Prologis Inc (PLD) 2009 Q2 法說會逐字稿

At this time, I would like to welcome everyone to the AMB Property Corporation second quarter earnings conference call.

(Operator Instructions) After the speakers remarks' there will be a question and answer session.

I will now turn the conference over to Ms.

Tracy Ward, VP of Investor Relations and Corporation Communications.

You may begin your conference.

Thank you, Casey.

Good morning, everyone and thank you for joining us this morning.

Before we begin formal remarks, I'd like to remind you that this call is the property of AMB Property Corporation and is being recorded.

The speakers on today's call will make various remarks regarding future expectations, plans and prospects for the Company, such as those related to our liquidity and delevering plans, our capital deployment activities, our planned dispositions, our development and private capital business, our leasing activities, expected earnings and our future business plans.

These remarks constitute forward-looking statements for the purposes the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

AMB assumes no obligation to update or supplement these forward-looking statements.

Such forward-looking statements involve important factors that could cause actual results to differ materially from those in forward-looking statements, including those risks discussed in AMB's December 31, 2008 10-K, which is on file with the SEC.

Reconciliations from GAAP financial measures to non-GAAP financial measures are provided in the supplemental analysts package, which is posted on the Company's Website at AMB.com.

This morning, I will turn the call over to Hamid Moghadam, Chairman and CEO, who will comment on macro economic environment and customer sentiment.

And Tom Olinger, our Chief Financial Officer, who will comment on financial position, a review of our financial results and guidance before we open the call up to your questions.

Also in attendance with us here today is Gene Reilly, President of the Americas.

Hamid, will you please begin?

Thanks, Tracy.

Good morning and welcome to AMB's second quarter earnings call.

Our financial and operating results were in line with our expectations and point to the excellent progress we're making on our business priorities.

Before we review the quarter's highlights, I'd like to go over the major drivers of global demand for industrial real estate.

In order of importance, the top five of these include global trade, global GDP, industrial production, business inventories and consumption.

Looking back at the last five business cycles, these indicators explained virtually all of the change in industrial demand.

Interestingly, these indicators rarely move in tandem and the current cycle is no exception.

First, let's look at global trade and GDP growth.

Trade explains roughly 80% of the historical variation in demand for industrial real estate.

When projecting demand for our product, global trade volume is the number to watch.

Over the last 50 years, trades growth has outpaced GDP by a factor of 4.

Current World Bank and Global Insight forecasts indicate that global trade will fall by 10% to 12% in 2009, which is substantially steeper than the 3% forecasted decline in global GDP.

As we look forward to 2010, the current consensus estimates for US and global GDP growth is in excess of 2%, a level that implies recovery in GDP growth and a rebound in trade and industrial real estate demand.

Next, we consider the dynamic between current US inventory levels and consumption to be particularly important in the assessment of future demand for distribution space.

Let me explain why.

As the global economic crisis grew, production ceased and businesses cut inventories that were already lean by historic standards.

These cuts occurred faster than ever before in response to the expected steep drop in consumption.

To put this into perspective, inventories, which were already low by historic norms, fell 13% compared with consumption, which fell by only 2%.

This is in contrast to the four preceding recessions when inventories were peaking and partially causing the start of each recession.

For the last 40 years, the inventory adjustment to consumption process has been relatively slow.

Inventories have not meaningfully contracted until after recessions were over.

In this recession, we've seen unprecedented liquidation of inventories.

Business inventories have fallen faster than sales.

Even as sales continue at the current pace, with no additional GDP growth, production and inventories will have to grow to meet immediate demands.

GDP, however, is expected to resume growth in the near term at the level of approximately 2%.

If this projection proves correct, we can make some assumptions about the growth in trade and industrial real estate demand.

Data shows that for every 1% of GDP growth, global trade grows by 3.5% and when global trade grows, US markets typically experience an increase in industrial demand.

According to current projections from the World Bank and Global Insight, global trade in 2010 is expected to grow by 4% to 6%.

It's important to note that the trend and recent revisions has been significantly positive and clearly represents a dramatic rebound from the 12% decline of the past year.

The take away message here is that there's likely a two-prong rebound in industrial real estate.

The near term incremental backfilling that can occur as production and inventories sync up with the current consumption levels.

And second, the occupancy gains that are the natural extension of the GDP and trade growth.

Today, we see unmistakable signs that we are moving closer to the inflection point in the cycle.

The record declines that we saw in the global economy and global trade during the first half of the year are clearly moderating.

For example, the decline in container traffic through major ports is slowing down.

Since bottoming in February, year to date port container decline has moderated in each of the four months ending in June.

This is also true for air cargo volumes, which hit their cyclical lows in February and have declined less on a year-to-date basis for each of the subsequent months through May, the last reported month.

While we're encouraged by the improvements in these trends, we acknowledge that they're off record lows and have yet to turn positive.

There are also early signs that some rebuilding of inventories has begun.

For example, leading indicators of industrial production, precursors to trade growth, have been on the rise in the US and are beginning to expand in many countries including Germany, France, Singapore, Korea and China.

Retail sales in China have continued to grow about 15% year-over-year.

We believe the Chinese consumer will play a significant role in the global recovery.

As you all know, in the US, retail sales have improved for the past four out of the six reporting months through June.

Our customers are also sending positive signals.

Sentiment and traffic through our properties are improving.

Customers tell us that they feel the economy has touched or is close to touching bottom.

Decision making has begun to ease.

Users are beginning to put business planning into action and the number of deals under negotiation has increased in the last 30 days.

Customers are treading lightly, though, pending transactions are weighted towards smaller deals with shorter lease terms.

Based on the current activity, we've seen demand turn positive in China and expect this to be followed by the US, Europe and then Japan.

Despite these encouraging signs, deal flow is not a switch that can be turned on overnight.

There's much work to be done, including the backfill of existing vacancy, before occupancy or rents can grow in a significant way.

We believe we could be as far as a year away from that point.

In spite of the recent positive signs, the current operating environment remains the most challenging we've seen in our 26 year history.

Fundamentals today are the weakest on record.

US markets have seen negative absorption of 170 million square feet year to date, 80 million square feet of which occurred in the second quarter.

Industrial availability rates in the US have increased 80 bips since the last quarter and now stand at 13% nationally.

Given these factors, we expect the improvements in the industrial markets will take some time to materialize.

Recovery however will be aided by the fact that supply is a nonissue.

Only 16 million feet were delivered in the quarter, a new construction rate, that's less than 50% the obsolescence rate.

Historically, vacancies start falling about three or four quarters after GDP growth turns positive.

However, in the last two cycles, deliveries of new space continued at a very high rate during the downturn.

This meant that when demand turned positive, availability continued to rise and deliveries continued to exceed demand for a longer period than we believe will be the case this time around.

While the exact timing of the turn of recovery remains uncertain, we believe that the inventory rebuilding process will be a very significant driver of demand for industrial real estate once GDP flips to positive growth.

I'd now like to give you a quick progress report on our key priorities.

You may recall that our top two objectives for the Company included the strength in balance sheet and a streamlined cost structure.

I'm pleased to report that we're well ahead of plan on meeting and exceeding both of these objectives.

Year to date, a few of our specific accomplishments include increasing our line availability and cash by approximately $300 million, while reducing our share of outstanding debt by more than $750 million or 17%.

Reducing our overall G&A costs by about 30% on a run rate basis.

Despite extremely challenging market conditions, we've made terrific progress in executing on our disposition program, both in terms of volume as well as pricing.

Year to date, through June, we've completed contributions and dispositions of approximately $461 million at a stabilized cap rate of 6.9%.

Given the many perspectives on cap rates, I'd like to spend a minute on this topic.

While the cap rates on our Japan asset were quite low, the more typical North American portion of our sales was also quite strong.

Excluding Japan, our dispositions in North America carried a cap rate of 8.1% and consisted of 22 separate transactions across 11 markets.

Generating proceeds of about $276 million.

It should be noted that the properties we sold represented assets with the lowest level of strategic fit with our portfolio.

We believe that pricing of our core assets would be much more favorable.

Buyers included a variety of players, primarily users and institutional investors, with a few 1031 buyers.

Let me now turn it over to Tom to discuss our results in greater detail.

Thanks, Hamid.

We made significant additional progress on strengthening the balance sheet and rationalizing our cost structure in the second quarter, building on the initiatives we put in place in the fourth quarter of last year.

At the end of the second quarter, we had ample liquidity of over $1.2 billion.

Consisting of $1 billion in capacity on our lines, which represents 38% utilization, and more than $200 million in cash.

And our share of debt to assets was 44%.

As we look at our capital requirements through 2012, our maturities are well staggered in manageable tranches and provided by long-standing lending partners.

These capital requirements can be divided into three categories; secured debt maturities, unsecured debt maturities and development pipeline funding.

Our wholly owned and JV secured debt maturities are very manageable over the next four years, with maturities in both 2009 and 2010 being relatively light.

By way of reminder, we have financed historically with debt service coverage ratios generally in excess of 1.4 times, resulting in moderate leverage.

And the majority of our loans are amortizing.

With the exception of Japan, the bulk of the mortgage debt maturities through 2012 are loans which originated five or more years ago.

As you may recall, we have stress tested our mortgage debt maturities through 2012, adjusting for changes in underlying cap rates.

We don't project any significant requirements to pay down debt in conjunction with refinancing these secured maturities.

This is due to the fact that we went into these loans with moderate leverage, the cap rates to debt origination were predominantly higher than what is being underwritten today, we've generally had rent growth over these terms despite recent rent declines and the loans amortized.

For example, a 10-year loan with a 30-year amortization period has a 14% reduction of principal at maturity.

Moving to our unsecured debt, we have $486 million maturing through 2012, excluding our lines of credit.

These maturities consist primarily of $150 million of public bonds and a $325 million term loan.

As of the end of the quarter, we had $89 million left to fund to complete our development pipeline.

These obligations have together totaled $575 million of funding needs through 2012.

From a sources perspective, if you just assume we use our cash on hand, add in our asset sales currently under contract or LOI and we close only 20% of assets currently being marketed, we have more than $580 million in capital sources.

Therefore, we can fully fund all our unsecured obligations and complete our pipeline without tapping into our lines or relying on other funding sources.

The bottom line is we're well positioned to address all of our financial commitments into 2013, while maintaining significant liquidity.

Turning to an overview of the industrial markets.

It will come as no surprise that current conditions across the globe are very soft and certainly some of the toughest, if not the toughest on record.

As an example, the US markets have reached the highest availability on record at the end of the quarter at 13%.

Deteriorating fundamentals have now spread to all of our major global markets, with the exception of China.

We are experiencing negative absorption, declining rents, rising vacancies and more lease concessions.

While we are beginning to see some bright spots with respect to leading macro economic indicators and customer sentiment, we expect demand for industrial real estate markets to remain weak in the near term.

Our US portfolio has continued to outperform national occupancy rates and we're beginning to see a pattern emerge that is similar to what we saw after the last recession.

We expect to maintain our spread of outperformance throughout the cycle.

In Europe, while the social backstops in western Europe are limiting the severity of the downturn, they will also delay it.

As Hamid mentioned, we expect western Europe's recovery to lag that of the US.

In Japan, while exports are down, there is anecdotal feedback that consumer demand is slowly beginning to return and the sentiment is generally more optimistic than Q1.

Dynamics in China continue to be relatively strong and we continue to see this market as a significant growth vehicle for us going forward.

We believe that China will be on the front end of the global recovery.

Now, let's move to results for the second quarter.

For the quarter, FFO was $0.34 a share, including a restructuring charge of $3.8 million.

Excluding this restructuring charge, FFO for the quarter would have been $0.37 a share, in line with our expectations.

Core operations were in line with our forecasts as well.

Same store growth was down 4.1% for the second quarter, primarily driven by declines in occupancy and the impact of foreign currency exchange.

Without the effect of foreign currency, same store NOI was down 3.2% for the quarter.

Our quarter end and average occupancies were 90.5% and 91.1% respectively.

Our quarter inoccupancy was 350 basis points above the national average.

We were able to maintain our four-year average quarterly leasing pace of 5.5 million square feet in our operating portfolio during the second quarter.

However, average occupancy declined 200 basis points, as forecasted, as we continued to face much higher than average lease rollovers during the second quarter.

During the first half of the year, we rolled 10% of our ABR into our portfolio, which is about 300 basis points more than normal.

Clearly, this has been an inopportune period to have such a significant portion of our portfolio turn, even with reasonably healthy tenant retention.

While we have seen a recent uptick in leasing activity, the operating environment continues to be very challenging as well as competitive.

Rent changes on rollovers on a trailing four quarter basis were flat and down 2.2% for the quarter.

We are pleased with our ability to effectively hold rent so far in this environment.

Our retention rate on a trailing four quarters basis was 62%, slightly lower than normal and primarily attributable to two large spaces in San Francisco and LA where tenant departure was expected and included in acquisition underwriting.

We leased 430,000 square feet in our development pipeline during the quarter, which was below our forecast.

Leasing of large space is currently very challenging in all of our markets.

Competition to lease first generation space is fierce and tenants are pushing hard for concessions, regardless of their credit worthiness.

While we are prepared to meet market leasing rates, we will not do transactions that are detrimental to long-term value.

Private capital revenue was in line with our expectations for the quarter.

G&A came in lower than we expected.

The decrease was due primarily to lower personnel costs as a result of our continued restructuring initiatives, as well as lower third party expenses.

As discussed earlier, we did have a severance charge of $3.8 million in the quarter related to this additional restructuring.

On a cumulative basis, we have now reduced our head count by about 1/3 and gross G&A by about 30% on a go-forward run rate basis.

For the remainder of 2009, our quarterly G&A run rate should be about $28 million.

This reflects the reduction of expenses from lower personnel costs, partially offset by lower capitalized development overhead costs in the second half of the year.

I also want to point out that the movements in other expenses and other income this quarter are largely driven by income from deferred compensation plan of $5.5 million, which grosses up both of these income statement line items.

From a customer receivable standpoint, the number of bankruptcies and write-offs during the quarter increased, as the challenging operating environment is impacting more of our customers.

We are reserving approximately 100 basis points of revenues for bad debts, which is in line with our experience in prior downturns.

Our accounts receivable agings are only slightly higher than our historical average.

We continue to believe that our receivables are adequately reserved and we are forecasting bad debts appropriately.

Now, let's turn to guidance for 2009.

We are narrowing our full year FFO guidance to $1.41 to $1.45 per share.

As a reminder, our FFO guidance excludes any gains from development activity, impairments and restructuring charges.

The decrease in the high end of our previous guidance is primarily attributable to the timing of the lease-up of our development assets, which at the end of the second quarter was 34.5% preleased.

As previously mentioned, we are forecasting demand for new space to continue to be weak.

To stabilize our development assets to 90% occupancy, we need to lease just under $10 million square feet, which we expect to complete by the end of 2010.

For the operating portfolio, we continue to expect our same-store growth before lease termination fees and without the effect of foreign currency exchange to be down 3% to 4.5%, and average occupancy to be 90.5% to 91.5%, consistent with our prior guidance.

However, we are trending at the low end of these ranges.

Private capital fee income is expected to be $0.25 to $0.27 per share.

We are now forecasting net G&A to be $0.82 to $0.83 per share for 2009.

I am pleased with our financial condition, our balance sheet is strong, we have ample liquidity and significantly improved our cost structure.

As I mentioned earlier, we have fortified our balance sheet and can address all of our financial commitments into 2013.

This financial strength positions us to take advantage of opportunities that we expect to arise in the coming years.

As we work through a very difficult operating environment, we are taking a long-term view to ensure that we continue to maximize the value of our real estate for both our public shareholders and private investors alike.

The good news is that we believe that rents are beginning to find a bottom and the worst days in the rental market should soon be behind us.

Given the considerable progress on our top priorities, we believe that we are well positioned to navigate through this challenging environment and we look forward to opportunities as they present themselves.

With that, I'll turn the call back to Hamid.

Thanks, Tom.

Before making my closing remarks, I'd like to give you an update on an important disposition that just closed within the last half hour.

We completed the sale of a 20 acre parcel at Los Angeles International Airport to Los Angeles World Airports (LAWA) for a sales price of approximately $125 million dollars.

Park One has been the only remaining parcel of contiguous real estate not yet owned by LAWA.

Given its strategic location, it was a great fit for LAWA and a highly profitable investment for AMB.

We've been working on this deal for over a year and its successful conclusion is a testament to our in-fill investment strategy and our patient and deliberate approach to maximizing value.

We'll be putting out a press release on this shortly.

Let me now make some closing remarks to summarize the key take aways from our call.

First, we've taken decisive actions to enhance our financial flexibility and to control costs.

These steps position us for future opportunities when the timing is appropriate.

While we believe the global economy is nearing bottom, we expect to contend with the most challenging operating environment on record for a few more quarters.

We expect to outperform the national average occupancy, given the location and quality of our assets and the diligence of our experienced team.

As always, relationships and credibility are paramount to our long-term success.

We benefit from active dialogue and long-standing relationships with our customers, lenders and brokers and are fortunate to have done so throughout the cycle.

Second, we are also confident in our focused investment strategy and believe that with the recovery of the global economy, our markets will be among the first to emerge from this downturn.

With higher yield requirements, the drop in market rents and the lack of new construction, we expect materially higher rents in the next few years beyond this crisis.

And therefore, we don't have to, nor will we encumber our portfolio with today's rents for long periods of time.

We believe the right approach is to be patient and deliberate in our leasing strategies.

We have the liquidity and the balance sheet to meet the market on terms that make sense for the long-term value creation.

And as we look forward, we're in active dialogue with our investors around the world and expect to attract new capital to take advantage of emerging investment opportunities.

Any asset sales beyond our current deleveraging objectives will be matched with new investment opportunities that will upgrade our portfolio in terms of returns and/or quality on a leverage neutral or leverage reducing basis.

We're ahead of plan in terms of our immediate priorities, which will enable us to consider growth opportunities when the timing and circumstances are right.

We believe that this is a sensible road map for long term value creation for our shareholders and investors alike.

The last year has been a difficult period for most businesses and ours is no exception but I don't ever recall a time where I've been more excited about our prospects and more confident in our team.

With that, let me stop there and turn it over to Casey.

(Operator Instructions) Your first question comes from the line of Jamie Feldman with Bank of America.

Thank you very much.

Hamid, it sounds like your strategy is to maybe forego occupancy in the near term and get better rents.

Can you just give a few examples of the deals you've passed on and how you guys are thinking about it?

And then, also, in terms of which markets, is it the inland US markets, is it the port markets or the international markets where things are really playing out that way?

Jamie, let me take the first part of that and then, I'll turn it over to Gene for the specific examples that you asked for.

Our strategy is not to drive occupancy down.

I can assure you of that.

We're going for occupancy but really, what we're looking for is long-term value.

And there is a -- we are as competitive as anyone and plan to be that way, if it's in the first three years or four years of the lease.

But we're not going to sign a 10-year lease that will depress the value of the property for a long time.

We just think that that's not sensible.

Because literally, if you do the math between today's cap rates, today's replacement costs, even lower replacement costs, even if you put very little in for land, you'll see that rents are -- got to be 30%, 40% higher than where they are today in terms of net effective rents before the next building gets built.

And as you also know, industrial real estate does not require a buoyant economy to have reasonably sensible absorption, with a 2%, 2.5% growth economy, we can have decent absorption.

So we may debate whether it takes two years or three years or even four years for markets to get to that level of equilibrium.

And I happen to think that, because of the surge in inventory build up that I talked about in my prepared remarks, it's going to be at the sooner end of that not the later end but we can debate the timing.

The question is when it happens, those rents are going to be 30% or 40% higher and entitlements are not getting any easier.

So I think encumbering the property beyond that period is not a sensible strategy if you don't have to.

If you have to, you've got to do what you have to.

Gene.

And, Jamie, it's Gene.

I'll just add to kind of where is this happening and try to give you some examples for color.

Basically, you have circumstances in the unconstrained markets where there's been a lot of development, where there's a fairly broad competitive set.

So examples of that would be the unconstrained submarkets of Chicago, Atlanta, Dallas, the Inland Empire outside of Los Angeles.

This is also true in several of the submarkets in Mexico.

Chicago also falls in that same category.

In terms of examples, I'm not going to give you sort of specific tenants examples but I'll give you some color on deals.

As Hamid mentioned, if a tenant is looking to lock in today's economics for more than five years, unless there's very unusual circumstances, we're not really going to be interested in doing that.

We're very competitive in the three to four-year time frame but we just don't want to lock rents in that long.

We've seen 10-year lease transactions done in a couple of different markets in the US at rents that do escalate a bit over the term but at the end of these leases, frankly five years from now will be way, way below replacement rents.

We're not willing to do that.

The other thing we're seeing is sort of nonrent terms, such as leasing a 200,000-foot building to 150,000-foot tenant and effectively, encumbering the balance of the building.

So, those are the things we're staying away from, too.

But the main point is not to lock in today's economics over the long term.

Okay.

Thank you.

And then just one more.

I think you had said you think you'll have the development pipeline stabilized by year end 2010.

Can you kind of give us some sign posts to watch?

Where do you think you'll have the most progress in the near term and how are you getting to that number?

Well, basically, if you look at that, it's about 9 million square feet of leasing, that's about 1.5 million square feet per quarter.

That's substantially below where we've been historically, of course.

And frankly, Jamie, that's ahead of where we are right now.

So, to repeat what Hamid said, we're not happy about the pace of development of leasing.

We think it will pick up.

We have some transactions in the works right now outside of the US that look very good.

And we have some big transactions that should move the needle within the US but I wouldn't call out any specific geographic region that we think we'll have progress any sooner than another.

One other thing I'd add, which is implicit in your question, is that we really don't distinguish between leasing of the operating portfolio and the development portfolio.

As I've said many times, we plan to hold our development assets in the long term and they -- we lease them the same way we're leasing the operating portfolio.

Now, those two kind of different leasing may have different accounting implications or stat reporting implications or all kinds of other implications.

But from the way we're running our business, we don't really differentiate between the two.

And that's an important point to keep in mind.

Okay.

Thank you.

Your next question comes from the line of Sloan Bohlen with Goldman Sachs.

Hi there, good afternoon.

Kind of along the same lines as Jamie's question.

As you look at the pace of development and you kind of think about how much gets contributed to the funds versus how much stays on the balance sheet, has there been any thought to that, as it's getting a little bit tougher to get all the way to fully stabilized?

Well, Sloan, I'll take that question.

To repeat Hamid's comment, we do plan on keeping the bulk of these assets for the long term.

We will opportunistically look for sales where we think it makes sense when we look at our entire portfolio.

We are in great position, in my view, from a liquidity standpoint in managing our maturities.

So again, when you just look at what's under contract in LOI and project out through 2012, we're really there from a capacity standpoint.

So again, it really gets back to being opportunistic and making sure our contros are at the right price if we choose to move them.

Your next question comes from the line of Michael Bilerman with Citi.

Good day.

I just want to go back to the asset sales and sort of the disposition plans.

Clearly, the Park One sale, $125 million is a big step.

And if I remember correctly, you bought that at like $75 million back in '02, I think, just under a 9% yield.

And so I don't know if there's a gain sort of that gets triggered in terms of distribution and how you're managing that.

But more broadly, how much more -- Tom, I think you talked about what was under contract, what was under LOI and what was marketed but you didn't sort of give ranges to what is still sort of left in the pipeline.

And so, maybe you could just walk through some of that and where you stand?

Okay.

Michael, let me take the first part of that since Tom wasn't there in 2002.

Your memory is actually remarkably good.

It was in 2002 and we bought it for, I think in the low 70's.

The gain is -- Tom?

It will be north of $45 million.

Yes.

So it's a pretty substantial gain.

But I think, as important as that transaction is, obviously, it is just a part of our strategy.

We're going to have other transactions, maybe not in the same magnitude but with the same idea in airports, when they're strategic to the airport or to another tenant or something.

You're going to see additional strategic infill dispositions on our part that may be more strategic to somebody else than our business at attractive pricing.

But let's step back from that and talk about overall disposition strategy.

I was pretty clear, I think, in the last couple of calls that we were going to look at more strategies and more dispositions that we plan to execute on.

So we were going to work on like 200% of what we needed to do for delevering and we we're just going to see how they turn out.

And they've turned out very well.

So, we're not going to be as aggressive in our disposition program than we have been.

We think we are way ahead of the plan and in very good shape, as Tom explained the details, with respect to our maturities.

So, the rest of them are going to be opportunistic.

We've got to get premium pricing or they've got to be a source of funding for a more strategic or better yielding investment.

But we're pretty much done with our delevering dispositions once this batch is complete.

Well, Michael, just to put a little color on that.

When you look at the $460 plus million we sold in the first half and about $280 million under contract or LOI or for contro, that's not quite $750 million.

And then, when you add that to what we raised with our equity raise, that approaches $1.3 billion in proceeds, which almost all went to the paydown of debt and to the completing the funding of our development pipeline.

So, we will look to do more if it makes sense but it will be a game time decision.

Your next question comes from the line of Ross Nussbaum with UBS.

Hi, good afternoon.

I'm here with Rob [Salisbury].

Hamid and Tom, I think -- given your macro out outlook, can you talk a little bit more specifically about quantifying where you would expect market rent to go over the next year on a percentage basis?

And then, maybe help us translate that into what it means for your releasing spreads?

It looks like for the rest of the year your leases are rolling at just under $6 a foot and next year at just under $7 a foot.

Let me take a stab at it.

We haven't rehearsed this, so it would be interesting to hear what Gene thinks.

I think the balance of the year, the trend is going to be stabilization of rents but with an arrow pointing down.

So I think we're still going down but I think we're going down in an imperceptibly low rate.

And somewhere around the end of this year, we're going to hit bottom, maybe a little bit sooner.

I think it will be really at least a year before we get any meaningful rent growth.

And in the beginning, it's going to be relatively moderate.

But I think kind of looking out three years, I think there's a big spike out there in rents in supply constrained markets where we operate and I think that spike can be 30% or 40%.

Exactly how it comes about, I can't really predict that.

But my time frame is beyond that, so I'm not too sensitive to exactly when it happens in that three or four-year window.

Gene.

The only -- maybe to add some color to it or some numbers to it.

We think rents of -- they've fallen -- there's a huge band.

Some markets are less than 10% peak to trough.

Some of the unconstrained markets, frankly, I referred to earlier, where we don't have a lot of our portfolio, they're down 40%.

But the right band for our portfolio is probably 10% to 20% and I think your -- there's maybe five left to go.

We really do see tenants -- their body language is such that maybe there's just not -- maybe the deals aren't going to get that much better.

And then, if you look ahead at our rent spreads, based on today's number, globally we're down 4.5% on a comparative basis for the rest of '09 and we're negative 6.3% in 2010 for those expiring leases.

So that doesn't certainly -- that's today's rents.

As I said, I don't think, from here, we have a lot further to go.

We're probably not going to see rent growth during that time frame but we certainly are going to see it, I think, maybe end of '10 going forward and there's a spike out there sometime.

I think the bottom line, we're maybe a quarter apart.

Your next question comes from the line of Vincent Chao with Deutsche Bank.

Hi, guys.

I know it's a little bit early but just wanted to get your thoughts on the credit line and how you're thinking about that when that comes due after the extension, 2011?

Yes, right now, given the runway we have, of two of the lines in 2011 and one in 2012, it doesn't make sense for us to do anything at this point.

Particularly, when you look at what's in the market today, it's a three-year term, we would gain very little by going out today, as well as you look at the very favorable pricing we have on our lines, which is LIBOR plus 42 on two of the lines and LIBOR plus 60 on the third.

And in addition, the banks are pretty busy right now dealing with issues and problems.

So it would not be the right time for that reason to go as well.

So we're being patient.

We have a lot of runway and we'll do it as we get further into 2010.

By the way, the -- while we're on the subject of line, this is not your question but I think it goes to earnings and forecasts and all of that kind of stuff.

Literally, with the line of credit at below 1% annual costs, we could do a lot of things in terms of maybe delaying dispositions, holding onto that income for longer, et cetera.

So our earnings could move around very significantly, $0.20 or whatever the number is, based on just some timing decisions.

We don't play those games.

Let me be very clear about that.

We could have, for example, delayed the transaction that happened today but it didn't make sense for us and for the buyer to do that.

So, we're not playing the line arbitrage game, which could be very influential on the direction and magnitude of earnings.

We're just doing the right thing in our eyes.

The next question comes from the line of Steve Sakwa with ISI Group.

Good afternoon.

I was wondering if you guys could talk about the development yields that you've got outlined on page 14 of the supplemental.

How have those changed and what is the risk to the extent that rents come down further?

How much of the rent decline is baked into that say 7.5% yield on the '09 expectations and the 7% yield for 2010?

Steve, this is Tom.

I'll take the first shot and then, I'll let Gene add some color.

When you look at the rent yields quarter over quarter, you don't see much of a decline, so you would initially say you're not reflecting those rent yields in there.

But what's happening is this quarter, you're seeing some FX cloak the drop in the yield, particularly being driven by Japan.

Those assets were constructed when the dollar was stronger against the yen and now, we're seeing the weakening dollar come back through the rents.

So that is largely masking the decline that we're seeing elsewhere.

And I'll let Gene give some color on that.

Right.

If you look at the US developments without the FX effect, those yields have fallen over 10% and it's directly related to the rents.

So, Steve, we think we've captured the rent decline in our yield.

Okay.

If I could just ask maybe a second question.

Hamid, you referenced sort of opportunistic opportunities out there in talking to partners.

Just kind of what's on the horizon, what's on the landscape?

Are there opportunities that you're currently exploring or is this sort of on the come?

We're not looking at a lot of things in the US -- well, let me restate that.

We're looking at a lot of things in the US but we're not seeing the kind of distress that we read about in the newspapers.

There have been a couple of notable portfolio transactions that have not been a good strategic fit for our business.

And frankly, the pricing has been in the -- well, ours has been 8.1% and from what I'm hearing from other people, it's been in the 8's and the low 9's.

And the math on our capital, our stock is pretty simple.

Basically, the Company is trading at close to a 10% cap.

So we would be destroying value to go ahead and use our capital to invest in those kinds of opportunities.

We are spending a fair amount of time elsewhere.

We're looking in the UK.

We're looking in other places.

And I would say we are some time away from really exciting opportunities.

But we're going to stay disciplined and patient and very mindful of our cost of capital in the public markets.

And try to do something that makes sense in that context, in terms of actually achieving a real spread.

Your next question comes from the line of [Ian Peterson] with Macquarie.

Thank you.

I was hoping you could give us a little more color on your Japan portfolio.

I noticed that the year to date same-store NOI number was 7.8% versus 13.1% last quarter.

So, just doing some simple math, that would imply that you were in the low single digit range in the second quarter.

Just hoping you can give a little color on what that drop is?

Yes, the drop in that is really almost all FX related.

There is a small -- there's a drop probably of around 4% to 5% when you back out the FX impact and that's driven by an occupancy decline.

Your next question comes from the line of Paul Morgan with Morgan Stanley.

Morning.

You mentioned the 10-year deals that you see being done in the market that you're not interested in participating in, given your view on where rents will be in five years.

Do you have a view as to what the people who are doing those deals, is it that they're more bearish or is it the ones you've seen driven by leverage considerations and needing to get a deal done?

Do you -- is there any consistency?

Yes.

The only thing that I've learned in this cycle and other cycles is that different people are in different places with their own unique challenges and their unique opportunities.

And we should just really speak for ourselves and you can ask the other people maybe -- probably both private and public, you have access to them.

I think they should really speak on their own.

So let me just not comment on those specifics.

Your next question comes from the line of David Fick with Stifel Nicolaus.

Good afternoon.

Congratulations on the sale.

Can you talk about the tax ramifications of that with respect to dividend?

And your dividend policy overall, I think, most models out there would have you basically paying out 100% of cash flow at this point?

So could you update us on your Board's thoughts there?

Sure, David.

I'll take the first shot at that.

On the dividend requirement, as you pointed out, we will have to consider the distribution of gains as part of our dividend of gains on those assets.

When you look at 2009 and you look at the FFO pay out, with gains, we'll probably be just under 60% and I think AFFO payout in '09 will be under 80%.

And obviously, some of that gain will have to carry over.

You can carry over some of that gain as part of your 2010 dividend.

When we set our dividend policy, we're really setting it to what we believe the long-term earning potential of the Company is.

And you need to think about all the different earnings drivers that sustain that dividend, whether it's getting our occupancy portfolio back up and other things.

David, let me build on what just Tom said because I think it's probably the most important and perhaps the least well understood aspect of our Company.

We set our dividends, as Tom mentioned, based on long term earning potential of the Company.

As you know, we have a number of underutilized assets and platforms around the plays, which we are working hard to more fully utilize.

So let me walk you through a couple of components of that.

The operating portfolio obviously at the low 90s has -- historically we've operated at 95% occupancy.

At some point, we'll be there given the quality of the portfolio.

That's about $20 million run rate a year of additional earnings, with no consideration for rent recovery or anything like that.

That's just at today's rents.

If you look at the development pipeline, which really we break down into development pipeline and available for sale, that's about $70 million of net change in FFO, net of what's being capitalized in terms of interest in there.

So that's an additional $70 million.

And monetization of our land bank over time, even if we do it very modestly and very slow pace, that's about $20 million of earnings a year.

And finally, our platforms that are -- we made a conscious decision to carry development in our staffing level because we do see build-to-suit opportunities and other ways of deploying capital.

And the idea of firing everyone and hiring back that business is not just something that we want to do.

So we've elected to carry that capacity around in this cycle.

That's about at least another $20 million of platform, if you will, that we're not fully utilizing.

So if you kind of add up all that stuff, with -- based on what we already own, without having to invest any more capital or anything, there's an opportunity to earn about another $130 million, round numbers, from where we are just by more fully utilizing the assets we already have.

Tom talked about the gains this year.

The total gains that we will have experienced, including Park One, would be on the order of $80 million.

So that $130 million, we can debate whether we're going to get there in a year or whether we're going to get there in two years but I think we're going to get there.

And that $130 million is way in excess of the $80 million in gains that we have today.

So the way I sort of simplistically think in my head is that if we're paying our dividend out with a 60% coverage factor or at 60% of our FFO with only $80 million of gains, obviously that would be even a lower percentage with $130 million of recurring earnings.

So without gains in the future, just by leasing up our existing portfolio and development pipeline, I think we can find ourselves in a position that; A, we can delever further.

Important point, delever further.

And second, continue to pay our dividend with a pretty safe cushion on top of it.

So, that's kind of the long-term thinking of the Company.

Your next question comes from the line of Michael Mueller with JPMorgan.

Yes, hi.

My questions have been answered.

Actually, can you comment on -- I know there was an intention for China fund.

Just any update on that?

Yes, we're working on it.

And as I mentioned to you, China is the one place in the world that actually demand has come back pretty quickly and there's a fair amount of interest and we'll continue to work hard on it.

It's tough to get a lot done in the summer months because of various vacation schedules and the like but we're working hard on it and are optimistic about it.

Your next question comes from the line of Cedrik Lachance with Green Street Advisers.

Thanks.

Looking at the CapEx schedule, it seems that it's dropped substantially, both in building improvements and TI's and leasing commissions.

Is there a deliberate policy here to be careful with capital expenditures or is there just a much lower requirement at this point to acquire tenants and just maintain your buildings?

Cedrick, this is Gene.

Let me take that.

There's a couple of things that drive that.

One, there absolutely is an effort to minimize capital across the portfolio, whether it's building improvements or tenant improvements.

We are really careful with tenant improvements right now.

The other thing, frankly, that drives that is our mix of renewals to new leases, I think, has shifted in favor of renewals during the quarter.

And that tends to reduce the number as well.

Okay.

And maybe just a second question, if I can.

When - Hamid, you talk about the potential spike in rent.

Given that market occupancy could be substantially lower in a couple of years from now and given that maybe some of that demand could come from build-to-suit, is there a chance that actually market rents for older product remains somewhat depressed and that the rents are only higher for built-to-suit possibilities?

Well, by definition, rents -- the second part of your premise, by definition, has to be true because if a build-to-suit tenant wanted to go into a spec building today and they could use a spec building, they certainly could buy or steal it at a much lower cost than the marginal cost -- or marginal rent that would give rise to build-to-suit.

So, absolutely agree with the second part of your question.

As to the first part, my crystal ball I've shared with you is that, I think there's going to be a pretty substantial spike three or four years out.

And we can debate the time but I'm not that worried about it taking place.

Now, there -- you could take a view that industrial demand will never come back.

And in the early '90's, I remember, there were certainly forecasts that we would never build another office building in this country.

I mean, literally.

I remember reading forecasts like that in the early '90's and in '95 we were building office buildings, '96 we were building office buildings.

So it's tough to predict these things in the long run.

Certainly, in the international front, there's very little product that meets the logistic needs of these growing countries.

And even in the US, their rate of obsolescence is pretty significant.

As you know, it's 1%, 1.5% per year, either conversion to other properties or just obsolete because of location and design.

So I think within that three or four-year time frame that I talked about, you can get back up into the sort of 8% national vacancy number and that implies a vacancy in our portfolio that would be sort of 5% or lower.

And certainly, at that stage you can drive rents up.

But reasonable people can have reasonable differences about that recovery time table.

Your next question comes from the line of Michael Bilerman with Citi.

I just had a couple of follow-ups.

Hamid - obviously, when you walk through a lot of the undervalued platform sort of cash flows, I think at the same time, you have to recognize your current $3.5 billion of debt is costing you 4.5%.

And that's probably not, if you look at the next five years, a good enough run rate from an interest cost perspective.

And so, some of that upside that you're talking about is clearly going to be eaten away.

So I just sort of put that out there.

And just to follow up on the $280 million of the stuff that's under contract in LOI, that includes the $125 million Park One sale or it excludes it?

It does include, the Park One is in there.

Yes.

The Park One is in that.

Let me -- you make a very fair point.

There is no question that interest rates will also move that number around.

And I know for sure that our line of credit won't be at under 1% costs.

So, we can debate the other interest rates.

So, you make a very fair point.

But I also think the rental growth that we just talked about, the rental spike is not anywhere in these numbers.

So, I kind of look at those two things as washing out with each other.

And if you listen to our Fed Chairman, he's pretty adamant about keeping rates pretty low for a long time or at least that's what I heard last week.

And spreads, if anything, have been coming in, as you know, in the last four or five, six months.

So I acknowledge the point.

I think it's a valid point.

My crystal ball on the interest rates is certainly foggier than yours but there's another mitigating factor on the other side, which is important.

Your next question comes from the line of Paul Morgan with Morgan Stanley.

Hi.

Could you just talk about any of the tenant industry segments maybe where you are seeing some traffic on leasing and maybe others where it's still very quiet?

Paul, it's Gene.

A couple of segments are more active right now.

Food and beverage has actually been fairly constant through the down cycle for reasons that I think are fairly obvious.

3PL's are pretty active right now because there's a lot of things going on.

There's some consolidation in that sector.

And there's a lot of supply chain reconfiguration thinking going on.

Now, this is a trend that we've seen kind of unfold over, frankly, over the last 10 years but more recently, as companies look to save money and bring costs out of their system, there seems to be a resurgence in that.

But the strong industry segments really are food and beverage, in the US at least.

Okay.

I think we are at the last question.

I want to thank you again for your interest in AMB and look forward to talking to you next quarter.

Thank you.

This concludes today's AMB Property Corporation second quarter earnings conference call.

Thank you for your participation.

You may now disconnect.