Prologis Inc (PLD) 2012 Q1 法說會逐字稿

Ladies and Gentlemen, this is the Operator.

Good afternoon.

My name is Melissa and I'll be your conference Operator today.

At this time I would like to welcome everyone to the Prologis First 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.

I would now like to turn the call over to your host, Tracy Ward, Senior Vice President, Investor Relations.

You may begin your conference.

Thank you, Melissa.

Good morning, everyone.

Welcome to our First Quarter 2012 Conference Call.

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

This morning we'll hear from Hamid Moghadam, co- CEO and Chairman, who will provide an update relative to the Company's priorities and will share the Company's view of the operating environment, who will then turn it over to Bill Sullivan, CFO, to cover results and guidance.

Additionally we are joined by members of our executive team including Walt Rakowich, Gary Anderson, Mike Curless, Nancy Hemmenway, Guy Jacquier, Ed Nekritz, 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 maybe invested by a variety of factors.

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

I'd also like to state this first quarter results press release and our 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 their questions, we will ask you to please limit your questions to one at a time.

Hamid, will you please begin?

Thanks, Tracy.

Good morning everyone.

Welcome to our First Quarter 2012 earnings call.

This morning I'll provide an update on our key priorities and share our views of the operating environment.

Our results exceeded our expectations.

It's shaping up to be a very good year for us, with strong momentum across all of our Business lines and solid execution on the four key priorities.

We've made excellent progress on strengthening our financial position, as well as aligning our portfolio with our investment strategy.

We're now three calendar quarters into our ten quarter, post-merger strategic plan and we have generated $1.4 billion from our net disposition contribution and deployment activities.

This amount is about $650 million, or 45%, ahead of our ten quarter plan to date.

As a result of this realignment activity, we've been able to increase our share of assets in global markets from 79% to 84%, and reduced our assets in other or exit markets from 8% to 6%.

These trends will continue as we execute the balance of our ten quarter plan.

We've been somewhat below plan in capital deployment, but we expect development volume to pick up in the coming quarters due to lack of supply of Class-A facilities, which I'll address in a moment.

Interestingly, we're once again seeing opportunities to utilize our platform for value-added conversions.

During the quarter we completed one such transaction in Silicon Valley, generating an economic gain of more than $23 million, or 38% higher than the value of the property as an industrial asset.

Turning to private capital, I'd like to use this opportunity to give you an update on our Japan operations, as well as our private capital initiatives there.

I spent last week in Japan, and my time with the team further reinforced my assessment of the quality and scale of opportunities that we have before us in that market.

We're having great success leasing our development projects in Japan, often prior to the completion of construction.

You recently saw a press release on a million square foot development project in Tokyo that was fully leased before we broke ground.

We expect to have more news of this nature to share with you in the coming weeks and months.

At the same time, vacancies for model-logistic facilities in Tokyo and Osaka have fallen below 5% and rents are moving up.

Our operating assets in Japan represent the highest quality product in the market, and actually within our entire portfolio.

With cash yields in the mid 5% range and long term financing costs under 2%, Japan offers the highest cash spreads among all of our global markets, and local investors appear eager to allocate capital to real estate in this yield starved environment.

We've seen strong Japanese fund flows into the US REITs as well as JREITs, the latter causing a narrowing of the gap between JREIT share prices and their underlying NAVs.

As a result, we are reassessing our fund formation strategy for Japan.

We are now upsizing our development funds to be formed later this year.

We're receiving strong interest from our large global investors and our substantially oversubscribed in this fund.

At the same time we're taking another look at the JREIT market as an alternative to the private open-end fund as the future vehicle for long term ownership of operating assets in Japan.

While we've not yet chosen this as our preferred structure, we think it is only prudent to see if the JREIT market offers a better alternative for our Company.

It will take some time for us to explore this alternative fully.

In the meantime, the capital markets are now offering us the opportunity to mitigate our Yen FX exposure by swapping some of our existing US debt into Yen denominated obligations.

This strategy has the added advantage of reducing the associated interest costs by more than 150 basis points a year.

This review process will surely delay the formation of our Japan ownership vehicle, but we're confident that we'll meet our ten quarter deleveraging plan by executing on a number of other initiatives in Europe and the Americas.

Turning now to our fourth priority, we have made great progress on improving the utilization of our assets.

Our leasing teams continued to deliver excellent results across-the-board.

Leasing activity was stronger than expected, a very positive sign in the first quarter, which is usually a soft leasing quarter.

And notably, rent change on rollover was the strongest its been for many years.

For the first time in four years, market rents have surpassed our in-place rents.

While there will be some volatility in this metric over the next couple of quarters, this improvement occurred earlier than our earlier forecast.

We expect the going-forward trend to be similarly positive.

Additionally our land bank decreased by $50 million driven by the monetization of land into new development projects.

Let me now offer a few observations on the economic trends we monitor most closely.

Global trade volumes remain well above peak, and the current IMF forecast indicates additional growth in global trade of 4% this year and 5.6% next year.

Relative to consumption, retail sales remain strong and container volumes are also above peak levels.

This is prevalent throughout the Americas and Asia, with Brazil and China taking the lead.

Inventories remain a key demand driver for industrial real estate in the US.

During the quarter, real inventories grew in excess of our internal forecast at a 4% annualized rate, causing the real inventory to sales ratio to move slightly off its record low.

The growth in consumption and rebuilding of inventories is translating into further improvements in the operating environment.

Net absorption in the US was positive for the seventh consecutive quarter at 25 million square feet.

We continue to forecast absorption at the healthy 160 million square feet for 2012, up one-third from last year.

This improvement in absorption, combined with continued record low new construction volumes, is driving the increases in rental rates in many of the global markets where Class A is scarce.

While some European markets continue to lag the US, our teams continue to deliver strong results as occupancy increased by 50 basis points from the fourth quarter.

Bear in mind that the vast majority of our European portfolios located in the UK, Northern Europe, France and Poland, which continued to perform well on a relative basis.

Our customers, particularly in the US, are increasingly optimistic.

To sum up we're making great progress on our priorities.

Our markets in the Americas, China and especially Japan will provide strong growth prospects for us over the next 18-24 months.

[Longer] macroeconomic headwinds in Europe, our team there has done an outstanding job of leasing space at good rates in an uncertain economic environment.

Before handing the call over to Bill, I'd like to say a few words about his substantial contributions to Prologis over the last five years.

As you know Sully is retiring from the Company and this will be his last call with us.

Sully has been the key leader on Prologis' executive team and a fixture on these calls since April 2007.

The world has changed dramatically over this period and Prologis has come a long way since as a Company.

One important constant throughout this period has been Sully' s unwavering commitment to our shareholders and we owe him many thanks for his tireless efforts on behalf of the Company.

Walt and I truly believe that Prologis would not be where it is today had it not been for Bill Sullivan's incredible leadership and dedication to our Company.

Sully' s leadership, business acumen, integrity and laser-like focus on always getting it right, have proved in valuable to Walt and me, the executive team and to the Company.

Bill's decision to retire earlier than the original plan is a testament to how quickly the two companies have come together.

He's ready to move forward knowing that his work at Prologis is complete, his efforts are appreciated and his legacy of excellence is admired by all his colleagues, in and out of the Company.

We all wish him the very best for the future and will certainly miss his comraderie and wonderful sense of humor.

With that let me turn the call over to Bill.

Thanks for those kind words, Hamid.

I'm not worthy

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

First the summary of our Q1 results.

Second, an overview of our capital markets activity.

And third, an update on our guidance for the year.

Let's start with our Q1 results.

For the First Quarter 2012 we generated core FFO of $0.40 per share, which modestly exceeded our internal forecast.

The out performance was principally due to higher than expected net operating income across our portfolio.

Typically we see a material decline in occupancy in the first quarter of the year.

The slight increase experienced this quarter, combined with a slight roll down in same-store rents, contributed to higher than expected rental income.

Additionally, the mild winter minimized seasonal operating expenses, although we also had a corresponding decline in reimbursable revenue, and therefore the drop in operating costs has a minimal impact on NOI.

Offsetting the operating performance was a quarter-over-quarter increase of approximately $9 million in net G&A, only $3 million of which is recurring.

Slightly over $4 million of this increase is seasonal to the quarter, approximately $3 million related to new compensation programs, and approximately $2 million related to mark-to-market adjustments on existing compensation plans, given the increase in our stock price over the quarter.

Diving deeper into the operating portfolio, all regions contributed to the strong leasing volume.

And in total, we leased about 31 million square feet during the quarter.

In spite of the economic headwinds, Europe generated another solid quarter of leasing, posting a 50 basis point increase in occupancy from the fourth quarter.

Rent change on rollover decreased a modest 1.1%, the lowest rent roll down we've seen in over three years.

The solid occupancy gains year-over-year, combined with the modest rent roll downs, culminated in an increase in same-store NOI of 1.7%.

Turning to dispositions and contributions, during the quarter we completed $994 million in land and building dispositions and contributions.

Our share of the proceeds was $762 million.

The building dispos and contros were priced at a weighted average stabilized cap rate of 7.2%, which was modestly better than our expectations, demonstrating the demand remains strong for high quality industrial real estate, even in secondary markets.

$13.5 million of these proceeds were from land dispositions, and we also monetized about $50 million in land that was put to work in new developments.

On the capital deployment front, during the first quarter we committed approximately $322 million of capital, of which approximately $244 million was Prologis' share.

Total deployment included $211 million of development starts, $71 million of building acquisitions, and $40 million of land acquisitions and infrastructure spend.

From a fund rationalization perspective, we had a very productive quarter.

We bought out our partners 63% interest in NA2, and now own 100% of this $1.6 billion portfolio.

As we talked about on our Fourth Quarter call, this purchase is modestly accretive to FFO, but dilutive relative to our debt metrics.

We concluded and dissolved our PCAL fund, dividing the portfolio equally with our partner, bringing our 50% share of the fund's $1 billion of real estate directly onto the balance sheet.

And we disposed of 11 of the 12 assets held in Fund 11, and expect to wind up this fund later this year.

During the quarter we also raised $128 million of third-party equity for Prologis' targeted US Logistics Fund.

Turning now to Capital Markets.

During the quarter we completed more than $1.3 billion of debt financings and refinancings, with approximately $1 billion related to the REIT and $296 million on behalf of our property funds.

Notable transactions for the REIT include a $642 million multi-currency senior term loan and an all-in drawn margin of 150 basis points over LIBOR, that is extendible at our option through 2017, and $372 million in TMK bond financings, with a weighted average term of five years and weighted average rate of 1.05%.

Both of these financings were beneficial from a natural currency hedging perspective.

Importantly, we have paid down $1.4 billion of debt on a look-through basis since the second quarter of 2011.

We remain highly focused on delevering the balance sheet, enhancing our unencumbered asset pool, and expect to make significant progress on improving our leverage and debt metrics over the course of 2012 and '13.

Notably, already in Q2, we have paid off $449 million of our 2.25% convertible notes and repaid $59 million of senior unsecured notes at maturity.

Now turning to guidance for 2012.

We are maintaining our full year core FFO forecast of $1.60 to $1.70 per share.

As a reminder our core FFO excludes any gains or losses from real estate transactions, as well as any impairment charges and merger integration costs.

From an operating perspective, we are modestly increasing same-store NOI guidance for the year to 1% to 2% positive, based on the strength of the first quarter occupancy and better than expected rent roll downs.

We continued to expect occupancy to trend higher, reaching 92.5% to 93.5% by the end of 2012.

And while we still expect to see net effective rent growth in select markets, rent change on rollovers is expected to be more negative than Q1, given leases rolling down from prior cycle peaks.

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

On the expense side we now expect net G&A to total $208 million to $213 million for the year, given the mark-to-market on the comp plans we saw in Q1, as well as expected increases to professional fees associated with fund activities and systems implementation.

On the capital deployment front, we are maintaining our full year forecast of $1.5 billion to $2 billion, about 60% of which will be our overall share of total expected investment.

The vast majority is targeted for the second half of the year, and includes $1.1 billion to $1.4 billion of development starts, primarily outside the US, and $400 million to $600 million of acquisitions, mostly in funds in the Americas and Europe.

Finally, we continue to expect contributions and dispositions in 2012 to total $4.5 billion to $5.5 billion, with a potentially larger emphasis on dispos and contros in the Americas and less in Japan.

Net of our co-investment in the fund activity, we expect Prologis' share of the proceeds to be approximately 75%.

Before closing I will provide you with a quick update on our systems integration.

Consistent with our plan, we completed the first of three milestones, and are well on our way to creating a world class information management platform.

The new Yardi 7.0 system implemented effective April 1, harmonizes our operating data and allows for the entire Company to be on one instance of Yardi.

It eliminates manual reconciliation and our access to global operating property info on a realtime basis.

It's fabulous.

Finally, our field teams are ecstatic with the usability of the new system.

This is a real home run.

In closing, we feel great about where we are and where we're going.

With the heavy lifting associated with the merger, and the first major step of the systems integration behind us, I feel it is an appropriate time for me to step aside and to focus on the next phase of my career aspirations.

I have thoroughly enjoyed my time here working with the analyst community and working for our investors.

Most importantly, working with the incredibly talented group of professionals at Prologis has been a highlight of my career.

I leave soon, confident that Tom will do a fabulous job as the new CFO.

And I wish Tom and the Company all the best going forward.

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

(Operator Instructions)

Your first question comes from Ross Nussbaum, UBS.

Hi, it's Ross Nussbaum.

A question on Japan.

Can you walk through maybe the pros and cons of what you see behind pursuing a J-REIT versus an open-end fund?

And does the timing and decision to do that depend on what GLP does, and how the market reacts to their potential offering?

The answer to the latter part is no, because we don't really plan our own strategies around other people's timing, which we don't control.

The answer to the first part is that we don't know just yet.

We are actually pursuing both avenues right now.

And we were basically, exclusively following the open-end fund format, up until I would say a couple weeks ago.

But given the substantial interest and the narrowing spreads to NAV, the J-REITs are becoming just much more compelling.

And of course, the decision is not just an instantaneous decision, because those factors change, but if in fact the J-REIT market proves to be deeper than it's been, and we think there's a real need for a substantial company in this sector to be active in it, it may prove to be the better alternative.

So, I guess the most straightforward answer I can give you is that we're studying the two alternatives very carefully, next to each other, and we'll make a decision in good time.

It is a pretty significant and permanent decision, because it has long-term implications, and we need to be thoughtful about making it.

In the meantime, the real capital need of the Company is in the development area, because it's really going gangbusters.

So, that one we're going to go ahead and just get that one done, because the opportunities there are really proving to be larger and more profitable than we thought because of the rent cycle.

Jeff Spector, Bank of America Merrill Lynch.

Thank you.

I'm here with Jamie Feldman.

First, Bill, congratulations, and enjoy your time off.

I guess, Hamid, if we could just focus a little bit on the ISM report today, definitely better results than what our economists were expecting, but they continue to call for, or warn about, the pending fiscal cliff in January.

Can you just tie together I guess what you're thinking these days when you saw these results, and the conversations you're having with your customer?

Okay, let me answer that question, and maybe even a broader question, which is that you guys know that we exceeded our expectations in the first quarter, and we weren't stepping on the scale in any way.

Clearly the first quarter is always a slower quarter; a lot of the month-to-month leases go away, and in the last three years, the first quarter has been pretty soft.

That didn't happen this quarter.

That's why we beat, by $0.02, our own internal estimates.

But we had healthy debate internally about guidance, and whether we should move guidance up or keep it where it is.

And we decided to keep it where it is, not because of lack of confidence in our business, in fact, it looks terrific right now.

But we've seen this movie before.

In fact, we've seen the movie and the sequel, and now we're looking at the third one.

In '10 and '11, the market went soft on us in May/June.

And we do have the fiscal cliff at the end of the year.

I personally have no confidence in our politicians to get it right, and it could happen again.

So, I'm not the best guy to address the fiscal cliff issue, but I'm just telling you that all signals today from our business and our customers are fabulous, okay?

Better than expectations.

Even in Europe, better than expectations.

By the way, I wouldn't add fabulous to Europe.

I would just say better than our expectations and good.

But fabulous everywhere else.

But who knows, this could go south on us again, and you guys are better positioned and your economists are probably better positioned to answer that question than we are around this table.

But from our perspective, things look really good.

Paul Morgan, Morgan Stanley.

Hi, good morning.

On the value-added conversions, you mentioned the one that you monetized in the last quarter.

It was a big initiative several years back, and now clearly, at least in the Bay Area, there's a healthy bid for land and development of other property types.

Is it something we could see pick up over the course of the year, and are you actively trying to harvest more sites right now?

This is Gene.

Let me take that, and Hamid might have some comments.

These things will tend to be episodic.

We are pursuing a number of smaller value-added transactions, some are value-added acquisitions.

In Phoenix we have a couple of those that we [bought] vacant, have leased up.

You'll see us sell those in the upcoming quarters.

In terms of value-added conversion activity, we think we're moving into a market cycle where that activity will pick up dramatically.

This is an opportunistic transaction we've talked about.

Don't expect to see one of these every quarter.

But we're certainly moving into a part of the cycle where these are beginning to make a lot more sense again.

And the only thing I would add is that when we rolled out the strategy, actually in '07, which now seems like ancient history, we actually said it's going to be about $30 million a year.

And guess what?

Its been about $30 million a year.

I think in the combined Company, it's going to go up, and I do think Silicon Valley is on fire.

These opportunities really come up in only a couple of markets; they don't happen in the less in-fill markets, but they certainly happen in Southern California and Silicon Valley and places like that.

And based on what I'm seeing in Silicon Valley, a lot of it could happen right there in the Bay Area, given all of the activity that's going on in social media and the other sectors.

So, yes, I think we're entering the sweet spot at the cycle.

But I just want to remind everybody -- we actually have delivered at about what we said we would back in '07, and we certainly didn't anticipate the great, whatever you want to call it, of '08 to '10.

Steve Sakwa, ISI Group.

Thanks, good morning.

Hamid and Bill, I just want to make sure I understand the math as it relates to the deleveraging and the contributions in sales as you roll out for the balance of the year.

So, if I heard you correctly, $4.5 billion to $5.5 billion of contributions, of which your share is 75%.

Can you just help us think about how that progresses throughout the year?

And then secondly, what would be outright asset sales on top of that, or is that number embedded inside that number?

Steve, the building and land asset sales are embedded inside the number, and so, total for the year, what we're targeting is the $4.5 billion to $5.5 billion, and we've done $1 billion so far this year.

And our share of that first $1 billion was a little over 75%, and so, as we look to the rest of the year, we're clearly focused on getting the Japan development fund done, which will add $200 million to that number.

In Europe, we have sizeable contributions targeted for the second half of the year.

And we've got three active funds there, that are acquiring right now in PEP2, [Petelson] and our Alliance fund.

And then in the US, Mexico, and Brazil, we have a healthy pipeline of dispositions of assets and contributions, particularly in Mexico.

And then, it is likely that we will do one decent size fund on the order of $400 million to $500 million in the Americas between now and the end of the year.

So, when you add it all up, it's probably -- of the $4 billion that's left at the midpoint of that guidance, you could probably see something on the order of $2 billion coming out of Europe, $200 million out of Asia, and then the remainder out of the Americas.

Yes, and the only thing I would add to Bill's commentary is that we're really focused on this 10-quarter plan.

And as you remember, we didn't actually really provide the detailed quarter-by-quarter numbers of that.

Because frankly when you do, then people get locked into that, and we're not that precise in terms of timing things.

And we're certainly not going to do anything stupid to meet an arbitrary timetable.

So, really what we're trying to do is get to a certain balance sheet by 2013.

And as I mentioned in my prepared remarks, we're actually way ahead in terms of the start we've gotten.

We're also spending money, by the way, a little bit less -- not as fast as we thought.

Now, I think some of that we'll catch up on, on the Build-to-Suits that we're doing.

But net, net, net, we continue to be committed to the balance sheet parameters that we talked about, and I think we're very much on track for getting it done by 2013.

Jordan Sadler, from KeyBanc.

Thanks, it's Craig Melman here with Jordan.

Maybe, could you just give a little bit more color on your comments regarding market rents versus in-place rents of the portfolio?

In what markets are you guys seeing the biggest spreads between the two?

It's Gene.

Let me just take that, and I'll probably kick it to Gary for some color.

If you look across our portfolio, as Hamid mentioned, we think we've passed a really key threshold -- we're in positive territory.

And if you break it down a little bit, in the Americas markets we're kind of right on top of that number, and frankly, one of the markets that we have sort of the highest rents as compared to market, happens to be Los Angeles.

And that also happens to be the -- by far, the fastest growing -- rent growing market in the US.

So, that will turn around pretty quickly, and obviously it really has turned around a lot in the last six months.

So, that tends to move the needle a lot.

In the Americas, in Brazil, we don't have a huge portfolio, but we're actually way below market rents because they're accelerating quickly.

Mexico, I'd say we're probably right on top of it.

I'll kick it to Gary for -- .

And in Europe, I think, again, we're right on top of it; mark-to-market is right at our portfolio rent level.

Like Gene said in the Americas, for us, it's really the global markets that are driving rent change over time, markets like Hamburg and Paris like we've talked about in the past.

In Asia, Japan is under-rented today.

So, we're seeing rental increases in Asia, but the mark-to-market is certainly under 100%.

And in China, it's well under 100%.

So, we're seeing pretty significant rent growth in those markets.

Ki Bin Kim, Macquarie.

Thank you, and Bill, thank you for all your help in the past couple years.

If I could squeeze in two quick questions.

One, if you pursue the JV strategy, would that be externally managed by PLD, or internally managed?

And second question, given the positive momentum we've had for several consecutive quarters in the industrial sector, and given that you have a $3 billion land bank that has been written down by $1 billion, most of it during the depth of the recession.

I'm not sure how to really ask this question, but how would you view your land bank?

And if you could market-to-market based on the strong operating fundamentals we've seen, how would that look like, and how would you describe your land bank today?

You answer the first one, I'll answer the second.

Yes, just on the J-REIT market, Ki, the J-REITs, by definition, are externally advised.

And so there is a separate management company that, if we pursued the J-REIT concept, we would intend to control and/or own that management company.

But by definition in Japan, the J-REITs have to be externally advised.

As for the question of the land bank, I think it's an excellent question, and one that we think about a lot.

If you want to answer that question by looking at actually Land Comps that are trading, you'll have a very limited answer because there isn't -- there aren't that many comps in terms of land trading in the US or, frankly, anywhere else.

Japan, there's a fair amount because there's active development.

But other than that, there's not a whole lot of data points out there.

But if you plug in some of the rents that we're achieving in the better performing markets like LA and Miami and DC and places like that, Houston, and you crank through construction costs and you back into land residuals, certainly we're at a place where the impaired values of the land are way below what those land residuals are.

Now, nobody started buying land on that basis yet, but I think they will.

And I think probably the best answer to your question is the general one, which I think land is going to go.

It's what I said a couple quarters ago.

I think land is going to go from being something that everybody struggles with, and there's a race between how much you can hair-cut existing book value to one that's going to be a source of tremendous growth and opportunity for our Company and our customers going forward.

So, I think people's attitudes about land are going to change substantially.

Michael Bilerman, Citi.

Great.

Hamid, I just want to come back to this exploration of a J-REIT, and effectively using a public company over there.

As you think about the struggles that Prologis had with Pepper, and you think about some of the other externally advised structures that were in Australia and Japan and other places.

I mean, why go down the road of having a listed entity versus what is your strong suit in terms of open-end funds and your fund investors in the private capital business, where you have this long history with -- ?

And just go down the road -- they're willing to pay the values that you want today to start the fund, and you can accelerate your deleveraging goals, and get to this balance sheet that you want quicker rather than delay it potentially to the end of the year?

Because just as you said, who knows what could happen with fiscal things?

And you have the bird in the hand right now.

Why not just grab it with all the complexities and issues that may go around of having

Okay, so, the question is the bird in the hand versus the one that's an unknown, and the answer is that the open-end fund is also not without its risks.

For one thing, the open-end fund is going to be the first of its kind in Japan, and our timing on that, we pushed back prior to this decision to look at the J-REIT alternative to the third quarter.

We in fact have a Book of Business that I will let Guy talk about on the open-end fund, which makes it an extremely viable alternative for us.

Probably a quarter or two delayed, but very much there as a good solid alternative for us to benchmark the J-REIT alternative against.

But we would be imprudent if we didn't look at that opportunity.

And we're well aware of the challenges of an externally advised structure.

But the good news in Japan is that's the only available structure.

So, we're not doing anything weird or different.

The idea of having a third-party advisor run these assets is actually the way J-REITs, as you know, are set up in Japan.

So, it's not, for lack of a better term, it's not a Pepper-type problem where you -- where investors prefer really an internally managed structure with its own management.

Because that option is not available.

So, I think it's a really different kettle of fish altogether, from the Pepper-type project structures that are, I would agree with you, problematic.

So, to summarize, we have not made the decision.

We have to evaluate the opportunity to its full extent, and when we do, we'll figure out which one the best is for our Company and our shareholders, and that's the one we'll pursue.

Guy, do you want to talk a little bit about the open-end fund?

Sure, relative to the open-end fund, we are targeting $750 million of third-party equity for that.

Today we have something over $1 billion worth of prospects in various forms of analysis, due diligence, approval.

Some of those are extended processes these people go through.

But we found that when we get these prospects to Japan to look at our properties, to meet our people, it's a strong story.

I mean, it's a story that we've got the best team on the ground.

There's nobody else that has 100 or so local people who can develop, lease, own, operate.

The properties we have for a [seed] portfolio, about $2.5 billion or more worth of properties, these are our newest.

These are our newest and best.

They've been completed in this last cycle, and they show really, really well.

So, we're not going to stop what we're doing on the open-end fund.

We're going to do these two in parallel, so that we can find out what is the best option for Prologis.

Sri Nagarajan, Cantor Fitzgerald.

Thank you, good morning, good afternoon.

Just wanted to follow-up on Hamid's comment on the Japan open-fund timeline being a little delayed.

If you can just outline or give us some color on the -- any delay there?

And as well as a quick follow-up on the capital deployment?

I mean, you had guided about $770 million to $980 million in development starts, and could we fairly assume right now, given the state of the world economy, that most of this would be Japan-centric?

Thanks.

Mike will talk about the development volume.

I think with respect to the open-end fund, you heard my answer and Guy's answer, so, I'm not sure what else we have to add there.

But originally -- look, we produced the documents for the Japan fund at the end of 2011.

That's when we put the private placement memorandum together.

The average time of formation of a fund today, and actually there was an article about this in one of the magazines that goes around, is about 18 months.

We had a very ambitious plan together, and we still have a very ambitious plan together, even within the timetable that we're talking about.

We're talking about third or fourth quarter with that proceeding.

So, yes, it's a quarter behind, but that's not unusual in this environment, and we feel pretty good about that.

It's just that I don't want to do something to get a quarter or two, and meet an artificial timetable if it's not the best thing to do.

We're going to assess that.

But you've already heard me say that.

Mike, do you want to talk about development?

Sure, let's talk a little bit about the mix of the pipeline for the year.

We did get off to certainly a fast start in the first quarter with $211 million of starts.

And Japan was $163 million of that start.

But overall, across the year, we envisioned the development pie was -- looked something more like 40% in the Americas, 45% in Asia, heavily driven by Japan, and call it 15% in Europe.

And compared to our mix from last year, that would be 10 points higher in the Americas, about the same in Asia, and 10 points lower in Europe, which feels pretty good relative to all of the factors in play.

In terms of mix, 93% of that activity we had in the first quarter was Build-to-Suit, so, we expect to see our Build-to-Suit percentage to be a good 15, 20 points higher than we saw last year.

We ought to see this number in approximately in the 40%s for this year, in terms of Build-to-Suit percentage, given the fact that our pipelines are much more robust in the United States and Japan in terms of Build-to-Suit.

So, that gives you a little flavor for geography and mix on the development pipeline.

Dave Rodgers, RBC Capital Markets.

Yes, Hamid, when I listened to your comments about the health of global trade, or some of the forecasts that you provided early on in your comments about US land and the appreciation that you expect to see there.

Wondering if, along the same lines as the spec development comment that you had just made, is that, at what point do you feel comfortable really ramping up US development?

It seems like yields are coming back, market rents appreciating, getting a sense for -- is the hurdle for you guys more a balance sheet issue, where you'd like to monetize more of the fund assets you brought onboard?

Or is it a fundamental issue, and the hurdles to get over that to really accelerate that US spec pipeline?

It's absolutely not balance sheet.

And by way of reminder, we are already doing a couple of spec buildings in the US -- Houston, we did one Miami, LA, Washington.

We've got a big problem.

We start these spec buildings and they turn into Build-to-Suits, so, I guess it's a high-class problem.

They're leasing up pretty quickly, so, that's why they show up as maybe Build-to-Suits or pre-leased, but I'm not really exaggerating.

We've been doing this for some time, and we'll continue to do it in a prudent way.

But volume-driven development gets companies into trouble.

We have seen that movie before, and we're going to be careful with development, and the land is not going anywhere.

It's sitting right there, and it's very well located, and I think cap rates -- put it this way, cap rates I don't see going up any time soon.

And I'm pretty sure rents are going up, so, whatever margin we have in them is going to improve as we prudently execute our plan.

Brendan Maiorana, Wells Fargo.

Thanks.

Good morning.

So, just to follow-up on that, Hamid -- I think the margin -- the value-creation margin on the development starts in the quarter was around 26%.

Is that a fair level that you guys think is appropriate throughout the regions, if you exclude Japan, and you look at Europe and the Americas?

And if so, does that indicate that you think you're likely to accelerate the development, just given that the capital deployment levels seem to be in line with what the expectations were a couple months ago when you guys initially gave guidance?

This is Mike.

I'll take that one.

In terms of the margin we saw in the first quarter, it was a higher margin than we expect to be than our overall average, largely driven by the fact the activity took place in Japan and Brazil.

And I would say for the remainder of the year, we certainly expect our blended margins to normalize somewhat, and be much more in our typical range.

For example, we would fully expect all of our Build-to-Suits in US and Europe to be in the margins in the 10%-plus range, and speculative construction would be in the mid-teens and/or higher.

So, over the entire year, we'd expect more of a normalization, more of a blend, that would translate to normalized margins we've seen in the past, slightly higher perhaps, but in the mid-teens approaching 20%s on average.

John Guinee, Stifel.

Yes, thank you.

Going back to the more mundane -- Hamid, it looks to me like your re-leasing costs have been running about $1.35 to $1.40 for a while now.

They went down to about $1.14 for this last quarter.

About the same time you also showed a improvement in your rent roll-downs.

Is there anything unusual going on here in terms of shorter lease term, more deals done in-house, that sort of thing that would cause this rather significant change?

Yes, this is Gene.

Let me take that question.

It does have to do with shorter lease terms, and I would not expect turnover costs to stay at $1.14.

$1.30, $1.35 is a number that will be more sustainable.

We did have a drop-off in lease term over the quarter, and we had a high retention rate.

And both of those things will tend to push down those costs.

But I would not expect that to be a trend.

In fact, the trend in terms of tenant demand is increasing [comfortably] with longer lease terms.

This really just had to do with the mix of deals we did in the quarter.

And we had a couple of very large, very short-term renewals that were related to big customers with three or four moving pieces.

I would expect this to go back to the trends that you've seen in the last couple of quarters.

And we're not trying to do more deals in-house or anything like that.

In fact, we have expanded our use of the brokerage network, and we have more of an open listing kind of approach, because we think that's the right way of doing it going forward.

So, we're not trying to save on commissions.

John Stewart, Green Street Advisors.

Thank you.

Maybe one quick one for Hamid, if I may.

How much better, ballpark, in terms of execution would you require to go the JV route -- to make the JV route worthwhile as opposed to an open-end fund?

And then quickly for, maybe either Bill or Tom, if you look at the net asset value detail on page 28, and you zero in on the deferred income tax liability, the $620 million there, can you remind us how much of that is related to Pepper?

And then hypothetically, if we were to assume that the end game is to sell off an 80% interest in Pepper, what would be both the accounting and economic ramifications?

Thank you.

Okay, John, let me answer the question.

I don't think we will be sitting there side by side, and looking at -- okay, we're going to get 2% more out of one execution versus the other, so let's do that one.

I don't think it's that kind of math.

I think it's going to be an assessment of the long-term sustainability of each program, and whether a natural local investor base that likes to be Yen-invested and not have a currency issue, if you will, on a long-dated asset, whether that is a more sustainable, if you will, structure with more capacity.

Because really our development business, as I've said a couple times, is ending up being a much bigger opportunity, post earthquake and tsunami, than we thought.

And so the capacity -- our capacity needs are going to go up because of that development pipeline being bigger.

So, it's really which is a more sustainable and larger-capacity pipe, because I think at the end of the day, the pricing is going to be pretty similar, otherwise we wouldn't do it.

So, it's on all of the other intangibles that are going to drive the decision.

Go ahead, Bill.

Let me just add relative to the deferred taxes, I don't have the exact numbers in front of me, but of the $600 million-plus, I'd say about two-thirds of it is related to Pepper.

And ultimately, Pepper, the vast majority of the Pepper assets are long-term -- high-quality long-term hold assets.

And so, any realization of that preferred income tax is a function of how we contribute and/or sell the assets, whether you sell assets directly or entities, and the discussion on the net present value of that income tax liability.

So, we don't envision a substantial realization of that in the near future.

Michael Mueller, JPMorgan.

Yes, hi.

On the disposition guidance, the $4.5 billion to $5.5 billion, is the same as what it was last quarter.

Considering that you've taken Japan largely out of the mix.

I know you gave us the breakdown of where you expected dispositions to come from, but what changed relative to last quarter in terms of those other regions?

Where did you pick up the slack from?

I think we're slightly more focused on the Americas, in terms of, again, getting out of some of the exit markets that we've identified, as well as creating a fund within the Americas with some high-quality assets.

It took a lot of assets on the balance sheet in the first quarter, and we have a fabulous portfolio of Canadian assets.

And so, the opportunities to create some fund vehicles, one or more, have gone up.

And so, that basically takes up the slack.

Here is the way I think about it conceptually, and maybe it's helpful to you guys.

The US is -- the two companies before merging had been in the US the longest.

A pretty substantial part of the portfolio was acquired, not developed.

Some of these assets were in other exit markets or in regional markets that we're trying to down weight.

So really the opportunity to sell assets in the US is primarily strategic, because we're trying -- the biggest realignment opportunity anywhere in our universe is in the US because that's probably when we started the biggest mismatch between the assets we wanted to hold in the long term and the total assets that we had.

The difference being salable properties.

In Europe and in Japan, where the other two big concentrations are, those are essentially, by and large, developed assets, very, very high quality, much higher fit between the totality of those assets and where we want to be strategically.

So, the realignment opportunities there are actually smaller than they are in the US.

That's more of a fund formation type of balance sheet activity as opposed to selling to align with our portfolio.

So, we're getting very good reception in the US on our asset sales.

So, that's where we're going to push more business, and we think it's a very receptive market for selling assets in the US.

In fact, it is better than the end of last year, and we're going to continue to execute in a prudent way.

That's why we don't mind -- I, frankly, think the assets in Europe that we have are trading at higher cap rates than they'll be trading in a year or two.

So, we're not in a big hurry to sell in those markets, assets or, frankly, to re, if you will, contribute those assets immediately.

Because we think there's upside in the valuation -- substantial upside in the valuation.

So, I think strategically the US is where we're trying to point more of the sales, and less of it overseas.

Paul Morgan, Morgan Stanley.

Hi, it's Chris Caton with Paul.

Hamid, I just wanted to follow-up on that point.

You talk about pricing in Europe.

Can you kind of take us between A and B?

And how do you see that market trending over the next year, given some of the headwinds there from an asset pricing perspective or from a capital raising perspective on the limited partner side?

I think the capital raising prospects for Europe are pretty good.

People realize that Europe is a bargain today, and pretty much -- they're seeing what happened to the US market snapping back in terms of cap rates, and people are viewed -- well, there's some people standing around waiting for distressed opportunities in Europe, and I think they'll essentially have the same experience as the people who were standing around for distressed opportunities in the US.

But to answer your question specifically, I think a lot of the valuations in Europe -- European, good quality European markets are in the 7%s, and those historically would have been in the 6%s.

And I think they will be in the 6%s, within a reasonable period of time.

So, I think -- don't get me wrong, we are going to execute on our plan and all that.

But on the margin, if we have the marginal million-dollar portfolio to sell, we're more likely to sell it in the US because it's closer to what its normalized value is, in our view, than in Europe.

That's all I'm saying.

But we're still going to form the funds and do our business the way we planned on it.

It's just that there's a bias to not being in a hurry there, because we think there's room in the CapEx to come in somewhat.

Financing costs in Europe are maybe 50 basis points higher than they are in the US, but cap rates are way wider than that for the similar quality property, so, it only makes sense that we do what I just described.

Jamie Feldman, Bank of America.

Thanks.

Sticking with Europe, can you guys just give a little bit more color on operating fundamentals there, how deep is the pool of interested tenants, what's your outlook for the rest of the year?

Sure.

Jamie, it's Gary.

Maybe I'll start with customer sentiment.

I don't think customer sentiment in Europe has changed really for the past eight quarters.

There's cautious optimism, and our customers basically, and have for the past two years, really been very thoughtful about taking that incremental bit of space.

But they have been taking that incremental bit of space, as you can see in the numbers, 50 basis points this quarter and 280 basis points over the prior three quarters.

Like last quarter, it's expansionary.

They are sitting there basically at very, very high utilization rates, and they have to take that next incremental bit of space, and they are doing it.

The key drivers in terms of our customers, it's still automotive, it's still eCommerce, and it's still non-food retail.

So, again, I think it's cautious optimism, and they are taking space as they actually have business.

But they are not in a big rush to make decisions, which is exactly where the US was maybe two years ago, and that's the difference.

The deals are around, and they'll take their time, and they have to go to five more committees and get three more approvals before they pull the trigger.

That's actually probably the best comment.

Because if the operating guys on the ground could make the decisions for themselves, they would take incremental space.

But they're having to kick that decision upstairs to corporate, and that decision process is prolonged.

But if you talk to our team in Europe, they are very -- our conversations go like this -- are you sure you guys are sounding as positive?

Are we hearing you correctly?

It's really that kind of conversation.

We have a confident, competent team with great assets in Europe, and they're not backing off.

And they've delivered, so far -- delivered great.

Michael Bilerman, Citigroup.

Thank you.

Hamid, with the stock now trading basically at the mid-point of your $35 to $38 NAV range, do you have any desire whatsoever to issue additional common equity, sort of in order to delever?

And I understand you said there's no timeline, you want to get through the deleveraging through next year, but it does sound at least some of the asset sales and contributions are pushed a little bit further back as you evaluate the J-REIT stuff, and you put more product in the US on the market.

So, I'm just curious how you think about equity today, especially when it's trading, basically, in line with the NAV.

So, it's a little bit less dilutive relative to the issuance last year?

Michael, I'm holding Sully back because he's trying to jump on the table and answer that question (laughter) because every time in the past I've tried to answer that question, I've totally messed it up.

So, let me have him -- since he won't be on this call next quarter, let me have him -- .

So, Michael, I'll answer that question very simply.

There's no right answer for that question.

If we said yes, people would go crazy, and if we said no, people would go crazy.

And so, we have made the conscience decision that question will not be answered either in investor meetings or on these calls.

Or anywhere.

Brendan Maiorana, Wells Fargo.

Thanks.

Just had a follow-up with respect to expiring rents.

Do you guys think that the expiring rent levels are going to go down on a cash basis, as you look out for the balance of 2012 and into 2013, given low rents that were signed at the trough of the markets in late '08, '09 and '10?

Or were those more reflective of the [PISA] rates, and the cash rents that are in place from those low initial rents are now closer to market?

It's Gene.

Let me take a stab at that.

I'm not sure I'm completely understanding your question, but if you're focused on -- what do we expect for the remainder of 2012?

I think, as Sully mentioned, if we look at the composition of what's rolling, and we look at the vintage years of those leases, we're going to see roll downs that are more negative than you're seeing this quarter.

And it will resume the overall trend toward positive rent change probably some time end of the year, early next year.

So, hopefully that's responsive to the question.

But if we look at the composition of those leases, they'll roll down a little more negative than you saw this quarter.

We're [rolling] off of fewer and fewer pre-peak leases though, to answer that piece of the question.

And if we're talking about rent change, one thing I would like to add about Europe, for example, is that for the first time in 16 quarters we've had positive rent change in Europe.

That's an unbelievable stat.

Now, you can look at that stat any way.

You can discount it because of mix.

You can discount it because of the fact that there were a higher percentage of renewals than new leases.

But the fact remains that we are getting closer and closer to the inflection point, and it's undeniably heading in the right direction.

And just a final point, our cash same-store NOI was actually closer to 4% this year, so, well above the gap, and so, we're starting to see this come through.

Okay.

Well, with that, that was the last question, so, let me just summarize.

I think we had a really great first quarter, and I'm hoping that this will continue throughout the rest of 2012.

Again, from our perspective, it sure seems that way, but you guys need to make up your own minds about fiscal cliff and the like.

But the key take-aways are -- number one, operations around the globe are firing on all cylinders.

Secondly, we're ahead of our 10-quarter deleveraging plan and realignment plan, and we're confident that we'll meet our objective in the timeframes that we've indicated them.

And finally, the drivers of the business are all heading in the right direction, and we have the properties, the platform, and the people in place to get ahead of those trends.

Thank you for joining us today, and we'll see many of you at NAREIT in a couple of weeks.

Thank you, ladies and gentlemen.

This concludes today's conference call.

You may now disconnect.