Prologis Inc (PLD) 2002 Q2 法說會逐字稿

Good morning.

My name is Phil Core, and I will be your conference facilitator today.

I would like to welcome everyone to the ProLogis second-quarter 2002 financial results conference call.

Today's call is being recorded.

All lines are currently in a listen-only mode to prevent any background noise.

After the speaker's presentation, there will be a question-and-answer session.

If you wish to ask a question during this session, simply press star, one on your telephone keypad.

Questions will be taken in the order in which they are received.

Also, please limit yourself to one question.

At this time, I'd like to turn the conference over to Ms. Melissa Marsden, Vice President of Investor Relations with ProLogis.

Please go ahead, ma'am.

Thank you.

Good morning, everyone.

Welcome to our second quarter 2002 conference call.

By now, you should all have received an e-mail in relation to our press release and supplemental, but if not, these documents are available from our website at www.prologis.com under Investor Relations.

This morning, we're first going to hear from Dane Brooksher, Chairman and Chief Executive Officer who will comment on overall market conditions and key accomplishments in the quarter, then Bud Lyons, President and Chief Investment Officer, who will provide more detail on market activity followed by Walt Rakowich, Chief Financial Officer, who will comment on operating performance objectives for 2002.

Before we get underway, I'd like to quickly state this this conference call will contain forward-looking statements under federal securities laws.

These statements are based on current expectations, estimates, and projections about the market and the industry of which ProLogis operates, as well as management's 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 our forward-looking statement notice in our 10-K.

Also, as we've done in the past, to give a broader range of investors the opportunity to ask questions, we ask you to please limit your questions to one at a time.

Dane, would you please begin?

Thank-you, Melissa.

Good morning, everybody.

Before reviewing our operating results and costs, and key accomplishments for the quarter, I'm sure everyone is curious to hear about what we're seeing in our global industrial markets.

In general, North American markets remain very soft, and while activity continues to accelerate and our market officers generally feel better about the tone of the markets, we've not seen definitive signs of an increase in leasing in all of our markets.

Corporations still seem reluctant to commit capital and pay for sublease remain slow in the U.S.

We do not expect to see marked improvement in leasing until late this year or early 2003, and with this week's continued volatility and uncertainty in the economy, it's becoming even more difficult to say when we could expect to turn around.

In Europe, there continues to be a general economic slowing, but demand for modern distribution facilities remains strong, and our European operations are performing in line with expectations, in addition to being helped by the strengthening of the our Euro.

In Japan, we're now seed a marked increase in potential opportunity and are very encouraged with the pipeline of transactions that our Japan operations are actively working on.

Company wide, operating property performance so far this year is in line with our expectations and basically flat relative to the first quarter.

We are pleased to be able to report positive growth in year-over-year FOO per share regardless of how small, and our full year's expectations are still in line with our previous guidance, but probably to the lower end of that range.

There are some bright spots, however.

Last quarter, I mentioned that some companies who had previously shelled their build to suit plans were again discussing expansion and reconfiguration of their distribution networks improved efficiency.

Our transaction with Unilever is evidenced of this trend.

Two weeks ago, we announced the development of a new distribution network to consolidate the national logistics net wherebies of UNilever's home and personal care division.

We began working with Unilever 18 months ago on an work optimization study.

We helped to select negotiated local incentives, design the facilities and material and provided material analytical leasing.

This complete solutions approach resulted in a development a network of five super- regional distribution facilities totaling 4.9 million square feet and represents an investment of nearly $200 million.

This is the largest and most comprehensive network optimization development program we've ever been awarded.

We continue to see similar requirements for more efficient distribution networks and are working with several other major customers on redesigned initiatives.

Our customer's centric business model continues to show its value by allowing us to grow in a weak economy and will help accelerate our growth as market conditions improve.

Our focus on our CDFS business generates unique opportunities and not only adds to FOO growth but also to return on invested capital, as we contribute properties to our fund and receive income and related fees.

And as the base of assets under management grows, our returns also grow.

Today, we have over $3.7 billion under management, up more than 60% from $2.3 billion a year ago, and when combined with wholly owned properties, ProLogis manages over $9.2 billion of assets, up from $8.5 billion at the end of 2001.

A key objective for 2002 was to secure long-term funding to support our North American development business and expansion in Japan.

In the second quarter, we helped with a launch of a successful IPO of Macquarie/ProLogis Trust in Australia.

This listed property trust has an infinite life and provides a source of long-term future funding for our North American development.

We also formed our first Japan property fund with the government of Singapore, which provides $1 billion of capacity to support the development and acquisitions in Japan.

In this environment, there's been a lot of talk about corporate governance, financial disclosure and the reporting of stock options.

We're very focused on supporting corporate America's efforts to restore investor confidence.

You will notice that our supplemental has enhanced financial disclosure, particularly as it relates to our funds.

And while we have provided detail and option-related expense in the past, we will continue to monitor and discuss with our board the expensing of options.

If we do decide to expense options, there would be on be a very minor charge in 2002 and will not affect our 2002 guidance, as we grant options late in the year.

On a full-year basis, the charge in the first year would be approximately one cent per share, growing in year four to three to four cents per share per year.

And to wrap up, our results reflect current economic conditions.

We're generally in line with our expectations, and despite market softness, our unique business model supports continued growth through the industry's only global operating platform.

Expanding private capital alliances, and growing base of properties under management, strong customer relationships and a management team that's weathered downturns in the past.

We continue to execute our business plan and manage our operations to generate solid growth in earnings, return on capital, and net asset value per share.

And now I'll turn it over to Bud.

Thanks, Dane.

And good morning.

I'd like to briefly discuss market conditions in North America, Europe and Japan, and then comment on our CDFS activity.

First, in North America, in general, the second quarter saw a decline in occupancies and deterioration market in rents.

Availability increased in many markets due primarily to subleased space becoming available.

We are, however, seeing more inquiries from our customers that have not yet manifested itself in signed leases and increased occupancy rates.

There also continues to be excellent institutional demand for investor property.

Now, let me turn to some specific markets.

Southern California, we continued experiencing increased activity in the inland empire for large users and in the south Bay for port-related users.

There's low demand in mid counties and very soft conditions in southern Orange County.

In the Bay area, it's the tale two of markets.

With the East Bay and Central Valley having bottomed out, in our judgment, with market vacancies about 9%, the South Bay continues to struggle due to the overhang of high-tech space and very little demand.

Dallas remains slow, but has recently demonstrated improved leasing activity.

As a matter of fact, we're working on eight RPs today representing over 2 million square feet of demand.

Overall market occupancy is down 50 basis points from last quarter.

Chicago, like many other markets, Chicago's submarket shows mixed results.

We believe the I-55 corridor submarket has bottomed out, as we've seen net absorption for the year of close to 1.5 million square feet with only one 400,000-square-foot building under construction in that submarket.

O'Hare remains one of the most active submarkets in Chicago.

Occupancy increased about 50 basis points in the quarter, but there's still pressure on rents [INAUDIBLE] not yet hit by it.

Northern New Jersey continues to show a sharp contrast in market conditions between the Meadowlands where market rents have stayed very firm and exit 8A, where there's little activity and market rental rates are down 15, 20% from 12 months ago.

And finally, Atlanta, net absorption during the first half of the year was slightly negative, with overall vacancy rates unchanged at about 14%.

Although that doesn't sound great, we believe we're close to the bottom in Atlanta, as we've seen a pickup in demand, particularly for smaller users, less than 25,000 square feet and larger users over 100,000 square feet.

Now, turning to Europe, in general, activity levels in Europe were moderate for the first six months of the year, but today, we are seeing a noticeable up tick in demand.

This up tick in demand is most noticeable in the U.K., where overall demand for distribution space is at the highest levels in a decade, driven by retailers and manufacturers who continue to reconfigure their distribution networks.

Southern Europe also shows signs of strengthening demand.

In France, the second quarter was slow due to the uncertainty about the national election.

Since the election in May, the demand has heated up, as French businesses are more confident about their future.

Since May, we have signed leases or signed LOIs on over 1.5 million square feet of space in France.

Now, turning to Spain, Barcelona continues to show strong demand in a very land-constrained environment.

Madrid's market is less vibrant but supply of new state-of-the-art facilities is very limited.

The [INAUDIBLE] countries have softened due to a continuing economic slowdown, and many 3PLs are not fully utilizing the warehouse space they currently lease.

In Germany, decision makers remain cautious in a slow economy.

Demand for logistics space is moderate, although we've had good success leasing our 190,000-square-foot inventory building in Colon.

We've had a very active quarter in Poland, where we've leased over 400,000 square feet and have a signed LOI on 120,000 square feet.

Overall, European demand remains steady as we continue to benefit from the reconfiguration of distribution networks for major companies.

Now, turning to Japan, we are beginning to really gain momentum in our efforts in Japan.

In addition to the DHL transaction, which will be completed in September, we're working on several requirements for Japanese companies, some of which are our customers in other markets.

Even in a flow economy, there is strong interest in modern, efficient facilities, particularly in the Noreda Airport area and an infill location close to Tokyo.

There's no virtually no existing inventory of modern facilities in these sublets.

With our capital partner now in place, we're very excited about our opportunity to accelerate our activities in Japan.

Let me turn now to one of the real bright spots this year.

Our CDFS activity.

Year to date, we've signed over 6.9 million square feet in 46 separate transactions in 25 different markets, in nine different countries, with 76% of that business representing repeat business with existing customers.

In addition to the Unilever transaction that Dane mentioned, we've recently signed with [INAUDIBLE] General Motors, Le Havre, a major French retailer, Hayes, a major UK 3PL and TNT logistic, all of which represent repeat business with global customers.

These transactions are generated by our full-service approach to the business, utilizing our ProLogis solutions group, and our local market presence in the major global markets.

I think Fred Brookhymer, Vice President of Logistics for Unilever North American Product Division summed it up best when he said it was not merely a question of what building may work the best or what individual transaction was the best, it was ProLogis' breadth of experience and comprehensive services that provided the true economic value to Unilever.

And with that happy note, I'm going to turn it over to Walter.

Thanks, Bud.

Good morning.

Before I cover our financial results, let me briefly discuss our enhanced supplemental disclosure.

Over the last two to three years, our business model has evolved, and so has the need to provide more informative disclosure to our investors.

As you know, we have responded to this need in a number of different areas.

As our fund management businesses have grown, we've provided additional balance sheet and income statement disclosure for each of our funds.

And as our development and recycling efforts have grown, we've beefed up our disclosure of disposition markets, leasing and repeat customers.

More recently, our efforts have been focused on simplifying metrics for you to use in valuing our company.

At the beginning of this year, we began to disclose the components of NAV and in the most recent press release, you'll see additional disclosure enabling you to compare value to EBITDA, return on invested capital and debt to equity ratios as if our prorata share of consolidated entities were consolidated on our balance sheet.

All in all, we think we've made it substantially easier for to you understand and value ProLogis and we will continue to look for ways to improve our disclosure to enhance the clarity and usefulness of our financial reporting.

Now, let me turn to our financial performance.

Overall, we are on track with our expectations for the year.

For the quarter, we achieved FOO of 59 cents per share up 1.7% from the second quarter of 2000.

Year to date, FOO is $1.18, up 2.6% over 2001.

Second quarter EPS was 31 cents per share, up 19.2% from the second quarter of 2001, and year to date, EPS is 62 cents -- excuse me, 62 cents per share, up 21.6% over 2001.

In addition, we paid a quarterly dividend of 35.5 cents per share, a 2.9% increase over last year.

Importantly, our dividend coverage ratio to FOO is quite strong at about 58%.

And as Dane mentioned we previously planned for a slower economic environment for the entire year, and as such, we are comfortable with the lower end of our previous FFO guidance.

Given the soft market conditions, we think it's appropriate to tighten our guidance at this time to $2.40 to $2.45 per share of FFO.

Our overall operating results reflected the soft U.S.

economy, though they continue to be in line with our previous guidance.

Cash same-store analog growth for the quarter was 4.9% with rental rate growth of 8.1% in the same store pool and 5.6% overall.

Stabilized occupancy slipped to 91% from 91.9%, but over 50% of the decline was due to new developments entering into the stabilized pool of properties.

The overall rate of decline appears to be slowing.

Let me also point out that we have been highly focused on managing our releasing costs.

For the quarter, our turnovers costs were 95 cents per square foot and 98 cents per square foot for the year.

Overall, our same-store growth year-to-date up over .9% is at the high end of our previous guidance of negative one to one percent.

And we're operating at occupancies and turnover costs consistent with out expectations.

Our CDFS business produced FFO of 38.9 million dollars for the quart where margins on dispositions of 16.7% predeferral and 12.5% post deferral.

For the first six months, CDFS income was $76.8 million, down about 5% from last year, but slightly ahead of our expectation due to the strong demand for private capital for functional, industrial real estate.

For the year, our CDFS business is on track with our prior guidance.

And we are optimistic about the development pipeline and how it's shaping up for next year.

For the second quarter, we had total development starts of $238 million, which are 82% preleased.

Surprisingly, North American development starts year to date have hit our annual expectation at $124 million, and Europe remains on track to produce 500 million to $600 million in starts.

Year-to-date, our total development starts are $374 million, and at this point in time, we feel comfortable that we will meet our target of 700 million to $800 million in development starts for the year.

We are achieving these results, because we have broadened our markets internationally, and we are building strong customer relationships that drive repeat business.

Note that our top-25 customers now lease 176 facilities from us, an average of seven facilities per customer.

And, of course, our CDFS business continues to drive growth in our property fund business, as over 97% of our dispositions for the quarter were to ProLogis' funds.

In the second quarter, property fund income and fees were $23.5 million, up 56% from 2001.

Year-to-date, income and fees from our property fund business totalled $42.3 million, and for the year, we are on track to meet our previous FFO guidance from our fund management business of 81 million to $85 million.

And our refrigeration business continues to post better operating results driven by stronger EBITDA margins in both the U.S. and Europe, and substantially reduced interest expense due to the retirement of debt through cash generated by dispositions.

During the quarter, we completed the sale of our businesses in Spain and Italy.

Finally, regarding our balance sheet and capital resources, we have made sure that we kept ourselves in a strong position, especially in light of the weaker economic environment.

At June 30th, we had available capacity on our lines of credit of $694 million.

Additional private capital capacity in our funds of $2.2 billion, and a conservative debt to total market capitalization ratio of 39%.

Especially in these times, we firmly believe that a strong balance sheet allows us to be opportunistic and confident in our future.

And with that, I'll turn it back to Dane.

Thanks, Walt.

Now we'll take your questions.

Thank-you.

Our question-and-answer session will be conducted electronically.

If you'd like to ask a question to our speakers, please press the star key followed by the digit 1 on your touch-tone telephone.

Once again, limit yourself to one question today.

Once again that is star, one to ask a question.

We will pause for just a moment to assemble our roster.

Our first question is from Rahul Bhattacharjee.

Hi, guys, I know you don't like talking about the economics of specific deals, but since it seems like the Unilever transaction could be a template for more transactions to come, can you provide us a little better sense of the economics of that transaction and how you looked at perhaps the residual risk associated with those large assets?

Rahul, let me comment on that.

You're right, we don't comment on specific deals, and I really wouldn't like to get into the details of that.

Let me just say that we're very happy with those transactions, as is Unilever in terms of the residual risk.

These are buildings built in markets that can accommodate buildings of that size.

The buildings that we're building in western Pennsylvania is in a market that is a very large regional distribution market.

Same in southern California.

So we feel very comfortable with the long-term nature of that real estate.

And, as a matter of fact, most of those buildings will be contributed to our funds.

So in terms of the economics of the transaction for ProLogis, we're very comfortable with the economics.

We're very comfortable with the real estate.

Sorry I can't give you more detail on that.

Our next question comes from Alexis Hughes with Banc of America Securities.

It's Lee Schalop. A question on the CDFS business.

You mentioned you're comfortable with the number for the full year, that that's the first step you're ahead of schedule.

That suggests things will be trailing off in the second half, or is there the opportunity to maybe beat your prior guidance on the business?

Lee, it's Walt.

Let me answer that question.

I would say that we are, for the first two quarters, slightly ahead in the CDFS business.

Quite frankly, we had planned that that business would be ahead in the first two quarters, and probably a little bit behind in terms of second half of the year relative to the first half of the year, so, no, in general, we are on track with our guidance.

The flip side of that is that the fund management business, as you contribute to these properties to the fund management business and your funds grow throughout the year, the fund management business should actually pick up in the second half of the year, even further to basically offset, if you will, the decline in CDFS.

So basically, we're on track with our expectations overall, and your observation is correct, but, no, pretty much on track for CDFS for the year.

Lou Taylor with Deutsche Banc.

Thanks.

Walt, can you talk about the financing strategy and just looking at your line, you're pretty heavily drawn on your European line, which seems to have a much higher rate than your U.S. line.

Would you draw on your U.S.

line to pay the European line?

You know, Lou, good question, and, it is a little bit higher, primarily because of the pound rate being a bit higher than what you see here in the U.S.

But, no, we're very focused on financing our European operations in Euro and pound, financing our U.S. operations in dollars, and financing -- financing our Japan operation with yen-denominated currency, because, frankly, you know, we've self-funded each of those businesses, and we're very comfortable with having the currencies in those various countries stay in those countries and not mixing and matching currencies at this point in time.

Moving on, we hear from Greg Whyte with Morgan Stanley.

Good morning, guys.

Can you give a little more color on the releasing sort of methods that our using?

When I look at positive same store NOY and I look at the tenant retention as well as the costs of turnover, maybe can you give a little more detail about, like, lease term?

Are you shortening term?

Are you cutting rate?

How are you accomplishing the sort of retention rates given the -- sort of the lower turnover costs and still driving a positive NOY?

Well, Greg, first of all, the lower turnover costs is nothing new.

That's really the result of having generic product, and our product, as you know, is bulk distribution product that lends itself to very, very low turnover costs.

In terms of our methodology on releasing, I mean, clearly, everyone in our marketing effort is aware we're in a slow market environment, so we will go the extra mile to accommodate our customers, to keep them in our space.

If that means to, you know, shorten a lease term, we don't necessarily think that's a necessarily bad thing to do right now in an environment where there's very little rental rate growth that we think, you know, it will pick up at some point in time.

So I can tell you every single market officer is very focused on tenant retention, and keeping bodies in our buildings.

And, again, you know, one of the features and the attractions of the industrial business is that low turnover costs.

Rick Rubin with Legg Mason has our next question.

Good morning.

I'm trying to reconcile some positive comments you about Europe with sort of the preleasing that you can see in the supplement.

It looks like it's sort of deteriorated over the last four quarters from close to 100% down to 25% in the quarter.

Can you help me just reconcile that?

Yeah, yeah.

Let me -- let me comment on that.

As I indicated in my comments, the first six months of the year were rather moderate in terms of activity in Europe.

It has dramatically picked up, and I don't think that's too strong a statement.

When we look at the leasing that's deferred since June 30 and the signed LOIs since June 30, the numbers you see in the supplement for the June 30 quarter, the 24.7% would be 57.8%, and the 64.8% would be 70%.

I think the other thing worth commenting on at this point is the lease-up of our development starts in Europe, we have 2.7 million square feet in starts in the quarter.

80.7% of those starts were leased.

So we feel very confident that our pipeline is in good shape.

So, you know, I can tell you that the activity was, as I said, moderate the first six months.

It's picked up fairly dramatically and fairly broadly.

Rick, let me add to that, too, I want to make sure you're reading this the right way.

There's not been a deterioration of leasing.

Keep in mind the September 30th pool is 100% leased.

Obviously, the December 31st pool is three months later, so you should see a progression down from 100% each of the quarters, of course.

So I just want to make sure you're reading that the right way.

That is consistent with the way we underwrite our inventory product.

We underwrite it with a 12-month streamline lease.

We will now hear from Don Findetti from Wachovia Securities.

Good morning.

It's Chris Haley.

Bud, congratulation, everybody, on the Unilever transaction, Walt thanks for the additional return on investment disclosure.

Thanks.

I had a particular question about the portfolio in terms of occupancy numbers, and I know that you include the development properties in your quote/unquote stabilized portfolio figures, or add them in.

But there was about a -- there's been about a 330-basis point decline in two quarters in your direct portfolio, and 210 basis point decline in the first six months of 2002 in the total [INAUDIBLE] decline with particular weakness in Europe and Kings Park.

Could you comment on that?

And what you believe the second half might hold in terms of occupancy numbers?

Yeah, let me just address that.

I think you have to be careful when you look at Kings Park isolated, because keep in mind that all of the buildings that they develop that are 100% leased are then contributed into funds.

So it's -- it's just simply that which is less than Kings Park that hasn't been contributed to funds.

It's not that it has underleased properties, just contributed them to funds.

So I think you have to -- you have to look at the overall total stabilized portfolio leasing, Chris, in that regard.

But I think the most important measure, quite frankly, to focus on would be basically to just look at same-store results, which kind of take out a lot of the noise, and that's on page 18, and if you look at that from a six-month perspective, last year to a six-month perspective, this year, we are down about 190 basis points on average in occupancies, and, you know, that is pretty much right in line with what we thought.

I think we said that the average occupancies would be down 100 to 200 basis points this year, and, in fact, that's exactly what we're averaging.

So when we get back to kind of the way we're thinking about the business, Chris, it is pretty much middle to fairway at this point in time with our expectations.

Well, in terms of moving forward expectation-wise, as you know, Chris, the new supply of inventory to space has really been choked off in most markets.

Very difficult to find new starts of inventory buildings virtually anywhere.

As Dane indicated in his comments and I in some of mine, we are starting to see some more life in the markets, so I wouldn't anticipate the occupancies dropping, you know, a whole lot more through the rest of the year, and, you know, with some luck here, with the economy kicking in, we should see occupancy growth towards the end of the year.

We will now hear from Gary Boston with Salomon Smith Barney.

Sorry, good morning.

Walt, could you just give us some color on the foreign currency losses, sort of where you see that trending, and, I guess, given the magnitude of the loss in the quarter, what went on there?

And, also, if you have the recurring Cap-X number, I'd appreciate it.

Sure, John.

First of all, technically, we did not have a loss, so let me explain.

I think what you're referring to is the consolidated statement of earnings, or EPS, and keep in mind I think we've stressed this over and over that particularly with a company with foreign operations, capital intensive capital with foreign operations, think the FFO statement is a better statement, because it takes out a lot of the FX noise in different line items.

But let me explain what's happened in the EPS statement, because it's basically a wash.

Keep in mind that part of our investment to Kings Park is through intercompany loans.

We loan Kings Park the money, and when the pound goes up in value, basically the word loan is worth less to ProLogis.

So on the foreign currency exchange line, there's a $6.5 million loss.

The flip side is that you'll notice the difference between the EPS statement for CDFS income shows it 45 million versus 39 million for FFO.

The flip side of that is that Kings Park picks up roughly 5 or 6 million in gain, because their loan -- the loan we've made to them is now payable in less pounds, okay?

So it's a complete wash in one-line item versus the other line item.

And basically, we try to take that noise, that remeasurement, if you will, of capital, we take that particular noise out of the FFO statement, so it's much clearer.

There's not been intercompany losses, basically just wash out.

And then, with regard to Cap-X, John, if you're looking for an overall Cap-X number for the company, this would be T.I.'s commissions and recurring capital.

The number is about 70 to $75 million.

Which for ProLogis would be in the neighborhood of 38 to 40 cents per share.

Once again, I'd like to give everyone a reminder, if you'd like to ask a question, please press star, one.

Moving one we'll hear a follow-up question from Rahul Bhattacharjee.

I had two questions with regard to your Japan fund.

First was with regard to leverages associated with that fund.

Is that the -- high leverage with the Japan associate or the Japan fund just peculiar [INAUDIBLE]?

And, second, can you provide us a little more color on how transaction in that fund are likely to pick up as over the next 12 to 18 months?

I'm going to let Bud talk about the transactions, but let me talk about the leverage in the funds.

Yes, we are planning to leverage that fund, just if you take value on a little bit higher basis than we have, of course, in the U.S. and part of that, in fact, it's completely driven by the fact that we believe that we can get longer-term money there at anywhere from 2.75 to 3.25% interest rate.

So if you look at the actual -- and I think what you really need to focus on is the coverage of that debt, because, you know, when you're building a building for anything from an 8% to 9% return, and you're leveraging that building at, you know, a 2.75 to 3, obviously your coverages are actually higher than they would be at a lower leverage ratio in the United States.

So that's, I think, very, very important.

On the transaction side, as I commented in my prepared remarks, we're seeing a lot of activity, and we are getting to be a more visible participant in the marketplace, certainly with the announcement of our Japan fund, with the government of Singapore, that got quite a bit of attention in the marketplace.

We are working on very real transactions with Japanese companies today.

I would expect that we'll find a number of these transactions before the end of the year.

As you probably know, the decision-making process in Japan is -- is quite long, so there's quite a lead time on any particular transaction.

I also think that sale and lease-back opportunities will appear later in the year, as Japanese companies really take a hard look at their balance sheets, and there clearly is a desire to remove some of the real estate assets from some balance sheets of the Japanese companies.

So, you know, I guess we're pretty bullish about our prospects there, and we've got a good team in place.

We've got nine individuals over there, six of which are Japanese nationals, and they're very focused.

John Perry with Deutsche Banc has our next question.

Hi.

Given that southern California seems to be doing fairly well, could you explain a little bit why the FFO for the California fund is down both for the three months and the six months on a year-over-year basis.

Yeah, I can just address that real quick.

It basically is a result of the fact that about a year ago, the California fund was about, I believe, 98% or so lease.

And so, the occupancy has dipped somewhat in that fund over time.

But nonetheless, it's still very well leased today.

Next, we'll hear from Brent Harris with Industrial Realty Group.

Mr. Harris, your line is open.

Please proceed with your question.

How do you feel about [Maqueradores], your Mexico operations and your flight to manufacturing to China.

Well, let me tell you, our activity levels have probably never been higher in Reynosa and Juarez.

It was slow certainly after September 11th and into the beginning of the year, but since that time, it's picked up fairly dramatically.

We've leased well over 500,000 square feet in the last four or five months.

So, you know, there had been some companies that have moved off -- offshore to Asia, but they've been replaced by other U.S. companies.

So we feel quite bullish about the market.

We will now hear from Jim Sullivan with Green Street Advisers.

Hi, guys.

A question on your property underdevelopment in Asia.

You show $35 a foot increase in the budget, roughly 15% of the total budget.

Is that a reflection of the change in the tenant requirement, or are you encountering some costs there that perhaps weren't expected?

No, Jim, that's a great question.

I'm glad you picked up on it.

That is purely a result of the increase in the yen relative to the dollar.

You might remember when we started development, the yen was somewhere in the neighborhood of 130, and now it's strengthened to about 115, 117, so that is all due to simple, you know, just the yen increasing in value.

Next, we'll have a follow-up question from Lou Taylor.

Thanks.

Just to stay on the foreign exchange theme here.

For FFO purposes, you showed a little bit of foreign exchange loss.

Given where your hedges were and the strength in Euro, I thought that might have gone the other way.

Yeah, Lou, it's a misnomer and I'm glad you pointed that out.

It's really not a loss.

What that is is basically our hedge expense.

That's the actual expense associated with writing the hedges each year.

So that's not -- and it is a misnomer, because it says losses.

It really should say expenses.

Greg Whyte also has a follow-up question.

Can you give us an update on what you're thinking in terms of buy-back and recent activity?

I can, Greg.

Year to date, we have bought back about 2.3 million shares at about -- in the neighborhood of $55 million.

We are, as you know, since the spinout of the shares by security capital group, GE, deal, we have been extremely active in the market.

You know, you can quickly go through the supplemental and the NAV analysis and the like, and we still think our stock is undervalued today, and we like it as an investment, and so, we're happy to be in the market, and we have been -- we have been buying back shares and will continue to do so.

With one question remaining in our queue, just as a reminder, please press star 1 to ask a question.

That question is from Don Findetti as a follow-up question.

Walt, quickly, if you could remind us of your G&A expectations for the full year?

Sure I'd be happy to do that, Don.

What we have basically done is laid out a number in the neighborhood of 53 to 55 million dollars, and I'm glad you asked that question, because if you look at the current G&A run rate today, quite frankly, we're slightly below where we think we'll be on an annualized basis.

So we're real happy with where we are.

Okay, thanks.

Greg Whyte has a follow-up question.

Well, just one small thing here as well.

Can you give some kind of -- when I look at rental expenses as a percentage of total rental income, they went up pretty sharply year-over-year.

Can you -- on that?

I can, Greg.

And I really want to caution you on that particular line item, because, number one, when you -- in fact, let me just turn to that statement.

In fact, let me just start at that statement. If you look at your rental expenses of -- and let's just look at the basically the year-to-date of 16,517, if you take that as a percentage of rental income, which I think is what you're doing, you'll see the percentage, or it certainly looks like the percentage is going up.

However, you have to be very careful, because 100% of the costs of running the wholly owned properties plus the fund properties are in rental expenses, net of recoveries.

So what you have to do is one of two things -- You have to either add rental income, plus you go to the -- the fine-level detail and pick off the NOI associated with the entire fund, and add those two line items together to get a sense as to whether or not rental income expense as a percentage of rental income is really going up.

When you run those number, you'll find the percentages are very, very close.

I.E., what's really happening here is that you see our fee business going up, and your rental expenses arguably should be, because the overall property base is increasing.

So, again, do you one or two things.

Either compare it against a gross number, or you could argue that you should offset some of those fees that you would get from the funds against the increased expense, which is much more difficult to do.

When you do either, I think you'd be very, very happy to know that things are in line.

We do have one follow-up question from Alexis Hughes on location.

Hi.

Just as a follow-up to the G&A question, you mentioned your current run rate is below your original projections for the year, and that you were happy where you are now.

Does that mean that we should use the -- the current run rate going forward so that you'll come in below your guidance for the year?

No, because, Alexis, really, if you look at the $26.4 million year to date, if you annualize that, basically you're at 53.

The guidance is 53 to 55, so I would not pick up an extra penny there.

It's not that exact of a science, but I just wanted you to note -- probably said better at the very low end of our G&A guidance.

At this time, there are no further questions.

Mr. Brooksher, I'll turn the conference over to you [overlapping speakers ]

Let me thank everybody for being with us, and we look forward to talking to you at the end of the third quarter, and I might say, as a final comment that we're very encouraged with the operations given the very weak economy that we're experiencing in the U.S., and we hope that the economy gets better as the year goes on.

So thanks for being with us.

We appreciate it.

Thank-you for participating in today's ProLogis' second quarter 2002 financial results conference call.

This conference call will be available for replay beginning today at 2:00 p.m. Eastern Standard Time through 11:59 p.m. Eastern Standard Time on August 9th, year 2002.

To access this replay, you may dial 1-800-203-1112, or area code 719-457-0820.

The replay pass code is 595412.

Again, that replay pass code is 595412.

Thank-you, you may now disconnect.