
|
|
111,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total CDFS business segment
|
|
|
789,914
|
|
|
|
379,485
|
|
|
|
252,608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment net operating income
|
|
|
1,726,374
|
|
|
|
1,332,915
|
|
|
|
780,167
|
|
Other North America
|
|
|
29,393
|
|
|
|
22,535
|
|
|
|
7,560
|
|
Reconciling items:
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from other unconsolidated investees
|
|
|
7,794
|
|
|
|
5,729
|
|
|
|
750
|
|
General and administrative expenses
|
|
|
(204,558
|
)
|
|
|
(153,516
|
)
|
|
|
(118,166
|
)
|
Depreciation and amortization expense
|
|
|
(308,971
|
)
|
|
|
(286,807
|
)
|
|
|
(186,605
|
)
|
Other expenses
|
|
|
(443
|
)
|
|
|
(459
|
)
|
|
|
(650
|
)
|
Interest expense
|
|
|
(368,065
|
)
|
|
|
(294,403
|
)
|
|
|
(177,562
|
)
|
Interest and other income, net
|
|
|
25,935
|
|
|
|
18,248
|
|
|
|
10,724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reconciling items
|
|
|
(848,308
|
)
|
|
|
(711,208
|
)
|
|
|
(471,509
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earnings before minority interest
|
|
$
|
907,459
|
|
|
$
|
644,242
|
|
|
$
|
316,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53
PROLOGIS
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Assets (9):
|
|
|
|
|
|
|
|
|
Property operations (10):
|
|
|
|
|
|
|
|
|
North America (11)
|
|
$
|
7,971,582
|
|
|
$
|
7,953,685
|
|
Europe
|
|
|
1,900,327
|
|
|
|
1,295,207
|
|
Asia
|
|
|
898,375
|
|
|
|
633,623
|
|
|
|
|
|
|
|
|
|
|
Total property operations segment
|
|
|
10,770,284
|
|
|
|
9,882,515
|
|
|
|
|
|
|
|
|
|
|
Investment management (12):
|
|
|
|
|
|
|
|
|
North America
|
|
|
818,025
|
|
|
|
416,909
|
|
Europe
|
|
|
653,076
|
|
|
|
430,761
|
|
Asia
|
|
|
284,012
|
|
|
|
134,170
|
|
|
|
|
|
|
|
|
|
|
Total investment management segment
|
|
|
1,755,113
|
|
|
|
981,840
|
|
|
|
|
|
|
|
|
|
|
CDFS business (13):
|
|
|
|
|
|
|
|
|
North America
|
|
|
1,596,659
|
|
|
|
1,312,883
|
|
Europe (11)
|
|
|
2,977,334
|
|
|
|
1,456,064
|
|
Asia
|
|
|
1,143,062
|
|
|
|
802,464
|
|
|
|
|
|
|
|
|
|
|
Total CDFS business segment
|
|
|
5,717,055
|
|
|
|
3,571,411
|
|
|
|
|
|
|
|
|
|
|
Total segment assets
|
|
|
18,242,452
|
|
|
|
14,435,766
|
|
|
|
|
|
|
|
|
|
|
Other North America
|
|
|
636,073
|
|
|
|
488,987
|
|
Reconciling items:
|
|
|
|
|
|
|
|
|
Investments in and advances to other unconsolidated investees
|
|
|
106,683
|
|
|
|
114,547
|
|
Cash and cash equivalents
|
|
|
418,991
|
|
|
|
475,791
|
|
Accounts and notes receivable
|
|
|
100,956
|
|
|
|
129,880
|
|
Other assets
|
|
|
199,272
|
|
|
|
201,396
|
|
Discontinued operations assets held for sale
|
|
|
19,607
|
|
|
|
57,158
|
|
|
|
|
|
|
|
|
|
|
Total reconciling items
|
|
|
845,509
|
|
|
|
978,772
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
19,724,034
|
|
|
$
|
15,903,525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes revenues attributable to the United States for the
years ended December 31, 2007, 2006 and 2005 of
$3,574.2 million, $1,421.9 million and
$845.3 million, respectively. |
|
(2) |
|
Includes rental income of our distribution and retail properties. |
|
(3) |
|
Includes investment management fees and incentive returns and
our share of the earnings or losses recognized under the equity
method from our investment in unconsolidated property funds
along with interest earned on advances to the property funds, if
any. |
|
(4) |
|
Includes proceeds received on CDFS property dispositions, fees
earned from customers and third parties for development
activities, interest income on notes receivable related to asset
dispositions and our share of earnings or losses recognized
under the equity method from our investment in CDFS joint
ventures. |
|
(5) |
|
Amount represents the earnings or losses recognized under the
equity method from our investments in unconsolidated property
funds and CDFS joint ventures and interest income on notes
receivable related to asset dispositions. These items are not
presented as a component of revenues in our Consolidated
Statements of Earnings. |
|
(6) |
|
Includes rental income less rental expenses of our distribution
and retail properties. Included in rental expenses are the costs
of managing the properties owned by the property funds. |
|
(7) |
|
Includes net gains on CDFS property dispositions, fees earned
from customers and third parties for development activities,
interest income on notes receivable related to asset
dispositions, and our share of earnings or losses recognized
under the equity method from our investment in CDFS joint
ventures, offset |
54
PROLOGIS
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
partially by land holding costs and the write-off of previously
capitalized pursuit costs associated with potential CDFS
business assets when it becomes likely the assets will not be
acquired. |
|
(8) |
|
Excludes a net gain of $28.7 million, $33.5 million
and $10.6 million for the years ended December 31,
2007, 2006 and 2005, respectively, associated with CDFS
properties sold to third parties and presented as discontinued
operations in our Consolidated Statements of Earnings. See
Note 8. |
|
(9) |
|
Includes long-lived assets attributable to the United States as
of December 31, 2007 and 2006 of $9.2 billion and
$8.8 billion, respectively. |
|
(10) |
|
Includes properties that were developed or acquired in the CDFS
business segment and are pending contribution to a property fund
or sale to a third party, as follows (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
December 31, 2006
|
|
|
Number of
|
|
|
|
Number of
|
|
|
|
|
Properties
|
|
Investment
|
|
Properties
|
|
Investment
|
|
North America
|
|
|
90
|
|
$
|
996,384
|
|
|
114
|
|
$
|
1,190,706
|
Europe
|
|
|
100
|
|
|
1,815,431
|
|
|
69
|
|
|
1,273,314
|
Asia
|
|
|
59
|
|
|
790,046
|
|
|
22
|
|
|
596,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
249
|
|
$
|
3,601,861
|
|
|
205
|
|
$
|
3,061,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11) |
|
Goodwill of $177.4 million and $193.7 million as of
December 31, 2007 and 2006, respectively, was attributable
to the property operations segment and $345.8 million and
$53.8 million as of December 31, 2007 and 2006,
respectively, was attributable to the CDFS business segment. |
|
(12) |
|
Represents our investments in and advances to the property funds. |
|
(13) |
|
Primarily includes land held for development, properties under
development, other real estate investments, investments in CDFS
joint ventures, and notes receivable related to asset
dispositions. |
|
|
19.
|
Supplemental
Cash Flow Information:
|
Non-cash investing and financing activities for the years ended
December 31, 2007, 2006 and 2005 are as follows:
|
|
|
|
|
We received $351.3 million, $128.0 million and
$74.5 million of equity interests in property funds from
the contribution of properties to these property funds during
2007, 2006 and 2005, respectively. In 2007, in connection with
these contributions, we recognized $51.6 million in
liabilities for remaining obligations we may have associated
with the contributed properties.
|
|
|
|
In connection with the acquisition of all of the units in MPR in
July 2007 (see Note 4), we assumed $828.3 million of
debt and reallocated our equity investment of $47.7 million
to assets acquired.
|
|
|
|
As a result of the conversion by Citigroup of its convertible
loan into equity of ProLogis North American Industrial
Fund II in August 2007, we now own 36.9% of the equity of
the property fund and account for our investment under the
equity method of accounting. This was accounted for as a
disposition of $2.0 billion of real estate assets and
$1.9 billion of associated debt in exchange for an equity
investment of $219.1 million and the recognition of a gain.
|
|
|
|
We capitalized portions of the total cost of our share-based
compensation awards of $10.8 million, $8.4 million and
$4.6 million to the investment basis of our real estate and
other assets during the years ended December 31, 2007,
2006, and 2005, respectively.
|
|
|
|
We assumed $27.3 million, $141.6 million, and
$35.0 million of secured debt in 2007, 2006 and 2005,
respectively, and operating receivables and liabilities of
$19.0 million and $22.6 million, respectively, in 2006
in connection with the acquisition of properties.
|
55
PROLOGIS
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
During the year ended December 31, 2007, we recorded
$27.8 million of minority interest liabilities associated
with investments made during this period in entities, which we
consolidate and own less that 100%.
|
|
|
|
We settled $4.4 million, $6.5 million and
$0.1 million of minority interest liabilities with the
conversion of limited partnership units into 128,000 common
shares, 180,000 common shares and 11,000 common shares in 2007,
2006 and 2005, respectively.
|
|
|
|
We recognized $18.8 million and $115.8 million in
gains and $67.8 million in losses in our Accumulated Other
Comprehensive Income related to foreign currency translation and
derivative activity in 2007, 2006 and 2005, respectively.
|
|
|
|
In 2006 we received 3.9 million ordinary units in PEPR,
valued at $68.6 million, representing the initial
allocation of an incentive return we earned as manager of the
property fund. See Note 4 for further discussion of this
transaction.
|
|
|
|
As partial consideration for properties we contributed in 2006
to the North American Industrial Fund, we received ownership
interests of $62.1 million, representing a 20% ownership
interest, and the property fund assumed $677.2 million of
secured debt and short-term borrowings. See Note 4 for
further discussion of this transaction.
|
|
|
|
In connection with the purchase in 2006 of the 80% ownership
interests held by our fund partner in Funds II-IV, we assumed
$418.0 million of secured debt (which was later assumed by
the North American Industrial Fund). See Note 4 for further
discussion of this transaction.
|
|
|
|
As partial consideration for certain property contributions, we
received: (i) $1.9 million and $32.6 million in
the form of notes receivable from ProLogis North American
Properties Fund V in 2006 and 2005, respectively, (all of
which has been repaid); (ii) a $50.9 million note from
a third party in 2005 (which was repaid during 2006); and
(iii) the assumption of an outstanding mortgage note in the
amount of $14.5 million from ProLogis North American
Properties Fund VII in 2005.
|
|
|
|
As partial consideration for the sale of a property, a third
party assumed an outstanding mortgage note in the amount of
$42.9 million in 2006.
|
See also the discussion of the Parkridge acquisition and the
Catellus Merger Note 3, the MPR transaction in Note 4
and the discussion of FIN 48 and other income tax matters
in Note 7.
56
PROLOGIS
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
20.
|
Selected
Quarterly Financial Data (Unaudited):
|
Selected quarterly 2007 and 2006 data (in thousands, except per
share amounts) is summarized in the table below. The amounts
have been restated from previously disclosed amounts due to the
disposal of properties in 2007 and 2006 whose results of
operations were reclassified to discontinued operations in our
Consolidated Statements of Earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended,
|
|
|
March 31,
|
|
June 30,
|
|
September 30,
|
|
December 31,
|
|
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
955,860
|
|
$
|
988,105
|
|
$
|
3,460,828
|
|
$
|
799,873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
319,969
|
|
$
|
298,146
|
|
$
|
348,610
|
|
$
|
169,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations
|
|
$
|
226,854
|
|
$
|
363,744
|
|
$
|
297,955
|
|
$
|
98,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings attributable to common shares
|
|
$
|
236,091
|
|
$
|
400,104
|
|
$
|
299,444
|
|
$
|
113,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share attributable to common shares
Basic (1)
|
|
$
|
.93
|
|
$
|
1.56
|
|
$
|
1.16
|
|
$
|
.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share attributable to common shares
Diluted (1)
|
|
$
|
.89
|
|
$
|
1.50
|
|
$
|
1.12
|
|
$
|
.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
571,575
|
|
$
|
680,353
|
|
$
|
575,000
|
|
$
|
619,464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
165,729
|
|
$
|
168,474
|
|
$
|
172,177
|
|
$
|
253,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations
|
|
$
|
162,344
|
|
$
|
124,092
|
|
$
|
120,967
|
|
$
|
305,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings attributable to common shares
|
|
$
|
183,159
|
|
$
|
168,397
|
|
$
|
166,305
|
|
$
|
331,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share attributable to common shares
Basic (1)
|
|
$
|
.75
|
|
$
|
.69
|
|
$
|
.68
|
|
$
|
1.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share attributable to common shares
Diluted (1)
|
|
$
|
.72
|
|
$
|
.66
|
|
$
|
.65
|
|
$
|
1.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Quarterly earnings per common share amounts may not total to the
annual amounts due to rounding and to the change in the number
of common shares outstanding. |
57
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders
ProLogis:
Under date of February 27, 2008, we reported on the
consolidated balance sheets of ProLogis and subsidiaries as of
December 31, 2007 and 2006, and the related consolidated
statements of earnings, shareholders equity and
comprehensive income, and cash flows for each of the years in
the three-year period ended December 31, 2007. In
connection with our audits of the aforementioned consolidated
financial statements, we also audited the related financial
statement schedule, Schedule III Real Estate
and Accumulated Depreciation (Schedule III).
Schedule III is the responsibility of ProLogis
management. Our responsibility is to express an opinion on
Schedule III based on our audits.
In our opinion, Schedule III Real Estate and
Accumulated Depreciation, when considered in relation to the
basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set
forth therein.
KPMG LLP
Denver, Colorado
February 27, 2008
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial Cost to
|
|
|
|
|
|
Gross Amounts At Which Carried
|
|
|
|
|
|
|
|
|
|
|
|
|
ProLogis
|
|
|
Costs Capitalized
|
|
|
as of December 31, 2007
|
|
|
Accumulated
|
|
|
Date of
|
|
|
No. of
|
|
Encum-
|
|
|
|
|
Building &
|
|
|
Subsequent
|
|
|
|
|
|
Building &
|
|
|
|
|
|
Depreciation
|
|
|
Construction/
|
Description
|
|
Bldgs.
|
|
brances
|
|
Land
|
|
|
Improvements
|
|
|
To Acquisition
|
|
|
Land
|
|
|
Improvements
|
|
|
Total (a,b)
|
|
|
(c)
|
|
|
Acquisition
|
|
Industrial Operating Properties (d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North American Markets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Atlanta, Georgia
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Atlanta NE Distribution Center
|
|
8
|
|
(e)
|
|
|
5,582
|
|
|
|
3,047
|
|
|
|
26,259
|
|
|
|
6,275
|
|
|
|
28,613
|
|
|
|
34,888
|
|
|
|
(11,428
|
)
|
|
1996, 1997
|
Atlanta West Distribution Center
|
|
18
|
|
(e)
|
|
|
10,336
|
|
|
|
48,444
|
|
|
|
14,253
|
|
|
|
10,147
|
|
|
|
62,886
|
|
|
|
73,033
|
|
|
|
(20,246
|
)
|
|
1994, 1996, 2005, 2006
|
Berkeley Lake Distribution Center
|
|
1
|
|
|
|
|
2,178
|
|
|
|
8,712
|
|
|
|
170
|
|
|
|
2,200
|
|
|
|
8,860
|
|
|
|
11,060
|
|
|
|
(352
|
)
|
|
2006
|
Buford Distribution Center (d)
|
|
1
|
|
|
|
|
1,487
|
|
|
|
|
|
|
|
4,805
|
|
|
|
1,487
|
|
|
|
4,805
|
|
|
|
6,292
|
|
|
|
|
|
|
2007
|
Cedars Distribution Center
|
|
1
|
|
|
|
|
1,366
|
|
|
|
7,739
|
|
|
|
2,991
|
|
|
|
1,692
|
|
|
|
10,404
|
|
|
|
12,096
|
|
|
|
(3,233
|
)
|
|
1999
|
Douglas Hill Distribution Center
|
|
5
|
|
|
|
|
16,647
|
|
|
|
46,825
|
|
|
|
30,586
|
|
|
|
16,647
|
|
|
|
77,411
|
|
|
|
94,058
|
|
|
|
(4,660
|
)
|
|
2005, 2006
|
Greenwood Industrial Park (d)
|
|
1
|
|
|
|
|
3,989
|
|
|
|
|
|
|
|
21,273
|
|
|
|
3,989
|
|
|
|
21,273
|
|
|
|
25,262
|
|
|
|
|
|
|
2006
|
Horizon Distribution Center
|
|
1
|
|
|
|
|
2,846
|
|
|
|
11,385
|
|
|
|
148
|
|
|
|
2,846
|
|
|
|
11,533
|
|
|
|
14,379
|
|
|
|
(455
|
)
|
|
2006
|
International Airport Industrial Center
|
|
9
|
|
|
|
|
2,939
|
|
|
|
14,146
|
|
|
|
7,679
|
|
|
|
2,972
|
|
|
|
21,792
|
|
|
|
24,764
|
|
|
|
(9,541
|
)
|
|
1994, 1995
|
LaGrange Distribution Center
|
|
1
|
|
|
|
|
174
|
|
|
|
986
|
|
|
|
718
|
|
|
|
174
|
|
|
|
1,704
|
|
|
|
1,878
|
|
|
|
(929
|
)
|
|
1994
|
Midland Distribution Center
|
|
1
|
|
|
|
|
1,919
|
|
|
|
7,679
|
|
|
|
486
|
|
|
|
1,919
|
|
|
|
8,165
|
|
|
|
10,084
|
|
|
|
(314
|
)
|
|
2006
|
New Manchester Distribution Center (d)
|
|
1
|
|
|
|
|
3,323
|
|
|
|
13,334
|
|
|
|
|
|
|
|
3,323
|
|
|
|
13,334
|
|
|
|
16,657
|
|
|
|
|
|
|
2007
|
Northeast Industrial Center
|
|
3
|
|
|
|
|
841
|
|
|
|
4,744
|
|
|
|
2,153
|
|
|
|
782
|
|
|
|
6,956
|
|
|
|
7,738
|
|
|
|
(3,381
|
)
|
|
1996
|
Northmont Industrial Center
|
|
1
|
|
|
|
|
566
|
|
|
|
3,209
|
|
|
|
977
|
|
|
|
566
|
|
|
|
4,186
|
|
|
|
4,752
|
|
|
|
(2,031
|
)
|
|
1994
|
Peachtree Commerce Business Center
|
|
5
|
|
|
|
|
1,519
|
|
|
|
7,253
|
|
|
|
1,955
|
|
|
|
1,519
|
|
|
|
9,208
|
|
|
|
10,727
|
|
|
|
(2,839
|
)
|
|
1994, 2006
|
Piedmont Court Distribution Center
|
|
2
|
|
|
|
|
885
|
|
|
|
5,013
|
|
|
|
2,499
|
|
|
|
885
|
|
|
|
7,512
|
|
|
|
8,397
|
|
|
|
(3,567
|
)
|
|
1997
|
Plaza Industrial Center
|
|
1
|
|
|
|
|
66
|
|
|
|
372
|
|
|
|
260
|
|
|
|
66
|
|
|
|
632
|
|
|
|
698
|
|
|
|
(268
|
)
|
|
1995
|
Pleasantdale Industrial Center
|
|
2
|
|
|
|
|
541
|
|
|
|
3,184
|
|
|
|
1,143
|
|
|
|
541
|
|
|
|
4,327
|
|
|
|
4,868
|
|
|
|
(2,047
|
)
|
|
1995
|
Riverside Distribution Center
|
|
3
|
|
|
|
|
2,533
|
|
|
|
13,336
|
|
|
|
2,978
|
|
|
|
2,556
|
|
|
|
16,291
|
|
|
|
18,847
|
|
|
|
(4,911
|
)
|
|
1999
|
South Royal Distribution Center
|
|
1
|
|
|
|
|
356
|
|
|
|
2,019
|
|
|
|
111
|
|
|
|
356
|
|
|
|
2,130
|
|
|
|
2,486
|
|
|
|
(386
|
)
|
|
2002
|
Tradeport Distribution Center
|
|
3
|
|
(e)
|
|
|
1,464
|
|
|
|
4,563
|
|
|
|
7,008
|
|
|
|
1,479
|
|
|
|
11,556
|
|
|
|
13,035
|
|
|
|
(5,301
|
)
|
|
1994, 1996
|
Weaver Distribution Center
|
|
2
|
|
|
|
|
935
|
|
|
|
5,182
|
|
|
|
1,746
|
|
|
|
935
|
|
|
|
6,928
|
|
|
|
7,863
|
|
|
|
(3,232
|
)
|
|
1995
|
Westfork Industrial Center
|
|
10
|
|
(e)
|
|
|
2,483
|
|
|
|
14,115
|
|
|
|
3,316
|
|
|
|
2,442
|
|
|
|
17,472
|
|
|
|
19,914
|
|
|
|
(7,552
|
)
|
|
1995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Atlanta, Georgia
|
|
81
|
|
|
|
|
64,975
|
|
|
|
225,287
|
|
|
|
133,514
|
|
|
|
65,798
|
|
|
|
357,978
|
|
|
|
423,776
|
|
|
|
(86,673
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Austin, Texas
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corridor Park Corporate Center
|
|
6
|
|
|
|
|
1,652
|
|
|
|
1,681
|
|
|
|
14,835
|
|
|
|
2,113
|
|
|
|
16,055
|
|
|
|
18,168
|
|
|
|
(7,338
|
)
|
|
1995, 1996
|
Montopolis Distribution Center
|
|
1
|
|
|
|
|
580
|
|
|
|
3,384
|
|
|
|
1,179
|
|
|
|
580
|
|
|
|
4,563
|
|
|
|
5,143
|
|
|
|
(2,432
|
)
|
|
1994
|
Rutland Distribution Center
|
|
2
|
|
|
|
|
460
|
|
|
|
2,617
|
|
|
|
846
|
|
|
|
462
|
|
|
|
3,461
|
|
|
|
3,923
|
|
|
|
(1,572
|
)
|
|
1993
|
Southpark Corporate Center
|
|
2
|
|
|
|
|
684
|
|
|
|
|
|
  |