EDGAR 10-K Filing

Company CIK: 1045609
Filing Year: 2022
Filename: 1045609_10-K_2022_0001564590-22-004436.json

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ITEM 1. BUSINESS
ITEM 1. Business
Prologis, Inc. is a self-administered and self-managed REIT and is the sole general partner of Prologis, L.P. through which it holds substantially all of its assets. We operate Prologis, Inc. and Prologis, L.P. as one enterprise and, therefore, our discussion and analysis refers to Prologis, Inc. and its consolidated subsidiaries, including Prologis, L.P. We invest in real estate through wholly owned subsidiaries and other entities through which we co-invest with partners and investors. We have a significant ownership interest in the co-investment ventures, which may be consolidated or unconsolidated based on our level of control of the entity.
Prologis, Inc. began operating as a fully integrated real estate company in 1997 and elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (“Internal Revenue Code” or “IRC”). We believe the current organization and method of operation enable Prologis, Inc. to maintain its status as a REIT. Prologis, L.P. was also formed in 1997.
We operate and manage our business on an owned and managed (“O&M”) basis and therefore evaluate the operating performance of the properties for our O&M portfolio, which includes our consolidated properties and properties owned by our unconsolidated co-investment ventures. We make operating decisions based on our total O&M portfolio, as we manage the properties without regard to their ownership. We also evaluate our results based on our proportionate economic ownership of each property included in the O&M portfolio (“our share”) to reflect our share of the financial results of the O&M portfolio.
Included in our discussion below are references to funds from operations (“FFO”) and net operating income (“NOI”), neither of which are U.S. generally accepted accounting principles (“GAAP”). See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations for a reconciliation of Net Earnings Attributable to Common Stockholders/Unitholders in the Consolidated Statements of Income to our FFO measures and a reconciliation of NOI to Operating Income, the most directly comparable GAAP measures.
Our corporate headquarters is located at Pier 1, Bay 1, San Francisco, California 94111, and our other principal office locations are in Amsterdam, Denver, Mexico City, Shanghai, Singapore and Tokyo.
Our Internet address is www.prologis.com. All reports required to be filed with the Securities and Exchange Commission (“SEC”) are available and can be accessed free of charge through the Investor Relations section of our website. The common stock of Prologis, Inc. is listed on the New York Stock Exchange (“NYSE”) under the ticker “PLD” and is a component of the Standard & Poor’s (“S&P”) 500.
THE COMPANY
We are the global leader in logistics real estate with a focus on high-barrier, high growth markets. We own, manage and develop well-located, high-quality logistics facilities in 19 countries across four continents. Our portfolio focuses on the world’s most vibrant centers of commerce and our scale across these locations allows us to respond to our customers’ diverse logistics requirements. Our teams actively manage our portfolio to provide comprehensive real estate services, including leasing, property management, development, acquisitions and dispositions. Our property dispositions allow us to recycle capital and contribute to self-funding our development and acquisition activities.
With the broadening of e-commerce adoption driving requirements for increased warehouse space to store inventory, surging customer demand has continued to outpace supply. We believe this demand surge is driven by three primary factors: (i) overall consumption growth; (ii) customer supply chains still re-positioning to address the significant shift to e-commerce, as well as preparing for higher growth and service expectations; and (iii) our customers’ desire for more supply chain resiliency. With inventory-to-sales ratios below pre-pandemic levels, our customers not only need to restock for this shortfall, but build an additional safety stock. We believe these forces have placed a premium on speed-to-market and flexibility, driving demand for years to come.
The scale of our 1.0 billion square foot portfolio allows us to help our customers in a multitude of unique ways. We continue to focus on differentiated ways to meet our customers’ needs through our Prologis Essentials business. This program includes product and service solutions for our customers’ operations, workforce, energy, transportation and data and analytic needs. Our integrated suite of solutions allows our customers to benefit from our global scale, strategic partnerships with vendors and local expertise to obtain services and products more efficiently. We use our proprietary data and analytics to provide our customers actionable insights on everything from inventory, shipping, security, communications management and dock visibility.
Prologis Essentials has a strong sustainability component to its suite of services, which supports our customers’ progress toward their sustainability goals. This includes new development and redevelopment of buildings to specifications that align with leading sustainable building standards and implementation of energy solutions such as solar power and LED lighting. As we explore additional ways to deliver revenue-generating sustainability solutions, we created a new senior leadership role in 2021 - chief sustainability and energy officer. We also are anticipating the introduction of electric vehicle (“EV”) fleets in logistics and are making long-term investments in our portfolio and talent to be well prepared for the future of EV trucking and logistics.
At December 31, 2021, we owned or had investments in, on a wholly-owned basis or through ventures, properties and development projects (based on gross book value and total expected investment at completion, respectively) in the following geographies:
Throughout this discussion, we reflect amounts in the United States (“U.S.”) dollar, our reporting currency. Included in these amounts are consolidated and unconsolidated investments denominated in foreign currencies, principally the British pound sterling, Canadian dollar, euro and Japanese yen that are impacted by fluctuations in exchange rates when translated to U.S. dollars. We mitigate our exposure to foreign currency fluctuations by investing outside the U.S. through co-investment ventures, borrowing in the functional currency of our subsidiaries and utilizing derivative financial instruments.
OPERATING SEGMENTS
Our business comprises two operating segments: Real Estate Operations and Strategic Capital.
Below is information summarizing consolidated activity within our segments over the last three years (in millions):
(1)
NOI from Real Estate Operations is calculated directly from our Consolidated Financial Statements as Rental Revenues and Development Management and Other Revenues less Rental Expenses and Other Expenses. NOI from Strategic Capital is calculated directly from our Consolidated Financial Statements as Strategic Capital Revenues less Strategic Capital Expenses.
(2)
A developed property moves into the operating portfolio when it meets our definition of stabilization, which is the earlier of when a property that was developed has been completed for one year, is contributed to a co-investment venture following completion or is 90% occupied. Amounts represent our total expected investment (“TEI”), which includes the estimated cost of development or expansion, land, construction and leasing costs.
Real Estate Operations
Rental. Rental operations comprise the largest component of our operating segments and generally contribute 85% to 90% of our consolidated revenues, earnings and FFO. We collect rent from our customers through operating leases, including reimbursements for the majority of our property operating costs. For leases that commenced during 2021 within the consolidated operating portfolio, the weighted average lease term was 62 months. We expect to generate internal growth by increasing rents, maintaining high occupancy rates and controlling expenses. The primary driver of our revenue growth will be rolling in-place leases to current market rents as leases expire. We believe our active portfolio management, combined with the skills of our property, leasing, maintenance, capital, energy, sustainability and risk management teams allow us to maximize NOI across our portfolio. Substantially all of our consolidated rental revenue, NOI and cash flows are generated in the U.S.
Development. Given the scarcity of modern logistics facilities in our target markets, our development business provides the opportunity to build to our customers’ current and future requirements and deepen our market presence. We believe we have a competitive advantage due to (i) the strategic locations of our global land bank and redevelopment sites; (ii) the development expertise of our local teams; (iii) the depth of our customer relationships and (iv) our ability to integrate sustainable design features and practices, as detailed in our Environmental Stewardship, Social Responsibility and Governance section below, that result in cost-savings and operational efficiencies for our customers. Successful development and redevelopment efforts provide significant earnings growth as projects are leased, generate income and increase the net asset value of our Real Estate Operations segment. Generally, we develop properties in the U.S. for long-term hold and outside the U.S. for contribution to our unconsolidated co-investment ventures.
Strategic Capital
Our strategic capital segment allows us to partner with many of the world’s largest institutional investors. We capitalize our business through private equity, principally perpetual open-ended or long-term ventures, and two publicly traded vehicles: Nippon Prologis REIT, Inc. in Japan and FIBRA Prologis in Mexico. We align our interests with our partners by holding significant ownership interests in all of our eight unconsolidated co-investment ventures (ranging from 15% to 50%). This structure allows us to reduce our exposure to foreign currency movements for investments outside the U.S.
This segment produces durable, long-term cash flows and generally contributes 10% to 15% of our recurring consolidated revenues, earnings and FFO. We generate strategic capital revenues from our unconsolidated co-investment ventures, principally through asset management and property management services. Asset management fees are primarily driven by the real estate valuation of the respective ventures. We earn additional revenues by providing leasing, acquisition, construction management, development and disposition services. In certain ventures, we also have the ability to earn revenues through incentive fees (“promotes” or “promote revenues”) periodically during the life of a venture or upon liquidation based primarily on the appreciation of the portfolio. We plan to profitably grow this business by increasing our assets under management in existing or new ventures. Most of the strategic capital revenues are generated outside the U.S.
FUTURE GROWTH
We believe the quality and scale of our global portfolio, our ability to build out the global land bank, our strategic capital business, the expertise of our team, the depth of our customer relationships and the strength of our balance sheet are differentiators that allow us to drive growth in revenues, NOI, earnings, FFO and cash flows.
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Rent Growth. We expect rents in our markets to continue to increase due to the demand for the location and quality of our properties. In addition, due to strong market rent growth over the last several years, our in-place leases have considerable upside potential to drive future incremental organic NOI growth. We estimate that our net effective lease mark-to-market is approximately 36%, which represents the growth rate from in-place rents to market rents based on our weighted average ownership of the O&M portfolio at December 31, 2021. Therefore, even if market rent growth is flat in the future, we expect our lease renewals to translate into significant increases in future rental income, on a consolidated basis or through the earnings we recognize from our unconsolidated co-investment ventures based on our ownership. We have experienced positive rent change on rollover (comparing the net effective rent (“NER”) of the new lease to the prior lease for the same space) in every quarter since 2013.
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Value Creation from Development. A successful development and redevelopment program requires maintaining control of well-located land and redevelopment sites and sourcing a future pipeline through acquisition opportunities, including our innovative approach with Covered Land Plays, which are income generating assets acquired with the intention to redevelop for higher and better use as industrial properties. The global nature of our development program is a wide landscape of opportunities to pursue based on our judgement of market conditions, opportunities and risks. We believe that the carrying value of our global land bank is meaningfully below its current fair value. Due to the strategic nature of our global land bank, development expertise of our teams and strength of our customer relationships, we expect to create value as we build new properties.
We are able to maintain strong margins despite rising construction costs, as we experienced in 2021, due to our procurement activities that mitigate a portion of the inflationary increases, as well as rising market rents. We measure the estimated value creation of a development project as the margin above our TEI. Based on our current estimates, our consolidated land, including options and Covered Land Plays, has the potential to support the development of $22.2 billion ($26.4 billion on an O&M basis) of TEI of new logistics space. As properties stabilize, we expect to realize the value creation principally through contributions to unconsolidated co-investment ventures and increases in the NOI of the consolidated portfolio. Our current investment in the development portfolio was $2.7 billion and we expect our development activities to increase in 2022.
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Strategic Capital Advantages. We continue to successfully raise capital to propel the long-term growth of the co-investment ventures while maintaining our substantial investments in these vehicles. At December 31, 2021, the gross book value of the operating portfolio held by our eight unconsolidated co-investment ventures was $45.3 billion across 456 million square feet. During 2021, the valuations of the real estate portfolios owned by the unconsolidated co-investment ventures increased significantly, resulting in higher asset management fees. We expect that continued market rent growth will result in an increase in the asset valuations of the unconsolidated co-investment ventures, which will drive significant returns to the investors and increase the potential for earning promote revenues over the next couple of years. Our Strategic Capital business generates durable fee streams, with asset management fees marked to fair values each quarter, all while requiring minimal capital other than our investment in the venture.
(1)
General and Administrative (“G&A”) Expenses is a line item in the Consolidated Financial Statements. Adjusted G&A expenses is calculated from our Consolidated Financial Statements as G&A Expenses and Strategic Capital Expenses, less expenses under the Prologis Promote Plan (“PPP”) and property-level management expenses for the properties owned by the ventures.
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Balance Sheet Strength. We continue to seek and execute on opportunities to refinance debt at historically low rates. Our financing activities over the last three years resulted in extending our consolidated weighted average remaining maturity from 6 to 10 years and lowering our weighted average effective interest rate from 2.7% to 1.6% at January 1, 2019 and December 31, 2021, respectively. At December 31, 2021, we had total available liquidity of $5.0 billion and continue to maintain low leverage as a percentage of our real estate investments and our market capitalization. As a result of our low leverage, available liquidity and investment capacity in the co-investment ventures, we have significant capacity to capitalize on value-added investment opportunities that will translate into future earnings growth.
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Economies of Scale from Growth. We have scalable systems and infrastructure in place to grow both our consolidated and O&M portfolios with limited incremental G&A expense. We believe we can continue to grow NOI and strategic capital revenues organically and through accretive development and acquisition activity while further reducing G&A as a percentage of our investments in real estate. We use adjusted G&A expenses as a percentage of the O&M portfolio (based on gross book value) to measure and evaluate our overhead costs. As shown in the graph above, the acquisitions of Liberty Property Trust and Liberty Property Limited Partnership (collectively “Liberty” or the “Liberty Transaction”) and Industrial Property Trust Inc. (“IPT” or the “IPT Transaction”) in 2020 are key examples of this effort, where we increased our investments in real estate in the O&M portfolio by over 20% and had minimal increases to G&A expenses, resulting in lower G&A expenses as a percentage of investments in real estate.
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Staying “Ahead of What’s Next™”. We are focused on creating value beyond real estate by enhancing our customers’ experience, leveraging our scale to deliver the best value through our procurement activities and constantly innovating through data analytics and digitization efforts. Our Prologis Essentials business supports our customers’ through service and product offerings, including innovative solutions to operations, transport, technology, energy, and labor challenges that can make our customers’ decision process easier and their enterprise more efficient. Additionally, we invest in sustainable logistics building design features and practices, such as the addition of solar panels, LED lighting and EV charging, that also allows us to assist our customers with their sustainability performance.
Competition
Real estate ownership is highly fragmented, and we face competition from many owners and operators. Competitively priced logistics space could impact our occupancy rates and have an adverse effect on how much rent we can charge, which in turn could affect our operating results. We face competition regarding our capital deployment activities, including regional, national and global operators or developers. We also face competition from investment managers for institutional capital within our strategic capital business.
Despite the competition, our global reach and local market knowledge over the years has given us distinct competitive advantages, including the following:
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a portfolio of properties strategically located in markets characterized by large population densities, growing consumption and high barriers to entry, typically near large labor pools and extensive transportation infrastructure, including our Last Touch® facilities;
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the ability to leverage the organizational scale and structure of our 1.0 billion square foot O&M portfolio to provide a single point of contact for our multi-market customers to address their needs through our in-house global customer led solutions team;
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long-term relationships with customers served by our customer experience team that allows us to proactively and promptly respond to their needs across our global platform;
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the access our customers have to Prologis Essentials integrated suite of solutions;
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a strategically located, global land bank and redevelopment sites that have the potential to support the development of $26.4 billion of TEI of new logistics space on an O&M basis;
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local teams with the expertise, experience and relationships to lease our properties and deploy capital advantageously;
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development of logistics facilities with sustainable design features that meet customer needs for high-quality buildings while enabling them to make progress on their own sustainability objectives;
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relationships and successful track record with current and prospective investors in our strategic capital business that is comprised of 95% perpetual long-term ventures and two publicly traded vehicles;
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a market intelligence team that allows us to track business conditions in real time, proactively pursue market opportunities and disruptions alike, and develop revenue-generating capabilities to strengthen our operational excellence;
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an investment in technology and talent to support our sustainability objectives, including expanding our efforts around renewable energy;
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Prologis Ventures, our corporate venture capital group, and Prologis Labs, our initiative for testing new technologies alongside our customers, together track the leading edge of innovation within real estate and the supply chain, creating important capabilities that connect Prologis with the C-suites of our customers; and
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a strong balance sheet and credit ratings, coupled with significant liquidity, borrowing capacity and long-term fixed debt with low rates.
Customers
At December 31, 2021, in our Real Estate Operations segment representing our consolidated properties, we had more than 3,500 customers occupying 448 million square feet of logistics operating properties. Our broad customer base represents a spectrum of international, national, regional and local logistics users who operate in various industries, providing diverse goods to consumers throughout the globe.
The location of our global portfolio gives us the unique ability to provide our customers with the right real estate solutions for their supply chains that, in turn, allows them to meet end-consumer delivery expectations. We have invested in properties located within infill and urban areas in our largest global markets with same day access (defined as Last Touch®) and next day access (defined as city distribution), to the consumer population. We have also invested in facilities located at key transportation hubs on the edge of these major infill and urban areas and gateway distribution facilities that incorporate access to major sea and intermodal ports.
Below are the primary categories of goods in our buildings for our consolidated real estate properties at December 31, 2021.
(1)
NER is calculated using the estimated total cash to be received over the term of the lease divided by the lease term to determine the average amount of cash rent payments received per year. Amounts derived in a currency other than the U.S. dollar have been translated using the average rate from the previous twelve months.
The following table details our top 25 customers for our consolidated and O&M real estate properties at December 31, 2021 (square feet in millions):
Consolidated - Real Estate Operations
Owned and Managed
Top Customers
% of NER
Total Occupied Square Feet
Top Customers
% of NER
Total Occupied Square Feet
1. Amazon
7.0
1. Amazon
4.8
2. FedEx
2.1
2. Geodis
1.4
3. Home Depot
1.9
3. FedEx
1.3
4. Geodis
1.1
4. DHL
1.2
5. Wal-Mart
1.0
5. Home Depot
1.2
6. U.S. Government
0.8
6. GXO
1.2
7. UPS
0.8
7. DSV Panalpina
0.8
8. GXO
0.7
8. CEVA Logistics
0.7
9. DSV Panalpina
0.7
9. UPS
0.7
10. DHL
0.6
10. Kuehne + Nagel
0.7
Top 10 Customers
16.7
Top 10 Customers
14.0
11. Pepsi
0.6
11. Wal-Mart
0.6
12. Office Depot
0.5
12. U.S. Government
0.6
13. Staples
0.5
13. ZOZO
0.5
14. Berkshire Hathaway
0.5
14. Hitachi
0.5
15. VF Corporation
0.4
15. DB Schenker
0.5
16. Kellogg
0.4
16. J Sainsburys
0.5
17. Ryder System
0.4
17. Cainiao (Alibaba)
0.5
18. Mondelez International
0.4
18. BMW
0.4
19. National Distribution Centers
0.3
19. Maersk
0.4
20. Westrock Company
0.3
20. Ingram Micro
0.3
21. Kuehne + Nagel
0.3
21. Sumitomo
0.3
22. Sysco Guest Supply
0.3
22. Pepsi
0.3
23. Lindt & Sprüngli
0.3
23. Staples
0.3
24. Ingram Micro
0.3
24. Panasonic
0.3
25. Iron Mountain
0.3
25. Mercado Libre
0.3
Top 25 Customers
22.5
Top 25 Customers
20.3
In our Strategic Capital segment, we view our partners and investors as our customers. At December 31, 2021, we had 149 investors in our private equity ventures, several of which invest in multiple ventures.
Employees
Our employees are the most important part of our business. When attracting, developing and retaining talent, we seek individuals who hold varied experiences and viewpoints to create an inclusive and diverse culture and workplace that allows each employee to do their best work and drive our collective success. We focus on leadership development at every level of the organization. We align employees’ goals with our overall strategic direction to create a clear link between individual efforts and the long-term success of the company. We then provide feedback on their performance towards those goals to ensure their growth. Providing our employees’ learning and development through training, educational opportunities and mentorship is critical to our ability to continue to innovate. We have strong employee engagement throughout all areas of the company, which we regularly measure through employee engagement surveys.
Throughout the COVID-19 pandemic, we have protected our employee’s health and well-being by providing the technology and communication equipment necessary to allow the majority of our employees to work remotely. For those employees who cannot effectively do their jobs remotely, we have put protocols in place to ensure a safe working environment. Moving forward, we will provide workplace flexibility with accountability to our employees as determined by role. We continue to attract and retain the top talent in the industry through a robust benefit package, career growth opportunities, talent recognition and individual development planning. Our talented team allows Prologis to deliver on our commitment to our customers and investors.
The following table summarizes our total number of employees at December 31, 2021:
Geographies
U.S. (1)
1,166
Other Americas
Europe
Asia
Total
2,053
(1)
This includes employees who were based in the U.S. but also support other geographies.
We allocate the personnel costs related to providing property management and leasing functions to our Real Estate Operations and Strategic Capital segments based on the square footage of the respective portfolios. The personnel costs to perform only Strategic Capital functions are allocated directly to that segment.
Prologis employees are not organized under collective bargaining agreements, other than in Brazil, France and Spain, and there is a works council in France.
CODE OF ETHICS AND BUSINESS CONDUCT
We maintain a Code of Ethics and Business Conduct applicable to our board of directors (the “Board”) and all of our officers and employees, including the principal executive officer, the principal financial officer and the principal accounting officer, and other people performing similar functions. A copy of our Code of Ethics and Business Conduct is available on our website, www.prologis.com. In addition to being accessible through our website, copies of our Code of Ethics and Business Conduct can be obtained, free of charge, upon written request to Investor Relations, Pier 1, Bay 1, San Francisco, California 94111. Any amendments to or waivers of our Code of Ethics and Business Conduct that apply to the principal executive officer, the principal financial officer, the principal accounting officer, or other people performing similar functions, and that relate to any matter enumerated in Item 406(b) of Regulation S-K, will be disclosed on our website.
ENVIRONMENTAL STEWARDSHIP, SOCIAL RESPONSIBILITY AND GOVERNANCE (“ESG”)
Our long-standing dedication to ESG creates value for our company by strengthening our relationships with our customers, investors, employees and the communities in which we do business. The principles of ESG are an important aspect of our business strategy, delivering a strategic business advantage while positively impacting the environment. We develop modern and efficient buildings with state-of-the-art technology to stay ahead of our customers’ needs while advancing structural, transportation, and energy requirements. We invest in sustainable design features and practices. This includes the addition of solar panels, cool roofs, LED lighting, electric vehicle charging stations, waste diversion, recycling and xeriscaping. These services and solutions deliver cost-savings and operational efficiencies for our customers, reduce energy and water consumption and decrease greenhouse gas emissions within our customers’ operations across our portfolio and our own corporate operations.
We believe our Prologis Essentials LED and SolarSmart solutions accelerate energy savings and help reduce the environmental footprint of our customers. We regularly and proactively reach out to customers to discuss how Prologis can work with them to enhance the sustainability of their operations. We have a comprehensive approach to carbon management that includes science-based targets to address our global carbon footprint resulting from our development activities. We have committed to achieving 100% carbon-neutral construction globally by 2025 and will partner with our customers to decarbonize their operations through our CarbonZero program. We have also committed to achieving green building certifications for 100% of our new development and redevelopment and are exploring innovative and sustainable building designs and technologies such as EV charging stations. We are regularly recognized for our commitment to and leadership in sustainable building practices and are positioning ourselves as the developer of choice for customers seeking a partner that can help them meet their own sustainability goals.
We are committed to social responsibility and strengthening relationships important to our business through customer partnerships, investor outreach, community involvement, labor solutions, and inclusion and diversity initiatives. We also focus on our employees and our customers’ employees through health and wellness programs and building design. Through our Community Workforce Initiative, for example, we are helping build a talent pipeline for our customers with an emphasis on revitalizing career pathways and creating economic opportunities in the communities where we operate. We set an ambitious goal to train 25,000 individuals by 2025 by partnering with leading public sector organizations and leveraging digital learning technologies to develop innovative training solutions. In 2021, we partnered with the Association for Supply Chain Management to create a new industry certificate for our digital curriculum to develop the next generation of talent for the logistics industry.
We strive to promote a culture of uncompromising integrity, including through our governance practices and corporate oversight. Our Board independence and diversity, open communication with our stockholders and a risk management framework that supports our investment and process decisions all serve to mitigate risk and preserve value for our company. The strength of our balance sheet and credit ratings, ability to stay ahead of customer needs, dedication to proactive risk mitigation and engagement with our employees through ethics and anti-corruption training, along with stockholder outreach ensures the financial, operational and reputational resilience of our organization for the long-term. Our approach is reinforced by our Code of Ethics and Business Conduct, as described above.
ENVIRONMENTAL MATTERS
We are exposed to various environmental risks that may result in unanticipated losses and affect our operating results and financial condition. Either the previous owners or we have conducted environmental reviews on a majority of the properties we have acquired, including land. While some of these assessments have led to further investigation and sampling, none of the environmental assessments have revealed an environmental liability that we believe would have a material adverse effect beyond amounts recorded at December 31, 2021. See further discussion in Item 1A. Risk Factors and Note 16 to the Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data.
GOVERNMENTAL MATTERS
We are exposed to various regulatory requirements, taxes, tariffs, trade wars and laws within the countries in which we operate and unexpected changes in these items may result in unanticipated losses, adverse tax consequences and affect our operating results and financial condition. In addition, we may be impacted by the ability of our non-U.S. subsidiaries to distribute or otherwise transfer cash among our subsidiaries due to currency exchange control regulations and transfer pricing regulations. The impact of regional or country-specific economic instability, including government shutdowns or other internal trade alliances or agreements could also have a material adverse effect on our business, financial condition or results of operations. See further discussion in Item 1A. Risk Factors.
INSURANCE COVERAGE
We carry insurance coverage on our properties. We determine the type of coverage and the policy specifications and limits based on what we deem to be the risks associated with our ownership of properties and our business operations in specific markets. Such coverage typically includes property damage and rental loss insurance resulting from such perils as fire, windstorm, flood, earthquake and terrorism; commercial general liability insurance; and environmental insurance. Insurance is maintained through a combination of commercial insurance, self-insurance and a wholly-owned captive insurance entity. Additionally, in 2021 we sponsored catastrophe bonds that provide further insurance coverage for potential losses resulting from earthquake risks in the U.S. The costs to insure our properties are primarily covered through expense reimbursements from our customers. We believe our insurance coverage contains policy specifications and insured limits that are customary for similar properties, business activities and markets and we believe our properties are adequately insured. See further discussion in Item 1A. Risk Factors.

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ITEM 1A. RISK FACTORS
ITEM 1A. Risk Factors
Our operations and structure involve various risks that could adversely affect our business and financial condition, including but not limited to, our financial position, results of operations, cash flow, ability to make distributions and payments to security holders and the market value of our securities. These risks relate to Prologis as well as our investments in consolidated and unconsolidated entities and include among others, (i) risks related to our global operations (ii) risks related to our business; (iii) risks related to financing and capital; (iv) risks related to income taxes; and (v) general risks.
Risks Related to our Global Operations
As a global company, we are subject to social, political and economic risks of doing business in many countries.
We conduct a significant portion of our business and employ a substantial number of people outside of the U.S. During 2021, we generated approximately $620 million or 13.0% of our consolidated revenues from operations outside the U.S. Circumstances and developments related to international operations that could negatively affect us include, but are not limited to, the following factors:
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difficulties and costs of staffing and managing international operations in certain geographies, including differing employment practices and labor issues;
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local businesses and cultural factors that differ from our usual standards and practices;
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volatility in currencies and currency restrictions, which may prevent the transfer of capital and profits to the U.S.;
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challenges in establishing effective controls and procedures to regulate operations in different geographies and to monitor compliance with applicable regulations, such as the Foreign Corrupt Practices Act, the United Kingdom (“U.K.”) Bribery Act and other similar laws;
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unexpected changes in regulatory and environmental requirements, taxes, tariffs, trade wars and laws within the countries in which we operate;
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potentially adverse tax consequences;
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the responsibility of complying with multiple and potentially conflicting laws, e.g., with respect to corrupt practices, employment and licensing;
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the impact of regional or country-specific business cycles and economic instability, including government shutdowns and withdrawals from the European Union or other international trade alliances or agreements;
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political instability, uncertainty over property rights, civil unrest, drug trafficking, political activism or the continuation or escalation of terrorist or gang activities;
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foreign ownership restrictions in operations with the respective countries; and
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access to capital may be more restricted, or unavailable on favorable terms or at all in certain locations.
In addition, we may be impacted by the ability of our non-U.S. subsidiaries to dividend or otherwise transfer cash among our subsidiaries due to currency exchange control regulations, transfer pricing regulations and potentially adverse tax consequences, among other factors.
Compliance or failure to comply with regulatory requirements could result in substantial costs.
We are required to comply with many regulations in different countries, including (but not limited to) the Foreign Corrupt Practices Act, the U.K. Bribery Act and similar laws and regulations. Our properties are also subject to various federal, state and local regulatory requirements, such as the Americans with Disabilities Act and state and local fire, life-safety, energy and greenhouse gas emissions requirements. Noncompliance could result in the imposition of governmental fines or the award of damages to private litigants. While we believe that we are currently in material compliance with these regulatory requirements, the requirements may change or new requirements may be imposed that could require significant unanticipated expenditures by us.
Disruptions in the global capital and credit markets may adversely affect our operating results and financial condition.
To the extent there is turmoil in the global financial markets, this turmoil has the potential to adversely affect (i) the value of our properties; (ii) the availability or the terms of financing that we have or may anticipate utilizing; (iii) our ability to make principal and interest payments on, or refinance any outstanding debt when due; and (iv) the ability of our customers to enter into new leasing transactions or satisfy rental payments under existing leases. Disruptions in the capital and credit markets may also adversely affect the market price of our securities and our ability to make distributions and payments to our security holders.
The depreciation in the value of the foreign currency in countries where we have a significant investment may adversely affect our results of operations and financial position.
We hold significant real estate investments in international markets where the U.S. dollar is not the functional currency. At December 31, 2021, approximately $9.1 billion or 15.6% of our total consolidated assets were invested in a currency other than the U.S. dollar, principally the British pound sterling, Canadian dollar, euro and Japanese yen. For the year ended December 31, 2021, $422 million or 12.1% of our total consolidated segment NOI was denominated in a currency other than the U.S. dollar. See Note 17 to the Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data for more information on these amounts. As a result, we are subject to foreign currency risk due to potential fluctuations in exchange rates between foreign currencies and the U.S. dollar. A significant change in the value of the foreign currency of one or more countries where we have a significant investment may have a material adverse effect on our business and, specifically, our U.S. dollar reported financial position and results of operations.
Our hedging of foreign currency and interest rate risk may not effectively limit our exposure to these risks.
We attempt to mitigate our risk by borrowing in the currencies in which we have significant investments thereby providing a natural hedge. We may also enter into derivative financial instruments that we designate as net investment hedges, as these amounts offset the translation adjustments on the underlying net assets of our foreign investments. We enter into other foreign currency contracts, such as forwards, to reduce fluctuations in foreign currency cash flow associated with the translation of future earnings of our international subsidiaries. Although we attempt to mitigate the potential adverse effects of changes in foreign currency rates there can be no assurance that those attempts will be successful. In addition, we occasionally use interest rate swap contracts to manage interest rate risk and limit the impact of future interest rate changes on earnings and cash flows. Hedging arrangements involve risks, such as the risk of fluctuation in the relative value of the foreign currency or interest rates and the risk that counterparties may fail to honor their obligations under these arrangements. The funds required to settle such arrangements could be significant depending on the stability and movement of the hedged foreign currency or the size of the underlying financing and the applicable interest rates at the time of the breakage. The failure to hedge effectively against foreign exchange changes or interest rate changes may adversely affect our business.
Risks Related to our Business
General economic conditions and other events or occurrences that affect areas in which our properties are geographically concentrated, may impact financial results.
We are exposed to the economic conditions and other events and occurrences in the local, regional, national and international geographies in which we own properties. Our operating performance is further impacted by the economic conditions of the specific markets in which we have concentrations of properties.
At December 31, 2021, 30.7% of our consolidated operating properties or $13.8 billion (based on consolidated gross book value, or investment before depreciation) were located in California (Central Valley, San Francisco Bay Area and Southern California markets), which represented 25.9% of the aggregate square footage of our operating properties and 33.0% of our consolidated operating property NOI. Our revenues from, and the value of, our properties located in California may be affected by local real estate conditions (such as an oversupply of or reduced demand for logistics properties) and the local economic climate. Business layoffs, downsizing, industry slowdowns, changing demographics and other factors may adversely impact California’s economic climate. Because of the investment we have located in California, a downturn in California’s economy or real estate conditions, including state income tax and property tax laws, could adversely affect our business.
In addition to California, we also have significant holdings (defined as more than 3% of total consolidated investment before depreciation) in operating properties in certain markets located in Atlanta, Chicago, Dallas/Fort Worth, Houston, Lehigh Valley, New Jersey/New York City, Seattle and South Florida. Of these markets, no single market contributed more than 10% of our total consolidated investment before depreciation in operating properties. Our operating performance could be adversely affected if conditions become less favorable in any of the markets in which we have a concentration of properties. Conditions such as an oversupply of logistics space or a reduction in demand for logistics space, among other factors, may impact operating conditions. Any material oversupply of logistics space or material reduction in demand for logistics space could adversely affect our overall business.
Our O&M portfolio, which includes our consolidated properties and properties owned by our unconsolidated co-investment ventures, has concentrations of properties in the same markets mentioned above, as well as in markets in China, France, Japan, Mexico and the U.K., and are subject to the economic conditions in those markets.
Real estate investments are not as liquid as certain other types of assets, which may reduce economic returns to investors.
Real estate investments are not as liquid as certain other types of investments and this lack of liquidity may limit our ability to react promptly to changes in economic or other conditions. Significant expenditures associated with real estate investments, such as secured mortgage debt payments, real estate taxes and maintenance costs, are generally not reduced when circumstances cause a reduction in income from the investments. As a REIT, under the IRC, we are only able to hold property for sale in the ordinary course of business through taxable REIT subsidiaries in order to not incur punitive taxation on any tax gain from the sale of such property. We may dispose of certain properties that have been held for investment to generate liquidity. If we do not satisfy certain safe harbors or we believe there is too much risk of incurring the punitive tax on any tax gain from the sale, we may not pursue such sales.
We may decide to sell or contribute properties to certain of our co-investment ventures or sell properties to third parties to generate proceeds to fund our capital deployment activities. Our ability to sell or contribute properties on advantageous terms is affected by: (i) competition from other owners of properties that are trying to dispose of their properties; (ii) economic and market conditions, including the capitalization rates applicable to our properties; and (iii) other factors beyond our control. If our competitors sell assets similar to assets we intend to divest in the same markets or at valuations below our valuations for comparable assets, we may be unable to divest our assets at favorable pricing or at all. The co-investment ventures or third parties who might acquire our properties may need to have access to debt and equity capital, in the private and public markets, in order to acquire properties from us. Should they have limited or no access to capital on favorable terms, then dispositions and contributions could be delayed.
If we do not have sufficient cash available to us through our operations, sales or contributions of properties or available credit facilities to continue operating our business as usual, we may need to find alternative ways to increase our liquidity. Such alternatives may include, without limitation, divesting properties at less than optimal terms, incurring debt, entering into leases with new customers at lower rental rates or less than optimal terms or entering into lease renewals with our existing customers without an increase in rental rates. There can be no assurance, however, that such alternative ways to increase our liquidity will be available to us. Additionally, taking such measures to increase our liquidity may adversely affect our business, and in particular, our distributable cash flow and debt covenants.
Our investments are concentrated in the logistics sector and our business would be adversely affected by an economic downturn in that sector.
Our investments in real estate assets are concentrated in the logistics sector. This concentration may expose us to the risk of economic downturns in this sector to a greater extent than if our business activities were more diversified.
Investments in real estate properties are subject to risks that could adversely affect our business.
Investments in real estate properties are subject to varying degrees of risk. While we seek to minimize these risks through geographic diversification of our portfolio, market research and our asset management capabilities, these risks cannot be eliminated. Factors that may affect real estate values and cash flows include:
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local conditions, such as oversupply or a reduction in demand;
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technological changes, such as reconfiguration of supply chains, autonomous vehicles, robotics, 3D printing or other technologies;
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the attractiveness of our properties to potential customers and competition from other available properties;
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increasing costs of maintaining, insuring, renovating and making improvements to our properties;
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our ability to reposition our properties due to changes in the business and logistics needs of our customers;
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our ability to lease the properties at favorable rates and control variable operating costs; and
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governmental and environmental regulations and the associated potential liability under, and changes in, environmental, zoning, usage, tax, tariffs and other laws.
These factors may affect our ability to recover our investment in the properties and result in impairment charges.
Our customers may be unable to meet their lease obligations or we may be unable to lease vacant space or renew leases or re-lease space on favorable terms as leases expire.
Our operating results and distributable cash flow would be adversely affected if a significant number of our customers were unable to meet their lease obligations. At December 31, 2021, our top 10 customers accounted for 16.7% of our consolidated NER and 14.0% of our O&M NER. In the event of default by a significant number of customers, we may experience delays and incur substantial costs in enforcing our rights as landlord, and we may be unable to re-lease spaces. A customer may experience a downturn in its business, which may cause the loss of the customer or may weaken its financial condition, resulting in the customer’s failure to make rental payments when due or requiring a restructuring that might reduce cash flow from the lease. In addition, a customer may seek the protection of bankruptcy, insolvency or similar laws, which could result in the rejection and termination of such customer’s lease and thereby cause a reduction in our available cash flow.
We are also subject to the risk that, upon the expiration of leases they may not be renewed by existing customers, the space may not be re-leased to new customers or the terms of renewal or re-leasing (including the cost of required renovations or concessions to customers) may be less favorable to us than current lease terms. Our competitors may offer space at rental rates below current market rates or below the rental rates we currently charge our customers and we may be pressured to reduce our rental rates below those we currently charge to retain customers when leases expire or we may lose potential customers.
We may acquire properties and companies that involve risks that could adversely affect our business and financial condition.
We have acquired properties and will continue to acquire properties through the direct acquisition of real estate, the acquisition of entities that own real estate or through additional investments in co-investment ventures that acquire properties. The acquisition of properties involves risks, including the risk that the acquired property will not perform as anticipated and that any actual costs for rehabilitation, repositioning, renovation and improvements identified in the pre-acquisition due diligence process will exceed estimates. When we acquire properties, we may face risks associated with a lack of market knowledge or understanding of the local economy, forging new business relationships in the area and unfamiliarity with local government and permitting procedures. Additionally, there is, and it is expected there will continue to be, significant competition for properties that meet our investment criteria as well as risks associated with obtaining financing for acquisition activities. The acquired properties or entities may be subject to liabilities, including tax liabilities, which may be without any recourse, or with only limited recourse, with respect to unknown liabilities. As a result, if a liability were asserted against us based on our new ownership of any of these entities or properties, then we may have to pay substantial sums to settle it.
We may be unable to integrate the operations of newly acquired companies and realize the anticipated synergies and other benefits or do so within the anticipated timeframe. Potential difficulties we may encounter in the integration process include: (i) the inability to dispose of non-industrial assets or operations that are outside of our area of expertise; (ii) potential unknown liabilities and unforeseen increased expenses, delays or regulatory conditions associated with these transactions; and (iii) performance shortfalls as a result of the diversion of management’s attention caused by completing these transactions and integrating the companies’ operations.
Our real estate development and redevelopment strategies may not be successful.
Our real estate development and redevelopment strategy is focused on monetizing land and redevelopment sites in the future through development of logistics facilities to hold for long-term investment and for contribution or sale to a co-investment venture or third party, depending on market conditions, our liquidity needs and other factors. We may increase our investment in the development, renovation and redevelopment business and we expect to complete the build-out and leasing of our current development portfolio. We may also develop, renovate and redevelop properties within existing or newly formed co-investment ventures. The real estate development, renovation and redevelopment business includes the following significant risks:
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we may not be able to obtain financing for development projects on favorable terms or at all;
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we may explore development opportunities that may be abandoned and the related investment impaired;
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we may not be able to obtain, or may experience delays in obtaining, all necessary zoning, land-use, building, occupancy and other governmental permits and authorizations;
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we may have construction costs or additional environmental regulation costs that exceed our estimates and projects may not be completed, delivered or stabilized as planned due to defects or other issues;
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we may not be able to attract third-party investment in new development co-investment ventures or sufficient customer demand for our product;
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we may have properties that perform below anticipated levels, producing cash flows below budgeted amounts;
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we may seek to sell certain land parcels and not be able to find a third party to acquire such land or the sales price will not allow us to recover our investment, resulting in impairment charges;
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we may not be able to lease properties we develop on favorable terms or at all;
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we may not be able to capture the anticipated enhanced value created by our value-added properties on expected timetables or at all;
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we may experience delays (temporary or permanent) if there is public or government opposition to our activities; and
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we may have substantial renovation, new development and redevelopment activities, regardless of their ultimate success, that require a significant amount of management’s time and attention, diverting their attention from our day-to-day operations.
We are subject to risks and liabilities in connection with forming and attracting third-party investment in co-investment ventures, investing in new or existing co-investment ventures, and managing properties through co-investment ventures.
At December 31, 2021, we had investments in co-investment ventures, both public and private, that owned operating properties with a gross book value of approximately $54 billion. Our organizational documents do not limit the amount of available funds that we may invest in these ventures, and we may and currently intend to develop and acquire properties through co-investment ventures and investments in other entities when warranted by the circumstances. However, there can be no assurance that we will be able to form new co-investment ventures, or attract third-party investment or that additional investments in new or existing ventures to develop or acquire properties will be successful. Further, there can be no assurance that we are able to realize value from our existing or future investments. The same factors that impact the valuation of our consolidated portfolio, as discussed above, also impact the portfolios held by the co-investment ventures and could result in other than temporary impairment of our investment and a reduction in fee revenues.
Our co-investment ventures involve certain additional risks that we do not otherwise face, including:
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our partners may share certain approval rights over major decisions made on behalf of the ventures;
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if our partners fail to fund their share of any required capital contributions, then we may choose to contribute such capital;
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our partners might have economic or other business interests or goals that are inconsistent with our business interests or goals that would affect our ability to operate the venture;
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the venture or other governing agreements often restrict the transfer of an interest in the co-investment venture or may otherwise restrict our ability to sell the interest when we desire or on advantageous terms;
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our relationships with our partners are generally contractual in nature and may be terminated or dissolved under the terms of the agreements, and in such event, we may not continue to invest in or manage the assets underlying such relationships resulting in
a decrease in our assets under management and a reduction in fee revenues. This may also require us to acquire the properties in order to maintain an investment in the portfolio; and
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disputes between us and our partners may result in litigation or arbitration that would increase our expenses and prevent our officers and directors from focusing their time and effort on our business and result in subjecting the properties owned by the applicable co-investment venture to additional risk.
We generally seek to maintain sufficient influence over our co-investment ventures to permit us to achieve our business objectives; however, we may not be able to continue to do so indefinitely. We have formed publicly traded investment vehicles, such as NPR and FIBRA Prologis, for which we serve as sponsor or manager. These entities bear their own risks related to trading markets, foreign currency exchange rates and market demand. We have contributed, and may continue to contribute, assets into such vehicles. There is a risk that our managerial relationship may be terminated.
We have also made investments in early and growth-stage companies that are focused on emerging technology. These companies may not be successful at raising additional capital or generating cash flows to sustain operations, which could result in the impairment of our investment. In addition, through Prologis Essentials we are investing in the development of new business lines that are complementary to our core business. These business lines may not be successful and may include risks that are different than investing in our core real estate business.
We are exposed to various environmental risks, which may result in unanticipated losses that could affect our business and financial condition.
Under various federal, state and local laws, ordinances and regulations, a current or previous owner, developer or operator of real estate may be liable for the costs of removal or remediation of certain hazardous or toxic substances. The costs of removal or remediation of such substances could be substantial. Such laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the release or presence of such hazardous substances. In addition, third parties may sue the owner or operator of a site for damages based on personal injury, property damage or other costs, including investigation and clean-up costs, resulting from the environmental contamination.
Environmental laws in some countries, including the U.S., also require that owners or operators of buildings containing asbestos properly manage and maintain the asbestos, adequately inform or train those who may come into contact with asbestos and undertake special precautions, including removal or other abatement, in the event that asbestos is disturbed during building renovation or demolition. These laws may impose fines and penalties on building owners or operators who fail to comply with these requirements and may allow third parties to seek recovery from owners or operators for personal injury associated with exposure to asbestos. Some of our properties are known to contain asbestos-containing building materials.
In addition, some of our properties are leased or have been leased, in part, to owners and operators of businesses that use, store or otherwise handle petroleum products or other hazardous or toxic substances, creating a potential for the release of such hazardous or toxic substances. Furthermore, certain of our properties are on, adjacent to or near other properties that have contained or currently contain petroleum products or other hazardous or toxic substances, or upon which others have engaged, are engaged or may engage in activities that may release such hazardous or toxic substances. From time to time, we may acquire properties, or interests in properties, with known adverse environmental conditions for which we believe that the environmental liabilities associated with these conditions are quantifiable and that the acquisition will yield a superior risk-adjusted return. In connection with certain divested properties, we have agreed to remain responsible for, and to bear the cost of, remediating or monitoring certain environmental conditions on the properties.
Our insurance coverage does not cover all potential losses.
We and our unconsolidated co-investment ventures carry insurance coverage including property damage and rental loss insurance resulting from certain perils such as fire and additional perils as covered under an extended coverage policy, namely windstorm, flood, earthquake and terrorism; commercial general liability insurance; and environmental insurance, as appropriate for the markets where each of our properties and business operations are located. The insurance coverage contains policy specifications and insured limits customarily carried for similar properties, business activities and markets. We believe our properties and the properties of our co-investment ventures are adequately insured. Certain losses, however, including losses from floods, earthquakes, acts of war, acts of terrorism or riots and pandemics, generally are not insured against or not fully insured against because it is not deemed economically feasible or prudent to do so. If an uninsured loss or a loss in excess of insured limits occurs with respect to one or more of our properties, we could experience a significant loss of capital invested and future revenues in these properties and could potentially remain obligated under any recourse debt associated with the property.
Furthermore, we cannot be sure that the insurance companies will be able to continue to offer products with sufficient coverage at commercially reasonable rates. If we experience a loss that is uninsured or that exceeds insured limits with respect to one or more of our properties or if the insurance companies fail to meet their coverage commitments to us in the event of an insured loss, then we could lose the capital invested in the damaged properties, as well as the anticipated future revenues from those properties and, if there is recourse debt, then we would remain obligated for any mortgage debt or other financial obligations related to the properties. Any such losses or higher insurance costs could adversely affect our business.
A number of our investments, both wholly-owned and owned through co-investment ventures, are located in areas that are known to be subject to earthquake activity. U.S. properties located in active seismic areas include properties in our markets in California and Seattle. International properties located in active seismic areas include Japan and Mexico. We generally carry earthquake insurance on our properties located in areas historically subject to seismic activity, subject to coverage limitations and deductibles, if we believe it is commercially reasonable. We evaluate our earthquake insurance coverage annually in light of current industry practice through an analysis prepared by outside consultants and in some specific instances have elected to self-insure our earthquake exposure based on this analysis. We have elected not to carry earthquake insurance for our assets in Japan based on this analysis.
Furthermore, a number of our properties are located in areas that are known to be subject to hurricane or flood risk. We carry hurricane and flood hazard insurance on all of our properties located in areas historically subject to such activity, subject to coverage limitations and deductibles, if we believe it is commercially reasonable. We evaluate our insurance coverage annually in light of current industry practice through an analysis prepared by outside consultants.
Risks Related to Financing and Capital
We may be unable to refinance our debt or our cash flow may be insufficient to make required debt payments.
We are subject to risks normally associated with debt financing, including the risk that our cash flow will be insufficient to meet required payments of principal and interest. There can be no assurance that we will be able to refinance any maturing indebtedness, that such refinancing would be on terms as favorable as the terms of the maturing indebtedness, or that we will be able to otherwise obtain funds by selling assets or raising equity to make required payments on maturing indebtedness. If we are unable to refinance our indebtedness at maturity or meet our payment obligations, our business and financial condition will be negatively impacted and, if the maturing debt is secured, the lender may foreclose on the property securing such indebtedness. Our credit facilities and certain other debt bears interest at variable rates. Increases in market interest rates would increase our interest expense under these agreements.
Covenants in our credit agreements could limit our flexibility and breaches of these covenants could adversely affect our financial condition.
The terms of our various credit agreements, including our credit facilities and term loans, the indentures under which certain of our senior notes are issued and other note agreements, require us to comply with a number of customary financial covenants, such as maintaining debt service coverage ratios, leverage ratios and fixed charge coverage ratios. These covenants may limit our flexibility to run our business, and breaches of these covenants could result in defaults under the instruments governing the applicable indebtedness. If we default under the covenant provisions and are unable to cure the default, refinance the indebtedness or meet payment obligations, our business and financial condition generally and, in particular, the amount of our distributable cash flow could be adversely affected.
Adverse changes in our credit ratings could negatively affect our financing activity.
At December 31, 2021, our credit ratings were A3 from Moody’s with a stable outlook and A- from S&P with a positive outlook. A securities rating is not a recommendation to buy, sell or hold securities and is subject to revision or withdrawal at any time by the rating organization.
The credit ratings of our senior notes and preferred stock are based on our operating performance, liquidity and leverage ratios, overall financial position and other factors employed by the credit rating agencies in their rating analyses of us. Our credit ratings can affect the amount of capital we can access, as well as the terms and pricing of any debt we may incur. There can be no assurance that we will be able to maintain our current credit ratings, and in the event our credit ratings are downgraded, we would likely incur higher borrowing costs and may encounter difficulty in obtaining additional financing. Also, a downgrade in our credit ratings may trigger additional payments or other negative consequences under our credit facilities and other debt instruments. Adverse changes in our credit ratings could negatively impact our business and, in particular, our refinancing and other capital market activities, our ability to manage debt maturities, our future growth and our development and acquisition activity.
In order to meet REIT distribution requirements we may need access to external sources of capital.
To qualify as a REIT, we are required each year to distribute at least 90% of our REIT taxable income (determined without regard to the dividends-paid deduction and by excluding any net capital gain) to our stockholders and we may be subject to tax to the extent our taxable income is not fully distributed. Historically, we have satisfied these distribution requirements by making cash distributions to our stockholders, however, we may elect to pay a portion of the distribution in shares of our stock. Assuming we continue to satisfy these distribution requirements with cash, we may not be able to fund all future capital needs, including acquisition and development activities, from cash retained from operations and may have to rely on third-party sources of capital. Furthermore, to maintain our REIT status and not have to pay federal income and excise taxes, we may need to borrow funds on a short-term basis to meet the REIT distribution requirements even if the then-prevailing market conditions are not favorable for these borrowings. These short-term borrowing needs could result from differences in timing between the actual receipt of cash and inclusion of income for federal income tax purposes, or the effect of nondeductible capital expenditures, the creation of reserves or required debt or amortization payments. Our ability to access debt and equity capital on favorable terms or at all depends on a number of factors, including general market conditions, the market’s perception of our growth potential, our current and potential future earnings and cash distributions and the market price of our securities.
Transition to an alternative reference rate due to the cessation of the London Inter-bank Offered Rate (“LIBOR”) could have a negative impact on our required debt payments and the value of our related debt and derivative financial instruments.
In March 2021, the Financial Conduct Authority (“FCA”) formally announced that the publication of LIBOR was ending and confirmed that USD LIBOR-indexed rates would cease to be published after June 30, 2023. Certain interbank offered rates (“IBOR”) ceased on December 31, 2021. For discussion on the transition of these rates see Note 2 to the Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data. The Federal Reserve Board and the Federal Reserve Bank of New York identified the Secured Overnight Financing Rate (“SOFR”) as its preferred alternative rate for USD LIBOR for debt and derivative financial instruments. This extended cessation date for USD LIBOR-indexed rates would allow most legacy USD LIBOR contracts to mature before disruptions occur in the USD LIBOR market, without the need to transition those contracts to SOFR. At December 31, 2021, only the available USD commitments on our global senior credit facilities were indexed to USD LIBOR. See Item 7A. Quantitative and Qualitative Disclosures About Market Risk for additional discussion regarding our variable rate debt.
Our global senior credit facility agreements contain provisions that reference a comparable or successor rate to the extent USD LIBOR rates are no longer available and no mandatory prepayment or redemption provisions would be triggered in that instance. We anticipate managing the transition from USD LIBOR to SOFR using the language set out in our agreements and through potentially modifying our debt and derivative instruments, however future market conditions may not allow immediate implementation of desired modifications and we may incur significant associated costs in doing so. We will continue to monitor and evaluate the potential impact on our debt payments and value of our related debt and derivative financial instruments.
Our stockholders may experience dilution if we issue additional common stock or units in the OP.
Any additional future issuance of common stock or OP units will reduce the percentage of our common stock and units owned by investors. In most circumstances, stockholders and unitholders will not be entitled to vote on whether or not we issue additional common stock or units. In addition, depending on the terms and pricing of any additional offering of our common stock or OP units and the utilization of the proceeds, our stockholders and unitholders may experience dilution in both book value and fair value of their common stock or units.
Risks Related to Income Tax
The failure of Prologis, Inc. to qualify as a REIT would have serious adverse consequences.
Prologis, Inc. elected to be taxed as a REIT under Sections 856 through 860 of the IRC commencing with the taxable year ended December 31, 1997. We believe Prologis, Inc. has been organized and operated to qualify as a REIT under the IRC and believe that the current organization and method of operation comply with the rules and regulations promulgated under the IRC to enable Prologis, Inc. to continue to qualify as a REIT. However, it is possible that we are organized or have operated in a manner that would not allow Prologis, Inc. to qualify as a REIT, or that our future operations could cause Prologis, Inc. to fail to qualify. Qualification as a REIT requires us to satisfy numerous requirements (some annually and others on a quarterly basis) established under highly technical and complex sections of the IRC for which there are only limited judicial and administrative interpretations and involves the determination of various factual matters and circumstances not entirely within our control. For example, to qualify as a REIT, Prologis, Inc. must derive at least 95% of its gross income in any year from qualifying sources. In addition, Prologis, Inc. must pay dividends to its stockholders aggregating annually at least 90% of its taxable income (determined without regard to the dividends paid deduction and by excluding capital gains) and must satisfy specified asset tests on a quarterly basis. Historically, we have satisfied these distribution requirements by making cash distributions to our stockholders, but we may choose to satisfy these requirements by making distributions of cash or other property, including, in limited circumstances, our own stock. The provisions of the IRC and applicable Treasury regulations regarding qualification as a REIT are more complicated for Prologis, Inc. because we hold substantially all of our assets through the OP.
If Prologis, Inc. fails to qualify as a REIT in any taxable year, we will be required to pay federal income tax (including, for taxable years prior to 2018, any applicable alternative minimum tax) on taxable income at regular corporate rates. Unless we are entitled to relief under certain statutory provisions, Prologis, Inc. would be disqualified from treatment as a REIT for the four taxable years following the year in which it lost the qualification and would be subject to corporate tax on built-in gains that exist at the time of REIT re-election if recognized within the five-year period after re-election, and potentially 10 years for certain states. If Prologis, Inc. lost its REIT status, our net earnings would be significantly reduced for each of the years involved. In addition, we may need to borrow additional funds or liquidate some investments to pay any additional tax liability. Accordingly, funds available for investment, operations and distributions would be reduced.
Furthermore, we own a direct or indirect interest in certain subsidiary REITs that elected to be taxed as REITs under Sections 856 through 860 of the IRC. Provided that each subsidiary REIT qualifies as a REIT, our interest in such subsidiary REIT will be treated as a qualifying real estate asset for purposes of the REIT asset tests, and any dividend income or gains derived by us from such subsidiary REIT will generally be treated as income that qualifies for purposes of the REIT 95% and 75% gross income tests. To qualify as a REIT, the subsidiary REIT must independently satisfy all of the REIT qualification requirements. If such subsidiary REIT were to fail to qualify as a REIT, and certain relief provisions did not apply, it would be treated as a regular taxable corporation and its income would be subject to U.S. federal income tax. In addition, a failure of the subsidiary REIT to qualify as a REIT would have an adverse effect on the ability of Prologis, Inc. to comply with the REIT income and asset tests, and thus its ability to qualify as a REIT.
In addition, we may acquire properties through the acquisition of REIT entities that own the real estate. If a gain in such assets is not otherwise recognized by the seller or target in such acquisitions, and such entities were to fail to satisfy the REIT requirements for any year, they would be disqualified from treatment as a REIT for the four taxable years following the year in which the REIT qualification was lost and the acquired assets would be subject to corporate tax on built-in gains that exist at the time of REIT re-election or, if earlier, at the time of Prologis’ acquisition of the assets. A sale of such assets within the 5-year recognition period, and potentially 10 years for certain states, could result in corporate tax liabilities that could be significant.
Certain property transfers may generate prohibited transaction income, resulting in a penalty tax on gain attributable to the transaction.
From time to time, we may transfer or otherwise dispose of some of our properties, including by contributing properties to our co-investment ventures. Under the IRC, any gain resulting from transfers of properties we hold as inventory or primarily for sale to customers in the ordinary course of business is treated as income from a prohibited transaction subject to a 100% penalty tax. We do not believe that our transfers or disposals of property or our contributions of properties into our co-investment ventures are prohibited transactions. However, whether property is held for investment purposes is a question of fact that depends on all the facts and circumstances surrounding the particular transaction. The Internal Revenue Service (“IRS”) may contend that certain transfers or dispositions of properties by us or contributions of properties into our co-investment ventures are prohibited transactions. While we believe that the IRS would not prevail in any such dispute, if the IRS were to argue successfully that a transfer, disposition or contribution of property constituted a prohibited transaction, we would be required to pay a 100% penalty tax on any gain allocable to us from the prohibited transaction. In addition, income from a prohibited transaction might adversely affect our ability to satisfy the income tests for qualification as a REIT.
Legislative or regulatory action could adversely affect us.
In recent years, numerous legislative, judicial and administrative changes have been made to the U.S., state, local and foreign income tax laws applicable to investments in real estate, REITs, similar entities and investments. Additional changes are likely to continue to occur in the future, both in and outside of the U.S. and may impact our taxation or that of our stockholders. Any increases in tax liability could be substantial and would reduce the amount of cash available for other purposes.
Complying with REIT requirements may limit our flexibility or cause us to forego otherwise attractive opportunities.
Our use of taxable REIT subsidiaries (“TRSs”) enables us to engage in non-REIT qualifying business activities. Under the IRC, no more than 20% of the value of the assets of a REIT may be represented by securities of one or more TRSs and other non-qualifying assets. This limitation may hinder our ability to make certain attractive investments, including the purchase of non-qualifying assets, the expansion of non-real estate activities and investments in the businesses to be conducted by our TRSs, and to that extent limit our opportunities.
General Risks
Our business may be materially and adversely affected by the impact of the global pandemic of COVID-19.
The World Health Organization and certain national and local governments characterized COVID-19 as a pandemic in March 2020. The COVID-19 outbreak has disrupted financial markets and global, national and local economies. There are government restrictions on activities across the globe. The impact of the COVID-19 outbreak on our business, that of our co-investment ventures, and our customers for the long-term continues to be uncertain.
Given the ongoing and dynamic nature of these circumstances, we cannot predict the extent to which the continuation of the COVID-19 pandemic may impact our business and operating results and that of our co-investment ventures, but its impact may include the following:
•
Existing customers and potential customers of our logistics facilities may be adversely affected by the decrease in economic activity, which in turn could disrupt their business and their ability to enter into new leasing transactions or satisfy rental payments;
•
Government, labor or other restrictions may prevent us from completing the development or leasing of properties currently under development or making our properties ready for our customers to move in;
•
Our ability to recover our investments in real estate assets may be impacted by current market conditions;
•
Increases in material costs as a result of labor shortages and supply chain disruptions may make the development of properties more costly than we originally budgeted; and
•
Our workforce, including our executives, may become ill or have difficulty working remotely, caring for our properties and/or customers.
Any prolonged economic downturn, escalation of the outbreak or disruption in the financial markets may also impact our ability to access capital markets to issue debt or equity securities and to complete real estate transactions at attractive pricing or at all.
These items may materially and adversely affect our financial condition, results of operations, cash flows and real estate values.
Our business and operations could suffer in the event of system failures or cyber security attacks.
Despite system redundancy, the implementation of security measures and the existence of a disaster recovery plan for our internal and hosted information technology systems, our systems are vulnerable to damages from any number of sources, including energy blackouts, natural disasters, terrorism, war, telecommunication failures and cyber security attacks, such as malware, ransomware, or unauthorized access. Any system failure or accident that causes interruptions in our operations could result in a material disruption to our business. We may incur additional costs to remedy damages caused by such disruptions. Third-party security events at vendors, sub-processors, and service providers could also impact our data and operations via unauthorized access to information or disruption of services which may ultimately result in financial losses. Despite training, detection systems and response procedures, an increase in email attacks (phishing and business email compromise) may create disruption to our business and financial risk.
Although security incidents have had an insignificant financial impact on our operating results, the growing frequency of attempts may lead to increased costs to protect the company and respond to any events, including additional personnel, consultants and protection technologies. Any compromise of our security could result in a violation of applicable privacy and other laws, unauthorized access to information of ours and others, significant legal and financial exposure, damage to our reputation, loss or misuse of the information and a loss of confidence in our security measures, which could harm our business. Additionally, remediation costs for security events may not be covered by our insurance.
Risks associated with our dependence on key personnel.
We depend on the deep industry knowledge and the efforts of our executive officers and other key employees. From time to time, our personnel and their roles may change. While we believe that we are able to retain our key talent and find suitable employees to meet our needs, the loss of key personnel, any change in their roles or the limitation of their availability could adversely affect our business. If we are unable to continue to attract and retain our executive officers, or if compensation costs required to attract and retain key employees become more expensive, our performance and competitive position could be materially adversely affected.
Our business could be adversely impacted if we have deficiencies in our disclosure controls and procedures or internal control over financial reporting.
The design and effectiveness of our disclosure controls and procedures and internal control over financial reporting may not prevent all errors, misstatements or misrepresentations. While management continually reviews the effectiveness of our disclosure controls and procedures and internal control over financial reporting, there can be no guarantee that our internal control over financial reporting will be effective in accomplishing all control objectives all of the time. Deficiencies, including any material weakness, in our internal control over financial reporting that may occur in the future could result in misstatements or restatements of our financial statements or a decline in the price of our securities.
We are exposed to the potential impacts of future climate change and could be required to implement new or stricter regulations, which may result in unanticipated losses that could affect our business and financial condition.
We are also exposed to potential physical risks from possible future changes in climate. Our logistics facilities may be exposed to catastrophic weather events, such as severe storms, fires or floods. If the frequency of extreme weather events increases, our exposure to these events could increase. We may be adversely impacted as a real estate developer in the future by potential impacts to the supply chain or stricter energy efficiency standards or greenhouse gas regulations for the commercial building sectors. We cannot give any assurance that other such conditions do not exist or may not arise in the future. The potential impacts of future climate change on our real estate properties could adversely affect our ability to lease, develop or sell such properties or to borrow using such properties as collateral.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1B. Unresolved Staff Comments
None.

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ITEM 2. PROPERTIES
ITEM 2. Properties
GEOGRAPHIC DISTRIBUTION
We predominately invest in logistics facilities. Our properties are typically used for distribution, storage, packaging, assembly and light manufacturing of consumer products. The vast majority of our operating properties are used by our customers for retail and online fulfillment and business-to-business transactions.
The following tables provide details of our consolidated operating properties, investment in land and development portfolio and our O&M portfolio. The O&M portfolio includes the properties we consolidate and the properties owned by our unconsolidated co-
investment ventures reflected at 100% of the amount included in the ventures’ financial statements as calculated on a GAAP basis, not our proportionate share.
Included in the operating property information below for our consolidated operating properties are 497 buildings owned primarily by one co-investment venture that we consolidate but of which we own less than 100% of the equity. No individual property or market amounted to 10% or more of our consolidated total assets at December 31, 2021, or generated revenue equal to 10% or more of our consolidated total revenues for the year ended December 31, 2021, with the exception of the Southern California market. Dollars and square feet in the following tables are in millions:
Consolidated Operating Properties
O&M
Geographies
Rentable Square Footage
Gross Book Value
Encumbrances (1)
Rentable Square Footage
Gross Book Value
U.S.:
Atlanta
$
1,629
$
$
2,084
Baltimore/Washington D.C.
1,269
1,667
Central PA
1,308
-
1,428
Central Valley
1,326
1,461
Chicago
3,248
4,724
Dallas/Ft. Worth
2,281
2,872
Houston
2,518
3,034
Lehigh Valley
3,107
-
3,386
New Jersey/New York City
3,869
5,144
Orlando
1,022
1,120
San Francisco Bay Area
2,951
3,611
Seattle
2,066
-
2,932
South Florida
1,614
2,471
Southern California
9,181
11,515
Remaining Markets - U.S. (15 markets) (2)
5,500
7,485
Subtotal U.S.
42,889
54,934
Other Americas:
Brazil
-
-
-
Canada
Mexico
*
-
2,765
Subtotal Other Americas
4,239
Europe:
France
-
2,913
Germany
-
2,387
Netherlands
*
-
2,261
U.K.
*
-
5,351
Remaining Countries - Europe (8 countries) (3)
-
7,064
Subtotal Europe
-
19,976
Asia:
China
-
-
-
3,098
Japan
*
-
7,201
Singapore
-
Subtotal Asia
-
10,440
Total operating portfolio (4)
44,286
89,589
Value-added properties (5)
-
Total operating properties
$
44,912
$
$
90,557
Items notated by ‘*’ indicate an amount less than one million that rounds to zero.
Consolidated - Investment in Land
Consolidated - Development Portfolio
Geographies
Acres
Estimated Build Out Potential
(square feet) (6)
Current Investment
Rentable Square Footage Upon Completion
TEI (7)
U.S.:
Atlanta
$
$
Baltimore/Washington D.C.
*
*
Central PA
*
-
-
Central Valley
Chicago
Dallas/Ft. Worth
Houston
*
Lehigh Valley
New Jersey/New York City
*
Orlando
San Francisco Bay Area
-
-
-
*
Seattle
*
South Florida
Southern California
Remaining Markets - U.S. (15 markets)
Subtotal U.S.
3,693
1,531
2,480
Other Americas:
Brazil
-
-
Canada
Mexico
Subtotal Other Americas
1,111
Europe:
France
*
Germany
Netherlands
U.K.
Remaining Countries - Europe (8 countries)
Subtotal Europe
1,349
Asia:
Japan
1,127
Subtotal Asia
1,127
Total land and development portfolio
6,227
$
2,520
$
4,717
Items notated by ‘*’ indicate an amount less than one million that rounds to zero.
(1)
Certain of our consolidated properties are pledged as security under secured mortgage debt and assessment bonds. 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. In addition to the amounts reflected here, we also have $10 million of encumbrances related to one land parcel included in the consolidated land portfolio.
(2)
No remaining market within the U.S. represented more than 2% of the total gross book value of the consolidated operating properties.
(3)
No remaining country within Europe represented more than 2% of the total gross book value of the O&M operating properties.
(4)
Included in our consolidated operating properties are properties that we consider to be held for contribution and are presented within Assets Held for Sale or Contribution in the Consolidated Balance Sheets. We include these properties in our operating portfolio as they are expected to be contributed to our co-investment ventures and remain in our O&M operating portfolio. At December 31, 2021, we had investments in real estate properties that were expected to be contributed to our unconsolidated co-investment ventures totaling $535 million and aggregating 4 million square feet. See Note 6 to the Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data for further information on our Assets Held for Sale or Contribution.
(5)
Value-added properties are properties we have either acquired at a discount and believe we could provide greater returns post-stabilization or properties we expect to repurpose to a higher and better use.
(6)
Represents the estimated finished square feet available for lease upon completion of a building on existing parcels of land.
(7)
TEI is based on current projections and is subject to change. As noted in the table below, our current investment in the development portfolio was $2.7 billion, leaving approximately $2.0 billion of additional required investment. At December 31, 2021, based on TEI, approximately 18% of the properties in the development portfolio were completed but not yet stabilized, 71% of the properties were expected to be completed before December 31, 2022, and the remaining properties were expected to be completed before October 2023.
The following table summarizes our investment in consolidated real estate properties at December 31, 2021 (in millions):
Investment Before Depreciation
Operating properties, excluding assets held for sale or contribution
$
44,454
Development portfolio, including cost of land
2,729
Land
2,520
Other real estate investments (1)
3,302
Total consolidated real estate properties
$
53,005
(1)
Included in other real estate investments were: (i) non-strategic real estate assets acquired that we do not intend to operate long-term; (ii) real estate assets that we intend to redevelop into industrial properties; (iii) land parcels we own and lease to third parties; and (iv) costs associated with potential acquisitions and future development projects, including purchase options on land.
LEASE EXPIRATIONS
We generally lease our properties on a long-term basis (the average term for leases commenced, including new leases and renewals, in 2021 was 62 months). The following table summarizes the lease expirations of our consolidated operating portfolio for leases in place at December 31, 2021 (dollars and square feet in millions):
NER
Number of Leases
Occupied Square Feet
Dollars
% of Total
Dollars Per Square Foot
2022 (1)
$
10.5
%
$
6.04
13.5
%
6.16
14.4
%
6.58
12.3
%
6.65
15.0
%
6.95
9.7
%
7.13
5.5
%
7.00
5.2
%
6.61
3.6
%
7.00
3.6
%
7.20
Thereafter
6.7
%
8.57
4,969
$
2,928
%
$
6.73
Month to month
Total consolidated
5,062
(1)
We have signed leases that were due to expire in 2022, totaling 31 million square feet in our consolidated portfolio (5.7% of total NER). These are excluded from 2022 expirations and are reflected at their respective expiration year.
CO-INVESTMENT VENTURES
Included in our O&M portfolio are consolidated and unconsolidated co-investment ventures that hold investments in real estate properties, primarily logistics facilities, that we also manage. Our unconsolidated co-investment ventures are accounted for under the equity method. The amounts included for the unconsolidated ventures are reflected at 100% of the amount included in the ventures’ financial statements as calculated on a GAAP basis, not our proportionate share. The following table summarizes our consolidated and unconsolidated co-investment ventures at December 31, 2021 (in millions):
Operating Properties
Square Feet
Gross
Book Value
Investment
in Land
Development Portfolio - TEI
Consolidated Co-Investment Venture
U.S.:
Prologis U.S. Logistics Venture (“USLV”)
$
7,927
$
$
Total
$
7,927
$
$
Unconsolidated Co-Investment Ventures
U.S.:
Prologis Targeted U.S. Logistics Fund (“USLF”)
$
12,199
$
-
$
Other Americas:
FIBRA Prologis
2,763
-
Prologis Brazil Logistics Venture ("PBLV") and other joint
ventures
Subtotal Other Americas
3,404
Europe:
Prologis European Logistics Fund (“PELF”) (1)
14,560
Prologis European Logistics Partners Holdings
Sàrl (“PELP”) (1)
5,208
Subtotal Europe
19,768
Asia:
Nippon Prologis REIT (“NPR”)
7,175
-
-
Prologis China Core Logistics Fund (“PCCLF”)
2,241
-
-
Prologis China Logistics Venture
Subtotal Asia
10,274
Total
$
45,645
$
$
1,402
(1)
In December 2021, Prologis UK Logistics Venture (“UKLV”) sold its operating properties to our unconsolidated co-investment ventures, PELF and PELP, and its land to us.
For more information regarding our unconsolidated and consolidated co-investment ventures, see Notes 5 and 11 to the Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data.

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ITEM 3. LEGAL PROCEEDINGS
ITEM 3. Legal Proceedings
From time to time, we and our co-investment ventures are parties to a variety of legal proceedings arising in the ordinary course of business. We believe that, with respect to any such matters to which we are currently a party, the ultimate disposition of any such matter will not result in a material adverse effect on our business, financial position or results of operations.

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ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4. Mine Safety Disclosures
Not Applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
MARKET INFORMATION AND HOLDERS
Our common stock is listed on the NYSE under the symbol “PLD.”
Stock Performance Graph
The following line graph compares the change in Prologis, Inc. cumulative total stockholder’s return on shares of its common stock from December 31, 2016, to the cumulative total return of the S&P 500 Stock Index and the Financial Times and Stock Exchange NAREIT Equity REITs Index from December 31, 2016, to December 31, 2021. The graph assumes an initial investment of $100 in our common stock and each of the indices on December 31, 2016, and, as required by the SEC, the reinvestment of all dividends. The return shown on the graph is not necessarily indicative of future performance.
This graph and the accompanying text are not “soliciting material,” are not deemed filed with the SEC and are not to be incorporated by reference in any filing by the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing.
PREFERRED STOCK DIVIDENDS
At December 31, 2021, we had 1.3 million shares of the Series Q preferred stock with a liquidation preference of $50 per share that will be redeemable at our option on or after November 13, 2026. Dividends payable per share was $4.27 for the year ended December 31, 2021.
For more information regarding dividends, see Note 9 to the Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data.
SALES OF UNREGISTERED SECURITIES
During 2021, we issued 0.8 million shares of common stock of Prologis, Inc. in connection with the redemption of common units of Prologis, L.P. and issued 1.0 million common units in Prologis, L.P. in connection with the acquisition of additional ownership interest in an unconsolidated other venture from our partner in reliance on the exemption from registration requirements of the Securities Act of 1933, as amended, afforded by Section 4(a)(2) thereof.
PURCHASES OF EQUITY SECURITIES
During 2021, we did not purchase any common stock of Prologis, Inc. in connection with our share purchase program.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
For information regarding securities authorized for issuance under our equity compensation plans, see Notes 9 and 12 to the Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data.
OTHER STOCKHOLDER MATTERS
Common Stock Plans
Further information relative to our equity compensation plans will be provided in our 2022 Proxy Statement or in an amendment filed on Form 10-K/A.

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ITEM 6. SELECTED FINANCIAL DATA
ITEM 6. [Reserved]

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data of this report and the matters described under Item 1A. Risk Factors.
A discussion regarding our financial condition and results of operations for 2021 compared to 2020 is presented below. Information on 2019 is included in graphs only to show year over year trends in our results of operations and operating metrics. Our financial condition for 2019, results of operations for 2019 and 2020 compared to 2019 and details on the IPT Transaction and LPT Transaction referenced throughout this document can be found under Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, which is incorporated by reference herein to our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, filed with the SEC on February 11, 2021, and is available on the SEC’s website at www.sec.gov and our Investor Relations website at www.ir.prologis.com.
MANAGEMENT’S OVERVIEW
Summary of 2021
Our financial condition and operating results were strong during 2021. E-commerce continues to grow well above its historical average and demand for space is robust based on our proprietary data. As demand surges, having the right logistics real estate in the right location is mission critical for our customers, which is evident with our O&M occupancy at 97.7% at December 31, 2021. Leasing activity accelerated for our portfolio during 2021. Our outlook for 2022 is equally as promising as we expect increases in market rents and asset valuations to drive our operating results as well as our execution of profitable deployment activities.
We generated net proceeds of $5.2 billion and realized net gains of $1.6 billion, principally from the contribution of properties to our unconsolidated co-investment ventures in Japan, Europe and the U.S. and dispositions to third parties.
We earned promotes aggregating $98 million ($43 million net of related expenses), primarily during the fourth quarter of 2021 from one of our unconsolidated co-investment ventures in Europe.
In December 2021, UKLV sold its operating properties to our unconsolidated co-investment ventures, PELF and PELP, and its land to us.
We completed the following consolidated financing activities that included the issuance of $2.9 billion and redemption of $1.5 billion of senior notes, with aggregate principal amounts in U.S. dollars. This resulted in a consolidated weighted average remaining maturity of 10 years and lowered our weighted average effective interest rate to 1.6% at December 31, 2021 (principal in millions):
Aggregate Principal
Issuance Date Weighted Average
Issuance Date
Borrowing Currency
USD (1)
Interest Rate (2)
Term (3)
Maturity Dates
February
€
1,350
$
1,639
0.7%
14.3
February 2032 - 2041
February
$
$
1.6%
10.1
March 2031
June
¥
65,000
$
0.8%
15.4
June 2028 - 2061
December
£
$
2.0%
17.7
December 2033 - 2041
Total
$
2,911
1.0%
14.2
Aggregate Principal
Redemption Date Weighted Average
Redemption Date
Borrowing Currency
USD (1)
Interest Rate (2)
Term (3)
Maturity Date
March
€
$
3.4%
3.0
February 2024
March
$
$
3.8%
4.7
November 2025
Total
$
1,466
3.6%
3.8
(1)
The exchange rate used to calculate into U.S. dollars was the spot rate at the settlement date.
(2)
The weighted average interest rate represents the fixed or variable interest rates of the related debt at the issuance or redemption date.
(3)
The weighted average term represents the remaining maturity in years on the related debt at the issuance or redemption date.
At December 31, 2021, we had total available liquidity of $5.0 billion, principally due to aggregate availability under our credit facilities of $4.4 billion and unrestricted cash balances of $556 million. In April 2021, we increased our available liquidity by entering into a second global senior credit facility with an available borrowing capacity of $1.0 billion and we terminated the $500 million multi-currency term loan.
RESULTS OF OPERATIONS
We evaluate our business operations based on the NOI of our two operating segments: Real Estate Operations and Strategic Capital. NOI by segment is a non-GAAP performance measure that is calculated using revenues and expenses directly from our financial statements. We consider NOI by segment to be an appropriate supplemental measure of our performance because it helps management and investors understand our operating results.
Below is a reconciliation of our NOI by segment to Operating Income per the Consolidated Financial Statements (in millions). Each segment’s NOI is reconciled to line items in the Consolidated Financial Statements as provided in the related discussion below.
Real Estate Operations - NOI
$
3,105
$
2,820
Strategic Capital - NOI
General and administrative expenses
(294
)
(275
)
Depreciation and amortization expenses
(1,578
)
(1,562
)
Operating income before gains on real estate transactions, net
1,617
1,402
Gains on dispositions of development properties and land, net
Gains on other dispositions of investments in real estate, net
Operating income
$
3,207
$
2,119
See Note 17 to the Consolidated Financial Statements for more information on our segments and a reconciliation of each business segment’s NOI to Operating Income and Earnings Before Income Taxes.
Real Estate Operations
This operating segment principally includes rental revenue and rental expenses recognized from our consolidated properties. We allocate the costs of our property management and leasing functions to the Real Estate Operations segment through Rental Expenses
and the Strategic Capital segment through Strategic Capital Expenses based on the square footage of the relative portfolios. In addition, this segment is impacted by our development, acquisition and disposition activities.
Below are the components of Real Estate Operations NOI, derived directly from line items in the Consolidated Financial Statements (in millions):
Rental revenues
$
4,148
$
3,791
Development management and other revenues
Rental expenses
(1,041
)
(952
)
Other expenses
(22
)
(30
)
Real Estate Operations - NOI
$
3,105
$
2,820
The change in Real Estate Operations (“REO”) NOI in 2021 compared to 2020 of approximately $285 million was impacted by the following activities (in millions):
(1)
During both periods, we experienced positive rental rate growth. Rental rate growth is a combination of higher rental rates on rollover of leases (or rent change) and contractual rent increases on existing leases. If a lease has a contractual rent increase driven by a metric that is not known at the time the lease commences, such as the consumer price index or a similar metric, the rent increase is not included in rent leveling and therefore impacts the rental revenue we recognize. Significant rent change during both periods continues to be a key driver in increasing rental income. See below for key metrics on rent change on rollover and occupancy for the consolidated operating portfolio.
(2)
One of the drivers of the increase in NOI in 2021, compared to 2020, was the Liberty Transaction on February 4, 2020. In the transaction we acquired 519 industrial operating properties, aggregating 100 million square feet, and increased our consolidated investments in real estate by approximately $13 billion.
(3)
We calculate changes in NOI from development completions period over period by comparing the change in NOI generated on the pool of developments that completed on or after January 1, 2020 through December 31, 2021.
Below are key operating metrics of our consolidated operating portfolio, which excludes non-strategic industrial properties.
(1)
In 2020, we completed the Liberty Transaction.
(2)
Consolidated square feet of leases commenced and weighted average net effective rent change were calculated for leases with initial terms of one year or greater.
Development Activity
The following table summarizes consolidated development activity (dollars and square feet in millions):
Starts:
Number of new development projects during the period
Square feet
TEI
$
3,478
$
1,997
Percentage of build-to-suits based on TEI
46.2
%
40.0
%
Stabilizations:
Number of development projects stabilized during the period
Square feet
TEI
$
2,329
$
2,451
Percentage of build-to-suits based on TEI
42.7
%
48.9
%
Weighted average stabilized yield (1)
6.1
%
6.3
%
Estimated value at completion
$
3,613
$
3,383
Estimated weighted average margin (2)
55.1
%
38.0
%
Estimated value creation
$
1,284
$
(1)
We calculate the weighted average stabilized yield as estimated NOI assuming stabilized occupancy divided by TEI.
(2)
Estimated weighted average margin is calculated on development properties as estimated value creation, less estimated closing costs and taxes, if any, on properties expected to be sold or contributed, divided by TEI.
At December 31, 2021, the consolidated development portfolio, including properties under development and pre-stabilized properties, was expected to be completed before October 2023 with a TEI of $4.7 billion, leaving $2.0 billion remaining to be spent and was 54.6% leased. While construction costs increased during 2021, we continue to maintain high margins as a result of lower capitalization rates and higher market rents. Our current investment in the development portfolio was $2.7 billion and we expect our development activities to increase in 2022. For additional information on our development portfolio at December 31, 2021, see Item 2. Properties.
Capital Expenditures
We capitalize costs incurred in improving and leasing our operating properties as part of the investment basis or within other assets. The following graph summarizes capitalized expenditures, excluding development costs, and property improvements per average square foot of our consolidated operating properties during each year:
Our capital expenditures continue to increase year over year as we grow the consolidated operating portfolio through development stabilizations and acquisitions. We plan to continue allocating capital in 2022 to renovate and modernize our operating portfolio, including the addition of sustainable and efficient building features.
Strategic Capital
This operating segment includes revenues from asset management and property management services performed, transactional services for acquisition, disposition and leasing activity and promote revenue earned from the unconsolidated entities. Revenues associated with the Strategic Capital segment fluctuate because of changes in the size of the portfolios through acquisitions and dispositions, the fair value of the properties and other transactional activity including foreign currency exchange rates and timing of promotes. These revenues are reduced by the direct costs associated with the asset and property-level management expenses for the properties owned by these ventures. We allocate the costs of our property management and leasing functions to the Strategic Capital segment through Strategic Capital Expenses and to the Real Estate Operations segment through Rental Expenses based on the square footage of the relative portfolios. For further details regarding the key property information and summarized financial condition and operating results of our unconsolidated co-investment ventures, refer to Note 5 to the Consolidated Financial Statements.
Below are the components of Strategic Capital NOI derived directly from the line items in the Consolidated Financial Statements (in millions):
Strategic capital revenues
$
$
Strategic capital expenses
(207
)
(218
)
Strategic Capital - NOI
$
$
Below is additional detail of our Strategic Capital revenues, expenses and NOI (in millions):
U.S. (1)
Other Americas
Europe
Asia
Total
Strategic capital revenues ($)
Recurring fees (2)
Transactional fees (3)
Promote revenue (4)
-
Total strategic capital revenues ($)
Strategic capital expenses ($) (4)
(112
)
(118
)
(12
)
(13
)
(45
)
(45
)
(38
)
(42
)
(207
)
(218
)
Strategic Capital - NOI ($)
(1)
The U.S. expenses include compensation and personnel costs for employees who are based in the U.S. but also support other geographies.
(2)
Recurring fees include asset management and property management fees. The increase in fees in 2021 as compared to 2020 is due primarily to higher asset management fees driven by the increases in the fair value of the properties based on third party valuations.
(3)
Transactional fees include leasing commissions and acquisition, disposition, development and other fees.
(4)
We generally earn promote revenue directly from third-party investors in the co-investment ventures based on the cumulative returns of the venture over a three-year period or the stabilization of individual development projects owned by the venture. An increase in asset valuations in the co-investment ventures, as we have experienced in 2021, is one of the significant drivers of returns that can translate into earning future promote revenues. Approximately 40% of the promote earned by us from the co-investment ventures is paid to our employees as a combination of cash and stock awards pursuant to the terms of the PPP and expensed through Strategic Capital Expenses, as vested.
G&A Expenses
G&A expenses were $294 million and $275 million for 2021 and 2020, respectively. G&A expenses increased in 2021 as compared to 2020, due to higher compensation expenses based largely on our outperformance and the increase in our share price. We capitalize certain internal costs, including salaries and related expenses, directly related primarily to our development activities. For discussion on our long-term incentive plans refer to the proxy statement for our 2021 annual meeting of stockholders.
The following table summarizes capitalized G&A (in millions):
Building and land development activities
$
$
Operating building improvements and other
Total capitalized G&A expenses
$
$
Capitalized salaries and related costs as a percent of total salaries and related costs
21.9
%
20.2
%
Depreciation and Amortization Expenses
Depreciation and amortization expenses were $1.6 billion in both 2021 and 2020.
The change in depreciation and amortization expenses in 2021 compared to 2020 of approximately $16 million was impacted by the following activities (in millions):
(1)
Included in acquisitions are the operating properties and related intangible assets acquired in the Liberty Transaction.
Gains on Real Estate Transactions, Net
Gains on the disposition of development properties and land were $817 million and $465 million for 2021 and 2020, respectively, and primarily included gains from the contribution of properties we developed to our unconsolidated co-investment ventures in Japan, the U.S. and Europe. Gains on other dispositions of investments in real estate were $773 million and $252 million for 2021 and 2020, respectively, which included sales of operating properties, including certain non-strategic assets acquired in the Liberty Transaction and the IPT Transaction, the contribution of operating properties to our unconsolidated co-investment venture in the U.S. and the sale of our ownership interest in other unconsolidated ventures. We utilized the proceeds from these transactions primarily to fund our development activities during both periods. See Note 4 to the Consolidated Financial Statements for further information on these transactions.
Our Owned and Managed (“O&M”) Operating Portfolio
We manage our business and review our operating fundamentals on an O&M basis, which includes our consolidated properties and properties owned by our unconsolidated co-investment ventures. We believe reviewing the fundamentals this way allows management to understand the entire impact to the financial statements, as it will affect both the Real Estate Operations and Strategic Capital segments, as well as the net earnings we recognize from our unconsolidated co-investment ventures based on our ownership. We do not control the unconsolidated co-investment ventures for purposes of GAAP and the presentation of the ventures’ operating information does not represent a legal claim.
Our O&M operating portfolio does not include our development portfolio, value-added properties, non-industrial properties or properties we do not have the intent to hold long-term that are classified as either held for sale or within other real estate investments. Value-added properties are properties we have either acquired at a discount and believe we could provide greater returns post-stabilization or properties we expect to repurpose to a higher and better use. See below for information on our O&M operating portfolio at December 31 (square feet in millions):
Number of Properties
Square
Feet
Percentage Occupied
Number of Properties
Square
Feet
Percentage Occupied
Consolidated
2,300
98.2
%
2,252
96.6
%
Unconsolidated
1,987
97.3
%
1,849
95.9
%
Total
4,287
97.7
%
4,101
96.2
%
Below are the key leasing metrics of our O&M operating portfolio.
(1)
Square feet of leases commenced and weighted average net effective rent change were calculated for leases with initial terms of one year or greater. We retained approximately 70% or more of our customers, based on the total square feet of leases commenced, for each year.
(2)
Turnover costs include external leasing commissions and tenant improvements and represent the obligations incurred in connection with the lease commencement for leases greater than one year. As a result of higher rents on leases that commenced in 2021, leasing commissions on a per square foot basis have continued to increase as commissions are based on the contractual rent we receive over the lease term.
Same Store Analysis
Our same store metrics are non-GAAP financial measures, which are commonly used in the real estate industry and expected from the financial community, on both a net effective and cash basis. We evaluate the performance of the operating properties we own and manage using a “same store” analysis because the population of properties in this analysis is consistent from period to period, which allows us and investors to analyze our ongoing business operations. We determine our same store metrics on property NOI, which is calculated as rental revenue less rental expense for the applicable properties in the same store population for both consolidated and unconsolidated properties based on our ownership interest, as further defined below.
We define our same store population for the three months ended December 31, 2021 as the properties in our O&M operating portfolio, including the property NOI for both consolidated properties and properties owned by the unconsolidated co-investment ventures at January 1, 2020 and owned throughout the same three-month period in both 2020 and 2021. We believe the drivers of property NOI for the consolidated portfolio are generally the same for the properties owned by the ventures in which we invest and therefore we evaluate the same store metrics of the O&M portfolio based on Prologis’ ownership in the properties (“Prologis Share”). The same store population excludes properties held for sale to third parties, along with development properties that were not stabilized at the beginning of the period (January 1, 2020) and properties acquired or disposed of to third parties during the period. To derive an appropriate measure of period-to-period operating performance, we remove the effects of foreign currency exchange rate movements by using the reported period-end exchange rate to translate from local currency into the U.S. dollar, for both periods.
As non-GAAP financial measures, the same store metrics have certain limitations as an analytical tool and may vary among real estate companies. As a result, we provide a reconciliation of Rental Revenues less Rental Expenses (“Property NOI”) (from our Consolidated Financial Statements prepared in accordance with U.S. GAAP) to our Same Store Property NOI measures.
We evaluate the results of our same store portfolio on a quarterly basis. The following is a reconciliation of our consolidated rental revenues, rental expenses and property NOI for each quarter in 2021 and 2020 to the full year, as included in the Consolidated Statements of Income and within Note 19 to the Consolidated Financial Statements and to the respective amounts in our same store portfolio analysis for the three months ended December 31 (dollars in millions):
Three Months Ended
March 31,
June 30,
September 30,
December 31,
Full Year
Rental revenues
$
1,022
$
1,015
$
1,037
$
1,074
$
4,148
Rental expenses
(278
)
(245
)
(256
)
(262
)
(1,041
)
Property NOI
$
$
$
$
$
3,107
Rental revenues
$
$
$
$
$
3,791
Rental expenses
(228
)
(232
)
(245
)
(247
)
(952
)
Property NOI
$
$
$
$
$
2,839
Three Months Ended
December 31,
% Change
Reconciliation of Consolidated Property NOI to Same Store Property NOI measures:
Rental revenues
$
1,074
$
Rental expenses
(262
)
(247
)
Consolidated Property NOI
$
$
Adjustments to derive same store results:
Property NOI from consolidated properties not included in same store portfolio and
other adjustments (1)
(259
)
(228
)
Property NOI from unconsolidated co-investment ventures included in same store
portfolio (1)(2)
Third parties' share of Property NOI from properties included in same store portfolio (1)(2)
(459
)
(438
)
Prologis Share of Same Store Property NOI - Net Effective (2)
$
$
7.9
%
Consolidated properties straight-line rent and fair value lease adjustments
included in same store portfolio (3)
(14
)
(11
)
Unconsolidated co-investment ventures straight-line rent and fair value lease
adjustments included in same store portfolio (3)
(12
)
(14
)
Third parties' share of straight-line rent and fair value lease adjustments included
in same store portfolio (2)(3)
Prologis Share of Same Store Property NOI - Cash (2)(3)
$
$
7.5
%
(1)
We exclude properties held for sale to third parties, along with development properties that were not stabilized at the beginning of the period and properties acquired or disposed of to third parties during the period. We also exclude net termination and renegotiation fees to allow us to evaluate the growth or decline in each property’s rental revenues without regard to one-time items that are not indicative of the property’s recurring operating performance. Net termination and renegotiation fees represent the gross fee negotiated to allow a customer to terminate or renegotiate their lease, offset by the write-off of the asset recorded due to the adjustment to straight-line rents over the lease term. Same Store Property NOI is adjusted to include an allocation of property management expenses for our consolidated properties based on the property management services provided to each property (generally, based on a percentage of revenues). On consolidation, these amounts are eliminated and the actual costs of providing property management and leasing services are recognized as part of our consolidated rental expense.
(2)
We include the Property NOI for the same store portfolio for both consolidated properties and properties owned by the co-investment ventures based on our investment in the underlying properties. In order to calculate our share of Same Store Property NOI from the co-investment ventures in which we own less than 100%, we use the co-investment ventures’ underlying Property NOI for the same store portfolio and apply our ownership percentage at December 31, 2021 to the Property NOI for both periods, including the properties contributed during the period. We adjust the total Property NOI from the same store portfolio of the co-investment ventures by subtracting the third parties’ share of both consolidated and unconsolidated co-investment ventures.
During the periods presented, certain wholly owned properties were contributed to a co-investment venture and are included in the same store portfolio. Neither our consolidated results nor those of the co-investment ventures, when viewed individually,
would be comparable on a same store basis because of the changes in composition of the respective portfolios from period to period (e.g. the results of a contributed property are included in our consolidated results through the contribution date and in the results of the venture subsequent to the contribution date based on our ownership interest at the end of the period). As a result, only line items labeled “Prologis Share of Same Store Property NOI” are comparable period over period.
(3)
We further remove certain noncash items (straight-line rent and amortization of fair value lease adjustments) included in the financial statements prepared in accordance with U.S. GAAP to reflect a Same Store Property NOI - Cash measure.
We manage our business and compensate our executives based on the same store results of our O&M portfolio at 100% as we manage our portfolio on an ownership blind basis. We calculate those results by including 100% of the properties included in our same store portfolio.
Other Components of Income (Expense)
Earnings from Unconsolidated Entities, Net
We recognized net earnings from unconsolidated entities, which are accounted for using the equity method, of $404 million and $297 million during 2021 and 2020, respectively. Included in 2021 is our share of the gains recognized upon the sale of certain non-strategic assets acquired in the IPT Transaction and the sale by UKLV of its operating properties to our unconsolidated co-investment ventures, PELF and PELP.
The earnings we recognize can be impacted by: (i) variances in revenues and expenses of each venture; (ii) the size and occupancy rate of the portfolio of properties owned by each venture; (iii) gains or losses from the dispositions of properties and extinguishment of debt; (iv) our ownership interest in each venture; and (v) fluctuations in foreign currency exchange rates used to translate our share of net earnings to U.S. dollars. See the discussion of our unconsolidated entities above in the Strategic Capital segment discussion and in Note 5 to the Consolidated Financial Statements for a further breakdown of our share of net earnings recognized.
Interest Expense
The following table details our net interest expense (dollars in millions):
Gross interest expense
$
$
Amortization of debt discount and debt issuance costs, net
Capitalized amounts
(42)
(42
)
Net interest expense
$
$
Weighted average effective interest rate during the year
1.7
%
2.2
%
Although our debt balances have increased, interest expense decreased in 2021 as compared to 2020 due to our refinancing activities to redeem higher interest rate senior notes before their stated maturities. As a result of these activities, we lowered the consolidated weighted average effective interest rate on our senior notes from 2.4% on January 1, 2020 to 1.7% on December 31, 2021 while extending the weighted average remaining maturity of our senior notes from 8 to 12 years over the same two-year period.
See Note 8 to the Consolidated Financial Statements and the Liquidity and Capital Resources section below, for further discussion of our debt and borrowing costs.
Foreign Currency and Derivative Gains (Losses), Net
We are exposed to foreign currency exchange risk related to investments in and earnings from our foreign investments. We may use derivative financial instruments to manage foreign currency exchange rate risk related to our earnings. We recognize the change in fair value of the undesignated derivative contracts in unrealized gains and losses. Upon settlement of these transactions, we recognize realized gains or losses.
We primarily hedge our foreign currency risk related to our investments by borrowing in the currencies in which we invest thereby providing a natural hedge. We have issued debt in a currency that is not the same functional currency of the borrowing entity and have designated a portion of the debt as a nonderivative net investment hedge. We recognize the remeasurement and settlement of the translation adjustment on the unhedged portion of the debt and accrued interest in unrealized gains or losses.
The following table details our foreign currency and derivative gains (losses), net included in earnings (in millions):
Realized foreign currency and derivative losses, net:
Losses on the settlement of undesignated derivatives
$
(8)
$
(6
)
Losses on the settlement of transactions with third parties
(1
)
-
Total realized foreign currency and derivative losses, net
(9
)
(6
)
Unrealized foreign currency and derivative gains (losses), net:
Gains (losses) on the change in fair value of undesignated derivatives and unhedged debt
(152
)
Gains (losses) on remeasurement of certain assets and liabilities
(9
)
Total unrealized foreign currency and derivative gains (losses), net
(161
)
Total foreign currency and derivative gains (losses), net
$
$
(167
)
See Note 2 to the Consolidated Financial Statements for more information about our foreign currency and derivative financial instrument policies and Note 15 to the Consolidated Financial Statements for more information about our derivative and nonderivative transactions.
Losses on Early Extinguishment of Debt, Net
We recognized $187 million and $188 million of losses on the early extinguishment of debt in 2021 and 2020, respectively. The losses during both periods were driven by the redemption of certain higher interest rate senior notes before their stated maturity. We compare any prepayment penalties incurred from the early redemption of the borrowings to the potential interest savings over the term, and make a decision to refinance the debt when it is economically viable. We redeemed $1.5 billion of senior notes with stated maturities of 2024 and 2025 in 2021 and $2.6 billion of senior notes with stated maturities between 2021 and 2024 in 2020. The losses in 2020 also included the extinguishment of debt assumed in the Liberty Transaction and the IPT Transaction, which represented the excess of the prepayment penalties over the premium recorded upon assumption of the debt. See Note 8 to the Consolidated Financial Statements and the Liquidity and Capital Resources section, for more information regarding our debt repurchases.
Income Tax Expense
We recognize income tax expense related to our taxable REIT subsidiaries and in the local, state and foreign jurisdictions in which we operate. Our current income tax expense fluctuates from period to period based primarily on the timing of our taxable income, including gains on the disposition of properties and fees earned from the co-investment ventures. Deferred income tax expense (benefit) is generally a function of the period’s temporary differences and the utilization of net operating losses generated in prior years that had been previously recognized as deferred income tax assets in taxable subsidiaries.
The following table summarizes our income tax expense (benefit) (in millions):
Current income tax expense:
Income tax expense
$
$
Income tax expense on dispositions
Income tax expense on dispositions related to acquired tax liabilities
Total current income tax expense
Deferred income tax expense (benefit):
Income tax expense
Income tax benefit on dispositions related to acquired tax liabilities
(3
)
(6
)
Total deferred income tax expense
-
Total income tax expense
$
$
Our income taxes are discussed in more detail in Note 13 to the Consolidated Financial Statements.
Net Earnings Attributable to Noncontrolling Interests
This amount represents the third-party investors’ share of the earnings generated in consolidated entities in which we do not own 100% of the equity, reduced by the third-party share of fees or promotes payable to us and earned during the period. We had net earnings attributable to noncontrolling interests of $209 million and $135 million in 2021 and 2020, respectively. Included in these amounts were $82 million and $42 million in 2021 and 2020, respectively, of net earnings attributable to the common limited partnership unitholders of Prologis, L.P. The recognition of net gains on the sale of the non-strategic assets identified for disposition in the IPT Transaction also increased the net earnings attributable to noncontrolling interests in 2021.
See Note 11 to the Consolidated Financial Statements for further information on our noncontrolling interests.
Other Comprehensive Income (Loss)
The key driver of changes in Accumulated Other Comprehensive Income (Loss) (“AOCI/L”) in 2021 and 2020 was the currency translation adjustment derived from changes in exchange rates during both periods primarily on our net investments in real estate outside the U.S. and the borrowings we issue in the functional currencies of the countries where we invest. These borrowings serve as a natural hedge of our foreign investments. In addition, we use derivative financial instruments, such as foreign currency forward and option contracts to manage foreign currency exchange rate risk related to our foreign investments, that when designated the change in fair value is included in AOCI/L.
See Note 2 to the Consolidated Financial Statements for more information about our foreign currency and derivative financial instrument policies and Note 15 to the Consolidated Financial Statements for more information about our derivative and nonderivative transactions and other comprehensive income (loss).
ENVIRONMENTAL MATTERS
See Note 16 in the Consolidated Financial Statements for further information about environmental liabilities.
LIQUIDITY AND CAPITAL RESOURCES
Overview
We consider our ability to generate cash from operating activities, distributions from our co-investment ventures, contributions and dispositions of properties and available financing sources to be adequate to meet our anticipated future development, acquisition, operating, debt service, dividend and distribution requirements.
Near-Term Principal Cash Sources and Uses
In addition to dividends and distributions, we expect our primary cash needs will consist of the following:
•
completion of the development and leasing of the properties in our consolidated development portfolio (at December 31, 2021, 99 properties in our development portfolio were 54.6% leased with a current investment of $2.7 billion and a TEI of $4.7 billion when completed and leased, leaving $2.0 billion of estimated additional required investment);
•
development of new properties that we may hold for long-term investment or subsequently contribute to unconsolidated co-investment ventures, including the acquisition of land in certain markets;
•
capital expenditures and leasing costs on properties in our operating portfolio;
•
repayment of debt and scheduled principal payments of $986 million in 2022;
•
additional investments in current and future unconsolidated co-investment ventures and other ventures; and
•
acquisition of operating properties or portfolios of operating properties (depending on market and other conditions) for direct, long-term investment in our consolidated portfolio (this might include acquisitions from our co-investment ventures).
We expect to fund our cash needs principally from the following sources (subject to market conditions):
•
net cash flow from property operations;
•
fees earned for services performed on behalf of co-investment ventures, including promotes;
•
distributions received from co-investment ventures;
•
proceeds from the contributions of properties to current or future co-investment ventures;
•
proceeds from disposition of properties, land parcels or other investments to third parties;
•
available unrestricted cash balances ($556 million at December 31, 2021);
•
borrowing capacity under our current credit facility arrangements ($4.4 billion available at December 31, 2021); and
•
proceeds from the issuance of debt.
Long-term, we may also have a primary cash need related to the voluntary repurchase of our outstanding debt or equity securities (depending on prevailing market conditions, our liquidity, contractual restrictions and other factors) through cash purchases, open-market purchases, privately negotiated transactions, tender offers or otherwise. We may also fund our cash needs from the issuance of equity securities, subject to market conditions, and the sale of a portion of our investments in co-investment ventures to achieve long-term ownership targets.
Debt
The following table summarizes information about our consolidated debt by currency at December 31 (dollars in millions):
Weighted Average
Interest Rate
Amount
Outstanding
% of Total
Weighted Average
Interest Rate
Amount
Outstanding
% of Total
British pound sterling
2.1
%
$
1,377
7.8
%
2.2
%
$
1,019
6.1
%
Canadian dollar
2.7
%
1.6
%
2.7
%
1.7
%
Euro
1.0
%
7,408
41.8
%
1.4
%
6,550
38.8
%
Japanese yen
0.9
%
2,879
16.2
%
0.8
%
2,877
17.1
%
U.S. dollar
2.6
%
5,767
32.6
%
2.8
%
6,117
36.3
%
Total debt (1)
1.6
%
$
17,715
100.0
%
1.9
%
$
16,849
100.0
%
(1)
The weighted average remaining maturity for total debt outstanding at both December 31, 2021 and 2020 was 10 years.
Our credit ratings at December 31, 2021, were A3 from Moody’s with a stable outlook and A- from Standard & Poor’s with a positive outlook. These ratings allow us to borrow at an advantageous interest rate. Adverse changes in our credit ratings could negatively impact our business and, in particular, our refinancing and other capital market activities, our ability to manage debt maturities, our future growth and our development and acquisition activity. A securities rating is not a recommendation to buy, sell or hold securities and is subject to revision or withdrawal at any time by the rating organization.
At December 31, 2021, we were in compliance with all of our financial debt covenants. These covenants include a number of customary financial covenants, such as maintaining debt service coverage ratios, leverage ratios and fixed charge coverage ratios.
See Note 8 to the Consolidated Financial Statements for further discussion on our debt.
Equity Commitments Related to Certain 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 following table summarizes the remaining equity commitments at December 31, 2021 (in millions):
Equity Commitments (1)
Prologis
Venture Partners
Total
Expiration Date
Prologis Targeted U.S. Logistics Fund
$
-
$
2,114
$
2,114
2023 - 2024 (2)
Prologis European Logistics Fund
-
1,803
1,803
2023 - 2024 (2)
Prologis China Core Logistics Fund
-
2022 - 2024 (2)
Prologis China Logistics Venture
1,543
1,815
2023 - 2028
Prologis Brazil Logistics Venture
Total
$
$
5,754
$
6,066
(1)
The equity commitments for the co-investment ventures that operate in a different functional currency than the U.S. dollar were calculated using the foreign currency exchange rate at December 31, 2021.
(2)
Venture partners have the option to cancel their equity commitment up to 18 months after the initial commitment date.
See the Cash Flow Summary below for more information about our investment activity in our co-investment ventures.
Cash Flow Summary
The following table summarizes our cash flow activity (in millions):
Net cash provided by operating activities
$
2,996
$
2,937
Net cash used in investing activities
$
(1,990
)
$
(3,074
)
Net cash used in financing activities
$
(1,008
)
$
(372
)
Net decrease in cash and cash equivalents, including the effect of foreign
currency exchange rates on cash
$
(42
)
$
(491
)
Operating Activities
Cash provided by and used in operating activities, exclusive of changes in receivables and payables, was impacted by the following significant activities:
•
Real estate operations. We receive the majority of our operating cash through the net revenues of our Real Estate Operations segment, including the recovery of our operating costs. Cash flows generated by the Real Estate Operations segment are impacted by our acquisition, development and disposition activities, which are drivers of NOI recognized during each period. See the Results of Operations section above for further explanation of our Real Estate Operations segment. The revenues from this segment include noncash adjustments for straight-lined rents and amortization of above and below market leases of $148 million and $126 million for 2021 and 2020, respectively.
•
Strategic capital. We also generate operating cash through our Strategic Capital segment by providing asset management and property management and other services to our unconsolidated co-investment ventures. See the Results of Operations section above for the key drivers of the net revenues from our Strategic Capital segment. Included in Strategic Capital Revenues is the third-party investors’ share that is owed for promotes, which is recognized in operating activities in the period the cash is received, generally the quarter after the revenue is recognized.
•
G&A expenses and equity-based compensation awards. We incurred $294 million and $275 million of G&A expenses in 2021 and 2020, respectively. We recognized equity-based, noncash compensation expenses of $113 million and $110 million in 2021 and 2020, respectively, which were recorded to Rental Expenses in the Real Estate Operations segment, Strategic Capital Expenses in the Strategic Capital segment and G&A Expenses.
•
Operating distributions from unconsolidated entities. We received $440 million and $451 million of distributions as a return on our investment from the cash flows generated from the operations of our unconsolidated entities in 2021 and 2020, respectively.
•
Cash paid for interest, net of amounts capitalized. We paid interest, net of amounts capitalized, of $279 million and $309 million in 2021 and 2020, respectively. See Note 8 to the Consolidated Financial Statements for further information on this activity.
•
Cash paid for income taxes, net of refunds. We paid income taxes, net of refunds, of $149 million and $101 million in 2021 and 2020, respectively. See Note 13 to the Consolidated Financial Statements for further information on this activity.
Investing Activities
Cash provided by investing activities is driven by proceeds from contributions and dispositions of real estate. During 2021, our dispositions included significant contributions of properties we developed to our unconsolidated co-investment ventures as well as the sale of operating properties. Cash used in investing activities is primarily driven by our capital deployment activities of investing in real estate development, acquisitions and capital expenditures. During 2021, our acquisitions included significant acquisitions of land for future development, operating properties and other real estate assets, including Covered Land Plays to support increased development activities in the future. See Note 4 to the Consolidated Financial Statements for further information on these activities. In addition, the following significant transactions also impacted our cash used in and provided by investing activities:
•
Liberty Transaction, net of cash acquired. We paid net cash of $29 million to complete the Liberty Transaction in 2020, primarily due to transaction costs. The acquisition was financed through the issuance of equity and the assumption of debt. A portion of this debt was paid down subsequent to the acquisition, see the Financing Activities section below. See Note 3 to the Consolidated Financial Statements for more information on this transaction.
•
IPT Transaction, net of cash acquired. Our consolidated co-investment venture, USLV, acquired real estate assets from IPT for a cash purchase price of $1.7 billion in 2020. Our partner in USLV contributed their share of the purchase price, $917 million, which is presented in Noncontrolling Interests Contributions in financing activities. All of the debt assumed was paid down subsequent to the acquisition, see the Financing Activities section below. See Note 4 to the Consolidated Financial Statements for more information on this transaction.
•
Investments in and advances to our unconsolidated entities. We invested cash in our unconsolidated entities that represented our proportionate share, of $798 million and $386 million in 2021 and 2020, respectively. The ventures used the funds for the acquisition of properties, development and repayment of debt. See Note 5 to the Consolidated Financial Statements for more detail on our unconsolidated co-investment ventures.
•
Return of investment from unconsolidated entities. We received distributions from unconsolidated entities as a return of investment of $58 million and $257 million in 2021 and 2020, respectively. Included in these amounts were distributions from venture activities including proceeds from property sales, debt refinancing and the redemption of our investment in certain unconsolidated entities.
Financing Activities
Cash provided by and used in financing activities is principally driven by proceeds from and payments on credit facilities and other debt, along with dividends paid on common and preferred stock and noncontrolling interest contributions and distributions.
•
Repurchase of common and preferred stock. We paid $35 million and $7 million to repurchase common shares and shares of Series Q preferred stock, respectively, during 2020.
Our repurchase of and payments on debt and proceeds from the issuance of debt consisted of the following activity (in millions):
2020 (1)
Repurchase of and payments on debt (including extinguishment costs)
Regularly scheduled debt principal payments and payments at maturity
$
$
Secured mortgage debt
Senior notes
1,644
4,856
Term loans
1,351
Total
$
2,560
$
6,782
Proceeds from the issuance of debt
Secured mortgage debt
$
$
Senior notes
2,902
6,170
Term loans
1,500
Total
$
3,598
$
7,825
(1)
We completed the Liberty Transaction in 2020 and assumed $2.8 billion of debt, of which $1.8 billion was paid off with the proceeds from the issuance of senior notes. USLV assumed $342 million of debt in the IPT Transaction, all of which was paid off at closing. The assumption of debt was excluded from the table above.
Unconsolidated Co-Investment Venture Debt
We had investments in and advances to our unconsolidated co-investment ventures of $7.8 billion at December 31, 2021. These ventures listed below had total third-party debt of $12.0 billion at December 31, 2021 with a weighted average remaining maturity of 7 years and weighted average interest rate of 2.2%. Certain of our ventures do not have third-party debt and are therefore excluded. This debt is non-recourse to Prologis and other investors in the co-investment ventures and bears interest as follows at December 31, 2021 (dollars in millions):
Total (1)
Weighted Average Interest Rate
Gross Book Value (1)
Ownership %
Prologis Targeted U.S. Logistics Fund
$
3,069
3.0%
$
12,714
27.0%
FIBRA Prologis
1,052
3.8%
2,780
47.3%
Prologis European Logistics Fund
3,737
1.5%
14,703
23.8%
Nippon Prologis REIT
2,621
0.6%
7,198
15.1%
Prologis China Core Logistics Fund
5.3%
2,240
15.3%
Prologis China Logistics Venture
2.9%
1,409
15.0%
Total
$
12,015
$
41,044
(1)
The weighted average loan-to-value ratio for all unconsolidated co-investment ventures was 25.4% at December 31, 2021. Loan-to-value, a non-GAAP measure, was calculated as the percentage of total third-party debt to the gross book value of real estate for each venture and weighted based on the cumulative gross book value of all unconsolidated co-investment ventures.
At December 31, 2021, we did not guarantee any third-party debt of the unconsolidated co-investment ventures. In our role as the manager or sponsor, we work with the co-investment ventures to maintain sufficient liquidity and refinance their maturing debt. There can be no assurance that the co-investment ventures will be able to refinance any maturing indebtedness on terms as favorable as the
maturing debt, or at all. If the ventures are unable to refinance the maturing indebtedness with newly issued debt, they may be able to obtain funds by voluntary capital contributions from us and our partners or by selling assets. Certain of our ventures also have credit facilities, or unencumbered properties, both of which may be used to obtain funds.
Dividend and Distribution Requirements
Our dividend policy on our common stock is to distribute a percentage of our cash flow to ensure that we will meet the dividend requirements of the IRC, relative to maintaining our REIT status, while still allowing us to retain cash to fund our capital deployment and other investment activities.
Under the IRC, REITs may be subject to certain federal income and excise taxes on undistributed taxable income.
We paid quarterly cash dividends of $0.63 and $0.58 per common share in 2021 and 2020, respectively. Our future common stock dividends, if and as declared, may vary and will be determined by the Board based upon the circumstances prevailing at the time, including our financial condition, operating results and REIT distribution requirements, and may be adjusted at the discretion of the Board during the year.
We make distributions on the common limited partnership units outstanding at the same per unit amount as our common stock dividend. The Class A Units in the OP are entitled to a quarterly distribution equal to $0.64665 per unit so long as the common units receive a quarterly distribution of at least $0.40 per unit. We paid a quarterly cash distribution of $0.64665 per Class A Unit in 2021 and 2020.
At December 31, 2021, our Series Q preferred stock had an annual dividend rate of 8.54% per share and the dividends are payable quarterly in arrears.
Pursuant to the terms of our preferred stock, we are restricted from declaring or paying any dividend with respect to our common stock unless and until all cumulative dividends with respect to the preferred stock have been paid and sufficient funds have been set aside for dividends that have been declared for the relevant dividend period with respect to the preferred stock.
Other Commitments
On an ongoing basis, we are engaged in various stages of negotiations for the acquisition or disposition of individual properties or portfolios of properties.
CRITICAL ACCOUNTING POLICIES
A critical accounting policy is one that involves an estimate or assumption that is subjective and requires management judgment about the effect of a matter that is inherently uncertain and material to an entity’s financial condition and results of operations. Management’s judgment considers historical and current economic conditions and expectations for the future. Changes in estimates could affect our financial position and specific items in our results of operations that are used by stockholders, potential investors, industry analysts and lenders in their evaluation of our performance. Of the significant accounting policies discussed in Note 2 to the Consolidated Financial Statements, those presented below have been identified by us as meeting the criteria to be considered critical accounting policies as they relate to our financial condition as of the years ended December 31, 2021 and 2020 and our operating results for the three-year period ended December 31, 2021. Refer to Note 2 for more information on these critical accounting policies.
Asset Acquisitions
We generally account for an acquisition of a single property or portfolio of properties as an asset acquisition. We measure the real estate assets acquired through an asset acquisition based on their cost or total consideration exchanged and any excess consideration or bargain purchase amount is allocated to the real estate properties and related lease intangibles on a relative fair value basis. Assets we do not intend to hold long-term are recorded at fair value. At a property-level, we allocate the fair value to the components, which include building, land, improvements, and intangible assets or liabilities related to acquired leases. The most significant portion of the allocation is to building and land and requires the use of market based estimates and assumptions.
The purchase price allocation is based on the expected future cash flows of the property and various characteristics of the markets where the property is located utilizing an income approach methodology, which may be a discounted cash flow analysis or applying a capitalization rate to the estimated NOI of a property. Key assumptions include market rents, growth rates, and discount and capitalization rates. Estimates of future cash flows are based on a number of factors including historical operating results, known trends and market and economic conditions. We determine discount and capitalization rates by market based on recent transactions and other market data and adjust if necessary, based on the property characteristics. The fair value of land is generally based on relevant market data, such as a comparison of the subject site to similar parcels that have recently been sold or are currently being offered on the market for sale. The use of different assumptions to value the acquired properties and allocate the most significant portion of the property value between the building and land could affect the expenses we recognize over the estimated remaining useful life.
Recoverability of Real Estate Assets
We assess the carrying values of our respective long-lived assets whenever events or changes in circumstances indicate that the carrying amounts of these assets may not be fully recoverable. This assessment is primarily triggered based on the shortening of the expected hold period due to our change in intent to sell a property in the near term. We have processes to monitor our intent with regard to our investments and the estimated disposition value in comparison to the current carrying value. If our assessment of potential triggering events indicates that the carrying value of a property that we expect to sell in the near term is not recoverable, we recognize an impairment charge for the amount by which the carrying value exceeds the current estimated fair value of the property. We determine the fair value of the property based on the proceeds from disposition that are estimated based on quoted market values, third-party appraisals or discounted cash flow models that utilize the future NOI of the property and expected market capitalization rates. The use of projected future cash flows is based on assumptions that are consistent with our estimates of future expectations and the strategic plan we use to manage our underlying business. Changes in economic and operating conditions could impact our intent and the assumptions used in determining the fair value that could result in future impairment.
NEW ACCOUNTING PRONOUNCEMENTS
See Note 2 to the Consolidated Financial Statements.
FUNDS FROM OPERATIONS ATTRIBUTABLE TO COMMON STOCKHOLDERS/UNITHOLDERS (“FFO”)
FFO is a non-GAAP financial measure that is commonly used in the real estate industry. The most directly comparable GAAP measure to FFO is net earnings.
The National Association of Real Estate Investment Trusts (“NAREIT”) defines FFO as earnings computed under GAAP to exclude historical cost depreciation and gains and losses from the sales net of any related tax, along with impairment charges, of previously depreciated properties. We also exclude the gains on revaluation of equity investments upon acquisition of a controlling interest and the gain recognized from a partial sale of our investment, as these are similar to gains from the sales of previously depreciated properties. We exclude similar adjustments from our unconsolidated entities and the third parties’ share of our consolidated co-investment ventures.
Our FFO Measures
Our FFO measures begin with NAREIT’s definition and we make certain adjustments to reflect our business and the way that management plans and executes our business strategy. While not infrequent or unusual, the additional items we adjust for in calculating FFO, as modified by Prologis and Core FFO, both as defined below, are subject to significant fluctuations from period to period. Although these items may have a material impact on our operations and are reflected in our financial statements, the removal of the effects of these items allows us to better understand the core operating performance of our properties over the long term. These items have both positive and negative short-term effects on our results of operations in inconsistent and unpredictable directions that are not relevant to our long-term outlook.
We calculate our FFO measures, as defined below, based on our proportionate ownership share of both our unconsolidated and consolidated ventures. We reflect our share of our FFO measures for unconsolidated ventures by applying our average ownership percentage for the period to the applicable reconciling items on an entity by entity basis. We reflect our share for consolidated ventures in which we do not own 100% of the equity by adjusting our FFO measures to remove the noncontrolling interests share of the applicable reconciling items based on our average ownership percentage for the applicable periods.
These FFO measures are used by management as supplemental financial measures of operating performance and we believe that it is important that stockholders, potential investors and financial analysts understand the measures management uses. We do not use our FFO measures as, nor should they be considered to be, alternatives to net earnings computed under GAAP, as indicators of our operating performance, as alternatives to cash from operating activities computed under GAAP or as indicators of our ability to fund our cash needs.
We analyze our operating performance principally by the rental revenue of our real estate and the revenues from our strategic capital business, net of operating, administrative and financing expenses. This income stream is not directly impacted by fluctuations in the market value of our investments in real estate or debt securities.
FFO, as modified by Prologis attributable to common stockholders/unitholders (“FFO, as modified by Prologis”)
To arrive at FFO, as modified by Prologis, we adjust the NAREIT defined FFO measure to exclude the impact of foreign currency related items and deferred tax, specifically:
•
deferred income tax benefits and deferred income tax expenses recognized by our subsidiaries;
•
current income tax expense related to acquired tax liabilities that were recorded as deferred tax liabilities in an acquisition, to the extent the expense is offset with a deferred income tax benefit in earnings that is excluded from our defined FFO measure; and
•
foreign currency exchange gains and losses resulting from (i) debt transactions between us and our foreign entities, (ii) third-party debt that is used to hedge our investment in foreign entities, (iii) derivative financial instruments related to any such debt transactions, and (iv) mark-to-market adjustments associated with other derivative financial instruments.
We use FFO, as modified by Prologis, so that management, analysts and investors are able to evaluate our performance against other REITs that do not have similar operations or operations in jurisdictions outside the U.S.
Core FFO attributable to common stockholders/unitholders (“Core FFO”)
In addition to FFO, as modified by Prologis, we also use Core FFO. To arrive at Core FFO, we adjust FFO, as modified by Prologis, to exclude the following recurring and nonrecurring items that we recognize directly in FFO, as modified by Prologis:
•
gains or losses from the disposition of land and development properties that were developed with the intent to contribute or sell;
•
income tax expense related to the sale of investments in real estate;
•
impairment charges recognized related to our investments in real estate generally as a result of our change in intent to contribute or sell these properties;
•
gains or losses from the early extinguishment of debt and redemption and repurchase of preferred stock; and
•
expenses related to natural disasters.
We use Core FFO, including by segment and region, to: (i) assess our operating performance as compared to other real estate companies; (ii) evaluate our performance and the performance of our properties in comparison with expected results and results of previous periods; (iii) evaluate the performance of our management; (iv) budget and forecast future results to assist in the allocation of resources; (v) provide guidance to the financial markets to understand our expected operating performance; and (vi) evaluate how a specific potential investment will impact our future results.
Limitations on the use of our FFO measures
While we believe our modified FFO measures are important supplemental measures, neither NAREIT’s nor our measures of FFO should be used alone because they exclude significant economic components of net earnings computed under GAAP and are, therefore, limited as an analytical tool. Accordingly, these are only a few of the many measures we use when analyzing our business. Some of the limitations are:
•
The current income tax expenses that are excluded from our modified FFO measures represent the taxes that are payable.
•
Depreciation and amortization of real estate assets are economic costs that are excluded from FFO. FFO is limited, as it does not reflect the cash requirements that may be necessary for future replacements of the real estate assets. Furthermore, the amortization of capital expenditures and leasing costs necessary to maintain the operating performance of logistics facilities are not reflected in FFO.
•
Gains or losses from property dispositions and impairment charges related to expected dispositions represent changes in value of the properties. By excluding these gains and losses, FFO does not capture realized changes in the value of disposed properties arising from changes in market conditions.
•
The deferred income tax benefits and expenses that are excluded from our modified FFO measures result from the creation of a deferred income tax asset or liability that may have to be settled at some future point. Our modified FFO measures do not currently reflect any income or expense that may result from such settlement.
•
The foreign currency exchange gains and losses that are excluded from our modified FFO measures are generally recognized based on movements in foreign currency exchange rates through a specific point in time. The ultimate settlement of our foreign currency-denominated net assets is indefinite as to timing and amount. Our FFO measures are limited in that they do not reflect the current period changes in these net assets that result from periodic foreign currency exchange rate movements.
•
The gains and losses on extinguishment of debt or preferred stock that we exclude from our Core FFO, may provide a benefit or cost to us as we may be settling our obligation at less or more than our future obligation.
•
The natural disaster expenses that we exclude from Core FFO are costs that we have incurred.
We compensate for these limitations by using our FFO measures only in conjunction with net earnings computed under GAAP when making our decisions. This information should be read with our complete Consolidated Financial Statements prepared under GAAP. To assist investors in compensating for these limitations, we reconcile our modified FFO measures to our net earnings computed under GAAP as follows (in millions):
Reconciliation of net earnings attributable to common stockholders to FFO measures:
Net earnings attributable to common stockholders
$
2,934
$
1,473
Add (deduct) NAREIT defined adjustments:
Real estate related depreciation and amortization
1,534
1,523
Gains on other dispositions of investments in real estate, net of taxes
(749
)
(252
)
Reconciling items related to noncontrolling interests
(57
)
Our share of reconciling items included in earnings related to unconsolidated entities
NAREIT defined FFO attributable to common stockholders/unitholders
3,924
2,955
Add (deduct) our modified adjustments:
Unrealized foreign currency and derivative losses (gains), net
(173
)
Deferred income tax expense
-
Current income tax expense on dispositions related to acquired tax liabilities
Reconciling items related to noncontrolling interests
(2
)
Our share of reconciling items included in earnings related to unconsolidated entities
(1
)
-
FFO, as modified by Prologis attributable to common stockholders/unitholders
3,755
3,120
Adjustments to arrive at Core FFO:
Gains on dispositions of development properties and land, net
(817
)
(465
)
Current income tax expense on dispositions
Losses on early extinguishment of debt, preferred stock repurchase and other, net
Reconciling items related to noncontrolling interests
(3
)
Our share of reconciling items included in earnings related to unconsolidated entities
(28
)
Core FFO attributable to common stockholders/unitholders
$
3,172
$
2,864

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to the impact of foreign exchange-related variability and earnings volatility on our foreign investments and interest rate changes. See our risk factors in Item 1A. Risk Factors, specifically Risks Related to our Global Operations and Risks Related to Financing and Capital. See also Notes 2 and 15 in the Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data for more information about our foreign operations and derivative financial instruments.
We monitor our market risk exposures using a sensitivity analysis. Our sensitivity analysis estimates the exposure to market risk sensitive instruments assuming a hypothetical 10% adverse change in foreign currency exchange rates or interest rates at December 31, 2021. The results of the sensitivity analysis are summarized in the following sections. The sensitivity analysis is of limited predictive value. As a result, revenues and expenses, as well as our ultimate realized gains or losses with respect to foreign currency exchange rate and interest rate fluctuations will depend on the exposures that arise during a future period, hedging strategies at the time and the prevailing foreign currency exchange rates and interest rates.
Foreign Currency Risk
We are exposed to foreign currency exchange variability related to investments in and earnings from our foreign investments. Foreign currency market risk is the possibility that our results of operations or financial position could be better or worse than planned because of changes in foreign currency exchange rates. We primarily hedge our foreign currency risk by borrowing in the currencies in which we invest thereby providing a natural hedge. Additionally, we hedge our foreign currency risk by entering into derivative financial instruments that we designate as net investment hedges, as these amounts offset the translation adjustments on the underlying net assets of our foreign investments. At December 31, 2021, after consideration of our ability to borrow in the foreign currencies in which we invest and also derivative and nonderivative financial instruments as discussed in Note 15 to the Consolidated Financial Statements, we had minimal net equity denominated in a currency other than the U.S. dollar.
For the year ended December 31, 2021, $573 million or 12.0% of our total consolidated revenue was denominated in foreign currencies. We enter into other foreign currency contracts, such as forwards, to reduce fluctuations in foreign currency associated with the translation of the future earnings of our international subsidiaries. We have forward contracts that were not designated as hedges, denominated principally in British pound sterling, Canadian dollar, euro and Japanese yen, and have an aggregate notional amount of $1.7 billion to mitigate risk associated with the translation of the future earnings of our subsidiaries denominated in these currencies. The gain or loss on settlement of these contracts is included in our earnings and offsets the lower or higher translation of earnings from our investments denominated in currencies other than the U.S. dollar. Although the impact to net earnings is mitigated through higher
translated U.S. dollar earnings from these currencies, a weakening of the U.S. dollar against these currencies by 10% could result in a $166 million cash payment on settlement of these contracts.
Interest Rate Risk
We are also exposed to the impact of interest rate changes on future earnings and cash flows. To mitigate that risk, we generally borrow with fixed rate debt and we may use derivative instruments to fix the interest rate on our variable rate debt. At December 31, 2021, $15.9 billion of our debt bore interest at fixed rates and therefore the fair value of these instruments was affected by changes in market interest rates. At December 31, 2021, $1.9 billion of our debt bore interest at variable rates. The following table summarizes the future repayment of debt and scheduled principal payments at December 31, 2021 (dollars in millions):
Thereafter
Total
Fair Value
Fixed rate debt (1)
$
$
$
$
$
14,858
$
15,864
$
15,995
Weighted average interest rate (2)
-0.1
%
4.4
%
7.6
%
3.1
%
1.7
%
1.7
%
Variable rate debt
Credit facilities
$
-
$
$
$
-
$
-
$
$
Senior notes
-
-
-
-
Term loans
-
-
-
1,090
1,090
Total variable rate debt
$
$
$
$
-
$
$
1,921
$
1,921
(1)
At December 31, 2021, we had one interest rate swap agreement to fix €150 million ($165 million) of our floating rate euro senior notes which is included in fixed rate debt.
(2)
The weighted average interest rates represent the effective interest rates (including amortization of debt issuance costs and noncash premiums and discounts) at December 31, 2021 for the debt outstanding.
At December 31, 2021, the weighted average effective interest rate on our variable rate debt was 0.5%. Changes in interest rates can cause interest expense to fluctuate on our variable rate debt. On the basis of our sensitivity analysis, a 10% increase in interest rates on our average outstanding variable rate debt balances would result in additional annual interest expense of $1 million for the year ended December 31, 2021, which equates to a change in interest rates of 5 basis points on our average outstanding variable rate debt balances and less than 1 basis point on our average total debt portfolio balances.

---

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8. Financial Statements and Supplementary Data
The Consolidated Balance Sheets of Prologis, Inc. and Prologis, L.P. at December 31, 2021 and 2020, the Consolidated Statements of Income of Prologis, Inc. and Prologis, L.P., the Consolidated Statements of Comprehensive Income of Prologis, Inc. and Prologis, L.P., the Consolidated Statements of Equity of Prologis, Inc., the Consolidated Statements of Capital of Prologis, L.P. and the Consolidated Statements of Cash Flows of Prologis, Inc. and Prologis, L.P. for each of the years in the three-year period ended December 31, 2021, Notes to Consolidated Financial Statements and Schedule III - Real Estate and Accumulated Depreciation, together with the reports of KPMG LLP, independent registered public accounting firm, are included under Item 15 of this report and are incorporated herein by reference. Selected unaudited quarterly financial data are voluntarily presented in Note 19 of the Consolidated Financial Statements.

---

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.

---

ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9A. Controls and Procedures
Controls and Procedures (Prologis, Inc.)
Prologis, Inc. carried out an evaluation under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities and Exchange Act of 1934 (the “Exchange Act”)) at December 31, 2021. Based on this evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms. Subsequent to December 31, 2021, there were no significant changes in the internal controls or in other factors that could significantly affect these controls, including any corrective actions with regard to significant deficiencies and material weaknesses.
Changes in Internal Control over Financial Reporting
There have not been any changes in Prologis, Inc.’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15(d)-15(f) under the Exchange Act) that occurred during the quarter ended December 31, 2021, that have materially affected, or are reasonably likely to materially affect, Prologis, Inc.’s internal control over financial reporting.
Management’s Annual Report on Internal Control over Financial Reporting
We are responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act.
Under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of the internal control over financial reporting was conducted at December 31, 2021, based on the criteria described in “Internal Control - Integrated Framework” (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management determined that, at December 31, 2021, the internal control over financial reporting was effective.
Our internal control over financial reporting at December 31, 2021, has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their attestation report, which is included herein.
Limitations of the Effectiveness of Controls
Management’s assessment included an evaluation of the design of the internal control over financial reporting and testing of the operational effectiveness of the internal control over financial reporting. The internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Controls and Procedures (Prologis, L.P.)
Prologis, L.P. carried out an evaluation under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) at December 31, 2021. Based on this evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms. Subsequent to December 31, 2021, there were no significant changes in the internal controls or in other factors that could significantly affect these controls, including any corrective actions with regard to significant deficiencies and material weaknesses.
Changes in Internal Control over Financial Reporting
There have not been any changes in Prologis, L.P.’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15(d)-15(f) under the Exchange Act) that occurred during the quarter ended December 31, 2021, that have materially affected, or are reasonably likely to materially affect, Prologis, L.P.’s internal control over financial reporting.
Management’s Annual Report on Internal Control over Financial Reporting
We are responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act.
Under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of the internal control over financial reporting was conducted at December 31, 2021, based on the criteria described in “Internal Control - Integrated Framework” (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management determined that, at December 31, 2021, the internal control over financial reporting was effective.
Limitations of the Effectiveness of Controls
Management’s assessment included an evaluation of the design of the internal control over financial reporting and testing of the operational effectiveness of the internal control over financial reporting. The internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

---

ITEM 9B. OTHER INFORMATION
ITEM 9B. Other Information
None.

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 10. Directors, Executive Officers and Corporate Governance
The information required by this item is incorporated herein by reference to, including relevant sections in our 2022 Proxy Statement, under the captions entitled Board of Directors and Corporate Governance; Executive Officers; Executive Compensation; Director Compensation; Security Ownership; Equity Compensation Plans and Additional Information or will be provided in an amendment filed on Form 10-K/A.

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ITEM 11. EXECUTIVE COMPENSATION
ITEM 11. Executive Compensation
The information required by this item is incorporated herein by reference to the relevant sections in our 2022 Proxy Statement, under the captions entitled Board of Directors and Corporate Governance; Executive Officers; Executive Compensation and Director Compensation or will be provided in an amendment filed on Form 10-K/A.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item is incorporated herein by reference to the relevant sections in our 2022 Proxy Statement, under the captions entitled Security Ownership and Equity Compensation Plans or will be provided in an amendment filed on Form 10-K/A.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item is incorporated herein by reference to the relevant sections in our 2022 Proxy Statement, under the caption entitled Board of Directors and Corporate Governance or will be provided in an amendment filed on Form 10-K/A.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 14. Principal Accounting Fees and Services
The information required by this item is incorporated herein by reference to the relevant sections in our 2022 Proxy Statement, under the caption entitled Audit Matters or will be provided in an amendment filed on Form 10-K/A.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 15. Exhibits, Financial Statements and Schedules
The following documents are filed as a part of this report:
(a) Financial Statements and Schedules:
1. Financial Statements:
See Index to the Consolidated Financial Statements and Schedule III on page 49 of this report, which is incorporated herein by reference.
2. Financial Statement Schedules:
Schedule III - Real Estate and Accumulated Depreciation
All other schedules have been omitted since the required information is presented in the Consolidated Financial Statements and the related notes or is not applicable.
(b) Exhibits: The Exhibits required by Item 601 of Regulation S-K are listed in the Index to the Exhibits on pages 102 to 112 of this report, which is incorporated herein by reference.
(c) Financial Statements: See Index to the Consolidated Financial Statements and Schedule III on page 49 of this report, which is incorporated by reference.