Prologis Inc (PLD) 2005 Q3 法說會逐字稿

Good morning.

My name is Cindy and I will be the conference facilitator today.

I would like to welcome everybody to the ProLogis third-quarter 2005 financial results conference call.

Today's call is being recorded.

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

After the speakers' presentation, there will be a question-and-answer session. (Operator Instructions).

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

Please go ahead, ma'am.

Thank you, Cindy, and good morning, everyone.

Welcome to our third-quarter 2005 conference call.

By now, you should all have received an e-mail with a link to our supplemental, but if not, those documents are available from our website at prologis.com under Investor Relations.

This morning, we will hear from Jeff Schwartz, CEO, to comment on overall market conditions and outlook.

Walt Rakowich, President and COO, will cover ProLogis' operating property performance and global market activity.

Ted Antenucci, President of Global Development, will discuss investment activity and development.

And Dessa Bokides will cover financial performance and guidance.

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

These statements are based on current expectations, estimates and projections about the market and the industry 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 these factors, please refer to the forward-looking statement notice in our 10-K.

I'd also like to add that our third-quarter results press release and supplemental do 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 Regulation G. And also, as we've done in the past, to give a broader range of investors and analysts the opportunity to ask their questions, we ask you to please limit your questions to one at a time.

Jeff, would you please begin?

Thank you, Melissa.

Good morning.

I'd like to welcome two important additions to our management team and today's call -- Ted Antenucci, who is now officially on board with us as President of Global Development, and Dessa Bokides, who just joined us as Chief Financial Officer.

It was a terrific quarter with continued strong financial results and improved operating performance.

Accordingly, we are tightening and raising our full-year 2005 guidance to between $2.67 and $2.70 in funds from operations per share, up from $2.60 to $2.68.

In addition, we are establishing an initial range for 2006 funds from operations per share of $2.90 to $3.02.

Dessa will have more relative to our guidance shortly.

The quarter was capped off by the closing of our merger with Catellus on September 15.

With the addition of more than $4.7 billion of high-quality assets, we have expanded our already leading market share of the North American distribution market and have created additional opportunities to serve our existing and prospective customers.

The integration with the Catellus team is going very well.

We're pleased with the way our development organizations have come together and are excited about the opportunities we have to significantly grow our share of the North American development market.

We're particularly excited by the unparalleled talent of our expanded development team and the value creation potential of the mixed use and redevelopment projects underway, as well as those we expect to undertake in the future.

Globally, strong customer demand supported an increased level of leasing in our record $3.1 billion CDFS pipeline.

Our pace of development starts moderated in the third quarter, as we indicated it would on the last call.

Still, at just under $1.8 billion of starts year to date, we're confident about achieving the upper end or perhaps slightly exceeding our revised range of 1.9 billion to 2 billion for the year.

Strong demand also supported positive net absorption across virtually every major market with further improvements in occupancies and rental rates.

We recorded positive same-store net operating income growth, and for the first time in 12 quarters, we achieved positive rent growth in our same-store pool.

In North America, we saw same-store average occupancies rise 1.73%, as compared with the third quarter of 2004, and we're seeing modest rent growth in a growing number of markets.

These improved conditions are spurring an increase in inventory starts in some markets.

However, national development levels are still well below historical peaks.

We're also noting that rising construction costs and interest rates are leading to higher rents, but also keeping some private developers on the sidelines.

Thus far, overall in North America, new supply has not exceeded the pace of absorption.

In Europe, activity also remains strong, driven by continued reconfiguration requirements.

At over $800 million in year-to-date starts, we've exceeded our strongest development year ever in Europe.

In Japan, our large multi-customer facilities continue to generate strong interest and are leasing up rapidly.

In most cases, they are 100% leased prior to completion.

And in all cases to date, our projects have been on time, on budget and leased ahead of pro forma with Lexus-like execution by our team.

In China, we're continuing to build our platform, which includes exclusive development rights for distribution facilities that support global trade at major ports and seaports, as well as China's fast-growing domestic consumption.

As global trade continues to expand, our leading global port presence will become even more valuable to ProLogis and to our customers.

A record $1.8 billion pipeline of properties under development is an outgrowth of improving customer demand and our position as both lead developer and owner of distribution facilities in nearly every major global market in which we operate.

Importantly, leasing at our pipeline of properties under construction was over 30%, up from 22% in the second quarter.

Good leasing activity in this pipeline and recent development completion supports future contributions to ProLogis' property funds, which in turn drives growth in fund income and fees.

Our fund business continues to grow, reaching over $9.8 billion in assets under management, and we continue to attract high-quality sources of private capital growth funds.

During the quarter, our team in Japan worked to fund ProLogis Japan Properties Fund II with the Government of Singapore, our Japan Fund I partner.

The new fund provides additional capacity of $3 billion to support our continued expansion in Japan.

During the quarter in the U.S., the ratio of business inventories to sales hit a record low, demonstrating that businesses continue to keep a tight rein on inventories.

Real GDP growth accelerated to 3.8% in Q3 '05 from 3.3% in the previous quarter, well above consensus expectations.

Additionally, the overall ISM index rose to 59.4 in September, up from 53.6 in August, surprising analysts that had been expecting a modest decline.

Real GDP growth in Germany and France, although sluggish, remains positive.

In Germany, business confidence has continued to climb, reaching a five-year high in October.

In France, employment conditions are improving and the unemployment rate is ratcheting lower.

In the UK, real GDP growth has stabilized at about 1.5% per year.

In Japan, real GDP growth is positive.

Joblessness is receding and price deflation appears to be easing.

China remains the main engine of growth for Asia.

In China, real GDP growth amounted to 9.4% year over year in quarter three.

While we watch all these indicators closely for clues of change in the economy and business sentiment, demand for distribution space remains more closely linked to global trade and the need for supply chain efficiencies than to the broader strength of regional economies.

Across the board, domestic and international markets are strengthening.

With our leading platform of more than $21.9 billion of assets owned and under management, we're steadily increasing both our share of new development on our share of the business we do with our largest customers.

We were extremely honored recently by several industry and development-based awards presented to ProLogis in the U.S., UK and Europe.

This recognition from our industry peers underscores the significant talent of our ProLogis team worldwide.

It is this group which has helped to solidify our market-leading positions and built solid customer relationships, enabling us to capture this opportunity and to further accelerate our growth in 2006 and beyond.

Now, let me turn it over to Walt to discuss operations.

Thank you, Jeff, and good morning, everyone.

I'd like to address market conditions in each area of the world, beginning in North America.

Markets continued to show steady improvement.

In the top 30 markets, overall occupancies increased by an average of 30 basis points over the second quarter to 91.4%.

Some of the markets that had been hit hardest, such as Dallas, Atlanta and the San Francisco Bay area, continued to recover, posting occupancy gains of between 75 and 100 basis points in each.

Year to date, we've seen positive net absorption of 122 million square feet, well ahead of the 112 million square feet absorbed for all of last year.

Importantly, all but two of the 30 top markets had positive net absorption in the third quarter.

Consistent with our expectation last quarter, overall industrial development in North America is picking up, with about 39 million square feet of new starts in the quarter and roughly 87 million square feet year to date.

Recall that in the peak years for industrial development, deliveries totaled about 140 million square feet.

For the year, the mix for the overall market is roughly 75% inventory, 25% build-to-suit, as you would expect with continued improvements in market conditions.

Our mix is fairly consistent with that of the overall market, although in the third quarter, our North American starts were 42% preleased.

We've also seen an increase in the cost of tenant improvements, which are rising at a faster rate than shell construction costs, validating our strategy of maintaining a portfolio of low-finish, bulk distribution space.

With less than 7% office finish, we're able to keep TIs low and maximize our cash flow.

ProLogis' North American operations continue to improve, with 93.4% of our stabilized portfolio leased at September 30.

Thus far this year, we have leased more than 53 million square feet, which exceeds our record leasing of 52 million square feet achieved for all of 2004.

Brisk leasing has also led to increased development.

Our year-to-date North American development starts of $438 million are already within the 400 to 500 million range we commented on last quarter.

Looking at our international operations, total development starts in Asia of more than $545 million are on track with our revised guidance of roughly 575 to $750 million for the year.

Customer demand remained strong, with completed CDFS developments in Asia over 79% leased at quarter end.

In Japan, we contributed our 1 million square foot ProLogis Park Yokohama to our Japan Fund in the third quarter.

Also during the quarter, we secured land to begin development of ProLogis Park Koshigaya II, a 360,000-square-foot inventory facility located about 12 miles north of central Tokyo in which about half the space is already leased to Sanyo Electric Logistics.

The build-to-suit market also remains active.

We recently signed an agreement to develop a facility for Hitachi in Sendai, our first transaction in this important new market.

In China, we began construction of two facilities in Guangzhou at ProLogis Park Yunpu that are both preleased to ST-Anda Logistics Company.

In addition, we are under construction with our first development in Beijing, a 263,000-square-foot facility at Beijing International Airport Logistics Park, and we broke ground on our first development at the just-opened Yangshan Deep Water Port in Shanghai.

This port will eventually be the largest in the world, supporting 25 million TEUs of container traffic.

Our teams in Asia have done a tremendous job of securing exclusive positions at these critical global ports, which we believe will create significant value for our shareholders in the future.

Turning to Europe, leasing activity is strong across most markets, with developments completed during the last 12 months at approximately 74% leased.

As a result of this strong demand, as Jeff mentioned, we started over $800 million of new development this year, well ahead of our initial expectations.

Demand for space in the UK remains steady as we continue to see leasing activity in our inventory facility there.

In northern Europe, rents have stabilized and vacancies have declined, but demand is still lackluster in many markets.

Our portfolio remains 100% leased in the Netherlands, Belgium and Sweden, and we're actually under contract on some strategic land positions to enable us to quickly respond as the demand resumes.

In Germany, our build-to-suit business has been very strong, leading to year-to-date starts at about 1.2 million square feet, up almost 15% over our record total for all of last year.

Economies in southern Europe are mixed.

In France, where market fundamentals are stagnant, we continue to do quite well with occupancies over 94% and good interest in our recently completed developments.

Despite negligible GDP growth in Italy, we're fully leased, and our development under way in Milan is generating significant interest.

Economic conditions are more dynamic in Spain, where we recently leased nearly 750,000 square feet in two facilities -- one inventory and one build-to-suit -- outside Barcelona to Grupo Eurofred, a European manufacturer of commercial air conditioning and refrigeration equipment.

You know, this transaction demonstrates the value of having both existing facilities to support immediate demand, as well as land positions to support new development.

In central Europe, we're seeing further compression in cap rates and increased values as a result of relatively strong GDP growth and these countries' entries into the EU.

Poland is extremely active.

Our 500,000-square-foot inventory building at Sosnowiec, which was just completed, is already 80% preleased.

In fact, we believe we've done 42% of all industrial leases signed in Poland this year.

During the quarter, our European fund also completed the acquisition of Harbor Park in Budapest, a 1.1 million-square-foot new development that doubles our presence in this important central European market.

Overall, we're encouraged by the continued strengthening of our global markets.

We've seen significant leasing activity and a growing number of opportunities to leverage our strong customer relationships for future growth.

Today, our Focus 500 customers lease over 51% of our total portfolio.

As we've talked about in the past, these are companies that have distribution facility requirements in multiple markets and understand the benefits of doing business with fewer service providers.

Just a few examples of recent transactions this quarter with this group -- we signed four leases totaling more than 411,000 square feet in the quarter with FedEx, one of our top 25 customers.

We now have 21 leases with FedEx throughout the world.

Geodis, another top 25 customer, just signed a build-to-suit agreement with us for 221,000 square feet in the Frankfurt market.

We now have Geodis in eight locations, including Budapest, Madrid, the Netherlands and central France.

And we signed our sixth lease agreement with Kunanagel (ph) for over 200,000 square feet of our new building at the Port of Hamburg that we talked about in our investor meeting earlier this year.

We now lease to Kunanagel in four U.S. markets and two European markets.

These are examples that underscore the importance of our platform and staying in close touch with our customers and their distribution needs.

And now, let me turn it over to Ted for investment and disposition highlights.

Thanks, Walt, and good morning, everyone.

It's great to be here today.

I'd like to spend a few moments today discussing the Catellus merger and some of our major acquisition disposition objectives moving forward.

As you all know by now, we completed the merger on September 15, well ahead of the expected merger date when we initially announced it.

Thus far, we've been very pleased with how the integration has gone and are beginning to see tremendous synergies in putting the teams and portfolios together.

In fact, we have already had two instances where we were able to expand customers from the ProLogis portfolio into available space in the Catellus portfolio.

Neither of these opportunities could have successfully happened without the merger.

In total, ProLogis added approximately $4.7 billion of properties from Catellus, consisting of roughly 4.4 billion of operating assets and $300 million of land.

Of the 4.4 billion in the operating portfolio, there are approximately $750 million of office and hotel assets that we plan to dispose of in the next 12 to 18 months.

And we're pleased to say that we are well on our way to meeting this objective.

As some of you likely heard on Catellus' final quarterly conference call, we completed the sale of the Park Central office building in Dallas and the South Bay Center office complex in San Jose.

Additionally, during the third quarter, purchase and sale agreements were signed for the sale of the Gap office building in San Francisco and the Santa Fe Railway Exchange office building in Chicago, which are expected to close in the fourth quarter of 2005 and the first quarter of 2006, respectively.

Total proceeds for these dispositions are approximately $321 million or roughly 45% of our targeted sales.

At the same time, we were able to successfully redeploy the expected capital into core infill assets as we closed on the purchase of our partners' 80% interest in North American Fund 12 on September 30.

We originally purchased our 20% interest in this fund in the Keystone transaction last year.

We were very excited to purchase the remaining interest in this fund, as the portfolio is comprised of very functional industrial assets in some of the best infill submarkets of New Jersey.

In addition, we expect that there should be very little dilution from the office asset sales in capital redeployment as the relative cap rates are not substantially different.

In sum, we are off to a great start and plan to keep you apprised of our continued progress in our redeployment efforts.

As you all know, the major reason behind the merger was to tap the development capabilities and pursue some of the mixed-use types of developments for which Catellus was highly regarded.

While ProLogis has not historically done this type of redevelopment in the U.S., the Company has significant experience with redevelopment and brownfield projects outside the U.S.

A good example of this is the venture we announced earlier this quarter in North Dartford, just east of central London.

The project ultimately will comprise 1.5 million square feet of space, including distribution facilities, offices, retail, development and a technology and science park.

ProLogis will develop the infrastructure for the project as well as the industrial facilities and selected build-to-suit for sale facilities.

We've already presold land to UK's largest homebuilder for the construction of a home and retail center.

In addition to our share of the development gains, we also will earn infrastructure development fees and have the potential to earn an incentive return over time.

In addition to this development, we're also making strong progress in our L.A.

Air Force Base and Austin Mueller Airport redevelopment projects here in the U.S.

In both of these projects, we're bringing our land and infrastructure development expertise to redevelop infill locations into multiuse facilities.

As is the case with all of these projects, we have structured them to minimize our capital risk while leveraging off our people's knowledge and capabilities.

We believe there will be continued opportunities ahead to profit from this type of development in light of the announced military base closures and increasingly difficult entitlement environment.

Now I will turn it over to Dessa for her comments on the financial performance.

Thank you, Ted, and good morning, everyone.

I'm excited to join ProLogis and look forward to meeting many of you.

Well, it was a good quarter to join the Company.

As has been noted, we were pleased with the strength of third-quarter results.

Funds from operations was up 9.9% to $0.78 per share, excluding charges associated with the merger integration and the relocation of our corporate offices.

With $2.15 in FFO per share year to date, we're comfortable raising and tightening our range for full-year guidance from $2.60 to $2.68 per share to $2.67 to $2.70 per share, excluding charges.

Most of that increase is expected to come from an additional $5 million in expected CDFS income.

At the same time, we are basing guidance for our full-year earnings per share from $1.60 to $1.80 per share to $2.65 to $2.85 per share.

This includes approximately $1.00 per share of gains on the sale of assets that are recognized under GAAP but not included in our FFO.

Overall, we're solidly on track with previous guidance, as operating fundamentals remain strong and favorable market conditions continue to support our global development pipeline.

From an operating perspective, same-store net operating income, or NOI, for the quarter was up just over 1%, with a 1.73% increase in occupancy driven by our merger with Catellus and positive same-store rental rate growth of 1%.

For the year to date, same-store NOI of roughly 1.8% is running ahead of our guidance of zero to 1%.

Based on the improving fundamentals, we now think same-store NOI for 2005 of 1 to 2% is achievable this year.

Stabilized occupancies for the industrial portfolio were 93.7%, with approximately 0.7% of the increase attributed to the Catellus assets.

We're still working through our expected postmerger general and administrative expenses.

However, we believe the guidance we provided for the full-year G&A of approximately 90 to $95 million is still a good run rate.

We had approximately 8 million of charges specifically related to the integration, which we will continue to present separately.

We expect to incur an additional $0.02 to $0.04 of merger integration costs through the first half of 2006, which we expect will be front-loaded.

During the quarter, we started roughly $308 million of new development, bringing our total year-to-date starts to 1.79 billion.

We're comfortable with the upper end of our previously stated range for total starts of 1.9 to 2 billion.

Leasing in our $3.1 billion CDFS pipeline of buildings completed or under development is approximately 44%.

This reflects our continued investment in inventory starts, which we believe is supported by improved market conditions.

Completions over the last four quarters of 1.4 billion totaling 23.5 million square feet were 69% leased at quarter end.

Gains from development contributions and sales activity for the quarter were about $88 million, including 16 million of deferred profits.

We'll recognize gains of about $200 million year to date were up 20.4% over last year.

Year to date, after deferral, after-tax margins on CDFS dispositions of roughly $1 billion were about 24.3%.

We remain comfortable with our revised annual CDFS disposition guidance for gross proceeds of 1.3 to 1.4 billion for the year, but expect average post-tax, post-deferral margins to be around 20 to 22%, slightly higher than we indicated in the last call.

Compared with the third quarter a year ago, our share of FFO from funds was up 6.4% to 23.4 million, and fund management fees were up 34.1% to $17.3 million, both in line with expectations.

Assets managed in ProLogis property funds increased modestly to 9.8 billion, as CDFS contributions of roughly 405 million were offset by our $235 million purchase of the 80% interest in North American Fund 12.

Now let me address guidance for the remainder of this year.

Recall that last quarter, we increased our guidance to $2.60 to $2.68 in FFO per share, excluding charges, and $1.60 to $1.80 in earnings per share.

We now expect that we will achieve $2.67 to $2.70 in FFO per share and $2.65 to $2.85 in earnings per share.

The increase FFO guidance is driven by $0.02 of additional after-tax CDFS income.

This means that we expect fourth-quarter FFO to be between $0.53 and $0.56 per share, which is lower than our results in Q2 and Q3, given the accelerated timing of CDFS contributions this year.

We also expect to have a pipeline of over $3 billion moving into 2006.

For 2006, we have established a range of $2.90 to $3.02 in FFO per share and $1.50 to $1.70 in earnings per share.

We will provide additional detail on the assumptions to support this guidance early next year, but in general, we look for improved operating property performance, continued increases in fund income and continued increases in CDFS income, driven by the momentum in development starts driven by our customer synergies.

We also accomplished several important financing initiatives during the quarter, including a significant increase in the equity base of the Company through the issuance of more than 56 million shares of common stock in the Catellus merger.

Last week, we issued 900 million of senior unsecured debt, the proceeds of which will be used to repay a portion of our merger-related bridge financing.

Finally, we closed a 2.6 billion global line of credit that will allow us to provide more flexible financing in multiple currencies as our opportunities change over time.

We believe that this is the first such global line among real estate companies.

Thanks.

We're looking forward to providing you with additional detail regarding our operating performance and our key financial drivers on our next call.

Operator, we are ready to take questions.

Thank you.

(Operator Instructions).

Jonathan Litt, Citigroup.

This is Krupal Raval with Jon Litt and John Stewart.

With regards to your expectations for '06, I know you said you're going to give guidance -- specific guidance next year, but I just want to get a sense of your expectations for the amount that you're going to contribute, given the fact that you're saying that the development pipeline is slowing with this year -- with 1.8 you're expecting that you'll to be able to meet this year, but that your starts are expect to slow.

Walt, do you want to answer that?

Sure.

I think, well, first of all, let me just say that we will give you the details on the next call as to the contribution amounts, the expected margins and the beginning-of-the-year pipeline, end-of-the-year pipeline, etc.

And so I think it's a little bit premature to talk about that.

The only thing I would say is that moving into next year, as Dessa mentioned, we expect the pipeline to be in excess of $3 billion, and remember that moving into this year, the pipeline was in excess of $2 billion.

So, in essence, you have call it 7 to $800 million of additional, if you will, buildings that could be contributed moving into next year, which frankly puts us we think in a terrific position moving into the year.

Greg Whyte, Morgan Stanley.

I apologize if this detail is in your disclosure, but there was too many earnings today.

Can you give us a little more color on the $0.04 charge for the merger?

I know obviously you're backing that out to get to the $0.78, but I would just like to know what was included in the $0.04.

What's included in $0.04 is a couple of things.

The first is the severance agreement with John Siebel, and that is probably a little over $0.03 of that charge, and the rest is the regular integration charges that we've incurred in pulling the groups together.

Paul Morgan, FBR.

Could you just give a little color about where you see the mix in your development starts between inventory and build-to-suit?

You mentioned increasing inventory starts in the U.S., but right now, where is your comfort zone of inventory kind of in aggregate and then relative to your starts volume?

This is Jeff.

In Walt's new role as Chief Operating Officer, I'm going to let him answer that, but we're very excited about our global development operations.

You know, Paul, I'll give you a little historical color on this.

First of all, if you go back only a couple of years, of course, we were developing somewhere in the neighborhood of 70 to 80% of, if you will, pre-leased buildings or build-to-suit buildings, as you might call them, and maybe 20 to 25% of that was inventory throughout the world.

And of course, prior to that, if you will, in 1999 and 2000, you will see that those numbers completely were shifted the opposite, i.e., 75% inventory, 25% build-to-suit.

And frankly, we're heading more towards that time in kind of the mid to late '90s now where the markets are strengthening significantly, and we feel really more comfortable starting more inventory development, which we really have been talking about the last couple of calls, and you will increasingly see that occur because the markets are expanding overall.

And if you just look at a couple anecdotal points, this year, we'll absorb -- and this is just North America -- 122 million square feet of net absorption and about 80 million of starts through the third quarter.

So that 122 will probably be 150 to 160 million of demand and about that 80 million in starts, or completions, I should say, will be about 100 million square feet.

Last year, there was only 111 million of absorption.

The year before was 76 million.

The year before that was 13.

So basically, what you're seeing is absorption is really, really strong -- strengthening over the last three years, and that's frankly giving us comfort to begin inventory development, particularly given where the starts -- excuse me, the completions have been, far below where the absorption has been.

Paul, while we are very comfortable with our inventory starts, we're going to put an increased focus on more build-to-suit starts, which is one of the driving factors in our merger with Catellus.

Ted may want to say a couple of words about that, and his team, along with our existing ProLogis team and our teams in the UK, Europe, Japan and China, are really driving that process.

Paul, we have -- the Catellus team brought about 2.3 million square feet of build-to-suits with us when we came over to ProLogis.

And this quarter, actually, one of those build-to-suits was with Georgia-Pacific for a little over 900,000 feet in Pennsylvania.

I think our focus will continue to add value by chasing down build-to-suit development deals and moderating that mix of inventory buildings to spec (ph).

Ross Nussbaum, Banc of America Securities.

Question I have is understanding that your CDFS pipeline is going to be growing into next year, can you add a little more color as to why Q4 profits are going to be lower than Q3?

Is it just a matter of sort of a blip in timing?

I think the reason is that we will have less CDFS contributions in the fourth quarter than we have in the others.

It's also part of the timing is associated with how we've started in the past, our developments, and as they mature and as they are ready to go in, it's just not an even process, but we'll see the CDFS income come into earnings.

Paul, I think it's somewhat a function of the pipeline coming into the year, too.

So there is a certain amount of that pipeline that you expect to contribute through the year, which is driven by the amount of leasing that you expect to do.

I think our leasing has been on track.

It's not, frankly, greater than we thought.

We started the year at 255 to 265.

Now we're talking about 267 to 270.

So that's pretty significant outperformance, i.e., we've been leasing faster than we expected.

But there's only so much leasing that can be done in the pipeline.

So we feel good about the numbers this year, and frankly, we feel really good about the pipeline moving into next year and I think have great visibility in our CDFS for 2006 as a result.

Lou Taylor, Deutsche Bank.

I want to go back to guidance for a sec.

And I guess there's two parts of it.

A., why would you give '06 guidance without any detail?

And I guess two is, you guys describe a very robust and exciting business, yet none of it seems to be going to the bottom line.

I mean, if you take the third-quarter run rate, annualize it, you are at a 312 run rate.

The development pipeline is 50% bigger than it was nine months ago.

You bought Catellus; you got more assets under management.

Are you telling us that the $0.78 is as good as it's going to get?

No, Lou.

I think what we're telling you is that we feel like we need to give you some guidance at this stage in the game for next year, but I also think that you are correct in that it's early in the process.

Ideally, we'll have much more visibility in January/February when we give our fourth-quarter call into next year.

But we really felt the need to give you some visibility, so we're giving you a number that we feel very, very comfortable at this point in time with.

Lou, it's Jeff.

We feel very comfortable and we feel very excited about having double-digit FFO growth in '05 and '06.

David Harris, Lehman Brothers.

Jeff, in the general sense, do you see your CDFS margins as being a cyclical high, and if that's the case, could you give us an idea of what you believe a more normalized margin would be over the next two or three years on that development program?

David, it's a great question.

I do think they are unusually high this year.

I think we all believe that.

We've had a multitude of factors that contributed to that.

We've had clearly compression and cap rates around the world.

Cap rates continue to compress in Europe.

They've compressed significantly in Japan over the last couple of years, and as you know, compressed significantly in the US.

U.S. seems to have stabilized, while Europe continues to compress.

Additionally, this year we've seen lease-up much faster than we expected.

We perform a 12-month lease-up in all of our developments; yet ProLogis Park Yokohama was 100% leased before we started doing the protocol.

So that was contributing very quickly, and obviously, we saved lease-up costs.

We also have leased our buildings in contributions that happened this year at above pro forma rents in addition to being done faster than we had pro forma.

So they are higher than one would expect on a normal run rate.

And we still feel comfortable long-term, post-deferral margin of in the midteens, whether it's 14 to 16% -- we're very, very comfortable with that on a long-term basis.

Jim Sullivan, Green Street Advisors.

Can you help me understand the transaction related to Fund 12, where you bought out the interest -- the 80% interest of your partner?

What triggered that deal, how was pricing determined, and what might the implications be for your other funds as they advance in age?

Is the likely scenario that as these funds get towards their stated maturity, that the ultimate outcome will be purchasing your partner's 80% or whatever interest?

Jim, that's a great question.

Our long-term strategy is clearly not to acquire 100% interest in the fund.

However, this is an unusual scenario in that we had an opportunity to sell some Catellus assets at very attractive cap rates.

As you know, the Catellus assets that we sell need to be 1031 exchange given the SECOR (ph) taint from their reconversion two years ago.

We have an opportunity to sell assets at what we felt were very, very attractive pricing and by what we feel are very attractive assets, i.e., the 80% interest in that 1031 exchange in New Jersey infill assets.

Walt, do you want to add--?

I was just going to comment, Jim, you don't get the opportunity to buy infill assets in New Jersey like we did, and frankly, we were in discussions with our partner for awhile.

You know, this fund came about as a result of the Keystone merger, so we've been talking to our partner for some time.

And you know, really, the stars really aligned because of what Jeff said.

I mean, we had some office assets that we really wanted to sell, and nothing better than redeploying the capital into, if you will, infill assets in New Jersey, which we already had managed and we knew very, very well.

So that's just an opportunity, but I think the answer to your real question is long term, as Jeff said, it is really not our intention to buy back funds and hold them back on a wholly owned basis.

Chris Haley, Wachovia Securities.

Could you -- Ted, you mentioned that the Dallas, San Jose, the Gap building, Santa Fe building -- I think you mentioned $321 million.

Is that for all four, or just the latter two, and then could you give a sense -- the return on -- the cash return versus what you are reinvesting at?

The four buildings in total were $321 million.

The Gap building was by far the most significant.

It is under contract at $162 million, which is -- when you include the tenant improvements, a little over $600 a foot.

The cap rate on the Gap building was around 6.75%.

The other buildings were tough to decipher.

They had a significant vacancy and/or rollover.

So it really depended on your leasing assumptions.

But I think the way we look at it, we exchanged into the New Jersey assets inside of about a 100-basis-point spread.

So it was a little bit dilutive, but when you add in risk associated with the office, the amount of capital that needs to be put into office, we feel really good about that trade.

Michael Mueller, J.P. Morgan.

I was wondering if you could talk about promotes that may arise from the various funds and if any are in your '05 or '06 guidance?

I will start.

But just one thing that Ted did not mention is that we did receive a promote or an incentive fee on the purchase of our North American Fund number 12.

However, since we purchased it ourselves, they wanted to reduce our basis as opposed to being recognized in earnings, and that was not an insignificant promote, and it does reduce our basis.

It increases yield from the yield that -- the effective yield on what we have on our books above what Ted stated.

And Mike, I would say overall, we have really not guided on how much we have got out there, but there's no question that many of our funds are in the money on the promote, and of course, that's a moving target because the actual expiration of these funds can go out three, four, five years.

So yes, we think that there is some imbedded value in there, but back to Jeff's point, on this particular deal we did not recognize any of that promote in our earnings this quarter, nor will we recognize that likely because we'll hold onto those assets on a long-term basis.

And as for '06, at this point in time, we plan to give more specifics in the guidance in January.

At this point in time, I think it would be premature to say.

Jay Leupp, RBC Capital Markets.

Jay Leupp here with Brad Johnson.

Jeff, in terms of the discussion you were giving on cap rate compression in Europe and also in Japan, can you give us some idea of what range of cap rates you are realizing on new development and acquisitions in those markets and how they compare to what you're looking at in the U.S.?

And then also, could you also give us a little bit of color on what '06 dispositions in the U.S. may look like and the cap rate expectations there?

Jay, I'm very comfortable going through the cap rate around the world.

However, on guidance for '06, we will get detail to everyone later on that.

But if you go around the world, this is a -- I'll try to do this as quickly as I possibly can, given the magnitude of the question -- although it's a great question.

If you look at the UK, you're now seeing cap rates in the 5.5 to 7% range -- 7% being more outlying areas, not the best of credit, not the best of lease covenants, but real good infill, London or Southeast-type assets with 15-year leases -- 15-year-plus leases and great covenants are at 5.5% to 5.6 and sometimes lower than that, if you trade down to a 5.25 or 5% range.

On the continent, you're seeing cap rates compress significantly in southern Europe.

We're seeing things well below 7% in Italy and in Spain, where supply is significantly constrained.

It's difficult to get good development sites there.

We're 100% leased in our Italian market, with 4.5 million square feet there.

In France, we're seeing cap rates in the 8 to 8.75% range.

We see them -- we see cap rates in France continuing to compress.

They are high by global standards, and we're seeing some continued compression there.

In northern Europe, it's again the 7.25 to 8% range.

Most good assets, again, 7 to 7.5% in northern Europe, and northern Europe would include Germany, it would include the Benelux and Scandinavia, in that region.

Central Europe, you've seen significant cap rate compression in the last few years.

Just two or three years ago, you would have seen 11.5% or so investment yields.

They are now below 9.5%, but that's to be expected, given the decrease in risk with their admission to the EU and the economic growth you see there.

In Japan, we're seeing cap rates now in the 5 to 6% range, and that's down from 6 to 7.5% just three years ago, but still tremendous positive arbitrage given where interest rates are in Japan.

And in China, we're seeing investment yields -- although we're not selling anything, but we're creating tremendous value for our shareholders because cap rates -- sales cap rates there or investment yields are in the 7 to 8.5% range, given the tremendous growth and the expectation of significant rental growth in the future.

You compare that to the U.S. -- well, I'll let Ted comment on cap rates in the U.S., but we're seeing a significant opportunity for cap rates in Europe to compress further.

In the U.S., in the major markets, cap rates are now getting down to -- in Southern California, right around 5%, 5.25%.

I think the same would apply to northern New Jersey and Chicago -- are seeing very low cap rates, definitely sub 6.

And pretty much throughout the balance in Atlanta in the low 6s, Dallas low 6s.

For the rest of the U.S., probably in the 7% range outside of the major markets.

So we've seen cap rates come down a lot over the last 12 to 18 months.

Carey Callaghan, Goldman Sachs.

It's Deron Kennedy with Carey Callaghan.

Forgive me if you've spoken about this, but in '06 guidance, I know you didn't include anything from merger and integration expenses.

However, I imagine -- well, I know that our posted results will include those.

Do you have any sense for what they will be?

What we have said is that we expect to have $0.02 to $0.04 more of merger-related expenses over the end of this year and into next year.

We expect that most of that will be closer to the beginning of that period, and so probably in '06, there will be a small amount of that $0.02 to $0.04.

David Harris, Lehman Brothers.

Jeff, I think this one's for you.

Could you give us an update of where you think we stand with regard to the proposed legislation for introduction of REIT-like structures in the UK and Germany, and how much you have an opportunity did you see that as being?

David, it's a good question.

What I've heard recently, and it's very timely, in the last two weeks, I've talked to people in the UK, and in fact I was in the UK just last week, and there's a sense there that the introduction of REIT-like structures is imminent, that it will happen in '06.

Similarly, we're hearing from Germany that with Merkel now, the chancellor, the likelihood of the impasse being broken and having some sort of transparent vehicle introduced is also very significant.

Our understanding is the UK structure would be far more flexible than originally proposed 12 to 18 months ago and will have more widespread utilization.

What that means for us with the largest platform by far of distribution properties in Europe -- we're five to 10 times the size of our closest competitor -- it's all good news.

It gives us additional opportunities to create liquidity for our fund investors, to create new funds, and it's nothing but good news, whether we capture that value in 12 months or in five years or 10 years.

It helps the market and will further give the opportunity to decrease cap rates and increase liquidity in the market.

Chris Haley, Wachovia Securities.

My apologies for asking -- I know I might not get a chance to talk you guys today -- maybe out in Chicago but, can you talk about this reserve recovery -- 4.25 million, 4.3 million?

I'm trying to understand this.

This was a receivable that was written off I think a year ago?

Two years ago.

And we recovered it in this quarter.

It was $4.3 million.

Chris, it's a reserve -- recovery reserve in a customer in a CDFS building that was written off about two years ago that we frankly never thought we would recover, and the customer's covenant strengthened and we recovered it, and so that's why it was basically added in.

And when it was written off, it was written off against -- in the same line item.

And that was why it was shown in the development and other income.

David Fick, Legg Mason.

Can you comment on the competitive environment you're seeing in terms of -- in fact, Jeff, just a minute ago you mentioned that you have become dominant in just a period of five or six years in your major European markets.

What kind of competition are you seeing emerge there, and what is the tenant base telling you about their commitment to the ProLogis platform versus competitors, both in Europe and in Japan?

David, I don't think we're dominant anywhere in the world today.

We're only as good as the last time we served a customer, and everyone in our team around the world understands that and understands that we have to execute and operate exceptionally well for customers every time we work with them.

There's no -- the second you start to think in terms of having any sort of dominance, that's the time that you lose a market-leading position.

But we're comfortable having a market-leading position in all these markets and with our customers.

What we're seeing from a competition standpoint, there's always good local competition.

We're seeing good local competition across Europe.

We're seeing good local competition in Japan, as one would expect it in what we've put together there.

There's some good Japanese national developers, major corporations that have real estate subsidiaries that are getting into the development business.

But the important thing is the examples like Walt went through with customers where we're serving them in three, four, five locations around the world, an opportunity to serve them, to be a single-source provider to them on three continents, and that's something no one else can do.

And we're seeing more and more customers really see the value in that and embrace that as a strategy and a business -- way of doing business that can help them in a significant fashion.

An interesting kind of commentary from Catellus' perspective -- this is Ted talking.

We obviously competed with ProLogis for quite some time prior to the merger, and more recently really found it more and more difficult to compete with the global platform, and that was one of the reasons for the merger.

We felt that that would add a lot of value to our customer base and increase our opportunities to grow the business, and I think that's something that in the brief time that I've been at ProLogis, I'm already seeing a lot of opportunities that come from being throughout the world.

Jonathan Litt, Citigroup.

This is Krupal Raval again.

I have a question following up on the $4.3 million recovery.

Do you back that out of your run rate, or if you back that out of the 9.3 for the total for the quarter, you get to 5 million versus 3 million for a quarter ago and 3 million for the entire year last year.

I'm just trying to get a sense of what you think a reasonable run rate for that is.

You know, is it a 5 million a year or a 5 million a quarter event, so meaning '06 could be 20 million, or is '05 just an anomaly of the year?

Let me just comment on that because I think you raised a real good question.

The run rate will be going up next year relative to this past year.

And there are a couple of things really kicking in.

One is going to be and has actually kicked in this quarter is that we're doing the development that you saw a press release on in Dartford outside the UK -- outside of London, excuse me, East London -- that will have a management fee component associated with it.

Next year, in addition to that, you're going to see some management fees from Catellus projects that will kick in in Austin and some other places, where they're doing some mixed-use-type development -- or I should say the Catellus operations will be predominantly doing that.

And so you are going to see that number go up.

But having said that, we will guide as to what that number will be, again, on our fourth-quarter call.

You should not be surprised to see that number rising, though, next year.

Jim Sullivan, Green Street Advisors.

Was the reserves included in FFO, and if so, why would you include that in FFO but exclude stuff like severance payments to former employees?

Yes, we discussed that, and the fact that we had to write this off against FFO when we wrote it off, the appropriate place to put it was in back into FFO, and we felt in disclosing it appropriately, you could look at it how you wanted to.

Yes, Jim, it was taken against FFO.

(Operator Instructions).

And it appears we have no further questions at this time.

I would like to turn the call over to Jeff Schwartz for any additional or closing remarks.

Yes.

Thanks, operator.

And thank you to everyone who joined us today.

We know everyone is exceptionally busy today.

There's a number of companies announcing their earnings, and a lot of people are going to be traveling to Chicago later in the day.

We look forward to seeing a lot of you in Maybury (ph) and spending time with you there, and again, thank you for spending time with us today.

Thank you for participating in today's ProLogis third-quarter 2005 financial results conference call.

This conference will be available for replay beginning today at 1 PM Eastern Standard Time through 11:59 PM Eastern Standard Time on November 15, 2005.

To access this replay, you may dial 1-888-203-1112 or area code 719-457-0820.

The replay passcode is 4385773. (Operator Instructions).

Thank you, and you may disconnect.