Prologis Inc (PLD) 2014 Q1 法說會逐字稿

Good afternoon.

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

At this time, I would like to welcome everyone to the Prologis First Quarter Earnings Conference Call.

(Operator Instructions)

Thank you.

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

Thanks, Cherylee, and good morning, everyone.

Welcome to our first quarter 2014 conference call.

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

This morning, we'll hear from Hamid Moghadam, our 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.

Also joining us for today's call are Gary Anderson, Mike Curless, Ed Nekritz, Gene Reilly and Diana Scott.

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

These statements are based on current expectations, estimates and projections about the market, and in 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.

Additionally, our first 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.

With that, I'll turn the call over to Hamid, and we'll get started.

Hamid?

Thanks, Tracy, and good morning, everyone.

We had a strong first quarter, and 2014 is shaping up to be a good year for us.

We see excellent momentum across all our business lines and geographies.

Markets continue to improve pretty much everywhere around the world.

Rents and occupancies are recovering at a pace ahead of the forecast we gave you at our investor forum last Fall.

In the US, absorption is running more than double the pace of new completions, pushing occupancies above pre crisis levels.

We expect this trend to continue throughout 2014, albeit at a more modest pace.

We see no general signs of over building, although speculative starts in Dallas are getting ahead of demand.

There's also a fair amount of new construction in the Inland Empire in Houston, but we're not concerned about those markets, as absorption is more than keeping pace with new supply.

Turning to capital flows, we see significant investor demand for quality industrial real estate.

Appraisals lag real-time transactions and our view of the market by 25 to 50 basis points.

At the same time, the market chatter about portfolio pricing is a further 25 to 50 basis points inside where we think the real market is today.

Moving to Europe, the leasing markets are also improving, but at an uneven pace.

The UK and Northern Europe are strong, and Southern Europe is slowly getting better.

While strengthening, Italy and Romania are the two softest markets in Europe.

Across the continent, cap rates are compressing rapidly, and appraisals are 50 to 100 basis points behind real-time transactions.

In Brazil, Mexico and China, the markets are much stronger than the economic headlines would suggest.

The customer interest in our product remains solid.

In Japan, markets continue to tighten, and rents are increasing faster than our previous expectations.

Japan is the market with the biggest upward pressure on construction costs.

Switching to our three lines of business, ops led the way in the first quarter.

Overall occupancies held up better than our expectations, and rental growth was above plan.

In our development business, margins on starts and stabilizations were well above average.

Our pipeline for the rest of the year continues to look strong in terms of volume and projected profit margins.

We had a good quarter of acquisitions in Europe, ahead of compressing cap rates.

As we look forward, given the strength of pricing in the US, we're putting more of our non-strategic assets on the market for sale in 2014.

With respect to acquisitions here in the US, we're only spending time on transactions where we can have a competitive advantage in terms of our scale and our expertise or see value at discounts to replacement cost.

In investment management business, we experienced another quarter of strong fundraising across all our vehicles.

Our ongoing dialogue with prospective investors is as strong as I remember in our entire history.

We are turning away more business that we choose to take on.

We're now rated BBB plus by S&P in the top quintile of REITs.

This represents the second full upgrade over the last 12 months, and is a long way away from where we started at the close of the merger.

We still plan to have one of the top balance sheets in the business, and to attain an A rating in the near future.

To sum it all up, we're feeling pretty good about our business, where it is today and where it's going.

We expect strong rental growth through the balance of the year and beyond, development and investment management businesses are two powerful engines for profitable growth going forward.

And finally, we're at the point in our evolution where we can grow significantly in scale with very little incremental investment and corporate overhead.

With that, let me turn it over to Tom, who will take you through the numbers.

Thanks, Hamid.

I'll start with our results for the first quarter.

Core FFO was $0.43 per share, about $0.01 ahead of our expectations.

The out performance was driven by higher NOI.

Additional interest income was higher than expected, due to the recovery of our notes receivable that was fully reserved.

Leasing volume totaled 32 million square feet, consistent with the first quarter of 2013.

Our quarter and occupancy was 94.5%, down 60 basis points from year end, and in line with our historical first quarter seasonality.

Americas and Asia occupancy outperformed expectations, with the drop from year end at 30 and 40 basis points respectively.

Europe occupancy with modestly lower than forecast, dropping 130 basis points.

GAAP rent change on rollover was 7%, and positive across all geographic divisions, led by the Americas at 10.4%.

Notably, Europe's rent change on rollover was 3%.

Cash rent change on rollover was positive 1.1% for the quarter.

Same-store NOI for the quarter increased 3% on a GAAP basis, and 4.1% on an adjusted cash basis.

G&A was $63 million in the first quarter, which is typically our highest quarter due to the seasonal nature of incentive compensation.

Turning to capital deployment, in the first quarter, development stabilizations were $264 million, with an estimated margin of 22%, generating our share of value creation of $51 million or about $0.10 a share.

Building acquisitions were $371 million, with a weighted average stabilized cap rate of 7%, and were primarily in Europe.

We also started $172 million of new development projects, at an estimated margin of 22%.

For dispositions and contributions in the quarter, we completed $1.2 billion.

Generating $568 million our share at a weighted average stabilized cap rate of 6.2%, with most of this activity related to the US Logistics Venture contribution.

Moving to investment management, operating income was $21 million in the quarter, in line with our expectations.

Following a record year in 2013, institutional investor demand remains strong.

Year-to-date, we've raised $582 million of third party equity, primarily for our European ventures.

Our capital raising and deployment drove investment management AUM higher to more than $27 billion at the end of the quarter.

Switching gears to capital markets, we completed $1.2 billion of financings in the first quarter.

We continue to capitalize on low interest rates, particularly with euro denominated debt to extend term, lower interest costs and align the currency of our debt and assets.

Our LTB and debt to EBITDA credit metrics increased slightly this quarter, due to deployment timing.

However, we expect our credit metrics will continue to improve, with NOI growth from high occupancy and rising rents.

We repatriated the majority of the EUR700 million Eurobond proceeds back to US dollars, which increased our US dollar at equity to 82% from 77% at year-end.

Subsequent to quarter-end, we redeemed $175 million of bonds maturing in 2015, and repaid $239 million of secured debt.

Additionally, ProLogis European Properties Fund II issued a EUR300 million Eurobond.

The recent credit rating upgrade from Standard and Poors to BBB plus, is affirmation of our earnings trajectory, liquidity, access to multiple sources of public and private capital, and our commitment to build one of the strongest balance sheets in the REIT sector.

Let's now turn to guidance for 2014.

We continue to expect year-end occupancy to reach between 95% and 96%, and GAAP same-store NOI to range between 3% and 4%.

On expenses, net G&A is forecasted to range between $233 million and $243 million.

For capital deployment, we continue to expect $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%.

For contributions, our forecast is unchanged at $2 billion to $2.25 billion, with 50% our share.

For dispositions, given the increase in investor demand, [SNB dimensions] we're raising our guidance by $250 million to range between $750 million and $1.25 billion, with 80% our share.

The increase dispositions will be primarily in the US.

We can self fund our growth this year, as proceeds for contributions and dispositions approximately equal our forecasted deployment.

Our investment management guidance remains unchanged, with revenue ranging between $200 million and $210 million, and expenses between $95 million and $100 million, representing an operating margin of about 50%.

This guidance includes the promote we expect to recognize in the second quarter, and debt of expenses of approximately $20 million from our open-ended targets US Logistic Fund.

We have added promote eligibility date disclosure within the supplemental, and you should note that we have an opportunity to earn a promote in each year of the foreseeable future.

For FX, we're continuing to assume the euro at $1.35 and the yen at JPY105 for the year, and our US dollar net equity to range between 85% and 90% at year-end.

Putting this all together, given the strong start to the year, we're raising the low end of our prior guidance and now expect full-year core FFO to range between $1.76 and $1.82 per share.

At the midpoint of our guidance range, 2014 core FFO is expected to grow more than 8% year over year.

We expect second quarter core FFO to be higher than the first quarter, principally as a result of the USLF promote.

As we move into the second half of the year, we expect rent growth and increased NOI from development stabilizations to steadily increase core FFO.

To sum it up, we had a good quarter, and we're excited about our prospects for the remainder of the year.

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

(Operator Instructions)

Brendan Maiorana, Wells Fargo Securities.

Thanks.

Good morning.

Tom, I wanted to ask about guidance.

You went through the details.

It seemed like the main change from the parameters that you give us was the increased dispositions to take advantage of the strong pricing that was out there.

But you did raise the low end by $0.02.

So I'm just wondering what the offset is, given that it seems that the deployment expectations are about the same.

Is it better on the operations side?

Is it better on the financing side?

Or is there something else that's driving the move up when dispositions would seem like it would be a little bit of headwind?

Brendan, this is Tom.

Thanks for your question.

It is driven by a better in line the first quarter and our confidence with the operating fundamentals going forward.

It's also the results of deploying our excess significant liquidity we had at the end of the year and in early January, a little faster than we thought.

And we also have a little more visibility now on the size of the promote from USLF in the second quarter.

Looking forward, we'll be as efficient as we can on redeploying any excess disposition proceeds.

And as you mentioned, we took our guidance up there.

We'll continue to look on how to do that efficiently on deployment, including redeeming bonds where we think the economics make sense.

Jeff Spector, Bank of America.

Thank you.

This is Jamie Feldman here.

Can you talk a little bit more about the occupancy dip in the first quarter?

I think you had said it was pretty sizable in Europe.

And then thinking forward, what gives you conviction that you'll get to occupancy guidance by the end of the year?

Well let me take the second part of that first.

Jamie, it's kind of happened every year in the last 25 years.

So the good expectation, our expectation is that always dips in the first quarter; and it always comes back.

And we have pretty good visibility in the leases we're working on for the second quarter and beyond.

So that one is pretty much a given.

I'll let Gary talk about Europe.

Jamie, in Europe, we're still bullish there.

The macroeconomic recovery is accelerating; its broadening.

¶ The recovery, actually over the course of the last 90 days, GDP forecast has increased by 30 basis points.

We're sitting at about 1.5% GDP growth for the entire EU.

So the recovery as a need set is uneven, and our operating results are reflective of that.

Things played out pretty much as we expected in Northern Europe and the UK.

Occupancies dropped while we started to push rents.

It makes perfect sense.

We're right in the sweet spot in those two geographies, sitting at 96%-97% occupancy and the ability to push rents.

We had hoped that we'd be able to hold occupancies in Southern Europe and Central and Eastern Europe, and we didn't.

There's not a concern there.

There's no systemic issue at all, and I expect occupancies to increase certainly by the third quarter of this year.

So net-net, we feel good about the operating results there.

And again, this is the third consecutive quarter that we had positive rental growth in Europe -- so 3%.

All in all, a pretty good result, I think, in Europe.

Michael Bilerman, Citi.

Good morning.

Kevin Barren is on the phone with me as well.

Tom or Hamid, I just wanted to talk about free cash flow, equity, dividend raise.

And when you look at the results in the first quarter, your core AFFO was effectively on top of the dividend, which you lifted 18% to $0.33.

When you think about the back half of the year, if you put aside the $0.04 promote that you have in the second quarter, your core FFO was about $0.43 to $0.45.

Let's assume the $0.10 drop from FFO to AFFO is similar; you've got pretty tight coverage.

And so, I guess, from your perspective, why raise the dividend and give away that free cash flow ability, and then also put an ATM in place of $750 million, potentially putting pressure -- even though the dispositions are good and you can match fund this year -- putting pressure on the need to raise equity where you've got free cash if you were to maintain the dividend where it was?

Wow.

That was a pretty long winded question.

I think you're assuming two businesses away, which are pretty important as part of our overall lines of business.

You just put investment management away by assuming away promotes.

That's a pretty important part of our business.

And you also put away the development business that makes us $300 million to $400 million a year -- really, really.

So, yes, if you just consider our operating business, the dividend and our earnings power from just the rent business -- assuming no growth in rents and occupancies, which is again a draconian assumption -- is right on top of the dividend.

But of course our view is that there will be growth in our rents and our occupancies, and that the development and investment management business will be strong contributors to our overall financial picture.

Tom, do you have anything to add?

I would just add on the development side, you have to remember that the realized development gains are taxable income; and that has to be distributed to shareholders.

So you need to look at it as a need set, the totality of that business, not just with the operating business.

And when you look at it on that basis, our AFFO payout ratio would be in the mid to low 80% range.

Vance Edelson, Morgan Stanley.

So you touched on construction costs in Japan.

And then you also discussed where you're seeing some construction activity domestically.

Could you update us on the placement costs in relation to rents in the US, the relative growth in both, and how your own construction costs are trending domestically?

Yes, sure, Dan.

It's Gene.

I'll hit that one.

So as we look at actual construction costs in the United States, we saw a 3% to 4% increase year over year.

And we expect that to increase, not significantly at this point, but probably that goes to a 4% to 5% range.

That's one component of replacement costs, obviously.

Land is moving -- that's really all across-the-board.

But in the healthy markets, it is moving really quickly.

So you're seeing 10% to 15% increase land.

You boil all that together, and you're probably looking on a go-forward basis, something in the 7% plus range all in.

So we've got a keen eye on replacement costs.

And as you know, we do a lot of development.

So it is something on one hand we're worried about.

But on the other hand, it underpins where rent levels are and also underpins the growth in those rents.

Our rental forecast in our Investor Day was predicated on a 10% real growth in construction costs, above and beyond inflation, in the period between 2013 and 2016.

That was the basis for that analysis, which we shared with you in September of 2013; and that was a global forecast.

I would say if you look at where we are -- and we were going to do that analysis over again -- I would say construction costs would be higher than those projections.

Primarily because Japan is much, much higher, and I would say the US is higher, and the growth is coming a little earlier than we thought in that analysis.

That's why we think that forecast that we put out there is actually looking pretty conservative right now.

And we're ahead of it both in terms of occupancy; we're ahead of it in terms of rents.

The only headwind to that forecast is that I would say cap rates have come in a little bit lower.

So development can occur a little sooner, and with the same level of profitability than before.

So compared to September, I would say global cap rates are down maybe 25 basis points.

Where we really think they are -- not where the price stock is, the price stock is all kinds of -- if you really believe the price stock, cap rates are down 50, maybe even more than that.

I don't believe the price stock.

But really, really cap rates are down 25 basis points.

So that's a bit more of a headwind that will negate the construction costs increase.

So roughly, I think replacement cost rents are about where they were when we forecast them in September.

John Guinee, Stifel.

Great, thank you.

Tom, can you -- I think it was Mr. Bilerman asked about dividend increase, et cetera.

Can you expand a little bit more for educational purposes on the, basically, developing merchant building investment sale business in the US versus Europe?

Because in the US, for the most part, your normal real estate annual corporate taxes are sheltered via the REIT rules.

And you can usually, if you want to, do a 1031 exchange into other assets.

How much linkage do you have in Europe because the US REIT rules don't apply, and you may or may not be able to use 1031 exchanges?

And how does that all translate into a percentage of your dividend that is almost guaranteed to go up as your merchant building business expands?

Thanks for the question, John.

So when you look at the outside the US, the friction to get -- well number one is, those gains do come back and it is taxable income.

You cannot shelter those gains through a 1031 mechanism like you can in the US.

So those earnings, when they're repatriated, come back; and that's taxable income.

The leakage on that is actually very minimal.

We're very efficiently structured, both out of Europe and Asia.

And that leakage is generally in the low to mid-single digits from a leakage perspective.

But here is the important point, John.

They only are taxed when they come back here.

So in terms of present value, they are very low in terms of their net economic impact.

Because they oftentimes, unless you're doing a lot of balance sheet gymnastics in terms of expanding or shrinking your balance sheet in these regions -- which, by the way, we've been doing a lot of -- but now we're in the stable mode given that we have all these funds structures in place and all that.

We shouldn't be doing a whole bunch of repatriating.

We've moved up the share of our US dollar equity to 82% already.

There isn't that much more money coming back and forth.

So I think you can think of effectively the present value of that leakage overseas, if the absolute number is in the low single digits, the present value impact is going to be virtually zero.

And then from a sizing perspective, when you think about the size of our development pipeline -- and this is on a long-term run rate basis-- if you just assume for easy math $2 billion of development that stabilizes the year and a long-term margin of 15%, that's $300 million.

Probably two-thirds of that is happening outside the US, and will ultimately affect your taxable income.

So a rough way to look at it would be about $200 million of potential taxable income, as Hamid mentioned, when it's repatriated could come back to your USTI.

George Auerbach, ISI Group.

Great, thanks.

Hamid, you mentioned the investment opportunity in Europe a few times now.

Can you give us a sense for any portfolio sized deals in the market today,?

And how long of a horizon you see to put capital to work in Europe at above-average returns?

Wow.

Boy, cap rates in Europe have compressed a lot faster than I ever thought.

And you really have this unusual situation where the appraisal community in Europe, I would say, is 50 to 100 but probably really more like 75 to 100 basis points behind real deals.

And we were very successful, actually, all in 2013 and the early part of this year.

But now we're finding that we're actually losing portfolio deals by maybe 25 basis points on the cap rates.

So markets in Europe have adjusted very, very quickly.

But you still have a good discount to replacement cost because rents are pretty low, and you can still buy a properties at below the replacement cost.

But the big surprise for me has been, boy, UK really normalized in 2012 in 2013; but the continent was right after it.

And if I were going to guess, probably since our Norges transaction -- which I think was basically the coasts are clear/the water is safe sign -- I bet you those cap rates were down 75 maybe 100 basis points and heading lower.

So the investment opportunities in Europe are quickly, quickly dissipating.

They're still attractive because you still have rent growth, but you don't have the combination of really high cap rates, cap rate compression and rent growth like you had before.

So still good, but not great.

George, I would just add that our pipeline is still pretty strong.

We're looking at over EUR1.8 billion worth of acquisition opportunities.

And it's a mix of one-off deals, smaller portfolios, call it in the $100 million range, and then some larger portfolios.

But there's pretty good activity there.

And better product, again, than I've seen in the last decade that's coming to market.

So, there are still opportunities, I think.

Craig Mailman, KeyBanc Capital Markets

Thanks.

Good afternoon, guys.

Maybe could we just hit on US development a little bit.

You mentioned Dallas looks like it may be getting a little bit ahead of itself, but Inland Empire in Houston there's still enough demand there to absorb the supply.

But on the other side, you said cap rates in the US are coming in a little bit more than you had thought, and maybe that makes development easier.

I guess as you guys look out on the horizon, are there more markets on the bubble of getting to Dallas or even Houston Inland Empire type development starts that they get you guys worried?

Or at this point, is the runway still pretty good here in the US for development?

Craig, it's Gene.

I'll take that one.

Generally, the answer to your question is, yes; it does look pretty good.

If you look across US markets, three of them stand out in particular: Dallas we've mentioned, the Inland Empire, and Houston.

But in all of those cases if you study the metrics, you look at where their actual vacancy rates are today, you look at historical absorption and supply as a percentage of stock, it's kind of in balance.

But it's ramping up quickly; as Hamid mentioned, in Dallas, it's ramping up really quickly.

So those are three markets we have our eyes on.

We are very active in development in all three of them. ¶

There's no doubt as this recovery takes shape that more markets will fall into that category.

But none of them are flashing red lights yet at this point.

The only thing I would add is that keep the overall numbers in mind.

The overall numbers are last year 65 million feet of new supply, 225 million feet of absorption.

We underbuilt the market by about 160 million square feet.

That directly translated into vacancy rates dropping by more than any other year ever.

And by the way, that doesn't account for obsolescence, putting that aside.

This year, we think absorption is going to be around 200 million, with construction increasing to about 100 million square feet.

So the deficit that we had at 160 million feet last year is going to be more like 100 million feet this year, which will mean that this will be the second best year for vacancy drop.

Now, of that 100 million feet of supply, my guess is 50% of it is in the three markets we just talked about.

And the reason that development is occurring in those markets, guess what?

Rents have recovered to replacement cost rent.

It's not because people have more development talent or are less disciplined or banks are more exuberant there.

It's just that the rents have recovered earliest in those markets, and those rents are through [peaks].

So I think this volume of construction is directly related to rents.

If rents pop 20% sooner than we thought, you'll get more development coming into these markets.

But until the other markets recover to the same extent, I don't think you'll see development there.

Ki Bin Kim, SunTrust.

Can't hear him.

Ki Bin, there's something wrong with your mike.

You might -- well, why don't we skip over him and come back to him.

Eric Frankel, Green Street Advisors.

Thank you.

I was wondering if you can just talk about your development pipeline a little bit?

It seems like the number of starts was a little bit lower than I'd probably anticipate giving the amount of development you're expecting to do this year.

Maybe you can just comment on that.

Thank you.

Sure, Eric, this is Mike Curless.

We're not particularly concerned about the first quarter.

Historically, our first quarter is always by far our lightest quarter.

This year, we started 13 projects.

They happen to be some smaller projects, just due to mix, and certainly weather was an impact on a couple projects that we moved into the second quarter.

But relative to the overall volume for the year, we certainly think there's bias to the upside.

80% of all of our activity is already identified.

That's a very high number for this time of the year.

And 80% of it is going to take place on land that we already own.

The ramp-up is already underway in Q2.

And we expect that to increase steadily all the way through to the end of Q4, which is pretty typical for our pattern of development for the year.

We continue to have bias to the upside in Europe and in Asia.

And don't rule out our build-and-see business given our customer reach and our land control.

So we feel pretty good about some upside opportunities in those three important categories.

If history is any indication, we expect the good margins again for the third year in a row.

So I feel real good about not just the quantity of the activity, but more importantly, the quality of that activity.

Dave Rodgers, Robert W Baird.

Maybe for Gene and/or Hamid.

I wanted to talk about capital raising in the US, obviously fairly quiet in the first quarter, and in tying that into your disposition acceleration, the election to pursue dispositions as opposed to contributions.

So, one, can you tie together the concept of capital raising in the US, the appetite here both for you as well as the partners out there?

And then the second is, if it's more of a property quality issue that you're trying to clean up, can you maybe give a little color around cap rates and timing?

Sure.

I think dispositions is -- what we're buying and what we're selling are very different things.

We have some residual cleanup of the portfolio left in our non-strategic markets and also the less strategic assets in core markets.

And we're just getting along with that quicker than we would have otherwise because we see an opportunity to get good valuation.

But what we're buying for USLF primarily, which is our active vehicle in the US, we're being very selective.

And we're buying Prologis' quality core product.

That's the mandate of that fund, and we're very mindful of replacement costs.

And like I said in my prepared comments, we're looking at situations that either are scale or our expertise can add value.

But it's getting tougher and tougher.

And one of the things that we don't want to do is sign up for a huge pipeline of capital.

There's plenty of interest for people who want to give us money.

We're being very selective and managing our pipeline so that we not only can raise money, but can invest that money intelligently without any undue pressure for people who want to get some capital to work.

So that's the balance.

It's not a lack of interest from investors, quite to the contrary.

There's a lot of interest on the part of the investors.

And we're just trying to balance that with the opportunities that we see in the market.

Michael Salinsky, RBC Capital Markets.

Good morning.

Tom, just given your comments about the increase in dispositions, can you just give us an update where you expect to end the year in terms of the US equity exposure, as well as overall leverage?

And then also, just as you get greater clarity in the promote, I think you had said $0.04 last quarter.

Is that still a good number to use?

Sure, Michael.

I'll tick those off.

The first, the equity, we expect to end the year, our US equity balance, somewhere between 85% and 90%.

So right on top of what our long-term goal is there.

From a leverage perspective, if you look at the midpoints of our sources and uses in our deployment and guidance, that would put us right around 35% LTV at the end of the year, if you remember, when you looked out to 2000.

The first of quarter 2015, two things are happening.

First, we've got the convertible debt that we would expect to convert into equity.

That is roughly about 200 basis points of LTV.

And then we also have optionality around the sell down of our interest in the help venture that would get us to the low, very low, near 30% LTV.

And your last question was on the promote.

Yes, I said we expect that to be around $20 million net of expenses, or roughly $0.04, recognized in the second quarter.

Ross Nussbaum, UBS Securities.

Tom, just on the same-store guidance, how much of a tailwind should we expect on the expense side going forward for the remainder of the year?

I don't think there will be much of a tailwind for the rest of the year.

What you saw in the first quarter was really the result of Q1 2013 expenses being higher than normal.

So you shouldn't see much of any tailwind at all from expenses.

We talked about this last quarter.

But when you look at same-store increase year over year, you've got about 1.5% driven by just rent change.

So think about 15% of your portfolio turning over, 10% rent change, about 150 basis points of occupancy improvement; so that's another 1.5%.

And then there's about 50 basis points of indexation that's not reflected in straight-line rent.

So it's in this indexation, primarily in Europe, where it's not a fixed amount, but it's based on an index that floats.

Therefore, you can't straight line it.

So that indexation also comes through, and that's about 50 basis points.

Michael Mueller, JPMorgan

I joined a little late.

I apologize if I missed this.

But I know you talk about longer-term development margins.

If you're looking at the next round of development starts, where do you see the stabilized fields coming in and the margins on this next batch?

I think for our starts this year, the margins are going to be above 20%.

And I think -- I've said this now I think two years a row and I've been wrong -- I think they're going to gravitate down to 15, but I may be wrong.

I think our land is on the books at a pretty attractive price.

So while we're monetizing that land, I think our margins will be overstated until we work our way through that land and have to by new land at market.

And it's about a two-and-a-half to three-year supply of land on our books today.

I think if we're going to pick a number for our land today on the books at $1.6 billion, I would say that land is easily 20% or 25% undervalued, with a big arrow up.

Ki Bin Kim, SunTrust.

Just one follow-up on promotes.

In 2015, it looks like a larger portion of it does come from somewhere newly-established JVs in Europe.

And given your commentary about cap rate compression there and if you're promotes are structured the way they were historically structured based on IRRs and certain laddered promote structures, I would think it would be a pretty sizable promote just even if 100 basis points of cap rate compression would drive a big part of that IRR calculation.

As of today, could you talk a little bit about what that size and promote would look like potentially in 2015?

Ki Ben, it's dangerous to do that because a million things have to happen before that promote is realized, including appraisers actually closing the gap between reality and what they're appraising.

That's been very sticky in Europe, and they're really lagging -- as I've now said three times -- I think by 75 or 100 basis points.

I have no idea when they're going to start recognizing the evidence in the marketplace.

It's very, very sticky.

But the best way I think to think about our promotes is that if you think that we're going to outperform our indices by, call it 200 basis points of performance -- and historically, that's been about the order of magnitude of the outperformance that the Company has experienced, with a big range -- but kind of averaging around 200 basis points, above the indices, the promotes are 15% to 20%.

So that translates into 30 to 40 basis points of growth promotes.

And the net promote is about 60% of the growth promotes.

So I think of it as a 25% -- 25 basis point of AUM, third-party AUM.

Of course, we're not charging ourselves promotes, right?

So take the third-party AUM.

And if you want to model something that's relatively regular, that's the number I would use.

Particularly now that we're getting into the period that there's almost a promote coming in every period.

You're going to get some volatility around that, but that's kind of a not-a-bad rule of thumb.

And I would say there would be bias towards the upside of that in the next three or four years, given that we're recovering from a really horrible three- or four-year period, where there were no promotes and most values are reverting to the norm.

So I think we're entering a good period of promotes for the Company, and it's a real part of our business.

I wish people would give us credit for it.

Brendan Maiorana, Wells Fargo Securities.

I had a couple of follow-ups.

Just first, on the new supply versus the net absorption calculation or projections.

I know for 2014 that it's been consistent, $100 million of new supply expectations versus $200 million.

I wonder, based on where the development starts are shaping up, how you think that outlook may trend in 2015?

And then the second question.

The improvement in the secondary market locations, which is causing you guys to sell some of your non-core assets, is that driven by improvement in fundamentals in those markets?

Is it accelerating more in the secondary markets?

Or is it just capital flowing into those markets because cap rates in primary markets are low?

I think fundamentals are getting better in all markets, including the secondary market.

So the weight of the capital means that you can achieve better pricing in those markets in terms of timing than we thought otherwise.

So the transactions that were slated for later, there's no sense waiting for later because you can achieve the same thing earlier and the decision is the same.

Those have been determined to be non-strategic, so we're going to sell them.

What was the first part of the question?

What happens in 2016.

Supply will be up, only because rents will be up; and it will make more sense to build in more markets.

So again, we shouldn't think about these issues in compartments.

Supply relates to where rents are and where profitable development can take place.

And if you buy the thesis of recovery in a broader range of markets, you would development in a broader range of markets.

But again, let me put this in perspective.

I've been in this business since 1983.

I hate to say it, but that's 31 years.

There have never been periods where we have underbuilt the demand in the US anywhere near these levels that we experienced last year and in this coming year and next year.

It's just unprecedented.

So vacancies are compressing rapidly, rapidly.

And I think together with that, rents are increasing rapidly.

And it's not because this all of a sudden became the best business in the world.

It's because we are climbing out of the basement -- the basement that we all fell into in 2008 and 2009.

So after we climb out of the basement, let's see how disciplined people are.

And hopefully they are disciplined, and we'll have a good long-term sustainable period of rent growth once we've reached equilibrium.

But between now and equilibrium, I expect a rapid rent growth.

Jeff Spector, Bank of America

Great, thanks.

It's Jamie Sullivan again.

I was hoping you guys could talk a little bit more about the types of tenant demand you're seeing, and maybe how it's changing or how you might expect it to change over the near term given where we are in the economic cycle in terms of sectors and what people are doing with the space.

Jamie, this is Mike Curless.

Certainly seeing a lot of movement in a variety of sectors and our customer demand: E-commerce, packaging, housing related, auto related.

E-commerce is a real large driver there, probably see them doing about 15% of the activity in our existing portfolio.

In our new space and the development pipeline, those numbers are more like 30% of that activity.

The space sizes tend to be much larger than traditional brick-and-mortar uses.

So plenty of activity in e-commerce.

The customers are gravitating towards large population centers.

The Amazon affect is well underway in terms of people wanting to be closer to the customers for the possibility of same-day delivery.

So we're seeing a lot of activity in our global markets.

And that plays very well with our platform, given our high percentage of land and buildings in those particular markets.

The only thing that I'd add is that the three PLs are back.

They are a big customer segment for us.

And if you had asked me a year ago how the three PLs were reacting, they were securing a contract, a logistics contract, before they secured real estate.

And today, it's exactly the opposite.

They realized that because of dwindling supply, they have to secure the real estate in order to secure the logistics contracts.

So I'd say that's an interesting trend that's occurred over of the last 12 months.

Globally.

Globally, yes.

Michael Bilerman, Citi

Yes, I had a few follow-ups, and I'll just rattle them off.

Just same-store NOI, you present on a gross basis.

I'm just curious what that would be a Prologis share, effectively your consolidated plus your share of joint ventures, number one.

Number two, the Japan land sale, 21 acres for $55 million, $107 of (inaudible) foot seems high.

I know land prices are high Japan.

Just curious what's going on there.

The third, just ATM, I know you had the ATM last June.

You didn't issue anything; you re-upped it.

How should we think about your intent to use it going forward?

And then lastly, it's just on expense recovery rate.

It was about 79% this quarter, which was higher than last year, higher than the first quarter of last year.

So it seems like that perhaps had something to do, I'm not sure, with the same-store expenses and revenues.

And if you can just clarify what drove that, that would be helpful.

Thanks.

So, Michael, I would be happy to answer any one of those questions that you select.

Which one would you like me to take?

We are trying to make this a fair process for everybody to get their questions in.

Do want to answer the equity one first, and then I will re-queue up for the same-store, which will be the second one just to understand?

Sure, that would be great.

We don't foresee any need for equity in our business for all the reasons that Tom talked about.

And, yes, we do have the ATM program in place; and we did renew it.

But we don't expect to be active underneath it, unless our investment opportunity set changes from where it is today and where we see it today.

Eric Frankel, Green Street Advisors

Can you maybe discuss what's causing the increase in the prices or decrease in the cap rates?

Our understanding is that a lot of institutional capital has been (inaudible) to build new shiny products.

But it appears that it's now going the other way, where B product is getting a little bit of a better bid just because it's rapidly improving (inaudible) fundamentals.

And I'm just trying to figure out -- is a lot of new capital out there?

Or is it just the same capital and we're willing to allocate more?

Our impression is that there's a lot of private equity that's interested in the sector.

And it is the weight of capital, and it's almost interested in bulking up plays are popular.

So I guess that's the incremental capital we see in the marketplace.

The institutional stuff and the non-traded REIT sector continued to be active.

But I would say the incremental capital is really private equity.

Mike, do you have more to add to that?

Yes, when you're seeing 15 or 20 people trying to buy a product in LA, and obviously only one can be successful, you're seeing 4 or 5 of the people on that list moving to B product and/or moving to regional markets as well.

We continue to see a real wall of capital and quite a few new players in the mix these days.

Michael Salinsky, RBC Capital Markets

Just going back to the compression you talked about and cap rates in Europe over the last six months relative to what you've seen in terms of rent growth, are return thresholds coming in?

Or is there an expectation in 2014, 2015, 2016 that the growth is going to accelerate to justify that compression at this point?

I think it's anticipation of rent growth and availability of financing in Europe that are the two things that have changed.

And also, I think it is the fact that the ice was broken.

I really think our Norges transaction, without dwelling on that too much, was really a sign that the waters are safe.

And almost immediately after that, people started piling into Europe in a big way.

So I think primarily the cap rates that were high, higher than elsewhere in the globe because the financing markets were more frozen than the rest of the globe, attracted people in.

Now that cap rates have compressed, I think people are attracted to Europe not because there's a little bit more cap rate compression that's going to happen, but also rent growth is kicking.

And you can still buy product at below the threshold cost.

So I think that's the attraction.

And it can be all financed now, which it couldn't be two years ago.

So those are the dynamics.

The way I would think about it, Michael, is that it's just like the US, maybe a two, two-and-half-year lag, with maybe the UK being only a year and a half behind the US, and some of the parts of Eastern and Southern Europe being three years behind the US, and the average of Europe being two, two-and-half-years behind the US.

Same pattern.

Focus on the core markets today in Europe, and they'll gravitate to the secondary markets over time.

Michael Bilerman.

Michael, go ahead.

It's your turn again.

Can you hear me?

We can hear you fine.

I thought round two you get more questions.

I apologize.

I didn't read the rules correctly.

So same-store NOI, you presented on a total share.

What would that be in terms of just Prologis' share?

And was there anything funky going on in the consolidated portfolio on expense recovery?

Because that was certainly higher year over year; and I didn't know if it played into the total same-store as well.

So, Michael, you're right.

What we present is owned and managed across our entire stack, same-store.

I don't have our proportionate share committed to memory.

I can certainly follow-up with you on that, but it's certainly higher than the owned and managed because of the relative US waiting.

So when you think about our US equity now across 80%, that really drives our underlying earnings.

And when you look at how the US is leading the charge on all of the operating metrics, whether it's rent change on roll in the quarter was 10.4%.

So our bottom line, our look through would be better than owned and managed.

And then on the expense recovery side, as I mentioned earlier, there's nothing going on unusual other than Q1 of 2013 expenses were higher than normal.

And that's the trail off that you see this year.

And going forward for the rest of this year, we don't expect any unusual expense changes.

And it's going to be the real occupancy and rents driving same-store.

Michael, by the way, one thing I would add just philosophically so you understand why we don't track that number separately, is that we've really always operated under the philosophy of one portfolio policy.

Our people in the field don't really differentiate whether we own 20% of something, 50% or something, or 100% of something.

We run it on an ownership-blind basis, and the stats are reported on an ownership-blind basis for that reason.

That's the only way we can do a good job for our institutional investors.

So really the only thing that Tom is talking about is the mix.

We have more fund mix in our non-US business than in our US business.

And given that the US is early, the mix would drive you to that conclusion.

But we actually don't track those kinds of numbers by ownership type at all.

(Operator Instructions)

David Harris, Imperial Capital

Thanks for taking my question.

I apologize if you've covered this; I was a little late on the call.

But if I look at your development cost capitalization, you're running at fairly close to $150 million on an annualized basis.

Is that cost fully reflected in the development margins that you're quoting on page 23 and 24 of your current development program?

Yes it is, David.

And it's a good question.

I'm actually glad somebody asked it because I get that question at NAREIT all the time.

The development margins that we report not only include capitalized overhead that matches the number that you mentioned, but it also includes a full carry on the entire capital.

Not just on the debt portion that's assigned to that project.

So we capitalize carry throughout the development process until it reaches stabilization.

I know some people don't do it quite that way.

And therefore our margins, if they were done in the alternative way, would even appear higher than they are today.

Okay, last opportunity for Michael to ask a question.

The line is clear.

Hearing none, I want to thank you for your time on this call and look forward to talking to you at NAREIT.

Bye-bye.

This concludes today's conference call.

You may now disconnect.