| 5. | Unconsolidated Entities |
Summary of Investments
We have investments in entities through a variety of ventures. We co-invest in entities that own multiple properties with strategic capital investors and provide asset and property management services to these entities. We refer to these entities as co-investment ventures. Our ownership interest in these entities generally ranges from 15-50%. These entities may be consolidated or unconsolidated, depending on the structure, our partner’s rights and participation and our level of control of the entity. This note details our unconsolidated co-investment ventures that are accounted for using the equity method of accounting. See Note 12 for more detail regarding our consolidated investments.
We also have other ventures, generally with one partner and that we do not manage. We refer to our investments in the entities accounted for on the equity method, both unconsolidated co-investment ventures and other ventures, collectively, as unconsolidated entities.
Our investments in and advances to our unconsolidated entities as of December 31, are summarized below (in thousands):
| 2013 | 2012 | |||||||
|
Unconsolidated co-investment ventures |
$ | 4,250,015 | $ | 2,013,080 | ||||
|
Other ventures |
180,224 | 182,702 | ||||||
|
Totals |
$ | 4,430,239 | $ | 2,195,782 | ||||
Unconsolidated Co-Investment Ventures
As of December 31, 2013, we had investments in and managed 10 unconsolidated co-investment ventures that own portfolios of operating industrial properties and may also develop properties. We account for our investments in these ventures under the equity method of accounting and, therefore, we record our share of each venture’s net earnings or loss as Earnings from Unconsolidated Entities, Net in the Consolidated Statements of Operations. We earn fees for the management services we provide to these ventures. These fees are recognized as earned and may include property and asset management fees or transactional fees for leasing, acquisition, construction, financing, legal and tax services. We may also earn incentive returns or promotes based on the third party investor returns over time. We report these fees and incentives as Investment Management Income in the Consolidated Statements of Operations. In addition, we may earn fees for services provided to develop a building within these ventures and those fees are reflected as Development Management and Other Income in the Consolidated Statements of Operations.
In the first quarter of 2013, we launched the initial public offering for Nippon Prologis REIT, Inc. (“NPR”). NPR is a long-term investment vehicle for our stabilized properties in Japan. On February 14, 2013, NPR was listed on the Japan Stock Exchange and commenced trading. At that time, NPR acquired a portfolio of 12 properties totaling 9.6 million square feet from us for an aggregate purchase price of ¥173 billion ($1.9 billion). At the time, we had a 15% ownership interest that we accounted for under the equity method. As a result of this transaction, we recognized a gain of $337.9 million, net of a $59.6 million deferral due to our ongoing investment. The gain was recorded in Gains on Acquisitions and Dispositions of Investments in Real Estate, Net in the Consolidated Statements of Operations. We recognized $38.6 million of current tax expense in connection with this contribution.
On March 19, 2013, we closed Prologis European Logistics Partners Sàrl (“PELP”), a joint venture with Norges Bank Investment Management (“NBIM”), which is the manager of the Norwegian Government Pension Fund Global. We have a 50% ownership interest that we account for under the equity method. The venture has an initial term of 15 years, which may be extended for an additional 15-year period, and thereafter extended upon negotiation between partners. We will have the ability to reduce our ownership to 20% following the second anniversary of closing. The venture acquired a portfolio from us for approximately €2.3 billion ($3.0 billion) consisting of 195 properties and 48.7 million square feet in 11 target European global markets. As a result of this transaction, we recognized a gain of $1.8 million, net of a deferred gain due to our ongoing investment. The gain was recorded in Gains on Acquisitions and Dispositions of Investments in Real Estate, Net in the Consolidated Statements of Operations. In connection with the closing, a warrant NBIM received at signing to acquire six million shares of Prologis common stock with a strike price of $35.64 became exercisable. The warrant can be net share settled. We used the Black-Scholes pricing model to value the warrant and this value was included as consideration in the overall result of the transaction.
During the three years ended December 31, 2013, we also acquired controlling interests in several co-investment ventures and began consolidating the venture or the properties. In addition, during this period we have made contributions of properties to several other co-investment ventures. See Notes 3 and 4 for discussion of these transactions and the impact on our real estate properties. In connection with the Merger, we added several co-investment ventures for which we recognized fees and our proportionate share of earnings (loss) for approximately seven months in 2011.
Summarized information regarding the amounts we recognize in the Consolidated Statements of Operations from our investments in the unconsolidated co-investment ventures for the years ended December 31 was as follows (in thousands):
| 2013 | 2012 | 2011 | ||||||||||
|
Earnings (loss) from unconsolidated co-investment ventures: |
||||||||||||
|
Americas |
$ | 21,724 | $ | (7,843) | $ | 22,709 | ||||||
|
Europe |
63,839 | 31,174 | 25,709 | |||||||||
|
Asia |
9,091 | 2,372 | 908 | |||||||||
|
Total earnings (loss) from unconsolidated co-investment ventures, net |
$ | 94,654 | $ | 25,703 | $ | 49,326 | ||||||
|
Investment management and other income: |
||||||||||||
|
Americas (1) |
$ | 70,642 | $ | 68,142 | $ | 67,293 | ||||||
|
Europe |
63,794 | 37,173 | 45,758 | |||||||||
|
Asia |
42,749 | 19,870 | 14,149 | |||||||||
|
Total investment management income |
177,185 | 125,185 | 127,200 | |||||||||
|
Development management and other income |
4,007 | 535 | 5,943 | |||||||||
|
Total investment management and other income |
$ | 181,192 | $ | 125,720 | $ | 133,143 | ||||||
| 1) | In connection with the conclusion of SGP Mexico in October 2013, we earned a promote fee from the venture of $7.9 million, which was based on the venture’s cumulative returns to the investors over the life of the venture. Of that amount, $6.4 million represented the third party investors’ portion and is reflected in Investment Management Income in the Consolidated Statements of Operation. We also recognized approximately $1.3 million of expense in Investment Management Expenses in the Consolidated Statements of Operations, representing the associated cash bonus paid out to certain employees pursuant to the terms of the Prologis Promote Plan, previously referred to as the Private Capital Plan. |
The amounts of Investment Management Income and Earnings we recognize depends on the number and size of co-investment ventures in which we have an ownership interest and manage. A summary of our outstanding unconsolidated co-investment ventures at December 31 was as follows (square feet and total assets in thousands and represents 100% of the venture):
| 2013 | 2012 | 2011 | ||||||||||
|
Number of ventures |
10 | 11 | 15 | |||||||||
|
Square feet |
264,293 | 208,753 | 267,752 | |||||||||
|
Total assets |
$ | 23,865,250 | $ | 17,612,590 | $ | 20,692,939 | ||||||
Information about our investments in the co-investment ventures as of December 31 was as follows (dollars and square feet in thousands):
| Number
of properties owned |
Square feet |
Ownership Percentage |
Investment
in and Advances to |
|||||||||||||||||||||
| Co-Investment Venture | 2013 | 2013 | 2013 | 2012 | 2013 | 2012 | ||||||||||||||||||
|
Prologis Targeted U.S.
Logistics Fund |
385 | 48,490 | 25.9 % | 23.9 % | $ | 743,454 | $ | 645,241 | ||||||||||||||||
|
Prologis North American Industrial Fund (2) |
237 | 46,500 | 23.1 % | 23.1 % | 201,482 | 209,580 | ||||||||||||||||||
|
Prologis North American
Industrial Fund III |
- | - | - | 20.0 % | - | 20,860 | ||||||||||||||||||
|
Prologis Mexico Industrial
Fund |
74 | 9,503 | 20.0 % | 20.0 % | 49,684 | 50,681 | ||||||||||||||||||
|
Prologis SGP Mexico |
- | - | - | 21.6 % | - | 33,245 | ||||||||||||||||||
|
Prologis Brazil Logistics Partners Fund (“Brazil Fund”) and related joint ventures (“Brazil Ventures”) (6) |
11 | 4,044 | 50.0 % | 50.0 % | 199,392 | 152,224 | ||||||||||||||||||
|
Prologis Targeted Europe
Logistics Fund |
84 | 13,652 | 43.1 % | 32.4 % | 471,896 | 280,430 | ||||||||||||||||||
|
Prologis European Properties Fund II (8) |
250 | 62,364 | 32.5 % | 29.7 % | 582,828 | 398,291 | ||||||||||||||||||
|
Europe Logistics Venture
1 |
24 | 5,070 | 15.0 % | 15.0 % | 62,654 | 44,027 | ||||||||||||||||||
|
Prologis European Logistics Partners (9) (11) |
209 | 51,790 | 50.0 % | - | 1,585,923 | - | ||||||||||||||||||
|
Nippon Prologis REIT (12) |
24 | 18,508 | 15.1 % | - | 309,715 | - | ||||||||||||||||||
|
Prologis Japan Fund 1 (Prologis Japan Fund I, LP) (13) |
- | - | - | 20.0 % | - | 144,352 | ||||||||||||||||||
|
Prologis China Logistics
Venture 1 |
19 | 4,372 | 15.0 % | 15.0 % | 42,987 | 34,149 | ||||||||||||||||||
|
Totals |
1,317 | 264,293 | $ | 4,250,015 | $ | 2,013,080 | ||||||||||||||||||
| (1) | We have an ownership interest in this co-investment venture along with numerous third party investors. During 2013, this venture disposed of 14 properties for a gain of $35.5 million. In addition, this venture acquired 34 properties from third parties in 2013 aggregating 4.4 million square feet for $274.7 million. |
| (2) | We refer to the combined entities in which we have an ownership interest with nine institutional investors as one unconsolidated co-investment venture named Prologis North American Industrial Fund. Our ownership percentage is based on our levels of ownership interest in these different entities. During 2013, the venture disposed of six properties for a gain of $2.3 million. |
| (3) | In August 2013, we acquired a controlling interest in and began consolidating NAIF III. See Note 3 for information regarding this transaction. |
| (4) | We refer to the combined entities in which we have an ownership interest with several institutional investors as one co-investment venture named Prologis Mexico Industrial Fund. |
| (5) | In October 2013, we purchased our partner’s interest and began consolidating this venture. See Note 3 for information regarding this transaction. |
| (6) | We have a 50% ownership interest in and consolidate an entity that in turn owns 50% of several entities that we account for on the equity method (the “Brazil Fund”). Also, we have additional investments in other unconsolidated entities in Brazil that we account for on the equity method with various ownership interests ranging from 5-50%. We refer to the Brazil Fund and the other unconsolidated entities collectively as the “Brazil Ventures.” During 2013, the Brazil Ventures contributed three properties to unconsolidated ventures in Brazil aggregating 1.1 million square feet for total proceeds of $122.6 million. |
| (7) | We have an ownership interest in this co-investment venture along with numerous third party investors. During 2013, we contributed eight properties aggregating 1.6 million square feet in exchange for $144.6 million in proceeds raised from us and third parties and additional ownership interests in the venture. As a result, our ownership percentage in this venture increased in 2013. |
| (8) | We have an ownership interest in this co-investment venture along with numerous third party investors. During 2013, we contributed 21 properties aggregating 4.5 million square feet for total proceeds of $391.6 million. Additionally, this venture acquired 10 properties from third parties in 2013 for $222.4 million aggregating 2.6 million square feet. |
| (9) | We have one partner in each of these co-investment ventures. |
| (10) | During 2013, we contributed 10 properties aggregating 1.9 million square feet for proceeds of $189.9 million. |
| (11) | We established this co-investment venture in 2013, as discussed above. Since the initial contribution, we contributed four properties aggregating 0.5 million square feet for total proceeds of $57.6 million. Additionally, this venture acquired 12 properties from third parties in 2013 for $380.4 million aggregating 2.6 million square feet. |
| (12) | We established this co-investment venture in 2013, as discussed above. Since the initial contribution, we contributed six properties aggregating 4.6 million square feet for total proceeds of $963.9 million. These contributions were funded by NPR with two follow on offerings in 2013. In addition, NPR acquired six properties from Prologis Japan Fund I aggregating 4.3 million square feet. |
| (13) | We concluded this co-investment venture in 2013 through the acquisition of 14 properties by us and the sale of the remaining six properties to NPR (as discussed above). |
The following is summarized financial information of the unconsolidated co-investment ventures and our investment (dollars in millions). The co-investment venture information represents 100% of Prologis’ stepped up basis, not our proportionate share, and may not be comparable to values reflected in the entities’ stand alone financial statements calculated on a different basis.
| 2013 (1) | Americas | Europe | Asia | Total | ||||||||||||
|
Revenues |
$ | 702.4 | $ | 801.4 | $ | 223.8 | $ | 1,727.6 | ||||||||
|
Net operating income |
$ | 512.9 | $ | 621.1 | $ | 174.7 | $ | 1,308.7 | ||||||||
|
Net earnings (loss) (2) |
$ | 58.3 | $ | 130.6 | $ | 47.5 | $ | 236.4 | ||||||||
|
Total assets |
$ | 8,014.4 | $ | 11,818.8 | $ | 4,032.1 | $ | 23,865.3 | ||||||||
|
Amounts due to us (3) |
$ | 10.3 | $ | 43.7 | $ | 110.0 | $ | 164.0 | ||||||||
|
Third party debt (4) |
$ | 2,999.1 | $ | 2,998.2 | $ | 1,715.2 | $ | 7,712.5 | ||||||||
|
Total liabilities |
$ | 3,177.1 | $ | 4,113.6 | $ | 1,899.2 | $ | 9,189.9 | ||||||||
|
Our weighted average ownership (5) |
22.7% | 39.0% | 15.0% | 29.2% | ||||||||||||
|
Our investment balance (6) |
$ | 1,194.0 | $ | 2,703.3 | $ | 352.7 | $ | 4,250.0 | ||||||||
|
Our deferred gains, net of amortization (7) |
$ | 139.6 | $ | 196.7 | $ | 94.8 | $ | 431.1 | ||||||||
| 2012 (1) | Americas | Europe | Asia | Total | ||||||||||||
|
Revenues |
$ | 759.3 | $ | 489.8 | $ | 140.5 | $ | 1,389.6 | ||||||||
|
Net operating income |
$ | 560.8 | $ | 380.2 | $ | 109.4 | $ | 1,050.4 | ||||||||
|
Net earnings (loss) (2) |
$ | (88.1) | $ | 85.7 | $ | 8.2 | $ | 5.8 | ||||||||
|
Total assets |
$ | 9,070.4 | $ | 6,605.2 | $ | 1,937.0 | $ | 17,612.6 | ||||||||
|
Amounts due to us (3) |
$ | 31.9 | $ | 33.3 | $ | 7.7 | $ | 72.9 | ||||||||
|
Third party debt (4) |
$ | 3,835.5 | $ | 2,384.2 | $ | 972.9 | $ | 7,192.6 | ||||||||
|
Total liabilities |
$ | 4,170.4 | $ | 2,953.8 | $ | 1,062.5 | $ | 8,186.7 | ||||||||
|
Our weighted average ownership (5) |
23.2% | 29.7% | 19.2% | 25.1% | ||||||||||||
|
Our investment balance (6) |
$ | 1,111.8 | $ | 722.8 | $ | 178.5 | $ | 2,013.1 | ||||||||
|
Our deferred gains, net of amortization (7) |
$ | 147.9 | $ | 181.6 | $ | 0.1 | $ | 329.6 | ||||||||
| (1) | We have had significant activity with our unconsolidated co-investment ventures in 2012 and 2013. We concluded Prologis California and NAIF II in 2012 and NAIF III, Prologis Japan Fund I and SGP Mexico in 2013 and only included the results of these ventures through the transaction dates. In 2013, we launched two new co-investment ventures (PELP and NPR) and the results of these ventures are included from the date these ventures acquired the properties. |
| (2) | In 2013, three ventures in the Americas recorded net gains of $60.6 million from the disposition of 23 properties. |
| In 2012, five ventures in the Americas recorded net gains of $9.4 million from the disposition of 38 properties. During 2012, NAIF III wrote off accumulated other comprehensive loss due to the settlement of debt before maturity by transferring the secured properties to the lender in lieu of payment for $25.1 million and the settlement of interest rate swap agreements in which the related debt is no longer expected to reach maturity for $21.5 million. |
| (3) | As of December 31, 2013, we had receivables from Prologis European Logistics Partners for remaining sale proceeds of $35.5 million which has subsequently been received. We also had a receivable from NPR of $88.5 million related to customer security deposits that are made through a leasing company owned by Prologis that pertain to properties owned by NPR. There is a corresponding payable to NPR’s customer in Other Liabilities in the Consolidated Balance Sheets. |
| As of December 31 2012, we had a note receivable from SGP Mexico of $19.8 million which was settled upon our acquisition of |
our partner’s interest on October 2, 2013. The remaining amounts represent current balances from services provided by us to the venture.
| (4) | As of December 31, 2013, we did not guarantee any third party debt of our co-investment ventures. |
| (5) | Represents our weighted average ownership interest in all co-investment ventures based on each entity’s contribution to total assets, before depreciation, net of other liabilities. |
| (6) | The difference between our ownership interest of the venture’s equity and our investment balance results principally from three types of transactions: (i) deferring a portion of the gains we recognize from a contribution of one of our properties to the venture (see next sub-footnote); (ii) recording additional costs associated with our investment in the venture; and (iii) advances to the venture. |
| (7) | This amount is recorded as a reduction to our investment and represents the gains that were deferred when we contributed a property to a venture due to our continuing ownership in the property. |
Equity Commitments Related to Certain Unconsolidated Co-Investment Ventures
Certain co-investment ventures have equity commitments from us and our venture partners. Our venture partners fulfill their equity commitment with cash. We may fulfill our equity commitment through contributions of properties or cash. The venture may obtain financing for the properties and therefore the equity commitment may be less than the acquisition price of the real estate. Depending on market conditions, the investment objectives of the ventures, our liquidity needs and other factors, we may make contributions of properties to these ventures through the remaining commitment period and we may make additional cash investments in these ventures.
The following table is a summary of remaining equity commitments as of December 31, 2013 (in millions):
| Equity commitments | Expiration
date for remaining commitments |
|||||||||||||
| Prologis | Venture Partners |
Total | ||||||||||||
|
Prologis Targeted U.S. Logistics Fund (1) |
$ | - | $ | 294.8 | $ | 294.8 | Various | |||||||
|
Prologis Targeted Europe Logistics Fund (2) (3) |
$ | 136.0 | $ | 183.4 | $ | 319.4 | June 2015 | |||||||
|
Prologis European Properties Fund II (2) (4) |
$ | 12.0 | $ | 154.9 | $ | 166.9 | September 2015 | |||||||
|
Europe Logistics Venture 1 (2) (5) |
$ | 25.7 | $ | 145.8 | $ | 171.5 | December 2014 | |||||||
|
Prologis European Logistics Partners (6) |
$ | 255.7 | $ | 255.7 | $ | 511.4 | February 2016 | |||||||
|
Prologis China Logistics Venture 1 (7) |
$ | 61.7 | $ | 349.6 | $ | 411.3 | March 2015 | |||||||
|
Prologis China Logistics Venture 2 (8) |
$ | 88.2 | $ | 500.0 | $ | 588.2 | November 2017 | |||||||
|
Total |
$ | 579.3 | $ | 1,884.2 | $ | 2,463.5 | ||||||||
| (1) | During 2013, equity commitments of $438.0 million were obtained from third party investors and we committed to contribute $100.0 million. To fund the acquisition of properties during 2013, the venture called capital of $273.3 million, of which $173.3 million was from third parties and $100.0 million was from us. Of the remaining commitments at December 31, 2013, approximately $245 million will expire by June 2014 and the remaining commitments are open-ended. |
| (2) | Equity commitments are denominated in euro and reported above in U.S. dollar. |
| (3) | During 2013, equity commitments of €234.0 million ($322.7 million) were obtained from third party investors and we committed €258.6 million ($346.8 million). To fund acquisition of properties and pay down debt, the venture called capital of €261.0 million ($350.1 million) of which €101.0 million ($139.3 million) was from third parties and €160.0 million ($210.9 million) was our share. |
| (4) | During 2013, equity commitments of €325.0 million ($438.4 million) were obtained from third party investors and we committed to contribute €125.0 million ($165.7 million). To meet the capital requirements of the venture, including the repayment of debt and contribution of properties by us, the venture called capital of €329.0 million ($438.4 million) of which €212.7 million ($284.7 million) was from third parties and €116.3 million ($153.7 million) was our share. |
| (5) | During the fourth quarter of 2013, the venture called capital of €149.7 million ($203.4 million) of which €127.2 million ($172.9 million) was from third parties and €22.4 million ($30.5 million) was our share. |
| (6) |
This venture was formed in March 2013 with an equity commitment of €2.4 billion ($3.1 billion), which included €1.2 billion ($1.6 billion) commitment from both our partner and us. We contributed 195 properties to this venture in March using the majority of the equity commitments. Additional equity commitments of €339.8 million ($457.9 million) were obtained, of which €169.9 million ($229.1 million) was our share. Of these commitments €159.8 million ($220.3 million) are denominated in British pound sterling, will be called in euro and are reported above in U.S. dollar. After the initial contribution, the venture called €241.0 million ($319.5 million) of additional capital to fund the acquisition of properties, of which €120.5 million ($159.8 million) was our share. The remaining equity commitments as of December 31, 2013, are to fund the future repayment of debt. |
| (7) | During 2013, equity commitments of $39.1 million, of which $6.9 million was our share, were called. |
| (8) | In the fourth quarter of 2013, we formed Prologis China Logistics Venture 2 and equity commitments of $588.2 million were obtained of which $500.0 million was from third parties and $88.2 million was our share. |
To the extent an unconsolidated entity acquires properties from a third party or requires cash to retire debt or has other cash needs, we may be required or agree to contribute our proportionate share of the equity component in cash to the unconsolidated entity.
Other ventures
We have several investments in other unconsolidated ventures that own real estate properties and/or perform development activity. We recognized our proportionate share of the earnings from our investments in these entities of $2.6 million, $6.0 million and $10.6 million for the years ended December 31, 2013, 2012 and 2011, respectively.