Prologis Inc (PLD) 2002 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

And welcome to the Catellus fourth quarter and year end 2002 conference call.

At this time, all participants are in a listen-only mode.

Later we will conduct a question-and-answer session.

Instructions will be given at that time.

If you should require any assistance during today’s call please press zero, followed by star.

And as a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, Ms. Morgan Mitchell.

Please go ahead.

Good morning, everyone.

Thank you for standing by for the Catellus fourth quarter and year 2002 earnings conference call.

With us today are Nelson Rising, Chairman and Chief Executive Officer, and Bill Hosler, Senior Vice President and Chief Financial Officer.

Both Nelson and Bill will be making a few comments regarding the highlights of our earnings release this morning.

Following their remarks we will open the phone lines for questions.

Before we get started, I need to inform you that during the course of this conference call the company may make projections or other forward-looking remarks regarding future events or the future financial performance of the company.

We refer you to the documents the company files from time to time with the SEC, including our Form 10-K for the year ending December 31, 2001.

These documents contain important factors that could cause actual results to differ materially from those contained in the company’s projections or forward-looking statements.

The broadcast of this call is the property of Catellus Development Corporation.

Any redistribution, retransmission, or rebroadcast of this call in any form without the express written consent of Catellus is strictly prohibited.

Thank you.

And with that said, it gives me great pleasure to turn the call over to Catellus’ Chairman and CEO, Nelson Rising.

Good morning.

I’ll comment first on the results for 2002 before I focus on our Board’s authorization to begin the process or reorganizing Catellus into a real estate investment trust.

Bill will then make some additional comments, and as Morgan said, we will then be pleased to take your questions.

Well, we’re very pleased by the results of 2002.

It was another very strong year for Catellus.

Earnings in the fourth quarter per share, EPS of 23 cents, represented a 15 percent increase over the same period in 2001.

And for the year we had EPS of $1.13, or 20.2 percent increase over 2001.

We’re pleased about the NOI from our rental portfolio since it continues to increase, it was a 13.7 percent increase compared to 2001.

During the course of 2002 we leased 4.1m square feet of second generation space, at an average rental rate increase of 6.6 percent on a GAAP basis.

This contributed in part to a same store, same space NOI increase of 2.4 percent.

At year end our rental portfolio had grown to 37m square feet with an occupancy of 94.5 percent.

2002 was our strongest year ever in terms of construction completions.

We completed 6.4m square feet at a total cost of $345.5m, and with a projected return on cost of 11.3 percent.

We currently have 4.1m square feet of development in process, most of which was started in 2002.

Given our recent expansion into Atlanta and the interest we’ve seen from other repeat customers we believe that 2003 could see starts in the 3m to 4m square foot range.

Now to discuss the REIT conversion.

After a comprehensive review of our strategic alternatives and the implications of the REIT conversion on our business model our Board of Directors unanimously approved the proposed REIT conversion at its meeting last Friday.

The REIT conversion is intended to provide investors with a stable cash return from our growing rental portfolio while continuing to offer growth opportunities through the company’s proven development skills.

It is our view that the REIT election is the next logical step in the evolution of Catellus.

Over the past several years we’ve succeeded in transforming one of the country’s largest land portfolios into a real estate operating company, generating an ever increasing share of cash flow from our rental portfolio.

For example, NOI from our rental income producing portfolio has increased from $81m in 1995 to $203.7m in 2002.

At the same time, land as a percentage of our total portfolio has decreased to 18 percent from 41 percent in 1995.

As a result, Catellus now has significant recurring cash flow generated from its rental portfolio.

We have a capital efficient business model that allows us to grow at attractive rates relative to our peers, without the need to retain all of our cash flow.

And we believe that the tax efficiency of the REIT structure will significantly increase the amount of cash available for distribution to our shareholders.

In addition, development sales and gains are becoming a smaller percentage of operations, and now fit within a taxable REIT subsidiary.

The plan to adopt REIT status is subject to a majority vote of the company shareholders at our annual meeting, and we anticipate this will be held in the third quarter of this year.

If the shareholders approve and subject to final Board approval we expect the REIT conversion to be effective on January 1, 2004.

We intend to file a preliminary proxy statement and prospectus with the SEC in approximately 30 days, and this will provide more detailed information to the shareholders regarding REIT conversion.

In the meantime, the company has filed information with the SEC that summarizes certain aspects of the REIT conversion.

Subject to final Board approval the company anticipates that it will begin to pay a quarterly dividend while still operating under a C Corp status, commencing with the quarterly dividend for the third quarter of 2003 of approximately 30 cents per existing share.

If the REIT conversion is approved the company will provide to shareholders a one-time distribution of pre-REIT earnings and profits, or E&P, currently projected to be approximately $100m in cash and $200m in common stock.

Following the REIT conversion which is also subject to final Board approval, the company anticipates that it will continue to pay a quarterly dividend of approximately 30 cents per share on a pre-split basis.

Bill Hosler will provide you with more detail on all these matters in his comments to follow.

Going forward we plan to increase our focus on expanding our portfolio of industrial properties by utilizing our proven development skills to achieve our growth expectations.

We plan to continue our mixed use development projects currently underway, and to recycle surplus capital from these projects, as well as capital generated from our residential properties into our expanded focus on industrial development and operations.

Before I turn this over to Bill, I want to thank those of you who have been following our progress on the REIT conversion decision since this Summer.

I want to thank you for your patience and for your understanding.

The issues are complex and required the thoughtful review of our management and the Board, with the assistance of our financial advisor, Morgan Stanley, our legal counsel, and other advisors.

With that, I’d like to turn it over to Bill Hosler, and then, of course, we’ll be opening it up for questions.

Thank you, Nelson.

I would like to review certain details of the conversion and what it means to shareholders.

Much of this information is presented in a PowerPoint presentation that has been filed with the SEC and is available on our web site on the home page.

In terms of the E&P we estimate, as Nelson mentioned, the amount of E&P at the end of 2003 to be approximately $225m.

With 2002 and 2003 contributing over $150m to that amount.

The significant amount generated in ’02 and ’03 is in part attributable to the large residential income that we’ve generated and hope to generate this year.

The actual amount won’t be known until after 2003, and so we’re targeting a distribution of approximately 300m in order to provide cushion.

The distribution is anticipated to be in the form of cash and, or stock at the shareholders option.

We are seeking a private letter ruling from the IRS that will allow us to limit the cash portion of the distribution to $100m with the remainder in the form similar to a taxable stock split.

The limitation will still allow our investors to receive cash while allowing the company to retain liquidity.

The timing of the distribution is planned for December declaration, December ’03, and a January ’04 distribution.

In part, the timing works with the accounting impact and will occur fully in 2003, but the tax impact to shareholders will not occur until 2004 tax year.

On the accounting impact, the accounting impact on the share distribution will be similar to a stock split, in that the company’s share count will increase on both an historical and a prospective basis, and as such, will have no material impact on per share growth rates.

All of the numbers we’re discussing today reflect pre-split shares.

Upon shareholder and final Board approval we anticipate paying a dividend beginning in the third quarter this year at a 30 cent rate that we’d expect to continue on into 2004.

In 2004 our indicated rate of 30 cents is, again, on a per share basis using today’s pre-split shares.

Our dividend is covered by our rental income, but has added cushion from the significant cash flow we generate from development sales.

For 2003 we will still operate as a C Corp, and will take steps to position our business for the 1/1/04 REIT election.

We should see significant sales activities out of our residential and urban assets.

As a result of the transition we will incur certain conversion costs currently estimated at about $15m.

Also converting from a C Corp to a REIT will result in charges to our current reported deferred tax liabilities.

Most of the deferred tax liabilities will reverse through income in the fourth quarter of this year, and generate an increase in GAAP earnings in the range of $2.50 to $2.80 per share over what would otherwise be reported.

We will still have deferred tax liabilities generally related to the TRS assets that will show-up on our books after the conversion, which will total in the range of $70m to $100m, down from the approximately $318m at year-end ’02.

As part of the conversion we are no longer reporting [EEBDET] [ph] after today.

Instead, we will report a new supplemental metric of FFO based on the pre-REIT definition.

It differs from EEBDET in that excludes portfolio building sales, desert land sales, the impact of land sales from existing residential and urban projects.

It represents primarily our income as we see ourselves evolving to in the future, that is rental portfolio income with ancillary land sales and build-to-suit sales from development.

It’s very important to note that this metric excludes approximately $4.50 per share in net book value from our existing urban and residential land, as we plan to focus future investment on industrial.

We don’t feel that the sales gains on these projects are recurring unless they’re excluded from our new earnings metric.

Our goal is to recycle the capital from these projects back into our industrial development business which should be reflected in increased FFO over time.

In terms of guidance for 2003, it’s made a little bit more complicated by the transition and conversion items.

However, ignoring these items we would expect EPS which is our primary metric to grow about two percent in 2003 over the $1.13 we realized in 2002.

For FFO we’ve had to make pro forma adjustments to take into account that we weren’t actually a REIT either historically or in 2003.

The PowerPoint presentation in the back provides a brief analysis of historical adjusted pro forma FFO assuming we were, in fact, a REIT.

Given our current forecast and pro forma assumptions we would expect FFO to be in the range of $1.50 to $1.55 in 2003.

However, in 2001, 2002 -- excuse me, that number was on a pro forma basis about $1.51.

However, remember in 2002 we received a very large one-time lease termination fee from our leases with level three that’s reflected in our 2002 adjusted FFO number.

Without that fee growth in 2003 would be more in line with our long-term expected growth in the high single digits per year.

And with that, I would be more than happy to open it up for questions.

Thank you. (Caller Instructions.)

And our first question today comes from the line of David Copp with RBC Capital.

Please go ahead.

Hi.

I am here with Jay, as well.

Congratulations, guys.

A question with regard to the dividend policy.

You mentioned that you anticipated recycling the capital from your residential lot sales into further industrial development.

You know, historically that industrial development hasn’t really been a capital intensive business.

You know, do you anticipate making any one-time dividend payments going forward based on return of capital from your residential lot sales?

At this point, no.

But that is always an alternative.

At this point we feel that we want to expand the industrial operation, and we would want to recycle that capital to the extent that it’s necessary to do that.

I pointed out in my comments we have a very capital effective and efficient model which allows us to achieve growth rates without retaining all of our capital, even though in the past we used some of that to purchase well over $450m worth of shares.

And we would always keep that alternative open.

But at this point our view is that in order to get the growth we would be recycling a significant portion of the residential and urban into increasing the portfolio, and thereby increasing the sustainable long-term earnings from the portfolio.

Okay, and so what do you think we would see happen next in terms of that recycling?

I mean are you looking for assets?

Or are you looking for another large, you know, master plan, land play?

Or what do you think we see happening next there?

Well, it’s our view that the two ways you could grow an industrial portfolio is one, development.

And the other, acquisitions.

We feel that our competitive advantage is in the ability to develop.

And so that would be our primary focus.

And that would be to expand into additional markets as well as to expand within the markets we already are.

We have recently announced that we’re going to be expanding to Atlanta with approximately $1m square feet of development.

We’ve talked on past conference calls about our interest in looking into the basically the Northern New Jersey marketplace.

And so in order to maximize our ability for repeat business with customers we would look to expand our industrial activities into new markets, and as I’ve said, within the markets that already exist, new land parcels in those markets.

Hey, David.

That $4.50 clearly isn’t going to come back instantaneously.

Right.

So as it comes back into our business we’ll find ways to put it to work, or if we don’t think there’s successful ways to deploy it it’ll be used to either pay-down debt or return to shareholders as we’ve historically done.

Okay.

And can you talk a bit about your expansion plans for …

For what?

Sorry, that was a bad joke.

But great, thanks, guys.

Our next question is from the line of Don [Vandetti] [ph] with Wachovia Securities.

Please go ahead.

Congratulations, as well.

A quick question, Bill.

I think you said you were going to include build-to-suit industrial sale gains in your FFO.

If that’s true can you quantify how much is in your ’03 guidance?

You know, in terms of sales gains from our industrial business we’ve run anywhere from, you know, the high single digits in terms of millions of dollars of sales gains, whether it’s ancillary land or the occasional build-to-suit building or two.

I think there are two buildings lined up this year that are under construction, just about finished, they’ll be build-to-suit for sale.

And so in relation to the rental income it will be an extremely small percentage.

Okay.

And what is your, the outlook for your office portfolio?

What should we look for there, in terms of growth?

In terms of expanding into more office?

What are your thoughts on your office portfolio over the next 12 or 24 months?

Well, I can – in many markets it continues to be pretty difficult, on the office side.

I don’t know that we have expectations other than kind of holding our own over the next year or so.

And I think that’ll be challenging as it is.

I also wanted to – someone has pointed out to me that during my comments I mentioned two percent earnings growth in 2003 and EPS, and I meant to say 10 percent.

And so I apologize for that.

Thanks.

Next, we have a question from the line of David Harris with Lehman Brothers.

Please go ahead.

Yes, hi.

Could you go through your thought process on the conversion in light of the proposed tax changes by the Busch Administration?

I would be happy to, David.

It’s our view that the President’s tax proposal will have little impact overall on REIT valuations.

We view the proposal as basically dividend neutral.

Based upon taxes paid, dividends would not be taxable to the recipients.

But there’s no requirement to distribute dividends.

And also under the President’s proposal many corporations may choose to retain earning and increase shareholders tax bases rather than pay cash dividends.

While I think it’s clear that his proposal reduces the previous negative bias against corporate equities I believe investment in real estate will remain attractive, and investment in REITs will remain attractive.

I don’t view investment as a zero sum game.

I think there’s two things to focus on.

That the attractiveness of REITs, and what’s attracted us to this conversion, and that is dividends and diversification.

I think if you look back on that, REITs have been, the most recent period, yielded 7.6 percent according to [pre-REIT].

Which is far above the average yield of 1.9 for the S&P 500.

So I think that the amount of the dividends, or the reliability of dividends because of the mandated dividend requirement of REITs yield investors, I think, will still be attracted to that.

The other thing, David, to keep in mind is that for the last seven years or so, again according to pre-REIT, about 25 percent of REIT dividends are already tax free, either returns of capital, or capital gains distributed tax at a maximum of 20 percent.

And so that coupled with the diversification I think is going to maintain the attractiveness of REITs.

And so our analysis of whether to do this did not take into consideration or did not, was not changed by an assumed passage of the President’s proposal.

There’s one additional positive note that should the President’s proposal be enacted REIT dividends that are attributed to income taxed at the TRS level would be eligible for an exclusion as they would be for a C Corp.

So all those things combined our view is that the REITs are going to retain their relative attractiveness because of the mandated level of dividends and the diversification it offers within the portfolio.

And that the changing of the negative bias towards equities I don’t think will have a major affect on that.

Nelson, as a follow-up, aren’t you also signaling by doing this that your growth rate is going to slow over time compared to what it has been?

Well, I think what we’re signaling, David, is that the composition – and that’s what we’re saying -- the composition of our growth is going to be increasingly from the income producing portfolio, which by definition will grow slower than the extremely high growth rates we’ve achieved when we were converting the land properties, land parcels we had, into a development sales and gains, as well as the income producing properties.

Over time the evolution I alluded to in my opening remarks is that we have seen our operating income from our rental portfolio increasing dramatically providing a more stable and predictable source of capital, which is the natural evolution from a company that started with one of the nation’s largest land portfolios.

I think, David, I would just amplify on that saying that the components of the shareholders total return have changed, not necessarily the total return expectation.

Much more of that return is going to come currently as opposed to through appreciation or dividend growth over time.

Hi, it’s the other David at Lehman.

I’ve just got a couple of questions as a follow-on.

Is it a simple majority of shareholders we’re talking about?

Yes, the majority of the quorum, correct.

Okay. if you look at the mix of these assets on the balance sheet would you estimate that we have those assets, those assets would currently command a market value in excess of the book value?

It’s hard to make such an estimate.

What we’ve said is let’s talk about what the net book value is, and leave the speculation to others.

They are extremely attractive assets.

We’ve had a tremendous success this year, and we anticipate it next year in the San Diego property.

We have despite the economy in the Bay area we are very pleased with what’s happening with the Mission Bay assets.

And we have many transactions in the discussion stage and closer than that to reality at the [Alameda Naval Station] [ph].

So we think the assets are very attractive.

We, the point of our business strategy is to recycle those assets through the development process to maximize the value for the shareholders, and we use the net book value as a starting point without trying to speculate what’s going to happen at any particular time above and below that.

I think, David, as part of the new, you know, the new going forward look at Catellus we’re much more focused on communicating that there is value in those assets, and we’re representing that by the book value, as opposed to the underlying profits in those assets over time.

We are booking on asset sales, pretty substantial margins, north of 30 percent, for example, in Mission Bay which implies a profit of above the basis.

But rather than as an investor relying on dramatic profits from those ventures what we’re saying is ‘look, focus on that money and how we’re going to take that.’ Just the capital itself, and deploy it back into our business, and what impact that could possibly have over the next couple of years.

Okay.

If we take say $4.50 is our book value then, what would you estimate the tax liability on the sale of those assets would be?

You know, we’re thinking that the deferred tax liability, which is the booked tax difference attributable to the assets that will remain in the TRS, which are predominantly these assets will be in the $70m to $100m range.

And that’s probably on the high side.

Some of that’s attributable to other assets.

And so I would tell you right now Mission Bay has a book tax difference of just under $50m.

And also keep in mind that there are very tax efficient ways to deal with that.

Obviously, an outright sale would trigger whatever the tax liability is.

A long-term land lease would not.

And that we have done, as you know, two long-term land leases with [Evelyn Bay] [ph].

We’re currently negotiating another transaction for different product type that would be a long-term land lease, so that there are ways that that can be dealt with in addition.

Okay, one final question from me, if I may.

How much was – did you include as capitalized interest and overhead in your ’02 results?

And how much are you including in your projections for ’03?

I’d say the numbers, you know, ’02 was a strong year in terms of development activity, construction completions.

And it’ll take me a second here to look it up, David, and if I can’t find it real quick – Nelson and I are in New York, so I don’t have the information I usually have available to me.

I’d say the capitalization rates will be the same in that they’ll be reflective of the activity.

We have a little less activity now going into this year than we did going into last year, which will result in a little less capitalization of interest in G&A in general.

Give me one more second, and I’ll come back to you with that number.

Okay.

No, well, that was my final question.

I think it’s important enough to wait, if I could. [Pray] for the indulgence of the audience.

Yeah, that’s fine.

Just give me a moment.

It’s in the supplemental.

Okay.

Yeah, David.

I am going to come back in …

Well, before the call is over we will come back.

Well, if it’s in the supplement I can find it anyway.

Thanks very much.

Thank you.

We have a question from the line of Greg Whyte with Morgan Stanley.

Please go ahead.

Good morning, guys.

Just a couple of things.

Bill, can you give some indication of what your same store growth expectations are within the guidance that you’ve given for FFO?

Yeah, our same store expectations are pretty flat.

I would say within a range of minus one to plus one.

And that’s on the NOI, right?

That’s on NOI, yeah.

Okay.

And in terms of occupancy changes?

We don’t foresee a lot of occupancy changes in the whole portfolio for the year.

We ended at 94.5.

I think we’ll be able to keep it within a point of that one way or the other.

Okay.

And then in terms of the private letter ruling has to do with the acceptance of the stock distribution, correct?

No, it has to do with the limitation, a preset limitation on the amount that can be cashed.

Okay.

It is already permissible to do stock and, or cash at the shareholders election.

What we would want to do is see if we can have it limited to a set amount so that we would be able to deal with the liquidity issues in that way.

Yeah, essentially, though, the E&P distribution is just pulling money from the shareholders pocket in the company into the shareholders pocket out of the company.

Okay, but I guess – so the direction I am going here is do you guys – I mean do you need to hold back on your cash balance, or defer potential stock buybacks and stuff until such time as you have that ruling?

We’ve – we anticipate the ruling well in advance of the distribution.

Well in advance of the conversion to REIT status.

Yeah, we don’t have a current stock buyback authorization in place at this point anyway, and we don’t have any immediate plans to exercise under that.

The difference, if the private letter ruling didn’t come in, Greg, and there’s really no reason to think that it won’t, but you never know.

If the private letter ruling doesn’t come in we would still give shareholders their option of cash and stock.

The – if the shareholders at the end of the day chose more in cash it would just result in a little bit, a point or two higher leverage for us going into the following year.

And less dilution from the stock distribution?

Yes, and I wouldn’t use the word dilution, just less of a stock [spike].

Okay.

And then, Bill, can you just run-through quickly for us – I mean I don’t expect it to be an exhaustive list.

But can you just quickly indicate exactly what you think will be in the TRS?

Yeah, I’d say the residential land, and the …

And portions of the urban land that we intend to sell.

Correct.

There’ll be certain land associated with the industrial activity that’s more likely to be sold than held.

Essentially, we have to go through and divide the pie into those pieces that we think will be development for sale, clearly residential falls into that.

There is no other alternative, versus pieces that will be developed for – to be retained.

And so we’ll go down slicing through that list, and the list really won’t be final until toward the end of the year when we’ve gathered even more information in terms of what we expect to happen with each piece of land.

But essentially, the significant amount of the urban, and all the residential will go into the TRS.

And then ancillary pieces of the industrial.

Okay.

And then, just one other sort of quick thing here.

I mean the conversion to the REITs, does it require any other changes from a corporate governance, or a Board perspective?

From a corporate governance or Board perspective no.

Other than shareholder vote and final Board approval.

And so from that …

There’ll be a couple of charter changes to go along, typical re-charters in terms of, you know, some of the shareholder limitations to put us more in line with the REIT industry.

Okay.

All right, thanks a lot, guys.

David Harris, I have the numbers here, finally.

Capped interest in 2002 was 24m, cap G&A was $16m.

Ladies and gentlemen, if there are any additional questions or comments please press the one at this time.

And we have a question from the line of Lee Schalop with Banc of America Securities.

Please go ahead.

Hi, guys.

Just to clarify, in the past the thought about being a REIT, or not being a REIT, and the thought about stock buybacks was somewhat limited by the idea that there’d be some interesting investment opportunity down the road.

You know, whether it’s as a result of the recession or something else that there’d be an opportunity to put serious money to work.

And with this change can we assume that that thought process is effectively off the table going forward?

Well, I wouldn’t quite put it that way, Lee.

I would just say this, if all of us involved in the real estate business have seen an interesting phenomenon take place.

Unlike what happened in the recovery in the 90’s, early 90’s, where there were enormous opportunities available for a transfer of wealth.

Those have not materialized this time.

Several reasons.

In part, because of the fact that we had much more discipline by the lending community.

And so that there wasn’t the kind of over-exposure that property owners had to debt, relative to income from their properties.

Also, what we’ve seen is that a very, very large amount of capital on the sidelines.

And we’ve seen that despite the fact that real estate fundamentals have somewhat deteriorated with vacancies up and rental rates slowing or declining we’ve seen cap rates go down.

And so it’s our view that our ability to have a repeat, or take advantage of what would be a repeat of the 90’s is not as likely.

That does not mean that we will try to be – maintain the flexibility to be opportunistic.

And we will always do that.

We think one of the skills that this company has that differentiates us is that we do have very entrepreneurial real estate experience, and that we would want to keep that possibility open.

Again, one of the reasons that we’re looking to put a limit on the cash portion of the E&P is to preserve that liquidity.

And so, those opportunities that we had hoped to materialize have not, but we feel that there are many other opportunities that will require the use of capital.

And again, as I say, the focus on that will be to expand that operation, our operations into the industrial side.

A classic example of that is what we did with Kaiser, and we would love to do more of those.

It was a very, very complicated entrepreneurial effort that produced one of the greatest sites in Southern California.

And we will constantly be looking out for those.

Remember, too, Lee that although the FFO number reflects $1.50 our cash flow is actually substantially higher when you look at kind of a GAAP cash flow statement, cash flow from operations, $187m in 2002.

And so there’s a substantial amount of cash flow that comes outside of what I call the ‘FFO cash flow.’ And there’s still substantial capital available for those type of investment opportunities.

I think going forward, the idea of plunking money down, substantial investment dollars, what we’re saying is really going to be in the industrial arena more so than outside of the industrial arena.

But having – repeating what I said earlier we intend to develop the current projects we have, and in those projects are two, we think very attractive expansion opportunities.

The Los Angeles Air Force Base Project, as well as the Mueller Airport Project in Austin, together with our storage product properties at Mission Bay, Alameda Naval Station, and [Santa Fe Depot] [ph].

And so it would be, I think wrong to think of us as not having the same growth potential from those assets as before.

As I mentioned because of the size of our income producing portfolio they have shrunk relative in size, and therefore, fit in the TRS enabling us to do the kinds of things in a re-context that two years ago we would be unable to have done.

Okay, thanks.

Next we have a question from the line of John Litt from Salomon Smith Barney.

Please go ahead.

Hi.

It’s John Litt.

I am here with Gary Boston.

Can you hear us all right?

We can hear you very well.

A couple of questions.

I guess you’re not giving us what the split adjusted numbers are because you don’t know how many shares might be issued?

Is that correct?

That’s correct.

So it’s just if I used a number like 10m shares issued then the dividend would be something less than 30.

It would be maybe 24, 25 cents?

If you use about a 10, or what, about 13 percent split factor, that dividend will drop from 30 by about 10 to 13 percent.

And so.

And the same holds true for FFO and AFFO exceptions?

Right.

But remember that’s on a post split basis, and so that’ll be a more interesting discussion this December when we discuss the actual distribution amount and the split terms.

For modeling purposes into ’04 we have to adjust those numbers, as well.

And you’re not giving any pro forma ’04 at this point?

We are not yet, that’s correct.

In your, I think you had addressed the question in how much you expected TRS to contribute.

And you said you didn’t think it was going to be significant.

You know, on $137m in FFO is that $1m, or is that $10m?

I’d say it’s more in the, well, it’s between those two numbers.

I mean are you talking about the TRS?

I am talking about the industrial portion.

You are excluding from FFO all the residential and urban activity which would be much more significant than that number.

Yeah, what we’re trying to do is focus on the recurring FFO, using the [pre-REIT] definition.

But that does not include urban land sales.

It does not include residential land sales.

Does not include desert land sales.

Does not include a host of activities that we had last year, and we project we’ll have this year.

But you will have in the number will be your build-to-suit gains?

Right.

And you will have any land sales of parcels on parks that are going to be used to build industrial product?

Correct, that’s right.

And those gains net of G&A and tax are in kind of the single digit arena.

And would you expect that they’d stay in that level, or do you think that that will be very lumpy?

And could be $25m, or it could be $5m?

I think the lumpiness would be rare to be that high from that particular portfolio.

I’d say, you know, ranging from 5 to 15 over time probably makes some sense.

The lumpiness would come if we had some extraordinary activities in the urban and residential area.

Again, it wouldn’t flow through earnings, but it would flow through cash flows.

The other thing to keep in mind, that historically what we’ve done is that we have in a park, and we will identify 10, 20 percent of the land that is suitable for a product type we would not really want to have and own in our portfolio.

So we would be selling that amount to a third-party developer.

There is also the case that we – although our first goal is to do a build-to-suit and hold in our portfolio, we’re not going to let somebody leave and go someplace else because they wouldn’t do a build-to-sell.

And so, again, 10, 20 percent order of magnitude, so that the answer to your question is if we are able to expand our industrial development activity into new markets, and within the markets we already exist, then the relative percentage will be the same but it’ll be on a bigger base.

On -- your peers maybe generate 15 to 30 percent of their FFO from these, from some of these sources.

It sounds like that would be under 10 for you guys?

I think that’s fair.

That’s correct.

And so the quality of the earnings would in theory be a bit better?

Right.

Again, our development model unlike a, you know, we were developing to sell based model, our primary goal is to develop and hold.

And therefore, you don’t generate current gain income, you generate long-term rental income.

However, on, again, I call it ancillary, there’s certain parcels of land that make more sense to sell versus own, and, or occasionally a tenant will want to own a building as opposed to be a tenant in a building.

And so you sell a building to them.

But I think this year there’s maybe two buildings that are set-up to be built for sale.

It’ll always be kind of in that realm as opposed to a core part of the, you know, a big part of the earnings.

So your interpretation is right.

The calculation of your E&P distribution I believe, or correct me, does that include the E&P of what’s going to be in the TRS?

Or is that only the E&P of what’s going to be in the new REIT?

The way the E&P calculations work is it really doesn’t matter where it is within the company, the consolidated group from a tax perspective has it.

So you can’t effectively put E&P in the TRS, if that makes sense?

So the consolidated group has E&P.

That’s the E&P that goes, it’s the total.

Another question.

On the private letter ruling, if you don’t get it then what’s the maximum you can do in stock?

Well, I think if we don’t get it what we offer the shareholders is the same thing we plan on offering, which is you can receive your distribution in cash.

You can receive it in stock, or you can receive it in a split percentage between the two.

We just won’t limit the total aggregate amount of cash.

And so it would be up to the shareholders as to how many wanted cash versus stock, and in what proportion.

We don’t need the letter – private letter ruling for that.

That’s …

Right, the letter ruling just gives us the limitation.

Host Marriott, for example, when they converted, you know, they distributed a large, I think, company to their shareholders.

They also had distributed, again at the shareholders election, stock or cash.

And they had no limitation on the cash.

And I believe it went about one-third cash, two-thirds stock.

I think Jordan Saddler is on the line, as well, and he has a question.

Jordan.

Hi.

I just wanted to know if you could quantify the significant residential sales and urban sales you have slated for '03?

You know, the residential activity is very – was very strong historically.

We did about 60m pre-tax last year.

I don’t think we’ll hit that level this year, but as we position ourselves to go forward and focus more on our industrial strategy we’ll begin to more acceleratedly sell the, some of those residential activities.

So I don’t have a quantifiable number for you in terms of the dollars there.

And in respect to the urban we have a basic view.

We don’t want to talk about a transaction until the letter of intent goes to the signed deal, so we don’t have to retrace our steps.

I think the best way to describe it is we have significant transactions under negotiation.

And that we think that they will contribute significantly for ’03.

But at this point I would be unwilling to put a number on it because they have not gone to the …

Yes, and these are individual parcel sales.

I’d say we have a couple of parcels that we would plan on selling this year.

And these are outside of that pro forma FFO number?

That is correct.

Yeah, they would not be in the pro forma.

None of this is reflective of that, into that number.

Yeah, again, that’s very important to keep that in mind.

Let’s repeat it one more time.

Because the pro forma FFO number does not include sales of buildings from the portfolio, does not include sales of residential land, sales of urban land.

And it does not include sales of desert land.

Does not include other income that we had generated last year.

Nonetheless, that will be reflected in the consolidated statement of cash flow, the GAAP statement, and of course, it will be reflected in our liquidity.

And could you just give us an update on the buildout of the Atlanta Development?

What the effective timing and cash flows would be?

Yeah, we went into Atlanta with a particular tenant, APL Logistics, who we do a fair amount of business with.

So they were looking for about 1m square feet in three facilities in Atlanta.

And so we went there and identified some land and competed for that.

And won that business.

And so we’ve actually, we’ll start construction here in the next probably 60 days on those three buildings.

They have an option to take a fourth building, which would take us to about 1.3m feet if they exercise that option.

We would expect those buildings, certainly the first three, to be completed right around this time next year.

And start contributing to rental income.

In addition in Atlanta we’ve tied up some additional land that we’ll begin, you know, marketing our services there for build-to-suit projects.

Okay.

And so the answer is that the Atlanta development was fairly targeted going in there.

We had an existing good client with a need there.

We’re going to develop about 1m feet for them, and that’ll be in the portfolio and paying rent by the end of the first quarter next year.

Thank you.

Thank you.

And there are no additional questions at this time.

Please continue.

Well, again, I want to thank you all for participating with us on this call today.

And those, as I said earlier, who have been patiently waiting for us to answer your questions about whether we would be choosing REIT status I appreciate that patience and understanding.

We are very optimistic about this, as the important next step in evolution of this company.

As I’ve said, just to repeat, the cash efficiency of our business model makes it possible to consider dividends.

The REIT status will enhance the amount of the dividends that are possible to distribute.

And we really believe that our core competencies developed over the years to work our way through this large land portfolio are the same core competencies that are going to give us a growth rate that will be very attractive in the REIT context, both in the TRS and growing our industrial portfolio.

And so we’re excited about it.

We don’t underestimate the amount of work we have to do between now and the end of the year.

But we think this is the right direction.

And with that, we look forward to taking any of your questions offline if anybody has more questions they’d like to follow-up with.

And, again, I point you to the materials that have been filed with the SEC, and alert you to the fact that within 30 plus or minus days there will be a very detailed proxy and prospectus.

Thank you very much.

Thank you, Operator.

Can you do the call-back?

Yes, thank you.

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