Prologis Inc (PLD) 2007 Q2 法說會逐字稿

I would like to welcome everyone to the ProLogis second 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, Amanda.

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

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

This morning we'll first hear from Jeff Schwartz, CEO, to comment on key accomplishments; Walt Rakowich, President and COO will cover ProLogis' operating property performance and global leasing activity; Ted Antenucci, Chief Investment Officer, will discuss investment activity; and Bill Sullivan, CFO, will cover financial performance and updated guidance.

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

These statements are based on current expectations, estimates, and projections about the market and the industry in which ProLogis operates as well as management's beliefs and assumptions.

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

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

I would also like to add that our second quarter results press release and supplemental do contain financial measures such as FFO and EBITDA that are non-GAAP 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 the opportunity to ask their questions, we ask you to please limit your questions to one at a time.

Jeff, would you please begin?

Thank you, Melissa.

Good morning, everyone.

Our second quarter was an exceptionally successful one for us, highlighted by several key accomplishments.

We recently announced two major transactions that enhanced our investment management business, as well as bolstered our leading position in key North American logistics markets.

We achieved further improvement in operating property performance and continued strong margins in our development business, in excess of 40%, giving us the confidence to tighten and raise our full-year FFO guidance to $3.95 to $4.10 per share, up from $3.80 to $4.

Additionally, we are making significant progress with various mixed use, redevelopment, and retail projects, many of which also support our market leading sustainability initiatives.

I'll discuss each of these achievements briefly, then turn the call over to Walt, Ted, and Bill for further details.

A couple weeks ago we announced a formation of a new North American fund that acquired $1.8 billion of high-quality distribution facilities from Dermody Properties, a leading private developer.

We added 24.7 million square feet of space in Reno, Las Vegas, Eastern Pennsylvania, Chicago, and Southern California.

The DP properties are of exceptional quality, very similar to our North American portfolio in terms of construction, size, and office finish with an average age of only 8 years.

As a result of this transaction, we've attained the number one market position in the fast-growing Reno and Las Vegas markets, as well as Eastern Pennsylvania, which has become a major distribution hub, similar to the Inland Empire and Southern California for products shipped through the ports of New York and New Jersey.

These are clearly markets which we believe will achieve above average rent growth over the long-term.

Additionally, we have a number of major customers in common and have already begun to further expand these relationships driven by the significant advantages the scope of our platform affords global customers.

Illustrating this, we have completed more than 1 million square feet of leasing in the acquired properties since beginning discussions with Dermody in May.

As part of the transaction, we also directly acquired 518 acres of land that can accommodate another 9 million square feet of development.

Reno, of course, is a major distribution hub for Northern California and the entire region, as well as benefiting from the Nevada tax regime in being an e-Commerce hub.

Affiliates of Lehman Brothers provided debt and equity financing to the new fund and we'll retain a 20% equity interest.

We plan to replace Lehman's bridge equity with more permanent sources of long-term and traditional equity over the next nine months and we expect the transaction to be additive to 2008 earnings as we integrate the portfolio into our investment management business and receive fee income.

Also in early July, we completed the purchase of the shares of Macquarie ProLogis Trust for a total consideration of roughly $2 billion.

For the time being, this high-quality portfolio will be held on our balance sheet.

However, as many of you know, a portion of the cash consideration for this transaction was provided by Citigroup in the form of a convertible loan.

Should Citigroup elect to convert that loan into equity at some point next month, there will be additional upside to our full-year FFO beyond today's increase.

Bill will have more on the components of changes to our guidance a bit battery.

Our second quarter also was notable for continued improvement in operating property performance with our strongest rent growth on lease turnovers in six years and the biggest increase in same-store net operating income in more than seven years.

Globally, we continue to experience strong demand for distribution space driven by the dramatic growth in global trade and the strength of our leading platform of people and assets.

Of course, we continue to closely monitor market conditions and economic indicators.

We also rely on our network of highly experienced people in the field who serve as early barometers of shifts in supply and demand.

While much has been written about the possibility of arising cap rates, when it comes to Class A distribution space, this not been the case.

Recently, we have noted that the spread between top quality and lesser quality assets is widening, as would be expected and quite frankly, should have always been the case.

While cap rates for Class B and Class C properties are inching upward, we continue to see stable Class A cap rates and in fact, they are still compressing in some markets.

Our private -- our current private capital raising efforts support that conclusion and, if anything, we are seeing a pickup in demand from institutional investors seeking the highest quality assets, locations, and partners.

In past calls we've talked about our sustainability initiatives.

This quarter I would like to highlight a business where we see significant opportunity in this regard and that is redevelopment.

Many of you know that our Catellus subsidiary has an unparalleled reputation in the U.S.

for its mix use and redevelopment projects such as Mission Bay.

But you may not be as familiar with our projects outside the U.S.

A great example of this is the new highly visible U.K.

project, which we are excited about.

We have entered into an agreement to buy the 65-acre former Rolls Royce engine plant in Bristol, U.K., subject to planning approval.

This mixed use redevelopment project at a former military engine manufacturing site will include up to 1 million square feet of distribution space as well as self-storage units, car dealerships, a hotel conference complex, and a technology center.

We expect this to create significant profitability while enhancing our sustainability initiatives.

Redevelopment and mix use projects such as the Rolls Royce project are a great example of how we take land that has fallen into disuse, clean up the environmental problems, and lay the groundwork for reuse.

The master plan may include industrial space or it may be slated for retail distribution, residential, or other commercial uses.

Brownfield development preserves raw land and creates value for local communities, our customers, and our shareholders.

We believe there will be an increasing number of these opportunities and look forward to bringing you details of our progress in this area.

In summary, we feel very good about the stability of global markets, the strength of institutional demand, and the exciting opportunities we have to expand our global market leadership position.

We will continue to leverage the talents of our team members, our customer relationships, our strategic land positions, our lead in sustainable development, and our design and construction expertise to capture opportunities worldwide.

We look forward to solid growth in each of our business segments as we continue to deliver value for all of our stakeholders.

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

Thanks, Jeff.

Good morning, everyone.

Operating performance for the quarter continued to be strong throughout all our global markets.

We leased more than 26 million square feet of space with a 71% retention rate on expiring leases.

Rental rates continue to grow in virtually every major market as demonstrated by average rental growth of 8.2% on turnovers for the quarter.

In our stabilized portfolio, overall occupancies were a solid 95.2% with Asia at 98.1, Europe at 94.6, and North America at 95.1%.

Now let me just touch on our business in a few specific markets.

In Japan, our $2.6 billion stabilized portfolio is 99.7% leased while our pipeline of roughly $700 million of properties currently under development has preleasing or letters of intent representing approximately 43% of the space, including a new lease just signed with Toyota at ProLogis Parc Centrair in Nagoya.

In China, our stabilized portfolio of 6.8 million square feet is 96% leased and our standing inventory of completed new space is only 200,000 square feet.

Market rents are growing at 7 to 10% per year and activity is accelerating.

In South Korea, our team is beginning to make very good progress and we expect to have more to talk about by next quarter.

Markets in Europe have also been active with single digit vacancy rates and customer expansions.

Year-to-date, same-store rental growth in Europe has been robust at 8.1%.

Italy is picking up.

We now have proposals out on all of our remaining inventory space there.

And France has been more active overall with build to suit signs this year with Michelin, the French Post Office, and FM Logistics.

Central Europe boasted the strongest GDP growth and our occupancies are now at 97%.

The Parkridge acquisition has also helped take our business to the next level in Central Europe, with 38% of our year-to-date leasing transactions signed on former Parkridge sites.

And Germany has been particularly strong, bolstered by additional talented people who joined us from Parkridge.

Since the quarter end, we signed over 750,000 square feet of new build to suit agreements.

We expect our development business to almost triple this year in Germany over last year.

In North America, markets continue to be in an equilibrium with the overall vacancy rate for bulk distribution facilities in the top 30 U.S.

markets at 7.6%.

This compares with 7.5% in the first quarter of '07 and 8% a year ago.

Net absorption in these markets was 32.4 million square feet in the second quarter.

By comparison, net absorption for all of 2006 was about 153 million square feet, so the current run rate is slightly below that pace, but still very healthy.

Rents are also growing.

Year-to-date same-store rental growth in our North American portfolio has averaged 8%.

It's important to note that the fastest rental growth is in Southern California, where we own over 40 million square feet of space or roughly 15% of our entire U.S.

portfolio and which is currently 99.8% leased.

We're also very pleased with our progress in growing our market share of the development business since the Catellus merger.

This year we expect starts in the U.S.

and Canada to be 80% higher than just two years ago.

And this growth is even more pronounced in Mexico, where as a result of greater market penetration and increased focus, starts will be four times higher than just two years ago.

Of course, the strength of our markets has been largely driven by a continued surge in global demand.

This global demand coupled with our land positions at key infrastructure nodes and our deep customer relationships are all now driving our build to suit business to higher levels.

We believe that by year end, based on transactions that are either signed or close to a commitment, we will execute build to suits that exceed over $1 billion in development starts this year.

That's up over two times last year's build to suit starts.

We think an important ingredient to this success is our dedicated efforts with major multinational companies, which continue to grow and prosper.

This year, we've signed build to suits with Nippon Express, Ingram Micro, Bonsall, Shanker, and Tesco, just to name a few.

Every one of these customers are repeat customers of ours and every one of them has a ProLogis Officer dedicated to serving their facility needs throughout the world.

But our global platform of people are not only developing new facilities for customers, they're also making strategic acquisitions, giving our customers additional supply chain alternatives in key logistics markets.

Now, these acquisitions in turn provide tremendous growth in our investment management business as we partner with our funds to expand our platform of assets.

In the beginning of the year, our guidance for growth and our investment management business through third party acquisitions was $900 million to $1.3 billion U.S.

Now with the acquisition of Parkridge assets in Q1, which is a targeted fund contribution, the recently announced DP portfolio and other acquisitions that we expect to make by the end of this year, we now expect to complete between 3.2 to $3.5 billion of third party acquisitions for our investment management platform this year.

Of course, this will have a very positive impact on our fee income into 2008.

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

Thanks, Walt.

The continued strength in global demand Jeff and Walt described supported starts of $688 million in the quarter, bringing year-to-date starts over $1.3 billion.

Roughly half of the quarter's starts were in Europe with another 35% in Asia and the remainder in North America.

Given the tremendous expansion opportunities we see across our global markets, we now anticipate that we will achieve total global development starts of 3.4 billion to $3.6 billion in 2007, a substantial increase over our initial guidance of 3 billion to $3.3 billion.

Since the end of the second quarter, we have made -- we have already made significant progress towards this new goal.

Notably, the increased level of starts does not include any development from Parkridge Retail, nor SZITIC-CP, our retail and mixed use venture partners in Europe and China, in which we have minority stakes.

These are two very young, fast-growing companies that are just getting started but are already exceeding expectations.

We are evaluating the best way to provide additional information on their activities and plan to have more information to share with you on these and other retail ventures at our investor day in New York this October and in future quarterly calls.

Our pipeline of properties under development at the end of the quarter represents about $2.4 billion of total expected investment.

Combined with completed developments and repositioned acquisitions of $3.6 billion, we now have a record CDFS pipeline of more than $6 billion that was 51% leased at the end of the quarter.

Although the pipeline has increased by 33%, the percentage leased is similar to that of a year ago when we had a $4.5 billion pipeline that was 53% leased.

Most importantly, CDFS completed developments and repositioned assets, including those in our CDFS joint ventures are on average more than 70% leased, which supports growth in our investment management platform and a stable source of future CDFS income.

Looking at second quarter development activity in North America, we started new projects in Columbus, Nashville, Louisville, the I-95 Corridor in New Jersey, and an expansion of one of our buildings at the Kaiser Distribution Center in Southern California.

Year to date starts in North America totaled just $150 million.

We have projects slated for the second half that will bring us in-line with our revised expectations of approximately $1 billion for the full year.

We had very strong new development activity in Europe during the second quarter with over $333 million of starts.

Roughly one quarter of these starts were in the U.K.

midlands and over a third was in central Europe.

A significant amount of this activity was in Slovakia, a market we entered as a result of the Parkridge acquisition.

Development activity was strong in Southern Europe where total starts of more than 75 million in France and Spain were all on a build to suit basis.

In Japan we began construction of 155,000 square foot build to suit for Sumitomo Rubber in the Hiroshima market.

We also started ProLogis Park Ichikawa 1, a 1.3 million square foot facility in one of the prime distribution hubs in the Tokyo Bay area with excellent access to the CBD.

In China we began our third development at ProLogis Park Beijing airport and our first in Dalian, a coastal city Northeast of Beijing.

Coastal markets remain an important focus for us, given expectations for dramatic growth in global container traffic.

However, we also continue to build our presence in other critical locations that serve our customer's global supply chain needs.

The DP transaction supports this, with a significant portion of the land we acquired located in Rochelle, Illinois, the site of the Union Pacific's international intermodal hub.

Separately, we acquired roughly 150 acres to support the development of our new park located just outside the Joliet Arsenal intermodal facility Southwest of Chicago.

As we have noted in past quarters, our objective is to maintain an appropriate supply of land to support roughly two years of development.

In addition to the DP and Joliet arsenal land, we also acquired land in Phoenix, Las Vegas, and the Inland Empire during the second quarter.

In Europe we acquired more than 500 acres distributed fairly evenly across each region.

In Asia, we picked up land to support additional development in Japan.

We also secured land in China for development in our Bonded Park in Guangzhou and our second building in Dalian, as well as our first parcel in Changzhou, one of the inland markets we identified last quarter.

To wrap up, we continue to identify and capitalize on exciting new opportunities to expand our global development business and feel very comfortable with the increase in our expectations for additional development activity this year and in the future.

Now I'll turn it over to Bill.

Thanks, Ted.

As Jeff mentioned, we had very strong performance from each of our business segments.

Overall, we reported $1.16 in diluted FFO per share, a 28.9% increase over the second quarter of 2006, reflecting strong overall property performance and above average CDFS contribution and disposition margins.

Diluted earnings per share of $1.50 were up 127% from $0.66 the prior year, primarily due to a high level of non-CDFS disposition activity.

Turning to property and operations, year-to-date same-store net operating income is up 5.9% and average occupancies are up 3.2% over a year ago.

As Walt noted, we are now capturing significant rental rate increases as demonstrated by year-to-date same-store rent growth of 7.8%.

In our CDFS business, Q2 dispositions of roughly $860 million bring us to $1.64 billion for the first half, putting us on a pace to achieve the top end of our full-year range of 2.8 to $3.2 billion.

Total dispositions for the quarter were significantly higher at $1.3 billion as we also generated $480 million of proceeds from non-CDFS contributions to funds and third party sales.

Gains from CDFS dispositions continued to be strong in Q2, generating year-to-date post-tax post-deferral margins of 41.4%.

As you may remember from our first quarter call, our CDFS pipeline includes the stabilized industrial assets we acquired in two portfolios, both of which are slated for contributions into new investment funds.

Details on these two portfolios are identified in the footnotes on page 17A of our supplemental.

We have previously cautioned that the margins on these assets would be negligible.

We also said that these lower margins would offset the significantly higher margins realized from disposition of new developments and repositioned acquisitions, bringing us to blended margins in the low to mid-20% range for the full year.

We now expect that blended margin to end up between 25 and 27% for the year.

In order to provide greater transparency, in the future it is our intention to disclose the margins for the different segments of our CDFS dispositions, developments, and repositioned assets.

Other CDFS -- other CDFS income, which includes development management fees, income from CDFS joint ventures, and interest on notes receivable totaled approximately $13 million for the quarter and $26 million for the first half.

Having gained additional insight into the timing of the development management fee portion of other CDFS income, we now expect the total of these items will be between 60 and $65 million for the year, a decrease of approximately $12 million from our initial full-year expectation.

Income from our property fund business is in-line with expectations, with recurring management fees up by approximately 18% year-over-year to roughly $24 million.

Our share of FFO from unconsolidated property funds increased by 32% over the second quarter of last year.

Year-to-date comparisons of income from our fund business are skewed by last year's first quarter gain associated with the liquidation of the 3 R Capita funds and subsequent contribution of those assets to our North American industrial fund.

On the expense side, the increased level of G&A reflects strengthening foreign currencies, an increase in head count to support the growth of our business, and in keeping with strong performance year-to-date, a higher level of performance-based compensation.

We also had about $8 million in the first quarter from one-time charges associated with employee departure costs.

In total, these adjustments represent an additional $30 million over our initial G&A guidance for the full year.

Interest expense is also expected to exceed initial forecasts due to higher average borrowings related to our significant acquisition activity.

We expect this increased interest expense to be essentially offset by the increased NOI and fund returns generated by our Macquarie and DP acquisitions, respectively.

Let me quickly recap the guidance adjustments that bring our new range to between $3.90 and $4.10 per share in FFO.

The principal components to the $0.10 to $0.15 increase in guidance are as follows--approximately a $0.30 increase related to a 3 to 5% increase in overall CDFS disposition margins, approximately a $0.10 decrease related to the G&A expenses discussed previously, a range of $0.05 to $0.10 decrease related to an impairment charge taken in Q2 of $12.6 million, and a shift in timing on approximately $12 million of development management fees.

We expect Macquarie and DP to be essentially neutral for 2007.

However, should the MPR loan be converted into equity, we would recognize a further $0.30 to $0.35 per share in FFO from a combination of the gain associated with the conversion premium, the uplift in the valuation of our historic interest, and release of previously deferred gains.

We will update everyone in August relative to this potential conversion.

Looking at our capital structure, our balance sheet remains strong with total debt to book capital of about 56% and 43% on a market capitalization basis.

In sum, we feel real good about where we are and where we're going.

Let me turn it back to Jeff to provide a quick synopsis.

Thank you, Bill.

In summary, we feel very good about both our results and our prospects going forward.

We're seeing accelerated momentum in our business and want to give you five key takeaways.

Number one, we're well-positioned with the leading global platform.

Our development in organic growth is evenly distributed with approximately one-third in each of Asia, Europe, and North America, giving us significant income diversity.

Number two, we are achieving excellent operational results with same-store NOI growth of 5.9% and rent growth of nearly 8% this past quarter.

This is the best performance in over six years.

Number three, we're generating strong post deferral CDFS margins in excess of 40% year-to-date and have increased expected starts two between 3.4 billion and 3.6 billion for the year.

Four, we expect growth of over $6 billion in our investment management business during 2007, which will give us annual growth in our total investment and management platform of 50% in 2007 to over $18 billion.

Five, we have a current development pipeline of $6 billion, expected to grow to over $7 billion by year end, positioning us very well for 2008 and beyond.

With that, operator, we'll take questions.

Thank you.

(OPERATOR INSTRUCTIONS) We'll take our first question from James Feldman of UBS.

Thank you very much and good morning.

Can you talk a little bit about, first of all, the same-store expenses in the quarter were about 16% growth, which was pretty high.

And then a follow-up to that is just can you talk about the sustainability of the same-store growth into '08 and even into '09?

Just in terms of how much rent growth you can get and then how much NOI growth you can get.

James, I think Walt is best prepared to answer that question.

James, as it relates to the same-store expenses, first of all, behind the numbers you basically had rental expenses in the same-store pool going up by $15 million.

But in addition to that, you had recoveries increasing by $15 million.

So basically -- practically all of our leases are triple net leases, so when our expenses go up, they're directly passed through to the customers.

The majority of the increases is really in either taxes or insurance and most of it is in taxes.

Needless to say with properties going up in value, you have significant revaluations that are taking place throughout the country and in particular, in California, we've seen some reassessment.

Again, all of that gets passed through.

In addition to that, you've got insurance that's gone up year-over-year.

No surprise there.

And all of that insurance, again, gets passed through to the customer.

When you really look at the majority of our expenses, it's really in taxes and insurance.

Those things are both going up and they're both getting passed through.

As to what we expect in the future, clearly we're seeing significant same-store growth of -- in the neighborhood of 6%.

That's obviously being driven by two factors.

One is increases in occupancy and two is increases in rental rates.

I would say moving forward, since we're roughly 95% occupied, I would see a lot less in terms of occupancy growth, but on the other hand, we'd see stronger rental growth.

We've talked about long-term same-store growth, which would be somewhere in the neighborhood of, call it 2 to 4% or tracking inflation, if inflation is much higher than that, I think we'll see higher rental growth.

But for now I think moving forward you're going to see a bigger component next year of same-store growth coming from rental growth.

Right now that looks very strong.

Historically, if you look back in the mid-90s, we were growing -- when we were turning spaces, we were getting 15 to 20% rental growth.

So if we get back into that environment, you can easily see a situation where you can get into, call it a 3 to 4% same-store growth on an annual basis.

We'll just have to see how it goes.

Right now, rents are definitely firming up in all of our markets.

We have a question now from Michael Bilerman, Citigroup.

Good morning.

Jon Litt is on with me as well.

Jeff, you, in your opening comments talked a little bit about how the institutional demand from institutional investors is very strong to go into the fund business and join you in acquisitions.

It sounds like Lehman took the equity in the DP portfolio and they're going to try to syndicate that out, I guess, over the next nine months.

It sounds like you gave Citi a convertible loan into MPR.

I'm just trying to reconcile why you would let the banks take the upside maybe on those portfolios relative to going direct to the institutional investors?

Michael, that's a great question.

However, the only modification I would make to your question would be when you stated that we gave the upside to the banks, which we did not do.

We keep the upside.

There's a slight sharing in the Citi case of the upside with the majority going to us on any sort of possible resyndication or gains from a resyndication.

We found this as a way to leverage our balance sheet with other institutions equity further as we build our investment management platform, keep our balance sheet very strong, gun powder dry to do things that are opportunistic.

And we just thought it was a prudent way to grow the business, to scale the business, continue building the business in a very profitable, accretive manner.

Accuse us of being overly conservative, potentially, but we would rather be overly conservative as we grow this business, because we truly believe in the growth prospects around the world and we're going to make sure that we're well positioned to take advantage of those.

We have a question now from Christopher Pike of Merrill Lynch.

Good morning, everybody.

I just wanted to talk about your comments with respect to the investment management business.

Can you help me quantify or characterize the environment for platform opportunities like you've done so far this year and how do those opportunities exist in the marketplace, not only for you guys, but for some of your competitors?

In other words, are these more internationally skewed?

What are the sources of these opportunities?

Are they off market deals?

Then finally, how is the due diligence timing changed?

It seems like especially the DP deal, from my understanding, that was really quick and you guys obviously have the capability to deal with that, but how has the diligence timing changed at all over the last year or so?

Christopher, I might start that and then turn it over to Ted to talk a little bit further about DP and our due diligence there.

I'm not sure what opportunities our competitors see.

And really don't think about that.

We think about building the only truly global real estate platform and further expanding that and further leveraging the advantages inherent in having that and having built that over the last decade, over the last 14 years, but really the international and global platform over the last ten years.

We're seeing a lot of opportunities and we're seeing opportunities that are accretive, both to our platform, the operations as well as to earnings and from an investment management standpoint.

The one thing that I failed to say in Michael's question, which I thought was a very good question also, we are seeing a significant amount of investor demand and we're seeing probably increased investor demand to invest in our fund management or investment management platform.

There is clearly a flight to quality and these investors are looking for the highest quality partners, the highest quality assets, the best quality locations and our development pipeline, which is providing the best source of development properties and the best source of institutional quality distribution assets and logistics assets on a global basis are in high demand and we're seeing more and more demand in that regard.

As it relates to DP and potentially shorter due diligence periods than you would have typically seen two to three years ago, quite frankly that works to our advantage because we have tremendous market knowledge in every market we operate in and Ted may want to comment on that.

Chris, the sources of opportunities is another question and we have worked very hard with the brokerage community to make sure we're aware of all the opportunities that are out there and then we try and identify the ones that we think fit us the best or are in the best markets, the best product type.

We're very focused on the markets that we enter into and the product that we're associated with.

So we work with a brokerage community to identify the best fits and then once we find that we work on them and stay very focused until it gets to a point where it makes sense for us or it doesn't.

But we pursue those opportunities very hard.

Jeff kind of touched on it.

On due diligence time frames, it is much tighter than it was in the past and we think that benefits us.

Compared to some of the other institutional buyers, they can't respond as quickly as we can.

We have a lot of information on the markets that we're in.

We know what rents are, we certainly understand occupancy levels and upside and opportunity and demand and although we'd always like to have a little bit more time, I think the shorter time frames have benefited us.

And right now in the current environment, I think we should expect to continue to see short due diligence time frames.

We have a question now from David Fick of Stifel Nicolaus.

Good morning.

I was wondering if you could clarify -- I know you're planning to put more out in August on this, but this gain from MPR, can you just sort of walk through the economics of that gain in maybe a little bit more detail on the accounting than you disclosed?

Yes.

David, I can talk to you.

Essentially, MPR was a portfolio that we managed currently when we put the properties into that because of our ownership interest, we deferred certain gains associated with that ownership.

Some of those will be recognized if and when Citi converts their loan, and so that's a piece of it.

We also will recognize a fair amount of gain just on the Citi conversion relative to the overall value of the portfolio and then we will recognize a piece of gain based on the difference between what Citi's conversion rate is and what our original purchase price of this portfolio is.

So there's basically three components to that gain and those components add up to somewhere between $0.30 and $0.35 per share.

Thank you.

We have a question now from Michael Mueller, JPMorgan.

Hi.

You talked about the build to suit activity ramping up.

A couple of things relating to that.

Do you expect that trend to continue in 2008?

And can you also talk a little bit about the economics in the margins of the build to suit activity versus the traditional spec deals?

This is Jeff.

I'll start and then I'll turn it over to Ted to talk about future growth in our build to suit business and Walt may want to add something on North America and Mexico.

We are seeing a ramp-up in that business.

We expect it to grow.

We put an increased emphasis on that.

We staffed up for it.

That's been part of our G&A increase from a people count standpoint.

We have dedicated teams in North America, and that's a good part of the reason why we're getting so much success and we -- you can expect to see some exciting announcements in that area in the next couple -- in the coming 60 days.

We're having a strong effort in that regard and tremendous success in Europe and again you'll see announcements related to the 750,000 square feet we signed, just since quarter end in Germany alone in build to suit transactions.

155,000 square feet for Sumitomo Rubber, one of the largest rubber/tire companies in the world in Japan.

So we're seeing a lot of activity and we expect to grow that business.

Michael, to add on to Jeff's, I think there's an increased level and I think it really is an increased focus and our relationship with customers is really starting to pay off.

On a global basis, we've got relationships that are getting us in front of customers before everybody else is aware of the opportunity and we're working very hard to capitalize on that.

Margins on build to suits are clearly less than what they are on inventory development and we've been very fortunate that overall our margins blending the build to suits in with inventory are still very strong.

I would say we expect to have margins on build to suits about 60 to 70% of that that we would get on an inventory building.

Michael, the only thing I would comment back to Ted's point, it's really all about serving customers.

Sometimes companies want a build to suit in a certain area and sometimes they don't have the time to wait for a build to suit in another area.

So to the extent we can serve them in one market, albeit at a lower margin, we think it's additive to the overall relationship we're going to do that.

And it was really a question of redoubling down on our focus, building the team internally.

We have done that and I think we've begun to see some great results throughout the world.

Michael, two other points, one that I find real interesting, one of the reasons on several of these build to suits that we prevailed was sustainability.

That is coming into play in a big way.

There are a lot of corporate customers that are focused on that and for the most part, it's a very competitive environment and when all things being equal, what we found as being a winning move for us has been the sustainability initiative and some of the things that we're doing with our new buildings.

Also, we look at the build to suit business as incremental and as growth on top of our inventory business and one of the reasons why our CDFS pipeline is continuing to grow so quickly.

We have a question now from Paul Morgan of FBR.

Good morning.

Could you just go into a little more detail about the momentum on the mixed use side, particularly maybe apart from things that were already in the Catellus pipeline at the time of the merger and what your expectations are there?

Our expectations are clearly to grow that business, as evidenced by our investment in Parkridge retail where we bought 100% of the industrial business of Parkridge and made an investment in our mixed use/retail business, as well as our investments at SZITIC-CP, which could arguably be the largest retail developer in China today with the pipeline they put together and we've helped them to put together there.

It's an area we expect to grow, internationally as well as domestically.

It's an area that does report to Ted, so I know he wants to make some comments.

Paul, I think you used the word momentum.

We do feel like we've got momentum in this business.

Jeff mentioned the Parkridge acquisition in Europe.

There's a lot going on there, SZITIC is exciting and in North America we've got some great stuff going on.

The Austin Mueller airport has been -- is going very well for us.

We've got a second phase of retail under construction right now.

We're working on several build to suits out there.

We acquired some land in Teterboro, New Jersey.

I believe that occurred last quarter.

That has got a retail component to it that's extremely exciting location with great upside.

It's a business that we're focused on and we do have momentum and we are growing.

What's important to remember, Paul, is every customer we're dealing with in this retail business, we already serve them in the distribution side.

So it's a furthering of the customer relationships that exist today, whether it be Wal-Mart or any of the other customers, we're serving their distribution requirements, strengthening relationships that already exist, and leveraging the platform we put together on a global basis.

So it's incremental, it's accretive, and it's also strengthening our global customer relationships.

Our next question comes from David Cohen of Morgan Stanley.

Hi, it's actually [Matt Austra].

I just wanted to ask you a little bit more on the partnership capital side of things.

It seems like -- you were talking before about how the partners you use most recently are a little bit different than the ones before.

Can you just expand a little bit more on the nature of those partners and especially going forward, it seems like you can make a sent that sentiment towards real estate, at least among some of your traditional players might change a little bit.

I know you're not seeing that yet, but looking over into '08 and the additional partners going forward, how do you see that changing going forward?

Matt, it's Jeff.

I'll answer that, if it's okay.

One, I don't think there has been a shift in the type of partners we put together.

And acquiring two platforms, that being MPR and Dermody Partners, we did choose to use equity bridge financing, or potentially equity bridge financing in the Citi case -- or the MPR case and equity bridge in the case of Dermody with Lehman.

And again, that was to preserve the strength of our balance sheet to leverage our balance sheet and use very good quality investment banks, both for their placement, their distribution.

To introduce us to new potential sources of capital long-term while we have great partner relationships today, we always want to expand the universe of partners that we have in the long-term as we grow and expand our investment management platform, which we're growing by 50% this year alone, but in our private capital raising activities, hopefully a lot of things we will announce in the very near term.

We are seeing an increased level of interest, quite frankly.

People that a year ago were looking for riskier ventures, riskier investments are now looking for more core, are looking for quality no different than in the debt markets, people moving out of subprime and moving into treasury bonds, we are considered to be very, very high quality and people are looking for that quality in assets and location and partner and lower leverage levels, all that works in our favor and we're seeing very, very strong institutional demand.

The other thing I might want to say and make a point of is we take a very long-term perspective in our investment management platform.

How we build it.

We want to establish long-term relationships where we have repeat investors that come into every one of our funds around the world that we do a lot of business with and we want to create win-win situations.

So we're creating structures that are very fair, that are good for us and also good for our partners and create those types of long-term relationships.

We have a question now from [Cedric LaChance], Green Street Advisors.

Thank you.

Walt, you talk a lot about rent growth.

Can you give us some examples of markets in which you've seen the greatest rent growth and markets in which you may not be seeing rent growth?

And if you could detail that throughout your global platform.

In addition, could you give us an idea of what is the mark to market for your portfolio overall and also by region, if you're able?

Cedric, I don't have all the markets in front of me, but I can give you a general view of it all.

The rental growth that we've been seeing in Southern California is obviously very, very steep because I would say the rents in place in most of our facilities there are anywhere from 15 to 20% below market, maybe even higher.

So when we turn those rents, we're way into the double digits.

There have been some other markets that we have not experienced as much rental growth.

A Memphis might come to mind, for example.

Some of the Midwest markets, although their rents are beginning to grow.

But I would say in general, the Midwest has not experienced as much rental growth as we've seen on the West Coast and as we've seen in Miami, for example, some of the Coastal markets.

But having said that, I think we're finally in a position where in all of our markets we're seeing some form of rental growth.

It may be in single digits, low single digits in the Midwest markets and it may be in high double digits in some of the Coastal markets.

It's averaging out to roughly 8% today.

I would say if you did -- if market to market in our portfolio, we're probably somewhere in the neighborhood of 5 to 6% below market in terms of where the average rates are today, which is kind of reflecting in the rental growth that we're seeing.

It might actually be greater than that.

We have not done a run recently to determine that, but the reason I say that is because the rents that we're turning today were generally leases that were done four years ago and I would tell you that the leases that were done between four years and now, we actually saw rental declines.

So -- I mean, we're pretty excited about looking out in the next two or three years because of that particular dynamic.

Thank you.

Our next question comes from David Toti of Lehman Brothers.

Good morning.

Could you provide us with some detail on your expectations for CDFS margins in the U.K.

for '07 and '08, potentially in the context of falling property prices?

Falling property?

David, I'll address that.

We have seen no evidence of falling property prices in Class A product in the U.K.

In fact, I'd argue that there's been far less rate compression in the U.K.

than anywhere else in the world and if you really look at quality and the risk-adjusted rates of return on an unleveraged basis, some of the greatest values remain in the U.K.

where cap rates on 15, 20-year FRI leases with institutional rate covenants are 5.25, 5.5% relative to three year leases elsewhere in the world at 6.25.

It really never compressed to the extent -- you probably saw 100 basis point total compression in the U.K.

over the last five, six years where you have saw 300, 400 basis points elsewhere in some other parts of the world.

So we're not seeing that in our product to date.

There may be other people seeing other product types, but we're clearly not seeing it and I think our margins, we expect to remain very constant.

David, just as an add, we do not provide guidance on the CDFS margins by region or by let alone country.

We have a question now from Mitch Germain, Banc of America.

Jeff, just continuing on your discussion of margin, of cap rates, are you seeing any further compression in any markets here in North America?

I'll let Ted or Walt answer that.

Okay, great.

I think we're seeing -- it's always interesting, cap rate compression from when to when.

Over the last 12 months we are, over the last three months, I would say if there is any, it's very, very slight.

I don't -- it's certainly decelerating in terms of the pace at which it is compressing.

I think it has for the most part stabilized.

I'd just add to that, Mitch, the cap rate compression that we have seen over the last 12 months has been generally in the secondary markets in the U.S., which were for the last two compressed, but I would agree with Ted.

You didn't ask internationally, but there are clearly some markets internationally that we see continued cap rate compression in China, we see it in Japan.

Obviously, most of the Asian markets.

We've seen it in Central Europe and so there are areas -- and keep in mind, Jeff had mentioned that we have a third of our development taking place now on all three continents, so there are clearly areas of the world where we will continue to see that.

Specifically to the U.S., I think that they're fairly stable at this point in time.

We have a question now from Chris Haley, Wachovia.

Good morning.

Congratulations on the quarter and a question on the portfolios that are being bridged right now, be interested to get your read as to how these banks are resyndicating the investments and what type of rates of return levered and unlevered they're communicating regarding these North American portfolios?

Chris, I think that we're in an environment today where obviously returns have compressed significantly and expectations of returns have compressed significantly.

I would say that what we see in the marketplace on a ten-year IRR would be something in the 8.5 to 9%, maybe low 9s would be fairly typical to what we're seeing in the marketplace today.

And that deal is getting syndicated and that's a deal that there are investors that are signing up to.

In a low levered or reasonably levered highly stable, well leased, loan lease term, so very strong cash flow/strong, strong covenant-type syndication, that's what we're seeing today and that's very attractive to the investors.

We have a question now from Jay Habermann of Goldman Sachs.

Hi.

Good morning.

Just a question still on margins.

Can you just give us a sense for the product that you're commencing today, what sort of margin assumptions you're underwriting, whether you're getting back to the mid-teens, or you're still in that 20% plus range.

I guess, Ted, you mentioned leasing remains strong, but for the second quarter, development completions, it looks like they're about 37% leased.

I'm just wondering if at this point if we're starting to see supply run ahead of demand.

And lastly, for Jeff, would just be any thoughts on a share repurchase?

Yes, Jay, in terms of margins, our margins continue to be strong.

We stated time and time again that we think margins are sustainable in the high teens, 15 to 20% range.

We're certainly above that.

We're still benefiting from cap rate compression.

As we look forward, we don't underwrite to cap rate compression and I think we feel that this business is a 15 to 20% margin business and that's what we look at when we make investment decisions.

In terms of demand, we're not seeing a drop off in demand.

We focus on -- if you look at our occupancy levels, they're effective at all-time highs.

We look at how many buildings we have that are available for more than 12 months and literally throughout the world, it's a handful.

I mean there's very few.

So are there certainly times when you complete buildings, when you just complete buildings and they're a percentage leased.

We don't assume it's going to be leased at completion.

We've been fortunate that a lot of them have been, but we're well within our pro forma lease up on the vast majority of our portfolio.

We're constantly monitoring the markets and doing the best job we can at building to demand.

I don't, at this point I don't see anything out there that concerns us about overbuilding.

And Jay, just so you know, and again, our tracking is different than others, some of the data that's put out because we focus just on Bulk Industrial and just in the 30 markets that we're in.

But we track net absorption in those 30 markets at about 64 million square feet for the first two quarters of this year and interestingly enough deliveries are at 63 million square feet.

So it's tracking pretty close and we're also taking a look at starts which are pretty much in line with deliveries.

A little bit up, but not substantially up and we're pretty comfortable with what we see in the United States.

The information is not as clear in international markets, but we've got a pretty good feel for what's going on there and if anything I would say that our demand is in excess of supply in most if not all of our markets.

And Jay, lastly on your question about potential share repurchase, let me start by saying like everyone, we believe the Company is significantly undervalued.

I know you hear that on a continual basis.

We look at the strength of our operations on a global basis.

We look at the strength of our development pipeline, how well leased it is, the kind of profitability we're creating there, the long-term value add, the uniqueness of having the only truly global operating platform in the real estate industry.

And as one particular example, look at our investment management platform, the fact that we've doubled that over a very short period of time.

In fact, this year alone we've had -- we're going to have 50% growth in our investment management platform.

Look at that kind of growth and you look at the way that's being valued.

It's being valued at half of the multiple that people put on similar investment management platforms that trade in Australia, for example.

I keep saying that if someone would give us 35 to 40 times the way they do in Australia, I'm ready to move to Sydney to get that.

We clearly believe that we're significantly undervalued in that regard.

That being said, we'll continue to evaluate share repurchase programs along with the alternative opportunities we have around the world to grow the business and create shareholder/stakeholder value and it's something we continue to evaluate on a daily basis.

We'll take one more question.

I think we have time for one more.

We have a follow-up now from Michael Bilerman of Citigroup.

Jeff, I wanted to come back to using Lehman and Citi, you talked about how that would introduce them to new investors, I'm just really trying to understand why you wouldn't just warehouse it yourself, use them as advisors to get to those investors and if something doesn't -- help me understand why you wouldn't just go direct because from the outside it would look like the institutional investor universe would be weakening if you were having to use a Lehman and a Citi for that equity.

Michael, that's -- understand your question.

One, let's start out by it's $4 billion of total acquisitions, which without issuing additional equity during the -- for a short period of time that we would warehouse those on our balance sheet, which would not be a good move in our belief to issue shares to strengthen the balance sheet so we could take $4 billion of assets on our balance sheet and then syndicate them, and put them into our investment management platform we think it's better long-term for our shareholders to take this structure.

You know, developing new relationships, obviously when you have organizations with the scope and the diversity of someone like Lehman Brothers or Citi, they have investor relationships that they may not have yet.

Those are relationships we want to develop.

We've got a great core of very strong institutional investors in all of our funds.

We're seeing tremendous success in our new private capital raising efforts, some of which we will hopefully be announcing very, very shortly.

We're seeing no shortage of demand in our current institutional investor set.

We always want to increase that set.

Establish new relationships as we scale and grow our business over the years to come and again, 4 billion is a lot of -- is a significant amount of capital and we want to maintain the strongest balance sheet in the industry so we can continue to take advantage of opportunities on a go forward basis.

It was a good question and I'm glad you asked it quite frankly.

I think we're pretty much out of time.

We look forward to talking to all of you again soon.

Please remember that in October we will have an investor day in New York which we're going to -- we're very excited about and we think it will be very, very interesting for all.

We're excited about the state of our business.

We're excited about the progress we made year-to-date.

We're even more excited about the momentum were building in growing the business on a go forward basis and some of the things we're currently working on.

Again, thank you and have a great day.

That does conclude today's conference.

We thank you for your participation.

Please have a good day.