Prologis Inc (PLD) 2008 Q2 法說會逐字稿

Good morning.

My name is Tamara, and I will be your conference facilitator.

Welcome to the ProLogis second quarter 2008 financial results conference call.

Today's call is being recorded.

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

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

(OPERATOR INSTRUCTIONS) The questions will be taken in the order in which they are received.

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.

Thank you, good morning, everyone.

Welcome to our second quarter 2008 conference call.

By now you should have all received an email with a link to our supplemental press release, but if not, the documents are available on our website at prologis.com under Investor Relations.

This morning we're going to first hear from Jeff Schwartz, CEO, to comment on key accomplishments and our sustainability initiative, Walt Rakowich, President and Chief Operating Officer, will cover overall market conditions.

Diane Paddison, Executive Director of Global Operations will discuss ProLogis's operating property performance and global customer activity.

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

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

These 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 effected by a variety of factors.

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

I would also like to add that our second quarter results press release and supplemental do contain financial measures such as FFO and EBITDA that non-GAAP measures and in accordance with Reg G we have provided a reconciliation to those measures in the supplemental.

And as we've done in the past, to give a broader range of investors and analysts an opportunity to ask their questions, we ask you to please limit your questions to one at a time.

Jeff, would you please begin?

Thank you, Melissa.

Good morning, everyone.

The Chinese have a very old saying (Chinese) which literally translates to learn knowledge from thousands of books and accumulate experience by traveling thousands of miles.

We're doing our call from Tokyo this evening.

Bill Sullivan and I have been in Asia for three weeks already and will be headquartered through early August.

We were joined by the rest of our senior management team this week.

While the anglo countries of the U.S.

and U.K.

are suffering from financial sector driven ills, the rest of the world does look a whole lot better.

Fortunately, we have built our business around the concept of risk management and mitigation through geographic diversification, with our global real estate platform and through financial diversification by building the leading investment management platform within a public real estate company.

These differentiating factors are proving powerful in today's economic environment.

During the second quarter, we achieved solid operating property performance with positive same-store NOI growth for the 16th consecutive quarter.

We have remained disciplined in our investment process, prudently expending our platform through acquisitions and development in select key logistics markets in Asia and Europe.

In fact, this year 90% of our investment is expected to be outside the U.S.

as we noted last call, where we can focus our capital on the highest risk adjusted return.

Thus our current focus on Asia.

Our stabilized occupancies were fairly consistent with first quarter levels at our mid-90s expectations.

Leasing activity was brisk with continued growth in rent and occupancies in our same-store pool.

While we closely monitor U.S.

market conditions, our portfolio continues to hold up relatively well.

The diversity of our global platform permits us to offset the softness in the U.S.

and U.K.

with strong demand and significant opportunities in Asia and Europe.

In our CDFS business, we started more than $1 billion in new development in the second quarter.

This investment amount is driven by continued growth in world trade as well as increased domestic consumption in emerging markets.

These factors drive requirements for modern, well-located logistics infrastructure in key global markets.

During the quarter, we continue to grow our investment management business and now have over $22.5 billion of assets under management in ProLogis' Funds, up from $19 billion at end of 2007.

With roughly a $14 billion of remaining capacity in our investment management business and no funds open to redemptions, we're well positioned to take advantage of current market conditions.

Now I would like to touch on a couple of the macroeconomic factors effecting our business, including speculation about the impact of higher fuel costs on distribution networks.

Customers are carefully considering how to tweak their networks under alternative oil price assumptions but are postponing implementation until the longer term outlook becomes clearer.

Network modeling experts agree that reconfigurations in response to higher fuel prices usually don't result in large scale revisions, however some companies will add additional facilities outside of their traditional hub cities and what they previously might have considered non hub locations to reduce transportation distances to their customers given the higher cost of fuel.

With sustained higher fuel costs, we believe long-haul trucks will eventually lose market share to intermodal rail and air freight will lose share to trucks and rail.

The consolidation in the airline industry will also make the major gateways such as L.A., New York, London, Tokyo and Shanghai more important.

Additionally, ocean shipping will likely gain share from rail because it is currently more -- both more fuel efficient and carbon friendly.

On balance, these newly-emerging trends should increase aggregate demand for distribution space.

Another driver of the demand for space is the continued growth in global trade and economic growth in emerging markets.

Economists are calling for 2008 global GDP growth of 5.6% or 6.4% if you exclude the U.S.

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

We expect to remain solid due to the emergence of central Europe, China and the remainder of the countries and while we watch the growth closely we continue to see the demand for logistic space outside the U.S.

more closely correlated with supply chain reconfiguration and a high level of functional obsolescence in the emerging markets.

We have seen dramatic increases in the cost of new construction, primarily driven by oil and fuel prices as Walt will expand on.

These cost increases are helping to put a lid on development starts as we see in the U.S.

and leading to stronger rental growth as we are seeing in other areas of the world.

Our belief is that the dramatic rise in the replacement cost of industrial facilities will provide a substantial safety net for capital values as well as accelerate rental growth, particularly in markets with stronger and absorption expectations.

Switching gears, I am pleased to highlight that we continue to receive recognition and awarded new business tied to our sustainability development expertise during the quarter.

In Asia, we were granted one of five annual rewards from the Japan Federation of Freight Industries receiving logistics environmental technology development reward for our development and implementation of a pre-cast concrete and seismic isolation system, which reduces the amount of life cycle CO2 emissions.

In Europe, we're developing a build-to-suit for Bosch Siemens Home Appliances in Zaragoza, Spain that will incorporate sustainable design features such as roof-mounted solar panels, energy efficient lighting and water efficient landscaping.

The site will also have direct access to rail.

And in North America, we achieved LEED commercial interior gold certification for new distribution center developed for Kraft in Morris, Illinois, the largest facility of its kind in the world to achieve this certification.

Importantly, our sustainability initiative is not just focused on building green.

It means we strive to sustain profitable long-term growth while doing the right thing for the environment and the communities in which we operate.

Just last week, I personally attended the opening of our ProLogis Hope school, 2 1/2 hours out of (inaudible) China.

It was an incredibly rewarding experience.

In 2006 we pledged to build one school for every 500,000 square meters of distribution space we built in China.

This was our fourth school to open.

This program provides educational infrastructure to help children in need and we're proud to sponsor this effort.

And finally, our global platform is proving to be a magnet for attracting extremely talented people to our team.

Notably Diane Paddison, who will succeed Walt as Chief Operating Officer when he retires at year end, has joined us this quarter.

Diane brings to us a wealth of experience in managing customers, people and operations.

Additionally, we continue to attract other talented individuals and further improve the quality of our teams in Europe, Asia and North America.

Now let me turn the call over to Walt.

Thanks, Jeff.

Before I talk about market conditions, I would just like to add some color to Jeff's point on inflation.

It's important to understand that in our business, in most areas of the world, only 25 to 35% of our total development costs are related to labor and land.

Therefore, when commodity prices rises as they're doing, it has a major impact on our overall development cost.

In just the last 12 months, our all in development costs are up 7 to 20%, depending on the geographic area.

The U.S.

is at the lower end of the range and China at upper end of the range, where raw materials constitute a higher percentage of overall costs due you to their lower labor rates.

And over the last four years, our all in development costs are up 40 to 60%.

Few people will argue that rapid inflation is good, however, as Jeff mentioned, we believe this significant rise in the replacement costs of industrial facilities will bolster capital values and will lead to commensurate rental growth over time and this is exactly what we're experiencing in China, where year-over-year market rents have risen 11% and 18% in Beijing and Shanghai respectively.

We now have a stabilized portfolio of 11 million square feet in China which is 97.2% occupied, including nearly 1 million square feet of inventory space leased during the quarter.

And in South Korea, our first inventory building was completed and fully leased also during the quarter.

And in Japan our business continues to be driven primarily by outsourcing and replacement of obsolete stock.

The pace of leasing remaining steady in Japan with our occupancy over 95% at quarter end.

In Europe, our investment focus has shifted more towards the continent, given softer market conditions in the U.K.

We continue to see tremendous opportunity in central Europe where GDP growth exceeds 6% and where our market share is about 35% of all leases in the markets in which we operate.

Germany is also strong, as we're now developing at a pace which is two times that of 2007 in Germany.

Leasing in both central Europe and Germany continues to be brisk.

Also, with the leveling off of cap rates, rents have stabilized in central Europe and are now rising in parts of Germany and northern Europe.

As for southern Europe, despite a more lackluster macroeconomic environment, we had our strongest quarter of leasing in two years.

On the other hand, the U.K.

remains soft and for the time being, as in the U.S., we're focused on leasing of existing product and are not taking speculative risk in new developments.

In North America, conditions in Mexico and Canada continue to be reasonably strong.

In the top 30 U.S.

markets, however, the overall vacancy rate moved up to 8.5% from 7.9% in Q1.

While market rents in the U.S.

are generally flat to down a bit, we're still seeing embedded rental growth in our portfolio due you to the fact that our in place rents are under market.

For the second quarter, rents on leases turning were up 4.8% in the U.S.

for ProLogis.

Second quarter deliveries in the U.S.

of 50 million square feet were up sharply from Q1 deliveries of 31 million square feet, reflecting the significant pop in starts at the end of last year.

The good news is that development starts are down dramatically this year.

We expect this trend to continue and, as we've noted on recent calls, we remain focused on a more conservative strategy based on a high percentage of build-to-suit development in the U.S.

For the first half of the year 98% of our $220 million in starts in the U.S.

were begun on a precommitted basis.

And now let me turn it over to Diane who will cover further our operations.

Diane.

Thanks, Walt.

It's a pleasure to be a part of the ProLogis team.

I look forward to getting to know you better and bringing you highlights of our operating performance in future quarters.

Overall, the results of ProLogis' property operations remain solid.

Our stabilized portfolio is leased at 94.2%, slightly down from the first quarter occupancy of 94.6%, with Asia at 95.8%, Europe at 93.1% and North America at 94.4%.

Leasing activity for the quarter was 34 million square feet.

Same-store NOI increased 1.6% for the quarter.

A positive note to mention is our retention rate of 76% for the quarter, reflecting strong customer loyalty and the tendency for our customers to stay put during uncertain economic times.

Also tied to our higher retention rates are lower capital expenses for TIs and commissions, which for the quarter came in at $0.88 cents per square foot.

This is especially noteworthy given the increasing construction costs that Walt referred to earlier.

We continue to see solid early renewal activity on leases scheduled to expire this year.

An area I would like to highlight that is a perfect fit from our core strength is our ability to serve global customers.

Currently 19% of our occupied square footage is leased to customers that we serve on more than one continent.

For example, during the quarter, we signed five new leases with (inaudible) polling almost 1 million square feet.

They're located in U.K., Indianapolis, Reno and two in Tracey, California.

We expanded our relationship with Yamato Transport who previously only leased from us in Japan and now also leases from us in Columbus.

And with a new lease in [Chan Jin], Volkswagon has become our newest three continent customer as we already served VW in central Germany, California and Florida.

In addition to our focus on global customers, our global services team plans to continue to strengthen relationships with our 250 largest customers that occupy roughly 50% of our portfolio.

Our retention rate amongst these customers is 83.5%, even better than the high retention rate on our overall portfolio.

Our continued efforts will help contain capital costs tied to TIs and commissions, even with rising construction costs.

In addition to our concentration on our customers on multiple continents and our largest 250, we will continue to drive service to all of our customers.

And now let me turn the call over to Ted who will have more on our development and investment highlights.

Thanks, Diane.

During the quarter, we began new developments with the total expected investment of $1 billion including those in our CDFS joint ventures.

Roughly 46% of this amount was in Europe, 37% in Asia, and 17% in North America.

The year-to-date mix of starts is similar, with 87% of our starts outside of the U.S.

and U.K.

As far as starts for the remainder of the year, we continue to anticipate starts of $4.4 billion to $4.8 billion as we allocate our investments to high demand areas like Asia and central Europe.

Our pipeline of properties under development at the end of the quarter represented about $4.4 billion of total expected investments.

Combined with completed developments and repositioned acquisitions of $4.2 billion, we have a CDFS pipeline of just over $8.6 billion, that was 42.4% leased at quarter end.

When looking at just the CDFS completed development and repositioned acquisition portion of the pipeline, we are 55.1% leased, consistent with the leased percentage in the first quarter, which is a healthy level and supports growth in our investment management platform.

Given further softening of overall market conditions in the U.S.

and U.K., we have continued to focus our development in those markets on build-to-suit projects.

Over 65% of the quarter starts in North America were begun on a precommitted basis.

In addition, approximately 30% of Europe starts in the quarter were build-to-suits, driven by new business in Germany and France.

We also started two precommitted buildings in South Korea and one in Japan, bringing global, second quarter starts to 31% build-to-suit.

While sometimes characterized by lower margins, build-to-suit projects permit us to more quickly recycle our development capital and provide attractive risk adjusted returns.

And on the topic of margins, as you'll note in supplemental, margins are still in excess of the historical levels we've have been talking about for the last two to three years.

Post tax, post deferral margins excluding the acquired property portfolio contributions at cost, were and 19.6% for the quarter and 23.6% year-to-date.

On a predeferral post tax basis, excluding the acquired property portfolio contributions, margins were 24.5% for the second quarter and 30% year-to-date.

To give you an idea of where our development capital is being invested, over half of our European starts were in Germany, 20% in central Europe and the remainder spread throughout Europe with the exception of the U.K.

During the quarter, we started our first building in Vienna, Austria which is located along the Danube river, a major pan-European trade route.

Vienna is the country's largest inner harbor and major international airport and one of the best railway systems in Europe.

It also happens to have an supremely low inventory of available for lease distribution space.

In Asia, in addition to build-to-suits in South Korea and our multi-story inventory building outside Tokyo, we began a build-to-suit for Hitachi Transport in Japan and new inventory buildings in Beijing and Shanghai.

During the quarter, our global land balance increased by about $100 million as we acquired land to support build-to-suit transactions in North America and Germany and new inventory projects in China.

Also during the quarter, we were pleased that ProLogis and Catellus were selected as master developer for a 550-acre mixed use project located near the Stockton airport.

This business park will include approximately 3.9 million square feet of air cargo and distribution space, 2.5 million square feet of commercial space, and 500,000 square feet of open space and parks.

Of particular note, this is the first project to combine the development expertise of both ProLogis and Catellus.

In summary we continue to enjoy an active, growing global business and believe we're uniquely positioned to capture opportunities to prudently expand our pipeline and support future property fund contributions.

And now I'll turn it over to Bill.

Thanks, Ted.

FFO for the second quarter was $1.06 per share compared to $1.16 in Q2 2007.

While FFO per share for the first six months of 2008 was $2.44, up from $2.41 in the first half of last year.

Quarter-over-quarter comparisons will vary, at times substantially, based upon the timing, level and margins associated with CDFS contributions.

In the second quarter 2008, we generated lower CDFS gains than Q2 2007 and we experienced a decrease in NOI from our direct owned assets.

These decreases were partially offset by substantial increases in fund-related FFO for property operations and asset management fees due to our contributions in growth in our investment management business.

Earnings per share of $0.80 for Q2 2008 compared to $1.50 in Q2 2007, reflecting more than $0.56 in gains from the non CDFS asset contributions and dispositions that were recognized in the EPS during the second quarter of 2007 compared to just $0.02 of similar gains in Q2 2008.

Looking at property operations, FFO from our direct owned portfolio was $176 million for the second quarter of 2008, approximately $22 million lower than 2007.

This is principally due you to the contribution of 66 non CDFS properties to the North American industrial fund at the end of second quarter 2007, lower occupancy in our direct owned stabilized portfolio, and increased property management expenses associated with the increase in managed properties in our funds.

Turning to our CDFS business, proceeds from dispositions and contributions of nearly $1.3 billion for the quarter put us at $2.7 billion for the year-to-date, still on track with our revised expectations of $5.6 billion to $5.8 billion for the full year.

FFO from CDFS dispositions was $200 million in Q2 and approximately $479 million for the year to date, running ahead of our mid point expectations of $835 million for the year.

Second quarter post tax post deferral margins of 18% reflected roughly $80 million in proceeds from the contributions of properties from acquired property portfolios in Europe and Mexico, which were contributed at cost.

Excluding the acquired property portfolio assets our post tax, post deferral margins were 19.6%.

At June 30, we had approximately $206 million of assets in Europe and Mexico remaining in this pipeline of acquired property portfolios, all of which we expect will be contributed later this year at cost, resulting in lower margins in the second half of the year.

However, we still expect post tax, post deferral margins to be between 18 and 21% for the full year.

Investment management fees and our share of property fund FFO together totaled $73.7 million for the quarter, an increase of 28.8% over Q2 2007 and consistent with our expectations for these fee streams -- for these income streams to grow in line with our growth in assets under management.

FFO from the property funds in the second quarter included losses of approximately $3 million from our share of settlement costs on derivative contracts inside the funds.

On the expense side, G&A of $59 million for the quarter and $116 million for the year to date is on track with our revised mid point guidance of $230 million, while net interest expense of $84 million for the quarter and $169 million for the year to date is slightly in excess of our full-year expectation of $325 million.

The increased interest expense is predominantly associate with the timing of the contributions versus development expenditures.

Looking at our capital structure, our balance sheet remains in good shape, with on balance sheet funded debt at 42% of total market capitalization at the end of the quarter and at 53% of the total book assets.

At June 30, we had approximately $2.2 billion of liquidity available between our cash on hand and availability under our global lines of credit, 10% higher than 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 U.K.

environment.

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

However, to this point, we have found substantial secured debt availability within the U.S.

life companies and the German mortgage banks.

Additionally, we access the public debt markets for over $1.1 billion of a combination of straight ten-year debt in convertible debt in May, essentially taking care of the on balance sheet maturities for 2008.

Within our funds, so far this year we have closed on $2.23 billion of refinancing and our funds currently have approximately $415 million of remaining 2008 debt maturities, all of which we have under active discussion and/or commitments with various financial institutions.

In a large global organization such as ours, we expect to experience upsides and downsides to our expectations throughout the course of the year.

In that vein, we believe there is 3 to 5% upside on our current CDFS guidance, which we anticipate will be essentially offset by a modest increase in interest expense and moderately lower FFO from property operations.

With the positives and the negatives largely offsetting each other, we continue to expect to generate $4.65 to $4.85 in FFO per share for 2008 and we continue to expect between $3.15 to $3.35 in earnings per share.

Relative to the quarterly expectations for the second half of the year, as many of you may recall from our recent meetings and presentations, we indicated that we expected about 47 to 50% of full year FFO to be recognized in the first half.

However, due to the recognition of certainly CDFS gains which had originally been anticipated in the third quarter, as well as a reduction in anticipated losses related to our share of the cost on derivative contracts within our property funds, we now expect that about 47 to 49% of full year FFO will be recognized for the second half of the year, as roughly two thirds of that amount in the fourth quarter due to a larger volume of planned CDFS contribution.

In sum, we feel very good about our Q2 results and believe we are positioned, both 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'd like to leave you with three key takeaways.

One, through turbulent times in the U.S.

and U.K., our global platform in excess of capital through our investment management business of allowing us to continue operating at a high level.

Two, we have grown our assets under management in the first six months of the year by 11% while concurrently accessing the debt market successfully for substantially all of our 2008 requirements.

This, along with the $14 billion of remaining capacity in our investment management business, gives us liquidity to take advantage of opportunities, and three, rising cost of construction has substantially increased replacement costs of our product and in our opinion, will provide a safety net for capital values as well as an impetus for growth.

Operator, we'll take questions now.

Thank you.

(OPERATOR INSTRUCTIONS) And we'll go first to Michael Mueller with JPMorgan.

With respect to the CDFS gains or not CDFS gains but the pipeline, the $4.2 billion completed and 55% leased, can you give us a sense as to what proportion of that pipeline is expected to stabilize either in the second half of '08 or beginning of '09 by hitting the 90% threshold?

Michael, I apologize.

Operator if you're listening in, either Michael has a bad connection or we do, but it was very tough for us to hear the question.

Is this any better?

That's much better.

Okay, sorry.

Not sure what happened there, but for the $4.2 billion of completed developments that's 55% leased, can you give us a sense as to what portion of that will hit at 90% occupancy and be statewide either in the second half of '08 or beginning of '09?

Michael, this is Walt.

I can just tell you that roughly $2.7 billion is 93% occupied or greater at this point and time.

All right -- let me just clarify.

93% leased or greater.

We have a couple of those buildings in build-to-suits that will be completed by the end of the year.

Right.

We'll go next to Michael Bilerman with Citi.

Good morning, it's Irwin Guzman on the phone with Michael.

When I look at the CDFS and the growth of the pipeline over the last couple of years, it looks like the growth in your -- the rate of growth in completions and starts has been a bit faster than the rate of growth in leasing and I'm wondering whether you expect leasing to accelerate over the next 12 months or whether you're outlook for 2009 would require the volume of leasing of CDFS to accelerate?

Irwin?

Yes.

This is Walt.

Let me just point out one thing to you because I think if you go to page 18A, which is probably where you're focused, if you look at the completions -- if you look at the completions part of the pipeline actually the leasing has gone up.

That number last quarter was I think 53% or 54% and now it's gone up to closer to 55%.

So we are developing -- we have developed certainly in the last 12 months at a more rapid pace than we've been developing prior to that, but as those properties are completed, they're actually getting leased and technically --

A higher leased percentage.

-- you could argue that they're actually at a higher leased percentage at completion than we were a quarter ago.

So we are very comfortable with those properties, as we get completed in where we are.

We'll take our next question from Lou Taylor with Deutsche Bank.

Thanks.

Good evening.

For Walt and Ted, Walt, given your comments about construction costs with more economies starting to slow down, I mean what does that mean for your second half development starts.

Maybe if you could give a little peek in '09 given that mix of higher costs and potentially flat rents?

Lou, this is Ted.

As long as there's demand for the space, as cost goes up, rents will increase.

We've seen that in many markets across the world.

China's a great recent example of that.

Costs are going up significantly but so are rents.

As we look forward, we're building to demand and our assumption is that if there's net new demand, we'll be able to develop with reasonable profit margins in the markets where there's significant activity.

In markets like the U.K.

and the U.S.

right now, we're concerned about demand and we have slowed down our development starts on a speculative basis and focused primarily on build-to-suits.

And Lou, to add to that, however, the one thing I will say is that the build-to-suits that we have done in the United States, clearly our costs are higher, but we're getting commensurately higher rental rate to compensate for those higher costs, such that we believe that we'll have a fair development margin at the end of the day.

So yes, to the extent that there is demand, to Ted's point, we are clearly getting high rents in those build-to-suit.

We will take the next question from [Steve Patlov] with Merrill Lynch.

Good afternoon or good evening.

Maybe going back to an earlier question.

Walt, if I look -- you said you leased about 60 million square feet of space in the first half of the year.

And if I look at your rollover schedule, you take kind of your wholly owned as well as your JVs, you have about 60 million feet sort of the aggregately kind of rolling each year.

Can you just kind of help put it in perspective.

How much aggregate leasing activity do you need to do on an annual basis to sort of keep occupancy relatively flat and also to meet your kind of CDF goals for this year and maybe next year?

Steve, I don't have the exact number but I can tell you that the 60 million for us for the first two quarters is a record number.

Having said that, we also have a record size of our overall -- the overall pipeline as well.

We have more leases turning now than we ever have had in the past.

So, I can only say that I think we've got -- if you add up the weighted average, I think we've got 7.9% still to renew this year.

So if you will, we're on track and we're seeing a pretty high level of renewals.

The one thing we're seeing a lot of is companies that are coming to us now and just wanting to early renew because they don't see themselves expanding and we're actually entering into renewal discussions earlier on than I think we historically have in the past is.

So --

Particularly in the U.S.

Particularly in the U.S., that's a good point, Jeff.

So I don't have the exact number in terms of the square footage, Steve, but I will say that we've been pleasantly surprised on the renewal side of the business.

We'll go next to Jamie Feldman with UBS.

Thank you.

I would like to turn a little bit here to the fund business, just in terms of demand from new investors and then risk of redemptions.

I think Jeff you had commented that there are no funds open to redemption.

So I guess can you clarify that comment and just give a little bit more color on what you are seeing.

There are no funds.

Clarification is that we have no funds open for redemption so we've had no redemption.

We're seeing continued demand on an investor base as we explore new opportunities throughout the world.

We have a little static in the line.

But we're seeing no shortage of investor demand.

I think we're looking at today.

Again, as we said almost a year ago there's been a -- like the quality, people are looking for less leveraged funds, less opportunistic funds.

As noted in the Forbes article there's a dark side to leverage.

We've been very conservative and stabilized property funds with low levels of risk but high risk adjusted returns (inaudible) very compelling in the investment market today.

Operator?

Yes.

Any more questions.

We'll take our next question from Jay Habermann with Goldman Sachs.

Can you remind us of the amount of the higher CDFS contributions this year when you upped last quarter.

Can you just mention geographically where those contributions are expected to come from and just a second question as well.

Can just comment on sort of the deterioration in same-store NOI and are you concerned or are you expecting that trends are getting worse than originally anticipated I guess more quickly than expected?

Let me touch on both.

First of all, our contributions in large part are going to follow, with the exception of China, our development activity and so you're going to see a sizeable portion of the contribution coming out of Europe, Mexico, and Japan for the remainder of this year and into the early part of 2009.

And so as we have a high-level of development starts in the second half of 2007 and so you are going to start seeing those contributions come to fruition.

So if you just sort of match up the development pipeline, that will track pretty well with the contributions.

And again, we've started about $220 million of starts in the U.S.

this year that are predominantly build-to-suit and those, as we've said repeatedly over the last year and a half or so -- those build-to-suits are nice because of the short construction cycle and as soon as they're completed, they're ready for contribution.

You will see further contributions in the U.S.

as well.

On the property NOI, there's really a couple of factors leading to the decline.

One is because of our contribution -- year-over-year our contribution of the large portfolio of CDFS pipeline probably impacted revenues in the $6 million range on what is about a $9 million or $10 million year-over-year hit, and that's sort of a permanent take-away from that level of property NOI.

The other piece that's impacting revenues as well as expenses is slightly lower occupancy within that stabilized portfolio of direct-owned properties.

And so that is negatively impacting revenue again probably to the tune of $4 million and because of that lower occupancy, we paid higher expenses associated with CAM, et cetera.

And so that's probably another $2 million on the expense side.

But other than that, as we grow, we incur the costs associated with property management activities for our funds inside that line item and so you'll see that line item of expenses grow somewhat disproportionately as our investment management activity grows.

It's more than offset by the investment and our fund returns.

The other thing that's worth noting is particularly given the high percentages of our income that comes from Europe today, if you look at the size of our European platform, $12 billion in assets.

That number is not adjusted in the Euro.

So the 1.6% does not have the FX effect of the Euro.

We didn't even want to run that number.

Suffice it to say it would be well north of 3% if we were to include that, but the impact of currency is not due to our operational expertise.

It's clearly due to the change in currency rates, but we are the beneficiary of that clearly.

But we don't show it that way because we don't think that's the true operating metric to show.

We'll take our next question from Cedrik Lachance with Green Street Advisors.

Can you give us a rundown of the changes in cap rates in the various regions over the past 90 days.

And in addition, can you also discuss changes in land values, perhaps with a bit of a longer term view.

We'll see land values today in the major regions versus about a year ago.

Cedrik, this is Jeff.

Why don't I start with the non U.S.

markets and let Ted comment on North American markets.

That way everybody isn't stuck with hearing me talk for too long a period.

If you look at Europe we just finished valuation for the entire portfolio in Europe.

So it's -- there's a -- the continent is almost just completely flat from a cap rate standpoint.

In this movement to have 1% here 1% there up and down and then cap rates have actually declined or values have increased in the Netherlands, in Spain and in Poland.

In other countries they have declined slightly.

But on the balance is almost a wash.

So -- we're talking about very, very small movement.

So, you would call flat for me, from a value standpoint of the continent.

U.K.

is a different story.

It's -- with the entire agency-type regime there, efforts move very rapidly.

You've seen further diminution in the first six months of this year (inaudible) peak to trough and hopefully it is in a trough right now, will start to work its way out, pricing decreases and valuations at 15 to 20% total.

That is clearly the worst market in the world from a cap rate value standpoint by a wide margin.

As you move to Asia, you see no movement whatsoever upward in cap rates by any measure and in China, if anything there is going to be downward pressure in cap rates.

We'll call those flat for the most part.

Same in Japan, relatively flat cap rate environment, no major changes to land values, although I will say in major changes in land values in China with the government cutback (inaudible) we've seen land appreciate in the last 12 months.

It's continued to appreciate in the last 90 days.

But in the last 12 months we've seen land appreciate in Shanghai by 30 to 35% and Beijing 20 to 25%.

Smaller markets, 25 million people, we've seen 15 to 20% type appreciation there.

So you're seeing pretty rapid appreciation in land values there (inaudible) government.

In the U.S.

it's kind of a tale of two different product types.

The A product type in good markets has held its value much better than the B product type in B markets.

I will say that in the A product it's moved about 30 to 80 basis points with less movement in the higher area entry markets.

In terms of land values, overall land values throughout the U.S.

are flat and maybe slightly down but that's more of a gut feel than true comps.

There's not a whole lot of land that's traded recently, so it's hard to know exactly where that is, but I would say it's flat or slightly down.

Operator?

Next question.

We'll take a follow-up question from Lou Taylor with Deutsche Bank

Lou, are you there?

I'm here.

You guys about $4 billion under construction in Europe right now.

Can you give us a rough sense of the country breakdown of your development pipeline there?

I will tell you that we've had no starts in the U.K.

this year.

So that new construction is heavily weighted towards central Europe, northern Europe, really Germany and that is the significant weighting.

And Lou we'll get you the exact numbers.

I don't believe we have those in front of us.

It's disproportionately weighted towards central Europe and Germany.

Our next question from Mitch Germain with Banc of America.

Hey, Walter, Ted, you have seen a shift in any of your customer distribution needs as a result of the rising fuel costs?

Go ahead, Ted.

Mitch, we've actually gone out and talked to a lot of our customers about this and we're not seeing a significant shift.

A few customers have noted that they may add a distribution center in certain locations but we don't see a major movement in terms of how people are looking at their distribution networks at this point in time.

We kind of anticipated it and we talk to people about it but we're not seeing much.

Next to [Garrett Bower] with Merrill Lynch.

It's actually Chris here.

I guess Walt, I just wanted to follow-up to Steve's question earlier and your response.

I believe you said you had record leasing in the quarter and if I look back historically on page 18, just -- and maybe I'm not looking at the right data here but if you're saying you leased 7.5 million square feet over a base of 112 in the total CDFS pipeline that's roughly 7%.

And then we go back in time and let's say June last year tell was 6 million or 6.7 million square feet off of a lower base call it 90 million square feet.

So maybe it's not even the right way to look at.

I guess what we're just trying to paint is, is the leasing velocity in the CDFS pipeline commensurate with burning that off with burning that off and getting that level of growth in that pipeline.

Are you going to be able to sustain that leasing and keep the machine running?

Chris, I wasn't exactly following the math so my apologies.

But may be a better way of looking at it and I can spend a little time if you want offline sort of going through your numbers, but if you look at page 19A.

I think it really tells the story if you want to focus on the leasing velocity in the development pipeline and it also exposes areas we've got wood to chop to be balanced on both sides.

I mean if you look the our development completions, of course we break it down by tranche, right?

So if you look at March 31st tranche, which is last quarter, right.

As a company we where -- when we ended the quarter one quarter ago, we were 41% leased.

Now we're 46% and two quarters ago we were 58 when we ended the quarter now we're 62.

But if you look at the composition of where we are in each of the areas of the world, Asia, in the last three quarters we're at 70, 86, 86 respectively.

Europe we're at 83, 80 and 83 respectively and that's all good stuff because you expect that by the four quarters out you'll be at roughly 90%.

So we're pretty much on track there.

Where we're not on track is in North America.

No surprise.

And if you looked at North America, it would be predominantly the United States, where we're at 62/34/41 percent respectively.

And so we realize we've got some wood to chop in the United States which is why we're really focused on build-to-suits at this point in time and leasing existing products, but I think that gives you a pretty good idea of the leasing velocity and why we feel we're on track in the other two continents.

Our next question from Wilkes Graham with FBR.

You have talked a lot recently about the weakness in the U.S.

and the U.K.

and how you stripped out most your development starts for this year.

Are there other markets internationally of material size to you that you're seeing challenges.

We know Germany and Japan and Asia are strong.

But are there other markets apart from the U.S.

and U.K.

where you're seeing challenging environments?

Will, this is Jeff.

I would have expected that you'd see some stress in Spain, given the state of the housing market there.

Residential developers are literally having problems.

But we're 100% leased in Spain.

We are leasing space.

We're signing build-to-suits as fast as -- very, very rapidly, actually looking for additional land there.

So it's been surprisingly -- although we're being careful in Spain.

But that would have been (inaudible) expected to be softer but maybe it's performance by our team, maybe it's customer relationships, maybe the industrial sectors (inaudible) which I think it clearly has, because it's difficult to find good sites in the country.

That's one that's quite frankly surprised me.

Italy, we have had a little bit of slowness there, but that's been consistent for a few years and we haven't had much in the way of development starts in Italy.

We put a new team in place there that's actually done a tremendous amount leasing and a tremendous amount of transaction volume in the last 60 days.

So we think we're turning that around.

That's a 36 (inaudible) story.

Back when everything else in the world was good, Italy was a little weak for us, so we haven't built much there at all and we're now gaining some momentum.

So it's actually on an uptrend that hasn't been that strong.

Germany has been great.

Central Europe has been great.

All of our Asian markets have been nothing short of phenomenal.

We're pretty pleased with our business outside of he U.S.

and U.K.

We'll go next --

Operator two more questions.

Okay.

We'll go next to Dan Sundheim with Viking Global Investors.

Can you talk about the margins -- development margins in build-to-suit versus speculative as you shift more of the business to build-to-suit?

And second question is (inaudible) I guess recently reported a dramatic slowdown in Asia and Europe trade volumes in June.

I guess in terms of trade lanes, are you more exposed to the European market.

Do you see your volumes, is it a transatlantic, can you give us a expense of where your exposure is there?

Seeing exposure on trade volumes.

Trade volumes.

Which trade lanes you're most exposed to.

Asia/europe trade lanes.

That would be kind of the biggest area of exposure or is it more transatlantic?

Well it's very little transatlantic.

If you're talking about Europe, North American trade, less so that more Asian trade, but quite frankly what we've really focused on in our China business is the growth of domestic consumption.

So our business continues to grow there.

If China's exports slow slightly that is -- I think domestic consumption offsets that in a five times ratio.

In Europe, Europe has become a larger trading partner than China and is seeing better trade growth than North America, given the weakness in the North American economy.

I don't know that we have one area of exposure in that regard.

We have very, very well diversified and we're also focused on tremendous amount of domestic consumption as opposed to focusing purely on trade and we think that's real important that balance is serving us very, very well today.

Ted, you want to comment on relative cap rate there -- or relative margins, I'm sorry.

Sure, build-to-suit margins are typically lower than that on inventory projects.

We've talked about this in the past and I think we've guided towards 8 to 14% on build-to-suits.

Probably 18 -- 16 to 26% on inventory buildings.

Both of those exclude profit on land, which can bring those numbers up.

So we'll oftentimes have build-to-suits that are at higher margins because of having an historically low land basis.

We don't cap interest on the majority of our land, which creates effectively some built-in gains over time and those often get captured when we do builds.

One more question.

We'll take our final question from Chris Haley with Wachovia.

Good evening.

Jeff and Bill, I appreciate your views on the higher share count and I know you guys alluded to this last month regarding your continuous equity offering and executive options.

Give us (inaudible) in light of what is historically viewed (inaudible) an excess capital position --

Chris, your fading in and out.

-- why would you have this program open, given where the shares have been over the last one or two quarters?

Chris, we heard about 35% of what you said.

Can you pick up?

Or operator, is there a way to get that line a little clearer?

We just increased his volume.

How's this?

That's much better.

Sorry about that.

I believe that your continuous equity offering program and the higher share count, I recognize it's a relatively small percentage change in your denominator, yet from a tactical perspective, the open position of your CEO program (inaudible) equity values both for raising new capital as well as for equity for options for insiders to give us your view that the pluses and minuses on your decision to keep this program open and issuing equity to where the current stock prices are.

You want me to.

Chris I think, first of all, it is a relatively modest dip into the equity offering program and I think we did probably about $100 million in Q1, another $100 million in Q2, all at an average share price of about $60 a share in what I think everybody on this phone would agree is probably the most uncertain capital market environment that I've ever faced in my business career and certainly in the last at least 18 years and so from that point, I'm showing up a balance sheet to a certain degree.

In the same fashion that we sort of took the maturities for 2008 off the table at the appropriate time.

I think should be applauded candidly and so I think it's a good thing that we did.

We'll constantly reevaluate whether we dip back into that market and we'll always focus on keeping a relatively strong balance sheet.

Chris, we think it's absolutely paramount to have exceptionally strong and pristine balance sheet at all times but clearly in certainty that potential markets were in distress in the financial sector, we thought it was very critical to do so, which is why we did more financing at the beginning of the year taking all of that risk off of the table.

Strengthening our balance sheet slightly through that continuous equity offering program, not to diminish the amount of shares, but nonetheless we think it's important to keep a strong balance sheet and when you look at both the opportunities within the markets we're in today and the opportunities that we see out there for growth on the platform, customer driven product, we think it's real important to have the capacity to take advantage of those, to have those growth opportunities and to grow the company on a (inaudible) basis.

There are no further questions at this time.

Just would like to thank everyone for their time today.

We really appreciate it and we look forward to seeing all of you very soon.

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