Prologis Inc (PLD) 2009 Q3 法說會逐字稿

Good morning.

I will be your conference facilitator today.

At this time, I would like to welcome everyone to the ProLogis third quarter 2009 financial results conference call.

Today's call is being recorded.

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

(Operator Instructions).

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

Melissa Marsden, Managing Director of Investor Relations and Corporate Communications to ProLogis.

Please go ahead, ma'am.

Thank you, Whitney.

Good morning, everyone.

Welcome to our third quarter 2009 conference call.

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

This morning, we'll hear from Walter Rakowich, CEO, to comment on progress relative to current initiatives and the overall environment and then Bill Sullivan, CFO, will cover results, guidance and recent finance activity.

Additionally, we're joined today by Ted Antenucci, President and Chief Investment Officer, Chuck Sullivan, Head of Global Operations and Gary Anderson, Head of Global Investment Management.

Before we begin prepared remarks, I would like to 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 industry in which ProLogis operates as well as management's beliefs and expectations.

Forward-looking statements are not guaranteed of performance and actual operating result may be effective by a variety of factors.

For a list of the factors, please refer to the forward-looking statement notice in our SEC filings.

I would also like to add that our third quarter results press release and supplemental do contain financial measures such as FFO and EBITDA that are non-GAAP measures and in accordance with Reg G, we have provided a reconciliation to the measures and as we we have done in the past, to go of a broader range of Investors and Analysts an opportunity to ask their questions, we will ask ask to you limit your questions to one at a time.

Walt, would you please begin?

Sure, thanks, Melissa, good morning, everyone.

Today, I'm going to cover some of the trends and opportunities that we're seeing in the industrial markets.

But first, I would like to take a moment to reflect on the actions that we have taken to stabilize the Company and position ourselves for future growth.

It's been about a year since we presented our plan to investors in New York.

What a difference a year makes.

Looking back over the last 12 months, we acted quickly and decisively through a series of sequential steps, each of which enhance the execution of the next.

In the aggregate, we completed more than $3.8 billion of asset sales and contributions.

We raised almost $1.5 billion of equity, tapped the unsecured and secured debt markets to refinance debt and bought back over $1.4 billion of bonds at a $320 million discount.

With these actions, we reduced direct debt by more than $3 billion substantially funded the remainder of our development portfolio.

At the same time, we refinanced and extended over $2.2 billion of fund-related debt, cut G&A by over 1/3 and brought our development portfolio leasing to nearly 62%.

And during the quarter, we completed two of the remaining major items on our list.

We successfully amended and extended our global line of credit and completed our bond holder concent solicitation.

The list goes on and I won't belabor the point any further.

Those of you who have been following us understand what was at stake and what it took to get done.

ProLogis Associates around the globe have worked diligently through arguably the most difficult conditions on record to improve our financial condition and maintain high levels of leasing, and I'm incredibly proud of what we, as a team have accomplished.

Now, it's time to move forward.

Looking ahead, we see a global market that is beginning to show signs of stability.

Perhaps growth and expansion will come sooner than we thought.

We'll see.

However, we will remain highly focused on three things -- Continued lease-up of our development portfolio and monetization of our land bank, further staggering and extending our debt maturities and addressing property fund issues as appropriate, and Bill will have more on the last two of these priorities shortly.

Let me address market conditions and development opportunities.

Globally, industrial demand is still soft, but we're seeing signs of increased customer activity.

We recently polled our top customers and not surprisingly, about 2/3 of those we spoke with expect a more positive outlook on their business by some time in 2010, although many felt it may not occur until later in the year.

Importantly, several of them mentioned supply chain reconfiguration, which sometimes means expansion and sometimes simply a search of greater efficiencies.

Either way, it's good for us because there is likely to be movement into higher-quality, well-located and in many cases, newly-built facilities and that is our business.

Market indicators are also looking better.

Occupancy declines are slowing globally and activity levels appear to be picking up.

In fact, ProLogis's core occupancies trended up by 20 basis points in Q3 as our overall leasing activity was up 13% from the second quarter.

Net absorption was barely negative throughout North America in Q3 and is positive in most continental European markets.

And we continue to see virtually no new development starts in planning.

We're also seeing signs of declining cap rates.

Yields have declined by 75 basis points in the UK, with anecdotal evidence of them declining another 50 basis points on deals not yet closed.

We have also seen a recent 50 to 100 basis point decline in cap rates on our asset dispositions in the US.

There is capital on the sidelines and we're seeing evidence of this in the number of solicited offers and unsolicited inquiries we're now receiving.

I never thought I would say this in 2009, but seems there are more buyers than sellers in the market right now.

The market rents are lower than a year ago and we expect it to remain the case for the foreseeable future.

The rents on lease is turning, we're down 14.7% in Q3, versus down 12.6% in the second quarter.

However, we believe this situation will reverse itself when market occupancies trend upward and, as we have mentioned in our second quarter call, rental rates today make no sense relative to replacement cost values and we'll certainly need to rise substantially to justify new developments spurred by any growth in the global economy.

Remember, most markets did not get substantially overbuilt-in this downturn and there is no new supply on the Horizon.

As a result, we're clearly seeing an increase in request for build-to-suit proposals.

Last quarter, we discussed our modified structure for future development that requires less of our capital and helps us generate returns from currently unproductive land.

On that call, we mentioned two transactions we had signed and during the quarter, we announced two more.

One is a 616,000 square foot facility in Osaka for a major Japanese distribution company and repeat customer and we're developing this facility within a joint venture on a five-acre parcel land we contributed.

We'll continue to own and manage the property, receiving asset and property management fees and our portion of rental income.

In addition, we have a repurchase option within three years of completion and have retained the flexibility to transfer the property into any new fund that we make for them in the future.

We also announced a 503,000-square-foot distribution facility for a leading UK retailer who currently occupies more than 300,000 square feet with us in the west midlands.

We'll construct the facility on the 32-acre parcel of our land, subject to planning consent and we have an agreement to sell the facility upon construction completion to a Canadian Life Insurance Company.

Through the land sales and the prelease developments that we have begun so far this year, we have monetized or will monetize on over $120 million of land year-to-date.

At the same time, we remain highly focused on reducing the unleased portion of our completed developments.

During the quarter, we increase the lease percentage in our static 12/31, 2008 develop portfolio to 61.7%, up substantially from 54.1% in the second quarter and 41.4% at the beginning of the year.

As a result, we have already reached the low-end of our 60 to 70% year-end goal for leasing in this portfolio.

This quarter, we announced we formed a global renewable energy group to procure new business and manage installations for renewable energy projects around the globe for us, our fund partners and our customers.

In addition, we announced the 4.8 megawatt solar project to be installed on eight rooftops at ProLogis Parks in Barcelona and Madrid.

Upon completion of this project, we'll have more than 11 megawatts of solar installations on roughly 2% of our roof space in the US, Japan, France, Germany and Spain.

This is an opportunity to leverage off our existing assets to do something good for the environment and create long-term value for our shareholders.

In summary, our work to stabilize the Company is substantially complete and we have shifted our focus to positioning for long-term growth.

And while we anticipate there will be pressure on rents for the foreseeable future, we're cautiously optimistic about market fundamentals overall and the opportunities we see to convert non-income producing assets into cash flow for our shareholders.

Now let me turn it over to Bill.

Thanks, Walt.

I would like to cover three topics today.

First, is Q3 results and guidance for the remainder of the year.

Second, recent initiatives and the third is progress on financing activities related to our property funds.

We generated FFO excluding significant non-cash items of $0.21 per share in Q3.

The significant non-cash items totaled $29.3 million or $0.7 per share.

And consisted of roughly $17 million to the upside from gains on early repayment of debt and $46 million to the downside from impairments of properties.

Additionally, we incurred $11.6 million or $0.03 per share in non-recurring charges associated with the write-down of certain corporate assets, as well as costs associated with the Company's G&A reduction program.

Unfortunately, the noise associated with gain on early extinguishment of debt, impairments and changing share counts will continue throughout the year making it challenging to present core results.

However, but let me give it a try.

On a year-to-date bases, we have generated $405 million of FFO excluding significant non-cash items.

The non-recurring charges incurred through September total $56 million resulting in core FFO for the first 9 months of approximately $461 million.

Based on our expected weighed average share count for 2009, of 409 million shares, this represents $1.14 per share relative to our earlier full-year 2009 guidance of $1.31 to $1.48 per share.

Which we now have narrowed to $1.39 to $1.43 per share.

In terms of future guidance, there are few items to note.

First is the successful execution of our at-the-market equity offering program, through which we generated $325 million of net proceeds during the third quarter at an average price of $11.15 per share.

In total, we issued 29.8 million shares, bringing our outstanding shares to approximately 473 million at September 30.

The issuance increased our expected full-year weighed average shares outstanding for 2009 to approximately 405 million from the previous guidance of 398 million shares.

The second point relative to guidance relates to our targeted property sales and contributions of 1.5 to $1.7 billion of which approximately $1.2 billion is completed, has been completed so far.

We continue on track to achieve this guidance based on planned fourth quarter contributions to pep two (Inaudible) as well as remaining asset sales.

Third, we will incur additional one-time charges in Q4 related to our restructuring activities.

Inclusive of fees and other expenses associated with our recent bond consent solicitation process.

Additionally, we'll be planning for 2010 and monitoring the markets to determine if the additional impairments are warranted or required.

Finally, relative to 2010, as noted in our press release, we're not yet ready to provide guidance.

We appear to be nearing an inflection point in many markets and, at this point, we want to monitor activity levels to be more confident in the direction things are heading before committing to specific targets.

We will provide detailed 2010 guidance in January.

Turning to recent initiatives, we have very nearly reached the culmination of the plan we laid out last November.

In August, we amended our global senior credit facility and obtained $2.25 billion of extended commitments through August 2012.

Also in August, we issued $350 million in unsecured bonds.

In September, we launched a bond consent solicitation which closed on October 1.

As a result of the effort, we obtained the consent necessary to amend the covenance under previous indentures to make them consistent with that of the August 2009 bond offering.

One of our stated objectives has been to simplify and improve our financial flexibility and transparency and this consent is a further step in that direction.

Additionally, throughout August and September, we raised the $325 million of equity, which I discussed briefly before.

Importantly during the period that we issued shares under this program, PLD stock price was up 40.4%, versus a range of 12.5% to 51.2% for our peer group.

We believe this was a prudent use of the program to bolster our balance sheet and provide liquidity that will allow us to take advantage of some of the opportunities that are emerging from our renewed bill-to-suit activities, as well as within our fund of businesses.

As I think about what has been accomplished in the last year, a fair number of our activities and transaction executions were interdependent and occurred in a targeted linear fashion.

We wouldn't have been as successful in raising equity if we hadn't first significantly reduced debt through the Asia sale.

And we would have had a harder time extending the line of credit if we had not demonstrated that we could raise equity and complete a large portion of the targeted asset sales and contributions.

All of which led to our credit spread's tightening and providing access to the unsecured debt market which then provided us the framework with which to pursue the bond consent solicitation.

So well the last 12 months have been a long and winding road, we're glad to report we have nearly come to the end of our stabilization endeavors; however, we still have work to do and we'll continue to focus on leveling out and extending debt maturity.

We reduced our overall balance sheet debt by over $3 billion since September of 2008, focusing principally on debt maturities in 2009, '10, and '11.

As for direct debt, due in 2012 and '13, we plan to continue to access the capital markets opportunistically and our target is to fully address these maturities by midyear 2011.

Finally, let me discuss our activities and progress relative to debt maturities inside our funds.

At this point, 2009 has been fully addressed and we're focused on the 2010 fund debt maturities of nearly $2.5 billion, down from $3.1 billion at June 30.

As I did last quarter, I will address the remaining 2010 maturities in three buckets.

In bucket number one, at September 30, we had approximately $576 million of debt in five separate US funds that mature in 2010.

We have already closed on a $56 million refinancing inside [P Cap].

We intend to call capital from the NAREIT investors in Q4 to fully pay off the $184 million outstanding under the revolver.

And we're in active discussions on each of the loans representing the remaining $336 million of 2010 maturities.

One or more of these may require a modest incremental investment from both us and our fund partners.

But at this point, we do not anticipate this to be a material amount.

In bucket number two, we have approximately 557 million Euros outstanding under our pep two bank line which, matures in May 2010.

We completed four separate financings during the quarter, totaling 288 million Euros and currently have four financing packages in various stages, totaling 323 million Euros, all of which we're hopeful of closing by year-end 2009.

We have an additional refinancing packages in earlier stages totaling nearly 156 million Euros, which more than likely will not close until Q1, 2010.

Given the financing activity, either closed or underway, we intend to pay off the bank line by the original maturity date through our refinancing program or through drawing down on the remaining unfunded equity commitments in pep two.

Finally, in bucket number three, we have approximately $750 million -- 750 million Euros of debt in Pepper.

It matures in 2010.

Down from approximately 1.05 billion at June 30.

The 750 million outstanding at September 30 comprises approximately 450 million Euros of CMBS debt that matures in May of 2010 and 300 million Euros under the Pepper Bank line that matures in December 2010.

We enter Q4 with 50 million Euros cash on hand.

We closed on a 48 million Euro financing in early October and we have six financing packages active in various stages totaling approximately 630 million Euros.

The majority, if not all of which, are currently targeted for 2009 closings.

Since the beginning of 2008, we have completed over 40 financing transactions within our funds, totaling over $6 billion, including 15 financing transactions this year, totaling more than $1.8 billion.

As I have said many times in the past, we have great treasury in asset services groups which do this for a living.

We will continue to finance and refinance well north of $1 billion on an annual basis due to the nature of the funds.

And at this point, we have proven our ability to do so both in good times and bad.

In closing, we have accomplished an incredible amount from a debt reduction, refinancing and liquidity standpoint in the last year.

We do not intend to slow down, particularly in light of the opportunities that we see ahead.

Now, let me turn it back to Walt to wrap up.

Thanks, Bill.

Before we open it up for questions, let me leave with you three final points.

First, we're immensely pleased we have completed the actions we have identified to stabilize the Company and, really, a little less than a year.

And we were highly motivated to act quickly, and I think that we did.

Second, we're not done.

As we shift our emphasis from the stabilization stage, we're keenly aware that market conditions are likely to remain challenging for the foreseeable future, and we will remain highly focused on maintaining strong occupancies in identifying opportunities to monetize our land.

And, third, we believe the actions we're taking today are positioning us to take advantage of opportunities tomorrow when the time's right.

We know that we have to be focused on earnings and cash flow growth and we certainly have and will be.

Make no mistake about it, our long-term focus will be growth in NAV and we will stay focused on this objective even if it means sacrificing short-term earnings to accomplish it.

Operator, we're prepared to open it up for questions.

(Operator Instructions).

Your first question comes from Steve Sakwa with ISI Group.

Good morning.

Bill, can you talk about your targeted leverage ratio.

You have obviously done a lot.

As you think about the possibility of continuing the issue equity, how should we think about where you want the balance sheet to be versus where it is today?

Steve, let me reiterate some of what we talked about in the past, which is at this point and we have been for awhile focused.

I think we want to get back to the Triple B plus rating.

Right now, we have the split rating at effectively Triple B flat and Triple B and from that, we want to bring down get debt to a reasonable level, both it is there today from a book basis.

But there is disconnect today between book and NAV and so I think that there are opportunities is any we're seeing it already in terms of stabilizing and not declining cap rates that will improve our NAV and bring it closer to book, so in the sort of the near-term being the next 18 months or so, I would love to so that debt ratio get down into the low to mid-50s versus what is perceived on a NAV basis today to be 60% plus and as importantly, we want to focus on monetizing the land and leasing up the pipeline because the other key measure is our interest coverage ratios, which we want to get well-north of two times and get back to that triple b plus rating.

And, Steve, this is Walt.

I will add more teeth to what Bill was saying.

I think our stated objective really has been to bring down the debt.

I think we want to do it over time and do it in a rationale way that the point in time and we kind of see doing it through a number of different things.

Obviously, we did do the CEO program this quarter, but, I think longer-term, really, we're focused on asset sales, we'll be focused on increasing the value of our land from an NAV perspective in terms of the way the narcotic thinks about it and their mind.

Will be focused on increased and value of our non-income producing assets.

Meaning primarily our development through leasing.

And, frankly, what we're beginning to so is the settle out, as bill said, in a more reasonable valuations to our assets .

With cap rate declines and I think you will see rental increases over time.

I do think in a rationale way, long-term, we will get there by blocking and tackling and doing the right things from an operational

Your next question comes from Sloan Bohlen with Goldman Sachs.

Good morning.

Has been a -- maybe a question for Ted on the leasing and development pipeline.

Still looks like you're well well-ahead for the 2010 stabilization.

Could you give us a little bit of color on the rates that you're seeing and whether you still kind of are in the targeted 7 to 8% yield range.

And then also, if you could touch term as well.

Thanks -- on lease term as well.

Thanks.

Thanks, Sloan.

I think we're in the 7 to 8% target range.

We're a little surprised and pleased with the amount of activity there is in the market in general.

It's certainly not robust, but it's better than we had expected.

We feel like we're getting more than our market share based on being aggressive and having good quality product and having good customer relations.

Lease terms we're trying to keep to five years or less.

That is not always the case, but we view this downturn in rent as something relatively short-term and we don't want to commit to longer-term leases right now.

I think I hit all the points.

And I would add, Sloan, we clearly are still leasing the development pipeline at less than what we pro forma a year ago, given what market rents are today.

Instead, if you can keep it somewhat short-term and our average lease term right now is in the neighborhood of 39 to 40 months, you know, the situation will reverse itself.

We're pretty confident that will happen and ultimately will be able to capture that upside over time.

And to add to, that we are, have stated and will continue to be aggressive in getting our occupancy levels up and it's interesting to note in the top 31 markets we have been tracking this quarter almost 31% in had an increase in occupancy w no new supply coming online giving us a level of comfort and of the occupancy and as we see, occupancy levels increase, we will certainly put, you know, push -- we're not at that point yet, but we do see that out there on the Horizon and didn't last quarter.

I think there has been a positive turn over the last three months.

Your next question comes from Ki Kim with Macquarie.

Thank you, good morning.

In regards to 15% roll downs this quarter, if you could break that down between lease renewals and new leases and if you have any expectations going forward?

This is Ted.

I will answer part of the question and Chuck can get the balance.

We looked at the roll down and there were 436 transactions that took price place and interestingly enough, if you take three of the transactions out of the equation, two of which were short-term deals, one was two months, one was six months, the negative rent growth went from 14.69 to 12.19, which was commensurate with last quarter.

So, it's interesting that one or two short-term deals generally impact a number.

The one other deal that was in there that was not short-term was in Dallas and relatively large building.

Very aggressive market in Dallas right now for a large phase and we met the market on that.

Overall, you know, we feel like there is a level of stabilization on the downward pressure on rents also, and really, with the three oust, there compares last quarter and this quarter pretty much on top of each other in terms of negative rent growth.

And keeping the second part of your question with regard to renewals and specifically if you look at renewals versus new transaction says, you're look at somewhat of half that in terms of negative rent roll down.

For example, if you're looking at a 12 or 13% negative rent growth on the new or aggregate portfolio, a percentage of renewals might be, say, 5 to 7 to 6% negative rent growth on renewal transactions.

Our next question comes from Michael Bilerman with Citigroup.

Good morning.

Bill, I wondered if you could spend time talking about your capital contributions into the funds last quarter.

You obviously had the NAV two in terms of the restructuring and putting in $85 million of cash.

You also you, and have been contributing some assets, been taking back equity interests and effectively having cash contributions and in some of your prepared commentary, you talked about the debt coming due and maybe having to put some new equity in and I'm just wondering if you step back, how much of that do you think occur going forward in terms of both your assets that you're can't sells the rest of the year in terms of the funds and how much cash are you taking back and/or are you just taking back equity and how much more capital do you think you going to need to inject into the funds when the debt comes due.

All right, Michael, let me try to touch on a couple of those sort of highlighted today.

If you think of what we talked about in my remarks, we're planning on calling capital in NAV and we have a 20% ownership in NAV.

If we call it 186 or $180 million of capital, that is about $36 million from our perspective and we're prepared to do.

That inside pep two, we talked about to the be tent that one or more financing transactions that we got underway were to fall out of bed or get delayed, we would be prepared to call capital for.

That I would put that sort ever in the outside, maybe 50 to 100 million Euros of capital in total and, again, we would probably contribute 20% of that and so, having said that, let me tell you, we have a lot of activity going in Europe and so, I view that as sort of the last resort from that perspective and I'm highlighting it and hopefully not expecting it.

Inside Pepper were, we talked about and Pepper had their conference call earlier today, we talked about a variety of initiatives we have going in Pepper, one of which will be to raise some equity, we hope, inside Pepper in a rights offering of sorts.

We're targeting a couple of different things we want have to sit down with the board of Pepper later next week and talk through all the various alternatives.

Can I see us committing, anywhere from -- we would be willing to underwrite the first tranch of an offering, which would be about 60 million Euros and we would intend to offer that on a very positive basis which will be an attract of instrument.

A piece would be 25% call it 15 million Euros.

We would glad to underwrite the whole thing.

It a pieces here and there and you're probably looking at something on the order of 100 million to $200 million all in and we have substantial liquidity inside the Company today and candidly, the opportunities and we view them as opportunities, to delever and increase NAV is part of the reason we raised the equity that we did.

Your next question comes from Jamie Feldman with BAS-ML.

Thank you very much.

I was hoping you could elaborate more -- your tenants in terms of facing businesses improving in 2010, if they were to do more supply-generated design, what would the timing be and in terms of what year and also, what markets.

You think when we come out of the cycle, you think we will see a different footprint for the supply chain globally?

I will start and probably turn it to Chuck on this, Jamie.

I think that I would say if you had to characterize the discussions we had in general, I would say they're cautiously optimistic.

That I say cautiously because, none of us know at this point in time if this is going to be a head fake, canned .

I think -- candidly.

I think it's moves in the right direction.

We feel good about occupancies and seen two quarters of stabilization or increase for us and the market occupancies, the declines have slowed down.

It may be a head fake.

I don't think so but maybe that is why our customers are looking at it as cautiously optimistic.

When we talked to a majority of them, they're saying, hey, expansion, 2010 might be late but 2010 and that means expand in their business that may or may not translate into translation and that is a precursor, we think.

That is good news.

The interesting thing was like you said, the amount of reconfigure discussion there was and that is interesting.

You see it in good times and bad times and an acceleration in bad times, typically, because people are looking to save costs.

Won't of the first things they look at is the logistics and how they can save on that mainly and that is good for us.

When you own, if you -- Class-A buildings, this reconfiguration means a new development or a movement into a building that is state-of-the-art, Class-A and can be more efficient and typically is well-located relative to what they have.

That is good for us.

What markets?

I don't know -- our focus has been on markets with very, very strong and large GDP and where we think GDP will grow.

That bodes well for the very large markets where there is a huge population and ultimately, people need to serve that population.

That said, let me turn it over to Chuck.

Chuck, you want some comments as

Yes, I will add color to that.

With regard to how they're actually approaching their supply chain, they're still looking at kind of a last mile, if you will, which is historically been the most traditional high-cost corridor in their supply chain.

With regard to how they're reconfiguring that, our customers are telling us that they want to get closer to their end customer.

Back to Walt's comment regarding large population centers and gdp, that doesn't necessarily change the overall supply chain but might reconfigure it within the large population centers.

Your next question comes from Mark Biffert with Oppenheimer.

Good morning, Walt.

I was wondering if you could expand upon your comments on the cap rate compression you're seeing.

Obviously some is probably related to the death threats coming in, I was wondering in terms to the contributions that you were making to the funds, how has that impacted the price on these and given the incremental spread that you put on top of that when you submit it, does that entail you might have gains next year once that marks the market in the fourth quarter?

Okay, that is a great question, Mark and let me kind of kick that off and I will ask Ted this all.

It's really interesting.

I would say that if we were to have this conference call 45 days ago and maybe even as much as 30 days ago, I am not sure that we would have had seen as much cap rate compression.

We certainly would have said some, but I would not have made the comment 50 to 100 basis points in the US.

This is moving very rapidly, okay, and there are situations that we're seeing literally as much as, 50 in one case, 100 confidentiality agreements that we literally had signed on a project that we put out to bid, okay.

And so when you have that many copies signed, I mean, you're going to get better pricing.

And so, I don't think we would have had that many copies signed six months.

Excuse me, two months ago or three months ago.

So it's moving rapidly and have, that said, the appraisals that on our contributions into our funds are looking.

They just are and -- are lacking and fortunate for us, they lagged while cap rates were compresses and unfortunate lawyer us they're lagging as cap rates are not compressing again.

The point is, I don't think we have seen that pricing yet manifest itself into our contributions.

Having said, that let me turn it over to Ted and maybe Ted can give more color.

Yes, Mark; I think -- may have used the same words, we're fascinated by what is going on with the movement in cap rates over a very short period, or what appears to be and we're seeing buyer on some of the projects we're trying to sell, public reads, private read activity, we're seeing pension fund activity.

It's kind of across the board.

Walt was referring to a project, I will be more specific, it's a retail project that was a (Inaudible) project we're trying to sell, we put on the market in September-October of last year, about a year ago.

And by the time it got to a point where we were able to get offers, we got none and in February, there was literally no one interested in buying it brand-new, fully-leased project in a great location.

We were told to get any go interest to get an 11 cap rate or greater and we chose not to pursue it.

We're now in a situation where we have 100 confidentiality agreements signed, we're getting offers.

We know of 13 offers we're getting at cap rates substantially below 11, actually below 9.

So, it's really moved very quickly.

In Europe, where we are contributing properties, we do feel that the look back that will occur at the end of 2010, will create some level of proceeds for us.

It's hard to quantify the discount that we have given the fund.

We feel it's been fair and appropriate but it looks like cap rates are coming back to a point where if we were to re-evaluate, what we would assume values would be at the end of the year, the end of 2010, there will be some local catch up.

Your next question comes from Ross Nussbaum with UBS.

Hi, good morning everyone.

Bill, can you talk about, A, what was the FX impact on third quarter earnings given the weak dollar and 2, with respect to the development pipeline, am I right in looking at there was 12.5 million of gains on developments included in FFO and did that relate to the 174 million of properties that were contributed into the funds and what do you expect going forward given all the cap rate commentary I have just heard.

If you're building to 7 to 8, is there a chance we're going to see continued gains on contributions in FFO?

Let me address the second part first.

The gains of the $12 million came in four or five or six different buckets.

And so, some of it was from land that we sold in Q3 and, again, maybe surprising to people but we're marketing close to properties and including land, and believe it or not, we do have land that has gains associated with it.

And so, you know, probably 25% of it was sort of land associated.

There was a small gain on the contribution but that was coming off of written down values on the European contribution and then there was a gain associated with our NA2 fund and the reconciliation of the investment we made earlier in the quarter as well.

It was a smattering of things in the gain category.

I think we'll have some modest gains from time to time in the foreseeable future.

Based upon contribution and/or land sale activities, but we may also see some impairments on that.

So, it's sort of too soon to tell on that aspect.

As it relates to the FX, I don't think the FX had a big impact, particularly, on the Q3 results largely because the FFO from Europe is to a large extent, shielded from the debts that we borrowed in Euros and the same is true in the Japanese Yen.

Now, given the world equation of this point, we may take a different tact on that in the future.

We see a softening US dollar and some of the discussion and debate that we have going on internally is preparing for what we believe may be a soft US dollar for the foreseeable future, in which case we may choose to undo some of the natural hedge that we have on the Euro and/or the Yen.

Your next question comes from Chris Kanten with Morgan Stanley.

Hi, good morning.

Talking about the property management, it picked up a bit, probably 14 million.

Wonder what is driving that, if you expect it to be sustainable and how it might trend going forward.

Imbedded in the $0.21 a share was a a descent-sized chunk in the fee associated with the conclusion of the asset management and property management agreement for the Japan funds.

And so -- that was also offset by substantial non-recurring charges as well and so, you know, I would look at sort of an, you know, the upside on the non-recurring charges and about I think 12 or 13 million of non-recurring quarterly property management asset management fees.

But that was the result of the cancellation, ultimate cancellation of the Japan fund.

Your next question comes from Brendan Maiorana with Wells Fargo.

Thank you, gearing.

Question on the land bank and development pipeline.

Walt and Bill, you both mentioned that land realizing increased value from your land is one of the keys to getting your leverage metrics in line with your longer-term targets.

Relative to the 7 to 8% yield that you're currently getting on your development pipeline, I have to assume if you're putting that land into motion, you're expecting to get a yield that is significantly above that level.

Can you give us a sense of where you would be comfortable putting land into motion from a return expectation and once the markets return to normal, how much do you think in development starts that you can do on a normalized basis annually?

That is a loaded question.

Let me throw out, Brendan, some anecdotal information that I don't want to you take and apply it to the entire $2.7 billion of land, but the interesting thing is we did announce four build a suits in the last quarter effectively.

Two were in Japan, two in Europe and we're working on others right now.

The interesting thing is that the land we put into those deals, generally, and I'll talk non-japan.

Let's talk about Europe.

Generally the yields on the full basis of land were somewhere in the 8.25 to 8.5% range and we were able to take the buildings and either contribution them into the, or should say have a precommitment at our cost with the European fund or in the case of the other building, we were actually selling it to a Canadian life insurance company and basically in our basis and included in our bases is a development fee.

Okay.

Now the two developments we're doing in Japan is also putting in our land at development costs, excuse me, at full value and we're getting a very, very high return on that expected capital in a joint vent our-type format, where there is roughly 50% river -- leverage and we're getting a 10-plus percent return on our equity, with our partners and fees.

Having said, that can we assume we can put the entire $2.7 billion into developments?

If we were to do yet all today, I would say some of that land is clearly going to be impaired and some of it is not.

It depends -- and I think a more reasonable expectation over time, unless we see value increases, would be that we would get a 4 to 5% return on that $2.7 billion of land.

Today 's value and values increasing and that is not going happen in one year but the course of call it two to three years or so and as it relates, the properties under, already developed -- developed and completed, you're right.

For the most part, we're getting, call it a 7% type yield, depending on the exact building Ted, you want to add to that?

Yes, Brendan, the 7 to 8% yields are using our land at book for the most part and the market is 7 to 8.

It would be outside of Japan and most likely in the 9 to 10 range and someone is compelled because they own the land.

We own some of the the land we're compelled to monetize it and would be more aggressive.

I think that today a new development deal is 9 to 10, not 7 to 8 in terms of the size of what we can do from a development standpoint, I think we feel, there are a lot of issues we're looking at and is amazing to me, how much development we can do from the market from our standpoint and we think it's similar between 500 million a 1 billion and it's a reasonable number for us to look at on a go-forward basis and that, I think, we would feel like would be the next 12 to 24-month timeframe and beyond that, who knows.

Right.

And I would add to.

That I think we did in the past, we focused a lost time and attention on reducing our G&A and believe from an infrastructure standpoint, we left ourselves with the infrastructure ability to have a bottom to a billion and a half of development starts on an annual basis.

Your next question comes from David Fick with Stifel Nicolaus.

Following up on that last question, you have commented a lot on the things firming, both from a cap rate and a space to NAV perspective.

PPR put on you a piece of a major market, they can see having spike on a large property, over a 0.5 million square feet to above 19% from below 8% a few years ago.

And I am wondering what your forward view is given the context of many years of supply and almost all the major US markets already on the ground.

To you really expect to see cap rates stay where they are or won't there be a lot of assets coming to the market due to distressed sellers with close to 20% vacancy out there, number one, and number two, don't you expect to see a commensurate pressure on rent from here given that we're still seeing increases in vacancy.

David, this is Ted here, given that we're still seeing increases in vacancy.

It's less than that.

I think we're looking over on market and you're looking at buildings over a certain size range.

The majority of which are devisable and I do.

Know they would necessarily focus on a certain subset.

I do think there are subsets of assets and I referenced one earlier.

Dallas right now, the buildings, a challenging market.

The amount of activity we have on our land is surprising to all of us.

We're in enough markets that there are pockets of opportunity.

And we're being approached by customers to help meet their demand in the markets, with those pockets of opportunity.

It's not robust but it's out there.

In terms of rents continuing to decline, you know, we're seeing a decline at this point, occupancies seem to be stabilizing and flat and rents have come down quite a bit.

I think there will be isolated situations where rent, where people get competitive on rent and there is no new supply coming on the market and I think that gives us a lot of comfort that there is a bottom to this, you know, rental decline and that we feel like we're getting close to that.

And, again, in terms of values and cap rates and distressed sellers, we're just not seeing the distressed sellers in industrial at this point in type.

There are a few properties that we're aware of that are vacant.

Non-income producing and challenging some markets that you can buy below reconstruction costs and substantially below.

There are very few and far between.

The majority of the income-producing assets that are on the market have a lot of activity on and there hasn't been a buyer in the market the last year and we're now hearing about with the stock market coming back up, people's allocations towards real estate.

They're under allocated to real estate.

We're seeing a substantial number of buyers and not a lot of sellers and it's surprising to us and we're holding our breath a little bit.

But right now, the inial balance is there are more buy -- the in-balance is there are more buyers than sellers with properties with income.

Lastly, what we see people doing in their underwriting is taking whatever the face rate rent is on the deal and assuming that there might be a dip in rents from now until five years from now when the lease matures.

Effectively, pro forma that when that lease matures, rates are going to be flat or up, so what you're seeing is if people are putting cap rates on in-place rent, even if they above current market, in anticipation by the time the lease rolls, that will be market or market will be greater than that.

Due to the fact that there is no new supply.

So, we're not seeing huge distress in leased assets.

David, I think you raised a really good question, too, and I would like to answer it, too, by saying this.

Right now we believe and we're tracking the bulk industrial markets.

I don't remember if PR breaks it out.

We think in the 30 markets we're in, the vacancy is roughly 10%.

Say it's 89.7% occupied, we think predictional vacancy is in the neighborhood of 92 to 93.

The high watermark over 25-year period of time, this market for all the 30 markets we think is somewhere in the neighborhood of 92.5, okay.

So, let's call it, for every percent that is 6 billion square feet, for every square feet you're talking about, 60 million square feet.

Okay.

There is no new supply and I don't think there will be much new supply next year.

Now, we think the third quarter in the bulk space only, the third quarter there was about negative 3 million square feet.

Not much.

In terms of absorption and that is reversing itself quickly.

In the height of the market, 2006 to 2007, the market was absorbing 150 million square feet.

i.e...

2.5 to 3% per year and there was also development of 2.5 to 3%.

Call it 2 to 3% per year to make up for that.

Literally, if you got back to a situation where you were, you absorbed 50 million or 60 million square feet, you could suck up that vacant space in a very, very quick period of time without much supply and you wouldn't have to get to, quote, unquote, a production number of 92.5.

You get to 91, 91.5, 93 and you see rent-- rents moving up at that point and that that is why I think this can reserve itself.

Be careful on the 500,000 up.

The fact of the matter is probably 80% to 90% of the buildings can be divided and they will.

Your next question.

One more question, operator.

Okay.

Your last question comes from Michael Mueller with JPMorgan.

Yes, hi, good morning.

Bill, I know you said you were going to talk about the drivers of 2010 on the next call, can you give us some sort of sense when we look at the dispositions, the contributions this year, ex-China and Japan, it was somewhere in the vicinity of a 1.5 billion.

At this point, seems like it should be low any more forward given what you have done see far in the equity side and the debt side and just any comments on that?

Well, again, I think, Michael, the -- we're in the planning stage on 2010.

We're looking at the spectrum of things that we want to accomplish in 2010.

And candidly we're not, we haven't finalized our thought process on how much we will contribute to the funds.

We'll still have a we go into 2010, a fair amount of up drawn capacity and pep two somewhere north of 600 million Euros, probably, as well as a couple hundred million in the Mexico fund, et cetera.

And we're going to be working on new funds and so, I think we will have a fair amount of capital to either pursue contributions or acquisitions inside the funds and in terms of asset sales, one of the things that we'll focus on and we have talked about in the past is we want a larger, wholly-owned portfolio in both Europe and Japan relative to what what has largely been a US portfolio to this point and so to the extent that we see acquisition opportunities or build-to-suit opportunities or other investment opportunities, you may find us selling some of the US assets and redeploying that capital into those opportunities.

Beyond that, I don't want to avoid the question, and I'm not trying to avoid the question, it's just that is all very fluid right now and we're going to take advantage of opportunities as we see them come to the forum.

Okay, thank you, everybody.

And we certainly look forward to seeing most of out call in one way, shape or form at NAREIT and we'll talk to you next quarter.

Thank you.

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