Prologis Inc (PLD) 2007 Q3 法說會逐字稿

Good morning.

My name is Amanda, and I'll be your conference facilitator today.

I would like to welcome everyone to the ProLogis third 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'd 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 third 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 will first hear from Jeff Schwartz, CEO, to comment on key accomplishments and our sustainability initiative.

Then Walt Rakowich, President and COO will cover ProLogis's Operating Property Performance and Global Leasing Activity.

Ted Antenucci, Chief Investment Officer, will discuss Investment activity and Bill Sullivan, CFO will cover Financial performance relative to 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 industry in which ProLogis's operates, as well as managements beliefs and assumptions.

Forward-looking statements are not guaranty's of performance and actual operating results maybe affected by a variety 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 third 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.

And as we have 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 yourself to one question at a time.

Jeff, would you please begin.

Yes, thank you, Melissa and good morning, everyone.

Our third quarter was one of significant accomplishment and continued strong financial and operating performance.

We've announced 4 new funds, that will enable us to grow investment management business by more than 80%, over today's level; to over $33 billion in assets under management.

Our operating properties continue to perform well and we maintained a very strong margin from developed and repositioned properties in our CDFS or development business.

Additionally, we unlocked significant value through our investment management platform, with the Macquarie ProLogis Trust transaction, which added $0.36 per share of FFO in the quarter, giving us the confidence to tighten and raise our full year FFO guidance to $4.40 to $4.50 per share., up from $4.25 to $4.40.

We are also establishing guidance range for 2008 FFO per share of $4.65 to $4.85 per share which is a growth rate of 17% at the top end of both years ranges and prior to the MPR related gains this year.

First, I'll hit a few highlights and then turn the call over to Walt, Ted and Bill for further details.

This quarter we announced new funds in Europe, U.S., Mexico, and South Korea that have a combined capacity of over $14 billion.

Together with the capacity in our existing funds, these new funds bring us a significant distance toward the goal we established at our investor day in New York, just two weeks ago.

At that meeting we outlined the plan to have 37 to $40 billion with their investment management business by the end of the 2010.

As part of our goal to achieve $60 billion in assets owned, managed and under development, by that time.

And as we build our investment management business we expect to see related increases in fund management, fee income and returns from our co-investment in these funds as new equity commitments are invested over the next three years.

We were pleased that our Europe and Mexico funds were significantly oversubscribed, despite current credit market conditions.

This speaks both for the quality of our worldwide platform and the strength of our global capital relationships, but importantly, as I have said before, also, to the flight to quality of institutional investors and while institutional demand has slowed for second tier assets we continue to see strong demand globally for the high quality exceptional locator assets we are developing.

We continue to be conservative and underwrite to higher cap rates we market in our developments.

As we have said for over two years now, but we have seen little evidence of high quality cap industrial cap rates softening.

And in fact, we have seen continued compression in Asia.

While we expected eventually margins will revert 15 to 20% we have very good visibility on our current development pipeline and are comfortable with margins averaging the low 20% range for 2008.

Given our dedicated development pipeline and committed capital in place, we believe we are well position to take advantage of any inefficiencies or opportunistic investments that may be available in the global market , given the current financing climate.

We also noted that current market conditions-- current marketing conditions are surprising new development supply in the majority of markets which will ultimately further strengthen market fundamentals.

During the quarter we also achieved solid operating property performance with continued strong growth in same-store net income and double-digit rent growth on lease turnovers.

A level we haven't seen since the late '90s.

Of course, we continue to closely watch market conditions and economic indicators and rely on our experience local market teams as well as our internal research.

While the current global credit crunch is expected to result in a modest slow down a world GDP to about 4.8% this year compared with 5.4% in 2006, this is still a relatively strong pace and though there will always be some correlation between a slow down in the U.S.

economy and the world economy, there appears to be enough forward momentum in both Asia and Europe to insulate them to a large extent from the U.S.

economic climate.

If there is a U.S.

per diem the diversification of our existing platform will help mitigate the impact of any single economy on our overall results.

Remember, 80% plus of our organic growth this year will be outside of the U.S.

Switching gears for a moment.

I would like to highlight our sustainability initiatives.

A couple weeks ago we announce two new build-to-suite developments for BMW in the U.S., one in eastern Pennsylvania and one outside Chicago.

Both facilities will be built according to the U.S.

Green Building Council's Lead program and will incorporate a number of sustainable design and construction techniques, including extensive use of recycled and locally sourced construction materials, energy efficient fluorescent lighting with advanced energy control, and low maintenance landscaping with water efficient irrigation.

BMW saw the development of these new facilities as an important element of their own sustainability initiatives in the U.S., and we are seeing more requirements such as these.

Particularly from large, multi-national companies that have prominent global brands.

Our new facility for BMW underscored this trend and reinforced the business value of the investments we have made to build a core competency in sustainable development.

Also the build-to-suit for Sainsbury in the UK, which is the first carbon neutral bulk distribution facility in that country and the growing number of environmentally driven build-to-suits in Germany, which Ted will talk of later, among the many and multiplying benefits of our sustainability initiatives.

Our build-to-suit program is both additive and incremental to our global leading inventory development program and provides very strong risk adjusted returns, while strengthening our customer relationship.

We look forward to bringing you details of our progress in this area.

Now let me turn over to Walt to discuss

Thanks, Jeff.

Our third quarter operating performance was also strong throughout our global markets, driven by the growth in global trade, continued supply chain reconfiguration and functional obsolescent in many emerging distribution markets.

Now during the quarter we leased nearly 29 million square feet of space with a 79% retention rate.

Rental rates continued to grow in virtually every major market as demonstrated by average rent growth in our same-store pool of 9.6% for the quarter and 8.4% year-to-date.

Our stabilized portfolio, overall occupancies were a solid 95.5%, with Asia at 98.9, Europe at 93.7 and North America at 95.6%.

Now let me just address activity in a few specific markets in Japan, our $2.6 billion stabilized portfolio is 99.3% leased.

An important accomplishment in Japan was the recent acquisition of 17 distribution facilities from subsidiary Matsushita for approximately $735 million.

Matsushita Logistics will lease back 15 of the sites totaling 3.6 million square feet from Sapporo City in the north, to Fukuoka in the south with more than 60% of the space in Tokyo, and Osaka .

This transaction is an excellent example of what we see as a growing trend in Japan, whereby large companies are beginning to look to out source distribution and real estate operations in order to strengthen their balance sheet and focus on core operations.

Now in China, our stabilized portfolio of 7.2 million square feet is 98.3% leased with just 500,000 square feet of standing inventory.

We had good leasing activity in Guangzhou, Beijing, and Shanghai and in a notable example of our ability to leverage global customer relationships we leased space in Shanghai, to Nippon Express and Hitachi Transport, two of our largest customers in Japan.

In South Korea, we are making good progress completing our first acquisition within our new Korea fund of a building in [Pyongyang].

We are also under development with our first building in Inchon and have secured land to support additional development in Chonging and Kyongsong.

Now these cities while not yet familiar names to some are major sub markets located near Seoul.

Our operations in Europe have also performed very well with solid occupancy in year-to-date same-store rent growth of 9.6%.

This average was achieved through 160 separate transactions with growth in virtually every European region with the exception of a handful of transactions in Poland and Hungary where cap rates and yields have dropped dramatically in recent years.

In northern Europe, we had our best quarter ever from a leasing and new development perspective and in southern Europe we have done nearly 6.7 million square feet of total leasing year-to-date, including 4 million square feet of new CDFS leases.

This compares very favorably with all of last year, during which we leased 3.8 million square feet in southern Europe.

Demand is stable throughout that region and we are beginning to see an uptick in activity in Italy, a country that has been soft since the middle of last year.

Market conditions in central Europe remain extremely strong.

We are very pleased with the progress we have made within the Partridge portfolio.

At the time of the transaction, 18 of the 25 newly developed properties were fully leased.

Two quarters later, now, we fully leased 23 of the 25 buildings and we are seeing other synergies as well, for example, at Bucharest were developing a distribution part in conjunction with an office complex being developed by Parkridge Retail.

In North America the overall vacancy rate for bulk distribution facilities in the 30 U.S.

markets is right if line with last quarter at 7.6%.

Net absorption in these markets was 32.6 million square feet for the third quarter.

Year-to-date absorption of 93 million square feet is a bit down from last year but right in line with year-to-date deliveries also at 93 million square feet demonstrating that North American markets remain in equilibrium.

Rents are also growing, with year-to-date same-store rental growth in our North American portfolio averaging 8.3%.

We also made excellent progress with the assets acquired from [Dermadie] Partners.

At closing, completed DP properties were roughly 86% leased.

Today, we have increased occupancy to over 92%, including leases with some of our major customers such as [Sievel Logistics.

] and [Coonanozel] Despite these positive statistics, we remain cautious on our outlook for growth in the U.S.

For this reason, we believe our focus on growing our percentage of pre leased developments through our build-a-suit business particularly in the U.S.

we will have a very positive future impact as we balance our speculative development risk.

We are also being proactive in our day-to-day portfolio management procedures with an even more intense focus on credit quality, accounts receivable, tenant improvements, and early renewals.

Through the implementation of these measures, we are confident that we are all well-positioned in the event the U.S.

economy slows.

And of course the strength of our platform is really in its diversification.

And it's that diversification combined with the relationships we have built with customers globally that allow us to execute our growth objectives notwithstanding market conditions in any one area of the world.

Now let me turn it over to Ted, we'll talk further about our development in investment highlights.

Thanks, Walt.

The continued strength in global demand that Jeff and Walt described supported starts of nearly $800 million in the quarter bringing year-to-date starts to just over $2 billion.

Roughly, 45% of the quarter starts were in Europe, with another 26% in Asia, and 29% in North America.

Given the significant opportunities whisking across our global markets, at a recent investor day, we increased expected full-year 2007 starts to 3.8 to $4 billion.

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

In fact, we have already reported 30% of our expected starts for the remainder of the year.

Notably, this increased level of starts does not include nonindustrial mixed use development from park ridge or civic CP.

Again as we outlined a couple of weeks ago between our opportunities in North America and the expanded activities of our retail and mixed use joint venture partners in Europe and China, we believe we can increase our investment in this growing area of our business and 600 to $800 million in annual starts by the end of 2010.

Our pipeline of properties under development at the end of the quarter represents about $2.8 billion of total expected investment.

Combined with the completed developments in repositioned properties of $3.4 billion, we now have a record CDFS pipeline of more than $6.2 billion that was 48% leased at the end of the quarter.

Although, the 6 of the pipeline has increased by one-third the percentage leased is not dissimilar to that of a year ago when we had a $4.6 billion pipeline.

Most importantly, CDFS completed developments in repositioned assets are on average 65% leased, which supports growth in our investment management platform and a stable source of future CDFS income.

Looking at third quarter development activity in North America, new starts were well diversified across our regions with projects in south Florida, Texas, the midwest, the northeast, and in four different cities in Mexico.

Momentum in our build-to-suit business has picked up dramatically in North America.

More than 25 % of the quarter starts were build-to-suit developments, include the BMW build-to-suit outside Chicago, and the 780,000 square foot build-a-suit for Sears Logistic in Northern California.

Year-to-date we signed over $142 million worth of build-to-suits, representing 2.4 million square feet in North America.

With build-to-suit leases outside for signature on another $22 million.

Additionally, we have signed fee development management deals with aggregate project costs of $75 million in North America this year.

We also have strong new development activity in Europe during the quarter with more than $357 million of starts.

The bulk of these starts were in central and eastern Europe including projects in Poland, the Chek Republic, Hungary, and Romania.

In France we began construction on a 0.5 million square foot build-a-suit at [Mossycromil] for a major automotive parts distribution customer.

Momentum is building in Germany.

Where year- to-date we signed roughly 4 million build-to-suit deals, including one with Volkswagen.

We are on track to nearly triple the amount of build-to-suit activity we did for all of 2006.

Which was also a record year.

In fact, when you include signed deals and executed letters of intent, we expect to start over $500 million of build-to-suit business in Europe this year.

In Japan, we began construction of 625,000 square foot multicustomer facility in Tokyo, and another smaller inventory facility in [Tahoku.

] In China we began new development in Gusngzhou and Qingdao and also broke ground on our first development in South Korea.

ProLogis Park Inchon.

We continue to look for strategic land parsals to supply roughly two years of development.

In addition to the DP land during the quarter we also acquired land in Austin, the England Empire, Toronto, and Jacksonville, Florida.

In Europe we acquired 220 acres primarily in France and Poland as well as land to support the new Volkswagen build-to-suit in Germany.

In Asia, we acquired land to support additional development in Japan and South Korea, as well as in China.

Where we added to our port related land positions in Dalian.

Shanghai, Guangzhou, and Qingdao.

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 and now I'll turn it over to Bill.

Thanks, Ted.

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

Overall we reported $1.41 in diluted FFO per share, a 78.5% increase over the third quarter of 2006.

Reflecting solid overall operating property performance, continued strong development margins and the recognition of the value created in our investment management business, through the MPR transaction.

Diluted earnings per share of $1.12 for the quarter were up 72.3% from $0.65 the prior year.

Turning to property operations third quarter net operating income is up 5.4% driven by average occupancies in the same-store pool increasing 2.7% over a year ago and same-store net growth of 9.6%.

In our CDFS business 3Q dispositions of $3.2 billion were comprised of roughly $800 million from dispositions of developed and repositioned properties and $2.4 billion of dispositions from acquired property in portfolios.

Included in this (inaudible) category, is $2.1 billion from the contribution of the MPR assets to a new fund in roughly $275 million from contributions of assets to our Mexico fund and Parkridge central European assets to our new European fund.

We called it last quarter we said the contributions of these acquired property portfolios would be made at or near cost.

Consistent with that guidance margins on the acquired property portfolio contributions were 2.9% in Q-3 while margins on our developed and repositioned CDFS's properties were 27.3% for the quarter and have averaged 36.4% year-to-date.

Combining the developed and repositioned property contributions and the acquired property portfolio contributions, brings year-to-date CDFS post deferral post tax margins to a blended 16.8%.

You'll note, we have broken out these two types of CDFS dispositions on our income and FFO , as well as on Page 16 of the supplemental.

So you can see the amount of gain associated with each category of disposition proceeds.

Total disposition for the quarter also included $97 million of proceeds from non-CDFS contribution to funds in third-party sales.

For Q-4, we expect to generate between 500 and $600 million in contributions, inclusive of incremental Parkridge assets that will be contributed at or near 0% margins.

This will bring full year contributions to approximately $5.3 billion in a blended post deferral post tax margin of approximately 16%.

Other CDFS income, which includes development in management fees income from CDFS joint ventures and interest on notes receivable totaled approximately $20 million for the quarter and $46 million for the first nine months.

As we noted last quarter, we anticipate the total of these items will be between 60 and $65 million for the year.

Income from our property fund business is in line with expectations with recurring management fees in Q-3 2007, up by approximately 33% over Q-3 2006 to roughly $27 million.

Our share of FFO from unconsolidated property funds, which includes about $8 million related to our share of FFO gains from the sale of the [Garanor] assets out of pepper, increased by 105% over the third quarter of last year.

On the expense side, the increased level of G&A reflects strengthening foreign currency and an increase in head count to support the growth of our business.

Year-to-date, we also have about $8 million from one time charges associated with employee departure costs.

We remain comfortable with G&A coming in between 200 and $205 million for the full year.

Interest expense is also expected to exceed initial forecast due to higher average borrowings related principally to the Parkridge merger, and the [porie] portfolio acquisition and increased development from fund investment activity.

The guidance adjustments will bring our new range to between $4.40 and $4.50 per share in FFO, include an incremental $0.06 recognized from the MPR transaction with the remainder due to stronger overall performance throughout our business.

Turning to our guidance for 2008, the continued strength of our three business segments, combined with our development pipeline and expectation of relatively strong margins, give us confidence to set a range for 2008 of $4.65 to $4.85 in FFO per share.

We expect to end 2007 with a CDFS pipeline of over $7 billion.

That pipeline today has $2.8 billion of property under development, as well as approximately $3.4 billion of completed and repositioned assets that will be ready for contribution during 2008.

As Jeff mentioned, we believe that we will see margins in the low 20% range, giving us confidence in our ability to grow CDFS income in 2008.

These contributions into funds, as well as anticipated acquisition activity, will drive our fund fees and returns, which we expect will grow more than 30%.

Note that our 2008 guidance does not include the recognition of any promotes or incentive returns.

We also expect continued rent growth and stable occupancies, supporting solid same-store NOI growth in 2008.

As is our custom, we will give you a detailed analysis for our business drivers in early 2008.

Looking at our capital structure, our balance sheet remains strong, with total debt to booked capital of about 57% and 41% on a market capitalization basis.

Also since the end of the quarter, we were successful in completing a E$500 million Euro dollar on behalf of Pepper in the Euro bond market.

The 7 year notes have a stated coupon of 5.875% and we are priced to yield the margin of 130 basis points over the 7 year mid swap rate.

The transaction was well-received by the marketplace has noted by its 2 X over subscription level and orders from 68 accounts.

Given the relative turmoil markets particularly in Europe, we are pleased to have completed this debut offering at an attractive margin.

In some, our capital structure is in good shape and all three business segments are performing in line with expectation.

Setting us up to continued growth.

Let me turn it back to Jeff to provide a quick

Thanks, Bill.

To summarize we are excited about our results, positioning and opportunities.

I would like to leave you with five key points to take away before opening the call up to questions.

Number one, we are well positioned to benefit from world trade, Asia and other macrogrowth drivers, with the leading platform on a global basis.

.

This drives our increased guidance for 2007 and strong double-digit growth for 2008.

I stretched that the platform is a combination of both the people and the assets.

Number two, our geographic diversity both supports our customer's multi national distribution facility requirements.

And mitigates risks for potential economic softness in any single country or region of the world.

Remember, as a global enterprise, over 80% of our organic growth is outside the U.S.

Number three, our operating property fundamentals remain very strong.

Are at the highest level since the late 1990s.

Our organization is stronger than ever with talented individuals throughout the world.

Number four, our developing margins remain strong with excellent visibility into next year's disposition activity.

We are looking forward to continued strong margins in 2008.

And our growing bill-to-suit business further mitigates risk while increasing overall profitability and customer relationships.

Last number five.

Note that we have already put in place the capacity in our investment management business when combined with our direct owned assets to bring us to around over $49 billion of total assets well on our way to our 2010 goal of $60 billion.

Operator, we are now ready for

(OPERATOR INSTRUCTIONS) John Peterson of UBS.

Thank you.

I'm sitting in for Jamie Feldman today.

Looking at same-store rent growth, it came in a lot higher.

9.6%.

Can you talk about what's driving that?

And if you think that is sustainable going forward?

John, yes.

This is Walt.

Well, you know, what is driving that is clearly stronger markets.

We are seeing rental growth you have got to keep in mind that markets today are 95% leased.

Our retention rate is 79%.

Needless to say, the customers are in a market where there's not a tremendous amount of space that's out there.

There is very little sub leased space, shadow space, so land lords are in a position to push rents.

The other thing I would say replacement costs are much higher today.

When you look at new developments and people's option to move, they are clearly paying higher lease rates then they have in place.

We are in a market where we are able to push rents, we are not only doing it in the U.S.

we are seeing it in Europe and in Japan and seeing it to the greatest degree in China.

If you look at the global environment in terms of rental growth we think we are in a position to do that.

Now the same-store growth overall is clearly driven not only by rental growth but occupancy growth, growth over the last year.

We think we are in a position where we continue to see the type of rental growth that we see today.

I think we are positioned pretty well to maximize that next year.

Okay.

Thank you.

Question from Lou Taylor of Deutsche Bank

Ken, You have covered a lot of the different points.

Can you just focus on Q-4 starts in terms of I guess the math suggests that the starts you are going to be a 1.5 billion like $1.8 billion range.

A, is that correct and B, can you give us a sense between the regional split and the split between build-to-suit and spec?

Lou, I'll start and I think Walt wants to hit on this point as well as Ted Antenucci want to add some color.

You are correct in the math.

The math does work that way.

As Ted noted, out of the starts for the fourth quarter, we have already achieved over 30% of them.

So we are comfortable with the good .

We would not have raised guidance only two weeks ago or three weeks ago at our investor day.

Had we not been comfortable with those numbers.

Walt, do you want to go through

I can, Lou let me just address, I'll break it down.

Basically it is $2 billion.

In North America, think is going to be in the neighborhood of $500 million.

Just 75% of that we've already started today the major markets southern california weighs in at a very, very big percentage of that.

So we are very comfortable with that.

Europe could be anywhere from $800 million to a billion dollars.

A lot is in the UK.

Interestingly enough, we've only started $150 million in the UK year-to-date.

We had no starts in the fourth quarter.

A lot of that is bringing land into development position.

So we feel pretty good about that.

Asia is roughly the other $500 million or so.

$200 million of which is in Japan which is already started and roughly300 million of that is in China and most of that has already started.

So we feel pretty good.

about call it a 1.5 billion to 2 billion and just so you know we think roughly 30 to 35% of that is in build-to-suits, many of which we have either signed or will be feel very good about signing in the next month to two months.

So yes, I think that we feel real good about where we are year-to-date.

And where we are heading until the rest of the year.

Jeff, it is Ted.

Jeff and Walt hit on pretty much all the main points.

It is an interesting question I have had it in the past years ago.

And sometimes you just get in a cycle.

Where you allow your start before the end of the year or different segments throughout the end of the year.

We are just in that cycle right now.

We certainly wouldn't have increased our guidance if we didn't feel very comfortable that we were going to hit the numbers at the end of the year.

Walt's point on the growth of our build-to-suit business.

The amount of preleasing were doing.

The strength of the customer relationships and for the benefits of the platforms we build around the world.

We have a question now for Jay Herriman at Goldman Sachs.

Back to the question in terms of rent growth and the outlook.

Can you just I guess maybe explicitly give mark-to-market rents rolling over the next year versus market today?

And Jeff in your comments you mentioned it widening or differentiation between institutional Class A sort of facilities maybe versus the bs and Cs.

Can you give us the sense of the spread you are seeing now?

Let me start with that and I think Walt or Ted may want to answer the first question.

Quite frankly, Jay, I was bewildered, and you start to feel like a dinosaur in this business.

If you believe in the business 25 years you understand what the delta should be what the differential should be between Class A, Class B and Class C product and what people should be willing to receive in the way reward for the appropriate reward for the appropriate level if risk and a year ago even six months ago we just weren't seeing it which is one reason why we really shifted our portfolio and sold out of a lot of these smaller markets, lower rent growth markets in the U.S..

because we are selling assets as spreads over Class A great located assets.

50 bips delta which made no sense to me.

It should have been 150 bips or 200 bips.

We took advantage of that.

If you look at the shift in our portfolio, particularly in North America toward the coast, it's been really dramatic over the last two years what we have accomplished.

That being said there's been since the summer somewhat ever return to rationality, so to speak.

And Class B Class C assets are now trading.

There is a limited market.

There is a lot of institutional capital chasing the best stuff.

The stuff that we build and stuff that we condition to develop as evidenced by our equity raise these summer.

But if you got Class C product that not traded where it should, which is a severe thick spread I.e.private lease 200 basis points above the good stuff, the stuff that we are developing.

And Jay I would answer the question by we don't really take a quarterly gauge on this but I do think that the fact that we achieved roughly what 9.5% or 9.6% rental growth for the quarter, is indicative of what rents are today below market.

I would say conservatively it's in the aggregate 7 to 10%.

I would say North America is probably the number is slightly lower than that and in China is above that.

We don't have a tremendous role in China next year.

Overall basically what we are performing at by now gives you a pretty good idea of where the market is as a proxy.

Our next question comes from Paul Morgan FBR Investment Bank.

Good morning.

A question on developed margins if a couple of areas.

Just wanted to see whether you thought two things.

One the leveling off of cap rate compression in central and eastern Europe and maybe additional competition in Japan.

Where you are seeing those two things and what the implications might be for the development margins over the next year or two.

Paul, it's Jeff.

I'll answer that.

One in central Europe we have seen cap rate compression level off which is a healthy thing, we started to see rental rate growth.

If you remember back at may rates the last couple of meetings Ted talked at length, I don't know that people really comprehended how powerful the things he was going through the slides with increased in construction costs were completely masked over the last three years by cap rate compression.

Now cap rates have flat end.

Light down with pressure to flat you know, if I had to say it was trending any words.

The trend is priced lightly toward compression but not anything what it was close to previous years.

With that you are starting to see rental rate given the way construction costs moved the shortage of entitled sites and quite frankly the number of great sites a handful of developers have acquired over the last few years with a combination of companies it gives us significant ability to put rents where they should be in the market.

As it relates to Japan, our team continues to execute exteremly well there.

We are starting rental rate growth in Japan which we think is very, very healthy.

You continue to see cap rate compression there although costs are coming up.

It is flowing through to the rents.

Wwe'd never thought that 40% plus margins are sustainable in the long-term we have run the business to be a 15 to 20% margin business long-term.

But I think our team in Japan is executing better than ever, there is local competition as we knew there would be when we started the business in 2002 in build to lease facilities in the distribution sector in Japan.

We knew that it was a huge market that would be a growing market, they would be treated as evidence.

You look at what Matsushita did, one of the best companies in Japan, one of the best globally.

It really trend sitting.

From them to sell their distribution facilities, 20 years, 10 years, even 5 years a major Japanese would never dream of selling it's real estate.

That is not the core it is being a great manufacturer a great marketer great designer of products and they can out source noncore activities like the real estate and logistics services.

That bodes well for our business, bodes well for the overall market and we'd like the fact that we have the only mover advantage, were the first in the market.

We got a number one market position that is something we plan on continuing to grow.

Our next question comes from Michael Dolberman of Citi?

Good morning.

This is Irwin Gussman here with Michael.

My first question is which markets if any are you currently looking to raise funds in?

And can you discuss your project there at all?

Michael this is Jeff.

We announced $14 billion of funds in August, and before that we didn't tell you we didn't make any disclosure of what we might be doing or we might be raising.

We've always taken the attitude of performing first talking about it later and we will continue to do that.

Suffice it to say we will continue to grow the global platform.

And great glowing platform in China.

We've got good platforms around the world and we'll continue to execute.

Our next question comes from Christie McElroy from Bank of America.

There was an article talking about a lack of bulk cargo ships available on a global basis versus demand and plans to produce moreover the next several years.

How did this trend impact the long-term demand for port distribution space and possibly the need for bigger ports globally, given the larger ones already seem to be operating at capacity.

Christie, it is Jeff.

That was a great article, by the way.

The article pretty much focused on the increase in the cost of transporting bulk goods as opposed to containers.

But shipping of containers has increased.

Not as fast as bulk.

The bulk has increased because of the demands from China for Iron, Ore, coal, for different bulk products being shipped to China and that's driven up pricing as you saw in that article.

On the container side, which is really our business, the shipment of either parts for manufacturing, components for manufacturing or inbound outbound supply type shipping, shipping rates are up.

Port capacities are, if you've got a ton of capacity obviously in Asia, they have done great job infrastructure (inaudible) down a -- done a great job on infrastructure.

I was with the mayor just this week when he visited the U.S.

That is the second largest port in the world today growing 30 per% per annum.

And actually the day that I saw him they opened the second port.

So they have sufficient capacity for a long time.

It's a different story in the U.S.

But I think they are doing some things port of L.A., long beach to increase capacity there.

There is other ports along the west coast as well as ports on the east coast that are adding additional capacity.

But it's good for our business.

Quite frankly, if there are capacity constraints within the ports.

That, as an accelerator, and we don't hope for that.

But that would increase the need for buffer stock, safety stock in distribution facilities and would increase our overall demand should there be a shortage or perceived shortage in the capacity business.

Thank you.

Next question from Chris Haley of Wachovia.

Good morning.

It is Brendon Maioranna with Chris.

Thinking back to the earnings forecast the long-term earnings forecast you guys provided at the investor out through 2010 and thinking about the NOI growth.

What is baked into that number and how does that compare to the past couple of years and the levels you are currently achieving?

The NOI growth is sort baked in the long-term forecast is essentially in that 3 to 5% range which is largely inflationary on a relative static owned portfolio, slightly increasing in the next couple of years.

So you know, for all intext and purposes, it is sort of inflationary growth that is baked into that long-term forecast.

And I would also comment on that.

I think you have to be careful, looking at the noI growth that we have had this year and last couple of quarters last year.

Because that noI growth has been partly driven by rental increases, but also largely driven by occupancy increases.

And with the okay pansies today at 95.5% moving into next year with you know, basically you are in a stable occupancy position, so if you are going to hit, call it a -- I mean it's hard to hit a 5% type rental growth moving into next year.

That would mean you need to get 20 to 25% overall growth rate in your reason.

You are only turning 15 to 20% of those rents.

So we'd like to think more conservatively back to what Bill is saying.

I don't know what you are seeing right now is something that you should expect year in and year out.

We have a question from David Harris of Lehman Brothers.

A question for Bill.

A two-part question.

Bill, what is included by way of FX in this year's guidance and are you assuming comparisons in your '08 guidance?

My second part of the question a couple of years ago when Walt was CFO, you talked in some detail about hedging 895% of your overseas income every quarter on a rolling basis.

Is that hedging policy still in place or have you amended it.

Let me address sort of the first question if he look at the FX year-to-date.

The biggest piece of that is an FX gain.

We realized on the McRory transaction.

And then other than that, other on a year to date basis, we have a little slippage here and there in the European markets.

So I think it's $21 million year to date.

We had about a $26 million realized gain on the transaction in large part I think you'll see that sort of hold steady through the rest of the year.

In terms of FX for next year, we are in essence projecting rates to stay approximately where they are maybe a little lower where the bureau's up over 143.

We are a little more conservative than that.

But in essence conservative being a lower Euro stronger dollar.

And so, you know, who knows what rates are going to do?

From a hedging policy standpoint, in essence, first and foremost we borrow on local currency.

We try to create as much of a natural hedge as possible relative to our operations and from a you know sort of an noI standpoint, we are looking to hedge about 50% of our ex exposure on a rolling 4 quarter basis.

And so, and that you know, gives us a pretty good natural head hedge sort of 50/50 particularly given the volatility in the occurrence says.

So if your previous comments were at the 85% level, and I wasn't here then, and can't comment on that, but 50% sort of head strategy today.

We have gotten better at matching our assets and liabilities in a common occurrence says.

In that time period we have developed a global platform.

We have a question now from Chris Pikes from Merrill Lynch.

Good morning, everybody.

I guess for Jeff, as you guys grow into emerging global industrial markets, how do you track fundamentals do you use local brokers or use external management companies.

Build up a scale as the follow-up as you continue to do it and expand into new regions, when should we assume the ramp in infrastructure with respect to corporate funds, business and his overall operations?

When should that be completed from a G&A perspective.

And let me try to answer that.

Not avoiding the question but just saying next time I see you we sit down into a half hour or hour.

Even the remaining total time we have on this call, but we've been doing this since 1996.

We are the first U.S.

company to venture outside of the U.S.

Now suffice it to see what consider ourselves to be a global company as opposed to a U.S.

company.

As we go into new markets, you have to invest in the infrastructure early and having people on the ground we have talked about having people on the ground in India and we have had people well over a year now.

We understand the market exceptionally well when we make an announcement when we make an investment, we expect to do it the right way.

In short order.

That being said.

That takes a lot of time it takes a lot of effort.

That is why we focus on the largest economies in the world.

We look at 180 plus countries in the world we are only in 120 of them but they constitute 76% of the world's economy and we are not very quick to move into countries we think don't provide sufficient bang for our buck.

We need to understand what drives the country what drives the dynamics.

The industry there what drives the economy how best to execute opportunities.

Then we recruit the best people out there.

Those of you that have spent time with us in China.

In fact, I was just on the phone with our China team this morning on the way in and they were having a bonding experience tonight after a big celebration today for a lot of things they have to get accomplished -- they have accomplished.

We have an incredibly strong team in Europe.

And that's just you know the way we need to do things and there is a ramp up in expense earlier on.

The ramp up in expense comes before we have revenue to support that.

To date we haven't made we haven't booked that much in the way of FFO China long-term there will be tremendous value and tremendous earnings growth tricked to our China business you know when we start making fun contributions whenever that time comes.

There is a lot of value that we have created already.

We have paid for that and put it in our G&A Numbers already.

And we continue to grow the business accordingly.

Chris this is Walt.

Just to add something with what Jeff is saying.

You built the infrastructure to accomplish a certain level of development in a country.

When you double and triple the amount of development and growth you have in that country, whatever infrastructure you have.

It is not going to be enough.

You want to stay ahead.

Walt's exactly right.

If you look what's happened in Europe, we felt like we had a great platform 6 or 7 years ago.

We had a platform that could take the development business to a billion dollars.

Now we are talking closer to $2 billion.

Whatever that platform was complete at the time is never complete when you double the size of your business.

And I don't think you ever you never complete the platform.

You always want to get better every day and every day we wake up we are trying to make our organization and our structure better on a global basis.

We have a question fro Michael Muller of JP Morgan.

You spent some time talking about the early steps you are taking to prepare for a potential slow down in the economy.

Can you talk about occupancy levels in the last down turn versus where you are today?

And what could be different this time?

And maybe more importantly the time to lease the spec developments back then versus where you are today?

Michael, we assume you are talking about a slow down in the U.S.

economy?

Yes.

U.S.

Okay.

That's fine.

And again, that is less than 20% of the growth this year.

But Walt, up to talk about that?

Yes.

Mike, back in let's call it five, six years ago, call it in the early 2002s, the okay pansies were in the high 80s.

So you are looking at call it a 500 to 600 basis point development.

Excuse me delta.

Where we were back then.

It is kind of interesting, if you look back on our development starts.

Again these are '01, '02 type numbers.

But we were doing somewhere in the neighborhood, I think of 300 to $400 million in development in the U.S.

prior to that and I would say 70 to 80% of that was call it inventory development in 99, 2000.

And we completely turned that around in '01, '02, if you look back at the numbers, we went to roughly 70 to 80% pre lease development or build-to-suit development obviously at a much lower level.

We developed somewhere in the neighborhood of $200 plus million in those years consistently but it was almost all pre leased.

Today if you look at the fundamentals starting 95.5% leased we feel very good about where we are head and go we certainly don't see huge occupancy lines like that.

Keep in mind we moved into a recessionary period.

Even the most bleak economists are looking at 1% type growth next year.

We don't see anything like that happening.

Having said that, what we are focused on doing is kind of doubling our efforts on things like accounts receivable, making sure that we are, you know, all over our customer base, trying to increase our communication with our customers in of your customers are having problems.

Interestingly enough we are monitoring bankruptcies closely taking a look at credit quality trying to step up the use of letters of credit on renewals, if we think somebody you know, has suspect credit.

And frankly, the big thing is minimizing the investment that we put back into if sits.

We are making sure we do the right thing on a daily basis to manage what could be a softer market moving in next year.

The only thing I would add to that.

Walt did a good job detailing the U.S.

It is important to note as you probably saw this morning, China announce today its third quarter growth was 11.5% and you know, which exceeded everyone's expectations for Klein na's growth.

Everyone thought there would be some slow down associated with what's happening in the U.S.

There has been no correlation whatsoever.

And what's real important to note there is China has become a bigger trading partner with Japan has been the U.S.

So there has been a decoupling of Japan with the U.S.

and also Europe with the U.S.

There is more trade between China and Europe than there is China/U.S.

The world is change and go we feel real good about how we are positioned.

To kind of point that out, if you look at page 13 amount of the supplemental I thought it was significant when I went through it that out of our top ten customers you have one U.S.-based companies and nine domiciled either in Europe or Asia.

We are monitoring the U.S.

We are doing all the right things.

Should there be a slow down here.

We feel real good about it.

I think we have time for one more question.

We have a follow-up now from Lou Taylor.

I just want you to clarify if you could your margins on your 08 guidance.

Your low 20s comments.

Should we be expecting that to the blend this year of 16 and some change.

Or just on the developed piece in 27.

On the developed repositioned properties, Lou.

We are still looking at some of the Parkridge assets, whether they might flop into '08.

Or Q-4.

But so we may have a little bit of that.

In 08.

With you the low 20s that I was referencing is in relation to the developed and repositioned.

That is what we build our guidance off of.

Right.

Does that answer your question, Lou?

Yes.

Well, I want to thank everyone for joining us today.

We look forward to seeing a lot of you if all of you in a few weeks.

Thank you for your time.

We are excited about the third quart and are more excited about the way the business is building and looking for the coming years.

Thank you.

I can't that does conclude today's conference.