Prologis Inc (PLD) 2010 Q3 法說會逐字稿

Good morning.

My name is Sarah and I'll be your conference facilitator today.

I would like to welcome everyone to the ProLogis third quarter 2010 financial results conference call.

Today's call is being recorded.

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

After the speaker's presentation, there will be a question-and-answer session.

(Operator Instructions) The questions will be taken in order in which they are received.

Also, please limit yourself to one question at a time.

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

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

Please go ahead, ma'am,.

Thank you, Sarah.

Good morning, everyone, and welcome to our third quarter, 2010 conference call.

By now you should all have received an e-mail with a link to our supplemental, but if not, it is available on our web site at prologis.com under investor relations.

This morning we'll hear from Walt Rakowich, CEO, to comment on the market environment, and then Bill Sullivan, CFO, will cover results and guidance.

Additionally, we are joined by Ted Antenucci, President and Chief Investment Officer, and Gary Anderson, Head of Global Operations and Investment Management.

Yesterday afternoon, we announced our intention to offer, subject to market and other conditions, 80 million of our common shares.

A separate press release was issued, and a preliminary prospectus was filed providing details about the proposed transaction.

The proposed offering is being made only by means of the preliminary prospectus supplement and the related prospectus.

I would refer you to the press release and the preliminary prospectus supplement for more specifics about the offering.

Because this offering is pending, we are unable to say more about it on this call.

Before we begin our 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 the industry in which ProLogis operates as well as management's belief and assumptions.

Forward-looking statements are not guarantees of performance, and actual operating results may be affected by a variety of factors.

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

I'd 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 those measures.

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

Walt, would you please begin?

Thanks, Melissa.

And good morning, everyone.

We've got a lot to talk about this morning, so let me get right to it.

It's clear to us now that market conditions are improving.

In Q2, we reported that net absorption had turned positive by 11 million square feet in the US markets.

In Europe, the same positive trend occurred.

In Q3, we again saw a positive net absorption of 7 million square feet in the US The figures aren't in yet for Europe, but we expect the results to be on the plus side as well.

It had been obvious for some time that sales growth was out pacing inventory growth, as you would expect in the beginning of a recovery.

We're now beginning to see this trend reverse itself.

There are a few important data points in our third quarter operating results that point to fundamental improvement.

First, same-store NOI was a positive 0.27%, and overall occupancies rose again by 24 basis points, mainly driven by occupancy increases in our direct owned portfolio.

Our static development leasing was up by 217 basis points, slower than previous quarters, but about what we expected due to the summer months in Europe, where decisions are slow to materialize.

Since the end of the quarter, overall activity has picked up, and given quarter-to-date agreements and leasing activity, we still expect our static development portfolio to be about 80% leased by year end.

In addition rental rates becoming more encouraging.

They've certainly flattened out in most markets.

And now, in a few markets, they are beginning to rise.

For the last four quarters, our rental rate growth has been down 13.9% on average.

This quarter, it's down 8.5%.

And finally, as we previously mentioned, we're seeing some markets where new space is almost completely absorbed.

This is incredibly -- an incredibly positive sign for the markets and for our development business.

Now, let me just spend a few minutes on our overall portfolio strategy.

In our view, nobody in the industry owns a more geographically diverse portfolio of high-quality industrial assets than ProLogis.

That's one of the benefits of having developed hundreds of millions of square feet of new product in global markets over the last 15 years.

However, we intend to pursue opportunities to optimize our portfolio and sharpen our investment focus.

Our aim is to invest our capital in the highest quality assets in major logistics corridors.

In our supplemental disclosure on page 5.4, we list the major logistics corridors in North America, Europe, and Japan, and our investment in those markets.

We're especially interested in these quarters because they have the highest concentration of population, which, of course, fuels consumption and business spending.

These characteristics drive a deep and consistent need for goods and distribution in those areas.

Now, currently, we have 71% of our capital in these major corridors adjusted for the Blackstone transaction.

Over time, you're going to see us take this to 80% to 90% of our capital, and you'll also see our development business more highly focused in these areas as well.

Now, that's not to say that we see little opportunity in some of the smaller secondary markets.

In fact, those opportunities will continue to exist.

But our strategy will be more concentrated in the major markets from a long-term capital investment perspective, which we believe will serve ourselves better in the years ahead.

So how does this play into our thinking around the recently announced sale to Blackstone?

Well, our strategy has been to recycle out of non-strategic assets in predominantly secondary US markets.

This transaction moves us forward in the accomplishment of that objective.

Of the direct owned sale portfolio, 72% of the assets are outside of the major logistics corridors in which we have chosen to concentrate our investment.

In addition, the average tenant size of 44,000 square feet is about 40% smaller than our average across the Company, and only 8% of the square footage in the portfolio is leased by our global customers.

So, after the completion of the transaction, we'll have an additional $2 billion to $2.5 billion of non-strategic industrial assets that we'll target for distributions in future years.

By recycling proceeds from these sales into new development, we believe we will substantially increase the NAV of the Company.

In addition we are going to look to exit our remaining investment in nonindustrial properties, which primarily consists of retail and other assets we acquired during the Catellus merger.

Historically, there were tax consequences to selling these assets before 2014 given the 10-year tax prohibition of selling assets that were once held in a C corporation.

However, the recent jobs bill, recently passed, changed that provision for 2010 and 2011, and we now have a window to sell these assets sooner without C corp.

tax consequences.

So, we will complete the first phase of these dispositions by selling off our interest in the New Orleans Hilton, which we announced in the Blackstone transaction.

And we are now actively engaged in the disposition of our remaining investment, which we hope to close in early 2011.

Looking ahead to the future, our prospects for growth are strong.

We've talked in the past about embedded growth in our overall occupancies and in our land bank, both of which are significant.

We also think there will be future growth in market rents as they climb back to replace the cost levels, although that may take some time, and it could be a little bit down the road.

But the emerging opportunity in our development business.

We have a very unique global franchise of people, customers, and land, and in certain markets, new product is virtually all absorbed and rents are poised to rise.

Construction costs have adjusted downward, competitors are on the side lines, and we're at an all-time low in terms of new supply.

And most importantly, customers are beginning to look for new space.

We believe our new development starts will grow next year to $800 million to perhaps as much as $1 billion dollars.

Levels would be up from this year in all regions of the world.

How do we plan to pay for it?

Really in two different ways.

For developments that are not in markets where we want our long-term capital to be, we will be sellers, just like we were this year when we built our co-op build-to-suit and sold it in Scotland and Miyagi build-to-suit in Sendai, Japan.

For the balance of it, as I mentioned, we will methodically recycle our capital out of older product or secondary markets, with the aim of holding those developments in targeted markets.

This will create growth in our NAV, improve our geographic diversification, and enhance the quality and concentration of our portfolio within major logistics corridors.

Now let me turn it over to Bill.

Thanks, Walt.

This morning, I plan to cover four aspects of the Company's financial position and strategy.

Number one, Q3 and year-to-date results; number two, expectations for Q4 strategic positioning; number three, a high-level overview of our outlook for 2011; and number four, how we're thinking about our dividend.

We reported $0.22 per share in FFO for Q3, 2010 after adding back $0.01 of non-cash adjustments associated with impairments related to the sale of one building and one land parcel, as well as modest losses from the early retirement of debt.

Of the $0.22 per share in FFO for the quarter, $0.07 was in gains associated with contributions to PEP II and the sale of Ichikawa II, while the remaining $0.15 was core FFO.

Q3 core FFO was slightly ahead of the guidance we provided last quarter when we stated that the Q3 would comprise roughly 40% of our second-half core FFO.

Approximately $0.01 Q3 core FFO was due to timing differences, with the largest being reimbursement of certain expenses that had been budgeted for Q4.

Gains of $0.07 per share also slightly exceeded the 30% of second-half gains we anticipated in the third quarter, principally due to the strengthened yen and its effect on the sale proceeds of Ichikawa II.

While we've seen significant strengthening of the euro versus the dollar in recent weeks, the average euro exchange rate for core operating earnings in Q3 was $1.28 versus $1.29 for Q2.

Therefore, the strength of the euro was not a particular factor for Q3 core FFO.

For the nine months ended September 30, we have generated FFO, excluding non-cash items, of $0.42.

After adding back the $0.08 of non-recurring charges that we highlighted in earlier conference calls, we have generated $0.50 of FFO relative to our full-year of guidance, of which $0.38 represents core FFO, with the remainder being gain related.

Last week, with the announcement of our agreement to sell over $1 billion of assets to Blackstone, we reduced and tightened our full-year core FFO range to reflect $0.015 to $0.02 of dilution.

This was primarily due to exceeding our original guidance for sales and contributions of $1.3 to $1.5 billion.

Additionally, the closing of the sales will take place sooner than expected with limited immediate reinvestment opportunities other than paying down the line of credit balance to zero and paying off our November bond maturity.

For the first quarter in a long while, I'm not going to spend any time talking about debt maturities.

With less than $400 million due before 2012 on our balance sheet debt, we are well positioned.

We do, however, intend to continue to deleverage the Company and bring our leverage debt-to-EBITDA and fixed-charge coverage in line with the sector and in line with investment grade metrics.

We remain comfortable with our guidance for full FFO, excluding non-cash items, of $0.70 to $0.78, which includes gains.

Relative to core, including the dilutive impact from the Blackstone transaction, we expect our Q4 FFO run rate to be roughly flat with Q3.

As noted in our press release, we anticipate taking charges in the fourth quarter associated with strategic positioning activities, which will not be included in our definition of core FFO.

Relative to the strategic positioning initiatives, we are highly focused on implementing a number of these in the fourth quarter, the most significant of which are, first, a strategic decision to more aggressively pursue land sales, wherein we are undertaking a rigorous reevaluation of all land positions, with the aim to expand the bucket of land which we will actively pursue sales on.

As a result, we may take further impairments on our current book basis, which we would expect to be in line with discount ranges presented in our recent investor presentations.

Second, we are going to pursue a tender for various bonds and/or converts of between $1 billion and $2 billion with the principal intent of further smoothing our annual maturities as well as deploying the proceeds from our asset sales more accretively.

The costs associated with these tenders from both the potential premium paid as well as transaction costs will be incurred as special charges in Q4.

Third, we are likely to close out a few derivative positions inside our funds which have become ineffective as well as incur swap breakage cost as a result of a partial repayment of some fund debt.

There would be one-time charges associated with these transactions.

Fourth, we continue to focus on simplifying the Company and creating incremental cost savings from structural and platform efficiencies, some of which may be incurred or reserved for in Q4.

And finally, we are pursuing the sale of various noncore retail mixed use and ground lease assets, principally associated with our purchase of Catellus in 2005.

The pursuit of the sale of these assets will likely result in a book impairment of approximately $120 million in Q4, but will also move us well down the path of simplification and getting back to our industrial roots.

Implementation of these initiatives represents the completion of our stabilization and simplification tasks that we laid out two years ago in New York.

Relative to these tasks, we are at the 26-mile mark in the marathon, and the finish line is in clear sight.

Lastly, let me address our thinking about our dividend and core FFO for 2011.

While the Blackstone transaction is expected to generate taxable gains, due to our intent to repurchase debt and other anticipated fourth-quarter charges, our taxable income will be lower than we originally planned.

As such, we plan to distribute $0.1125 per share in the fourth quarter.

Our board currently intends to maintain this level of cash dividend throughout 2011, which is a dividend level more in line with our expected taxable income and AFFO from core operations.

We anticipate growing the dividend over time in line with AFFO growth.

Turning to core FFO per share in 2011, we are looking at growth of 15% or more over 2010 core, and we plan to provide detailed business drivers to support that guidance in early 2011.

While our growth rate in 2011 will be impacted by the reinvestment dilution associated with our 2010 asset sales, we anticipate growth from the impact of further development portfolio leasing and occupancy, new build-to-suit developments coming online, and higher average occupancies in both the funds and core portfolios.

With that, let me turn it back over to Walt to wrap up.

Thanks Bill.

In closing, let me just say a few things.

First, global markets are beginning to rebound, and occupancies continue to rise.

Overall, it's beginning to feel better out there.

Second, we think there will be strong development opportunities with healthy margins for companies with customer relationships, land, expertise, and access to capital.

This is where we intend to deploy the vast amount of our capital in the years ahead.

And third, when you combine the potential NAV accretion from a diversified development business with the upside associated with occupancy gains, depressed market rents, and monetization of land, it's a powerful backdrop for future growth.

Brighter days are ahead.

Thank you.

And, now, operator, we are able to open it up for Q&A.

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

(Operator Instructions) Once again, please limit yourself to one question at a time.

(Operator Instructions) We will pause for just a moment to assemble our roster.

Your first question comes from the line of Rob Salisbury from UBS.

Your line is open.

Hi, good morning, everyone.

It's Ross Nussbaum, here with Rob.

I just wanted to clarify from the earnings release that the commentary surrounding the expected FFO per share growth in 2011 of 15% plus, did that include or exclude the expected earnings delusion from the equity offering?

Hey, Ross, because this public offering is pending, we are unable to say more about it on this call.

And, Ross, we're sorry about that, but we just can't say anything about the offering.

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

Your line is open.

Thanks.

Walt, maybe you can't answer this one either; but, you know, it seems like you went through a lot of conferences in September, and I know that there was maybe half the people told you to do something, half the people told you not to do something.

And it seemed like you guys were pretty steadfast in agreeing that you needed to deleverage the Company, but that you didn't need to do it right away.

And just seems like your thought process has changed rather quickly, and-- but yet you're talking about the business being good and improving both on the development side and the core leasing side.

I'm just trying to figure out what's change in the last couple of weeks?

Well, let me -- I guess let me answer the thought process associated with what we had said in the past, Steve, was that we knew, eventually that we will have to issue equity in the Company.

It's just really a question of when.

But our focus really was, and continues to be, asset sales.

The focus of the asset sales, I think we talked about somewhat deleveraging, but also candidly repositioning the portfolio and paying for future development, and that really hasn't changed one iota.

And we're going to continue to focus on those asset sales moving forward.

Now, that said, we may or may not be doing -- some of our plan next year will come out in January as to how much we plan to sell next year.

It may not be nearly as much as this year, because at the end of the year we may selling, what, $1.6, $1.7 billion of sales.

I don't think we're going to need that much in the way of sales moving forward .

But really, our plan hasn't changed overall, nor has our overall view that eventually we would have to bring equity into the Company, and that's just a question of

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

Your line is open.

Good morning, guys.

Sort of a similar question with regard to future asset sales.

One is maybe you could size the prospect for land sales going forward, what you're looking at there.

And then, with regard to -- for those future sales, how much of that goes towards new development versus how much of that would go towards further deleveraging the Company and whether there's a target in mind in regards to leverage?

Yes, Sloan, let me pick up on that.

I think we've been fairly consistent in terms of our long-term leverage metrics.

Again, people measure them in different ways; but the way we look at it is from a net to gross real estate asset perspective.

We want to be in that low 40%s, max, sort of 40% to 45% range over the long-term, and hopefully toward the bottom end of that range, if not the low.

From a debt-to-EBITDA perspective, we clearly intend to get that down into the -- into the 7%s; and from a fixed charge coverage ratio, we want to get that up.

All of those metrics, we want to get into line with a strong BBB investment grade metrics, and so that's where we're focused.

In terms of the asset sales and land sales, we're still working through the whole budgeting process and allocation.

Our intent is to more aggressively pursue land sales by widening and opening up the bucket of land available for sale.

It's not, in and of itself, going to generate land sales, but it will certainly give our guys a better direction and the ability to get creative in that.

Our -- we've talked about, over the next two to three years, that we want to get our ultimate land balance down into that, call it $600 million to $750 million range.

And that's our focus in terms of land sales as well as putting land into development, is long term getting it down into that range.

And if you look three years out, that's where we'd hope to be.

And I'd also, Sloan say -- and again, we haven't come out with the 2011 plan.

But one of the things I referenced in my discussion is, on page 5.4, is new disclosure.

But here we've sort of highlighted what we believe to be the major logistics corridors in the markets that we operate in.

This is where a lot of our investment, the majority of our investment will take place in the future, and again, this is where 71% of our investment is today.

So, one of the things I'd say, as it relates to land sales in the future, is that the sales that will take place will likely be more weighted outside of these markets than inside these markets.

In other words, our view is that we would be developing in these markets, which isn't to say we don't have some parcels within these markets that could be for sale, but it is to say that we are going to look very, very closely at developing and our focus development in these markets.

So, in the determination of all of that, we'll take that into account.

Your next question comes from the line of Ki Bin Kim from Macquarie.

Your line is open.

Thank you.

To follow up on the previous question regarding the leverage targets, what are the leverage targets that your credit rating agencies are comfortable with in terms of debt-to-EBITDA or fixed-charge coverage?

And it seems like to even hit your own leverage targets, even the best -- using the best possible scenario with the pending capital raise, seems like you're pretty far off.

So how do you reconcile that?

Well, first of all, because the public offering is pending, we're unable to say anything about that on our call.

But I think you ought to go back and take a look at the debt, etc., because, candidly, we're not that far off the debt metrics other than on the debt-to-EBITDA side, where, as we monetize land and as we lease up the development portfolio as well as the gain occupancies and the overall portfolio, we believe our EBITDA will increase substantially.

And so, the only metric, in my mind, that we're out of line on today is really the debt-to-EBITDA, and that's because of the nonperforming assets or non-income-producing assets.

So, I would go back and recalculate some of those debt metrics.

But relative to the rating agencies, I'm not going to go through every single agency.

We put this in our presentation back at the BAML conference a couple of weeks ago.

Every single agency calculates each of those metrics in a dramatically different fashion, and so they have debt-to-EBITDA targets.

One of them has, if you're below 10 times, you're in good shape .

On fixed-charge coverage, one of them has if you're at 1.5, another at 2.0.

But they bear no relationship to each other in the calculation, and so it's just a very confusing thing.

I would encourage you to go back and look at the last page of our presentation, and you can get some indication as to how differently they calculate them.

But clearly we're focused on improving the leverage

Your next question comes from the line of Chris Caton from Morgan Stanley.

Your line is open.

Thanks.

Good morning.

I think, following up on the line of questioning, looking at the major logistics corridors and where you have investments, can you talk about the positioning of your existing landbook and where it is relative to these logistics corridors, and where you see, say, earliest (inaudible) development being justified by market fundamentals?

Yes.

I can.

Although, Chris, I will say that, as Bill said, in the fourth quarter, we're going to undertake a review of the investment in the land and take impairments.

And so one of the things that I want to caveat my comments by is that the book value today may not be the book value at the end of the fourth quarter.

But I will say that, based on the book value today, close to 78% of our land is in the US logistics corridors, and about 66% of our land is in the corridors in the US relative to the -- excuse me, in Europe, relative to the book value today.

Again, that may change with the overall analysis that we're going to undertake in the fourth quarter.

But it does give you a pretty good idea, and I will say that those numbers pretty closely mirror the acreage which obviously will not change.

So, we are pretty well positioned to develop in those corridors relative to our land overall; but again, I can't -- I can't tell you where the fourth quarter numbers are going to come out.

In terms of -- the second part of the question was what markets are likely to --

Oh, for development?

It's interesting, Chris.

The build-to-suit business, we're seeing across the board.

We're seeing it in markets that -- it's not like you have more build-to-suits in one market versus another.

It's amazing how spread out that seems to be, and what that's really done is created an opportunity for us, this year at least, to look at a few build-to-suits and say, "Do we want to own this, or don't we want to own it?" And I mentioned in my comments, two of those build-to-suits we decided to sell off.

One was in Sendai and one was in Scotland.

That said, I think the markets that are probably ripe for development in the future -- and I'll say this by saying non-build-to-suit development, i.e., a little bit more inventory development, LA seems to be picking up steam.

Toronto is picking up steam.

Potentially, air pockets of Washington, D.C.

are picking up steam.

I would say areas within the UK and areas with certain size ranges within the UK, particularly larger buildings, appear to be picking up steam, and our folks are very bullish on Stuttgart and Munich.

So there are areas throughout the world -- and certainly Tokyo.

There are areas throughout the world where we really believe the markets are actually back today, and we'll begin to see some development moving into next year.

Your next question comes from the line of Brendon Maiorana from Wells Fargo.

Your line is open.

Thanks.

Good morning.

I just wanted to go into the guidance a little bit more, and maybe exclude the potential impact from the equity offering.

You guys can't talk about it, but if you're at $0.42 year to date and at $0.53 to $0.56 for the full year, so $0.11 to $0.14 in Q4, how are you going to get up to a 15% growth per share over the 2010 estimate in 2011, given what the run rate will be around $0.12 to $0.13 a share in Q4?

And that probably doesn't include the full impact of -- a full quarter impact of the Blackstone sale.

And then you'll be selling an additional $350 million to $550 million of non-core assets, which are also likely to be diluted.

So, it just seems like there's a lot of growth that's got to get baked into 2011, and I'm wondering where that's going to stem from.

Well, let me clarify.

Hopefully, for the -- well, maybe the second to the last quarter, but one of the last two quarters -- confusing numbers, because as we head into 2011, we hope to have this thing simplified so that all the numbers that everybody is focused on are identical.

And hopefully, you guys will start focusing on core as a key guidance measure so that the censuses estimates out there become consistent.

But, just to clarify, on the $0.42, etc.

Back in my comments, I talked about that fact that we've got $0.42 of year-to-date FFO.

However, in the first quarter -- and this is all related to our guidance.

In the first quarter, we had about $0.08 of actual cash but non-recurring charges, principally associated with our tender exercise earlier in the year when we paid some premiums on the repurchases of those bonds.

And so, when we talked about guidance, we were talking about excluding those sort of one-time charges.

We have -- if you exclude those one-time charges of about $0.08, we have generated $0.50 of FFO this year, relative to our $0.70 to $0.78 full-year guidance.

On a core FFO basis, we've generated $0.38 this year.

In other words, of that $0.50, $0.12 is clearly related to gains.

We've generated $0.38 of FFO relative to our core FFO guidance of $0.53 to $0.56.

Therefore, our fourth quarter to meet -- to come inside the range, would be $.015 to $0.18 or $0.19.

Now, we've taken into account the dilutive impact that we'll have in the fouth quarter from the reinvestment of the Blackstone proceeds, etc.

But just, I want everybody to be clear.

From our perspective relative to our guidance, our FFO -- our core FFO year to date is $0.38, and our full-year FFO year to date is $0.50 relative to our guidance.

Your next question comes from the line of Sri Nagarajan from FBR Capital Markets.

Your line is open.

Thanks.

Walt, just following up on your earlier comments on the markets that are picking up steam and your starts of $800 million to $1 billion in development for the next year.

Is this a net expansion or existing tenants or existing market tenants simply moving up to better locate?

Meaning that, are you encouraged by the overall demand from net new demand, or is just an expansion, or are people simply moving around?

Good question.

I would say that what we've -- first of all, in the last four quarters, we've started $593 million of new starts.

And so, just to put things into context, let's just round that, and let's say in the last four quarters, it's been $600 million.

So, the expansion would be doing from, if you will, $600 million to what we think is $800 million to $1 billion.

What we've really seen for the most part in the last four quarters is a little bit of musical chairs, meaning that companies are moving from one facility into another generally in search of efficiencies.

And so, they may not be expanding, but they are certainly keeping roughly the same square footage, some maybe a little up, some a little down, but moving from one asset, which is older, into another asset that's newer.

What we expect to see and what we're beginning to see overall is expansion.

If you take a look at the fact that, first of all, in the US, gross absorption last year was down roughly 50 million to 60 million square feet.

It was the first year gross absorption was down in the US in over 25 years since it's been tracked.

This year, year-to-date gross absorption is a positive 35 million square feet.

In most years, if you go back over 25 years, gross absorption is anywhere from 50 million square feet on the low side to close to 200 million square feet on the high side.

So what we're beginning to see is positive gross absorption.

We're seeing the same thing in Europe, which really to me says that we're looking at expansion.

And in my view, expansion means an overall expansion of our business.

So, we feel that we could build roughly another $600 million to $700 million of build-to-suits next year if the market was, if you will, in musical chairs land.

But, in fact, we think that the market will be expanding next year based on what we see, and that's what gives us more comfort in the $800 million to $1 billion range.

Let me just point out one other thing.

If you take a look at overall retail sales and track that on a peak to trough basis, those retail sales went down 12%, then up 9.5%, and they're down by roughly 4% peak to trough.

Then you look at inventories, which went down 15%, and they've only recovered 6%, and they're basically down 10.5% peak to trough.

What that basically tells you is that retail sales are rebounding.

Inventories haven't rebounded, but, again, we're seeing that inventory rebound starting to kick in today in terms of our discussions with our customers, in terms of the positive absorption that we're seeing.

And so, all of that is giving us comfort moving into next year that we should see an expanding development program.

And then, Sri, I'd just add, if you look beyond the development portfolio and look at our broad portfolio, the composition of our customer base really hasn't changed that dramatically over the course of the last year.

It's still 3PL transportation companies, electronics, appliance, and paper packing being the largest customer segments.

But what we really have seen is certain segments begin to emerge.

So, Internet retailers are emerging as a group that's taking a lot of space, food and supermarkets, health care, paper and packaging.

And the paper and packaging companies or segment is a group we really look at, because they are tracking very closely the increases in retail sales and inventory levels.

Your next question comes from the line of John Guinee from Stifel.

Your line is open.

Hi.

John Guinee here.

Couple of quick questions.

Bill, when you do your math, what you're implying is you can run this business at $0.15, $0.16 FFO run rate for the fourth quarter and then into 2011.

Is that an accurate statement, and can you push it beyond that?

And then the second question is, Walt, as you know, you can sell assets anywhere from a sub-6 cap up to unsafe at any cap.

They won't even trade at a 9 or a 10 for third-tier quality product and third-tier markets.

Can you sort of run through the spectrum of cap rates throughout your portfolio as you do your 2011 planning?

John, that was a fabulously sneaky way to get two questions in.

Let me address the first.

I think your first statement is accurate.

When we look at the fourth quarter, that sort of number makes sense, and that will drive into 2011.

And at that point, we'll see what's the -- we probably expect a continued rolldown on rent renewals, but hopefully nothing as dramatic as we saw earlier in the year, and hopefully more on a line that's coming down.

However, we will have the benefits of the incremental occupancy that we gained this year, and the development portfolio, and hopefully increasing occupancies in both the overall portfolio, but particularly the development portfolio, going into next year.

And so, we're going to have a little bit of a rolldown, but we're also going to have increased occupancies and the full-year benefits.

Now, that's going to be tempered a bit, depending upon the reinvestment opportunities associated with the asset sales, etc.

And again, those are marginally or slightly dilutive today because our easiest and most obvious reinvestment rate is in lower cost, reducing lower-cost debt.

So we've got a spread there.

But overall, I think you hit the nail on the head in terms of fourth quarter as well as the run rate going into '11.

And, John, good question on the cap rates, and you're right, you can run the gamut on this thing.

So let me -- let me just say, I know of very few assets that we own that I would classify as third-tier quality.

And so, it's hard for me to really speak to, that because if you've got a third-tier quality asset, you may not be able to sell it at all.

But we don't own that type of product by and large.

So.

I would just say that the spectrum of cap rates -- let me talk first about new assets throughout the world, and then we'll focus on second-tier.

New assets in Japan are probably 5.5% today.

In the UK it's probably 6% to 6.25%, and on the continent in Europe and western Europe it's probably 7%.

And I'd say US major markets would be anywhere from 6.5%, maybe even low 6%s to 7%, and when I say major markets, it's really the US, the large corridors that are listed on page 5.4.

So, our focus is really building assets at an 8% or an 8.5% or a 9% and picking up NAV growth through where the new asset cap rates are.

But if we look at secondary markets, and really we don't own a lot of second-generation properties in secondary markets.

But to the extent that we do, I'd say that those assets today are trading anywhere from at 7.25% to probably an 8.5%, and that circles the fence, I'd say, and that would be in the US.

It's hard for me -- and I would say that probably is the case in Europe as well.

It's hard for me to really gauge where second-generation assets would trade in Japan.

We just don't own any.

Nor do we really own much in the way second-generation assets in Europe.

So, we don't see a lot of that trading.

But in the US, again, I'd say 7.25% to 8.5% if they're decent assets in second-generation markets but have a little bit of age to them.

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

Your line is open.

Thank you, guys, and good morning.

You guys have mentioned NAV a few times in the presentation.

Where do you see that today, and what are your thoughts about other ways to -- I know you can't talk about today's exact equity offering, but think about equity raises potentially add below the midpoint of you previously published any of these going forward, and how do you make up for the dilution?

I think, Steve we've got what we've published in terms of NAV in the past, and all of that is in the supplemental reports.

So I don't know exactly how to answer your question other than to say that I think we've provided it pretty closely.

In terms of equity, I think we have to be careful at this point in time, because we have the public offering, so we're unable to say more about it on the call.

And then, after today, we should be able to talk a little bit more about it, hopefully.

Yes.

And Steve, just to follow on, I mean, we laid out at both NAREIT and more recently at the Bank of America conference our range of NAV relative to the components, and we put those components -- the inputs to those components in our supplemental every quarter now.

And I -- relative to NAV, beauty is in the eye of the beholder.

So, I would encourage all of you to look at our template, look at our inputs, and then apply whatever sort of valuation metrics that you would like to those inputs.

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

Your line is open.

Thank you.

Good morning.

Walt, I think -- and even, Bill, you had talked about the fact -- I think you said you glossed over the debt maturity schedule, because there's no really no use,and it's really been smoothed out, and there's no immediate use of proceeds, and even in the Blackstone transaction, just being able to pay down the line at credit.

And so I guess, as I sit back and you think about a lot of the things that you said during the year in terms of even pushing out a lot of the sales to later, because you didn't have a use of the proceeds, why is now the time to get really, really aggressive on raising capital, and then even pay a premium to tender for debt?

Why not just stay the course and continue what you're doing?

Well, Michael, because -- this is going to sound repetitive.

Because this public offering is pending, we are unable to say more about it on this call.

However, relative to the debt tenders and repurchasing debt, look, I think it -- personally I think it makes sense to continue to attack the debt maturities and the smoothing of those debt maturities at all times.

And paying a premium is -- for potentially pieces of that is a factor where interest rates are now versus where -- where our debt costs are.

The other opportunity in attacking some of that debt is to position ourselves better for future debt issuances, and candidly, transfer some of that debt that we might issue in the future over into the euro-related debt, Eurobond market, to begin increasing the natural hedge on the euro.

We've [had] a pretty sizable rise in the euro over the last four to six weeks.

And we do already put in place TMK bond debt as we stabilize our Japan buildings, and so that provides a fair amount of the natural hedge to the yen, but we're light on the natural hedge to the euro today.

So cleaning up some of this debt, taking some of it out of the system, smoothing out the maturities, and potentially being able to replace it with euro-denominated debt over the next 12 to 18 months in our mind would be prudent.

And, Michael, I guess I'd just also answer one -- a piece of your question by saying that we do think that the growth opportunities are picking up steam.

At the end of the day, we want to make sure that we are extremely well capitalized in this Company to take advantage of those opportunities.

And I think that our views, certainly, in the last three months, are beginning to progress because we are seeing the markets get better and better and better.

And I think there's going to be a number of companies that are developers out there that will be on the side lines and not able to take advantage of those opportunities because they're not well capitalized.

And our Company is in a great position to take advantage of them, and we want to make sure we are well capitalized to do it.

Your next question comes from the line of George Auerbach from ISI Group.

Your line is open.

Great.

Thanks.

Walt, you mentioned that rent rolldowns improved in the third quarter, but what's your expectation for rolldowns in 2011?

And across the portfolio, where do you think in-place escalator rents are today relative to market?

I'm going to ask Gary to -- Gary, can you hit that one?

Sure.

I think, as Walt said at the beginning of the call, we're seeing net affective rents basically stabilize across all of our global markets.

We expect them to be flat to up in 2011.

For the first four quarters the average rental rate growth was negative 13.9%.

And again, in Q3, you saw it was negative 8.51%.

I think that our view is that there is variation in the go-forward quarters probably up from that 8.51%, but ultimately, it will trend down through 2011 as we roll out 2006 and '07 and '08 (inaudible).

So the general trend is down from where we are today.

And I'd say, George, it's really hard to say where the rents are relative to market because the market really is moving quickly.

If you'll take -- if you take a look at where our investment is, one of the things we haven't talked much about, but we have $2.4 billion of our investment in LA, which is sizable relative to the overall Company.

It's our largest investment by two and a half times anyplace in the world, and we're beginning to see rents move up in southern California.

So it could have a very significant impact, positive impact on our -- on our rent roll-downs next year, and we've got to take a close look at it.

I would estimate that we're still over market by, call it, 5%, 6%, 7% in the aggregate.

But that could really change very quickly.

Market rents jump to 5%, and all the sudden, three months from now, I'm telling you that we're at market, so we'll see.

We're beginning to see some good things happening out in the marketplace today.

Operator, we can take one more call -- one more question, excuse me.

Your last question comes from the line of Sri Nagarajan from FBR Capital Markets.

Your line is open.

Thanks for the follow-up question here.

I think your (inaudible) A and B remark that the remaining lease of properties is taking incrementally longer to lease them, because what's left over in the sub-markets that are weaker.

As you sit on a 75% -- 73% lease-to-development portfolio, what is your prognosis on this?

Well, Sri, I'd answer that by saying that we ended the quarter at slightly below 75%.

One thing I'd want to point out and make sure everybody knows is that we have a development portfolio leasing number, and then we have, if you will, a static leasing number.

The reason we track the static number is because as we lease up some of these buildings, we had commitments to contribute those assets into mainly the European fund, and we had a Japan joint venture as well.

So, as we take those out of the portfolio, the leasing essentially drops because you're taking fully leased buildings and essentially contributing them.

So, if you look at page 3.1, the actual leasing in the static portfolio down at the bottom is 74%.

That number, I can tell you, has jumped materially since then, closer to 76% today because of the some of the leasing we've done in the quarter, and that's what's giving us confidence that that number will rise to 80%.

That number went up 217 basis points during the quarter.

We talked about it.

If you go back and take a look at what we said in the second quarter call, we knew that the third quarter would be slower.

It always is in Europe.

The majority of the space that needed to be leased -- or needs to be leased is in Europe.

So, we've got confidence based on the activity that we see that we'll be in that 80%-type level at the end of the year.

This is Ted Antenucci.

Also, relative to your question pertaining to weaker sub-markets, I think a small -- we wouldn't really describe that the buildings are necessarily on the weaker sub-markets.

For the most part, everything we built is in the best markets in the world.

There are certainly going to be some buildings that we leased a portion of that we'll have space available in that are 100,000 square-foot unit or a 150,000 square-foot unit of a larger building, and oftentimes it takes a little while to find the right size customer to fit that remaining space.

So, as time goes on, you end up with less available units that will meet users' demand or users' needs, and, therefore, you're not going to be able to lease it as quickly as you did when you had two or three units that were larger that could be broken down and accommodate just about any size.

So, I think naturally it takes longer as you get to the end, but I wouldn't necessarily describe it as because they are lesser-quality buildings.

Thank you, everybody, for your questions.

We look forward to seeing many of you at NAREIT and to the next quarter call.

Thank you for participating in today's ProLogis third quarter 2010 financial results conference call.

You may now disconnect.