Prologis Inc (PLD) 2013 Q4 法說會逐字稿

Good morning.

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

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

(Operator Instructions)

Thank you.

I would now like to turn the call over to your host, Ms. Tracy Ward, SVP Investor Relations.

You may begin your conference.

Thank you, Melissa, and good morning, everyone.

Welcome to our fourth 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 today by members of our executive team including Gary Anderson, Mike Curless, Gene Reilly and Diana Scott.

Before we begin our prepared remarks, I'd like to state 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 filing.

Additionally, our fourth quarter results press release and supplementals do contain financial measures such as FFO and EBITDA that are non-GAAP measures and in accordance with Reg G we have provided a reconciliation to those measures.

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

Hamid, will you please begin?

Thanks, Tracy, and good morning, everyone.

I'd like to keep my comments brief at a high level today.

We had a great quarter, capping a very strong year.

We are seeing strong improving market conditions pretty much around the world.

The US markets in particular have been terrific, with record absorption and very low levels of new construction.

And against this backdrop, our business has been firing on pretty much all cylinders.

Operations were strong with good rent and occupancy growth across the globe.

Our development business ended the year with solid volumes and profit margins well ahead of long-term averages.

We had a record year in strategic capital with two major new ventures, China and the US, both closing around year end.

Looking forward, we have a very straightforward business plan, based on rising rents, value creation through development, and economies of scale from growth in AUM.

In fact, if you were going to ask me about the prospect for our business compared to last September, when we held our analyst day, I would have to say that we are well ahead of those expectations.

Of course, there are always risks we can't control such as geopolitics, Capitol Hill, the fed, undisciplined developers, but overall we feel very good about our business going forward.

Our team has worked very hard for the last three years to simplify our Company and to build a solid foundation for growth.

I believe we are at the beginning of a multi-year cycle when our hard work will pay off in terms of great results for our shareholders.

Let me now turn it over to Tom and let him fill in some of the specifics for you.

Thanks, Hamid.

I'll start with our financial results.

Core FFO for the fourth quarter was $0.43 per share and for 2013 was $1.65 per share.

Our share of value creation from stabilizations was $125 million in the quarter and $372 million for the year or approximately $0.74 a share.

Investment management income in the fourth quarter was higher sequentially due to the increase in assets under management and the recognition of a $6 million promote.

Moving to operations; it was a great quarter and our results continue to demonstrate the high quality of our portfolio.

We closed the year with occupancy at 95.1%, which was above the top end of our guidance range after leasing a record 44 million square feet during the quarter.

GAAP rent change on rollover was 5.9% and positive across all geographic divisions.

Cash rent change on rollover was a negative 2.3%.

Same-store NOI increased 2.7% on a GAAP basis and 3% on an adjusted cash basis.

Turning to capital deployment; in the fourth quarter we committed $1.1 billion with $842 million our share in new development starts, building acquisitions and investments in funds -- in ventures.

We reduced our land bank during the year by $300 million to $1.6 billion, through development starts of $450 million and land sales of $100 million offset by acquisitions and infrastructure spend.

For contributions and dispositions, we completed $1.8 billion in the fourth quarter with $1.4 billion our share.

Subsequent to quarter end, we announced the signing of USLV, our US joint venture with Norges Bank, and a contribution of $1 billion of properties to this vehicle.

With a large volume of disposition and contribution activity in the fourth quarter, along with the closing of USLV in early January, we generated approximately $900 million of excess cash available to fund 2014 growth.

With these contributions, our asset repositioning plan is essentially complete.

As we look forward, contributions will be primarily from the stabilization of assets off our development pipeline, while dispositions will be part of a selective culling process.

Turning to capital markets; we completed $3.9 billion of activity in the fourth quarter.

These transactions were effectively leverage neutral but reduced interest costs and extended term.

For the full year, the bulk of our capital markets activity focused on the refinancing of our unsecured bonds, effectively lowering the average interest rate by 105 basis points to 4.5%, and extending the maturity to over six years.

We ended the year with leverage modestly higher than we expected, largely due to the timing of the contribution to USLV in January.

Look-through leverage adjusted for the USLV net proceeds is 35.8%.

Going forward we have a clear runway with no significant debt maturities until 2016.

We'll continue to look at opportunities to get after our medium term expirations if the economics make sense.

Even in the face of rising interest rates we believe we can further extend our maturities and lower our borrowing cost in a meaningful way.

Now, let's turn to guidance for 2014.

We expect year-end occupancy to reach between 95% and 96.5%.

Consistent with our normal seasonal patterns, we expect occupancy to decline in the first quarter then trend higher over the remainder of the year.

We expect further strengthening of re-leasing spreads in 2014 in line with our rent growth projections.

We're forecasting 2014 GAAP same store NOI to increase between 3% and 4%.

We expect investment management income, including promotes, to range between $200 million and $210 million, while investment management expenses will range between $95 million and $100 million.

For FX, we're assuming the Euro at $1.35 and the yen at JPY105 for the entire year, and US dollar net equity at the end of 2014 to range between 85% and 90%.

On the expense side, we expect net G&A to range between $230 million and $240 million.

This is an increase of 2.5% at the midpoint, which is about half of the expected growth of AUM for 2014.

For capital deployment our 2014 forecast is between $2.3 billion and $3.2 billion.

This includes $1.8 billion to $2.2 billion of development starts with 80% our share, and building acquisitions between $500 million and $1 billion with our share at 40%.

Turning to contributions and dispositions guidance, we expect contributions to range between $2 billion and $2.25 billion, which includes the January contribution to USLV with our share at 50%, and dispositions to range between $500 million and $750 million with 80% our share.

Putting this all together, we expect full year core FFO to be in the range of $1.74 to $1.82 per share.

Core FFO will not be evenly distributed between quarters, as Q1 will be lower than the fourth quarter of 2013 given the timing of capital redeployment and seasonality of Q1 lease roll.

From a big picture perspective, we're expecting 2014 core FFO growth of 8% at the midpoint of our range driven by rent growth and increased NOI from development stabilization, net [of the restriction] to redeploy the $900 million of cash we have to invest.

To sum up, we had a great quarter and we have excellent momentum heading into 2014.

With that, I'll turn it over to the operator for questions.

(Operator Instructions)

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

Your line is open.

Thanks.

Good morning.

Wanted to ask a little bit about how you guys are managing the occupancy relative to pushing rate.

I think in 2013 you pushed rate a little bit more and that caused occupancy to lag in the earlier quarters before picking up in Q4.

How do you think about the friction between rate and occupancy as you look out at 2014?

And can you give us a sense of pushing rents, what that means in terms of order of magnitude, is that 5% higher, is it 10%, is it 15%?

Any color on that would be helpful as well.

Thanks.

Sure, Brendan.

It's Gene.

Let me start with that and I'll kick it over to Gary.

So, we're really focused on pushing both of those metrics and obviously you saw a lot of occupancy pick-up in the fourth quarter.

That wasn't because we switched focus to occupancy from rent growth.

Really, I would tell you more primarily focused on rent growth.

And let me also give you some color into what's going on in the US before I kick it to Gary.

So, in the US, we had a third quarter rent change of 7.4% and that actually increased pretty materially to 8.3% in the fourth quarter.

So, we're having a lot of success pushing rents.

We've got very low vacancies in the markets and obviously low vacancies in the portfolio.

Looking into 2014, we'll have a rent change of about 10% overall for the global portfolio during the year and you are going to see that ramp up materially over the year, particularly in the US where we've got a lot of pricing power.

So I'll kick to Gary for the --.

Brendan, I'd just say again we are hitting the sweet spot right now.

We're going to be averaging 95% to 96%.

That's a good place for us to be pushing rents globally.

If you look at Asia, today we're sitting at almost 97% occupied and we are pushing rents there.

You've seen almost 6% rent change in those markets.

In Europe, it's a little bit different story.

It's a mixed bag.

We're pushing rents where we can, particularly in the UK and Northern Europe, some of the markets in Central and Eastern Europe, and in other markets we continue to solve for occupancy and that's really how it's going to be until we get to again that 95% to 96% level.

But even in Europe we had positive rent change and positive rent change for the second consecutive quarter.

So, all in all we're feeling pretty good about our prospects.

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

Your line is open.

Craig Mailman from KeyBanc Capital Markets, your line is open.

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

Your line is open.

Thank you, good morning.

Maybe I missed this.

Did you guys comment on the expense decline in the quarter?

Was it a tax adjustment or some sort of weird comp?

David, this is Tom Olinger.

I assume you're referring to the drop in operating expenses in the quarter?

Yes.

That was largely driven by a decline in CAM expenses.

So, we saw a similar decline in revenues.

So, the drop in CAM expenses moved -- the overall drop was 4.5%.

It moved 3.5% of that 4.5%.

And that also knocked down revenues by about 1%.

So, it was really just a re-class of CAM expenses and revenues and had no impact on the bottom line growth.

We also did see about 1% of the decrease was related to better bad debt recovery, so that was a positive that was driving the bottom line.

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

Your line is open.

Great.

Thank you very much.

Question, Tom, just in terms of the balance sheet.

You were very successful last year at -- I think you talked about extending your debt duration, lowering your cost.

To do that, though, you went in the market and you bought back a lot of bonds and I think over the course of the year you had upwards of $300 million of debt prepayment make-wholes and charges.

So, call it about $0.60 of cash out-the-door and you'll accrete that balance.

And I'm just curious as you think to 2014, how aggressive do you want to be at continuing that strategy which is obviously having a near-term positive effect on core FFO but is cash out the door that you have to accrete over time?

I'm just trying to think about how you're trying to make that trade-off from an NPV perspective versus a current basis.

Michael, if you don't mind, I'll take that again and remind you of my answer from last quarter.

The way we price these things is that the spot time when we're making a decision to redeem and reissue at a longer maturity, we try to manage the present value of that entire activity within 1% of the debt amount.

So, that's where we start.

But the way it actually works is that you end up issuing immediately, but you end up redeeming with a lag.

And by just dumb luck, every time we did it last year interest rates went up in the interim.

So, actually we ended up instead of incurring a 1% cost, present value cost, we actually ended up ahead on a present value basis.

So, every transaction was present value positive.

Now, with respect to its impact on FFO and accounting, you're absolutely correct.

That happened to be the accounting on it, but as you know, we don't have a lot to say about what the accounting treatment is.

I can assure you that is not a criteria that we look at in making those kinds of decisions.

Michael, as we look to 2014, we'll continue to look at our inner maturities and where this math makes sense in the economics prove out, as Hamid said, we'll continue to go after those bonds because we do have a view that rates are going to go up and we want to get in front of that as best we can and we think the long-term benefits of that, of locking in those rates are -- is the right thing to do.

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

Your line is open.

Thank you.

This is Jamie Feldman here with Jeff.

So, Hamid, we noticed in your comments you were talking about some of the risks you can't control and one of them was undisciplined developers.

So, can you talk a little bit about -- more about what you're seeing in terms of that risk and then your thoughts on how long the cycle continues before we really start to see that become an issue and pressure rents?

Sure, Jamie.

The reason I threw it in is that I knew somebody would bring it up in the Q-and-A.

I just wanted to get ahead of it.

So, here's what I really think.

Developers have not forgotten how to build buildings, and there's lots of them around.

I don't think banks have forgotten how to lend to developers, although they're a little bit more cautious at the beginning of this cycle but I'm sure in time with a couple of good quarters and years behind us, the banks will become less disciplined.

So, I don't think those are the real reasons why the development volumes have been so low.

I think the reasons are pretty simple.

Their rents have not been there given what's happening to costs of land and costs of construction, to develop profitably in many of the markets in the US.

And certainly rents haven't been there to do any development in the smaller building category because that sector has been pretty low in occupancy and depressed, and that accounts for a big chunk of the market normally.

Where you've seen development is places like LA and Houston and a few other markets where rents have been at levels that justify new development.

So, I think this is actually good news.

I think we'll see muted levels of development.

We think development next year could be about around 100 million feet in the US, 110 maybe, and we think absorption is going to be north of $200 million.

The gap will be smaller than this year but 100 -- I'm sorry, all those dollars are square feet.

The gap will be smaller, but still 100 million square feet of gap is unheard of.

Other than the last year or two, we'd never seen it in our entire career.

So, I think development is going to ramp up because more and more markets will reach replacement cost rents.

That's good news because if the rents actually get there, while there will be more competition on the development side, I think we'll do a lot better in terms of capturing those rents.

So, we fully expect development to ramp up over time, but still be a very good environment if you compare it to the last 30 years.

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

Your line is open.

Yes, good morning out there.

I guess maybe for Gene or for Hamid, 4Q commencements obviously pretty strong for the portfolio overall, but I'm a little more curious about the seasonality and the discussions that you're having today with tenants with housing data a little bit weaker in the fourth quarter.

Retail sales weaker in the fourth quarter.

Are you seeing any hesitation either on small or the big box spaces related to a weaker economic environment in the fourth quarter that are having any impact on the discussions for first quarter leasing and uptake?

Sure, Dave, it's Gene and Mike might jump in a little bit, too.

Well, first of all, our fourth quarter activity was really, really strong in terms of leasing and when the government shutdown took place, there was certainly some concern a few months ago, but we've actually seen inquiries and overall tenant dialogue increasing dramatically towards the end of the year and so far that's continued into this year.

So, if you look at our starts volume in the fourth quarter, I would not attribute that to anything other than it's a normal cycle and the projects we had teed up ready to go happened to start in the fourth quarter.

So, we remain quite bullish as we look into next year.

Candidly, I think we're going to probably do better than we think on the build-to-suit front because that has picked up.

Build-to-suit inquiries tailed off a little bit towards the middle and the fall last year, but again that's all picked up as well.

Mike, I don't know if you have color as well.

Yes, I would suggest the pipeline in both the US and Europe are as strong as we've seen here in the last couple years and I think the customers' abilities to actually make decisions seems on the increase, and so we're bullish relative to just overall activity and our ability to convert that into real volume next year.

Let me make one more point on housing because you brought that up.

Clearly the housing data has been really spotty.

It's been one month, then it tails off, but if we look at where our demand is coming from, it's pretty heavy in that area.

So, construction materials, furniture, and other housing-related activities are clearly leading other segments of our customer base.

So, maybe they're wishful about the future.

I think although if you look at the overall trends in housing, you're going to see a bad report one month but overall it's trending in the right direction and at least our customers are voting with their feet in those segments.

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

Your line is open.

Thank you.

Could we spend a couple seconds on your same-store NOI guidance?

Could you help us break it down in terms of what part is coming from same-store revenue and what portion is coming from expenses, especially given that there's a couple moving parts here.

Looks like your first quarter 2014 number will have an unusual expense comp as well.

So, if you could tie that all together for us.

Ki Bin, it's Tom.

So, if you look at the midpoint of our same-store GAAP NOI guidance of 3.5%, about 1.5% of that is going to come through higher occupancy, about 1.5% of that is going to come through rent growth, rent change on rollover, just higher rent, and then about 50 basis points is going to come through indexations where -- that don't get captured in straight line.

So, if you get a 2% contractual bump every year, that could straight line, but if you are going off of a CPI index, for example, that gets picked up.

You don't straight line.

You can't straight line that component.

So, that piece of the rent bumps is about 50 basis points.

So, that's how you get to the 3.5% overall.

Big picture, I don't expect to see any significant moves at all in those numbers related to any one-time items or unusual periods.

I think it's a pretty clean number.

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

Your line is open.

Great.

Thanks.

Just following up on the competitive supply and the build-to-suit demand, back in the third quarter I think about two-thirds of the development starts were build-to-suits and that might have been unusually high, but during the fourth quarter that dropped to less than 30%, so I'm wondering would you chalk that up to natural volatility or does such a large swing suggest any increased confidence on your part that the build-it-and-they-will-come approach is going to be successful given the demand you're expecting or is it that you have an interest in getting ahead of the competitive supply that's inevitably going to come?

This is Mike.

I would suggest the last quarter -- that's just a small sample of supply and mix issue relative to the ratios.

As we look forward to this year we'd anticipate build-to-suits would be in the 25% range which is lower than we've seen in the past where build-to-suits have been in the 40% to 55% range and that actually gives us some encouragement given our global platform and our customer reach that there's some built-in bias to the upside relative to our volume associated with build-to-suits.

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

Your line is open.

Hi, good morning, guys.

You did a nice job in the fourth quarter of working down the land bank a little bit down to just under $1.6 billion.

Can you talk a little bit about what your goal is for year-end 2014 for where the land bank's going to go given your development start guidance, and then talk to us a little bit about what you think the current market value of that land is today, Hamid, given some of your earlier comments on cost?

Thanks.

This is Mike.

Why don't I address the land bank.

We did put a significant [dent] in the land bank this year of about $300 million which gets us right in the zone which we talked about for a couple years in terms of the ideal size.

Our work this year is to continue to improve the quality of that land bank.

And we're down to the last remaining 15% or so parcels that we'll continue to sell out of the system and end up with the primary parcels put into production.

And we sold $170 million last year.

We'll do that kind of number again this year.

And we will very selectively replenish our land bank with the high quality sites for those sites we can put in production.

Hamid, do you want to address the --?

Sure.

If you just look at our development margins, I think we've talked about this in previous quarters, if you pick a number of 10% for build-to-suit and maybe 14%, 15% for a typical spec deal, given our mix we should be in the 12%, 13% range and we're substantially higher than that, like 10 points higher than that, depending on the quarter.

So, 10 points of extra margin is coming not because we're great developers but because we've got cheap land.

So, 10% on land which is usually 25% of the overall mix, you could argue could be 30%, 40% undervaluation of land.

Nobody around here is courageous enough to step up and say our land is 30% or 40% undervalued and certainly not all of our land is valued that attractively, but I definitely do think we're around 20% undervalued in terms of book value and there's a big arrow north on that.

And while we're on land, let me tell you, based on what we're seeing in most markets, most of this land that's in our books, and it probably dates back to 2005 or something like that and went through the cycle and got impaired, so the next series of lands that are going to come up are going to be almost 10 years beyond when this land and the inventory was acquired.

The world's really changed in terms of entitlement cost, in terms of what concrete costs, and what exactions are and all that.

So, I think the next series of land that is put -- new land that comes into production -- is going to have a much, much higher cost than the old land and that's why I'm so confident about replacement cost continuing to go up and rents alongside with it and why I'm so optimistic that this development engine that everybody's scared about is not going to very quickly exceed demand.

It will eventually, but I think we've got a couple of three years before that happens.

Your next question comes from the line of Eric Frankel of Green Street Advisors.

Your line is open.

Thank you.

My question is related to the last one that was just asked.

Can you talk about the replacement cost of rent concept and given that you've increased your speculative start this year, just where you're underwriting your current development relative to where rents are being achieved today?

I think we generally pro forma around the globe on spec deals, margins today in the mid-teens and we're not projecting a whole lot of rent growth, certainly not beyond inflation, and we're ending up with results that are better than that.

That's been really the summary of the experience over the last 12 to 24 months, but in a normalized market, Eric, I think spec deals should be -- certainly in the US, should have margins in the call it 14%, 15% range.

We're definitely getting higher than that in some of the less developed markets like Brazil.

So -- but it should be in that range.

Replacement costs are moving up.

That's clear in basically all of our markets, maybe with the exception of some of the European markets, but replacement costs are definitely heading north, as are rents.

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

Your line is open.

Great.

Thank you very much.

This is I think for you, Tom.

A three-part question.

First, I think you said in your guidance assumption that net US equity would be 85% to 90% and if I get -- if I'm getting the definition right, it was 77% for page 30 of your sup.

So, if I'm correct in saying that, how does it grow from 77% to 85% to 90%?

Second is your GAAP rents appear to be going up around 6% over the last couple quarters but your cash is down a little bit, maybe 2% or 3% which seems like a pretty wide spread for an average lease term of 3.5 to 5 years.

So, how does that math work?

And then the third is the $6 million promote in your core FFO?

Okay.

John, I will take that and we'll let you have a three-part question since we butchered your last name.

On the first one, on how do we get to 85% to 90% US net equity from 77% today.

It's largely going to be from repatriating money.

When we look at funding needs, we're going to continue to push for euro and yen-denominated debt and bring down our US dollar-denominated debt and move those funds around, and we'll continue to look at hedging opportunities where we see them to be attractive and take advantage of those.

So, those would be the biggest tools that we can use and obviously, as you know, we've done a lot with moving assets -- overseas assets in investment of funds which certainly helps that as well.

I'm going to take your third question here.

Is the promote income in core FFO?

It is.

For sure.

And your second one --

And it was in 2013, too.

Yes, it was.

It's been through all of 2013.

And then your other question, your last question was cash versus GAAP and why that spread.

We provide the cash rent change and, as you know, we don't track it.

We don't use it to manage our business that way because it can obviously lead to unusual fluctuations, just based on how the lease is structured, whether you have free rent on the front end or the back end or you -- or how the rents escalate over time.

What really matters from our perspective is what the overall economics of that cash flow stream is over the life of that contractual lease -- what it is in month one versus what it is in month 60 really doesn't matter at the end of the day.

It's what the economics are over the whole contractual term.

So, yes, you can get some fluctuations between cash and GAAP between quarters, just due to mix and how certain things are structured versus what's rolling off.

But I would tell you looking into 2014 I would expect that number to move into positive territory just with where -- with our trajectory of GAAP rent change I would expect this cash number, although we don't forecast it, I would expect it to be positive in 2014.

And I think that gap is going to get closer and closer and I think in about a year or two it could flip.

Your next question comes from the line of Steve Sakwa of ISI Group.

Your line is open.

Thanks.

Good morning.

I guess I just wanted to circle back on the development front, Hamid.

I know that you guys have really not been driven by a specific development target, but given all the comments that you've had this morning about how good the business is, how much rent growth is going up, I'm a bit surprised that the development volume is only up about $100 million.

And given some of the comments that Gene made about build-to-suits going up, the question is what's the risk that one or two quarters from now the development (technical difficulties) meaningfully?

So, Steve, the way we forecast development volume is that we look at the visibility that we have on deals that are pretty much in the bag, and I would say last year at this time when we're sitting around and giving you guidance, we had about 60% visibility as to the number for the year and that number has moved to like 80% visibility on what we have.

So, we're pretty good with the number, particularly at the lower end of the range, not that many good things have to happen during the year for us to be able to exceed that.

And some good things always happen, some bad things happen, but we're really solid on our development guidance type of numbers.

I guarantee you this.

If there are good development opportunities in markets that we see, that we think we can capture, we're going to take advantage of those.

But we're not going to drive to some artificial number to keep the perception of what makes investors happy.

We're going to underwrite that as we see it -- game time decision.

And, again, go back to my comment.

Not all markets, in fact, most markets are still not at the level what with today's rents you can generate acceptable margins.

I think that's a choice that will change very quickly.

So, maybe our numbers for the back half of the year are too conservative.

Time will tell.

But we would rather start off at the beginning of the year at a conservative level and see how it plays out.

So, if I were going to say -- if I were a betting person, I would say it would be at the high end of that range or maybe even higher.

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

Your line is open.

Hamid, just going back to your opening comment there in terms of -- and also factoring the supply, when you talk about being well ahead in the sector relative to your expectations, does that imply that as you look at the cycle this time you now expect stronger growth relative to where you had presented at your investor day?

Or do you expect the cycle to be a bit more compressed with development ramping up in the back half?

I think, Michael, that we came out with a pretty aggressive rental forecast, based on the feedback we got from the investors.

We actually thought we came with a very realistic rental forecast and, by the way, we got the same comments back in 2012 analyst day.

I think on both of those the market has played out ahead of what we told you guys and I think at the time we talked about what our expectations were, people thought we were a little crazy and overly aggressive.

I'm just telling you it's playing out faster.

I think ultimately where these rents go before they get to equilibrium is purely driven by replacement cost in some of these markets, and I would tell you replacement cost is also accelerating faster than we thought.

So, on both those scores, I think it definitely will happen quicker.

Whether ultimately we get more rental growth or not, I'm not ready to forecast that yet.

That's still out three or four years, but so far the signs are pretty good.

Your next question comes from the line of Mike Mueller of JPMorgan.

Your line is open.

Hi.

Going to the promotes for a second, Tom, I was just wondering if you could talk about what's in the 2014 numbers?

Okay, for 2014 we have a similar level of promote -- core FFO promote, so about $0.04 in 2014 and it relates to our USLV venture.

Your next question --

If I can follow up on that, and I think this would be a useful guide for you because it's very hard to -- for you to get inside our promotes fund by fund and all that kind of stuff.

The way I think about it is that we have about $16 billion, $17 billion of third party capital under management.

And most of our -- we ought to be able to do at least 100 basis points over our threshold in terms of preferred return.

So -- and our normal promote participations are 15% to 20%.

So, the easy way to think about it is that if we outperform by 100 basis points and we get somewhere between 15% and 20% of that for the Company, once you net it against the comp effect of that -- call it 10% of the excess growth, so call it 10 basis points, call it 10 basis points of $16 million, $17 million under management.

So, we'll be in that 3% or 4% range.

It will be probably a little higher in the near term than that because, A, we're outperforming our benchmarks by more than 100 basis points; and, B, we're recovering from a pretty deep hole in valuations that are driving returns, but I think over the very long term, it should be on the order of 10 to call it 15 basis points of third party AUM net to the bottom line across the cycle.

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

Your line is open.

Good morning.

Thank you.

Hamid, given your comments about development and Tom's comments about the direction of interest rates, I just wonder if you're changing your hurdle rates for development in any of the markets in which you're active?

Jim, we do constantly.

We actually change not so much the hurdles, but the cost of capital in every market that we operate on a quarterly basis based on what's happening in the capital markets in each of those economies, et cetera, but certainly the margins that we'd like to get over and above the normal cost of capital in terms of investing in operating real estate, those are fairly stable.

I mean, so think of it, if you're thinking about it in terms of bond spreads, we definitely have views -- changing views on what the base rate will be, but in terms of what the spread is that we want to achieve over that, that's fairly constant and it's in the range of low teens for build-to-suits.

If it's a great credit, 20-year deal with fabulous credit we might go down to a high single-digit margin, but generally in the low double-digits for build-to-suits and mid-teens for spec deals, pretty much across the board.

Places like Brazil we might tack on a little bit more, in Brazil and China, to the margin requirement of spec, but that's generally the guideline.

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

Your line is open.

Yes, Tom, I was wondering if you could perhaps just spend a moment just on sources and uses.

It looks at least that your share, if you were to take the sales and contributions, you're raising just under $1.6 billion, and then from a use perspective you have obviously the acquisitions of $300 million, and then development on a start basis, $1.6 billion, though I recognize your spend would be very different and you're also contributing land, though it sounds like from Hamid's response to a prior question you may -- the land bank at $1.6 billion even if you put in call it $300 million to $400 million of land into the current developments, you're probably reigniting that.

I know you have about almost $500 million of cash, and you're going to have some free cash flow next year excess of $100 million, but I'm just trying to figure out how in your mind you're thinking about sources and uses of capital for next year -- or this year, sorry.

Michael, Tom will give you the detailed answer, but the real answer is we have a bunch of non-strategic assets left that we can sell at any time in a very good market and that's something that we value.

If we need capital, we've got a pretty attractive place where we can go to get that and that's what our plan will be.

If you'd like, Tom can take you through --

Michael, your numbers are really right on.

If you look at our deployment guidance, what we gave and use the midpoint, you would see net deployment growth of call it $250 million to $300 million, not talking about the land bank but, as Hamid said, we've got a lot of different ways to fund it.

Primarily, we're going to be running our line at virtually zero most of 2014, so we at any one point in time will be able to tap that $2.5 billion-plus of capacity.

So, we're not concerned about how we fund growth.

Let me say one other thing about capital needs.

$300 million for acquisitions, as you know, and I've stated many years in a row, our acquisition guidance for -- is meaningless I think because who knows.

We only -- we might invest zero if there are no good deals, we might invest $10 billion if they're really good deals.

In fact, the year I said it's zero to $5 billion, we ended up doing the merger with Prologis.

So, it could be any wide range of numbers.

So, we don't really -- we can't really look at our capital planning in such a debit, credit kind of way.

We've got to look at it more strategically and in a broader view.

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

Your line is open.

Thank you.

Sorry about earlier.

Question -- two quick questions.

One on occupancy.

You guys are obviously expecting to trend 95% to 96%.

Just as we look into 2015, what are the thoughts about where stabilized occupancy can go for the current portfolio you guys have?

Then the other quick question is just are there any markets where you guys are still -- have in place rents that are above market and that could drag as we head into next year?

Yes, it's Gene.

Let me start with that.

First of all, at this point we don't have any markets in the Americas at least that have above market rents.

Gary can follow up on this.

In terms of stabilized occupancy, that number's 95%.

Can we run in LA where there's a 2% embedded local vacancy rate should we run higher than that?

Yes and we will.

Overall, 95%'s the number you ought to be working with.

I totally agree, 95% to 96% is how we think about the markets and that's again when we can push rents.

In Japan and China, no markets that are over-rented today I would say, certainly markets that we're active in and trying to grow in.

And in Europe I'd say three, France, Hungary, and Italy, those would be the three markets that may be over-rented today.

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

Your line is open.

Thanks.

I have a quick question.

If you look at CDS spreads in Europe, it seems like even the past couple of quarters we're now back down to 2007 levels.

Could you comment on any kind of trends you're seeing in cap rates and if those have adjusted in the past half year or so downwards?

Yes, if you go back to our investor day, we predicted over the three-year period we'd see, call it 75 to 80 basis points of cap rate compression.

And we said at that time we thought that it might actually move more quickly.

We had spread that out over the three-year period.

My view is very clear.

It is moving much more quickly than we had anticipated.

I'd say easily 25 basis points today and moving in a positive direction relative to values.

I have seen more portfolio transactions over the course of the last 12 months than I have in my career in Europe, and there is capital chasing those transactions.

So, I expect the trend to continue through the balance of this year for sure.

I think there will be a big lag in terms of how the appraisers work through that number and all that, but if you ignore that stuff, cap rates are really falling in Europe and on a real-time basis much faster than will show up in the appraisals at least for the next 12 to 24 months.

Your next question comes from the line of Eric Frankel of Green Street Advisors.

Your line is open.

Thank you.

Just two quick follow-ups.

Sorry if I missed this before but, Tom, did you disclose your same-store guidance on a cash basis?

No, we did not but I'll tell you.

So, cash same-store for next year should be a little above 4%.

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

Your line is open.

Hi.

It's Jamie Feldman with Jeff again.

Tying into the last cap rate question on Europe, can you talk also about the appetite for assets you're seeing both in the US and Asia and what you're seeing in terms of cap rates, maybe changes in underwriting assumptions and what's happening -- how people are thinking about the rising interest rates and the impact on valuations?

We have seen no impact -- well, we've seen actually a little bit of a positive impact on valuations in the US.

I would say cap rates on core assets are down probably in the last quarter by maybe 10-ish basis points.

And on secondary market assets maybe a little bit more than that, maybe 25 basis points.

As I've said before, I really think other than short-term blips and -- like in May, I think until interest rates 10-year bond gets to the mid-fours, I think we're good on cap rates in the US.

I don't expect further compression, but I certainly don't expect expansion.

And that's 150 basis points above where we are today, maybe a little bit more, in terms of room on the Treasury, on the 10-year Treasury before we have to worry about cap rates.

In Europe, you heard the discussions so I won't go over that.

I think maybe there's been a little bit of cap rate expansion maybe on the order of 10 basis points probably in a place like Brazil or maybe even Mexico, given the EM situation.

In Japan, oh, my God, I mean, you look at the disconnect between public markets and private markets -- cap rates in the public markets are, I don't know, 120 to 150 basis points below where they are in private markets.

So, I think that will continue to drive cap rates in Japan down.

And in China there isn't enough visibility in terms of transaction volume to be able to report on that with certainty, but I think it's down a tiny smidgen if I were going to pick a number.

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

Your line is open.

A question for Tom.

Beyond the Norges US joint venture formation there, do you expect any additional funds or JV formations in 2014 as part of your $2 billion to $2.5 billion contribution forecast?

No, Michael, we do not.

It would be to existing vehicles and, as you've seen from the capital raising we've done over the year, a record capital raising, and with the very low leverage to no leverage in these vehicles we are -- they have a lot of capital and are hungry to grow.

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

Your line is open.

Great.

Mike, Carlos said, just given all the questions about cap rates and portfolios and all that, what's the status on the IIT portfolio?

John, they actually pronounced your name correctly but I will not be able to respond to that as you know.

We can't talk about any --

What's the IIT portfolio?

-- potentially new acquisitions, sorry.

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

Your line is open.

For Tom.

Tom, the capital outlook for the year, talked a lot about that -- leverage neutral throughout the year.

If I think about the timing of that I guess with the USLV venture, I would think that there's more capital coming in the door early in the year and then you put more of that out throughout the year.

So, if I look at the overall 8% FFO growth year-over-year compared to the 10% FFO growth that you guys had provided at your investor day, should we think that there is an increasing ramp in the rate of growth in the back half of the year relative to the first half of the year?

Absolutely, Brendan.

If you look at the components of the growth, if you use Q4 2013 as a -- to compare it to the mid-point of our guidance, Q4 annualized is about $1.70.

So, if you want to grow that $1.70 to the mid-point of our $1.78 you've got about $0.09 from same-store growth.

You've got $0.08 from development NOI growth and then you have about $0.08 of drag or friction from redeploying that cash.

As I said in my prepared remarks, we have $9 million of cash.

We ended the year with $450 million and we generated another about $450 million with the USLV transaction.

So, as I said, earnings in Q1 will be down for the Q4 run rate, then we're going to ramp back up.

Particularly to your point in the second half we should see core FFO ramp significantly.

Brendan, the only thing I would add to that, I think just to tie it to our investor conference and our forecast for that, even though we're talking about sort of a four-year time frame -- within the four years it certainly is more back-end oriented because it doesn't have the dilution up front.

And the interesting thing is given the recovery in rents, and I'm not talking about projected further recovery in rents but just the recovery we even had to date in rents, just like on the way down it takes a while for the numbers to get marked down.

On the way up, it takes a while for the numbers to get marked up.

So, I think whatever momentum is going to come through in this rental growth is going to benefit us for many, many years.

So, if we're going to forecast that again today we would just still say that the four-year ramp is more back-end oriented too, not just within the year but also within the four years.

Anyway, that was the last question.

Thank you for participating in our call.

I know today's a busy day so we'll let you go.

Thank you and see you next quarter.

Ladies and gentlemen, this concludes today's conference call.

You may now disconnect.