Prologis Inc (PLD) 2013 Q2 法說會逐字稿

Good afternoon.

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

At this time, I would like to welcome everyone to the Prologis second-quarter earnings 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)

Tracy Ward, you may begin your conference.

Thank you, Tiffany and good morning everyone.

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

Additionally, we are joined by members of our Executive Team, including Gary Anderson, Mike Curless, Nancy Hemingway, Guy F. Jaquier, Ed Nekritz, Gene Reilly, and Diana Scott.

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, 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, EBITDA, that are non-GAAP measures, and in accordance with Reg-G, we have provided reconciliation to those measures.

As we've 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?

Good morning, everyone, and thank you for joining us this morning.

We are pleased to be hosting today's call from our Operational Headquarters in Denver.

As you know, since the completion of the merger, we've been laser focused on our 10 quarter plan, which has guided our priorities as a new Company.

During this time, you've watched us deliver on our five key strategic objectives.

We've completed this plan two quarters ahead of our own ambitious schedule.

Let me take a moment to review a few of the highlights.

Our most important objective was to align our portfolio with our investment strategy.

We completed $10.2 billion of dispositions and contributions, with an average cap rate of 6.9%.

On the development front, we started more than $2.5 billion of new developments, with an average yield of 7.8%.

45% of this volume was in build to suits.

In addition, we acquired $925 million of new properties in our target markets at an average cap rate of 7.3%.

The net result of this activity was an increased allocation to global markets from 79% at the merger to 85% today.

Our second objective was to improve the utilization of our assets.

Occupancy post merger is up 300 basis points to 93.7%.

During this period, we monetized $865 million of our land bank, mostly through development starts, at an 18% value creation margin, as well as some third-party sales.

Streamlining our Private Capital business and positioning it for growth represented of the third pillar of our plan.

At the time of the merger, we had $25.7 billion of gross assets across 22 Private Capital entities.

Our plan was to rationalize our funds into a smaller number of differentiated and profitable vehicles.

Today, we have $22.8 billion of gross assets under management across 15 ventures, and we expect our fund count to go down by a few more by the end of the year.

Including the assets we brought on balance sheet, we have retained 96% of our original assets as part of our platform.

We expect to grow our third-party assets under management from this point forward.

As part of our plan, we've been repositioning our business to focus on larger, long-duration ventures, open-end funds, and most recently, geographically-focused public entities.

These long-duration ventures now account for 84% of our Investment Management revenue, versus 68% at the merger.

We are also accessing alternative sources of public equity, such as our newly-formed J-REIT.

Our strategy enables us to tap capital in both public and private formats for targeted geographies across our global platform.

In this regard, the Team has raised $5.5 billion of new third-party strategic equity since the merger.

This is on top of the $2.7 billion of equity we have raised at the hedge stock level during this period.

Strengthening our financial position has been the core element of our plan and our fourth objective.

Since the merger, we reduced our look-through leverage, including preferreds, from 50% to 36%, lowered debt-to-EBITDA from 10.4 to 7.4 times, improved our share of equity in US dollars from 45% to 75%, and increased our line of credit capacity by $350 million, while reducing our borrowing spreads by 40 basis points.

We believe we are in the final stages of building one of the strongest balance sheets in the REIT industry and are optimistic that this strength will be reflected in our credit ratings going forward.

Our fifth objective was to build a highly effective and efficient global organization.

As a combined company, we achieved over $[115] million in merger synergies, well above our initial target of $80 million.

In addition, we successfully implemented a major enterprise system that will provide us an information infrastructure that is unparalleled in our industry.

We are also focused on building a culture of accountability and empowerment.

We have equipped our leaders with a series of management tools that will help them manage their divisional profitability, overhead efficiency, and business risk.

In summary, I'm incredibly proud of what the Prologis Team has accomplished since the closing of the merger.

These efforts have simplified our Company and built a strong foundation for sustainable growth in the coming years.

It's now time to focus on the future.

We believe the scale and quality of our operating platform, the skill set of our Team, and the strength of our balance sheet provide us with unique competitive advantages going forward.

We've established a clear roadmap for growth in the coming years, with a focus on three key priorities.

First, to capitalize on rental recovery; second, to realize the potential of our land bank by putting it to work; and third, to use our scale and customer relationships to grow earnings.

I'll take a minute to expand on each of these priorities.

First, the rent recovery cycle is firmly under way and is accelerating in most markets at a pace ahead of the rental growth forecast we laid out at our Investor Forum last September.

This is best evidenced by the second quarter's 4% increase in rents on rollover.

Over the past three quarters, the US industrial market has absorbed 164 million square feet of space.

This is more than triple development completions during the same period, which were a mere 46 million square feet.

This excess demand of 118 million square feet is the highest in the 33 years of data from CBRE.

As we look forward, we are increasing our 2013 net absorption forecast for the US to 180 million square feet, up from 150 million square feet.

We expect to see a modest volume of completions at 65 million square feet.

Moving to Europe, although still in recession, we believe Europe has reached an inflection point, in many ways similar to what took place in the US in mid 2010.

We believe rents are off the bottom and cap rates are heading lower.

In retrospect, it seems that our venture with Norges Bank was a watershed event in terms of restoring investor confidence in the European industrial markets.

In Japan, the political changes are driving increased consumer confidence.

Strong market conditions and healthy spreads are attracting capital from around the globe.

Turning to China, despite the downward revisions to GDP, demand for class-A logistic space remains strong and much better than the headlines would suggest.

Market rents continue to rise, and concessions have decreased across the country.

Our portfolio in China has more than 96% leased, and rents have increased by more than 13% in the past year.

Globally, space utilization in our facilities is at the highest level we've seen since we've been tracking this metric.

This means there is little or no shadow space in the system.

Additional economic growth would translate directly to incremental demand for logistic facilities.

As this over utilization reverts to the norm, we could see an extended period of excess demand driving up rents even further.

Our second growth opportunity is to realize value from our land bank and our customer relationships.

The key to a successful development program is having strategic land control, and in this regard, we are in an excellent position.

Our land bank is increasingly undervalued and will be an asset going forward.

We have the potential to build an additional 200 million square feet, or about $10 billion in new development, at high incremental returns on land that is already paid for.

We'll be prudent with our development starts, which we expect to average around $2.5 billion annually.

The value creation potential on this level of starts will be approximately $300 million a year.

Our third growth opportunity is to use our scale to grow earnings.

We have the ability to expand our global platform by at least $10 billion, without adding much in the we have incremental overhead.

We measure and disclose our overhead efficiency in terms of the ratio GNA to assets under management, which currently stands at 54 basis points.

We believe we can add incremental AUM from here at the marginal overhead rate of 10 basis points or less, which will further drive efficiencies and earnings growth.

We are beginning to see our acquisition pipeline grow, both through proprietary opportunities such as buying up in our funds and as more third-party transactions come to market.

This was the primary rationale for our equity offering in April.

Despite recent increases, interest rates are far from a level that would affect pricing in the US and Europe.

Cap rate spreads over 10-year Treasuries remain above historical averages in our markets.

In short, we are confident that these three strategies would enable us to generate above-average earnings growth in the coming years.

With that overview, I will turn things over to Tom.

Thanks, Hamid.

This morning I'll cover three areas.

First our results of the quarter; second deployment, development and value creation, and capital markets activity; and third, updated guidance for 2013.

Starting with our results for the second quarter, core FFO was $0.41 a share, $0.04 above our expectations.

About $0.025 of the out-performance was from Investment Management income, primarily driven by a promote related to winding up Alliance Fund II.

We had expected this to occur in the second half of 2013.

Our share of development value creation was $79 million for the quarter, including $64 million that was monetized through sales and contributions at a 34% margin.

Turning to our operating portfolio, we had another strong quarter of leasing volume at 36.3 million square feet.

Occupancy was 93.7% at the quarter and flat to the first quarter.

Our Teams on the ground are focused on driving rent growth versus occupancy at this point in the cycle.

To that end, GAAP rent change on rollover increased 4% for the quarter and was evident across all space sizes.

On our first-quarter call, we were asked about cash rent change.

This is not a measure we use internally to drive leasing decisions or evaluate our operating performance.

We make our leasing decisions based on net effective rent change as this metric best reflects the underlying lease economics.

To provide you with some perspective, cash rent change on rollover was down 3.4% for the quarter.

Consistent with our GAAP figure, this metric includes rent change on all spaces signed during the quarter, for both new and renewal leases, and regardless of how long the spaces were vacant.

For the quarter, GAAP same-store NOI was up 70 basis points, and on an adjusted cash basis, was down 40 basis points.

The decrease in cash same-store NOI this quarter is a result of increased free rent associated with longer lease terms and a greater volume of leasing in large spaces.

Moving to Investment Management.

We had a very active quarter, completing an $800-million secondary offering for our J-REIT and rationalizing two ventures.

The rationalization included Fund II that I mentioned earlier and the closeout of Japan Fund I. Retaining the high-quality assets that these two funds was the great outcome.

I want to point out that the $13-million promote related to Fund II was not included in Investment Management revenue, but instead was reflected as a component of non-controlling interest in the income statement.

This accounting treatment is required since Fund II was a consolidated venture.

Now, switching to our deployment activity.

We took advantage of some great investing opportunities during the quarter, deploying $922 million, which included development starts, acquisitions, and investment in our funds.

With respect our development business, it is strategically important to us to provide our customers with modern, state-of-the-art logistics facilities and it generates real economic value.

We do not include development creation in our core FFO because not all value creation flows through our income statement to the extent we keep developments on balance sheet.

If we were in under international accounting standards, all of the value creation with flow through earnings.

Going forward, we'll provide you with development value creation on stabilization and upon monetization so you can value this business appropriately.

Our share of development value creation during the first half of the year was $393 million.

This includes $311 million, or $0.64 a share, that was monetized through sales and contributions.

Turning to our capital markets activity, we had a very busy quarter, completing $4.3 billion of capital markets transactions.

This included debt financing, refinancing, paydowns, and the redemption of preferred stock, as well as our $1.5-billion follow-on offering.

As of the end of June, we invested about $600 million of the follow-on offerings, in line with our forecast, and by year-end, we expect to invest the majority of these proceeds, with the remainder effectively left for delevering.

As of June 30, our look-through leverage was 35.8%, net debt to EBITDA was 7.4 times, and net debt to EBITDA adjusted for development was 6 times.

During the quarter, we did incur $32.6 million of debt extinguishment costs, primarily related to the prepayment of $350 million senior notes.

These notes were due to mature in 2014 and had a coupon rate of 7.6%.

A very important part of our capital structure strategy is to minimize our foreign net equity exposure.

During the quarter, we hedged EUR800 million at an average economic exchange rate of 1.36 for a term of 4.5 years, and JPY250 million at an average economic exchange rate of 88.9 for a term of 5 years.

Our US dollar net equity was 75% at June 30, an increase of 600 basis points from the first quarter.

We are forecasting our US dollar net equity positioned to be approximately 80% by year end.

Subsequent to quarter end, we recast our global line of credit and established an ATM program for $750 million, both of which provide us with further flexibility to fund our growth.

Let me now turn to our guidance for the remainder of 2013.

For operations, we're maintaining our GAAP same-store NOI range of 1.5% to 2.5%, and year-end occupancy to range between 94% and 95%.

For FX, we are assuming the euro at 1.3 and the yen at 100 for the second half of the year.

On the expense side, we are forecasting net G&A to range between $225 million to $233 million.

For capital deployment, we are seeing an increase in opportunities to invest and are now forecasting a range of $3.5 billion to $4.1 billion.

This is an increase of $1.7 billion from our previous guidance and includes $1.8 billion to $2 billion of development starts, up $250 million from our prior guidance, with our share at approximately 80%.

We expect to stabilize about $1.4 billion of developments in 2013 at an estimated margin of approximately 25%, generating $350 million of value creation, with $310 million our share.

Our deployment guidance also includes $800 million to $1 billion of building acquisitions, an increase of $400 million from prior guidance, with our share at about 40%, and fund investments of $900 million to $1.1 billion.

We have a great opportunity to invest in our funds.

The quality and location of our fund assets along with our expectations for a significant rent recovery make these investments very accretive.

Turning to contributions and dispositions, we are maintaining the top end of our guidance and narrowing the range of $8.5 billion to $10 billion for the year, with our share of proceeds at approximately 60%.

We are narrowing our 2013 core FFO range to $1.63 to $1.67 per share.

We expect our quarterly run rate for the second half to be at or above our Q2 run rate of $0.41 a share, driven by higher NOI from development utilization, deployment of the remaining equity offering proceeds, same-store NOI growth, and lower interest expense.

Before I close, want to mention four new disclosures in our supplemental this quarter.

First, we added and enhanced disclosure around development value creation.

Second, we added average term for our quarterly leasing it activity.

Third, we added turnover cost as percentage of lease value.

And fourth, added property improvements per square foot on a trailing 12-month basis.

To sum up, we had a great quarter.

Clearly, we had a number of moving parts related to the execution of our strategic priorities.

However, when you take a step back and you compare our results with last year, our core FFO is essentially flat, while leverage has been reduced by 10%, and our US net equity exposure has improved by 1600 basis points.

As we had forecasted, we were able to de-risk our financial position with minimal impact on earnings.

With that, I will turn it back to Hamid.

Thanks, Tom.

There are three key takeaways that I would like to leave you with.

First, we expect improving economic conditions and a constrained supply picture to lead to a significant increase in demand and pricing power for our product around the globe.

Second, we expect to see substantial earnings growth from three areas, the recovery in rents, putting our land bank to work and capitalizing on our scale, and by continuing to expand in existing markets.

Third, our accomplishments over the last eight quarters are a direct result of the efforts of a dedicated and engaged Team.

This Team has worked hard to get the Company to its current position of strength, and we are all excited to take advantage of the opportunities that this platform will offer us in the coming years.

With that, we will open it up for your questions.

Tiffany?

(Operator Instructions)

George Auerbach with ISI Group.

Great.

Thanks.

Sorry about that.

Tom or Hamid, to talk about the opportunity set in a bit more granularity in terms of your ability to buy into existing funds or the opportunity you see in Europe today?

Sure.

In terms of our funds, I think you saw two really good examples in the past quarter.

One was an acquisition that's been actually reported -- we haven't announced it, but it's been widely reported --which is a portion of our NA3 portfolio that we had, and we're buying a portion of those assets.

And secondly, we were able to buy up in our Alliance Fund II portfolio to from 28% to 100% of the fund, and actually, the contribution of Japan Fund I to the J-REIT, which was funded by the secondary offering, is actually a way of actually acquiring assets without going through the balance sheet directly into that vehicle.

So this is really good for our investors, too because they get certainty of execution.

They know that we're there to be for them, and it also provides us a cost-efficient way of accessing new assets.

In Europe, specifically, we think the appraisal community is lagging the reality of the marketplace.

And we've been pretty vocal about this, so this is not a big secret.

And the yields in some funds are in the mid-7% range, which we think are very attractive returns, particularly once you think about what's going to happen to cost of financing in Europe.

Exactly the same thing that happened to the cost and availability of financing here in the US.

So that's one way of increasing our exposure.

And now, we have a lot more capacity given the JV that we did.

We can take advantage of that.

We are not restrained by our allocations to Europe.

And then, we are seeing some opportunities, specifically in southern Europe, where you can buy assets at significant discounts to replacement cost, even ignoring the price of land.

You can buy assets in some instances in the 9%s and with very significant spreads over cost of Treasury.

So I think at a prudent level, we'll be net investors over there, and we'll use our existing vehicles to take advantage of those emerging opportunities.

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

Tom, have a question for you, and it's big picture.

If we look at the cap rates on the disposed assets in the second quarter, they seem to have compressed a little bit, and the same with the stabilized development yields on a sequential basis as well.

And that seems to be happening around the same time that we're seeing some expansion in spreads in the cost of capital.

Do you expect those trends in the yields to reverse in lock step or in correlation with capital costs?

Or do expect more compression in those yields going into the second half of the year?

David, let me take that.

I think that a yield in any given quarter is more driven by mix than any big trend.

So if you have a couple of big Japan deals or something in there, that could really move around the numbers in a big way.

So I wouldn't read too much in the yields on a quarter-to-quarter basis.

In terms of what our view of cap rates are around the globe, I think cap rates are going to decline in Europe, or are declining in Europe.

I think they are stable and at very low levels in the US for really good assets and even good assets in secondary markets.

I would say C assets and in softer markets could see, haven't yet, could see a 25 or 50-basis-point increase in cap rates because those are usually acquired by highly leveraged buyers where they are more affected by interest rates.

We by and large don't have any kind of that product, and the very little that we do, we never priced to the top tick of the market anyway, so I think we can absorb that kind of 25, 50-basis-point cap rate increase without missing our pricing expectations.

But generally, I think the vast majority of the properties that we traffic in, I think the cap rate trend is down.

And not to go too far on a limb, but cap rates are very comparable to where they were in, all it late '07, early '08.

But Treasuries, even with their increase, are a good 200 basis points lower, so the spreads are actually pretty good.

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

Hamid, wonderful quarter.

Congratulations.

I'm not sure who this question is for, but can you -- if you look at your $2 billion of land, I think that's the number, that $1.8 billion of land, how much of that would you expect to be able to deploy because demand is there in the next three years?

And how much of it do you think is in inventory for longer than three years?

And how much of it can be sold to a third party?

Thanks, John.

I will hand it over to Mike Curless.

John, it's Mike.

I would say in the next three years, we would expect to deploy a good 75% of the entire land bank if not more.

And in terms of what we would intend to sell, I think we've mentioned before, about 15% of our entire land bank right now we view as non-strategic and we have plans to sell those.

Last year, we sold 30 parcels that fit that category.

We've already sold 15 yet this year and expect to do more the balance of this year.

That would imply being able to develop, say, 15 million square feet in the Central Valley, 12 million square feet in Southern California.

Is that really able to --

John, it's Gene.

Let me give you some color on this.

You are correct.

In the Central Valley, we have a very, very big piece of that might be -- could be a 15-year buildout.

But that is very rare.

If you look at most of our land parcels, our overall build-out timeframe for them is going to be anywhere from immediate to three years.

So -- and, by the way, we love that piece of land, and I wouldn't be surprised if we absorb it in less than 10 years.

But I think that's somewhat of an outlier.

And I think Mike said we will absorb 75% or so of the land bank.

15% of it is for sale, so there's 10% a cushion there.

The only other thing I would add, John, is that, specifically, with respect our Central Valley land, that's the price of land for a 300,000-square-foot building in Tokyo.

We bought that land really, really well.

And really, the real investment in that land is the infrastructure that will be phased in over time as we take it down.

So think of it as an option because really, the price was just the upfront ticket price to get into the game.

We feel really good about that position.

And the percentages I referenced were in terms of dollars, not acres.

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

Just curious.

I know Hamid, you've given your views here on cap rates in a lot of the markets.

But just curious, have you guys changed at all the way you're underwriting acquisitions or developments to account for the potential for rates to rise year?

Or are there the no changes at all?

I think the best evidence of that is the margins that we report to you on starts every quarter and what we realize.

At least for the last two years, the realized margins have been far in excess of the way we underwrite.

So we've been trailing, if you will, the movement in cap rates, and there's always -- I wouldn't say always -- I'm sure in '08, we were over our skis on a couple of underwritings.

But we -- but at this point in the cycle, we've been pleasantly surprised by the cap rates on our development stabilization.

So I think there's room in our numbers going forward.

Your next question comes from the line of Ki Bin Kim with SunTrust.

Question regarding your strategy on your capital stack.

With your goal to try and develop $2.5 billion of new development and with acquisitions combined, and with leverage not being the same of concern it was maybe two or three years ago, the 30%, what would make you change your view on a 30% look-through leverage ratio, which seems pretty low.

On a look-through basis, you will be lower than assignment, which is considered a blue-chip status.

What would have to happen for you to change that view on overall leverage?

Dave is a pretty good friend, but I think we are low leveraged today, not at 30% significantly.

I think it will be time before maybe we are recognized as having the same kind of balance sheet.

But to answer the substance of your question, look, 35%, 36% that we are today, includes preferreds.

So if you look at the normal capital structure that has 5% preferreds on it, we are already at a 30% leverage kind of.

The mix is a little different, but we are basically that way.

So we feel good about our leverage.

We've worked hard to get it here.

We have a business model that has more development in it, as you pointed out.

So I think we need to be more prudent in terms of leverage on the balance sheet.

And we want to leave some capacity for doing strategic stuff that come along from time to time.

So you could see us fluctuate from 30% to high 30%s back down to 30%s, but we want to manage around that level.

And I want to point out, the $2.5 billion development is not a goal.

We do not have goals for development.

Having goals for development gets you into trouble.

That's our estimated volume of business that will be there to do profitably.

If it's less than that, it's less than that.

If it's more than that, so be it.

But I think across the cycle, that it's a reasonable number.

But I want to emphasize, it's not a goal.

Your next question comes from the line of Jamie Feldman with Bank of America.

Hamid, I was hoping you could talk more about the outlook for rent growth.

I think you had said that rent growth is happening faster than you expected.

How should we think about prospects for continued rent growth versus new supply coming online, given you guys are growing your are pipeline, and it looks like you've got a higher percentage of specs than in the past.

What are the other competitors doing that might put a damper on rent growth?

I think that is an invitation for you to come to our Investor Forum in September because we are going to devote a substantial amount of time taking you to our views on rent growth.

And in addition to what we provided last year, we are going to talk about the profile of that rent growth as we see it as markets near stabilization.

But we're pretty optimistic about the overall magnitude of the rent growth.

Probably very consistent with our views last year.

We just think the profile of getting there is a little quicker.

We never in our wildest dreams imagined 118 million square feet of absorption over construction deliveries.

Those are big numbers, and we think that's going to continue this year.

So I think we are going to get there faster.

And interestingly, some of our lagging markets, like in the Ohios, have been actually -- have pretty solid rent growth, albeit from very low and depressed levels, but it's rent growth.

And that's happening a lot faster than we thought.

Some of the other markets, like LA, that were earlier in the cycle and have essentially reached their pre-crisis levels are probably going to taper off here in terms of rent growth.

But some of the lagging markets, I think quite a bit of rent growth.

And the rent growth that we've experienced to date, this is obvious to you, but has not rolled through our rent roll by any stretch of the imagination.

It's just the spot rents that have rolled.

Even if rents stop right here, which they won't, we're going to have three or four years of rent growth by the time this stuff rolls through.

So we are feeling pretty good about our business.

It's about time.

Your next question comes from the line of Vance Edelson with Morgan Stanley.

Turning to the occupancy rate, I realize it varies by facility size.

But with regard to the overall rate, sounds like it's mainly by design that it's plateaued out a bit.

You'd rather raise the rent than see the occupancy significantly rise.

So given that, do you think this level of occupancy is the sweet spot, the 94%, 95% range?

Is that were you'd like to see it stay as you increase the rates?

Right.

This is Gene.

Let me take that.

Your observation is spot on.

If you want to drill into the numbers a little bit, you saw a sequential decline, actually, in occupancy in the Americas by about 10 bps.

What's important to emphasize is we are actually slightly ahead of our plan in the Americas because obviously, it depends on what's the composition of what's rolling.

We expect to ramp into the mid to high-94% range.

And yes, right around 95%, that is the sweet spot.

And actually, above 93%, you can really push rents.

So our emphasis in the Americas is absolutely on rent growth.

Those markets are leading the recovery.

In Europe and Asia, they are at different stages.

A little bit different.

In Asia, we've been sitting around 96%, 97% occupied, and obviously, been pushing rents there even at a faster rate than we had anticipated last September.

When we talked about China, we talked about 5% to 6% compound annual rent growth that we were underwriting when historically, they were about 8%.

This first half of the year, we're at about 13% in China.

Japan is up 6% when we thought we'd be up 2%.

So again, a very, very positive trend.

With respect to Europe, obviously, we are lagging, but we're holding occupancies at 93% plus.

We've been 20 basis points this quarter, so things are heading in the right direction.

And again, if you look at the trend with respect to rents, I feel pretty strongly that come the back half of this year, you are going to see positive rent change in Europe coming through as well.

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

It's Michael Bilerman.

Tom, I was wondering if you could spend a couple minutes going through the back-half deployment as well as sale plans because a lot of the numbers are for the full year, and really trying to understand the balance sheet as of June 30, really what the impact is in second half.

It would appear as though the predominance of the equity proceeds, that $1.5 billion, are really going toward growth initiatives.

If you were to take that $1.7 billion and multiply it by the percentages that you had, it totals $1.4 billion, so leaving very little for debt repayment.

But I don't know from the sales perspective in the second half whether that's a source of other capital.

So if you could really break down that second-half deployment between development and acquisitions and fund, as well as sales.

Thanks, Michael.

So you are right in regards to the bulk of our equity raised proceeds will be deployed in starts, acquisitions, investments in funds.

We did take up our guidance on contributions and distributions, and that's about $0.5 billion dollars, so that's incremental proceeds that you are seeing that allow us to fund that incremental $1.7 billion.

But your numbers are very close.

From how things will lay out in the second half, starts are back-end loaded, but you will see those fairly evenly through Q3 and Q4.

Acquisitions will be more weighted to Q3 than Q4, and on contributions, you are going to see those weighted a little towards Q4 versus Q3.

The only other thing, Michael, I would add to Tom's answer, is that what we acquire may not always live on the balance sheet forever.

So you should assume that we use private capital throughout -- the private or strategic capital throughout our business, and we may, at some point, recapitalize some of the stuff that we acquire.

So keep that in mind.

Bottom line is, with the second -- the last 30% of Norges in Europe and our convertibles being paid off, we already have 4 or 5 points of deleveraging that's on the books.

It's just a matter of time before that happens.

So think of our 36 as 32 plus 4. We'll get there.

Right now, we see leverage at year end at around 34%.

So to Hamid's point, with the Norges and the converts, that would put us right at our long-term target look-through at 30%.

We are not even thinking about that issue anymore.

We've moved so far beyond that that it think it's a matter of time before everybody figures it out.

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

I think this question is for Tom.

The answers that you gave to Michael's question with the deployment timing of both development and acquisitions, offset by contributions.

If I think about the guidance outlook and the run rate in the back half of the year, it suggests that maybe there's a little bit of a ramp, but probably not a dramatic ramp as we would think about Q3 to Q4.

Is that correct?

And does your guidance in the back half of the year include any type of one-time gains like the promote that you got in the second quarter?

No, it doesn't.

So from -- our next scheduled promote is in 2014, so we are not modeling a promote in the second half, so there's not a promote in the second half of our guidance.

But does affect our run rate when you think about Q2 and the promote was in there.

But when you look at Q2 without the promote of $0.39, we are going to be ramping up our core FFO without the promote, and you are seeing that through deployment of the remain equity proceeds.

You are seeing that through the same-store NOI growth.

You are seeing that through stabilization of developments, and somewhat of an impact of lower interest cost because in Q2, you did not see the full impact of our deleveraging efforts.

So I think in the back half, you are going to see us grow off that core base, and we see it at $0.41 plus a quarter.

Your next question comes from the line of Jim Sullivan with Cowen Group.

Hamid, this is really a question for you based on your commentary on rent growth and the promise of a very exciting Analyst Day at the end of the year.

And this really goes to the issue of the same property NOI, that forecast you had for the full year.

I'm surprised that the range hasn't narrowed a little bit from the 1.5%, 2.5% that you've retained all year given the results we've seen in the first half.

And I guess the flat-out question here is that, do you anticipate that your rental spreads in the coming quarters are going to be higher than they've ever been?

Because that's what seems to be suggested here.

Jim, first of all, the excitement around the Analyst Day is mostly because the Americas Cup, not what we are about to talk about (laughter).

Secondly, -- that's unabashed marketing.

The rent ramp, it takes a while for these things to work through the leases.

And remember the leasing that we report doesn't even kick in for another couple of months.

So really, at this point, you are looking at the year.

There's three months of leasing left to be done, and no matter what we do, it's very hard to affect the numbers with that little period as these leases make their way through the system.

So we've got to be a little bit more patient about the spot rent increase coming through.

And you're absolutely right.

I think it's going to reflect itself into the mark to market of rent.

And last quarter, in answer to that question, we said about 5%.

Our answer this quarter would be 5% to 10%, so we are higher than we were before for precisely the reason that you mentioned.

Jim, I want to add one thing just to emphasize what Hamid said.

When we report our leasing activity, that's based on signings.

And we are typically signing leases one to two quarters in advance of their effective date, so we are signing leases in Q2 that are going to kick in in Q3 and Q4.

So you're seeing a lag -- you're not seeing the full impact of the rent change that's being reported on the leasing in Q2.

You are going to see that in Q3 and Q4.

So Q2 is more of a reflection of the leasing activity that we reported to you in Q4 and Q1.

So there's a lag there that our same-store NOIs should really start to pick up, as Hamid said, with rent growth, but as this lag between signing and effective date kicks in.

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

Tom, first of all, thanks for the continued improvements in disclosure.

We appreciate that.

Hamid, a couple questions for you.

First of all, not looking for earnings guidance for next year, but you referenced the ability to generate above average earnings growth over the next several years.

What's your bogey?

What are you referencing in terms of an average?

And then you also mentioned that you think you can add $10 million to the asset base with just 10 basis points of incremental overhead.

What's the optimal size for your asset base?

And likewise, what's the optimal land bank?

I'm surprised to hear that you expect to cycle through 75% of it in the next three years, although it makes sense.

But what's the optimal size as you think about replenishing the land bank?

Good questions.

The optimal size of the land bank should be viewed in the context of the development run rate, and historically, our average value has been about 2.5 to 3 years worth of land.

I think we should get more efficient and carry a little less than two years worth of land and just get the land -- control more land by options and other things that allow us to cycle through it a little quicker.

But think for now as two years worth of development would be the appropriate amount of land.

So if you think it's $2.5 billion, it's $5 billion development in two years, and if land is 25% in Japan and places a little higher than that, I would like to see our land bank be around $1.2 billion to $1.5 billion, call it, it will take us to get there.

And yes, we are chewing through land, but we are also getting new land every day, so it's not a static number.

We won't go through it completely.

What was your first question?

Oh, rent growth.

I think the industrial business across the cycle has been inflation, really long cycle, and I think the last five or six years we all know have been an exception to that.

Long-term has been about inflation.

I think if you are focused on supply-constrained markets and the global markets that we are, I think rent growth would be 100 to 150 basis points ahead of that.

So call it inflation at 2%, 2.5%.

Rent growth at 3%, 3.5%.

That would be across the cycle.

I think in the next three or four years, we could be 5% or 6% because we are closing that gap through replacement costs.

By picking up an extra, call it 2% to 3% for an incremental four or five years until we get to that level.

So to answer question, about 300 basis points on top of what's normal would be my expectation.

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

Your line is open.

Thanks.

I'm here with Gabe Hilmoe.

When I think about where your capital deployment is going to occur over the next year or two in terms of the monetization of the land bank, in terms of the investments you're going to be making in funds, and then I look at where your current footprint is in terms of your share, it would seem to me that it's possible that your exposure to Asia could go down a little bit.

How should we be thinking about the importance of Asia to the platform, and ultimately, what percentage of NOI or of asset value it's going to represent?

Our gross asset allocations, you are familiar with, I think.

Gross meaning where our gross assets are regardless of how they are financed.

And those are roughly a little under 50% in the US, 10% in the other Americas, and the remaining 40% roughly split between Europe and Asia, just to use some pretty rough numbers.

Europe is over that today; Asia is below that today.

So that's the gross asset allocation.

But in terms of our net asset allocation, meaning where our equity is, we certainly have a higher percentage of funds over time in Asia than we do in Europe or the US because we started out the business with that model and now we have this public entity in Japan where the expenses' assets live.

So a lot of that stuff is going to be living in a public entity that we own 15% of.

So in terms of our net equity exposure, we'll be way lower than that to Asia, and to Europe, frankly, and much more than that to the US.

And that's been a deliberate strategy.

The strategy is to take advantage of global opportunities to serve customers, but we are a US dividend payer, so we need to manage our exposure to foreign currencies down significantly through the use of private capital vehicles and by, in effect, setting up our debt so we have a natural hedge on those assets.

That is very deliberate, but one of its implications is that our NOI, or certainly our FFO, will be less, dependent on some of those overseas locations.

Your next question comes from the line of Vincent Chao with Deutsche Bank.

Just sticking with the FX commentary.

Just curious if, in light of the target of 80% exposure to the US dollar, and if the dollar strengthens here more than you are modeling in today, how should we be thinking about the FFO (inaudible) over the balance of 2013?

If it's a maybe 5% strengthening versus where you are talking about today.

Well, when you look at -- from an FX exposure on earnings, in the second half, a 5% move of currencies would be $0.015.

And currencies, by the way, don't move together.

The yen and the euro have been moving opposite each other, so it depends on -- I think Tom is answering 5% bad on both.

If you add --

That doesn't happen that way.

So his answer is for maybe 10% bad on one and 5% good on the other on.

And as I said in my remarks, we've got the euro at 1.3, and we have the yen at 100 in our model for the second half.

So the impact of FX, as we've moved assets around and as our net US equity exposure has grown to 75% this quarter, the impact of FX movements is diminishing in our portfolio.

And we would like to take that, our long-term equity exposure, even above 80%.

We're going to do our best to mitigate that.

The hedging strategies -- the hedges we put in place this quarter were part of that strategy, and we're going to continue to look for ways to further minimize FX exposure.

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

I was wondering, can you talk a little bit about, once you get past 2013, what you see as a normalized level, just position activities for the model?

Not trying to sneak a question in there, but Tom, a few questions ago, you referred to a 2014 promote.

Can you just say, should it be -- is it expected to be similar in size to what we had this year?

I'll answer the second question first.

I won't get into the size of the promotes.

We'll wait and see how the performance continues out.

But the bottom line is, we're coming into a cycle where we believe we are going to see promotes on an annual basis from a variety of our funds, and we are obviously seeing significant asset appreciation around the world, and we see a lot of rent growth, so I think that bodes well for future promote levels.

And with respect to sales, I would be very surprised if our average volume of sales in the next couple of years would be outside of $500 million to $1 billion a year.

So it won't be lower than that, and it won't be higher than that would be my best answer to you right now.

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

Hamid, I think you mentioned in your comments about a new enterprise system.

Can you talk about the benefits you see from that new rollout?

And also, just -- I believe on the last call you talked about an 80% equity target for the US.

Just given the increase in deployment, how quickly do you think you can get there?

Okay.

Could you clarify the second question?

I'm not sure I quite understood that.

Sure.

You talked about a US equity exposure of 80%.

I think Tom gave in his prepared remarks, I think you said a 600-basis-point increase you had in the quarter.

Just given the increase in deployment, how fast do you think you can get to that 80% target?

Okay, 80% will be by year-end.

And my target is 100%.

Tom's target is 90%.

We're negotiating on that one.

(laughter) And that will take us probably another year or two, but we'll get to 80% by year end, no question about it.

The ERP, once fully implemented, then we are like 90% plus implemented, will allow us to do two things.

One, it will allow us to do some tactical stuff much more efficiently in terms of accounting for assets, knowing our historic operating metrics, being able to ask all your questions much more efficiently in many different ways.

So it will give us a much more efficient way of looking backwards is a simple way of thinking about it.

I think its most important benefit, however, is that it will allow us to capture information on realtime tenant activity, traffic activity, through a CRM system that we are doing, and also forecasting -- ten-year forecasting on a dynamic basis, so we know the value of our assets all the time in a real live basis as opposed to this cap-rate approach.

Once we get there, I think we'll be hopefully a lot smarter about what's happening down the road as opposed to what happened in the past.

So efficiencies goal number one, and better market insight is goal number two, on full implementation.

With respect to the -- I want to go back and answer a question that I think John asked that my colleagues just reminded me that I didn't answer.

The optimal size of the portfolio.

I think the optimal size needs to be defined by market.

For us to go into a bunch of new markets and grow $10 billion by doing $200 million here and $200 million there, that would be insane.

It doesn't move the needle on a company our size, and frankly, we'll have reverse efficiencies.

We want to deepen in our existing market.

And I don't think there's a topside to how much we can drive efficiencies.

I think we now, particularly with the ERP system in place, can scale very, very efficiently as long as the assets are in the same markets where we already have a presence.

Becomes really easy.

New markets are a different story.

Your next question comes from the line of Jon Peterson with MLV Company.

Just, I was hoping you could help us better understand the $750 million ATM program that you recently put in place, just how you expect to use the proceeds or if you expect these proceeds -- do you expect to trickle it out over time to fund developments or use it here and there for acquisitions, or is it just something you are going have to keep your options open?

And then also, just in terms of guidance, what's assumed in terms of that program?

So right now, as you said, Jon, we are going to use it on an as-needed basis.

Right now, given our sources and uses that we see in our model, (inaudible) to raise equity.

We're always going to watch our long-term capital goals, but foremost, we are going to have to be at a stock price where we are trading at a premium to NAV, number one, where we're valued.

And then number two, we'll look at our various funding sources across all of our different -- our capital stack and make a determination.

But right now, there wouldn't be any equity raise embedded in our guidance in the second half.

Your next question comes from the line of Dave Rodgers with Robert W. Baird.

US industrial supply this year, I think coming in around 60 million or 65 million square feet, and just highlighting the domestic market.

You guys are about 5 million or 6 million square feet of that, or 8% or 10%.

As you look forward, I think just reading between the lines, you're talking about maybe ramping up to a 20-million square foot annually number for the US.

Two questions.

Can you, one, comment on -- if you continue to be about 10% of the overall market, that would imply about 200 million square feet starts for the US over the next couple of years.

One, can the market handle that?

And two, can you comment on your competitors' ability to deliver the same type of supply you are thinking about profitably?

This is Gene.

Let me start with that.

First of all, I don't think we are going to get to 20% of the market.

We also don't think that supply is going to be so anemic at 65 million feet, so that's going to grow.

And we really don't think of market share as either a catalyst to build more or some type of ceiling.

We just simply look at market opportunity.

In terms of our ability to deliver space, first, the first threshold is, is the market there?

Right now, the market is there for sure.

We've talk about the excess demand we see.

And the second is the capacity of our infrastructure.

And we can probably double our current volume adding only arms and legs at the field level.

So capacity of the organization is there.

But the one thing I want to stress is that -- and we've referenced it earlier on the call -- we will build based on demand, not based on what our competitors are doing or some arbitrary share of the market we're trying to hit.

And then finally, you ask about our competitors' ability to deliver space.

Well, there's been a lot less supply than we expected.

We do have competitors.

The have been cautious so far.

And ultimately, the landscape in the US has changed quite a bit.

The old local developer model really doesn't exist anymore.

It's really mostly institutional capital.

We are watching it carefully.

But I think we'll have a less volatile supply environment going forward because of that.

We're not going to -- just to be clear, we are not going to do 20 million square feet in the US.

We've never done 20 million square feet in the US.

That would be it $1 billion in the US.

Not going to happen.

The beautiful thing about our platform is that it's so diverse, we have the ability to choose where we develop.

And what we are trying to prove out is that we can build $2.5 billion on a run-rate basis and deliver 15% margins year in and year out.

It's a sustainable, profitable business.

And we're advantaged relative to our competitors because of our platform and our choice.

Your next question comes from the line of Ki Bin Kim with SunTrust.

A couple quick follow-ups.

The promote you booked this quarter, how much of that is influenced by you taking full ownership of that JV?

I think that's uncommon from what you've done in the past, to book a promote just because of closing the JV itself.

And second, it seems like maybe the quarter that promotes become a bigger picture of your Company.

If nothing changes in industrial landscape from a rent-growth perspective, what is the approximate level of promotes already embedded in your portfolio that we could probably, at the very least, expect to see in 2014 and beyond?

Sure, Ki.

This is Guy.

I'm going to take the first one, and then maybe Hamid will take your second one.

The promote on the Fund II was based on the price we paid for the asset, which was driven by appraisal.

So there really was no impact on the amount of the promote based on pricing or how we structured the deal.

The only thing it might have done is accelerated the timing of the closings, so if it's an I or R driven fund or an I or R promote, the fact that the investors got cash all at once versus a series of sales over a period of time might have had an infinitesimal amount.

But there's nothing in the structure that influenced the promote.

Yes.

And with respect to future levels of promotes, tough to speculate.

It all depends on what that terminal value ends up being.

But over time, I think you've heard me say before, that we think promotes across the cycle should be on the order of 15 to 25 basis points of assets under management, year in and year out.

But there will be some years where there will be no promotes and some years where there would be a promote.

The good news is that we by and large don't put it into our guidance, and you guys don't give us credit for it anyway.

So we don't worry about it a lot.

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

Tom, just a quick follow-up.

You mentioned leverage on an asset-value basis by the end of the year.

Where is that on debt to EBITDA?

That's number one.

Number two, you look at CapEx on page 16, on the trailing four quarters basis, that has been consistently rising.

It's almost 15% this quarter relative to 12% at this point last year.

Again, it's a trailing 12, so it's a smooth number.

Are we going to go on the other side of that at some point?

Because obviously, 300 basis points of NOI increase is a lot over the course of a year.

Then just lastly, my prior question, you talked -- you didn't actually give the numbers what was going to be in the back half of the year, in terms of deployment and sales.

If you could actually break down the dollars, your share, so that we really understand the ins and outs of what's happening on the balance sheet, that would be helpful.

Michael, let me tell you.

We are not going to predict to the nearest dollar what the deployment activity is going to be in the back end of the year because a lot of those things are up in the air and may or may not happen.

And so we're not going to -- we offered you directional guidance, but we can't give you specific guidance on things that haven't happened yet.

So that's the answer to that.

As to the CapEx question, Gene, why don't you take that?

Sure.

Michael, so let me give you a little bit of an essay answer.

The punch line is that we think total CapEx as a percentage of NOI is going to decline in quarters ahead and be in the range of 13% to 14%.

That's in terms of a best estimate I can give you.

But the way we look, and we have tried to improve the disclosure in the supplemental, as Tom mentioned, and give it to you in a way we think about capital.

So you've got basic property improvements, which are not affected by leasing volume and are constant.

We think the best way to look at that is a trailing-four-quarter average.

That's pretty flat at about $0.06 a square foot, and it's been flat for quite a long time.

And then turnover costs, which represent the majority of capital, we track as a percentage of the total rental value of the leases and that period.

That's very important because you got to take into consideration rent levels and lease term.

In other words, what you're getting in return for the turnover cost.

And this metric is fairly steady in the mid to high-8% range.

So the bottom line is, we see capital as being fairly steady in terms of a trend line.

If you look simply at CapEx as a percentage of NOI, you've got a lot of noise because leasing volume dramatically affects it over time.

So our current curve, so to speak, has an upward trend to it over time.

That's going to be, as I said, of the 13% or 14% range.

One other thing is that leases now in the cycle are getting longer, so the commissions are getting bigger.

That's why you want to look at it as a percentage of the lease consideration and not on a per-square-foot basis.

We purposely didn't want to sign long-term leases during the downturn.

We do want to sign longer-term leases as the market approaches replacement cost rent.

So that alone would drive that number up on a per-foot basis, but hopefully not as a percentage of the lease consideration.

Michael, on your debt to EBITDA question, we see debt to EBITDA at about 6.75 at the end of the year, and debt to EBITDA adjusted for development would be about 5.75 at the end of the year.

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

I just want to follow-up on the development capital deployment outlook.

The margins in the quarter came in and were right around 14%, in line with the 12% to 15% longer-term target that you have, but down from 20%, which you guys were sort of over-earning, if you will, the past several quarters.

So first, do you think that the excess margins of 20%, that that is likely over with now and we are in a much more normalized environment going forward?

And then second, maybe can you frame up why the development yields would come in -- the margins would come in, given that it seems like rent gross is accelerating your land bank, is worth more now.

And it would seem that the fundamentals are more positive.

So I would think that on a historical land cost, that doesn't change, but that margins actually would've been accelerating a little bit as opposed to coming in a little bit.

This is Mike Curless.

I don't get too worked up about any given quarter with respect to margins.

I like to look at this as a long-haul as Hamid mentioned.

As if you look at the entire year, our margin is right at 17.5%, which is entirely consistent with our 10 quarter plan of about 18%.

So if you look out over the broad spectrum, it indicates a couple of things.

One, our level of land control and customer control is driving strong margins.

We are building spec in the right spots where the fundamentals are strong.

And furthermore, I think it points to our land bank's value, where at 18% margins was in excess 3% or 4% of expected margins can point to an uplift in our land of 20% or so and our land bank.

So net-net, we feel real good about these margins and expect those to continue throughout the rest of the year.

Brendan, let me be even more precise.

This would be a low mark in the near term in terms of margin you will see coming through.

And the answer -- when we answered the question about margins, we're talking about margins if you were to buy new land and build in new property.

To the extent that our land bank be undervalued is adding to excess margin, that is why we are arguing or you've heard us say before we think our land bank is undervalued.

So I think if we were to go buy a piece of land today and build it with the rents that we pro forma, the margins would be in the low to mid teens.

With our actual land bank at historical book and some of it impaired, I think the margins are going to be a lot higher than that.

And I think this quarter is a bit of an aberration.

But the long-term margins in this business are not 20%.

They are little bit lower than that.

Your last question comes from the line of Jamie Feldman with Bank of America.

Great.

Thank you.

Tom, just turning to the operating expenses in the same-store presentation.

If you look at the last four quarters, they have really fluctuated.

I think they were 3.5% in the second quarter.

How are you thinking about that going forward?

And maybe you would like -- if you compare 1Q '13 at 9% to 2Q '13 at 3.5%, what were the major differences?

Jamie, this is Tom.

There is noise that goes through, through (inaudible).

There's some seasonality to it, some true-ups that we've had.

There's always the famous snow removal, or lack of snow, that drives variances in the first half of the year.

But I do think the variances are going to settle down as we go forward, so I would expect to see same-store operating expenses to normalize, quite frankly, at inflation.

There are no further questions in queue at this time.

I turn the conference back over to our presenters.

Okay.

Thank you, everybody, and we look forward to see many of you in September in sunny San Francisco.

This concludes today's conference call.

You may now disconnect.