Prologis Inc (PLD) 2008 Q3 法說會逐字稿

Good morning.

I will be your conference facilitator today.

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

Today's call is being recorded.

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

After the presentation, there will 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, ma'am.

Thank you.

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

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

This morning we'll hear from Jeff Schwartz, CEO, to comment on the overall environment and then Bill Sullivan, CFO, will cover liquidity and capacity.

Additionally, we are joined today by Walt Rakowich, President and COO; Ted Antenucci, Chief investment Officer; and Diane Paddison, Executive Director Global Operations.

Before we begin prepared remarks 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 notice in our 10-K.

I would also like to add our third quarter results press release and supplementals do contain financial matters such as FFO and EBITDA that are not non-GAAP measures and in accordance with Reg G we have provided a reconciliation to those measures.

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

Jeff, would you please begin?

Yes, thank you so much, Melissa.

Before we get started I would like to mention that we'll be changing things up a bit on our call.

Given the current climate we thought it would be better to limit our opening remarks to Bill and myself and allow more time for your questions.

I will start by covering our strategy for how we plan to work our way through an extraordinary global -- through the extraordinary global economic events that have transpired with Bill following providing greater detail.

Needless to say these are extraordinarily difficult times.

I won't belabor the point by reciting the litany of recent issuing in the financial markets.

Suffice it to say that these events are having a profound effect on global economies, access to credit, private and public real estate pricing and customer decision making.

How is this affecting our business?

Well, through the third quarter industrial real estate fundamentals held up reasonably as as well, and our global leasing activity was slightly ahead of the level we achieved in the second quarter.

We also continued to realize growth in rents and net operating income in our same store portfolio.

However, customer demand has begun to moderate in recent weeks as around the globe companies are pausing to assess how their businesses might be affected by this turmoil.

Our global operating teams have done an excellent job of managing both lease expirations and the credit quality of our customers as overall market conditions have softened.

Retention is at record high levels and our overall occupancies continue to outperform market averages due to the strength of our customer relationships.

Our turnover costs continue to be some of the lowest in the business.

Additionally, over the past four years we have repositioned a significant percentage of our ownership positions both on balance sheet and within our investment management business to the markets with the greatest stability and in some cases even growth in this environment.

Shanghai, Beijing, Seoul, Tokyo, Warsaw, Los Angeles, among others.

While this and the stable nature of the industrial business does not make us recession proof, it does add to recession resistance.

This operational focus has led to solid property performance.

We are building upon this strong foundation by focusing on the income streams produced by our direct owned properties and our investment management business which are both stable and predictable.

It is clear that in this market our 13-year track record of progressively creating greater value through development activity is being heavily discounted or more accurately not being recognized at all by investors.

We firmly believe that while development has been an important component of our business, it is but one of the many levers from which we can drive NAV.

It has enabled us to respond to customer requirements and to quickly establish market leadership positions around the world.

However, it has also been a less predictable source of earnings both on the upside as we reap the benefits of declining cap rates during recent years and now on the flip side of that equation, the margin compression we talked about previously exceeds anyone's expectations requiring a reset in our required development yields.

Given the greater degree of uncertainty in today's market, we have significantly reduced new development starts to mitigate risk, increase liquidity, and reduced leverage, and now expect to start between 2.7 billion and $2.9 billion this year.

We continue to reduce the risk profile of our development pipeline by focusing development on build to suits and in emerging markets where there is a chronic shortage of space and new development is being absorbed relatively quickly.

We are still assessing our anticipated level of starts for 2009 and we will provide direction on this as we firm up guidance for next year.

But we will take an extremely conservative approach given current and anticipated economic conditions.

Obviously a curtailment in starts means our earnings will slow, but that is not our primary focus.

We are focused on increasing liquidity, maintaining a strong balance sheet, carefully assessing opportunities to reduce non-essential business spending, and continuing our best in class investment management and property operations.

Given today's financial markets, there has been a lot of concern about the Company's ability to access the credit markets to refinance both corporate and property level debt, and in the cases of companies with investment management platforms, there are questions about the ability to continue to contribute assets to funds in order to recycle capital and delever.

Let me make a few points in this regard, and then Bill will cover these topics in more detail.

First, we've addressed all of our 2008 corporate maturities and are focused on 2009 which has a relatively low level of direct debt maturing.

Similarly, we have successfully put debt in place in our property funds, again with very little remaining for this year and are working on next year's maturities.

We have $3.9 billion of remaining third party equity commitments to our funds which when leveraged at target levels provides $11.1 billion to total capacity.

These equity commitments are backed by subscription agreements which have no active redemption preservations.

In those jurisdictions where we do not currently have funds in place we have the option and capacity to hold completed development assets on our balance sheet, lease them, and recognize the net operating income.

Most importantly, it is our intent through reducing our CDFS pipeline, making contributions to our funds, and strong expense management to reduce our Company debt levels by 15 to 20% or approximately $2 billion in 2009.

Very few companies have developed an investment management platform with sufficient investment capacity in place to accomplish such deleveraging while simultaneously enhancing the quality and stability of earnings.

Before I turn it over to Bill, I would like to add that with respect to our long-term opportunities, nothing has changed.

Global trade continues to grow albeit at a slower pace, but the shifts in trading patterns driven by where production takes place and where consumers need those products are not easily reversed.

Emerging markets around the globe will continue to need modern distribution facilities to serve their growing populations, and more distribution markets like the U.S.

and U.K.

will continue to need space to replace obsolete inventory and make supply chains more efficient once economies begin to recover.

ProLogis is well positioned in the right markets with well located facilities and the people and customer relationships in place to weather the storm.

Now, let me turn it over to Bill.

Thanks, Jeff.

As Jeff stated in his remarks, given the current environment we believe it is more prudent to focus on liquidity in preparing for the future rather than short-term earnings.

As such, I do not intend to comment directly on our third quarter results although we would be glad to answer any questions you may have therein.

At the end of my remarks I will provide some commentary on our guidance revision.

In breaking from our usual routine on this conference call, I will focus the majority of my comments on the issues that we are focused on.

Those are fund related debt maturities, on balance sheet debt, scheduled maturities and overall liquidity, our development pipeline, and fund capacity.

I intend to be fairly detailed, so bear with me.

Starting with the fund related debt maturities, there was approximately $2 billion of fund debt with 2008 maturities as of 12/31/07.

As of September 30, we had refinanced $1.8 billion of that amount and in addition financed an additional $1.1 billion of borrowings in connection with the property fund contributions.

At September 30, as newly depicted on page 11 of the supplemental, we had an additional $386 million of debt maturing in the funds consisting of $166 million in our NA3 fund with Lehman Brothers, $99 million in our Mexico fund, and $121 million in our Japan fund 2.

The Lehman maturity is frustrating following their bankruptcy.

However, after repeated attempts to contact appropriate people inside Lehman or their bankruptcy advisors, we finally spoke with a knowledgeable representative just yesterday wherein he clearly indicated they're intending to sit down with us shortly to discuss an extension of the existing loan as well as hopefully agree upon a game plan for the long-term value maximization of their equity interest in this fund.

In sum, good discussion, much appreciated by us.

The Mexico fund loan was refinanced in its entirety on October 7, with a four-year loan at a 6% coupon.

Japan fund 2 has two loans maturing in December 2008, one of which is in documentation and is anticipated to close this month, the second loan has an agreed upon term sheet, will go into documentation shortly, and is targeted to close in November.

Looking at 2009, our property funds have $1.46 billion of debt maturing.

We are in active discussions with U.S.

life companies, German mortgage banks, and our Japanese relationship banks with respect to our refinancing requirements.

With the exception of a bridge loan from Citibank, on our NA2 fund, our 2009 fund refinancing requirements are modestly leveraged based upon the underlying collateral value available for refinance.

Let me touch on each of the funds with debt maturities in 2009.

Pepper has a maturing CMBS transaction totaling $478 million in July 2009.

The underlying assets provide 2 to 1 coverage on the loan and therefore should be refinanceable as the bond rate market reopens.

We're in active discussions with various German mortgage banks as we speak and have a focus on alternatives should that market not reopen widely.

The ProLogis California fund has debt maturities of approximately $316 million in 2009.

The properties in this fund were contributed in 1999 and have appreciated substantially since.

The loan to value on the assets secured by these loans is well below 40%, and we are in active but early discussions with U.S.

life company lenders to refinance these.

North America property fund 11 has a June maturity of approximately $14.5 million at low leverage.

We will address this in early 2009.

The NA2 fund has maturities of approximately $560 million in 2009 comprised of a $62 million life company loan due in January, a $452 million city bridge, and a $46 million life Company loan due in August.

We have rate locked on a ten-year deal relative to the January Life Company maturity and will use approximately $42 million of excess proceeds from that refinancing to reduce the city bridge.

The August Life Company maturity will be handled in the ordinary course of business as we get into 2009.

The city bridge matures in July and we're in active discussions with the bank relative to that loan as well as their underlying equity investment.

Finally, Japan fund 2 has approximately $92 million in maturities beginning in August 2009.

We have not experienced any significant issues in financing or refinancing our Japan assets, and we'll deal with these maturities accordingly.

We have a variety of other financings that we're working on for the funds.

This is just part of what we do on a day-to-day basis.

Europe remains the toughest market for perm financing today, but we're confident that the government programs put in place over the past few weeks will open the markets for our relatively low leveraged requirements.

Secondly, let me address the on balance sheet debt and liquidity.

I hope everyone had a chance to see our press release yesterday regarding a new line of credit with Bank of Communications totaling 5 billion RMB or a little over $700 million that can be used to fund future development projects in China.

Turning specifically to our quarter end balance sheet, at September 30, we had $11.1 billion in funded debt outstanding.

The debt consisted of $2.98 billion outstanding under our various lines of credit, and $8.1 billion outstanding under our bonds and secured debt.

Let me spend a few moments on each of these components.

Relative to our lines of credit at September 30, we had total capacity within our various lines of $4.36 billion thereby leaving borrowing capacity under these lines of $1.2 billion which together with $341 million in cash on the balance sheet provides over $1.5 billion of liquidity available to the Company.

The lines of credit consist of four components.

The global line excluding the China tranche has a total commitment of $3.59 billion with $1.1 billion of available capacity.

This line matures in October 2009 but is extendible to October 2010 solely at our option which option we intend to exercise.

The China specific tranche of the global line as of September 30, had a total commitment of $721 million RMB or $105.8 million of which $92.7 million was outstanding.

This tranche currently matures in May 2009.

We have been in discussions with existing and new participant banks regarding the extension of this facility over the past few months and currently have commitments to increase the facility by approximately $60 million and extend the maturity to three years from execution.

This increase in extension is targeted to be completed in early December.

The multi-currency line represents a total committed facility of $600 million of which $552 million was drawn at September 30.

This facility like the global line matures in October 2009 but is extendible for one year to October 2010 solely at our option.

Again, which we expect to exercise.

Finally, we have a 364-day committed sterling facility totaling $35 million pounds sterling, the equivalent of $63 million, with $48 million outstanding under letters of credit leaving $15 million of available capacity.

This facility matures on November 15, 2008, and is in the process of being renewed for another 364-day period.

Relative to our bonds and secured debt, at 12/31/07 ProLogis had on balance sheet debt, 2008 debt maturities, that totaled $963 million all of which have been successfully refinanced as a result of our May 2008 public debt offerings that totaled $1.15 billion.

Looking to 2009, ProLogis has on balance sheet debt maturities totaling $353 million, $250 million of which relateds to a floating rate note issuance that is due in August 2009.

To the extent that the debt markets do not open up, we are targeting to repay the 2009 maturities out of cash flow and/or availability under the global line.

Collectively, the bank and bond covenant or documents contain a variety of financial covenants including a minimum consolidated book net worth test, fixed charge coverage ratio test, and unencumbered debt service coverage ratio, overall leverage test, a restricted investment test, a secured debt test, and a restriction on distributions based on FFO.

We have plenty of room on all of our covenants currently and are confident in our ability to meet these covenants in the future.

I want to give special thanks to our Treasury teams around the globe.

They have done an out outstanding job of managing our debt maturity there is this most difficult of environments.

Turning to our development pipeline, at September 30, our pipeline totaled $8.2 billion, a decrease of nearly $400 million from June 30.

Approximately $200 million of this reduction was the result of contributions in excess of development starts with the majority of the remainder a result of the strengthened U.S.

dollar, particularly against the euro.

Additionally, the pipeline shows a 530 basis points increase in overall lease percentage increasing to 47.7% from 42.4% at June 30, a result of solid leasing efforts in Q3 as well as our deliberate risk mitigation efforts focused on build to suit opportunity.

This is a great start to derisking the pipeline, and we will make even more substantial progress on this front in the months ahead.

Finally, ProLogis currently has six funds which are actively investing.

At September 30, these six funds had total equity commitments of $4.9 billion with third party equity commitments representing $3.9 billion of that amount.

On a targeted leverage basis, the funds had total capacity at September 30, of $11.1 billion, roughly $2 billion of net overall capacity is in our China acquisition fund leaving $9 billion of capacity as it relates to those funds established to acquire the properties that we develop.

Let me briefly touch on the pipeline related funds and their relative capacities at September 30.

The North American industrial fund has remaining equity of $626 million and an estimated asset value capacity of $1.4 billion versus an existing North American pipeline of $1.5 billion.

The funds investment period expires in March 2009 and we have been in discussions with investors regarding the extension of the investment period.

The ProLogis Mexico fund has $291 million of remaining equity and an estimated asset value capacity of $647 million.

Currently Mexico has a total pipeline of $344 million.

Japan fund 2 has $238 million in remaining equity and $681 million in estimated asset value capacity.

We estimate that Japan fund 2 will fill its investment capacity by the end of Q2 2009 and our overall pipeline is $1.9 billion.

In Korea we have approximately $150 million in equity remaining in the fund with an estimated current asset value capacity of $320 million, Korea's pipeline is $54 million.

This fund has ample capacity for future development and acquisition opportunities.

ProLogis' European property fund has remaining equity of $2.7 billion and a leveraged asset value capacity of $5.9 billion.

Europe's current pipeline is $3.3 billion providing ample room for further development and acquisition activity.

As we have said on many occasions, we are constantly out talking to investors about new funds and fund opportunities, and therefore expect to continue to expand our fund capacity.

However, just to be clear, in speaking with our senior operating people, to the extent that we were not to have capacity in one or more of our funds, relative to our pipeline properties, we would be glad to hold any of these properties on our balance sheet as long-term investments.

Finally, let me touch on the change in guidance for Q4 and some commentary on 2009.

While no one appears to be focused much on 2008 any longer, approximately 50% of the difference between our most recent guidance and the $3.60 to $3.70 range announced today is related to an anticipated steeper slowdown in leaseup than originally expected and a resulting delay in the timing of various contribution.

10% of the decrease is associated with the tougher cap rate environment, while the remaining 40% of the decrease relates to a variety of factors including FX rates, taxes, and did you documentation hurdles on preparing properties for contribution.

This change in guidance following on the revision we announced in mid-September is a reflection of just how difficult the environment has become.

Given these market conditions, putting forth guidance for next year is a real challenge.

We anticipate growth in income from our investment management business driven by expected contributions to the fund as well as fund related acquisitions.

CDFS income will be lower reflecting both lower margin assumptions, and a reduction in starts in both 2008 and 2009.

Property operations are holding up reasonably well, but we're concerned about additional occupancy slippage which may lead to a modestly lower level of income from this segment.

Clearly we intend to reduce our G&A in 2009.

Finally, we intend to provide substantially more specific updates on the key drivers of all of these elements as we approach year end, but in no case later than our fourth quarter call.

In sum, let me reiterate, we have our fund debt maturities well under control.

We are highly focused on delevering the Company, and we have over $1.5 billion of existing liquidity.

Our pipeline is being derisked in rapid fashion, and our fund capacity is unique and should be much appreciated in these times.

Now I will turn it back to Jeff.

Thanks, Bill.

This is undoubtedly the most painful period from a capital markets perspective in any of our lifetimes.

However, we remain firm in our commitment to create long-term value for our public and private investors, associates, and customers.

We have a well leased portfolio of high quality properties, excellent customer and capital relationships, and the resolve to maintain and strengthen our balance sheet to ensure that we're one of companies that is emerges from this period poise to do take advantage of opportunities as they arise.

Operator, we'll now take questions.

Thank you.

(OPERATOR INSTRUCTIONS) We'll take our first question from Steve Sakwa with Merrill Lynch.

Good morning.

Two questions.

Jeff, first of all I guess in light of the environment here, why wouldn't you just basically shut the entire development pipeline down now given that you've got $8 billion of properties and some form of stabilization period and/or leaseup which by most accounts would be at least a two-year potential delivery of supply into funds?

I guess why wouldn't you take a more dramatic reduction in development at this point?

Steve, I will start that and I will turn that over to Ted to elaborate, and we both have been involved in this on a global basis, Ted particularly in North America and more involved myself outside of the U.S.

But effectively that's what we've done beginning in September we have done nothing but build to suit starts, and those are serving customers, customer relationships that we've had for an extended period of time.

We've also both put an, increased our expected investment yield or decreased our expected value upon completion to be conservative in those, and have required that our teams not only have things 100% pre lease but also increased our required margins substantially above where they were previously to 2X what they were previously quite frankly, at a minimum on those, so effectively when you see our starts in Q4 and our expectation is in the first half of next year, there will be very few development starts again only pre-leased buildings as we assess the market conditions, but your point is well taken and something that we've already put into effect.

Okay.

And then secondly, can you maybe -- Bill did a very good job out lining the capacity of the funds given that there seems to be very little debt available.

If you have an ability to finish product and then complete it and sell it into funds using 100% equity, or do these investors effectively require the use of leverage and therefore if leverage isn't available assets cannot be contributed?

Steve, this is Bill.

According to our funds we have the ability at our discretion to use 100% equity to fund any of the contributions, and so effected actively kick that one off the table, but you know there is debt available, and I hoped that in sort of talking through our fund debt activities we have a lot of things that we've closed in the last five to six weeks.

We've got a number of closings coming up in the coming weeks, and we've got term sheets and commitments commitments and other activities on other financings, and so I think the, sort of the depth of the refinancing market is slightly overstated at this point, at low leverage, we are finding opportunities to finance the majority of these assets, having said that we can use all equity if we so choose, and in certain instances it may make sense to use all equity and wait for the markets to settle down and then lever up.

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

Yes, hi.

Was wondering can you talk a little bit about maybe going through the regions and talk about where you see the market cap rates today versus the yields that you have achieved on development and maybe tie all that together ultimately to how you look at dividend coverage these days to the extent gains shrink materially?

Mike, that was a good question, one that we looked at all the markets went into great detail, we could be here an hour answering that question, but something we spend a great deal of time on.

I will start it, and then this may be -- we try not to do too much of having multiple people answer the same question, but this may be the rare exception where Ted and Sully jump in and add color or additional depth or detail to what I will go through.

If you look at the U.S.

we think that cap rates have moved 50 to 75 basis points already for Class A product which is the only product we have, buildings that are well located in great markets with long-term strong demand, you hate to -- and when things look gloomy, as they do today, it is easy to lose sight of the fact that these are long-term great markets, but we think the cap rates have moved 50 to 75 basis points already.

Is there potential for them moving out further, absolutely, how far?

Whether it is 0 to another 50 or 75 basis points, time will tell.

That's within the U.S.

and obviously cap rates are lower on the Coast where we've repositioned a lot of our assets over the last few years, the California, the New Jersey's, et cetera.

If you go to Europe, clearly the market that has had the most substantial cap rate movement or the greatest value diminution of any place we know of of, any developed country I should say has been the U.K.

where we have seen cap rates move out order of magnitude by 30%, things that were in the 5.5, 5.25 range are now turning closer to 7% as a cap rate.

So there has been significant value diminution there in the U.K.

On the continent, quite frankly we've seen less, probably to date 25 or 50 bips.

We're being conservative in how we look at the world thinking that could again move out by 25 to 75 basis points over the coming year if things -- if things continue to stay difficult, but as Sully said, there is a reopening of the credit markets, a brief market as banks have been nationalized and the tremendous liquidity has been pumped to the markets, so while we're taking a conservative approach -- we're planning for the worst, hoping for the best as it relates to cap rates there and we may all be pleasantly surprised but we're not planning for it.

As you move to Asia, cap rates in Japan have probably moved out 25 to 50 bips.

This is at the same time where the financing markets have remained relatively open or very much open I should say relative to the rest of the world, but Japanese banks missed out on making mistakes of their counterparts throughout the rest of the world because they were solving their own problem from the burst of the bubble in 1988 and have emerged from all of this as some of the strongest banks in the world and they have continued to lend to us.

We've got great relationships with the major Japanese banks, and that's been a great source of capital.

As you move to China you probably have seen less cap rate movement there than anywhere else in the world which is not surprising.

You might have seen 25 bips, and our expectation is while you may see a little expansion there, given the growth, the current numbers, official government numbers, and the best economic forecasters are looking at 9% GDP growth even in 2009 in China, even if you say, think that's overstated, and go contrary to the best economic forecasters out there and cut that to 6% GDP growth, you're still looking at economic performance that the rest of the world would kill for, case in point, the numbers that JLL put out for the first six months of this year showed 15% rental growth in Shanghai, again that's an exception around the world.

We wish all the global markets were like that, but that's why you're seeing continued investor interest in the China market because of the growth prospects there.

I hope that kind of answers the question.

We've traditionally underwritten 15 to 20% development yields as we talked about in the past.

This has put pressure on our margins, absolutely, but the beauty of our business is it is a relatively short development cycle.

Today we're resetting our expected yields on anything we would start into Steve's comment earlier, we're starting very little today, but when the market improves, we have the ability to reset our expected investment yields underwrite to those standards and make investments accordingly and bring back to those margins the 15 to 20% historical margins as the economies improved, whether that be -- best case scenario people look at end of '09, whether it's in '10, whether it's '11, but we're there, we're very disciplined and very resolved to stay disciplined, strengthen our balance sheet and long-term create value for our shareholders and investors.

We'll take our next question from Dave Rogers with RBC Capital Markets.

Good morning.

Thanks, guys.

Wanted to follow-up on an earlier question with respect to the equity takeout, not using any debts within the fund to take out contribution.

What would you estimate the impact to be to the price?

I am guessing there are certain underwriting hurdles within the fund separately.

How would that impact PLD, earnings, gains or contribution prices in 2009?

And Bill, if you could also address how much availability are in your warehouse lines of credit in total across the funds within the fund structures themselves?

Okay.

The first answer to that is there is no impact on the underwriting criteria or the valuation methodology, the contribution is going to the fund at, at the time of the contribution, just we do it with equity versus debt if that makes sense.

So under that scenario there is no impact or change from that perspective.

In terms of the availability under the fund, I think we have -- I apologize.

Have a ton of paper, but I think we have about 300 million available under the European line of credit today on pep 2, another 300 million under pepper, and about $100 million under North America today.

And again particularly as it relates to pep 2, we have a five brief financing that's committed to that will reduce the outstandings under that, and free up some of that capacity as we move forward.

We have financing scheduled to close in Mexico next week that will free up capacity there as well.

Bill, you may want to hit -- Mike had a question previously on dividend coverage.

I think we're comfortable with our dividend coverage.

We were in the low 40s previously.

What we've targeted is probably taking that up into the 50 to 60 range in 2009, and beyond, and to the extent in the grand scheme of things to the extent that our CDFS profitability were to come under some pressure, first and foremost we view it as somewhat of a temporary phenomenon as we underwrite to the new environment in the future, so you may see a little bit of that for a year, but that's in line with what we've talked about historically.

We feel good about our dividend and our coverage.

We'll take our next question from Jeff Miller with JMG Capital.

Thanks.

It has been asked and answered.

Okay.

Thank you.

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

Good morning.

Good morning.

The stock market and bond market are implying pretty significant value destruction over the last three to six months and the bond markets, some of your bonds are trading as if your credit worthiness is less than most of your peers, public, and wanted to see if you could offer a little bit of opinion about where you see or what specifically you can offer regarding credit worthiness and cash flow potential either not so much in your supplemental but in a separate presentation that could come out and lay out 2009, 2010 maturities, risks, stress tests, I think that will be very helpful, and in that context you offer very good amounts of information about specific funds and maturities, but one of the questions just asked was how much capacity do you have in aggregate on your credit lines and if you were to assume those developments that you currently have in process and the unfunded amount, what would that do to your debt ratios, coverage ratios of that nature because most of those properties are not yet generating income above the leverage costs?

It would be helpful if you can offer any initial thoughts and any commentary regarding market activity.

That's a -- well, mouthful, Chris, but let me just give you some color.

Look, from the fund side, okay, what we've said is worst case scenario if we have to do all equity on the contributions, we've given you what we believe is sort of perfect clarity to what the equity commitments are in those funds, and a large portion of our pipeline is covered by the equity in those funds, particularly through the next twelve months or so, and so we feel pretty good about that.

In terms of the color on the cash flow and the availability, I think we'll continually reassess and look at providing better clarity, both in the supplemental and in our conference calls in terms of our liquidity position.

I actually think we did a -- we took a giant leap forward today, and so hopefully some of what you may have wanted to know before the call we answered on the call, and we'll certainly address that in more detail at NAREIT and then again in what I hope to be a cleaner version of the supplemental in Q4, and so in terms of overall liquidity, look, we've stress test debt covenants and liquidity a lot of different ways, and that's why we say if you took CDFS contributions to 0 and held the assets on our balance sheet, we're in fine shape relative to all our debt covenants and leverage tests, et cetera, et cetera, so that's sort of the draconian stress test, test, and we feel good about it, so if that provides or leaves you any comfort, I hope so, and we'll certainly get into more detail as the months progress.

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

Thank you.

As we look at the currency in the FX pipeline, what percentage of that is 95 or 100% leased, basically ready for contribution?

Hang on one second, Jamie.

I have it.

Go ahead, Diane.

Currently we have about $1.4 billion that is above 93% leased that are in different stages of being ready to contribute.

Some of the assets are build to suit, so they're leased, but it will be awhile before they're finished, and then other assets are in China which currently we don't have a fund to contribute those but are in process of putting together the fund.

And, Jamie, we look at the 93% plus leased as opposed to 100 as a metric which is why we scramble to get to the 100% number which obviously we could get but it would take a couple minutes but we look at the 93% as the highest threshold in any of our funds to constitute a stabilized property and make contribution.

It ranges from 90 to 93 depending on the fund, so that's why we look at it 93.

We'll take our next question from David Fick with Stifel Nicolaus.

Good morning.

You have got today about $2.7 billion in land of which roughly 1.1 is U.S.

or North America, 1.3 is Europe, and another 400 million in Asia.

That is up roughly $600 million this year in the first three quarters.

I guess the question is why and what didn't you see about this market that you see today?

Second, what is your forward land strategy?

And, third, what before write-offs given that you bought a lot of this stuff at the peak of the market and clearly you would build to a loss on some of this land today?

David, I will start that and I will turn it over to Ted.

We've had -- we've seen some growth in our land bank that is -- we've put infrastructure into some sites that we bought previously.

That's a more substantial number than one might think.

There is a tremendous amount of value creation which leads into your second or third subpoint on potential impairments or loss of value, but a lot of this land we went through the entitlement process, we go through the infrastructure process, we have -- we had and still have significant margins from basis -- from our basis to market value, and when we do that so the way we look at our land bank we have some really valuable parcels and particularly in the U.K.

Are they ready to develop today given the state of the market, no.

Do we feel like we've still created value given the quality of our land entitlement operations and teams, yes, and in the U.S.

it is a similar situation.

In Europe or I should say in Asia it is close to being just in time with the exception, purchase of land and build the buildings.

We slowed that down as Steve's comment -- was in the beginning.

We slowed that down in Japan slightly although we still feel great about our sites there, and in China we've got a very strategic land positions there which allows to continue to grow.

Ted.

I wanted to first just step back to Jamie's question real quickly.

Diane hit on a part of the properties we have that are over 93% leased which are the stabilized pool.

In addition to that, there is another 1.1 billion of gross proceeds that are under development, so when you total the two together, we actually have 2.6 billion of properties gross proceeds for property that is are either under development or completed.

Yes, those are over 93% leased.

I want to first clarify that.

And then in terms of our overall Jeff, you really touched on the majority of the response to David's question, but I think we feel overall very good about our land positions and the buildings that we're building.

We're clearly in a rising cap rate environment.

That's concerning.

I look at our contributions this quarter and see a wide variety of properties indifferent locations around the world, some of which have still relatively high profit margins and frankly a couple of larger contributions that have zero margins.

I think we're going to see that type of mix in our geographic diversity is definitely coming into play.

I mean, we're seeing areas where there is still strength, and we're seeing areas of weakness, and when you blend it altogether, we're still above par.

Our CDFS margins are still strong.

We anticipate finishing out the year in the 18% range.

That's the range that we've always talked about, 15 to 20%, and even in these tough times as we see things tailing off there still are areas of the world that are doing well.

We'll take our next question from Michael Bilerman with Citi.

Good morning.

Jeff, I wanted to come back to the dividend again, and you talked a little bit about how things changed since mid-September where when you reduced guidance you also increased the dividend by 10%, and you talked a lot about trying to maintain liquidity and having balance sheet leverage, and if you just took your numbers for this year at $3.70, you have about $2.30 of CDFS gains, so about $1.40 of FFO, $0.45 of CapEx, $0.40 of capitalized interest, another $0.10 deduction for straight line rents, and so I am just trying to get my arms around how you think about the dividend in that context and why not try to maintain as much liquidity as possible, and I am not sure where your taxable net income, and so maybe there is a certain level you need to do, but just from a cash flow perspective, it would seem that if you start meaningfully lowering the CDFS portion which is a possibility next year, you will be over funding the dividend by a significant extent.

Michael, good question, and I am glad you asked it.

The way, one, I think if you look at the CDFS gains, that's without allocating its appropriate share of overhead, so when you look at that, it is a much smaller percentage of our overall gains than the market has perceived it to be, and clearly we're going to over the coming years reduce the percentage of our income that comes from transactional income or transactional type gains and transition more to investment management model where it is annuities both fees and returns as well as wholly owned returns while maintaining our core of excellence within the development but doing it in different ways.

That being said, we feel as Bill said very good about our overall dividend coverage, every way we stress test looking forward.

We feel good about it.

We think -- yes.

We think the right way forward in delevering and taking a stronger and stronger balance sheet throughout 2009 is by completing assets as Ted said there is over $2.6 billion or at $2.6 billion of assets that are already leased and ready for contribution within our fund structures to continue leasing the remainder of the portfolio, make those contributions, significantly slow down our starts, limit those to only build to suits which are again immediately contributable or provide net operating income, and by doing so we find a way to delever the balance sheet significantly while maintaining the dividend.

The other thing that we kind of miss out in that whole analysis is as we dramatically decrease our development starts and continue to make contributions to our funds, we are lowering our interest expense very significantly and once we put that into our model and do the stress testing Sully was talking about, quite frankly we sleep better at night after we did all that, I know that I sleep a whole lot better at night and feel very comfortable.

Again from the stress test standpoint, one thing to be clear is we have a pretty sizable return on capital incorporated into our dividend, and so we are in no way, shape or form at a level of taxable income that requires us to distribute anywhere near that, but we're comfortable with our dividend.

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

Thanks.

Maybe just take on the team here because I have basically the same question as Michael has and don't quite understand the math, Bill.

Just going off FFO number ex CDFS, call it $1.40 or so, even if you are selling properties and cap rates are up so that your building liquidity, you're maintaining the overhead because you are building and selling properties, but there is no margin, you have the G&A, I mean build us up from the $1.40 into kind of what the dividend coverage should be because it looks just, the dividend looks just very, very high relative to kind of a core number, a core FFO number much less an FAD number, so if you could put numbers behind it to give us some comfort here?

Yes.

We'll probably sort of go through it at NAREIT and walk through the whole math on that, and also just leave some of the focuses on the stress test side of that, but again from a stress test standpoint in the grand scheme of things if we did not -- we're not to contribute properties into the property fund and create CDFS gains.

We've become a very sizable portfolio of high quality real estate with great NOI underneath it, collecting rented, and managing that business, and that provides substantial cash flow much like and under that scenario we would have a substantially higher dividend payout ratio but more in line with traditional REIT numbers, and so again we'll constantly look at the opportunities and the issues associated there with, and take those things into account.

Operator, we'll take two more questions.

We'll take our next question from Mark Streeter with JPMorgan.

Gentlemen, good afternoon and the team.

Question -- a couple questions.

Number one is really for Bill and Jeff on your strategy and how you're managing the markets perception of the Company because clearly the credit market has lost faith in the Company's credit worthiness following up on Chris Haley's comments, and I am wondering you sort of waited for the conference call here to give some more disclosure on the credit side and funding in liquidity yet I have spoken to a lot of your bond holders who are sort of disappointed you haven't come out swinging earlier, and I am wondering if you can talk a little bit about the decision for how you're sort of managing the perception?

Mark, I guess if you look at the focus of our call today, if you look at the focus of the Company, if you talk to any of our people around the world, whether you talk to our people in Asia, North America, Europe, everything, our entire focus is on managing our portfolio, leasing up our pipeline, which you can see the results of that with our pipeline leasing of 540 basis points in one quarter alone, and reduction in the size of the pipeline, the drastic reduction in any development starts, and again focus only on pre-leased with strong credit.

If you look at the focus and tone of our call today, it is all focused upon managing the Company, strengthening the balance sheet, reducing leverage, increasing liquidity, and being not just a survivor out of this economic/financial crisis that is going on around the world, but be the strongest survivor and be there to take advantage of opportunities when things recover, but we are solely focused on this.

It is exceptionally, exceptionally important, not just to the people in this room, on the call today, but to every one of our associates throughout the world and they're all fully committed to making this very successful and very strong.

Let me comment as well, Mark, just on virtually every conference call that we've had and every investor presentation that we've done including the Merrill Lynch conference in September about the same time as our sort of guidance revision then therein, we have focused on our liquidity and the fact that we have strong liquidity that we have maturities well under control, that we've done a good job in refinancing our fund related debt, et cetera, and whether people chose not to listen, or not to pay attention and to take things to extreme, I think there was a perception that a focus on 2009 with the global line maturity and we've said for the better part of a year that line is extendible into 2010.

We're going to do that, et cetera.

The other side of it is we ramped up pretty quickly, and it is a testament to the Company in terms of its ability to ramp up for development activity, et cetera, particularly in emerging markets.

On the other hand, we've been able to ramp down, and if you look at our pipeline, we took it down by $400 million in one quarter.

We added 530 basis points to the leasing side of that equation through a very deliberate and concerted effort, and we're telling everybody we have the capacity to turn this thing much quicker than people might have otherwise imagined, and so we're going to delever, and we're pretty excited about it.

We'll take our last question from Mitch Germain with Banc of America Securities.

Hey, guys, Bill, what's the pricing you're getting quoted from the life companies, and if you can just confirm are the current terms of the global credit line, do they stay upon extension?

We have to pay a one-time fee which I think is 0.75 basis points.

Okay.

Great.

For the extension.

In terms of -- extension.

In terms of pricing on the various financings today, and again you got to sort of take things in stride relative to any day or point in time, for example we talked about the facility coming due in NA2 in January, we rate locked on that about two weeks ago.

It is at a 6.3% coupon, ten-year interest only maturity, 58% loan to value, and so it is a pretty good indication in the fund brief market today the pricing that might have been 120 basis points six months ago is probably now closer to 175 basis points in that market.

Which is still very good.

Which you swap that to fixed, and you're below 6.

Yes.

And so the pricing on the secured debt -- now, on the other side, in the life Company market today, there were a variety of people out there that are saying 7% is my floor, and so certainly the spreads have gapped out a little bit, but the base rates are coming down, and so the overall pricing in the secured market is not unattractive in today's world.

May want to comment on Japan also.

Japan, the spreads have gapped out, but we're still in the mid-2s overall.

Overall.

Overall.

And so there's tremendous positive spread investment on the development activity there as well.

The Bank of Communications line was a great example, PVOC rate which is about as good as you can do in China, and so we feel pretty good about it.

We would like to thank everyone.

We appreciate your time.

We're excited about what we need to accomplish, and know what we need to accomplish, and fully committed and resolved to not -- to surviving this economic storm, but not just surviving it, surviving as the strongest survivor as we go through this.

Thank you all for your time.

This concludes today's conference.

A replay of this call will be available today, October 23, at 12:00 Central until November 7, at 12:00 Central.

You may access the replay by dialing 1-888-203-1112 or 719-457-0820 and entering 3691428.

Again, thank you for your participation on today's call.

Have a great day.