Prologis Inc (PLD) 2012 Q4 法說會逐字稿

Good afternoon everyone.

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

At this time, I would like to welcome you all to the Prologis fourth quarter 2013 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 our host, Ms. Tracy Ward, Senior Vice President of Investor Relations.

You may begin your conference.

Thank you, Tracy, and good morning everyone.

Welcome to our fourth quarter 2012 conference call.

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

This morning, we will hear from Hamid Moghadam, Chairman and CEO, who will comment on the Company's strategy and market environment.

Then from Tom Olinger, CFO, who will cover results and guidance.

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

Before we begin our prepared remarks, I would 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 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 like to also state that our fourth 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 on the past, an order to provide a broader range of investors and analysts with the opportunity to ask their questions, will ask you to please limit your questions to one at a time.

Hamid, will you please begin?

Thanks, Tracy.

Good morning everyone, and welcome to our fourth quarter call, a significant milestone because it marks our first full year of operating as a new Company.

As you know, at the outset of the merger, we put together an ambitious plan to drive our paths for the first 10 quarters as a new Company.

The purpose of this plan was to build a strong foundation for growth into the future.

Today, we are six quarters into that plan, and I'm pleased to say that we have outperformed our own high expectations.

Let me take a few moments to review the highlights of our progress.

Of the four priorities, perhaps the most central to the plan was our decision to realign our portfolio with our investment strategy, because, in many ways, the other priorities follow from this one.

We are ahead of plan in terms of focusing our presence in the global markets.

This priority contemplated $2.9 billion of dispositions during the course of the 10 Quarter plan.

Today, we are 80% complete, with $2.3 billion of sales at an average cap rate of 7.1%.

The dispositions have occurred predominantly in secondary markets, increasing our overall percentage of assets in global markets from 79% at the merger date to 85% today.

Well on our way to achieving our target of 90% of the future.

Given the number of transactions over the past 18 months, the market has clearly spoken that there's no shortage of demand for high-quality industrial real estate.

Importantly, we sold properties at prices in line with values embedded in our internal NAV analysis.

On the deployment front, we started more than $1.5 billion of new development and an average yield of 7.9%, and a value creation margin of more than 18%.

These starts represent a 50% increase over the last year, with a record 57% of them in build-to-suits.

In the process, we are able to monetize about $400 million of our land bank.

We've also exceeded our target for a second priority, which was to streamline our private capital business.

Our 10 Quarter plan contemplated the rationalization of [four] funds, and today, we have liquidated or restructured a total of eight funds.

At the same time, we are growing our private capital business, with the formation of new vehicles and raising capital for existing funds.

We exceeded last year's record and raised $1.9 billion of new equity.

A big part of this new business was the 50/50 joint venture with Norges Bank Investment Management that we announced in December.

We are excited about this new relationship with such a highly-regarded investor, and expect to close the transaction in March.

Shifting over to Asia, we selected the J-REIT as optimal structure for capitalizing our Japan operating platform.

We are very pleased with the level of interest and demand for the IPO, which priced earlier the week at the top of its filing range and will close next week.

With these two major priorities behind us, we will turn our emphasis to growing our private capital platform, by raising additional growth capital within the existing funds and ventures.

Growing levels of investor interest and industrial property is being met by a dearth of stable operating platforms, and a experienced management team.

As an owner-operator with global capabilities look across a full range of risk return strategies, we are well-positioned to take advantage of this trend.

Our third priority was to strengthen our financial position and in this regard, we expect to get significantly ahead of plan following the closing of our J-REIT and Norges transactions.

Tom will go into the details of this in his prepared remarks.

Our fourth and final priority has been to improve the utilization of our assets.

Occupancy since the merger date is up 330 basis points to 94%, very close to the long-term average of 95%.

Our leasing teams around the world did an outstanding job last year.

We set records for annual leasing at 145 million square feet, and for the quarter, with 40 million square feet.

In the US, we are continuing to see considerably stronger demands for our spaces under 100,000 feet.

Occupancy in these smaller spaces was up 140 basis points in the fourth quarter, and up 200 basis points year-over-year.

This segment is closely tied to the recovering housing market, where we expect demand to increase into the foreseeable future.

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

The recovery in industrial real estate markets continues around the globe.

All signals point to a positive future for our sector.

For example, the IMF is forecasting global trade growth at 3.8% for 2013, and even stronger in 2014.

Improving industrial production in new goods orders also indicate strengthening economic growth.

US inventories has now been growing for the last 11 out of 12 quarters, and are almost back to their pre-crisis levels.

We expect further rebuilding of inventories this year that will surpass the previous peak.

This is not surprising, given the fact that the US population has increased by 12 million in the past five years.

We are forecasting 150 million square feet of net absorption in the US in 2013.

This may prove conservative, as it doesn't factor a strong recovery in housing, or the strength we saw in the fourth quarter.

In Europe, net absorption continues to be positive, and has been, since we began collecting the data series in the first quarter of 2011.

Take-up also remains well above its long-term average.

Supply of Class A product remains constrained in both Japan and China.

We expect the reconfiguration of supply chain in Japan and growing consumption in China to continue to drive demand for our product in the long-term.

In summary, strengthening demand in the US, Europe, and Asia, together with low levels of new construction, is having a positive impact on market rents.

Recovery in rents has taken hold in most global markets and is now spreading to regional markets.

With that, let me turn things over to Tom.

Thanks, Hamid.

This morning, I will cover two topics.

First, our fourth quarter and year end results, and second, guidance for 2013.

So, let's look at our results.

Core FFO for the fourth quarter was $0.42 a share, and for the full year of 2012 was $1.74 per share.

Net operating income was stronger than we expected, driven by higher occupancy and development leasing.

This was partially offset by higher G&A expenses due to accruals for our compensation plans, as a result of an increase in our stock price and our accomplishments for the year.

Turning to our operating portfolio.

Occupancy at quarter end was 94%, up 90 basis points from the third quarter, and 180 basis points year-over-year, setting leasing records for both the quarter and year, as Hamid mentioned.

Leasing activity in the fourth quarter was strong across all space sizes.

At year end, our spaces over 0.5 million square feet where 100% occupied, and spaces over 250,000 square feet were 98.5% occupied, while small spaces were at 90%.

GAAP same-store NOI for the fourth quarter was up 0.1% bringing the full year to 1.3%.

GAAP same-store in the fourth quarter was essentially flat, as a result of lower than normal operating expenses in the fourth quarter of 2011.

On an adjusted cash basis, same-store NOI was up 0.8% for the quarter.

Rent change on rollovers decreased 2.4% for the quarter.

The decline was primarily driven by European regional markets, where leases were signed at the high point of the prior cycle.

Looking at the Americas, rent change was essentially flat in the fourth quarter, down only 0.6%.

Rent change is continuing it's upward trend and we expect positive rollover in 2013.

Turning to our capital deployment.

We had contribution and dispositions of $1.3 billion in the fourth quarter, with our share of this activity at $1 billion.

We made significant progress in the past few months on our asset realignment strategy, with the formation of the Norges venture and the launch of our J-REIT.

While the Norges venture hasn't closed, it is impacting our Q4 net earnings.

Therefore, it's important to understand the whole picture when both of these transactions are completed.

The net effect of these two transactions is an overall net book gain of more than $165 million, and a modest increase in our fourth quarter NAV, using current FX rates.

Let me walk you through the specifics.

First, we anticipate the J-REIT will close next week, through the contribution of $1.9 billion of stabilized assets, we expect to recognize a book gain of more than $300 million at today's FX rate.

This gain is based on contributing 85% interest in the assets to the J-REIT, as we will retain the 15% interest in the entity.

Second, we expect the Norges venture to close in March.

The European portfolio is primarily comprised of the former PEPR assets, but also includes some wholly-owned assets.

The former PEPR assets were contributed to the venture at a value effectively equal to our tender costs to acquire the additional PEPR interest.

For the balance sheet assets, we recognized an impairment of approximately $135 million based on the plan contribution value of these developments.

About 75% of the impairments relate to the Czech Republic and Spain.

These properties were developed by us, and on average, had a construction start date in the first half of 2008, the peak of the prior cycle.

Keep in mind that accounting rules require us to recognize the impairment as if we sold 100% of the assets to the venture.

However, we will retain a 50% interest, and expect the asset value to appreciate over time.

To sum up, we expect to recognize a net gain of over $165 million and taking into account FX, a modest increase in NAV from these two transactions.

Additionally, by electing to retain a 50% ownership in our Norges venture, we will participate in the recovery of asset values in Europe, which we think will be significant.

Moving to deployment and acquisitions.

Development starts increased significantly in the fourth quarter, ending the year at $1.5 billion.

We are continuing to see more development opportunities and as we have previously discussed, our land bank is a competitive advantage.

During the quarter, we conducted a thorough review of our land bank to refresh both valuation, and our intended strategies.

Let me give you some color on this analysis.

Our conclusion is that our global land bank has a market value above it's book value as of year end, and can be divided into two segments.

First, there are strategic landholdings located in global markets with the book value of $1.7 billion, that we believe have a market value of approximately $2 billion.

Second, the remaining $200 million of land is not strategic that we intend to sell in the near term.

It is on this portion that we recognized the non-cash impairment charge of approximately $78 million.

The bottom line is, we think we can create more value by selling these parcels and reinvesting the proceeds into our goal global markets.

As you know, GAAP accounting doesn't provide for land values to be written up, but does require impairments for planned land sales with projected book losses.

So, when you look at the land bank in aggregate, we believe the market value exceeds the book by more than 10%, or by over $200 million on a net basis after the impairment.

On a capital markets front, during the quarter, we completed more than $1.1 billion of debt financings, refinancings, and paydowns.

On a look-through debt basis, it decreased by $800 million, and we ended the year with 43.9% leverage.

We expect the Norges and J-REIT transactions will increase our leverage further to about 37%.

Now turning to guidance for 2013.

For operations, we expect 2013 GAAP same-store NOIs to range between 1.5% and 2.5%.

Given the disproportionate level of lease roll in the first quarter, as well as the seasonal nature of month-to-month leasing, we expect occupancy to decline in the first quarter, then trend higher and reach between 94% and 95% by year end.

For FX, our guidance assumes the euro at $1.35 and the yen at JPY92 [per $1].

On the expense side, we expect net G&A to be $220 million to $230 million.

For capital deployment, our 2013 forecast is between $1.9 billion and $2.4 billion.

This deployment includes $1.5 billion to $1.8 billion development starts with our share of approximately 75%.

We have great visibility into our development pipeline, and are off to a good start.

Our forecast also includes acquisitions of $400 million to $600 million, with our share at about 35%.

Turning to contributions and dispositions, we expect $7.5 billion to $10 billion in 2013, our share of the contribution and disposition proceeds will be approximately 60%.

Over 50% the contributions and disposition forecast relates to the Norges and J-REIT transactions, which we expect, again, will complete the first quarter.

Now for our Core FFO guidance for 2013.

We expect full year Core FFO to be in the range of $1.60 to $1.70 per share.

As a reminder, our Core FFO excludes any gains or losses from disposition and contribution activities.

We believe the appropriate 2012 run rate to which our 2013 guidance should be compared is $1.68 per share, which represents our Q4 2012 results annualized.

This is also consistent with our full year 2012 results of $1.74, less the one-time tax benefit we recognized in the third quarter.

The midpoint of our 2013 guidance is $1.65, and represents a $0.03 year-over-year decrease versus the 2012 run rate.

The decline is driven primarily by the initial dilution from the timing of [associated friction] of redeploying the significant proceeds from our contribution disposition activity.

Relative to this, the average yield on contributions and dispositions is about 6.8%, while the average yield on our use of proceeds is approximately 4.2%, consisting of debt repayments, preferred redemption, and capital deployment.

This dilution is largely offset by new private capital revenues, increased NOI from development stabilizations and same-store growth, and lower taxes from structure efficiencies.

The timing of contributions and dispositions obviously has a significant impact on Core FFO.

As we have previously said, the Europe recapitalization is happening earlier than what our original plan contemplated.

If the Norges venture closed in the fourth quarter of 2013, our guidance would increase by almost $0.08.

We think our quarterly Core FFO run rate by the end of 2013 should be at or above $0.42 a share, so by the end of 2013, we will fully recover our fourth quarter 2012 run rate, yet with significantly lower leverage and FX exposure.

In closing, I'm very pleased with our results is quarter and our progress related to our 10 Quarter plan.

As we've been saying for some time, this is an asset-driven plan and our achievements will significantly improve our cost structure, our balance sheet and our liquidity.

To put this all in perspective, by the end of 2013, we will have reduced our leverage, including preferreds, from 50% at the merger, to 37%, reduced our non-USD equity exposure from 55% at the merger, to less than 35% by year end.

All while enhancing the location and age and quality of our portfolio.

We I have a little further to go reach our long-term target for leverage and foreign currency exposure, we are well-positioned to take advantage of opportunities to continue to grow our Company strategically.

With that, I will turn it back to Hamid.

Thanks, Tom.

Before we open the call to questions, let me close with the key takeaways.

We had an excellent quarter and a strong finish to the year, and I couldn't be more proud of how our teams have executed.

I also think it's easy to lose sight of the magnitude of these accomplishments.

As a quick recap, since the merger, we have sold $2.3 billion of assets, realigned over $12 billion, that's $12 billion, of fund assets.

Raised $2.4 billion in new private capital.

Increased portfolio occupancy by 330 basis points.

Started $1.9 billion of developments, with an average margin of 19%, and reduced our leverage by 1,300 basis points, post the Norges and J-REIT transactions.

These efforts have allowed us to build a strong foundation for sustainable growth, and to reach our goal of being a blue chip REIT, as we discussed at our Investor Forum.

We have the portfolio, the customer relationships, the balance sheet, and most importantly, the team to capitalize on markets opportunities by leveraging our scale and global footprint.

As always, we will do this in a responsible manner.

We will now open the call for questions.

Operator?

(Operator Instructions)

Your first question comes from the line of John Guinee with Stifel Nicolaus.

Your line is now open.

Hamid, or whomever, looking at page 29, which is your development story, it looks to me like you've got about 10 million square feet -- I'm sorry, 11.2 million square feet in the US alone, at a development number of somewhere between $73 and $76 a square foot, which strikes me as fairly high for bulk industrial.

What exactly are you building, and where are you building it, to come up with $73 to $76 a square foot?

John, I will have Gene answer that.

Sure, John.

I'm actually having trouble reconciling the page number but, as to the cost per square foot -- these are driven primarily by a lot of starts in the Los Angeles market.

That's not an unusual number at all.

If you are looking at an Americas number, it is going to incorporate Brazil.

(technical issue) Sorry.

Operator, I think you are coming on the call.

John, I'm going to continue.

In Brazil, our development costs range from $95 to over $100 a square foot.

It's a real mix issue.

If we want to look at the downside, we can certainly develop, for example, large floor plate build-to-suits in call it low to mid-$40s, if you are in a market like Dallas, for example.

So, there's a pretty broad spectrum, there.

Great.

Thank you.

Your next question comes from the line of Jeff Spector with Bank of America Merrill Lynch.

Your line is now open.

This is Jamie Feldman here with Jeff.

I guess my question is more on guidance.

I was hoping you could provide a couple of details, which are -- what's the cash same-store NOI growth rate?

What is the AFFO, based on your guidance range?

And then, bigger picture on the dispositions.

How should we think about that adding from either the $7 billion to $10 billion -- what would you be selling?

What kind of pricing, and what's the appetite?

Jamie, this is Tom.

I will take those.

So, first on cash same-store NOI, I would expect cash same-store NOI to be at the high end of our GAAP range.

We've clearly been trending cash higher than GAAP, same-store, which is consistent with this point in the cycle.

Next, on AFFO, AFFO for 2012 will come in right about the low 90% range.

I would expect the same range for 2013.

On the disposition side, when you look at dispositions for the year, we will step back.

When you look at contributions and dispositions for the year, with the guidance, the midpoint is just under $9 billion.

When you think about Norges and JREIT transactions, that's a little over $5 billion.

You are left about with a little over $4 billion left.

When you look at the buckets of what's left, it's really three things.

One, there are about $1.3 billion of asset repositioning, so selling out of non-core markets and assets.

There's about $1.5 billion of contributions into existing funds.

A lot of that's in Europe, but also in platforms in Mexico and Brazil.

And, we had a little over $2 billion of what I would call fund rationalization, so these are continuing asset sales out of existing funds that we're rationalizing.

Your next question comes from the line of David Toti with Cantor Fitzgerald.

Your line is now open.

Just a couple questions.

I'm sorry if I missed this.

Did you go into detail about the impairments that we are taking in the period?

We did.

And, is there -- I guess, it's a fairly recurring event at this point.

I guess, what is your sentiment, relative to the asset base and potential impairments going forward?

How that impacts your decisions on future contributions?

I would just like to get more of an understanding about the nature of the accounting and the strategic decisions behind that, those kind of charges.

This is Tom.

I will take that question.

Believe me, the impairment is over.

We don't see any impairments going forward, really at all.

What's driving this is, clearly, our change of intent on a very small portion of our land bank, which we believe we can redeploy that capital.

Quite frankly, generate a much better return by redeploying that capital.

That's on that point.

On the European asset side, these were assets we had planned to hold for the long-term, very good assets.

But, as we talked about in my prepared remarks, these assets were developed at the peak of the cycle.

The important thing is, we had picked up 100% of that value change, even though we only contributed 50% of the assets into the venture.

That's just the way the accounting rules work.

It's a very lopsided view of what really happened, when in reality, we are keeping 50% of the upside of those assets.

So, I would call it accounting gymnastics, and don't expect to see much of any of that going forward.

I would question that characterization of the recurring event.

I think that's the first time we've done it as a merged company and it was after a strategic review of our land assets in Europe, primarily.

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

Your line is now open.

Tom, sticking with you, in terms of peeling back the onion a little bit on sources and uses.

So, just at the midpoint, you're going to generate $5.25 billion of cash from the sales, and you talked about that being about a 6.8 cap rate.

As a use of the cash at a 4.2 for debt repayment preferred and capital deployment.

I'm wondering if you could go through the amount that your using for each and the timing, because I assume it is going to be bumpy throughout the year as the cash comes in, but you won't be able to use that cash immediately.

So, maybe just walk us through some of that.

And, you talked about new private capital and lower taxes, but you didn't quantify the change of those line items, year-to-year.

So, if you could go through that as well, that would be helpful.

Okay.

I will try to address all of that.

So, you are right.

When you look at the midpoint of our contribution disposition guidance, about $5.25 billion, but for round numbers call at $5.5 billion.

Our share of deployment is about $1.4 billion.

When you look at the debt side, which again we think will be around 4.2% blended yield on what we could get after, there's several different components of it.

I will try to give you the bigger pieces.

Number one, the biggest piece is debt transfer.

That's about $1.1 billion.

When you think about the Norges transaction, debt transferring from our balance sheet into the venture, although it's very small, we also have contributions in Europe where debt is getting transferred to the funds.

When you think about the JREIT transaction, where we are extinguishing debt in connection with that transaction.

That's all about $1.1 billion.

There's convertible debt of just under $0.5 billion that matures, there's bonds that mature of about $400 million.

There's about $700 million of other debt, some of that's maturing and some of it is debt we think we can get after that matures beyond 2014, with minimal friction.

One more piece would be the preferreds, as you mentioned.

We can redeem all but one series of our preferreds, that's just under about $0.5 billion.

The balance of that, to finish it out, would be on our line.

When you look at the blended yield on all that activity, on all of that reduction of leverage, that's about 4.2%.

You are right, from a timing perspective, this will be lumpy, as we look through half the quarters of 2013.

Clearly, with the Norges and the JREIT transaction happening mid- to late in the first quarter, that will clearly have impacts throughout the year, because when you step back, there's really a timing difference here, as we said in my prepared remarks, to really put this capital back to work.

Although we can reinvest in very, very profitable development activity, there is just the timing gap between as we are constructing those assets, the only real yield we get is cost security, which is about 4.5%.

We don't get that yield out of our buyback.

Your next question comes from the line of Craig Mailman with KeyBanc.

Your line is open.

Jordan Sadler's on with me as well.

Could you guys just maybe address, last quarter you commented that you think run spreads were going to start to turn negative, here.

I know you had mentioned it's going to bounce around a bit, but the negative 2.4 this quarter is also surprising.

What are you seeing on that front?

Do think it's early in 2013?

Or is that going to push out, that expectation?

Craig, it's Gary.

As we said last quarter, and most quarters, this is going to bounce around on a quarter-to-quarter basis.

It's a bit volatile.

I think the important thing for you to do is look at the trend line on a year-to-year basis.

That trend is absolutely undeniable, and it's positive.

So, we're definitely trending in the right direction.

We would fully expect that we will see positive rent change on rollover for the full-year 2013.

If you want to dig into Q4, specifically, Tom said at the outset that it was related to Europe leasing and it was.

I just remind you for the quarter, we had record leasing for the Company at 40 million square feet, and record leasing for Europe at about 12 million square feet.

When you pull back the onion with respect to Europe it's actually pretty interesting, the composition of the leasing.

70% of the leasing was in France, Germany, Poland and the Netherlands.

That shouldn't surprise you.

Those are our big markets.

20% of the leasing was in Slovakia, the Czech Republic and Spain.

Slovakia might not surprise you, the Czech Republic and Spain should.

Peel the onion back even a little bit further, it gets more interesting.

In the Czech Republic, we did leasing in Uzice, which is a market that's about 30 kilometers North of Prague.

In Spain, it was in [Masavas], which is a secondary market.

In Tarancon, we're actually seeing leasing.

The long and short of it is we are seeing leasing in non-core submarkets that we haven't seen really for the past three years, and those markets are rolling up peak rent.

While we are seeing somewhat higher rental rolldowns in Q4, I think we are seeing greater activity in the non-core markets, and I will take the NOI from those core markets as opposed to the quarter-to-quarter rent change any day.

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

Your line is open.

I wanted to go back into the evaluation for the assets that were sold or to be sold, the Norges in Europe, and the JREIT in the prepared remarks.

You mentioned that they were above the internal values within the NAV.

As outsiders, as we look at it, the cap rates appear higher than what we would use for -- where those regions would come out, at least on an average basis.

So, I'm wondering, if these values are above the internal NAV, first, is that excluding the pickup that you get in management fees?

Second, what does that suggest about the values or the appropriate cap rates for the remainder of the portfolio that will be in both Europe and in Japan?

So, let me give you a global answer on that.

I think the Japan -- the IPO has to be priced at NAV by definition, which is based on appraised values and those are, actually, within 10 basis points of our cap rate to the good.

In other words, the appraised values were at a 10 basis point lower cap rate than what internally we had in our model.

So, that's pretty simple.

Actually, you will have to wait to see where the thing trades.

But I think indications of what the valuations are going to be are going to be pretty strong at the public level.

That's pretty simple to talk about.

In Europe, it's pretty simple math.

We actually end up buying the bulk of what we recapitalize in this transaction, through a tender process at PEPR.

Basically, our goal was not to make a spread on the deal or anything like that.

We just wanted to get it from one format that was not right into another format that was right.

We did that on a breakeven basis, a year sooner than we wanted to.

You could argue that we could have hung in there and done it at 50 basis point lower cap rate, and maybe we could have.

But, we chose to actually breakeven on that transaction, and establish a very new major relationship with a major investor, and we kept 50% of the portfolio that we get to write up, plus a promote on the other 50% that we sold.

So, I think what it says about cap rates is that it was a really good transaction for the Company from a capital allocation point of view.

And, if you take all of that and compare it to the range of cap rates that we have used in our investor presentations and you -- particularly blended in with the dispositions, which are off the bottom of the portfolio, we are selling our least desirable assets.

Actually, you would conclude that we were a little low on our NAVs before, and the market, based on the market speaking, we should be a little bit higher than what we had before.

Brendan, to answer the second part of your question regarding management fees, yes, the decrease in management fees from the formation of those new ventures in our NAV calculation.

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

Your line is now open.

Just one question for Tom.

The trailing four-quarter CapEx as a percentage of NOI has been ticking up through the year, which makes sense given how much leasing you are doing.

With the portfolio at 94% occupied, where do you think that ratio goes in 2013?

I'm going to take that.

This is Gene.

We think that as you look at 2012 going into 2013, these overall numbers will stay the same.

You accurately point out that substantial leasing activity is going to move the CapEx number, but if we break this down a little bit and just look at property improvements, for the last couple of years, we have really been ticking along at about $0.05 per square foot per quarter of property expenses, agnostic of leasing.

We think that's going to continue at that rate.

We do not see uplift there.

With respect to the cost to lease our space, that's held pretty steady, if you look at it on a constant basis, which would be on a cost per square foot as you do leasing, that's right around $1.37.

Again, we see that as being fairly steady.

Frankly, I'm really happy about that, because we are doing more small tenant leasing in the last couple of quarters and those generally have higher TIs.

So, looking at the trailing four-quarters numbers, the way we've done this book, it's going to take another few quarters for those numbers to rationalize.

If you look at the book last year, we didn't even start doing that until the fourth quarter.

So, we've got to digest this and run it through a little bit further.

But, I would say -- you get a 13.9% number there for this quarter.

That's going to go down, because that's pushed up by the high velocity of leasing.

Though, I would say it would be in the 12s.

Let's let it play through for a couple quarters.

George, I wouldn't look at those numbers quarter-by-quarter, I would look at them year-over-year because they are seasonality and all kinds of things.

Really, the right time to look at these is where the different segments in terms of size of portfolio are about the same level we see.

We are basically out of big space.

We have 100% occupancy on spaces over 0.5 million feet.

1.5% on spaces over 250,000 square feet, and 10% in the small spaces.

Most of the new leasing that's going to be done is the small spaces.

Those are going to be more expensive.

Your next question comes from the line of Michael Mueller with JPMorgan.

Your line is now open.

Just real quick, if we're looking at the sequential occupancy increase into Q4, was all that coming from leasing, or was there any significant impact from asset mix change?

There's no impact from disposition or activity.

Okay.

And real quick, in terms of the build-to-suit, in terms of the guidance for development starts, can you talk about what the percentage of build to suits is in that mix?

This is Mike.

Last year, we enjoyed a very high built-to-suit percentage, as Hamid referred to it, 57%.

We would expect on a going-forward basis that to more level off, approximately more in the 50/50 range going forward.

We're certainly very optimistic about our build-to-suit pipeline when you consider US pipeline is as strong as we've seen in sometime.

We are seeing some pickup in Europe.

And we are seeing our customers, potential customers in those pipelines changing some of their requirements with more of a focus on what we would consider global markets as they are intending to be in more major population centers to serve their customers potential in one day delivery cycles.

We think that's going to bode very well for our build-to-suit prospects in the future.

Your next question comes from the line of Tom Truxillo with Bank of America.

Your line is open.

Tom, I appreciate your comments on where you think leverage is going and on walking us through the sources and uses on how you get there.

Given how the Norges JV is going to be structured essentially debt-free, it seems like, at least the timing of how that leverage is going to be split between your wholly-owned and the joint ventures has changed a little bit.

I mean, you had the goal of wholly-owned being 25%, JVs 40%.

It seems like those two ratios are going to be maybe inversed here for a while.

Can you talk with the timing of that?

Do still plan to get wholly-owned assets to a 25% leverage number?

Yes.

I think, yes, we will get the wholly-owned to 25%.

I think the reality is that our joint ventures will actually be less than 40%, when you really look at it long-term.

Because we have several ventures now.

The Norges venture, the Allianz venture that are using little or no leverage.

Brazil, no leverage.

I think the reality is, 25%, yes, we are going to hit that number on a wholly-owned basis.

My guess is, the JV is actually lower than 40, what we said long-term.

Your next question comes from the line of John Stewart with Green Street Advisors.

Your line is now open.

I've got one for Hamid and two quick housekeeping items for Tom.

Yellow flag.

I will try to keep it short.

First of all, Hamid, congratulations on all you been able to accomplish since the last call, particularly in Japan and Europe.

Question on Japan.

What is the rationale for essentially leaving half of the portfolio on balance sheet, and how did you arrive at what went into the JREIT, and what stayed on balance sheet?

For Tom, just following up on the accounting treatment for the European JV.

Will you initially consolidate that?

Just curious about when you were referring to the debt transfer.

Lastly, on G&A, I think you give us the net number.

What would the gross number be?

I presume at this point all merger integration costs will have been realized, is that right?

Okay.

I will answer the accounting questions.

First of all, thank you for your congratulations.

But I get to talk about it, the team gets to do all the hard work, so we appreciate it on behalf of the team.

Secondly, the rationale was pretty simple.

We think there's tremendous upside in values in Europe.

We were able to recapitalize PEPR, which was the primary component of this and bring it in-house, basically, at a pretty good value.

That's essentially where we recapitalized it with the Norges transaction.

We like -- originally, we were going to do an 80/20 deal.

We looked at these values and said this is the best place we could have our capital invested over the next couple of years.

So, we like owning 50% of this portfolio.

If you really look at the economics on a 50/50 basis plus a promote opportunity, we think in the next three years, we could have maybe 60% of the upside economics of this deal and meet our objectives.

So, that was pretty easy.

Now, on the JREIT side, I think you asked about that, too.

On the JREIT side, the selection of the portfolio was pretty easy.

Those were the assets that were essentially unencumbered and stabilized on the balance sheet, that were ready to go, and in the pipeline for the JREIT, there were further eight properties that are under development and in late stages of development, actually pretty well leasing up.

And two assets from the old ANB portfolio that has secured debt on them that needs to get resolved.

So, of those assets, when they are ready to go, we are hoping that the JREIT will transact on those assets as part of the pre-designated portfolio.

So, I think that answers all your questions.

Okay.

John, I will tick through yours.

Norges will be on the equity method of accounting as well the JREIT.

Merger expenses were done, happy to close the cover on that book.

We won't have merger expenses in 2013 related to that transaction, and on the G&A perspective, gross G&A, of course, just excluding property management or private capital, which is the way we look at G&A, gross would be between $290 million to $300 million for 2013 on a gross basis before capitalization.

The only difference between the gross and the net on our vocabulary is basically what capitalized into development.

That number will probably increase over the next couple of years.

The portion that's capitalized would increase.

Just given our development activity.

Your next question comes from the line of Ross Nussbaum with UBS.

Your line is open.

A couple questions.

I'm looking at a footnote in the back of the supplemental.

Two things caught my eye.

The first is, there's been about $220 million spent on merger acquisition and other integration expenses, including $28 million this last quarter.

How much more should we expect in 2013?

Then, the table that's sitting right next to it, the free rent number, almost $17 million in the fourth quarter.

Can you give us a sense of how many of the leases that are getting signed have are a free rent component, and where should that number trend over the next year?

Ross, no merger expenses in 2013.

We're done with merger expenses after 2012.

On the free rent, I hesitate to tell you were that number's going to go, but in general, if you look across geographies, concessions are declining and that includes free rent.

Frankly, I'm struggling to think of a place where that's static.

Concessions are declining.

We would expect to see free rent lower in the future.

Your next question comes from the line of Mike Salinsky with RBC Capital Markets.

Your line is open.

Hamid or Tom, when you made your presentation back in the fall, your stock was trading at $34, it's trading close to $40 now.

As you look at your sources and uses for 2013 and beyond, how do you think about common equity at this point?

I have never answered that question in a good way.

So, I will take the fifth on that completely.

But, let me get to the essence of your question, which is kind of leverage and where it's gone, and all that.

So, after Norges and JREIT, the Company will be 37% levered.

We think of the 30% additional interest that we are keeping in the Norges transaction as a temporary investment.

Hopefully, one that we will liquidate, if you will, in the next three years, per the terms of the agreement that we have.

That is about 2.5 to 3 points of leverage.

We also have some convertible preferreds, just under $500 million of them, that are technically expiring in 2015.

We might be able to get at that a little bit earlier, who knows?

You would think those guys would want to convert at some point, given where the strike prices are.

That's another 1.5 to 2 points of leverage.

Based on what we've done, assuming we don't do anything else, and we plan to do plenty of other things, our leverage will be in the low 30s.

So, we have a pretty good path to reducing leverage.

So, I know I didn't quite answer the question you asked, but I think I answered the question that I could answer.

Your next question comes from the line of Jeff Spector with Bank of America Merrill Lynch.

Your line is open.

Just wanted to ask about the US housing recovery and how you are thinking about that this year.

At the prior peak, what was the percent of the home-oriented tenants in your portfolio and where are you today, and where are you thinking about that going forward?

Jeff, this is Gene.

Let me take a stab at that.

Let me give you a general answer first.

With respect to the housing, we have been talking about this recovery for a while.

What we have in our forecast is a continued modest recovery in home building in the US.

So, as I look at our US operations, we have upside potential, if this recovery really picks up steam.

There is an awful long way to go.

We were at 1.8 million in annual starts of homes at the peak.

I don't think that's going to happen.

But we were down to 500,000, 600,000 and now we are trending up 700,000.

So, we have upside in our numbers, if that really picks up steam.

If the recovery completely stalls and reverses, and we probably have downside.

The question you asked about what percentage of our tenants are related to home building, that's probably a pretty big number, but it has a bandwidth to it.

In other words, you don't have a lot of tenants are 100% necessarily, but you have many tenants who are generally related to it.

So, that's probably something we can work on for you, to get in more detail.

But, we look at what our leasing activity is shaping up to be in the last quarter, this current quarter.

More and more demand from the carpet guys, the tile guys.

Appliance sales are up.

Markets like Las Vegas or Phoenix were really hurt, we are finally seeing some good demand.

That's why you are seeing occupancy levels in the smaller spaces go up.

A little more of a complex answer to be precise than the numbers.

I am personally quite optimistic that this trend is going to accelerate.

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

Your line is now open.

Just two quick follow-ups.

One was just in terms of debt to EBITDA.

Just thinking about leverage in a different way.

It would appear as though once you stabilize the existing developments underway, plus the developments you're going to start in 2013, and you sell all of the assets you plan to sell this year, and you have the growth in EBITDA, just from the increase in same-store, that you are probably in the low 7s debt to EBITDA.

I just wanted to make sure that we're sort of on the same path and same page.

I think you've talked about a target of 5 to 6 times.

It would seem as though some of these other sales will eventually get you to that goal.

I want to make sure we are thinking about it the right way.

The second one is just in terms of spend.

Tom, you talked about $1.4 billion of deployment this year.

I assume on those developments, you aren't spending at all of it this year, and you have $800 million left to spend on the existing pipeline.

Call it a $2.2 billion total commitment that you put out there.

How much of that actually gets used in 2013 as we think about the sources and uses?

I think you forgot to answer the question that I had asked earlier about private capital contribution, and the lower taxes and how much that's impacting 2013 versus 2012?

Okay.

First on the EBITDA question.

You are right in the ballpark there, regarding it being in the low 7s.

Clearly, with the additional pieces that Hamid mentioned, that will get us down into the low 6s, if not putting a 5 in front of it.

To get in the 5s, we need a more robust recovery in rents, which we will get, but it will take a while for it to rollover through the rent.

So, I think we will get there, but it's not going to be primarily because of deleveraging activity.

I think if we just look at deleveraging and not at substantial growth in rents, we will be in the low 6s.

We need that last little oomph from rents to get into the 5s.

Michael, on your question about deployment, you are right.

We are not going to spend all of the money on our 2013 starts.

The midpoint of that is $1.650 billion, but we had $1.155 billion of starts in 2012 and we are going to be spending -- what we haven't spent in 2012, we are spending all of that in 2013.

The numbers are actually fairly much in line with what I pointed out.

The $1.4 billion I gave you is really full spend.

Here's the math I think you are trying to do.

Obviously, we own the land.

When you were talking about yield on incremental investment, you are looking at it as total investment.

You have to back out the land.

The yield on the incremental investment is much higher.

The land is for free, actually it's negative in terms of what it cost us.

Michael, I think your last question was regarding private capital and deferred taxes, with the contribution.

Clearly, we talked about the deferred taxes, the deferred tax liabilities we have on our books.

If that was your question, when you look at the drop, we dropped deferred taxes by about $75 million from Q3 to Q4, and that was largely a result of contributions.

So that balance started at about $525 million.

It's down to $450 million-ish now.

We will drop that number by another $260 million when we transact the Norges close.

That's going to take our number down.

It's going to have a 1 in front of it.

So, we really worked it down.

The most important thing, the vast majority, if not almost all of that liability was really moved from a structuring standpoint.

We didn't have to settle that obligation with the relevant taxing authorities in cash.

We were able to move that liability through structuring.

So, and that's really important, because that's often a piece people miss from an NAV perspective.

They look at that NOI side of the house, but they don't look at the liability that is moved off the balance sheet.

That's really important for you guys to look at.

And, I think there was a question earlier about cap rates in Europe and all of that.

That, in effect, is a negotiating item.

You can either do the deal at a lower cap rate and incur that deferred tax liability or you can negotiate a deal at the higher cap rate and transfer that liability.

So, we obviously reported to you the worst possible cap rate number.

There's another way we could've shown it to you, which would've shown a much lower cap rate.

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

Your line is open.

Sorry about that.

I think what you're saying, Tom, in this regard, is that you really -- we really should look at -- or is another $200 million of implicit or explicit proceeds on the Norges deal because the tax liability goes away?

Or does it just get pushed down the block?

Well, it's focused one in the same, right?

If we transfer that liability to an entity which we now only hold 50%, 50% of that liability has been relieved.

It's cut in half in nominal dollars and its cut into a fraction in present value dollars, given that it's pushed out way into the future.

But, if you look at just what we completed in Q4 in Europe, as well as the Norges transaction, that's a drop of over $300 million.

It's like cash.

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

Your line is open.

Tom, I just wanted to follow-up on the same-store guidance, the cash number.

It sounds like cash is probably 2.5% maybe 3% at the high end of your GAAP numbers, is what you said.

If I look at 2013, it looks like you've got some nice tailwinds from a same-store perspective.

Occupancy should be up year-over-year.

You've got rent spreads that are getting better.

You've got positive in-place annual rent bumps, and you've got that large free rent portion as it stands in your portfolio today that ought to be whittled down, at least a portion of it, during 2013.

So, maybe plus 2.5% to 3% strikes me as a little bit conservative, especially relative to what I think was a cumulative 25% NOI growth that you provided back in September over the next four or five years.

I'm just wondering if you can sort of lay out how 2013 shakes out relative to the longer-term expectations of same-store NOI growth over the next few years?

Well, 2013 would be -- if you think over the next four years, given the nature of how this stuff rolls through the portfolio with expiration of leases, obviously in 2008 and 2009, certainly in 2008, if you're still rolling off peak rents and by 2009, you pretty much got to the bottom of the market.

Every new lease you were doing there was at a pretty low number.

So, when you roll out 4.5, 5 years forward of that, by 2014 it should really pick up.

But, we roll out 15% or 20% of the portfolio in any given year.

So, the market, if the spot rents recover substantially, it still takes a while before it works through the portfolio.

But, our thesis -- if we were doing our investor conference today, as opposed to last September, I would tell you our outlook on rents would be stronger than it would've been last September.

The reason for it, is that at least for the next month, the cloud on this whole fiscal cliff thing is a little bit more positive.

The tone in Europe is more positive.

We've got [Abe] economics in Japan.

So if you look at those three factors alone, and China has definitely turned the corner, right?

If you look at those three or four political factors alone, we would have a more optimistic outlook.

But, the leases make it a while before it rolls over the portfolio.

Let me tie this to guidance.

This is really important and you guys are going to get this, but I just want to state it.

If you look at the $0.06 of the one-time tax thing last year, and you look at the $0.08 of dilution on Norges, because we weren't even thinking about doing that deal until the very end of 2013 or a deal like that, that's $0.14.

If you adjust the guidance by $0.14 to keep it kind of comparable, our earnings growth range at midpoint is 8% in terms of FFO per share growth over last year, and that is with significant deleveraging.

I think that's pretty impressive.

The primary driver of that is same-store growth.

So, yes, you are right.

We are on that path.

I'm very optimistic about the prospects for our business.

Your next question comes from the line of Michael Salinsky with RBC Capital Markets.

Your line is now open.

You talked a bit about pricing in Europe, could you talk a little bit about domestically and where you expect that in 2013?

And also the development side, can you talk about where you expect the development margin is for the starts that you're planning in 2013?

This is Mike Curless.

I will take the margin question first.

What we saw last year, I think you saw margins in the 18% range, which we were certainly happy with that.

We mentioned on the call many times before, that our expectations typically are about 10% for build-to-suit and 15% for spec and a margin of 18% this year would definitely indicate, as Tom mentioned, that we have built-in increased land value within our portfolio.

As you look forward to next year, in terms of margins, we have an expectation over time to have a little bit more of a normalization back into that 10% to 15% range, as land prices continue to increase over time in terms of their market value.

In terms of pricing, with respect to dispositions, given the nature of the product, the type and locations, we expect similar results next year.

We were happy to have cap rates in the low 7s, in terms of our disposition activity, when you consider that we are selling older product, tuning up our investment strategy in terms of ending up with more of our assets in the global markets, we're at 85% now up from 79%, since merger.

All-in, we think our disposition strategy would be similar this year, which will really help us tune of our investment strategy.

The only thing I would really add to what Mike said, is that if you look at the 18% margin, given the mix of almost 60% build-to-suits, that should have been 12% to 13%.

We have 5 or 6 extra points of margin, easily, there.

If you look at land as 25% to 30% of the total cost, that tells you that the land bank is 20% undervalued, if I'm doing that math carefully -- correctly, 20 to 25%.

That's one way to get too comfortable with the fact that actually think there is NAV upside in the land bank.

I think with increasing rents, that spread gets bigger over time.

But, of course, we are always buying new land, and the spread on the new parcels of land will be lower.

So, anyway, I wanted to thank everybody for joining our call, and we look forward to talking to you next quarter.

Thank you.

This concludes today's conference call.

You may now disconnect.