Prologis Inc (PLD) 2014 Q4 法說會逐字稿

Good morning. My name is Keith and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Prologis fourth-quarter earnings call.

(Operator Instructions)

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

Thanks, Keith and good morning, everyone. Welcome to our fourth-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 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 supplemental do contain financial measures such as FFO and EBITDA that are non-GAAP measures. 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 [set].

Thanks, Tracy. Good morning, everyone. We had a terrific quarter to finish off an excellent year. A year into our three-year strategic plan, which we presented to you back in September of 2013, we are ahead on both earnings and deployment targets. Our outperformance reflects the strength of our repositioned portfolio, which today is focused on the highest quality assets and the best markets around the globe. Our earnings in 2014 exceeded the top end of our guidance, driven by operations and capital deployment.

Let me take a few minutes to discuss the three key elements of our strategic plan. Our first priority has been [to capitalize] on the rental recovery. The improvement in market fundamentals has been strong, but somewhat uneven across regions. It is well underway in the Americas, Asia, and certain parts of Europe at a pace ahead of our initial projections, while southern, central and eastern Europe lagged behind.

In the US, net absorption in 2014 was right on our forecast, at double the rate of deliveries. Our US occupancy outperformed the market by [320] basis points. Demand was broad-based. At year-end, we are more than 98% occupied in many of our markets. This occupancy, combined with double-digit rent change on rollover, resulted in same-store NOI growth of more than 5% in the US, and 3.7% overall. For 2015, we forecast deliveries of 165 million square feet against absorption of 225 million square feet, leading to further increases in occupancies.

Moving to Europe, despite the bifurcated recovery, at 95%, our occupancy in the region outperformed the market by 210 basis points. As we forecasted, cap rate compression has been a headwind on rental growth in Europe. What's surprising is how far and how fast cap rates have dropped on the continent. While absorption and delivery information is harder to [come by] in Europe, we estimate Class A absorption of 66 million square feet compared to new deliveries of 45 million square feet in 2014.

This drove market occupancy up by 150 basis points. Looking forward, market occupancies in Europe will continue to rise as supply remains constrained. We see space utilization running at a high level, forcing customers to lease more space to support their incremental growth, just as they did in the US two years ago. In Asia, market conditions continue to be strong and pretty much on plan.

Our second priority has been to realize value from our land bank through development. Last year we put $430 million of land to work in developments with an estimated overall profit margin of 20%. These outsized margins are driven by the low book value of our land, which has a build-out potential of about $11 billion of properties over time.

Our third priority has been to leverage our scale to grow earnings. Our global reach allows us to deploy capital where we see the highest risk-adjusted returns, often ahead of the pack. In the US, where market conditions are strong and values are high, we have been a net seller of non-strategic holdings. Conversely, in Europe, our focus was on development, where we acquired quality assets at significant discounts to replacement costs. Timing here was critical as cap rates compressed throughout the year.

For perspective, we took the proceeds from our dispositions and contributions at a weighted average cap rate of [6.2%] and redeployed those proceeds into higher yielding assets at a weighted average cap rate of 6.8%. The net result was a favorable spread of 60 basis points on investments. As a result, we were able to grow earnings and at the same time improve the quality of the portfolio.

Moving to strategic capital, we continued to have a significant investor queue with steady interest across all our funds. In 2014, we raised about $2.5 billion of third-party strategic capital. What's remarkable is that each of our funds has outperformed its respective benchmark for all-time segments in the past five years.

To sum it all up, we expect market conditions globally to improve from these healthy levels. Our market-leading position in key cities around the world gives us the ability to deploy capital profitably and we have the financial capacity to carry out our plan. As we've explained before, we are well insulated from movements in foreign currencies. With that, I'll turn it over to Tom.

Thanks, Hamid. We had great results for the fourth quarter and full year. Core FFO was $0.48 per share in the quarter and $1.88 [for] 2014, representing an increase of 14% year-over-year. Leasing volume for the [operating] portfolio in the quarter was 33 million square feet. Development leasing totaled 9 million square feet, our highest level in seven years, as we continue to see strong demand for new space.

Average term for leases signed in the quarter increased sequentially from 45 to 60 months. Quarter-end occupancy was 96.1%, up 110 basis points from the third quarter. The sequential increase was driven by Europe, the Americas, and spaces under 100,000 square feet.

GAAP [rent change] on rollover was 6.2%, led by the US at 11.4%. This metric may swing quarter-to-quarter based on the composition of rolling leases. In 2015, we expect rent spreads to continue to increase and exceed 2014 levels. Cash rent change on rollover was flat for the quarter.

GAAP same-store NOI on an owned and managed basis increased 4.1% in the quarter and 3.7% for the full year, at the high end of our prior 2014 guidance range. GAAP same-store NOI on an our share basis in the fourth quarter was 4.9%, driven by the outperformance in the Americas, which represents about 75% of our share of NOI.

Moving to capital deployment, development stabilizations totaled $1.1 billion, with $236 million our share of value creation, or $0.46 per share. Development starts in 2014 totaled $2 billion, with an estimated margin of 20%, indicating the book value of our land bank continues to be significantly undervalued.

We acquired $1.5 billion of buildings during the year, with $659 million our share at a weighted average stabilized cap rate of 6.4%. The majority of the acquisitions were through our co-investment ventures in Europe. We invested $679 million in our North American Industrial Fund, at a 6.1% weighted average stabilized cap rate, increasing our ownership to 66%. We began consolidating this venture in our financial results this quarter.

Contributions and dispositions totaled $3.2 billion, driven by non-strategic asset sales in the US and the formation of our US logistics venture. Our share was $2.2 billion and was at a weighted average stabilized cap rate of 6.2%. Looking at realized gains in 2014, we generated $172 million from development and $37 million from VACs. We measure the realized gains on VACs as the difference between the sales price and the value of the building based on an industrial use.

Turning to capital markets, we continue to exploit the low interest rate environment, while maintaining significant liquidity. In the [fourth] quarter, we issued a EUR600 million bond and raised a total of $356 million in equity, with $214 million through the exercise of warrants related to the formation of our PELP venture back in 2012 and $142 million issued through our ATM program.

Our debt metrics and liquidity strengthened this quarter, as leverage declined to 36.5%, debt-to-adjusted EBITDA fell to 6.8 times, and liquidity increased to $3.4 billion. Another indication of the strengthening of our balance sheet is the significant amount of nominal fixed charge coverage. On a run rate basis, we're generating over $1 billion of excess EBITDA [from our] fixed changes annually. Our excess coverage should continue to grow in 2015, given expected leverage levels and pace of EBITDA growth.

We've [discussed] before, we've taken significant steps to minimize our foreign currency exposure on both NAV and earnings. With our US dollar net equity at 89%, we've effectively insulated our balance sheet and operations from movements in foreign currency. Europe comprises about 7% of our non-US dollar net equity, with sterling representing the majority of this exposure.

We've minimized our euro net equity exposure by naturally hedging with euro-denominated debt, which has the added benefit of very low borrowing costs. We currently have EUR3.8 billion of debt, with an average interest rate of 2.6%, and a term of over seven years. While we have continued to see the US dollar strengthen over the past quarter, the impact on core FFO from the decline in the euro and the yen in the quarter was less than $0.01. The bottom line is we virtually eliminated the risk of FX movement significantly impacting our NAV and earnings.

Let's turn to 2015 guidance. For operations, we expect our year-end occupancy to range between 95.5% and 96.5%. We expect to stabilize $1.7 billion to $1.9 billion of developments, an increase of $700 million at the midpoint over 2014. We're forecasting that the increase in NOI from development stabilizations will be the largest driver of our 2015 core FFO growth.

The higher volume in stabilizations will contribute about $0.14 a share to 2015 core FFO. Looking forward, stabilizations will continue to be a significant driver of NOI growth, given projected starts of approximately $2.5 billion in 2015. GAAP same-store NOI on an owned and managed basis is expected to grow between 3.5% and 4.5%.

As you know, it is our share of same-store NOI that impacts earnings. We expect our share of same-store growth in 2015 to be 50 to 100 basis points higher than owned and managed. As I mentioned earlier, this is driven by the higher performance and our higher ownership of the Americas relative to Europe and Asia. Our share of same-store NOI growth will contribute about $0.13 a share to 2015 core FFO.

On net G&A, we expect the full year to range between $238 million and $248 million. We forecast to hold G&A flat despite a planned increase in AUM. On the capital deployment front, we are seeing an increase in volume of profitable development opportunities in 2015 and expect starts to range between $2.3 billion and $2.6 billion. Our well-located land bank and global customer relationships are driving increased build-to-suits activity, which we expect to account for about one-third of our starts in 2015.

On the speculative development front, we are largely building in our existing established master parks. The average occupancy in the [markets] where we expect to start and stabilize spec this year is about 97%. While acquisitions are always hard to forecast, we are estimating building acquisitions to range between $1 billion and $1.5 billion.

We expect dispositions to increase from 2014 and range between $1.5 billion and $2 billion, with activity coming from the Americas, Europe, and value-add conversions in the US. Contributions to our co-investment ventures will be [driven] by development stabilizations and are expected to range between $1.3 billion and $1.8 billion. We expect realized development gains of between $200 million and $250 million in 2015. Putting this all together, our share of net deployment is about $600 million.

For strategic capital, we expect revenue to range between $210 million and $220 million, which includes an expected net promote from our PELP venture in the fourth quarter of 2015 of between $0.03 and $0.04, which is in line with the net promotes we've earned in 2014. Now putting all of our guidance together, we expect 2015 core FFO to range between $2.04 and $2.12 per share.

This represents year-over-year growth of 11%, or an increase of $0.20 at the midpoint of our guidance. The year-over-year growth is primarily driven by development stabilizations in our share of same-store NOI, and reflects dilution of about $0.08 a share, driven by the timing of dispositions and increased level of deployment during the year.

From an FX perspective, we have hedged the majority of our estimated 2015 euro and yen net earnings, effectively insulating 2015's results from any FX movements. In closing, we're very pleased with our results for the quarter and the year. We delivered ahead of our 2014 plan and have strong momentum heading into 2015. With that, we'll open it up for questions, operator.

(Operator Instructions)

Your first question comes from the line of Brad Burke from Goldman Sachs. Your line is open.

Hey, good morning, guys. I wanted to ask about the sources of capital over the course of 2015. It looks like you're planning on deploying around $600 million into development and acquisitions over the course of the year, that's net of your contributions and dispositions. You raised equity during the quarter, so I was wondering whether or not we should expect you to be raising additional equity in 2015?

Thanks, Brad, it's Tom. When you look at our net deployment in 2015, it's about $600 million all together. If you exclude our share of acquisitions, we are actually generating about $200 million of net proceeds in 2015, so the decision about how we'll fund any growth really gets down to acquisitions. It will be a function of the opportunities that we see in the markets and the volume of activity we see and the relative returns and that's going to drive our decision on how we capitalize and what equity we raise.

We clearly have the ATM program. It's a highly efficient way to issue equity, but we also have $3.4 billion of liquidity that we plan on maintaining that level. Our plan assumes that level of liquidity throughout the year. Our line is undrawn and sitting on some cash, so we feel very good about our ability to fund any growth and it's going to be a function of opportunities we see, returns we can earn and where our share price is trading.

Your next question comes from the line of Jamie Feldman from Bank of America Merrill Lynch. Your line is open.

Great, thank you. I was hoping you could focus a little bit on fundamentals and demand. Just give us some color on what weakness or any weakness you are seeing from changes in oil prices? We seen a pullback in some of the durable goods numbers. Cat earnings were relatively weak today. So just any big picture thoughts on what's happening in the broader economy and the impact on demand as we roll into 2015?

Sure, Jamie, it's Gene. I'll take that one. So far, we really haven't seen any impact. Of course, impact from oil prices is going to take some time to play itself out. At the moment, if you actually look at the markets that would be affected by that particular statistic, Houston and Dallas, they're looking pretty good right now. Having said that, there isn't any question that a long term $45 price of oil is going to have negative impacts on Houston and is probably going to have negative impacts on the state of Texas generally.

But we have not seen that. In fact in Houston, fundamentals are robust. Our portfolio there is about almost 99% leased, and about 10% of our customers have any exposure to the petroleum directly, so we're not particularly concerned. But having said that, when we look at future capital deployment and development starts in the state of Texas, we will be very selective on what sub-markets we're active in and of course [very vigilant].

The only thing, Jamie, I would add to that is that, remember, we have -- we are also pretty active in Europe and Japan and those are two net importers and a drop in the price of oil actually helps those economies.

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

Thank you, good morning, guys. Tom, or maybe Hamid, can you just comment on the rent spreads in the quarter of 6.2% versus 9.7% in the third quarter. How much was that a function of market mix or euro weakness or just any specificity would be great?

Yes, this is Tom and I'll let Gary or Gene add on. It really was a function of mix this quarter, and particularly in Europe, and the amount of roll we saw in central and eastern Europe.

Yes, that's it. That's the big story. Europe accounted for about 33% of our leasing this quarter. Typically you see it at about 25% or 26%. A disproportion amount of the leasing was done in central and eastern Europe, which were markets that were lagging. Net-net, a good thing. We're leasing space in those tougher markets, so it's driving occupancy and NOI.

As we've said, this number is going to be volatile quarter-to-quarter, but we feel very good about going into 2015 when you look at our annual rent change number. So we think it's going to be up over 2014, and as Tom said in his opening remarks, driving same-store NOI to that 3.5% to 4.5% range on an owned and managed basis, and higher than that on a Prologis share basis, given our disproportion weighting to the US. So net-net we feel good about it.

Yes, the only thing I would add to this is that we're going to be positive and strong throughout the year. The first quarter will be the weakest quarter, just because of the demographics of the leases, and our rent change will accelerate throughout the year. So just be prepared on that because you're going to have the same question three months from now.

Yes. Same mix expectation, actually, with respect to Europe, southern and central Europe.

For Q1, so good point, Hamid.

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

Thanks. If I heard you correct, Tom, do you provide guidance on what you expect on realized development process in 2015? And just a couple questions around that, which I think is an important metric that we haven't seen from you guys in a very long time. What was that on 2014 versus 2015? If I just do some simple math, it seems like the margin is closer to a 15%, if I compare it to your contribution guidance on 2015. So with more disclosure, there's probably more questions around it, but maybe you could provide us some more color?

We did, I did discuss what our expectations are for realized development gains. Just to be clear, we talk about, when we stabilize assets, we will talk about what our margins are at that time. Our margins are above 20% on what we're stabilizing. We expect similarly high levels on starts. For realized gains, those are gains as a function of our contributing those developments overseas into our ventures, or also third-party sales, so those are realized, they go through the P&L.

The most important thing about those realized gains are that's taxable income and it drives AFFO growth, as well as dividends, and we had $172 million of realized development gains in 2014. We're forecasting realized development gains of between $200 million and $250 million in 2015. That's a function of higher stabilizations that are coming off the development pipeline next year or in 2015 and those getting contributed into ventures as well.

Yes, and then of course there's the unrealized gains that are the other one-half that don't even hit the P&L, which is pretty interesting. You're in a business that generates a couple hundred million dollars of value creation and basically doesn't show up anywhere in the P&L until a couple of years later, as in effect you're getting a free $200 million of real estate every year that will produce a return, so over time you get the return but you're not getting it in any way up front.

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

Great, thanks. Could you provide some color on US rental rates and the continued strength there, specifically the relative rent change between larger and smaller warehouses and what some of the driving forces are for the demand in big box versus small?

Yes, sure it's Gene. I'll take that. We're getting to occupancy levels that are historic. We haven't seen them before. What we're finding is that small customers, that segment of the portfolio had about 180 basis point increase quarter-over-quarter, so that's really the portion of the portfolio that we have left to lease. And frankly, that's where we have more pricing power, so you have more rent growth with the smaller customers. As I've said on previous calls, that product has much higher replacement costs and we have a ways to go before we reach that, so that's where we're going to see a continuation of that.

In terms of big box demand, Mike may have some commentary on this, but we see two types of demand going on in the United States; big box demand, which is heavily oriented to eCommerce. We don't see that slowing down. That's going to be episodic quarter-to-quarter because they're very big transactions; so we think that will continue. And then on the small side of the space is you just have an awful lot of pent-up demand in that category and very little, if any, construction in most of the markets.

I would add, just in terms of big box demand, particularly in the build-to-suit segment, we're seeing a definite increase on size requirements, which are reflective of more confidence that the customers have in their future space needs.

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

Yes, good morning, everyone. Just curious in Europe, your comments sounded very similar to what we've been hearing over the last couple quarters in terms of rents being capped by lowering cap rates, but obviously doing very well on the occupancy front. I was just curious, given the economic conditions there and some of the [key OE] measures that are going on, if there's been any particular markets where you're seeing an increased opportunity to deploy capital or invest, that may be a little bit different than what you have seen over the past few quarters just given competitive levels or your outlooks for those markets?

Vincent, our thesis in Europe is [pretty] simple. Our forecast, when we prepared the 2015 plan, in no way anticipated obviously [key OE], so on the margin, [key OE] Europe is a positive and that's not reflected in our guidance or anything. So if anything, on the margin, there is upside in our numbers going forward.

Now as to how important that will be, et cetera, I can't really tell you, but I can tell you that cap rates in Europe have probably compressed 75 basis points anyway, and maybe more in some places. Not UK, UK compressed a couple years ago and it's one of the lowest cap rate markets in the world. But the rest of Europe, has compressed 75 to 100 basis points, maybe, depending on the market and that is definitely a headwind on rental growth. It will be more anemic rental growth as a result of that, but we'll take it in terms of increased values, so it's okay.

But Vincent, one thing to add, certainly the weight of capital and ECB is driving cap rates down. We've been in front of this, if you think about it, look back to 2013, we deployed about $600 million in third-party acquisitions. This year, or last year, rather, in 2014 about $1.2 billion. Prior to that, we were investing in our funds. So we've been in front of this. Certainly going to be a tougher environment on a go-forward basis to acquire, I would say, large portfolios in Europe, but we'll be selective.

Your next question comes from the line of Steve Sakwa from Evercore ISI. Your line is open.

Thanks, good morning. Hamid, I can appreciate the fact that the business is performing well and that you guys are in the position to increase development starts. I'm just wondering, given some of the comments Jamie made about some of the consumer demand and drops in companies like Cat, how do you guys think about managing the development risk? And potentially, what are the warning signs that would get you guys to potentially pull back on the development starts?

Steve, that's a really good question and something that we think about all the time. Our business has a lag with what's going on in the real economy. Remember when the business turned around in 2011, we were all sitting around wondering why people were not taking space. And what they were doing was the utilization rate was going up and utilization rate was absorbing all the net new demand, but not translating into more space being leased.

Then finally, people could no longer up the utilization rate and they had to lose space. Nobody wants to lease industrial space because they like to. They only do it because they have to. So finally US absorption picked up and that ended up being a big driver of demand. As the economy has sputters and the data sets that are coming out are really erratic. Some data is really good and surprises people and some data like the Cat stuff, surprises [in] the negative.

I don't think we'll see the impact of that until a couple years down the road. Unless it's a steady trend, up one quarter, down one quarter, that won't affect anything. But if it's a steady decline, obviously, it will show up in our numbers and demand for our product down the road. But I don't really think that that's an overall, we're going to be experiencing that any time soon.

How we manage risk is pretty simple. We're by and large, most of our developments -- one-third of them are build-to-suits, so those are leased and we know -- actually 35% of them -- and we know where that stands. Of the balance of 65%, I would say the vast majority are in parks where we already have a couple buildings or many buildings and we're building the next incremental building.

Those parks that usually lead to the next building being built are 97% occupied today. So on the margin, we may guess wrong on one building in one park, but it's not like the office business where you throw up 1 million square-foot building and three years later maybe you're wrong about the market. It's a very incremental kind of growth. So that's what we do. We look at how space is leasing every day, every minute by talking to our people.

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

Yes, good morning out there. Tom, I was wondering if you can just provide a little bit more granularity in terms of the FFO increase that's coming from developments. You, in your opening comments, talked about $0.14 incremental in 2015, gross about $70 million of FFO. When I look at the development pieces that we have, you have about $700 million, give or take, of pre-stabilized developments that are obviously rolling into 2015 and then overall $700 million increase in the net of development stabilizations in 2015 relative to 2014.

I assume the pre-stabilized developments are earlier and the billing [in ahead] of the $2 billion that you're developing that's ending in 2015 are probably later. You're going to get this continual FFO growth. So maybe provide us a little bit more details of (inaudible), effectively, how much NOI was recognized in 2014 off of what base? How much of that is spillover from last year and how much was coming to 2015, because I assume it's probably helping 2016, as well?

Yes, Michael. Simple math would be we stabilized $1.5 billion in 2014. We'll stabilize $1.8 billion at the midpoint in 2015. Just take a simple one-half year convention, so we're going to get a one-half a year pop from 2014, take a yield of 7.5%. We're going to get one-half a year pop from 2015's stabilizations, so one-half of the $1.8 billion. Take that at 7.5% yield, that gets you roughly $70 million, that's your $0.14 a share.

The important thing, like you said, is what this means going forward. The pop we got in 2015, until our stabilizations reach our steady state of development, you're going to continue to see this incremental pop from stabilizations every year, because in 2016, we're going to be stabilizing the other one-half -- you're going to get a full-year run rate on that $1.8 billion. We're starting at about [$2.5 billion] at the midpoint in 2014, so that ought to be stabilizing in 2016. So I would see -- we're going to continue to see this pop until we reach the point that our stabilizations and our run rate at a steady state converge.

The only other thing, Michael, I would add to that, is that if you're trying to normalize our earnings for the development ramp and all that, there's one other thing you normalize for and that is dispositions over acquisitions. Our dispositions tend to be more front-end loaded. Our acquisitions and development completions and stabilizations tend to be back-end completion.

That timing dispatch erodes or dilutes us by about $0.08. So the $0.14 to the good will be offset by $0.08 to the bad in a steady state environment, so net/net/net, it's not as big as you would think. And in a normalized year, obviously, acquisitions and dispositions would be equal and would be roughly the same timing.

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

Hi, good morning, guys. I wanted to follow-up a little on Steve's question. If market trends in the US continue in the manner that they've been going, which is that absorption has been outpacing construction so industry occupancy rates are moving higher, it would lead me to believe that one of two things are about to happen. Either you're going to see accelerated market rent growth or you're going to have to see more supply coming. So the question is which one is it going to be and why?

Ross, it's Gene. Both are going to happen and you're going to have one in certain markets and the other in markets where you can have more supply. But overall, at these levels, we have nine markets above 98% occupancy and 19 markets above 96%. That's in our portfolio. And the underlying markets that we're doing business in there are getting to occupancy levels they haven't seen before.

So my guess -- and by the way at the same time the constraints on supplying new space continue to get more difficult, so the entitlement process isn't easier building our kind of product, building industrial product, is particularly challenging. So you're going to see more rent growth than immediate reaction in terms of new supply. As we've forecasted, we think supply will tick up in the US next year and we're going to get closer to equilibrium. But the other thing I'd point out is that, as a percentage of stock, these new completions are still very, very low; and frankly, as a percentage of stock, the net absorption is also low by historical standards, so there's probably some upside there, as well.

Let me tie this to something that we talked about in our analyst day, maybe two to three years ago, when we laid out the thesis for very substantial rental growth, which in those days was actually quite a position to take, and it actually has played out pretty much that way, maybe a little better in the US and a little less in Europe; but fundamentally the same way. We laid out three steps in this rental increase scenario.

Step one is just a simple rollover of lease done at the trough to market rents, just a spread to market of the existing leases. Number two, the catch up of market rents at that point in time to replacement cost rents, which is the phase we're in now. The third step is that as construction volumes increase, price of construction is going to go up. We're seeing this in many markets at substantially higher than inflation because margin will come back into the subs and into general contractors and construction costs are going up. Also land costs are going to be new cycle land costs with new entitlement burdens and all of that. All of that stuff is coming in at significantly higher than inflation.

So replacement cost is not a static number. It's a number that is going up pretty fast right now. At some point, it will normalize, but I think that we are in the middle to late stages of phase two but phase three hasn't even started. And there's some markets that are further behind and some markets more closer in. Inland Empire, I would say, your rents are right about the place where you can develop profitably, and interestingly it's not because of rents, it's because of cap rates, but same difference. So replacement cost is a moving target and expect it to move a lot in the next couple of years.

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

Great. Wow. Okay, one long question. Tom, looks to us like your weighted average cost of interest went down from [4.2 to 3.6] as a result of all of the tenders you did, which to us, the back of the envelope is that's worth about $0.10 a share in FFO growth for 2015 over 2014. Is that the right math? And then second is what are you thinking about your dividend policy? And then for Hamid, PLD stock and oil are both about $47 a share. What will be higher in two years (laugh)?

By the way, John, before we answer any of those questions, I just want to give credit to Keith for doing the best pronunciation of your name ever, so let's start with that.

So on the impact of the various debt tenders that we've done, I'd say over the last two years, the impact over on all that has been about $0.10, like you said. However, we saw about $0.03 come through in our 2013 earnings, about another $0.03 in 2014 and we'll get about $0.03 to $0.04 in 2015. So the 2015 impact is really $0.03 to $0.04.

If you isolate only the impact of the tenders in your analysis, you would get a higher number, but you can't do that because you need to look at what we did to our overall capital stack. We used to run our lines at over $1 billion drawn at a very low interest rate. We are carrying $0 outstanding balance at our line so $0.10 is not right number. It's really $0.03 to $0.04 for next year.

Actually, we have cash on the balance sheet, which is going the other way in terms of what it contributes. In terms of our stock price versus oil, I have no idea other than the fact that in the very long term, both of them are going to be up a lot. With respect to dividends, which was the other part of your question -- by the way, pretty good job of asking three questions in one. But on the dividends, obviously, our AFFO is growing pretty rapidly and so our dividend is going to grow somewhere in line or a little lower than AFFO and higher than inflation. It's going to be in that range, so Tom, you want to say something?

Yes, I'll just add, our AFFO growth in 2014 was about 22%, and looking at 2015, we see AFFO growth in line with core FFO growth, so around 11%. We look at and we have to look at our AFFO with realized gains because that impacts our TI. When we look at the payout ratios, this year our AFFO payout would be about 74%, and in 2015, it's going to be probably even a little less than that, payout ratio. So we'll be somewhere in the low 70%s payout ratio in 2015.

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

Hi. Just curious, saw the weighted average maturity on the overall lease in this quarter go up about 15 months relative to previous. Maybe if you can just comment, was it something in particular this quarter or are you seeing tenants trying to take a longer-term perspective on their space needs?

And maybe if I could slip in the second one for Hamid, sounded like you have a pretty good queue of private capital wanting to be deployed. Maybe just comment on what geographies that capital is looking for and any changes to their investment hurdles or the return hurdles?

Craig, I'll take your first question. It's Gene. We've now for the last few quarters, we have been aggressively pushing term. At this part of the cycle, we're pushing rents and looking for longer term. Most of you will recall, during the downturn, we scaled back dramatically and did not want to lock in lower rents so that strategy has been shifting.

We have a very, very large quarter-to-quarter change, 15 months. Don't think of that as a trend, so there is a little bit of aberration there. But looking at it, say, over the trailing four quarters we're up about 10%; four or five months, and you're going to see that continue. So we're going to continue putting term, at least in the US, and Europe is probably a different story. Gary?

Craig, I'll just say that what's driving it up, obviously the Americas. In the UK, we're at about 75 months. That's typically a longer-term lease market and you've got the market [flips] in our favor. Obviously, this particular quarter, we had development leasing at 9 million square feet, which is driving the quarter-to-quarter up, because the development leasing with the high percentage of build-to-suits are generally longer-term.

But that's offset by what we're doing in continental Europe. We're trying to stay short in continental Europe. So our average lease term is about 36 months, plus or minus, because we want to take advantage of the rental growth when it does come through.

In terms of interest in private capital, I would say it's across the board and at pretty high levels, I would say comparable to the mid-2000s, because there's a lot of pent-up demand. These people sat the market out for a long time and now that there's more liquidity in the markets, their investors are back in.

If I were going to pick one region, I would say Europe is getting the most interest on the margin, because people view Europe as a place that has some cap rate compression still left. In Europe, the appraisals are way behind reality and most people understand that, so they are trying to get their money invested based on old prices, as opposed to new prices that are being paid on the margin. But people really do believe this cap rate compression story and the value being less in the European markets.

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

Thanks, good morning. Tom, I heard your response to Michael Bilerman's question about the development stabilizations, how that has an impact in terms of FFO for 2015. If I look at 2014 stabilization, it was only $1.1 billion, which was down from 2013, even though starts have increased each year from 2011. What caused these stabilizations to be low in 2014 relative to where starts have been in the past couple of years. Do you see that as a risk or a swing factor in what FFO numbers could be as we look at 2015?

Yes, 2013 versus 2014 was a mix issue, because a fair bit of the starts that we had in 2013 were in Japan, and the Japan construction cycle is probably more like 18 months to construct and then lease up; so that was the wave that [skipped] over 2013 into 2014. But going forward, Japan has been -- we've had a very steady level of development starts 2013, 2014, 2015 in Japan so I don't see that swinging at all.

I see stabilizations should get closer and closer to our -- if we're going to average out like we said long-term, start somewhere in the $2.5 billion range, it's probably going to take us into 2017 until we get that at an equal run rate. But for simple math, I would use a two-year lag between starts and stabilizations, so that's a good rule of thumb.

Your next question comes from the line of Tom Catherwood from Cowen and Company. Your line is open.

Just thinking about foreign currency here a bit. Was wondering what the same-store NOI would have been in the fourth quarter and for 2014, inclusive of the negative currency movement? And when we think about you now being an 89% US dollar net equity, what kind of exposure FFO-wise do you think you have in 2015 as far as big swings in the euro or yen?

Yes, I'll answer your second question first. As far as, from a P&L perspective, we have virtually $0 impact from any FX movements. We have hedged our estimated euro and yen net earnings for 2015. We hedged the euro at about $1.20 and the yen at [120], so we are really locked in for earnings for 2015 so we're fully insulated. On an NAV perspective, a 5% move of all of our foreign currencies against us is about $0.25 a share impact on NAV.

The other item -- well, your other question was on same-store, we do report same-store on a constant currency basis, so you can see the real impact of what's happening on the operations side. However, if we looked at our same-store impacted by FX, our share would really go up because we are disproportionately owned in the US, or over -- about 75% of our NOI is in dollars.

That relative percentage, the US actually becomes a higher percentage if you FX-adjust it because the dollar has strengthened against other currency. So dollar goes up in that scenario, euro and yen impact goes down. When you look at our share, it would actually be more positive on an FX-adjusted basis.

The other thing, since you brought up FX, I do want to touch on is we've gotten a question or two around, in our reconciliation of FFO to -- our net income down to our core FFO, about whether we are backing out the impact of unrealized FX losses. When you look at our operations, virtually all of our FX activity around the world goes through our P&L, is realized, and goes through our FFO. The only things that would go through unrealized FX are anything around a derivative. We take those when they're realized.

When you look at our P&L, there's a line that says derivative losses and FX adjustments. There's two things going onto that line. It's a negative $20 million number that's getting added back so a positive $20 million number. That's made up of a $36 million loss related to the mark-to-market on our derivative, our derivative convertible debt security, so that convertible debt matures here in March.

We think it's going to convert into equity. The strike price is $38.72. From a GAAP perspective, we have to mark the fair value of that derivative debt against our share price. So our share price went up in the quarter, we had to recognize a loss related to that. That we add back, that was $36 million. We actually had about $20 million of FX unrealized gains in the quarter and that all related to our hedges that we have out in place.

We have about $1 billion of hedges and those hedges today are worth about $160 million. None of that $160 million of gains that we've realized over the last year since we had those hedges in place went through our P&L, $0. So that should go through our NAV, but none of that's going through our P&L, so everything, the vast majority of all of the FX that happens around the world hits our P&L, hits our core FFO.

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

Good afternoon, guys. You talked about your share of the same-store NOI. Can you talk a little bit maybe on a regional basis, what your expectations, maybe the US and Europe specifically? Then as you look forward to 2015, just given the compression we've seen in cap rates, as well as the growth already realized in a lot of the primary markets domestically in the US, where do you see the best growth opportunities domestically?

Okay, I'll take the first question. Just some color on where we would see same-store growth. I'll talk about it on an owned and managed basis. We would see the US in mid-5%s somewhere next year; Europe and Asia, in the, call it 1% to 2% range. Now blending that all together when you look at proportion ownership, that's how you get something in the mid- to high 4%s for our share of same-store growth next year.

And growth opportunities, if the question is related to where can we push rents more aggressively, I'd draw your attention to the supplemental. Look at where you're at very, very high occupancy. But I want to call out two markets that have really been laggards, one is Chicago and the other, Atlanta. Both of those markets began to turn the corner in 2014.

Huge amounts of absorption and we're actually seeing very, very strong rent growth in those markets and for us that's 50 million square feet of product. And in terms of incremental growth in income, I would probably point to those two markets, in terms of potential for the future.

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

Thank you. Hamid or Tom, who has a lower cost of capital, you or the investors in your strategic capital queue?

I think our investors in our strategic capital queue a have lower cost of capital for core product. We have a lower cost of capital for development activity.

Your next question comes from the line of Tom Lesnick from Capital One Securities. Your line is open.

Thanks. I've got a clarification question on the North American Industrial Fund consolidation this quarter. Ownership obviously increased from 42% in 2Q to 63% in 3Q, but it didn't consolidate. What was the control threshold or test that qualified it for consolidation in 4Q that now that ownership is 66%?

It relates to, this is Tom, it relates to the rights that the limited partners had in that fund. In Q4 we got down to just one remaining investor, so it's ourselves and one investor; and as a result of that, the limited partners control right went away. That was the triggering event, getting down to one investor.

Your next question comes from the line of Dave Rodgers from Baird. Your line is open.

Yes, thanks. Either for Tom or for Mike. You talked a lot about development in terms of one-third of the starts being build-to-suit. Could you talk geographically where you expect those starts to be? If you had said that earlier I missed it.

And then along those same lines, can you talk about where you're seeing any differential in margin or development yield that would be different, obviously geographically it varies, but any differences that you're seeing start to emerge, given the economic environment out there? And then the second question, just to Tom, on the promotes, you did expect some promotes or that there's some potential this year, but I assume [those] aren't in guidance. Can you confirm that?

Yes, I'll take the promote question first. In my prepared remarks, I did talk about our guidance does include $0.03 to $0.04 of net promote in 2015. In the fourth quarter of 2015, we have a promote opportunity with our PELP venture, our Norges venture in Europe, and again that's $0.03 to $0.04 that's in our guidance in Q4 of 2015 and it's consistent with the level of promote we've recognized both in 2013 and 2014's earnings.

And in terms of, this is Mike, in terms of the make-up of the development volume, geographically, as Tom mentioned in his remarks, over 95% of the activity is going to take place in our global markets where the fundamentals there are real strong, call it 97% occupancy in those markets. From a margin perspective, we take the over in terms offer our average, relative to the global markets, relative to the some of the regional markets we're doing business in; but it's not a big appreciable difference.

We still think regional markets are a very meaningful part of our business. At the end of the day, build-to-suites ought to be about 35% of the total volume. I would point out that 35% of a larger amount of volume this year would be about a 25% increase in the build-to-suit volume from last year. We're very bullish about how that pipeline looks, given the amount of LOIs and signed leases we have in terms of carryover volume already this year.

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

Hi. I was just wondering, the Norges, the assets on balance sheet that you can contribute to the Norges JV this year, what are you thinking about that for 2015?

We don't have a contribution arrangement with Norges on any funds or assets. It's a JV. JV on the series of assets. Actually, it's two JVs, one in the US, one in Europe.

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

Yes, I had just a couple of follow-ups. Just in terms of the equity raised in the quarter, when, just in terms of timing, when were you notified that Norges was going to exercise the warrant? And then also, when did you make the decision to tap the ATM and at what price did you do that? I get the fact that the convert is this coming, will give you more equity in March. But where the stock is today, relative to your view of NAV, do you have a desire to tap the ATM further, given where it may have occurred in the fourth quarter?

From a timing perspective, the Norges warrant was exercised in December and we tapped the ATM program in December. Going back to our plans for 2015, again, it really gets back to acquisition opportunities. If you strip out acquisitions, our share out of 2015 guidance, net/net, our deployment generates cash of roughly $200 million. So our decision to raise equity will line up with the opportunities we see and the returns that we see with those acquisitions.

So that's how we're looking at it. If we see great opportunities to acquire portfolios, we'll think about the smartest way to capitalize that. We've got a lot of different ways to do that when you think about our liquidity, our ability to tap the equity markets, and the substantial equity queue that's built up in all of our private capital or strategic capital vehicles. So we've got lots of different ways we can fund deployment and acquisitions, in particular, if we like the economics out there.

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

One other question is you had implied, Tom, that your PELP promote is Q4 2015. Does that also imply that Norges goes from 50% to 80% in that same quarter or are those apples and oranges?

Those are apples and oranges. We have the ability, and this is, I think, true in almost all of our funds where we can earn -- we have the opportunity to earn a promote every three years. Fourth quarter 2015 is the third anniversary of the formation of the PELP venture; therefore, that is the first time, first quarter, in which we can earn a promote.

Likewise, if you look to 2016, and you can see this in our disclosure in our supplemental, is we've got two other funds -- it's our PEP II fund and PTELF in Europe; both are up for promote opportunities in 2016. So we're going to see a steady stream of promote opportunities over the next several years given, as Hamid mentioned, our funds are performing above their benchmarks. So I would expect, if that holds, we're going to see promotes not just in 2015 but continue on.

The other thing you are referencing is the PELP sell-down right that we have, that we can sell down our [50%] interest down to a 20% interest. That is totally independent of any promote. That's a separate decision and that's going to be a function of how we want to deploy our capital globally. That's going to trigger and what opportunities we have, if and when we trigger that sell-down right.

It's also, as long as we make that decision in 10 point increments, it's not all or none. It's in 10 point increments and it doesn't all have to be -- that decision doesn't have to be made in 2015. We have that window coming up every year, so we can sell as much or as little as we want whenever we want, pretty much.

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

Thank you. Want to talk about US property values a little bit. Could you talk about the composition of the properties sold during the quarter? The weighted average stabilized cap rate is the lowest I've seen in a while. I know that you guys had some unique properties you sold, the South Bay part of the Bay Area, that were properties that would be likely converted in a couple years. But I'd like to understand just where property values you think are; where cap rates might have moved?

I would say this. We had one property that would fall under the description of unusual, in terms of unusual good, in terms of Bay Area, with an upside potential. But the vast majority of our sales actually in the last couple years have been non-strategic properties in smaller markets from the bottom of our portfolio. So with the exception of that one deal in Silicon Valley, the rest of it would be non-strategic sales. So on average, it would be lower than median of our properties and probably a lot lower than the median of our properties.

Eric, bottom line is the price talk on industrial cap rates in the US are in the low 4%s on the very best markets and are in the low 5%s for most markets. I'm talking about brand new great product in the markets everybody wants to be in with a good credit tenant. I [would sit in] low 5%s in most markets and 6%s, 6% pluses, in 6%, 6.5%s in some of the less strategic markets. I'm not sure we deploy capital at those kinds of numbers. In fact, we won't, but that's where the market is.

Your last question comes from the line of Jamie Feldman from Bank of America Merrill Lynch. Your line is open.

Thanks, Hamid, can you walk through where you think cap rates are Europe, along the same lines of what you just did for the US?

Sure. London and the Southeast would be 4%. Midlands would be low 5%s. Southern Europe would be 6.5% to 7% with an arrow down, by the way, on that one. Germany would be in the low 5%s. Same with the rest of Northern Europe. What am I leaving out? Central and eastern Europe would be 6.5%, call it.

There are no further questions.

And I'm sorry, just to complete the globe, since we talked about everywhere else, Japan is low 5%s hitting high 4%s and within the J-REIT structure, it's actually trading in high 3%s.

There are no further questions at this time. I'll turn the call back over to the presenters.

Great. Thank you, everyone, for being here. I know a lot of you are battling the storm back east. All the best to you in dealing with that and look forward to talking to you next quarter.

This concludes today's conference call. You may now disconnect.