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Prologis, Inc.$65.76($.41)(.62%)

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 Prologis Reports Third Quarter 2016 Earnings Results
   Thursday, October 20, 2016 8:00:00 AM ET

Prologis, Inc. (PLD ), the global leader in logistics real estate, today reported results for the third quarter of 2016.

Net earnings per share was $0.52 compared with $0.49 for the same period in 2015. The year-over-year increase is due primarily to improved operating performance and higher net promote income offset by lower gains from the disposition of real estate. Core funds from operations per diluted share* was $0.73 compared with $0.58 for the same period in 2015. The 26% year-over-year increase reflects improved operating performance and higher net promote income.

"This was another excellent quarter for Prologis, resulting from our well-located portfolio, favorable secular trends and the laser focus of the team," said Hamid R. Moghadam, chairman and CEO, Prologis. "Our portfolio and financial position have never been stronger and we are very confident in our prospects for earnings growth going forward."

Moghadam added: "Customers continue to invest in their supply chains to improve efficiencies. Their requirements for logistics facilities are matching up very well with our properties’ locations and functional characteristics. In the third quarter, we saw broad-based demand across customer segments, led by e-commerce, automotive, consumer products and construction supplies."

OPERATING RESULTS STRONG ACROSS THE BOARD

Owned & Managed      3Q16  3Q15  Notes
Period End Occupancy 96.6% 96.0% Europe reached 96.1% occupancy
Leases Signed        46MSF 42MSF Record operating leasing volume
Prologis Share                3Q16  3Q15  Notes
Net Effective Rent Change     15.0% 12.0% Led by the U.S. at 23.3% and the U.K. at 20.5%
Cash Rent Change              5.7%  3.6%
Net Effective Same Store NOI* 5.6%  6.2%  Led by the U.S. at 6.9%
Cash Same Store NOI*          6.6%  4.5%  Led by the U.S. at 8.6%

DEVELOPMENT STABILIZATION AND CAPITAL RECYCLING ACTIVITY ON TRACK FOR RECORD PERFORMANCE

Prologis Share                                                          3Q16
Building Acquisitions                                                   $17M
Weighted avg stabilized cap rate                                        5.4%
Development Stabilizations                                              $392M
Estimated weighted avg yield                                            7.2%
Estimated weighted avg margin                                           31.8%
Estimated value creation                                                $125M
Development Starts                                                      $434M
Estimated weighted avg margin                                           17.6%
Estimated value creation                                                $76M
% Build-to-suit                                                         45.5%
Total Dispositions and Contributions                                    $517M
Weighted avg stabilized cap rate (excluding land and other real estate) 6.2%

CAPITAL MARKETS ACTIVITY BENEFITS FROM ACCESS TO GLOBAL CAPITAL Prologis ended the quarter with liquidity of $3.8 billion. During the third quarter, the company and its co-investment ventures completed $1.3 billion of financings, including a ?120 billion loan.

"The $1.2 billion yen transaction we completed in the quarter to refinance three older loans is a great example of our ability to source capital globally at attractive rates," said Thomas S. Olinger, chief financial officer, Prologis. "This new facility has a current interest rate of 65 basis points and a term of approximately seven years."

GUIDANCE INCREASED FOR 2016 Net earnings guidance increased $0.13 at the midpoint, primarily a result of improved operations and higher gains from the disposition of real estate.

"Market fundamentals continued to exceed our expectations in the third quarter," Olinger said. "As a result of outperformance from operations we are increasing the midpoint of our full-year guidance ranges for earnings and net effective same store NOI*. The earnings increase reflects net earnings growth of 17 percent and Core FFO* growth of 15 percent including promotes and 11 percent excluding promotes. During this same period, we have further strengthened our balance sheet and increased liquidity."

KEY CHANGES TO GUIDANCE

Earnings (per diluted share) Previous       Revised
GAAP Net Earnings            $1.70 to $1.90 $1.90 to $1.95
Core FFO*                    $2.52 to $2.58 $2.56 to $2.57
Operations                                     Previous       Revised
Net Effective Same Store NOI - Prologis share* 4.75% to 5.25% 5.50% to 5.80%
Other Assumptions (in millions)   Previous     Revised
Strategic capital revenue         $190 to $200 $195 to $200
Net promote income                $75 to $85   $79 to $82
Realized development gains        $200 to $250 $275 to $300
General & administrative expenses $218 to $228 $222 to $226
Capital Deployment (in millions)                                       Previous         Revised
Development stabilizations (85% Prologis share)                        $2,200 to $2,400 $2,400 to $2,600
Development starts (85% Prologis share)                                $2,000 to $2,300 $2,100 to $2,300
Building and land dispositions (75% Prologis share)                    $2,000 to $2,300 $2,000 to $2,200
Building contributions (80% Prologis share, net of retained ownership) $1,100 to $1,400 $1,200 to $1,500

The earnings guidance described above includes potential future gains (losses) recognized from real estate transactions but excludes any future foreign currency or derivative gains or losses as these items are difficult to predict. In reconciling from net earnings to Core FFO*, Prologis makes certain adjustments, including but not limited to real estate depreciation and amortization expense, gains (losses) recognized from real estate transactions and early extinguishment of debt, acquisition costs, impairment charges, deferred taxes and unrealized gains or losses on foreign currency or derivative activity. The difference between the company’s Core FFO* and net earnings guidance for 2016 relates predominantly to these items. Please refer to our third quarter Supplemental Information, which is available on our Investor Relations website at www.ir.prologis.com and on the SEC’s website at www.sec.gov for a definition of Core FFO* and other non-GAAP measures used by Prologis, along with reconciliations of these items to the closest GAAP measure for our results and guidance.

WEBCAST & CONFERENCE CALL INFORMATION Prologis will host a live webcast and conference call to discuss quarterly results, current market conditions and future outlook. Here are the event details:

-- Thursday, October 20, 2016, at 12 p.m. U.S. Eastern Time.

-- Live webcast at http://ir.prologis.com by clicking Investors>Investor Events and Presentations.

-- Dial in: +1 877-256-7020 or +1 973-409-9692 and enter Passcode 81585906.

A telephonic replay will be available October 20-27 at +1 (855) 859-2056 (from the United States and Canada) or +1 (404) 537-3406 (from all other countries) using conference code 81585906. The webcast replay will be posted when available in the Investor Relations "Events & Presentations" section.

ABOUT PROLOGIS Prologis, Inc. is the global leader in logistics real estate with a focus on high-barrier, high-growth markets. As of September 30, 2016, the company owned or had investments in, on a wholly owned basis or through co-investment ventures, properties and development projects expected to total approximately 665 million square feet (62 million square meters) in 20 countries. Prologis leases modern distribution facilities to a diverse base of approximately 5,200 customers across two major categories: business-to-business and retail/online fulfillment.

FORWARD-LOOKING STATEMENTS The statements in this document that are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are based on current expectations, estimates and projections about the industry and markets in which we operate as well as management’s beliefs and assumptions. Such statements involve uncertainties that could significantly impact our financial results. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates" and variations of such words and similar expressions are intended to identify such forward-looking statements, which generally are not historical in nature. All statements that address operating performance, events or developments that we expect or anticipate will occur in the future -- including statements relating to rent and occupancy growth, development activity and changes in sales or contribution volume of properties, disposition activity, general conditions in the geographic areas where we operate, our debt, capital structure and financial position, our ability to form new co-investment ventures and the availability of capital in existing or new co-investment ventures -- are forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Although we believe the expectations reflected in any forward-looking statements are based on reasonable assumptions, we can give no assurance that our expectations will be attained and therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. Some of the factors that may affect outcomes and results include, but are not limited to: (i) national, international, regional and local economic climates, (ii) changes in financial markets, interest rates and foreign currency exchange rates, (iii) increased or unanticipated competition for our properties, (iv) risks associated with acquisitions, dispositions and development of properties, (v) maintenance of real estate investment trust status, tax structuring and income tax rates (vi) availability of financing and capital, the levels of debt that we maintain and our credit ratings, (vii) risks related to our investments in our co-investment ventures, including our ability to establish new co-investment ventures and funds, (viii) risks of doing business internationally, including currency risks, (ix) environmental uncertainties, including risks of natural disasters, and (x) those additional factors discussed in reports filed with the Securities and Exchange Commission by us under the heading "Risk Factors." We undertake no duty to update any forward-looking statements appearing in this document.

*This is a non-GAAP financial measure. See the Notes and Definitions in our supplemental information for further explanation and a reconciliation to the most directly comparable GAAP measure.

dollars in millions, except per share/unit data                          Three Months ended           Nine Months ended
                                                                         September 30,                September 30,
                                                                         2016          2015           2016     2015
Revenues                                                                 $ 705         $ 581          $ 1,913  $ 1,554
Net earnings attributable to common stockholders                         279           259            763      744
Core FFO*                                                                402           307            1,056    836
AFFO*                                                                    368           356            974      859
Adjusted EBITDA*                                                         573           567            1,582    1,422
Estimated value creation from development starts - Prologis share        76            63             198      265
Common stock dividends and common limited partnership unit distributions 231           210            692      588
Per common share - diluted:
Net earnings attributable to common stockholders                         $0.52         $0.49          $   1.44 $   1.41
Core FFO*                                                                0.73          0.58           1.94     1.59
Business line reporting:
Real estate operations*                                                  0.55          0.54           1.65     1.47
Strategic capital*                                                       0.18          0.04           0.29     0.12
Core FFO*                                                                0.73          0.58           1.94     1.59
Realized development gains, net of taxes                                 0.09          0.24           0.27     0.39
Dividends and distributions per common share/unit                        0.42          0.40           1.26     1.12
* This is a non-GAAP financial measure, please see below for further explanation.
in thousands                                                                                          September 30, 2016  June 30, 2016  December 31, 2015
Assets:
     Investments in real estate properties:
                   Operating properties                                                               $  23,876,290       $ 23,913,335   $ 23,735,745
                   Development portfolio                                                              1,809,002           1,770,771      1,872,903
                   Land                                                                               1,352,600           1,322,214      1,359,794
                   Other real estate investments                                                      532,812             550,090        552,926
                                                                                                      27,570,704          27,556,410     27,521,368
                   Less accumulated depreciation                                                      3,638,688           3,521,198      3,274,284
                                                           Net investments in real estate properties  23,932,016          24,035,212     24,247,084
     Investments in and advances to unconsolidated entities                                           4,580,584           4,483,804      4,755,620
     Assets held for sale                                                                             450,349             393,434        378,423
     Notes receivable backed by real estate                                                           33,800              33,800         235,050
                                                           Net investments in real estate             28,996,749          28,946,250     29,616,177
     Cash and cash equivalents                                                                        375,120             332,221        264,080
     Other assets                                                                                     1,516,340           1,467,463      1,514,510
                                                           Total assets                               $  30,888,209       $ 30,745,934   $ 31,394,767
Liabilities and Equity:
     Liabilities:
                   Debt                                                                               $  11,256,997       $ 11,139,415   $ 11,626,831
                   Accounts payable, accrued expenses and other liabilities                           1,347,942           1,323,485      1,347,100
                                                           Total liabilities                          12,604,939          12,462,900     12,973,931
     Equity:
                   Stockholders’ equity:
                                       Preferred stock                                                78,235              78,235         78,235
                                       Common stock                                                   5,286               5,265          5,245
                                       Additional paid-in capital                                     19,433,001          19,361,787     19,302,367
                                       Accumulated other comprehensive loss                           (889,223)           (848,079)      (791,429)
                                       Distributions in excess of net earnings                        (3,828,132)         (3,885,017)    (3,926,483)
                                                           Total stockholders’ equity                 14,799,167          14,712,191     14,667,935
                   Noncontrolling interests                                                           3,092,988           3,154,205      3,320,227
                   Noncontrolling interests - limited partnership unitholders                         391,115             416,638        432,674
                                                           Total equity                               18,283,270          18,283,034     18,420,836
                                                           Total liabilities and equity               $  30,888,209       $ 30,745,934   $ 31,394,767
in thousands, except per share amounts                                                                                  Three Months Ended         Nine Months Ended
                                                                                                                        September 30,              September 30,
                                                                                                                        2016         2015          2016            2015
Revenues:
                            Rental                                                                                      $ 560,277    $ 532,755     $ 1,660,524     $ 1,413,001
                            Strategic capital                                                                           140,577      44,176        241,565         133,247
                            Development management and other                                                            3,711        3,691         10,931          7,625
                                                                          Total revenues                                704,565      580,622       1,913,020       1,553,873
Expenses:
                            Rental                                                                                      140,514      140,284       427,820         393,199
                            Strategic capital                                                                           44,624       26,532        97,783          76,661
                            General and administrative                                                                  58,157       54,178        165,634         157,458
                            Depreciation and amortization                                                               224,867      247,471       705,249         607,467
                            Other                                                                                       3,779        8,765         12,364          44,467
                                                                          Total expenses                                471,941      477,230       1,408,850       1,279,252
Operating income                                                                                                        232,624      103,392       504,170         274,621
Other income (expense):
                            Earnings from unconsolidated co-investment ventures, net                                    44,547       32,617        132,673         103,704
                            Earnings from other unconsolidated ventures, net                                            1,310        940           12,949          2,679
                            Interest expense                                                                            (75,310)     (81,035)      (232,577)       (218,698)
                            Gains on dispositions of development properties and land, net                               53,717       135,043       160,001         210,110
                            Gains on dispositions of real estate, net (excluding development properties and land)       63,579       133,748       301,962         445,178
                            Foreign currency and derivative gains (losses) and interest and other income (expense), net 1,202        (3,191)       (19,226)        18,759
                            Gains (losses) on early extinguishment of debt, net                                         1,492        -             2,484           (16,525)
                                                                          Total other income                            90,537       218,122       358,266         545,207
Earnings before income taxes                                                                                            323,161      321,514       862,436         819,828
                            Current income tax expense                                                                  (13,054)     (17,283)      (38,335)        (22,828)
                            Deferred income tax benefit (expense)                                                       (2,865)      2,955         1,737           1,758
Consolidated net earnings                                                                                               307,242      307,186       825,838         798,758
Net earnings attributable to noncontrolling interests                                                                   (18,629)     (43,360)      (35,865)        (43,558)
Net earnings attributable to noncontrolling interests - limited partnership units                                       (7,687)      (3,176)       (22,238)        (5,756)
Net earnings attributable to controlling interests                                                                      280,926      260,650       767,735         749,444
Preferred stock dividends                                                                                               (1,671)      (1,671)       (5,056)         (5,019)
Net earnings attributable to common stockholders                                                                        $ 279,255    $ 258,979     $    762,679    $    744,425
Weighted average common shares outstanding - Diluted                                                                    547,200      532,073       545,230         531,121
Net earnings per share attributable to common stockholders - Diluted                                                    $       0.52 $       0.49  $          1.44 $          1.41
in thousands, except per share amounts                                                                                                      Three Months Ended     Nine Months Ended
                                                                                                                                            September 30,          September 30,
                                                                                                                                            2016       2015        2016         2015
Net earnings attributable to common stockholders                                                                                            $ 279,255  $ 258,979   $    762,679 $    744,425
Add (deduct) NAREIT defined adjustments:
                                               Real estate related depreciation and amortization                                            217,041    239,896     681,866      587,384
                                               Gains on dispositions of real estate, net (excluding development properties and land)        (63,579)   (133,748)   (301,962)    (445,178)
                                               Reconciling items related to noncontrolling interests                                        (23,028)   (1,080)     (87,318)     (33,373)
                                               Our share of reconciling items related to unconsolidated co-investment ventures              36,794     49,349      116,821      144,299
                                               Our share of reconciling items related to other unconsolidated ventures                      1,420      1,650       436          4,948
Subtotal-NAREIT defined FFO*                                                                                                                $ 447,903  $ 415,046   $ 1,172,522  $ 1,002,505
Add (deduct) our defined adjustments:
                                               Unrealized foreign currency and derivative losses (gains), net                               (1,915)    12,362      21,864       8,856
                                               Deferred income tax expense (benefit)                                                        2,865      (2,955)     (1,737)      (1,758)
                                               Current income tax expense related to acquired tax liabilities                               -          3,497       -            3,497
                                               Reconciling items related to noncontrolling interests                                        (1,247)    (375)       39           (1,167)
                                               Our share of reconciling items related to unconsolidated co-investment ventures              830        2,116       1,170        (11,771)
FFO, as modified by Prologis*                                                                                                               $ 448,436  $ 429,691   $ 1,193,858  $ 1,000,162
Adjustments to arrive at Core FFO:
                                               Gains on dispositions of development properties and land, net                                (53,717)   (135,043)   (160,001)    (210,110)
                                               Current income tax expense on dispositions                                                   4,701      9,403       14,820       4,930
                                               Acquisition expenses                                                                         304        2,115       2,532        29,549
                                               Losses (gains) on early extinguishment of debt, net                                          (1,492)    -           (2,484)      16,525
                                               Reconciling items related to noncontrolling interests                                        3,242      (180)       4,298        (12,407)
                                               Our share of reconciling items related to unconsolidated co-investment ventures              1,364      1,282       4,683        6,883
                                               Our share of reconciling items related to other unconsolidated ventures                      (685)      -           (1,995)      -
Core FFO*                                                                                                                                   $ 402,153  $ 307,268   $ 1,055,711  $    835,532
Adjustments to arrive at Adjusted FFO ("AFFO"), including our share of unconsolidated co-investment ventures less noncontrolling interests:
                                               Gains on dispositions of development properties and land, net                                53,717     135,043     160,001      210,110
                                               Current income tax expense on dispositions                                                   (4,701)    (9,403)     (14,820)     (4,930)
                                               Straight-lined rents and amortization of lease intangibles                                   (31,551)   (22,178)    (85,942)     (37,537)
                                               Property improvements                                                                        (22,337)   (19,583)    (50,294)     (45,540)
                                               Tenant improvements                                                                          (18,659)   (22,812)    (65,540)     (59,536)
                                               Leasing commissions                                                                          (17,723)   (20,473)    (59,561)     (49,086)
                                               Amortization of management contracts                                                         945        1,088       2,799        3,383
                                               Amortization of debt premiums and financing costs, net                                       (3,431)    (7,161)     (13,047)     (21,547)
                                               Stock compensation expense                                                                   14,446     13,406      43,658       40,124
                                               Reconciling items related to noncontrolling interests                                        11,781     13,334      43,809       31,109
                                               Our share of reconciling items related to unconsolidated co-investment ventures              (16,142)   (12,895)    (42,332)     (43,344)
AFFO*                                                                                                                                       $ 368,498  $ 355,634   $    974,442 $    858,738
* This is a non-GAAP financial measure, please see below for further explanation.
in thousands                                                                                              Three Months Ended     Nine Months Ended
                                                                                                          September 30,          September 30,
                                                                                                          2016       2015        2016          2015
Net earnings attributable to common stockholders                                                          $  279,255 $ 258,979   $     762,679 $    744,425
                  Gains on dispositions of real estate, net (excluding development properties and land)   (63,579)   (133,748)   (301,962)     (445,178)
                  Depreciation and amortization expenses                                                  224,867    247,471     705,249       607,467
                  Interest expense                                                                        75,310     81,035      232,577       218,698
                  Losses (gains) on early extinguishment of debt, net                                     (1,492)    -           (2,484)       16,525
                  Current and deferred income tax expense, net                                            15,919     14,328      36,598        21,070
                  Net earnings attributable to noncontrolling interests - limited partnership unitholders 7,687      3,176       22,238        5,756
                  Pro forma adjustments                                                                   (1,862)    (664)       (8,866)       28,751
                  Preferred stock dividends                                                               1,671      1,671       5,056         5,019
                  Unrealized foreign currency and derivative losses (gains), net                          (1,915)    12,362      21,864        8,856
                  Stock compensation expense                                                              14,446     13,406      43,658        40,124
                  Acquisition expenses                                                                    304        2,115       2,532         29,549
Adjusted EBITDA, consolidated*                                                                            $ 550,611  $ 500,131   $ 1,519,139   $ 1,281,062
                  Reconciling items related to noncontrolling interests                                   (37,410)   (8,982)     (117,942)     (64,217)
                  Our share of reconciling items related to unconsolidated co-investment ventures         59,799     75,466      180,385       204,801
Adjusted EBITDA*                                                                                          $ 573,000  $ 566,615   $ 1,581,582   $ 1,421,646
* This is a non-GAAP financial measure, please see below for further explanation.

Adjusted EBITDA. We use Adjusted EBITDA, a non-Generally Accepted Accounting Principles ("GAAP") financial measure, as a measure of our operating performance. We calculate Adjusted EBITDA beginning with consolidated net earnings (loss) attributable to common stockholders and removing the effect of interest, income taxes, depreciation and amortization, impairment charges, third party acquisition expenses related to the acquisition of real estate, gains or losses from the acquisition or disposition of investments in real estate (other than from land and development properties), gains from the revaluation of equity investments upon acquisition of a controlling interest, gains or losses on early extinguishment of debt and derivative contracts (including cash charges), similar adjustments we make to our FFO measures (see definition below), and other items, such as stock based compensation and unrealized gains or losses on foreign currency and derivative activity. We make adjustments to reflect our economic ownership in each entity in which we invest, whether consolidated or unconsolidated.

We consider Adjusted EBITDA to provide investors relevant and useful information because it permits investors to view our operating performance on an unleveraged basis before the effects of income tax, non-cash depreciation and amortization expense, gains and losses on the disposition of non-development properties and other items (outlined above), that affect comparability. We also include a pro forma adjustment in Adjusted EBITDA to reflect a full period of NOI on the operating properties we acquire and stabilize and to remove NOI on properties we dispose of during the quarter assuming the transaction occurred at the beginning of the quarter. By excluding interest expense, Adjusted EBITDA allows investors to measure our operating performance independent of our capital structure and indebtedness and, therefore, allows for a more meaningful comparison of our operating performance to that of other companies, both in the real estate industry and in other industries. Gains and losses on the early extinguishment of debt generally include the costs of repurchasing debt securities. While not infrequent or unusual in nature, these items result from market fluctuations that can have inconsistent effects on our results of operations. The economics underlying these items reflect market and financing conditions in the short-term but can obscure our performance and the value of our long-term investment decisions and strategies.

We believe that Adjusted EBITDA helps investors to analyze our ability to meet interest payment obligations and to make quarterly preferred share dividends. We believe that investors should consider Adjusted EBITDA in conjunction with net earnings and the other GAAP measures of our performance to improve their understanding of our operating results, and to make more meaningful comparisons of our performance against other companies. By using Adjusted EBITDA, an investor is assessing the earnings generated by our operations but not taking into account the eliminated expenses or gains incurred in connection with such operations. As a result, Adjusted EBITDA has limitations as an analytical tool and should be used in conjunction with our GAAP presentations. Adjusted EBITDA does not reflect our historical cash expenditures or future cash requirements for working capital, capital expenditures, distribution requirements, contractual commitments or interest and principal payments on our outstanding debt.

While EBITDA is a relevant and widely used measure of operating performance, it does not represent net income as defined by GAAP and it should not be considered as an alternative to those indicators in evaluating operating performance or liquidity. Further, our computation of Adjusted EBITDA may not be comparable to EBITDA reported by other companies. We compensate for the limitations of Adjusted EBITDA by providing investors with financial statements prepared according to GAAP, along with this detailed discussion of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to consolidated net earnings (loss), a GAAP measurement.

Business Line Reporting is a non-GAAP financial measure. Core FFO and development gains are generated by our three lines of business: (i) real estate operations; (ii) strategic capital; and (iii) development. Real estate operations represents total Prologis Core FFO, less the amount allocated to the Strategic Capital line of business. The amount of Core FFO allocated to the Strategic Capital line of business represents the third party share of the asset management related fees we earn from our co-investment ventures (both consolidated and unconsolidated) less costs directly associated to our strategic capital group, plus development management income. Development gains include our share of gains on dispositions of development properties and land, net of taxes. To calculate the per share amount, the amount generated by each line of business is divided by the weighted average diluted common shares outstanding used in our Core FFO calculation of per share amounts. Management believes evaluating our results by line of business is a useful supplemental measure of our operating performance because it helps the investing public compare the operating performance of Prologis’ respective businesses to other companies’ comparable businesses. Prologis’ computation of FFO by line of business may not be comparable to that reported by other real estate investment trusts as they may use different methodologies in computing such measures.

Calculation of Per Share Amounts
in thousands, except per share amount                                          Three Months Ended        Nine Months Ended
                                                                               September 30,             September 30,
                                                                                   2016         2015         2016           2015
Net earnings
Net earnings                                                                   $   279,255  $   258,979  $   762,679    $   744,425
Noncontrolling interest attributable to exchangeable limited partnership units     7,713        3,203        24,479         7,331
Gains, net of expenses, associated with exchangeable debt assumed exchanged        -            -            -              (1,614)
Adjusted net earnings -Diluted                                                 $   286,968  $   262,182  $   787,158    $   750,142
Weighted average common shares outstanding - Basic                                 527,288      523,528      525,462        520,388
Incremental weighted average effect on exchange of limited partnership units       14,568       6,685        17,156         5,875
Incremental weighted average effect of stock awards                                5,344        1,860        2,610          1,953
Incremental weighted average effect on exchangeable debt assumed exchanged (a)     -            -            -              2,905
Weighted average common shares outstanding - Diluted                               547,200      532,073      545,228        531,121
Net earnings per share - Basic                                                 $   0.53     $   0.49     $   1.45       $   1.43
Net earnings per share - Diluted                                               $   0.52     $   0.49     $   1.44       $   1.41
Core FFO
Core FFO                                                                       $   402,153  $   307,268  $   1,055,711  $   835,532
Noncontrolling interest attributable to exchangeable limited partnership units     1,088        48           3,282          160
Interest expense on exchangeable debt assumed exchanged                            -            -            -              3,506
Core FFO - Diluted                                                             $   403,241  $   307,316  $   1,058,993  $   839,198
Weighted average common shares outstanding - Basic                                 527,288      523,528      525,462        520,388
Incremental weighted average effect on exchange of limited partnership units       16,233       6,685        17,156         4,201
Incremental weighted average effect of stock awards                                5,344        1,860        2,610          1,953
Incremental weighted average effect on exchangeable debt assumed exchanged (a)     -            -            -              2,905
Weighted average common shares outstanding -Diluted                                548,865      532,073      545,228        529,447
Core FFO per share - Diluted                                                   $   0.73     $   0.58     $   1.94       $   1.59
(a) In March 2015, the exchangeable debt was settled primarily through the issuance of common stock. The adjustment in 2015 assumes the exchange occurred on January 1, 2015.

FFO, as modified by Prologis attributable to common stockholders/unitholders ("FFO, as modified by Prologis"); Core FFO attributable to common stockholders/unitholders ("Core FFO"); AFFO (collectively referred to as "FFO"). FFO is a non-GAAP financial measure that is commonly used in the real estate industry. The most directly comparable GAAP measure to FFO is net earnings. Although the National Association of Real Estate Investment Trusts ("NAREIT") has published a definition of FFO, modifications to the NAREIT calculation of FFO are common among REITs, as companies seek to provide financial measures that meaningfully reflect their business.

FFO is not meant to represent a comprehensive system of financial reporting and does not present, nor do we intend it to present, a complete picture of our financial condition and operating performance. We believe that FFO is only meaningful when it is used in conjunction with net earnings computed under GAAP. Furthermore, we believe the consolidated financial statements, prepared in accordance with GAAP, provide the most meaningful picture of our financial condition.

NAREIT’s FFO measure adjusts net earnings computed under GAAP to exclude historical cost depreciation and gains and losses from the sales, along with impairment charges, of previously depreciated properties. We agree that these NAREIT adjustments are useful to investors for the following reasons:

(i)  historical cost accounting for real estate assets in accordance with GAAP assumes, through depreciation charges, that the value of real estate assets diminishes predictably over time. NAREIT stated in its White Paper on FFO "since real estate asset values have historically risen or fallen with market conditions, many industry investors have considered presentations of operating results for real estate companies that use historical cost accounting to be insufficient by themselves." Consequently, NAREIT’s definition of FFO reflects the fact that real estate, as an asset class, generally appreciates over time and depreciation charges required by GAAP do not reflect the underlying economic realities. We exclude depreciation from our unconsolidated entities and the third parties’ share of our consolidated ventures.
(ii) REITs were created in order to encourage public ownership of real estate as an asset class through investment in firms that were in the business of long-term ownership and management of real estate. The exclusion, in NAREIT’s definition of FFO, of gains and losses from the sales, along with impairment charges, of previously depreciated operating real estate assets allows investors and analysts to readily identify the operating results of the long-term assets that form the core of a REIT’s activity and assists in comparing those operating results between periods. We include the gains and losses (including impairment charges) from dispositions of land and development properties, as well as our proportionate share of the gains and losses (including impairment charges) from dispositions of development properties recognized by our unconsolidated and consolidated entities, in our definition of FFO. We exclude the gain on revaluation of equity investments upon acquisition of a controlling interest from our definition of FFO.

Our FFO Measures

At the same time that NAREIT created and defined its FFO measure for the REIT industry, it also recognized that "management of each of its member companies has the responsibility and authority to publish financial information that it regards as useful to the financial community." We believe stockholders, potential investors and financial analysts who review our operating results are best served by a modified FFO measure that includes other adjustments to net earnings computed under GAAP in addition to those included in the NAREIT defined measure of FFO. Our FFO measures are used by management in analyzing our business and the performance of our properties and we believe that it is important that stockholders, potential investors and financial analysts understand the measures management uses.

We calculate our FFO measures, as defined below, based on our proportionate ownership share of both our unconsolidated and consolidated ventures. We reflect our share of our FFO measures for unconsolidated ventures by applying our average ownership percentage for the period to the applicable reconciling items on an entity by entity basis. We reflect our share for consolidated ventures in which we do not own 100% of the equity by adjusting our FFO measures to remove the noncontrolling interests share of the applicable reconciling items based on average ownership percentage for the applicable periods.

We use these FFO measures, including by segment and region, to: (i) evaluate our performance and the performance of our properties in comparison with expected results and results of previous periods, relative to resource allocation decisions; (ii) evaluate the performance of our management; (iii) budget and forecast future results to assist in the allocation of resources; (iv) assess our performance as compared with similar real estate companies and the industry in general; and (v) evaluate how a specific potential investment will impact our future results. Because we make decisions with regard to our performance with a long-term outlook, we believe it is appropriate to remove the effects of short-term items that we do not expect to affect the underlying long-term performance of the properties. The long-term performance of our properties is principally driven by rental revenue. While not infrequent or unusual, these additional items we exclude in calculating FFO, as modified by Prologis, defined below, are subject to significant fluctuations from period to period that cause both positive and negative short-term effects on our results of operations in inconsistent and unpredictable directions that are not relevant to our long-term outlook.

We use our FFO measures as supplemental financial measures of operating performance. We do not use our FFO measures as, nor should they be considered to be, alternatives to net earnings computed under GAAP, as indicators of our operating performance, as alternatives to cash from operating activities computed under GAAP or as indicators of our ability to fund our cash needs.

FFO, as modified by Prologis

To arrive at FFO, as modified by Prologis, we adjust the NAREIT defined FFO measure to exclude:

(i)   deferred income tax benefits and deferred income tax expenses recognized by our subsidiaries;
(ii)  current income tax expense related to acquired tax liabilities that were recorded as deferred tax liabilities in an acquisition, to the extent the expense is offset with a deferred income tax benefit in GAAP earnings that is excluded from our defined FFO measure;
(iii) unhedged foreign currency exchange gains and losses resulting from debt transactions between us and our foreign consolidated subsidiaries and our foreign unconsolidated entities;
(iv)  foreign currency exchange gains and losses from the remeasurement (based on current foreign currency exchange rates) of certain third party debt of our foreign consolidated subsidiaries and our foreign unconsolidated entities; and
(v)   mark-to-market adjustments associated with derivative financial instruments.

We believe investors are best served if the information that is made available to them allows them to align their analysis and evaluation of our operating results along the same lines that our management uses in planning and executing our business strategy.

Core FFO

In addition to FFO, as modified by Prologis, we also use Core FFO. To arrive at Core FFO, we adjust FFO, as modified by Prologis, to exclude the following recurring and nonrecurring items that we recognized directly in FFO, as modified by Prologis:

(i)   gains or losses from contribution or sale of land or development properties;
(ii)  income tax expense related to the sale of investments in real estate and third-party acquisition costs related to the acquisition of real estate;
(iii) impairment charges recognized related to our investments in real estate generally as a result of our change in intent to contribute or sell these properties;
(iv)  gains or losses from the early extinguishment of debt and redemption and repurchase of preferred stock; and
(v)   expenses related to natural disasters.

AFFO

To arrive at AFFO, we adjust Core FFO to include realized gains from the disposition of land and development properties and our share of recurring capital expenditures and exclude our share of the impact of; (i) straight-line rents; (ii) amortization of above- and below-market lease intangibles; (iii) amortization of management contracts; (iv) amortization of debt premiums and discounts and financing costs, net of amounts capitalized, and; (v) stock compensation expense.

We believe it is appropriate to further adjust our FFO, as modified by Prologis for certain recurring items as they were driven by transactional activity and factors relating to the financial and real estate markets, rather than factors specific to the on-going operating performance of our properties or investments. The impairment charges we have recognized were primarily based on valuations of real estate, which had declined due to market conditions, that we no longer expected to hold for long-term investment. Over the last few years, we made it a priority to strengthen our financial position by reducing our debt, our investment in certain low yielding assets and our exposure to foreign currency exchange fluctuations. As a result, we changed our intent to sell or contribute certain of our real estate properties and recorded impairment charges when we did not expect to recover the costs of our investment. Also, we purchased portions of our debt securities when we believed it was advantageous to do so, which was based on market conditions, and in an effort to lower our borrowing costs and extend our debt maturities. As a result, we have recognized net gains or losses on the early extinguishment of certain debt due to the financial market conditions at that time.

We analyze our operating performance primarily by the rental revenue of our real estate and the revenue driven by our strategic capital business, net of operating, administrative and financing expenses. This income stream is not directly impacted by fluctuations in the market value of our investments in real estate or debt securities. Although these items discussed above have had a material impact on our operations and are reflected in our financial statements, the removal of the effects of these items allows us to better understand the core operating performance of our properties over the long term.

We use Core FFO and AFFO, including by segment and region, to: (i) evaluate our performance and the performance of our properties in comparison to expected results and results of previous periods, relative to resource allocation decisions; (ii) evaluate the performance of our management; (iii) budget and forecast future results to assist in the allocation of resources; (iv) provide guidance to the financial markets to understand our expected operating performance; (v) assess our operating performance as compared to similar real estate companies and the industry in general; and (vi) evaluate how a specific potential investment will impact our future results. Because we make decisions with regard to our performance with a long-term outlook, we believe it is appropriate to remove the effects of items that we do not expect to affect the underlying long-term performance of the properties we own. As noted above, we believe the long-term performance of our properties is principally driven by rental revenue. We believe investors are best served if the information that is made available to them allows them to align their analysis and evaluation of our operating results along the same lines that our management uses in planning and executing our business strategy.

Limitations on the use of our FFO measures

While we believe our modified FFO measures are important supplemental measures, neither NAREIT’s nor our measures of FFO should be used alone because they exclude significant economic components of net earnings computed under GAAP and are, therefore, limited as an analytical tool. Accordingly, these are only a few of the many measures we use when analyzing our business. Some of these limitations are:

-- The current income tax expenses and acquisition costs that are excluded from our modified FFO measures represent the taxes and transaction costs that are payable.

-- Depreciation and amortization of real estate assets are economic costs that are excluded from FFO. FFO is limited, as it does not reflect the cash requirements that may be necessary for future replacements of the real estate assets. Furthermore, the amortization of capital expenditures and leasing costs necessary to maintain the operating performance of industrial properties are not reflected in FFO.

-- Gains or losses from non-development property acquisitions and dispositions or impairment charges related to expected dispositions represent changes in value of the properties. By excluding these gains and losses, FFO does not capture realized changes in the value of acquired or disposed properties arising from changes in market conditions.

-- The deferred income tax benefits and expenses that are excluded from our modified FFO measures result from the creation of a deferred income tax asset or liability that may have to be settled at some future point. Our modified FFO measures do not currently reflect any income or expense that may result from such settlement.

-- The foreign currency exchange gains and losses that are excluded from our modified FFO measures are generally recognized based on movements in foreign currency exchange rates through a specific point in time. The ultimate settlement of our foreign currency-denominated net assets is indefinite as to timing and amount. Our FFO measures are limited in that they do not reflect the current period changes in these net assets that result from periodic foreign currency exchange rate movements.

-- The gains and losses on extinguishment of debt that we exclude from our Core FFO, may provide a benefit or cost to us as we may be settling our debt at less or more than our future obligation.

-- The natural disaster expenses that we exclude from Core FFO are costs that we have incurred.

We compensate for these limitations by using our FFO measures only in conjunction with net earnings computed under GAAP when making our decisions. This information should be read with our complete consolidated financial statements prepared under GAAP. To assist investors in compensating for these limitations, we reconcile our modified FFO measures to our net earnings computed under GAAP.

Guidance. The following is a reconciliation of our guided Net Earnings per share to our guided Core FFO per share:

                                                    Low       High
Net Earnings                                        $ 1.90    $  1.95
Our share of:
Depreciation and amortization                         1.71       1.72
Net gains of real estate transactions, net of taxes   (1.10)     (1.15)
Unrealized foreign currency and other                 0.05       0.05
Core FFO                                            $ 2.56    $  2.57

Prologis Share represents our proportionate economic ownership of each entity included in our total owned and managed portfolio whether consolidated or unconsolidated.

Rent Change (Cash) represents the change in rental rates per the lease agreement on new and renewed leases signed during the periods as compared with the previous rental rates in that same space. This measure excludes any free rent periods and teaser rates defined as 50% or less of the stabilized rate.

Rent Change (Net Effective) represents the change in net effective rental rates (average rate over the lease term) on new and renewed leases signed during the period as compared with the previous effective rental rates in that same space.

Same Store. We evaluate the operating performance of the operating properties we own and manage using a "Same Store" analysis because the population of properties in this analysis is consistent from period to period, thereby eliminating the effects of changes in the composition of the portfolio on performance measures. We include the properties included in our owned and managed portfolio that were in operation (including development properties that have been completed and available for lease) at January 1, 2015 and throughout the full periods in both 2015 and 2016. We have removed all properties that were disposed of to a third party from the population for both periods. We believe the factors that impact rental income, rental expenses and NOI in the Same Store portfolio are generally the same as for the total operating portfolio. In order to derive an appropriate measure of period-to-period operating performance, we remove the effects of foreign currency exchange rate movements by using the current exchange rate to translate from local currency into U.S. dollars, for both periods.

Our same store measures are non-GAAP financial measures that are commonly used in the real estate industry and are calculated beginning with rental income and rental expenses from the financial statements prepared in accordance with GAAP. It is also common in the real estate industry and expected from the analyst and investor community that these numbers be further adjusted to remove certain non-cash items included in the financial statements prepared in accordance with GAAP to reflect a cash same store number. In order to clearly label these metrics, we call one Same Store NOI and one Same Store NOI - Cash. As these are non-GAAP financial measures they have certain limitations as an analytical tool and may vary among real estate companies. As a result, we provide a reconciliation from our financial statements prepared in accordance with GAAP to Same Store NOI and then to Same Store NOI - Cash with explanations of how these metrics are calculated and adjusted.

The following is a reconciliation of our consolidated rental income, rental expenses and NOI, as included in the Consolidated Statements of Operations, to the respective amounts in our Same Store portfolio analysis:

dollars in thousands                              Three Months Ended
                                                  September 30,
                                                  2016          2015          Change (%)
Rental Revenue:
Rental Revenue                                    $  435,868    $  418,116
Rental Recoveries                                    124,409       114,639
Per the Consolidated Statements of Operations        560,277       532,755
Properties not included and other adjustments (a)    (165,655)     (152,033)
Unconsolidated Co-Investment Ventures                438,860       429,360
Same Store - Rental Income                        $  833,482    $  810,082          2.9   %
Rental Expense:
Per the Consolidated Statements of Operations     $  140,514    $  140,284
Properties not included and other adjustments (b)    (29,701)      (30,685)
Unconsolidated Co-Investment Ventures                90,710        94,937
Same Store - Rental Expense                       $  201,523    $  204,536          -1.5  %
NOI:
Consolidated NOI                                  $  419,763    $  392,471
Properties not included and other adjustments        (135,954)     (121,348)
Unconsolidated Co-Investment Ventures                348,150       334,423
Same Store - NOI                                  $  631,959    $  605,546          4.4   %
Same Store - NOI  - Prologis Share (c)            $  363,536    $  344,112          5.6   %
NOI- Cash:
Same store- NOI                                   $  631,959    $  605,546
Straight-line rent adjustments (d)                $  (11,716)   $  (14,701)
Fair value lease adjustments (d)                     (1,218)       (312)
Same Store - NOI- Cash                            $  619,025    $  590,533          4.8   %
Same Store - NOI- Prologis Share (c)              $  356,807    $  334,674          6.6   %
(a) To calculate Same Store rental income, we exclude the net termination and renegotiation fees to allow us to evaluate the growth or decline in each property’s rental income without regard to items that are not indicative of the property’s recurring operating performance.
(b) To calculate Same Store rental expense, we include an allocation of the property management expenses for our consolidated properties based on the property management fee that is provided for in the individual management agreements under which our wholly owned management companies provide property management services (generally the fee is based on a percentage of revenue). On consolidation, the management fee income and expenses are eliminated and the actual cost of providing property management services is recognized.
(c) Prologis share of Same Store is calculated using the underlying building information from the Same Store NOI and NOI - Cash calculations and applying our ownership percentage as of September 30, 2016 to the NOI of each building for both periods.
(d) In order to derive Same Store- NOI - Cash, we adjust Same Store- NOI to exclude non-cash items included in our rental income in our financial statements, including straight line rent adjustments and adjustments related to purchase accounting to reflect leases at fair value at the time of acquisition.

Value Creation represents the value that we will create through our development and leasing activities. We calculate value creation by estimating the stabilized NOI that the property will generate and applying a stabilized capitalization rate applicable to that property. The value creation is calculated as the amount by which the value exceeds our total expected investment and does not include any fees or promotes we may earn. Value Creation for our value-added conversion properties includes the realized economic gain.

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SOURCE Prologis, Inc.

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