DEAR FELLOW SHAREHOLDERS
2012 marked a significant milestone for Prologis as we concluded our first full year of operations as a new company. Our business continued to strengthen as global demand for high-quality logistics facilities increased due to growing consumption and supply chain reconfiguration.
Hamid R. Moghadam
Chairman and Chief Executive Officer
At the merger in June 2011, we developed an ambitious 10 quarter plan to build a strong foundation for our future growth. Today we are six quarters into that plan, and I am pleased to say we have outperformed our own high expectations. The substantial work is complete and we are either on track or ahead of schedule on each of our priorities. Our teams around the world worked relentlessly on this plan to deliver strong results for our shareholders, investors and customers.
Here are the highlights of our progress:
Aligning our Portfolio
Aligning our portfolio with our investment strategy is our first priority. All the work we do as an organization in the context of our 10-quarter plan builds on this objective.
This priority targeted $2.9 billion of dispositions. At year-end, we were 80% complete, with $2.3 billion in sales of nonstrategic assets, with an average
“THE SUBSTANTIAL WORK IS COMPLETE AND WE ARE EITHER ON TRACK OR AHEAD OF SCHEDULE ON EACH OF OUR PRIORITIES.” stabilized capitalization rate of 7.1%. The dispositions have occurred predominantly in regional and other markets, increasing our percentage of assets in global markets from 79% at the merger date to 85% today. At completion of our plan, we expect to have 90% of our assets in our global markets. Our substantial disposition progress over the past 18 months demonstrates the demand for high-quality industrial real estate around the world.
We have recycled a portion of the proceeds from our dispositions into new developments. Since the merger, we have started more than $1.9 billion of new developments, $1.5 billion of which commenced in 2012. Approximately 57% of our 2012 starts were build-to-suits, and we have achieved an average profit margin of 18%. While we don’t expect to sustain this level of profitability indefinitely, these strong margins clearly support the value of our land bank.
“…WE ARE ACTIVELY GROWING OUR PRIVATE CAPITAL BUSINESS AND INVESTORS HAVE RESPONDED POSITIVELY TO OUR EFFORTS.” Streamlining our Private Capital Business
In 2012, our Private Capital team made excellent progress on our second priority—streamlining the business with fewer, more profitable and differentiated investment vehicles. Since the merger, we have liquidated or restructured seven funds, six of which were rationalized in 2012, including the Prologis European Properties Fund (PEPR).
At the same time, we are actively growing our Private Capital business and investors have responded positively to our efforts. Our restructured funds and newly formed vehicles have attracted $2.4 billion of new, third-party equity in the last 18 months. More than $1.9 billion of that total was raised in 2012.
A significant portion of this new business was the joint venture with Norges Bank Investment Management, the manager of the Norwegian Government Pension Fund. Announced in December, the transaction closed in March 2013. Upon closing, the venture acquired a stabilized portfolio of 195 properties totaling approximately 49 million square feet (4.5 million square meters); about 75% of the properties coming from the former ProLogis European Properties (PEPR) fund and the remaining 25% from other Prologis wholly owned assets. This joint venture is a significant milestone for us, as it completes our European recapitalization ahead of schedule. We are very pleased to be teaming up with such a highly regarded investor in Europe.
In Asia, we selected the J-REIT as the structure to capitalize our Japan operating platform. In early 2013, we launched the initial public offering for Nippon Prologis REIT Inc., “NPR,” and on February 14, it was listed and commenced trading on the Japan Stock Exchange. Concurrently, NPR acquired a portfolio of 12 properties
from us for an aggregate purchase price of ¥173 billion ($1.9 billion). We will retain at least a 15% equity ownership interest in NPR. The level of interest in and demand for the IPO was exceptionally strong, and we plan to grow NPR’s portfolio with assets from our significant development pipeline in the future.
With most of the streamlining of private capital business behind us, we are turning our emphasis to growing our co-investments by raising additional capital for our existing funds and ventures.
Strengthening our Financial Position
We made great strides in our third priority—further securing the company’s financial position in 2012. Improvements to our cost structure, balance sheet and liquidity were driven by proceeds from our assets alignment.
To put this in perspective, by the end of 2013, we expect to have reduced our look-through leverage by 1,300 basis points to 37%. Further, we expect to reduce non-USD equity exposure from 55% of our equity base at the time
“…OUR PROPERTY OPERATIONS STOOD OUT AS A SIGNIFICANT SUCCESS FACTOR FOR PROLOGIS IN 2012 AND OUR GLOBAL LEASING TEAMS DESERVE (ALL THE) CREDIT...” of the merger to approximately 30%—all while enhancing the location, age and quality of our portfolio.
We are well on our way to reaching our own long-term targets for look-through leverage of 30% and exposure to foreign currency of 20% of our equity base. Our efforts have created a balance sheet that positions us well for strategic growth.
Improving Asset Utilization
Our fourth priority is to improve the utilization of our assets. Our property operations stood out as a significant success factor for Prologis in 2012, and our global leasing teams deserve credit for delivering a record leasing volume of 145 million square feet. Occupancy since the merger date is up 330 basis points to 94%, and we are drawing closer to our long-term average of 95%.
“THE RECOVERY IN INDUSTRIAL REAL ESTATE MARKETS CONTINUES AROUND THE GLOBE, WITH SIGNALS POINTING TO A POSITIVE FUTURE FOR OUR SECTOR.” Demand for our industry-leading portfolio is particularly evident when looking at our properties by size. Our largest facilities—those above 500,000 square feet—are currently 100% leased and are driving the bulk of our build-to-suit requirements. Stabilization in our small facilities—those less than 100,000 square feet—has been lagging, as they are 90% leased. Notably, we are beginning to see stronger demand as occupancy in these units was up 200 basis points in 2012. This segment is closely tied to the recovering housing market, where we expect demand to further increase in the foreseeable future.
In Europe, despite headlines of a difficult economic recovery, we leveraged our industry-leading portfolio with our global customer relationships to drive occupancy to 93%, an increase of 140 basis points over the comparable period in 2011.
Additionally, we monetized approximately $500 million of land into new development projects. We believe that our global land bank has a market value above its book value and will provide locational benefits for customers and a unique advantage for Prologis as we compete for future build-to-suit business.
Drivers of our Business
The recovery in industrial real estate markets continues around the globe, with signals pointing to a positive future for our sector. The International Monetary Fund is forecasting global trade growth at 3.8% for 2013, with even stronger levels in 2014. Improving industrial production in new goods orders indicates further strengthening and economic growth.
We are forecasting 150 million square feet of net absorption in the U.S. in 2013. This may prove conservative, as it doesn't factor in a strong recovery in housing or the increased leasing momentum we saw in the fourth quarter. In Europe, net absorption continues to be positive, and has been, since we began collecting the data series in the first quarter of 2011. Takeup—a measure of leasing volume—also remains well above its long-term average.
In Asia, the supply of Class-A facilities remains constrained in both Japan and China. We expect the reconfiguration of the supply chain in Japan and growing consumption in China to present long-term demand for our product.
In Latin America, demand for Class-A facilities remains vibrant. Brazil continues to be an underserved logistics market, as growing GDP and increasing consumption creates significant new space requirements. Demand in Mexico is similarly positive, benefiting from the economic recovery in the U.S. and the growth in “near-shoring” of production activities.
Strengthening demand in the Americas, Europe and Asia, together with low levels of new logistics and distribution space construction, is having a positive impact on market rents. Recovery in rents has taken hold in most global markets and is now spreading to our regional markets. This will clearly have a positive impact on our business.
“STRENGTHENING DEMAND … TOGETHER WITH LOW LEVELS OF NEW LOGISTICS AND DISTRIBUTION SPACE CONSTRUCTION, IS HAVING A POSITIVE IMPACT ON MARKET RENTS.” Beyond the Business
No discussion of our business in 2012 would be complete without recognizing the significant contributions of two executives who retired, as planned, from the company last year: William E. Sullivan and Walter C. Rakowich.
Bill, our former chief financial officer, retired in May a few months ahead of schedule. He joined the former ProLogis in March 2007. We will remember him for his leadership, business acumen, integrity and laser focus on always “getting it right.” He was instrumental in establishing the plan to reposition and rebuild the former ProLogis in 2008, and played a vital role in making the merger possible.
Walt joined ProLogis in 1994, and his steady hand and unwavering commitment have helped pave the road to success for our organization. He did a tremendous job turning things around and made numerous tough decisions in the face of adversity. At the time of the merger, he assumed the role as my partner, co-CEO and Board member. Walt is a class act, and I can’t think of anyone else I’d have liked to have been paired with to lead this company over the last two years.
Foundation for Growth
2012 was a highly productive year for Prologis. I am incredibly proud of how our teams across the globe have delivered on the challenging goals we set. With determination and hard work, we have successfully built the foundation upon which the company will profitably grow.
Though 2012 was a monumental year for Prologis, it is the prospects for our future that are most exciting to us. Demand for our properties is robust and increasing. The rent-recovery cycle is firmly under way and poised for accelerating growth. Globally, customers continue to reconfigure their supply chains and have requirements for state-of-the-art logistics facilities. Private capital investors value our operating expertise and gravitate to our co-investment fund vehicles.
From San Francisco to Amsterdam to Shanghai, we have the scale to support the activities of our customers and the ability to produce leading returns for our stockholders and investors.
On behalf of our Prologis colleagues around the world, thank you for your ongoing support and confidence.
Hamid R. Moghadam
Chairman and Chief Executive Officer
March 22, 2013