Prologis Inc (PLD) 2005 Q2 法說會逐字稿

Welcome to the Quarter 2 2005 Catellus Development Corporation earnings conference call.

My name is Anika (ph) and I will be your coordinator for today.

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

We will be facilitating a question-and-answer sessions towards the end of today's conference. (OPERATOR INSTRUCTIONS)

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's conference, Ms. Minnie Wright, Director of Investor Relations.

Please proceed, ma'am.

Thank you.

Good morning, everyone, and thank you again for standing by for the Catellus second-quarter 2005 earnings conference call.

With us today are Nelson Rising, our Chairman and CEO;

Bill Hosler, Senior Vice President and Chief Financial Officer, and Ted Antenucci, President of Catellus Commercial Development, who is calling in from our Denver office.

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

We will then open the phone lines for questions.

Before we continue, I would like to state that this conference call will contain projections and other forward-looking statements regarding future events and 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 ended December 31st, 2004.

This document identifies 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 all that said, it gives me great pleasure to turn the call over to Catellus Chairman and CEO, Nelson Rising.

Good day, everyone, and welcome to our call.

I will make initial comments regarding the status of our merger with ProLogis, our financial results and the status of our rental portfolio and our development and investment activities.

Then Bill Hosler will provide further detail on these subjects, after which Bill, Ted and I will be pleased to answer your questions.

September 14th has been set as the date for the special meetings of the security holders of Catellus and ProLogis, and we anticipate the merger will close the next day.

In June, when we announced the merger agreement, I said I felt this transaction was in the best interest of Catellus shareholders because of the synergies that would result from combining our operations and properties in the U.S., as well as the opportunity for our shareholders to participate in the ProLogis third-party fund business and their global development business.

Over the past seven weeks, as we have moved ahead with the integration planning, I'm even more excited about the value that can be created for the shareholders of the combined Company.

The working relationship with Jeff and Walt and the whole ProLogis team has been outstanding, and the integration of the organizations is going extremely well.

The combination of Ted Antenucci and his development team with the ProLogis team will indeed be a powerful one.

I also very pleased to report that even though we've devoted a tremendous amount of time, energy and effort to the merger transaction, we made excellent progress on many fronts during the second quarter and since.

The second-quarter operating results were consistent with our expectations, our development and leasing activities have been very successful, and we have made excellent progress with the marketing of our four largest office buildings.

Core segment FFO per share on a fully diluted basis for the second quarter was $0.38 compared to $0.39 for the same period in 2004.

And this was after $86.8 million impairment charge related to the sale of the Park Central office building in Dallas.

Parenthetically, even with this charge, our overall internal rate of return on this investment was 12%.

Core segment FFO per share on a fully diluted basis for the first six months of 2005 was $0.85 as compared to $0.83 for the same period in 2004.

Based on the results for the first six months of 2005 and our progress in July, we are slightly ahead of the guidance we gave earlier this year.

With respect to our rental portfolio, at June 30, 2005, our rental portfolio totaled 41.1 million square feet and was 93.8% occupied.

We continue to feel very good about our occupancy for 2005.

We are experiencing very good leasing activity and once again anticipate that occupancy at year end will be in the 95% range.

During the second quarter, we completed and added to our rental portfolio 500,000 square feet of development properties.

These buildings are 77% preleased and represent a total investment of $20.3 million, with a projected return of 11.4%.

In addition to the sale of our Park Central office building in Dallas, we've been active in the marketing of other office properties.

We are under contract to sell our 427,000 square foot South Bay Center office complex in San Jose, for a projected gain on sale of $41 million.

We are in negotiations to sell our 380,000 square foot Railway Exchange Building in Chicago, and have begun marketing for sale of the 283,000 square foot Gap building at Mission Bay.

In total, these four office properties represent almost 1.8 million square feet and the total expected value is well in excess of $300 million.

With respect to development and investment activity, at June 30, we had 5.6 million square feet under construction, of which 3.9 million square feet will be added to our rental portfolio upon completion.

Subsequent to the end of the second quarter, we started construction on a 935,000 square foot build-to-suit in Quakertown, Pennsylvania and we now have 6.5 million square feet in our construction pipeline, almost triple the size of the pipeline at June 30, 2004. 4.8 million square feet of this will be added to our rental portfolio at a projected cost of $182.4 million.

With leasing since quarter's end, the buildings we intend to hold are now 78% leased, and when fully leased, are projected to yield a return on cost of approximately 9.2%.

Included in the total of buildings to be added to our portfolio are a 543,000 square foot building at Kaiser Center in the Inland Empire.

This building was started without preleasing and we just entered into a 10-year lease with LG Electronics.

A 758,000 square foot building in San Bernardino, also in the Inland Empire, that was started without preleasing.

It is now 37% leased to Cott Beverage, and we are currently negotiating with a tenant for the balance of the building.

A 362,000 square foot building at Port Reading Business Park in Carteret, New Jersey.

We are seeing a great deal of interest in this building, but do not have any leases to announce as yet.

An 850,000 square foot build-to-suit distribution warehouse facility for Clorox Sales Company, a division of Clorox Company, at International Center in Minooka, Illinois.

A 913,000 square foot build-to-suit distribution facility for Quaker Sales and Distribution, a division of PepsiCo, at our Douglas Hill Business Center in Atlanta.

Another 428,000 square foot distribution warehouse at our Douglas Hill Business Park in Atlanta, and APL has signed a short-term lease for 210,000 square feet of this building.

Subsequent to the end of the quarter, Fort James Corporation an affiliate of Georgia Pacific, signed an 8-year lease for 935,000 square feet of industrial space at Quakertown Interchange Commerce Center in Quakertown, Pennsylvania.

In addition to these development activities, we've continued to add to our land inventory.

During the quarter, we acquired land in Tracy, California on a major Bay Area distribution corridor, entitled for 3.3 million square feet of commercial development.

Subsequent to the end of the quarter, we acquired through a joint venture land in Beaumont, California, the intersection of the 10 and 60 freeways in the Inland Empire, entitled for 2.9 million square feet.

As a result of the activity since the end of the first quarter, we feel that Catellus is well positioned for the pending merger.

We are very encouraged by our leasing activity and anticipate our portfolio will achieve occupancy in the 95% range by year end.

Our construction pipeline will add an additional 4.8 million square feet of high-quality buildings to our rental portfolio.

We are encouraged by our efforts to market our four largest office buildings and we have added an additional 6 million square feet to our land inventory, with other transactions in active negotiations.

On Wednesday of this week, the Catellus Board of Directors declared a third-quarter dividend of $0.27 a share with a record date of August 16th and a payment date of August 31st.

This is six weeks ahead of when we normally pay our quarterly dividend.

Under the merger agreement, the companies agreed to declare and pay their dividends on the same date, and this resulted in the acceleration of the payment of the dividend to Catellus shareholders.

As mentioned earlier, our special meeting of shareholders has been set for September 14.

Shareholders of record on August will be entitled to vote.

The meeting will be held at 9 A.M. in San Francisco.

With the closing of the merger anticipated on September 15, this is likely our last earnings conference call.

And since I have been with Catellus for 11, years I guess this makes the 40th, plus or minus, such call.

I sincerely appreciate the coverage of the analyst community and the support of our shareholders and have truly enjoyed our interaction, and I will miss it.

The merger marks the next logical step in the evolution of Catellus that we began 11 years ago.

The success of this evolution would have not been possible without the outstanding people who have been part of the Catellus team and without the guidance of our Board, and I am deeply grateful for both.

As I said earlier in the call, I'm very excited by this transaction and I am looking forward to serving on the ProLogis Board and being a ProLogis shareholder.

Bill?

Thank you, Nelson, and hello, everyone.

I'll make just a few comments about the quarter.

But as this will likely be our last results that we will report as an independent company, I will be brief.

Our EPS and core segment FFO was a little less than our forecast, due entirely to the 6.8 million impairment charge on the Park Central building.

After discussing the options with ProLogis, we decided a sale at this price was the right decision that this time.

The charge is partially offset by the higher NOI we'd received on the building, as we've held it this year much longer than we thought.

Without this charge, we would have exceeded what we had projected for the quarter, primarily due to lower interest expense and G&A.

Assuming we complete a full year and absent merger effects, we'd likely beat our $1.63 original guidance by a few cents and we would have significantly exceeded $1.63 if not for the impairment charge.

Property performance this quarter was affected by lower occupancy, but primarily by a very large slate of repair and maintenance work that comes with the spring and summer weather, more than what we had done in the second quarter last year.

That accounts for most of the same-store decline, which should not be a concern long-term.

Our occupancy is at the low end of our typical range versus the high end of our range last year, 93.8% today versus 95.6% last year.

This also should be temporary, and as Nelson mentioned, we should be back near 95% year-end.

Same-store rents are still rolling down anywhere from 0 to 10 percent everywhere but L.A.

But again, the bigger impact on quarterly performance was lower occupancy and timing of maintenance expenditures.

Nelson spoke about the development under construction and we are pleased with the opportunities we found, with good tenants and fairly strong development yields, aggregating over 9% return on cost.

Since the merger announcement, both companies' development teams have worked closely together under Ted, and despite the extra effort required by the merger, we continue to source attractive development opportunities, which will hopefully add to ProLogis's future results.

Finally, as this is likely our last earnings conference call at Catellus, I would just like to say that I have enjoyed preparing for these conference calls and trying to answer your questions.

I hope that you feel Nelson and I have tried to answer your questions thoroughly and honestly as you, the owners, clearly deserve.

I greatly appreciate the attention and support you've shown Catellus over time.

I also wish to thank of the Catellus employees.

We can all be proud that under Nelson, we are turning over to ProLogis a very successful Catellus, in a much better state than when we joined, and one that I am sure will be part of their success in the future.

And what that, I will open it up for questions.

(OPERATOR INSTRUCTIONS) Jay Leupp of RBC Capital Markets.

Good morning, Nelson.

For the first time in 10 years following your Company, I don't have any questions.

I just want to say congratulations, fantastic job.

It's been a pleasure following Catellus since we started coverage at $6.50 a share.

You're a great role model for public company CEOs.

And Bill, same goes for you as Catellus CFO, fantastic job.

We will miss these conference calls.

Thank you, Jay.

We can definitely take more questions like that.

Are you going to take the next call?

Jim Sullivan of Green Street Advisers.

Thanks.

I'll just echo Jay's comments; that was well put.

I have some questions.

Can you comment on build-to-suit margins?

We've seen one of your peers report surprisingly skinny profit margin.

Given that you signed a couple of big build-to-suits, can you talk about what you guys think are acceptable build-to-suit margins?

And what is really available to you out in the market, given how competitive it is?

Ted, why don't you answer that?

Hi, Jim.

How are you doing?

Great, Ted.

You and I actually talked a little bit about build-to-suit margins the other day.

We've got a little bit of a different model or have had one, where we're acquiring large pieces of land.

And so oftentimes, part of our margin is coming through the land development process.

And so we are still seeing what we believe to be reasonable margins, if you are taking raw land and going through the process and ending up with finished buildings.

The return on cost that we are building to is certainly lower than it has been before, but so are cap rates.

So I think that on build-to-suit for sales in a competitive market, profit margins are somewhere between 6 and 10%, and we typically end up on the higher end of that.

And I think if you are building a building, leasing it out and looking at what the value is once it's leased, there is still 10 to 15% profit margins in competitive markets.

And there is always those occasions where you, you know, in a Kaiser-like opportunity, the building we just leased up there, we leased for over a 9% return and cap rates in that market now are sub-6.

So there is obviously very large spreads under that scenario.

But much greater than 15%.

6 to 10 if you're buying the land at market; 10 to 15 through your model where you're creating some value through the land.

I think those are fair numbers.

I mean, we have certainly exceeded that on a lot of deals.

But I think those are a fair range.

Six would be low; six is kind of low.

Okay, and then turning to the office building portfolio, now that you are in contract or in the market, how is the pricing coming out relative to your original expectations?

Ted, do you want to --?

I think on Park Central, the major lease is expiring at the end of the year, and we knew that the value was going to go down on a monthly basis.

But we are also generating significant cash flow on a monthly basis.

I would have liked to see that price be a little bit higher but -- so that one is below what we would have expected.

The Santa Fe building in Chicago is coming in, frankly, above what we expected.

It was a competitive situation and it came in above, and the same thing on South Bay Center.

And certainly, the Gap Building, the feedback that we are hearing in terms of where pricing is going to come in, is definitely higher than what we would have expected six months ago.

So, Jim, on balance, I would say that the marketing efforts to date are producing numbers higher than we had anticipated in the aggregate, with the low end being the Park Central and everything else is coming in higher than we had anticipated.

When those buildings close, those is going to be significant 1031 activity, correct?

Correct.

And we've sat down with the people at ProLogis and have identified properties that they're looking at acquiring, independent of our transactions.

And we've got a game plan together and matched up kind of our sales goals with their acquisitions goals and think we've got a plan we can execute on successfully to make sure we don't pay taxes on that stuff (ph).

Okay, we will miss chatting with you.

All the best.

We'll miss you, Jim, thank you.

Chris Haley of Wachovia.

It's been a treat, guys.

It's good to see some of the moves you guys have made, and I appreciate the candor on these calls.

It's always been a pleasure online and off-line.

I can't let you go yet.

But --

But.

The Austin project, where you're going to start generating some fee income and it's going to be a mixed-used project.

Can you give us a sense, maybe Ted, this is for you, what the ownership position will look like within PLD of this project a couple years from now, versus what it was originally designed as?

How much of it do you think that the combined company will hold versus dispose of?

Our goal in Austin was to make money on the land development deal, and we planned on holding it in our and our TRS and doing it for fees and profit on the land.

There is --

At Catellus?

At Catellus.

At Catellus.

That goes the same for ProLogis.

There is an opportunity to do some retail in Austin.

That is something that, frankly, both companies are excited about, both ProLogis and Catellus.

And I think it is up in the air as to what ProLogis will do with the retail, but we certainly will develop it.

It would probably have been something Catellus would hold and I think that depending -- at the time we get it developed, we'll take a look at it from ProLogis's perspective and decide what makes the most sense.

I don't think there's any hard and fast decision on that.

I do know that the balance of the project will be held in a TRS and we'll be doing it for profit.

I think you had commented in prior calls, maybe Nelson or Bill, the fee levels or kind of a rough math that might go along with how much fees could be recognized beginning later this year or next year?

Could you refresh me on that?

Typically, we don't like talking about how much money we're going to make before we make it, but the --.

The structure, then.

The deal structure is a 15% profit margin on all landfills and fees for infrastructure, fees for commissions on sales, general overhead fees.

I think when you add it all up, I think, Bill, when we were running the numbers we were in overall 20%-ish profit margin on all (multiple speakers).

I think in overall margin on the land sales, yes, that is probably a good average.

On the building sales, just looking at your balance sheet today, putting into the new company what type of pickup there might be off of the stated balance sheet numbers, looking at your supplemental.

The total value, Nelson, that you mentioned of was it three office buildings, the San Jose Railway and GAAP, you said was approximately 300 million?

That was for all four.

That was for all four.

I said in excess -- it should be in excess of that.

Excess of 300 million.

What is the number that is on your balance sheet for that, for those assets?

Approximately.

I think we are probably -- now that we've taken the impairment -- clearly we're flat on Park Central.

We said in the press release what, about a 40, $41 million gain on South Bay.

I think the gain's relatively similar, maybe 30 odd million, on the Chicago office building.

And then the Gap Building, it could be $100 million.

Okay.

And these will all sell in the third quarter?

No, I think the -- Park Central is supposed to close today, so will find that out shortly.

The South Bay Center was Building Number 2, that is the one in San Jose, that is going to close the end of August.

The Railway Exchange is the one we're negotiating right now, so the closing date will happen probably not in the third quarter --either the fourth or early next year.

And then the Gap Building we just started marketing, so I would be surprised if it closed the third quarter, but not surprised if it closed the fourth.

And just a final -- on the debt side, what is the mark-to-market on your debt, roughly?

Well, the S4 we filed with the pro forma number showed about an $80 million mark-to-market on our debt.

Positive adjustment?

Yes, debt balance.

That includes your other liabilities?

(multiple speakers) standpoint higher.

That includes just the debt.

I don't have the S4 in front of me;

I don't know what it was for the other liabilities.

And would there be another filing with Q2 numbers prior to the shareholder meeting?

I think that is the anticipation, yes.

On behalf of our research team at Wachovia, congratulations and good luck.

Thank you.

Greg Whyte of Morgan Stanley.

Good morning, guys.

Just a couple of quick things here.

Bill, did you -- on the property operating expense, it went up as a percentage of rent revenues.

When you said there was some sort of R&M stuff going on, is that what you were alluding to?

Yes, we do a lot of roof replacement and parking lots in April-May-June timeframe.

Some of that extends then into the third quarter as well.

And just in terms of the expenses that may be incurred in connection with the merger, that is all going to be capitalized in, I'm assuming?

I mean, not that you're going to report it anyway.

Right, I mean we have probably .5 million or $1 million in the second quarter just running through our G&A right now.

And then at the time of the merger, effectively the instant before the merger, there's a lot of charges that run through.

And some of those get capitalized and some don't.

Okay.

I think Walt and Jeff talked yesterday about what they expected would run through after the merger.

But yes, assuming the deal closes in mid-September, we won't report anymore but our stub period third-quarter numbers would look pretty -- we'd have a fair number of charges in there related to the merger.

Call me a cynic if you will -- so the sale of the assets that would be impaired, the Dallas impairment thing and some of these higher expenses, is that a little bit presidential pardon day here, getting them cleaned up before ProLogis gets them?

I think we didn't really look at any of that.

The budget was for doing that R&M work this year.

I think a lot of it got concentrated a little more in April, May, June, and there wasn't as much maybe in March as we wanted.

It's hundreds of thousands of dollars; it's not anything dramatic.

And then the Park Central was clearly a building we have been looking at selling; we've had it in a contract on and off two or three times, I think, in the last six or nine months.

As Ted said, every month that we own it, its value goes down but we book income from the rent.

So in theory, the impairment increases -- it's almost like every quarter you're going to have an impairment if you don't sell it because you've booked some income on the rent, and you're just essentially getting rid of that income through the impairment.

But I wouldn't call you a cynic, Greg, but I don't --.

You can, though.

We have been trying to complete the merger and clearly get Catellus in the best shape we can possibly get it in for ProLogis.

If I were going to flush stuff through, I'd do it in the third quarter, and you'd never see it, Greg.

Just on the Park Central stuff, Bill, I guess it's sort of market specific, but one of the comments Boston Properties made the other day was that brokers were actually advising them not to lease up stuff in advance of sales because potential buyers had more optimistic expectations.

Are you seeing any of that at all?

Ted, I'll let you comment on that.

That building is unique.

I don't think that that applies to the Park Central building.

I mean, we have JC Penney in that building.

They're in three-fourths of the building and they're moving out of all of it, so you're going to have 500,000 feet of vacancy at the end of the year.

So I don't think anyone would recommend having 500,000 feet of vacancy right now in Dallas.

Clearly, that is the challenge.

I mean, the buyers understand that and I think they've certainly taken that into account in their pricing.

But we always believe collecting rent is a good thing.

And so we would not, as a strategy, not lease our buildings in anticipation of selling them, because you don't know what you are going to end up with sale price, and you are not always sure going to sell it, even though you've got a deal.

We have had people comment on that; that would not be inconsistent with what we have had some people tell us.

Certainly in Northern California, that discussion came up on our building -- South Bay Center.

And that was advice we were actually given by the brokers.

There were some deals out there that we were chasing and they felt we would be better off letting the buyer chase the deal and price it the way the buyer wanted it priced.

Interesting.

And just to one last, Bill, sort of technical stuff.

Did you say the date of record is August 8?

August 8 for the vote, yes.

And maybe it's already happened -- the election between the cash and stock?

That election date will run probably up to the moment before the day before the shareholder vote.

So September 13th will be the final date to vote on your cash-stock split.

So we're pushed to the very end.

And only at that point will you know exactly what it's likely to be?

We already know it's going to be --

Well, we know from your perspective, but from a shareholder's perspective.

Right.

I would say within a few days after that the shareholder will know exactly what they are getting.

All right, guys.

Enjoyed covering you.

Good luck.

At this time, there are no further questions.

I'd like to hand the call over to Mr. Rising for closing remarks.

Thank you all again for your coverage and our interaction.

As I said earlier, I have thoroughly enjoyed it and we look forward to the successful conclusion of this merger transaction and success at ProLogis going forward.

Thank you very much.

I'd like to remind everyone to access a recording of today's conference, you may dial 1-888-286-8010 from within the U.S. and Canada, and 1-617-801-6888 from outside the U.S. and Canada.

Your access code will be 35073125, and you may access the replay for one hour after your call ends.

Once again, we thank you for your participation in today's conference.

This concludes today's presentation.

You may now disconnect.

Have a great day.