Prologis Inc (PLD) 2015 Q1 法說會逐字稿

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

(Operator instructions)

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

Thank you, Kim. Good morning everyone. Welcome to the Prologis conference call. If you have not yet downloaded the press releases or acquisition presentation related to this call, they are available on our website at Prologis.com under investor relations.

This morning, you will hear from Hamid Moghadam, our Chairman and CEO; Gene Reilly, our CEO of the Americas; Tom Olinger, our CFO; and also joining us for the call today are Gary Anderson, Mike Curless, Ed Nekritz, and Diana Scott. After our prepared remarks, we'll host a question-and-answer session.

Before we begin our prepared remarks, I'd like to state that this call will contain forward-looking statements under federal securities laws. These statements are based on current expectations, estimates, and projection about the market and the industry in which Prologis operates, as well as Management's beliefs and assumptions. Forward-looking statements are not guarantees of performance, and actual operating results may be affected by a variety of factors. For a list of those factors, please refer to the forward-looking statement notice in our 10-K or SEC filings.

Additionally, our first-quarter results press release and supplemental do contain financial measures, such as FFO and EBITDA, that are non-GAAP measures, and in accordance with Reg G, we have provided a reconciliation to those measures. As is our custom, after our prepared remarks, we will please ask you to limit your question to one. With that, I will turn the call over to Tom, who will begin with the highlights from our earnings from the first quarter.

Thanks, Tracy. Good morning. As you've seen from our earnings press release, we had a very strong start to the year. Core FFO was $0.49 per share, an increase of 14% over the same period last year. Occupancy at quarter end was 95.9%. Leasing volume was very good. As a result, we saw a lower-than-normal seasonal dip in first quarter occupancy.

GAAP rent change on rollover was 9.7%, positive across all regions, and led by the US at 15.1%. Cash rent change on rollover for the quarter was 3.3%. GAAP same store NOI increased 3.5% on an owned-and-managed basis, and 3.7% on an our-share basis.

CAM true-ups negatively impacted same store NOI by about 50 basis points in the quarter; however, this is isolated to Q1 and will not impact our same store NOI run rate for the remainder of the year. Given the momentum and occupancy in rent change, we feel confident about same store NOI and are increasing the midpoint and narrowing the range on a GAAP owned-and-managed basis to 3.75% to 4.5%, with our share expected to be 50 to 100 basis points higher.

On the capital deployment front, starts and acquisitions totaled $421 million, while dispositions and contributions were $494 million (sic - see press release "$464 million"). The weighted average stabilized cap rate on dispositions and contributions was 3.6%, which includes the previously announced value-added conversion sale on a 56-acre industrial park to Facebook.

Turning to capital markets, we converted $460 million of convertible debt to equity during the quarter, helping drive down leverage, which was 34.4% at quarter end. Debt to adjusted EBITDA, including realized gains, improved to 5.8 times, and to 6.4 times without gains. We also continue to have significant liquidity, with $2.8 billion at quarter end. Our USD net equity increased to 91% from 89% last year.

Looking further at foreign currency, we continued our efforts to mitigate the impact on both NAV and earnings. Notably, we've now fully hedged our estimated sterling, euro, and yen earnings for both 2015 and 2016. As a result, movements in these currencies will have no impact on our estimated core FFO throughout next year.

Let's turn to 2015 guidance, which does not reflect any impact of the KTR transaction, as we'll discuss this separately it a moment. We have included guidance in our press release and supplemental, so I'll focus only on significant changes from last quarter.

Starting with deployment, we're increasing our disposition range to between $2.1 billion and $2.5 billion, with activity coming from non-strategic asset sales in Europe and the US, and we're increasing our share of contributions to co-investment ventures to 65%. As a result, we now expect to fully fund our 2015 deployment activity through capital recycling. In addition, we're increasing the range of realized development gains to between $250 million and $300 million for the year.

Putting this all together, we are increasing the midpoint and narrowing our 2015 core FFO to a range between $2.07 and $2.13 per share. This represents year-over-year growth of 12%, or an increase of $0.22 at the midpoint. This is on top of the 14% growth we had in 2014. Again, our 2015 guidance here does not reflect any impact from the KTR transaction.

Our existing portfolio continues to benefit from strong operating fundamentals, and we're well positioned to deploy capital at favorable returns. With that, I'll turn the call over to Hamid to discuss the KTR transaction.

Thanks, Tom, and good morning everyone. We appreciate your joining us today to discuss this exciting transaction. Yesterday, we announced the signing of definitive agreements to acquire KTR's $5.9-billion business at the stabilized cap rate of 5.5% and in line with replacement costs. The transaction is summarized on page 3 of the presentation. The portfolio comprises of all of KTR's funds and will be acquired by our consolidated joint venture with Norges Bank.

As we've discussed on previous occasions, we're interested in acquiring stabilized assets in the US only when we see a strong alignment in quality and location with our own holdings and when we bring significant competitive advantage to the table. This transaction is an excellent example of these principles in action.

First, it's rare to find a portfolio that aligns so perfectly in terms of asset quality, customer profile, and market composition with our own. We believe this synergy enables us to add immediate value through leasing and portfolio operations. Second, we worked hard to position our balance sheet and our institutional capital relationships to pursue significant investment opportunities such as this, as they arise.

And third, our OP unit structure, the attractiveness of our currency, and our ability to execute reliably and expeditiously give us an important edge on large, complex portfolios, as evidenced in both the KTR and Morris transactions. Let me add that I've known the KTR Leadership Team for 15 years, and have always considered them to be knowledgeable investors, and among the most astute competitors in the US industrial market.

I would now like to walk you through the strategic rationale for the transaction, which is summarized on page 4 of the presentation. First, the portfolio strengthens our US presence with highly complementary assets, representing a 95% overlap with our existing US operating portfolio. Second, the acquisition presents a rare opportunity to deliver immediate accretion to our shareholders as we build an even stronger platform for sustainable growth.

Third, this transaction advances our important partnership with Norges. Specifically, it will expand the assets under management of the USLV venture by 6X, to $7 billion, and grows our partnership with this leading investor to more than $11 billion of assets on two continents.

And fourth, this acquisition expands relationships with our current customers and establishes some important new ones. It also adds to our development pipeline, driving incremental NOI growth as we lease up these properties. With that, let me turn it over to Gene to walk you through the details of the portfolio.

Thanks, Hamid. Please turn to page 5 of the presentation deck, and I'll start with some background on KTR for those of you who are not as familiar with them. KTR Capital Partners is an investment, development and operating company focused exclusively on US industrial real estate since its founding in 2004. The company is a significant player in the sector and would actually rank second among public companies here excluding Prologis.

KTR's investment strategy has been very similar to ours throughout its history. They've been our toughest US competitor over the years and have consequently constructed a portfolio that is an extremely good fit for Prologis.

The real estate assets include three categories. First, a 60-million square foot operating portfolio of very high-quality assets located throughout the US, with over 70% focused in LA, New Jersey, Chicago, South Florida, Seattle, and Dallas. 87% of the assets are located in global markets, and as Hamid noted, 95% are located where we currently operate real estate, leading to the terrific operating synergies we'll have here going forward.

Second, there are eight well-conceived development projects totaling 3.6 million square feet, two-thirds of which are located in California. 50% of the development will be delivered at or near shell completion at closing, and the remainder will be shell complete before year end. And finally, 438 acres of land capable of supporting 6.8 million square feet in nine markets, all of which are PLD targets, in places in which our land bank needs to be restocked.

While the development portfolio and land complement our strategy and meet current needs, combined, they represent less than 6% of the transaction, and our percentage of non-income-producing assets actually declined post closing. Turning to page 6, this really speaks for itself in terms of depicting the common market selection preferences between the two firms and the clear operating synergies of this combined portfolio.

Turning to page 7 and 8, we describe the effect of the acquisition on the Prologis US and global portfolio metrics. Key takeaways here are as follows. Obviously, a very well aligned portfolio as compared to ours. The KTR portfolio is slightly younger, with a longer remaining lease terms. The portfolio is also under leased at 89% occupancy currently. We are highly confident in our ability to bring this occupancy in line with the rest of our US portfolio within 12 months. We are active in these markets, know all of these assets, and actively look forward to taking this on in the current operating environment. This gap, by the way, represents about 2 or 3 weeks of normal leasing volume for us in the US.

Finally, US net equity is up significantly on top of a nice quarterly improvement metric pre-acquisition. And finally, turning to page 9, from the customer perspective, the addition of this portfolio will expand relationships with over 150 multi-market customers that today lease space from both firms. Like Prologis, KTR's sophisticated customer outreach strives to develop strategic, not purely transactional, relationships with the customers on their roster. With that, I'm going to turn it over to Tom to discuss capitalizing the transaction.

Thanks, Gene. I'll continue on page 10 of the presentation.

While this transaction provides immediate accretion to core FFO and to cash flow, it also has other significant financial benefits. First, the acquisition will increase our share of US dollar investments. Our US dollar net equity post the KTR transaction will increase to 93%. As Gene mentioned, we can officially integrate these assets, and as a result, we expect to lower G&A as a percentage of AUM by about 12%.

Let's move to slide 11 to discuss how we plan to finance the transaction. We are committed to maintaining a very strong balance sheet with significant liquidity. This transaction is proof of why a strong balance sheet and ample liquidity is a strategic advantage.

Long-term, we'll finance the transaction in line with our capital strategy, which includes both debt and equity on a leverage-neutral basis. In the interim, we have many different options to fund the transaction, and it's important to remember we've already financed 45% of the deal through USLV.

Let's look at the book ends of our options. On the asset side, this includes incremental dispositions of non-strategic assets and fund contributions, in addition to the potential sell down of our interest in PELP, our European venture with Norges. If we assume funding the transaction using a mix of accelerated dispositions of non-strategic assets, contributions, and sell down of fund interest, the annual stabilized core FFO accretion would be about 5%, or $0.11 per share, with year-end leverage of about 35%.

On the debt side, we have significant availability on our line, and capacity for more unsecured and secured debt. We have also obtained a commitment for a bridge loan from Morgan Stanley for up to $1 billion to ensure we continue to maintain significant liquidity regardless of how we elect to fund this over the near term. If we assume we fund the entire transaction with long-term debt, the annual stabilized core FFO accretion would be about 9%, or $0.18 a share, with year-end leverage of about 38%.

We also have a $750 million ATM program in place. Regardless of the various combinations of capital in the interim, over the long term, we'll fund this on a leverage-neutral basis. We'll provide more information on financing plans at the appropriate time.

Turning to accretion on slide 12, on a leverage-neutral basis we expect the transaction to deliver accretion of $0.14 on an annual stabilized basis. We expect to hit this annual stabilized run rate in mid 2016. This represents about 7% growth over the midpoint of our rised 2015 guidance.

When you consider our net deployment for the rest of the year, including funding this transaction on a leverage-neutral basis, our leverage at year end would decline to approximately 33%. From a cash flow or AFFO perspective, we expect growth in line with core FFO. The impact of this transaction on 2015 core FFO will vary, based on the closing date of the deal and how we finance this in the short term. However, assuming we close in June and fund initially on a leverage-neutral basis, 2015 core FFO accretion would be approximately $0.05 a share.

To wrap-up on page 13, we're very excited about this transaction as it meets all of our strategic objectives. It is very high quality and consistent with our long-term investment strategy, provides significant accretion to core FFO and cash flows on a leverage-neutral basis, increases our US dollar net equity, lowers G&A as a percentage of AUM, and expands our relationship with Norges Bank. With that, I'll turn the call over to the operator for questions.

(Operator Instructions)

George Auerbach from Credit Suisse.

Thanks. Good morning. Tom, just a few questions to help us in the street model this out. First, the deck noted it's a 5.5% stabilized cap rate. Can you comment on the cash yield today?

Second, maybe for Gene, the 89% occupancy, where is the vacancy in the portfolio, just to help us think through how fast you are going to be set up? And three, Tom, the $0.14 of accretion to core FFO, is that a GAAP number or a cash number?

I'll start. Go ahead with -- Gene will start, and I'll answer the last question.

George, I'm going to start with the leasing. One of the things, first of all the vacancy is actually distributed pretty much throughout the portfolio, so we don't have pockets of vacancy. We have a couple of large buildings, but nothing worth pointing out.

One thing I didn't mention in the prepared remarks, we have leases signed that haven't yet commenced or leases out for about 240 basis points of occupancy right now. So we hit -- the timing just happens that it's 89%, but actually, we're going to start quite a bit higher than that. As I said, we're not concerned about getting this in balance. So, your first question was related to cash yields, and Tom, you probably want to take that one.

Well, George, I'll answer your question on $0.14 a share. That is a GAAP measure, and that includes about $0.02 to $0.03 of non-cash items, which would include any impact on resetting straight-line rent, any impact on resetting lease mark to market, as well as debt mark to market.

So again, the $0.14 is on a GAAP basis and includes $0.02 to $0.03 of non-cash items. And when you think about what the impact on AFFO is, we think the AFFO growth from this transaction will be right in line with our core FFO growth. So any of the scenarios I talked about, you should consider AFFO growing in line with that, those growth rates.

Yes. Let me answer George's first question. George, if you stabilized the portfolio to 95%, which is in line -- actually, a little bit lower than our existing portfolio, that's when you get to your 5.5%. At the current 89%, you are at 5.2%. So I think that's the number you were looking for.

Michael Bilerman from Citigroup.

Hey, guys. Manny Korchman here with Michael. If we just think about the value that you ascribe to the operating platform? And Jeff and his Team, is there a non compete there? Can you help us think about those two topics when you approach this transaction?

Sure. The operating platform, you can approach its value from two places. One is, how would the market value this? And there are a fair number of comps for investment management organizations. Their EBITDA round numbers was in the mid to high $20-million range, and at $230 million, that works out to a little under a 9 multiple on EBITDA.

On our side, from our on point of view, given the synergies that we have on the overhead side and the arrangements we have on the investment management side, our EBITDA is actually going to be a little bit higher than that in terms of synergies. So the multiple to us would be a little bit lower than it would be to the outside market. So, depending on which of those two measures you want to look at, somewhere between a 7 and a 9 multiple on EBITDA.

Jeff Spector from Bank of America Merrill Lynch.

Good morning This is Jamie Feldman here with Jeff. If I could just ask a followup to the prior question, and then I'll ask my question. The follow-up being, what are the synergies? And do you expect to on maintain a lot of the KTR staff and platform?

And then my actual question is just following up with Tom on slide 11. Can you talk us through the magnitude of some of these financing options? Getting a lot of questions about how much equity you'd actually need. And then also thinking about maybe the PELP ownership or some of the other things you could have prefunded, what was the thought on not having all the financing in place at this point?

So Jamie, it's Gene. I'll answer your first question. We have the opportunity to recruit talent from this team, and we certainly hope to hire a number of people.

We're taking on 60 million square feet here. As you know, we manage our real estate in-house with an in-house property management team. KTR also ran their business in an integrated model. And frankly, besides sharing an investment strategy that was pretty much in common with Prologis, their approach of running the business was also very similar.

I think they have some of the best people in the business, and they work within a platform that treats customers the same way and approaches the brokerage community and the broader real estate community in the same way. That's very attractive for us. We certainly will be taking on a number of their people, primarily in property management roles in terms of numbers, but also some of their investment folks as well.

Yes. Just to be clear, I think in the past, you've heard us say that we can take between $10 billion to $20 billion of incremental assets in our markets without any increase in G&A. This transaction is totally consistent with that, notwithstanding what Gene said, which are those additions are on the property management and leasing side, which are attributable at the property level and are already factored into the cap rate and all the things we've just talked about.

In terms of the bottom line G&A of the Company, we anticipate no change. In fact, having gone through this exercise now, we are even more convinced that we can take on maybe $10 billion or $15 billion more of assets, again, without a commensurate or without any increase in the below-the-line G&A.

Jamie, this is Tom. I'll answer your question. First, on being prepared, we've been getting prepared for a transaction like this for the last four years and getting our balance sheet to where it is with high liquidity, low leverage, strong cash flows. I'll walk you through some of the assumptions on the different scenarios.

So first, on the leverage-neutral scenario, where earnings were $0.14 on a leverage-neutral basis, so what we're assuming there is equity of approximately $1.7 billion, so that would include the units of $230 million and the balance of common equity. So call it $1.5 billion. About $1 billion of debt. About $400 million which is assumed, so incremental new debt of about $600 million.

Then we've got a combination of other assets, which is cash and some other liquid assets, plus some additional asset sales of about $500 million. Those are the three components that get you to our share of the funding of $3.2 billion. Again, $1.7 billion of equity, $1.5 billion which is common, $1 billion of debt, and about $500 million of other assets. That takes our leverage, in combination with our deployment guidance for the full year without KTR, all of that in combination gets us to LTV of about 33% at year end.

The asset sale scenario we talked about simply replaces that $1.5 billion of common equity with a combination of asset sales and fund contributions and sell downs of interest. So the debt component's exactly the same. That results in earnings accretion of about $0.11 a share, and we end up with leverage at the end of the year of about 35%.

The last scenario is if we fund this transaction all with debt. And that scenario is $0.18 of accretion, and we would end up the year at leverage around 38%.

So we feel really good about our ability to fund this in a variety of different ways. And our leverage in all of these scenarios continues to be very good, even in the fully debt scenario. So we feel good about where our balance sheet is, we feel really good about our liquidity through any of these various iterations, and we feel good about our rating as a very solid BBB+, Baa1 Company.

And I'd like to add one more thing. A couple of years ago, we did our first joint venture with Norges in Europe, basically recapitalizing Pepper and some other assets in Europe, and at that time, you may recall that we did it on a break-even cost basis about an 8 cap. The reason we retained a 50% interest is that we were confident that there'd be some value appreciation in that portfolio. And we negotiated the right to sell up to 30% of that venture, down to 20%.

Well, in the interim two years, cap rates have, in that portfolio, compressed from 8% to about 6.4% as of the end of the year. We believe that those cap rates will continue to compress just based on realtime transactions in Europe to probably 6% or a little bit under. And that is a negotiated right that at any time we can basically pull that lever and generate $1.1 billion of capital to fund this or any other activities we might have.

So think of it as a built-in equity issuance out there that we can always use. We have great optionality there to fund our business.

Gabriel Hilmoe from Evercore.

The 5.5% stabilized cap rate, does that include all the current developments in process as well as the land being built out? If not, where does the yield move to, assuming those are built out and stabilized? And then, just one for Gene. As far as market rents, where is the KTR portfolio relative to market today?

Let me take your last one first. We think that their portfolio is under rented, pretty much in the same neighborhood as our US, so call it 10% under rented. Relative to the yields, the numbers we gave you were for the operating portfolio. If you add the development portfolio, those yields go up a little bit, as you can imagine, because we have a margin in there, but it's such a small component, you're talking about basis points.

And the land is priced as we would buy land, okay? So when that is put into production, again, that's going to push the yield. But it's $90 million of land, and that, again, is basis points.

Yes, the projected value add on the development portfolio is about 7%. Now remember, the development portfolio is almost all under construction and in various stages of being completed, so a lot of the risk has been taken out of it. But there's still a pretty good spread of 7% between it and its retail value.

Ross Nussbaum from UBS.

Hey, guys. A couple-part question on the fee side. Tom, first, of the $0.35 to $0.37 of accretion that you talked about that was NOI plus fees, how much of that was fee income?

And then the second question I have was, you're buying the KTR platform here. Was just simply buying the assets and not paying the $230 million for the platform just simply not an option in this deal structure?

I'll take the first question. On the incremental fees, it's between $0.02 and $0.03 is the incremental fees in that caption on page 12.

And it's Gene. I'll take the second one. First of all, no, that was not an option.

And second of all, we wanted it. We're getting benefits out of this that we've already described, and there's a lot of intangible benefits as well that come along with this, mostly in their people, reputation, brand in the industry. As we said, this is a tough competitor who we think is really, really good.

Ki Bin Kim from SunTrust Robinson Humphrey.

Just a couple of quick questions. I'm not sure if I missed it, but what is the total value of the [vamping] plus CIP?

And second question, just going to the equity portion for funding for this deal -- about $1 billion to do, right? Your stock, I have it trading around 10% discount to NAV. Just curious to know, what is your thinking process in terms of timing? Like, is it within a couple of years? Maybe slightly, I won't say agnostic to the pricing, but is $42, $43 a share, is that in the range of where you would commit to the equity neutral statement? Or is it longer term where you want your stock price to be closer to NAV before you actually pursue a equity or leverage-neutral transaction like this?

And maybe tied to that, I thought the whole point of having a low levered balance sheet was not to maintain that low leverage but was actually to use it and maybe take leverage up for a deal like this. So curious why you even have to keep it leverage neutral. Thanks.

Okay. Those are all good questions. So let me take them one at a time. The land bank is $90 million of the total deal. And the construction in progress is $260 million of the whole deal.

Secondly, in terms of how we think about equity, first of all, it would be really unfair and misleading if we reported the accretion of this deal on a levered up to 38% basis using debt; which is something we can do, but some of that benefit, $0.04 of that benefit would come from levering up, and we can lever up anything and generate that. So really, we chose to describe the transaction on a leverage-neutral basis, and that leverage-neutral level is pretty consistent with our goals because remember, this Company is still driving toward a single A rating, and we're committed to that.

In terms of the level of equity that we need to generate, actually to do it perfectly on a leverage-neutral basis, if we were doing nothing else, the number is about $1.5 billion. And we're issuing about a little over $200 million of OP units to the seller. So the number is $1.5 billion.

When we would do that totally depends. We're going to be opportunistic. We know what the value of our properties are, and we're in no rush. As you heard from Tom, we have multiple ways and multiple levers to pull in terms of financing this transaction.

And hopefully, we'll be thoughtful about when we take advantage of the equity markets, but we don't need to do it today, tomorrow, or even six months from now. We have plenty of runway to do that, but we will equitize this transaction.

Blaine Heck from Wells Fargo Securities.

Follow-up on that last one. Can you tell us where the $44.91 share price for the OP units issued to KTR came from? And then can you comment on the timing of the deal at this point in the cycle, versus maybe investing more in Europe where you guys have said that values seem to be accelerating a little bit more?

So in terms of $44.81, our deal was the stock price for the 20 trailing days of trading with a floor of consensus NAV, which on the day that we shook hands was $44.81. So that's where that came from. So there was -- actually consensus NAV is higher than that now, but it happened to be that on that date.

In terms of -- what was the other question?

Timing of the deal. Why this as opposed to Europe?

Well, we're doing both. This is -- we can't exactly time strategic transactions like this, and we can't plan for them.

And as you know, we're not in the business of buying a lot of companies. Because frankly, every time we look at a portfolio, we realize that there is no fit between it and our business. And if we want to buy something, we usually have to go through, I don't know, selling half of it. So it's pretty complicated.

This is the one portfolio that has almost a perfect match with our own holdings, so we've been very excited about it because of these synergies. That doesn't mean that we're not active in Europe. We continue to be pretty active in Europe, and we have a good capital recycling model with our funds that adequately capitalizes our development business in Europe, and we did a lot of acquisitions in Europe in the last 24 months before the pricing really started tightening up.

Pricing is tightening up. We think there's more room on the cap rates. But there has been 100 to 150 basis points of cap rate compression in Europe since we started investing there in this cycle. There is probably another 50 to 75 basis points left, and we'll be opportunistic to take advantage of those deals as well. So it's not an either or. We just can't plan on transactions like this.

Craig Mailman from KeyBanc.

Good morning. It's Jordan Sadler here with Craig. My question is something of a follow-up on that last question.

Based on the commentary we've heard from you most recently, I think we would have felt that you've thought that the US was longer in the tooth as it relates to the stage of the rental rate growth cycle and as it relates to where cap rates are, evaluations are, whereas there seemed to be more room or upside in Europe. And so, this transaction comes as a little bit of a surprise in that you seem to be buying in the US here. So is there anything that's changed relative to maybe the comments in February and March?

So I think at one of the conferences, somebody asked me where we are in the cycle of -- what inning we're in. And I think specifically, about the US, I answered the question that we're in the eighth or ninth inning on the cap rates. And by the way, I've been wrong about that for the last two to three years. Cap rates have continued to compress. But we think cap rates are pretty much there.

We said that we are in about the fifth or sixth inning of market rents recovering. And as you know, for the last three years, we've been talking about the market rent recovery and actually had some pretty specific projections that we shared with you which, to be honest with you, were controversial at the time but turned out to be really correct; and in fact, a little understating the rental recovery.

And most importantly, in terms of rents in the portfolio, we're in the second maybe third inning because these market rents have only started escalating in the last two to three years, and it takes awhile before all these things are all through the portfolio. So really, the attractiveness of this portfolio, in addition to its fit, is the opportunity to capture some of those rents as they work their way through the portfolio.

Europe, just to be clear, has had cap rate compression, significant cap rate compression, very consistent with the way we called it. The rental upside in Europe will be less because the rental declines in Europe were less during the downturn So we think we're in the early stages of rental recovery in Europe, probably in the first or second inning of the rental recovery, other than the UK. The UK is very US-like.

But most of Europe is in the early stages of rental recovery, and the real story in the short term in Europe is cap rate compression. So they're flipped, Europe is cap rate compression, modest rent recovery. US, probably not a lot more cap rate compression, but pretty robust rental growth.

There's also one other thing I'd like to say because it's really important. We all sit around and throw around cap rates because they're just really easy things for people to discuss, but there's an underlying quality and the ability of the portfolio to generate same store growth over time. You're seeing that in the Prologis portfolio today. We've worked hard to prune our portfolio down to the key global market, and you're seeing that our US rent change this quarter was 15%. I'd put that up against anybody else's numbers, and the KTR strategy is very consistent with the Prologis strategy.

So we think these high-quality portfolios will outperform in terms of same store NOI growth over time, and frankly, to buy another portfolio -- and there have been portfolios for sale -- for another 40 basis points on the cap rate and giving up this upside; we don't think it's too wise, even though it sounds like a better cap rate. That's how we think about it.

Eric Frankel from Green Street Advisors.

I was hoping you'd comment on these types of deals and how you view your development platform franchise? I see, you guys, you talked about in the past, you guys have ascribe a lot of value to it, so I just wonder, if you think about dilution, when you think about these larger types of deals, especially relative to your cost of capital now, which we will argue is not particularly strong. Thank you.

It's all a big circle isn't it? Yes, we do think our development business has value. We have done everything we can in the last two to three years to show its ability to generate profits, and that continues. And we've talked about maybe getting a 5 or 6 times multiple on those sustainable development gains, but we're not getting it. And all the NAVs that people throw around are exclusive of that development platform.

Some people are beginning to give us a little bit of credit for that, maybe on the order of $0.50 or $1 a share, but certainly not on the order of $3 to $4 a share, which a 6 multiple on those earnings would imply. And the reason our cost to capital is, in your view, not very attractive is because we're not getting full credit for that development business.

Now, with this transaction, we really are reducing the percentage of the Company that has non-income-producing assets because this is a large portfolio of operating assets. And actually, the other thing we're doing is actually cranking up the percentage of assets in the US. And those two things, over time, should make this debate about the development, the value of the development business, less important as the size of the operating portfolio gets bigger and bigger. Because our development business is not going to get proportionally bigger, but the underlying operating portfolio will continue to grow.

Vincent Chao from Deutsche Bank.

Hi, everyone. Just wanted to see if we could get some more color on just the background of this deal. Obviously, you've been working with these guys, or aware of them, dealing with them for a long time. But just curious about the timing, and maybe coincides with the cycle question, but why now? And maybe the decision to bring Norges in, were they the driver behind this? Or did you consider this for the wholly-owned portfolio at all?

Yes, Gene.

Yes, first of all Norges wasn't the driver of this. I think it was pretty well known that KTR was exploring opportunities for its first two funds throughout last year. And we are aware of that, engaged in dialogue, and took it in a bit of a different direction.

But as you said, we've known these guys for a long time, and we've competed against this business for a long time. We always have respected how they do things, and we like the real estate. So this naturally went in the direction of basically buying the entire business. Once that was solidified, then Norges came into the transaction, but they didn't drive the deal.

Yes, our understanding was that the alternatives they were looking at, and you would have to ask them about it, but included -- primarily was focused on recapping the first two funds and continuing the investment of fund three, as we understand it. Also, the other alternatives probably did not include attractive currency like we have that would be desirable to certain of the investors.

John Guinee from Stifel.

Tom and your Team there, I'm sure you've done a lot of forward NAV numbers, and if you hold your cap rate fixed, is this going to end up being value creative or value destructive two or three years down the road?

This deal, as Hamid talked about, will be value creative for sure. When you look at the growth potential of this portfolio and its fit, the efficiencies in which we can integrate this portfolio, I think those two things alone will create a lot of value over the next several years. And notwithstanding the immediate accretion of this deal, most importantly on a cash flow basis.

We've talked about the $0.14 of earnings, and there's about $0.02 to $0.03 estimate in there of non-cash items. But our AFFO should grow toe to toe in line with core FFO. I think there's value creation all around this thing, whether you want to take an earnings cut or a quality slice, a growth cut; we're very excited about the upside here.

John, let me give you a couple of numbers so you get a sense for this. This portfolio, once you look at the operating assets, is about $92.50 a foot. If you look at the US portfolio that Prologis has, it's a little over $82 a square foot. So there is about a 12% difference in terms of price per foot between these two portfolios. But there is a 15% rent difference between the portfolios.

In other words, this transaction, average rent, market rent is $5.47, and the Prologis portfolio prior to this deal is $4.73. So 12% more of price per foot, 15% more in rent. So in terms of metrics, it's very comparable and actually attractive compared to our portfolio.

Now, why is it a little more expensive and higher rent? Well, because it has -- the Prologis portfolio is about 50% focused on the top five markets, and this portfolio is about 56% focused in those markets. So, slightly higher concentration in the bigger markets, and longer average lease terms. The average lease term in this portfolio is about six and change, and our portfolio, before this deal is about four.

And finally, in terms of age, the Prologis portfolio is about 20, 21 years; this is about 17 years. So on a couple of parameters, mix of market, age, and duration of leases if you adjust for it, you can very quickly get to the same valuation, and the rents line up exactly with that.

Now, why did I take you through all this? Because we are a big believer on rental growth in the Prologis portfolio absent this. Remember, last year we grew our earnings and the leverage by 14%, our FFO per share. This year at the midpoint, we're growing our earnings, even before this deal, at 12% per share, again with neutral or slightly declining leverage. And this transaction adds another 7% on top of that when fully equitized.

So obviously, those are pretty good numbers. And to have more of the kind of real estate aligned with ours that can produce those kinds of growth numbers, we think is a pretty attractive proposition.

Vance Edelson from Morgan Stanley.

Sumit Sharma for Vance Edelson. Most of our questions have been asked. But what I'm wondering is, is there any part of the portfolio that you would consider noncore or something that you would sell immediately?

And also, going back to your question on pricing, I guess this particular deal changes the competitive landscape of -- at least from an e-commerce fulfillment category. Because I see that one of the most telling charts is slide 9, which has Amazon shooting up like crazy. The question really is, having picked up one of the top three e-commerce fulfillment center developers, are you seeing higher pricing power as part of the revenue synergy eventually? Or if not, what else is there driving up the revenues?

Yes, let me just address the question about Amazon, and Gene can talk about the other part of your question. I wouldn't exactly use the words shooting up. Amazon, when it's fully shot up, is 2.4% of our global rent roll. So it is an important customer, but our rent rolls are very, very diversified across different players. Gene?

Yes, so your last question, which is a good one, is did we factor in any competitive advantage in pricing power with Amazon or other e-commerce? No, we did not do that.

Having said that, that's part of the platform. KTR has probably the best relationship with that particular company on the build-to-suit side as anybody. And we've done a lot of business with Amazon ourselves, by the way.

What was the first question? Oh yes, sales. Sales. So there is an immediate sale portfolio, and immediate probably means the next couple of years, 4% to 5%. It is small, and basically, it's flexi assets in South Florida, some in California. But it's very, very, very small.

Mike Salinsky from RBC Capital Markets.

Hi, this is Neil Malkin. I'm with Mike. Couple of questions. On the KTR portfolio, you guys cited a good amount of vacancy that you can lease up. Just wondering how you factored in the fact that you can get to 600, 700 basis points of occupancy increase within a year. KTR was an astute operator. And then also, are the Prop 13 resets and the occupancy growth, are all those things factored into that 5.5% stabilized yield?

Yes. Let me take the first one. So KTR is a very astute operator. But they're also a private equity investor with finite live funds, and I can tell you, they don't manage to occupancy. They manage to value. And you should call them up and ask them what they focus on. Our approach is more balanced.

But frankly, to move this, we have 250 basis points pretty much in the bank. This is like a couple of weeks of leasing. I'm really not that concerned with it. So we can maybe go into that in more detail. But our teams are the best leasing teams in the country, and I think that our stats speak for themselves.

As to your other question, do we have everything baked into the stabilized returns? Yes.

Michael Bilerman from Citigroup.

Yes, I had two questions. One was, Tom, I think you mentioned $1.7 billion of equity, and I'm just curious, if you think about 85% leveraged, call it 6.5 times debt to EBITDA, that's like an equity commitment closer to $2 billion to $2.1 billion, so I wasn't sure if I heard the $1.7 billion wrong.

And the second question was just related to earnings. You took up your current 2015 guidance $0.02 at the midpoint, and I was wondering if you can walk through the drivers of that increase because I think when you start thinking about the changes, it would seem more that it's tilted down (inaudible) because you are selling a lot more assets, contributing more, you have lower strategic capital revenue, you have slightly higher acquisitions and slightly higher same store, but I would have thought that dispositions and the lower strategic capital revenue would have offset both of those.

Michael, I'll take both of those. On your first question, the stock, when we talk about the $0.14 of earnings and leverage neutral, that assumes $1.5 billion of common stock and $230 million of units, so $1.7 billion in total. And that relationship, when you also consider in the debt we're issuing and the $500 million of other assets, so there's cash in that number of other assets. There's some other assets that we're utilizing.

So that is a perfect 65%-35% equity debt split, which is debt in line with where our leverage was at the end of the quarter. We ended leverage at the end of the quarter at 34.4%. So that is the equity number that is needed, $1.7 billion all in with the units that keep us in our quarter relationship.

Your other question about Q1 earnings, and thank you for asking a question about Q1 earnings. We got them out early. Yes, we're up $0.02 at the midpoint, and that is really driven by operations.

Yes, we did have some deployment move around. We increased our dispositions, but that was a fairly wide range that we gave you initially, and we've tightened that up. But when you look at the year, the increase, at the midpoint of $0.02, it's really operations driven. And it's the fundamentals that you hear us talking about that we have confidence in and we're seeing come through our numbers.

Hey, Michael, there's one other really important transaction, too, that helps with this equity math that you were trying to do. Remember, we sold something that was in our NAV probably for low $100-million range for about $400 million, and that was a Facebook campus. So that obviously generates a lot of capital.

Eric Frankel from Green Street Advisors.

Thank you. Just speaking of earnings, Tom, can you go through the expense true-up process and just talk about how expenses can ramp up like that? And second, just in terms of dispositions now a factor for the year, is this at all related to the KTR deal?

And third, it looks like Amazon is roughly 10% of the KTR portfolio. From what I understand, there is a lot of highly amortized improvements that go into those build-to-suit developments. I know KTR has done a lot of that. Can you talk about the economics of those deals, and what do you think the long-term rent for those facilities matches up to a typical for a new generic asset? Thank you.

Eric, it's Gene. I'll take the last question first, relative to Amazon. So you are correct. What really drives the longer lease terms in this portfolio would -- the Amazon leases represent a lot of that. And those will have slower growth over time.

If you look at this portfolio, probably the tradeoff is longer lease terms, slightly slower growth because you're not capturing what we believe market rent growth to be. But in terms of above-standard tenant improvements, we strip those out in terms of how we analyze any acquisition, including this one.

Yes, those are not in the numbers that are reflected in the cap rate analysis.

Eric, I'll take your other two questions. First, in the CAM true up, we go through CAM analysis every quarter, and we do a true up to billings for the prior year in every Q1. When you look specifically at Q1, what happened this time, it's not a relatively large, big expense number. It's about $3 million.

But what you have is, we had a slight positive true up in the Q1 of 2014, a slight negative true up in 2015, and the delta between those two was about $3 million. But that's far less than 1% of total operating real estate costs for the whole year, which is really what this is driving to. So it has a really surprisingly disproportionate move in your same store.

Your second question about deployment changes, the deployment changes we made absent KTR were made independent of the transaction. We've talked about accelerating sales of non-strategic assets, particularly in the US. We're also looking at the sale of non-strategic assets now in Europe. And we just tightened up the range and tightened up our approach with that to sell into this market right now.

John Guinee from Stifel.

First, Hamid, great insight and value add on the per pound and rents versus the two portfolios. Second, you may have said this and I just didn't catch it, but is Norges also buying a 45% interest in the platform, the land, and the underdevelopment, or are they only a 45% interest in the 60 million square feet?

We're 45%-55% across the board.

Okay. Everything?

Yes.

Got you. Thanks.

Brad Burke from Goldman Sachs.

Let's move on.

Sorry about that guys. Good morning. I had you on mute. A quick one for me. Can you comment on the $5.9 billion paid, how that will compare potentially to the estimates that you have for total replacement costs for the entire portfolio?

Yes, sure Brad. It's Gene. We think we're buying this right at replacement costs.

And by the way, in terms of timing and the cycle and so forth, remember, we think replacement costs are going to move up pretty dramatically. They certainly have in the last year or two, and we think that's going to continue. So we like this entry point. But it's right at it.

Michael Bilerman from Citigroup.

Yes. One last one. Just in terms of that 5.5% yield, I think you've talked about being stabilized with the increase in occupancy by next summer, and I think Tom, you said there's $0.02 to $0.03 of non cash. I don't know how much of that is actually in the 5.5% quoted yield, if it's all in, it's about 40 basis points.

So maybe you can just help us, what is the going in current cash yield, day one, at 89% occupancy, with the current rents? And then what is that next summer? What are you assuming that occupancy goes to? I assume it's 95% if you're taking it to stabilize. How much market rent growth are you assuming, and what's your -- I think you said the rents were similar below market to yours, so I assume there's some pickup also from whatever their role is next year. Maybe just help us current to next summer.

Okay. All the numbers that I'm going to mention to you are this instant's numbers. No rental growth projection from this point forward, okay?

At 89% occupancy, which is what the portfolio is -- by the way, for another nanosecond, because we think there is another 2.5% of leasing coming through immediately. But at 89%, if you took a picture of that, it's a 5.2% yield. If you lease it at today's rent, no inflation in rent, at today's rents, up to 95% leasing, that number goes up to 5.5% yield. And that -- neither one of those two numbers includes land and CIP, which are currently non-income producing.

If you throw those in the denominator and say we're not getting any return for $260 million of CIP and $90 million of land, the yield goes down to 4.85% yield, but that would be a misleading number. If you then say, what happens when you lease up the development that's underway, that 5.5% goes up to like a 5.6% because those developments are coming in at a slightly higher yield.

And none of this assumes any rental growth because it's a cap rate. It's a static measure. For the more dynamic things we look at IRRs and things like that.

Craig Mailman from KeyBanc.

Just two follow-ups here. Tom, I was hoping maybe you could give us the number on a cash basis for the US that equates to the 15.1%. Then just secondly, as we look out maybe five years, just curious, to the earlier question you guys had talked about the Amazon leases, but just curious if you were to compare PLD's legacy, same store NOI outlook that you guys talk about, versus what the KTR would be, are the same store outlooks similar? Or is this one slightly below where the legacy portfolio would be?

I would say this one is slightly above where the legacy portfolio would be because the concentrations of this one, as I mentioned, is about 5 points more in the -- what we consider the very best markets. Good demand and supply constraints.

As to when you're going to get to those rental changes, it would be slightly delayed in this portfolio because the weighted average lease term is longer. So the potential is more here. You're just going to get to it a little bit later. But if you took a seven-year view it would be higher.

On your second question, I don't have that exact number in front of me, but I think it's going to be something in the 6% to 7% range because we've always talked about our GAAP rent spreads in the US were about 15.1%. We would see the spread between GAAP and cash at any one point in time average between 600 and 800 basis points. So I think it'll put you in that range.

Jeff Spector from Bank of America Merrill Lynch.

Thanks. It's Jamie again. Just a couple of quick follow-ups. One, the yield you just quoted, Hamid, does that include your fee stream from Norges? Secondly, (multiple speakers). I'm sorry.

No.

So that's before fees?

Yes.

What is the incremental yield on fees?

It's a cap rate, so it doesn't have fees in it. You can assume that our investment management fees are around 50 basis points of assets under management.

Okay.

Round numbers.

All right, great. And then, Tom, for the guidance, I think you guys took down your strategic capital income. Can you talk us through that?

Yes. That is all related to FX movements. About two-thirds of our strategic capital revenues are outside the US, so euro and yen denominated. So that reflects marking down the revenues to those spot rates today.

Now however, but remember, we're hedging our net earnings in both euro and yen, as well as sterling. So we've -- even though you're seeing revenues go down, you're going to see the offset of that sitting in our income statement in our FX and derivatives line. That's where the hedges that are in place sit. So that's the benefit.

Likewise, we would see some small benefit from G&A, for example, going the other way because of FX movement. So, bottom line is it's all FX movements, but the offset is all sitting down in the net hedge FX line that you'll see over the rest of the year. So no impact on earnings.

Okay great. I think that was the last question. So let me summarize the key takeaways from this call.

First and foremost even though we didn't really talk about it that much, we had pretty good earnings in the first quarter. We're pleased with it, and we think it's going to continue to get better throughout the year.

But let me just go back to the merger, which is now almost four years ago. We worked very hard to realign our portfolio with our investment strategy, to strengthen our balance sheet, to create a very attractive currency through our OP unit structure, and to form really strong relationships with strategic sources of capital. That was a lot of hard work, but I think that hard work has now positioned us to be a very efficient and effective acquirer of assets.

And the platform is scaled to a level that we can do that with no or minimal incremental additions to our overhead. So we're very excited about that. Thank you for participating in our call, and we look forward to talking to you next quarter.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.