Prologis Inc (PLD) 2010 Q1 法說會逐字稿

Good morning.

I am Sara and I will be your conference facilitator today.

I would like to welcome everyone to the ProLogis Q1 2010 conference.

call.

Today's call is being recorded.

(Operator Instructions)

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

Melissa Marsden, Managing Director of Investors Relations at Crawford Communications with ProLogis.

Please go ahead, maam.

Thank you Sara.

Good morning, everyone.

Welcome to our first quarter 2010 conference call.

By now, you should all have received an e-mail with a link to our supplemental; and if not, this document is available on our web site at prologis.com under Investor Relations.

This morning we'll hear from Walt Radowich, Chief Executive Officer, to comment on the market environment.

And then Bill Sullivan, our Chief Finance Officer will cover results and guidance.

Additionally, we are joined today by Ted Antenucci President and Chief Investment Officer, and Chuck Sullivan, head of Global Operations.

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

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

Forward-looking statements are not guaranteed for performance, and actual results may be affect by a variety of factors.

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

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

In accordance with Reg G we have provided a reconciliation to the measures and as we have done in the past to give a broader range for analysts and investors an opportunity to ask their questions, we ask that you limit your questions to one at a time.

Thank you Melissa and good morning, everyone.

This morning, I'll try to keep my comments brief and talk about business fundamentals, and progress forward our key focused areas, with the objective of leaving more time for Q&A.

Bill will have more on our financial results, balance sheet and guidance for the remainder of 2010.

Overall, I'd say that Q1 feels a bit like Q4 last year.

We hear great things about the recovery, and we believe it will have a positive impact on our performance, but industrial tends to lag the overall economy, and we're not seeing it just yet.

Right now our business feels like the tale of two cities.

On the one hand, the operating environment is still soft, although it feels likes it has hit bottom.

Our operational results for the quarter bear this out.

Rental rates were down by about the same amount as in Q4, and the lease percentage in our total industrial operating portfolio was flat compared to Q4.

This reflects a slightly more than expected drop in leasing within our investment management and core direct own portfolios offset by a better than expected 500 basis point increase in the lease percentage of our completed developments.

Now, on the other hand, values has risen, buyers are plentiful, and there's rising activity and optimism in the market.

In addition, there's virtually no new supply; and our development business is picking up abroad very nicely.

Many of our customers are talking expansion for the second half of this year.

We'll see.

It certainly feels like brighter days are ahead.

And if history were to repeat itself, fundamentals should improve by the third or fourth quarter, as inventory levels rise in accordance with a growing global economy.

Overall, our FFO per share for the quarter was about a penny below our expectations.

As we've said in the past, annual FFO will be significantly back-end-weighed.

We believe we will end the year in line with our original FFO guidance after adjusting for delusion from our bond offering.

However, what's important is we continue to stay focused and execute on three basic things, all of which we're making good progress on.

First, converting our non-income producing assets into income-producing assets.

Second, creating value through accretive development, which helps us accomplish our first objective by monetizing land.

And third, continuing to strengthen our balance sheet.

Bill will have more on the third objective.

So let me cover progress on the first.

The most impactful thing we can do right now is lease space in our existing portfolio.

Nine months ago, leasing in our total industrial operating portfolio, which is basically everything not under development, was 87.7%.

That number was significantly weighed down by our completed developments.

At the end of the first quarter, total leasing in that same portfolio was 89 .2%.

No doubt, market conditions have been challenging, but we're pleased with the progress we've made.

In the future, we will reach a lease percentage in the low to mid 90% range.

That will generate over $175 million in additional annual FFO, or $0.35 per share.

That's real future cash flow.

In addition, we are growing our development business and in turn reducing our land bank.

Last year, that seemed like a daunting task.

This year, it certainly seems more doable.

Opportunities, particularly in international markets, are increasing.

These markets are starved for new product.

And while overall conditions are still soft, much of the vacancies, especially in Europe are in older, obsolete buildings.

We set a goal to start $700 million to $800 million of new development this year, primarily from build-a-suits.

Right now that goal looks very achievable.

In the first quarter, we assigned two build-a-suits, one in the UK and one in Hungary.

We also started a 1.5 million square foot development in Tokyo, which will not be complete until next year.

Already we have letters of intently for over a third of the building.

Total development starts for the first quarter were $252 million.

As important, given where cap rates are today, we expect to generate over $60 million of NAV accretion from fourth and first quarter starts, with land put into the developments at our original book basis.

In addition, we signed four feed development transactions for customers, totaling $81 million.

Two of the buildings were in Germany, one was in France; and one was in Sweden.

In one case, we sold land as a part of the overall transaction.

Importantly, that land was sold at a 3% profit to our original basis.

For the quarter, we sold a total of $447 million of land.

So when you combine land sales with land moved into development, we were able to monetize $138 million of land in the first quarter.

Now, that's progress.

The rest of the year is shaping up as well.

Since the end of the quarter, we've signed two new build-a-suits, totaling $125 million and have another 7 build-a-suits in negotiations.

Given the environment we've been in, it can be easy to overlook the long-term value creation potential of our development franchise.

We understand that.

But for us, it's one of our core competencies.

In combination with strong customer relationships, our development business has great upside potential right now, especially with improving market conditions.

Our goal is to unlock that value over time while monetizing our land bank and leasing our non-income producing assets.

When we succeeded this, earnings and NAV growth will follow.

Now let me turn it over to Bill.

Thanks Walt.

Similar to Walt, I'm going to try to keep my commentary relatively brief and just hit the key points.

I'm going to cover three aspects of the Company's financial position this morning.

First a summary of our Q1 results.

Second our guidance for the year, with some brief insight into the things the things we expect that will impact the next three quarters.

And lastly some comments on our balance sheet and fund debt initiatives.

We reported $0.01 per share in FFO for Q1 2010, negatively impacting our quarter results was approximately $53 million or $0.12 per share in charges associated with our bond and convert buy-backs in Q1 as well as a loss on settlement of a derivative in one of our funds.

After adding back these charges, we effectively generated $0.13 per share in FFO for the quarter, which was about $0.01 below our internal expectations.

Of the $0.13, $0.02 per share is gain-related, and $0.11 represents core FFO.

The core FFO was $0.01 below our internal expectation, principally due to the strength of the dollar versus the Euro and lower expected occupancies.

There were also a variety of expenses incurred in Q1 that will be non-recurring, including the onetime tax charge and increased rental expenses associated with the harsh winter.

Relative to full year FFO guidance, our original guidance for 2010 is a range of $0.74 to $0.78 per share.

We decided to expand the range of our guidance $0.70 to $0.78 per share to take into account the dilutive effects from the debt issuance in March.

The revised guidance still excludes the charge of $0.12 in the first quarter related to the buy-backs and other buybacks and other capital activity.

Relative to our core FFO, we are lowering estimates to a range of $0.55 to $0.60 per share from our original guidance of $0.64 to $0.68 per share representing a decrease of $0.085 cents per share at the midpoint of the core FFO ranges.

The principal contributing factors to the decrease are approximately $0.03 to $0.04 delusion associated with the debt offers, approximately $0.025 associated with lower capitalized costs, resulting from our expectation of lag in the timing of development cost out lays, mitigated somewhat by accretion from a delay in the timing of asset sales.

The proceeds of which will be ultimately be used to fund the development cost.

We expect about $0.03 delusion from our original forecast from the combination of a stronger than expected dollar, lower than expected occupancy experienced in Q1, higher rental expenses in Q1 and the onetime tax charge.

Finally, we will pick up a little more than $0.01 from our FFO, from our increased investment in (inaudible), net of increased borrowing.

Of the net decrease of $0.085 just outlined, we believe $0.04 to $0.05 is a more permanent nature, IE the debt offering delusion and potentially the FX while the remainder is either a one-time costs or merely the result of a lag of one or two quarters in timing.

Achievement of the targeted FFO will be dependent on seeing a recovery in occupancy in the second half of the year as well as implementation on our development activity.

From a gain perspective, we expect to generate an additional $0.05 to $0.07 in increased FFO from certain assets that have been targeted for sale or contribution due to increasing values, as well as gains from other opportunity that we are working on.

As we have communicated since February, we expect the core FFO to be back end loaded this year, which is driven principally by our expectation of recovering occupancies and an increased in capitalized cost associated with a ramp-up of development activity later this year.

We have never guided specifically to quarterly results.

However, given the disconnect between the sale side quarterly estimates and our internal estimates, let me give a little insight.

Q2 will likely see a pickup in core FFO from continued leasing and occupancy within the completed development portfolio and reduced tax expense.

However, we expect Q2 and Q3 to be our low points for capitalization of cost associated with our development activity, which will mitigate a portion of the increases.

We expect Qs 3 and 4 to show the beginning of recovery in occupancy in the funds and direct owned core portfolio, as well as continued occupancy pickup from the development portfolio, with capitalized costs increasing in Q4 associated with our development activity.

Additionally, as most of our asset sales are now targeted to close in late Q3 or Q4, core FFO in Q4 will likely be flat to Q3 and pick up again in 2011 upon completion in occupancy within our build to suit pipeline.

Finally, we expect little to no gain on dispositions to be realized in Q2 with our remaining targeted gains realized roughly equally in Q3 and Q4.

I hope this bit of insight helps.

However, I realize it's never enough.

Let me turn to our balance sheet debt and fund related debt briefly.

Our balance sheet debt increased in Q1 by a little over $100 million principally associated with our units in Pepper.

As a result of our debt offers and buy-back activity, we made great progress on smoothing out debt maturities with the focus on reducing 2012 and 2013.

We believe the maturities are at acceptable risk levels at this point, and, therefore, what we intend to be on or opportunistic if the situation presents itself in 2010, we will likely put further activity on these maturities on the back burner until 2011.

Finally, we do intend to continue our delevering efforts through a variety of activities.

Turning to the fund debt, at March 31st, we had $738 million in remaining 2010 maturities, of which $330 million has been refinanced so far in April.

In the vast majority of the remainder will be refinanced or paid off by midsummer, if not by June 30.

We see no issues associated with dealing with these maturities.

Let me conclude by making it clear that in 2010, we are most heavily focused on growing the NAV of the Company in near-term FFO generation may suffer a bit as a result.

However, we believe the moves we have made and others we are focused on for the rest of the year will make ProLogis sustainable profitable and growth-oriented in the future.

Thank you.

Let me turn it back over to Walt to wrap up.

Thanks, Bill.

Before I open it up for Q&A, let me just leave with you one final thought.

We understand what we have to do, and we continue to make progress in doing it.

It's dangerous to get too focused on where the market is today.

We know we have to address today's market, but are optimistic that it will improve.

Our mission in the meantime is to stay focused on our near-term objectives.

They are converting non-income producing assets to income producing assets, creating NAV through creative development which helps accomplishes the first as it relates to land and continuing to strengthen our balance sheet.

As I said before our successful execution of these three objectives will drive substantial value in the future.

We look forward on giving you an update on our progress next quarter.

Thank you.

Operator, we are ready to open up our line.

Our question-and-answer session will be conducted electronically.

(Operator Instructions) Your first question comes from Ralph Nesba of UBS.

Your line is now open.

Sorry.

Hi, good morning, everyone.

Good morning.

Guys, can you talk amount bit about the dividend with respect to some of the commentary you gave on the source of the earnings as we think forward?

Bill, I thought I heard you say, from a guidance perspective, there is an incremental positive of $0.05 to $0.07 a share now in the guidance from the drop in Cap rates that occurred over the last couple of months.

And I guess I'm just trying to think about that relative to what I think about is income generated off the core assets versus development gains and how that relates to sustainability of the dividends given the AFO and FFO you're suspected to generate.

Okay, Hey Ross, let me see if I can try to simplify that from my perspective.

I think we've communicated constantly over the last 12 or 15 months.

We have a large portion of non-income producing assets on our balance sheet in the way of our land bank and the unleased portion on in our development pipeline.

And we're working hard, and we've made fabulous associated with that.

And at the conclusion of those modernization and leasing efforts, our core FFO is going to well exceed what's necessary from the dividend.

The gains associated with various transaction activities, from a basic REIT level, are intended to be distributed to shareholders.

And so, generating the FFO through a combination of core and gains is just fine by us right now.

And so, as we look out there's nothing on our radar that would adjust adjust negatively given the activity that we have going.

And over the next 18 months or so, we believe that the core FFO, in and of itself, will more than amply cover the dividend.

Your next question comes from Jamie Feldman of Banc of America Merrill Lynch.

Your line is now open.

Thank you very much and good morning.

I was homing you guys could give a little more color on conviction on how we will see a back half on recovery.

Maybe talk a little bit more about the conversations you're having with tenants and with times of lead time.

If you're having discussions before you actually see leases an cash flow flowing through to the bottom line.

It may be a combination of us, Jamie, taking that.

I think we're reasonably positive based on discussions that we've had with customers.

We do survey our customers on a quarterly basis, and late last year they were telling us they felt they would be expanding by the second half of the year.

And interestingly enough, when we talked to them again, they're saying the same thing.

So, we feel convicted about it.

The other thing we see is, if you look at the fact that we are starting $250 millions of development.

Last year we started $330 million of development.

I mentioned it's almost like a tale of two cities.

On one hand, on the court portfolio, it's basically flat to down slightly.

On the other hand, you've got this lack of supply that's in the market, and you do have customers that are sort of snooping around and starting to sign build-a-suit transactions.

And I think that that clearly just by looking at the development and the fact and we signed another $125 million between the end of the quarter and sort of in the last three weeks, I think, is a pretty good indication that there's activity.

If you talk to brokerage firms and the one in particular, who we talked with prior to the conference call, they'll tell you that they are book overall of business is up somewhere in the neighborhood of 10% to 20%.

The interesting thing is is that's activity and not necessarily net absorption; but activity nine times out of ten does lead to net absorption.

So whoever you talked to in the market are feeling a lot better.

But the truth of the matter is that we tend to lag six months to maybe 9 month behind.

First, companies create sales, and then they increase inventories, generally speaking.

So we'll see, but we are feeling a lot better about what we are seeing up there, and I don't know if, Chuck, or Ted, you guys want to add to that.

Thanks, Walt.

Jamie, they're also not -- a year ago, they were talking about potentially contracting in a variety of facilities.

We're not having those conversations anymore.

Additionally, when we do the surveys, we ask them what capacity they are at in their supply chain.

A year ago, you would have heard that in the mid 80%s.

You are starting to hear that in the high 80%s to 90%.

And they don't ever want to go much above 93% to 94%, because it creates inefficiencies.

So you're starting to see that their activity level is being based upon that they anticipate which are the sales that Walt talked about.

The global economy improving, and activity levels have risen over the last year.

Your next question comes from Steve Saqua of ISI Group.

Your line is now open.

Okay.

Thanks.

I guess I just wanted to go back to the pace of leasing.

It looks like, in the lease and the direct-owned portfolio on page 1.5, things kind of tailed off pretty dramatically here in the first quarter.

Can you guys just help me think about what kind of pace of activity do you need to see to really start moving the needle here on the occupancy front?

I'll take the leasing in Q1 and the direct, for example.

We went and look at it historically, and Q1 for a variety of reasons, always seems to be a lower quarter.

And, actually, we're splitting out direct and core.

And as you took investment management back a few quarters in Q1, you'd find a similar trend exempting this quarter.

You speak to many commercials, and many have a retail component in their supply chain, and they are not highly focused on leasing warehouse space in the fourth quarter.

And that spilled over into Q1.

You see trending up of restocking both short and long-term for back to school and the holidays; but that trending upward usually is a Q2 through Q4 occurrence.

Steve, let me give you the surprise on one hand, and then I think the upside on the other hand is I'd say that while we were probably, we weren't surprised at the drop in investment management.

Because we were starting from a 93.5% number, and given market conditions, we did expect to come down, and I think we guided there.

What surprised us a little bit was the 30 basis point drop in the court.

Candidly what surprised us on the upside was the development went from 62 to 67.

And I would have said probably more like 3% to 4% but 5%, we'll take it.

You're not going to see the cash flow coming through from that development until another couple of quarters from that leasing, because you do a lease, but they don't start paying your rent for another three months after you do the TI's and the like.

So the upside are is where you look at the portfolio on page 1-5, it's now at 83.7%.

It was at 78.8%.

Obviously that's driven by the development.

Overall, the quarter stayed the same.

So, we think we've bottomed out from a occupancy perspective generally speaking.

Plus or minus, could we see it go up or down 30 basis points or so in any quarter, 40 basis points?

Sure.

We saw that in the first quarter, and it disappointed us.

That said, it's not completely out of line, and we believe we are bumping along the bottom.

We think we are making progress in the development.

And hopefully brighter days are ahead, and we are hearing good things in the market.

But we'll talk about it after it happens as oppose to after it happens.

Your next question comes from Sloan Bollen of Goldman Sachs.

Your line is now open.

Good morning.

Thank you.

Walt, just a question.

We heard a quote yesterday on a potential banner year for private capital raising.

Can you maybe comment on what you guys are seeing out there, and whether that changes your perspective on your guidance for asset dispositions or even potential new fund vehicles?

Yes, that's a great question, Sloan.

There's no question that there is a lot of private capital out there today, and it's, candidly it sort of surprised me.

I wouldn't have said six months ago it would have been as active as it is.

We've had some discussions with some partners of ours that we've done business with globally, and there's, as I say, there's no shortage of capital today, which is the good news.

We started the year, and it's still in our plan, thinking that we would be disposing of certain assets in the US out right; and then potentially putting together a fund and/or joint venture towards the end of this year.

That is still in our plan, and we continue to have very, very preliminary discussions with some of our partners about it.

I would tell you that I have zero concerns at this point in time that we would get that done, absolutely zero given what we see in the market.

It's really more a question of our timing, because our timing really needs needs to be lined up somewhat with our developments.

So we signed $250 million of starts this quarter.

We think we'll sign $700 million to $800 million this year; but, you know, you sign it, but don't start the development and actually start spending money substantially until, 5, 6 months after the leases are signed.

And so, we are trying to think about how do we somewhat coincide those sales or that joint venture with our actual development, developments in progress?

And that's why it's sort of pushed it back toward tend of this year in our mind.

But there is absolutely no shortage capital.

The other thing I would say is I believe this time around that capital sources will gravitate more an more to operators that have coinvestment; and when I say "operators," I'm talking about best in class operators.

And there isn't any question in my mind, and I don't think anybody on this phone that we are a best in class operator in the industrial business.

So we think that we've got a very attractive story relative to the capital.

And when it comes time to raise it, we don't think there will be an issue at all.

Your next question comes from Kee Bin Kim of McCory.

Your line is now open.

Thanks.

Just two quick questions.

First on page 1.25, did you guys change the way you report occupancy, because it looks like the labels and the numbers are slightly different than last quarter.

And second, if you can give an update on the marketing efforts on the Eaton Vance portfolio.

And also specifically looks like you guys split up the portfolio from six to 10 and you guys put to six through eight and eight through ten for reporting purposes.

And what the rationale was behind that?

Let me take the first part of that, Kee.

The organization on page 1.5 changed slightly.

What it's focused on is the fact we have a core direct owned portfolio; and we have a core completed development portfolio.

As we said for the better part of the last six to nine months, that development portfolio is really going to become a part of our core portfolio.

And that becomes more so every day as we continue to lease up and complete those properties.

So this is sort of an evolving effort to have you focus on what's the leasing in the overall core wholly owned portfolio.

And again, that will improve as we lease up the development side of that.

But at a point, relatively soon, they merge.

They become sort of one portfolio.

We'll track that.

And so we want to lay that out and make sure people are focused on; but also for the time being so you can continue to track the progress.

We marked on behalf of, upon Eaton Vance's request two of the funds.

And got offers in.

And ultimately, us and Eaton Vance were not satisfied with the offers.

The portfolios were not highly occupied.

And they weren't attractive in this particular environment.

People are definitely paying top dollar for class A assets that are a 100% lease and this portfolio at this point in time didn't meet that criteria.

So we have chosen to pull those off the market.

There are three other funds, and I believe Eaton Vance is interested in marketing those.

And I think there will be more to follow on that.

And Kee Bin to your question, if you recall your question, you recall in Q4, we wrote off the investment in two of those funds.

So we remove them from our numbers.

If you were to put them back in to the investment management portfolio, the occupancy would have declined by 57 BPS.

The total operating portfolio would have declined by 28 BPS.

Your next question comes from Michael Bilerman of Citi.

Your line is now open.

Thank you.

Bill, maybe you can give a little more granularity on the ramp at core FSO.

I know you tried to give details; but if you look at the $0.11 in core without the development in core and your guidance of $0.55 to $0.60 cents, you get to a quarterly run rate in the last three quarters of $0.15 to $0.16.

That's almost $75 million to $100 million of annualized FFO.

And I'm just trying to get a sense of what are the big things, I can't imagine that's all capitalized G&A and capitalized interest that's driving that.

So maybe you can walk us through.

some of the big components of really going from $0.11 and it sounds like second quarter is going to be almost flattish, up to almost $0.16, $0.17, $0.18 by the end of the year, just given your share count.

It's a lot of dollars in FSO.

And what changed relative to mid-March when you had your bond offering when you said you were comfortable with your core FFO guidance.

And now you've decreased it pretty meaning fly down from $0.60 down to $0.55 to $0.50.

Michael, let me try to address it in two parts.

Let me touch the second part relative to the core FFO guidance.

The bond offers have a dilutive effect, and that's that's the single biggest piece of the decline.

And that's, again, associated with the fact that at the end of the day, we reduced our line of credit, which is our chiefest form of borrowing as a result of those.

I think we've done a great job from a risk management standpoint of pushing out maturities and basically aligning our line of credit that are with what is an active development portfolio.

And others have gone longer in that regard, and there's a risk element associated with that.

But a couple of things that sort of popped up in March well pass the offerings.

The winter expenses that flow through both the fund portfolios and our core portfolios sort of gave us a little surprise there.

And it's a onetime charge from our perspective.

And there's a chance we're digging into it that some or all of that may be more recoverable than we've than we're planning on right now.

And so that's a good thing.

We also took a took a tax charge of about $5 million that is a onetime item.

And so, when you start getting at that, you've got about $0.06 right there.

So there are a variety of things that impact our perspective, relative to the overall year's guidance.

The other side of it is is that we believe our development activity will, the $700 million to $800 million that we've guided to will differently come to fruition.

We are well along in that regard.

However, the occurrence of those development costs will occur substantially later.

And the majority of those, other than the land, will really be pushed into Q4 and into 2011, which because of that does increase or decrease the amount of capitalized costs associated with those.

And we've mitigated some of that by planning on pushing some of the asset sales off.

So those are really the key drivers of what's impacting guidance.

Relative the ramp-up of FFO, we're, I believe, in the second quarter and certainly in the third and fourth quarter.

We're going to start finally start seeing the full effect of what we've seen leased so far versus what's occupied in the development portfolio.

And that's been a painful lag for all of you and us.

But we going to start generating the FFO out of that.

We're still eating the cost associated with the unoccupied portions of that development portfolio which is a drag on us.

If we are successful as we hope to be in continuing to lease up, we have sort of a super charged FFO associated with that because we get the reimbursement of the expenses we are eating today as well as the base rent associated with new lease up.

So we think that will ramp up pretty significantly through the end of the year.

And then on the other side, both Walt and I touched on, we need to lease space.

We are planning on a recovery in the second half of the year relative to occupancies.

And those candidly will generate FFO quicker than a sort of a development portfolio where you always have sort of that three to six month lag time for TEIs etc.

To the extent that we can get the renewals and increase occupancy in that, I think you'll see that ramp-up.

From a quarterly perspective, you are not going to see all of it in Q2 by any means.

Because we will get hit with these capitalized cost that we had in Q1.

But by Q3 and Q4, you should start to see that ramp pretty significantly.

Your next question comes from [Brandon Mailrani] with Wells Fargo.

Your line is now open.

Thanks, good morning.

I just wanted to revisit the land monetization, which you guys had in the quarter, which was good.

It appeared that most of the land as it relates to development starts was from Japan, and the land as a percentage of the overall development cost was pretty high, at around 35%.

I'm wondering if you can give us an outlook on how you think you'll be able to monetize land with your North American land and your European land over the next year or two or three.

And what a reasonable percentage of total development costs your land is likely to be.

Hi, Brandon.

This is Ted.

I'll do the best I can at addressing that.

It always gets to be a challenge to try and talk about percentages of land that when you're looking at it globally, because every part of the world, land is a different component.

It costs more in many parts of the world than others and therefore is a higher percentage in some ares and lower in other areas.

Japan happens to be a market that land values are very high.

The UK would fall in that category.

Some markets within that US would fall in that category.

So I think we'll use on average approximately 25% for non-Japan transactions.

I think we feel very good about the activity level we have both on build-to-suits and land sales.

It's encouraging.

We're focused on getting our land bank down.

The Japan deal is great opportunity for us.

So are the other development deals that we've signed.

I think we feel we're definitely on the right track for meeting our goals for this year and beyond.

And, Brandon, I would say this, we believe it's on our web site.

We did presentation a month or two ago, where we laid out the fact that our goal is not to take our land to zero.

Our goal is to take our land to somewhere in the neighborhood of let's say $600 million to $1 billion, and you get there.

We believe on a run rate basis, we develop somewhere in the neighborhood of $1.2 billion to $1.5 billion this year.

We won't hit that this year because it's a transition year.

I think when we get to a recovered economy it's there.

When you think about land as 25% to 30% of overall value and you have 2.5 years of land, you get to those numbers.

So our view is we want to take our $2.5 billion today down to -- I'm just going to the midpoint, and that would be $800 million.

And we think that's about a 2.5 to 3 year process to do that.

In other words, we'll be working off of excess land.

Over the next two to three years, we'll probably be working off more land than we buy.

We won't buying zero because in certain markets you may be at no land, and other markets you might have some excess land.

But you're working off more land than you're buying.

And ultimately, you're working down to the $800 million, $1 billion whatever that number is, and by that point, you have it where you want it.

And that should create also additional upside in our earnings.

Because whether or not you would sell the land which you would pay down debt or do something with the capital that would generate a return or you would put it into production at some return on invested capital, either way, you're getting a return on it, and, therefore, monetizing it.

And so that's our real goal and objective long-term.

And one other point, we guided this year from $350 million to 400 million.

Obviously, we monetized $138 million in the first quarter.

We feel very, very good about hitting the $350 million to $400 million at this point.

Your next question comes from Michael Mueller, JPMortgage.

Your line is now open.

Yes, hi, Bill.

Just want to go back to comment about the run rate and the ramp-up.

I think you said there was $0.06 of onetime items if you factor in the charge plus the winter expenses.

That implies, the winter expenses on a onetime basis were $28 million, $25 million something like that.

Is that correct?

And then secondly, you mention the capitalized cost and capitalized overhead.

If we're starting with the $42 million G&A expense in the first quarter, how significant of sequential changes are we going to see to that G&A expense that will help you go from the $0.11 in Q2 up to $0.17 in Q3 or so?

Mike I'm not sure I follow the beginning of your numbers there because the cost that we're talking about relative to the winter cost are nowhere near $20 million.

In terms of sort of Q1 big-picture items there's about $5 million of taxes that are sort of onetime.

There's probably versus an historic run rate an increase in interest costs both on the funds and the balance sheet as a result of the activities that we've undertaken.

Interestingly enough, and I think Michael Bilerman may have said it a few minutes ago, these costs are more meaningful these days.

But as an example we have payroll taxes in the first quarter, where you pay the line share of FICA in the first quarter, and that's not a run rate going forward.

And so there's a whole host of things that factor into sort of a first quarter lower FFO.

And that for us was exaggerated a little bit by some of the onetime costs.

And it was offset by some benefits that we saw in the first quarter as well.

But we feel pretty good about the ramp-up through the rest of the year.

You're not going to see a big piece of that in the second quarter because in fact we have, to put things in perspective, I think we have 163 buildings in our completed development portfolio.

And we typically capitalize costs associated with those until they reach what we call stabilization which is either they are 93% leased or they are completed for more than 12 months.

And in first quarter, we have 17 buildings as a subset of that in which we were still capitalizing various costs.

14 of those 17 buildings roll off into the stabilized category in Q2

So, we will see a decrease in Q2 and Q3 of capitalized cost associated with the roll off of that.

And you won't pick it up until Q4 where we incur the lion's share of the costs associated with the incremental build a suit development that we started.

I think that answers the question.

Next question?

Your next question comes from Steven Frankel of Green Street Advisors.

Your line is now open.

Thank you, and good morning.

I have a couple of different questions.

First of all, we've seen some different peers go out and raise equity in the public markets recently to take advantage of the recent rally.

Get some fire power and or delever.

Can you update us on the ATM ?

I know you guys have one of those you announced recently.

And your thoughts on an equity raise?

Secondly, in Europe conditions weakened materially during the quarter.

We saw occupancy a hundred debts for the Pepper, and the other debts for Pepper 2.

How does that enter into you guys calculus on starting build-to-suits?

And why start build-to-suits if you have so much supply in your current high quality portfolio

You want me to answer the first piece of that.

Yes.

I'm happy to take the second piece.

First of all, let me just say this, Steve.

Good question.

I'll taking the second piece of it and let Bill take the first.

You start build-to-suits, because companies want it, not because you want them to.

What's happening is that companies are looking for a certain size in a certain location.

Nine times out of ten, on one or two pieces of land that make sense to them.

You might have an existing building that's out there.

But the fact is, it may not fit them.

If they needed 100,000 square feet and you have 80,000 vacant, that particular building may not fit them more.

Maybe they want 100 with an additional 30 of expansion.

So what you're finding is that there are is there are less and less of those choices, and you don't have developers build those choices on a speculative basis.

So while the market doesn't appear to be growing, per se, in terms of additional occupancy, it is certainly, there are companies in need of space that just isn't out there.

So, we've got really one of two choices.

You can either ignore it, or in our case, you've got land that needs to be monetized over time.

You can hop on it and do it.

And there aren't that many companies out there that have the capital today to build these buildings.

And so we think it's an opportunity.

And again, I think you'll see, as you look at our quarterly numbers throughout the year, you'll see we do a substantial amount of that build-to-suit business, which is indicative of the fact that the market is there.

There are just people who need it.

Why do it?

In addition to that, frankly, the construction costs today are somewhere in the neighborhood of 20% down from where they were 2 years ago.

And so you have all these people that are floating around in the market saying, "Buoy, we were buying these assets and a 20% or 30% discount to replacement cost,".

And they're fooling themselves to a certain degree because replacement costs have changed.

We may back, back to where we were a couple years.

But the fact is replacement costs are much lower today.

And I would much rather build a new building pre-leased on a long-term basis with a great customer and monetized land at 20% below where I could build a building than be out there knocking our heads against anybody else in the market that in 20 buyers that are looking to buy something that creates no value on a long-term basis.

That's why we're developing today, and I think ultimately you'll find that the demand is there to meet it.

I just want to caution you.

There has been a drop in occupancy in Europe.

But going from 96.27% to 94.74%, 94.74% is a pheonomenal occupancy level.

In any circumstance, this is one of the toughest markets I have ever seen.

I think that's a fully occupied market at 94.74%.

That's not to say that might drop a little more; but the overall occupancy levels in our portfolio in Europe are fantastic at this point.

And we have a team out there that's doing a great job keeping these buildings leased.

Bill?

ATM?

Yes, just relative to the ATM, the ATM program is something we've had in place for many, many years, and we've used it intermittently.

And so as you get near the end, we used it in the fall and just a tad bit earlier this year, to the tune of about $28 million.

And as you get near the end, you reload the program.

We thought an on or opportunity time to do that was when we were in the midst of following the convert offering and entering into the blackout period for the earnings where we were in a period where we technically couldn't sell anything for a 60-day period just to take the heat off the market thinking we were going to sell a bunch of stock.

The practical reality is that if we choose to raise equity of any size, we'll do it in an open market transaction.

But, the ATM affords us the opportunity that if circumstances arise where you can take advantage of something and use $50 million or $75 million here and there, that program is available to us.

And I believe that and I believe that we would use it.

So the main message is if we were going to do an offering or raise equity of any size, we would do it through the normal process in open market.

And, Steve, I want to make one other point, too, back of the development, which I didn't before, but I'm glad you raised the question.

I made the comment in my prepared comment, we think that between the third quarter and the fourth quarter that we've created somewhere in the neighborhood of $60 million of NAV with our land end at book basis, and that's on basically five deals, if you look at our starts in Q4 and our starts in Q1.

And I think the interesting thing is that we believe today that were we to sell these starts, we would create somewhere in neighborhood, I said $60 million.

It would be roughly a 20% to 21% margin on our cost with our land in at book basis.

And that is, that really is indicative of what's happened to cap rates in the last year.

And so I -- again, I'd rather build it at much higher yields than be knocking our heads out there to buy it on the buy side.

I think that's the way to create NAV .

Your next question comes from David Nick of Stifel Nicholas.

Your line is now open.

Good morning.

This is Josh Barber here with Dave.

In light of some your comments about Europe, I was wondering why Pepper II has taken a large write-up.

It was written up by almost 50% in the quarter.

Was that cap rate compression so much in the last three months?

I think in Pep 2, candidly I think the NAV per share is the exact same number, off by a couple pennies.

Off by Euros.

Yes.

And it may be -- I don't know if you said up or down; but if it moved down, it would be because of the Euro exchange rate going down between Q4 and Q1.

But the actual NAV per share between the fourth and first quarter, I think, is really close.

I'm not sure I understand.

Why don't we take that question if we could offline and we'll be happy I this to get.

Your next question comes from George Orback of ISI Your line is now open.

Great.

Thank you.

Can you provide some color on the economics of the dispositions and developments in Q1.

And also with regards to future dispositions?

Are you still guiding to roughly $1.4 billion in sales this year?

And what kind of pricing should we expect?

Yes, George, I can.

It's interesting.

There was $172 million or $171 million of dispositions in this quarter.

You got to back out, $47 million of that was in land as we've spoken to.

As to the rest of it, 95% of it was in two buildings.

Was the Marischino contribution to the JLS in Tokyo, and that was $88 million.

That was at a 5.9% cap rate.

And the other one was a building that was in New Jersey, Port Reading, that we did a build-to-suit on, that we had a prearranged agreement or an agreement with our North American fund, which we cut last year to contribute it when it was done in at 8.25% yield.

And I would say that 8.25% on new buildings today, would probably be somewhere in the 7.25% to 7.5% range worst case.

And so there's value, obviously, that the funds gotten because we had cut the deal last year, the cap rate is at 8.25%, but the 5.9% I think is very characteristic of the Tokyo market today.

And when you add land you come up to 95% of the $172 million.

And let me just, we pulled out some data.

In response to the last question, the Euro at March 31st for asset value purposes was at $1.34, and it was $1.44 at year end.

So that difference accounts for 100% of the decline in NAV.

And, George, one of the questions -- I'm sorry.

I missed the second part of your question.

We are still guiding.

We are not changing at this point our overall disposition guidance for the year.

Your next question comes from Shane Buckner from Wells Capital Management.

Yes, you had mentioned early the NAV accretion based on current cap rates.

I was wondering if you could just talk about your internal view where cap rates may go with a recovery.

Are you making decisions about your portfolio based on an improvement in cap rates?

Or do you expect the recovery to increase in interest rates and cap rates stay flat?

Just trying to get an idea of how you think about it as you're making decisions on your portfolio and development activity.

Shane, I don't think, it's hard to say obviously, I don't know that I would be a proponent to say cap rates are coming down from where they are today.

I think cap rates are where they are.

They've come down substantially in the last 12 months.

And so it would be crazy, even though I think there will be more capital in the market, I'm not sure I believe cap rates are coming down substantially.

The flip side to that is because of the amount of capital in the market, I'm not sure they're going up either much in the next year.

So, how we're planning our portfolio around that.

Well, one of the things that we talked about is we're going to sell some assets throughout the year, predominantly in the US.

And trade those dollars into development where we think we can create NAV.

And I still believe today that that is is right thing to do, because there isn't as much competition to build existing buildings.

We have a lank bank that we need to monetize and we have the people in place and customer relationships.

So we're best positioned to do that.

So, why wouldn't you gravitate to your core competency and in doing so, sell assets where there's a feeding frenzy.

So, we continue to have that in the become of our mind candidly.

We are less concerned immediately, because the developments will ramp up more towards the end of the year, and selling assets substantially in advance of the cash flow needed of those developments is significantly diluted.

So, we'll try to time that better, but it hasn't change our overall view of how we go about our business right now.

I think the business model that we currently have also doesn't have, we certainly have NAV risk relative to cap rates, but our business model is not built around cap rates anymore.

We're not building buildings to sell them.

Cap rates are going to go up and down.

Rents are going to go up and down.

Respectively are going to develop properties at a return that's higher than our weighted cost of fund if funds and play for cash flow.

And we think that opportunity is out there, especially within developments on land that we own.

Operator, we have time for one more question.

Your last question comes from Ross Nesbaum.

Your line is now open.

Hi, guys.

Just a follow up on my first question because I heard a couple of different messages I wanted you to clarify.

Bill, I thought I heard you say at the beginning you're comfortable at least for the time being having part of the dividend covered through development sale gains until you start generating more operating income off of the development assets.

Yet, at the same time, I'm hearing that the business model isn't predicated upon cap rate changes.

And I guess those two statements really stand out to me in the sense do you feel comfortable if the dividend were being covered simply by operating cash flows going forward and development gains weren't apart of that at all?

Yes, I think we'd all feel, I don't think there's anybody on this phone who wouldn't feel more comfortable than if the dividends were being covered out of pure operating cash flow.

But the fact of the matter is that until we monetize the land and lease up the vacant space we're going to take advantage of the gains that we see out there and use that to maintain our dividend and to distributed the funds to share holders as reits are supposed to do.

You're 100% right Russ.

And I hesitate to chuckle on it but I know the question is probably deeper, but it's an obvious answer.

Yes, we would all prefer that it come straight out of operating cash flow and core cash flow.

I don't know whether you want us.

No, Ross.

The only thing I would add to that is that if you got $175 million of additional FFO and simply leasing up your development pipeline and moving up your occupancies a little bit and that's not with regard to monetizing land and the upsize associated with that, I don't think that you're really that far off at this point and time.

And we have no intention in this point and time of reducing the dividend.

Operator, I think we are about done at this point.

Ok, I'll turn the call back to you if you have any closing remarks.

None here.

Thank you, everybody for participating in today's ProLogis Q1 2010 conference call.

You may now disconnect.