Prologis Inc (PLD) 2011 Q4 法說會逐字稿

Good morning.

My name is Jessica, and I will be your conference operator today.

At this time, I would like to welcome everyone to the Prologis Fourth Quarter Earnings Conference Call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions) Thank you.

Tracy Ward, Senior Vice President of Investor Relations and Corporate Communications, you may begin your conference.

Thank you, Jessica.

Good morning, everyone.

Welcome to our fourth-quarter 2011 conference call.

The supplemental document is available on our website at www.Prologis.com under Investor Relations.

This morning we'll hear from Hamid Moghadam, co-CEO and Chairman, to comment on our Company's strategies, the market environment, and then from Bill Sullivan, the CFO, who will cover results and guidance.

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

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

These statements are based on current expectations, estimates, and projections about the market and the industry in which Prologis operates, as well as management's 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 forward-looking statement notice in our 10-K or on SEC filings.

I'd also like to state that our fourth quarter results press release and supplementals do contain financial measures such as FFO, 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 their questions, we will ask you to please limit your questions to one at a time.

Hamid, will you please begin?

Good morning, everyone, and welcome to our earnings call.

As you know, 2011 was a year of transformation for our Company.

It's rare in business that two leading companies from the same sector are able to combine so seamlessly.

Walt and I are very pleased to report that the integration has exceeded our expectations.

You may recall, at the outset of the merger, we established four key priorities to guide our path over the next two years.

These priorities were -- first, to align our portfolio with our investment strategy; second, to strengthen our financial position; third, to streamline our private capital business; and fourth, to improve the utilization of our low yielding assets.

We've made excellent progress on these four objectives, and I'd now like to take a few moments to review their essential highlights.

Of the four priorities, probably the most central to our plan is our decision to refine the combined portfolio, and to align it with our investment strategy, because in many ways the other priorities flow from this one.

The merger expanded our portfolio, and as you'd expect, not all of those assets were a perfect fit for the new Prologis.

We performed a comprehensive review of our markets and our properties, and constructed a $2.9 billion third-party disposition plan to cull the portfolio over the next two years.

Execution of this plan is well underway.

During the second half of the year, our share of third-party dispositions of buildings and land generated more than $530 million in total proceeds.

Our sale properties were located predominantly in markets we've categorized as regional or other, and had an average age of about 25 years.

The disposition momentum has carried into 2012, as we've continued to see solid demand and capital available for high-quality industrial real estate acquisitions around the globe.

In fact, we've closed more than $425 million of dispositions year-to-date, of which our share is $385 million.

This includes the sale of a 3.5 million-square foot portfolio in the UK that closed just this morning.

This brings our share of third-party sale proceeds from the second half of the year to $915 million.

Our second priority is to further strengthen our financial position.

Our sales proceeds enhance our stated objective to build one of the strongest balance sheets in the industry, and to lower our overall financial risk and currency exposure.

This means our assets outside the US will be held in private capital ventures.

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

Here, we are on track as well.

During the second half of the year, our share of the contributions and sales to our co-investment vehicles totaled more than $800 million.

Combined with our share of third-party dispositions, we've generated more than $1.7 billion of capital for the Company.

Turning to our third priority, we made great progress in rationalizing our private capital business.

Subsequent to year-end, we purchased our partner's interest in NA2, and brought the portfolio onto our balance sheet.

We are engaged in similar discussions with our institutional partners regarding a couple of other funds, and we expect to report on our progress soon.

We're also growing our private capital business with the formation of new funds, and raising capital for our existing vehicles.

Our top focus is on establishing new co-investment vehicles in Japan.

We began our marketing efforts for core and development ventures in November, and are confident of a mid-year close.

We're very encouraged by the high level of engagement of institutional investors, and the number of potential partners in various stages of due diligence has increased four-fold over last year.

In short, the private capital team is firing on all cylinders, and we believe we can meet or even exceed last year's record fundraising level of $1.8 billion.

Our fourth priority is to improve the utilization of our low-yielding assets.

Our leasing teams have delivered excellent results across the board in 2011.

Activity was strong, and we ended the year with occupancy in our global portfolio up 120 basis points from the third quarter.

And despite the problems in Europe, our team continues to produce impressive results.

Fourth-quarter occupancy in our European portfolio was up 160 basis points over the prior quarter.

Demand for our properties remains strong in Asia, and we continue to lease new developments in both Japan and China, well ahead of schedule.

Let me switch gears now and discuss our views on the operating environment, and what we're seeing and hearing from our customers.

The primary indicators of our business tell us that the recovery is on track.

Global trade has been improving at a healthy pace in the ocean and air sectors.

Air cargo volumes experienced strong rebound in December, and surpassed last year's record level.

Retailers and manufacturers rushed shipments as sales outpaced their inventory holdings.

We're seeing a similar trend in container volumes.

For ports reporting data through December, volumes are up 6% year-over-year.

Looking to the US, consumption retail sales and GDP have surpassed their pre-crisis levels.

Historical data tells us that as consumption trends up, customers will require more distribution and logistic space to accommodate their inventory restocking efforts.

You may recall, in October, we said that US inventories were low heading into the holiday season, and as we anticipated real inventories grew in the fourth quarter.

Despite this growth, real inventories remain 5% below their pre-crisis peak.

The continuing rebuilding of our customers' inventories will be a significant theme in 2012.

We closed out 2011 with positive net absorption of 120 million square feet in the US, the strongest it's been since 2007.

We're forecasting an even stronger 2012, with positive net absorption in the range of 150 million to 175 million square feet.

Our customers indicate that they're entering 2012 with a higher level of optimism, and with many new space requirements.

Following three years of inventory reduction and cost saving efforts, utilization is running high in our buildings, and our customers have reached an inflection point where they can no longer delay decisions on expansion.

Of particular note, demand is picking up among our small- and medium-size customers as they gained an impressive 200 basis points in occupancy from the third quarter.

In fact, they accounted for the vast majority of our occupancy gains during the quarter, and will continue to drive occupancy and rents in the near term.

In short, we had a very successful year.

Walt and I are extremely proud of what the team has accomplished in just a couple of quarters together.

We believe the opportunities ahead for the new Prologis are tremendous, and we look forward to our continued success in 2012.

With that, let me turn it over to Bill.

Thanks, Hamid.

This morning, I will focus my comments on four key areas -- first, results for the fourth quarter; second, our capital markets activity; third, an update on our merger integration; and fourth, our guidance for 2012.

Let's start with fourth quarter results.

For the fourth-quarter 2011, we generated core FFO of $0.44 per share, which exceeded our original internal forecast by $0.04.

The strength in our Q4 core FFO was driven principally by higher than expected occupancy, strong private capital revenues associated with our Q4 transaction activity, various year-end adjustments, and reduced G&A expenses as a result of our deferred compensation plans.

From a run rate perspective, approximately $0.025 per share of the $0.44 was related to the year-end adjustments and the effect of the one-time impact from the deferred comp.

In our operating portfolio, leasing volume was strong across all regions, and in total, we leased more than 37 million square feet, an 11% increase over the third quarter.

As Hamid referenced, our operating portfolio was 92.2% occupied at year-end, up 120 basis points from the third quarter.

Rent changes on roll-overs decreased 4.5%, an improvement over the third quarter, which, when combined with our strong occupancy, led to an increase in same-store NOI of 0.4%.

From a contributions and dispositions perspective, we completed approximately $1.2 billion in transactions in the fourth quarter, of which approximately 83% or $1 billion was our share of the proceeds.

The weighted average stabilized cap rate on our share of contributions and dispositions was 7.1%.

The assets sold to third parties represented predominantly non-strategic or non-core market assets.

In the contributions and sales to our co-investment ventures, nearly 33% of the assets were in the higher cap rate markets of Mexico and Brazil.

Excluding those markets, the weighted average stabilized cap rate would be 6.8%.

We also disposed of $32 million of land, and monetized an additional $41 million of land through our Q4 development starts.

On the capital deployment front, we committed approximately $345 million of capital, of which $210 million was Prologis' share.

Our deployment included $166 million of development starts, $146 million of building acquisitions, and $32 million of land acquisitions.

Turning to capital markets -- in Q4, we completed more than $1.3 billion of debt financings and refinancings, with nearly $1.1 billion of that on behalf of our co-investment ventures, and $240 million related directly to Prologis.

Additionally, we bought back over $75 million of debt associated with our converts and the PEPR bonds during the quarter.

These transactions, in combination with the net effect of our Q4 disposition and capital deployment activity, enabled us to lower our look-through debt by over $900 million, reduce our share of 2012 maturities by $400 million, and improve our leverage stats across the board.

While we are pleased with our progress, and exceeded our 2011 delevering objectives, we remain laser-focused on achieving our long-term leverage and credit rating targets.

Relative to the merger integration, we continue to make excellent strides in both identifying and realizing merger synergies.

We have identified a total of $115 million in merger synergy savings, of which we have realized over 90% on a run rate basis as of year-end 2011.

We will continue to incur merger integration costs throughout 2012, related primarily to costs for the remaining transitional employees, as well as our continuation of our rebranding efforts.

To be clear, the heavy lifting associated with the integration is effectively complete.

It has gone extremely well, and we could not be happier with the synergies and the collaboration among our teams.

Now, turning to guidance for 2012, we expect full-year core FFO to be in the range of $1.60 to $1.70 per share.

As a reminder, our core FFO excludes any gains or losses from disposition and contribution activity, as well as merger integration costs.

While we don't guide to individual quarters, it's important to note the core FFO will not be evenly distributed between quarters in 2012.

We expect first quarter core FFO to be lower than the fourth quarter of 2011, principally as a result of -- first, the $0.025 of Q4 adjustments and deferred comp savings I referenced earlier; second, the NOI loss associated with the substantial dispositions late in Q4 2011; third, seasonally lower occupancy in Q1; and finally, expected seasonal expenses associated with wintertime property OpEx.

We expect FFO to gradually increase as the year progresses, driven principally from increasing occupancies in the operating portfolio, stabilization of development assets, and increased private capital revenues.

On a GAAP basis, we expect to report a net loss for 2012 ranging from $0.40 to $0.50 per share, with the differential from core FFO driven predominantly by real estate depreciation and merger integration expenses.

In our earnings press release, we outlined the business drivers that support our 2012 guidance, which I will briefly review.

Same-store NOI is expected to be flat to up 1%, reflecting increased occupancy, net of rent roll-downs.

Given the lease roll that takes place at the beginning of each year, and the seasonal nature of month-to-month leasing, we expect occupancy to drop in the first quarter, and then to trend higher and reach 92.5% to 93.5% by the end of 2012.

And while we expect to see net effective rent growth in select markets, rent change on roll-overs is expected to again be negative during the year, given leases rolling down from prior cycle peaks.

However, we believe we are nearing the end of this roll-down cycle.

On the expense side, we expect net G&A to be essentially flat to the annualized fourth-quarter level, and to total $200 million to $205 million for the year.

Now, turning to capital deployment -- we anticipate starting $1.1 billion to $1.4 billion of new development, with the vast majority targeted for the second half of the year.

Our overall share of total expected investment will be approximately 70%.

We expect building and acquisitions of $400 million to $600 million, of which we expect Prologis' share of the capital to be approximately 40%.

We expect contributions and dispositions in 2012 to total $4.5 billion to $5.5 billion.

Net of our co-investment in the Fund activity, we expect Prologis' share of the proceeds to be approximately 70%.

Our guidance assumes a substantial portion of the contributions are expected to come as a result of the formation of our Japan funds, but does not contemplate a recapitalization of PEPR in 2012.

In an effort to simplify our business, which we have stated as a goal from the outset of the merger, we also intend to rationalize a number of our funds in 2012.

To that end, last week we bought out our partner's 63% interest in NA2, and now own 100% of the assets.

This purchase was in our plan for 2012, and is modestly accretive to FFO, although temporarily dilutive to our debt metrics.

We intend to eliminate, either through dispositions or through consolidations, at least three other funds in 2012, in order to simplify our fund structures and reduce competing priorities.

In closing, we are incredibly pleased with the results in 2011, and the significant progress we made in enhancing our financial position over the last six months.

We have delivered ahead of plan on our 2011 priorities, and are solidly positioned to execute on our strategic goals for 2012.

At this point, I will turn the call back to the operator to open up for questions.

(Operator Instructions) Jeff Spector, Bank of America.

I'm here with Jamie.

We had a quick question and we thought there was a timely article today in the journal talking about US markets shining brighter, manufacturers looking homeward.

Can you talk to us about that and how does this impact your business?

Let's say if manufacturers are bringing more business back to the United States, how does that impact the warehouses in your portfolio?

It should help Chicago and the Midwest a little bit more.

As you know, we've had major holdings there.

You've heard me talk about how Chicago used to be one of the good markets and was now, in the last three or four years, behaving like one of the bad markets.

I think there is more metal bending and manufacturing of the low tech nature, it's probably auto-related in the Midwest that will benefit Chicago.

I think we'll be a beneficiary of it, but probably not on the coast, more on lower cost manufacturing areas like the Midwest.

Hamid, this is Jamie.

Just a follow-up, as you're talking to tenants, are they thinking more along those lines?

Is this just more in the press and Super Bowl commercials?

More of the latter than the former.

But it is a trend.

What's important about it is -- let me back up, people get this manufacturing thing wrong.

Manufacturing employment in the US has gone down, but manufacturing actually is not gone in the US.

US is still a powerhouse manufacturer, particularly because of the high productivity and the high value goods that are being made.

The trend in manufacturing employment has been down.

Now, that decline has flattened basically and has tipped up a little bit.

To that extent, it's significant and sells headlines and newspapers, but I think the long-term dynamics are such that US will continue to be a big manufacturer, but employment levels in manufacturing are not going to be substantially higher.

Paul Morgan, Morgan Stanley.

Just going to the development guidance, you have $1.1 billion to $1.4 billion, could you just talk a little about how much of that will be monetizing land currently in your inventory versus new land acquisitions?

Then also maybe the mix of build-to-suit and spec and where you might have the confidence to be starting spec?

This is Mike Curless.

Let me talk to you a little bit about, first, how we see the makeup of our the development pipeline.

The guidance that Sully referenced, we'd expect some 35% of that or so of that to take place in the Americas, 40% in Asia, and 25% in Europe.

And the makeup of that between spec and build-to-suit, we'd suggest that some 35% of that would be build-to-suit, with 55% spec, keeping in mind that the more expensive spec buildings in Brazil, China and Japan drive up that percentage.

We would suggest it would be much more balanced from a transaction count standpoint going forward.

In terms of spec opportunities, we're seeing opportunities in primarily in our global markets, that includes cities like Miami, Los Angeles, Washington, DC, Paris, and Tokyo among others and we feel like we're very cautious about our spec development program.

For starters, we focus our spec only in global markets where our global customers indicate that's where they want to be.

And then it's important to note, within those global markets most of our spec development takes place in our proven existing park where we've got extensive track records with very high occupancies.

We know the local market inside and out, have a lot of people on the ground in those markets and those feel like very appropriate places to build specs.

Relative to the land component of that, we're going to put a fair amount of our land to work this year inside developments, but also expect to see, in line with what Mike was talking about relative to where there are good development opportunities, undoubtedly we'll be looking to buy more land in Brazil and China, in Japan, et cetera.

There will be land acquisition throughout the year, but we certainly intend to put our land to work.

Yes, I think our net land position is probably going to decline about $200 million a year until we get to the point that we're comfortable, which is in the low $1 billion range.

But it will not be a straight line, as Bill mentioned.

Ross Nussbaum, UBS.

Was hoping we could talk a little about the North America Fund 2 purchase.

Can you give us some idea of the overall price paid for that 63% interest and how it worked from a valuation perspective, as well?

Yes, Ross, this is Bill.

Netting it out, in our NAV schedules for ad infinitum that we put in our supplemental, we've always included a pro forma in the NOI for virtually 100% ownership in NA2, as well as the corresponding debt associated with it.

When we look at NAV and when we've guided you guys to look at NAV in the past, we've asked you to look at that as if we own 100%.

We had the opportunity or we restructured the NA2 fund about two years ago to the point where effectively, we had the opportunity to buy the 63% interest for $1, which we did.

We bought it for $1, we paid off the Citi debt that was sitting on that, a little over $300 million in doing that, and we're bringing the whole portfolio onto our balance sheet.

It just simplifies our fund structures, puts a bunch of really good assets on our balance sheet, and again, it's from an FFO standpoint, it's modestly accretive.

From a debt metric standpoint, it's modestly dilutive to the debt metrics.

But again, we're on a mission to pay down debt and actually some of the interesting pieces as we look for good accretive debt to be able to pay down, as we generate proceeds, there's some secured debt inside NA2 that offers us the opportunity to pay it down this year and so there's some benefits associated with it.

Michael Bilerman, Citi.

I'm speaking to Sully.

As you think about, you gave this $400 million to $600 million of gross acquisitions for the year and your share is obviously lower, and you talk about some of these fund contributions, or the fund acquisitions of maybe two or three more where you would consolidate in.

I assume those are not the same sort of opportunities like NA2, where effectively you are consolidating already and it doesn't include, it doesn't sound like, the land potentially you'd be buying.

Maybe you can talk a little about how you see that capital being spent this year to take in those fund interests?

How you intend to fund them, and also gross land purchases that we should be thinking about as a use of capital in 2012.

Let me talk to some of these fund consolidations and whatnot that we're talking about.

In essence, we're really targeting three funds and I think we've chatted about this before.

We began the liquidation of the Oster's fund back in the third quarter last year and we'll continue that process into this year.

The likelihood is that we'll either dispose of those assets and distribute the cash or we'll take the assets onto our balance sheet in exchange, in essence, for our interest and maybe a little more cash, but it's a relatively small portfolio.

Same thing is true with the AFL-CIO, so those are funds 1 and funds 11 in the schedule.

Those are relatively small funds.

The other fund that we're focused on is the PCAL, the Prologis California fund, where we have a 50/50 and in essence, we're going to just split the assets and each of our partners take the asset on the balance sheet.

From a cash out-of-pocket in terms of what we're talking today, it probably will be a cash generator, not a cash utilizer in 2012.

And it just cleans up a host of the fund structures and so I hope that answers.

The only other thing is that the land as I mentioned, Michael, is probably going to be a net contributor of a couple hundred million dollars, call it $200 million of cash.

We'll buy some, we'll sell some, we'll transfer some into developments, but net-net-net, based on most scenarios, we're looking at about a $200 million reduction in our land bank.

Ki Bin Kim, Macquarie.

First, as a quick follow-up, is it the calculation of 9% cap rate for your purchase in NA fund 2?

And the second question, turning to Europe, what are your plans for taking your ownership rate in PEPR up from 93.7% to 95% to get legal control and possibly start raising a new European fund to offload those assets and a small third part of that question is what's the appetite from investors for private capital in Europe?

You want me to chat about NA2 first?

Yes, NA2 and then maybe Walt can talk about the --

I'm not sure the cap rate you just threw out there but whatever it is, it's substantially higher than what the value of that portfolio is.

The value of that portfolio is going to be -- have probably at most a 6% on it on the US portion and probably a 7% on the Mexico portion of it, somewhere in that range.

But it's not 9%.

I don't know what the math is that you're doing.

When you work through it, and this will all be in the purchase accounting that goes into Q1, but in the supplemental, you'll see NA2 with about a $2 billion gross book value, that's gross book value on that original acquisition.

We bought out Citi's interest for $1 and so the overall acquisition price of NA2 was closer to $1.6 billion, with the reduction being borne by Citi on that, not us.

It's effectively breakeven to us from our original investment, which is a deal considering that we did the fund in July of 2007.

Those values have come back pretty strongly over the last couple of years.

Ki Bin, this is Walt.

As relates to the second part of your question, our goal is not necessarily to gain 95% legal control of PEPR.

I don't know if you saw it, but yesterday PEPR put out a release and first of all, let me just step back.

I think we've been saying for a long period of time now that PEPR is not, in our view, in the right structure as a public company with very little liquidity.

You'll see in that release that we made a proposal as a unit holder, which would be taken for a vote in March, mid-March, to change the management regulations to allow for a winding up of PEPR with a distribution of assets.

We call it a distribution in specie.

At the end of the day, we think that this proposal is good for all unit holders, because number one, it provides an equal benefit to everybody across the board and number two, it provides liquidity to everyone, all unit holders in a tax efficient way.

Number three, it provides -- this is very important -- optionality to the unit holders who hold in excess of 1% of those shares to in essence take cash today or take properties in the event that they think that those properties will appreciate in the future.

And so we're obviously in favor of this proposal.

We tabled it and we plan on voting on it in mid-March or voting for it in mid-March.

Sloan Bohlen, Goldman Sachs.

Just wanted to get a little bit more color on the distributions plan for this year.

If you could maybe break it out geographically and then if we could maybe get a sense of what amount of NOI will be tied to which regions you're distributing or contributing assets to?

Well, you said distributions, I assume you mean contributions or dispositions, in essence.

As we said, a sizable portion, if you look at the $4.5 billion to $5.5 billion, effectively 60% of that relates to Japan and that's going to be an incredibly low cap rate relative to the overall average.

Think of the other 40% as fairly evenly spread between Europe and the US, but the vast majority of it's going, in our plan, is targeted for the two Japan funds, the development fund and the core fund.

Brendan Maiorana, Wells Fargo.

Just wanted to go into the same-store guidance a little bit, flat to plus one for the year.

It would strike me that your occupancy has moved up pretty nicely throughout 2011 and you expect it to move up a bit in 2012.

Why shouldn't we see same-store maybe move up a little bit more than that?

Is there something that's impacting that number?

Can you give us a same-store number on a cash basis and compare that to the GAAP guidance that you've given?

Let me answer the cash side first.

I don't have those numbers with me on the cash side and we got asked that question about an hour ago through somebody's e-mail and we'll have to get back to you guys on the cash side of that.

We'll look at first quarter whether we can't provide some deeper input to that.

From the same-store standpoint, there's an opportunity, the markets are recovering.

We're looking at our best guess as to what's going to happen in the overall markets.

We think that overall, the portfolio is probably somewhere less than 5% over-rented today.

In 2012, five years after the 2007-2008 peak, some of what we have rolling down this year will be at the top of some of the theoretical roll-downs.

But, that's why we feel pretty confident going into 2013 that this thing is turning around pretty quickly and so 2012 should be the end of the process where we see some sizable roll-downs in this portfolio.

Brendan, this is Walt.

Let me also say that keep in mind that the same-store results that we're talking about this year, a lot of that is somewhat driven by what happened last year in terms of rent roll-downs.

We've had in 2011 roll-downs, order of magnitude, 6%, 7%, 8%.

I don't know what the average is.

That's now flowing into next year's numbers.

If you're turning 15% to 20% of your portfolio down, if you will, 7% or 8%, by definition you need to have 2% occupancy growth just to be at zero.

Looking forward into the future, we're telling you what we think it's going to be this year, but hopefully this year's rent roll-downs will be a lot less, and that will have a measurable impact on next year's same-store NOI.

Having said all that, there is a big bet between different members of the Management team as to when that will occur and you can guess which side of it I'm on.

Michael Mueller, JPMorgan.

Real quick, on North American Fund 2, could you just comment before my other question on whether or not those assets you brought on balance sheet, are they expected to stay on balance sheet or are you just temporarily housing them for another fund?

And then looking at occupancy trends sequentially, what you categorized as other markets had a nice increase of call it about 200 basis points.

Can you talk about what's going on in there, what the markets are?

Two questions there.

Let me try to address the first one relative to the NA2 assets.

The NA2 assets are, I don't know, Walt, 60% or 75% developed.

Right.

By --

They're great assets.

Fabulous assets.

Fabulous assets.

They're great assets to bring on the balance sheet, but they also happen to represent great assets that we might cede into some of the funds, et cetera.

They represent a pool, probably not unlike the SGP assets that were brought onto the balance sheet in 2011 and then put into USLF later in the year.

But no determination has been made in that regard specifically to those assets.

And then the second question --

It's Gene.

You're right about our regional markets are recovering and a couple of them which are noteworthy in our portfolio would be Cincinnati, Columbus, and Memphis.

Frankly, those markets themselves are doing a little bit better, but the real story there is the performance of our portfolio.

We're in high 90s, mid to high 90s occupancy there and we outstrip market occupancy by over 1,000 basis points, and it's really a testament to the quality of these assets in our portfolio and the quality of the team.

There's one other thing I'd like to point out relative to what changed this quarter in the operating environment in the US, and this was referenced in the initial remarks, but we've seen a 170 basis point pickup in occupancy for (inaudible).

I caution, these are volatile statistics quarter-to-quarter, but I think we highlighted this trend a couple quarters ago.

We've seen it develop, but now it's really coming through fast in a big way.

That's really important because that's where we have occupancy to pick up in that portfolio and we expect it.

John Guinee, Stifel.

This is probably a question for Mike.

As you well know, when the big retailers, in looking at their distribution channels and the big logistics companies did all their modeling five, six, seven, eight years ago and they put in the employee cost, right to work state, fuel cost, rent rates, et cetera, it was clearly a shift towards centralized big box, which is what drove a lot of build-to-suit and spec development in the primary markets.

How have those models changed and how do you see that working going forward in terms of the big users of bulk industrial space?

This is Gene.

Let me start and then maybe Mike can fill it in with more big picture.

But I actually think what's really taken place as you go back 5 to 10 years, a lot of the supply chain reconfiguration conventional knowledge was big buildings.

Many of these big buildings were developed in, frankly, ex-urban, in some cases, locations where they're really not near population centers and they are around that 500-mile radius, that one day truck route.

So Memphis benefited and Columbus, Ohio benefited.

What we've seen recently, and I know you (inaudible) by a couple of things, one being fuel prices is that big buildings are still in demand and we've talked a lot about that on these calls.

But the location is clearly going back to population centers and (inaudible) locations.

I think the big shift has been away from tertiary locations toward major markets and we see that continuing and obviously, it's good for our portfolio, but it's also very challenging to deliver big growth rates in these big markets.

But we think we're pretty well-positioned.

I just would add, it's very consistent with our long-term build-to-suit strategy, as well, John, being our primary focus on build-to-suits is predominantly in global markets and some select regional markets, all, of course, with acceptable profit margins.

I think we'll see more of that type of activity this year as we're hearing our customer sentiment approve more of a gravitation back to some of the larger markets, as Gene mentioned.

And then you heard Hamid mention earlier that space utilization is at all-time highs.

You combine that with better customer sentiment and the lack of big lots of space available in existing buildings, we're pretty bullish on our build-to-suit prospects for next year.

Not to pile on, but I would just say there's a little bit different thing going on in Europe right now.

You're really seeing supply chain reconfiguration completely.

You're seeing companies moving from older to newer buildings.

This has been happening for the last decade and really, manufacturing has been shifting for the last 25 years from Western Europe to Central and Eastern Europe.

You're really seeing companies today trying to conduct Pan-European distribution as opposed to local and regional distribution, so you actually are seeing companies move to bigger boxes over time.

Not nearly as big as you'd see in the US.

A 500,000 square foot building in Europe would be a very, very large building and there are just a handful of a million square foot buildings, but slightly different dynamic in Europe than in the US.

John Stewart, Green Street Advisors.

Bill, can you please identify for us where the additional synergies that you've identified are going could come from?

Can you also please discuss your ability to buy back unsecured?

I presume that you could issue today well inside of the coupons on what's outstanding, so what's the execution going to look like on buying those back?

And then lastly, Walt, if you could please give us just a bit more color on the PEPR proposal?

Specifically, do you need a majority of the minority to approve that proposal and then if it is approved, where do you go from there?

I know you said that a recap is not contemplated in this year's guidance, but what's to prevent you from distributing at that point and where do we go from there?

Thank you.

This is Tom.

I'll take the increase in merger synergies question.

There were five items that drove the increase.

The first was greater headcount savings.

We identified lower IT costs and lower professional fees, including the benefit from entity simplification.

We've identified more entities that we believe we can eliminate.

We had greater savings related to bringing property management in certain markets in-house and we also had some greater global line of credit amortization savings than we originally anticipated.

Relative to the debt question, we look across our portfolio to see where we can buy the most accretive or where we can pay off the most accretive debt possible as we generate the proceeds.

Hence, one of the reasons we did NA2, as an example, was because there was a fair amount of debt that effectively was 100% ours and gives us the opportunity.

There's more of that in the secured debt side.

Candidly, the most accretive, quote, debt, is sitting in our preferreds right now.

We're going to look across the spectrum as we generate proceeds and look to see where we can use those proceeds to delever most accretively as we get it.

We've said this a couple of times, given our disposition and contribution program, we may have a high class problem that says we are sitting on some cash ahead of scheduled debt maturities.

But we're hoping to plan that pretty well.

John, as it relates to color on PEPR, yes, let me just answer your question by saying that this proposal that we've made requires a 67% vote to be approved.

Obviously, we own 94% of PEPR.

Once the management regulations are changed, basically any shareholder that owns in excess of 20% of the shares can table a vote to wind up the Company and that could be a logical next step for us to consider, obviously.

As it relates to long-term, the assets, I think we've been pretty upfront to say that one of our key objectives is to mitigate the FX exposure that we have long-term.

Consistent with that objective, I'd say longer term we would likely seek to put our pro rata share of those assets into funds.

But let me be clear and make sure that everybody understands that, and Bill said this in his remarks, that this is not in our plan or in our guidance as it relates to 2012.

Dave Rodgers, RBC Capital Markets.

Hamid, I think for a couple years, we've been talking about more and more of the development running through funds and I think for 2012, you've got about 70% of the capital in the developments will be PLD.

I think some of that's probably timing-related to when you can start these funds, but a couple of questions around that.

One, are there any funds contemplated this year that would be development funds as a part of that 70%?

And maybe more broadly, can you give us a sense as to whether your third-party capital providers continue to be interested in development funds, and will we see that 70% PLD contribution declining in years to come?

Great.

Dave, first of all, the 70% is a big improvement over 100%, so we're actually pleased with that and we think that number's going to move right down to about just under 50% in the long term.

Yes, we are doing all our developments in ventures today in Mexico, in Brazil, and in China and we'll be, as you know, adding a development fund in Japan, along with an open end fund.

More and more of our markets outside of the United States and Europe are moving into a development in a venture format, bringing down that percentage.

Investors are really interested in development and frankly, when they look around for development partners and platforms, without being too boastful, there aren't that many choices that would be more attractive to them than what we have to offer in terms of scale of platform, quality of teams, land assets, et cetera, et cetera.

I think we're well-positioned to serve the needs of the investors.

With respect to the US and Europe, for the foreseeable future, the developments will be on balance sheet.

But really think of those as replacing the significant number of assets that we're selling in terms of our exit markets and other markets and regional markets that we're selling.

We've got to replace those assets and the land bank and the US developments on balance sheet and on Europe will serve that function.

That's the plan long-term.

Two, three years from now we'll be under 50% in terms of development on balance sheet.

And by the way, you didn't ask this question, but I was going to say this in connection with the land question.

Land used to be a four letter word.

My judgment is, that a year from now, land will be one of the strongest aspects of this Company, particularly given the location of the land we have and the opportunities that we'll have to monetize it through development.

Because we're going from 100% development on balance sheet model to 50%, roughly, across the board, and we're reducing our land bank by a couple hundred million dollars net-net-net, development and land actually will be sources of capital, not uses of capital.

That's a pretty important switch that I'm not sure everybody's figured out yet.

George Auerbach, ISI Group.

Guys, last summer you embarked on a project to build out solar panels on a number of the US rooftops, which at the time you estimated could add upwards of $20 million a year of NOI and $100 million of development fees over a period of four or five years.

Two questions -- First, where are we in the buildout, i.e., how much of the NOI from the program is in the run rate today?

Second, how much incremental NOI and fees should we expect this year from the solar program?

This is Mike Curless.

Just to circle back on the solar thing, first, as most of you are aware we have closed the deal, the OE loan program a few months ago.

In a short few months, we're off to a good start with respect to (inaudible) pursuit by our dedicated solar team.

It is a long lead time sales item and we expect to see results from that in 2013, but keep in mind it is a relatively long sales cycle.

As you are aware, last summer there's $2.6 billion potential capacity.

That can create some significant value potential based on development fees, roof rental and return on equity, even replacement of some roofs.

But as we look at it over the long haul, even if we're able to capture a portion of that value.

This is going to be very meaningful against what we think is relatively low overhead.

We already have the people in place, plenty of roof tops.

We're optimistic that even a significant or a small portion of that overall value creation will be very accretive to us over the long haul.

Again, it's a long sales cycle and we look forward to see results coming our way in 2013.

The short answer, I think, to your question is that it's pretty back-end loaded because it takes a while to, A, make the deals and two, to put out these roof top units and start generating fees and revenues on it.

Don't expect the number, the $20 million, to come in at quarter for each year in the next four years.

It will be mostly back-end loaded.

Did guidance for 2012, the add from that program is de minimus for 2012, but we are also optimistic that, even with the long lead time cycle, these guys could get a move on.

Yes.

And get something started in late 2012.

And I should remind you, we already generate a significant amount of revenue from rooftop solar outside of this program, because of activity earlier on.

I believe that number is like $8 million a year, but don't hold me --

Don't hold you to that, but we've done well over 60 megawatts of solar installations so far and this program, if it was fully built out, will be something on the order of 250 to 275 megawatts.

There's a lot to come but --

Be patient.

We've already done some, yes.

Michael Bilerman, Citi.

Just in terms of just looking at the occupancy increase, page 28 of the supplemental, you break down the portfolio between the assets that are generating NOI and those that are generating net operating loss.

It would appear, sequentially, those generating net operating loss, the square footage went down by 9 million, but the ones generating NOI also went down 2 million as you've sold or contributed assets out of the consolidated portfolio.

Assuming you talked about the 7% cap rate, I assume you sold more fully leased assets, so is it fair to assume that most of the leased stuff that you got in the quarter was from taking these really low leased assets and moving them up?

Just talk about maybe what else is happening here between these two buckets.

Let me try to touch on that in a couple big pictures.

First of all, if you take out all the noise in Q4, what did we dispose of, what did we acquire, what did we take out of the operating portfolio and put into held for sale, et cetera, what ended the year at 92.2% occupancy would have been 92.29%.

Our occupancy actually would have improved relative to eliminating the noise.

We had pretty robust results in Q4, from a leasing perspective, and it's somewhat intuitive to look and say hey, guys, we leased a boat load of space that was empty.

Michael, the easiest trend that you can grab onto is what Gene talked about.

We were pretty fully leased on large buildings.

We were only 88% leased on smaller buildings.

The small and medium size Businesses coming back are driving the occupancy in the near-term because, frankly, on the super big buildings, we don't have a lot of product to lease.

We're pretty full.

It's really the story this quarter is the first and second inning of the small, medium size Businesses coming back and I think that's a huge deal for the recovery of this Business.

And there are higher rents per square foot in the smaller spaces, the NOI drags on higher.

Ross Nussbaum, UBS.

Is the management transition that's planned for the end of this year still happening, as originally contemplated one year ago when the merger was announced?

Yes.

Yes.

Ki Bin Kim, Macquarie.

How would you describe the institutional demand for European industrial properties, and if you could quantify how much money you think you could raise from third party investors out there?

Yes, Kim, this is Guy.

We had a great year last year in raising institutional capital.

It was a record year.

We've seen that momentum carry on to this year.

Europe, the Japan raise we're doing, and even our US funds, we're seeing continued interest.

There are a couple of trends going on.

One is that lot of these investors are still underinvested in industrial and they're seeing the same change in improvement in the fundamentals that we're talking about here today, so that interest is increasing.

Secondly, there's a trend towards having fewer relationships with managers and so they want the larger managers who they can have multiple investments with and we can have ventures or funds offered to them in multiple geographies.

Thirdly, I think there's a move towards greater appreciation of the owner-operator model, where they can invest with a manager who, especially in this part of the cycle, can add value at a real estate level rather than financial engineering.

Those three things are going our way.

Relative to Europe specifically, we have not seen a drop-off in capital looking at Europe.

Obviously there's a lot of headlines, but we're still seeing considerable interest.

Even of note, in the last quarter or so we've seen an interest in Japanese institutional investors looking at Europe which is something new.

I don't know whether it's just yen, Euro or what.

That's something I think, if I was sitting here six months ago, I wouldn't have said we're seeing a lot of.

John Stewart, Green Street Advisors.

Just a quick clarification.

On, call it, $5 billion of distributions and contributions this year, I know you said that your share is expected to be 70%, but what would the net proceeds be?

Distributions.

You mean contributions and sales, right?

That's what I said, yes.

No, no, no, the net proceeds to us are 70%.

Net gross proceeds, but you got to take debt out of that.

It's gross proceeds we're going to use that to pay off debt.

Japan's an example, just to sort of work through it.

There's debt in Japan.

The best way to look at it is on gross assets, our share, and deal with the debt separately.

Forget about secured debt, think of debt as being on the portfolio.

That's the easiest way of thinking about it.

70% of $5 billion is $3.5 billion.

You've got the math.

Michael Bilerman, Citi.

I just had a follow-up on my question that I just asked, do you know specifically out of those properties that are generating that operating loss, 9 million square feet came out.

How much of that popped into those generating income versus how much of that has either been sold or targeted to be sold?

Then just as a second follow-up, in terms of the leasing activity that you did in the quarter, is 80% retention, so that was a lot of leasing net of existing expiries, but the CapEx, at least per foot, seemed to be higher than it has been.

I was trying to understand the dynamics and I don't know if that's just maybe because it's more expensive space or smaller space, I didn't know what was going on to drive that with high retention.

Michael, let me take your second question first and then we'll get back to the first one.

The high retention ratio is not a reflection of what percentage of the leases we did in the quarter were renewals versus new leases.

In fact, the ratio went the other way.

We had more new leases this quarter than we did in the last quarter.

The other thing to just point out on turnover cost is that we had an increase in the length of term of the leases we signed this quarter.

If you look at the numbers in terms of cost per square foot per term of lease, the cost actually went down a little bit.

If you look at a trailing four quarter, we're pretty flat on turnover costs and I don't think it's adjusted relative to the retention rate.

Let me try to answer your other question.

We don't have the exact math you want but we can get it to you.

But here's the conceptual, top-down way of getting to the answer I think you're looking for.

We already told you that the assets that we sold were more leased than the assets in the balance of the portfolio.

Had we not sold them, our occupancy, as Bill said, would have been at 92.9%, instead of 92.2%.

So by definition, there's not a lot of sale of empty assets going on in aggregate.

I'm sure there are a couple of individual user sales and the like that we had in our sales, but on aggregate, it's not selling vacancy.

That is what's going on.

It's really the lease-up of the smaller buildings trending up and getting into the other bucket of stabilize our operating properties.

On Gene's question, even if you put the term aside, our TIs and commissions are $1.35 to $1.40 per foot for as long as we can track it.

Given that smaller, the longer term results and bigger commissions, put the TIs aside, just simply the fact that you're signing longer leases, you have to pay more commission to your brokers and the improvements in smaller buildings is of higher value, a couple of pennies increases in TI costs should not surprise anyone.

[Kiyang Zhang], Bank of America.

It's actually Jamie Feldman again.

Two questions -- one is you had commented that you're seeing more demand from small and mid-size businesses.

Can you provide a little more color in terms of where you're seeing that, what kind of businesses and what that means for the recovery or the pace of recovery here?

And then secondly, we are expecting a drop-off in the January 1, based on short-term leases rolling over.

Can you talk a little about what you expect in the warehouse markets in general, in your portfolio but also just across the industry.

Sure.

To your second point, Jamie, and this is Gene, we will see a drop-off like we always do at the beginning of the year and of course, that's baked into our forecast.

As we look out into the year, our strong markets that we've talked about have been places like Los Angeles, places actually like Dallas, South Florida, New Jersey.

There's no signs of that changing.

We continue to see strength there.

I'm hopeful for markets like Atlanta, markets like Phoenix, who are significantly impacted by the housing downturn to return.

We're seeing some signs of that.

Obviously, they're struggling to return.

And getting back to your --

any particular industry, business?

The small tenant space.

Jamie, these spaces have been under so much pressure since the downturn, meaning, in some cases, for very small tenants and frankly, we do not have a lot of very small tenants, business is -- they went back to the garage.

We saw huge, huge fall-off.

What we're seeing with small customers is I think a ton of pent-up demand, because all the small business isn't dead in this country.

It's just very, very careful on expansion and we're finally, and this is across the board, a big segment of that population tends to be housing-related and, as you can imagine, we're really not seeing that yet.

But other than that, it's really across the board and what we're seeing is simply pent-up demand finally being unleashed a little bit.

Some of these companies have probably had expansion needs for a couple years and have just held the line.

Jamie, we bifurcated the portfolios in Europe and Asia.

It's really more important in Europe, the same way that we have in the US, large, medium and small spaces.

They're smaller buildings overall and therefore smaller spaces, but you've got the exact same phenomenon, higher occupancies in the largest spaces and lower occupancies in the smaller spaces.

This quarter, for the first time, Q4, the change between Q4, the change between Q3 and Q4 showed marked improvement also in the small spaces in Europe, so we're seeing exactly the same phenomenon that Gene was talking about, in the US and Europe.

Let me just transition to some concluding remarks with that commentary.

It just reminded me that a couple weeks ago, I had a meeting with the CFO of a major bank, a top four bank in the country, and he had just come off his earnings call and he just told me that the most dramatic thing that he had seen in his portfolio was that the lines of credit for small and medium size businesses that were outstanding were finally being utilized.

People were spending that capital, had the confidence to spend that capital, small and medium sized businesses, to buy inventory, invest in facilities and the like.

I think if you guys look for it, there are a lot of signs for that very important part of the market coming back and I think the employment numbers and the like give you another window into that phenomenon, which I think it's important.

But let me thank you for all your questions and I'd like to reiterate that we had a terrific second half and we expect the momentum to continue into 2012.

I think the most important take-aways from today's call are the following -- first, the integration has gone extremely well and our teams are hitting on all cylinders, second, the markets, including Europe, are doing a lot better than most people think, and third, we are, across the board, ahead of plan and very focused on our strategic priorities.

Thank you for joining us today.

This concludes today's conference call.

You may now disconnect.