Prologis Inc (PLD) 2008 Q1 法說會逐字稿

Good morning, everyone.

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

I would like to welcome everyone to the ProLogis first quarter 2008 financial results conference call.

Today's call is being recorded.

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

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

(OPERATOR INSTRUCTIONS)

At this time, I would like to turn the conference over to Ms.

Melissa Marsden, Senior Vice President of Investor Relations and Corporate Communications with ProLogis.

Please go ahead, ma'am.

Thank you, Abe.

Good morning and welcome everyone to our first quarter 2008 conference call.

By now you should all have received an email 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, who will comment on key accomplishments of our sustainability initiative; Walt Rakowich, President and COO will cover ProLogis' operating property performance and global leasing activity; Ted Antenucci, President and Chief Investment Officer, will discuss investment activities; and Bill Sullivan, CFO, will cover financial performance and guidance.

Before we begin the call, I would like to quickly state that this conference call will contain forward-looking statements under federal securities laws.

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

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

For a list of those factors, please refer to the forward-looking statements ^^information in our 10-K.

I'd also like to add that our first quarter results press release and supplements could contain financial measures, such as FFO and EBITDA, that are non-GAAP measures.

In accordance with Reg G, we have provided a reconciliation of those measures.

As we have done in the past, to give a broad range of investors analysts an opportunity to ask their questions, we will ask for you to please limit your questions to one at a time.

Jeff, would you please begin?

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

Our global platform to perform well in the first quarter, despite uncertainty in the overall U.S.

economy.

Driven by the expansion of our investment management platform globally, continued solid development margins, and importantly, stable results in our property operations throughout the world.

Before I touch on each segment, I would like to share a quick observation.

Like many of you, I read the Wall Street Journal and Financial Times online in the morning; and frankly, the headlines are pretty frightening.

But then I talk to our people in Asia and I feel a bit better.

Then I talk to our team in Europe and I feel even better.

Then I talk to our North American team, and I hear that things are still relatively stable.

So by mid-morning, I feel pretty good about the business.

Then I get up the next morning, read the papers, and the cycle starts all over again.

Despite all the negative headlines, at this point the current U.S.

financial sector crisis is not being reflected in a significant way within the industrial market, nor in our portfolio.

Our stabilized occupancies were down about a point compared with the end of last year, but basically in line with our 94%-plus expectations.

Our positive same-store results reflect the continued rent growth and year-over-year occupancy increases in the pool.

We do expect, however, that the U.S.

industrial market will soften later this year.

Walt will have more related to our expectations for the U.S market shortly.

While the U.S.

and UK have some risk of softer conditions, we are fortunate to have the most globally diverse platform in the industry, and are seeing continued strong demand from China, Japan, Central and Western Europe, as well as our new markets in India and the Gulf Cooperation Council or GCC region.

Turning to our development or CDFS business, we started over $900 million of new development in the first quarter, supported by the strength of demand in our European and Asian markets, and by continued build-to-suit activity in the U.S.

To continue to serve our customers in the most dynamic markets worldwide, we extended our global platform in the past few weeks through two important new initiatives.

First, ProLogis Middle East, is a JV with our capita that will develop and acquire up to $1 billion of warehouse space in the GCC region.

We expect to begin development in the second half of 2008, starting in Saudi Arabia, the largest economy in the region.

Additionally, we announced a new JV with K Raheja Corp through which we will expand our presence into India, focusing on the fastest growing locations for distribution operations in the country.

Raheja is one of India's largest real estate developers, with significant experience in the retail, office, and hotel sectors.

The JV already has acquired 27 acres near Pune, and is in advanced stages of land acquisition, and the key markets of Mumbai, Chennai, Bangalore and Calcutta.

We expect this fast-growing country of 1 billion-plus people to be a major initiative and growth opportunity growing forward.

In these particular areas of the world, by establishing the highest quality of local partnerships, we can create important governmental and local business relationships and gain access to strategic land that would be difficult to acquire without such partners.

ProLogis in turn brings key customer relationships and logistics infrastructure development expertise to our partners.

Together, we believe these JVs will enable to secure an advantage in these emerging markets, while helping to build the country's logistics infrastructure.

During the quarter, we continued to grow our investment management business, and now have over $21 billion of assets under management in ProLogis funds, up from $19 billion at the end of 2007.

Also, in early April, we formed a China acquisition fund, with an affiliate of GIC, who will maintain a 67% stake.

This exclusive JV will acquire distribution properties from third parties in our targeted distribution markets across China.

The funds total capacity, including GIC's equity, our 33% equity and 50% leverage will be $2 billion.

We expect this new fund to enable us to further expand our position as a leading contributor to the establishment in China's logistic infrastructure and leverage our local property management organization.

Additionally, in the first quarter we increased the capacity of our Japan Fund II, by $500 million of equity and $1 billion of total capacity.

This gives us in excess of $15 billion of remaining capacity in our investment management business.

Institutional demand on the equity side remains strong, although the debt markets remain challenging.

As we noted in our last call, credit is still available but only for the best borrowers, with quality assets and lower to moderately leveraged business models.

And although spreads are higher, they are offset by lower base rates.

Bill will have more on the current credit environment later, but what - we believe that access to capital is again clearly a competitive advantage today.

The lack of access is definitely driving down the level of new speculative starts in many U.S.

and European markets.

This flight to quality is also reflected in cap rates.

For high quality, Class A properties, cap rates remain relatively stable, while there has been a more significant increase in cap rates for lower quality assets.

Turning to our outlook for the remainder of this year, we continually analyze market dynamics and economic indicators through our experienced local market and research professionals.

The most recent forecasts show global GDP growing at about 4.9% in 2008, from an estimated 5.2% in 2007, on a purchase price parity basis, which is a better metric to measure movement of goods in emerging markets.

We expect it will remain solid, due to the emergence of China and India.

And while we watch global economic growth closely, we continue to see the demand for logistic space outside the U.S.

is more closely correlated with supply chain reconfiguration and a high level of functional obsolescence in emerging markets, in addition to growth and global trade for goods, which is projected to be roughly 5.6% in 2008.

Lastly, let me quickly cover some of our recent sustainability initiatives.

Following on the heels of our commitment to develop all new U.S.

buildings to elite standards, during the quarter we also announced that our new - all our new industrial space in the UK will be built according to BREEAM, the UK's national standard for best practice in sustainable development and environmental performance.

Additionally, we entered into an agreement to lease roof space to Southern California Edison as part of the utility's new solar power program.

The initial installation at our Kaiser Distribution Park in Fontana will generate enough electricity to power more than 1,400 households per year, and be the largest rooftop solar array in the U.S.

SCE plans to install 50 megawatts of solar panels in each of the next five years, which is also the largest initiative in North America.

With 180 distribution facilities in SCE's territories, totaling more than 41 million square feet, we expect to play a significant role in future SCE solar installations.

This is a great way to leverage our assets and generate returns with no incremental investment, doing the right thing for both the environment and our shareholders.

Now let me turn the call over to Walter.

Thanks, Jeff.

I'll start by covering overall operating performance, which remained solid throughout the first quarter, supported by the key growth drivers that Jeff mentioned a few minutes ago.

Our first quarter leasing of 26.5 million square feet was down slightly from average levels throughout 2007, but up relative to leasing in the first quarter of last year.

Same-store net operating income was up 3.3%, same-store rental rate growth was up 6.6%, offset by higher expenses, the majority of which related to property taxes and CAM, which were reimbursed through expense recoveries.

In addition, we recognized roughly $6 million related to our share of damages from tornadoes that struck Memphis in early February.

Our overall stabilized occupancies declined 93 basis points, to 94.6%, with Asia at 98.7, Europe at 92.4, and North America at 94.8%.

In the U.S., as Jeff mentioned, we continue to watch for signs of material weakness by closely monitoring delinquencies, bankruptcies and subleased space.

So far we have not really seen a major diminution in our operating metrics.

Bad debt is only running at three-tenths of 1%, and we have had six bankruptcies so far this year versus 26 in all of last year.

We are also seeing decent early renewal activity on leases scheduled to turn over later this year.

However, our expectation, given lower overall activity levels and the deferral of customers' expansion plans, is that the U.S.

market fundamentals will soften a bit further, and occupancies will dip a bit more before they firm up.

In the top 30 North American markets, the vacancy rate moved up slightly from 7.8% to 7.9%.

First quarter deliveries were 26 million square feet, down sharply from Q4 last year deliveries of 46 million square feet, but still in excess of net absorption of 21 million square feet.

Now we are anticipating an even more significant cutback of new starts in the U.S.

for the remainder of the year.

In fact, we have seen competitors mothballing projects which they already had begun to break ground on.

As we discussed last year, we made a deliberate shift toward a more conservative strategy, focused on higher percentage of build-to-suit development.

In the first quarter, 96% of our $113 million of starts in North America were begun on a pre-committed basis.

Now, outside the U.S., our markets are holding up well.

We continue to see consistent demand in most areas, with a decreasing supply of new competitive development given credit condition.

In the UK, we are in active discussions on all of our inventory stock, but leasing decisions are slower.

Therefore, we are proceeding more cautiously and, as in the U.S, we are focused almost exclusively in on build-to-suit activity in terms of new development for this year.In southern Europe, despite a softer macro economic picture, activity for our space is still good.

During the quarter, we signed 960,000 square feet of new development leases and letters of intent for new build-to-suit development of over 1.4 million square feet.

And in central Europe, in Germany, our business continues to be exceptionally strong.

In Germany, while GDP growth has slowed, outsourcing the logistics has tremendous momentum and is driving a major shift from owned to leased facilities.

We have also been able to create close working relationships with auto manufacturers and parts suppliers, many of whom are talking to us about growth on multiple continents.

Some key transactions with global customers in Europe during the quarter included our eighth lease with Unilever, our 22nd lease with Wincanton, and our 89th lease with Deutsche Post.

As for Asia, in Japan, our 25 million square foot portfolio - stabilized portfolio is 99.5% leased.

And the pace of leasing continues to be active.

We are particularly proud of the relationship our team in Japan has established with Nippon Express.

During the quarter, we signed leases with Nippon, representing 166,000 square feet, across all three continents, one in Rotterdam, one in Hiroshima and one in Washington, D.C.

These new leases bring us to more than 2.3 million square feet leased to them in 11 global markets, and in South Korea we have significantly increased our activity, having recently acquired four newly-built, fully-leased buildings, bringing us to 96.3% leased in our 1.3 million square feet stabilized portfolio.

We also signed our first two build-to-suits in South Korea, and fully leased our first inventory building with strong regional logistics providers that will almost certainly grow with us in the future.

And in China, our stabilized portfolio is 96.8% leased.

Earlier this week, we announced our activity in a couple of inland China markets, Chongqing and Nanjing, where our first buildings there are now 100% leased.

Overall, leasing activity continues to be brisk in China for completed developments.

Of course, our focus in China has been growing our development pipeline, and today we have over 10 million square feet under construction in various stages of leasing.

We expect to see a tremendous amount of leasing in the second half of the year, as these buildings are completed.

To wrap up, we continue to be demand-driven, investing development capital in markets according to supply and demand fundamentals, and we continue to nurture critical customer relationships as they drive a significant amount of new CDFS leasing, and support higher retention levels in tougher market conditions.

Now, let me turn it over to Ted, who'll have more on our development and investment highlights.

Ted?

Thanks, Walt.

The continued global demand that Jeff and Walt described supported starts of the $929 million in the quarter, including those in our CDFS joint ventures.

Roughly 46% of this amount was in Europe, 42% in Asia and 12% in North America.

Our pipeline of properties under development at the end of the quarter represents about $4.1 billion of total expected investment.

Combined with completed developments and repositioned acquisitions of $3.7 billion, we have a CDFS pipeline of just over $7.7 billion that was 42.8% leased at quarter end.

While this total lease percentage is down slightly, from about 46.3% at year end, it will fluctuate from time-to-time due to the mix of assets in the pipeline.

During the quarter, we acquired a major distribution park outside Shanghai that included several vacant buildings, and we broke ground on inventory developments in several new markets in China.

This activity, which will bolster our leading market position in the long-term, has a dampening effect on pipeline occupancy in the near-term.

CDFS completed developments and repositioned acquisitions are on average 54% leased, which is a healthy level and supports growth in our investment management platform.

As far as starts for the remainder of the year, we have scaled back on inventory starts in the U.S.

and UK, and are therefore more comfortable towards low end of our 4.4 to $4.8 billion range, which represents about $300 million to $400 million increase over last year.

We expect that North American starts will be down relative to last year, with the reduction in U.S.

speculative starts partially offset by increased build-to-suit activity and continued growth in our Mexico and Canada businesses.

European starts should be slightly higher than in 2007, given growth in Central and Northern Europe, and we expect Asian starts to be higher, as we move some of the land we secured in China over the past couple of years into development and accelerate our activity in South Korea.

We continue to believe that build-to-suit development is a prudent way to build our platform, given current market conditions, while still generating attractive risk-adjusted returns.

Walt mentioned that nearly all of our North American starts during the quarter were build-to-suit.

In addition, over 30% of Europe's starts were build-to-suits, led by our businesses in Germany and Sweden, where pre-committed development is critical to accessing key land acquisitions that can support future inventory development.

Roughly 25% of our European starts were in Southern Europe, and during the quarter we began projects in Southern France and in Valencia, Spain.

Central Europe represented about 36% of the European starts, spread among Poland, Hungary, the Czech Republic and Slovakia.

The remaining starts were in Northern Europe.

While we did not start any new development in the UK in the first quarter, we continued to see a steady flow of build-to-suit proposal activity there, and expect to have more to announce in these transactions in the coming weeks.

As Walt noted, the tightening of the credit markets in Europe has led to a drop off in speculative development by private developers, which is providing us with opportunities.

In Asia, first quarter start were $386 million.

In Japan, we began two new inventory projects in Nagoya and Tokyo.

While in China, we started a total of 15 buildings located in Nimbo, Beijing, Kwangchow and Chengdu during the quarter.

In addition, we announced two new build-to-suit transactions in South Korea, both of which will start later this year.

This quarter, our overall land balance increased by approximately 10% to $2.4 billion.

Over half of the increase was due to the changes in exchange rates, and the balance was due to a few strategic purchases in Japan that we plan on developing in the near future.

To wrap up, the breadth of our development opportunities around the globe diversifies our exposure to market conditions in any single region.

We are uniquely positioned throughout the world with customer relations and land positions that allow us to allocate capital to inventory developments in high-growth markets, and focus on pre-committed developments in less robust regions.

Our prudent shift toward a greater overall percentage of pre-committed investment gives us confidence in our ability to meet our development goals and support future contributions to our property funds.

And now I will turn it over to Bill.

Thanks, Ted.

FFO for the quarter was $1.38 per share, up 10.4% over the prior year, principally due to growth in FFO and fees from our property funds, and continued healthy development margins.

Earnings per share of $0.73 were down slightly relative to last year, due to a $0.12 charge in Q1 2008 related to our share of re-measurement and settlement losses on interest rate, derivative contracts entered into by ProLogis's unconsolidated property funds.

Looking at property operations, net operating income from our direct owned portfolio was $178 million, slightly lower than last year, due to a higher level of rental expenses, which for Q1 2008 included the $6 million reserves set up for our share of the damages from the tornadoes that struck Memphis in February.

Turning to our CDFS business, proceeds from dispositions and contributions of more than $1.4 billion for the quarter are a little ahead of our full-year expectation of $4.5 billion to $4.9 billion.

FFO from CDFS dispositions was $278 million in Q1 2008, with a post-tax, post-deferral margin of 27.6% from our developed and repositioned assets, and 25.4% on a blended basis, reflecting roughly $83 million in proceeds from the contribution on properties from acquired property portfolios in Europe and Mexico, which were contributed at cost.

At March 31st, we have approximately $293 million of assets remaining in our pipeline from the Europe and Mexico-acquired property portfolios, all of which we expect will be contributed later this year at cost.

As we have said consistently, we believe development is a mid to high-teens margin business over the long term.

Due to our visibility on embedded margins within our completed or soon-to-be-completed developments and repositioned acquisitions, we expect our post-tax, post-deferral margins to be in the range of 18% to 21% for the year, which implies that margins will likely return to historical levels in the quarters ahead.

In the first quarter, we recognized $12.3 million of other CDFS income, which includes development management fees, and CDFS joint venture income.

This amount is in line with our full-year expectations of $45 million to $50 million.

Our investment management fees and our share of fund FFO together totaled $66.8 million for the first quarter, an increase of 27.8% over last year and consistent with our expectations for these two income streams to grow in line with our growth and assets under management over the course of the year.

On the expense side, G&A of $56 million for the quarter is on track with our guidance of a 10% increase for the full year over 2007 levels.

Net interest expense of $85 million is running slightly ahead of our full year expectation of $310 million, due principally to increased development expenditures in Q1 from the high level of Q4 2007 development starts, and slightly later than anticipated contribution dates on the Q1 CDFS contributions.

Looking at our capital structure, our balance sheet remains in good shape with on-balance sheet funded debt at 41% of total market capitalization at the end of the quarter, and at 53.8% of total book assets.

At the end of the quarter we had approximately $2 billion of liquidity available between our cash on-hand and availability under our global lines of credit, roughly the same as we had at year end 2007.

The debt markets, particularly in the U.S.

and Europe, remain very challenging given the continuation of the relatively uncertain U.S.

and UK economic environment.

The credit crunch is most notably felt in the bank debt and real estate securitization markets.

However, we continue to find ample sources of secured debt capital to refinance the maturities we have in our various funds, principally from the U.S.

Life companies and the German Hypo banks.

Within our funds, there is approximately $2.3 billion of debt with 2008 maturities.

At this point in time, we have commitments and/or rate lock agreements on $1.9 billion of bad debt that are in various stages of documentation.

As of March 31st, we had approximately $813 million of balance sheet debt maturing during the remainder of 2008.

Relative to our on-balance sheet debt, we have previously stated our intention of pursuing one or more unsecured bond offerings to refinance 2008 maturities.

Fortunately, it looks as though pricing and liquidity in that market has improved as of late, and we will look to pursue something during Q2.

As was announced earlier today in Europe, Gordon Keiser has been promoted and will be leaving his current position as Treasurer and moving to Europe to take over as CEO of PEPR.

Gordon has been a tremendous asset to ProLogis from both an operating and financial perspective, and we are confident that he will add significant value to the PEPR organization.

Our treasury staff has been well trained and with the addition of planned resources, it's well positioned to continue in a business-as-usual fashion.

We are reiterating our guidance range for 2008 of $4.65 to $4.85 in FFO per share.

We continue to expect between $3.15 and $3.35 in earnings per share in 2008, reflecting a substantially lower level of planned non-CDFS dispositions in 2007.

Overall, we feel very good about our Q1 results and believe we are well positioned financially and operationally to achieve our 2008 guidance.

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

Thank you, Bill.

Before I open the call to questions, I would like to leave you with four key takeaways.

Number one, while the U.S.

may be slowing, we derive greater than 85% of our incremental growth from outside the U.S., focused on markets where conditions remain quite healthy.

Thus we are well positioned just for continued growth in both FFO and NAV per share.

Number two, our U.S.

portfolio is in great shape to weather the current downturn, with strong credit quality customers, and we are realizing the benefits of a strong build-to-suit business that we focused on and built over the last three years.

Number three, with the addition of our new China Fund and increased capacity in our Japan Fund II, we now have over $15 billion of total remaining capacity in our funds, which supports continued growth in our investment management platform.

And number four, most importantly, we have an incredibly deep management team that has been cycle-tested.

The combination of this team, our global platform, a strong balance sheet, investment management platform, and powerful customer relationships positions us well in these times.

Operator, we'll take questions now.

Thank you.

(OPERATOR INSTRUCTIONS) Our first question of the morning will go to Jay Haberman at Goldman Sachs.

Please go ahead.

I'm here with Sloan as well.

I guess a question for Jeff or walt or Ted, just specifically on the impact of the credit markets and I guess on a global basis, can you talk a bit more, just expanding on decision making process, obviously leasing and then ultimately cap rates and margins, because you are really talking about margins in the latter half of the year.

I'm just curious on two fronts.

Number one is the 3% to 4% same-store NOI growth assumption of the 95% occupancy, as well as, do you consider reducing your starts even below that 4.4 billion sort of low end of the range?

Well, Jay, let me start.

While we have talked about not seeing a significant diminution in the U.S.

market, which scaled our U.S.

speculative or inventory starts down dramatically by about 80% to get to that number, that number is somewhat - our total development starts are somewhat mitigated by build-to-suits that we have already signed.

Obviously, build-to-suits is business that we focused on, really ever since the Catellus merger.

Catellus had some strong, strong talent, and we had the ability to add the talented Catellus staff to the people we already had in ProLogis.

We had the capacity to build an extremely talented build-to-suit team three years ago, and the dividends from that are really starting to pay off today, those relationships they developed and the expertise we developed in-house, it takes a while to build that kind of business, but we're reaping the benefits of that today.

In the UK, we started exactly zero buildings in the first quarter, but we are seeing some significant build-to-suit activity and that is really helping to drive the business, we expect, in the halter half of this year, despite the overall potential for a slowdown in the economy.

But we feel good about the way we have allocated capital, we have some fast-growing regions of world, China, Japan remains strong, Western Europe remains strong, with the exception of the UK, and Central Europe is very, very strong, but that's without even layering in the additional growth markets we have in India now, and when you see the kind of market activity in the GCC, it's unbelievable what $100 plus oil does for those markets.

And we'll go next to Jamie Feldman at UBS.

Thank you.

I was hoping you could address what you are seeing in terms of appraisals on your properties and the funds in general, maybe if you could go by region.

Jim, why don't I do outside the U.S., and then Walt or Ted will pick up the U.S, and that way we could split this up a little bit and you guys don't have to get tired of hearing me talk the entire time.

But in Europe, we have seen some diminution in values clearly on the appraisal side, in the UK.

There's many in the UK that think the market has over-reacted and will swing back in the latter half of the year.

I think that there's probably some semblance of truth to that.

You look at the strength of the covenants, 15 to 20 year leases, fully recurring leases, and the way that market moved by circa 10, 15% on Class A product, and more than that on lesser quality product, more than any place else in the world moved, there's a significant chance that there will be a correction in that market in the second half of the year.

That being said, we are seeing cap rates relatively stable in Western Europe, really no appreciable movement whatsoever.

Believe it or not, we have seen some continued compression, very, very slight, in Central Europe.

Wee have seen cap rates remain constant in China and in Japan.

So overall around the world, it's been relatively stable with the exception of the UK, and I'll let somebody else pick up on the U.S.

if they like.

I will hit it, Jamie, this is Walt.

As it relates to the U.S., I would say - well, first of all, you have to remember that what we are really contributing into our funds are newly-minted product, and so we have not seen that much diminution at all in the appraisals, maybe 5, 10 basis points, but not much, I mean, as Jeff said, substantially the same.

And of course it's hard to compare it exactly to the same exact asset you had last year, but I would say they are slightly off but not much.

And we are really not appraising much Class B product or B or C product because that's not what we are contributing into our funds, but we do have anecdotal evidence that the Class B product is probably off as much, say, 100 basis points, maybe even a little bit more than that, or sort of, if you will, second class product.

But overall, for really good product, in good markets, pretty much appraisals are holding up from where they were last year.

And we feel real good about the fact we sold $1 billion of that Class B product in the U.S.

in '07, '06, and redeployed that capital in markets that we haven't seen cap movements, and we have seen strong markets, which has have positioned us well.

Our next question goes to Michael Bilerman at Citi.

Thanks, good morning.

Irwin Guzman is on phone with me as well.

Ted, I was wondering if you can dive a little bit deeper.

You talked about the percentage leased in the CDFS pipeline going down 400 basis points to about 42%, and also reducing the starts down towards the lower end of your range.

Why shouldn't we be concerned about that, A, impacting, potential margins from not being able to get them leased up in time, so they are going to sit on the balance sheet for longer, but also just not developing as much product as you would - had hoped to, and the pipeline shrinking.

Maybe just help me calm some nerves about that?

Okay, Michael.

Okay.

I'll first start with the starts.

You know, we are, I guess, trying to focus everybody on the lower end of our guidance.

It's still - we are still guiding to a 300 to $400 million increase over last year.

We are definitely still growing, but we are trying to be prudent in a few areas of the world where we think it makes sense to be prudent, and overall we're still growing our pipeline and we have got great growth opportunities in some of the new markets we just announced deals with.

So we are still very bullish in our ability to grow our pipeline.

We are just looking at markets that have been stable for us in the future, seeing some softness in those markets, and slowing down developments, primarily inventory developments in the U.S.

and UK.

Those are really the two areas that are - we are anticipating a slowdown in our starts.

Relative to the pipeline, we obviously take a hard look at that number.

That's something that we are very focused on.

The drop in that pipeline percentage leased really comes through China.

I mean, we acquired a distribution park outside of Shanghai, it's a great located piece of property, it's a change-in-use type of opportunity, it's approximately 2.7 million square feet.

That added with starting new inventory projects in several new markets in China, brought that - was basically all of the drop in the CDFS pipeline leasing.

So we are comfortable with that, we know where that money is being deployed and we are very focused on growing our position in China.

we have got a great leading market position, and we are doing everything we can to capitalize on it.

We have demand for all of that space, but if you look at just that 2.7 million square feet that accounted for 50% of the 400 bps, it's part of reallocating our capital with the fastest growing parts of the world, being intelligent investors, and taking advantage of the investment management platform that we have created.

And, Michael, this is Walt, where are you going to see that if you look on page 18A, so you know in the supplemental, you'll notice that under Asia, properties under development, you see that you've 15.8 million square feet that's 10.7% leased.

And then in addition to that, if you see Asia CDFS properties, repositioned acquisitions you will see that's 5.8 million square feet, 34% leased.

That's the thing that Jeff and Ted is really referring to, we basically 10 million square feet or so in China that just literally got started and is dragging that number down and we feel terrific about the opportunity of leasing in China today.

And I'll just add my two cents on the development starts.

I mean, realistically if you think about remaining guidance at 3 or 400 million square feet - $300, $400 million over the last year, and a reduction in U.S.

starts relative to just being prudent, you know, you could look at $500, $600 million increase over everything but U.S.

Okay?

And so I think there is still strong growth going on around the world and we're taking advantage of it.

Our next question will go to David Cohen at Morgan Stanley.

Hey, good morning.

Can you guys just talk a little bit about the margins on the development for the remainder of the year if you're sticking with 18% to 20%, and you did 28% in the first quarter, so you'll be around 15% to 17%.

You guys are pretty bullish on cap rates holding up.

So, can you just talk a little bit about why - talk about the development margins for the remainder of the year at 15% to 17%?

Why would they be that much different if cap rates are holding up?

we have said 15 to 17 for the last three years.

We underwrite to those margins and so cap - in a stable cap rate environment, I think that you should expect those types of margins.

What we have experienced in the past was a declining cap rate environment.

And you know, that certainly benefited us in our margins over the past several years.

On a - at some point the two things really affect debt is cap rates and rental growth.

In some markets we're actually seeing rental growth, so we might do a little bit better on margins because of that.

But in a stable cap rate environment, I think that 17% to 20% margin range is --

Long term is the right range.

Yes.

And you know, I'd just say but we still have close to $300 million of the acquired portfolio further it can go at zero.

And we have a much more robust strategy on build-to-suits which typically come in at a little lower margin than the inventory.

And so in this environment, you'll see a little decrease in that but we're still focused on sort of 18% to 21%, overall.

Okay.

And the next question goes to Mitch Germain at Banc of America.

Just interested in some of your thoughts on the Mid East markets with regards to demand drivers, infrastructure and I guess the quality in the current stock that's there?

Outstanding, outstanding, outstanding, terrible, in that order.

So let me - which was - and a completely accurate answer to your question but let's go to a little bit more detail.

Demand drivers obviously unbelievable amount of wealth being transferred to the Middle East, in access of $300 billion per year.

You have regions like Abu Dhabi with tremendous wealth, relatively small population, a tremendous need for infrastructure.

They are getting it right this time around, they are investing in their own country.

There is over $250 billion worth of infrastructure projects going on in Abu Dhabi today.

That's a country remember with a population of about 1.5 million people, about 400 million citizens.

So tremendous, tremendous infrastructure investment.

Airports, roads, ports, et cetera and almost no stock whatsoever in the way of logistics, sincerely nothing that's really high quality.

Look at opportunities in Saudi Arabia, again tremendous cash flows and much larger population, so it's a bigger overall longer term opportunity for us.

Countries like Qatar, people don't realize the amount of wealth in Qatar.

Qatar has - will have in 2011 gas revenue equal to the oil revenue received this year by Saudi Arabia.

It's just - there is tremendous amount of wealth there, there is tremendous amount of infrastructure investment and it's a tremendous place for us to serve our global customers and to built out a platform.

We will go next to Cedrick LaChance at Green Street Advisors.

Thank you.

We read them all at capital from joint venture partners outside of the U.S.

in recent months.

I know you don't necessarily have near-term capital needs in the U.S., but if you were to try to raise more capital for joint ventures for the U.S., what do you think would be the reception from your partners?

And do you think the terms would change from previous years?

Hi.

Cedric in fairness, I think there is some concern about the U.S.

still, although we have a tremendous amount of interest from our institutional partners in some things we're looking at in the U.S..

People see it and it looks very interesting is investors outside the U.S.

are exceptionally interested in investing in the U.S.

because not only do they see values, potential values in some markets, but more significantly they see a significant FX play.

The whole country is on sale.

All you have to do is go shopping in New York and just seem to see the number of non-U.S.

people filling up suitcases to take it back to London or Paris or Tokyo.

And you see the same mentality quite frankly in investors that want to invest.

At 160 Euro, want to buy assets in the U.S.

at today's exchange rates, they think it's a very, very good bargain.

So I think there is opportunity to create some value for us by taking advantage of that.

We will go next to Paul Morgan at Friedman, Billings, Ramsey.

Good morning.

About your comment regarding the mothballing projects in the U.S., I'm curious as to whether that's - you're seeing that in certain kind of concentrated markets or regions.

And then whether it's taking place because of developers pulling back from spec projects or could it be more kind of construction financing related, and if it's a latter or are you actually seeing anything that you might want to opportunistically take advantage of?

Ted, do you want to start?

Walt, you go ahead, you start and I'll jump in.

Well yes let me - I'll start it off, Paul, good question.

Interestingly enough, we said there was 26 million square feet of deliveries; there is also 26 million square feet of starts in the quarter.

Roughly 60% of those starts were in LA, Dallas and Houston.

No surprise in Dallas and Houston with oil being where it is and probably no surprise in LA.

And s -.

and there is a lot of markets in that Top 30, probably half of them that have zeros where there are no starts.

And w -.

and so regionally, it's concentrated and our analysis say that we expect for the rest of the year that that 26 million square feet per quarter will actually go down more, okay?

And it may go down substantially more because people are really cutting back on spec development.

Construction financing, needless to say is not easy to get without a lot of equity today.

And yes, we do think there is opportunities because the flip side of that is that we had 21 million square feet of absorption in the first quarter, that's obviously down a little bit from last year but not that much.

And the wild card is, will that continue?

And if it does, I think we could be seeing a very healthy market condition and I think we'll see a very good uptake in build-to-suit development because there is not a heck of a lot of spec space that's out there.

And so that's basically what we see today and that's kind of what we expect to see moving forward for the rest of the year.

Just to add on to that, Paul.

Walt mentioned 26 million square feet in starts for the first quarter.

You know, fourth quarter of last year, the starts were actually quite larger, 46 million square feet.

From what we're seeing, a lot of people got building started because they were concerned whether they could actually get financing going into this year and we think that basically people have done what they are going to do.

A lot of their commitments were about to expire.

And they took advantage of those commitments because they didn't think they could get further commitments.

Certainly I'm talking to investors around the U.S.

and the people that partnered up with a lot of the private developers tech capital has dried up and it's going to be very challenging to get - whether it be equity or debt on speculative developments in the U.S..

And as Walt said, we think that although this quarter is down dramatically from last quarter, we think that it did continue to tail up through the balance of the year.

And we'll go next to Lou Taylor at Deutsche Bank.

Thanks, good morning.

Hey Walt, can you talk about your - just your operating margins for the quarter.

You had a big jump in operating expenses relative to the growth in revenue this quarter.

Can you just talk about that a little bit?

I will, Lou, and that's a good question.

You will see expenses basically going up in the quarter, somewhere in the neighborhood to $20 million to $22 million which looks very big.

But if you look at it, about $11 million of the expense increase was due to taxes, common area maintenance; basically taxes are still a lot higher from increased old property valuations.

CAM is higher, snow removal, utilities especially really up.

Gas, obviously up.

But that $11 million is completely passed through on the revenue side of things, up above.

And then the additional - so you got about if you will another $10 million of expenses that is non-recoverable.

$6 million of that $10 million was in the tornadoes that hit in Memphis in February, which unfortunately hit about four or five of our buildings.

And about $2 million of that is just in our proportionate share of non-recoverable expenses and about 60% of that $2 million is in bad debt.

And so if yo -.

and then there is another roughly $1 million which related to '07, we got a tax credit in '07 that we obviously didn't have in this year.

So if you really looking at it, the big moving items, $11 million of it is recoverable and $6 million of it is basically tornadoes which is of course out of our control.

And so that's really what gives you the delta.

And we'll go next to Chris Haley at Wachovia.

Good morning.

Congratulations on the solar deal, first of all.

Thank you, Chris.

Looking at the foreign exchange and the interest rate swap agreements that are taken on by yours and your property funds affiliates, and see these numbers vary quarter-to-quarter, year-over-year, and as your business has become more global, assuming you are trying to mitigate and hedge some of these rate and currency items, first, how should we think about the accounting in this quarter for the re-measurement items, and then a larger perspective, how should we think about the cost of doing business and underwriting these costs into margin and returns?

Well, let me touch on a couple of those.

First of all, in the - you are going to see a large gap exposure but not an FFO exposure on some of the interest rate issues and there's a piece of that that is related to one of our funds where we put a hedge in on the treasury at a point last summer where at the time, people thought the tenure was in the low 5s and sort of the consensus opinion of all the people smarter than us said it was going to 6 and it's now at 3.7, and so we are out of the money on that hedge inside the fund, and we've taken a count of --

But in the money as a company.

In the money as a company, I don't know the money on the hedge.

We've taken account of some ineffectiveness on that hedge, but unrealized as of yet, and that's what hits GAAP earnings, but not FFO.

The FFO impact of that won't be known until we settle those hedges and that comes up over the next 18 months or so.

And so, you know, that's just one of those that we put our best foot forward and interest rates on the treasury went the opposite way.

And there's another piece of that where in essence, we have a swap agreement on floating-to-fixed inside Japan, we don't get hedge accounting treatment on it.

It fluctuates over the life of that hedge, but there never will be, it always comes through unrealized FX movements, and that can be up or down depending on the various markets, but there will never be a realized loss.

It all nets to zero at the end.

And so that's just one of those where we just don't get the hedge accounting treatment on it.

On the FX, we look at hedging on the FX from time-to-time, realistically if you want to look at the exposure on the FX, we basically go through a natural hedge on the majority of our exposure.

You know, I sort of target the CDFS opportunities as sort of the unheeded piece of that, and we constantly review that as to whether we should be putting in appropriate hedges or not.

Right now, we are basically unhedged on the euro and the yen, and we look at it sort of on a weekly basis, when to put it on.

I wouldn't be surprised if we start throwing a few hedges on in the next couple of weeks, just to - with a potentially slightly strengthening dollar.

We'll go next to David Harris of Lehman Brothers.

Good morning.

I have a question for Ted on margins.

Ted, you talk of mid-teens, mid to high teens as being your margin on inventory development.

Where would you peg the number for build-to-suit?

David that it is all over the map depending on whether we do or don't own the land, and where it is located within the U.S.

and the world.

I think that on the low-end, you could assume 10% and on the - 10 to 15%.

If it's land that we've owned for quite a while, that number could certainly be higher.

I think at 10 to 15% margin would be fair in most of those developments.

I was looking at the first quarter numbers and it was actually on the higher end of that scale.

So we were feeling real good about our build-to-suit starts in the U.S.

and the margins that we were achieving.

We'll go next to Michael Mueller at JPMorgan.

Hi, I was wondering, can you talk about the stabilized portfolio, particularly the 90 basis point occupancy decline from year end.

Can you cut that up and talk about how much of that was more of a same-store operating decline versus the impact of new developments being added to the pool that weren't necessarily stabilized, and maybe also comment on the type of lease development trends?

Oh, boy.

That's a little bit tough, Mike, because I don't have all of that information in front of me, because it is obviously a very big pool, but I think it's needless to say, there's has been a slight slowing frankly of development - excuse me, of leasing in North America and I would say a slowing as we mentioned earlier in the UK, but our retention ratio is roughly 67% for the quarter, and that's kind of in line, we think about the business is 65 to 70%, if we do greater than that, terrific.So I think there's some and of course, there's some diminution just because there has been some bankruptcies that we've had year-to-date, so you are going to have a little bit of that.

I think the way we sort of look at it moving into this year is we think that there will be some more, a bit more diminution.

I mean when you really think about the business over the 20 and 30 year period of time, you are looking at roughly 92 to 93% leased, so I think it's very difficult to maintain sort of a 95 to 96% overall occupancy level.

I wouldn't be surprised if it continues to slip down into the 93, 94% level in that neighborhood.It is hard to say at this point in time, but I think there's probably a little bit more down side to it.

Having said that, overall there is activity in the market.

There are warm bodies that continue to look, and we are renewing customers, and we feel still pretty good about the overall level of activity.

I think the other part of your question, if I'm not mistaken is some of our new developments impacting that drop in occupancy, and in North America it's remained relatively consistent.

I mean we have very few buildings that have been available for over 12 months, which is our typical lease up period in a point in time in which it would hit our pool.So that's actually been remarkably stable.

It's something we focus on a lot and we really pretty much have underwriting on leasing and including up to this quarter.

And we look forward - we are looking out in the future and keeping close track on it.

But as Walt said, overall there's decent activity on everything was going on out there.

Yes, and overall again we run the business, as Walt said we look at it, you know, 94%-type leased is - we are driving good rental growth.

You look at our rental growth in Europe, you look at our extraordinary rental growth in China, good rental growth in Japan and still solid rental growth in the U.S.

overall metrics are solid.

I think one other thing.

This is a time in the cycle where our relationships go a long way.

And our customer relationships have been fantastic, both on the build-to-suit side and in leasing our inventory building.

In our global positioning - us being in just about every market now, every major market in the world has continued to strengthen all of our customer relationships and when there's a customer that's looking for space in the U.S.

and one of the markets we have gotten inventory buildings, we leverage our relationships to make sure we get a very good look at every opportunity that's out there.

I think that's going to help us through what might be a slightly slower year.

Jonathan Haberman with Goldman Sachs.

Hey, thanks.

Just one follow-up here, Bill in your comments, I know you reiterated guidance, but you talked about the higher interest expense running at roughly $85 million in the quarter and part of that, I think was that projects carried on balance sheet longer than expected and I assume that's due to leasing or just the ability or the inability to contribute into the funds, should we be concerned about that trend?And I guess what sort of impact there are you anticipated into your sort of full year assumption?

You know, Jay, I would say realistically when we plan, we sort of try to contribute, create our contributions sort of middle of the quarter and just in Q1 we made our contributions sort of in the second half of March.

And in the grand scheme of things, you know some of that was just due to particularly in sort of Mexico and central and eastern Europe.The process of getting various government approvals, to separate assets in different entities and get the titles squared away, et cetera, is just a slightly more cumbersome process.

And, so we are on top of it.

And, again, we're planning on sort of mid-quarter, it just so happened in the first quarter, a couple of the large contributions went into the second half of March.

And so we carried those, but that's not sort of a secular trend.

Increases your rental income increases your interest expense.

It's net to the good.

So it's minor.

Right.

It hits different line items.

Operator, we have time for two more questions.

Very good, thank you.

Our next question, we'll go to David Cohen with Morgan Stanley.

Hey, can you guys just talk about to what degree either or your fund partners have the ability to kind of delay or negotiate the timing of the contribution of the assets to the fund to optimize either pricing or financing?

Everything, David, is structured and must be paid with strict guidelines on the timing in which it must be contributed.

The stabilization criteria and there's no ability to lay beyond that on either party's part.

We try to do everything to minimize, or eliminate any potential conflicts to create an alignment of interest between us and our partners.And quite frankly, that's why we have repeat partners or repeat investors that have invested with us since 1999, and we've become their strategic - they become strategic to us and us to them.And we are growing that base of investors, and it's a It's a true alignment with no real ability to do that on either size.

Our final question of the morning goes to Lou Taylor at Deutsche Bank.

Hi, thanks.

Bill, as your development mix gets further and further outside the U.S.

and UK as you look at your debt maturities, is your currency mix of debt going to change either later this year or into next year?

So currency mix going to change, yes, I mean clearly within the funds, clearly.

Within our pipeline, we'll be more focused on Euros because if you look at 2007 and our plans for 2008, clearly Europe is our single largest development start area with Japan following.

So we'll be more yen and euro focused on the debt side in 2008 than in prior years.

And that's actually a good thing in these credit environments to be borrowing in Euros and Yen and currencies that don't have the financial crisis that we see in U.S.

today.

But I just want to leave with one thought and it's somewhat repetitive of point number four I went through in the summary to our original comments.

But we really believe that the combination of the teams that we built around the world, the high level of expertise, the high level experience there, the global platform we put together, strong balance sheet, investment management platform with over $15 billion in remaining capacity, and the powerful relationships with customers that Ted was talking about will allow both of our operating portfolio and our overall business to outperform in the coming year.

We appreciate your time.

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

Thank you.

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