Prologis Inc (PLD) 2013 Q1 法說會逐字稿

Good morning.

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

At this time I'd like to welcome everyone to the Prologis first quarter earnings call.

(Operator Instructions)

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

(Operator Instructions) I would now like to turn the call over to Ms. Tracy Ward, Senior Vice President, Investor Relations.

Please go ahead.

Thank you Michelle, and good morning everyone.

Welcome to our first quarter 2013 conference call.

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

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

And then from Tom Olinger, our CFO, who will cover results and guidance.

Additionally, we are I joined today by our 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'd like to quickly state that this conference call will contain forward-looking statements under federal securities laws.

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

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

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

I'd also like to state that our first quarter results press release and supplemental do contain financial measures such as FFO and EBITDA, but our non-GAAP measures and in accordance with Reg-G, we have provided a reconciliation to those measures.

As we have done in the past, in order 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.

Thank you, Tracy.

Good morning everyone, and welcome to our first quarter call.

The year is off to a great start, and I'm pleased with our results.

Momentum is building across all our lines of business.

Performance in the first quarter was driven primarily by strong operations and the continued execution of our 10 quarter plan which remains ahead of schedule.

Let me first offer some observations on the economic trends that affect our business.

Global trade has risen well above its previous peak, and the IMF forecast of growth are 3.6% for this year and 5.3% for the next year.

Globally, consumption is also expanding with e-commerce an increasingly important factor, growing 15% per year in developed markets and more than 25% a year in emerging markets.

This is driving new demand for large-scale distribution facilities around the world.

First, from pure online companies and second from traditional retailers, building out parallel supply chains for their online divisions.

Most of these companies are positioning their distribution networks in global markets for expedited delivery, which plays right into our area of strategic focus.

Space utilization stands at record levels.

This suggests that our customers have less shadow space than normal which is an important leading indicator of demand.

In the US, personal consumption and expenditures are 5% above prior peak, and the consensus forecast is for consumption to grow by 2% this year and next.

Housing is clearly on an upward trajectory, with starts and sales growing in the first quarter.

Real inventories troughed three years ago, and today, they're still 3.3% below the pre-crisis level.

This is the only major economic indicator that remains below peak.

We expect inventories to surpass previous highs by year-end.

In the US, net absorption in the first quarter was a positive 63 million square feet, 2.5 times the comparable quarter last year, and the strongest first quarter since 2000.

We've not changed our forecast for net absorption of 150 million square feet for 2013, but we may prove to be conservative given the strong start to the year.

In spite of surging demand, development remains in check.

For the quarter, new supply was a modest 17 million square feet, well below the historic average.

The majority of starts were build-to-suit projects.

For the year, we expect completions in the US of 60 million to 70 million square feet, roughly 50% the norm for a recovery and in line with our estimates for annual obsolescence.

I spent last week in Europe and came away convinced that demand for high-quality facilities, combined with a dearth of modern supply, will result in near-term improvements in occupancy and in-time rental rates.

Today we see clear evidence of this occupancy and rental growth in northern Europe and the UK.

The key takeaways from my trip last week were -- first investor interest in investing in European logistics is growing substantially following the closing of our Norges venture.

Second the Capital Markets are improving.

Investment activity has picked up, and there's more financing available then the headlines suggest.

We're confident this activity will put downward pressure on cap rates as it did in the US two years ago.

In Asia, demand is driven by e-commerce and 3PLs, who are reconfiguring their supply chains.

Vacancy rates reached new market lows in Japan.

In China, net effective rents continue to rise and are expected to grow by 5% to 7% in 2013.

In short, we see in new window of opportunity opening with a return of pricing power in most markets.

At the same time, we have interest rates at historic lows.

These two conditions rarely coexist.

We believe we're entering the sweet spot of the industrial rent cycle with a period of significant rental growth ahead of us.

Let's switch gears now for a brief look into our results for the quarter.

Our teams around the globe did a stellar job leasing a total of 35 million square feet.

This volume is 15% higher than the comparable quarter last year.

We had the typical seasonal dip in occupancy in our small units.

This was due to normal seasonal factors.

We continue to believe this segment will experience a considerable boost from the recovering housing market.

Demand for our largest properties continued to grow.

We are 99% leased in spaces over 250,000 feet, and completely sold out of product above 0.5 million square feet.

This level of demand is significant for two reasons.

First, following 17 quarters of rental roll-downs, rent change turned positive this quarter as we had anticipated.

Recovery in rents has broadened and now includes most of the markets around the globe.

Second, as we indicated at our investor forum, we expect net effective rents to grow by 20% to 25% globally through 2016.

The only change from our earlier expectations is that we now believe we'll realize this growth sooner.

Rental growth will be the single biggest driver of our future core earnings, and its realization is not dependent on any incremental capital investment.

The lack of supply is driving our development starts, especially for larger buildings.

During the quarter, we started more than $310 million of new development projects with an average estimated margin of more than 21%.

Over a third of our starts were build-to-suits.

While we don't expect to sustain this level of development profitability forever, our margins point to the low book value of our land bank and the competitive advantage it provides us going forward.

We saw the benefit of our land bank with a number of recent build-to-suits, including projects with Amazon, Quaker, BMW, and Sainsbury's.

In each case, our fully entitled and ready-to-go sites were a major contributor to our success.

Let me conclude with a few comments on private capital.

During the quarter we reached two key milestones.

We completed the IPO of our J-REIT, which was a tremendous success and continues to trade well.

This vehicle will serve as a long-term operating vehicle in Japan.

We also completed the recapitalization of Pepper and our European balance sheet assets by forming our joint venture with Norges Bank.

This venture underscores the strength of the European industrial real estate market and the appeal of our portfolio.

To sum up, Prologis had a great first quarter, and we're poised to do well going forward.

With that I'll turn things over to Tom.

Thanks, Hamid.

This morning I'll cover three topics.

First our quarterly results; second, deployment and Capital Markets activity; and third, guidance for 2013.

Starting with our results for the first quarter, core FFO was $0.40 a share, $0.01 ahead of our expectations.

Net operating income was better than we forecasted, driven primarily by higher occupancy.

We'd expected occupancy to drop about 80 basis points sequentially in line with the higher lease role that occurs at the beginning of each year.

However, occupancy only declined 30 basis points from year-end, as leasing volume came in higher than forecast.

Occupancy was 93.7% at quarter-end.

Q1 leasing volume was 35.8 million square feet, which was seasonally strong, as Hamid mentioned.

Rent change on rollover increased 2% for the quarter.

Positive rent change was driven by space sizes 250,000 square feet and larger, consistent with where we're seeing low vacancies and limited new supply.

For the quarter, GAAP same-store NOI was up 0.3%, and on an adjusted cash basis was up 1.8%.

Cash same-store NOI should continue to outperform GAAP same-store throughout 2013, as we expect further benefits from contractual rent bumps and declines in rent concessions.

Switching gears to private capital.

Our private capital revenues this quarter are up sequentially due to Asset Management fees from the J-REIT and Norges joint venture.

Had both of these transactions occurred at the beginning of the quarter, our private capital revenue would have been almost $6 million higher.

Following these transactions, about 80% of our private capital fees are now generated from perpetual or long-life vehicles.

Moving to our deployment activity, we had contributions and dispositions of $5.3 billion during the first quarter with $3.3 billion our share.

The vast majority of this related to the closings of our J-REIT and Norges joint venture.

We realized our monetized $247 million of development value creation in the first quarter, driven primarily by contributions to our J-REIT.

As you know, our core FFO does not include any of these development gains, even though we recognize real economic value from the transactions.

To put the magnitude of the development realization in context, the development gains were $0.53 per share relative to our core FFO of $0.40 per share for the first quarter.

Development starts were $313 million for the first quarter, with $218 million our share.

We are continuing to see more development opportunities, and as expected, our land bank has proven to be a competitive advantage.

We have very good visibility into our pipeline and are off to a great start this year for this early in the period.

On the acquisition front, it was a light quarter.

However, our pipeline is building as there are more opportunities coming to market.

Now let me walk you through our uses of our net deployment proceeds.

We used to $2.4 billion of the proceeds to repay our senior, convertible, and secured debt as well as pay down our credit facilities.

We retained the remainder of the net proceeds and ended the quarter with $785 million in cash.

Subsequent to quarter-end, we completed the redemption of $482 million of our preferred stock.

This leaves one series of preferred stock currently outstanding with the redemption value of $100 million.

As a result of the significant disposition and contribution activity, we lowered our look-through leverage to 37.5%, a reduction of almost 600 basis points from year-end.

And we improved our net debt to EBITDA to 7.5 times down from 8.8 times in the fourth quarter.

And we also increased our US dollar net equity to 66%, up from 58% at year-end.

Our long-term goal is to have this metric over 80%.

It's important to point out that while we've significantly reduced our leverage, we've also been able to maintain our core FFO level of $0.40 per share on a year over year basis.

Now for an update for 2013 guidance.

For operations, we are maintaining our GAAP same-store NOI range of 1.5% to 2.5%.

We continue to expect year-end occupancy to range between 94% and 95%.

On the expense side, we're maintaining our net G&A guidance range of $220 million to $230 million.

For capital deployment, our 2013 forecast continues to range from $1.9 billion to $2.4 billion.

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

Based on the pipeline we see today, we could be at the high end of this range in $400 million to $600 million of building acquisitions, with our share at about 35%.

Turning to contributions and dispositions, we're maintaining our guidance of $7.5 billion to $10 billion for the year, with our share of the proceeds to be about 60%.

With the activity completed in the first quarter, we were at about 60% of the way through our disposition and contribution guidance for the entire year.

The balance of the guidance totals $2.3 billion to $4.8 billion with dispositions primarily in the US and contributions to our co-investment ventures in Europe, Japan, Brazil, and Mexico.

We've revised our FX guidance and are now assuming the euro at $1.30 and the yen at JPY100 to reflect the strengthening of the US dollar over the past quarter.

This change has about a $0.03 per share negative impact on full year core FFO.

We continue to expect 2013 core FFO to range between $1.60 and $1.70 per share.

As we discussed last quarter, our core FFO guidance is significantly impacted by dilution from the timing and associated friction of redeploying the proceeds from our contributions and disposition activity.

Relative to this, the average annual yield on contributions and dispositions is approximately 6.8%, while the average annual yield on our use of proceeds is approximately 4.2%.

These use of proceeds consist of debt repayments, preferred redemptions, and capital deployment.

As a result of the redeployment timing and friction, core FFO will not be evenly distributed between the quarters for the balance of 2013.

We expect second quarter core FFO to be with $0.02 to $0.03 lower than the first quarter.

Core FFO will increase in the back half of 2013, primarily driven by higher NOI from development stabilizations, same-store NOI growth, and lower interest costs.

Before I close I want to discuss two new disclosures in our supplemental this quarter.

The first disclosure relates to our debt-to-EBITDA metric.

As you know, development it is a key business segment for us.

However, its earnings or realized value creation gains are not included in our core FFO or in EBITDA, as I pointed out earlier.

In order to correct for this misalignment, certain adjustments need to be made to our debt-to-EBITDA calculation to appropriately reflect our development business.

These adjustments are detailed in our supplemental and include increasing EBITDA for stabilized NOI from the pipeline, increasing debt to fund the remaining cost to complete the pipeline, and decreasing debt by the book value of the land bank.

Using this methodology, our debt-to-EBITDA was 6.2 times for the first quarter.

This was the right metric to use to compare us to REITs who do not have a meaningful development business.

The second disclosure relates to G&A as a percentage of AUM.

We use this metric internally to measure and manage our overhead costs.

We provided two ways to look at this metric.

Based on whether you want to use our AUMs on an owned-and-managed or our share basis.

Using owned-and-managed AUM, you need to include both our G&A and private capital expenses in the numerator.

This results in 69 basis points.

Using our share of AUM, you need to include both G&A and private capital expenses, but you must deduct our private capital revenues from the numerator which resulted in 61 basis points.

The traditional way of measuring G&A as a percentage of FFO is not applicable for us given our substantial private capital business.

To wrap up, I'm very pleased with our results this quarter and the positive impact you now see on our financial position resulting from the progress we've made on our strategic priorities.

While we had a little further to go to reach our long-term leverage and foreign currency exposure targets, we're in a great position to take advantage of emerging opportunities and to profitably grow the Company.

With that, I'll turn it back to Hamid.

Thanks, Tom.

Here are the key points I hope you take away from today's call.

First, the recovery in industrial real estate continues around the globe.

This is evident in growing demand in the face of still very modest supply of new space.

We're in an unusual phase of the cycle where we benefit from both low interest rates and accelerating growth in rents.

Second, the substantial work associated with the merger is complete, and we're ahead of schedule on our 10 quarter priorities.

We built a solid foundation from which to grow in the coming years.

Third, we believe the scale of our operating platform, the depth of our expertise in customer relationships, and our substantial land bank provide us with significant competitive advantages going forward.

We have the financial resources both public and private to capitalize on the growing and exciting set of new opportunities around the world.

With that, we'll open it up to your questions.

Michelle?

(Operator Instructions) Jeff Spector, BofA Merrill Lynch.

This is Jamie Feldman here with Jeff.

I was hoping you could talk a little bit more about the kind of leasing you did see in the quarter and what you're expecting for the year.

I know there's a lot of talk about housing helping demand grow.

But maybe just frame how much of your bullish comments are housing-related, how much is eCommerce, how much is supply chain redesign.

Just to frame it a little bit more what's going on out there?

Sure, Jamie.

It's Gene.

Let me take that.

I think it's broad-based.

Obviously, what's really moving the needle is eCommerce, because you have a lot of very, very large transactions, so they're driving the absorption in the market.

And we're certainly seeing our fair share of that.

But we are also beginning to see, although on this quarter as Hamid mentioned, we had a normal seasonal decline in occupancy of small spaces.

Jamie, I'm actually more bullish this quarter about our prospects for small tenant leasing than I was last quarter.

Last year, I think we dropped in the first quarter, and then built about 340 basis points of occupancy in that segment.

And like I said, I feel better about it this year, so it's fairly broad-based.

We need better information for you guys relative to housing.

But we do see is that there's more floor covering type demand, more demand for millwork, appliances, and other housing-related activity.

And that's probably growing 25%, 30% quarter-to-quarter, so we are seeing that and that does show more in the small tenant spaces.

The one final thing on aggregate demand and our general sense of bullishness, and I'll speak to the US in this, there isn't any doubt that eCommerce was driving tons of demand, we're getting our share.

But it's really -- it's focused on major population centers, it's focused on gateways, so there is -- they are winners and losers in the this.

And we think our portfolio is well positioned.

So, Jamie, just a couple things I think on Europe and Asia.

With respect to Europe it's really about high utilization rates.

The spaces that they're in our full.

We don't have the same phenomenon of housing driving Europe today.

In fact, the housing market -- it is really tough to get data on housing in Europe.

But the data we've been able to piece together on some of them larger markets is that from 2007, which was the peak, housing starts have dropped 55% since, 55% and haven't recovered yet.

That will be something that will be a driver in the future for Europe.

In Japan, eCommerce is a big play but the bigger and broader play, quite frankly, is reconfiguration, and that's going to happen for decades.

So that's not a story that's going to go away.

And in China, again it's about consumption, moving from export-oriented economy to a consumption economy and again that's going to take some time.

So we are optimistic about leasing and in Europe and Asia.

David Toti, Cantor Fitzgerald.

I just have a very quick question.

Can you walk us through the 9% same-store expense growth that you posted in the quarter?

What were some of the primary drivers there?

And is it possibly related to some of the changes that you've instituted?

Yes.

Look, it's Gary.

Let me take a stab at that.

First of all, I'd tell you that if you look at the comparable quarter, Q1 2012, that was a very low expense quarter.

We were actually down 6.6%, so it's tough to compare quarter-to-quarter, but let me try.

The 9% change is really split into two pieces.

You have the Americas and Europe, and it was basically half and half.

For the Americas, we say this occasionally but it really had to do with a light winter in '11 and '12, so we didn't see much expense in the expense in the first quarter of '12.

For Europe, it's a little bit more complicated story.

You had the same sort of winter variance, light winter in Central and Eastern Europe.

We had some repair and maintenance increases in Northern and Southern Europe, and there were some utility and property tax timing differences.

Net-net-net what I would tell you is that I wouldn't be concerned about operating expenses spiraling out-of-control.

We've got them under control; most of these are recoverable expenses.

And in my view again, I think we need to get a couple of quarters behind us, so we can get really good clean comparable quarter-to-quarter data.

Michael Bilerman, Citigroup.

Hamid, you talked in your comments about the rental growth upside that you laid out last September, the 20% to 25% upside in rents by 2016.

And I think you made the comment on the call that you believe that you're still going to get it, but you're going to get it sooner.

And the other thing that you put out at that investor day was call it $400 million of potential incremental NOI over $0.80 with the majority of that coming from this rent growth.

And so just given the lease rollover schedule that you have, how should we start thinking about that 365 annualized number starting to hit bottom line FFO next year, the year after, how quickly will that come?

Sure.

Michael, that's a good question.

I think probably the single most important question in terms of what our earnings profile's going to look like in the next couple of years.

The $400 million is a simple math of roughly 25% plus a little bit of occupancy gain, which from that point I made the comment to stabilization is about two to three points.

It's a combination of 21%, 22% rental growth and a couple points of occupancy gain.

And 25% of $1.6 billion is $400 million, and that's how that math comes from.

We actually did not project that in terms of what actually rolls over through the leases through 2016.

I don't know, my guess would be 70% of it will rollover by 2016, and some of it will be anticipated in 2016 on our 2017 number.

So it will be maybe 85%, 90% of it.

But it's some fraction of it; it's not 100% of it.

The other thing you've got going is that the leases in the interim that get mark-to-market obviously are going to have escalations on them.

So those, while not affecting GAAP, those affect our cash same-store growth numbers.

So that's really a ballpark estimate.

But directionally, I think if I were going to make a guess, I would say we're probably six months earlier than what I told you six months ago.

So feeling pretty good.

Craig Mailman, KeyBanc Capital.

Jordan Sadler is on the line with me as well.

Tom, I know you touched on it in the prepared remarks, the bump in expenses or the private capital business basically.

I know on page 30 you laid out the pro forma addition there.

But just looking -- are a lot of the expenses frontloaded in that 19.9 and that $5.8 million flows right to the top line, or is there a little bit of margin erosion in the private capital business?

No.

That's a great question.

There is not.

We're actually going to see improved margins in our private capital business.

When you look at the Q1 number, it's seasonally a little high; that number will come down as we look forward into the rest of the year.

And the private capital expenses are going to be up a little bit as a result of NPR and that platform cost.

And there are more assets under management in that business now compared to Q4.

But Q1 was a little seasonally high.

It will come back down, and you're going to see pretty significant margin improvement over the year in our private capital business.

Vance Edelson, Morgan Stanley.

Could you comment on property valuations in Europe?

Are there any signs of improved sentiment there and higher valuations being applied?

Or do you think that's going to have to wait for actual economic improvement, even though you're clearly outperforming based on the push toward upgraded logistics now?

Yes.

It's Gary.

Look, I think that this is happening.

We've seen a very slight bit of compression over the course of the last quarter.

But again, I think that the Norges transaction that we did recently is a watershed event, and I think you're going to see more capital coming into Europe.

And as a result, I think you're going to see more compression.

Valuations are lagging today, but I would expect over the course of the next 12 months, you're going to see improvement there.

Thank you.

This is Guy.

Just to add to that a little bit.

In our funds in Europe, we've seen pretty much flat values for seven quarters.

We have not seen a recovery in values since the trough.

If you look at last year, the entire logistics fund industry in Europe might have raised EUR100 million of capital, virtually nothing given the scale of that market.

Since the Norges transaction was announced, we have seen a significant pickup of real inquiries, real investors doing due diligence.

And going back to Hamid's comments, we think that capital will flow through funds, ours and others, and will start to drive those values.

Thanks.

Brendan Maiorana, Wells Fargo.

Question on the debt-to-EBITDA metric in the back of the supplemental which, Tom, you mentioned in your prepared remarks.

Wondering if you guys are now looking at the balance sheet on that adjusted pro forma metric of 6.2 times, as opposed to the 7.5 which is on the traditional metric, and what that might mean for your target leverage in debt-to-EBITDA metrics which I think on the traditional calculation are still 5 to 6 times?

Brendan, it's Tom.

Thanks for your question.

There is absolutely no change in our long-term leverage targets.

We still want to get to 30%.

We wanted to share the adjusted debt-to-EBITDA metric for the development business to make sure people really understand how that business impacts those metrics.

And if you want to compare us to other companies who do not have a substantial development business, you have to adjust for that business to accurately reflect our financial position.

So we think it's the right way to compare us to other companies, but absolutely no change in our long-term goals of leverage.

Ross Nussbaum, UBS.

Can you talk a little bit about the goal you have for your US dollar exposure?

I think the commentary was you're up to 66% following Q1 transactions and the long-term goal was 80%.

Generally speaking, can you just refresh us on what your timeframe for that goal is, and at this point, are there any other what I'll call big moving pieces to get to that goal or is it the basic blocking and tackling [of the curve?]

This is Tom.

We'll see that goal -- I think we'll attain that goal over the next two years.

The biggest movers of that were clearly the J-REIT transaction and the Norges transaction.

As you know, we have the ability to sell down an incremental 30% in our Norges joint venture two years out.

That will significantly impact this number.

And we'll continue to contribute assets off of our balance sheet -- development assets off our balance sheet in Japan into NPR.

Now, when you think about the other big dials that will turn this, it's really going to be on the debt side of the equation.

We really moved most of the pieces on the asset side, so now it's on the debt side.

You're going to see us move more of our long-term debt out of US dollars into euro and yen to further naturally hedge our exposure.

I think that will take us over the balance of the next two years to get those pieces together, hopefully sooner.

George Auerbach, ISI Group.

Tom, can you help us maybe bridge the step-down in revenues from the first quarter to the second quarter, as you fully move Norges and the J-REIT assets out of the revenue run rate?

Yes.

So as a reminder, NPR happened on February 14, so it's in Q1's results for half a quarter.

The Norges transaction happened on March 18, so less than 15 days in the quarter.

When you look at those two transactions alone, that is about -- when you net out -- after you net out the incremental fees we get from those transactions, it's about $27 million of NOI.

So that is really what's driving that decline.

And then there's also the timing impact of how we're deploying the capital.

If you remember, we ended the quarter with $785 million in cash, and we're putting that to work in the second quarter.

As you know, we've redeemed $482 million of preferred shares, and we also have substantially all of our balance sheet debt maturing by June 1 of this year.

So we'll be able to redeploy a significant amount of the excess proceeds in the back half of the second quarter.

But that's really explains what that dip.

And going into the second half of the year, you're going to see core FFO grow back because we're going to see stabilizations from our development pipeline.

As you know, we've been ramping up our development pipeline.

That kicks in.

You're going to see same-store NOI growth kick in, and also you're going to see the full impact of our deleveraging through lower interest expense, as well as the elimination of those preferred securities.

John Stewart, Green Street Advisors.

Tom, could you please give us the re-leasing spreads on a cash basis?

And then Hamid, you pointed out that the J-REIT has continued to trade well since the IPO, but of course the flip side is that there was some value left on the table.

Could use please speak to the process, the execution, and the trading since the IPO?

John, it's Gene.

Let me take your first question on the cash rent change.

We do not track that metric, and the reason we don't is as you know it's extremely volatile.

And we believe other measures more informative.

So if we look at our quarterly GAAP rent change, [of factors] and concessions and the rent bumps, and is a better gauge for comparing real apples-to-apples net effective rents on a quarterly basis.

We think that's helpful.

But if we really want to understand where our cash in place rents relative to the current market, we looked at it just on a courtly basis you should get a lot of noise.

But as the rents have recovered globally, we think today overall, the portfolio's currently under-rented by about 5%.

So, John, this is Hamid.

In Japan, the way an IPO works is that the buyer, the J-REIT, cannot buy assets for more than appraised value.

Particularly when acquiring assets from a sponsor that's an affiliate.

So no matter where the REIT market would have been, even if we were doing it today, it would have to transact at the same number.

So really, the pricing of the IPO only affects leverage, not the price of the assets of the sponsor.

The more the price is, the lower the leverage is.

So even if we had waited till today, with the benefit of 20-20 hindsight, and executed on the peak of the market, we wouldn't have gotten a dime more in proceeds.

So that's the first point.

The second point is that our range of pricing was JPY500,000 to JPY550,000.

We priced at the top of that range, which was equivalent to the low 5% cap rate on the assets that were contributed.

And that was a much more attractive cap rate than any of the analysts following us had it in their NAV.

And finally, I would say that in terms of exchange gains, notwithstanding the yen, if you will, weakening in the last three months, from where we invested in those assets, we had several hundred million dollars of gain that you'll never see because they're foreign exchange gains.

So in short, we're very pleased about the execution of the J-REIT, and we think it will continue to be a great vehicle for growing values in Japan for us.

Michael Mueller, JPMorgan Chase.

I guess on the acquisition side, I was wondering if you talked a little bit about the types of products you're looking at?

Is it what you see in the pipeline is predominantly stabilized assets?

Is it stuff with a lot of vacancy or something in between?

This is Mike.

We're certainly looking at a combination of acquisition opportunities, which range from primarily core, most of our activity heretofore has been -- 95% has been in the core markets.

But a very important part of our business is the value added acquisition part of our business, where we've had real success in identifying below or off market.

And very attractive returns that we can add our leasing [machine] to and create some real value.

So I think it will be a combination of that as we look forward to the future.

Vincent Chao, Deutsche Bank.

Just a quick question, just going back to the development pipeline and the value creation there.

I know you said the margins are pretty high right now, but just looking at the weighted average cap rate at stabilization, estimated at 6.4.

I know that ticked down just a tiny bit quarter-on-quarter, but just thinking about that relative to some of the cap rates that were discussed at the investor day.

It just seems like it's a little bit high given the mix of assets we're talking about here in the pipeline being almost 50-50 Asia, US.

And so I was wondering if you could provide some color on that?

If that's just conservatism there, or if I'm not maybe not interpreting that correctly?

Vincent, this is Tom.

To go back, we'd like you to think about what we've talked about margins to be from a long-term perspective.

We've talked about build-to-suit margins being in the low double digits, we've talked about spec being mid- to high-teens.

And what you're seeing today is really those margins are reflective of the land bank that we're seeing today.

Let me just add one more thing, Vincent.

You do have some mix of Brazil and Mexico probably in those numbers, which certainly in the case of Brazil, dramatically affected.

Michael Bilerman, Citigroup.

Just had a follow-up in terms of the G&A disclosure, Tom, which certainly appreciate it.

I guess thinking about that you are in the development business, the same way that you talked about the debt-to-EBITDA.

Your deducting from here the $85 million of development G&A that you're capitalizing to the projects, but you're not including that as sort of as a platform, but you are including the land and the development portfolio in your AUM.

And that actually is a meaningful percentage, it's like 20 basis points in terms of G&A.

I'm just curious why you don't think about the totality of the enterprise that you need?

Because arguably you are in the development business, and if you weren't in the development business, you would have to either bring those people on or get rid of them, but then you wouldn't have the development AUMs.

I'm just trying to think about how you are thinking about managing the enterprise in that way.

So, Michael, you're absolutely right.

We are in the development business, and those are real people with real costs associated with them.

And by all means, you're welcome to add that to our G&A, and look at it in the totality of our business.

But that would be one way of looking at it, but seems to me that it would be pretty inconsistent with looking at it without any of the gain or value creation coming out of the real estate -- out of the development business.

So I guess the most conservative way of looking at it is to add 20 basis points to our overhead, and continue to not count any value creation in the development business.

The more modest way would be to attribute the proper overhead, which long-term by the way, is a variable cost.

Short-term it may not be a variable cost.

And if we decided, for some reason which we're not going to decide, just to be clear, to get out of the development business, we wouldn't forever have all these extra developers around.

We would right-size our organization.

We could theoretically put all those people in a related entity off to the side and outsource to them as well.

And still show the same margins, because the margins that we're showing, the 21%, doesn't include the cap overhead.

If we were to add that to the margin, it would probably be 25%.

So look, we're going to give you all the data.

You can figure it out any way you want.

In the long-term, those costs are variable; in the short-term, they're fixed.

That's a real business.

It produces real profits, and we're very excited to have it going forward.

And full disclosure, you figure it out.

Michael, just one point of clarification, the $88 million annualized in the capitalized costs; those are not all development.

About 40% of those costs relate to leasing.

We'll clear that up so you can see the components of that, going forward, in the supplemental.

And also to point out that we're not capping all of our development costs, by any means.

So sitting in our G&A are costs that support all of our businesses, and our back-office supports development, just like it does our rent business.

And those costs are not getting capitalized.

Yes.

It's just the direct costs of development not the indirect cost of development.

Michael Salinsky, RBC Capital.

Tom, could you talk a little bit about the transaction activity planned for the balance of the year?

How we should expect timing in terms of development starts?

And then also, the active pipeline right now is about 7.8% yield.

Where would you expect additional starts to commence at over the balance of the year?

In terms of our activity in the business -- this is Mike -- in terms of our activity and development starts, as Tom and Hamid mentioned we're certainly off to a good start this year at $300 million-plus in the first quarter, which is typically a very light quarter.

I'll give you a little contrast.

This time last year, we were at essentially 14% at the midpoint of our guidance range.

We're already at 20% of the midpoint of the guidance range.

And we have a handful of announcements I think you've seen already to put the balance of our development forecast in really good shape.

We've got a handful of announcements that have been made or will be made soon to get second quarter off to a real good start.

And so therefore, I think we're very bullish relative to our guidance on development activities going forward.

Brendan Maiorana, Wells Fargo.

I had just a few follow-ups.

One, Tom, I think you mentioned initially in your prepared remarks that same-store guidance of GAAP basis plus 1.5% to plus 2.5% was unchanged.

But I think you also stated that cash is likely to be higher.

Wondering if the spread of roughly 100 to 150 basis points that we saw in Q1, higher cash versus GAAP is likely to sustain throughout the rest of the year?

And then secondly on FFO guidance, I think you said the FX changes were a negative $0.03 a share.

So should we sort of look at, from an operational perspective, that you're feeling $0.03 better at the midpoint of your guidance Q1 versus what you guys reported or what you guided to February?

Okay, Brendan.

On the same-store GAAP versus cash, if you look over the last really five quarters, the spread between GAAP and cash has ranged -- has averaged about 100 basis points.

I think we'll see cash same-store outperform GAAP by about between 150 and 150 basis points for the year.

I think that's going to hold.

Regarding your FX question, and it did have a negative $0.03 impact on full-year guidance.

And you're right, we are seeing ops offset that, which is helping us keep our range the same.

Dave Rodgers, Robert W. Baird.

Hamid, with regard to the speculative development and construction that we've seen obviously increasing in the last couple of quarters with your excitement around the business as well.

Maybe can you talk about governors around the overall development pipeline, kind of the sizing of the pipeline relative to the size of the Company that you're thinking today, and then how that sizing might depend relative to the build-to-suit and speculative mix?

Good question, Dave.

So just to put historic perspective, at the peak I think the old Prologis was doing in the high 3s and the old AMB was doing in the low 1s of development.

So combining those two platforms, even without considering that we have Brazil which is an added market, it would have been $5 billion a year.

We are not going to do $5 billion a year.

We've been doing about $1.5 billion, it inching up to $2 billion.

As we laid out now two or three years ago, we think it's a $2.5 billion a year type of number.

To put a range on it, we think it's $2 billion to $3 billion when it finally ramps up and is stabilized.

Not all of that will be our capital.

Remember, in China and Brazil and Mexico, we're doing that with private capital, so roughly 60% of that will be our capital exposure.

So our capital exposure on a run rate annual basis, call it $2.5 billion times 60%, a $1.5 billion on a bigger company compared to $5 billion before.

So it's much more modest in the context of certainly history.

In terms of -- and we continue to believe that the opportunity -- profitable opportunity is about $2.5 billion a year.

We could do $5 billion, but it wouldn't be profitable, okay?

And we're not going to do that.

And I think it's going to be a year or two before we get to that level as the market continues in this direction.

The build-to-suit percentage is been unusually high; in the last year, it was 57%, et cetera, et cetera.

Today I think run rates were build-to-suit is probably 25% to 30% for a company our size.

But remember, the spec deals that you talk about -- this is not putting up a 40 story spec office building somewhere.

This is building the seventh building in a park where the other six buildings are full, and we have visibility into what demand is.

So I don't know what you call that, incremental development, whatever the name is.

But purely it's not development in a spec or pioneering type of location, it's the (technical difficulty) with an established base.

And when you're 95% leased, which were not there yet but we'll get there, an incremental 1 million square foot building on Prologis' 550 million square foot base is not really material.

So I think we're very prudently managing risk in an integrated way across the Company by not just the volume of development, but also by our capital exposure in development.

John Guinee, Stifel Nicolaus.

First, wonderful job on the 10 quarter plan.

Congratulations.

Looking at page 28 because that's an easy one to look at, Hamid.

Think about a $30 billion total enterprise value, about $47 billion of AUM, does your three-year plan basically have enough active asset recycling that the $30 billion and $47 billion numbers stay about the same?

Or is this also a growth business in terms of those numbers as well as square footage?

And then the second question, which is really part of the first question, is you're creating a lot of value.

It's not coming through the core FFO.

But what's your thinking about the dividend and the ability to raise the dividend?

Great question.

John, I'm always excited see your name on the board because I want to see how it's pronounced.

And I've got to tell you, Michelle did the best job in any quarter of anyone pronouncing your name.

(laughter) So again, good questions there.

I think we are going to grow in terms of square footage and AUM, but not because that's a metric that we plan to but because of the opportunities I see in front of us in terms of the business.

And let me elaborate on that.

First of all, we are cleaning up the portfolio pretty quickly in terms of getting out of other markets and the bottom of our regional markets.

And as that process continues, there's less of it to sell.

And I think we'll sell $2 billion a year for little while.

But I think, on the other hand, we're developing as I mentioned earlier $2 billion, $2.5 billion a year and we'll certainly have some acquisition activity on top of that.

So I think net-net-net, AUM will grow.

Not a number that we plan around, but I think that's going to be the reality of the picture.

What was your question second question?

Oh, dividend?

Dividend.

I love dividends.

I think the key run rate of the dividend will be matched to our key core FFO rate over time.

Our development gains and the way we look at it are not really accounting or realized gains.

What we do in terms of development and creating a margin, does not necessarily mean that we are going to realize it in cash.

It just means that we may put it in the operating portfolio, we may sell it to a third-party, or we may contributed it to one of our related platforms.

So I think, if we all of a sudden get gobs of cash, because we sell it to a third party, and we book a lot -- or we earn a lot of cash profits, maybe we'll do a special dividend at that time for that purpose if we can't manage it in another way.

I'm not a big fan of special dividends, but that's conceptually how we think about it.

But really the long-term rate of the dividend needs to be matched to the core FFO earning power of the Company.

John, I would add on the other piece that the development gains really allow us to do is -- we're redeploying that capital, all those profits back into our development engine.

It allows us to recycle that capital much more effectively, much more quickly.

We don't have to go out in the market, so those profits are really helping us fund our growing development business.

And John, let me also mention one other thing.

As I said in the investor forum last September, I think eventually people will start giving us credit.

I hope by the way never at 10X or 12X or whatever people were counting development profits in the good old days, but at the sensible you know 4X, 5X kind of a number, in terms of the value that we're creating in that number.

I may be wrong about that, but that's what I think.

So I think there's some good news there.

Michael Salinsky, RBC Capital Markets.

You talked about the impact of single-family a couple quarters back, you talked about the small block space in the portfolio.

Can you give us an update you know what -- how much leasing the occupancy in that portfolio and how that's tracked over the last couple quarters, as we've seen a pickup in single-family housing?

Mike, I'll tell you what.

Gene already answered that question a little earlier.

You may not have been on the call.

So instead of repeating that, why don't you just call Gene, and he'll take you through it?

If you don't mind.

Jeff Spector, BofA Merrill Lynch.

It's Jamie again.

Just following up on what you were saying about build-to-suit and just new supply in general, is there something going on in this cycle that there is more of a demand for build-to-suit rather than spec?

And I'm just thinking maybe it's like eCommerce related or supply chain redesign, where these companies want very specific, have very specific requirements?

Or is there something else that's driving the fact that we've seen so much more build-to-suit than usual at this point?

I think the buildings are getting bigger for eCommerce.

And there are fewer private developers.

The private development machine is really constrained right now because of financing.

And Jamie, you would know that obviously.

So it's tough for these private guys to get a lot of financing.

1 million square foot building even in out-of-the-way places are $50, $60 a foot, so those are big-ticket items.

I don't think it's because the buildings are particularly specialized.

The shells and configurations are pretty flexible.

What people put inside of them, in terms of conveyor systems and the like in some cases can be elaborate, but that's at the tenant's cost and it's removable.

In fact actually if you go look inside a lot of these fulfillment centers that are these big buildings, you'd be really surprised to see how low-tech some of them are, with boxes sitting around on the floor.

And actually the building's not that crazily, heavily utilized because the whole distribution is set up around parcels, as opposed to pallets and all that.

So nothing special about the buildings.

Buildings are getting bigger, and the private machinery for building spec is constrained because you can't get 100% financing.

Mike, do have more say about that?

Yes.

There's more expectations, I think, with these customers to identify what we like to consider the safe choice.

Folks that don't have any financing contingencies or long track records with building high-quality buildings.

And the requirements are gravitating, as we've heard before, to larger or global markets, and those three facts have contributed to I think a very substantial and high closure rate for us.

And you mix in the dearth of supply of large spaces around the country, then they've really got nowhere else to go.

And it's all playing very well into our hands right now.

Michael Bilerman, Citigroup.

Just had a quick question, Tom, just on the debt-to-EBITDA, the 7.5 GAAP number, The debt is reflective of all the sales that you did because it's an end of quarter number.

Have you pro forma'd the EBITDA down for the NOI that's effectively going out from the sales?

Yes, we have.

When I talked earlier about the drop in NOI over quarter one to quarter two, the run rate.

We've adjusted that down; it's about $27 million, I think.

It's a footnote, and I think it's on page 9 of the supplemental.

Michael, you get the last word.

Thank you everyone, for your interest, and we look forward to talking to you next quarter if not sooner.

Bye-bye.

Thank you, everyone.

This concludes today's conference call.

You may now disconnect.