Prologis Inc (PLD) 2007 Q4 法說會逐字稿

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

I would like to welcome everyone to the ProLogis fourth quarter year end 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, Anthony.

Good morning, everyone and welcome to our fourth quarter year end 2007 conference call.

By now you should have all received an e-mail with a link to our supplemental and our guidance assumptions but if not the documents are available on our website at prologis.com under investor relations.

This morning we'll hear first from Jeff Schwartz, CEO, to comment on key accomplishments and our sustainability initiatives, Walt Rakowich, President and COO, will cover ProLogis' operating property performance and global leasing activities.

Ted Antenucci, Chief Investment Officer, will discuss investment activity and Bill Sullivan, CFO, will cover financial performance and guidance.

Before we get underway, I'd like to state that this conference call will contain forward-looking statements under Federal Securities Laws.

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

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

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

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

In accordance with Reg G we have provided a reconciliation to those.

And 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 yourself to one question at a time.

Jeff, would you please begin?

Yes.

Thank you, Melissa, and good morning, everyone.

2007 was an outstanding year for ProLogis with strong performance including a 24.6% increase in funds for operations over 2006 and solid operating fundamentals.

But most importantly 2007 was a year of which we positioned ourselves extremely well, both organizationally and financially for 2008 and beyond.

Quickly summarizing our key accomplishments for 2007, we achieved excellent results in each of our business segments.

Operating property performance was solid as occupancies remain stable at approximately 95% and we saw strong same-store rent growth throughout the year.

We significantly enhanced our Investment Management platform with the formation of four new property funds, one each in the U.S., Mexico, Europe and South Korea, and also acquired the shares from the (inaudible) ProLogis trust later contributing those assets to a fifth fund.

In total we secured equity commitments that allow to us grow our Investment Management Business to more than $33 billion from our current level of $19 billion in assets under management.

In our development, or CDFS business, we began a record $4.1 billion of new development starts supported by the strength of global demand in existing markets and our expansion into major new logistics areas.

During the year we entered the Middle East with our first project in Dubais and initiated development activity in South Korea as well as the new high growth markets throughout China, Japan, Central Europe and Mexico.

Also during the year we acquired the industrial business of Parkridge, our best competitor in Europe, and invested in Parkridge's mixed-use in retail business.

And we made substantial progress in our global retail and mixed-use business through Catellus Development Group in the U.S.

and our investment in [Civic] CPs Retail Development Business in China.

We also strengthened our balance sheet and reduced our exposure to floating rate debt with the issuance of two convertible securities, generating more than $2.2 billion of proceeds at very a attractive rates.

Between the $14.5 billion of capacity we raised in our Investment Management platform and the $2.2 billion of convertible securities at a 2.1% average interest rate, we have positioned ourselves incredibly well to take advantage of current market conditions.

Turning to our outlook for this year and beyond, we continue to closely monitor market conditions and economic indicators, leveraging the experience of our local market professionals, many of whom have been through previous cycles as well as an internal research team.

The global credit crunch, U.S.

economic slowdown and surge in oil prices are expected to slow global GDP growth to about 4.6% in 2008 from an estimated 5.1% in 2007.

To put this in perspective, global GDP growth over the last 25 years has averaged 3.7% or only 80% of expected 2008 global GDP growth.

This is obviously due to the growth in emerging markets such as China and India.

Economists disagree by the level of decoupling between the U.S.

and other economies, but it's important to keep in mind that global demand for logistics space is not directly correlated to economic growth.

In fact, the majority of our growth throughout Europe and Japan was undertaken during a time of weak or negative GDP growth in many of those countries.

In the majority of markets outside the U.S.

demand for distribution space continues to be driven by growth in global trade currently more than triple the growth rate of global GDP, obsolescence and the need for more efficient distribution networks.

We believe our geographic breadth and leading presence in the world's top logistics markets mitigates the impact of any single economy on our overall results.

Remember, 80% to 85% of our growth this year will be outside the U.S.

Like many companies, we've become more cautious on our outlook for the U.S.

During 4th quarter we saw a slight slowing of net absorption and a 0.25 point decline in national occupancies although most markets are generally in balance.

Still we have shifted our development mix in the U.S.

to a larger portion of build-to-suit business which has a strong richly adjusted return profile.

We also believe that the tightening of credit has already caused the drop off in the development of speculative distribution facilities by private developers which will provide us with opportunities.

We continue to see a flight to quality.

I said it for the first time in August after we announced the formation of our new funds and it remains true.

Credit is available for quality assets and low to moderately leveraged business models, although at more expensive spreads mitigated by lower treasuries.

We continue to see a similar situation with Cap rates.

There is a divergence between quality, class A product, where Cap rates remain relatively stable and lower grade product where Cap rates have risen substantially.

Globally institutional demand for high quality assets remains strong.

As we've said for the last couple of years, over the long-term development is a mid- to-high teens margin business.

We continue to believe this.

Given the visibility to our current development pipeline we are comfortable that margins on our developed properties and repositioned acquisitions will average about 21% in 2008.

Importantly given the size and scale of our pipeline, our disposition volumes are significantly higher than a few years ago, so we expect to continue to grow income from our CDFS business.

Now I'd like to spend just a minute discussing our sustainability initiatives.

We recently announced that going forward all of our new U.S.

development projects will comply with environmental standards developed by the U.S.

Green Building Council and we will register every building for lead certification, the National standard for environmentally responsible construction.

Additionally, we are developing sustainability checklists for all buildings we develop on a global basis to ensure that we remain the global leader in sustainable development of distribution facilities.

While empirical evidence for the industrial sector is limited, studies for other property types have shown that green buildings significantly reduce operating costs for customers and are commanding higher rents.

We think this is the right thing to do not only for the environment, but for our customers and ultimately for our shareholders as well.

As I transition the call to my long time partner and close friend, Walt Rakowich, who will retire in 2009, let me take a moment to recognize his many contributions to the growth of our Company and establishment of the strong position financially and organizationally we are in today.

Walt will continue his current position for the next year continuing to help drive our Company while working with me on his transition.

While we are all sorry to see him leave, we understand his strong desire to focus his time on his family and on charitable endeavors.

Walt?

Thanks, Jeff.

As most of you know, I'm, I'm-- know by now I'm planning to retire from ProLogis after this year to spend a little more time with my wife and my highschool children before that opportunity eludes me when they go off to college in a few years.

And I will tell you that it's been a tough decision because ProLogis has so many bright and energetic people with frankly can do attitudes.

It's a contagious place to work and a fun place to work.

And I want you all to know that I'm proud to be a part of this Company and what's been accomplished in my 15 years here, and I'm committed to working this year with Jeff and others to add value where it it makes sense and to making the Company an even better place than it is today.

Now onward and upward let me talk about our operating performance.

It remained solid throughout the fourth quarter, supported by the key growth drivers that Jeff mentioned a few minutes ago.

Our fourth quarter leasing at just over 30 million square feet was actually more active than each of the previous three quarters bolstered by an 81% retention rate on renewals.

Same-store rental rates grew by 5.6% for the quarter and 8% for the full year, and overall occupancies picked up about 10 basis points to 95.6% with Asia at 99%, Europe at 93% and North America at just under 96%.

Not with standing these strong operating metrics we're watching for signs of market weakness.

We've been closely monitoring delinquencies, bankruptcies, tracking sublease space and doubling our communication with our customers.

Right now somewhat surprisingly our markets are holding up well in the U.S.

and very well outside the U.S.

Let me first touch on Asia.

Same-store rents on turnovers grew in Asia by 47% for the quarter and 18% for the year.

In Japan our 24 million square foot stabilized portfolio is about 99.1% leased.

Recently completed inventory space continues to be attractive to users in the market with about 400,000 square feet of new leases signed since the beginning of the year.

In China our stabilized portfolio of about 9 million square feet is 99.4% leased.

During the quarter we signed more than 960,000 square feet of leases at our parks in Beijing, Tongzhou, Shanghai and Shenzhen.

And in South Korea we kicked off our new fund with approximately $50 million in acquisitions during the second half of '07 all in and around the Seoul metropolitan area.

And based on the activity we see in that market we expect to commence construction on a minimum of four new developments in South Korea this year.

Our operations in Europe have also performed very well with same-store rental growth on turnovers of 24% for the quarter and 13.5% for the year.

In the U.K., despite seeing a slight upward shift in Cap-- class A Cap rates, our business remains solid with leasing activity during the year in line with the prior year at over 4 million square feet.

In addition, the pace of inquiries for space has thus far carried over into 2008.

Importantly, we signed over 1.8 million square feet of new leases in the U.K.

in the fourth quarter which is good velocity relative to historical quarterly performance.

On the continent demand also remains good with a dwindling supply of new competitive product.

Without question the real estate credit markets in Europe have slowed down many of our less capitalized competitors and put us in a unique position to build product with far less risk.

Just a few data points, in Southern Europe which includes France, Italy and Spain we signed over 3.9 million square feet of leases on new development in '07 of which 73% were build-to-suits, essentially preleased in advance of construction.

In Germany, the largest economy in Europe, we signed over 4.4 million square feet of transactions last year in new developments, over 95% of which were build-to-suits.

This activity is three times the leasing business we did in Germany in 2006 and is in large part due to the tremendous team we've assembled there in our industry vertical focus that we implemented in 2007.

In North America our market officers are reporting some level of slowing in leasing velocity, although the markets overall are still fairly active.

Very little sublease space has been put back on the market and those bankruptcies that we have seen have been isolated to smaller more regional companies.

With that as a backdrop we're pleased with our operating performance in North America during the fourth quarter with stabilized occupancies increasing from 95.63% to 95.86%.

Same-store rental growth on turnovers was 3.3% for the quarter and 7.1% for the year.

As for the top 30 U.S.

markets, the vacancy rate moved up a bit from 7.5% to 7.8% due to fourth quarter deliveries of 45 million square feet outpacing net absorption of 26 million square feet.

However, we do expect to see supply of new product at considerably lower levels in 2008 given the current credit conditions and in expectation of a slower U.S.

economy.

As in Europe we believe this environment will be very good for us given our access to capital and strong customer relationships.

And it is those very customer relationships enhanced by our diversified platform that provide us with a real competitive advantage, especially in tougher environments.

During the fourth quarter we added another of our major customers to the ranks of those we serve on three continents with the signing of leases in Rotterdam, Columbus and Memphis with ManLo Logistics.

These new leases bring us to nearly 1.8 million square feet with ManLo in nine locations.

As importantly we expect to do a lot more incremental business with them as they continue to expand their footprint globally.

And now let me turn it over to Ted.

We'll talk further about our Development and Investment highlights.

Thanks, Walt.

The continued strength in global demand that Jeff and Walt describe supported starts of nearly $2.1 billion in the quarter bringing full year starts to $4.1 billion including $169 million in our retail and mixed-use business.

Roughly 49% of the $4.1 billion was in Europe, 28% in Asia and 23% in North America.

Our pipeline of properties under development at the end of the quarter represents about $3.9 billion of total expected investment.

Combined with completed developments and repositioned acquisitions of $3.7 billion we have a strong CDFS pipeline of more than $7.6 billion that was 46.3% leased at year end, very consistent with our pipeline of $6.2 billion last quarter that was 47.7% leased.

Most important, CDFS completed developments in repositioned acquisitions are on average 61% leased which supports growth in our Investment Management platform and is a stable source of future CDFS income.

As Jeff and Walt mentioned, we have increased our focus on build-to-suit starts to mitigate risk.

In fact, driven by a dedicated group in the U.S.

about 23% of full year U.S.

starts were build-to-suits.

In addition, we had roughly $70 million of fee development deals during the year.

We are also capturing a significant amount of incremental build-to-suit activity in other global markets.

In Europe nearly 37% of the year's $2 billion plus of starts were build-to-suits including $140 million in Germany in the fourth quarter alone.

We also had a good year for starts in France with roughly 80% of those being build-to-suits including two adjacent 226,000 square foot facilities for tire companies Bridgestone and Continental outside (inaudible).

And we had strong development activity in Central Europe with preleased projects started during the quarter in Poland and Slovakia.

In addition, we have seen more build-to-suit demand in Japan.

During the year we signed our second build-to-suit lease with SRI, a logistics (inaudible) rubber for a 250,000 square foot facility at ProLogis Park [Koreama].

And we will soon complete a new 350,000 square foot build-to-suit in Tokyo for [Cal Corp.], a manufacturer of beauty and healthcare products.

In total we started over $1 billion of build-to-suit business globally in 2007, more than double the $388 million started in 2006.

We continue to evaluate market conditions prior to undertaking inventory starts and feel comfortable with our mix of build-to-suit development and inventory projects.

Of course, replenishing our land bank is critical to support the expansion of our development pipeline.

To that end, during the fourth quarter we acquired major land parcels in the (inaudible) Empire, Phoenix, Toronto and [Warez].

In Europe we acquired roughly 425 acres, much of that was associated with build-to-suits in Germany as well as in Poland, the Czech Republic, Hungary and France.

In Asia we acquired land to support additional development in China where we added positions in [Tenjen], [Shinjo] and [Guango].

Now I'd like to address our starts for 2008 which we expect to be between $4.4 billion and $4.8 billion.

That's an increase of $300 million to $700 million over our starts in 2007.

For North America we believe our starts will be in line with 2007 with U.S.

slightly down offset by growth in Mexico and Canada.

European starts should be slightly higher than in 2007 given the growth in Central Europe.

Most of our 2008 incremental growth will come from China, Japan and South Korea due to stronger expected economic growth, high obsolescence of existing space and further penetration of existing markets and expansion into new markets.

We also expect to see an increase in our mixed-use developments globally.

To wrap up, we continue to identify and capitalize on exciting new opportunities to expand our global development business, and we feel very comfortable with the modest 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.

First let me cover our 2007 results and then I'll cover 2008 guidance.

For the full year 2007 FFO was $4.61 per share, up 24.6% over 2006 exceeding the $4.50 top end of our guidance primarily due to continued strong operating property performance and slightly better than expected development margins.

The $4.61 per share included approximately $0.36 per share in various gains from the MPR transaction included in Q3 2007.

Earnings per share of $3.94 were up 18.7% over last year and in line with guidance of $3.80 to $4 per share.

Let me touch on the major components of our 2007 FFO performance.

Beginning with property operations for 2007 our net operating income from our wholly owned portfolio was $787 million driven by same-store NOI growth of 5.2% as a result of occupancy growth of 2.9% and rent growth of 8% in the same-store pool turnovers for the year.

Customer retention was 78% for the year coming in ahead of our original expectations of 65% to 75%.

It was a strong year and we met or exceeded guidance in every key property operations measure.

Turning to our CDFS business, we had development starts of approximately $4.1 billion in 2007, an increase over 2006 of 62% and just slightly above the top end of our most recent guidance of $3.8 billion to $4 billion in starts.

Dispositions and contributions totaled $6.1 billion for 2007 inclusive of roughly $650 million from nonCDFS dispositions.

In line with our accounting policy and consistent with the (inaudible) definition of FFO, $200 million of gains we recognized in 2007 from these nonCDFS transactions were not included in our FFO, nor in our calculation of margins.

CDFS dispositions totaled $5.4 billion inclusive of approximately $2 billion of assets from the MPR transaction.

Total CDFS income for the year was $786 million slightly ahead of our investor day guidance of $775 million.

Profitability in our CDFS business was strong with post tax post deferral margins for the year of 34% from our developed and repositioned assets and 17.1% on a blended basis slightly ahead of our guidance of 16%.

Recall that last quarter we broke out proceeds and margins between developed and repositioned assets in the acquired property portfolios in our income and FFO statements as well as on page 17 of the supplemental, but you can see the gain in margins associated with each category of disposition proceeds.

Our Investment Management fees and our share of fund FFO totaled $254 million for 2007 which represented an increase of over 40% compared to 2006 excluding the $159 million gains and promotes from the Pepper IPO in the North American funds recapitalization in 2006.

The significant growth in fees and fund FFO was directly attributable to the nearly $7 billion in growth in our funds under management during 2007.

On the expense side full year G&A of $205 million was in line with our revised guidance last quarter of $200 million to $205 million.

The 200-- the 2007 G&A includes a $500 million contribution to the ProLogis Foundation.

Net interest expense of $368 million was slightly below our most recent 2007 guidance of $375 million principally due to the convertible debt issuance in November, which was largely used to pay down the Q4 debt maturity and our global line of credit.

Looking at our capital structure, our balance sheet is in good shape with on balance sheet funded debt at 38.2% of total market capitalization as of December 31st, 2007, and a 53.3% of total book capital.

At year end 2007 we had approximately $1.64 billion available under our global lines of credit and over $400 million of cash providing substantial liquidity to pursue our objectives in 2008.

The debt markets particularly in the U.S.

and Europe, are in substantial disarray in the current uncertain economic environment.

However, we are finding ample sources of debt capital to refinance the debt maturities we have in 2008 both on our balance sheet as well as in the funds.

We have approximately $965 million of balance sheet debt maturing in 2008, $265 million of which will be refinanced upon a scheduled asset contribution to our Japan Fund 2, while the remaining $700 million will be refinanced through a planned corporate bond issuance later this year.

Within our funds we have approximately $1.9 billion of debt with 2008 maturities which we have been working on as a matter of course.

At this point in time we have commitments and/or rate locked agreements on $1.6 billion of bad debt that are in various stages of documentation and we'll have RFPs out on the later in the year maturities within the next few weeks.

Despite the existing credit crunch, we are finding a fairly vibrant life company in European mortgage bank markets available to finance lower leverage high quality assets such as ours.

Turning to 2008 expectations, we are reiterating our guidance range for 2008 of $4.65 to $4.85 in FFO per share.

If you exclude the $0.36 in FFO gains in 2007 from the MPR transaction, this equates to 11.7% year-over-year growth at the mid-point of our 2008 FFO per share range.

We expect to generate $3.15 to $3.35 in earnings per share in 2008 reflecting a substantially lower level of planned operating portfolio dispositions than 2007.

We expect FFO from property operations to be in line with 2007 FFO based on a slightly smaller base of operating properties offset by projected growth in same-store NOI and same-store rental rates in the range of 3% to 4%.

We also expect occupancies to remain relatively stable at around 95%.

In our Development Business we expect CDFS dispositions and contributions to range between $4.5 billion and $4.9 billion with CDFS post tax, post deferral margins in a range of 18% to 21%.

Give given our visibility into embedded gains within our CDFS pipeline, we are confident in our ability to produce CDFS income of between $730 million and $750 million on a post deferral post tax basis.

The growth in assets under management that will result from the fund contributions in 2008 will generate property fund fees of between $130 million and $140 million, our share of property fund FFO is anticipated to increase to between $190 million and $210 million.

On a combined basis at the mi-point of this guidance this represents a nearly 32% increase over 2007.

Our guidance does not include the recognition of any promotes or incentive returns for 2008.

We expect that other CDFS income, which includes Development Management and CDFS joint venture income, will be between $45 million and $50 million for 2008 versus $46 million for 2007.

Due to the pay down of many of the notes receivable previously included in this category, the interest income is no longer meaningful and therefore, other CDFS will consist of just Development Management fees and income from our CDFS joint ventures going forward.

While this income will be lumpy, we anticipate significant growth over time.

We expect our G&A expense to increase by approximately 10% over 2007 levels principally due to continued investment in our global infrastructure while we expect our interest expense to decrease by approximately $60 million principally due to the full year effect of the convertible note offerings in 2007.

Overall we feel very good about the momentum in our three operating segments, the strength of our balance sheet to finance our growth and enhance our ability to achieve the guidance we have laid out for 2008.

And now I'll turn it back to Jeff for a quick synopsis.

Thank you, Bill.

Before I open the call to questions I'd like to leave you with four key takeaways.

Number one, with the leading global real estate platform we have achieved significant diversification.

While the U.S.

may be slowing in excess of 85% of our projected growth and development starts will be outside the U.S.

Global GDP growth excluding the U.S.

is still expected to be 5.4% in 2008.

Number two, that being said, our U.S.

portfolio remains strong with 95% plus occupancy, a growing build-to-suit business, strong credit tenant and solid operating fundamentals.

Number three, we have in excess of $14 billion of capacity with our-- within our Investment Management platform.

Number four, most importantly, we have deep talented experienced teams throughout the world, and are extremely well positioned financially and organizationally to take advantage of market conditions in 2008 and beyond.

Operator, we'll take questions now.

(OPERATOR INSTRUCTIONS) We'll go first to Jay Habermann and Goldman Sachs.

Please go ahead, sir.

Hi good morning, here with [Sloan Billan] as well.

And Walt, congratulations on your decision.

I'm sure it was a difficult one.

But I just wanted to start off I guess with comments on the supply demand imbalance.

Seems to be the first quarter we've heard that obviously supply exceeded demand by quite a bit, and obviously focused here in the U.S.

and so I know you've guided 3% to 4% NOI growth for the year but is the business really being impacted by the slowing U.S.

economy?

And I guess more broadly, what are you looking at in terms of data points where you might be scaling back your development pipeline at some point in the future if, in fact, growth slows?

Well, Jay, we'll just start by saying you were correct in your assessment that that is a U.S.

only phenomenon at this point, while it's albeit limited in the U.S.

And I think Walt wants to add some color to the U.S.

perspective.

Yeah Jay, it's a good question.

You're right this-- that was the fourth quarter was the first we saw that.

Now the interesting thing is that the supply that was delivered in the fourth quarter and frankly last year was right in line with the year before.

What happened was that there was a slowing in absorption and that should be no surprise to any of us.

And I think what we believe is going to happen next year is we do believe absorption in the U.S.

will slow.

It's hard to say how much, but it will slow.

This year it was 120 million square feet and the total supply was 140 with the fourth quarter.

We think that what's going to happen, however, is that the absorption will slow, but we think the supply is going to precipitously fall out.

We're already seeing it today, because a lot of the sort of the regional, or the less capitalized people are just simply not putting up buildings anymore.

They're just not.

They're just having trouble getting credit.

And that I think will play into our advantage and so in any case I mean that's sort of the the backdrop of the overall situation.

Ted, do you want to add to that?

Walt, I think you covered most of it.

Overall, Jay, things within our portfolio and our pipeline are still doing well.

So we are anticipating and preparing ourselves for some level of a slowdown, but so far we've been able to continue to lease up our buildings and there's no one area that we're overly focused on or concerned about.

Jay, let me just make one other comment.

I think the one question you'd asked overall is about our development starts.

I mean Ted sort of laid it out in what he, in terms of what our global starts look like, but I wouldn't be surprised if it our starts in the U.S.

go down somewhat this year and, in fact, frankly we're planning for that.

I mean if you look at overall North America, I think Ted's comment was that we'd be flat because we'd see a pickup in Mexico and probably some decline in the U.S.

and so really our development growth is outside of the U.S.

this year.

And we'll take our next question from Michael Billerman at Citi.

Thank you.

Jon Litts on the phone with me as well.

When you think about you have your new development starts where you're seeing a drive 85% or 80%, 85% outside the U.S., how about what's already been completed and sort of what you're expecting to sell and lease up in order to generate the CDFS gains in 2008?

Can you sort of talk through a little bit about what's sitting on the books today ready to be sold, what the prognosis is for leasing and also the mix by region as you go out and generate the gains in '08?

Michael and Jon, that's a great question.

Ted, you want to hit that?

Yeah.

I don't have the exact numbers in front of me, Michael, but for the most part it's -- we're sticking with the 80% to 85% of growth outside of the U.S.

would be consistent with our contributions and what we've got in our pipeline.

I mean the majority -- I don't have the exact number, but the majority of what we've got in our pipeline is going-- is also outside the U.S.

This trend toward diversifying our starts and doing more globally wasn't necessarily with the intent that if things may or may not slow down in the U.S.f it was just that's where our growth has been and it's been very significant outside of the U.S.

over the past three to five years.

And, Michael, I think the thing I'd add to that would be to say look, we expect in our guidance that we've talked about $4.5 billion to $4.9 billion in overall contributions.

If you back out a profit margin on that, the numbers are obviously let's say it's 20% margin our roughly $4 billion to $4.5 billion which means that we're contributing somewhere in the neighborhood of 50% of our overall pipeline and that pipeline today is roughly 50% leased.

So we feel good about the contributions this year relative to where we are in terms of leasing as well.

Yeah.

I mean I just-- if you think through the math, as we looked at our 2007 development starts that sort of ratio is going to be where the contributions come from.

And so in 2008 you're going to get maybe slightly less than half of CDFS profits from European contributions.

You're going to get somewhere between 10% and 15% of the CDFS profits from U.S.

and Canada and we still see some sizable gains in Japan.

So it's going to follow where our development starts are.

And Michael, it's Jeff.

As you can tell by the number of people that wanted to jump in and answer your question, we all feel pretty comfortable with the answer.

We're very, very pleased with our lease up.

We're very pleased within the status of leasing within our portfolio, with our execution of our teams around the world, and we've got great people and they've done a great job and we feel very good about the leasing.

The other thing, Michael, and we are all piling here, is the build-to-suit activity in the U.S.

I mean we made a strong commitment to that early last year and that paid off big for us.

I mean 23% of what we built were build-to-suits.

So a huge percentage of what we did last year was effectively hedged to the leasing environment and that was thought through.

I mean we set up a special group to do that.

That was an initiative that we really pushed and we continue to see growth in build-to-suits in the U.S.

So we're pretty enthusiastic about that.

We'll take our next question from Jamie Feldman at UBS.

Please go ahead.

Great, thank you.

I was hoping you could give a little more perspective on what you're seeing from your tenant base and your fund clients?

So I guess it's a two-part question.

First of all, for the fund investors, are they in any position where they're trying to get a reprice fund contributions or maybe pull back a little bit on any -- I guess do they have any ability to pull back on some of the funding that they've already allocated?

Jamie, I'll answer that.

It's Jeff.

One, they don't have any ability to do that within the documents.

We have firm subscription agreements from some of the leading global institutions, sovereign wealth funds around the world.

That being said, I'm in constant contact with some of the largest real estate investors globally, the people that are instrumental in our funds, and it's just the opposite.

They see this as an opportunity, particularly we see investors in Europe that are looking at the U.S.

both from the valuation of the dollar as an opportunity to invest in the U.S.

We see U.S.

investors that want to invest with us in Europe and Asia as evidenced by what we did in August, which isn't that long ago, which was at probably the height of uncertainty in the credit market where we had our largest investors significantly up size at the eleventh hour and cause us to be oversubscribed in our European properties fund, our second one.

And from a tenant standpoint or customer standpoint we're seeing continued strong build-to-suit demand as they reconfigure their distribution network.

You look at the 80% metrics.

You look at the growth in Germany, phenomenal results there, phenomenal results in Japan in China, as Ted noted strong results in the U.S.

So I guess the unequivocal answer, the question is we're seeing strong demand from our fund investors and we're cautious but we continue to see strong demand from our customers and we monitor it.

We ask the question on a weekly basis, but it remains relatively strong.

And we'll take our next question from Chris Pike at Merrill Lynch.

Mr.

Pike, please go ahead.

Your line is open, sir.

That was an easy question.

We'll take our next question from Michael Mueller at JPMorgan.

Yeah, hi.

With respect to the $4.4 billion to $4.8 billion in development starts this year, what portion of that's expected to be build-to-suit?

Ted, I think you said it was about $1 billion for '07.

And then what portion of the spec development would you characterize as being more of a pure reconfiguration play where you may have little less activity to changes in the economic conditions?

I'm sorry, Michael.

I got that first part.

The second half of that, died off, was very weak.

Yeah, can you hear me?

Yeah.

Okay.

The first part was when you look at the $4.4 billion to $4.8 billion in starts this year, what portion will be build-to-suits?

I think that number you said for '07 was about $1 billion.

And then when you're looking at the spec component of the development this year, what portion of that would you characterize as being more of a pure reconfiguration play where you may be a little less sensitive to what happens with changes in the economy?

Well, the first part is probably easier to answer than the second.

We expect our build-to-suit business to continue to grow and I think 30% to 35% of our starts is our target and something we think's very achievable which would be consistent with last year, maybe a little bit better than last year.

On the spec portion being part of the reconfiguration, I'm not sure if -- what you're really referring to, but the bottom line, is we are very--we are able to be and are very selective in terms of what markets we start speculative product in and we're focused on -- Jeff wanted to say something there.

We're focused on markets like Southern California and China, Asia, I mean really throughout Europe, port markets, areas where there's significant global trade.

So I think that answers the question, but I'll let Jeff --

Michael, I think your question which is probably -- Ted's been through multiple cycles as I have and Walt and some of the, either the gray-haired or losing-hair people around the room, but the -- and not because of the-- not because of current market conditions, that's for sure.

But what we've seen traditionally in any sort of downturn, if we're talking about the U.S.

in particular, is a continued drive by customers to cut costs in any sort of downturn.

We're seeing it from some people today, and we won't mention the names of customers, but customers that are somewhat associated in the retailing/homebuilding industries that you would think have some softness today, we've had a lot of built-- things that we haven't announced yet but build-to-suit activity with them, major leases signed with them as they're trying to reconfigure their distribution network today in the U.S., and we've seen it in every cycle.

Our expectations will continue to see it in this cycle whether it's 30%, 40%, 50%, 60% of the total it's hard to say, but it's clearly a driver of the business and mitigates our business in particular against downturns in the economy somewhat.

And we'll take our next question from Chris Haley at Wachovia.

Morning.

Walt, onward and upward, congratulations.

Thanks, Chris.

Bill, I have a question for you on balance sheet capacity excluding the capacity within the funds.

I think one of the stress tests you guys do is you had to hold assets on your balance sheet before contribution and one of the conditions would be that the lease-up either stops or doesn't meet the threshold in which the funds would invest in the assets.

Do you give us maybe a little bit of a walk-through in term of how you look at this in terms of how much you have to put on your balance sheet?

Well I think--

What type of considerations we should think about?

Yeah, Chris, first of all, let me put it this way.

I think we have in addition to our cash and current capacity under our global line of credit we have the capacity under our covenants to borrow an additional $1 billion or so, and which we don't have at this point any intention of doing, but we have borrowing capacity under our balance sheet equal to about 40% of our -- or 50% of our existing capacity of global lines of credit and cash.

So we feel pretty comfortable from that standpoint.

And again the issue or question for us when we think about what would we hold on our balance sheet, we monitor the development starts and the contribution opportunities and potentials actively.

And as we look at our 2008 contribution activity, there's about 65% of our contribution properties that are ready to go in sort of the first and second and maybe the early third quarter and so those are underway now.

So we have a strong piece of our expectation for 2008 already embedded in our portfolio on operations.

So we feel pretty good about that.

And we'll take our next question from David Harris at Lehman Brothers.

Yeah, good morning, everyone.

Ted, simple question for you.

Don't margins on build-to-suits typically come in lower than your spec build?

They do, David.

I mean typically they will come in a little bit lower.

It depends partially on whether or not we're doing a build-to-suit on land that we own and control or land that has been designated by the customer and we acquire on their behalf.

We look at the build-to-suit business as incremental.

I mean our starts came in-- in 2007 substantially above 2006 and a lot of that was incremental.

In fact the entire-- you couldn't make the argument that the entire increase of $1 billion dollars was incremental to -- it wasn't quite $1 billion, but close, was attributable to build-to-suits.

So we look at it as a way to grow our customer relations.

It is a solid reliable source of CDFS income.

It hedges your pipeline.

I mean we're very excited about the percentage leased our pipeline is and what that affords us in the future and what it allows us to do in terms of doing some level of inventory projects throughout the world and feel very comfortable that we've got a significant bank of property that we can contribute.

Because once they're leased our funds are -- our agreements with the funds are they will take the leased property.

So it's a balancing act, but we still make good money on the build-to-suits and its a great business to be in.

We really like it from a risk adjusted rate of return.

We think the margins are healthy and they're clearly incremental.

They drive and strengthen customer relationships as well as they drive growth in our asset management platform, our Investment Management platform, incremental asset management fees, incremental incentive fees in the long run.

We love the business.

And we'll take our next question from Scott O'Donnell at MetLife.

Yes, good morning, a couple questions from the fixed income perspective.

First of all, Walt, best of luck.

You have been and will be missed.

Thanks, Scott.

Appreciate you saying that.

And then the question would be as you look towards 2008 and approaching the corporate debt market, most fixed income investors would look at the leveraging of the capitalized funds management fees to be the most egregious example of the loosening of credit terms in the REIT market.

Given the fact that we're in a credit crunch and given the fact that credit investors will be more discriminating when you come to market in 2008, is the Company considering abandoning that approach for its future debt deals?

Scott, no, we're not.

I mean again we've-- you and I have had discussions on this and I suspect you had discussions on it prior to my arrival.

But one of the things I would hope that people would come to realize, if it they don't already, is the annuity-like nature of these fees and the growth opportunity and that's seen in 2007 where as a result of increasing our funds under management from $12.3 billion to just slightly over $19 million we had 40% plus growth in our FFO and fees from our funds management activity and we expect 32% plus growth in 2008.

And so I -- Jeff was kind enough a couple minutes ago to not include me in the people that have seen the cycles because he knows that I've seen somewhere between one and two more cycles than anybody else in the room.

We're being kind.

I arc back to 1990 in that timeframe which was a real estate depression and I looked at the Investment Management business inside my old firm with South Partners, and it was annuity-like and it was fabulous recurring revenue in a very difficult time and I view this as fabulous recurring revenue in this time.

So --

It the safest, most stable, strongest form of cash flow which is why it's typically rewarded the highest multiple if you look at the great asset management companies around the world.

And we'd like to have a lot more of it and we're going to continue to grow the Investment Management platform.

Operator, we'll take two more questions.

And we'll go next to Mitch Jermaine at Banc of America Securities.

Hey, everyone.

Ted, you mentioned some land acquisitions.

Have you seen any drastic change in cost over the last six months?

Mitch, that's a great question and I think in some markets in the U.S.

you would assume that would be happening and so far it is not.

Rent growth has been really strong throughout the U.S.

and although we haven't seen much in class A product in terms of Cap rate decompression if Cap rates going up, we have-- we've seen rents going up and I think that's supporting people maintaining land prices.

We-- and then outside of the U.S.

for the most part most markets are actually quite strong and we're seeing land values go up.

So as we sit here today we haven't seen land prices go down.

It wouldn't surprise me if they tick down a little bit in certain markets in the U.S.

I think the real opportunities, Mitch, will be are outside the core industrial markets, core industrial markets have remained strong from an occupancy standpoint, remained strong from a rental growth standpoint.

So the opportunities that are out there in land values or land costs are outside the industrial sector.

We'll take one more question, operator, please.

And we will take our final question from David Cohen and Morgan Stanley.

Hey, good morning.

I just wanted to talk about the margins again, 23.5% this quarter has obviously been coming down closer to where you guys say the normalized range is, but when you look at the 23.5% how much was due to kind of just lower initial yields versus just higher Cap rates on the appraisals?

And then looking into 2008 the 18% to 21%, is that any-- does that differ from your original assumptions when we had your investor conference last year?

And then looking into '09 where do you think those margins will go from there?

Well, let me touch on that.

First of all, as you-- we have some additional contributions of the acquired property portfolios in 2008 that -- so our development, our margins on our development activity, the pure development activity in 2008, will be above the 21%, probably in the mid-- low to mid-20s, okay, and that will be brought down to what we are guiding to, sort of 18% to 21% versus as a result of including some of the incremental acquired property portfolios in the contribution activity.

Some of that has been anticipated to be included in 2007 and for structural reasons in terms of getting the properties in the right entities, et cetera, et cetera was pushed off into 2008 and so we -- as you saw, we had a slight uptick in margins in the Q4 versus where we had originally guided to.

And we have a little bit of a decrease in the margins for 2008 as a result of inclusion of those property funds.

But what we talked about back in investor day was sort of 19% to 21% I think, and I think we're now talking 18% to 21%.

So not a sizable difference in that margin activity.

Yeah, Jeff, or-- Okay.

Well I'd like to thank everyone for joining us today and I feel I'd be remiss in talking about 2007, the outstanding year we had and the way we're positioned for 2008 and beyond without thanking our Leadership Team outside the U.S., who aren't on the call with us today.

But from Walt, Ted, Bill and I we want to say thank you to Masato Miki, to Mike Yamada, Ming Mei, Gary Anderson and the rest of our Senior Management team inside the U.S.

and outside the U.S.

who have done a great job in positioning the Company.

Thank you.

Thanks, everyone, for joining us today.

This does conclude today's presentation.

We thank everyone for their participation.

You may disconnect your lines at any time.