Prologis Inc (PLD) 2012 Q2 法說會逐字稿

Good afternoon, my name is Stephanie and I will be your Conference Operator today.

At this time, I would like to welcome everyone to the Prologis second-quarter 2012 earnings conference call.

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

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

(Operator Instructions)

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

Thank you, Stephanie, good morning, everyone.

Welcome to our second-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 comment on Company strategy and the market environment, and then from Tom Olinger, CFO, who will cover results and guidance.

Additionally we are joined today by members of our Executive team including Walt Rakowich, Gary Anderson, Mike Curless, Nancy Hemmenway, Guy Jacquier, Ed Nekritz and Gene Reilly.

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

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

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

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

I'd also like to state that our second-quarter results press release and supplemental do contain financial measures such as FFO and EBITDA that are non-GAAP measures.

And in accordance with Reg G, we have provided a reconciliation to those measures.

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

Hamid, will you please begin?

Thanks.

Good morning and welcome to our second-quarter earnings call.

When we spoke with you last quarter, we reported strong performance and positive momentum across all our business lines.

While the economy has slowed since April, I'm pleased to report that we delivered solid results for the quarter.

Given the doom and gloom headlines, we thought it would be helpful to review the indicators that most affect our business and to assess their impact on our Company's prospects.

While revised down, global trade remains well above peak.

Additionally the IMF continues to forecast growth of 3.8% for 2012 and significantly higher next year.

Global container volumes continue to grow.

For the major ports who have reported, their volumes are up about 1% year over year and the forecasts are that they'll be up 5% by year end.

Looking to the US, while retail sales moderated in the second quarter, they're up almost 5% year over year.

Despite slightly tempered expectations, real inventories continued to grow in the second quarter following an annualized growth rate of more than 3% in the prior quarter.

These factors created the back drop for net absorption of 26 million square feet in the US in the quarter, a number on par with the first quarter.

We are forecasting total absorption of 150 million feet for 2012, up 25% over last year.

This means absorption is expected to be 50% stronger in the second half, in line with its historic trend.

Effective rents continue to increase in our US global markets and on the margin in our regional markets.

Outside the US, we see high demand in rent growth in Japan, China, Brazil, Canada and the major consumer markets in Mexico.

Even Europe is stable with occupancy and prime brands holding steady in the vast majority of our European global markets.

The broader recovery in inventories and net absorption of industrial space is clearly reflected in our second-quarter operating results.

Our team signed 35 million square feet of new and renewal leases in the second quarter.

This comes on the heals of 31 million square feet of leasing last quarter and is close to fourth quarter levels, typically the years' most active leasing period.

We find ourselves in an excellent position for the second half as we have minimal roll of about 4% for the balance of the year.

This is in sharp contrast to the 10% of lease expirations we resolved in the first half of this year.

Let me give you a little more detail on the leasing environment and its impact on our portfolio.

The strongest demand continues to be for long Class-A facilities.

Occupancy remains the highest in our largest spaces.

The real news, however is the momentum and leasing of our smaller spaces.

At quarter end, our occupancy of units less than 100,000 feet in the US was up 110 basis points for the first quarter, from the first quarter.

Demand for larger spaces continues to be driven by consolidation, supply chain reconfiguration and eCommerce.

Changing tax laws as well as free and same day delivery are driving the need for our customers to be closer to consumers.

This aligns well with our global market strategy.

It's important to note that this high volume of leasing is not being done at the expense of rate.

Market rents continue to improve overall, but the primary movement is coming from larger Class-A spaces which generated positive rent increases of about 2%.

The recovery is broadening.

No market in the Americas is getting weaker and even lagging markets such as Atlanta, Chicago are showing strength for the first time in years.

Let me now give you an update on what's happening on the ground in Europe.

In spite of economic headwinds, the operating environment for industrial real estate in our markets is holding up well.

Importantly, there is little deterioration of rents in our European portfolio.

Though the overall leasing demand is subdued, the lack of new supply and the dwindling stock of vacant buildings have allowed us to push rents and lease terms on a selected basis.

As a matter of fact Europe was our strongest continent with the smallest declines in rents on rollover.

The key here is that European demand is driven more by long-term structural drivers such as supply chain reconfiguration [done] by changes in GDP.

Demand still outweighs supply in most major markets in Europe.

The trend is for continued positive net absorption as space utilization remains high and customers continue to optimize their supply chains.

During this point in the cycle, top line growth is limited and therefore customers are focused on reducing operational costs through network consolidations.

Our portfolio is clearly meeting the needs.

Case in point, during the second quarter, occupancy in our European portfolio held steady at 92.1%, outperforming the overall European market on average by about 350 basis points.

This outperformance is because of our high-quality portfolio as 90% of our European assets are in the strongest markets and our team is second to none.

These long-term drivers of demand globally are also apparent in the institutional investment community and are fueling demand for our private capital funds.

During the second quarter we raised $163 million of new third-party equity in our core open end funds.

This was a strong quarter of fund raising and brings our 2012 total to $288 million for these vehicles.

Additionally we remain on track for closing our new development fund in Japan before year end.

As institutional investment and interest continues to grow, so does our progress on the fund rationalization front.

A good example of this is the progress we made in winding down PEPR.

At quarters end, we owned 99.5% of the fund and expect to have full ownership by the end of August.

We've already started the recapitalization process of our European portfolio ahead of our original schedule.

Last quarter, we spoke in some detail about our financing and restructuring alternatives for our portfolio in Japan.

We're investing the capital to obtain the applicable licenses to form a JREIT.

We want to have the ability to select the optimal structure to realize the best value from our Japan assets.

It's important to note that the JREIT may be an alternative or a complement to our open end fund as the future vehicle for the long-term ownership of our operating assets in Japan.

The combined effects of consumer demand, lack of new supply and growing investor interest is leading to a variety of capital deployment opportunities for us around the world.

Going forward, we expect the majority of our deployment activity to come from development as opposed to straight acquisitions.

On the development front, build-to-suites represent 80% of our starts year to date, all of which are being constructed on our land bank.

This activity is supported by strong leasing demand paired with a (inaudible) supply of large space from global markets.

Our margins and our year-to-date starts are more than 20%.

While we don't expect to sustain these margins over the cycle, these strong margins validate the value of our land bank.

We'd expect margins to normalize to our historical range of 12% to 15% going forward.

Given investor appetite for high-quality industrial real estate, we're increasing the pace of our non-strategic dispositions especially in the US.

As we typically do this time of the year, we're working hard to bring a few packages to market and expect a busy fourth quarter of closings.

To wrap up my comments, I'd say that despite the gloomy economic headlines, we're encouraged by the realities on the ground and the evidence of what we see in the market.

Trade consumption and GDP levels are growing beyond previous peak levels.

This coupled with very high utilization levels should continue to drive net absorption throughout the year.

We're making excellent progress on our priorities and are looking forward to reporting on our further progress in the coming quarters.

With that I'll turn it over to Tom for a closer look at our results and guidance.

Thanks, Hamid.

This morning I'll cover three topics, first a summary of our Q2 results, second an overview of our capital markets activity, and third an update on our guidance for the year.

Let's start with our results.

Core FFO for the second quarter was $0.43 a share, $0.02 above our expectations.

The outperformance was primarily due to stronger net operating income driven by higher occupancy.

We had expected occupancy to dip slightly in the second quarter given the amount of leasing rolling.

Foreign exchange did not materially impact core FFO for the quarter as the average euro rate was 1.29 just under our forecasted level.

Looking over our operating portfolio performance, occupancy at the quarter end was 92.4%, up 10 basis points sequentially and 170 basis points year over year.

All regions contributed to the strong leasing activity of over 35 million square feet, an increase of more than 4 million square feet from the prior quarter.

For the third consecutive quarter, we saw healthy demand in leasing for our smaller spaces in the US.

The smaller spaces will be a key driver of continued occupancy growth.

Our European portfolio had another solid quarter results with occupancy holding firm at 92.1%.

For the second half of the year, as Hamid mentioned, we only have 4.2% of our ABR rolling as a result of the significant number of renewals that resolved in the second quarter.

This positions us well for continued occupancy growth through the remainder of the year.

Rent change on rollover was a negative 3.9% for the second quarter.

GAAP same-store NOI was at 0.4% while stabilized cash same-store NOI was up 2.3%.

I'd like to point out the additional stabilized cash NOI disclosure for both same-store and NAV included in our supplemental package this quarter.

Lastly I want to point out our bad debt expense for the last several quarters has been about half our long-term average which is obviously a very positive trend.

To put this in context, our historical bad debt expenses averaged about 50 basis points of revenue, and during the last downturn, bad debt expense was over 100 basis points.

Turning now to capital markets.

During the quarter we completed more than $1.2 billion of debt financings, refinancings, and pay downs and we further improved our average debt cost.

Subsequent to quarter end, we closed two transactions for Prologis European Properties Fund II.

A EUR145 million senior unsecured term loan and a GBP40 million secured facility.

While the financing environment in Europe is very challenging, we were able to complete these two transactions on very attractive terms.

As we have seen in the past, the strength of our sponsorship, the quality of our assets and our global platform enables us to source capital very effectively.

We continue to reposition our debt back towards non-US dollar borrowings to further naturally hedge our foreign net equity.

Turning to dispositions and contributions.

During the second quarter we completed $228 million in building and land dispositions and contributions.

Our share of these proceeds was $191 million.

On the capital deployment front, we committed approximately $313 million of capital in the quarter, of which $277 million was our share.

Total deployment included $229 million of development starts and $85 million of building acquisitions.

Now turning to guidance for 2012.

We're increasing the bottom of our range for full year core FFO from $1.60 to $1.64 per share and maintaining the top end of our range at $1.70.

The main driver of this guidance is our forecast to the macro economy and the drivers of demand for our business.

We continue to expect slow and steady growth in the overall global economy driven by demand from consolidation, supply reconfiguration and eCommerce fulfillment.

From a foreign currency standpoint, we're assuming an average euro rate for the second half of the year of 1.2 and average yen of 80.

The lower euro rate assumption had about a $0.02 reduction to our second half forecast.

For operations, 2012 same-store NOI guidance is unchanged at 1% to 2%.

We're forecasting year-end occupancy between 93% and 93.5% which reflects an increase of the low end of our prior guidance of 92.5%.

We're seeing market rent growth in the majority of our markets today, however, we do expect rent change on rollovers to be negative in the second half driven primarily by smaller spaces.

2012 will be the end of the negative lease roll downs as our largest spaces are already in positive territory, smaller spaces continue to recover and leases signed during the prior peak roll off.

On the expense side, we continue to forecast net G&A of $208 million to $213 million for the year.

For capital deployment, we're maintaining our full year forecast of $1.5 billion to $2 billion with our overall share of expected investments to be about 70%.

Deployment includes $1.1 billion to $1.4 billion of development starts primarily in the Americas and Japan, and $400 million to $600 million of acquisitions mostly in our co-investment ventures in the Americas and Europe.

The acquisition market remains challenging given the high demand for Class-A product which results in very competitive pricing.

We'll continue to be disciplined and only pursue transactions that make sense from both a quality and valuation standpoint.

Turning to contributions and dispositions, we're widening our annual range to $3.5 billion to $7 billion from $4.5 billion to $5.5 billion.

This activity can vary significantly based on the recapitalization of PEPR and the Japan operating assets.

If one of these transactions happens, we could be at the high end of our guidance, while if neither happens, we could be at the low end of our guidance.

We feel very good about completing the contribution disposition activity, it's just a matter of timing as to what closes by year end.

Our focus continues to be on achieving good execution over the course of our 10-quarter plan.

In closing we're very pleased with our results this quarter and our progress to date and we remain highly focused on our strategic priorities to further position the Company for continued growth.

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

(Operator Instructions) Brendan Maiorana with Wells Fargo.

Tom, a question for you, just with respect to the guidance, two things.

One, was there any change due to the timing of the dispositions which sounds like maybe it's a little bit later in the year relative to prior expectations?

And then at the low end, I guess it sounds like there's an additional $2 billion of dispositions and was I correct in assuming that would exclude PEPR and anything on the Japan open end fund?

Okay, Brendan.

I'll take the first-- I'll take both of those.

On the disposition side and the second half back end nature of these, really had a minimal impact on our guidance, slightly dilutive for the back half of the year.

However, when you look at our total 10-Q plan, dilution is virtually zero and that's because in the second half of the year, what's happening is we're accelerating more US dispositions which will be at higher cap rates.

And the only debt we have available to pay down is our line of credit which is at very low interest rates.

So when we get into 2013, you've got Japan assets that are yielding much lower than the US and we can get after higher interest rate debt that's maturing.

On your second point to go to our guidance, I'll give you some of the pieces of our disposition and contribution activity.

So when you look at our range for the year of $3.5 billion to $7 billion and you back out the $1.2 billion we've done already, that leaves a range for the second half of between $2.3 billion and $5.8 billion.

When you look at what we have, we have a lot of irons in the fire.

We have a lot of activity going on, so this range does not include every possible transaction that could happen.

So when you look at what we have, what irons we have in the fire here it starts with the PEPR, recapitalization we have over $3 billion of assets for recapitalization.

Japan operating assets are $2.9 billion.

We've got Canada assets of $450 million, we've got sales of over $200 billion, the sales are primarily in the US, $2 billion I'm sorry, and contros of $1.5 billion.

So when you look at all of that activity, that aggregates to 10, over $10 billion of activity.

So again, we feel good about that list.

It's a matter of timing and what on that list closes by year end.

Ross Nussbaum with UBS.

I'm curious what your embedded GDP forecast is for the back half of the year both for the US and the global economy?

And in particular I was thinking about it relative to some of the comments that UPS made on their conference call insofar as they think that forecasts are too high and GDP growth is going to come in closer to 1%.

And if that scenario played out what do you think it would do to your business?

Thanks.

Our forecast is higher than that.

It's about 2% for the US and mid-3s for the global economy.

I think on the global economy, frankly the markets that we are operating in, I'm not worried about that at all because really, if you see most of the activity on the development side is in markets where there's virtually no supply.

And the trends in Japan and China and all that are very, very strong and I don't see them changing by the end of the year.

In terms of the US, I must say that even though the economy has slowed, there has been probably a little bit of a slowdown in terms of leasing activity but still, it's either the lag or it's the high utilization rate.

We suspect that it's the high utilization rate, but there is-- we're just running out of space in the US.

The fact of the matter is nobody has really built anything in four years and there's been a fair amount of obsolescence.

So we're getting pricing power in a lot of markets notwithstanding the slowdown of the economy.

So at the margins whether it's 1% or 2% I'll leave that discussion for smarter people than us, but I think demand for our product is going to be really, really good going forward.

Michael Bilerman with Citi.

Just sticking on the disposition plans and Tom you had sort of outlined this $10 billion grouping part of which is obviously contributions that you can make.

But I think at least for PEPR don't you have the ability just with the capacity in some of the funds that you have today to be able to rotate some of that $3 billion pretty much almost immediately.

And then I would think that on the $1.5 billion of contributions outside of PEPR you have the ability to do a lot of that today.

Japan obviously is a question mark as you evaluate, and then you have all of these $2 billion of out right sales.

It would seem that with all of the stuff happening, it probably is something that's sooner rather than later just given your ability.

So maybe you can sort of walk through a little bit how much you can execute almost immediately versus needing the market to go your way.

Okay, Michael, I'll let Tom walk you through the details of it, but big picture, the reason the lower end of our range is $3.5 billion on all this deleveraging activity is exactly because of what you said because we have a fair amount of visibility in our contribution pipeline which when added to the deals that we've already closed and the deals that we have in the market with good action on them, we feel pretty good about the low end of that.

And the upper end of $7 billion is really not everything we were working on.

The big list is over $10 billion.

So by way of reminder, the 10-quarter plan is a 10-quarter plan that ends at the end of 2013.

So whether how much of the $10 billion is going to fall exactly into this year and how much of it is going to fall into exactly next year, that's harder to predict.

But we feel we've got enough irons in the fire that we can be in that range as I described.

So now maybe Tom you can go through the pieces of that.

So Michael, you're correct in that so the PEPR number I gave you of $3.1 billion would exclude any of our planned contributions of assets out of PEPR into our other European funds this year.

So the $1.5 billion of contributions I mentioned about two-thirds of that, so about $1 billion of that contribution amount is either existing PEPR assets or existing on balance sheet Europe assets that we can contribute into our three existing funds.

So when you look at the Alliance fund, its got capital to go, the Fund II PEP II has got capital plus we're raising more capital, Cattell we continue to raise capital.

So as Hamid said, we feel good about getting those contributions in this year and that's our plan.

Yes and just to finish up on that, in terms of how we think about our European portfolio and its recapitalization, really at this point, we think about PEPR on the balance sheet assets as being one integrated portfolio because we own 99.5% of PEPR, it's in effect balance sheet.

So really going forward, think about those two things as really being one.

And a big chunk of them is going to go to the existing funds and then a big chunk of them is going to get recapitalized.

David Toti with Cantor Fitzgerald.

Just quickly, when you talk about your margins contracting back to the mean, is this something you just expect over time in the normal course of business or are there indications today perhaps regionally that that is under way already?

I'll start and Mike will finish up on that.

I think part of it is also land value, which is that remember this land has been pretty heavily impaired.

So I know a lot of the discussion in the last couple of years has been sort of is our land appropriately valued or not, and it's tough to answer that question when there are very few land comp sales of industrial land in the market.

But I think as we put this land into production and we're getting the yield on our total developments that at the impaired values that lead to a 20% margin, that kind of tells you that our land is valued well and maybe upside in the land value to start off with.

The other thing that I just want to tie back to the dilution comment that Tom made a couple of questions ago, the incremental land on these developments that we're putting into service given that we already own the land and it's not yielding anything are really high.

So the $200 million that we're putting in let's say and it's yielding 8% with land, with that land it's yielding like 10%.

So that means that our deployment activity really fills up any kind of dilution that we might have from paying down debt.

So with that, Mike, why don't you talk about the branding and stuff.

In terms of margins, we certainly got the great start of the first half of the year with the deals in Brazil and Japan that drove some high margins.

And over time, over the year, we expect that to normalize somewhat as we anticipate doing a larger proportion of build-to-suites in the Americas, particularly in the US where we expect build-to-suite margins to be more normalized in that 10% to 15% range.

So nothing unusual, it's just a matter of timing and mix and over the long haul of the year we expect those just to normalize somewhat.

Craig Mailman with KeyBanc Capital Markets.

Maybe could you just talk a little bit about the demand you're seeing for the Japan fund, maybe in a dollar amount?

And then maybe discuss the triggers or the decision tree for going the open end fund route versus the JREIT route?

Well let me give you the big picture answer and Guy will give you more details on the private capital side of it.

So first of all, you should not think of the JREIT or the open end fund as either/or solutions in the long term.

We may end up actually having both because we have-- the important thing is we have a very good development pipeline in Japan and we're listing it up much faster than we thought.

So the Japan business is going really well and we need capacity, if you will, to absorb these assets as they are completed, and they are really good assets.

And we all like to talk about cap rates and all that in different parts of the world, but you got to understand when you're talking about a 5.5% cap rate asset in Japan, you're talking a brand new, state-of-the-art six or eight story building with one roof, virtually no parking lot, no CapEx, very little turnover cost which means that your 5.5% is really 5.5%.

It's not like the 6% in the US that you got to take out the (inaudible) and commissions and all that.

So the 5.5% is a pretty good return.

And once you look at financing rates that are 1.5% to 2% in Japan, your cash yields are in the high single-digit range in an economy that has virtually no inflation.

We love our assets in Japan and we love the return on our assets in Japan and one of these days people are going to figure that out.

In fact it's probably the place in the world that the yield on the assets is the widest that we see over the cost of capital.

So we need high capacity vehicles both private and public to do this.

We are giving ourselves a lot of optionality by going through the licensing requirements of the JREIT, the trigger will be the valuation.

I mean the JREITs are trading at a slight discount to NAV today.

We're watching that very carefully, but just immediate up front valuation is not the sole criteria.

We are looking at the governance issues that go along with that having just had recent experience with another public vehicle in Europe that we've gotten pretty good at understanding those governance issues and working through those.

So there are a lot of different factors.

And the one thing that we've done wrong is that we went out there and we said we're going to get this done this year.

We'll get this done this year if it makes sense to get it done this year, and we won't get it done this year if it doesn't make sense because we love the yield on these assets.

With that let me have Guy fill in the blanks.

So with respect to the Japan development fund, we're seeing the larger interest.

We're in advanced discussions with a number of investors.

This includes weekly due diligence sessions including late last night San Francisco time which hits the Asia time for their convenience.

And large discussions on with existing partners we have in other funds around the world.

Just picking up on what Hamid said, it is surprising to a lot of these investors when they start to peel the onion on the development opportunity in Japan.

And Mike was talking earlier about the 20% margins we're seeing in some of our Japan developments, and a good majority are build-to-suites and it's not intuitive in a relatively slow growth environment that one of your strongest development markets would be Japan.

But as investors start to peel the onion, we're getting a lot of good interest on that.

Paul Morgan with Morgan Stanley.

On the core portfolio, if you look at where you are in occupancy versus your-- kind of the high end of your guidance for the year of 93.5%, if you were to approach kind of the high end by year end, what would it take, what regions or markets would drive you there and do you see it coming from the improvement in that you mentioned in the smaller units or just broader based?

It's Gene, let me at least start with that.

Gary, might want to file on.

But I think the first thing you got to look to is our roll second half of the year is just over 4% so we've plowed through about three quarters of our roll already this year.

So we have a light roll coming at us.

We do need to continue to build occupancy in small tenant spaces, but in the last three quarters, we've added almost 200 basis points.

We're still in the sort of mid 88s for those spaces, but as we've discussed in probably the last three calls, we see really good momentum there.

We also now have a little bit vacancy in large spaces, it's about 2%, 3%.

But I'll give you an example.

We in the US, we have I think 2.2 million feet of vacant space above 500,000 feet and it's in four spaces.

So it's vacant today and we have deals working on all that space.

So we have a pretty high confidence level that as that space rolls we'll lease it up.

In terms of regional contributions to this, we're at-- you look at Los Angeles, it's 97% leased or thereabouts, not much more to add.

But frankly, wouldn't be surprised if you push it a little bit higher.

The other thing I'll just leave you with is that the regional markets are really beginning to recover, so our level of confidence in improving occupancy there has also improved.

So it's basically a variety of factors.

And I'd just say the contribution is pretty broad based.

I mean we don't expect much contribution in occupancy from Asia.

Asia is already trending at about 97%, so there's not much wood to chop there vis-a-vis increases in occupancy.

But we do expect to see occupancy to increase in Europe for the same reasons-- same basic reasons that Gene outlined.

We've got a very little roll, we've done a lot of work in the first half and when you look at our pipeline and the visibility that we have to the pipeline we would expect to end the year higher than we are today.

Ki Bin Kim with Macquarie.

Just a couple of quick questions around PEPR.

At what all-in rate do you think you can contribute or dispose those assets at today and at what yield would you not be a seller given that it might not help you deleverage?

And second quick question is I noticed that you acquired an asset for PEP 2 third party, just curious as to why you did that instead of waiting to contribute assets into it?

Well, the second question is very easy to answer.

If we see good opportunities for our funds to invest in assets from third parties, the funds are there to make those returns for our investors.

The funds are not there just to take out our balance sheet assets, so let's be clear about that.

So that one is an easy one.

With respect to exactly where we would transact, I would rather not engage in that conversation on the call today.

I obviously-- that's a negotiation that we're happy to report on after we're done with it.

But I think you ask a good question and the question is would we do something stupid to meet a 10-quarter plan, and the answer is rest assured, we're not going to do something stupid to meet a plan.

We can be patient, we have more activity going on than our plan and we've left some optionality around it, so we'll be patient.

We have really good assets and we'll do them at an attractive price.

John Stewart with Green Street Advisors.

Little bit of a follow up along that line of questioning actually.

First of all, Tom, if the-- what would the weighted average cap rate be on the entire $10 billion of dispositions and contributions that you've identified?

And then on specifically on Europe, Hamid, last quarter you'd commented on where you thought sort of spot cap rates were, and I guess with respect to asset specifically identified for contribution from PEPR, how do you reach a meeting of the mind on the valuation of those contributions?

Thank you.

Okay.

First of all the appraisal profession in Europe is really good, and probably better than anywhere else in the world and there's a high level of transparency and trust in that process.

And that's really the basis for transacting and there's an independent advisory board that looks over that process, and we have good governance built into ensure that the pricing is good.

Tom, can you answer--?

Yes, I'll take the-- so looking at the $10 billion and the mix of those assets, I would expect that the blended would be in the mid-6s when you consider on the low end of cap rates you're going to have Japan to be $5.25 billion to $5.5 billion and on the high end you would have dispos in our other regional markets in the US that have a seven in front of them.

It would be in the 6s clearly on an all-in cost, but remember my point about monetizing land bank.

I think some portion of those will be land bank which are the incremental capital will get very good yields, so and some of those will be sold.

So it may-- that will pull up the average cap rate in effect that you'll see on those.

Michael Mueller with JPMorgan.

Just a quick question on the balance sheet, Tom.

Next year it looks like you have about $800 million or $900 million coming due between converts and bonds and I mean how should we be thinking about that?

Do you just see those two items or those two buckets of items going away by asset sales or do you plan on refinancing some of the debt?

And I guess to that point, where do you think you could price new debt today?

So our current plan would be to clearly retire that debt with proceeds from the contributions and dispositions.

What we could do today, I mean there's been some good price points out there with other REITs in the last couple of weeks and that traded significantly through cash yields.

Our bonds are very tightly held.

We see very little activity on those.

If you looked at where those are trading today at 10 years probably trading 250ish over spread, or 250 spread.

I would expect if looking at other activity we could do something in the low 2s today, if we would choose to go out there.

I mean clearly, being able to do 10-year money at sub four rates is very attractive.

So not to say that we wouldn't think about doing something at some point just to have that's a really cheap capital to have if-- to put out there.

But the plan right now would be to just pay it off with dispos and contros.

John Guinee with Stifel Nicolaus.

One last question on the whole disposition contribution, whether it's $2.3 billion or $10 billion, I think everybody hopes you sell these at low cap rates, high proceeds, but you've also got probably a low tax basis as through depreciation.

How should we look at the capital gains tax, and is that already accounted for in your $560 million deferred income tax liability?

John, I'll take that.

It would be built into our deferred income tax liability for sure.

And when you look at that liability, it's around $525 million at the end of the quarter, a big chunk of that would be $375 million related to PEPR.

Our belief with PEPR is we're going to be able to move most of those assets via entity transactions and not out right sales, so that liability would essentially move as part of the purchase price to whatever agreed on with that to the purchaser.

We could be selling some assets from a sales perspective and we would settle at that deferred tax liability to that extent.

I think the other issue would just be around taxable income and looking at distribution requirements with some of the gains.

For example, the Japan assets create a very significant gain so we'll have to look at our payout ratios relative to our TI over this period.

(Operator Instructions) Michael Bilerman with Citi.

I just wanted to follow up just a little bit on the build-to-suite and sort of development starts overall.

And I'm just curious as you think about where that demand is coming from for the activity you're doing, how much of that's coming from your existing tenant base and perhaps coming out of your existing buildings, how much is more market driven?

And then maybe just a comment overall on development activity.

It looks at least in the US from the data that we're seeing it starts while still below historical averages are certainly over the last couple of months been rising and coming back to almost 1% of stock.

So I'm just curious as sort of what you're seeing in your marketplace as other developers are stepping up and starting new product and whether this is really incremental absorption or whether as people just shuffling around and whether there's a negative impact on the core portfolio.

This is Mike Curless, why don't I take this from an overall viewpoint and then I'll flip it to Gene for a little bit of color in terms of where some of this demand is coming from.

We're real excited in terms of our activity in the first half of the year with $440 million in development activity and what you've heard some 80% of that was in the form of build-to-suites and specifically, we started seven build-to-suite projects in the US, Japan and Brazil.

That totaled over $355 million volume, some 3.5 million square feet.

And as we mentioned the margins there were strong in the 20% range, and based on yields that landed in the high sevens and I think a big part had to do with driving those strong margins was the land that we monetized in the process.

And we think that land provided us a real competitive advantage and once again proves out that our land bank is a real differentiator and helps us not only win business and drive margins.

And I think this activity has been fueled in two primary large buckets.

We have a very robust pipeline both in the Americas and Asia in terms of build-to-suite prospects which I think will bode very well for the rest of the years activity.

We'd expect to duplicate this type of volume as we look forward to the balance of the year.

But maybe Gene why don't you add a little color in terms of where some of the specific demand is coming from.

Yes, sure.

So Michael, the demand we've been seeing building over the last couple of quarters, it really has been coming from consumer products companies outside the US.

And inside the US, online sales are probably the biggest category and that will be across a variety of industries.

But our activity in terms of starts this quarter is heavily weighted to online sales.

We think that is going to continue.

I think we mentioned in the prepared remarks that as tax laws change in the United States that is going-- really means population centers and gateways are winners in that equation.

So we're seeing that take place.

We're seeing customers frankly assume that tax laws will become-- will be rationalized across the US.

And I think on balance, our build-to-suite activity is going to be stronger this year than expected.

You've heard us talk about this for a couple of years now, finally we have some deals to talk about.

But volumes good in the first half of the year and our pipeline for the second is equally strong at this point.

Michael, in Europe and Asia, I mean there are basically three buckets of customers that are driving demand for build-to-suites, it's eCommerce, it's pharmaceutical and it's automobile.

Those are really the three key drivers for us.

Paul Morgan with Morgan Stanley.

Hi, it's Chris with Paul.

Just wanted to follow up with Guy on the fund raising.

And separate from short-term negotiations, how would you characterize the fund raising environment today?

What strategies are clients seem interested in and what [strategies] are they less interested in?

Sure.

I would say that many of the investors are cautious, they're doing a lot of due diligence but they're still moving forward in making decisions.

I think there's the larger investors and larger global investors are actually quite aggressive in certain areas.

Some of the smaller investors have moved a bit to the sidelines or at least gotten a little more conservative but there's still pretty good demand.

With respect to how this is working out and those negotiations, we usually start our private capital presentations talking about our global platform, our people, our products and all that.

And the conversation quickly turns to yes, we acknowledge that we're the global leader but we want to talk about price and terms.

And with respect to that, we're not the price leader in investment management.

We're not in the private capital business just to increase assets under management and we really just don't need to build scale.

We're doing it for a profit.

We're willing to accept that profit in the back end in the form of a center piece but we do this as a business.

With respect to the terms and how that back and forth goes, it's really creating a balance for the investors desire to participate in fund governance.

But we've got to create a structure that recognizes that most of these funds we are the largest co-investor or at least one of the largest and we're the GP.

We have to have discretion to execute the strategy.

We aren't just a [Pat, Will] manager, providing a service to increase assets under management.

That's just not the best way to build long-term value for our network, our customers, our private capital partners and our shareholders, so it's back and forth.

We could cut these and give up GP discretion to increase assets under management, but we just don't have to and we don't think that's the best way to build the business in the long term.

John Stewart with Green Street Advisors.

Could we get you to either update or reiterate your latest greatest estimate for merger costs and synergies?

And then Hamid, could we get your 30,000-foot view on fundamentals, valuation and the size of your land bank in Mexico?

Okay, John, I'll take the first piece.

On synergies no change, although we continue to find opportunities to become more efficient as we continue to move forward.

On the merger expenses side, we would see $70 million to $75 million in merger expenses this year, that's up from what we talked about probably back in Q3.

And the biggest drivers of that-- there's two big drivers of that.

One is PEPR coming in-house, recapitalization happening or bringing in-house I should say in 2012, so there's expenses associated with that.

And there's higher severance costs primarily related to some-- the work we're doing in Europe to reorganize in Europe.

But you'll also remember this ties into the fact that we raised our synergy guidance back in Q4 which was largely around finding more headcount synergies.

Okay, and I'll address your question of valuation.

I hope it's a little closer than 30,000 feet though because we're actually selling a fair amount of real estate all around the world, so we have pretty good insight into what cap rates really are and all that.

I would say in the US, the very best market, the very best assets are mid size on in-place stabilized sort of call it 93% to 95% occupancy type numbers.

And when you go to the global markets that are somewhat less supply constrained like Atlanta and Dallas, you might get into the mid 6s for the very best assets.

And then obviously you tack on some premium blend on those cap rates for assets that are not state-of-the-art, et cetera, et cetera in these markets.

In Europe, the very best assets or the longest duration of leases in for example, the UK maybe as low as high 5s.

I would say when you get into Central and Eastern Europe and the like you might get into the high 7s and everything is kind of in between the modern product.

I would say solidly in the high 6s, maybe low 7s if you take the extremes out.

Japan is the best assets in Tokyo 5.25 when you get to Stockholm maybe high 5s.

And if you get into older generation assets, who knows maybe they will be in the low to mid 6s.

China, we used to think they were in 7s.

We've seen some comps now in the 6s based on what people have paid for assets.

I would have to say it's 6s today.

Brazil it used to be 10 or 11, today it's come to 8.5 maybe.

Mexico is probably mid 7s to 8, so I don't think-- and Canada which is really Toronto, I would say it's like the best markets in the US, so mid 5.

Specifically our land bank in Mexico, let me ask Gene to answer that, but let me make commentary about land bank generally, and I've said this before and I think we're finally got the exact time.

That land bank is worth a lot of money.

That land is good land, not all of it by the way, some of it, some portion of it, which actually is a lot of acres but not a lot of value, maybe $150 million to $200 million of it is not that great but the rest of it is pretty good land in really good markets and I think you guys are going to perceive that as a real competitive advantage for this Company going forward.

I certainly do.

Gene, Mexico?

Yes, sure.

So we have a large land bank in Mexico and I'd point out a couple of things here.

One is that the majority of this is in the population centers where the markets are good and we're actually very active with development right now.

We do have some land bank exposure in the border markets which have been weaker but are actually recovering pretty well.

There's actually very strong manufacturing growth right now in Juarez and Tijuana.

And while overall these markets are no where near at the point where we'd (inaudible), we think we're actually going to see some build-to-suite activity there sooner than we expect.

And then finally, we had a private capital vehicle in place with our (inaudible) fund in Mexico which does development.

And we contribute land to that vehicle and execute development and we have several projects under way right now.

So you will not see us monetizing land through sales any time soon in Mexico, but you will see us monetizing a lot of land through development.

And I just want to make a general comment about valuations in Europe.

If you think about our European platform, again Hamid mentioned that we've got 90% of our assets in the strongest market, that is absolutely a fact.

But if you think about current valuations, (inaudible) values in the US declined, went to 30% decline and they've recovered 90% of that decline.

Europe values fell about 40% and they have not really recovered at all.

So you think about it another way, if you take a look at our current stock price and you value the US and Asia at our cap rates, you'd be valuing Europe at about a 10.5% cap which is well above sort of the dooms day predictions we saw around Lehman, the expectation that was set for the US in 2009 and we sort of all saw how that worked out.

So we actually believe that the markets are pricing at a multiple of a breakup scenario of the euro into our stock price already.

Jeff Spector with Banc of America.

This is actually Jamie Feldman here with Jeff.

I was hoping you could talk a little bit more about the supply side.

I know you kind of touched on it on a question before, but we're hearing that a lot of private developers have partnered up with deep pockets here and even if capital markets tighten up they'll continue to be able to build.

So how concerned are you about new supply weighing on the recovery given your pretty positive outlook for the demand side?

So let's look at the numbers, Jamie.

I think for a couple years we've been going along at 20, 30 million feet of development which is essentially zero.

20 to 30 million square feet of development in the US which is essentially zero particularly when you look at the obsolescence factor, even at 0.5% of base, you're looking at 50, 60 million feet a year of obsolescence.

So we haven't built anywhere near to just holding steady.

So the fact that development volumes have maybe doubled from that or could have tripled from that, let's take an extreme, still means that you're just building to obsolescence.

Secondly you just heard from us and probably every other call you're on that large buildings are only 2%, 3% vacant and there are definitely good-- the tenants are growing, need big buildings.

So I wouldn't be surprised at all that the build-to-suite volume would match what that need is.

And by the way financing, if you have a good credit tenant in tow, financing gets a lot easier all of a sudden so the private developers, particularly those that are prepared to work for no margins, can put up those buildings for the bigger buildings with pre commitments.

So my expectation is that development volumes will go up and but I think demand is pretty strong too.

So I don't see a situation where we get into 200 to 250 million feet of demand and 300 million feet of supply any time soon.

I think supply will lag demand and that will chew up vacancy until we get to the 7% or 8% range.

And in industrial, 7% or 8% vacancy range really means 4% to 5% vacancy because there's a couple points that's obsolete or it's in the wrong place or it's in Detroit and we'll never lose.

So that's our quick take on the-- we're not that excited about the volume of development that's coming online.

It's pretty predictable and it's driven by a lot of these larger tenants.

Ki Bin Kim with Macquarie.

You alluded to somewhat in your opening comments about how you're not giving up rental rates for occupancy, especially in Europe.

I was wondering if you could provide a little more color on that and maybe year to date or second quarter if you could differentiate your leasing spreads between the various regions?

Yes, I guess generally, to respond to the question, we are not giving up rate to build occupancy.

And with respect to where our spreads are and where it's headed, we've talked a lot about this in the past.

If you look at a trailing four quarter average, we get a very, very predictable glide path to positive territory, and I think we've been saying that's sort of the end of this year, the beginning of next year for several quarters, there's a bid ask between Hamid and me when that takes place.

But it's going to be in-- and so far he's winning and-- but it's going to be in a relatively tight box.

We are going to get there.

If you look at fundamentals in the markets, you have positive rent growth in most of our markets at this point.

Some are more positive than others but at this point the wind is really at our back.

So we're not having to buy occupancy.

And if we look at this year, we've got very little roll in the second half and hopefully we can make some more progress on rent growth.

And Ki Bin with respect to Europe, as Hamid said in his opening comments, I mean we gave up the lowest amount of roll per continent in Europe this year, it was less than 2%.

And where we are giving it up is like Gene said earlier in the smaller spaces, the bigger spaces we're actually seeing rental growth.

So I think we are on the same sort of glide path in Europe as we are in the US, probably six-month delayed in Europe from the US, because we went into the downturn afterwards but still exactly the same glide path.

Michael Bilerman from Citigroup.

Tom just in terms of the sources and uses as you think about the $10 billion of dispositions and the 10-quarter plan, by memory I had thought that that was about $8.5 billion net basically of what you would retain through the contributions, and then that $8.5 billion would then be used call it about $2 billion for development funding, $1 billion for your share of acquisitions, and the remaining $5.5 billion for debt repayment.

And I'm wondering A, is that still sort of good numbers to use, B, in relation to John Guinee's question, should we be thinking about a potential tax leakage in any of those numbers?

And then secondly, just as a second question in terms of the development yields that you're quoting, what would those be on historical land bases?

Okay, I'll take the first part of that.

So those numbers are still good estimates, Michael, for our 10-quarter plan.

I do want to point out though the $10 billion that are irons in the fire, that is not all of the 10-quarter plan.

There are other disposition activity for example, that's not in that number and there's some other contribution activity that's not in that number that we plan on working on in 2013.

So those are good numbers, but the $10 billion is actually higher, it's more like $12 billion so when you-- and then when you look at our share, our share should be roughly around 70% of all of that.

It will vary by quarter just because of the mix of what transactions happen, so it's difficult to say what our share is going to be of the activity for the second half of the year.

But for the aggregate of the plan, it should be around 70%.

Yes, the 10-quarter plan is not everything we're ever going to do in terms of moving the pieces of the portfolio around.

It's just that that's what we thought we would accomplish in the first 10 quarters following the closing of the merger.

Our ultimate list as Tom mentioned is larger.

I would say our deployment in straight acquisitions is lower than planned, so our net liquidity generation will be higher than planned because of that.

But most of our acquisitions were going to be in funds anyway.

So on our share, it's not as big an impact as it would be on the development activity because more of the development activity is our share.

So we got-- the take away is I think-- by the way on the tax leakage issue, I think the answer is no, there's not going to be tax leakage.

And your take away should be that we've got a lot more activity out there that we can pull the trigger on than what we need to execute on our 10-quarter plan.

And we're as a result of that, some of the confidence that you see from us is that we do know we have all these different irons to make our plan, so--

Second question was on margins.

Oh, margins.

Look, we see-- every Monday we set at our investment committee and we look at development proposals and the like coming through and the margins look great on an impaired basis and my number one question is how are we making money based on historical land costs?

And the truth of the matter is some are breakeven, some we make money, for example, in Miami we make money on our historical land bases we've got-- because our land unimpaired is still pretty good value and in some places we're losing 10% or 20% margin based on historical value because we just simply bought land at the peak of the market in 2006 and 2007.

So it varies all over the place but I would-- if I were going to pick a number I would say the margins are in the very low-single digits based on historical value and into the high teens based on impaired value today.

And I think those numbers will go up based on impaired value.

Jeff Spector with Banc of America.

Thank you.

It's Jamie again.

Hamid, I was just hoping there's a way to quantify the level of demand you're seeing.

I mean you definitely sound pretty bullish here on the prospects.

I mean can you maybe compare it to last cycles or maybe some square footage numbers around just how deep is the leasing pipeline across your regions?

Okay, so let me just level set.

If (inaudible)-- if Lehman moment is 1 and the peak of 2007 of craziness is 10, in the US, I'm kind of a feeling it's 6 to a 7. So I'm not outrageously bullish like an 8 to 10, I'm a 6 to a 7. But remember where we've come from.

We've come from one going to two to three to four, so it feels pretty good right now, okay?

And I'm saying if we were sort of 7ish last quarter, we're maybe 6.5 now.

I think I'm feeling a little less bullish than last quarter because of all of the same papers that you read, but actually what I see in the portfolio is still pretty consistent with what's going on last quarter.

So that's a way I would describe the business.

Now let's put some context, in the 90s, the peak years had 250 to 300 million feet of absorption and 300 million feet of development in the US, and by the way the US is the only place that they're decent enough statistics that make it worthwhile to talk about.

The other numbers are not reliable.

And here we are at I don't know, 50, 75 million feet of development maybe this year and 150 million feet of absorption and I think obsolescence is 40, 50 million feet anyway.

So I think you're going to see vacancy rates continue to march down from where they are to probably 7% to 8% within the next two years and that's when you get real pricing power.

We already have pricing power in some of the really good markets, Miami, LA, Houston, those are markets that we have serious pricing power.

We don't yet have pricing power in Atlanta but it's getting better, so-- and by the way, we shouldn't feel really great about all this.

It feels a lot better than the last couple years, but my God we're still 20% below peak rate to rents and they don't make anymore industrial land and communities don't want more industrial land.

So I don't know when it is and I don't know when the worm is going to turn really, but if you take it three to four year outlook, and I know in these calls we tend to focus on quarters not years, I'm pretty bullish that the level of rents in industrial real estate is going to be significantly higher than it has been, only just to recover back to its mid 2000 levels.

No great shapes, nothing to get too excited about, but I think because of that, I'm optimistic about the prospects of our portfolio.

So that was the last question.

Let me thank you for participating in the call and I just want you to take away the following couple of things that we try to communicate in this call.

The macro economic environment has weakened a little bit but our operations are exceeding our expectations.

Look for particular strengthening in the Americas and continued outperformance in Europe.

We'll continue to exercise a patient and deliberate approach to achieving our 10-quarter plan with respect to realigning the portfolio, strengthening our financial position, streamlining our private capital business and improving asset utilization by the end of '13.

And while we're focused on these strategic priorities, which are the same ones we announced at the time of the merger, we're also well positioned to stay opportunistic, flexible and very focused on growth initiatives.

So with that, let us sign off and we look forward to seeing many of you at the investor event in September.

Thank you.

Thank you.

This concludes today's conference call.

You may now disconnect.