Prologis Inc (PLD) 2007 Q1 法說會逐字稿

Good morning, my name is [Stacy] and I'll be your conference facilitator today.

I would like to welcome everyone to the ProLogis first quarter 2007 financial results conference call.

Today's call is being recorded.

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

After the speakers presentation there will be a question and answer session.

(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, Stacy.

Good morning everyone and welcome to our first quarter 2007 conference call.

By now you should all have received an e-mail with a link to our supplementals.

If not, the documents are available on our web site at ProLogis.com under Investor Relations.

This morning we'll first here from Jeff Schwartz, CEO, to comment on key accomplishments and our sustainability initiatives, Walt Rakowich, President and COO will cover ProLogis' operating property performance and global leasing activities, Ted Antenucci , President of Global Development will discuss investment activity, and Bill Sullivan, CFO, joins to us cover financial performance relative to our guidance.

Before we get underway I would like to 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 managements beliefs and assumptions.

Forward-looking statements are not guarantees of performance and actual operating results may be affected by a variety of factors.

For a list of those factors please refer to the forward-looking statement notice in our 10-K.

I'd also like to add that our first quarter results press release and supplemental do contain financial measures such as FFO and EBITDA that are nonGAAP measures 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 range 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

Thank you, Melissa, and good morning everyone.

Before reviewing our achievements for the quarter I first would like to welcome Bill Sullivan to our call and say how pleased we are to have him join us as CFO.

I personally have known Bill for a number of years and he brings to us a wealth of experience as a CFO and in international real estate.

We have had a very active start to the year highlighted by several key accomplishments.

First we strengthened our number one market position in the U.K.

and in central Europe with the Parkridge transaction.

Second, we've announced a tender offer from Macquarie ProLogis Trust.

Third, we continue to achieve significant improvement in operating property performance.

And fourth, we launched our first sustainability report and became part of the global reporting initiative.

I'll touch on each of these briefly then turn the call over to Walt, Ted and Bill for further updates.

Shortly after our last quarterly results call we completed the acquisition of Parkridge's Industrial Business and invested in the Parkridge Retail Business for a total consideration of $1.3 billion.

We are very excited about this transaction, having combined the two most highly experienced industrial teams in Europe and consolidated our top competitor there.

We added a land bank in the U.K.

that will support over $2.25 billion of new development over our projected seven-year period, providing growth opportunities in the land (Inaudible) market well into the next decade.

In addition we acquired Parkridge's Industrial Business in central Europe, giving us another $500 million of high quality existing facilities plus land and construction in progress that represents another $650 million of total expected investment and full build out, furthering our market leadership position there.

Most significantly, we strengthened our team.

And with it our future growth.

The integration of 19 additional employees we brought into our industrial business is going very well.

John Cutts, the founder of Parkridge, who also headed Kingspark, the UK.

developer we acquired in 1998, and worked personally with me in building our European business in late 90s, remains involved strategically as Vice Chairman of Europe for ProLogis, while continuing his role as CEO of Parkridge Retail.

And Christian Bischoff, who now heads our northern European region, was instrumental in building (Inaudible) Industrial Development business in Germany, their top market, prior to his joining Parkridge.

Our 25% interest in the fast growing Parkridge Retail business gives us a strong retail warehousing development business focused on markets in the UK, France and Spain, an investment in two mixed use development projects in the UK, and a rapidly expanding retail development business in central Europe.

Another key transaction is our recent tender offer for Macquarie ProLogis Trust, a total consideration of roughly $1.9 billion including debt.

The offer price per unit represents an annualized total return to MPR shareholders of 15.4% since the IPO in June of 2002.

As many of you know, from the formation of funds through the end of 2005, MPR had exclusive access to ProLogis' development pipeline in North America.

However, as a result of significant cap rate compression in the U.S.

and the devaluation of U.S.

dollar relative to the Australian dollar it became very difficult for MPR to accretively raise capital in Australia in order to acquire new ProLogis assets.

Given our development opportunities, we formed the ProLogis North American Industrial Fund late last year -- or last year, I should say, to be the take out capital source for our U.S.

developments.

As a result, MPR.s Board reviewed the Company's strategic direction and was receptive to our offer.

The properties are well leased, well located and since we developed most of them in recent years we are extremely comfortable with their quality.

Accordingly, there exists the opportunity to hold these assets on our balance sheet or attribute them to a property fund, maximizing value for both MPR and ProLogis shareholders.

The quarter was also notable for a significant improvement in operating property performance.

As we reported our strongest length growth on lease expirations since third quarter of 2001 and the biggest increase in same store net operating since the third quarter of 2000.

Worldwide customer demand remains strong, and with only a few exceptions global markets have proven resilient.

We continue to monitor market conditions and economic indicators closely, and at present do not see any significant slowing in momentum, global trade continues to increase at a pace that far our strips GDP growth and remains a major business driver for us.

In addition to monitoring global economies, we continue to [tap] the experience of our people in the field.

Their frequent communication with our customers gives us an early read on local supply and demand and provides the input we need to continue to make sound, capital deployment decisions.

As you heard us say in the past, sustainability is one of our major corporate initiatives.

You may have seen the [squirt feet] story in the New York Times business section this past Sunday that highlighted some of our sustainable development efforts.

Just yesterday we launched our inaugural sustainability report as we became the first U.S.

real estate company and first real estate company operating internationally to be part of the global reporting initiative, or GRI.

GRI is a multi-stakeholder network of thousands of experts who use GRI guidelines to report their economic, environmental and social performance.

We have also engaged a third party assurance provider to assist us in expanding the scope and level of detail we include in future reports, as well as developing and refining data collection methods.

Included in our report are some new long-range sustainable development targets, including; utilizing 20% recycled content based on costs in all of our new development projects, diverting 75% of construction debris away from land fills and incinerators and reducing use of potable water for landscaping by 50%, through a combination of organic reductions and the offset procurement we also pledge to maintaining a carbon neutral position for our [years] operations from 2006 through 2010.

We believe these and other components of our sustainability focus are not only the right thing to do for the planet and the communities in which we operate, but that our ability to provide energy efficient and initial reducing building features will fast become a strong competitive advantage.

Increasingly our customers are asking us how we can help them with their initiatives in this area, and are keenly interested in how our programs can compliment their firms own sustainability in carbon reduction programs.

In summary we are pleased with the strength of our business and the expansion of our global market [alusha] position.

We believe our customer relationships, ability to leverage the talent of our global team members, strategic land positions and best in class design and construction expertise will enable us to capture increased global market development opportunities, generate solid growth in all of our business segments and deliver value for all of our stakeholders.

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

Thanks, Jeff.

Our operating performance for the quarter was strong throughout all of our global markets.

We leased over 23 million square feet of space with a 75% retention rate on lease expirations, and our stabilized portfolio overall occupancies were a healthy 95.4% with Asia at 97.6%, Europe at 94.1% and North America at 95.6%.

And rental rates are growing now in most areas of the world.

Our rental rate growth for the quarter was 6.3% overall and 6.9% in our same store pool.

In Europe we are experiencing a steady flow of leasing activity and are already seeing a boost in our business as a result of of the Parkridge transaction.

Not only are we proposing on additional build-to-suits, we've also gained market share with key customers such as [Tesco], [Sevo] Logistics and Schneider Electronics.

We also strengthened our business with DHL who we now serve in 78 locations globally.

During the quarter we achieved positive rental growth in Europe for the first time in several years as rental rate increases in western Europe more than offset cap rate driven rent roll downs in central Europe.

As we've previously commented, continued cap rate compression in central Europe has kept a lid on rent growth, although market activity has been robust.

Our operation in central Europe has been greatly augmented by Parkridge's lands holdings.

We previously had no presence in Slovakia, but now we are positioned to be the market leader.

Slovakia is rapidly becoming a preferred location for outsourcing of our automotive manufacturing and related distribution of auto parts and supplies.

And in Poland, where we previously had an estimated 40% share of the development market the Parkridge acquisition has deepened our presence to well over 50%.

In several cases Parkridge properties were located near ours, allowing us to help a few customers quickly move into expansion space.

In the UK rents are modestly rising and leasing continues to be brisk.

As we've mentioned, we are extremely bullish on the UK given its land constraints and tougher planning environment, without question having a titled land in the UK is a critical element to growth.

Now combining our existing land positions with the recent Severn Trent and Parkridge acquisitions we now have enough owned and optioned land to support over 6 billion U.S.

dollars of new development in the UK, an enviable position that should serve us for years to come.

And our sustainable building designs have also been well-received by customers in the UK where we were recently awarded a 530,000 square foot build-to-suit for Sainsbury's.

Now we won this business because of our experience in developing facilities with advanced environmental features designed to reduce energy consumption and carbon emissions.

We believe this will be the first carbon neutral large scale distribution facility ever developed in the U.K.

Turning to Asia, growth in demand continues to accelerate.

Now recent research report on the Japan logistics market, we noted that new starts of warehouses larger than 100,000 square feet rose to 35.5 million square feet in 2005, well above the previous years pace.

However, demand remains exceptionally strong with new projects leasing up rapidly.

During the quarter our 1.5 million square feet of properties completed were 55% preleased.

In China, we are more than 98% leased in our stabilized asset pool of 6.7 million square feet, importantly, market rents in China have risen 7 to 10% in most major markets in just the last 12 months.

And that does not take into account an additional 4% rise in the [RNB] against the dollar over that same period.

Transactions in the first quarter in China included new leases with repeat customers Nippon Express and [Sujo], and Toshiba in Shanghai.

We are also seeing strong interest in our projects underdevelopment in Honjo, Beijing Airport, [Woosie], and [Chingdow].

Finally, markets in North American markets remain solid.

The overall vacancy rate for bulk product in the top 30 U.S.

markets declined to 7.5% in the first quarter from 8.3% a year ago.

Net absorption in these markets was about 30 million square feet in the quarter, which is 25% greater than the 24 million square feet absorbed in the first quarter of last year.

So far these statistics suggest that the pace of absorption will be at least as good as 2006.

Supply also remains in balance as 24 of the top 30 markets reported positive absorption for the quarter.

Generally most markets are tight, customers are expanding, rents are growing and retention rates are healthy.

Our rental rate growth for the quarter in North America was 6.4% and our retention rate was 76%.

We also signed leases with major customers Kimberly Clark, Oakley and Safeway, totaling over 1.4 million square feet.

And it's the strength of our customer relationships that helps us to stay ahead of the curve in monitoring demand and creating tremendous value in leasing our new developments.

Our work with Deutsche Bond, the parent company of Shanker Logistics and Fax Global, is a recent example of how our customers drive incremental business for us globally.

During the quarter Deutsche Bond became a three continent customers after preleasing 120,000 square feet from us at ProLogis Park [Ming Yang], which is currently under construction near Shanghai.

This building which is now 100% leased is not slated for completion until September.

We now have leases with Deutsche Bond companies in 11 markets globally, four European countries, the U.S.

and, of course, now China.

Now let me turn it over to Ted who will talk about our investment highlights.

Ted?

Thanks, Walt.

The continued strength in global demand, that Jeff and Walt described, supported starts in more than $615 million in the quarter, probably 1/2 or about 305 million of that was in Asia, with another 225 million in Europe and 85 million in North America.

These starts bring up properties underdevelopment to over $2.4 billion of total expected investment.

When combined with completed developments and repositioned assets of 3.4 billion we now have a record CDFS pipeline of more than $5.8 billion, that was 53% leased at the end of the quarter.

This leasing percentage compares favorably with total pipeline from a year ago of 4 billion which was 50% leased.

Most importantly, CDFS completed developments in repositioned assets are on average over 73% leased, which supports contributions to our property funds and a steady source of future CDFS income.

Looking at first quarter development activity in North America, we started new projects in Monterrey Mexico, Chicago, Atlanta and Portland.

We also began construction of a build-to-suit for Bed, Bath and Beyond in Port Reading, New Jersey.

Our project at Port Reading is located in the foreign trade expansion zone, and is the largest sight in the ports build initiative.

Under this initiative the port of New York, New Jersey, second largest in the United States, has identified nearby development sites for port related warehousing to help ease congestion related to increased cargo traffic.

In Europe, as Jeff mentioned, we are making steady progress in the projects acquired in the Parkridge transaction.

At [Stanley] Park in Corby, a 170-acre planned park that was included in the Parkridge acquisition, we received planning (Inaudible) in just 45 days after closing the transaction, at full build out Stanley Park represents potential investment value of approximately $500 million.

Elsewhere in Europe, build-to-suit activity is strong.

In France we signed build-to-suit agreements totaling more than 750,000 square feet during the quarter including one for Michelin in the west of France.

In Germany build-to-suit projects accounted for roughly 80% of first quarter development activity in the market.

Land constraints in key sub-markets continue to be a challenge but demand for new space in the Netherlands, Belgium and Sweden remains stable.

In Japan preleasing of first quarter starts was strong with roughly a 1/3 of [Mashima] preleased to a major 3 [PO], and over 1/2 was spaced at ProLogis Park [Kamaki], we leased to Japan's largest manufacturer of gas appliances.

We also announced plans to develop a 1.2 million square foot inventory facility later this year in Osaka, one of Japan's primary import-export hubs, as well as a build-to-suit for Sumitomo Rubber in the Hiroshima area, another key logistics market.

You've heard us talk a lot about ports and how they serve as a critical link in global trade.

And while we will continue to grow our leading presence in key global ports, we are also focused on other logistics hubs such as key inland locations and intermobile sites.

Our recent investment activity in China is a good example of this.

Over the past three years we have built an industry leading position in China by focusing on coastal markets where demand is tied to import-export activity resulting in the control of land sites that can support approximately 50 million square feet of total development.

Our expansion into five new inland China markets is a natural evolution of our strategy.

These five cities have an aggregate population of more than 60 million people and are all important regional distribution hubs for manufacturers, retailers, and third party logistics providers.

Given our global customer requirements we continually seek to maintain an appropriate supply of entitled land to support our developments.

In keeping with this objective, we acquired land in the inland Empire in south Florida as well as in [Lake Nosa], Juarez and Tijuana, in addition to the roughly 700 acres we added with the Parkridge transaction ,land acquisitions in Europe were concentrated in Poland, the Czech Republic and France.

As our development pipeline grows you should expect to see land held on our balance sheet rise as we aim to keep our land position on average that can support roughly 2 years of development.

We continue to identify new opportunities in our mixed use business.

A couple of weeks ago we were named Co-master Developer for Alameda Point near San Francisco.

This foreign naval base is one of the best located sites we've had the opportunity to develop.

The work we have done at other mixed use redevelopment projects such as Mission Bay, LA Air Force Base and the (Inaudible) airport in Austin, were key to being chosen as co-developer for Almeda Point.

We look forward to partnering with the City of Almeda on the development plan that will help Alameda Point to realize its full potential.

In summary, we are excited about the acceleration in our development business and look forward to capitalizing on the many opportunities we have around the globe.

Now I will turn it over to Bill.

Thanks, Ted.

First I'd like to say how happy I am to have joined ProLogis.

I have watched the Company's global expansion with interest in recent years and am pleased to be part of some such a dynamic, well regarded team.

I look forward to seeing those of you with whom I have crossed paths in the past, and to meeting many others who have been following ProLogis' success.

Turning to our financial results, I'll cover the performance of each of our business segments and some of the business drivers that we monitor relative to our guidance.

Overall we reported $1.25 in diluted FFO per share, a 38.9% increase over the first quarter of 2006.

In diluted earnings per share, of $0.89, a 23.6% increase over the prior year.

This strong performance was driven primarily by a high level of CDFS disposition activity.

As noted in our previous guidance, we anticipate that our per share FFO will be more heavily weighted towards the first half of the year due to the planned timing of our CDFS dispositions.

Turning to our business segments let me start with property operations.

Our same store results are running a bit ahead of our guidance.

Net operating income grew 5.6% and average occupancies in this pool were up 3.6% over a year ago.

These increases are in part because our same store comparisons now include the Catellus properties, which were concentrated in California and other key logistics markets.

These properties were not included in last year's same store pool comparisons.

Leasing in our stabilized pool remains solid at 95.4%.

Basically in line with fourth quarter 2006 levels.

We began 2006 at 94.5% leased and previously indicated that we expected occupancy gains to moderate and settle at around 95%, and that is exactly what we are seeing.

As Walt noted, we are now capturing significant rental rate increases, as demonstrated by rent growth of 6.3% on lease turnover in the first quarter.

In every key property operations measure, we are on track and meeting or exceeding our guidance.

Looking at our CDFS business, dispositions of $780 million during the quarter put us on target to achieve the top end of our full year 2007 expectation of 2.8 to $3.2 billion.

Although disposition activity was slightly higher at 830 million, as we also generated roughly $50 million from noncore, nonCDFS sales.

We expect to continue to generate proceeds from the active management of our direct owned and fund portfolios, as we dispose of certain assets from markets with less rental growth potential and redeployed proceeds in the markets with better rent growth prospects.

CDFS disposition profitability was unusually strong in Q1 with average post tax, post deferral margins of 45.4% for the quarter, on $237 million of gains.

During the quarter we completed six land sales on all three continents, a number of which involved conversion from industrial to a higher use, such as conversions to residential use in international markets where residential remains strong.

The average margin on these land sales was 110%.

Net of these land sales CDFS margins was 34.1%.

As we noted in the past, long-term we expect our margins on our CDFS dispositions to return to historic levels.

Our other CDFS income, which consists of development and management fees, income from CDFS joint ventures and interest on long-term notes receivable, totaled approximately $13 million for the quarter.

Similar to the CDFS disposition activity the majority of this income stream is susceptible to relatively broad swings from quarter to quarter.

In our property fund business, steady state fees increased approximately 31% to roughly $22 million; principally reflecting the growth in assets under management in our property funds.

Fund fees in Q1, 2006, totaled approximately $17 million, excluding the $22 million incentive return related to the liquidation of North America funds two, three and four.

Likewise our share of FFO from unconsolidated property funds increased nearly 18% when compared to the first quarter of last year, excluding the gain recognized upon the fund liquidations.

On the expense side, G&A included $8 million of employee departure costs of which 3 million related to integration expenses associated with the Parkridge acquisition.

Excluding these one time charges the increase in G&A is slightly ahead of our expectations for annual growth of 3 to 5% this year, principally related to our European infrastructure.

Interest expense in the first quarter also ran a bit higher than our initial expectations, due to the additional debt associated with Parkridge and our expanding development pipeline.

For the year the increased costs associated with the Parkridge and development debt will be offset to an extent by the lower cost of debt on our successful $1.2 billion convertible debt offering.

Looking at our capital structure, our balance sheet remains strong with total debt to book capital of about 56%, and 39% on a market capitalization basis.

The convert offering helped reduce our contractual weighted-average interest rate to 4.5% at March 31st, versus 5.13% at December 31, 2006.

Additionally, our percentage of floating rate debt decreased to 30% at March 31, from 36% at December 31.

Overall we are comfortable with our debt level but will focus on further reducing our floating rate exposure.

It is still early in the year and therefore we are not making any changes to our overall guidance at this time.

However, given the strength of our Q1 operating performance and continued strength in global demand we have become confident in our ability to achieve the top end of our FFO guidance of $3.80 to $4 per share.

Our guidance does not include any impact from the MPR tender offer.

At this point we don't expect that transaction to close until late June to mid July.

We will provide more detail on this opportunity and any related effect on our guidance during our second quarter conference call.

Thank you.

We look forward to sharing our results with you again next quarter.

Operator, we are ready to take questions.

(OPERATOR INSTRUCTIONS) We'll take our first question from Jay Habermann with Goldman Sachs.

Hi, good morning.

I guess just a question to start off on margins, you mentioned coming in at 34%.

Excluding the land, and that's obviously well above your guidance which you said in the low to mid 20s.

I'm just wondering, I know you are holding off on raising guidance at this point, but just given that impact alone, plus you mentioned same store NOI growth, why hesitate in terms of raising guidance at this point?

Jay, it's Jeff.

I'll start and let Bill follow up on this.

Generally early in the year, as Bill stated, we feel very comfortable talking about the top end of our guidance at this point.

But remember it's only after one quarter and there's a lot to go in the year.

But we are feeling good about the year.

And, Jay, just relative to the overall margins, I think we will see those come down for the year as we progress through the year.

There are a variety of assets you can pick on some of the Parkridge assets as an example, that are likely to contribute later in the year at very little margin.

So on a blended basis you'll see that margin come down throughout the course of the year.

Then to clarify that, the Parkridge assets that were completed and fully stabilized that we acquired, we acquired at something close to the market.

Now obviously, the development opportunities within the Parkridge portfolio, the developments that the project underdevelopment as well as the land bank that Walt talked about and Ted talked about, we expect to have full margins or very healthy normalized margins on those assets.

So we are very excited about the opportunity and the acquisition, but obviously the completed assets of $500 million we acquired at something close to market.

Thank you.

And we'll go next to Michael Bilerman with Citigroup.

Good morning.

Could you talk a little bit about the land bank?

I guess in the quarter you sold about $85 million of land at two times book.

You got another 1.8 billion.

Can you just talk about how you think about the land bank?

How much more is there in terms of these conversion opportunities, which you're, I guess, selling rather than doing them yourself or partnering to do them and how much of it's just traditional industrial land?

Hi, Michael, it's Ted Antenucci.

The conversion to higher and better uses is an ongoing opportunity within the business but it's the majority of our land we acquired for industrial purpose,s and in fact several of the sites that we sold this quarter were bought with the intent of building industrial.

And when a higher and better use comes along, and we have the opportunity to maximize value through some other type of development or through a sale we will take advantage of that.

I think that those are going to be isolated opportunities outside of possibly some of the stuff we are doing in our mixed use developments that really have that intent.

But of the over $1.5 billion worth of land on our balance sheet is all focused on industrial and I think you should assume that it will get developed out as industrial.

One thing that's worth noting, though, Michael, is this kind of validates, absolutely validates our strategy of having significant mix use expertise.

And mix use expertise we acquired with the Catellus merger, the mix use expertise we developed organically and in the UK and in Europe that we acquired through our investment in [Sidik], that we acquired through our investment in Parkridge retail, allows us the skill set to create significant conversion opportunities going forward.

Again as Ted said, we buy land typically within the industrial portfolio of land, with the idea of developing industrial buildings, but when you have as large a global operation as ours, with this large a platform, they will present themselves opportunity on a continual basis to create more value and having that expertise and have significant expertise that we have in Europe and Asia will allow us to do so very effectively.

Thank you.

We'll go next with Chris Pike with Merrill Lynch.

Good morning, everybody, Jeff, perhaps back to margins, compared to your expectations that you guys cast a couple months ago, was there any upside surprise in the wholesale contribution of the assets in the quarter?

Obviously, excluding the land, or does cap rate compression continue to result and better expected gross overall contributions?

Secondly on the expansion portion, could you talk about what markets you would first expect to see margins inflect back down outside the Parkridge position?

Well, first obviously, the first quarter margin were better than we had projected in our guidance for the year.

And it's a combination of factors.

Some of it's cap rate compression.

We haven't seen cap rates move that significantly since we set guidance for this year.

A lot of it has to do with execution by the team.

When you lease up buildings, when they are leased up 100% at completion there's a significant savings in carry.

When the leases are done at above pro forma rental rates, obviously that increases your margin significantly.

And all those factors came into play, it was really strong execution by our global team that led to these type margins.

And long-term, you could resort to the mean, people understand what the new rental rate environment looks like, we are seeing significant pressure upward in rental rates but that resets itself in higher land prices on a go forward basis.

Obviously it's advantageous to have a two-year supply of land at today or yesterday's land prices, which helps medium -- short and medium term on margins, but long-term we do expect a reversion to the mean.

We haven't yet seen any sort of cap rate increases.

We have seen stable cap rates in place in the world.

And, quite frankly, that's a good environment for us to operate in, a stable cap rate environment.

We get surprised, when you get the downward pressure on cap rates there's positive surprises, obviously, in margins but at the same time it's harder to operate a business, it's harder to plan effectively to execute your strategy in that type of environment.

So the stable environment is one that we see good long-term growth in.

But we've yet to see any cap rate expansion.

Thank you.

We will go next to with Cedrik Lachance with Green Street Advisors.

Thank you.

Do you have any MPR acquisition, why would you acquire a vehicle that was allegedly live and take away at least temporarily some of the fees that you could use, say even from these properties?

Well, I will let -- Walt was instrumental on that transaction.

It's been a good part of his life over the last six months in Australia.

So I will let him answer it.

But remember that that was in a partnership or joint venture with Macquarie Bank and in fact the (Inaudible) we are only receiving 50% of the fees we would normally receive in a fund type structure.

It also, there was a number of reasons and corporate rationale for doing that, but I will let Walt speak on that.

Cedrik, as you know, that -- the Macquarie funds, and by the way we've had a terrific partnership with Macquarie over the years, and the fund itself I think has performed very, very well, but it was really in a difficult position in that the Australian dollar had moved significantly against the U.S.

dollar and obviously at the same time cap rates in the United States had lowered pretty significantly.

Capital became a lot more competitive over the years ,and the trust found itself in a very, very difficult position.

Where it could not grow.

And frankly, as a co-sponsor of that, we believe we were in a position to do the right thing for the fund, as well as do the right thing on a long-term basis for our shareholders by providing that fund with an offer that made sense for both parties.

And we basically have taken a stay tuned attitude to that, because at this point in time we could either hold it on the balance sheet or put it into another fund.

We'll determine the course of that action after we close the transaction.

But I think, suffice it to say that we think it's going to be the right long-term position for our shareholders as well or we wouldn't have done it.

But we also think it's the right long-term decision for the MPR shareholders.

We think this is truly going to be a win win, and be patient, it will play out over a period of time.

Thank you.

We'll go next to James Feldman with UBS.

Thank you.

Good morning.

Jeff, quick question for you, when you think about the constraints on ProLogis' organizational growth and the opportunities, the business opportunities in your core markets and your target markets, how big do you think the development pipeline can become and see if [Best] pipeline can become at their peak?

It's a, James it's a great question, it's something we talked about, and I was going to, and are excited about quite frankly.

I was going to say struggle with but struggle is the wrong word.

As Bill Sullivan constantly points out things like that, it's a high class problem.

To build a global leading platform with the right people in the right places around the world and present ourselves with a number of opportunities we are seeing and the growth opportunities we are seeing is the kind of situation you want to deal with and you want to talk about and have discussions about and plan is strategically for.

But if you look at central Europe and take our development market share there it's 40, 50%.

In North America, 12, 14%, so obviously there's a lot of room for growth in North America.

We are still gaining market share actually in central Europe with the Parkridge merger, and when we see the synergies involved with that, I think we can grow our market share even further.

In western Europe we have a market leadership position, but again it's not close to where we can be.

And things tend, customer relationships tend to expand upon themselves.

Walt talked about our relationship with Deutsche Bond and that gets closer and closer every day, our relationship with DHL, the same thing, [Ceiba] Logistics which used to be [T&T], we are doing a lot of business with them now and it's a power of a network in away.

The more relationships and the more touch points you have with the customer, the more ways you can serve them on a global basis and the more they want to be your partner because you can be a good partner for them around the world.

I know that's not directly answering the question, but we think that there's significant opportunity to continue to grow our development operations in a very prudent fashion in a well leased, preleased fashion.

And we can grow development market share on a global basis.

James, this is Walt, let me also answer that, too, by saying this, I want to be very, very clear, we've been saying it for several years now, that we don't need to grow the development pipeline in order to grow our earnings.

We truly believe that we can grow our earning on a double-digit number without growing that pipeline because every year we are retaining somewhere in the neighborhood of 400 to $500 million in cash flow.

And when you throw that through the model, will you find that we create pretty significant growth just in retained earnings, throwing off the same development pipeline, the same level of development every year, as well as increasing fees with some NOI growth you get there.

Having said that, I don't think that any of us would be comfortable without growing it, and we all believe that we can grow it over time and it is just that there are immeasurable opportunities we believe internationally and domestically to grow that, not only in the distribution business but in the retail business that we are also in in the mixed use business that we are in.

And all of us feel very, very good about that long-term.

I think Walt makes a great point in that people really don't understand the power of retaining the type of cash we do, the kind of retained earnings we have because it's relatively unique within the industry.

I think there's only one company that's outside of our sector that comes even close to our retained earnings.

It's a powerful growth engine for us.

We've created a very tax efficient structure that allows us to retain that type of earnings on a go forward basis and it drives future growth, and we can have a stable development pipeline and grow earnings at a double-digit rate, given the current environment and the ability to grow rents and at a good occupancy level.

Thank you.

We'll go next to Ross Nussbaum with Banc Of America Securities.

Hi, everyone, good morning.

I have a question on the CDFS pipeline.

I went over your supplemental in 17 A., it looks like 1 billion, 1.1 billion of the pipeline is repositioned acquisition, and I guess a couple of questions surrounding that.

One is, can you give us any sense of where the margins are coming out on the repo'd acquisitions versus development?

And, number two, talk about a little bit the sustainability of acquisitions as part of the CDFS pipeline going forward?

Ross, this is Walt, let me address that.

It's a great question.

It really gets to something that Bill Sullivan said earlier.

It is a larger number, and part of that is that there is a good, roughly $0.5 billion in CDFS properties repositioned acquisitions in Europe that you will note that was added this quarter.

And as Jeff mentioned, that's basically the acquisition of central European properties from Parkridge which, that we acquired fairly close to market.

And, or at market if you will.

And so, the recontribution of those assets at some point in time will be at a very, very low margin, and it would certainly be single digit and may be very low single-digit.

But I would say the remainder of the repositioned acquisitions that you see in North America and to a smaller degree in Asia are probably kind of what we've been talking about, call it 5 to 10% margin type properties, don't get me wrong, there are some that are double-digit, but it generally depends on how much work we have to do to the property, whether or not it's fully leased, partially leased, a lot of capital needed and the like.

So you should think about the repositioned acquisitions as being, call it, probably a good number would be 5 to 10 and maybe a middle range would be 8% type margin and then the development properties are obviously, we think longer term 15 to 20% type margin properties.

Thank you.

We will go next to Paul Morgan with FBR.

Can you talk a little bit about the supply side and what you are seeing and whether you expect development in any of your markets is running in your view sort of a head of where demand is at this point in the cycle?

Paul, it's Jeff.

I think Ted is best suited to talk about that, particularly North America and if there's anything you want to ask, I could ask.

Yeah, Paul, overall it continues to be a relatively well balanced supply and demand, our occupancy levels are just about as high as they've ever been.

And our leasing is strong.

We keep very close track of how long buildings are on the market.

Our pipeline lease percentages is as high as its ever been.

The overall, the supply demand seems to be very well in balance for the most part throughout the world.

There's always a pocket here or there that's extremely tight like southern California, and then there's some areas that are a little bit slower, but overall I think throughout the world it's very balanced right now.

The specific numbers that we've got on that is that the first quarter in '07 in the top 30 markets and again keep in mind that we only track bulk product.

We are cutting out all the service center and the flax and the like, but we track in our top 30 markets, the markets that we are in, 25.5 million square feet of deliveries in the first quarter of '07 and we have total demand of 29.5 million.

I refer to it as 30 million, I rounded it to 30 million.

So you're talking about in the neighborhood of 5 million -- 4 million square feet, excuse me, of net absorption in our top 30 markets.

And all but 3 or 4 markets had positive net absorption.

So it's pretty wide spread.

We are comfortable with where the supply is today relative to the demand.

And by the way, that 30 million square feet compared to 24 million square feet in the first quarter of '06.

So it's not obvious to us that there's been any decline, in fact if anything it's 25% higher than it was last year in the first quarter.

Walt was speaking specifically in North America in those numbers.

But, needless to say as evidenced by our development starts markets remain very strong in Europe, particularly in the UK it's a very tight market as well as northern Europe is very tight, seeing good activity in southern Europe, pockets of weakness in Italy, although we think long-term that will be a very strong market for us.

China, if someone asked me a question about land in China I could talk for about 20 minutes on that alone.

That's kind of a set up question for anybody who wants to ask it.

Needless to say rental rates have gone up 7 to 10%.

In China, in all the markets we are in, and more than that in the Shanghai region, over the past year as well as in Japan, we are starting to see upward pressure in rental rates but significant occupancies and very, very strong lease up.

In central Europe we've now seen rental rates stabilize when cap rates went from 16% when we started there in 1997 to 6.25, 6.5 today.

Obviously there was some significant downward pressure on rents but that started with stabilization of cap rates.

We are seeing a stabilization of rental rates and we expect to see some upward pressure, because the leasing occupancies there are very, very strong and demand is exceptional.

Thank you.

We will go next to Chris Haley with Wachovia.

This is [Ben] (Inaudible) with Chris.

Was the impact of the convertible debt offering in your original guidance and (Inaudible) severance cost included in the quarter?

I'm sorry, I couldn't hear you, repeat the last part of that question.

Were the severance counts related to [Dessa] included in the quarter?

Severance costs, yes, the termination costs related to Dessa are part of the 8 million that we discussed.

And in terms of the convert, the convert was not in the original guidance as we were looking at some refinancing opportunities.

But decided late in the quarter to take advantage of the convert opportunity.

But I mean the Parkridge acquisition added debt to our balance sheet.

The convert and the lower interest rate saves us about 30 basis points on 1.2 million -- 300 basis points on 1.2 billion.

So those two sort of updates to original guidance in large part offset each other.

We thought it was a fabulous opportunity, quite frankly, worked out coincidentally that we did both in the same quarter.

If you look at the growth opportunities, long-term, the ability to grow earnings in '08, 9, 10, through the middle of next decade, and we are doing that with no dilution this year, given the opportunity to do the convert just worked outer better than we could have expected.

Thank you.

We'll move next to David Harris with Lehman Brothers.

Good morning.

I understand the democrats are pretty serious with that proposal to tax current interest at income tax rates as opposed to capital gains tax.

Could you give us an idea of what you are thinking might be in terms of the impact on your business?

One, given the fact we are -- given our corporate tax structure, our retax structure and our structures around the world, it does not, and we would not expect it to have a significant impact on our business.

And given the fact that none of us personally participate in any kind of interest unlike people in private equity funds and opportunity funds it doesn't personally impact anyone sitting in this room so I don't expect it would have a major impact.

Bill?

It's not 100% clear how that proposal is going to work, what the legislation might look like, et cetera, et cetera, and how they might, quote, defined carried interest.

I think we have to wait a little bit and see how that gets defined to see whether any of the ways that they might define a carried interest impact our business.

But as of right now it's not a significant element that we are concerned about.

Thank you.

We'll move next to Michael Mueller with JPMorgan.

Hi, going back to the Macquarie assets for a moment, I know you talked about either holding them on the balance sheet or contributing to a fund, what would be the rationale for holding them on your balance sheet?

Would it be you need a bigger balance sheet to support a $6 billion CDFS pipeline?

Can you walk us through that?

Mike, I think the one rationale frankly would be that we love the assets.

They are great assets.

They are assets that we developed and we know very, very well.

That financial decision would simply be something that we need to think long and hard about, call it the third quarter of this year.

Holding them on our balance sheet is an option, obviously putting them into another fund is an option as well.

I think the most important thing would be to say that we are recycling capital, it would be a wonderful way in holding them on our balance sheet, if you will, to recycle out of old assets and add new assets to our balance sheet, which on a long-term basis I think would be a great thing.

If that's what we decide to do.

But that's not necessarily what we are going to decide to do.

We are going to kind of think about over the next, course of the next two or three months.

Thank you.

We will move next to Lou Taylor of Deutsche Bank.

Thanks.

Can you guys talk about your developed cost in Asia, they've coming down the last couple of quarters and how much of that is mixed with maybe more China assets in there or is it just other markets in Japan, that are contributing to that?

It's Jeff, and thank you for the note this morning.

It's clearly the, we are now reaping the rewards from the initial work we did in China and our development starts are ramping up very nicely in China.

Our team there has done an exceptional job in putting together a strong loan bank, creating strong relationships, and putting together, our senior management team they're putting together a superior operating team on the ground in the 16 cities that we are in today.

And we are just getting a lot more development starts, and obviously things are a lot less expensive in China than they are in Japan.

We are continuing to do exceptionally well in Japan, and grow the business there, but given the later start we had in China and the faster growth, as of late it's just a change in the mix, purely.

We don't -- actually we are seeing construction costs go up in both markets, commensurate with increasing construction costs around the rest of the world.

We are also seeing the pressure upward in rental rates.

So that 's really the answer to the question.

Thank you.

We'll go next to David Fick with Stifel Nicolaus.

Now we know why you paint everything green.

[laughter] Your Parkridge acquisition has a lot of land in the UK, can you just talk about the supply demand dynamics a little bit for UK industrial?

Yes, I can start that and, yes, and if anyone else wants to contribute that would be great.

I was actually in the U.K.

last Thursday, Friday, and spent the morning on Thursday in a helicopter with Alan Curtis who runs the UK for us, and we looked at, I'd say, 60%, 70% of our land holdings in the UK.

And, of course, the only way to look at it in a three hour time period is get up in the air.

It would take days driving around.

And strong, strong occupancies across the market.

Everything we are looking at, as soon as we can get entitlements we are seeing build-to-suit activity.

In fact a constraint in our business, we lost one or two build-to-suit transactions, solely because we didn't have the land bank ready and entitled today.

So our mid 30% market share could be even higher if we had a greater bank of entitled land today.

So we are seeing very, very strong demand, no shortage of demand at all.

We are seeing good, solid rental rate growth and we are very, very comfortable with the UK market as it stands today.

Understand the Bank of England has raised interest rates already this year.

We expect they may raise rates another were 25 to 50 bips over the course of the year.

But if you look at the returns on an unlevered basis, they are relative bargains, on an unlevered basis compared to the rest of the world at, call it , 5 to 6 in a quarter, 5 to 6%, with 15-year leases, 20 year leases, FOI fully repaired leases, so we feel very, very comfortable with the long-term prospects in the market.

It's becoming more and more difficult, and I know it's a long answer, but it was just the fact I was just there on Thursday, and extremely excited about what I saw.

It's becoming more and more difficult in the planning environment to acquire full planning approval or entitlements on land and it's an island and it's a very, very strong, to your point, green movement.

It's been green a lot longer than most parts of the world with the exception of Japan, and they are very, very serious of maintaining their green belt and making it difficult to get entitlements, [not] controlling traffic on the roads, and we are in a great position given our land

And, Dave, I'm going to add to that, too.

We think in the UK we can build, if you take all of our owned and optioned land together, it's about 48 million square feet.

Now half of that land we actually have optioned.

We don't have it on our balance sheet today.

If you look on page 8 you will see the land controlled in Europe, 2009 are 10 acres, a lot of that is in the U.K.

I don't have the exact number but a good amount of it, I would say at least half.

So if you think about the 48 million square feet being, call it (Inaudible), 24, 25 in terms of what we own on our balance sheet today.

And we are going to build, last year I think we built 5 or 6 million square feet.

We think we can take that to 7 or 8 million square feet a year.

You are talking about three-year land supply on our balance sheet, with another probably three officer four more years that we have optioned land, which is a tremendous position to be in, given the fact that it's not all on our balance sheet today and given the tight land constraints that we have in the overall market.

Operator, I think we have time for one more question.

Our last question will be a follow up from Michael Bilerman with Citigroup.

Yes, just on the CDFS scans for the rest of the year, it would look like to reach the high-end, if you see them 3.2 billion of sales and the 600 million of gains, that you would only need a 17% margin on those sales, which doesn't seem realistic given the trajectory in your business.

Would you just give us a sense of your expectation for margins, the CDFS profits and the total sales for the balance and how much the weights would be?

Well, I think the 17% margin that we need for the rest of the year to bring it back into the original guidance is not far off.

Again as we've said a couple of times so far this morning, we have a couple of pools of assets, some assets that, some Mexican assets that we have on our balance sheet that are likely going to be contributed this year.

Some Parkridge assets that are likely going to be contributed.

Where our basis in those is roughly equal to what we are going to contribute them at.

So you are going to see lower margins.

As Walt said, low single digits on some of those contributions.

And we are going to get more normalized margins on some of the development deals.

And so, getting to the mid 20s on the overall margins is really in our plan and, again, from sales at the top end of the range.

Michael, just a follow up on Bill's comment, because one thing he did not mention is, our Mexico assets or Mexico developments, our developments are at normalized or better development margins with expected value relative to our construction costs, our development costs.

However, as you may remember, just last year we bought what we believe to be the best portfolio of properties in Mexico City, a very large portfolio, very infill, very strategic, and should we decide to contribute that to a fund this year, we obviously paid something close to market last year.

We've appreciated it since then, there have been cap rate compression [using] rental rate increases, we've increased occupancy in those properties, but nonetheless we [bought] in that market last year and it was a significant portfolio, so that would be in something closer, at a lower margin than other assets that we've developed on our own.

But we feel very, very comfortable, obviously with our guidance for the year at the top end of the guidance and obviously we will look at that later in the year and make further decisions but we are feeling good about the year as it stands today.

With that we are going to sign off.

We want to thank everyone for joining us today.

It's a great start to the year.

It's great to have Bill Sullivan join us for his first call of many to come.

And we are looking forward to seeing a lot of you, if not all of you, at next month.

Thank you.

Thank you.

And once again, ladies and gentlemen, that will conclude today's call.

We thank you for your participation and you may disconnect at this time.