Prologis Inc (PLD) 2001 Q1 法說會逐字稿

PROLOGIS FIRST QUARTER EARNINGS CONFERENCE CALL

Good morning. My name is [_______________] and I will be your conference facilitator today. At this time, I would like to welcome everyone to the ProLogis first quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question and answer period. If you would like to ask a question during this time simply press the 1 on your telephone keypad and questions will be taken in the order that they are received. Thank-you, Ms. Marsden you may began your conference.

Thank-you. Good morning everyone and welcome to the ProLogis first quarter conference call. If you do not yet have a copy of our press release and supplemental information you can obtain them from our website at www.ProLogis.com. This morning we will hear from Dane Brooksher, Chairman and Chief Executive Officer who will comment on the overall results of the business and Walter C. Rakowich, CFO will discuss operating performance and financial position and then Bud Lyons, President and Chief Investment Officer will comment on market conditions and development activity in both North America and Europe. Before we get started, I would like to quickly state that this conference call would contain forward-looking statements under the Federal Securities Law. These statements are based on current expectations, estimates, and projections about the market, and the industry in which ProLogis operates as well as managements beliefs and assumptions. Forward-looking statements are not guarantees of performance and actual operating results may be affected by a variety of factors. For a list of these factors, please refer to the forward-looking statement notice in our 10-K. Also to give a broader range of investors the opportunity to ask their questions, we ask you to please limit your questions to one at a time. After management addresses your first question, we will move on to the next caller and the operator will poll for followup questions after the first round, and with that I will turn it over to Dane.

Thank you Melissa, and good morning everyone. Let me thank you again for joining in on our first quarter conference call. We had a good quarter. FFO per share was ¢57 up 9.6% over last year, and one set above the consensus estimate. And once again, our real estate business performed very well with solid internal growth with same-store net operating income growth of 3.9%, rental rate growth of over 20% in occupancy, and our stabilized portfolio of 94.6%. Our demand continued to be strong in our corporate distribution facilities business. We signed over 2.2 million sq. ft. of new built-to-suite leases, driven by additional business from existing customers, the growing need among companies to have more cost efficient distribution networks and ProLogis' unique competitive position to provide major global companies reconfiguration services, and the new facilities required by these new distribution networks across national and international markets, and Bud will describe some of these emerging new opportunities during his remarks. In North America, over 69% of our CDF business is in the top seven US logistic markets where demand for large distribution facilities remain strong. In Europe our CDF business is very strong. The recently established Jones Lang Lasalle European Warehousing index, which tracks performance of 22 investor markets in Europe reports that during 2000, rents and values for prime distribution space increased at the fastest rate since 1990, driven by strong occupier demand and an acute shortage of available supply in Europe's prime distribution hubs.

The report also indicates that while construction activity is increasing, most development is on a built-to-suite basis and high quality inventory development in prime locations are usually very quickly leased and certainly this tracked our experience during 2000, and the business remained strong during the first quarter of 2001. The potential for a significant slowing in the US economy underscores the importance of the unique real estate platform we are building in Europe. As the only pan-European provider of distribution facilities and services, we expect to benefit from the supply demand imbalance there and help offset any weakness that might develop in North America. We plan to continue to fund our CDF business by recycling the proceeds generated by sales of recently completed development into our stabilized property funds, and consistent with that strategy during the quarter, we formed ProLogis North America property funds 2, contributing $238 million of properties, and as we said last year, when we formed the first North American properties fund. We plan to use this structure to fund our North American development going forward. The fund structure allows us to recycle capital and maintain customer relationships while generating fees that increase our return on capital. Now briefly turning to our refrigerated logistics business, our European subsidiary is showing the effects of the lack of governmental intervention that we indicated would be the case last fall. While results are down compared with this time last year when governmental programs were still in place, results in the combined North American and European refrigerator logistics business met our expectations and the guidance we gave you for 2001.

And we know you as well as us are all focused on the current economic uncertainty and what it means to our business, and I wish we could provide exact answers, but we cannot. We can tell you, however, that ProLogis is well positioned to manage through and take advantage of a slowing economic environment. We have deep customer relationships that we manage, which keeps us in close contact with our customers, which enhances retention, support stable occupancy, and generates new development business. We have geographic breadth with operations in the key logistic markets in the US and Europe, and we have access to private equity capital through our property funds structures, which supports growth through efficient recycling of capital and the generation of fees, and we have a strong balance sheet, which provides the financial flexibility to take advantage of opportunities during a weak economic environment. In summary, we have the available resources, the capital, the outstanding people, and the customer relationships that will ensure we are able to continue to grow and increase returns on invested capitals for our shareholders. And with that, I will turn it over to Walter to discuss our financial results.

Thank you Dane. Overall for the quarter as Dane mentioned, we earned ¢57 per share, a 9.6% increase over the first quarter of 2000. Our operating properties and our CDFS business continue to produce good results. For the quarter, our same-store sales growth was 3.9% on 145 million sq. ft., which represents 87% of our operating portfolio. Our stabilized portfolio was 95.6% lease with rental rate growth of 20.2%. Now this exceeds our earlier rental rate growth projections for the year of 12% to 15%, and is mainly driven by strong growth in our Pacific regions and Central regions of 32.9% and 18.9% respectively. In addition, our Southeast region experienced rental growth of 7.1%, and our Mid Atlantic region showed growth of 6.8% for the quarter. Our G&A expense was higher for the quarter, due primarily to the consolidation of Kingspark, which ships approximately $1.5 million of G&A per quarter from our Kingspark subsidiary to ProLogis. This G&A is mainly associated with our fee development business in Europe. Outside of Kingspark, the remaining uptake in G&A can be attributable to normal quarterly variations, and at this point of time, we are still comfortable with our previous guidance given on G&A for the year in the low $50 million range. Our net rental expenses as a percentage of total revenues continued to decline from 4% last year to 3.7% this year. Now this is due in large part to our aggressive internal management and cash through of expenses. For the quarter, our recoveries increased to 79% of total expenses from 78% for all of last year and our interest expense for the quarter over last year declined by $2.6 million offset in large part by increased debt and interest expense in the refrigerated companies, which I will comment on in a moment. With respect to the performance of our operating funds, overall FFO for ProLogis California was up slightly for the quarter with continued strong occupancy of over 98%. Our European fund had same-store growth of 5.9%, occupancy of over 95%,

and management fees to ProLogis of $1.7 million for the quarter. Note, this year-over-year NOI increased significantly due mainly to increased property contributions during 2000. However, year-over-year FFO performance was negatively affected by a 10% decline in the euro to the dollar, and in addition during the first quarter last year, the fund was substantially under leveraged and interest rates were also 50 basis points lower in Europe than they are today. For the quarter, our blended cost of debt in the fund was 6.7%. However, yesterday, we completed the first ever sterling-euro denominated pan-European [________________] transaction for the fund. Of 213 million euros, which carried a triple A rating from both Moody's and S&P, the issue was 3 times oversubscribed with 16 institutional investors participating and the only cost for this permanent debt is 6.1%, and we will execute more of these transactions as the fund grows in size. Lastly, with regard to our North American fund, 1, we contributed 3 assets during the quarter, which we believe will augment the mix of properties in the overall portfolio. Occupancy in this fund was strong at over 95%. Turning to our CDFS business, we recycled $364 million of capital during the first quarter, which created over $40 million in recognized development profits, and an additional $14.7 million of unrecognized profits.

I will speak more about our CDFS business in a moment. Our refrigerated business is on track with our expectation stated in out last call. Remember, in order to become more tax efficient, the company incurred an additional $125 million in debt, which raised interest expense for the quarter by approximately $2.5 million. After adding back this adjustment, the FFO for the quarter equaled the seasonally adjusted 15% of our midpoint guidance of $26 to $30 million in FFO for the year. I would also like point out a few additional disclosures in this quarter's release. First, we had consolidated our Kingspark subsidiary and as result have shown a pro forma balance sheet and FFO statement for last years first quarter for comparative purposes. In addition, we've added supplemental data on page 8 for our refrigerated business, and since our fund disclosure did not start until the 2nd quarter of last year, we have included a Q1 2000 summary of each fund in place at that time. Now, let me address the topic of our CDFS business. Much has been discussed and written about this business in light of its significant growth over the last 2 to 3 years. However, I'd like to spend a moment discussing the long-term value creation strategy associated with this business. As a global company having strong relationships with growing customers, we are in a position to generate substantially more development volume as we expand our reach into new markets with our customers. For example, we have increased our annual development volume in just the last 3 years by 21/2 times, and as we look at global landscape in the future we believe there will be a growing number of opportunities to increase this development business further.

The question is how do you best finance this growth and we believe that it is best done through the recycling of our development capital for a number of reasons. First and foremost, we are in the customer service business and need to be able to fulfill profitable requirements, whether or not public capital is available. Second, we think about public equity as expensive and scarce. In our view, a 100% build and hold strategy, given our level of development, would require us to raise equity each year, which would be very costly and totally reliant on the capital markets. Finally, a development strategy which requires no additional equity but is financed by dispositions in the 8% to 9% cap-rate range as a more attractive implicit cost of capital and a higher return on invested capital for our shareholders. Now, the second piece of our CDFS strategy is they have a more predictable source of capital for our dispositions through ProLogis funds with institutional financial partners. This structure allows us to reinvest a higher amount of earnings, generate fees, and maintain customer relationships, thus our CDFS business not only generates a higher return on our invested capital, but it helps drive future growth in our operating portfolio by generating seed capital for future ProLogis funds. Is there are an ongoing market for the development and sale of new investor buildings? Absolutely. Every day, we're reminded of the fact that our development business is driven by a number of factors. The most important of which is the supply chain efficiencies. Bud will speak to this more, but we believe this trend will continue, possibly at an accelerated pace in the future. In addition, our development program is now quite diversified.

During the first quarter, our CDFS profits came from sales in 18 markets throughout the US and Europe, and this year, we expect that greater than 50% of our CDFS profits will come from Europe where the market is vigorously restructuring and very stable. Yet, the business will have its strong and weak years, and we will not be immune to these fluctuations, but overall, global demand continues to grow and ProLogis is in a strong position to take advantage of that growth. Finally, turning to our financial position, we recycled almost $400 million in total capital during the first quarter, substantially paying down our lines of credit. We've now built a pipeline of nearly $600 million in land and CIP between the US and Europe with no major debt or equity issuances in the last 2 years. In fact, we have financed virtually all of our growth internally through cash flow and asset sales. In addition, we recently took steps to lower our overall cost of capital by calling our series-A preferred shares, which have a coupon point rate of 9.4%, and over 97% of our series-B convertible preferred shareholders recently converted their shares into ProLogis common shares. Both of these events substantially increased our fixed charge coverage ratio to over 3 times. We combined with our 36.5% debt to total market capitalization. We believe that we are in actual and financial shape to take advantage of the opportunities that could arise from a swirling economic environment. With that, let me turn it over to Bud.

Thanks Walter, and good morning. I'd first like to comment on our investment activities in the first quarter then give you a development update and then discuss the market conditions, both here and in Europe. In March, as you know, we closed our second North American fund with $55 million of third party equity and a total asset value of $238 million. This product was primarily newly completed stabilized properties. This brings our total asset value in North America funds to $1.175 billion, which represents 22.1% of our total operating properties under control and management in North America. When we add in our European fund into which we contributed an additional $146.4 million of properties in the first quarter, the total value of properties in fund structures equaled $2.14 billion, which represents 33.4% of our total operating portfolio under control and management. Our equity investment in these funds totals only $486 million. Clearly, what the structure allows us to do is to control significant real estate positions with very limited capital. Increase our return on our capital, significantly through degeneration and continue to withstand our customer relationships and grow our ability to service their needs. Development cash yields are holding up well. In North America, our new deliveries are averaging 10.85%, that is a cash development yield, and in Europe, they are averaging 9.4% producing strong profit margins in our dispositions of 16.3% in North America, and 17.5% in Europe. Let me turn now to our development activity.

In the first quarter, we had development completions of 3,456,000 sq. ft., which were 44.2% at least at completion. By comparison our average occupancy for quarterly completions, over the last 4 quarters, have been 57%, so we are trailing at the average a bit. When we look at our completions over the last 12 months, we have completed a total of 12,699,000 sq. ft., and we were 66% committed on the space, which is about 4% or 5% behind pro forma. It's clear that absorption of new inventory product has slowed. As a result, we have revised downward our inventory starts for the year in North America. However, I believe, we will make up all of this revision a new build-to-suite starts as the result of some significant network rollouts that we are working on that I will comment further about later. In Europe, our total starts are on track with the information we've previously provided you on prior calls. We would expect overall starts in North America and Europe to total about $800 million for the year, with 60% in Europe and 40% in North America. Lets turn now to the current market conditions. We see a general slowing of leasing activity with the exception of some significant new opportunities, again that I will comment on later. With absorption rates declining, we are seeing the markets react by slowing the pace of new development starts. We would expect a fairly significant decline in inventory starts for the balance of the year. Let me comment on specific markets. In the San Francisco Bay area, which we divide into two markets, the East Bay and the South Bay, we have seen a slowdown in new inquiries. In the case of the East bay, we have seen a modest decrease in occupancies in the competitive base, from 95.5% to 94.5%. Now, the good news is that new construction is falling dramatically.

Last year, the market had 4 million square feet of new starts. This year we expect that number to be about half that amount. Of the 4 million square feet of new completions in 2000, 51% of it was leased at year-end. So, when we look at the availability of new inventory in the East Bay, it equaled about 2.6 million sq. ft. in a market that absorbed 1.5 million sq. ft. last year. We would expect to see occupancy rates decline a bit and the rents to remain flat. In the South Bay, although there is a lot of threat about the fallout in the dotcom space and the hi-tech space in the silicon valley, our product is somewhat insulated from this activity. Our portfolio remains 99.8% leased, although we have seen new inquiries decline, and would expect rents to remain flat. Keep in mind that market rents in the South Bay have doubled in the last three years. When we look at market-to-market rental rate analysis in our portfolio in the Bay area, it would translate to about 35% increase. Moving to Southern California, the South Bay market has experienced a dramatic drop-off in activity, as well as a spike in new deliveries. This has resulted in the occupancy rate for class-A new product decreasing from 97% to 87%. This is mainly due to 5 million sq. ft. of new product been completed in a market whose class-A competitive base is only 29 million sq. ft. But bear in mind that the entire South Bay market is a huge market with over 200 million sq. ft., and shows a healthy occupancy rate of 96%. The mid county is another [________________] market in Southern California remains very tight at 98%. The main difference here is that only 800,000 sq. ft. was delivered in the land constrained market last year on a base of 87 million sq. ft.

The good new here again, new construction starts are expected to be a fraction of what they were last year. We would certainly expect asking rents to decline in the South Bay. In the Inland Empire, activity has slowed a bit, but again here new development activity has decreased significantly. For example, last year this time, 12.7 million sq. ft. was under construction in the Inland Empire. It was about 48% leased. This year, 7.9 million sq. ft. was under construction and is about 42% leased, that's about a 48% decline in new construction. One trend we are seeing here, which is consistent in other large regional distribution markets is that there continues to be adequate demand for large facilities. These would be facilities of 400,000 or 500,000 sq. ft. and up. Currently, in the Inland Empire there are six or seven requirements totaling in excess of 5 million sq. ft. at demand. Now, turning to Dallas. Dallas is interesting. If you look at the numbers it doesn't look all that bad with net absorption of 12 million sq. ft. in 2000, and new deliveries of 9.2 million sq. ft. However, the activity in the market has recently slowed substantially and the newly completed inventory combined with what's under construction totals 10 million sq. ft. Again, the good new is 2001 deliveries are projected to be about half of what they were in 2000. We have already seen rents flatten out in Dallas. We have not seen rental concessions in the market and there still appears to be positive job growth in the market, although way under the pace of last year's 100,000 new jobs. In Chicago, I didn't see a 159 million sq. ft. competitive base that we tracked has fallen slightly from 91.9% a year ago to 90.7% today.

Occupancies range from 93% in the O'Hare sub-market where we own 3 million sq. ft. to 88% in the I-55 Corridor. Again, the good new in the I-55 Corridor is that new construction activity is off dramatically from a year ago. A year ago, at this time, there was 4.5 million sq. ft. under construction. Today there is virtually zero under construction. Just like some of the other major regional markets, we are seen good demand for large bulk product. Today, there are six requirements we are tracking that total over 300 million sq. ft. of demand. In O'Hare, we are seeing steady demand with good interest in new product. In the North DuPage marketplace we see moderate activity in smaller users in the 25 to a 150,000 sq. ft. range and very little demand for large boxes meaning 150,000 sq. ft. and up. In Atlanta, we would classify the overall market is experiencing a slowdown, but not an over-build situation. Last year Atlanta experienced record absorption of 15 million sq. ft. New constructions total 10 million sq. ft. We would expect new construction to drop in half and absorption rates likely off by 50% as well. We would expect flat rental rate throughout the Atlanta market. Again, in Atlanta, a familiar story in the big box demand, currently there are nine active prospects totaling 5 million square feet with most of this demand located at the south along the I-75 Corridor. Lastly, northern New Jersey, although the market data looks reasonable with an overall occupancy of 94.4%, we are seeing evidence of downward pressure on rental rates for big box users.

There is a bubble of space coming on the market totaling about 3.8 million feet between Exit 8A and Exit 10 on I-95. This is the market that absorbed 3 million sq. ft. last year. So we would expect absorption rates to be down a bit, and therefore, some over-hang space in the market. The Meadowlands submarket remains very tight at 97% occupancy. We have experienced good demand and strong rental rate growth in that submarket. Now, let me comment on some emerging opportunities in the marketplace. Abbott, [_______________] and several of the larger distribution markets we continue to experience steady demand for big box users in the face of a slowing economy. These again are users in the 400 to 500,000 sq. ft. range and up. What we are experiencing is continued consolidation and rationalization of supply chain by Fortune-100 companies. These initiatives were started by these companies 18 to 24 months ago, and are just coming to provision today. These companies will continue along this course even in a slower economic environment because they see substantial savings associated with a more efficient supply chain. Let me give you an example, one of our customers is rolling out a 7-location consolidation, which totals 4.6 million sq. ft. At completion, they estimate a total of 20% savings on the supply-chain activity. This customer recently awarded us their first two consolidations representing 1.5 million sq. ft. of product, which will start construction on later this year. We are currently in discussion with eleven customers regarding their multi-market network rollout, representing a potential of over 16 million sq. ft. of new requirements. The main concern for these companies, having made the decision to move forward on the consolidation, is time to market.

Therefore, they will align themselves with one or two providers that can deliver this new product in a timely manner. ProLogis is uniquely positioned to take advantage of these opportunities. Because of our land positions in the major markets, our in-house development expertise and capabilities are locally-based professional residing in and conducting business in the markets where our customers want to be and our ability to provide our customers network optimization services through insight. Now, turning to Europe, generally we continue to see excellent demand for new state-of-the-art products, and just like in North America, we're seeing a trend towards larger facilities. In Europe, until very recently, it was highly unusual to see requirements in excess of 200,000 sq. ft. Today, we see a lot demand for building greater than 250,000 sq. ft. In the UK, we are very active with over 1.3 million sq. ft. of transactions signed in the Midlands submarket alone during the quarter, including greater than 10,000 sq. ft. to Excel and our customers at Safeway, and farther than 50,000 square feet to Dunlop Tires. So, the sales around London, we see no let up in activity. The last 2 years the average of absorption in that submarket was 10 million sq. ft. We would anticipate the same amount of activity this year. We have seen a flapping in the cap-rates in the UK at around 7%. The market in France, likewise, remained strong for new product, although there are signs of slowing demand for secondary locations. The Paris market is in equilibrium from a supply and demand perspective with deliveries of new space in 2000, at about 9.8 million sq. ft. and absorption of about the same amount. Rents have increased 20% over the last 3 years in the Paris market.

In Leon, supply has not kept up with demand, ProLogis, today, has 1.32 million sq. ft. in Leon which makes us the largest owner in Leon. It's all a 100% lease. As a matter of fact, there is virtually no space available in this 9 million sq. ft. submarket. We have seen some cap rate compression throughout France with cap rates falling below 9% in the Paris market, down by a 150 basis points over the last 3 years. Northern Italy continues to suffer from a shortage of modern product and of a laborious [_______________] process. We have seen rents grow by 25% since 1999 and cap rates decline by 50 basis points in the last year. We are seeing the same dynamics in Barcelona, where rents have jumped as much as 20% in the last year and cap rates have decreased by 50 basis point to around 8%. Some significant transactions of note that we have completed recently in Europe include 620,000 sq. ft. lease to TNT a major third party service provider in [_______________] France, this is a spare parts contract for Fiat[_______________], 280,000 sq. ft. leased to Schneider Electric on a 14-year commitment in Barcelona, 300,000 sq. ft. to Samsung Electronics in [________________] in the Netherlands, and just last week we came to terms on a million sq. ft. 3 building project for a major third party service provider in the Italian market in Milan. I think you get the picture that we see and continue to enjoy tremendous demand in Europe for our new product. In summary, even though the general market in North American is slowing we're encouraged by a significant slowdown in new construction in most markets, and the new network rollouts that I mentioned, and in Europe, we continue to see unabated demand for new product that we will continue to take advantage of by delivering new buildings in underserved markets, and with that I would like to open it up for questions.

At this time, I would like to remind everyone, in order to ask a question please press the number 1 on your telephone keypad. Your first question comes from Gregory White of Morgan Stanley.

Hi, good morning guys. Walt, can you just give a little more clarity on the cold storage business? If I look back at the guidance that you were giving it seemed to be a sort of a net [_______________] of about 17% to 20% for the full year with 15% to 20% at first quarter, can you just help me understand how that relates to the numbers that you've reported today?

Sure Greg, I would be happy to. You know, what we had really done and I think we gave guidance on this as actually increased the overall debt in CSI, primarily, by about $125 million. That added for the quarter roughly $2.5 million of interest expense to CSI, and if you look on page 8 of the supplement, you'll see that basically the EBITDA is about the same as it was last year, but the interest expenses were much higher and of course that's because of the shift in debt. If you were to take the old midpoint range of, lets say 26 to 30 million, and say the midpoint range is 28, at 15% seasonality, and of course as you know the business is seasonable, the first quarter is slowest, you come up with a number in the neighborhood of $4 million or so in FFO, and of course when you backup the 2.5 million in interest you come to pretty much the number that we have booked, so what we're really looking at is very, very typical to what we thought that the business would yield in the first quarter net of the interest expense shift if you will that took place for tax purposes. Relative to the overall business, I would say that we are absolutely on track and we have actually seen a slight pickup in intervention, the storage of beef in France and in Germany that has taken place as a result of the mad-cow disease and basically, Greg, the color on that is that particularly France and Germany have gotten to a point where the farmers are very, very much suffering because the consumption is way down,

and as a result of that the governments have begun to intervene, i.e., buy up beef to stabilize prices and begin to store that in our facility. So, we're not changing our guidance at this point in time in the refrigerated business, but what we see in Europe is that net likely a positive at this point of time. But, get back to the first quarter, in essence the first quarter net of interest was right on track with what we thought.

Your next question comes from Alexis Hughes of Banc of America Securities.

Good morning. Walter, I was wondering if you could comment on how this slowdown might affect your ability to raise private equity going forward?

I am going to let Bud, Alexis, just to talk a little bit about that.

Alexis let me comment on that. We continue to see very strong demand for industrial product. As you are aware, we closed down our second North American Fund with an overseas source of capital. To me that just broadens the marketplace that we can appeal to. In terms of domestic source of the capital and their interest level in industrial product, I think its still very strong in the US, so I don't think a general economic slowdown is going to impair our ability to raise capital for stabilized properties.

Your next question comes from Matthew Dembski of Credit Suisse First Boston.

Hi, thanks. First, on the refrigerator, that the page 8 is great. Its good to have that information, thank-you, and then the question is on development, looking at the percent leased as of the end of this quarter relating it back to prior quarters, as you mentioned clearly there is a drop off, but then I would like to go back to what you had said you're still expecting the $800 million of development and it is going to be split 50-50 between the United States and Europe and that doesn't sound like there is any adjustment there, to me the reality of the marketplace, I wanted to get more color from you on what is your outlook? How are you adjusting going forward, is it a switch to Europe or what you doing in the United States?

Well, actually it's a 60-40 split between Europe and the US or North America, and I think the shift in North America is really going to be a shift away from inventory development, speculative development to built-to-suite opportunities. I mentioned the 11 customers that we're in current conversation with we've already received an order from one of those customers for 2 buildings totaling to a one million and a half square feet, we would expect more as the year progresses. Turning to Europe, Europe there continues to be excellent demand both from built-to-suite perspective and in an inventory perspective. So, we will continue a very aggressive billing program throughout Europe.

And Matt, thank-you for the comment on the refrigerator disclosure.

Your next question comes Rohit Bhattacharjee.

Hi. Two-part question on CDFS. Given sort of the fairly large volume of dispositions you did in the first quarter, is your guidance of doing 950 for the year still intact?

Yes, Roh. We are not contemplating changing our overall mix at this point of time in the guidance.

Your next question comes from Lou Taylor.

Thanks. This is, to Walter, as a followup to that. You have got 558 of total expected investment in the development pipeline. If you had a margin of about 13% that would be about 70 million or so in CDF revenue plus the first quarter, will give you roughly 110 million for the year. Is that the right number or you see it higher than that? Or if there is margin expansion, where do you see it coming from? Or volume changes?

You know Lou, basically on the surface, I would say that that's right and of course, we have got some developments that are done from last year that would be sold and some of that development pipeline that's being built this year that will actually go into next year, and of course then in addition to that you have your fee development business, and basically that's the biggest add to the CDFS. But, yeah, I mean, I think Lou I remember, you or someone else from the first quarter conference call ask the question, whether or not we felt we were on track with our development pipeline? And we did at the time and you saw that we also started about 250 million in the first quarter which is a pretty significant number, and certainly on track to hit our development start for the year. So, we feel very, very comfortable with where we are from a development perspective today, and taking into account the comments that Bud made on the mix may be a little bit different at built-to-suite versus inventory. But right now, we feel pretty good about it.

Our next question comes from James Hoffman of Wellington Management.

Walter, two questions on the footnotes to your FFO-1. You had $6 million of foreign currency adjustments. Part of that relates to, I guess, the marking-to-market principal, but part of it is actual apex adjustments I would assume. Could you just talk about the two?

Jim before you... Could you tell me what footnote you are stating to?

Page 4.

Yeah.

There is a 3 million foreign currency exchange losses that and then there is a foreign currency exchange gains and losses, it's total of 6 million.

Right. Basically, I will tell you that those foreign exchange losses, good question, are really a result of the, if you remember, we ended the quarter, I think the euro was in the 94 to 94.5 range when we ended the fourth quarter. We ended the first quarter at roughly 89 to 90, okay. So, you had that movement in the Euro. You also had a very similar movement in the pound to the dollar, and so let's assume that ProLogis has between its refrigerated business and in all the other investments, we have several $100 million invested in Europe. So, if you have roughly a 5% movement in the euro quarter-to-quarter, you will generate losses because the re-measurement of your total investment needs to flow through your income statement. And now the flip side of that is, let's assume the euro, next quarter, goes from ¢89 to ¢93 or whatever the number might be, you will then see an increase, if you will or foreign exchange gain on the re-measurement of our investment there. It doesn't have anything to do with our cash flow, it's just measured on our investment. And so, you can get some very wide swings quarter-to-quarter, and our view is we are long-term investors in Europe, and those re-measurement gains and losses frankly create a lot of noise in our overall financials and that is why we basically add those back or deduct those from GAAP earnings to get to FFO.

Your next question comes from Jonathan Litt of Salomon Smith Barney.

Good morning, with me is Paul Silver as well. Questions relate to you, lease expiration schedule, you guys still have about 14% rolling this year and about 18% rolling next year, given the current economic environment, I was wondering if you could comment on the prospects for the rollovers there, revenue levels, releasing opportunities, and the impact that might have on your 'O2 consensus estimates of 270. Are you guys still comfortable with that number?

Well, Jon, let me just comment, first of all, we have not put out any estimates for 2002, and we are not commenting on 2002 at this point in time. I will let Bud, speak through the actual rollovers themselves, but let me just tell you internally, first of all, you probably noticed that we had a 71% retention rate in the first quarter and that is not by any mistake. This company realizes the situation that the economy may be in, and our focus is really to try to retain as many customers as we can today saving downtime, and I would just tell you that we are being vigilant internally with our own people about meeting with customers well in advance as we would normally, and normally I think we are pretty vigilant about it, but there is really a push to maintain our customers at this point in time conservatively. So, frankly we expect to see higher retention this year, and in terms of the overall portfolio, it's interesting when you look at the bad debt reserves that we had at the end of last year, vis-à-vis the bad debt reserves this year, I mean, it's the first quarter, it's negligible. I think we had 440,000 reserved at the end of last year, and in the first quarter we had 481,000, which for a company that's billing close to 700 million per year, that is a very, very small amount; it's basically 0.2%. So, and our policy really is to reserve everything over 90 days that's delinquent, plus any known cases. So, at this point in time, we don't see a major kick up in bankruptcy or delinquencies, but we're being cautious. We continue to try to retain our customers and take care of our lease expirations earlier than possible. Now, having said that let me pass that on to Bud.

Yeah Jon. I would echo Walter's comments here, but I also think there are some other factors involved. When we enter a period of uncertainty like we are entering in the economy, the customers generally are inclined to make a move. They are sort of waiting on the sidelines. As a result of that, we would expect our retention to stay at relatively higher levels, particularly also related to the fact that we are being extremely vigilant about talking to our customers about their renewals. So, in terms of rental-rate growth, we had a very strong first quarter and as we look through the markets we would expect rental-rate growths to continue fairly strong throughout the year. So, I think it's a combination of factors, we can expect that rental retention rate to remain high throughout the year.

Your next question comes from Alexis Hughes from Banc of America securities.

Just a followup on that. What is your current loss to lease on the whole portfolio? Bud, I think, you mentioned in the Bay Area was 35%. So, what's the whole portfolio?

I think Alexis, means it si market-to-market.

Market-to-market.

Yeah. In the Bay Area, it's 35% throughout. The Pacific region quite frankly is about 18%. I think when you look at the company overall, I would say conservatively, it's in the 8% to 10% area clearly driven by the Pacific.

Your next question comes from Lou Taylor of Deutsche Bank.

Thanks. Walter, can you just, go back to figure 8 for a second, and if you could go, what is your guidance on refrigerated, now that you have pulled some capital out instead of being 26 to 30, what is it now? And, how did your investment in refrigerated went from 423 to 350, and how does the increased debt pulling out of capital impact that decrease in your investment?

Okay. That's no problem. First of all the guidance that we've given on the refrigerated business Lou, is 17 to 20 million in FFO, and that is net of the increased debt that we've put in place on the company, effectively. The decline in the overall investment balance is simply due to the incremental debt that we put in place on the company now. The number doesn't reconcile exactly to 125, because what happened is we refinanced, and you'll see on Page 8, footnote 2, I believe, talks about the fact that when we actually refinanced the Frigoscandia loan, and we refinanced it, we refinanced it basically in two tranches. One of the tranches closed just before the end of the quarter. And the other tranches, which was roughly $40 million closed in the first week of April. And, so, technically, if you look at the debt in place in Frigoscandia at the end of the quarter, instead of being 185 million, its really 143, but again, that was only that way for maybe 2 or 3 days, and the real debt balance as of April, I'm going to say April 3rd or 4th, was 189 million. So, basically, when you increase that debt, the investment overall, in the refrigerated business goes down and it's roughly in line with the 125 million of additional debt that we put in place on the company. Hopefully that answers your question.

Your next question comes from Rick Reuben of Legg Mason.

Hi, also David Fick here. I want to follow up on Lou Taylor's first question on the CDFS business. He made some comments in terms of margins. I just want to know how comfortable you are with the margins in the US development business.

In the US, I would say we are quite comfortable. You know, again, our delivery are averaging in the high 10s, the 10 - 8 range, now the markets appetite remains strong, and last quarter, the profit margins in North America were in the 16% range. So, for guidance I would use 13% to 15% as a pretty comfortable area.

And Rick and Dave let me be specific, and I want to reconcile with what Bud had said to the disclosure that we have out in the market. As you know, we put out some guidance about 3 months ago, and in that guidance, I believe that we said we would be in the 11% to 13% range after deferral. Now, and I think that this is very important, everybody on the call understands, because we are only booking profit to the tune of 11% to 13%. We are actually making profit of more like 15% to 17% on these assets, and that's critically important as you look at the CDFS profits, because basically, they're 25% to 30% understated; very, very important, and so we are very comfortable with the 11% to 13% "after deferral," which again equates the Bud's number of 16% in North America, and just to blend them together, for the quarter, our profit margin before deferral was 16.7% throughout the world, and after deferral it was 11.8 which falls right in the mid range, after deferral of what we had given you in the past.

Your next question comes from Jonathan Litt of Salomon Smith Barney.

Yeah, it's Paul Silver. I just wanted to follow up and ask, I have in my notes the last time you quoted the market-to-market as 15%, and now you're saying 8% to 10%. What is the reason for the change?

Paul, I think, the 15% was really in response to a question, but I would say overall, you know, as we look at the market today, I think with the economy being where it is we're all somewhat cautious and so what Bud said was conservatively 8 to 10 and frankly, I think, if we were being aggressive, and we looked at the world about 3 to 6 months ago, we feel like we probably could have been in that range, but, I think, as we look at it today, we'd rather look at it conservatively.

Your next question comes from Gregory Whyte of Morgan Stanley.

Bud, can you just comment a little bit on the same store, sort of NOI numbers. If I look at the GAAP in NOI slowed to 3.9%, and it was 8.1% a year ago. Fourth quarter was 4.3, and typically we, sort of, seem to have the seasonality going into the latter part of the year, starting out at 3.9 might be of concern. Can you just give a little more color on that?

Yeah Greg, I think the seasonality pieces it because of the way that its calculated, will not be that important moving forward for us, and I think you raised a great question. If you look at, on page 12, the portfolio consists of 144 million sq. ft. now, and much of the Meridian assets are now in the same-store pool, in fact, all of them for that matter, so that 87% of all of our properties are now in our same-store pool, and so the pool itself will not be really influenced by outside noise of development completions whatever it might be that weren't leased 13 months ago, so forth and so on. So, I think, that we'll see a same-store growth number, sort of, quarter-to-quarter, within a tighter range, if you will, overall. And frankly, as you know, the same-store growth is somewhat driven by your growth, be it the quarter before that, and so I'm not surprised with where the numbers are. I think the numbers are fairly consistent with what we think they'll be moving forward. I think we had a very, very strong quarter at 20%, but, we've pointed out, in the past, that this year the good news frankly is that we really don't have that much in the way of turns, I think we turn only about 14% to 15 % of our overall portfolios, so there is less opportunity to create same-store growth irrespective of what we can achieve from a rental growth perspective.

At this time there are no further questions. If you have any additional questions, please press the number 1 on your telephone keypad. You have a question from Charles Fitzgerald of JP Morgan.

Hi guys. I wanted to just get an update on the stock buyback if you've repurchased any shares. And then, also, just some clarity on the acquisitions that you made in the quarter, were those put into funds and do you think that you might be acquiring more assets in the funds going forward?

Okay, Charles, I'll let Bud talk about the acquisitions. In terms of the stock buyback, most of the quarter we've been really out of the market because, you know, we've had a couple earnings releases where we make sure that we are not in the market prior to, and subsequent to. We also, Charles, had a series-B conversion as you probably know which meant that we were out of the market for about 40 days before, and after that took place and so we've really not been, candidly, in the market all that much. However, we did purchase about $4.5 million if you will, worth of stock at a price of about 19.50 per share, and that's really what we've completed in the first quarter. Bud, you want to talk a little bit about acquisition?

Yeah on the acquisitions. Those acquisitions were really opportunistic acquisitions in the US. They were decent yields and below replacement cost generally. I would, in terms of acquisitions going into the funds; we will be aggressive certainly in Europe, in terms of acquisitions for our European fund. In the US, we are really not geared up to acquire acquisitions into our existing funds today. That may change in the future, and I would expect that we are going to see some interesting opportunities in the acquisition arena.

At this time, there are no further questions.

Well let me just simply thank everybody for joining us, and we look forward to visiting with you at the end of the second quarter.