SECURITIES AND EXCHANGE COMMISSION
Form 10-K
(Mark One)
x
For the fiscal year ended December 31, 2003.
OR
o
For the transition period from to .
Commission File Number 1-12846
PROLOGIS
|
Maryland
|
74-2604728 | |
|
(State or other jurisdiction
of incorporation or organization) |
(I.R.S. employer identification no.) |
14100 East 35th Place
(303) 375-9292
Securities registered pursuant to Section 12(b) of the Act:
| Name of each exchange | ||||
| Title of Each Class | on which registered | |||
|
Common Shares of Beneficial Interest, par value
$0.01 per share
|
New York Stock Exchange | |||
|
Series F Cumulative Redeemable Preferred Shares
of Beneficial Interest, par value $0.01 per share
|
New York Stock Exchange | |||
|
Series G Cumulative Redeemable Preferred Shares
of Beneficial Interest par value $0.01 per share
|
New York Stock Exchange | |||
Securities registered pursuant to Section 12(g) of the Act: NONE
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 registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes þ No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes þ No o
Based on the closing price of the registrant’s shares on June 30, 2003, the aggregate market value of the voting common equity held by non-affiliates of the registrant was $4,447,834,700.
At March 5, 2004, there were outstanding approximately 181,071,178 common shares of beneficial interest of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Portion of the registrant’s definitive proxy statement for the 2004 annual meeting of its shareholders are incorporated by reference in Part III of this report.
TABLE OF CONTENTS
| Item | Description | Page | |||||||
| PART I | |||||||||
| 1. | 1 | ||||||||
| 1 | |||||||||
| 3 | |||||||||
| 11 | |||||||||
| 17 | |||||||||
| 18 | |||||||||
| 2. | 18 | ||||||||
| 18 | |||||||||
| 18 | |||||||||
| 22 | |||||||||
| 28 | |||||||||
| 29 | |||||||||
| 3. | 34 | ||||||||
| 4. | 34 | ||||||||
| PART II | |||||||||
| 5. | 35 | ||||||||
| 35 | |||||||||
| 35 | |||||||||
| 37 | |||||||||
| 37 | |||||||||
| 6. | 38 | ||||||||
| 7. | 43 | ||||||||
| 44 | |||||||||
| 44 | |||||||||
| 46 | |||||||||
| 58 | |||||||||
| 58 | |||||||||
| 65 | |||||||||
| 68 | |||||||||
| 7A. | 74 | ||||||||
| 8. | 76 | ||||||||
| 9. | 76 | ||||||||
| 9A. | 76 | ||||||||
| PART III | |||||||||
| 10. | 76 | ||||||||
| 11. | 77 | ||||||||
| 12. | 77 | ||||||||
| 13. | 77 | ||||||||
| 14. | 77 | ||||||||
| PART IV | |||||||||
| 15. | 78 | ||||||||
| Computation of Ratio of Earnings - Fixed Charges | |||||||||
| Computation of Ratio of Earnings - Combined Fixed | |||||||||
| Subsidiaries | |||||||||
| Consent of KPMG LLP - Stockholm, Sweden | |||||||||
| Report of KPMG LLP - Stockholm, Sweden | |||||||||
| Consent of KPMG LLP - New York, New York | |||||||||
| Report of KPMG LLP - New York, New York | |||||||||
| Consent of KPMG LLP - San Diego, California | |||||||||
| Certification of Chief Executive Officer | |||||||||
| Certification of Chief Financial Officer | |||||||||
| Certification of Chief Executive Officer- Sec. 906 | |||||||||
| Certification of Chief Financial Officer- Sec. 906 | |||||||||
ITEM 1. Business
ProLogis
ProLogis (collectively with its consolidated subsidiaries and partnerships, “ProLogis”) is a real estate investment trust (“REIT”) that operates a global network of industrial distribution properties. ProLogis’ business strategy is designed to achieve long-term sustainable growth in cash flow and increase the overall return on equity for its shareholders. ProLogis manages its business by utilizing the ProLogis Operating System®, an organizational structure and service delivery system that ProLogis built around its customers. When combined with ProLogis’ international network of distribution properties, the ProLogis Operating System enables ProLogis to meet its customers’ distribution space needs on a global basis. ProLogis believes that, by integrating international scope and expertise with a strong local presence in its markets, it has become an attractive choice for the largest global users of distribution space, its targeted customer base.
ProLogis is organized under Maryland law and has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”). ProLogis’ world headquarters and North American customer service headquarters are located in Aurora, Colorado. ProLogis’ European headquarters are located in Luxembourg while its European customer service headquarters are located in Amsterdam, The Netherlands. ProLogis’ Asian headquarters are located in Tokyo, Japan. ProLogis’ common shares of beneficial interest, par value $0.01 per share (“Common Shares”) were first listed on the New York Stock Exchange (“NYSE”) in March 1994.
This report on Form 10-K includes certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on management’s current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from these expectations due to changes in global economic, business, competitive, market and regulatory factors. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Factors.”
A copy of this Annual Report on Form 10-K, as well as ProLogis’ Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to such reports are available, free of charge, on the Internet in the Investor Relations section of ProLogis’ website. All required reports are made available on the website as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission (the “SEC”). ProLogis’ website address is www.prologis.com. The reference to ProLogis’ website address does not constitute incorporation by reference of the information contained in the website and such information should not be considered to be part of this document.
| Business Strategy and Global Presence |
ProLogis was formed in 1991 with the primary objective of creating an operating company in the United States that would differentiate itself from its competition through its ability to meet a corporate customer’s distribution space requirements on a national, regional and local basis, with the added benefit of providing consistent levels of service throughout the country. ProLogis’ initial business strategy involved the acquisition and development of industrial distribution properties that it would operate and lease to customers in the United States. These properties represented one operating segment — the property operations segment — as ProLogis’ intent was, and continues to be, to hold certain investments on a long-term basis while generating income from leasing the properties to customers.
An integral part of ProLogis’ customer service focus has always been to have a portfolio of properties that meets the distribution space needs of its existing customers, as well as meeting the needs of targeted national and international companies. As distribution space users expanded and managed their businesses for greater profitability, their distribution networks expanded and were reconfigured, including their distribution networks outside of the United States. In order to meet the growing distribution space needs of these companies, ProLogis expanded its operations to Mexico in 1996, to Europe in 1997 and to Japan in 2001. In April 2003,
1
In 1995, ProLogis expanded its business to include the corporate distribution facilities services (“CDFS business”) operating segment. The CDFS business segment began utilizing ProLogis’ existing development capabilities, which had been focused only on the development of properties for direct, long-term investment, to develop properties for sale to third parties. As with ProLogis’ property operations segment, the CDFS business segment operated initially only in the United States. In 1998, ProLogis expanded its CDFS business segment activities to Europe to complement its European property operations. The acquisition of an established industrial development business in the United Kingdom in August 1998 provided ProLogis with access to strategic land positions in a country where previously it had only limited investments and where significant barriers for initial start-up activities existed. With both property operations and CDFS business segments in operation in the United Kingdom and Continental Europe, ProLogis was positioned to be a single-source pan-European provider of distribution space to global users.
Because ProLogis, as a REIT, must distribute rather than reinvest substantial amounts of its internally generated capital, it must find public or private sources of capital to fund development activities and to grow its portfolio. Sales of properties to third parties in the CDFS business segment enabled ProLogis to begin recycling capital to fund some of its future development activities. This ability to recycle funds in the CDFS business segment became a more integral part of ProLogis’ business strategy in early 1999 when the public equity markets became an increasingly costly method of raising capital. As such, it was necessary for ProLogis to increase the volume of its CDFS business segment transactions so that it could self-fund its development activities. Therefore, ProLogis shifted the focus of its CDFS business segment from developing and selling properties to third parties to developing properties that would be contributed to property funds — property funds that would be formed by ProLogis by accessing private equity capital and that would be managed by ProLogis. And, to supplement the private equity investments in each property fund, the property funds were positioned to obtain secured debt financing by using their properties as security. Today, the property funds’ leverage ratios typically range from 40% to 75%.
The first property fund was formed in August 1999 primarily with operating properties from ProLogis’ property operations segment. However, the formation of ProLogis European Properties Fund in September 1999 embodied ProLogis’ overall property fund strategy that: (i) allows ProLogis to realize, for financial reporting purposes, a portion of the development profits from its CDFS business activities by contributing its developed properties to a property fund (profits are recognized to the extent of third party investment in the property fund); (ii) provides a source of private capital to ProLogis; (iii) allows ProLogis to maintain a long-term ownership position in the properties; and (iv) allows ProLogis, as the manager of the property fund, to maintain the market presence and customer relationships that are the key drivers of the ProLogis Operating System. Five of ProLogis’ property funds, all in the United States, were formed with a specific amount of private capital that allowed the property fund to generally make one portfolio acquisition from ProLogis. In addition to its ownership positions, ProLogis provides these property funds with management services. Three property funds, one each in North America, Europe and Japan, were formed with third party capital commitments that are available to the property fund over time to allow these property funds to acquire properties as ProLogis’ CDFS business segment makes them available.
ProLogis’ business strategy has evolved to fit the environment in which it operates. The primary driver in this evolution has been ProLogis’ focus on its customers’ needs for distribution space. After 12 years in operation, that focus has enabled ProLogis to become a leading global provider of distribution space operating on three continents.
2
ProLogis’ Operating Segments
ProLogis’ business is organized into two operating segments: property operations and the CDFS business.
| Property Operations |
| Investments |
The property operations segment represents the long-term ownership, management and leasing of industrial distribution properties. ProLogis’ property operations segment at December 31, 2003 (including assets owned by eight property funds in which ProLogis has ownership interests) consisted of 1,737 operating properties aggregating 230.4 million square feet in North America (the United States and Mexico), 11 countries in Europe and in Japan. ProLogis presents its investments in the property funds under the equity method. Of the total operating properties, ProLogis directly owned 1,252 operating properties aggregating 133.1 million square feet. ProLogis’ ownership interests in its eight property funds ranged from 14% to 50% at December 31, 2003. ProLogis’ investment strategy in the property operations segment focuses primarily on generic industrial distribution properties in key distribution markets.
ProLogis develops distribution properties in its other operating segment, the CDFS business segment, with the intent to contribute the property to a property fund or to sell the property to a third party. Also in the CDFS business segment, ProLogis acquires properties with the intent to contribute them to a property fund, generally after rehabilitation and/or repositioning activities have been completed. These properties, along with their operations, are included in the property operations segment after they are completed or acquired through the date they are contributed or sold. The gains and losses realized from the contributions or sales of these properties are included in the CDFS business segment’s income because they were developed or acquired in that segment. At December 31, 2003, there were 119 CDFS business segment operating properties aggregating 20.4 million square feet at a total investment of $928.3 million that were included in the property operations segment’s investments on an interim basis.
Property operations segment investment activities in 2003 included:
| • | Acquisition of two properties aggregating 0.2 million square feet at a total acquisition cost of $13.3 million with the intent to own these properties directly in the property operations segment rather than to contribute these properties to property funds. | |
| • | Disposition of 13 properties aggregating 0.8 million square feet generating aggregate net proceeds of $60.2 million that were direct, long-term investments in the property operations segment. | |
| • | In North America, ProLogis North American Properties Fund V acquired 33 properties aggregating 8.7 million square feet at a total investment of $362.5 million from ProLogis; ProLogis’ other property funds, all operating only in the United States, maintained their existing portfolio sizes. | |
| • | In Europe, ProLogis European Properties Fund acquired 24 properties aggregating 6.6 million square feet at a total investment of $385.1 million, including 17 properties aggregating 4.0 million square feet at a total investment of $279.5 million that were acquired from ProLogis. Also, ProLogis European Properties Fund disposed of 13 properties in the United Kingdom aggregating 2.1 million square feet generating aggregate net proceeds of $320.0 million. | |
| • | ProLogis Japan Properties Fund acquired four properties aggregating 1.4 million square feet at a total investment of $264.9 million, including three properties aggregating 0.9 million square feet at a total investment of $162.6 million that were acquired from ProLogis. |
See “Item 2. Properties — Properties,” “Item 2. Properties — Unconsolidated Investees — Property Operations” and Notes 4 and 10 to ProLogis’ Consolidated Financial Statements in Item 8.
| Operations |
The property operations segment generates income from rents and reimbursements of property operating expenses from unaffiliated customers who lease ProLogis’ distribution space. Also, the operating income of the
3
The net earnings or losses generated by operating properties developed or acquired in the CDFS business segment that are included in the property operations segment on an interim basis prior to their contribution or sale are also included in the operating income of the property operations segment. The resulting gains or losses from the contributions or sales of these properties are included in the operating income of the CDFS business segment.
In 2003, 2002 and 2001, the property operations segment’s operating income was $480.7 million, $477.6 million and $477.5 million, respectively. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — Property Operations” and Note 10 to ProLogis’ Consolidated Financial Statements in Item 8.
Operational information about this operating segment for 2003 includes:
| • | ProLogis’ stabilized operating portfolio of 226.4 million square feet (including properties owned by the property funds) was 90.2% leased and 89.6% occupied at December 31, 2003. ProLogis’ total operating portfolio of 230.4 million square feet (including properties owned by the property funds) was 89.1% leased and 88.5% occupied at December 31, 2003. ProLogis defines its stabilized properties as those properties where the capital improvements, repositioning efforts, new management and new marketing programs for acquisitions, or the marketing programs in the case of newly developed properties, have been in effect for a sufficient period of time, generally 12 months. A property enters the stabilized pool at the earlier of 12 months or when it is substantially leased, which is defined by ProLogis generally as 93%. Overall occupancy levels decreased in 2003 from prior periods. ProLogis’ leased percentage for the stabilized portfolio at December 31, 2003 was approximately 1.0% lower than the 2002 percentage. | |
| • | ProLogis leased 56.9 million square feet of distribution space in 1,527 leasing transactions in its properties and in the properties owned by the property funds. Rental rates decreased by 4.8% for 2003 transactions involving previously leased space. ProLogis’ weighted average customer retention rate was 71.4% for all properties in 2003. In 2002, ProLogis’ rental rate growth for transactions involving previously leased space was 2.0% and its weighted average customer retention rate was 64.7%. | |
| • | ProLogis’ same store portfolio of operating properties (properties owned by ProLogis and the property funds that were operating throughout all of 2003 and 2002) aggregated 179.3 million square feet. Rental income, excluding termination and renegotiation fees, less rental expenses of the same store portfolio increased by 0.09% in 2003 from 2002. For the same store portfolio applicable to 2002, rental revenues, excluding termination and renegotiation fees, less rental expenses decreased by 0.90% in 2002 from 2001. See the discussion of ProLogis’ same store portfolio at “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — Property Operations.” | |
| • | ProLogis earned termination and renegotiation fees of $5.6 million related to leases in its directly owned properties in 2003. Such fees in 2002 were $14.6 million. In certain leasing situations, ProLogis finds it advantageous to negotiate lease terminations with a customer, particularly when the customer is experiencing financial difficulties or when ProLogis believes that it can re-lease the space at rates that, when combined with the termination fee, provides a total return to ProLogis in excess of that which was being earned under the original lease terms. | |
| • | ProLogis earned various fees from the property funds, primarily from property management and asset management services, of $44.2 million in 2003 as compared to $34.5 million in 2002. |
4
| Market Presence |
ProLogis has generally invested in distribution markets in North America, Europe and Japan in which it has identified strong distribution dynamics as well as supply and demand factors. In making its investment decisions, ProLogis evaluates market conditions that indicate favorable distribution growth prospects including, but not limited to: (i) growth in imports and exports; (ii) long-term cost and quality of labor advantages for domestic and international manufacturers; (iii) proximity to large regional and local population centers with good access to transportation networks; (iv) expansion and contraction needs of distribution space users located in the market; and (v) an historically high ratio of distribution space per capita.
ProLogis assesses its market presence not only in terms of its investments in the market, but also by the extent it has developed relationships with customers that have distribution space requirements in such markets. ProLogis believes it can maintain these relationships by offering operating properties that are functional and cost-effective, complemented by a comprehensive level of customer service. ProLogis believes that by being a significant local owner and developer in multiple markets it has the ability to increase customer retention because it can meet its customers’ needs to either expand or contract through its network of distribution properties and land positions. This network allows ProLogis to retain the customer by relocating the customer within its existing inventory of distribution space or readily developing a new property for the customer.
At December 31, 2003, the 1,252 properties aggregating 133.1 million square feet in the property operations segment that are owned directly by ProLogis are located in 37 markets in the United States, four markets in Mexico and 16 markets in seven countries in Europe. All of ProLogis’ operating properties in Japan are owned by a property fund. ProLogis’ largest markets in the United States (based on investment in directly owned properties) are Atlanta, Chicago, Dallas/ Fort Worth, Houston and San Francisco (both South Bay and East Bay markets). ProLogis also has large holdings in several markets in the United Kingdom. See “Item 2. Properties — Geographic Distribution” and “Item 2. Properties — Properties.”
The operating properties owned by the property funds at December 31, 2003 were as follows (square feet in thousands):
| Number | Square Feet | ||||||||
|
ProLogis California(1)
|
79 | 13,017 | |||||||
|
ProLogis North American Properties Fund I(2)
|
36 | 9,406 | |||||||
|
ProLogis North American Properties Fund II(3)
|
27 | 4,477 | |||||||
|
ProLogis North American Properties
Fund III(4)
|
34 | 4,380 | |||||||
|
ProLogis North American Properties Fund IV(5)
|
17 | 3,475 | |||||||
|
ProLogis North American Properties Fund V(6)
|
90 | 20,737 | |||||||
|
ProLogis European Properties Fund(7)
|
197 | 40,108 | |||||||
|
ProLogis Japan Properties Fund(8)
|
5 | 1,619 | |||||||
|
Totals
|
485 | 97,219 | |||||||
| (1) | All properties are located in the Los Angeles/ Orange County market. |
| (2) | Properties are located in 16 markets in the United States. |
| (3) | Properties are located in 13 markets in the United States. |
| (4) | Properties are located in 15 markets in the United States. |
| (5) | Properties are located in 10 markets in the United States. |
| (6) | Properties are located in 24 markets in the United States and in three markets in Mexico. |
| (7) | Properties are located in 25 markets in 11 countries in Europe (67 properties, 11.8 million square feet located in the Central France market, primarily in Paris). |
| (8) | Properties are located in Tokyo, Japan. |
5
See “Item 2. Properties — Geographic Distribution” for a discussion of ProLogis’ defined markets and “Item 2. Properties — Unconsolidated Investees — Property Operations” for additional information on the operating properties owned by the property funds.
| Competition |
In general, numerous other industrial distribution properties are located in close proximity to ProLogis’ properties. The amount of rentable distribution space available in any market could have a material effect on ProLogis’ ability to rent space and on the rents that ProLogis can charge. In addition, in many of ProLogis’ submarkets, institutional investors and owners and developers of industrial distribution properties (including other REITs) compete for the acquisition, development and leasing of distribution space. Many of these entities have substantial resources and experience. Competition in acquiring existing distribution properties and land, both from institutional capital sources and from other REITs, has been very strong over the past several years.
| Property Management |
ProLogis’ business strategy includes a customer service focus that requires ProLogis to provide responsive, professional and effective property management services at the local level. To enhance its management services, ProLogis has developed and implemented proprietary operating and training systems to achieve consistent levels of performance and professionalism in all markets and to enable its property management team members to give the proper level of attention to ProLogis’ customers throughout its network. ProLogis manages substantially all of its directly owned operating properties and all of the operating properties owned by the property funds.
| Customers |
ProLogis has sought to develop a customer base in each market that is diverse in terms of industry concentration and that represents a broad spectrum of international, national, regional and local distribution space users. At December 31, 2003, ProLogis and the property funds had 3,785 customers occupying 203.8 million square feet of distribution space. Including customers leasing space in properties owned by the property funds, the largest customer and the 25 largest customers accounted for 2.38% and 21.8%, respectively, of the annualized collected base rents of ProLogis and the property funds at December 31, 2003. When the customers leasing space in the properties owned by the property funds are excluded, ProLogis’ largest customer and its 25 largest customers accounted for 1.21% and 15.2%, respectively, of ProLogis’ annualized collected base rents at December 31, 2003.
| Employees |
ProLogis directly employs approximately 725 persons. ProLogis’ employees work in North America (approximately 460 persons), in nine countries in Europe (approximately 240 persons) and in Asia, primarily in Japan (approximately 25 persons). Of the total, approximately 350 employees are assigned to the property operations segment. ProLogis’ other employees may assist with property operations segment activities. ProLogis believes that its relationships with its employees are good. ProLogis’ employees are not represented by a collective bargaining agreement.
| Seasonal Nature of the Business |
The demand for industrial distribution space is not seasonal.
| Future Plans |
ProLogis believes that its current level of direct investment in the property operations segment enables it to serve its customers at a high level and increase returns to its shareholders. ProLogis’ business plan with respect to direct investments in the property operations segment allows for the expansion of its network of operating properties on a limited basis and only as necessary to: (i) address the specific expansion needs of a
6
ProLogis plans to continue with its current business strategy with respect to the growth in assets held by property funds. ProLogis expects to achieve this growth primarily through the property funds’ acquisition of properties developed or acquired by ProLogis in the CDFS business segment, but also by their direct acquisition of properties from third parties. ProLogis expects that the fee income it earns from the property funds will increase in 2004 over the 2003 levels as the sizes of the portfolios of operating properties in the property funds increase. Also, depending on capital availability, the number of property funds could increase in 2004. Properties contributed to property funds must generally meet certain leasing criteria. ProLogis observed a slowing in its customers’ decision making processes and in overall leasing activity in 2003 that it believes were primarily the result of weak economic conditions in the United States and certain Western European countries. ProLogis’ business plan for 2004 with respect to property fund contributions does not anticipate a significant improvement in prevailing economic conditions. However, ProLogis’ market research and customer feedback indicates that the consolidation and reconfiguration of distribution networks in Europe and Japan have been, and will continue to be, key drivers in leasing decisions. ProLogis believes that being a single-source provider of state-of-the-art distribution properties in Europe and Japan positions it to take advantage of these trends to the extent they continue in 2004.
ProLogis intends to fund its investment activities in the property operations segment in 2004 with operating cash flow from this operating segment, its short-term borrowing facilities and the proceeds from contributions and sales of properties (properties that have been directly owned, long-term investments in the property operations segment, as well as CDFS business segment properties that are included in the property operations segment on an interim basis prior to their contribution or sale).
See the discussion of factors that could affect the future plans of ProLogis and the property funds in the property operations segment at “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Factors.”
| CDFS Business |
The CDFS business segment encompasses those activities that ProLogis engages in that are not primarily associated with the long-term ownership, management and leasing of industrial distribution properties. Within this operating segment, ProLogis develops distribution properties that are either contributed to property funds or sold to third parties and acquires distribution properties that are contributed to property funds. Properties that are acquired by ProLogis in this segment are generally rehabilitated and/or repositioned prior to their contribution to a property fund.
| Investments |
At December 31, 2003, ProLogis had 27 distribution properties aggregating 9.8 million square feet under development at a total expected cost at completion of $678.5 million. These properties are all being developed with the objective that they will be contributed to a property fund or sold to a third party. ProLogis’ properties under development at December 31, 2003 include:
| • | North America: eight properties; 3.2 million square feet; $101.0 million total expected cost (approximately 15% of the total); | |
| • | Europe: 15 properties in six countries; 4.0 million square feet; $246.3 million total expected cost (approximately 36% of the total); and | |
| • | Japan: four properties; 2.6 million square feet; $331.2 million total expected cost (approximately 49% of the total). |
At December 31, 2003, ProLogis had land positions, including land controlled through contracts, options or letters of intent, aggregating 4,549 acres with the capacity for the development of approximately 76.8 million square feet of distribution properties. Of these land positions ProLogis owned 2,706 acres with the
7
| • | North America: 2,655 acres with the capacity for the development of approximately 45.0 million square feet of distribution properties and | |
| • | Europe: 1,894 acres in 12 countries with the capacity for the development of approximately 31.8 million square feet of distribution properties. |
CDFS business segment investment activities in 2003 included the following:
| • | Development starts aggregated 13.2 million square feet at a total expected cost at completion of $674.1 million including: |
| • | North America: 4.9 million square feet at a total expected cost of $157.1 million; | |
| • | Europe: 6.3 million square feet at a total expected cost of $305.0 million; and | |
| • | Japan: 2.0 million square feet at a total expected cost of $212.0 million. |
| • | Development completions aggregated 12.4 million square feet at a total cost of $643.8 million including: |
| • | North America: 5.2 million square feet at a total cost of $175.3 million; | |
| • | Europe: 6.3 million square feet at a total cost of $348.2 million; and | |
| • | Japan: 0.9 million square feet at a total cost of $120.3 million. |
| • | Acquisition of 36 operating properties aggregating 6.2 million square feet at a total acquisition cost of $194.9 million with the intent to contribute the properties to a property fund (including properties where rehabilitation and/or repositioning efforts are needed prior to contribution). | |
| • | Contributions and sales of 66 properties aggregating 14.2 million square feet that were developed or acquired by ProLogis in the CDFS business segment. These transactions, the discontinuation of ProLogis’ participation and significant reduction of its investment in a joint venture and dispositions of land parcels that no longer fit in ProLogis’ development plans generated net proceeds to ProLogis of $894.9 million. | |
| • | Acquisition of 1,077 acres of land: 651 acres in North America (all in the United States), 400 acres in seven countries in Europe and 26 acres in Japan. This land can be used for the development of approximately 20.5 million square feet of distribution properties. |
| Operations |
The operating income of the CDFS business segment consists primarily of the net gains and losses recognized from the contributions and sales of developed properties to property funds and third parties and from the contributions to property funds of operating properties that were acquired with that intent. ProLogis uses its development and leasing expertise to rehabilitate and/or reposition certain of the properties that it acquires such that the subsequent contribution of the property is expected to generate a profit to ProLogis. ProLogis also earns fees from customers for development activities performed on their behalf and recognizes gains and losses from sales of land parcels when ProLogis’ development plans no longer include these parcels.
In 2003, 2002 and 2001, the CDFS business segment’s operating income was $124.8 million, $152.3 million and $151.7 million, respectively. In 2003, 39% of the operating income of this operating segment was generated in North America, 39% was generated in Europe and 22% was generated in Japan. In 2002 and 2001, 36% and 43%, respectively, of the operating income of this operating segment was generated in North America. In 2002, Europe generated 60% of the operating income of this operating segment and Japan generated the remaining 4%. In 2001, Europe generated the remaining portion of the CDFS business segment’s operating income.
8
Operational information about this operating segment for 2003 includes:
| • | Recognition of net gains of $132.8 million (including amounts that had been previously deferred); $118.6 million related to sales and contributions of developed properties, $6.2 million related to contributions of acquired properties, $6.3 million related to dispositions of land parcels and $1.7 million related to the discontinuation of participation and significant reduction of investment in a joint venture. | |
| • | Earned $2.0 million of fees from the development of 0.8 million square feet of distribution properties on behalf of customers under development management agreements. | |
| • | Incurred expenses and other charges of $11.1 million |
See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — CDFS Business” and Note 10 to ProLogis’ Consolidated Financial Statements in Item 8.
| Market Presence |
ProLogis’ CDFS business segment operates in substantially all of ProLogis’ property operations segment’s markets. At December 31, 2003, ProLogis had properties under development in six markets in the United States, two markets in Mexico, 12 markets in six countries in Europe and in Japan (Tokyo, Nagoya and Osaka). At December 31, 2003, the land positions owned by ProLogis were located in 27 markets in the United States, four markets in Mexico and 19 markets in ten countries in Europe. At December 31, 2003, ProLogis had begun development on all of its land holdings in Japan.
| Competition |
Until recently, ProLogis has been the only owner of distribution properties and provider of services operating on a global basis. As such, ProLogis believes it has differentiated itself from many of its competitors.
There are a number of other national, regional and local developers engaged in industrial distribution property development in the North American markets where ProLogis conducts business. ProLogis competes with these developers for land acquisition and development opportunities. The disposition market in North America is very competitive and is driven by the supply of new developments, access to capital and interest rate levels. A key component of ProLogis’ success in the CDFS business segment in North America will continue to be its ability to develop and timely lease properties that will generate profits when contributed or sold and its ability to continue to access private capital that allows for the continued acquisition of ProLogis’ properties by the property funds.
ProLogis’ competition in the CDFS business segment in Europe generally comes from local and regional developers in its target markets as opposed to pan-European real estate companies. As in North America, the disposition market in Europe is very competitive and is driven by the supply of new developments, access to capital and interest rate levels. With respect to its development activities in Europe, ProLogis believes that it has a competitive advantage due to the strategic locations of its land positions owned or under control in Europe and due to its personnel who are experienced in the land entitlement process.
ProLogis has identified one other North American industrial distribution development company who is in direct competition with its CDFS business segment in Japan. ProLogis believes that it has an advantage over the local development companies in Japan due to its global experience in the development of industrial distribution properties and its global customer base.
| Customers |
ProLogis uses the customer relationships that it has developed through its property operations segment activities and the ProLogis Operating System in marketing its CDFS business. See “— Property Operations — Customers” and “— ProLogis Management.” In 2003, approximately 51% of the customers that leased distribution space in ProLogis’ CDFS business segment properties were repeat customers of ProLogis.
9
| Employees |
ProLogis directly employs approximately 725 persons. ProLogis’ employees work in North America (approximately 460 persons), in nine countries in Europe (approximately 240 persons) and in Asia, primarily in Japan (approximately 25 persons). Of the total, approximately 115 employees are assigned to the CDFS business segment. ProLogis’ other employees may assist with CDFS business segment activities. ProLogis believes that its relationships with its employees are good. ProLogis’ employees are not represented by a collective bargaining agreement.
| Seasonal Nature of the Business |
The demand for industrial distribution properties that are developed or acquired in the CDFS business segment is not seasonal in nature. However, the development process can be impeded by weather in certain markets, particularly during the winter months, affecting the scheduling of development activities and potentially delaying construction completions.
| Future Plans |
ProLogis’ success in the CDFS business segment depends on its ability to develop and timely lease properties and its access to private capital that can be used by a property fund to acquire properties that have been developed or acquired in this segment. ProLogis believes that the reconfiguration of supply chains driven by the need for distribution space users to add efficiencies within their distribution networks will continue to favorably impact the demand for distribution properties and the distribution-related services that ProLogis offers in the CDFS business segment. Also, the limited supply of state-of-the-art distribution space in Europe and Japan could also provide opportunities within this operating segment.
ProLogis intends to utilize the capital generated through the contributions and sales of properties, the proceeds from public debt offerings that take advantage of favorable market conditions and its short-term borrowing facilities to fund its future CDFS business activities.
ProLogis is committed to offer to contribute its stabilized developed properties available in specific markets in Europe to ProLogis European Properties Fund through September 2019 and all of its stabilized developed properties available in Japan to ProLogis Japan Properties Fund through June 2006. ProLogis believes that, while the current capital commitments and borrowing capacities of these property funds will be expended prior to the expiration dates of these commitments, each property fund does have sufficient capital to acquire the properties that ProLogis expects to have available during 2004.
ProLogis’ commitment to offer to contribute certain of its stabilized developed properties in North America to ProLogis North American Properties Fund V expired at the end of 2003. However, ProLogis North American Properties Fund V did acquire two properties from ProLogis in January 2004. While ProLogis North American Properties Fund V’s majority owner is a listed property trust in Australia that is able to raise capital in the public market, there can be no assurance that ProLogis North American Properties Fund V will have the available capital to acquire additional properties from ProLogis in 2004 or, if capital is available, that ProLogis North American Properties Fund V will want to use its capital to acquire properties from ProLogis. Further, there can be no assurance that ProLogis will continue to offer to contribute properties to ProLogis North American Properties Fund V.
There can be no assurance that if existing property funds do not continue to acquire the properties that ProLogis has available, that ProLogis will be able to secure other sources of private equity capital such that it can contribute or sell these properties in a timely manner and allow ProLogis to continue to generate profits from its development activities in a particular reporting period.
See the discussion of factors that could affect the future plans of ProLogis, in the CDFS business segment at “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Factors.”
10
ProLogis Management
ProLogis’ management team is headed by its Chairman and Chief Executive Officer, K. Dane Brooksher and its Vice Chairman and Chief Investment Officer, Irving F. Lyons III. Mr. Brooksher and Mr. Lyons are members of ProLogis’ Board of Trustees (the “Board”). On March 25, 2003, ProLogis announced that Mr. Brooksher would relinquish his role as Chief Executive Officer of ProLogis on December 31, 2004 and that Mr. Lyons would relinquish his role as Vice Chairman and Chief Investment Officer of ProLogis on that same date. Mr. Brooksher will remain as ProLogis’ Chairman of the Board and Mr. Lyons will remain as a member of the Board and will serve as Chairman of the Board’s investment committee. The Board’s succession committee has been working with the full Board on succession planning and transition issues.
ProLogis’ investments and operations are overseen by Jeffrey H. Schwartz, President of International Operations and President and Chief Operating Officer — Asia, John W. Seiple, Jr., President and Chief Investment Officer — North America, Robert J. Watson, President of North American Operations and Steven K. Meyer, President and Chief Operating Officer — Europe. Further, in North America, each of ProLogis’ four regions (Mid-Atlantic, Southeast, Central/ Mexico and Pacific) is led by two senior members of the management team — one who is responsible for capital management and one who is responsible for capital deployment. The three regions in Europe (Northern and Central Europe, Southern Europe and the United Kingdom) are each led by a senior officer who has both capital management and capital deployment responsibilities. In Japan, the capital management and capital deployment responsibilities are primarily those of Mr. Schwartz and there are two senior officers in Japan who work closely with Mr. Schwartz, primarily in the area of capital deployment. This structure will continue in Japan until such time as the volume of investments and the level of operations demonstrate the need for additional managers. At this time, ProLogis has one senior officer in China.
ProLogis maintains a Code of Ethics and Business Conduct applicable to its Board and all of its officers and employees, including the principal executive officer, the principal financial officer, the principal accounting officer, the controller or persons performing similar functions. A copy of ProLogis’ Code of Ethics and Business Conduct is available on ProLogis’ website, www.prologis.com. In addition to being accessible through ProLogis’ website, copies of ProLogis’ Code of Ethics and Business Conduct can be obtained, free of charge, upon written request to Investor Relations, 14100 East 35th Place, Aurora, Colorado 80011. Any amendments to or waivers of ProLogis’ Code of Ethics and Business Conduct that apply to the principal executive officer, the principal financial officer, the principal accounting officer, the controller or persons performing similar functions and that relate to any matter enumerated in Item 406(b) of Regulation S-K, will be disclosed on ProLogis’ website.
The reference to ProLogis’ website address does not constitute incorporation by reference of the information contained in the website and such information should not be considered to be part of this document.
| ProLogis’ Operating System |
ProLogis’ management team is responsible for overseeing the use the ProLogis Operating System, the cornerstone of ProLogis’ business strategy, to allow ProLogis to achieve long-term sustainable growth in cash flow and increase the overall return on equity for its shareholders. The ProLogis Operating System is a proprietary property management and customer service delivery system that has been designed to assist ProLogis’ professional management team in providing a unique and disciplined approach to serving existing and prospective customers. ProLogis believes that, through the ProLogis Operating System, it is, and will continue to be, well positioned to leverage its customer relationships to generate additional business opportunities.
| Capital Management and Capital Deployment |
Within the ProLogis Operating System, ProLogis has a team of professionals who are responsible for managing and leasing the properties owned by ProLogis and the property funds. These capital management team members are part of the Market Services Group. ProLogis has 38 Market Officers who are primarily
11
Capital deployment is the responsibility of a team of professionals who focus on ensuring that ProLogis’ capital resources are deployed in an efficient and productive manner that will best serve ProLogis’ long-term objective of increasing shareholder value. The team members responsible for capital deployment evaluate both acquisition and development opportunities in light of the market conditions in their respective regions and ProLogis’ overall goals and objectives. In North America the capital deployment and capital management functions are divided between two senior officers in each region due to the level of investments in each region. In Europe, the responsibilities for capital deployment and capital management are shared by one senior officer in each region who rely heavily on country officers to assist them in carrying out their responsibilities. Capital deployment officers work closely with the Global Development Group on creating industry-leading distribution properties and master-planned distribution parks utilizing the extensive experience of the Global Development team members in the development and construction of generic industrial distribution properties that appeal to a wide variety of customers. The Global Development Group incorporates the latest technology with respect to building design and systems and has developed standards and procedures that it strictly adheres to in the development of all properties to ensure that properties developed by ProLogis are of a consistent quality.
| Customer Service |
The Global Services Group provides service to a group of the largest users of distribution space that ProLogis has identified as its targeted customer base. The Global Services Group’s primary focus is to position ProLogis as the preferred provider of distribution space to these targeted customers. The professionals in the Global Services Group also seek to build long-term relationships with ProLogis’ existing customers. The Global Services Group is dedicated to providing a single point of contact for multi-location global users of distribution space to simplify and streamline the execution of such customers’ distribution space plans.
The ProLogis Solutions Group was formed to address ProLogis’ customers’ distribution and logistics needs by consulting with them on distribution network matters and by providing them with access to material handling equipment. The distribution-related consulting services available to customers by the ProLogis Solutions Group includes network optimization tools, strategic site selection, business location services (including tax incentive analysis and tax negotiation consulting) and design consulting services. ProLogis believes that the services provided by the ProLogis Solutions Group can strengthen its customer relationships.
| Trustees |
K. Dane Brooksher — 65 — Mr. Brooksher has served as a Trustee since October 1993. Mr. Brooksher has been Chairman and Chief Executive Officer of ProLogis since March 1999 and he was Co-Chairman and Chief Operating Officer of ProLogis from November 1993 to March 1999. Prior to joining ProLogis, Mr. Brooksher was Area Managing Partner and Chicago Office Managing Partner of KPMG Peat Marwick (now KPMG LLP), independent public accountants, where he served on the Board of Directors and Management Committee and as International Development Partner for Belgium and The Netherlands. Mr. Brooksher is a Director of Butler Manufacturing Company, the National Association of Manufacturers, Pactiv Corporation and Colorado Forum, a not-for-profit organization. Mr. Brooksher serves as an Advisory Board Member of the J.L. Kellogg School of Management of Northwestern University. Mr. Brooksher will begin a term as a Director of Qwest Communications International, Inc. in April 2004. Mr. Brooksher’s term as Trustee expires in 2005.
12
Irving F. Lyons, III — 54 — Mr. Lyons has served as a Trustee since March 1996. Mr. Lyons has been Vice Chairman of ProLogis since December 2001 and Chief Investment Officer of ProLogis since March 1997. Mr. Lyons was President of ProLogis from March 1999 to December 2001, Co-Chairman of ProLogis from March 1997 to March 1999 and Managing Director of ProLogis from December 1993 to March 1997. Prior to joining ProLogis, Mr. Lyons was the Managing Partner of King & Lyons, a San Francisco Bay Area industrial real estate development and management company, since its inception in 1979. Mr. Lyons’ term as Trustee expires in 2006.
Stephen L. Feinberg — 59 — Mr. Feinberg has served as a Trustee since January 1993. Mr. Feinberg has been Chairman of the Board and Chief Executive Officer of Dorsar Investment Co., Inc., a diversified holding company with interests in real estate and venture capital, since 1970. Mr. Feinberg is also a Director of Security Capital Preferred Growth, an affiliate of Security Capital Group Incorporated (“Security Capital”), previously ProLogis’ largest shareholder (see Note 7 to ProLogis’ Consolidated Financial Statements in Item 8), Continental Transmission Corporation, MetaMetrics, Inc., St. John’s College, The Santa Fe Institute and The Feinberg Foundation, Inc. He was formerly Chairman of the Board of St. John’s College and a former Director of Farrar, Strauss and Giroux, Inc. (a private publishing company), Molecular Informatics, Inc., Border Steel Mills, Inc., Springer Building Materials Corporation, Circle K Corporation, EnerServ Products, Inc. and Texas Commerce Bank-First State. Mr. Feinberg’s term as Trustee expires in 2004.
George L. Fotiades — 50 — Mr. Fotiades has served as a Trustee since December 2001. Mr. Fotiades is President and Chief Operating Officer of Cardinal Health, Inc., a provider of services supporting the health-care industry. Prior thereto, Mr. Fotiades was President and Chief Executive Officer of Life Services Products and Services, a unit of Cardinal Health Inc. Mr. Fotiades was President and Chief Operating Officer of R. P. Scherer Corporation (which was merged into Cardinal Health, Inc. in August 1998), Executive Vice President and Group President from 1996 to 1998 and Group President of the Americas and Asia Pacific from 1996 to 1998. Mr. Fotiades’ term as Trustee expires in 2006.
Donald P. Jacobs — 76 — Mr. Jacobs has served as a Trustee since February 1996. Mr. Jacobs has been a faculty member of the J.L. Kellogg School of Management of Northwestern University since 1957 and Mr. Jacobs is currently Dean Emeritus, having served as Dean from 1975 until 2001. Mr. Jacobs is a Director of Hartmarx Corporation, Terex Corporation and CDW Computer Centers. Mr. Jacobs was formerly a Director of Commonwealth Edison and its parent company, Unicom and he was formerly the Chairman of the Public Review Board of Andersen Worldwide. Mr. Jacobs was Chairman of the Advisory Committee of the Oversight Board of the Resolution Trust Corporation for the third region from 1990 to 1992, Chairman of the Board of AMTRAK from 1975 to 1979, Co-Staff Director of the Presidential Commission on Financial Structure and Regulation from 1970 to 1971 and Senior Economist for the Banking and Currency Committee of the U.S. House of Representatives from 1963 to 1964. Mr. Jacobs’ term as Trustee expires in 2004.
Neelie Kroes — 62 — Ms. Kroes was appointed as a Trustee in May 2002. Ms. Kroes is a member of the Supervisory Boards of Volvo Group (Sweden) and the Thales Group. Ms. Kroes served as President of Nyenrode University, a private university in The Netherlands, from May 1991 to April 2000. Prior thereto, Ms. Kroes held various logistics-related positions in the Dutch government, including Cabinet Minister of Transportation, Public Works and Telecommunication. Ms. Kroes was an assistant professor for transport areas at Erasmus University in Rotterdam, The Netherlands from May 1965 to August 1971. Ms. Kroes serves on various advisory boards including P&O Nedlloyd, Lucent Technologies B.V. and Nederlands Spoorwegen NV (Dutch Railways). Ms. Kroes’ term as Trustee expires in 2005.
Kenneth N. Stensby — 64 — Mr. Stensby has served as a Trustee since March 1999. Mr. Stensby has been Senior Vice President, Mortgage Origination, with Heitman Real Estate Investment Management since September 2003. Mr. Stensby was a Director of Meridian Industrial Trust Inc. from 1996 to March 1999, when it was merged with and into ProLogis. Mr. Stensby was President and Chief Executive Officer of United Properties, a Minneapolis-based diversified real estate company, from 1974 until his retirement in January 1995. Mr. Stensby is past President of the National Association of Industrial and Office Parks and was a
13
D. Michael Steuert — 55 — Mr. Steuert was appointed as a Trustee in September 2003. Mr. Steuert has been Senior Vice President and Chief Financial Officer of Fluor Corporation, a publicly owned engineering and construction firm, since 2001. Mr. Steuert was Senior Vice President and Chief Financial Officer of Litton Industries, Inc. from 1999 to 2001. Prior thereto, Mr. Steuert was Senior Vice President and Chief Financial Officer for GenCorp, Inc. Mr. Steuert has served as a Trustee of the Mental Health Association of Summit County (Ohio), regional director of the Financial Executive’s Institute and Director of GenCorp, Inc. board of directors. Mr. Steuert’s term as Trustee expires in 2004.
J. André Teixeira — 51 — Mr. Teixeira has served as a Trustee since February 1999. Mr. Teixeira is Vice President, Global Innovation and Development, Interbrew, Belgium, a publicly traded brewer. He was Chairman and Senior Partner with BBL Partners LLC, Moscow, Russia, a consulting and trading company specializing in the food and food ingredient industry, from 2001 to 2002 and he was the President of Coca-Cola for the Russia and Ukraine region, General Manager of Coca-Cola Russia, Ukraine and Belarus and Head of Representation for the Coca-Cola Export Corporation, Moscow from 2000 to 2001. Mr. Teixeira was General Manager/ President of the Coca-Cola Ukraine and Belarus region, Kiev from 1998 to 2000 and was with Coca-Cola in various capacities since 1978. Mr. Teixeira’s term as Trustee expires in 2004.
William D. Zollars — 56 — Mr. Zollars has served as a Trustee since June 2001. Mr. Zollars has been Chairman, President and Chief Executive Officer of Yellow Corporation, a holding company specializing in transportation of industrial, commercial and retail goods, since 1999. From 1996 to 1999, Mr. Zollars was President of Yellow Freight System Inc., Yellow Corporation’s principal operating subsidiary, and he was a Senior Vice President of Ryder Integrated Logistics, Inc. from 1994 to 1996. Mr. Zollars is a Director of Butler Manufacturing Co. Mr. Zollars’ term as Trustee expires in 2006.
| Senior Officers |
Jeffrey H. Schwartz — 44 — President of International Operations since March 2003 and President and Chief Operating Officer — Asia since March 2002. Mr. Schwartz was President and Chief Executive Officer of Vizional Technologies, Inc. (“Vizional Technologies”), an unconsolidated investee of ProLogis (see Note 4 to ProLogis’ Consolidated Financial Statements in Item 8) from September 2000 to February 2002. From October 1994 to August 2000, Mr. Schwartz was with ProLogis, most recently as Vice Chairman for International Operations. Prior to originally joining ProLogis in October 1994, Mr. Schwartz was a founder and managing partner of The Krauss/ Schwartz Company, an industrial real estate developer in Florida.
Steven K. Meyer — 55 — President and Chief Operating Officer — Europe since January 2004. Mr. Meyer was Managing Director of ProLogis from December 1998 to January 2004, where he had capital deployment responsibilities for the Central/ Mexico region and has been with ProLogis in various capacities since September 1994. Prior to joining ProLogis, Mr. Meyer was an Executive Vice President with Trammell Crow Company, a diversified commercial real estate company in North America.
John W. Seiple, Jr. — 45 — President of North America since December 2001 and Chief Investment Officer — North America since February 2004. Mr. Seiple was Chief Operating Officer — North America of ProLogis from December 1998 to February 2004 and has been with ProLogis in various capacities since October 1993. Mr. Seiple is a Director of Insight Inc. (an unconsolidated investee of ProLogis — see Note 4 to ProLogis’ Consolidated Financial Statements in Item 8). Prior to joining ProLogis, Mr. Seiple was a Senior Vice President with Trammell Crow Company, a diversified commercial real estate company in North America.
Robert J. Watson — 54 — President of North American Operations since February 2004. Mr. Watson was President and Chief Operating Officer — Europe of ProLogis from December 1998 to January 2004 and has been with ProLogis in various capacities since November 1992. Prior to joining ProLogis, Mr. Watson was the Regional Partner for Southwest United States Real Estate with Trammell Crow Company, a diversified commercial real estate company in North America.
14
Walter C. Rakowich — 46 — Managing Director and Chief Financial Officer of ProLogis since December 1998, where he is responsible for worldwide corporate finance. Mr. Rakowich has been with ProLogis in various capacities since July 1994. Prior to joining ProLogis, Mr. Rakowich was a consultant to ProLogis in the area of due diligence and acquisitions and he was a Principal with Trammell Crow Company, a diversified commercial real estate company in North America.
Edward S. Nekritz — 38 — Managing Director of ProLogis since December 2002, General Counsel of ProLogis since December 1998 and Secretary of ProLogis since March 1999, where he oversees the provision of all legal services for ProLogis and is responsible for ProLogis’ Risk Management and Asset Services departments. Mr. Nekritz has been with ProLogis in various capacities since September 1995. Prior to joining ProLogis, Mr. Nekritz was an attorney with Mayer, Brown & Platt (now Mayer, Brown, Rowe & Maw LLP).
Paul C. Congleton — 49 — Managing Director of ProLogis since September 1999, where he is responsible for Fund Management and Real Estate Research in North America. Mr. Congleton has been with ProLogis in various capacities since January 1995. Prior to joining ProLogis, Mr. Congleton was Managing Principal with Overland Company, a property management, leasing and consulting company based in Arizona.
Alan J. Curtis — 56 — Managing Director of ProLogis since December 2002, where he has capital management and deployment responsibilities for the United Kingdom. Mr. Curtis has been with ProLogis or an investee of ProLogis in various capacities since June 1997. Prior thereto, Mr. Curtis was with Gazely Properties as a Senior Development Surveyor with responsibilities for the Midlands market of the United Kingdom.
Ranald A. Hahn — 48 — Managing Director of ProLogis since December 2002, where he has capital management and deployment responsibilities for Southern Europe. Mr. Hahn has been with ProLogis in various capacities since March 1999. Prior to joining ProLogis, Mr. Hahn was the International Business Development Director of GSE, a French logistics construction company.
John R. Rizzo — 54 — Managing Director of ProLogis since December 2000, where he is responsible for the Global Development Group in North America. Mr. Rizzo has been with ProLogis in various capacities since January 1999. Prior to joining ProLogis, Mr. Rizzo was Senior Vice President and Chief Operating Officer of Perini Management Services Incorporated, an affiliate of Perini Corporation which is a construction management and general contracting firm.
Robin P. R. von Weiler — 47 — Managing Director of ProLogis since December 1999, where he has capital management and deployment responsibilities for Northern and Central Europe. Mr. von Weiler has been with ProLogis in various capacities since October 1997. Prior to joining ProLogis, Mr. von Weiler was with DTZ Zadelhoff V.O.F., part of DTZ Debenham Tie Lung, in Rotterdam, The Netherlands, most recently as Vice Managing Director, Real Estate Agent and Corporate Advisor.
Gary E. Anderson — 38 — Senior Vice President of ProLogis since May 2003, where he has capital deployment responsibilities for the Central/ Mexico region. Previously, Mr. Anderson was a Market Officer for ProLogis’ New Jersey markets and he has been with ProLogis in various capacities since August 1994. Prior to joining ProLogis, Mr. Anderson was with Security Capital, previously ProLogis’ largest shareholder, as a member of its Management Development Program.
Bert Angel — 47 — Senior Vice President of ProLogis since December 2003, where he oversees the Global Services Group in Europe. Previously, Mr. Angel was a First Vice President of ProLogis with similar responsibilities and he has been with ProLogis in various capacities since May 1998. Prior to joining ProLogis, Mr. Angel was the International Marketing and Sales Director for the Port of Rotterdam, the largest port in the world.
Gregory J. Arnold — 48 — Senior Vice President of ProLogis since December 2001, where he oversees the Global Services Group in North America. Mr. Arnold has been with ProLogis in various capacities since May 1994. Prior to joining ProLogis, Mr. Arnold was an Equity Vice President with LaSalle Partners (now Jones Lang LaSalle), a corporate real estate advisory firm.
15
Patrick J. Boot — 39 — Senior Vice President of ProLogis since January 2003, where he has responsibility for Real Estate Research in China and for the establishment of ProLogis’ operations in China. Prior to joining ProLogis, Mr. Boot was Executive Vice President and Executive Director of Property Investment Advisors Indonesia/ P.T. Sanggraha Daksamitra, a real estate development and leasing company in Indonesia.
Eric D. Brown — 43 — Senior Vice President of ProLogis since January 2004, where he has capital management responsibilities for the Central/ Mexico region. Previously, Mr. Brown was a Market Officer for ProLogis’ San Antonio and Reynosa, Mexico markets and he has been with ProLogis in capacities since May 1994. Prior to joining ProLogis, Mr. Brown was a Partner and Vice President of Crow Barshop Properties, Inc., an industrial real estate management and leasing company in San Antonio.
Ken R. Hall — 53 — Senior Vice President of ProLogis since December 2002, where he oversees the Global Development Group in Europe. Mr. Hall has been with ProLogis or an investee of ProLogis in various capacities since July 1998. Prior thereto, Mr. Hall was a Managing Director of Birse Construction, a development company in the United Kingdom.
Larry H. Harmsen — 43 — Senior Vice President of ProLogis since December 2001, where he has capital deployment responsibilities for the Pacific region. Mr. Harmsen has been with ProLogis in various capacities since February 1995. Prior to joining ProLogis, Mr. Harmsen was a Vice President and General Partner with Lincoln Property Company, a diversified national real estate operating company.
M. Gordon Keiser, Jr. — 59 — Senior Vice President of ProLogis since October 1995 and Treasurer of ProLogis since December 1998, where he is responsible for relationships with ProLogis’ lenders. Mr. Keiser has been with ProLogis in various capacities since October 1995. Prior to joining ProLogis, Mr. Keiser was Senior Vice President of JMB Realty Corporation with responsibilities for corporate finance and capital markets financing.
Douglas A. Kiersey, Jr. — 43 — Senior Vice President of ProLogis since December 2001, where he has capital deployment responsibilities for the Mid-Atlantic region. Mr. Kiersey has been with ProLogis in various capacities since May 1994. Prior to joining ProLogis, Mr. Kiersey was a member of the Industrial/ Technology Group at Cushman & Wakefield of Oregon, Inc., a real estate brokerage and services company.
W. Scott Lamson — 41 — Senior Vice President of ProLogis since March 2003, where he has capital management responsibilities for the Pacific region. Previously, Mr. Lamson was a Market Officer for ProLogis’ San Francisco markets and he has been with ProLogis in various capacities since June 1995. Prior to joining ProLogis, Mr. Lamson was a Vice President with Commercial Property Services, a commercial real estate company with responsibilities in the San Francisco market.
Luke A. Lands — 47 — Senior Vice President and Controller of ProLogis since August 2000, where he supervises ProLogis’ accounting, financial reporting and financial forecasting functions. Mr. Lands has been with ProLogis in various capacities since January 1996. Prior to joining ProLogis, Mr. Lands was Vice President of SCG Realty Services, an affiliate of Security Capital. Prior thereto, Mr. Lands was Vice President and Controller for Lincoln Property Company, a diversified national real estate operating company. Mr. Lands is a Certified Public Accountant.
Brian N. Marsh — 39 — Senior Vice President of ProLogis since January 2004 where he has capital management responsibilities for the Mid-Atlantic Region. Previously, Mr. Marsh was a Market Officer for ProLogis’ Columbus, Ohio market and he has been with ProLogis in various capacities since January 1995. Prior to joining ProLogis, Mr. Marsh was an Associate with The Pizzuti Companies, an industrial real estate company in Columbus, Ohio.
Debra A. McRight — 44 — Senior Vice President of ProLogis since December 1999, where she is responsible for client services and property management operations in North America. Ms. McRight has been with ProLogis in various capacities since September 1995. Prior to joining ProLogis, Ms. McRight was with Paragon Group, Inc., a full service real estate company, where she was responsible for property management operations in St. Louis, Missouri.
16
Masato Miki — 39 — Senior Vice President of ProLogis since January 2004, where he is responsible for acquisition activities and capital raising in Japan. Previously, Mr. Miki was a First Vice President of ProLogis with similar responsibilities in Japan and he has been with ProLogis since August 2002. Prior to joining ProLogis, Mr. Miki was Vice President of Mitsui Fudosan Investment Advisors, Inc., an affiliate of Mitsui Fudosa Co., Ltd., a comprehensive real estate company in Japan.
Charles E. Sullivan — 46 — Senior Vice President of ProLogis since December 2001, where he has capital management responsibilities for the Southeast region. Mr. Sullivan has been with ProLogis in various capacities since October 1994. Prior to joining ProLogis, Mr. Sullivan was an Industrial Broker with Cushman & Wakefield of Florida, a real estate brokerage and services company.
Neville D. E. Teagarden — 40 — Senior Vice President and Chief Information Officer of ProLogis since September 2003, where he is responsible for development and implementation of ProLogis’ global business technology systems. Prior to joining ProLogis, Mr. Teagarden was the Chief Information Officer of Navigant International, a provider of travel management services.
Peter R. S. Wittendorp — 38 — Senior Vice President of ProLogis since December 2003 where he has Global Capital and Fund Management responsibilities in Europe. Previously, Mr. Wittendorp was a First Vice President of ProLogis with similar responsibilities in Europe and he has been with ProLogis since September 2001. Prior to joining ProLogis, Mr. Wittendorp was an independent real estate consultant and he also served as Coordinating Fund Manager and Executive Vice President of the real estate investment group of ABP Investments.
Mike Yamada — 50 — Senior Vice President of ProLogis since January 2004, where he is responsible for development activities in Japan. Previously, Mr. Yamada was a First Vice President of ProLogis with similar responsibilities in Japan and he has been with ProLogis since April 2002. Prior to joining ProLogis, Mr. Yamada was a Senior Officer of Fujita Corporation, a construction company in Japan.
Environmental Matters
Under various federal, state and local laws, ordinances and regulations, a current or previous owner, developer or operator of real estate may be liable for the costs of removal or remediation of certain hazardous or toxic substances at, on, under or in its property. The costs of removal or remediation of such substances could be substantial. Such laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the release or presence of such hazardous substances. The presence of such substances may adversely affect the owner’s ability to sell such real estate or to borrow funds by using such real estate as collateral. ProLogis has not been notified by any governmental authority of any non-compliance, liability or other claim in connection with any of the properties owned (directly or through investments in property funds), or being acquired, as of December 31, 2003, and ProLogis is not aware of any environmental condition with respect to any of its properties that is likely to have a material adverse effect on ProLogis’ business, financial condition or results of operations. ProLogis or the predecessor owners have subjected each of its properties to an environmental assessment (which may not involve invasive procedures such as soil sampling or ground water analysis) by independent consultants. While some of these assessments have led to further investigation and sampling, none of these environmental assessments have revealed, nor is ProLogis aware of, any environmental liability (including asbestos-related liability) that ProLogis believes would have a material adverse effect on its business, financial condition or results of operations. No assurance can be given, however, that these assessments and investigations have revealed or will reveal all potential environmental liabilities, that no prior owner or operator created any material environmental condition not known to ProLogis or the independent consultants or that future uses or conditions (including, without limitation, customer actions or changes in applicable environmental laws and regulations) will not result in unreimbursed costs relating to environmental liabilities. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Factors.”
17
Insurance Coverage
ProLogis and its unconsolidated investees carry comprehensive insurance coverage. ProLogis determines the type of coverage and the policy specifications and limits based on what it deems to be the risks associated with its ownership of properties and other of its business operations in specific markets. Such coverage includes property, liability, fire, flood, earthquake, environmental, terrorism, extended coverage and rental loss. ProLogis believes that its insurance coverage contains policy specifications and insured limits that are customary for similar properties, business activities and markets and ProLogis believes its properties and the properties of its unconsolidated investees are adequately insured. However, an uninsured loss could result in loss of capital investment and anticipated profits. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Factors.”
ITEM 2. Properties
Industrial Distribution Properties
ProLogis has directly invested in real estate assets that are primarily generic industrial distribution properties. Due to the costs associated with retrofitting service center space for new customers, ProLogis has acquired properties containing service center space on a very limited basis. Generally, service center space has been acquired as part of portfolio acquisitions in which the majority of the properties being acquired were generic industrial distribution properties. In Japan, ProLogis’ distribution properties will generally be multi-level centers, which is common in Japan due to the high cost and limited availability of land. ProLogis’ properties are typically used for storage, packaging, assembly, distribution and light manufacturing of consumer and industrial products. Based on the square footage of operating properties directly owned by ProLogis at December 31, 2003, 87% of ProLogis’ properties are used for bulk distribution with the remaining properties used for light manufacturing and assembly (11%) and for other purposes, primarily service centers, (2%).
All operating properties are part of the property operations segment. ProLogis has commitments with certain property funds that require ProLogis to offer to contribute certain of its stabilized developed properties to those property funds, subject to certain conditions, upon completion. All properties under development are part of the CDFS business segment. Regardless of ProLogis’ intent with respect to a property (i.e., direct, long-term investment or expectation of future contribution or sale), all properties that are classified as operating properties are included in the property operations segment while they are directly owned by ProLogis.
Geographic Distribution
ProLogis has direct ownership of 1,279 distribution properties (operating and under development) in North America, Europe and Japan at December 31, 2003. In North America, properties that are owned directly by ProLogis are located in 38 markets (including three cities that are not target markets) in 23 states and the District of Columbia in the United States, and in four markets in Mexico. In Europe, the properties that are owned directly by ProLogis are located in 19 markets in eight countries. In Japan, the properties that are owned directly by ProLogis are currently reflected in one market that includes Tokyo, Osaka and Nagoya. ProLogis defines its markets based on the concentration of properties in a specific area. A market, as defined by ProLogis, can be a metropolitan area, a city, a subsection of a metropolitan area, a subsection of a city or a region of a state or country. Accordingly, the actual location of each market may not be easily identifiable by the name given to the market by ProLogis. Such markets are identified below along with the major
18
|
United States:
|
||||
|
I-81 Corridor, Pennsylvania
|
Allentown, Bethlehem, Harrisburg | |||
|
I-95 Corridor, New Jersey
|
Cranbury, Newark, Secaucus, Trenton | |||
|
Los Angeles/ Orange County, California
|
Los Angeles and Orange County metropolitan areas | |||
|
Europe:
|
||||
|
France:
|
||||
|
Central
|
Orleans, Paris, Vatry | |||
|
East
|
Metz | |||
|
North
|
Lille, Le Havre | |||
|
South
|
Lyon, Marseille | |||
|
Germany:
|
||||
|
Rhine/ Main
|
Frankfurt | |||
|
Rhine/ Ruhr
|
Cologne, Dortmund, Dusseldorf | |||
|
South
|
Munich | |||
|
Netherlands:
|
||||
|
South
|
Haaften, Tilburg, Veghel, Venlo | |||
|
Poland:
|
||||
|
Central
|
Piotrkow | |||
|
South
|
Bedzin | |||
|
West
|
Poznan | |||
|
United Kingdom:
|
||||
|
East Midlands
|
Bedfordshire, Coalville, Corby, Daventry, Leicester, Northampton | |||
|
London and Southeast
|
London, Hemel Hempstead, Thurrock | |||
|
North
|
Leeds, Wakefield, Crewe | |||
|
West Midlands
|
Banbury, Birmingham, Coventry, Rugby | |||
|
Asia:
|
||||
|
Japan
|
Nagoya, Osaka, Tokyo | |||
The table below illustrates the geographic distribution of ProLogis’ portfolio of directly owned operating properties and properties under development. The table excludes land held for future development. The table includes properties owned by ProLogis and its consolidated subsidiaries and partnerships, which may not be 100% owned by ProLogis (see “— Real Estate Partnerships”). The table does not include properties that are owned by the property funds or ProLogis’ other unconsolidated investees which are discussed under “— Unconsolidated Investees.”
| December 31, | |||||||||||||||||
| 2003 | 2002 | ||||||||||||||||
| Percentage of | Percentage of | ||||||||||||||||
| Number of | Assets Based | Number of | Assets Based | ||||||||||||||
| Properties | on Cost(1) | Properties | on Cost(1) | ||||||||||||||
|
North American Markets:
|
|||||||||||||||||
|
United States:
|
|||||||||||||||||
|
Atlanta, Georgia
|
80 | 4.89 | % | 84 | 5.22 | % | |||||||||||
|
Austin, Texas
|
27 | 1.24 | 27 | 1.31 | |||||||||||||
|
Charlotte, North Carolina
|
33 | 2.58 | 30 | 2.20 | |||||||||||||
19
| December 31, | ||||||||||||||||||
| 2003 | 2002 | |||||||||||||||||
| Percentage of | Percentage of | |||||||||||||||||
| Number of | Assets Based | Number of | Assets Based | |||||||||||||||
| Properties | on Cost(1) | Properties | on Cost(1) | |||||||||||||||
|
Chattanooga, Tennessee
|
5 | 0.29 | 5 | 0.30 | ||||||||||||||
|
Chicago, Illinois
|
61 | 6.26 | 59 | 6.07 | ||||||||||||||
|
Cincinnati, Ohio
|
42 | 2.19 | 39 | 1.95 | ||||||||||||||
|
Columbus, Ohio
|
32 | 3.38 | 29 | 2.93 | ||||||||||||||
|
Dallas/ Ft. Worth, Texas
|
125 | 8.09 | 127 | 8.52 | ||||||||||||||
|
Denver, Colorado
|
25 | 1.46 | 25 | 1.52 | ||||||||||||||
|
El Paso, Texas
|
18 | 1.34 | 19 | 1.24 | ||||||||||||||
|
Ft. Lauderdale/ Miami, Florida
|
14 | 1.19 | 11 | 0.92 | ||||||||||||||
|
Houston, Texas
|
91 | 4.58 | 92 | 4.86 | ||||||||||||||
|
I-81 Corridor, Pennsylvania
|
3 | 0.87 | 3 | 0.92 | ||||||||||||||
|
I-95 Corridor, New Jersey
|
26 | 2.50 | 28 | 2.98 | ||||||||||||||
|
Indianapolis, Indiana
|
43 | 2.45 | 43 | 2.53 | ||||||||||||||
|
Kansas City, Kansas/ Missouri
|
29 | 1.15 | 29 | 1.19 | ||||||||||||||
|
Las Vegas, Nevada
|
17 | 1.72 | 17 | 1.80 | ||||||||||||||
|
Los Angeles/ Orange County, California(2)
|
2 | 0.70 | 2 | 0.94 | ||||||||||||||
|
Louisville, Kentucky
|
7 | 0.66 | 7 | 0.64 | ||||||||||||||
|
Memphis, Tennessee
|
47 | 3.48 | 48 | 4.07 | ||||||||||||||
|
Nashville, Tennessee
|
41 | 2.06 | 31 | 1.72 | ||||||||||||||
|
Oklahoma City, Oklahoma
|
6 | 0.22 | 6 | 0.22 | ||||||||||||||
|
Orlando, Florida
|
19 | 1.25 | 19 | 1.31 | ||||||||||||||
|
Phoenix, Arizona
|
30 | 1.25 | 30 | 1.30 | ||||||||||||||
|
Portland, Oregon
|
20 | 0.88 | 20 | 0.92 | ||||||||||||||
|
Reno, Nevada
|
23 | 1.77 | 23 | 1.85 | ||||||||||||||
|
Salt Lake City, Utah
|
7 | 0.84 | 7 | 0.88 | ||||||||||||||
|
San Antonio, Texas
|
53 | 2.29 | 51 | 2.36 | ||||||||||||||
|
San Francisco (East Bay), California
|
54 | 4.23 | 53 | 4.34 | ||||||||||||||
|
San Francisco (South Bay), California
|
71 | 4.25 | 71 | 4.43 | ||||||||||||||
|
Seattle, Washington
|
14 | 1.05 | 14 | 1.10 | ||||||||||||||
|
St. Louis, Missouri
|
13 | 0.71 | 14 | 1.44 | ||||||||||||||
|
Tampa, Florida
|
61 | 2.54 | 64 | 2.88 | ||||||||||||||
|
Tulsa, Oklahoma
|
9 | 0.23 | 9 | 0.24 | ||||||||||||||
|
Washington D.C./ Baltimore, Maryland
|
38 | 2.92 | 42 | 3.35 | ||||||||||||||
|
Other(3)
|
3 | 0.26 | 2 | 0.10 | ||||||||||||||
|
Mexico:
|
||||||||||||||||||
|
Juarez
|
12 | 0.67 | 12 | 0.70 | ||||||||||||||
|
Monterrey
|
8 | 0.59 | 8 | 0.64 | ||||||||||||||
|
Reynosa
|
12 | 0.77 | 11 | 0.66 | ||||||||||||||
|
Tijuana
|
3 | 0.25 | 2 | 0.18 | ||||||||||||||
|
Subtotal North America
|
1,224 | 80.05 | 1,213 | 82.73 | ||||||||||||||
20
| December 31, | ||||||||||||||||||
| 2003 | 2002 | |||||||||||||||||
| Percentage of | Percentage of | |||||||||||||||||
| Number of | Assets Based | Number of | Assets Based | |||||||||||||||
| Properties | on Cost(1) | Properties | on Cost(1) | |||||||||||||||
|
European Markets(4):
|
||||||||||||||||||
|
Czech Republic:
|
||||||||||||||||||
|
Prague
|
— | — | 1 | 0.24 | ||||||||||||||
|
France:
|
||||||||||||||||||
|
Central
|
3 | 0.58 | 1 | 0.18 | ||||||||||||||
|
East
|
1 | 0.23 | — | — | ||||||||||||||
|
North
|
1 | 0.26 | 2 | 0.36 | ||||||||||||||
|
South
|
4 | 0.77 | 3 | 0.54 | ||||||||||||||
|
Germany:
|
||||||||||||||||||
|
Rhine/ Main
|
2 | 0.58 | 1 | 0.32 | ||||||||||||||
|
Rhine/ Ruhr
|
2 | 0.49 | 2 | 0.32 | ||||||||||||||
|
South
|
2 | 0.30 | — | — | ||||||||||||||
|
Hungary:
|
||||||||||||||||||
|
Budapest
|
2 | 0.24 | — | — | ||||||||||||||
|
Italy:
|
||||||||||||||||||
|
Milan
|
1 | 0.27 | 3 | 0.69 | ||||||||||||||
|
Netherlands:
|
||||||||||||||||||
|
South
|
2 | 0.87 | 1 | 0.37 | ||||||||||||||
|
Poland:
|
||||||||||||||||||
|
Central
|
1 | 0.29 | — | — | ||||||||||||||
|
South
|
1 | 0.06 | 1 | 0.07 | ||||||||||||||
|
Warsaw
|
2 | 0.33 | 1 | 0.18 | ||||||||||||||
|
West
|
2 | 0.13 | 1 | 0.04 | ||||||||||||||
|
Spain:
|
||||||||||||||||||
|
Madrid
|
2 | 0.64 | 2 | 0.52 | ||||||||||||||
|
United Kingdom:
|
||||||||||||||||||
|
East Midlands
|
6 | 2.10 | 12 | 2.61 | ||||||||||||||
|
London and Southeast
|
9 | 3.07 | 14 | 5.08 | ||||||||||||||
|
North
|
2 | 0.31 | 1 | 0.27 | ||||||||||||||
|
West Midlands
|
6 | 2.46 | 4 | 1.14 | ||||||||||||||
|
Subtotal Europe
|
51 | 13.98 | 50 | 12.93 | ||||||||||||||
|
Asia(5):
|
||||||||||||||||||
|
Japan
|
4 | 5.97 | 4 | 4.34 | ||||||||||||||
|
Total
|
1,279 | (6) | 100.00 | % | 1,267 | (6) | 100.00 | % | ||||||||||
| (1) | Properties under development are reflected at their total expected cost at completion, rather than at the cost incurred as of the dates presented. |
| (2) | ProLogis California has the right of first offer with respect properties that ProLogis develops, excluding properties developed under build to suit agreements, in certain counties included in ProLogis’ Los Angeles/ Orange County market, subject to the property meeting certain specified criteria, including leasing criteria. |
21
| (3) | Includes one property in each of the Akron, Ohio, Birmingham, Alabama and Brownsville, Texas markets, none of which are considered to be target markets of ProLogis. |
| (4) | ProLogis is committed to offer to contribute all of the properties that it develops and stabilizes in specific markets in Europe to ProLogis European Properties Fund through September 2019, subject to the property meeting certain specified criteria, including leasing criteria. |
| (5) | ProLogis is committed to offer to contribute all of the properties that it develops and stabilizes in Japan to ProLogis Japan Properties Fund through June 2006, subject to the property meeting certain specified criteria, including leasing criteria. |
| (6) | Includes 27 properties under development at December 31, 2003 and 37 properties under development at December 31, 2002. |
Properties
The information in the following tables is as of December 31, 2003 for the properties and land directly owned by ProLogis and its consolidated subsidiaries and partnerships, which may not be 100% owned by ProLogis (see “— Real Estate Partnerships”). No individual property or group of properties operated as a single business unit amounted to 10% or more of ProLogis’ consolidated total assets at December 31, 2003 or generated income equal to 10% or more of ProLogis’ consolidated gross revenues or total income for the year ended December 31, 2003. The table does not include properties that are owned by property funds or by ProLogis’ other unconsolidated investees which are discussed under “— Unconsolidated Investees.”
| Rentable | ||||||||||||||||||||||
| No. of | Percentage | Square | ||||||||||||||||||||
| Bldgs. | Occupancy(1) | Footage | Investment(2) | Encumbrances(3) | ||||||||||||||||||
|
Operating Properties Directly Owned at
December 31, 2003(4):
|
||||||||||||||||||||||
|
North American Markets(5):
|
||||||||||||||||||||||
|
United States:
|
||||||||||||||||||||||
|
Atlanta, Georgia
|
80 | 80.24 | % | 8,504,171 | $ | 271,202,953 | $ | 35,618,033 | ||||||||||||||
|
Austin, Texas
|
27 | 83.05 | 1,759,309 | 68,920,961 | — | |||||||||||||||||
|
Charlotte, North Carolina
|
33 | 88.75 | 4,603,630 | 143,120,391 | 41,371,602 | |||||||||||||||||
|
Chattanooga, Tennessee
|
5 | 96.50 | 1,147,872 | 15,923,237 | — | |||||||||||||||||
|
Chicago, Illinois
|
60 | 84.77 | 7,832,665 | 330,136,091 | 44,688,271 | |||||||||||||||||
|
Cincinnati, Ohio
|
42 | 81.50 | 4,486,846 | 121,398,240 | 40,924,343 | |||||||||||||||||
|
Columbus, Ohio
|
31 | 94.73 | 5,272,331 | 169,576,695 | 30,840,379 | |||||||||||||||||
|
Dallas/ Fort Worth, Texas
|
124 | 82.96 | 13,104,598 | 434,549,171 | 63,086,584 | |||||||||||||||||
|
Denver, Colorado
|
25 | 82.75 | 2,849,696 | 81,087,292 | — | |||||||||||||||||
|
El Paso, Texas
|
18 | 73.48 | 2,596,483 | 74,386,024 | 1,964,447 | |||||||||||||||||
|
Ft. Lauderdale/ Miami, Florida
|
14 | 92.47 | 1,137,689 | 65,902,493 | 1,606,815 | |||||||||||||||||
|
Houston, Texas
|
91 | 86.82 | 8,400,201 | 254,264,097 | 45,590,711 | |||||||||||||||||
|
I-81 Corridor, Pennsylvania
|
3 | 100.00 | 1,068,420 | 48,304,131 | — | |||||||||||||||||
|
I-95 Corridor, New Jersey
|
26 | 99.53 | 3,608,653 | 138,895,232 | 28,141,909 | |||||||||||||||||
|
Indianapolis, Indiana
|
43 | 82.11 | 4,184,599 | 135,849,021 | — | |||||||||||||||||
|
Kansas City, Kansas/ Missouri
|
29 | 93.41 | 1,578,487 | 63,610,026 | 11,512,592 | |||||||||||||||||
|
Las Vegas, Nevada
|
17 | 96.69 | 2,061,291 | 95,112,389 | 16,728,554 | |||||||||||||||||
|
Los Angeles/ Orange County, California
|
1 | 100.00 | 249,283 | 11,145,451 | — | |||||||||||||||||
|
Louisville, Kentucky
|
7 | 87.05 | 1,469,988 | 36,661,395 | 6,406,868 | |||||||||||||||||
|
Memphis, Tennessee
|
47 | 86.92 | 7,309,879 | 192,753,408 | 9,881,854 | |||||||||||||||||
|
Nashville, Tennessee
|
41 | 80.00 | 4,439,170 | 114,271,012 | 6,930,533 | |||||||||||||||||
22
| Rentable | |||||||||||||||||||||||
| No. of | Percentage | Square | |||||||||||||||||||||
| Bldgs. | Occupancy(1) | Footage | Investment(2) | Encumbrances(3) | |||||||||||||||||||
|
Oklahoma City, Oklahoma
|
6 | 76.68 | 639,942 | 12,181,777 | — | ||||||||||||||||||
|
Orlando, Florida
|
19 | 86.92 | 1,750,236 | 69,541,705 | 7,465,210 | ||||||||||||||||||
|
Phoenix, Arizona
|
30 | 91.42 | 2,016,336 | 69,233,239 | — | ||||||||||||||||||
|
Portland, Oregon
|
20 | 98.50 | 1,330,129 | 49,029,182 | 327,285 | ||||||||||||||||||
|
Reno, Nevada
|
23 | 97.48 | 2,702,923 | 98,193,976 | 10,491,690 | ||||||||||||||||||
|
Salt Lake City, Utah
|
7 | 94.13 | 1,643,468 | 46,603,502 | — | ||||||||||||||||||
|
San Antonio, Texas
|
52 | 91.16 | 4,373,638 | 123,620,001 | — | ||||||||||||||||||
|
San Francisco (East Bay), California
|
54 | 71.34 | 5,882,515 | 234,388,901 | 31,080,656 | ||||||||||||||||||
|
San Francisco (South Bay), California
|
71 | 81.55 | 3,695,747 | 235,879,869 | 6,767,728 | ||||||||||||||||||
|
Seattle Washington
|
14 | 89.32 | 1,272,827 | 58,313,385 | 4,533,307 | ||||||||||||||||||
|
St. Louis, Missouri
|
13 | 75.42 | 1,251,825 | 39,138,730 | 7,097,074 | ||||||||||||||||||
|
Tampa, Florida
|
61 | 91.03 | 3,707,575 | 141,104,030 | 24,583,158 | ||||||||||||||||||
|
Tulsa, Oklahoma
|
9 | 99.14 | 523,623 | 12,809,305 | — | ||||||||||||||||||
|
Washington D.C./ Baltimore, Maryland
|
38 | 95.97 | 3,936,330 | 161,712,918 | 36,181,170 | ||||||||||||||||||
|
Other(6)
|
2 | 100.00 | 215,723 | 5,055,124 | 352,221 | ||||||||||||||||||
|
Mexico:
|
|||||||||||||||||||||||
|
Juarez
|
12 | 92.13 | 966,918 | 36,970,643 | — | ||||||||||||||||||
|
Monterrey
|
8 | 70.63 | 825,001 | 32,611,117 | — | ||||||||||||||||||
|
Reynosa
|
11 | 100.00 | 967,041 | 36,467,201 | — | ||||||||||||||||||
|
Tijuana
|
2 | 100.00 | 262,220 | 9,499,403 | — | ||||||||||||||||||
|
Subtotal North America(5)
|
1,216 | 86.34 | 125,629,278 | 4,339,423,718 | 514,172,994 | ||||||||||||||||||
|
European Markets(7):
|
|||||||||||||||||||||||
|
France:
|
|||||||||||||||||||||||
|
Central
|
1 | 100.00 | 149,943 | 9,214,895 | — | ||||||||||||||||||
|
North
|
1 | — | 344,760 | 14,469,605 | — | ||||||||||||||||||
|
South
|
3 | 32.42 | 842,993 | 35,965,646 | — | ||||||||||||||||||
|
Germany:
|
|||||||||||||||||||||||
|
Rhine/ Main
|
1 | — | 202,772 | 21,718,462 | — | ||||||||||||||||||
|
Rhine/ Ruhr
|
1 | — | 180,469 | 12,308,568 | — | ||||||||||||||||||
|
Hungary:
|
|||||||||||||||||||||||
|
Budapest
|
2 | 34.71 | 305,267 | 13,307,223 | — | ||||||||||||||||||
|
Netherlands:
|
|||||||||||||||||||||||
|
South
|
1 | 50.00 | 448,407 | 23,862,607 | — | ||||||||||||||||||
|
Poland:
|
|||||||||||||||||||||||
|
Central
|
1 | 100.00 | 428,500 | 15,829,047 | — | ||||||||||||||||||
|
South
|
1 | 100.00 | 123,000 | 3,469,660 | — | ||||||||||||||||||
|
Warsaw
|
1 | 60.42 | 186,196 | 7,709,668 | — | ||||||||||||||||||
|
West
|
1 | 60.84 | 61,570 | 2,554,990 | — | ||||||||||||||||||
|
Spain:
|
|||||||||||||||||||||||
|
Madrid
|
2 | 19.80 | 608,466 | 35,263,747 | — | ||||||||||||||||||
23
| Rentable | ||||||||||||||||||||||
| No. of | Percentage | Square | ||||||||||||||||||||
| Bldgs. | Occupancy(1) | Footage | Investment(2) | Encumbrances(3) | ||||||||||||||||||
|
United Kingdom:
|
||||||||||||||||||||||
|
East Midlands(8)
|
6 | 40.79 | 1,620,549 | 116,862,968 | — | |||||||||||||||||
|
London and Southeast
|
7 | — | 827,569 | 118,278,213 | — | |||||||||||||||||
|
North(9)
|
2 | 30.67 | 267,399 | 17,263,002 | — | |||||||||||||||||
|
West Midlands(10)
|
5 | 41.59 | 914,155 | 81,292,456 | — | |||||||||||||||||
|
Subtotal Europe(7):
|
36 | 35.92 | 7,512,015 | 529,370,757 | — | |||||||||||||||||
|
Total Operating Properties Directly Owned at
December 31, 2003(4)
|
1,252 | 83.50 | % | 133,141,293 | $ | 4,868,794,475 | $ | 514,172,994 | ||||||||||||||
| Rentable | |||||||||||||||||||
| No. of | Square | Total Expected | |||||||||||||||||
| Bldgs. | Footage | Investment(2) | Cost(11) | ||||||||||||||||
|
Properties Under Development at
December 31, 2003(12)(13):
|
|||||||||||||||||||
|
North American Markets:
|
|||||||||||||||||||
|
United States:
|
|||||||||||||||||||
|
Chicago, Illinois
|
1 | 457,701 | $ | 2,373,292 | $ | 17,180,281 | |||||||||||||
|
Columbus, Ohio
|
1 | 749,952 | 10,922,367 | 17,823,543 | |||||||||||||||
|
Dallas/ Ft. Worth, Texas
|
1 | 447,400 | 11,805,790 | 14,457,534 | |||||||||||||||
|
Los Angeles/ Orange County, California
|
1 | 882,230 | 8,941,957 | 27,706,793 | |||||||||||||||
|
San Antonio, Texas
|
1 | 74,100 | 3,309,056 | 3,631,498 | |||||||||||||||
|
Other(14)
|
1 | 294,000 | 8,999,979 | 9,585,237 | |||||||||||||||
|
Mexico:
|
|||||||||||||||||||
|
Reynosa
|
1 | 148,000 | 2,761,598 | 6,263,160 | |||||||||||||||
|
Tijuana
|
1 | 110,000 | 2,638,417 | 4,396,929 | |||||||||||||||
|
Subtotal North America
|
8 | 3,163,383 | 51,752,456 | 101,044,975 | |||||||||||||||
|
European Markets:
|
|||||||||||||||||||
|
France:
|
|||||||||||||||||||
|
Central
|
2 | 503,949 | 7,212,515 | 23,145,215 | |||||||||||||||
|
East
|
1 | 326,149 | 3,104,161 | 13,014,743 | |||||||||||||||
|
South
|
1 | 164,926 | 2,316,250 | 6,800,000 | |||||||||||||||
|
Germany:
|
|||||||||||||||||||
|
Rhine/ Main
|
1 | 164,582 | 7,916,288 | 10,457,204 | |||||||||||||||
|
Rhine/ Ruhr
|
1 | 275,946 | 4,239,338 | 14,966,696 | |||||||||||||||
|
South
|
2 | 300,854 | 8,028,755 | 16,386,614 | |||||||||||||||
|
Italy:
|
|||||||||||||||||||
|
Milan
|
1 | 336,235 | 1,851,605 | 14,810,237 | |||||||||||||||
|
Netherlands:
|
|||||||||||||||||||
|
South
|
1 | 503,787 | 10,323,294 | 24,284,402 | |||||||||||||||
|
Poland:
|
|||||||||||||||||||
|
Warsaw
|
1 | 266,797 | 3,267,165 | 10,727,551 | |||||||||||||||
|
West
|
1 | 131,493 | 1,529,000 | 4,633,979 | |||||||||||||||
24
| Rentable | |||||||||||||||||||
| No. of | Square | Total Expected | |||||||||||||||||
| Bldgs. | Footage | Investment(2) | Cost(11) | ||||||||||||||||
|
United Kingdom:
|
|||||||||||||||||||
|
London and Southeast
|
2 | 359,600 | 45,860,178 | 51,810,406 | |||||||||||||||
|
West Midlands
|
1 | 726,000 | 33,656,930 | 55,209,262 | |||||||||||||||
|
Subtotal Europe
|
15 | 4,060,318 | 129,305,479 | 246,246,309 | |||||||||||||||
|
Asian Market:
|
|||||||||||||||||||
|
Japan
|
4 | 2,599,331 | 223,523,519 | 331,200,455 | |||||||||||||||
|
Total Properties Under Development at
December 31, 2003(12)(13)
|
27 | 9,823,032 | $ | 404,581,454 | $ | 678,491,739 | |||||||||||||
| Acreage | Investment(2) | Encumbrances(3) | ||||||||||||
|
Land Held for Development at December 31,
2003(15):
|
||||||||||||||
|
North American Markets:
|
||||||||||||||
|
United States:
|
||||||||||||||
|
Atlanta, Georgia
|
234.2 | $ | 19,398,395 | $ | — | |||||||||
|
Austin, Texas
|
7.2 | 775,877 | — | |||||||||||
|
Charlotte, North Carolina
|
17.3 | 1,519,348 | — | |||||||||||
|
Chicago, Illinois
|
83.2 | 15,869,604 | — | |||||||||||
|
Cincinnati, Ohio
|
97.3 | 8,821,438 | — | |||||||||||
|
Columbus, Ohio
|
15.9 | 935,447 | — | |||||||||||
|
Dallas/ Ft. Worth, Texas
|
155.4 | 15,336,833 | — | |||||||||||
|
Denver, Colorado
|
118.9 | 4,637,979 | — | |||||||||||
|
El Paso, Texas
|
85.2 | 5,459,775 | — | |||||||||||
|
Houston, Texas
|
56.0 | 5,272,379 | — | |||||||||||
|
I-81 Corridor, Pennsylvania
|
153.2 | 6,727,276 | — | |||||||||||
|
I-95 Corridor, New Jersey
|
10.1 | 545,585 | — | |||||||||||
|
Indianapolis, Indiana
|
149.6 | 10,370,109 | — | |||||||||||
|
Kansas City, Kansas/ Missouri
|
16.6 | 1,526,602 | — | |||||||||||
|
Las Vegas, Nevada
|
34.6 | 4,935,847 | 239,326 | |||||||||||
|
Los Angeles/ Orange County, California
|
91.7 | 8,197,369 | — | |||||||||||
|
Louisville, Kentucky
|
90.1 | 7,064,424 | — | |||||||||||
|
Memphis, Tennessee
|
120.6 | 7,083,218 | — | |||||||||||
|
Orlando, Florida
|
28.1 | 2,841,892 | — | |||||||||||
|
Portland, Oregon
|
10.3 | 1,753,655 | — | |||||||||||
|
Reno, Nevada
|
30.1 | 4,275,700 | — | |||||||||||
|
Salt Lake City, Utah
|
28.3 | 2,095,715 | — | |||||||||||
|
San Antonio, Texas
|
57.7 | 4,383,139 | — | |||||||||||
|
San Francisco (East Bay) California
|
77.6 | 6,593,262 | — | |||||||||||
|
Seattle, Washington
|
10.6 | 2,020,161 | — | |||||||||||
|
Tampa, Florida
|
48.4 | 3,396,123 | — | |||||||||||
|
Washington D.C./ Baltimore, Maryland
|
30.8 | 5,306,550 | — | |||||||||||
|
Mexico:
|
||||||||||||||
|
Juarez
|
47.3 | 7,809,319 | — | |||||||||||
|
Monterrey
|
12.8 | 1,759,700 | — | |||||||||||
25
| Acreage | Investment(2) | Encumbrances(3) | |||||||||||||
|
Reynosa
|
59.6 | 8,129,143 | — | ||||||||||||
|
Tijuana
|
11.6 | 2,464,846 | — | ||||||||||||
|
Subtotal North America
|
1,990.3 | 177,306,710 | 239,326 | ||||||||||||
|
European Markets:
|
|||||||||||||||
|
Belgium
|
12.4 | 1,158,351 | — | ||||||||||||
|
Czech Republic:
|
|||||||||||||||
|
Prague
|
31.3 | 8,930,809 | — | ||||||||||||
|
France:
|
|||||||||||||||
|
Central
|
16.5 | 2,517,904 | — | ||||||||||||
|
North
|
19.8 | 1,322,147 | — | ||||||||||||
|
South
|
40.3 | 9,362,930 | — | ||||||||||||
|
Germany:
|
|||||||||||||||
|
Rhine/ Main
|
12.4 | 9,285,937 | — | ||||||||||||
|
Rhine/ Ruhr
|
6.3 | 1,991,845 | — | ||||||||||||
|
South
|
0.6 | 167,721 | — | ||||||||||||
|
Hungary:
|
|||||||||||||||
|
Budapest
|
37.9 | 5,839,978 | — | ||||||||||||
|
Italy:
|
|||||||||||||||
|
Milan
|
47.2 | 3,708,563 | — | ||||||||||||
|
Netherlands:
|
|||||||||||||||
|
Rotterdam
|
5.0 | 1,927,158 | — | ||||||||||||
|
Poland:
|
|||||||||||||||
|
Central
|
5.7 | 1,537,463 | — | ||||||||||||
|
South
|
19.1 | 2,676,006 | — | ||||||||||||
|
Warsaw
|
66.0 | 5,396,144 | — | ||||||||||||
|
Spain:
|
|||||||||||||||
|
Madrid
|
33.3 | 11,459,865 | — | ||||||||||||
|
United Kingdom:
|
|||||||||||||||
|
East Midlands
|
42.5 | 13,691,179 | — | ||||||||||||
|
London and Southeast
|
111.9 | 155,116,155 | — | ||||||||||||
|
North
|
57.4 | 9,673,159 | — | ||||||||||||
|
West Midlands(16)
|
150.0 | 88,093,312 | — | ||||||||||||
|
Subtotal Europe
|
715.6 | 333,856,626 | — | ||||||||||||
|
Total Land Held for Development at
December 31, 2003(15)
|
2,705.9 | $ | 511,163,336 | $ | 239,326 | ||||||||||
26
| Rentable | ||||||||||||||||||||||||||
| No. of | Square | Total Expected | ||||||||||||||||||||||||
| Bldgs. | Acreage | Footage | Investment(2) | Cost(11) | Encumbrances(3) | |||||||||||||||||||||
|
Grand Totals at December 31,
2003:
|
||||||||||||||||||||||||||
|
Operating properties(4)(5)(7)
|
1,252 | n/a | 133,141,293 | $ | 4,868,794,475 | n/a | $ | 514,172,994 | ||||||||||||||||||
|
Properties under development(12)(13)
|
27 | n/a | 9,823,032 | 404,581,454 | $ | 678,491,739 | — | |||||||||||||||||||
|
Land held for development(15)
|
n/a | 2,705.9 | n/a | 511,163,336 | n/a | 239,326 | ||||||||||||||||||||
|
Other investments(17)
|
n/a | n/a | n/a | 69,507,754 | n/a | — | ||||||||||||||||||||
|
Totals
|
1,279 | 2,705.9 | 142,964,325 | $ | 5,854,047,019 | $ | 678,491,739 | $ | 514,412,320 | |||||||||||||||||
| n/a | Not Applicable |
| (1) | The percentage occupancy presented is the physical occupancy at December 31, 2003. Operating properties at December 31, 2003 include recently completed development properties that may be in the initial lease-up phase, including properties aggregating 3.3 million square feet that were completed in 2003. The inclusion of properties in the initial lease-up phase can reduce the overall occupancy percentage. |
| (2) | Investment represents ProLogis’ carrying value of the properties, before depreciation, at December 31, 2003. |
| (3) | Certain properties are pledged as security under ProLogis’ secured debt and assessment bonds at December 31, 2003. For purposes of this table, the total principal balance of a debt issuance that is secured by a pool of properties is allocated among the properties in the pool based on each property’s investment balance. See Schedule III — Real Estate and Accumulated Depreciation to ProLogis’ Consolidated Financial Statements in Item 8 for additional identification of the properties pledged. |
| (4) | All operating properties are included in the property operations segment. See “Item 1. Business — ProLogis’ Operating Segments — Property Operations.” |
| (5) | Includes 88 properties aggregating 14.0 million square feet at total investment of $448.0 million that were developed in the CDFS business segment that are pending contribution to a property fund or sale to a third party or that were acquired in the CDFS business segment that are pending contribution to a property fund. See “Item 1. Business — ProLogis’ Operating Segments — CDFS Business.” |
| (6) | Includes one property in each of the Akron, Ohio and Brownsville, Texas markets, neither of which are considered to be target markets of ProLogis. |
| (7) | Includes 31 properties aggregating 6.4 million square feet at a total investment of $480.3 million that were developed in the CDFS business segment that are pending contribution to a property fund or sale to a third party. See “Item 1. Business — ProLogis’ Operating Segments — CDFS Business.” |
| (8) | Includes a 0.7 million square foot property at an investment of $21.8 million that was previously presented under the equity method in the temperature-controlled distribution segment. See Notes 2, 4 and 10 to ProLogis’ Consolidated Financial Statements in Item 8. |
| (9) | Includes a 0.1 million square foot property at an investment of $1.9 million that was previously presented under the equity method in the temperature-controlled distribution segment. See Notes 2, 4 and 10 to ProLogis’ Consolidated Financial Statements in Item 8. |
| (10) | Includes a 0.2 million square foot property at an investment of $13.1 million that was previously presented under the equity method in the temperature-controlled distribution segment. See Notes 2, 4 and 10 to ProLogis’ Consolidated Financial statements in Item 8. |
27
| (11) | Represents the total expected cost at completion for properties under development, including the cost of land, fees, permits, payments to contractors, architectural and engineering fees and interest and property taxes to be capitalized during construction, rather than actual costs incurred to date. |
| (12) | All of the properties under development are included in the CDFS business segment. See “Item 1. Business — ProLogis’ Operating Segments — CDFS Business.” |
| (13) | Includes ten properties aggregating 3.2 million square feet that are in the design and permitting stage. |
| (14) | Includes one property in Birmingham, Alabama that ProLogis was developing under a pre-sale agreement with a customer. Birmingham is not considered to be a target market of ProLogis. |
| (15) | All of the land held for future development is included in the CDFS business segment. The land owned can be used for the development of approximately 48.2 million square feet of distribution properties. See “Item 1. Business — ProLogis’ Operating Segments — CDFS Business.” Does not include 1,388 acres of land controlled directly by ProLogis under option, letter of intent or contingent contract with the capacity for the development of approximately 20.7 million square feet of distribution properties. Does not include 455 acres of land owned or controlled by unconsolidated investees of ProLogis with the capacity for the development of approximately 7.9 million square feet of distribution properties. See “— Unconsolidated Investees — CDFS Business.” |
| (16) | Includes 18 acres of land at an investment of $0.2 million that were previously presented under the equity method in the temperature-controlled distribution segment. See Notes 2, 4 and 10 to ProLogis’ Consolidated Financial Statements in Item 8. |
| (17) | Other investments include: (i) earnest money deposits associated with potential acquisitions; (ii) costs incurred during the pre-acquisition due diligence process; and (iii) costs incurred during the pre-construction phase related to future development projects. |
Real Estate Partnerships
At December 31, 2003, ProLogis held a majority ownership interest in and controlled five real estate partnerships (collectively, the “Partnerships”). For financial reporting purposes, the assets, liabilities, results of operations and cash flows of each of the Partnerships are included in ProLogis’ Consolidated Financial Statements and in the preceding real estate tables. The interests of the limited partners are reflected as minority interest in ProLogis’ Consolidated Balance Sheet.
Generally, pursuant to partnership agreements, ProLogis or a wholly owned subsidiary of ProLogis is the sole controlling general partner of each of the Partnerships with all management powers over the business and affairs of the Partnership. The limited partners of each Partnership generally do not have the authority to transact business for, or participate in the management decisions of, the Partnerships. The general partner in each of the Partnerships may not, without the written consent of all of the limited partners: (i) take any action that would prevent the Partnership from conducting its business; (ii) possess the property of the Partnership; (iii) admit an additional partner; or (iv) subject a limited partner to the liability of a general partner. In each Partnership, ProLogis or a wholly owned subsidiary may not voluntarily withdraw from the Partnership or transfer or assign its interests in the Partnership without the consent of all of the limited partners. The limited partners may freely transfer their partnership units to their affiliates, provided that the transfer does not cause a termination of the Partnership under the Code and does not cause ProLogis to cease to comply with the REIT requirements of the Code. The limited partners in each of the Partnerships are entitled to redeem their partnership units for Common Shares. Additionally, the limited partners are entitled to receive preferential cumulative quarterly distributions per outstanding unit equal to the quarterly distributions paid on Common Shares.
See Note 6 to ProLogis’ Consolidated Financial Statements in Item 8.
28
The Partnerships are as follows at December 31, 2003:
| Real Estate | ||||||||||||||||||||
| Formation | Number of | Rentable | Assets | ProLogis’ | ||||||||||||||||
| Date | Properties | Square Footage | (in millions) | Ownership | ||||||||||||||||
|
ProLogis Limited Partnership-I(1)
|
1993 | 74 | 3,904,336 | $ | 217.9 | (2)(3) | 68.65% | |||||||||||||
|
ProLogis Limited Partnership-II
|
1994 | 28 | 1,925,902 | 57.2 | (4) | 99.99% | ||||||||||||||
|
ProLogis Limited Partnership-III(5)
|
1994 | 17 | 1,004,120 | 36.3 | (6) | 95.25% | ||||||||||||||
|
ProLogis Limited Partnership-IV(5)(7)
|
1994 | 46 | 2,801,617 | 94.9 | (8) | 98.87% | ||||||||||||||
|
Meridian Realty Partners Limited Partnership
|
(9 | ) | 1 | 249,283 | 11.1 | (10) | 87.00% | |||||||||||||
| 166 | 9,885,258 | $ | 417.4 | |||||||||||||||||
| (1) | Irving F. Lyons, III, ProLogis’ Vice Chairman and Chief Investment Officer, had an effective ownership in ProLogis Limited Partnership-I of 1.8% at December 31, 2003. | |
| (2) | These properties cannot be sold, prior to the occurrence of certain events, without the consent of the limited partners, other than in tax-deferred exchanges. The Partnership Agreement provides that a minimum level of debt must be maintained within the Partnership, which can include intercompany debt to ProLogis. | |
| (3) | One property is located in the Tampa market; all other properties are located in San Francisco (the East Bay and South Bay markets). | |
| (4) | These properties are located in the Charlotte, Dallas/ Ft. Worth, Denver, El Paso, San Francisco (East Bay), St. Louis and Washington, D.C./ Baltimore markets. | |
| (5) | Jeffrey H. Schwartz, ProLogis’ President of International Operations and President and Chief Operating Officer — Asia, owned 4.75% of ProLogis Limited Partnership-III and 1.0% of ProLogis Limited Partnership-IV at December 31, 2003. | |
| (6) | These properties are located in the Chicago, Orlando, San Antonio and Tampa markets. | |
| (7) | ProLogis Limited Partnership-IV was formed through a cash contribution from a wholly owned subsidiary of ProLogis, ProLogis IV, Inc., and through the contribution of properties from the limited partner. ProLogis Limited Partnership-IV and ProLogis IV, Inc. are legal entities that are separate and distinct from ProLogis, its affiliates and each other, and each has separate assets, liabilities, business functions and operations. At December 31, 2003, the sole asset of ProLogis IV, Inc. was its interest in ProLogis Limited Partnership-IV. At December 31, 2003, ProLogis IV, Inc. had outstanding borrowings from ProLogis of $0.9 million. | |
| (8) | These properties are located in the Cincinnati, Dallas/ Ft. Worth, Ft. Lauderdale/ Miami, I-95 Corridor (New Jersey), Orlando and Tampa markets and one property is located in Akron, Ohio. | |
| (9) | This partnership was formed by another REIT that was merged with and into ProLogis in 1999. |
| (10) | This property is located in the Los Angeles/ Orange County market. |
Unconsolidated Investees
At December 31, 2003, ProLogis’ investments in and advances to unconsolidated investees (entities that ProLogis present under the equity method rather than on a consolidated basis) totaled $677.3 million. ProLogis’ investments in and advances to property funds discussed below under “— Property Operations” totaled $548.2 million at December 31, 2003. ProLogis’ investments in and advances to its entities operating in the CDFS business segment totaled $12.8 million at December 31, 2003. ProLogis’ investment in and advances to a temperature-controlled distribution company was $113.8 million at December 31, 2003. ProLogis’ investments in and advances to other companies that do not own and operate real estate totaled
29
ProLogis’ investments in unconsolidated investees, other than the property funds, were structured to allow ProLogis to comply with the REIT requirements of the Code. Certain of these investees produce income that is not REIT qualifying income (i.e., not rental income or mortgage interest income). To maintain its qualification as a REIT, ProLogis can collectively invest in these companies and other taxable REIT subsidiaries in amounts up to 20% of the fair market value of ProLogis’ total assets.
With respect to the property funds, maintaining an ownership interest of 50% or less is integral to ProLogis’ business strategy. This business strategy allows ProLogis to: (i) realize, for financial reporting purposes, a portion of the profits from its CDFS business activities upon contribution of a property to a property fund; (ii) earn fees from the property funds; (iii) raise private capital to fund its future CDFS business activities; (iv) maintain an ownership interest in its developed properties; and (v) maintain relationships with its customers. See “Item 1. Business — ProLogis — Business Strategy and Global Presence.”
| Property Operations |
At December 31, 2003, ProLogis had ownership interests ranging from 14% to 50% in eight property funds that are presented under the equity method. The property funds primarily own operating properties and ProLogis’ investments in the property funds are included in its property operations segment. The information provided in the table below is for the total entity in which ProLogis has an ownership interest, not ProLogis’ proportionate share of the entity. ProLogis acts as manager of each property fund. See “Item 1. Business — ProLogis’ Operating Segments — Property Operations” and Note 4 to ProLogis’ Consolidated Financial Statements in Item 8.
| Rentable | |||||||||||||||||||
| No. of | Square | Percentage | Entity’s | ||||||||||||||||
| Bldgs. | Footage | Occupancy(1) | Investment(2) | ||||||||||||||||
|
North America:
|
|||||||||||||||||||
|
ProLogis California(3):
|
|||||||||||||||||||
|
Los Angeles/ Orange County, California
|
79 | 13,017,378 | 96.06 | % | $ | 625,579,511 | |||||||||||||
|
ProLogis North American Properties
Fund I(4):
|
|||||||||||||||||||
|
Atlanta, Georgia
|
5 | 1,615,688 | 100.00 | 53,753,293 | |||||||||||||||
|
Chicago, Illinois
|
1 | 249,576 | 100.00 | 14,795,641 | |||||||||||||||
|
Cincinnati, Ohio
|
2 | 297,720 | 100.00 | 15,147,126 | |||||||||||||||
|
Columbus, Ohio
|
2 | 888,691 | 100.00 | 30,217,915 | |||||||||||||||
|
Dallas/ Ft. Worth, Texas
|
3 | 1,221,934 | 69.90 | 49,443,692 | |||||||||||||||
|
Denver, Colorado
|
2 | 198,892 | 100.00 | 9,188,276 | |||||||||||||||
|
El Paso, Texas
|
1 | 354,159 | 100.00 | 13,613,996 | |||||||||||||||
|
Houston, Texas
|
2 | 238,450 | 92.49 | 10,866,872 | |||||||||||||||
|
I-95 Corridor, New Jersey
|
5 | 1,100,320 | 79.58 | 59,058,348 | |||||||||||||||
|
Indianapolis, Indiana
|
2 | 719,829 | 94.45 | 21,466,716 | |||||||||||||||
|
Louisville, Kentucky
|
3 | 905,800 | 96.69 | 33,501,485 | |||||||||||||||
|
Nashville, Tennessee
|
1 | 412,800 | 74.42 | 14,635,605 | |||||||||||||||
|
Phoenix, Arizona
|
1 | 156,410 | 100.00 | 6,762,008 | |||||||||||||||
|
Salt Lake City, Utah
|
3 | 396,600 | 100.00 | 17,066,819 | |||||||||||||||
|
San Antonio, Texas
|
1 | 244,800 | 100.00 | 9,097,814 | |||||||||||||||
|
San Francisco (East Bay), California
|
2 | 404,400 | 91.69 | 16,963,586 | |||||||||||||||
|
Total ProLogis North American Properties Fund I
|
36 | 9,406,069 | 91.29 | 375,579,192 | |||||||||||||||
30
| Rentable | ||||||||||||||||||
| No. of | Square | Percentage | Entity’s | |||||||||||||||
| Bldgs. | Footage | Occupancy(1) | Investment(2) | |||||||||||||||
|
ProLogis North American Properties Fund
II(5):
|
||||||||||||||||||
|
Austin, Texas
|
4 | 324,800 | 100.00 | 17,831,658 | ||||||||||||||
|
Charlotte, North Carolina
|
2 | 178,000 | 100.00 | 7,817,285 | ||||||||||||||
|
Chicago, Illinois
|
4 | 510,725 | 84.52 | 37,924,299 | ||||||||||||||
|
Dallas/ Ft. Worth, Texas
|
4 | 669,416 | 79.38 | 25,586,499 | ||||||||||||||
|
Denver, Colorado
|
1 | 104,400 | 100.00 | 5,435,610 | ||||||||||||||
|
El Paso, Texas
|
1 | 239,131 | 100.00 | 10,318,866 | ||||||||||||||
|
Ft. Lauderdale/ Miami, Florida
|
3 | 383,650 | 80.82 | 23,640,018 | ||||||||||||||
|
I-81 Corridor, Pennsylvania
|
1 | 528,670 | 100.00 | 25,427,547 | ||||||||||||||
|
I-95 Corridor, New Jersey
|
1 | 501,400 | 69.32 | 26,331,416 | ||||||||||||||
|
Reno, Nevada
|
1 | 169,625 | 100.00 | 7,178,416 | ||||||||||||||
|
San Antonio, Texas
|
1 | 160,000 | 100.00 | 6,742,151 | ||||||||||||||
|
San Francisco (East Bay), California
|
1 | 89,626 | 100.00 | 4,368,792 | ||||||||||||||
|
Washington D.C./ Baltimore, Maryland
|
3 | 617,225 | 100.00 | 35,505,042 | ||||||||||||||
|
Total ProLogis North American Properties Fund II
|
27 | 4,476,668 | 90.07 | 234,107,599 | ||||||||||||||
|
ProLogis North American Properties Fund
III(5):
|
||||||||||||||||||
|
Atlanta, Georgia
|
2 | 151,600 | 64.38 | 6,820,478 | ||||||||||||||
|
Austin, Texas
|
6 | 282,100 | 93.09 | 15,700,047 | ||||||||||||||
|
Charlotte, North Carolina
|
1 | 136,000 | 74.19 | 5,390,598 | ||||||||||||||
|
Cincinnati, Ohio
|
5 | 1,044,390 | 93.84 | 45,600,579 | ||||||||||||||
|
Columbus, Ohio
|
1 | 289,280 | 100.00 | 8,555,586 | ||||||||||||||
|
Denver, Colorado
|
1 | 104,400 | 100.00 | 5,351,006 | ||||||||||||||
|
Houston, Texas
|
1 | 140,000 | 100.00 | 5,489,189 | ||||||||||||||
|
1-95 Corridor, New Jersey
|
1 | 204,000 | 100.00 | 10,565,600 | ||||||||||||||
|
Las Vegas, Nevada
|
1 | 235,520 | 100.00 | 9,870,314 | ||||||||||||||
|
Orlando, Florida
|
4 | 361,866 | 92.48 | 18,241,183 | ||||||||||||||
|
Portland, Oregon
|
2 | 200,600 | 100.00 | 10,756,196 | ||||||||||||||
|
San Francisco (East Bay), California
|
1 | 351,788 | 100.00 | 15,388,416 | ||||||||||||||
|
Seattle, Washington
|
1 | 117,620 | 100.00 | 5,836,098 | ||||||||||||||
|
St. Louis, Missouri
|
2 | 370,000 | 100.00 | 14,967,666 | ||||||||||||||
|
Washington D.C./ Baltimore, Maryland
|
5 | 391,325 | 100.00 | 29,686,364 | ||||||||||||||
|
Total ProLogis North American Properties Fund III
|
34 | 4,380,489 | 95.43 | 208,219,320 | ||||||||||||||
|
ProLogis North American Properties Fund
IV(5):
|
||||||||||||||||||
|
Atlanta, Georgia
|
3 | 252,800 | 74.21 | 13,259,252 | ||||||||||||||
|
Columbus, Ohio
|
1 | 1,014,592 | 100.00 | 27,508,871 | ||||||||||||||
|
Dallas/ Ft. Worth, Texas
|
1 | 180,440 | 100.00 | 10,788,821 | ||||||||||||||
|
Denver, Colorado
|
2 | 357,400 | 100.00 | 14,998,296 | ||||||||||||||
|
El Paso, Texas
|
1 | 153,034 | 100.00 | 5,590,981 | ||||||||||||||
|
Ft. Lauderdale/ Miami, Florida
|
1 | 421,101 | 100.00 | 16,159,279 | ||||||||||||||
|
I-95 Corridor, New Jersey
|
1 | 181,370 | 100.00 | 8,965,440 | ||||||||||||||
|
Phoenix, Arizona
|
1 | 273,586 | 100.00 | 9,627,468 | ||||||||||||||
|
Portland, Oregon
|
4 | 426,780 | 82.38 | 24,409,008 | ||||||||||||||
|
San Antonio, Texas
|
2 | 213,800 | 100.00 | 10,038,638 | ||||||||||||||
|
Total ProLogis North American Properties Fund IV
|
17 | 3,474,903 | 95.96 | 141,346,054 | ||||||||||||||
31
| Rentable | ||||||||||||||||||||
| No. of | Square | Percentage | Entity’s | |||||||||||||||||
| Bldgs. | Footage | Occupancy(1) | Investment(2) | |||||||||||||||||
|
ProLogis North American Properties Fund
V(6):
|
||||||||||||||||||||
|
United States:
|
||||||||||||||||||||
|
Atlanta, Georgia
|
13 | 1,859,913 | 98.72 | 55,864,185 | ||||||||||||||||
|
Charlotte, North Carolina
|
1 | 246,400 | 100.00 | 9,173,069 | ||||||||||||||||
|
Chicago, Illinois
|
1 | 124,519 | 100.00 | 12,031,686 | ||||||||||||||||
|
Cincinnati, Ohio
|
2 | 544,800 | 100.00 | 19,110,008 | ||||||||||||||||
|
Columbus, Ohio
|
2 | 402,439 | 96.70 | 13,636,701 | ||||||||||||||||
|
Dallas/ Fort Worth, Texas
|
9 | 2,080,046 | 100.00 | 75,028,365 | ||||||||||||||||
|
Denver, Colorado
|
1 | 52,915 | 100.00 | 1,612,869 | ||||||||||||||||
|
El Paso, Texas
|
5 | 415,462 | 100.00 | 16,335,568 | ||||||||||||||||
|
Ft. Lauderdale/ Miami, Florida
|
3 | 354,151 | 92.84 | 21,761,012 | ||||||||||||||||
|
Houston, Texas
|
3 | 688,024 | 100.00 | 22,113,528 | ||||||||||||||||
|
I-81 Corridor, Pennsylvania
|
1 | 1,059,645 | 100.00 | 49,832,017 | ||||||||||||||||
|
I-95 Corridor, New Jersey
|
3 | 1,012,972 | 100.00 | 52,904,840 | ||||||||||||||||
|
Los Angeles/ Orange County, California
|
2 | 1,726,776 | 100.00 | 91,501,100 | ||||||||||||||||
|
Louisville, Kentucky
|
1 | 350,000 | 85.71 | 14,517,723 | ||||||||||||||||
|
Memphis, Tennessee
|
4 | 1,549,250 | 100.00 | 40,142,386 | ||||||||||||||||
|
Nashville, Tennessee
|
2 | 516,240 | 100.00 | 17,145,169 | ||||||||||||||||
|
Orlando, Florida
|
1 | 124,800 | 100.00 | 4,893,697 | ||||||||||||||||
|
Portland, Oregon
|
1 | 127,420 | 100.00 | 6,663,109 | ||||||||||||||||
|
Reno, Nevada
|
2 | 820,006 | 100.00 | 35,113,228 | ||||||||||||||||
|
San Antonio, Texas
|
8 | 1,105,420 | 99.04 | 44,724,932 | ||||||||||||||||
|
San Francisco (East Bay), California
|
1 | 401,536 | 100.00 | 15,971,017 | ||||||||||||||||
|
St. Louis, Missouri
|
1 | 1,262,648 | 100.00 | 44,558,836 | ||||||||||||||||
|
Tampa, Florida
|
2 | 172,000 | 100.00 | 10,650,428 | ||||||||||||||||
|
Washington D.C./ Baltimore, Maryland
|
6 | 1,389,092 | 98.58 | 65,050,888 | ||||||||||||||||
|
Mexico:
|
||||||||||||||||||||
|
Monterrey
|
5 | 684,940 | 100.00 | 36,718,391 | ||||||||||||||||
|
Reynosa
|
5 | 836,506 | 84.94 | 44,086,989 | ||||||||||||||||
|
Tijuana
|
5 | 829,090 | 100.00 | 38,519,158 | ||||||||||||||||
|
Total ProLogis North American Properties Fund V
|
90 | 20,737,010 | 98.70 | 859,660,899 | ||||||||||||||||
|
Subtotal North America
|
283 | 55,492,517 | 95.70 | 2,444,492,575 | ||||||||||||||||
|
Europe:
|
||||||||||||||||||||
|
ProLogis European Properties
Fund(7):
|
||||||||||||||||||||
|
Belgium
|
2 | 468,535 | 100.00 | 23,973,711 | ||||||||||||||||
|
Czech Republic:
|
||||||||||||||||||||
|
Prague
|
7 | 1,340,245 | 100.00 | 96,550,775 | ||||||||||||||||
|
France:
|
||||||||||||||||||||
|
Central
|
67 | 11,849,520 | 91.33 | 782,971,071 | ||||||||||||||||
|
East
|
2 | 613,548 | 100.00 | 31,951,841 | ||||||||||||||||
|
North
|
8 | 1,607,657 | 89.01 | 80,659,926 | ||||||||||||||||
|
South
|
15 | 3,676,618 | 88.57 | 189,223,814 | ||||||||||||||||
|
Germany:
|
||||||||||||||||||||
|
Rhine/ Main
|
2 | 240,188 | 100.00 | 21,197,242 | ||||||||||||||||
|
Rhine/ Ruhr
|
4 | 748,560 | 100.00 | 65,716,661 | ||||||||||||||||
|
South
|
2 | 281,963 | 100.00 | 26,675,549 | ||||||||||||||||
|
Hungary:
|
||||||||||||||||||||
|
Budapest
|
1 | 216,044 | 75.16 | 13,036,033 | ||||||||||||||||
|
Italy:
|
||||||||||||||||||||
|
Milan
|
13 | 3,949,224 | 99.66 | 222,301,267 | ||||||||||||||||
32
| Rentable | |||||||||||||||||||
| No. of | Square | Percentage | Entity’s | ||||||||||||||||
| Bldgs. | Footage | Occupancy(1) | Investment(2) | ||||||||||||||||
|
Netherlands:
|
|||||||||||||||||||
|
Amsterdam
|
4 | 633,289 | 100.00 | 64,121,931 | |||||||||||||||
|
Rotterdam
|
9 | 1,785,424 | 99.16 | 113,982,445 | |||||||||||||||
|
South
|
5 | 1,558,789 | 100.00 | 98,913,448 | |||||||||||||||
|
Poland:
|
|||||||||||||||||||
|
Central
|
1 | 228,348 | 100.00 | 14,219,261 | |||||||||||||||
|
South
|
1 | 366,880 | 100.00 | 23,381,634 | |||||||||||||||
|
Warsaw
|
10 | 1,882,783 | 89.38 | 141,339,173 | |||||||||||||||
|
West
|
2 | 271,415 | 100.00 | 15,933,066 | |||||||||||||||
|
Spain:
|
|||||||||||||||||||
|
Barcelona
|
7 | 1,806,865 | 99.53 | 147,593,822 | |||||||||||||||
|
Madrid
|
1 | 124,755 | 100.00 | 9,863,823 | |||||||||||||||
|
Sweden:
|
|||||||||||||||||||
|
Stockholm
|
2 | 710,839 | 100.00 | 42,680,272 | |||||||||||||||
|
United Kingdom:
|
|||||||||||||||||||
|
East Midlands
|
13 | 2,903,036 | 97.23 | 310,970,477 | |||||||||||||||
|
London and Southeast
|
7 | 1,045,938 | 82.05 | 178,877,779 | |||||||||||||||
|
North
|
2 | 248,723 | 100.00 | 24,456,458 | |||||||||||||||
|
West Midlands
|
10 | 1,548,799 | 100.00 | 189,389,693 | |||||||||||||||
|
Total ProLogis European Properties Fund
|
197 | 40,107,985 | 94.56 | 2,929,981,172 | |||||||||||||||
|
Asia:
|
|||||||||||||||||||
|
ProLogis Japan Properties Fund(5):
|
|||||||||||||||||||
|
Tokyo, Japan
|
5 | 1,618,514 | 98.37 | 350,166,432 | |||||||||||||||
|
Total Unconsolidated Investees
|
485 | 97,219,016 | 95.27 | % | $ | 5,724,640,179 | |||||||||||||
| (1) | The percentage occupancy presented is the physical occupancy at December 31, 2003. |
| (2) | Investment represents 100% of the carrying value of the properties, before depreciation, of each entity at December 31, 2003. |
| (3) | ProLogis had a 50% ownership interest in ProLogis California at December 31, 2003. |
| (4) | ProLogis had a 41.3% ownership interest in ProLogis North American Properties Fund I at December 31, 2003. |
| (5) | ProLogis had a 20% ownership interest in each of ProLogis North American Properties Fund II, ProLogis North American Properties Fund III, ProLogis North American Properties Fund IV and ProLogis Japan Properties Fund at December 31, 2003. |
| (6) | ProLogis had an effective ownership interest of 14% in ProLogis North American Properties Fund V at December 31, 2003. |
| (7) | ProLogis had a 21.9% ownership interest in ProLogis European Properties Fund at December 31, 2003. |
| CDFS Business |
In the United Kingdom, a wholly owned subsidiary of ProLogis, has active investments in three joint ventures (the “CDFS Joint Ventures”) that primarily own and develop distribution properties and own land for the future development of distribution properties. ProLogis’ ownership in each of the CDFS Joint Ventures is 50%. Collectively, the CDFS Joint Ventures owned 57 acres of land with the capacity for the development of approximately 0.3 million square feet of distribution properties at December 31, 2003. Additionally, at December 31, 2003, the CDFS Joint Ventures collectively controlled 398 acres of land (through contracts, options or letters of intent) with the capacity for the development of approximately 7.6 million square feet of distribution properties. See “Item 1. Business — ProLogis’ Operating Segments — CDFS Business.”
33
| ITEM 3. | Legal Proceedings |
From time to time, ProLogis and its unconsolidated investees are parties to a variety of legal proceedings arising in the ordinary course of their businesses. ProLogis believes that, with respect to any such matters that it is currently a party to, the ultimate disposition of any such matters will not result in a material adverse effect on ProLogis’ business, financial position or results of operations.
| ITEM 4. | Submission of Matters to a Vote of Security Holders |
Not applicable.
34
PART II
| ITEM 5. | Market Price of and Dividends on the Registrant’s Common Equity and Related Stockholder Matters |
Market Information and Holders
ProLogis’ Common Shares are listed on the NYSE under the symbol “PLD”. The following table sets forth the high and low sale prices of the Common Shares, as reported in the NYSE Composite Tape, and distributions per Common Share, for the periods indicated.
| High Sale | Low Sale | ||||||||||||
| Price | Price | Per Common Share Distribution | |||||||||||
|
2002:
|
|||||||||||||
|
First Quarter
|
$ | 24.15 | $ | 20.96 | $ | 0 | .355(1) | ||||||
|
Second Quarter
|
26.00 | 21.90 | 0 | .355 | |||||||||
|
Third Quarter
|
25.95 | 21.70 | 0 | .355 | |||||||||
|
Fourth Quarter
|
25.27 | 22.85 | 0 | .355 | |||||||||
|
2003:
|
|||||||||||||
|
First Quarter
|
26.60 | 23.63 | 0 | .36 | |||||||||
|
Second Quarter
|
28.60 | 25.60 | 0 | .36 | |||||||||
|
Third Quarter
|
30.39 | 26.97 | 0 | .36 | |||||||||
|
Fourth Quarter
|
32.62 | 28.34 | 0 | .36 | |||||||||
|
2004:
|
|||||||||||||
|
First Quarter (through March 5)
|
$ | 35.17 | $ | 30.80 | $ | 0 | .365 | ||||||
| (1) | Declared in the fourth quarter of 2001 and paid in the first quarter of 2002. In all other quarters, the distribution is declared and paid in the same quarter. |
On March 5, 2004, ProLogis had approximately 181,071,178 Common Shares outstanding, which were held of record by approximately 9,600 shareholders.
Distributions and Dividends
In order to comply with the REIT requirements of the Code, ProLogis is required to make Common Share distributions (other than capital gain distributions) to its shareholders in amounts at least equal to (i) the sum of (a) 90% of its “REIT taxable income” computed without regard to the dividends paid deduction and its net capital gains and (b) 90% of the net income (after tax), if any, from foreclosure property, minus (ii) the sum of certain items of non-cash income. ProLogis’ Common Share distribution policy is to distribute a percentage of its cash flow that ensures that ProLogis will meet the distribution requirements of the Code and that allows ProLogis to maximize the cash retained to meet other cash needs, such as capital improvements and other investment activities.
ProLogis announces the following year’s projected annual Common Share distribution level after the Board performs its annual budget review and approves a Common Share distribution level, generally in December of each year. In December 2003, the Board announced a projected increase in the annual distribution level for 2004 from $1.44 to $1.46 per Common Share. The payment of Common Share distributions is subject to the discretion of the Board, is dependent on ProLogis’ financial condition and operating results and may be adjusted at the discretion of the Board during the year. On January 29, 2004, the Board declared a distribution of $0.365 per Common Share for the first quarter of 2004. This distribution was paid on February 27, 2004 to holders of Common Shares on February 13, 2004.
Common Share distributions to shareholders are characterized for federal income tax purposes, as ordinary income, capital gains, non-taxable return of capital or a combination of the three. Common Share
35
| Years Ended December 31, | ||||||||||||||
| 2003 | 2002 | 2001 | ||||||||||||
|
Per Common Share:
|
||||||||||||||
|
Ordinary income
|
$ | 1.23 | $ | 0.95 | $ | 1.09 | ||||||||
|
Capital gains
|
0.05 | 0.06 | 0.19 | |||||||||||
|
Return of capital
|
0.16 | 0.41 | 0.10 | |||||||||||
|
Total
|
$ | 1.44 | $ | 1.42 | $ | 1.38 | ||||||||
In addition to Common Shares, ProLogis has issued cumulative redeemable preferred shares of beneficial interest (“Preferred Shares”). At December 31, 2003, ProLogis had four series of Preferred Shares outstanding (“Series C Preferred Shares”, “Series D Preferred Shares”, “Series F Preferred Shares” and “Series G Preferred Shares”). Previously, ProLogis had two other series of Preferred Shares (“Series A Preferred Shares” and “Series E Preferred Shares”) and one series of cumulative convertible redeemable preferred shares of beneficial interest (“Series B Convertible Preferred Shares”) outstanding, all of which have been redeemed. Holders of each series of Preferred Shares outstanding have, subject to certain conditions, limited voting rights, and 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 payment of dividends. After the respective redemption dates, each series of Preferred Shares can be redeemed at ProLogis’ option. The cash redemption price (other than the portion consisting of accrued and unpaid dividends) with respect to Series C Preferred Shares and Series D Preferred Shares is payable solely out of the cumulative sales proceeds of other capital shares of ProLogis, 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 ProLogis’ other series of Preferred Shares. Annual per share dividends paid on each series of Preferred Shares were as follows for the periods indicated (in U.S. dollars):
| Years Ended December 31, | ||||||||||||
| 2003(1) | 2002(2) | 2001(3) | ||||||||||
|
Series A(4)
|
$ | — | $ | — | $ | 0.84 | ||||||
|
Series B(5)
|
— | — | 0.44 | |||||||||
|
Series C
|
4.27 | 4.27 | 4.27 | |||||||||
|
Series D(6)
|
1.98 | 1.98 | 1.98 | |||||||||
|
Series E(7)
|
1.09 | 2.19 | 2.19 | |||||||||
|
Series F(8)
|
0.15 | — | — | |||||||||
|
Series G(9)
|
— | — | — | |||||||||
| (1) | For federal income tax purposes, $4.11 of the Series C dividend, $1.90 of the Series D dividend, $1.05 of the Series E dividend and $0.14 of the Series F dividend are estimated to represent ordinary income to the holders. The remaining portions of each dividend are estimated to represent capital gains. |
| (2) | For federal income tax purposes, $4.04 of the Series C dividend, $1.87 of the Series D dividend and $2.07 of the Series E dividend represent ordinary income to the holders. The remaining portions of each dividend represent capital gains. |
36
| (3) | For federal income tax purposes $0.71 of the Series A dividend, $0.38 of the Series B dividend, $3.63 of the Series C dividend, $1.68 of the Series D dividend and $1.86 of the Series E dividend represent ordinary income to the holders. The remaining portions of each dividend represent capital gains. |
| (4) | The Series A Preferred Shares were redeemed on May 8, 2001. |
| (5) | The Series B Convertible Preferred Shares were redeemed on March 20, 2001. |
| (6) | ProLogis redeemed 5,000,000 of the 10,000,000 outstanding Series D Preferred Shares on December 1, 2003. The Series D Preferred Shares that were redeemed in 2003 earned dividends of $1.82 per share prior to their redemption. All of the remaining Series D Preferred Shares were redeemed on January 12, 2004. |
| (7) | The Series E Preferred Shares were redeemed on July 1, 2003. |
| (8) | The Series F Preferred Shares were issued on November 28, 2003. |
| (9) | The Series G Preferred Shares were issued on December 30, 2003. |
Pursuant to the terms of its Preferred Shares, ProLogis is restricted from declaring or paying any distribution with respect to its 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.
ProLogis’ tax return for the year ended December 31, 2003 has not been filed. The taxability information presented for ProLogis’ distributions and dividends paid in 2003 is based upon the best available data. ProLogis’ tax returns for previous tax years have not been examined by the Internal Revenue Service. Consequently, the taxability of distributions and dividends is subject to change.
ProLogis’ earnings and profits are first allocated to the Preferred Shares, which increases the portion of the Common Share distribution that is characterized as return of capital. The portion of the Common Share distribution that is characterized as return of capital represents the excess of distributions over the earnings and profits, and primarily results because non-cash charges such as depreciation are not considered in determining distribution levels. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations.”
Securities Authorized for Issuance under Equity Compensation Plans
For information regarding securities authorized for issuance under ProLogis’ equity compensation plans see Note 12 to ProLogis’ Consolidated Financial Statements in Item 8. The other information required by this Item 5 is incorporated herein by reference to the description under the caption “Equity Compensation Plan Information” in ProLogis’ definitive proxy statement for its 2004 annual meeting of shareholders (“2004 Proxy Statement”).
Other Shareholder Matters
| Other Issuances of Common Shares |
In 2003, ProLogis issued 104,000 Common Shares, upon redemption of limited partnership units in two of the Partnerships. See “Item 2. Properties — Real Estate Partnerships” and Note 6 to ProLogis’ Consolidated Financial Statements in Item 8. These Common Shares were issued in transactions exempt from registration under Section 4(2) of the Securities Act.
| Common Share Repurchase Program |
Under a Common Share repurchase program, ProLogis may repurchase up to $215.0 million of Common Shares. The Common Shares that have been repurchased to date were purchased through open market or privately negotiated transactions, depending on market prices and other conditions. Future repurchases, if any, are expected to be through similar transactions. Common Share repurchases under this program through December 31, 2003 aggregated 5,571,100 Common Shares at a total cost of $130.9 million. ProLogis has not made any Common Share repurchases in 2004.
37
| Common Share Plans |
ProLogis’ holders of Common Shares may acquire additional Common Shares by automatically reinvesting Common Share distributions under the 1999 Dividend Reinvestment and Share Purchase Plan, which was amended in November 2002, (the “1999 Common Share Plan”). Holders of Common Shares who do not participate in the 1999 Common Share Plan continue to receive Common Share distributions as declared and paid. The amount of Common Share distributions that can be reinvested is limited to those distributions earned on no more than 300,000 Common Shares per quarter. The 1999 Common Share Plan also allows holders of Common Shares that are registered on the share transfer books of ProLogis in the shareholder’s name, as well as 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 Common Share Plan, either through reinvestment of distributions or through optional cash payments, are acquired at a price ranging from 98% to 100% of the market price of such Common Shares, as determined by ProLogis. ProLogis generated net proceeds of $26.3 million from the issuance of 991,000 Common Shares in 2003 under the 1999 Common Share Plan.
Under the terms of the ProLogis Trust Employee Share Purchase Plan (the “Employee Share Plan”), employees of ProLogis and its participating entities may purchase Common Shares, through payroll deductions only, at a discounted price of 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 5,000,000. ProLogis began issuing Common Shares under the Employee Share Plan in January 2002. In 2003, 34,000 Common Shares were issued under the Employee Share Plan, generating net proceeds to ProLogis of $0.7 million.
ITEM 6. Selected Financial Data
The following table sets forth selected financial data relating to the historical financial condition and results of operations of ProLogis for 2003 and the four preceding years. Certain amounts for the years prior to 2003 presented in the table below have been reclassified to conform to the 2003 financial statement presentation. The financial data in the tables is qualified in its entirety by, and should be read in conjunction with, “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and ProLogis’ Consolidated Financial Statements and related notes in Item 8.
ProLogis begins presenting its investments in previously unconsolidated investees on a consolidated basis when such presentation change is required under generally accepted accounting principles in the United States of America (“GAAP”) based on changes in Prologis’ ownership interest. Previously reported financial information is not required to be restated under GAAP when the reporting method is changed to consolidation from the equity method under these circumstances. ProLogis’ consolidated shareholders’ equity and its consolidated net earnings are the same under the two reporting methods. See Note 2 to ProLogis’ Consolidated Financial Statements in Item 8.
38
The amounts in the table below are in thousands of U.S. dollars, except for per share amounts.
| Years Ended December 31, | ||||||||||||||||||||||
| 2003 | 2002 | 2001 | 2000 | 1999 | ||||||||||||||||||
|
Operating Data:
|
||||||||||||||||||||||
|
Rental income(1)
|
$ | 546,064 | $ | 542,202 | $ | 562,527 | $ | 572,706 | $ | 579,733 | ||||||||||||
|
Other real estate income(2)
|
128,875 | 126,773 | 99,890 | 75,573 | 46,756 | |||||||||||||||||
|
Income (loss) from certain unconsolidated
investees(3)
|
59,166 | 97,876 | (16,149 | ) | 75,527 | 22,596 | ||||||||||||||||
|
Total income
|
734,105 | 766,851 | 646,268 | 723,806 | 649,085 | |||||||||||||||||
|
Rental expenses(1)
|
136,840 | 125,316 | 124,513 | 118,883 | 121,408 | |||||||||||||||||
|
General and administrative expenses
|
65,907 | 53,893 | 50,274 | 44,954 | 38,284 | |||||||||||||||||
|
Total expenses
|
375,324 | 336,825 | 322,266 | 321,229 | 318,004 | |||||||||||||||||
|
Operating income
|
358,781 | 430,026 | 324,002 | 402,577 | 331,081 | |||||||||||||||||
|
Income (loss) from other unconsolidated
investees(4)
|
52 | (1,495 | ) | (33,495 | ) | 3,331 | (77 | ) | ||||||||||||||
|
Interest expense
|
155,475 | 152,958 | 163,629 | 172,191 | 170,746 | |||||||||||||||||
|
Earnings before certain net gains and net foreign
currency exchange expenses/losses
|
200,282 | 272,433 | 126,582 | 236,221 | 161,648 | |||||||||||||||||
|
Gains on dispositions of real estate, net
|
1,638 | 6,648 | 10,008 | 1,314 | 38,994 | |||||||||||||||||
|
Gain on partial redemption of investment(5)
|
74,716 | — | — | — | — | |||||||||||||||||
|
Foreign currency exchange expenses/losses, net
|
(10,587 | ) | (2,031 | ) | (3,721 | ) | (17,927 | ) | (16,818 | ) | ||||||||||||
|
Total income tax expense
|
(15,374 | ) | (28,169 | ) | (4,725 | ) | (5,130 | ) | (1,550 | ) | ||||||||||||
|
Cumulative effect of accounting change
|
— | — | — | — | (1,440 | ) | ||||||||||||||||
|
Net earnings
|
250,675 | 248,881 | 128,144 | 214,478 | 180,834 | |||||||||||||||||
|
Less preferred share dividends(6)
|
30,485 | 32,715 | 37,309 | 56,763 | 56,835 | |||||||||||||||||
|
Less excess of redemption values over carrying
values of Preferred Shares redeemed(7)
|
7,823 | — | 4,797 | — | — | |||||||||||||||||
|
Net earnings attributable to Common Shares
|
$ | 212,367 | $ | 216,166 | $ | 86,038 | $ | 157,715 | $ | 123,999 | ||||||||||||
|
Net earnings attributable to Common Shares per
share — Basic
|
$ | 1.18 | $ | 1.22 | $ | 0.50 | $ | 0.96 | $ | 0.81 | ||||||||||||
|
Net earnings attributable to Common Shares per
share — Diluted
|
$ | 1.16 | $ | 1.20 | $ | 0.49 | $ | 0.96 | $ | 0.81 | ||||||||||||
|
Weighted average Common Shares outstanding:
|
||||||||||||||||||||||
|
Basic
|
179,245 | 177,813 | 172,755 | 163,651 | 152,412 | |||||||||||||||||
|
Diluted
|
187,222 | 184,869 | 175,197 | 164,401 | 152,739 | |||||||||||||||||
|
Common Share Distributions:
|
||||||||||||||||||||||
|
Common Share cash distributions paid(8)
|
$ | 258,187 | $ | 252,270 | $ | 237,691 | $ | 219,333 | $ | 208,969 | ||||||||||||
|
Common Share distributions paid per share(9)
|
$ | 1.44 | $ | 1.42 | $ | 1.38 | $ | 1.34 | $ | 1.30 | ||||||||||||
|
Funds From Operations(10):
|
||||||||||||||||||||||
|
Reconciliation of net earnings to funds from
operations as defined by ProLogis:
|
||||||||||||||||||||||
|
Net earnings attributable to Common Shares
|
$ | 212,367 | $ | 216,166 | $ | 86,038 | $ | 157,715 | $ | 123,999 | ||||||||||||
39
| Years Ended December 31, | ||||||||||||||||||||||||
| 2003 | 2002 | 2001 | 2000 | 1999 | ||||||||||||||||||||
|
Add (Deduct) NAREIT defined adjustments:
|
||||||||||||||||||||||||
|
Real estate related depreciation and amortization
|
157,085 | 145,233 | 137,033 | 146,859 | 150,050 | |||||||||||||||||||
|
Gains on contributions and sales of non-CDFS
business segment assets, net
|
(1,638 | ) | (6,648 | ) | (10,008 | ) | (1,314 | ) | (38,994 | ) | ||||||||||||||
|
Funds from operations adjustment to gain on
partial redemption of investment
|
(26,894 | ) | — | — | — | — | ||||||||||||||||||
|
Cumulative effect of accounting change
|
— | — | — | — | 1,440 | |||||||||||||||||||
|
ProLogis’ share of reconciling items of
unconsolidated investees:
|
||||||||||||||||||||||||
|
Real estate related depreciation and amortization
|
44,373 | 41,779 | 63,950 | 57,366 | 49,644 | |||||||||||||||||||
|
Funds from operations adjustment to gain
recognized on disposition of CDFS business segment assets
|
(1,823 | ) | — | — | — | — | ||||||||||||||||||
|
(Gains) losses on contributions and sales of
non-CDFS business segment assets, net
|
(12,322 | ) | (2,248 | ) | 4,417 | (744 | ) | 826 | ||||||||||||||||
|
Cumulative effect of accounting change
|
— | — | — | — | 1,480 | |||||||||||||||||||
|
Total NAREIT defined adjustments
|
158,781 | 178,116 | 195,392 | 202,167 | 164,446 | |||||||||||||||||||
|
Subtotal — NAREIT defined funds from
operations
|
371,148 | 394,282 | 281,430 | 359,882 | 288,445 | |||||||||||||||||||
|
Add (Deduct) ProLogis defined adjustments:
|
||||||||||||||||||||||||
|
Foreign currency exchange (gains) expenses/
losses, net
|
7,764 | (743 | ) | 1,484 | 19,569 | 16,596 | ||||||||||||||||||
|
Deferred income tax expense
|
10,615 | 17,660 | 2,258 | 4,230 | — | |||||||||||||||||||
|
ProLogis’ share of reconciling items of
unconsolidated investees:
|
||||||||||||||||||||||||
|
Foreign currency exchange (gains) expenses/
losses, net
|
11,721 | (4,269 | ) | 8,204 | (2,773 | ) | 14,650 | |||||||||||||||||
|
Deferred income tax (benefit) expense
|
(503 | ) | (13,881 | ) | (12,173 | ) | (4,190 | ) | 510 | |||||||||||||||
|
Total ProLogis defined adjustments
|
29,597 | (1,233 | ) | (227 | ) | 16,836 | 31,756 | |||||||||||||||||
|
Funds from operations attributable to Common
Shares as defined by ProLogis
|
$ | 400,745 | $ | 393,049 | $ | 281,203 | $ | 376,718 | $ | 320,201 | ||||||||||||||
|
Weighted average Common Shares outstanding:
|
||||||||||||||||||||||||
|
Basic
|
179,245 | 177,813 | 172,755 | 163,651 | 152,412 | |||||||||||||||||||
|
Diluted(11)
|
187,222 | 184,869 | 180,284 | 178,166 | 167,421 | |||||||||||||||||||
40
| Years Ended December 31, | ||||||||||||||||||||
| 2003 | 2002 | 2001 | 2000 | 1999 | ||||||||||||||||
|
Cash Flow Data:
|
||||||||||||||||||||
|
Net cash provided by operating activities
|
$ | 326,795 | $ | 377,235 | $ | 343,272 | $ | 321,091 | $ | 271,376 | ||||||||||
|
Net cash provided by (used in) investing
activities
|
(155,479 | ) | (136,145 | ) | 103,952 | (376,945 | ) | (34,350 | ) | |||||||||||
|
Net cash provided by (used in) financing
activities
|
$ | 49,378 | $ | (158,270 | ) | $ | (477,105 | ) | $ | 44,386 | $ | (230,828 | ) | |||||||
| December 31, | |||||||||||||||||||||
| 2003 | 2002 | 2001 | 2000 | 1999 | |||||||||||||||||
|
Financial Position:
|
|||||||||||||||||||||
|
Real estate owned, excluding land held for
development, before depreciation
|
$ | 5,342,884 | $ | 5,008,707 | $ | 4,387,456 | $ | 4,502,087 | $ | 4,811,255 | |||||||||||
|
Land held for development
|
511,163 | 386,820 | 200,737 | 187,405 | 163,696 | ||||||||||||||||
|
Investments in and advances to unconsolidated
investees
|
677,293 | 809,286 | 1,308,856 | 1,453,148 | 940,364 | ||||||||||||||||
|
Total assets
|
6,369,202 | 5,911,380 | 5,557,984 | 5,946,334 | 5,848,040 | ||||||||||||||||
|
Lines of credit and short-term borrowings(12)
|
699,468 | 545,906 | 375,875 | 439,822 | 98,700 | ||||||||||||||||
|
Senior unsecured debt
|
1,776,789 | 1,630,094 | 1,670,359 | 1,699,989 | 1,729,630 | ||||||||||||||||
|
Secured debt and assessment bonds
|
514,412 | 555,978 | 532,106 | 537,925 | 695,586 | ||||||||||||||||
|
Total liabilities
|
3,270,757 | 2,994,571 | 2,838,225 | 2,972,333 | 2,832,232 | ||||||||||||||||
|
Minority interest
|
37,777 | 42,467 | 45,639 | 46,630 | 62,072 | ||||||||||||||||
|
Redeemable preferred shares(6)
|
475,000 | 400,000 | 400,000 | 691,403 | 710,518 | ||||||||||||||||
|
Total shareholders’ equity
|
$ | 3,060,668 | $ | 2,874,342 | $ | 2,674,120 | $ | 2,927,371 | $ | 2,953,736 | |||||||||||
|
Number of Common Shares outstanding
|
180,183 | 178,146 | 175,888 | 165,287 | 161,825 | ||||||||||||||||
| (1) | Beginning in 2003, ProLogis has included as part of rental income the amount of rental expenses that have been recovered from customers under the terms of their lease agreements. Previously, ProLogis reflected the amounts recovered from customers as a reduction to rental expenses. This reclassification has been made for all periods presented. |
| (2) | Other real estate income consists primarily of net gains and losses from the contributions and sales of properties in the CDFS business segment. After July 1, 2002, such amounts include the activity of an unconsolidated investee that, prior to that date, was presented under the equity method. |
| (3) | Income (loss) from certain unconsolidated investees includes these items related to ProLogis’ investments in two temperature-controlled distribution companies presented under the equity method in addition to amounts related to unconsolidated investees that operate in the property operations and CDFS business segments: |
| • | 2003: ProLogis recognized its proportionate share ($38.3 million) of an impairment charge recognized by its European investee. As a result of the dispositions of certain assets, ProLogis recognized its proportionate share ($5.2 million) of the net gains recognized by its European investee. Also, ProLogis recognized its proportionate share ($2.3 million) of a charge representing an adjustment to the amount recognized in 2002 as a result of the disposition of all of the operations and a significant portion of the assets of its United States investee. |
41
| • | 2002: ProLogis recognized its proportionate shares ($42.9 million) of impairment charges recognized by its two investees. As a result of the dispositions of certain operations and assets, ProLogis recognized its proportionate shares ($1.6 million) of net gains recognized by its two investees. | |
| • | 2001: ProLogis recognized its proportionate shares ($88.4 million) of impairment charges recognized by its two investees. Upon dispositions of certain assets, ProLogis recognized its proportionate share ($4.4 million) of the net losses recognized by its European investee. Also, ProLogis recognized its proportionate shares ($5.8 million) of the net losses resulting from the write-off of technology related investments of its two investees. |
| See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — Other Components of Operating Income — Income (Loss) from Certain Unconsolidated Investees.” |
| (4) | Income (loss) from other unconsolidated investees includes ProLogis’ proportionate shares of the write-downs of technology related investments of two of ProLogis’ other unconsolidated investees of $2.1 million in 2002 and $37.0 million in 2001. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — Other Income Items — Income (Loss) from Other Unconsolidated Investees.” |
| (5) | In 2003, ProLogis recognized a $74.7 million gain on the partial redemption of its investment in ProLogis European Properties Fund, including a foreign currency exchange gain of $47.9 million resulting from the repatriation of the cash redemption proceeds to the United States. See “Item 7. Management’s Discussion and Analysis of Financial Conditions and Results of Operations — Results of Operations — Other Items — Gain on Partial Redemption of Investment.” |
| (6) | In 2003, ProLogis redeemed $175.0 million of Preferred Shares ($50.0 million on July 1, 2003 and $125.0 million on December 1, 2003). In 2001, ProLogis redeemed $139.6 million of Preferred Shares ($4.6 million on March 20, 2001 and $135.0 million on May 8, 2001) and $151.8 million of Preferred Shares were converted into Common Shares during the period from January 1, 2001 to March 20, 2001. In 2003, ProLogis issued $250.0 million of Preferred Shares ($125.0 million each on November 28, 2003 and December 30, 2003). |
| (7) | The recognition of these charges is discussed in Note 2 to ProLogis’ Consolidated Financial Statements in Item 8 and in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Other Items — Excess of Redemption Values over Carrying Values of Preferred Shares Redeemed.” |
| (8) | For 1999, includes dividends of $11.1 million that were paid to shareholders of another REIT that was merged with and into ProLogis in 1999. |
| (9) | For 1999, does not include dividends paid to shareholders of another REIT that was merged with and into ProLogis in 1999. |
| (10) | Funds from operations is a financial measure that is commonly used in the real estate industry. Although the National Association of Real Estate Investment Trusts (“NAREIT”) has published a definition of funds from operations, modifications to the NAREIT calculation of funds from operations are common among REITs, as companies seek to provide performance measures that meaningfully reflect their business. Funds from operations, as defined by ProLogis, is presented as a supplemental performance measure. Funds from operations is not used by ProLogis as, nor should it be considered to be, an alternative to net earnings computed under GAAP as an indicator of ProLogis’ operating performance or as an alternative to cash from operating activities computed under GAAP as an indicator of ProLogis’ ability to fund its cash needs. |
| Funds from operations is not meant to represent a comprehensive system of financial reporting and does not present, nor does ProLogis intend it to present, a complete picture of its financial condition and operating performance. ProLogis believes that net earnings computed under GAAP remains the primary measure of performance and that funds from operations is only meaningful when it is used in conjunction with net earnings. Further, ProLogis believes that its consolidated financial statements, prepared in accordance with GAAP, provide the most meaningful picture of its financial condition and |
42
| its operating performance. The funds from operations measure presented by ProLogis will not necessarily be comparable to similarly titled measures of other REITs. | |
| At the same time that NAREIT created and defined its funds from operations concept 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.” ProLogis believes that financial analysts, potential investors and shareholders who review its operating results are best served by a defined funds from operations measure that includes other adjustments to net earnings computed under GAAP in addition to those included in the NAREIT defined measure of funds from operations. ProLogis’ funds from operations measure is discussed in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Funds from Operations.” |
| (11) | In calculating the weighted average Common Shares for funds from operations purposes, weighted average Series B Convertible Preferred Shares and weighted average limited partnership units are considered potentially dilutive instruments. The weighted average Series B Convertible Preferred Shares applicable to this calculation are 1,544,000, 8,417,000 and 9,221,000 for 2001, 2000 and 1999, respectively (the Series B Convertible Preferred Shares were redeemed in 2001). The amount of Series B Convertible Preferred Share dividends are $81,000, $11,358,000 and $12,523,000 for 2001, 2000 and 1999, respectively (the Series B Convertible Preferred Shares were redeemed in 2001). The weighted average limited partnership units applicable to this calculation are 4,773,000, 4,938,000, 5,087,000, 5,348,000 and 5,461,000 for 2003, 2002, 2001, 2000 and 1999, respectively. The minority interest share in earnings associated with these limited partnership units are $4,959,000, $5,508,000, $5,968,000, $5,586,000 and $4,979,000 for 2003, 2002, 2001, 2000 and 1999, respectively. |
| (12) | At March 5, 2004, ProLogis had $769.8 million of total borrowings outstanding under its revolving lines of credit resulting in $728.2 million of borrowing capacity available (total capacity of $1.52 billion reduced by $23.7 million of letters of credit outstanding with lending banks at March 5, 2004). |
| ITEM 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion should be read in conjunction with ProLogis’ Consolidated Financial Statements and the related notes included in Item 8 of this report.
Some statements contained in this discussion are not historical facts but are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Because these forward-looking statements are based on current expectations, estimates and projections about the industry and markets in which ProLogis operates, management’s beliefs and assumptions made by management, they involve uncertainties that could significantly impact ProLogis’ financial results. Words such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “seeks”, “estimates”, variations of such words and similar expressions are intended to identify such forward-looking statements. Forward-looking statements include discussions of strategy, plans or intentions of management. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. The discussions concerning ProLogis’ expectations with respect to economic conditions in the geographic areas where it has operations and its ability to raise private capital and generate income in the CDFS business segment (including the discussions with respect to ProLogis’ expectations as to the availability of capital in its existing property funds such that these property funds will be able to acquire ProLogis’ stabilized developed properties that are expected to be available for contribution in the future) contain forward-looking statements. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. Factors that may affect outcomes and results include: (i) changes in general economic conditions in ProLogis’ markets that could adversely affect demand for ProLogis’ properties and the creditworthiness of ProLogis’ customers; (ii) changes in financial markets, interest rates and foreign currency exchange rates that could adversely affect ProLogis’ cost of capital, its ability to meet its financial needs and obligations and its results of operations; (iii) increased or unanticipated competition for distribution properties in ProLogis’ markets; (iv) the availability of private capital to ProLogis; (v) geopolitical concerns and uncertainties; and (vi) those additional factors discussed under “— Risk Factors.”
43
Overview
A summary of the discussions that follow in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” is presented below.
| Results of Operations: |
| • | ProLogis’ net earnings attributable to Common Shares were $212.4 million in 2003 and $216.2 million in 2002. | |
| • | Operating income of ProLogis’ property operations segment increased by $3.1 million in 2003 over 2002; stabilized leased percentage at December 31, 2003 was approximately 1.0% lower than at December 31, 2002; rental rates on new leases of previously leased space decreased 4.8% in 2003; and same store net operating income, as defined, was slightly higher than in 2002, 0.09%. | |
| • | ProLogis’ income from property funds increased in 2003, including an increase in fees earned from property funds of $9.7 million. No new property funds were formed in 2003. | |
| • | Operating income of ProLogis’ CDFS business segment was $27.5 million less in 2003 than in 2002; dispositions of properties in this segment in Europe were down from the 2002 level but dispositions in Japan increased in 2003; reduced transaction volume in Europe was primarily the result of slower leasing activity in the CDFS business segment’s properties. | |
| • | ProLogis recognized a loss of $13.0 million under the equity method from its investments in temperature-controlled distribution companies as compared to income of $7.1 million from these investments in 2002. ProLogis’ remaining temperature-controlled distribution investee continued to dispose of its operating assets in 2003. This investee’s remaining operating assets at December 31, 2003 were primarily in France and were held for sale. | |
| • | ProLogis recognized a gain of $74.7 million on the partial redemption of its investment in ProLogis European Properties Fund, including a foreign currency exchange gain of $47.9 million resulting from the repatriation of the cash redemption proceeds to the United States. |
| Liquidity and Capital Resources: |
| • | Generated net cash flow from operating activities in 2003 of $326.8 million. | |
| • | Used net cash in its investing activities of $155.5 million in 2003 (used $1.31 billion for real estate investments and generated $835.2 million from contributions and sales of properties and land parcels). | |
| • | Repatriated $210.3 million to the United States from the partial redemption of its investment in ProLogis European Properties Fund. | |
| • | Issued $331.0 million of long-term debt and made principal payments on long-term debt of $224.8 million. | |
| • | Issued two new series of Preferred Shares generating net proceeds of $241.8 million and redeemed $175.0 million of Preferred Shares. | |
| • | Distributed $1.44 per Common Share in 2003 for aggregate distributions paid of $258.2 million in 2003; set the distribution level for 2004 at $1.46 per Common Share; ProLogis has increased its Common Share distribution level every year since its Common Shares became publicly traded in 1994. | |
| • | Increased the total borrowing capacity under its revolving lines of credit to over $1.5 billion. |
Critical Accounting Policies
A critical accounting policy is one that is both important to the portrayal of an entity’s financial condition and results of operations and requires judgment on the part of management. Generally, the judgment requires management to make estimates about the effect of matters that are inherently uncertain. Of the accounting
44
| Consolidation |
ProLogis’ consolidated financial statements include the accounts of ProLogis, its wholly owned subsidiaries and its majority-owned and controlled subsidiaries and partnerships. All entities in which ProLogis owns a majority voting interest are consolidated. Investments in entities in which ProLogis does not own a majority voting interest but over which ProLogis does have the ability to exercise significant influence over operating and financial policies are presented under the equity method. Investments in entities in which ProLogis does not own a majority voting interest and over which ProLogis does not have the ability to exercise significant influence are carried at the lower of cost or fair value, as appropriate. Management’s judgments with respect to its level of influence or control of each entity involves consideration of various factors including the form of ProLogis’ ownership interest, its representation on the entity’s board of directors, the size of its investment (including loans) and ProLogis’ ability to participate in policy making decisions. Management’s ability to correctly assess its influence or control over an entity affects the presentation of these investments in ProLogis’ Consolidated Financial Statements and, consequently, its financial position and specific items in its results of operations that are used by its shareholders, potential investors, industry analysts and lenders to evaluate ProLogis.
In January 2003, Interpretation No. 46, “Consolidation of Variable Interest Entities”, was issued. Interpretation No. 46 was revised in December 2003. The revised Interpretation No. 46 (“FIN 46R”) is applicable to ProLogis for the interim period that ends after March 15, 2004. FIN 46R clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements”, and requires that ProLogis present the variable interest entities in which it has a majority variable interest on a consolidated basis in its financial statements. ProLogis is continuing to assess the provisions of FIN 46R and the impact to ProLogis of its adoption. At this time, ProLogis expects that it will consolidate its investments in TCL Holding S.A., formerly Frigoscandia Holding S.A. (“TCL Holding”) and CSI/ Frigo LLC, a company that holds the voting ownership interest in TCL Holding, as of January 1, 2004. Through December 31, 2003, ProLogis has presented its investments in TCL Holding and CSI/ Frigo LLC under the equity method. ProLogis’ combined effective ownership in these entities was 99.75% at December 31, 2003. ProLogis expects that it will continue to present its investments in all of its other unconsolidated investees under the equity method after FIN 46R is adopted. Management’s ability to correctly assess its investments under the new rules with respect to variable interest entities will affect the presentation of these investments in ProLogis’ Consolidated Financial Statements and, consequently, its financial position and specific items in its results of operations that are used by its shareholders, potential investors, industry analysts and lenders to evaluate ProLogis.
| Impairment of Long-Lived Assets |
ProLogis and its unconsolidated investees assess the carrying values of their respective long-lived assets whenever events or changes in circumstances indicate that the carrying amounts of these assets may not be recoverable and, with respect to goodwill, at least annually applying a fair-value-based test. The determination of the fair values of long-lived assets, including goodwill, involves significant judgment. This judgment is based on management’s analysis and estimates of the future operating results and resulting cash flows of each long-lived asset. Management’s ability to accurately predict future operating results and cash flows impacts the determination of fair value.
If there is a decline in the fair value of a long-lived asset combined with a history of the asset generating operating losses, ProLogis or its unconsolidated investees will be required to determine whether the operating losses associated with the asset will continue. Management’s assessment as to the nature of a decline in fair value is primarily based on estimates of future operating results, the resulting cash flows and ProLogis’ intent to either hold or dispose of the long-lived asset. If an investment is considered impaired, a write-down is recognized based on these analyses.
45
| Revenue Recognition |
ProLogis recognizes gains and losses from the contributions and sales of real estate assets, generally at the time the title is transferred and ProLogis has no future involvement as a direct owner of the real estate asset contributed or sold. In certain transactions, an entity in which ProLogis has an ownership interest will acquire a real estate asset from ProLogis. Management makes judgments based on the specific terms of each transaction as to the amount of the total profit from the transaction that ProLogis can recognize given its continuing ownership interest and its level of future involvement with the investee that acquires the assets. Management’s ability to accurately assess the provisions of each transaction under the accounting guidelines for profit recognition could impact ProLogis’ financial position and specific items in its results of operations that are used by shareholders, potential investors, industry analysts and lenders to evaluate ProLogis.
| Depreciation and Useful Lives of Real Estate Assets |
ProLogis estimates the depreciable portion of its real estate assets and their related useful lives in order to record depreciation expense. Management’s ability to accurately estimate the depreciable portions of its real estate assets and their useful lives is critical to the determination of the appropriate amount of depreciation expense recorded and the carrying values of the underlying assets. Any change to the estimated depreciable lives of these assets would have an impact on the depreciation expense recognized by ProLogis.
Results of Operations
ProLogis’ net earnings attributable to Common Shares were $212.4 million in 2003, $216.2 million in 2002 and $86.0 million in 2001. Basic and diluted net earnings attributable to Common Shares were $1.18 and $1.16 per share, respectively, in 2003, $1.22 and $1.20 per share, respectively, in 2002 and $0.50 and $0.49 per share, respectively, in 2001.
| Property Operations |
In addition to its directly owned operating properties, ProLogis includes its investments in the property funds, that are presented under the equity method, in its property operations segment. See Note 4 to ProLogis’ Consolidated Financial Statements in Item 8. ProLogis owned operating properties directly or had ownership interests in operating properties through its investments in the property funds as follows as of the dates indicated (square feet in thousands):
| December 31, | |||||||||||||||||||||||||
| 2003 | 2002 | 2001 | |||||||||||||||||||||||
| Square | Square | Square | |||||||||||||||||||||||
| Number | Feet | Number | Feet | Number | Feet | ||||||||||||||||||||
|
Direct ownership
|
1,252 | 133,141 | 1,230 | 127,956 | 1,208 | 123,356 | |||||||||||||||||||
|
Property funds(1)
|
485 | 97,219 | 444 | 82,633 | 334 | 57,477 | |||||||||||||||||||
|
Totals
|
1,737 | 230,360 | 1,674 | 210,589 | 1,542 | 180,833 | |||||||||||||||||||
| (1) | ProLogis’ ownership interests in the property funds ranged from 14% to 50% at December 31, 2003. |
See “Item 2. Properties — Properties” and “Item 2. Properties — Unconsolidated Investees.”
The operating income of ProLogis’ property operations segment consists of: (i) rental income and rental expenses from the operating properties that are directly owned by ProLogis; (ii) income recognized by ProLogis under the equity method from its investments in the property funds; (iii) fees and other income earned by ProLogis for services performed on behalf of the property funds, primarily property management and asset management services; and (iv) interest earned on advances to the property funds, if any. The net earnings or losses generated by operating properties that were developed or acquired in the CDFS business segment are included in the property operations segment during the interim period that these properties are included in the property operations segment, generally from the date of completion or acquisition through the date the properties are contributed or sold. See “Item 1. “Business — ProLogis’ Operating Segments —
46
The amounts recognized under the equity method represent ProLogis’ proportionate share of the net earnings or loss of each property fund based on its ownership interest in the property fund. The net earnings or losses of the property funds includes the following income and expense items, in addition to rental income and rental expenses: (i) interest income and interest expense; (ii) depreciation and amortization expenses; (iii) general and administrative expenses; (iv) income taxes; and (v) foreign currency exchange gains and losses, with respect to ProLogis European Properties Fund. See Notes 4 and 10 to ProLogis’ Consolidated Financial Statements in Item 8. ProLogis’ operating income from the property operations segment was as follows for the periods indicated (in thousands of U.S. dollars).
| Years Ended December 31, | ||||||||||||||||
| 2003 | 2002 | 2001 | ||||||||||||||
|
Properties directly owned by ProLogis:
|
||||||||||||||||
|
Rental income(1)
|
$ | 546,064 | $ | 542,202 | $ | 562,527 | ||||||||||
|
Rental expenses(2)
|
136,840 | 125,316 | 124,513 | |||||||||||||
|
Net operating income
|
409,224 | 416,886 | 438,014 | |||||||||||||
|
Property funds(3):
|
||||||||||||||||
|
Income from ProLogis California(4)(5)
|
14,229 | 14,379 | 13,147 | |||||||||||||
|
Income from ProLogis North American Properties
Fund I(4)(6)
|
5,177 | 5,997 | 4,648 | |||||||||||||
|
Income from ProLogis North American Properties
Fund II(4)(7)
|
2,381 | 3,645 | 2,328 | |||||||||||||
|
Income from ProLogis North American Properties
Fund III(4)(8)
|
2,827 | 2,779 | 1,178 | |||||||||||||
|
Income from ProLogis North American Properties
Fund IV(4)(9)
|
1,924 | 1,977 | 598 | |||||||||||||
|
Income from ProLogis North American Properties
Fund V(10)
|
12,500 | 7,544 | — | |||||||||||||
|
Income from ProLogis European Properties Fund(11)
|
30,190 | 24,162 | 17,581 | |||||||||||||
|
Income from ProLogis Japan Properties Fund(12)
|
2,221 | 239 | — | |||||||||||||
|
Subtotal property funds
|
71,449 | 60,722 | 39,480 | |||||||||||||
|
Total property operations segment
|
$ | 480,673 | $ | 477,608 | $ | 477,494 | ||||||||||
| (1) | The number and composition of operating properties that are directly owned by ProLogis throughout the periods presented impact rental income for each period. Rental income in 2003 includes $5.6 million of termination and renegotiation fees as compared to comparable fees recognized in 2002 of $14.6 million and in 2001 of $3.1 million. In certain leasing situations, ProLogis finds it advantageous to negotiate lease terminations with a customer, particularly when the customer is experiencing financial difficulties or when ProLogis believes that it can re-lease the space at rates that, when combined with the termination fee, provides a total return to ProLogis in excess of what was being earned under the original lease terms. ProLogis cannot predict the levels of such fees that will be earned in the future or whether ProLogis will be successful in re-leasing, in a timely manner, the vacant space associated with the lease terminations. Rental expense recoveries from customers, a component of rental income, were $99.4 million in 2003, $92.7 million in 2002 and $95.8 million in 2001. Total rental expense recoveries were 72.7%, 74.0% and 76.9% of total rental expenses in 2003, 2002 and 2001, respectively. Rental expense recoveries as a percentage of total rental expenses has declined over the last three years due to the impact of lower average occupancy levels that have been experienced over this three-year period. Lower occupancy levels will result in certain fixed costs being borne directly by ProLogis in instances where |
47
| customers are not occupying the space to which the expenses relate. Additionally, ProLogis will absorb a higher percentage of common area costs when occupancy levels are lower because there are fewer customers available from whom these costs can be recovered. |
| Rental income, excluding termination and renegotiation fees and rental expense recoveries, was $441.1 million in 2003, $434.9 million in 2002 and $463.6 million in 2001. The decrease in 2002 from 2001 is primarily due to lower average occupancy levels in 2002 as compared to 2001. Overall occupancy declines were experienced in many markets in North America and Europe in 2002, which offset the impact of having more properties in the directly owned portfolio in 2002 as compared to 2001. In 2003, the average occupancy levels were lower than 2002 levels; however, the increase in the number of properties in the directly owned portfolio in 2003 was sufficient to mitigate this effect. |
| (2) | The number and composition of operating properties that are directly owned by ProLogis throughout the periods presented impacts rental expenses for each period. The increase in rental expenses in 2003 from the 2002 and 2001 levels is primarily the result of the number and composition of operating properties in the directly owned portfolio in each period. |
| Rental expenses are presented before any recoveries from customers, which are a component of rental income. Rental expenses as a percentage of rental income, before rental expense recoveries and termination and renegotiation fees, were 31.0% in 2003 as compared to 28.8% in 2002 and 26.9% in 2001. Generally, in periods when occupancy levels reduce rental income this percentage will rise as many rental expenses are fixed costs. | |
| (3) | The income from property funds includes fees earned by ProLogis for providing services to the property funds of $44.2 million in 2003, $34.5 million in 2002 and $18.1 million in 2001. |
| (4) | The net earnings of the property funds whose portfolios did not change significantly over the three years presented, of which ProLogis recognizes its proportionate shares, fluctuate from period to period primarily due to occupancy levels and the amount of termination and renegotiation fees earned. |
| (5) | ProLogis’ ownership interest in ProLogis California was 50% for all periods presented and ProLogis California was in operation with substantially the same portfolio of properties for all periods presented. |
| (6) | ProLogis’ ownership interest in ProLogis North American Properties Fund I was 41.3% for substantially all of the periods presented and ProLogis North American Properties Fund I was in operation with substantially the same portfolio of properties for all periods presented. |
| (7) | ProLogis’ ownership interest in ProLogis North American Properties Fund II was 20% for all periods presented and ProLogis North American Properties Fund II was in operation with the same portfolio of properties for all periods presented. |
| (8) | ProLogis’ ownership interest in ProLogis North American Properties Fund III has been 20% since its inception on June 15, 2001. ProLogis North American Properties Fund III has had the same portfolio of properties since its inception. |
| (9) | ProLogis’ ownership interest in ProLogis North American Properties Fund IV has been 20% since its inception on September 21, 2001. ProLogis North American Properties Fund IV has had the same portfolio of properties since its inception. |
| (10) | ProLogis North American Properties Fund V began operations on March 28, 2002 and increased the size of its portfolio of properties in each subsequent quarter through September 2003. ProLogis’ ownership interest in ProLogis North American Properties Fund V was 14.0% at December 31, 2003 and 16.1% at December 31, 2002. |
| (11) | ProLogis European Properties Fund began operations in 1999 and has increased the size of its portfolio of properties in each year since inception. ProLogis’ ownership interest in ProLogis European Properties Fund was 21.9% at December 31, 2003, 29.6% at December 31, 2002 and 35.4% at December 31, 2001. |
| Amounts presented for ProLogis European Properties Fund include ProLogis’ proportionate share of net foreign currency exchange gains and losses. These amounts were $13.4 million of net losses in 2003, $4.5 million of net losses in 2002 and $0.8 million of net gains in 2001. Excluding these net foreign currency exchange gains and losses, ProLogis’ proportionate share of the net earnings of ProLogis European Properties Fund would be $43.6 million, $28.7 million and $16.8 million for 2003, 2002 and |
48
| 2001, respectively. The increase in the income recognized by ProLogis from its ownership in this property fund, excluding net foreign currency exchange gains and losses, is the result of: (i) the additional properties owned in 2003 as compared to 2002 and in 2002 as compared to 2001; (ii) increases in the fees earned by ProLogis for services provided to the property fund due to the increase in the number of properties managed by ProLogis; offset by (iii) higher interest costs associated with the higher debt levels that primarily result from the use of debt to acquire the additional properties; and (iv) decreases in ProLogis’ ownership interest in each year. Additionally, the average foreign currency exchange rate at which ProLogis translates the net earnings of the ProLogis European Properties Fund to U.S. dollars increased in both 2003 and 2002, resulting in the recognition of higher earnings by ProLogis under the equity method. |
| (12) | ProLogis’ ownership interest in ProLogis Japan Properties Fund has been 20% since its inception on September 24, 2002. ProLogis Japan Properties Fund has increased its portfolio size from one property at inception to five properties at December 31, 2003. |
The stabilized operating properties owned by ProLogis and the property funds were 90.2% leased at December 31, 2003, 91.2% leased at December 31, 2002 and 93.1% leased at December 31, 2001. ProLogis defines its stabilized properties as those properties where the capital improvements, repositioning efforts, new management and new marketing programs for acquisitions or the marketing programs in the case of newly developed properties, have been completed and in effect for a sufficient period of time, generally 12 months. A property enters the stabilized pool at the earlier of 12 months or when it is substantially leased, which is defined by ProLogis generally as 93%.
ProLogis believes that the reduction in its stabilized occupancy levels experienced in 2003 was primarily the result of weak economic conditions in the United States and certain Western European countries, that resulted in a slowing of customer leasing decisions and a slowing in the absorption of new distribution properties in many of ProLogis’ markets. Additionally, ProLogis believes that geopolitical concerns and uncertainties, primarily in Europe, in the early part of 2003 also contributed to the slower leasing activity. ProLogis has not observed similar trends in Japan. ProLogis does not expect economic conditions to change significantly in 2004. While there were some positive trends in occupancy levels in certain markets in late 2003, ProLogis believes that occupancies will not increase significantly but that further declines in occupancies, if any, will not be significant. ProLogis continues to believe that shifts in distribution patterns of its customers in Europe and Japan and their needs to reduce their distribution costs have been, and will continue to be, key drivers of leasing decisions in many of its European markets and in Japan. ProLogis believes that the diversification of its global operating platform and the ProLogis Operating System have somewhat mitigated the effects of market occupancy decreases.
Rental rates in 2003 for both new and renewed leases for previously leased space (42.8 million square feet) for all properties including those owned by the property funds decreased by 4.8% as compared to rental rate growth of 2.0% in 2002 and 14.6% in 2001 on similar transactions. ProLogis believes that the negative rental rate growth experienced in 2003 is the result of decreased customer demand that negatively impacts the rental rates that can be charged in a particular market.
ProLogis’ same store portfolio of operating properties, properties owned by ProLogis and the property funds that were in operation throughout all of 2003 and 2002, aggregated 179.3 million square feet. ProLogis views the operating results of the same store portfolio as a key component in evaluating the performance of its properties, its management personnel and its individual markets because this population is consistent from period to period, thereby eliminating the effects on performance measures of changes in the composition of the portfolio. Net operating income, defined for the same store analysis as rental income, excluding termination and renegotiation fees, less rental expenses, generated by the same store portfolio increased by 0.09% in 2003 from 2002. In 2002, the net operating income of the same store portfolio applicable to that period decreased by 0.90% from 2001. The percentage change presented is the weighted average of the measure computed separately for ProLogis and each of the property funds with the weighting based on each entity’s proportionate share of the combined component on which the change is computed. In order to derive an appropriate measure of period-to-period operating performance, the percentage change computation removes the effects of
49
Rental income computed under GAAP applicable to the properties included in the same store portfolio is adjusted to remove the net termination and renegotiation fees recognized in each period. Net termination and renegotiation fees excluded from rental income were $1.6 million for directly owned properties and $1.2 million for properties owned by the property funds for 2003; $12.5 million for directly owned properties and $6.3 million for properties owned by the property funds for 2002; and $1.7 million for directly owned properties and $0.03 million for properties owned by the property funds for 2001. Net termination and renegotiation fees represent the gross fee negotiated to allow a customer to terminate their lease, offset by that customer’s rent leveling asset that has been previously recognized under GAAP, if any. Removing the net termination fees from the same store calculation of rental income allows ProLogis’ management 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. Customer terminations are negotiated under specific circumstances and are not subject to specific provisions or rights allowed under the lease agreements.
In computing the percentage change in rental expenses, the rental expenses applicable to the properties in the same store portfolio include property management expenses for ProLogis’ directly owned properties. These expenses are based on the property management fee that is provided for in the individual agreements under which ProLogis’ wholly owned management company provides property management services to each property (generally the fee is based on a percentage of revenues). On consolidation, the management fee income earned by the management company and the management fee expense recognized by the properties are eliminated and the direct costs of providing management services are recognized as part of ProLogis’ net rental expenses reported under GAAP.
| CDFS Business |
Operating income from ProLogis’ CDFS business segment consists primarily of: (i) the gains and losses from the contributions and sales of developed properties and from the contributions of properties that were acquired with the intent to contribute the properties to a property fund, including properties that have been rehabilitated and/or repositioned; (ii) gains and losses from the dispositions of land parcels; (iii) development management fees earned by ProLogis for services provided to third parties; and (iv) income recognized under the equity method from ProLogis’ investments in unconsolidated investees through June 30, 2002. Under the equity method, ProLogis recognized its proportionate shares of the earnings of ProLogis UK Holdings S.A., formerly Kingspark Holding S.A., (collectively with its subsidiaries, “Kingspark S.A.”), a Luxembourg company that performs CDFS business activities in the United Kingdom and Kingspark LLC, a holding company that held the voting ownership interests of Kingspark S.A. through June 30, 2002. ProLogis began consolidating its investments in Kingspark S.A. and Kingspark LLC on July 1, 2002. See Notes 2 and 4 to ProLogis’ Consolidated Financial Statements in Item 8. ProLogis’ proportionate shares of the net earnings or losses recognized from its ownership interests in Kingspark, S.A. and Kingspark LLC includes (in addition to net operating income): (i) interest income and interest expense (net of capitalized amounts); (ii) general and administrative expenses (net of capitalized amounts); (iii) income taxes; and (iv) foreign currency exchange gains and losses.
Income from the CDFS business segment is dependent on ProLogis’ ability to develop and timely lease properties, or to acquire properties that can be contributed to property funds or sold to third parties, generating profits to ProLogis, and ProLogis’ success in raising private capital to acquire its properties through the formation of property funds or other sources. In 2003, ProLogis’ operating income in this segment decreased from 2002 by $27.5 million. This decrease was due to longer lease-up periods for ProLogis’ CDFS business segment properties, as ProLogis observed a slowing of customers’ decision-making processes with respect to changes in their distribution networks. ProLogis attributes the decreased leasing activity experienced in 2003 to economic weaknesses in many of its markets coupled with geopolitical concerns and uncertainties (primarily in Europe during the early part of 2003). There can be no assurance that ProLogis will be able to maintain or increase the current level of operating income in this operating segment. ProLogis cannot predict the effect that any economic and other uncertainties will continue to have on its ability to lease its properties,
50
ProLogis’ operating income from the CDFS business segment decreased in 2003 from 2002 and 2001 levels. The CDFS business segment’s operating income includes the following components for the periods indicated (in thousands of U.S. dollars):
| Years Ended December 31, | |||||||||||||
| 2003 | 2002 | 2001 | |||||||||||
|
Net gains(1)
|
$ | 105,653 | $ | 113,912 | $ | 94,487 | |||||||
|
Recognition of previously deferred gains(2)
|
27,116 | 8,352 | 2,360 | ||||||||||
|
Development management fees
|
2,048 | 4,038 | 2,723 | ||||||||||
|
Income from Kingspark S.A. and Kingspark LLC
|
— | 29,531 | 55,839 | ||||||||||
|
Income from CDFS Joint Ventures(3)
|
730 | 551 | — | ||||||||||
|
Miscellaneous fees and other income
|
301 | 470 | 321 | ||||||||||
|
Other expenses and charges(4)
|
(11,051 | ) | (4,540 | ) | (3,983 | ) | |||||||
|
Total CDFS business segment
|
$ | 124,797 | $ | 152,314 | $ | 151,747 | |||||||
Had ProLogis presented its investments in Kingspark S.A. and Kingspark LLC on a consolidated basis for all of 2002 and 2001, ProLogis’ CDFS business segment’s operating income would have been as follows (in thousands of U.S. dollars):
| Years Ended December 31, | |||||||||||||
| 2002 | 2001 | ||||||||||||
| 2003 | (Pro Forma) | (Pro Forma) | |||||||||||
|
Net gains(5)
|
$ | 105,653 | $ | 128,752 | $ | 133,257 | |||||||
|
Recognition of previously deferred gains(2)
|
27,116 | 8,352 | 2,360 | ||||||||||
|
Development management fees
|
2,048 | 9,736 | 8,050 | ||||||||||
|
Income from Kingspark S.A. and Kingspark LLC
|
— | — | — | ||||||||||
|
Income from CDFS Joint Ventures(3)
|
730 | 551 | 2,271 | ||||||||||
|
Miscellaneous fees and other income
|
301 | 486 | 321 | ||||||||||
|
Other expenses and charges(4)
|
(11,051 | ) | (4,592 | ) | (4,093 | ) | |||||||
|
Other(6)
|
— | 9,029 | 9,581 | ||||||||||
|
Total CDFS business segment
|
$ | 124,797 | $ | 152,314 | $ | 151,747 | |||||||
| (1) | Represents the net gains from the dispositions of land parcels, contributions and sales of properties and the discontinuation of participation and significant reduction of investment in a joint venture as follows: |
| • | 2003: 208 acres; 14.2 million square feet; $894.9 million of proceeds (including $35.9 million generated by the significant reduction of investment in a joint venture); | |
| • | 2002: 45 acres; 16.9 million square feet; $972.6 million of proceeds; and | |
| • | 2001: 229 acres; 14.5 million square feet; $714.0 million of proceeds. |
| (2) | Upon the disposition to third parties of properties contributed by ProLogis and/or the decrease in ProLogis’ ownership interest in a property fund, portions of the gains from previous contributions that had been deferred due to ProLogis’ continuing ownership in the property fund that acquired the properties are recognized in income. In 2003, ProLogis European Properties Fund sold 13 properties to third parties resulting in the recognition of $11.4 million of the previously deferred gains associated with the original |
51
| contribution of these properties by ProLogis. ProLogis’ ownership interest in ProLogis European Properties Fund decreased from 34.4% at January 1, 2001 to 21.9% at December 31, 2003. ProLogis’ ownership interest in ProLogis North American Properties Fund V decreased from a high of 16.9% in 2002 to 14% at December 31, 2003. See Note 2 to ProLogis’ Consolidated Financial Statements in Item 8. |
| (3) | ProLogis, through Kingspark S.A., has investments in joint ventures that perform CDFS business activities in the United Kingdom (the “CDFS Joint Ventures”). ProLogis’ ownership in each of the CDFS Joint Ventures was 50% at each period end. Originally, Kingspark S.A. had invested in four CDFS Joint Ventures, one of which owned 11 operating properties that it had previously developed. ProLogis discontinued its participation and significantly reduced its investment in this joint venture in November 2003. The remaining CDFS Joint Ventures own no operating properties and engage primarily in development activities. While ProLogis’ investment in Kingspark S.A. was presented under the equity method, the CDFS Joint Ventures that were accounted for under the equity method by Kingspark S.A. were not separately presented in ProLogis’ Consolidated Balance Sheet. See Note 4 to ProLogis’ Consolidated Financial Statements in Item 8. |
| (4) | Includes land holding costs of $2.9 million, $2.8 million and $2.7 million in 2003, 2002 and 2001, respectively, and the write-off of previously capitalized pursuit costs related to potential CDFS business segment projects of $1.9 million, $1.7 million and $1.3 million in 2003, 2002 and 2001, respectively. Also in 2003, ProLogis recognized charges of $6.3 million against previously recognized gains generated by properties that were contributed to property funds. These charges were primarily associated with the settlement of customer balances and additional costs associated with the transfers of certain properties in Mexico. |
| (5) | On a pro forma basis, represents the net gains from the dispositions of land parcels, contributions and sales of properties and the discontinuation of participation and significant reduction of investment in a joint venture as follows: |
| • | 2003: 208 acres; 14.2 million square feet; $894.9 million of proceeds (including $35.9 million generated by the significant reduction of investment in a joint venture); | |
| • | 2002: 68 acres; 18.1 million square feet; $1,119.0 million of proceeds; and | |
| • | 2001: 292 acres; 17.2 million square feet; $1,014.0 million of proceeds. |
| (6) | The income recognized by ProLogis under the equity method from its investments in Kingspark S.A. and Kingspark LLC for the six months in 2002 and for the year ended December 31, 2001 includes items that, when presented on a consolidated basis, would not be included in the CDFS business segment’s operating income. Such items include: |
| • | Net rental income of $1.7 million for 2002 and $2.6 million for 2001; | |
| • | General and administrative expenses of $1.6 million for 2002 and $1.7 million for 2001; | |
| • | Interest income of $0.2 million for 2002 and $1.3 million for 2001; | |
| • | Current income tax expense of $2.6 million for 2002 and deferred and current income tax benefits of $3.7 million for 2001; | |
| • | Gross interest expense of $0.9 million for 2002 and additional capitalized interest of $8.0 million for 2002 and $12.1 million for 2001; | |
| • | Depreciation and amortization expense of $0.2 million for 2002 and $3.8 million for 2001; and | |
| • | Net foreign currency exchange gains of $4.4 million in 2002 and foreign currency exchange losses of $4.6 million in 2001. |
Since 1999, ProLogis’ focus in the CDFS business segment reflects the economic and market conditions in the areas in which it owns properties. Accordingly, there has been a shift of ProLogis’ CDFS business activity since 2000 in favor of Japan. ProLogis’ CDFS business segment assets were located in North America (35%) and Europe (65%) at December 31, 2000. At December 31, 2003, ProLogis’ CDFS business segment
52
| • | 2003: 39% in North America, 39% in Europe and 22% in Japan. | |
| • | 2002: 36% in North America, 60% in Europe and 4% in Japan. | |
| • | 2001: 43% in North America and 57% in Europe. |
See Note 10 to ProLogis’ Consolidated Financial Statements in Item 8.
ProLogis will continue to monitor leasing activity and general economic conditions in the United States as it pertains to its CDFS business segment operations with the expectation that such an economic recovery could provide increased CDFS business opportunities to ProLogis as companies continue optimizing their supply chains. ProLogis believes that the continued demand for state-of-the-art distribution properties in Europe could result in the acceleration of leasing decisions that could provide opportunities for ProLogis in the CDFS business segment; however, ProLogis will continue to monitor the impacts of economic and other uncertainties that negatively impacted leasing in Europe during 2003. ProLogis believes its development activities will not be significantly affected by land entitlement constraints that currently exist in Europe because it has almost 1,900 acres of land owned or controlled in Europe at December 31, 2003 and its personnel are experienced in the land entitlement process. As in Europe, ProLogis believes that demand for state-of-the-art distribution properties in Japan will continue to provide opportunities for ProLogis in the CDFS business segment. ProLogis has not observed similar trends in Japan with respect to economic and other uncertainties. In Japan, the CDFS business opportunities available to ProLogis will be limited if ProLogis is unable to acquire adequate land parcels for development.
| Other Components of Operating Income |
| General and Administrative Expense |
General and administrative expense was $65.9 million in 2003, $53.9 million in 2002 and $50.3 million in 2001. Had ProLogis presented its investments in Kingspark S.A. and Kingspark LLC on a consolidated basis for all of 2002 and 2001, ProLogis would have recognized general and administrative expense of $55.5 million and $52.0 million for 2002 and 2001, respectively. General and administrative expense is primarily a function of the various business initiatives being undertaken in a given period and can vary from year to year based on ProLogis’ business activities. Also, the average foreign currency exchange rate used to translate to U.S. dollars the general and administrative expense recognized by ProLogis’ European subsidiaries prior to consolidation was significantly higher in 2003 as compared to 2002 and 2001. For a discussion of the presentation of ProLogis’ investments in Kingspark S.A. and Kingspark LLC, see Notes 2 and 4 to ProLogis’ Consolidated Financial Statements in Item 8.
| Income (Loss) from Certain Unconsolidated Investees |
Amounts recognized by ProLogis under the equity method from its investments in unconsolidated investees that operate temperature-controlled distribution networks and are not included in one of ProLogis’ two operating segments were as follows for the periods presented (in thousands of U.S. dollars). For a
53
| Years Ended December 31, | ||||||||||||
| 2003 | 2002 | 2001 | ||||||||||
|
TCL Holding(1)
|
$ | (10,727 | ) | $ | 2,917 | $ | (52,972 | ) | ||||
|
ProLogis Logistics(2)
|
(2,286 | ) | 4,155 | (58,496 | ) | |||||||
| $ | (13,013 | ) | $ | 7,072 | $ | (111,468 | ) | |||||
| (1) | For substantially all of the periods presented, ProLogis’ effective ownership interest in TCL Holding was in excess of 99%. TCL Holding owns TCL Holding AB (formerly Frigoscandia Holding AB), a temperature-controlled distribution company that operates in Europe. During the years 2001 to 2003, TCL Holding and TCL Holding AB recognized net gains and losses from the dispositions of TCL Holding AB’s operations and operating assets in ten countries. ProLogis’ proportionate share of the aggregate net losses from these asset dispositions was $3.9 million (a $5.2 million net gain in 2003, a $4.7 million net loss in 2002 and a $4.4 million net loss in 2001). Also related to these dispositions, TCL Holding and TCL Holding AB recognized impairment charges associated with TCL Holdings’ investment in TCL Holding AB and the carrying value of TCL Holding AB’s property, plant and equipment. Through its investment in TCL Holding, ProLogis’ proportionate share of impairment charges recorded by TCL Holding and TCL Holding AB was $38.3 million in 2003, $5.7 million in 2002 and $35.1 million in 2001. In 2001, ProLogis’ proportionate share of the impairment charges recognized by TCL Holding and TCL Holding AB includes $5.1 million related to technology investments of these entities. Substantially all of the remaining operating assets of TCL Holding AB are located in France and were held for sale at December 31, 2003. See Note 4 to ProLogis’ Consolidated Financial Statements in Item 8. |
| (2) | ProLogis invested in ProLogis Logistics Services Incorporated (“ProLogis Logistics”), which owns CS Integrated LLC (“CSI”), previously a temperature-controlled distribution company operating in the United States. During 2001 and through October 2002, ProLogis effectively owned in excess of 99% of ProLogis Logistics. In October 2002, all of the operations and a significant portion of the assets of CSI were sold. ProLogis’ proportionate share of the aggregate net loss from this transaction was $86.5 million, consisting of cumulative impairment charges of $90.5 million recognized in 2002 ($37.2 million) and 2001 ($53.3 million) offset by a net gain of $4.0 million (a $6.3 million net gain recognized upon closing the transaction in October 2002 and an additional loss of $2.3 million recognized in 2003 upon settlement of the prorations of CSI’s accounts as of the sale date). Subsequent to the October 2002 transaction, ProLogis’ ownership interests changed such that ProLogis owned 100% of ProLogis Logistics. Accordingly, ProLogis began consolidating its investment in ProLogis Logistics in October 2002. Certain assets that were retained by CSI after the sale (three operating properties and three tracts of land at December 31, 2003) are included with ProLogis’ real estate assets in its Consolidated Balance Sheet. In 2001, ProLogis’ proportionate share of the impairment charges recognized by ProLogis Logistics and CSI includes $0.7 million related to technology investments of these entities. See Note 4 to ProLogis’ Consolidated Financial Statements in Item 8. |
| Other Items |
| Income (Loss) from Other Unconsolidated Investees |
Amounts recognized by ProLogis under the equity method from its investments in unconsolidated investees that do not own and operate real estate assets were as follows for the periods indicated (in thousands
54
| Years Ended December 31, | |||||||||||||
| 2003 | 2002 | 2001 | |||||||||||
|
Insight
|
(5 | ) | 4 | 9 | |||||||||
|
ProLogis Equipment Services(1)
|
57 | 574 | (209 | ) | |||||||||
|
GoProLogis(2)
|
— | (2,073 | ) | (26,506 | ) | ||||||||
|
ProLogis PhatPipe(2)
|
— | — | (6,789 | ) | |||||||||
|
Totals
|
$ | 52 | $ | (1,495 | ) | $ | (33,495 | ) | |||||
| (1) | The assets of this investee were sold in 2002. |
| (2) | ProLogis had indirect investments in two technology companies that ceased operations in 2002 and 2001. Substantially all of the amounts recognized by ProLogis for the periods presented represent ProLogis’ proportionate shares of charges that these companies recognized when each wrote down their investments in technology companies to zero. |
| Interest Expense |
Interest expense is a function of the level of borrowings outstanding, interest rates charged on borrowings and the amount of interest capitalization that is calculated based on the volume of ProLogis’ development activities. Interest expense for the periods indicated includes the following components (in thousands of U.S. dollars):
| Years Ended December 31, | |||||||||||||
| 2003 | 2002 | 2001 | |||||||||||
|
Gross interest expense
|
$ | 185,638 | $ | 178,210 | $ | 182,346 | |||||||
|
Premium/discount recognized, net
|
371 | 315 | 326 | ||||||||||
|
Amortization of deferred loan costs
|
5,891 | 4,967 | 5,233 | ||||||||||
|
Subtotal interest expense before capitalization(1)
|
191,900 | 183,492 | 187,905 | ||||||||||
|
Less: capitalized amounts(2)
|
36,425 | 30,534 | 24,276 | ||||||||||
|
Net interest expense(3)
|
$ | 155,475 | $ | 152,958 | $ | 163,629 | |||||||
| (1) | Had ProLogis presented its investments in Kingspark S.A. and Kingspark LLC on a consolidated basis for all of 2002 and 2001, ProLogis would have recognized interest expense before capitalization of $184.4 million and $187.9 million for 2002 and 2001, respectively. The increase in interest expense in 2003 results primarily from higher average borrowings, partially offset by lower average interest rates. Interest expense before capitalization in 2002 decreased from 2001 primarily due to lower average interest rates in 2002, the effect of which was partially offset by higher average borrowings in 2002. Also, the average foreign currency exchange rate used to translate to U.S. dollars the interest expense recognized by ProLogis’ European subsidiaries prior to consolidation was significantly higher in 2003 as compared to 2002 and 2001. |
| (2) | Gross interest expense incurred on borrowings outstanding during the period is offset by the amount of interest that is capitalized based on ProLogis’ qualifying development expenditures. Had ProLogis presented its investments in Kingspark S.A. and Kingspark LLC on a consolidated basis for all of 2002 and 2001, ProLogis’ capitalized interest would have been $38.5 million and $36.4 million for 2002 and 2001, respectively. Capitalized interest levels are reflective of ProLogis’ average cost of debt and the volume of development activities in each year. |
55
| (3) | Had ProLogis presented its investments in Kingspark S.A. and Kingspark LLC on a consolidated basis for all of 2002 and 2001, ProLogis would have recognized net interest expense of $145.9 million and $151.5 million for 2002 and 2001, respectively. |
For a discussion of the presentation of ProLogis’ investments in Kingspark S.A. and Kingspark LLC, see Notes 2 and 4 to ProLogis’ Consolidated Financial Statements in Item 8.
| Gains on Dispositions of Real Estate, Net |
The net gains recognized from the contributions and sales of operating properties that were acquired or developed for direct, long-term investment in the property operations segment are presented below operating income in ProLogis’ Consolidated Statements of Earnings. From time to time, ProLogis will contribute or sell properties that have been held for direct, long-term investment in the property operations segment because such properties are determined to have become non-strategic properties. Non-strategic properties are assets located in markets or submarkets that are no longer considered to be target markets or they can be assets that were acquired as part of previous portfolio acquisitions that are not consistent with ProLogis’ core portfolio based on the asset’s size or configuration. Also, ProLogis may contribute properties that have been held for direct, long-term investment in the property operations segment to complement the portfolio of CDFS business segment properties that are contributed to the property funds.
Contributions and sales of direct, long-term investment properties from the property operations segment were as follows:
| • | 2003: 0.8 million square feet; $60.2 million of proceeds; net gain of $1.6 million; | |
| • | 2002: 2.0 million square feet; $63.6 million of proceeds; net gain of $6.6 million; and | |
| • | 2001: 6.7 million square feet; $236.1 million of proceeds; net gain of $10.0 million. |
The amounts recognized in a period will include adjustments to previously recognized gains or losses. These adjustments generally occur upon the settlement of contractual issues or due to changes in the original estimates of the costs associated with previous transactions.
| Gain on Partial Redemption of Investment |
In December 2003, ProLogis European Properties Fund disposed of 13 operating properties aggregating 2.1 million square feet in the United Kingdom to a third party. All of these properties were originally contributed to ProLogis European Properties Fund by ProLogis. Proceeds from these dispositions were used to redeem certain ownership interests in ProLogis European Properties Fund at the option of the unit holders. ProLogis redeemed 17.0 million units and recognized a gain on the partial redemption of its investment in ProLogis European Properties Fund of $74.7 million, including a foreign currency exchange gain of $47.9 million resulting from the repatriation of the cash redemption proceeds to the United States. See Note 4 to ProLogis’ Consolidated Financial Statements in Item 8.
| Foreign Currency Exchange Expenses/ Losses, Net |
ProLogis recognized net foreign currency exchange losses of $10.6 million, $2.0 million and $3.7 million for 2003, 2002 and 2001, respectively. Had ProLogis reported its investments in Kingspark S.A. and Kingspark LLC on a consolidated basis for all of 2002 and 2001, ProLogis would have recognized a net foreign currency exchange gain of $2.4 million for 2002 and a net foreign currency exchange loss of $8.3 million for 2001. For a discussion of the presentation of ProLogis’ investments in Kingspark S.A. and Kingspark LLC, see Notes 2 and 4 to ProLogis’ Consolidated Financial Statements in Item 8.
ProLogis and certain of its foreign consolidated subsidiaries have intercompany or third party debt that is not denominated in that entity’s functional currency. When the debt is remeasured against the functional currency of the entity, a gain or loss can result. ProLogis attempts to mitigate its foreign currency exchange exposure by borrowing in the functional currency of the borrowing entity. Certain of ProLogis’ intercompany debt is remeasured with the resulting adjustment recognized as a cumulative translation adjustment in
56
Generally, the amount of net foreign currency exchange gains or losses recognized in results from operations is a function of movements in exchange rates, the levels of intercompany and third party debt outstanding and the currency in which such debt is denominated as compared to the functional currency of the entities that are parties to the debt agreements. The net foreign currency exchange expenses/losses recognized in ProLogis’ results of operations were as follows for the periods indicated (in thousands of U.S. dollars):
| Years Ended December 31, | ||||||||||||||
| 2003 | 2002 | 2001 | ||||||||||||
|
Gains (losses) from remeasurement of third
party and certain intercompany debt, net(1)
|
$ | (10,391 | ) | $ | (10,267 | ) | $ | 3,657 | ||||||
|
Gains (losses) from the settlement of third
party and certain intercompany debt, net(1)
|
2,421 | 12,421 | (6,166 | ) | ||||||||||
|
Transaction gains (losses), net
|
75 | 238 | (185 | ) | ||||||||||
|
Derivative financial instruments — put
option contracts(2):
|
||||||||||||||
|
Expense associated with contracts expiring during
the period
|
(2,897 | ) | (3,171 | ) | (2,255 | ) | ||||||||
|
Mark-to-market gains (losses) on outstanding
contracts, net
|
205 | (1,411 | ) | 1,122 | ||||||||||
|
Gains realized at expiration of contracts, net
|
— | 159 | 106 | |||||||||||
|
Total(3)
|
$ | (10,587 | ) | $ | (2,031 | ) | $ | (3,721 | ) | |||||
| (1) | At the time certain debt balances are settled, remeasurement gains or losses that have been recognized in results of operations as unrealized are reversed and the cumulative foreign currency exchange gain or loss realized with respect to the debt is reflected as a realized gain or loss in the period that the settlement occurs. |
| (2) | ProLogis enters into foreign currency put option contracts related to its operations in Europe and Japan. These put option contracts do not qualify for hedge accounting treatment. Accordingly, the cost of the contract is capitalized at the contract’s inception and is marked-to-market by ProLogis as of the end of each subsequent reporting period. Upon expiration of the contract, the mark-to-market adjustment is reversed, the total cost of the contract is expensed and any proceeds received are recognized as a gain. |
| (3) | The foreign currency exchange gain that was realized as a result of the repatriation to the United States of the cash redemption proceeds that ProLogis received as a result of the partial redemption of its investment in ProLogis European Properties Fund is presented as a part of the total gain on the redemption transaction under GAAP. See “— Gain on Partial Redemption of Investment.” |
| Income Taxes |
ProLogis is a REIT for federal income tax purposes and is not generally required to pay federal income taxes if it meets the REIT requirements of the Code. ProLogis’ consolidated subsidiaries in the United States that are not qualified REIT subsidiaries for tax purposes are subject to federal income taxes, and ProLogis is taxed in certain states in which it operates. Also, the foreign countries where ProLogis has operations do not necessarily recognize REITs under their respective tax laws. Accordingly, ProLogis recognizes income taxes in accordance with GAAP, as necessary.
57
Current income tax expense was $4.8 million, $10.5 million and $2.5 million for 2003, 2002 and 2001, respectively. Had ProLogis reported its investments in Kingspark S.A. and Kingspark LLC on a consolidated basis for all of 2002 and 2001, current income tax expense would have been $13.1 million and $6.6 million for 2002 and 2001, respectively. ProLogis recognized deferred income tax expense of $10.6 million, $17.7 million and $2.3 million for 2003, 2002 and 2001, respectively. Had ProLogis reported its investments in Kingspark S.A. and Kingspark LLC on a consolidated basis for all of 2002 and 2001, deferred income tax expense for 2002 would not have changed and ProLogis would have recognized a deferred income tax benefit of $5.5 million in 2001. For a discussion of the presentation of ProLogis’ investments in Kingspark S.A. and Kingspark LLC, see Notes 2 and 4 to ProLogis’ Consolidated Financial Statements in Item 8.
Current income tax expense is generally a function of the level of income recognized by ProLogis’ taxable subsidiaries operating in the CDFS business segment in addition to state income taxes and taxes incurred in foreign jurisdictions. The deferred income tax component of total income taxes is a function of the period’s temporary differences (items that are treated differently for tax purposes than for book purposes) and the utilization of tax net operating losses generated in prior years that had been previously recognized as deferred tax assets. In 2003, ProLogis began recognizing a deferred income tax liability associated with certain contributions to ProLogis European Properties Fund based upon an indemnification agreement that was entered into in August 2003. Under this indemnification agreement, ProLogis will continue to recognize a deferred income tax liability related to its future contributions to ProLogis European Properties Fund. Of the total deferred income tax expense recognized in 2003, $3.6 million is related to the indemnification agreement. See Note 4 to ProLogis’ Consolidated Financial Statements in Item 8.
| Excess of Redemption Values over Carrying Values of Preferred Shares Redeemed |
ProLogis recognized charges to net earnings of $7.8 million in 2003 and $4.8 million in 2001 representing the excess of the redemption values over the carrying values of Preferred Shares redeemed (Series E Preferred Shares and Series D Preferred Shares redeemed in 2003 and Series B Convertible Preferred Shares and Series A Preferred Shares redeemed in 2001). ProLogis also recognized a charge of $4.2 million in January 2004 related to the redemption of its remaining Series D Preferred Shares. After the redemption in January 2004, all of ProLogis’ series of Preferred Shares that have met their optional redemption date have been redeemed. The next optional redemption date for a series of Preferred Shares is in 2008.
Environmental Matters
ProLogis has not experienced any environmental condition associated with its properties which materially adversely affected its results of operations or financial position, nor is ProLogis aware of any environmental liability that it believes would have a material adverse effect on its business, financial condition or results of operations. See “— Risk Factors.”
Liquidity and Capital Resources
| Overview |
ProLogis considers its liquidity and its ability to generate cash from its operating activities, the contributions and sales of properties and other financing sources to be adequate and expects it to continue to be adequate to meet its anticipated future development, acquisition, operating and debt service needs, as well as its shareholder distribution requirements.
ProLogis expects that its primary cash needs will consist of the following in 2004 and future years:
| • | Acquisitions of land for future development; | |
| • | Development and acquisitions of properties in the CDFS business segment; |