Prologis Inc (PLD) 2003 Q4 法說會逐字稿

Good morning, my name is Michelle and I will be your conference facilitator today.

I would like to welcome everyone to the ProLogis fourth quarter 2003 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 speakers' presentation, there will be a question and answer session.

If you wish to ask a question during the session, simply press star 1 on your telephone keypad.

The questions will be taken in the order in which they are received.

At this time, I would like to turn the conference over to Miss Melissa Marsden, First Vice President of Investor Relations with ProLogis.

Please go ahead, ma'am.

Thank you.

Good morning, everyone.

By now you should all have received an e-mail with a link to both our supplementals as well as our 2004 guidance assumptions.

If not, those documents are available from our web site at www.prologis.com under the Investor Relations section.

This morning, we will first hear from Dane Brooksher, Chairman and CEO, who will comment on overall market conditions and outlooks.

Then, Jeff Schwartz, President of International Operations will discuss activity in Europe and Asia.

Next, Bud Lyons, Vice Chairman and Chief Investment Officer will talk about North American markets and investment activity, followed by Walt Rakowich, CFO, who will comment on financial performance and guidance for the coming year.

Before we get under way, I'd like to quickly state that this conference call will contain forward-looking statements under Federal Securities laws.

These statements are based occurrent expectations, estimates and projections about the markets and the industry in 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 those factors, please refer to our forward-looking statement notice in our 10K.

I'd also like to add that our fourth quarter results press release and supplemental both contain financial measures such as EBITDA and FFO that are non-GAAP measures.

Our supplemental does contain a reconciliation of these measures to GAAP in accordance with Reg. "G".

As we've done in the past, to provide a broader range of investors and analysts the opportunity to ask their questions, we will ask you to limit your questions to one at a time.

Dane, would you please begin?

Thank you, Melissa and good morning, everybody.

First, I'll briefly go over the quarter's results and current trends, discuss our outlook for 2004 and then turn the call over for more detailed discussions of key markets and financial performance.

When you cut through the preferred and impairment charges, annual FFO per share of $2.41 exceeded our guidance of $2.32 to $2.37.

These strong results were primarily due to the appreciation in foreign currencies, continued growth in our property phone business, steady operating property performance and gains in our CDF business, which were augmented by the sale of several U.K. properties by the European fund and the partial redemption of ProLogis units in the fund.

And despite the slowness in North American and European leasing activity throughout most of the year, our CDFS business performed in line with our expectations.

In the fourth quarter, we contributed our facility at Narita Airport to the Japan Sun.

In addition, driven by the European fund investors desire to reduce the waiting in the U.K. and enhance overall yield, we completed the sale of $320 million of U.K. properties from the fund.

And we'll provide more details later in the call.

But let me emphasize that this is an excellent example, this transaction displays of the power of our unique business model and how it allows to us take advantage of opportunities to redeploy capital and at the same time maximize return on equity for our shareholders.

Our property fund business also is right in line with expectations.

We ended the year with total assets under management in ProLogis Property Funds of more than $5.7 billion, a 25% increase over the $4.6 billion of assets under management a year ago.

While overall operating property performance showed some improvement with a modest increase in same-store occupancy, rent growth for the year was disappointing.

Although market conditions in the fourth quarter appear to be improving and our market and country officers are now reporting meaningful increases in proposal activity and leasing in just the last few weeks.

And you may have noted, recently, that we've made several announcements about built-to-suit agreements in Europe and globally we have signed 1.9 million square feet of new build to suit and CDF leases during January of '04.

And Asia continues to be a bright spot with a significant pipeline of transactions,both in Japan and China.

While we're encouraged by this momentum, we're cautious and until we see a more sustained overall improvement property, it causes us to be a bit more moderate in our outlook for 2004.

With that in mind, we're setting a guidance for '04 in an initial range of $2.35 to $2.45 in FFO per share.

Factoring into the caution is the mixed nature of the latest round of U.S. economic indicators.

Some, like GDP growth, while overall was strong at 4% for the fourth quarter, it was below third quarter of 8.2% and below the consensus forecast of 4.5 to 5.5%.

Other indicators such as job growth remained disappointing.

Looking at those factors that have a more direct bearing on our business, the overall ISM index was at 63.6% in January, the highest level in 20 years, and the eighth straight month of being over 50%, the benchmark for expansion.

The current low levels of inventory also suggest we are poised for a meaningful pickup in leasing, which we are starting to see.

Be on the other hand, after surging in September and October, new orders or nondefense capital goods dropped significantly at the end of the year, reversing much of the gains of the previous two months.

Although this indicator is still moving upward, the growth rate is not as steep as it appeared to be then.

And while the U.S. recovery looks to be gaining momentum, expectations for the pace of growth have moderated somewhat.

In Europe, it is much the same story and Asia is continuing to show strong activity.

Bearing all this in mind, on balance, we're feeling much better about the conditions of the global markets and our opportunities to further penetrate those markets.

New supply is in check and demand is improving.

Increased leasing activity in the U.S. and Western Europe, the expansion of our operations in Asia and the recent surge in global build to suit business all provide a solid underpinning for future growth in our property operations and CDFS businesses.

Our pipeline of more than $1.6 billion of properties both completed and under development will generate future contributions to our property funds that support growth in related income and management fees.

While our initial FFO range for 2004 reflects both our caution and our optimism, we believe that the strength of our operating team, our unmatched market presence in key logistics markets and strong customer relationships will help accelerate our growth when conditions further improve.

With that I will turn it over to Jeff to discuss our international activities.

Thank you, Dane.

First and foremost, we'd like to wish all of you a happy and healthy 2004.

We are very pleased with the significant pickup in activity and momentum built during the last part of Q4 2003 and beginning of Q1 2004 across the U.K. and Europe.

While, obviously, the slow down in the U.K. and European economies impacted both our lease-up and development during the first three quarters of 2003, we saw significant reversal this trend at the end of 2003, which has continued this year with our operations in Japan, continuing to execute very well.

Before going into activity in the select group of our key European markets, I'd like to note that overall we see little new speculative development under way across the European markets with a significant increase in both leasing and built-to-suit activity.

Cap rates are generally stable across Western Europe and still declining in central Europe.

The $40 million plus scare feet we hold in the ProLogis European Properties Fund remained in excess of 95% leased at year-end.

On page 20-A of the supplemental it is important to note that the 26% lease percentage on our completed development and repositioned assets and 60% lease percentage on our buildings under development at 123103 in Europe compares very favorably with the 14% and 44% lease percentages, respectively, at the end of Q3.

This represents lease up in excess of 2 million square feet during the fourth quarter.

Of course, when our developments reach 90% occupancy in Europe they're transferred to the ProLogis European Properties Fund.

Additionally, as summarized on page 21 of the supplemental, it is interesting to note that our development completions during 2003 in Europe were 71% leased at year-end and the March 31, 2003 development completions, which were 55% leased at 12/31/03, are now 70% leased with 100% of the space either out for signature on leases or under a letter of intent.

Further, the development completions at June 30, September 30, December 31, 2003 all now have either letters of intent or strong interests from our customers for 100% of the space.

In the U.K., a key accomplishment Q4 2003 was the portfolio sale to Standard Life of 13 buildings from ProLogis European Properties Funds for $320 million and two buildings directly from ProLogis for $14 million, a total of approximately $334 million.

Due to the extremely strong development program we have in the U.K., our fund had become over weighted in U.K. assets.

While the U.K. population of less than 60 million people accounts for less than 1/6 of the European Union, our success to date in the U.K. at costs 1/3 of the assets within ProLogis European properties fund by value to be located in the U.K.

This transaction brought the percentage of fund assets in the U.K. from 32% to 25%.

And because of its favorable pricing to the fund, we'll simultaneously increase our projective return to all funded unit holders, including ProLogis, by 35 basis points in 2004.

The sales price in this transaction represented a mid-fix cap rate for both ProLogis and the fund unit holders.

As part of this transaction, ProLogis reduced its ownership percentage in the fund from 29.1% to 21.9%, releasing previously deferred CDFS profits, a unique win-win scenario for all parties involved.

Again, during December and January, the market activity has improved considerably in the U.K.

Of the 13 unleased facilities we mentioned last quarter, we have already sold two of them and are negotiating for five additional buildings to be leased or sold to major customers.

In only three of the buildings do we not have multiple parties all negotiating for or interested in utilizing the entire facility.

And just last week we signed a new 175,000 square foot built-to-suit for a facility fee operated by Excel Logistics, one of our largest global customers on three continents, for a facility at ProLogis Park Daventry.

In Germany, we signed an additional built-to-suit for 1,010 square feet in Bavaria with a major third party logistics provider and signed letters of intent in excess of 430,000 square feet of additional built-to-suit activity with two of our largest global logistics customers for the Hamburg and Hanover regions.

In France, the market has regained the dynamic nature it lacked for most of 2003.

As evidenced by the signing of build to suit agreements totaling approximately 1 million square feet with [Rosagnal Dougherty], the largest provider of light goods in France and Bridgestone Tires.

As further evidence of this upturn, just last week we leased 290,000 square feet of existing new inventory development to Ideal Logistics, whose customer is [Carafor] Europe's largest retailer at ProLogis Park Place [LeSuit].

In the Benelux, the central Europe occupancy remains very strong and we have recently signed a lease agreement in the Netherlands with Geodis, the major French logistics operator, who is a ProLogis customer in five locations for an additional 235,000 square feet in Venlo, near the German border.

In central Europe, demand for both built-to-suit and inventory space has been exceptionally strong.

In Italy, we signed a 535,000 square foot built-to-suit with [Merolni], a strong credit in Bologna.

We remain 100% leased in Italy with our entire 4.5 million square foot portfolio leased on 12-year terms.

Fortunately, we have just acquired an important site near Milan that we have been working on for over three years, allowing to us further serve our customers there.

Moving to Asia, our new operations in China continue to build nicely.

As many of you are aware, the bureaucracy and paperwork in China is very significant, further intensifying an existing shortage of modern logistic facilities.

We expect excellent long-term results from China with development activities commencing in 2004.

In Japan, our talented team continues to deliver very strong results.

We completed and transferred ProLogis partner Rita to our ProLogis Japan fund in December, bringing the fund total to over $350 million U.S. at year-end.

We were 93% leased at Narita at completion, exceeding our underwritten lease-up schedule by a full year.

Leasing activity remains very strong for all of our product in Japan and built-to-suit activity has strengthened further from a good 2003 to be better in 2004.

And this morning, we acquired an outstanding building in Tokyo for approximately $52 million, which is leased for 14 years to a major, very credit worthy, Japanese retailer, [Muji].

The building is located less than 800 meters from the built-to-suit we completed last year for Matsushita, also known as Panasonic.

This acquisition, when added to our development pipeline, brings our position in Japan to over $750 million at today's exchange rates, all in the last 16 months.

Overall, we have seen significant pickup in Europe with continued strong operating results from Japan.

Our team continues to forge strong relationships with the largest best companies operating internationally and we believe this will result in superior performance in 2004 and beyond.

With that, I turn it over to Bud.

Thanks, Jeff and good morning.

As in the past, I'd first like to review market conditions in North America, then briefly discuss specific markets and finally comment on our global investment activities for the quarter and the year.

North American market conditions can be characterized by increasing demand, new deliveries at a moderate pace and market rents starting to stabilize.

On the demand side, the fourth quarter produced the highest growth absorption pace since the fourth quarter of 2000.

Many of our markets experienced positive net absorption in the quarter for the first time in several quarters.

New supply is generally in check.

For the year, new supply as a percentage of existing stock was only 1.6%, the lowest level since 1994 and well below the recent peak year of 1999 when it reached 3.5% of total stock.

The fourth quarter saw new deliveries and absorption in the equilibrium for the first time since the quarter of 2000.

We would expect to see the national vacancy rates start to fall with the first quarter results and continue to fall throughout the year.

Rents in most markets have stabilized and we're actually seeing rental rate growth in Southern California, specifically in the inland empire.

Concessions have moderated and subleased space continues to decrease.

Cap rates have continued to compress in most markets responding to the insatiable demand for industrial product from institutional buyers.

We don't see any evidence that the movements in cap rates will reverse itself.

Operationally, we closed out the year with our fourth consecutive quarter of increasing occupancies in our same-store sales pool of assets and basically flat same-store sales growth in a very difficult environment.

Overall, occupancy growth in our North American portfolio was slightly positive for the quarter at 41 basis points despite the addition of over 2 million square feet of newly completed developments and opportunistic acquisitions of repositioned assets that combined were 77% leased.

Before I move on to specific markets, I'd like to comment on how we, as a company, think about our business and how we have operated since day one.

First and foremost, we are focused on maximizing our return on capital and our return on equity.

How does this focus manifest itself in the markets day-to-day?

Well, first we emphasize retention of our existing customers.

We were quite pleased with our retention rate of 71.4% for the year, which is the strongest performance in six years.

We are very focused not only on the numerator or net operating income, but also on our investment.

We are very disciplined about how much capital we invest in any given transaction, subscribing to the philosophy of not buying occupancy gains by throwing capital at the problem.

Our average cost basis in North America is $37.78 per square foot.

Our turnover costs average less than 7/10 of 1% per year.

If you're able to control your investment in this manner and experience same-store sales growth that has averaged about 3% per year for the last eight years, then you have a formula for consistently increasing your return on capital and return on equity.

Now, let me turn to specific markets.

The story is pretty much the same as last quarter, with Los Angeles and Northern New Jersey leading in performance.

Atlanta, Dallas and the South Bay market in San Francisco, still presenting challenges and somewhere in between are Chicago and the East Bay.

The one common denominator in the markets is more activity and a sense that customers are beginning to show signs of urgency in completing transactions that have been in the works for a while.

Every one of these markets, with the exception of Dallas record a positive net absorption in the fourth quarter.

Now, let me turn to our build of development business.

We closed the year with $155 million of starts in the fourth quarter with the bulk of that in Europe.

For the year, we had $674 million in starts, down from the previous year's total of $955 million, as we significantly cut back on our inventory starts.

We are generally pleased with leasing activity of our recent completions, our fourth quarter completions of 1.47 million square feet were 88% leased at the end of the quarter.

In addition, all of our completions of the last 12 months, which totaled 12.4 million square feet were 81.7% leased at the end of the year.

That's the strongest leasing performance on our 12-month pipeline since 1999.

The 9.8 million square feet under development at year-end was 51.2% leased, a performance we feel quite comfortable with.

Our built-to-suit business remains very solid.

In 2003, we signed in excess of 7.25 million square feet of new build to suit business, representing 25 transactions in 17 markets in 8 different countries.

Turning now to our CDFS dispositions, for the year our dispositions totaled $895 million, 90% of which were contributed into our funds in Europe, North America and Japan.

Throughout the year, our predeferral margins held up quite well at close to 17%.

It's worth emphasizing, as Dane did, that we entered 2004 with a large pipeline of potential contribution assets, with over 9.8 million square feet under construction and another 20.4 million square feet of completions or repositioned assets that we've acquired that are in the lease-up stage.

These represent potential contributions in excess of $1.8 billion.

In summary, we entered the year with a very strong existing pipeline in an environment dominated by recovering markets, which should show a consistent improvement throughout the year.

This combined with our well-capitalized funds puts us in a very strong position to continue our business and execute our global strategy.

With that I will turn it over to Walt.

Thank you, Bud and good morning to everybody.

First, I would like to touch on our operating results for 2003 and then I'll spend a few moments addressing our expectations for 2004.

For the fourth quarter of 2003, funds from operations per share were up 31% over last year to 80 cents, which excludes preferred stock redemption charges of 2 cents per share.

FFO per share for the year was $2.41, up .8% over last year before impairment and preferred stock redemption charges.

EPS for the quarter was 71 cents compared to 44 cents in 2002 and for the year, EPS was $1.16 compared to $1.20 in 2002.

And again, in December, our board declared a dividend increase to $1.46 per share, which represents an increase in our dividend in every year since we went public in 1994.

Now, for the quarter, our operating properties experienced slightly negative same-store NOI growth of 1.19%.

Occupancies were up 61 basis points and rents declined 6.5% in the same-store pool.

Importantly, we ended the year with positive same-store growth of .09%, driven by a 91-basis point average occupancy increase, which was in line with our annual expectations and a clear sign relative to 2002 that the markets have improved.

Our operating expenses were also generally in line with our guidance with the exception of G&A expense.

G&A came in 5 to $6 million above our expectations set forth in the beginning of the year.

Approximately $3 million of this difference was due to higher foreign currency exchange rates and $2 million was due to a more rapid acceleration of our Asian expansion.

Rental expenses were also a bit higher than our expectation due to higher property taxes and insurance costs but most of that increase was reimbursed to us through recoveries, which you will note that we have now reported in rental income versus netted against rental expenses.

The biggest disappointment for the year was our development leasing in Western Europe and the corresponding slow down in global developments starts to roughly $700 million.

However, as Bud and Jeff mentioned, we are very optimistic going into 2004, based on recent activity and based on the fact that our pipeline of future developments in repositioned acquisitions at over $1.6 billion, has never been larger.

You will note that we have added new disclosure on our pipeline on page 20-A of our supplemental package.

In 2003, we made tremendous progress in our fund management business, exceeding our expectations for the year.

We started the year with $4.6 billion of total assets under management and ended the year with $5.7 billion of assets under management.

This was a significant driver of revenue growth as real estate and C income from funds rose to $117.6 million, up 28% from 2002.

During the fourth quarter, as Jeff previously mentioned, we accomplished a significant goal for our European fund.

By disposing of $320 million of fund assets in the U.K., we were not only able to enhance returns and diversification for all fund investors, but were able to bring our fund ownership have in line with our stated long-term target of 20 to 25%.

The disposition also allowed to us repatriate some of our investment in Europe, thereby crystallizing a portion of our NAV at attractive foreign currency rates, resulting in a substantial gain of $48 million to us in the fourth quarter.

Additionally, we were able to recognize $26 million in deferred profits that could not previously be recognized, given the higher level of our ownership in the fund.

Finally, we added to the tremendous capacity within ProLogis to fund future growth with a current 35% debt to market capitalization ratio net of cash on our balance sheet at the end of the year.

Now, some may point to the short-term dilution in selling such a large amount of assets.

It is true that in the short run, our fund income and fees net of interest savings will be less by an annualized amount of 5 to 6 cents per share, assuming no reinvestment of the proceeds during the year.

However, bear in mind that with a lower ownership percentage in the European fund, we will recognize a greater percentage of our CDFS profits in Europe moving forward.

In addition, we are highly focused on a number of different reinvestment strategies that will enhance our platform even further and will result in strong returns on invested capital.

First, we believe that we will see a more active global development environment in 2002.

You will hear in a moment that we expect a modest increase in development levels over 2003 but there is a reasonable chance that we could exceed our initial expectations based on preliminary activity that we're seeing from users as global economies recover.

We are also seeing opportunities to more rapidly build our fund management business in the U.S. through acquisitions of stable assets as well as assets that need repositioning.

Last year we purchased over $200 million of assets that we either recycled or plan to recycled into our property funds as our repositioning efforts are executed.

Whatever the opportunity, we plan to deploy the incremental capital into activities that drive higher returns through further growth in our fund management business.

Now, let me cover 2004.

You will note that this morning we also released detailed assumptions supporting our 2004 guidance.

We expect full year FFO for 2004 to be in the range of $2.35 to $2.45 per share and EPS to be in the range of $1.25 to $1.35 per share, both prior to a preferred redemption charge of 2 cents per share, which will be taken in the first quarter of this year. $1.05 to $1.15 per share of FFO is expected to be earned in the first half of the year and $1.25 to $1.35 is expected to be earned in the second half of the year.

We expect AFFO to be $1.95 to $2.05 per share for the year providing a dividend to AFFO payout ratio of 71 to 75%.

Now, let me just cover some of the key assumptions for the year.

We should see slightly positive same-store growth with positive occupancy gains offsetting negative rental growth.

Same-store growth should be better than in 2003, but not more than 1%.

As I mentioned previously, we entered the year with a CDFS pipeline exceeding $1.6 billion which had produced recognized profits after deferral of 150 to $160 million.

We certainly believe development starts will pick up from 2003 levels and expect a total of 800 to $900 million in starts is reasonable.

Depending on how fast global markets recover, this number could be conservative.

We expect to make 100 to $200 million in net direct acquisitions in 2004 with our funds acquiring an additional 3 to $400 million.

Our share of property fund FFO from rents and fees should be up 2 to 4% in 2004 with growth in the Japan and U.S. funds offset by dilution in the European fund due to the sale of the U.K. properties at a reduction of our ownership.

We also expect interest expense and preferred dividends to be considerably lower in 2004 at a combined total of 165 to $170 million, due to repayments and refinancings that we successfully completed in 2003 and expect to complete in 2004.

You will also see us take steps to naturally hedge our currency position further in Europe, while taking advantage of the strong Euro and Pound by shifting some of our U.S. corporate debt to Europe.

Finally, we're looking at the year more conservatively from a foreign currency perspective given the rapid rise of most currencies against the dollar in 2003.

Current foreign currency rates are 3 to 5% stronger than our assumed rates in our guidance.

In general, a movement of foreign currencies against our ranges of plus or minus 5% on a full-year basis would have an impact on annual FFO of about 4 to 5 cents per share.

Let me wrap up by saying that we moved into the new year well-positioned for growth, global economies appear to be recovering, our balance sheet is very strong and our dividend coverage is rock solid.

Financially, we have never been in a better position to take advantage of the opportunities that lie ahead.

With that, I will turn back to Dane.

Okay, thank you, Walt.

Operator, we'll now open it up for questions.

Thank you.

Our question and answer session will be conducted electronically.

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

Once again, please limit yourself to one question at a time.

Once again, that is star 1 to ask a question.

And we'll pause for just a moment to assemble our roster.

And our first question today will come from Lou Taylor with Deutsche Banc.

Thanks.

Good morning, guys.

Congrats on the quarter.

Walt, can you maybe just talk about the U.K. sale in a little bit more detail with regards to the nuances.

The assets were sold and then it looks like you also redeemed your units in the fund to recognize a gain and is that, in fact, what happened?

Lou, I'm going to ask Jeff to answer the first part of the question.

I will color it in after that.

Go ahead, Jeff.

Perfect.

Lou, in fact what happened was strategically it was very significant for us to sell this portfolio of the properties in the U.K. because it brought our ownership percentage or the ownership percentage of the ProLogis European properties fund in U.K. assets from 32% to 25%, which was the stated goal and something we agreed with our investor base that we'd reduce that given how successful we have been and continue to be in the U.K. in the development pipeline.

That being said, we sold at a very attractive price, mid-six cap rate, great buyer standard life and someone we established an ongoing relationship with.

Those proceeds, obviously we credit a great deal of cash within ProLogis European property fund, at that point it in time when we triggered that sale and the way we increased both the projected IRR to our investors and their projected cash yield for 2004 by 35 basis points, we couldn't have that cash in our balance sheet because it would be highly dilutive.

We created a redemption fund and only two of the investors, because they were so pleased, the overall group of investors in the aggregate, was so pleased with the overall investment opportunity and, in fact, even more pleased with the going-forward opportunity at this higher current yield, only two investors chose to redeem their units.

It was open for all investors to redeem their units.

There was only two investors that did.

What we had agreed to do with our board in Europe was we would soak up the liquidity and redeem units as long as we didn't go below 20% because our stated tent was to stay between 20 and 25% long-term.

That's exactly what we did and it worked out very well for all involved.

And, Lou, as it relates to the earnings issue, most of ProLogis's investment abroad is in the form of equity and gains and losses on that investment are not recognized in either GAAP income or FFO until such time as they are realized.

Now, this does not relate to any inner company loans within Europe, but our true investment from the U.S. to Europe is principally an equity investment.

And instead of being recognized, instead, they build up in what is called our accumulated other comprehensive income account, which you'll see on page 6 of the balance sheet, currently that has a balance of about $138 million positive.

Now, once the sale of your equity interest does take place, the proportionate share of income or loss that is related to the sale is taken into income for GAAP purposes and FFO purposes.

I.e. is now released, similar to when a mutual fund manager sells a stock.

So, the gain was larger for GAAP purposes due to the previous depreciation charges taken on the asset that was sold or assets that were sold and we did, of course, adjust the gain down for FFO purposes, taking out the appreciation.

So, in essence, that's basically what happened.

We crystallized a portion of our NAV, diversified the funds geographical presence, increased return on capital and freed up deferred profits in the process.

Next we will move on to Brian Legg with Merrill Lynch.

Yes, just further on that question, can you explain the 26.

It looks like you took $26 million of deferred gains in your CDFS income, so, the actual gains from newly contributed properties looks to be $16 million.

And that's significantly below the 30 to $40 million that you typically have in a quarter.

Were there some assets that were expected to be contributed in the quarter that shifted into the first quarter of '04, like your ProLogis Park Tokyo?

Brian, we did recognize $26 million in deferred gains.

In the supplemental, there's still over about $114 million in deferred profits that were unrecognized from prior years and from last year, that are still sitting there.

One thing I want to note is last year, 2003 alone, we generated $26 million of additional deferred gains from contributions just in Q1 to Q4.

So, it's really hard to make the argument this is a recapture of profits earned in prior years without acknowledging that we basically have created the same amount of profits last year that simply got deferred.

As for other alternatives, basically we had always planned really since the summer in our guidance, we had planned to make the sale, and I will tell you that the sale turned out to be better than we thought, because foreign currency exchange rates moved higher during that time period.

But basically it was always, in our minds that we would make the sale.

It's really hard to say what would have happened without the transaction.

You know, we, perhaps, would have made different decisions with respect to other areas of the business so I don't think you can simply say if this didn't, what would have happened because we really had planned all along and we had, accordingly, done things internally to be sure we made the sale happen.

We are obligated in our European fund to transfer facilities within six months of leasing.

Generally this is similar for our U.S. funds.

This does give us some flexibility in contributions but ultimately we are living up to what we had agreed to with respect to our funds.

And Carey Callaghan with Goldman Sachs will have our next question.

Yeah, good morning.

Can you break out for us, of the 1.1 to 1.3 billion in property dispositions in '04, how much comes from developments and how much comes from the repositioned acquisitions?

And on the repositioned acquisitions can you just sort of strategically review for us what the economics of that activity are?

I.e., how do you recognize income at the ProLogis level as you buy assets and sell them into the funds?

Do you take a gain or not?

And if so, how much?

Yeah, Carey, let me give you - - if you turn to page 19, I don't know if you happen to have the supplemental in front of you, you will see that there are 8 - - excuse me, on page 20 you will see that there's $894 million in contributions.

If you go to the previous page, page 19, under dispositions, basically you will see the breakdown CDFS completed developments is $794 million.

And CDFS repositioned acquisitions was $100 million.

So that's, I think, the answer to your first question.

As it relates to the acquisitions themselves, we buy a lot of assets here and you'll see in the last quarter we bought 1.9 billion square feet that was 78% leased.

Needless to say, there is some leasing that needs to occur in some of the facilities that we built or that we purchase.

And we, frankly, think that's the opportunity for us.

So, if an asset is stable, we will generally buy it, and let's say we are ear marking it for a fund, we will generally buy it and contribute it to the fund at our cost and we will hold it very, very short-term.

If an asset has value, a value add component, which could be capital, could be leasing, it's probably a combination of those two in some cases, we will take it on our balance sheet, we will stabilize the asset.

Sometimes that takes a year, sometimes it's six months and sometimes it's eighteen months, much like the development.

And we will contribute it at fair market value, appraised value.

We will designate it as the CDFS asset from day 1.

Any gain or loss is reported in GAAP earnings as well as FFO and generally we're holding it a little more long-term before we ultimately contribute it.

So, that's the message behind the madness.

We think it's a terrific opportunity for us.

The margins will be lower in that business.

They may be 4 or 5%, maybe 3%, depending on the asset, but again, we're not developing from ground-up and the risk is a lot less.

And what that strategy allows to us do in the marketplace is really to be more competitive on certain transactions, certain transactions clearly are fully stabilized.

Those are very competitive, you know, pension fund money is very interested and those kinds of transactions.

When you have a transaction that's a mix of stabilized assets, value-added assets, perhaps a development component, that's really right up our alley and that's where we can be very competitive, put the value-added assets, put the development component on our balance sheet, add value and then later contribute it to a fund.

And, Brian, the last piece of your question, I just might add that we did add page 20-A to the supplemental.

I think it's going to be a very useful schedule for all of you to be able to track our pipeline.

We've broken down repositioned assets and completed developments in North America, Europe and eventually Asia when we have something that's other than under development.

We also breakdown properties under development for view and there you can see the pipeline is basically $1.6 billion moving into this year.

Next we'll move on to David Harris with Lehman Brothers.

Yes, good morning.

Jeff, can you just elaborate a little more on your optimism in the continental Europe, in particular.

If I look at economic forecasts, the economic growth in many of the European countries is very sluggish and I wondered if you would just like to give a little bit more color on where you're seeing tenant demand?

Is this reflective of the overall market or is it particularly focused in, perhaps, on trade-related activities?

I'm not certain, David, I'm not certain - - well, it's trade-related, obviously, but a lot of it is internal trade versus export or import related.

But we are seeing a dramatic increase the end of Q4, beginning of Q1 and leasing activity.

In the U.K.

And on the continent.

In France it's been a dramatic, just a remarkable change from the first three quarters of last year to what we're seeing today.

As evidenced by a million square feet of built-to-suit activity, 270,000 square feet of inventory leasing just in the last 45 days on the continent.

Then U.K. we're seeing a similar phenomena.

All the buildings we had previously unleased, the pool of 13 buildings that we discussed last quarter, there is virtually activity on every building.

All but three of the buildings have multiple customers interested in either buying or leasing the facilities.

Most being leases but a couple of freehold sales involved given today's interest rate environment.

But it's been dramatic.

I think companies are really focused on cutting costs and improving their supply chain efficiencies and as we said so many times in the past, Europe is not nearly as efficient today from a supply chain standpoint as the U.S. is.

There's still room for improvement and companies are realizing those improvements in this process.

In central Europe, you do have strong economic growth and that's translating into increased demand both for built-to-suit and for the inventory product we have, problem we have there, quite frankly, is we cannot build inventory product quick enough to meet the demand.

And next we'll move on to Greg Whyte with Morgan Stanley.

Hi, good morning, guys.

Just wanted to go back to the European fund for a second.

You've articulated pretty optimistic expectations for the markets there and for your particular assets.

I wanted to reconcile that optimism with your desire to take your percentage ownership down.

Call me cynical if you want, but I'm sort of curious, would you have been able to recognize as much of the gain if you hadn't taken your ownership down?

Greg, it's Jeff.

We have stated from the beginning, if you look,any of our investors, when we initially marketed ProLogis European properties in 1999, remember, you and I spoke back then, we from day one had set our goal at 20% ownership in the fund and actually put that in all the documentation that we would not go below 20%, but the stated objective was to be at 20%.

As we contribute properties to the fund on an ongoing basis in '04, '05 and '06, we continue to take units back as part of that contribution.

Our ownership percent will stay above 20%.

In no event will we go below 20%.

But again, this is our intent from day one.

Our investors want to get their capital out.

They're very pleased with the return on equity they're receiving.

They're very pleased with the projected IRRs for the fund.

In fact, that's why only two of the investors chose to redeem their units and we were able to take ownership down to 21.9% and help the investors at the same time by making sure that it was not diluted by having too much cash on hand.

It worked out perfectly for the investors and it worked out very well for us, also.

And it was a very strongly executed transaction on the part of our European team.

And, Greg, let me add to that.

First of all, anytime you can sell something at a mid-6 cap rate you've got to look at it, you have to think about it.

And I think importantly for ProLogis, we do think that we're pretty well positioned today to penetrate further the markets that we're in.

We do think, if you look out one, two and three years from now that our global development program will be larger.

We do think that we will have opportunities to co-invest in other areas of the world with investors.

And, frankly, capital isn't infinity.

So, by definition there will be times we have to move capital around because our opportunities to invest throughout the world are, in our view, tremendous.

We see that development beginning to pick up right now.

We know that Asia will take capital and we know that developments will pick up in the United States.

So we need to think about that.

So our investment moving it from Europe to other areas of the world has a lot to do with what we think the opportunities are in the next one to three years.

Lee Schalop, Banc of America Securities, will have our next question.

Thank you.

On the CDFS detail that you gave, could you give us a breakdown of those numbers by quarter?

And also talk a little bit more about what might cause the numbers to go up from the 8 to $900 million that you outlined?

Lee, I think if you're talking about the CDFS projects for this year, by quarter,we don't give that.

We don't break that down and,frankly, that's one of the reasons why we're giving guidance on a semi annual basis at this point in time because to predict that on a quarter-to-quarter basis is not easy.

And so, we are comfortable giving mid-year guidance but we're not comfortable at this point saying one deal is going to be in the first quarter versus the second quarter and giving such wide ranges that it doesn't really give you much guidance at all on a quarterly basis.

And we'll move on to Chris Haley with Wachovia Securities.

Good morning and congratulations on a good finish.

Thanks, Chris.

I have a question.

Walt, last quarter you indicated that the expectations for 2004 CDFS income were high.

I'm looking at - - I can't exactly remember the words, but my sense was that that you, at that point, were a little bit cautious on '04 CDFS contributions .Now I'm looking at your year-to-year changes and it looks like you guys are looking fora little bit of what - - maybe robust is not the right word, but a little bit better than that.

Is that a fair assessment in what may be driving that?

No, I think what we said, Chris, is that we thought that the estimates on the street in general for us were high.

At that time they were in the 255 or 256 or some such range and our view is that the overall estimates were high.

But no, moving into next year, but having said that, I think it is important to note that if you were to ask us a quarter ago what we thought next year's CDFS net income would be, we wouldn't give you an answer, but we were probably a little more sceptical because we really hadn't seen what we'd seen last year in terms of the uptick in Europe.

Quite frankly, we've seen a dramatic uptick in terms of the activity there, which causes us to be more bullish overall.

And we'll move on to Jay Leupp with RBC Capital Markets.

Hi, good morning.

David Copp here with Jay.

Can you talk a little bit more about the leasing activity, specifically within your European completions?

You know, if I go back to say first quarter of '03, we're still in the mid-50% range.

What's your expectation if you look beyond the infamous 13 buildings that we've been talking about with leasing activity picked up.

Assuming the deal flow kind of progresses there as you've assumed it will, where does that put your lease-up here with the completions you've made this year in Europe?

David, if you go to page 21 of the supplemental.

Yep.

I want to correct something you said.

You said our completions are 50%.

And in fact, if you take all four quarters and add up the leasing in Europe on our completions , it's actually 71%.

Which I think that's pretty doggone strong considering the fact that a good amount of completions only happened within the last month or two.

So, we're very happy with that.

Now, having said that, what Jeff had mentioned and Jeff, I don't know if you want to go through each of the quarters?

Yeah, if you look at each of the quarters of the development completions from '03, in every building we completed in '03, we have a prospect actively looking.

We either have a letter of intent sign a lease-up for signature or a prospect looking at the building.

So, we have strong interest on 100% of the buildings we completed last year.

That would have been a different answer 90 days ago.

Right.

Then to add to that, now, you just addressed development completions, David, but I will take it one step further, if you go to page 20-A, which really shows the fronts under development, and that's another reason why we're getting excited about things, if you look at Europe, 4 million square feet, which is basically 60% preleased, I mean that's about as high as it's ever been and these are properties that are under development.

And if you compare that, I know we didn't show this quarter, but basically if you looked at it last quarter it was a million square feet less and only 44% leased.

And 44 we're comfortable with.

So, basically we've done about a million and a half square feet of leases just in the development pipeline for the quarter, as well as the under completions.

So, we are more excited about what we see in both areas.

You know, I might just comment a little bit about North America, as well.

If you look at our completions for the year, very strong numbers, almost 92% leased at year-end and those are completions throughout the year.

If you look at what's under development, it shows almost 47% leased.

That's a little misleading.

We've got run large inventory building in Southern California that's 800,000 feet.

If you take that out of the mix, I mean that is a market that produced 17.1 million square feet of net absorption last year so we feel very strong about that.

It takes that total up to north of 61, 62%.

So, very strong numbers but in North America and Europe.

And we'll move on to Mike Mueller with J.P. Morgan.

Hi, question for Walt.

Not to beat a dead horse, but going back to CDFS profits, can you tie together the guidance you gave on the 3Q call for the fourth quarter, which I think was 55 to 58 million, which was reported in the fourth quarter and also how that ties into the other reported gain?

Yeah, I can, Mike, and it was a little bit - - we didn't know at the time that the sale of the U.K. properties for accounting purposes would be broken out separately, which it is in the financial statements.

So, when we were thinking about our CDFS guidance, which we would have, of course, blown out the door had we added that into the CDFS profits, that is in my mind, what we were thinking about.

Having said that from an accounting perspective, you can see that in our financial statements.

That's really the only reason why there's a difference.

And we'll move on to Jonathan Litt, Smith Barney.

Hi, it's Gary Boston.

Just a follow-up there, Walt, on that.

I thought that the foot notes said that the gain was included in the CDFS or at least the deferred gain, the previously-deferred gain, was included in the CDFS line item?

Gary, there are two components of it.

One is the actual gain on the sale of the U.K. properties and the other is the release of the deferred profits associated with the reduction in our ownership interest, essentially.

And if you look at those two pieces, the latter of the two, the release of the deferred profits, is in the CDFS number.

The former of the two, the gain on the sale of the U.K. properties is broken out separately.

And our next question, we will hear from Chris Brown with Banc of America Securities.

Yeah, good morning.

I just wondered, if you could, Walt, clarify your financing plans for the year?

It sounded like you mentioned something about Euro denominated debt.

I wondered if you could give us a little more detail on that?

Sure.

Chris, one of the goals that we have in the company is to basically hedge our net asset value in Europe and, frankly, throughout the world, ultimately, but right now in Europe, back to dollars.

And we do that really in two different ways.

The first way is the debt into European fund, which basically is about 50% of book value of the assets.

But we still have our equity investment, which is the other 50%.

Now, we don't want to change the overall debt profile of the company, but one of the ways that we can hedge that equity investment, i.e. the NAV, is by shifting U.S. denominated, unsecured corporate debt and doing European bond offerings in the future and basically retiring debt, which is in the United States.

By doing that, we provide a natural Euro and Pound hedge assuming we do pound unsecured debt in the future, as well.

We hedge that naturally without changing the overall composition of debt on our balance sheet.

And that will be one of the goals that you will see us execute in the next one to three years.

And next we will take a follow-up question from Lou Taylor with Deutsche Banc.

Yes, thanks.

Walt, I tried to follow up earlier on the U.K. sale.

The gain that was in FFO, the $48 million, pretty much is right on top of the currency gain of around 48.

So, I mean are we reading in right that the entire gain on the sale to ProLogis is really just driven by the change in currency?

Well I think, first of all, I want to point out that all of the assets that were sold, Lou, were on average 1.2 years old.

So the fact that we had sold them into the fund within basically the last year would make it very difficult to see considerable appreciation in those assets.

The fact of the matter is, back to what Jeff said, is what it really was is a diversification strategy for the fund.

Now, having said that, the fund, if you go into the fund financial statements you will see that there was a profit that was made on the sale but then, of course, when you break it down into our 21% or 29% ownership interest it was basically a million or a million and a half pounds, I believe it was, and we, of course, had expenses associated with the sale.

So, in essence, the lion's share of the gain was in foreign currency exchange over time where our basis was considerably lower than where we ultimately repatriated the cash.

And Jim Sullivan with Green Street Advisors will have the next question.

It's just a follow-up on that, Walt.

If I heard you right, the buildings were new, therefore it was hard to get a considerable appreciation.

Yet earlier in the call you talked about a 6 cap or a mid-6 cap being great pricing.

Does that suggest that you're developing to something like a 7?

Jim, I'll answer that.

It's Jeff.

Actually, as you know, we develop on our balance sheet within Europe and we transfer the ProLogis European properties fund that stabilization.

So, a great portion of the deferred profit that was realized on this transaction actually related to the exact same properties sold to standard life.

So, we do develop at a reasonable margin, a margin consistent with what we develop around the world, in the U.K., predeferral and post deferral margin, you know,the mid-teens type range and that clearly was recognized upon the transfer there.

There was a gain, pro-life ProLogis's European properties, we market to market the properties every seven months.

We do appraisal every six months.

So, even above the appraised value the properties were reappraised on the average, twice before this.

They've been stepped up in value.

Even above that newly-appraised price, there was a gain looked to ProLogis European properties so our holders were thrilled with the transaction.

It was a gain for ProLogis and we did have the opportunity, a real gain that we had on the currency exchange and was a true gain that was a paper profit previously but an opportunity clear to crystallize that and take that off the table and realize a real gain from what was previously paper.

Yeah, both Jim and Lou, I want to get back something Lou had asked.

I think it's a good question and tying in with what Jeff had said.

The other profit to ProLogis associated with the fund sale, of the $26 million in released deferred profits, 11 million of that 26 related to just those assets that were sold that we could not recognize in the past.

So, by definition, $11 million in profit we actually made in the transaction.

It was just lumped into the recognition of the deferred gains, the $26 million that was in CDFS.

Operator.

Yes, sir.

We will take two more questions, please.

Thank you.

We will hear from David Harris with Lehman Brothers.

Thanks.

Hi again.

Walt, I've got a simple question for you.

How much currency gain was in your results for '03?

And secondly, associated with that, how sensitive are your plans and guidance to any significant volatility over and above the 5 cents delta also that you identified on the difference between current currency paratives and your guidance?

Okay, David, overall in the year, without regard to the gain that we just talked about on the U.K. sale, net of expenses, the foreign currency rise this year added about 3 cents per share to our overall earnings.

And back to my comments initially, if you had basically a 5% plus or minus movement in the currencies on a full year basis this year, i.e. that would start from January 1 to the end of the year, versus what we had outlined in our assumptions, there would be a positive or negative, if it went down 5%, 4 to 5 cent per share impact.

Hopefully that quantifies it on an annual basis.

And, of course, if the currencies don't move until the middle of the year, then it's half of that.

And our final question today will come from Greg Whyte with Morgan Stanley.

Guys, just a follow-up here and I know I've asked this a couple of times on previous calls, but can you give us any update on where you might be in terms of management succession announcements?

It's unchanged, Greg.

Bud and I will retire at the end of the year and before the end of the year, the succession announcements will be made.

And that concludes our question and answer session today.

Okay.

Thank you, operator.

And let me just have a wrap-up comment here.

I would like to just leave you with a couple of closing thoughts.

If you detected an optimistic tone from our comments, then you've reached the right conclusion.

And while the timing of the sustained improvement in North American property operations cannot be predicted with any accuracy, this management team has been through downturns and their related recoveries before.

Our collective past experience in this business suggests to us that the heightened level of activity that we're experiencing is a precursor to what's just ahead.

The momentum we've been building underscores that we're off to a very strong start in '04.

And since the end of '03, we signed 1.9 million square feet of new built-to-suit and CDFS lease agreements.

More than a half million of that is in Europe.

Where in 2003, as you know, the market was very slow.

And in Asia, there is very, very strong proposal activity.

We are confident that our unmatched global presence, strong customer relationships and demonstrated ability to further penetrate existing markets when leveraged through our business model will provide accelerated growth in earnings and NAV per share as global economies continue to improve.

We definitely are more optimistic today than we have been at any time over the last two years.

And with that, thank you for listening and thanks for the questions and we look forward to talking to you at the end of the first quarter in '04.

And thank you for participating in today's ProLogis fourth quarter 2003 financial results conference call.

This conference call will be available for replay beginning today at 1:00 p.m. eastern standard time through 11:59 p.m. eastern standard time on February 18, 2004.

To access this replay, you may dial 1-888-203-1112 domestically.

Or area code 719-457-0820, internationally.

The replay pass code is 761126.

Again, that replay pass code is 761126.

Thank you.

You may now disconnect.