Prologis Inc (PLD) 2011 Q2 法說會逐字稿

Good morning.

My name is Ashley and I will be your conference operator.

(Operator Instructions).

Thank you.

I would now like to turn the call over to Ms.

Tracy Ward.

Ma'am, you may begin.

Thank you, Ashley.

Good morning everyone.

Welcome to our second quarter 2011 conference call.

Our press release and supplemental are available on our website at ProLogis.com under Investor Relations.

This morning we will hear from Hamid Moghadam, co-CEO and Chairman, to comment on our Company strategy and the market environment.

Then from Bill Sullivan, CFO, who will cover results and guidance.

Additionally we are joined by Walt Rakowich, Gary Anderson, Mike Curless, Guy Jaquier, Gene Reilley, and Tom Olinger.

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

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

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

For a list of those factors, please refer to the forward looking statement notice in our 10-K or SEC filing.

I would also like to state that our second 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 have done in the past to provide a broader range of investors and analysts with the opportunity to ask questions, we will ask you to please limit your questions to one at a time.

Hamid, will you please begin.

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

We are pleased to be hosting our first earnings call as a combined Company.

Over the past few months, Walt and I have spent a lot of time visiting our offices around the globe, and I can tell you our team is very enthusiastic and energized about this merger.

It is great to see how well and how quickly the two organizations have come together.

As we plot our course for the future, we have established a clear strategy for the new Company.

Our priorities are first to strengthen our financial position and to build one of the top three balance sheets in the industry.

Second, to align our portfolio with our investment strategy while serving the needs of our customers.

Third, to refine our private capital business and to position it for substantial growth.

And fourth to build the most effective and efficient organization in the business and become the employer of choice among top professionals interested in real estate as a career.

I would like to take a few minutes to expand on each of these things.

First by streamlining the Company's overhead structure, reducing our leverage and focusing on portfolio on our target markets we plan to achieve substantial savings in operational expenses as well as our overall cost to capital.

This added financial flexibility will position us to capitalize on market opportunities across the entire business cycle.

Also by adopting the best practices from both companies and by incorporating the lessons of the past few years, we have created the sophisticated framework for evaluating and managing risk on an integrated basis across the different aspects of our business.

You will hear more from us on this in the coming months, but as an example, we have introduced the private capital model into our development activities in Brazil and China.

This strategy lowers our balance sheet exposure to land and development, mitigates our net currency, exposure and allows us to devote more of our financial resources to meeting the needs of our customers around the world while reducing the overall risks of our business.

Second, in order to align our portfolio with our asset allocation strategy, we performed a comprehensive review of our markets which we have now categorized into two main segments.

Global markets comprised roughly 30 of the largest most liquid markets tied to global trade and represent approximately 80% of our overall platform.

These markets are defined by large population centers with high per-capita consumption rates.

They typically feature major seaports, airports and other transportation infrastructure.

While initial returns might be lower, global markets tend to out perform in terms of growth and total return.

Examples of global markets would be Los Angeles, Tokyo, London and Sao Paolo.

Regional markets consist of about 50 regional logistic corridors and represent 13% of our platform.

These markets also benefit from large populations and strong local demand, but they are not as directly tied to the global supply chain and are often less supply constrained at global markets.

We intend to hold only the highest quality Class A product in our regional markets.

Examples of which include Orlando, Prague and Nagoya.

Properties in regional markets typically trade at higher yields than equivalent quality assets in global markets.

Our global customers have substantial space needs in both of these market segments.

Each of which provides a unique investment opportunity for the Company and our partners.

We also own a small number of assets in other markets such as New Orleans, Turin, and Seoul which we plan to exit in an orderly fashion in the next few years.

These other markets account for only 7% of our platform.

By segmenting our markets in this manner, we are able to construct a strategy that includes culling the portfolio for buildings and potentially sub-markets that are no longer a strategic fit for the Company.

Exiting these markets would also allow us to recycle capital into new developments, to upgrade the age and quality of our portfolio over time, to de-lever the balance sheet and to monetize our land bank.

Going forward we expect our assets outside the US will be held predominantly in funds.

New developments in these regions, particularly in emerging markets, will be in conjunction with our private capital partners.

Our long term capital allocation decisions will be governed by opportunities as they evolve over time with a focus on overall risk management.

As always we will employ our one portfolio policy in the way we operate all of our assets.

In other words, our private capital partners will get the full benefit of our integrated operating model including our customer franchise, our 600 million square foot global footprint as well as industry leading portfolio wide programs such as our recently announced rooftop solar initiative.

We believe these investor benefits are unparalleled in the real estate business today.

Third, let's talk through the near term priorities for our private capital business.

As a combined Company we have about $26 billion of assets under management in 22 funds and ventures around the world.

With over $3 billion of available investment capacity.

Over the next 18 months we plan to add to this capacity by forming a few new funds as well as raising incremental capital for existing open end funds in the US and Europe.

Currently our top priority in fund formation is Japan where we have a sizable portfolio of the highest quality logistic facilities in the market, together with the best management team in the business.

We believe Japan will present significant development and investment opportunities over the next few years.

We plan to rationalize our private capital business in conjunction with our investors and this plan is well underway.

As we look at our product offerings across our funds, not all of the funds are profitable for our new Company.

Some provide fee structures that fall short of our costs of managing the fund assets.

Others include unworkable operating requirements and oversight.

In some cases this means terminating or restructuring unprofitable relationships.

In other cases it means combining some funds to gain operational efficiencies that will benefit all investors.

In yet a number of other cases, this means defining a differentiated and compelling growth strategy for the venture.

In every case, however, we will work very closely with our partners and fund investors to make sure that they are active participants in these decisions.

As always, our actions will be guided by our strong commitment to transparency, leading governance policies, and a high level of financial alignment with our investors.

In the short-term, you may see the number of funds and our assets under management decrease while we build a foundation for future growth.

Finally, Walt and I believe we have a unique opportunity to capitalize on the best attributes of our former companies, and to build a strong culture of empowerment, speed and accountability that will attract and retain the best talent in the industry.

Risk management and world class operational efficiency will continue to be important areas of emphasis for us as we build the new Prologis.

As I mentioned earlier, I'm incredibly impressed with how well our teams have come together, which has been evident in how they have been collaborating.

I watched team members work seamlessly over the past few months as we successfully accomplished our objectives with PEPR, closed the merger, completed the bond exchange and the follow-on equity offering, revamped our investment committee process, even prepared for this earnings call.

And just yesterday secured a $500 million capital commitment from one of the most respected pension funds in the country.

Now I would like to shift gears and offer some comments on the key demand drivers for our business.

First global GDP continues to signal demands for industrial real estate.

Our business is very strong in Asia and Latin America.

The US is improving and Europe is mixed, but steady overall.

While global GDP growth in the first half of the year came in below consensus, we have not seen it slow demand for investor real estate.

We have looked hard to find evidence of a slowing market, but if anything, we appear to be a little ahead of our expectations, and you can see this in our leasing results for the quarter.

We believe this has more to do with the rapid pace of inventory rebuilding which has more than made up for the lower economic growth rate in the first six months.

US inventories have now been increasing for six consecutive quarters and are more than halfway back to their pre crisis level.

Based on the most recent data we expect further rebuilding of inventories toward the balance of the year with an expectation that we'll surpass the previous peak in early 2012.

As the global recovery broadens across the major economies, and as inventory restocking continues, we expect to see increased demand for industrial real estate that should translate to approximately 150 million square feet of net absorption in the US in 2011.

As you know, absorption in the second quarter was also ahead of expectations.

This should come as no surprise as we have about 10 million more people living in this country than we did before the crisis.

This outlook is further supported by positive signs from our customers which have requirements for major distribution centers all over the world.

Space utilization continues to increase and we are also seeing a meaningful up tick in build to suit activity with potential multi market opportunities in some significant cases.

These opportunities are led by our larger, better capitalized customers who want to achieve operational efficiencies by consolidating smaller facilities or to expand globally into under-served markets in preparation for growth.

The momentum with smaller and medium sized customers is lagging somewhat, but still positive.

Given our global platform and long-term relationships with customers, we have the unique ability to serve as their strategic partner for real estate across the globe and across the business cycle.

As you can tell, Walt and I are very pleased with the progress we have made in the first few months of the new Company.

We are excited about the opportunities we see ahead.

We believe that the new Prologis has come at the right time and is positioned in all of the right places to make the most of these opportunities.

Let me turn the call over to Bill so he can walk you through our results and update you on our guidance.

Thanks, Hamid.

This morning I plan to cover three aspects of the Company's reporting structure and financial performance.

First our new supplemental, second our results for the quarter and third guidance for the back half of the year as well as how to think about the Company going forward.

By now you have seen our new supplemental reporting package.

Our goal in creating this package was to align how we report externally with how we manage the business internally.

We have taken what we believe is the best of both worlds from each Company.

For example, we adopted legacy AMB's holistic view of the owned and managed portfolio.

This means our operating metrics are presented without regard to ownership.

From legacy Prologis we adopted the NAV disclosure format as we believe it gives the financial community comprehensive data to value the Company.

As you think about a go forward view of the combined Company, we believe the current supplemental provides the right level of detail to help model expectations.

Now let me turn to the second quarter financials.

We realize there is a lot of noise in the numbers, and it is difficult to compare our reported results with either of legacy Prologis or AMB.

With Prologis as the accounting acquirer, second quarter combines two months of stand alone legacy Prologis and one month of combined Company results.

Also during the quarter, we consolidated SGP, PEPR and completed an equity offering.

Before I get into detail on the quarter's core FFO, let me remind everyone that core FFOs we defined excludes merger and integration expenses, impairment charges as well as disposition or acquisition-related gains or losses.

In the second quarter we had significant adjustments in each category.

First, we recorded $103 million and $0.33 a share of integration and transaction costs associated with the acquisition of the PEPR interest and the merger.

We expect to continue to incur severance and transition costs associated with the merger between now and year end 2012, and we will report these expenses on a separate line item.

Second we recorded $104 million or $0.34 per share of impairment charges.

The vast majority of which related to our [NA3] fund where our partner is leaving.

In conjunction with our evaluation fund rationalization process, we deemed evaluation trajectory of this venture to be insufficient to ultimately recover our entire investment despite widespread recoveries in values over the last six to nine months.

Finally our impairment adjustment was essentially offset by approximately $107 million or $0.34 per share of net gains on acquisitions and dispositions of investments in real estate mainly related to the consolidation of PEPR on to our balance sheet.

As a reminder, the impact of the purchase accounting adjustments from the merger, while noncash, are included in our definition of core FFO.

We continue to expect these to negatively impact FFO through 2014 with an estimated annual drag of between $0.02 and $0.03 per share.

This is principally due to increased stock compensation expense associated with the mark to market of legacy AMB stock and option awards, reduced NOI from the mark to market of the leases, and amortization of the fair market value of the investment management contracts.

All of which is partially offset by the favorable affect of the mark to market of legacy AMB debt.

Let me now give you insight as to how we view the quarter and what things would have looked like had we been able to report a full quarter's worth of operations in our current merged and consolidated status.

For the quarter core FFO was $0.35 per share, modestly ahead of our internal expectations.

The results were higher than forecasted primarily due to higher occupancy, lower than expected rent change on rollover and modestly lower interest expense.

To put things in perspective, we have analyzed the quarter's operating results from a variety of view points.

In doing so, we estimate that taking into account a full quarter of legacy AMB, a full quarter of consolidated PEPR, and adjusting for the change in share count associated with both the merger and equity offering, our core FFO on a pro forma basis for the quarter would have been approximately $0.38 per fully diluted share.

Turning now to capital markets initiatives, we are highly focused on our de-levering objectives and have already taken significant steps toward our stated goals.

During the quarter we amended and recast our global lines of credit as well as completed an equity offer.

As we have mentioned previously, our use of proceeds from the offering was to reduce leverage in light of our acquisition of PEPR.

At the end of the quarter our share of total enterprise debt was $14 billion.

We expect this number to decrease substantially throughout 2012 as we implement on our fund rationalization strategy and create new funds with a particular focus on our second Japan fund.

Additionally we will continue to implement on other asset dispositions and contributions which we have communicated in numerous investor presentations over the past two months.

Let me turn now to our guidance for the rest of 2011.

Based on our performance in Q2 and our expectations for continued recovery in the overall macro economy and operating environment, we are reiterating our second half core FFO guidance of $0.78 to $0.82 per share and expect to end the year near the top end of our range.

Our shares in units outstanding on a fully diluted basis are expected to total approximately $463 million reflecting the merger and the equity offering.

As we move through 2011, we expect to see an increase in FFO relative to Q2 principally as a result of increased occupancy in the operating portfolio and the completion and lease up of a number of properties currently under development.

We expect our operating portfolio occupancy to increase between 100 and 150 basis points by year-end.

This NOI pick up from the occupancy gains will be tempered to an extent by the loss of NOI from asset sales and fund contributions that are targeted for Q3 and Q4 of this year.

For the second half, we are maintaining our development start and acquisition guidance of $900 million to $1.35 billion that we have provided in connection with our equity offering.

This includes $600 million to $800 million in development starts and $300 million to $550 million of acquisitions principally in the funds.

We now expect dispositions and contributions to be $1.2 billion to $1.5 billion dollars with roughly 75% coming off the balance sheet and 25% inside the funds.

We are feeling good about this volume as we currently have north of $950 million of these dispositions closed under LOI or PSA or committed to by a fund.

This is a $300 million increase from previous guidance driven largely by the US logistics funds in pension and desire to acquire substantial portions of the former SGP assets in the fourth quarter.

To wrap up, we feel really good about how things have come together in the merger process.

We are highly focused on implementing the de-leveraging strategy, and I could not be prouder of the efforts put forth by the combined teams to bring all of this to fruition.

With that let me turn it back to the operator to open it up for questions.

(Operator Instructions).

And your first question is from Ki Bin Kim with Macquarie.

Ki Bin Kim: Thank you, and congratulations on a good first quarter.

Going back to your comments on being more positive of hitting your higher end of the guidance for 2011, what gives you confidence that you will hit that?

Is it more on the operation side or is it (inaudible) capital?

If you can give some more details behind that.

Ki, this is Bill Sullivan.

I think it is more operational.

I really think it is focused on the fact that we are slightly ahead of our occupancy expectations at the end of the quarter, and we feel good, absent some nasty macro factor, but we feel pretty good about what's happening in the overall operations, and so we are really looking at that occupancy gain.

The NOI that we will lose from some of the disposition activities later in the year, it is more fourth quarter focus, but we feel good about hitting the top end of the guidance at this point.

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

Thank you, and good morning.

Just a question on development, particularly with Japan.

You guys continue to ramp up activity there.

What do you think the ultimate pace could be in Japan?

And is the future fund also going to include development opportunities within the fund itself?

Let me start, and I'm sure Gary will have some comments on this.

I think the opportunities we are seeing in Japan simply stated are today in excess of our capital allocation abilities.

In other words, there is more profitable development opportunity in Japan than we feel comfortable allocating capital to off the balance sheet.

That's why the priority is on forming the Japan fund.

Because really it is a tremendous market, particularly post earthquake, where the benefits of modern facilities has become very evident to customers there.

Gary?

100% right.

There is a huge amount of functionally obsolete space in Japan right now and that trend that has been going on for the last decade is continuing.

The tragedy has actually accelerated the pace.

You've got companies who are actually flying to quality facilities.

So there is a tremendous flight to quality and we are going to benefit from that.

At the same time what is happening is you are getting redundancy built into the supply chain.

Companies, instead of having facilities just in Sendai are also putting them Sendai and Tokyo.

The fact of the matter is, we've got a fantastic development team in Japan.

They have developed a huge chunk of the Class A space and a lot of this new development is going to nurture Prologis going forward.

Your next question is from Paul Morgan with Morgan Stanley.

Paul Morgan: Hi, good morning.

Can you just talk a little about your momentum in terms of discussions on build to suits as you kind of gradually ramp the development pipeline?

You mentioned a little about sort of where you are seeing the activity, but a little more color there as well as the space needs and the industries involved there.

This is Mike Curless.

We are seeing quite an up tick in build to suit activity, particularly in North America and Europe.

In terms of North America we have some 300 million in proposals spanning over 10 proposals right now, order of magnitude, 400 million in Europe on call it 15 proposals, and particularly North America.

This is a significant up tick compared to what we have seen in the last couple years.

I think it is largely driven by a few things.

A lot more activity from our customers coming from the 3PO world, food business, e-commerce retailers.

We are seeing a lot of multi market activity which is -- we think bodes well for us given our global footprint and [deed] development bench across the country.

And there is a real dearth of large product available right now, which would have otherwise accommodated some of those larger requirements in the past.

So anyway we will continue to see good activity in North America and Europe has been very active in terms of build to suits.

Your next question comes from Ross Nussbaum with UBS.

Hi, guys.

Good morning.

Good quarter.

I'm trying to reconcile some of the disclosure on page 12 of your supplemental and in particular the overall leasing activities for the combined Company from Q1 to Q2, looks like it was up 6% nearly 35 million feet, but the same store leasing looks like it was sequentially down by 1.8%.

And I am trying to reconcile those numbers against the commentary on where fundamentals are in 2Q.

Ross, in combining the former completed and development portfolio for AMB, we are leasing up in that development portfolio.

You saw some of that strong leasing activity in Europe et cetera, and so the overall numbers don't surprise me.

We had good lease up in our development portfolio, nearly a $1.4 million, 100,000 square feet in the second quarter and so on.

I am not sure there is much of a disconnect there.

Your next question comes from Sloan Bohlen with Goldman Sachs.

Hi, good morning.

Hamid, maybe a question for you.

Just on the pace with regard to dispositions and how that seems to have picked up a little bit, is that a function of the depth of the buyer market, and I guess to that point are you more comfortable on the price or are the funding capabilities for those potential buyers, have they improved?

Maybe just add a little detail there.

I have to tell you, people continue to be very under allocated to industrial, and there has been a short -- and there is a lot of pent up demand because people haven't really filled those allocations in the last couple of years, institutions, because really nobody unless they had to sell has been selling any properties.

So there is a lot of capital that is out there for industrial deals.

And we have some very good quality properties.

We have a lot of confidence that we can execute our plan both in terms of pace and in terms of pricing.

Your next question comes from Michael Dillerman.

Good morning.

It is Bilerman and not Dillerman, but that's okay.

I have a request and a question.

The request is, Bill, you talked about the $0.38 of FFO core basis for the quarter.

It would be great if you could just provide a worksheet for the 2Q income statement that puts that together so that the street and investors can model forward based on that income statement for the third and fourth quarters.

In terms of the question, Hamid, I just wanted to come back to the equity raise that you completed, and more of a question of timing.

I think that when you were doing the merger and you and Walt both said, look, there is no noose around our neck, there is no desperate need for capital, we want to move to a top three balance sheet, we want to be there, but there is no immediate need to raise equity at what would be a bad price.

And then a lot of the things that you had in progress, the fund formation, selling assets, would be value enhancing and clearly from the results perspective, you sort of had an inclination that your results would be coming in ahead of plan.

And so I guess why take -- why do the step of raising the substantial amount of equity that you did at a price that probably -- you would probably want to do it higher at a later point if there was no immediate need, no debt covenant issues, nothing that would have caused it, and just wait.

Okay, I will let Bill answer your first question and Walt and I will take a stab at the second question.

Yes, hi Michael.

Putting out the pro forma is a complicated little exercise, but let me just give you some food for thought on that.

First of all, in -- when we file the 10-Q we are going to have some condensed pro forma information so I think you'll get a little insight in that.

It will not be as broad as anyone on this call would like.

We also will be filing a new prospectus to bring that up to speed in September.

That will have a more detailed set of pro forma financials.

But if you wanted to do sort of the back of the envelope, you can sort of take our numbers and account for the new share count.

And what you will get is increased FFO representative of 463 million shares.

You can go through the math.

Take AMB's first quarter and look at two months' worth of that data and add it to what you see in this reported results.

PEPR just recorded -- reported their results, take two thirds of that, add it to these results, and you get a pretty good run rate on a line item basis.

And the only thing you would have to factor into that really just in, again, big picture, is that we have G&A savings inured to the future.

And so you'd reduce some of the G&A associated with that.

But I think if you went and did the back of the envelope on that, you would come to a pretty good run rate to get you to $0.38 cents per share and then take a look at that for future expectations.

Michael, on the equity question, what we talked about before is what we've talked about consistently.

The Company did not have a need to raise equity.

We have a couple different dials available to us to de-lever.

Dispositions would be one, fund formations would be the other, and equity would be the third.

So there was no desperate need.

It was not like the market was deteriorating and we were running out to raise equity.

There was secret -- double secret plan to say one thing and do another thing.

It was -- really the decision to do equity was that every conversation that we were having, all it focused on was on equity as opposed to all of the other aspects of our business plan which as you can see now, now that we have reported, have been going well both in terms of operations, private capital, all of the other aspects of the business.

So we have a pretty ambitious de-leveraging plan ahead of us that requires a lot of fund formation and dispositions.

If we are off on our timing., if we are off on our execution, I figure whatever we gave up on the equity race will more than make up on the terms that we will get on the other activities.

And we can be very patient and execute really well.

Bill, did you want to --

I would just add to that, Michael.

From a risk management standpoint again we levered up to buy PEPR in an environment where all of a sudden there is a lot of noise around the European debt crisis, the US government then extending the debt ceiling et cetera, et cetera.

I believe it was incredibly prudent to raise the equity that we did in light of the sort of the overall macro factors.

As Hamid said, relative to the overall size of the Company, it was sort of a non-event.

And I think it was just risk management and prudence in that regard, and I am very excited that we did it.

Walt, did you want to add anything to that?

No -- well, I will just also say, Michael, keep in mind that as Hamid said at NAREIT, there were so many discussions about equity that in fact over a two or three day period of time during NAREIT our stock had fallen quite substantially.

And I think what we also said was not at this price.

It didn't make any sense.

And it did rebound over a course of the next couple weeks as well.

So put all of that into context and I think we felt good about the decision we made.

Your next question comes from Suzanne Kim from Credit Suisse.

Hi, good morning.

Just a little bit more color on the dispositions.

You increased your guidance.

I'm just trying to figure out a geographical break down of your disposition target, and also timing wise, are they weighted toward third or fourth quarter?

This is Mike Curless.

Typically our dispositions have always been weighted toward the fourth quarter, and as Sully mentioned, we have right at $1 billion that are in very good shape.

They are either closed, under contract or committed.

I would say in terms of geographical diversification it is primarily in North America and Europe, and we feel comfortable that these numbers are going to come in well within guidance.

Your next question comes from John Guinee.

Hi, John Guinee.

Can you repeat the information on the impairment charge again?

Well, the overall impairment charge was about $104 million and the vast majority -- it really related to really two things, John.

One of which was [NA3] where we took a sizable write down relative to what we think the recovery value is on the NA3 fund.

And again I said that was the vast majority of that charge.

And the other was really related to a small incremental impairment relative to our Korea operations which we communicated in the last six or so months we are going to exit.

We hope to be exiting those activities in Q3.

Your next question comes from Steve Benyick with Jefferies & Company.

Sure, thanks very much and good morning.

I was hoping you guys could provide some further break down on the $10 million in incremental merger synergies in terms of how much is actually coming from G&A versus the lower line of credit costs or lower amortization and what ultimately will flow through to cash flow?

Steve, this is Tom.

Virtually all of the synergies will result in real cash savings.

The incremental increase is really spread across all three of those items, between G&A related, so personnel and non personnel related as well as amortization of intangible -- or tangible assets, mostly fixed assets and IP assets, corporate infrastructure, lower amortization and some additional savings from fees associated with the lines.

Not the interest savings, but just the fees, facility fees, et cetera on the lines.

So it is pretty well split between all three.

Your next question comes from Sri Nagarajan from FBR.

Yes, it's Sri Nagarajan at FBR.

Hi.

Just, all eyes on Europe these days.

Perhaps you could quantify the impact of FFO on a full quarter run rate of PEPR there as well as any impact on say 1 percentage point of occupancy, if you can.

Well, PEPR, you know, PEPR just released its second quarter earnings, and so you can go on that website and take a look at PEPR's results.

Again we consolidated it for one month during this quarter, approximately one month, and so I think if you just takes two-thirds of the PEPR results and add it to this component, you will see the full quarter effect.

Those are publicly disclosed numbers.

I'm sorry, you can [get to that aspect.] Gary?

Yes, why don't I just give you a little bit of color on sort of what is happening in Europe in general.

I will give some tone.

There has obviously been a lot of noise around the sovereign debt crisis and that may have lead to some slower decision making.

But the reality is, if you step back and think about what is happening in Europe generally the positive trend, I think, is sort of undeniable.

Values are stable to up, rents are stable to up, really almost across the board.

Occupancies were up 100 basis points last quarter, 230 basis points over the last three quarters.

There is still limited supply and strong build to suit demand that we are taking advantage of.

All in all, aside from sort of the macro noise that you are hearing, we are feeling pretty good about the European market place.

Your next question comes from George Auerbach with ISI Group.

Great, thanks, good morning.

Good morning.

Just a follow-up on Michael's question.

Bill, can you just provide us with a run rate cash NOI figure for the portfolio today at 90.7% occupancy given the moving pieces of PEPR plus AMB plus SGP less the dispositions?

Well, not off the top of my head.

On a lot of these pro forma questions, et cetera, let us sort of regroup.

We should probably put something together, Bill.

We should probably put something together.

Yes, let's do that.

We will give it our best shot, guys.

I guess the -- it is probably too late for your desires, but by Q3 this is going to be really clear --

We will put something out.

-- but we'll try to put something together.

We will put something out.

Your next question comes from Michael Mueller with JPMorgan.

Yes, hi, Bill, just a question about guidance and in terms of clarifying it.

I was under the impression that guidance had a full run rate of the all the expected synergies in there.

Is that the case, or is it just the synergies that are in place now?

Well, the guidance has -- how do I say this?

The guidance has the synergies --

as we expect them to come through.

As we expect them to come through.

We still have some duplicative costs in 2011 that go away by 2012.

Those are in our G&A numbers as we incur them.

So the vast majority of the transition costs are out, but we will incur a modest amount of costs in 2011 that are in the G&A.

So that G&A number will improve modestly over time, but we are going to identify in a separate line item, which we will add back to get to core FFO, the transition and the synergy costs associated with the people that are continuing to provide services that will ultimately go away.

Hopefully that clears it up.

Your next question comes from Jeff Spector with Bank of America.

Hi, this is Jaime Feldman, and I'm here with Jeff.

Can you give us a little bit more color on your commentary about restructuring some of the funds that you made in your prepared remarks?

I just want to make sure I heard that correct.

And also if I did, can you talk about maybe any impact it may have on future earnings and kind of what funds you are talking about and the magnitude.

Okay, I will start and then maybe Guy can fill in some of the details.

So as we look at the combined fund management platform, I think the important message is that I think it is unparalleled, certainly in the investor real estate business.

I would go further and say it is unparalleled for any operating company, and it is certainly in the top three or four global fund management platforms around.

So it is a really good business, and we think it is going to be a powerful growth engine for the company.

You saw evidence of that yesterday in terms of what happened over in Oregon, and I think we are just getting warmed up.

So that's the big comment.

In order to get there, these companies started in the fund management business in different ways, from different directions and with different needs.

And it is really, really important when you are in this business that you treat all of your investors consistently and you operate your portfolio with no bias toward one fund versus another or your balance sheet assets.

So really the first thing you heard from me is that we are going to run everything.

We don't have favorite children.

All our children we love equally, and all our funds are going to be run as one portfolio because the power is in the platform and the scale of the platform.

Secondly, we are not in the business of providing fund management services for free or at a loss.

So to the extent that the proper costs -- we don't expect to make a lot of money, by the way , in our on going asset management business.

We expect to cover our costs, but not make a lot of money.

Our real money is made in our promotes and our incentive fees.

But to the extent there are relationships in place that either don't pay sufficient funds or have onerous oversight and guidance -- they want to micromanage an operating company, for example, we will modify those arrangements or move on in a very thoughtful and respectable manner to investors so that everybody's interests are protected.

And we are in the midst of a lot of that dialogue.

We also have certain platforms around the world where we have multiple funds that were before competing with one another.

There will be some level of overlap between some of the funds although our strategies can be somewhat differentiated between these funds, but as differentiated as they may be there could be small areas of overlap, and we have put in place an allocation process that has been well articulated and communicated in terms of how assets are allocated between these funds.

So basically that's where it all falls together.

In terms of what it all means for the business, it means that we could shrink by a few billion dollars, and I mean a few, like one or two before we start growing by a lot more than that going forward in the management business.

Yes, just a couple other comments.

One is that they are certain of these funds where we don't have the discretion we want to run the assets the way we want to do it.

So if you think about it, where if we have a number of different assets and we are trying to lease them, and one building we have to go to a partner and get approval to sign a lease.

That just creates problems for us.

Similarly, if we want to go build out TIs and with one partner we have to go get a special type of contractor to build out TIs.

It just becomes very inefficient for us.

There are also some funds that are -- over the next couple of years are going to be -- closed end funds that are nearing the end of their life.

And we are in discussions to either liquidate those funds or potentially roll those funds into other funds.

So I think it is a little early to speculate on which ones, how many and all of that.

But suffice to say in our guidance we're really not projecting and future efficiencies or synergies from some fund consolidations.

Your next question comes from Paul Morgan with Morgan Stanley.

Hi, it is Chris Caton on with Paul.

Just a follow-up question on expected fund contributions over the course of the next 18 months.

You mentioned you painted your highest priority.

I wonder what else is high on the list.

And how will the assets be valued in Japan, contribution, and with respect to PEPR will have you an opportunity for new appraisal on those assets?

The priorities -- the biggest priorities are Japan.

At some point we need to do something with our platform in Canada.

Brazil we have one fund in place, and we are being very successful in almost going through that.

I think we have maybe another couple quarters of capacity in that fund.

The business is going very well there.

So we will be thinking about Brazil too at some point.

Obviously PEPR is premature to talk about because PEPR is still a public company and has other shareholders in it.

But at some point that could become a priority.

And remember we have these evergreen vehicles in terms of the open end funds that are going to be raising capital and growing and they are going to have a dynamic business plan.

So all of those are priorities.

The other platform, and this goes back some time, but do you remember that we did the [Aforez] fund in Mexico.

Our business in Mexico is going quite well.

It is at the higher scale now, and at some point we need to start thinking about the next vehicle for Mexico or an expansion of the existing vehicle.

But I would say Mexico and Canada are probably 2012 priorities.

The real emphasis is Japan now for the next 12 months and the open end funds.

Guys you want to add?

Yes, and then the second part of your question is, any fund contributions will be done at fair market value.

Anytime we are transferring asset off our balance sheet into a fund, we do have to get third party appraisals and there is a review process, but it is basically a fair market value.

And there is independent oversight on that.

Correct.

Your next question comes from Michael Bilerman.

Great.

In terms of the split of the portfolio you provide on page 22, this was the old Prologis summary where you break it out between greater than 75% leased and under 75% leased.

Clearly those above 75% are basically almost full.

It is really the stuff that was developed and came into the core portfolio not fully leased.

And so I'm just curious.

When you look at that 45 million square feet it is almost $3 billion of value.

There is obviously a lot less to lease in that portfolio, and so I think you talked a little about the developments coming ion line in the back half of the year.

How should we think about this $3 billion of real estate?

Does this represent a lot of those non core markets that you want to get out of?

How much of it is really core assets that you really want to see the leasing get up, and in terms of then the timing of that happening?

Michael, let me try to take that.

I think it is pretty well spread in terms of what the 45 million square feet represents -- I have it (inaudible) coming in here.

And Michael I can get back to you guys on what the spread is, but when I looked at it, the reason we didn't put the NOI in there effectively is because with that portfolio, that set of assets and its current leasing status, it is really eating operating costs today and so it is really tough to get to the pro forma and to put things in perspective, there are about 32 million of the 45 million square feet that are in the Americas.

There are about 12 million in Europe and about 1 million in Asia.

And if you -- when we looked at it in terms of -- and we put out here the average investment balance per square foot of $62 That's about $55 a foot in the Americas, about $73 a foot in Europe and $140 a foot in Asia which obviously is Japan focused.

And in that some of the major -- some of these assets are in the major markets.

It is heavily weighted toward northern New Jersey and New York and Dallas, Southern California, Chicago, et cetera.

And so from a per square foot basis, we are pretty comfortable that there is value there.

Your next question comes from Dave Rogers with RBC Capital Markets.

Good morning and thank you.

In the context of selling stabilized assets, redeploying some or most of that capital maybe through development in the coming years and taking into consideration your comments about lower fund capital, maybe just for a year or two, where is your fixed charge coverage today, and I guess where would you like to keep that on a combined basis?

If it was in the packet I didn't see it and so I apologize.

Again, when you look at the numbers we have here, because we have all of the debt at the end, but we don't have the full quarter of operations, we left the fixed charge coverage calc out.

It was one more detail calc you guys would go through with me and ask me to explain.

Today it is slightly more north of two times in the grand scheme of things.

We have clearly indicated we want that fixed charge coverage calc to be in the two and a half to three times.

When you look at the debt reduction expectations we have throughout 2012, we will be there and we feel real good about that.

Your next question comes from John Guinee.

Hi, a quick question (inaudible - multiple speakers) operating numbers.

It looks to me like going forward including some lease up, you ought to expect about 17% of the portfolio coming up for re-lease every year and maybe TIs leasing commission and base building CapEx coming in at about 12% of cash NOI.

Are those good numbers going forward?

We think so.

They have been pretty steady if you look at these companies.

The reason we provided it, it was a new disclosure is because when you get to 600 million feet, those numbers are remarkably stable.

So that's the way we should really look at this Company is top down.

Thank God we don't have to get into what's going on in San Francisco in the third quarter on a 400 square foot least.

So this is really good, to look at it top down.

And the two metrics I would look at is on re-leasing costs, looking at per square foot numbers, those are reliable.

And then the percentage of NOI that's going to CapEx, which includes building improvements.

Those are the two metrics I look at.

Yes, and if you look at the CapEx number in total (inaudible) you're basically looking at [$0.15 to $0.16] in CapEx and, John, the 12% may be sort of at the high end.

I think about 10% to 12% of NOI.

Okay.

And, Bill, one other question.

Just how on Earth (inaudible - multiple speaker) --

Go ahead.

How on earth did the Lehman fund impairment charge get kicked down the block for two or three years and come up post merger?

Well, candidly, if you went back, John, and looked at a disclosure we had back in January of 2010, where we talked about -- and this was public information, we put a slide in one of the investor presentations that we put out on our website that identified our over levered funds, okay.

And that the point we talked about the Eaton Vance funds, NA2 and NA3, and at that point in time we said look, we think -- and even go through the math in that slide and you will see the magnitude of what our carrying value was below fair market value.

And our point in discussion at that time was, we think values are going to recover, these are long-term holds relative to NA2 and NA3.

We took the impairment at that time relative to Eaton Vance because we highly focused on exiting those funds and did not believe values would come back in an appropriate time frame.

As we now fast forward to mid 2011 and we look at NA2 as an example, that value has come back strongly and in fact it is at or above carrying value.

And so we feel really good about that.

When you look at NA3 it is much more heavily focused and oriented in Las Vegas and Reno, that value trajectory hasn't come back in the same fashion and candidly we talked about some of these funds where we are not getting the appropriate management fees or there is issues and complications of what to do with the fund.

NA3 is certainly a poster child for that and it's time to deal with the issue.

Your next question comes from Jeff Spector with Bank of America.

Thank you.

Hamid, I appreciate your comments earlier talking about the rapid pace of inventory rebuilding we have seen and I just wanted to see if you could talk a little bit more about that going forward and how investors can get comfortable that that will continue.

Well, it's probably you guys are tired of hearing me talk about this because I have been talking about it for over a year going back to our analysts' meeting in September in New York but inventories were down from the peak at about 8% at the trough and through the first quarter we were more than 4% recovered from that, so more than halfway back.

The preliminary numbers, and as you know those numbers are lagging, so the first quarter is the latest numbers we have.

But based on some of the monthly numbers that are highly correlated with the inventory number we think we have gained another point or two and if we are going to -- if we add the data today we would say that we are back about six of those eight points so we think we are 75% back and it is not a big prediction to know that we are going to get back to normal because the retailers were just running too lean and it was not sustainable.

Also as you heard me say, population is almost 10 million people more, and while employment is a real issue and has a dampening effect on consumption, the fact is a lot of the things that go through our warehouses are highly non discretionary and correlated with population growth.

So I don't think it is a big stretch or leap to call a full recovery of the inventory number.

Also, we are seeing the air freight numbers normalize, and air freight as you have heard me say before is a very good early indicator of people running very lean on inventories because they miss sales and they got air freighted in.

So air freight is normalizing.

Which means it is growing but growing in the more normal pace as opposed to a crazy pace like a year ago.

So all those different things point to inventories getting some what more normalized and that sort of 8% rebound in restocking really overwhelms the difference between a 3% GDP growth and 2% GDP growth which is what everybody wants to talk about.

So in terms of the driver of our business it is really inventory levels and ultimately once we get to a normalized level we'll ride along it with GDP but we've a ways to go before we get on that track.

Your next question comes from George Auerbach with ISI Group.

Okay, thanks.

Bill, the spreads in the quarter were down 6% on renewal leasing.

What are your expectations for the rest of the year and 2012 for renewal spreads?

I think it is better, I can go through that but I think it is better if I have the operating guys walk through the results for us.

Gene, do you want to --

Yes, sure.

George, as Ed mentioned at the beginning, it is really difficult to reconcile these numbers with legacy Prologis or AMB, so there's some noise in there.

But first of all, I would suffice it to say that our same store numbers and the rent spreads came in better than expected.

And the outperformance is probably impacted somewhat on definitional changes but it is better than expected and we think it is going to continue.

Now, you have heard us talk in the past on the AMB side of when do we see that turning positive and how many years are we out there.

I'm not going to give you an estimate of what is going to happen this year because frankly we have a lot of work to do on the numbers.

But I think those spreads are going to turn positive, and my guess would be sort of towards the end of next year which is a different out look than you would hear me say a quarter ago or so.

And just to be clear, that outlook is not only different, it's better than our previous outlook because of this and we think definitional changes maybe account for about half of the improvements.

But half the improvements are real so and you just are going to have to bear with us for about a quarter before we scrub all those numbers and can present them in a totally comparable way.

And they are directly comparable, of course, to legacy Prologis.

Yes, right.

Your last question comes from Ki Bin Kim with Macquarie.

Thank you.

Two quick questions.

One going back to your fund free fee structures.

Could you talk a little bit more about what the fee structure looked like in the past and what it looks like today in terms of management fees and also promote ceilings and last one quick one any change do your mark to market on land inventory after the merger?

Bill, why don't you talk about the land and Guy, you can talk about the funds.

Let me, Ki, just touch on the land.

We had a little bit of a decrease in the carrying value of historic AMB land and that really relates to -- when you look at an impairment analysis that you would go through, it is different than a fair market value analysis on the overall portfolio of land.

Because if you are going to hold land for future development it is incredibly tough to in essence impair it, okay, because you go through this kind of cash flow and is the land worth its value at a zero percent return, et cetera.

And fair market value analysis clearly you can put in the development profit and what not.

I would say this, it is too -- we have to scrub the whole purchase accounting analysis in detail in the upcoming weeks and certainly we intend to scrub it thoroughly by the end of August and so the valuations are going to move around a little bit undoubtedly as we scrub to that detail.

I think it is a better question to address when we get to the end of Q3 because by that time I expect we would have very little future movement in that valuation analysis.

And relative to our question on where market fees are on a gross asset value they are some where between 60 and 75 basis point with some quantity discounts for larger investors.

Commenting on promotes, it's really -- it really depends on the fund and the objectives of the fund.

Depends on what level of leverage you have, whether it's a core fund or it's a public fund.

But round numbers it is somewhere between 15% and 20% profits over the appropriate benchmark.

Okay.

I would like to thank all of you for participating in this call and to summarize, Walt and I are pleased with the results for the quarter which are modestly ahead of our expectations.

We are very proud of the fact that our teams were able to accomplish all this in spite of all of the pressures and distractions of the merger which are thankfully behind us.

We are very appreciative of the efforts of our talented teams around the globe and are excited about what the rest of the year holds for the Company.

I also want to emphasize the three key take aways from today's call.

First, while we still have a lot of work cut out for us our overall progress on integration is on target and actually ahead of plan in most cases.

Second, from what we can see, the recovery in our business is also on track.

We continue to look out for signs of a slowdown but frankly we don't see it.

And third, we are just beginning to unlock the full potential of the new Prologis and are excited about our prospects.

Thank you again for joining us for our inaugural call and we look forward to reporting back to you next quarter.

That concludes today's conference.

Thank you for your participation.

You may now disconnect.