Prologis Inc (PLD) 2005 Q4 法說會逐字稿

Good morning.

I will be your conference facilitator today.

I would like to welcome everyone to the ProLogis fourth quarter 2005 financial results conference call. [OPERATOR INSTRUCTIONS] At this time I would like to turn the conference over to Ms. Melissa Marsden, Senior Vice President of Investor Relations and Corporate Communications with ProLogis.

Please go ahead, ma'am.

Thank you.

Good morning everyone and welcome to our fourth quarter and year end 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 on our Website at prologis.com under Investor Relations.

This morning we will first 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 Dessa Bokides will cover financial performance and guidance.

Before we get underway, I would like to quickly statement 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 those facts please refer to the forward-looking statement notice in our 10(K).

I would also like to add, that our fourth quarter results press release and supplement do contain financial measures such as FFO and EBITDA that are non-GAAP.

And in accordance with Reg G we have provided a reconciliation to those measures.

As we've done in the past to give a broader of investors and analysts an 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 and good morning everyone.

By any measure, 2006 was a phenomenal year for ProLogis.

We exceeded the top end of our guidance posting 11.5% growth in FFO per share.

We also made significant progress toward our long-term objectives.

At our investor day, roughly one year ago, we had outlined a five-year plan to reach $30 billion in assets under management.

With a total of 500 million square feet and annual development starts of $2 billion per year by the end of 2009.

Some thought it was a bit aggressive.

However, in year one we made significant strides towards those goals and now are at over 75% of the first two objectives, while already exceeding the third.

We are pleased with the execution by our global team.

Obviously, our merger with Catellus was the most significant event of 2005.

Five months after the merger, we are excited by the way that the two organizations have come together.

We are already realizing the benefits of combining the two strongest development organizations and deepest land banks in North America through expanded customer relationships and leasing activities.

During the year, we also accomplished a great deal on the private capital side raising a second $3 billion Japan fund.

And forming our new $4 billion open end North American industrial fund, which we just announced on Tuesday.

Walt and Dessa will have more on this in a few moments.

To quickly summarize global market conditions, we are seeing continued strong customer demand, increased occupancies and record leasing activity in all three continents.

There are pockets where speculative development starts have picked up but thus farm leasing activity has outpaced new construction deliveries, resulting in continued positive net absorption.

We continue to watch absorption and key business indicators such as GDP growth, sales to inventory ratios and manufacturing indices very closely so we can react quickly if conditions change.

But at the present time our key business drivers are, almost without exception, trending very positively.

In our portfolio we achieved significant improvement in our same store measures, with the highest occupancies we have seen in over four years, increases in net operating income and in the second half of the year positive rent growth.

We had an excellent year from the development standpoint as well.

With more than $2 billion of starts across the globe, with completed developments in the last 12 months roughly 2/3 leased.

The need for greater distribution network efficiency and the growing shift to third-party logistic providers continue to be the primary business drivers across the globe.

In many markets, particularly outside the U.S., there is a true shortage of the modern facilities needed to support customer initiatives in these areas.

Local response to our state-of-the-art developments has been terrific.

For example, we recently were awarded the 2005 Metallic Structure Golden Steel Cup for our development at ProLogis Shanghai Northwest Logistics Park.

We are very proud of our development teams around the globe.

This award in China, like those earlier this year in France, the U.K. and North America, underscores the talent resident in all our development organizations around the world.

One of the things you will be hearing about from us more frequently is sustainability.

In fact, sustainable development is quickly becoming a business imperative to us.

Customers and municipalities alike are beginning to understand the importance of this initiative.

We are fortunate to have developed worldclass expertise at ProLogis.

With years of experience working with environmental technology and design all over the world, allowing us to be the thought leader in the area of sustainability.

Due to this market leading expertise, last week when I was in the U.K., we were able to announce that a government agency selected to us develop what will be the state-of-the-art in sustainable distribution development.

Our new 610,000 square foot Sideway project in the Midlands.

We were selected from 11 competing developers for this project, which will include roof mounted solar panels, heat absorbent solar walls, and high efficiency lighting, among other features that will make this a model of sustainable development for the entire industry.

This project combines the best of breed solutions from ProLogis projects in France, Japan, the U.S. and the rest of the world.

We retained a third-party engineering and consulting firm to help monitor and analyze the various sustainability features.

By measuring the performance of these features, we will further develop our ability to create the greatest value proposition for its shareholders and customers.

However, our interpretation of the word stainability encompasses more than just development.

It includes our ability to sustain profitable growth, the sustainability of our customer relationships, organization and that of our communities.

We believe that by focusing on the sustainability of our projects mentoring and developing our people and nurturing our strong customer relationships; we will be better able to leverage these strengths and capture opportunities as we move into 2006 and beyond.

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

Thank you, Jeff.

Overall, we are encouraged by conditions across our global markets.

For the full year, we leased roughly 95 million square feet, a significant increase over last year's 66 million square feet.

In addition, occupancies in our stabilized portfolio are above market averages in virtually every market in which we operate.

Looking first at our international operations.

Completed developments in Asia during the last 12 months were 92% leased at year end.

Our projects in China and Japan continue to be fully leased by, or shortly following, their completion.

For example, about 1/2 of ProLogis Park Amagasaki, just outside of Osaka, and roughly 0.5 of Prologis Park Koshigaya, just north of central Tokyo; are leased.

With completion of these two major multi-customer facilities not scheduled until the second half of 2006.

And in China, during the quarter, we leased over 1 million square feet to companies such as UPS, [NOMI] Logistics, Adidas, ABS, and Nokia.

Ted have more on development activities there in a moment.

Turning to Europe.

Leasing activity is strong, with our developments completed in the last 12 months approximately 71% leased.

In fact we have only two development buildings in all of Europe that are available for lease after having been completed for more than one year.

In the U.K. we had a record year with an approximate 25% market share of the total leasing countrywide.

In the Netherlands and Belgium, incremental demand remained soft but we're over 95% leased.

We are especially excited about our progress in Germany.

Where in 2005 we had a record year with over 1.7 million square feet of new spaces leased.

Including two build to suits for JeffCo.

A relationship that started in France and now has grown to eight leases throughout Europe.

In central Europe, demand remains strong with record absorption during 2005 in the Czech Republic and Poland and continuing cap rate compression.

We had a very strong year in Poland, with an approximate 38% market share of the total leasing transactions completed in the country during 2005.

In addition, we just completed three buildings at ProLogis Park Poznan in December, two of which are already fully leased.

In southern Europe, we are seeing market demand improving gradually in France.

While rapidly compressing cap rates are pushing market rents lower.

However, our portfolio there continues to be well occupied with over 700,000 square feet of new development leases signed just in the last two weeks.

Italy and Spain also are improving with strong leasing in our existing stock, leading to new projects such as the expanding of our largest park in Italy just outside of Milan.

Now looking at North America.

Markets continue to show steady improvement.

In the top 30 U.S. markets, overall occupancy increased by an average of 29 basis points over the third quarter to 91.7%.

For the year, we estimate that new deliveries of space in the top 30 markets totaled roughly 106 million square feet or about 2% of the existing competitive base.

Still well below annual increases in the base of about 3.5% during the late 90's.

New construction was in response to increasing demands as net absorption was up 47% over 2004 levels to 166 million square feet.

Now given the market strength, the mix remains at about 75% inventory and 25% build to suit.

Our development mix also is skewed towards inventory.

Although our fourth quarter starts in North America were 44% preleased and properties completed in the last 12 months were 47% leased at year end end.

In total, we leased a record 75 million square feet in North America in 2005, up almost 50% over leasing in 2004.

Occupancies in our North American stabilized properties continued their strong upward climb, increasing another 110 basis points over the third quarter and were up almost 300 basis points for the full year.

And let me just share a few notable statistics around the country.

In Dallas, occupancies rose 210 basis points for the year -- for the market, with positive net absorption of 8.6 million square feet.

Atlanta's vacancy at 11% is now at its lowest level in four years and net absorption for the year was an impressive 16.5 million square feet.

In Chicago, while occupancies have moved sideways due to deliveries, net absorption was strong at over 15 million square feet for the year.

And most impressive was L.A. where market occupancies are over 96% and net absorption was about 30 million square feet for the second year in a row.

As for ProLogis, new inventory development is driven by our customer relationship and understanding their space needs.

In 2005 about 50% of our developed space was leased to repeat customers.

Examples of transactions with these customers include six leases we signed during the year with Home Depot, our third largest customers, totaling more than 2 million square feet.

We now have 15 leases with Home Depot around the country.

Another example is Hitachi.

For which we leased more than 1.2 million square feet in five facilities in Japan with another 0.5 million square foot facility underway near Osaka and another facility in Mexico.

As we continue to expand our market share and capture opportunities, it's critical, very, very critical to have the capital in place to support our growth.

As Jeff mentioned earlier, we announced the formation of our $4 billion North American industrial fund earlier this week, our largest fund ever.

The fund has been seeded with $763 million of assets we acquired from North American funds II, III and IV.

And we'll have the potential to earn an incentive fee every three years based on cash distributions to the limited partner and growth in NAV, which will be revalued annually by independent appraisal.

And we believe this is an important milestone in the evolution of ProLogis' fund business.

As we contributed to third party interests we acquired from the [Arcapata] funds in January into this new open end fund; we were able recognize gains from our management of the expiring funds as well as incentive returns.

Moving forward, we believe this perpetual, more liquid structure will be a win/win for us and our investors.

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

Thanks, Walt.

The continued strong fundamentals, Walt just covered, supported total annual starts of just over $2.1 billion for the years, including those in our CDFS joint ventures.

In every area of the globe we met or exceeded our revised targets for development.

Just as important, we made significant headway in 2005 in acquiring land to replenish our land bank as we moved projects into development.

You'll note, that the total acres owned and controlled increased to nearly 9,900 up from 4,900 a year ago.

Starting in North America.

Strong leasing and market fundamentals in Mexico supported the recent purchase of a great site in Monterrey to support the development of nearly 3.2 million square feet there.

During the quarter we also started an additional 160,000 square foot facility in are underway with two additional inventory facilities at ProLogis Park [Farbridge] in Reynosa, for a total of roughly 370,000 square feet.

In Europe, we started two new build to suit facilities, totaling 380,000 square feet for Decathlon in Belgium.

Belgium is quickly gaining ground as a desirable location for European logistics operations.

We also began development of two new facilities in Poland.

One, 800,000 square foot project in [Gdansk] and another 190,000 square foot facility in southern Poland.

In the U.K. we began construction on three new inventory facilities in the Midlands, totaling 262,000 square feet.

We also acquired a 35-acre site in the north Midlands and were successful in winning the tender of 64 acres at Sideway, which Jeff mentioned earlier.

In Asia, we just announced the first development project in South Korea Korea, ProLogis Park Yongin.

A logistics and manufacturing hub located about 60 kilometers outside of Seoul.

Development of this first 400,000 square foot two-story facility will begin this quarter.

Also during the quarter we broke ground on ProLogis Park Amagasaki.

A 1.4 million square foot inventory facility outside of Osaka.

As well as two build to suit facilities for Hitachi in Japan, that Walt mentioned earlier.

In China, we began two new facilities at ProLogis Northwest Logistics Park outside Shanghai.

And two new facilities, totaling 350,000 square feet in Beijing.

Turning to disposition activity, we completed the sale of our portfolios in Oklahoma City and Tulsa, as well as the GAP office building in San Francisco.

The Railway Exchange Building in Chicago is expected to close this quarter.

So far, we've closed on $326 million of nonstrategic asset sales, with another 90 million under contract.

We currently have an additional $260 million of properties on the market.

As you can see, we have made significant progress towards achieving our total disposition goal of $750 million.

Finally, we have completed construction on the office buildings at the L.A.

Air Force Base and expect to complete the land exchange with the Air Force within the next 90 days.

We have the land under contract with the residential developer and expect to close the transaction in the second or third quarter.

At the Austin Mueller Airport, we have made substantial progress on the retail portion of the project, with plans almost complete and significant deal activity with prospective users.

In addition, we are experiencing strong demand for residential lots and plan on bringing those to market later this year.

We continue to pursue similar opportunities, which we hope to be in a position to discuss in the very near future.

And now I will turn it over to Dessa.

Thanks, Ted.

As noted earlier, for the year, we are in line with or exceeding virtually every business driver we laid out last year.

Our overall FFO per share was $2.71, $0.01 above the top end of our end of year guidance of $2.67 to $2.70 per share, an 11.5% increase.

For the fourth quarter we achieved FFO per share of $0.58, up 3.6% from $0.56 in the same quarter of 2004.

Our quarterly performance was above performance in $0.53 to $0.56 per share.

I should note, that given our large issuance of shares in connection with the Catellus merger, the cumulative quarterly per share FFO numbers are higher than the total FFO for the year of $2.71.

Development starts and CDFS dispositions also were also in line with the revised guidance we laid out last quarter at $2.1 billion and $1.3 billion respectively.

With total CDFS dispositions slightly, were took slightly lower than 2004 levels.

Higher margins, led by strong development returns in Japan, resulted in total post deferral, post tax CDFS gains of 227 million or about a 22.4% post deferral margin, compared with approximately 200 million net of tax in 2004.

Our share of FFO from property funds was right in line with our guidance at $96 million.

While fund fees of 67 million were in the middle of our range.

From an expense standpoint, interest and preferred dividend were in line with expectations of 204 million.

And G&A levels at 107 million were consistent with our upwardly revised guidance following the Catellus merger.

Turning first to our operations.

We achieved same store NOI growth of 1.46% on a GAAP basis for the year.

In line with the 1% to 2% noted on our last call.

Rent growth on turnovers of negative 1.5% was better than our expectation of negative 3% to negative 5%.

Customer retention of 73% and improvement in stabilized occupancies of 223 basis points were ahead of our guidance.

Turning to this year.

We increased the top end of our guidance in December to 2 -- to $3.10 from $3.02 but we left the bottom end of the range at $2.90 per share.

This was due to the fact that we had better visibility on market conditions and the income recognition potential for certain strategic initiatives.

As we enter the year, we have seen continued improvement in the market conditions and our ability to unlock value from those strategic initiatives.

We are now increasing our FFO guidance to $2.95 to $3.15 per share for the year.

Now, for the our major drivers in 2006.

I'm sure most of you saw the information that was released Tuesday.

I'm just going to touch on a few of the highlights and we will be happy to answer your questions later.

We continue to be positive about our ability to achieve same store NOI growth at a 1 to 2 percentage pace.

With cap rate compression occurring across the globe, lease rates are still moving lower in many markets as we turn longer term leases.

That said, we expect a continued improvement in overall occupancies will offset some of the pressure on rents.

As mentioned earlier, overall occupancy in our stabilized portfolio increased from 92.3% to 94.5% in 2005.

Even with same store rental increases, our rental income for 2006 will not be as high as the fourth quarter post merger run rate would imply.

This is due to the fact that over the last year we have continued to grow our development pipeline, resulting in more completed development on our balance sheet that is substantially lease than there has been in prior years.

As we complete leasing and contribute those assets to funds and as we complete the disposition of 4 to 500 million of assets from our direct owned portfolio, including those that were initially planned for the fourth quarter, we are changing 100% owned properties for 20% owned properties that have a higher return on asset characteristics.

Development starts for 2006 are expected to be about 10% higher than this year's levels.

While CDFS contributions and dispositions are expected to be between 2.2 and 2.4 billion.

At average mid-teens margins, we would expect post deferral, post tax CDFS income to increase to $285 to $315 million.

Our share of income from our property funds is expected to be between $135 and $145 million.

And finally, our fund management fees are expected to be between 95 and 100 million.

We have added an other revenue item to our business drivers release, which we expect to be $60 to $85 million in 2006.

This includes revenue primarily related to fees and returns from our development joint ventures, infrastructure development fees and the interests from the Catellus fossil note.

As we said before we have a lot of opportunity in mixed use and redevelopment projects that has greater income generating potential.

These are long-term projects that will drive earnings in future years but for which forecasting the timing of particular projects is difficult.

On the expense side, G&A is expected to be up 10% to 20% over 2005, largely due to the Catellus merger and our expansion into new markets.

As for interest expense, we expect to continue and to maintain our leverage at about 50%.

With an average interest rate on our direct debt of approximately 5%.

While the recognition of our new North American fund gains will be in the first quarter, we also anticipate the development dispositions will be weighted to the second half of the year.

This will result in approximately $0.10 per share more of FFO to be recognized in the first half of the year versus the second.

Let me provide a little more detail on the gains that we are recognizing in connection with the purchase of the North American funds II, III and IV and the subsequent contribution of those assets into a new fund.

In the first quarter we expect to recognize approximately 67 million of deferred gains, incentive fees and property fund gains.

The $67 million consists of three pieces.

First we will recognize a $14 million release of our deferred gains on the original contribution of the assets to the fund.

This will be recognized in CDFS income.

Second, we earned a $22 million promoted interest on the funds that will be recognized in fund fees and incentives.

The third piece is a $31 million gain due to the increased value of our ownership in the fund properties that will be recognized in fund returns.

The $67 million is net of an additional $15 million a gain then has been deferred, making the entire transaction worth $82 million to our shareholders.

The restructuring of these portfolios is an excellent example of how we can manage assets in a fund that is set to expire or where investors object to change and contribute those assets into a new or existing fund.

Thereby both creating and unlocking value while perpetuating the fee income the we will recognize on those assets in the future.

To wrap up, we had a very successful year in terms of financing.

Including, increasing our equity base with the issuance of 56 million shares in the merger, completing a 900 million bond offering, forming a $2.6 billion global line of credit.

In addition, we raised two private equity funds.

One in Japan that has $3 billion in capacity and one in North America that has $4 billion of capacity.

In all, we improved our financial flexibility and strengthened our financial position.

Achieved improved coverage ratios with conservative leverage on both the debt to total book and debt to total market cap basis.

Thank you.

And we are looking forward to providing you with additional detail regard regarding our performance and opportunities on our next call.

Operator, we are ready to take questions.

Thank you. [OPERATOR INSTRUCTIONS]

Jon Litt with Citigroup.

It's John Stewart here with Jon Litt.

Jeff, I believe you alluded in your comments to pockets of new supply.

Can you give us a sense for which markets you are seeing those pockets of new supply?

And then can you speak to the same store guidance?

Given the bullishness of your comments, the less than 1% growth in the fourth quarter and 1% to 2% forecast for '06 kind of seems a little bit less than exciting?

Well, John, we are very comfortable with the guidance we put out as we stated before.

But I will let Ted talk about where the pockets of new development are and Walt can comment on same store sales growth and why we feel like those are good numbers at this point in the year.

The -- probably the most notable pocket of growth is the Chicago market.

There has been a lot of development in that market.

We've seen strong fundamental absorption throughout the majority of the country and because of that occupancy levels have risen.

Walt commented on Chicago being one of the markets that things have stayed relatively flat in terms of occupancy levels but even with strong absorption.

And I would use that as probably an example of one of the pockets out there.

But overall, there's very few of them and net absorption is up in just about every market and so are occupancy levels.

And John, and I will also comment on absorption, too, to add to what Ted said.

When you really think about it in the U.S. we are looking at $106 million in construction deliveries and 166 million of net absorption.

So, when you really think about it, we are still in great shape.

106 million feet, you said dollars.

Dollars, excuse me, I meant square feet.

We are still in great shape.

We net absorbed about 60 million square feet for the year throughout the country in the top 30 markets, so that's pretty impressive.

And we expect, by the way, that to continue in 2006.

Perhaps closing the gap a little bit but nonetheless still in positive territory.

On the same store numbers, we feel comfortable at this point with 1% to 2%.

Could it be higher this year?

Perhaps.

I think the real wildcard is what will happen with rental growth.

Clearly we see occupancy levels this year will, by definition, simply be higher than last because we are moving into this year at about 94.5% leased and we moved into last year at 91%, 92% lease.

So we will have 100 to 200 basis points of occupancy.

The real wildcard is; will we continue to have some rent roll downs?

And that's kind of been driven somewhat by cap rate compression.

We have seen rental decreases still.

I think for the most part, the mark-to-market in the portfolio is lessening significantly but we will see.

It's January and so we are putting out numbers right now that we are very, very comfortable with.

We'll go now to Lou Taylor with Deutsche Bank.

Thanks.

Walter, Dessa, can you talk a little bit about the $31 million gain from the sale in the funds?

It looks like a regular just gain on sale to me.

And can you just walk us through your logic that led you to include it in FFO?

Sure.

We view this particular gain as an investment gain.

And we look at it as we're sharing equally with our partners in both the losses and gains in the portfolio as a fiduciary.

And this is no different than we think a Black Rock or a Fidelity or another fund manager would look at it.

The gains we are recognizing are our proportionate share of the increased value in the assets.

And we are recognizing those because we are contributing them in to a new fund.

And we think this is part of our overall investment management business and a value we are adding to investors because we are in the investment management business.

Well, as you know and we talked about a long time ago, we made a concert concerted effort starting in 1999 to be stronger in the investment management business.

We think we have a leading position in that today.

This is consistent with that strategy.

As of the end of the year we had over $10 billion in assets under management within that investment management business.

And it's an area we will continue to grow and we hope to be very, very lucrative to our shareholders long-term.

We'll go now to Paul Morgan with FBR.

Can you provide a little more color on Asia, particularly what's going on in China and then with your South Korea initiative?

Sure.

This is Jeff and I will let -- Walt cand add any color that he sees fit to it when I get finished.

Because when you are talking about -- and you just mentioned a population of about 1.4 billion people, so I know I can't do it justice in less than 60 seconds.

But I will do my best.

China we've been very, very successful.

As Walt mentioned, we leased over 1 million square feet in the last quarter.

In fact, I was just on the phone this morning with Ming Mei, who runs our China operations, President of our China business, And Ming let me know that one of two things, first, tremendous activity there.

Everything we are building is leasing up very, very rapidly and we are continuing to expand the business, hiring people rapidly.

We now have over 80 people on the ground in China.

As you know, we have offices in Beijing, Tianjin, Shanghai, Suzhou, [Liangang] Guangzhou and Hangzhou, And expanding in all those markets have significant projects and really capturing key infrastructure nodes in all those areas.

Our strategy where we captured exclusive development rights at the Port of Liangang, which will be the largest port in the world.

We're, very consistent with what we are doing doing.

The most interesting story I heard this morning was, Dan Meador, who's our market officer in Indianapolis, sent an e-mail to Pat Boot, who is one of our -- who is the only non-Chinese national we have out of those 80 people, telling him that one of our customers in Indianapolis needed space in China.

It was only 50,000 square feet but it really shows the power of having a national system.

We talk about the UPS.

This is a local Indianapolis based company that was expanding to China.

They leased the last remaining space in ProLogis Park Northwest Shanghai.

The 500,000 square feet we started earlier this year, is now 100% leased.

And it's a local company out of Indianapolis that our local market officer in Indy sent an e-mail to China and now we are 100% leased.

South Korea, we see being a good market.

We think that we can have development starts, as we mentioned at our investor meeting year ago, $100 to $200 million a year.

It's a solid market.

Is it going to be the size of Japan?

No.

Is it going to be the size of China?

No.

But is it a good incremental market?

It is very conveniently located, there are a lot of south Korean companies doing business in China.

It's a big part of the manufacturing base in China.

You have the Samsung's etc. doing -- the LG's with the significant presence in China.

So, it makes sense, it synergistic and we think it will be a good incremental business and accretive long-term.

And Paul, the only thing I would add to what Jeff said; is we've consistently said that if you look at China two years ago we did $50 million in development starts.

This year we did well over $100 million in development starts.

And we really see no reason to believe that China can't be at the same place as North America is with $500 million plus in development starts, once we really begin to spread our wings there, which we are doing today.

Incrementally, it takes time to build the organization to do that but the opportunity clearly is there.

So, when you look at China plus South Korea together and you are looking at two countries that can produce $7, $800 million in development starts, which is in excess or about where North America is, that's pretty exciting.

Walt and I are both very focused on this.

As a matter of fact, starting next week we will both be between China, Japan and South Korea for 1.5 week.

We'll go now to Greg Whyte with Morgan Stanley.

Good morning, guys.

Dessa, you referenced I think the development, management and other income line item.

Can you give us a breakdown -- the 19 or nearly 20 million that you had this quarter was a significant component of the full year number.

Could you give us a break down of where that came from?

A lot of that came from some of the Catellus joint ventures that we had and we got as part of the merger and Ted can speak to those.

And going into next year that line item will also be the development joint ventures primarily to Catellus assets and development business that we picked up, which as I mentioned, the fossil note.

And Ted, you may want to address some of the other ones, the L.A.

Air Force base and some of those will be in that.

And we have L.A.

Air Force base, as Dessa mentioned, the entire fossil transaction.

The [Sarano] and Parkway is a joint venture that we've got.

I don't think Austin -- Hercules, which is a residual deal that we did quite a few years ago, that is still generating revenue.

These are all -- we've split this out because we are looking at the scenario where we really are going to see income coming in on some of the development business that we are doing that is -- much of it is less asset intensive than some of the other business on an ongoing basis.

It's very high return on equity business and we thought it was -- it would be significant enough that it was worthwhile to split it out and give greater visibility.

We'll go now to Ross Nussbaum with Bank of America Securities.

Good morning, it's Ross Nussbaum here with John Kim.

A question on the CDFS margins, can you break them out between North America, Europe and Asia for the year and the quarter?

And then Dessa, help me understand where on the income statement -- is there a way for to us actually calculate these margins ourselves based on the new breakout you put on your income statement?

I don't think we have historically broken them out by the different regions as to our different margins by region.

I think that you can see the dispositions that we've done by region and that's on page, I think it's 17 in our supplemental.

And so you can see the actual dispositions by region.

But as far as breaking out individual margins by region; what I will tell as you Japan did contribute to the margins.

And we had strong margins in Japan, due to compression and due to some excellent management and excellent acquisitions by our Japan team.

Ross, we don't break that out on on annual basis, quarterly basis.

But what we can tell you is that, one, our portfolio of Japan that is stabilized is now 100% leased, which is an incredible feat by the management team there.

Everything they have built they leased up ahead of pro forma at rental rates that exceeded pro forma.

And quite frankly, it's just been exceptional feet on their part.

And you combine that with cap rate compression and margins were very, very good in Japan this year.

We'll go now question to David Harris with Lehman Brothers.

Good morning, a little bit more on margins if I may many I think Dessa, you referred to cap rate compression still occurring agreeably.

I'm trying to reconcile that with what seems to be fairly modest assumptions as to your margin on your CDFS business in '06?

And moreover, I just wondered if you could give us an indication as to what we are looking look further out in '07 and '08?

I know that's very much little bit crystal gazing.

But cap rates are going to stop compression at some point across the globe.

And I'm just wondering if you could give us a feel for what your sustainable margins are in your CDFS business, one you don't have that wind behind you.

I think that as we look out we can't -- we don't forecast the cap rate compression is going to increase our CDFS margins because we build to a particular margin.

And since we are building to that margin and we set our costs when we actually start a project, we expect to get consistent margins as we build out.

When we look into the next couple of years, there's no doubt we are building product now.

And we are starting to put things in the ground that we will realize in '07 and '08.

And we are building to those margins at this point of kind of a 15% margin.

Could margins -- could something positive happen like they did last year year?

It always can but we continue to build to a stable 15% margin and that's what we project to.

Walt, do you want to add anything?

Yes.

David, just to add to that, basically another way of saying it is that which we think we are going to harvest in 2006 was started in 2005.

And in some cases perhaps late 2004 when cap rate compression had started already.

So, we are just simply building at lower margins anticipating that the cap rates on the contribution to the sales will be lower.

So, now that's beginning to manifest itself.

In 2006, we think we are going to be moving into a little bit more normalized environment.

We will see.

We'll go next to Steve Sakwa with Merrill Lynch.

Good morning.

A couple of questions just I guess a multiple part for Dessa maybe on the open end fund.

Can you maybe just talk about the promotes and the levels at which you may receive them?

And if there's any kind of call back features and what the exit provisions are for the institutional clients in the fund?

And then I think you guys had bought some assets out of fund 12 and I'm wondering if those will be contributed to this fund as well?

First of all regarding the promote, we are able to recognize a promote every three years.

And it is above an IRR of 9%.

So we will -- our assets will be appraised annually and we will look at it on an ongoing basis every three years, we can recognize that promote. 50% of the promote will be reinvested in the funds.

So, that's the way the promote works.

Steve, I'm not sure I understand what you mean by call backs but the promote is effectively a look over a three-year period of time.

Unless, Jeff, do you know?

I know what Steve means -- Steve's question was one of if you hit your promote in one period and then you fail to perform at that same level in that period would you --?

No.

There's no call back.

As Steve as it relates to --

It's a good question, no one had asked that yet.

Steve, as relates to the exits there is a maximum redemption that can occur in this open ended fund structure of -- we cannot be forced to sell more than 10% of the assets in any one year period of time or any twelve-month period of time.

So basically, what -- the real objective here is that people will trade shares, ie. they will sell their shares to somebody else as opposed to force a redemption of properties.

But in the event that there is absolutely no market to sell shares, ProLogis can't be force to sell any more than 10% of the portfolio in a twelve-month period of time.

So, that would just -- there would be, if you will, no run on the bank as relates to exits.

And then finally your question on fund 12, we do not -- we are not going to put anything from fund 12 into this particular fund.

At least we don't anticipate at this point in time.

We'll now now to Michael Mueller with J.P. Morgan.

Hi, a few things, well, actually just one question here.

Can you talk about the prospects of replacing the $0.27 on a go forward basis, the $0.27 that's coming from funds II through IV, you're buying out the interest?

Because that's about 9% of the midpoint of your '06 estimate.

We believe that we have a number of things that are going on, both strategic initiatives and the ongoing strength of the business that we are expecting to grow off of the full EPS -- or I should say FFO per share that includes that $0.27.

So, I think that while we don't believe that it will be line for line exactly the same, or growth on each line item we believe there are enough things within the Company that we have in the plans and things that we are developing at this point; that we will be able to grow at a nice rate in 2007 as well.

Jeff, I don't know if you have an answer?

I'm sorry.

My only point Mike is when you look at the pipeline today of $3.3 billion, I think that pipeline moving into last year was 1.9 billion.

There is obviously a tremendous amount of fire power left in that pipeline today for future earnings.

We are really excited about that.

And so, if you really look at it and kind of do the math on the pipeline itself I think you are going to find that there's tremendous earnings growth moving forward.

Mike, this is Jeff.

And not to belabor the point, but it's something we are all passion about, so if everyone is jumping in on this point it's because everyone feels strongly and feels good about it.

When Walt and I got up and talked at our investor conference a year ago, we talked about being confident and looking forward to 8% to 12% FFO growth on a go forward basis for the next to three to four years.

We hit at the top end of that range in the first of those years.

We are projecting growth in that range again in the second year.

And we feel good about that going into the third year.

We'll now to Chris Haley with Wachovia.

Hi guys.

It's Gregg Korondi.

Just a quick question following up on some of the developments from Catellus.

Can you just give us an idea of what's going on with the Austin, Texas project and as well as the 30 billion square feet at Victorville?

Yes, you've asked for it now.

Ted may talk for 1.5 hour.

Austin is going great.

That project is on fire.

We've got activity in all product types.

We have a 400 unit multi-family deal that we are going under contract on on.

We are bringing 350 units to market, single-family units that the response has been phenomenal.

We are doing plans on a 350,000-foot retail center that we are actively negotiating leases on.

We expect to break ground on once we are significantly preleased.

The hospital is pretty much complete.

We've got a deal with the University on a piece of the property that they may expand on to another site.

It's pretty much hitting on all cylinders right now.

In terms of the Victorville project, that is not a project that we announced and it is a project that we are intrigued with and working on but we do not have anything finalized on that at this point.

That's still somewhat speculative and something we are working on it.

We'll go now to Jim Sullivan with Green Street Advisors.

On the domestic fund how do you fill up the rest of the budget beyond what you've already seeded? 3.3 billion over a two to three-year time frame seems like a lot given your current domestic development pipeline.

Is it going to serve as a take-out vehicle for any of your other domestic funds?

And then secondly can you put a range on a cap rate for the properties that you contributed to the fund as you got it started?

Jim, I think Walt is best to answer that question.

He's explained that to all the investors as we've raised over 1.5 billion of third-party equity for the fund.

Jim, here's the way we think about it for the next three years.

We believe that in -- first of all starts this year in total at the Company we said would be up, call it 10%.

So, that would be total starts of somewhere in the neighborhood of, what, $2.3, $2.4 billion.

Of that, we really do believe that we can start some in the neighborhood of, call it 600 million plus of development starts in North America.

And that's about what we did last year.

So, if you are at 600 and potentially 700 million in the next couple of years of starts without a profit margin, by definition you're at, call it, 700 to 800 million with a profit margin, maybe a little bit more.

You take that times three, your development starts could probably get you somewhere in the neighborhood of 2.5 billion of that 3.3 billion.

And so the incremental, call it 800 million if you do $200 million or so of acquisitions a year, you are there.

That's basically the way we think about it.

We don't look at it today as a conduit to take out other funds.

In fact we don't have expirations in the U.S.

We don't have anything that for the next three years that does expire.

And also, Jim, one other thing to keep in mind is that of that $3.3 billion pipeline that we have right now in developments, and I'm looking real quickly here, but I am going to guess about 1.062 billion of it is in North America.

So, you kind of have $1 billion start.

Now, some of that's still -- tha's 49% leased, some of that has got to leased obviously, but the product is there.

We'll go now to Lou Taylor with Deutsche Bank.

Walt, Dessa, if I can talk about G&A for a second to make sure I understand the manual.

You looks like Catellus, ProLogis together premerger were running about 35 a quarter, 140 a year.

And then you referenced about 35 million in savings from the merger gets you down around 105.

So, if you are growing off 10% to 20% on top of that, so to call it $15 million;

A) is the math right?

B) Is the 15 million -- how much of that is just normal growth in salaries and the like versus how much of that is really due to new market expansion?

Well, let me start out here and I will let Walt jump in.

But I would say that the problem with the math is that it's hard to look at ProLogis on just a pure run rate based on any particular quarter because we've been growing rapidly on our own.

So, I think that if you looked at our annualized where we were going to come in we would have come in kind of in the probably $95ish to $100 million of G&A for the year this year without Catellus.

We expected that there was somewhere around $20 million of additional G&A that we would get from Catellus.

So if you kind of look at it, taking off the 107 that's 10% to 20% up is about in the center of that range of where we would expect things to end out.

I would also just add that there are a couple of large G&A items that were not in our G&A in previous years.

And one of them is something that's running both through our income and G&A it's about a $2 million number that is going to continue to increase and that is our deferred comp.

We now are, due to some accounting standards that we've adopted or been -- thought that were better suited for our business the way we should be booking it, we book both the income and expense on our deferred comp programs.

So there's $2 million in income, there's $2 million in expense.

And that's also pushing that number up a bit and it will probably increase future years.

And Lou, I think also as relates to the fourth quarter, you've got bonuses, you've got comp settle off basically of your long-term comp, your performance shares and the like the that get mark-to-market.

And there's a bunch of thing that happen in the fourth quarter but the bottom line is Catellus is probably going to cost us about 20 million in net G&A on an annual basis.

And one thing I forgot to say, Jim Sullivan, my apologies.

I didn't answer the second half of your question, which was the cap rate I think the Arcapata today deal, which was about a 6.75% cap rate.

We'll go now to Jamie Feldman with Prudential.

Can you give more detail on market conditions in the U.S. by region in terms of what's driving demand right now?

And then if you could comment on kind of what you think tenants are thinking at this point in the cycle?

Jamie, I will try to answer that.

I would say that in general, the Coasts during this recovery have recovered more rapid than the interior of the country.

Although, pretty much across the board we are seeing now the recovery take hold.

It's kind of interesting.

If you look at the last two recoveries and we've studied it pretty closely, the market starts recovering and you really have accelerated leasing that occurs.

So the first year maybe you have a 20 or 30 basis point pick up, then the next year you have 100 basis point, then the next year you have 150 basis points.

And we have sort of in this third year of recovering occupancies right now and we saw accelerated occupancy growth pretty much across the board.

L. A. was already in the 94% to 95% level going into the year and now it's at 96%.

But where we saw the real recovery taking place really in the second half of last year, were in markets like Dallas and Atlanta, to a lesser degree Chicago.

Where we just were kind of waiting and waiting and waiting and all of a sudden, boom, it was up 200 basis points literally in six months.

That was encouraging to us and it's exciting.

What's driving, it quite frankly, I think overall is GDP growth, positive GDP growth, consumers are buying.

But I think what really has fueled this most recent recovery the last couple of years is capital spending.

Businesses are spending again.

Computers are moving through our warehouses.

Businesses are spending on everything right now.

And that's -- I think that's a real positive and it's something that we quite frankly didn't see a couple of years ago when we felt that the consumers were really leading whatever occupancy growth we had.

Overall, I think we ended the year at 94.5% in North America.

We continue to see that trending upward and that's as good as it's been since the year 2001.

So overall, we are pretty excited about it.

And Ted, I don't know if you want to add to it at all in terms of the markets.

The only thing I would add is potentially drivers to demand is the continuing manufacturing overseas and we are seeing just such enormous demand in southern California.

And you can definitely point to more and more things manufactured overseas coming to the United States and needing to be warehoused before it gets distributed.

That's clearly part of the overall demand factor right now.

The other thing I'd mentioned Jamie too, is that inventories -- incredibly, inventories are very tight.

If you look at the inventory to sales ratio, it's at its all time low.

And so the one thing I would say is; that when there is demand it's popping inventories right now because people are not carrying excess inventories.

And I think that's a real positive thing for our business moving into -- looking at 2006 and 2007.

Operator, we could take two more questions.

We will take our next question from Greg Whyte with Morgan Stanley.

Just a quick question, on the new open-ended fund, I think you referenced that you'd have an appraisal every year.

Will you disclose the details of that appraisal?

Yes, Greg, actually we will, like we do the European fund.

Actually, we put that in the release to kind of keep it simple.

But what we really do is we appraise one quarter of the assets every quarter.

So that every year, every asset gets appraised once every year but every quarter there's kind of updates.

So, we will -- we may be on a one quarter lag but we will update the NAV in our disclosure maybe one quarter later but bottom line is we will update it.

And we'll take our final question from Paul Morgan with FBR.

Can you just maybe comment on the merger of DHL and Exel and whether -- and what the implications are are?

I know you've got 80 leases that you showed with the combined company and whether there's any fallout do you expect now that the merger has closed or are opportunities?

Paul, that's a good question.

Let me -- this is Jeff.

I was actually -- when will I was in the U.K. last week I had dinner with the person who will now been the head of real estate for what's being called DHL logistics, which is the combined logistics arms for DHL and Exel.

And remember that DHL's contract logistics business was not very large.

Exel had the largest logistics contract logistics business in the world.

DHL is a very large customer of ours and most of that is parcel delivery, sorting, as part of their delivery network as opposed to really contract logistics, where they are serving one customer in a dedicated facility.

The reason they were acquiring Exel is to get into that business, which means by definition, there is not much overlap in their network between the two.

We talked about it in Europe, they see almost no overlap whatsoever, in North America, no overlap, DHL did not have a big contract logistics business, Exel does have a significant one in the U.S.

So, that's important to them.

In Asia, it's the same phenomena.

So, they're seeing it as a growth opportunity.

They think they will need additional distribution space as they grow their business.

But also remember, that when you combine the two of them they still have less than a total 4% market share in contract logistics.

They may be the largest but it's a very, very, very fragmented business globally.

They are the leader but there is a lot of competitors out there for them.

They are very good and they expect to grow that business and we hope to serve them as they grow the business.

Operator, thank you.

And everyone, thank you for your questions, thanks for spending time with us.

And we look forward to talking with you again next quarter.

That concludes today's teleconference.

Thank you all for your participation.