Prologis Inc (PLD) 2015 Q3 法說會逐字稿

Good afternoon. My name is Suzanne and I will be a conference operator today. At this time I would like to welcome everyone to the Prologis third-quarter earnings conference call.

(Operator Instructions)

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

Thanks, Suzanne. And good morning, everyone. Welcome to our third-quarter 2015 conference call. The supplemental document is available on our website at prologis.com under Investor Relations.

This morning we will hear from Hamid Moghadam, our Chairman and CEO, who will comment on the Company 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 would like to state that this conference call will contain forward-looking statements under federal securities laws. These statements are based on current expectations, estimates and projections about the market and in the industry in which Prologis operates, as well as management's beliefs and assumptions. Forward-looking statements are not guarantees of performance and actual operating results may be affected by a variety of factors. For a list of those factors, please refer to the forward statement notice in our 10-K or SEC filings.

Additionally, our third-quarter earnings 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. With that, I will turn the call over to Hamid and we will get started.

Thanks, Tracy. And good morning, everyone. Welcome to our third-quarter call. Let me start with some brief introductory comments and I will turn it over to Tom for more details on the quarter.

In most markets business just keeps getting better. The operating environment is stronger than I've ever witnessed in the US. In Europe rents are flat and occupancies are trending up. Cap rates continue to compress. Let me call out Paris as the only major soft market in Europe that I can think of.

In Japan we have a mixed picture. Development is up 26%, but surprisingly sentiment is strong and there is quite a bit of pre-leasing. Rents remain strong.

China's slowing but less than the media headlines suggest. In fact, the business relating to the domestic consumption is very strong and it is only the export locations that are experiencing some softness. In Brazil demand for industrial real estate is holding up despite a weak overall economy.

Overall, I'd summarize demand as being ahead of our expectations and supply below. We are seeing bidding wars between customers for space; something we hadn't seen in many years. As the difference between in place and market rents widens, there is a multi-year driver of NOI growth that's created which is almost independent of market rent growth assumptions from here on out. All of these factors have led to very strong financial results for the quarter and the year so far.

I want to address the issue of supply because I get a lot of questions on this. We just came from ULI in San Francisco and I must say that the memories of the great recession are quite fresh. The toll that it took on real estate will not be forgotten soon. Nobody seems to want to go there again and all of us are looking for sustained long-term growth in rents.

While it's the best of times in our industry, our takeaway is that the tone is very conservative on new development. Customers, on the other hand, are pressing us for more space to fulfill their needs. We heard this over and over again at our recent customer advisory meeting in New York.

We said we would be vigilant on supply and in that vein I would like to call out Houston as a market that has the potential for getting overbuilt. There are 7 million feet of construction coming online, mostly in the port market, and 3 million square feet of that is spec. So, that's a market we are watching very carefully.

Globally, we are cautious with our development starts, particularly on the spec side, because supply and demand are not closer to equilibrium. On the other hand, our built-to-suit volume has moved up from the low 30% range of total starts in 2014 to the low 40% in 2015. And we've had some major wins with companies such as Menlo Logistics and BMW. Bottom line, there's quite a bit of discipline around spec development and our focus remains on profitability and margins.

Let me talk a bit about the investment sales market. We are still living in an era of wallet capital being interested in real estate. Demand is robust for high-quality well-located industrial assets. We are confident we will be able to meet our disposition goals. The majority of that work is well underway.

In the long term, our emphasis is going to shift to culling the portfolio, when appropriate. Most of the heavy lifting is behind us.

Let me give you an update on KTR and its impact on our overall operations. The KTR portfolio is exceeding our expectations. We are leasing at the higher-than-expected rent and on pace with our projections.

While bigger isn't always better, the benefits of scale are becoming increasingly clear. We have grown our market-leading positions around the world in many locations. But perhaps the most important thing is that we are driving G&A down. The transaction has allowed us to reduce our G&A as a percent of assets under management from 65 basis points last year to about 55 basis points this year.

With that, let me turn it over to Tom for the details on the quarter.

Thanks, Hamid. Operating results and cash flow growth remains strong and we're generating significant value creation through development stabilizations and VAC dispositions. I'll start with our Q3 results.

We generated core FFO of $0.58 a share, up 21% over the third quarter of last year. Occupancy excluding the KTR portfolio was 96.2%, up 60 basis points sequentially. This is essentially at an all-time high. The team is making great progress on the KTR portfolio, which was over 93% leased, and had releasing spreads of 20%, exceeding both our underwriting and the remainder of our US portfolio.

Our share of GAAP rent change was 12%, driven by the US at 16.4%. GAAP same-store NOI continued to improve as our share increased to 6.2% in the quarter, again driven by the US at 8%.

In the third quarter, the amortization of lease intangibles from the merger, which has been negatively impacting GAAP NOI since that time, finally fully burned off. This has had a positive impact of about 100 basis points on GAAP same-store for the quarter. We expect the impact for the year on same-store to be about 50 basis points from this burn off of the intangible asset, consistent with what we outlined at our investor event last fall. Regarding cash same-store NOI growth, we would expect it to converge with GAAP during the back half of next year.

Moving to capital activity, year to date our share of dispositions and contributions totaled $1.7 billion at a 4.8% stabilized cap rate, generating over $210 million of realized development gains and $165 million of value creation from VACs. Pricing on the third-quarter activity was equally strong at 4.9%. The profitability of our overall development program continues to be outstanding. Year-to-date we stabilized $1.4 billion of developments at a 34% margin, generating about [$460 million] of NAV accretion or about $0.86 per share.

Let's switch to 2015 guidance. I'll highlight only the key points here, so for complete detail please see page 8 of our supplemental. We are increasing the bottom end of our year-end occupancy guidance, with the range now between 96% and 96.5%. Our share of GAAP same-store NOI growth for the year remains unchanged at between 5% and 5.5%.

We now expect net G&A to come in lower for the year, ranging between $235 million and $240 million, a decrease of 4% at the midpoint over last year. At the same time, assets under management have grown by 13%. For strategic capital, we continue to expect the net promote from our PELP venture in the fourth quarter of about $0.04 a share.

We are narrowing the range of our development starts to be between $2.5 billion and $2.6 billion. The slight decline is timing related as some build-to-suit activity moved to Q1. But having said that, and as Hamid mentioned, we are being diligent with speculative starts so don't be surprised if total starts next year are flat or slightly down. We're focused on profitability not trying to reach a volume number.

We're seeing the profitability of our developments coming through realized gains which we now expect to be between $300 million and $325 million this year. As we discussed last quarter, we had $1.3 billion of short-term debt related to our acquisition of KTR. This consisted of a $1 billion term loan due in 2017 and $300 million drawn on our line of credit. We continue to plan to repay the short-term debt with proceeds from dispositions and contributions.

In the third quarter we reduced our line balance by $232 million, leaving less than $1.1 billion of this to be repaid. The reduction is consistent with our expectations as the majority of disposition and proceeds from the third quarter were used to fund planned development spend and acquisitions.

We expect to generate about $500 million of proceeds from our net deployment activity in the fourth quarter. You can get there using our fourth-quarter guidance, factoring in the OP units issued in connection with the industrial portion of the Morris transaction, as well as using development spend.

We will use the net proceeds from the fourth quarter to further reduce our short-term debt, for a total reduction of about $750 million by year end. As a result, leverage on a gross book basis and debt to EBITDA should be about 38% and 7 times, respectively, by year end. This will leave us with approximately $550 million of short-term financing which we expect to repay by the middle of next year.

We're very confident that we will complete our planned fourth-quarter capital recycling. As Hamid mentioned, buyer interest from our dispositions is strong and diverse. For contributions, our ventures are well-capitalized and we are far along in the process of completing property appraisals and fund approvals.

As we mentioned last quarter, we have substantial embedded capital in our ventures given our ownership is well above our long-term target of 20%. The ability to reduce our interest to this level provides us with significant flexibility and optionality to fund our future capital needs. Putting our guidance together, we're maintaining the midpoint and narrowing our 2015 core FFO range to between $2.19 and $2.21 per share. This represents 17% year-over-year growth or an increase of $0.32 at the midpoint.

In closing, we had exceptionally strong operating results, cash flow growth and significant value creation. Looking forward, we have substantial liquidity and a high degree of confidence as well as optionality in our capital recycling plan.

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

(Operator Instructions)

Brendan Maiorana, Wells Fargo.

Good morning. I wanted to ask a little bit about rent spreads. They were about flattish with where they have been the past couple of quarters. And it looked like your scheduled expiring rents moved up a little bit. So, with the change in the expiring rents, is that just a mix issue or were you able to pull forward some of those low expiring rents into this quarter? And how should we think about the change in rents going forward from here?

Yes, Brendan, let me take that. We are always pulling forward rents so it's difficult to look at a schedule and predict what is necessarily going to happen in the next quarter. But let me draw your attention to a couple of changes quarter to quarter that are worth noting.

We had a heavy volume of leases in the Northwest and Southwest in the US. We had 40% of the leases rolling in those regions. Those are the highest rent change regions. In this quarter it's just 22%. And virtually all of that was taken up by the east which actually has the lowest. So, you're going to see this quarterly volatility just based on the mix.

But to answer your last question, the last segment of it, if you look out into next year, just take a look at page 22 what we are rolling next year and, frankly, what we are rolling in 2016. That mix won't tie exactly to what we actually lease next year but it is a pretty good proxy. And the comps look really good going forward.

Bottom line is that the trajectory is going to look just like it has. It will have an upward slope to it. I think it is going to have an upward slope to it going into next year.

Craig Mailman, Keybanc Capital.

Tom, just on the high end of guidance, just curious what really brought that down. Because when you look at some of the operating metrics, year-end occupancy trended a little bit higher, you had the $5 million reduction in G&A at the high point, and really an increase in net investment activity given some of the slowdown in dispositions relative to what you guys have thought about before. So, just maybe clarify that.

And just one other quick one on, Hamid, your comments about feeling good about the disposition pipeline here for the fourth quarter. Could you maybe just give us an update on what kind of volume you guys have under contract or LOI and maybe expected timing on that $1.3 billion?

Craig, it's Tom. I'll take both of those questions. On the guidance change, the only reason why the top end is down slightly is deployment mix. Actually, what we have sold to date has been right on time, actually even a little bit ahead of what we talked about on an our-share basis. So, what you are seeing in the fourth quarter is purely timing around deployment.

Just regarding some more color on our planned contribution and disposition activity in the fourth quarter, our share of the contribution/distribution activity is $1.3 billion. That's $900 million of dispositions and $400 million of contributions.

Taking the contributions first, as I mentioned earlier, the funds have adequate capital, they are extremely well capitalized, low leveraged. We're very far along in getting the appraisals done and standard approvals done. And these contributions have been in their deployment plans all year. So, this is what we've been planning for and we feel very good about that happening by the end of the year.

On the disposition side, as Hamid mentioned, the buyer pool is very deep. Pricing is meeting and, in some cases, even beating our expectations.

If you look at the contributions plus the dispositions where we've already identified a buyer, that represents about 80% of our Q4 activity. So, as Hamid said, we are well on our way of knocking this out by the end of the year. So, we feel good about our progress to date and what we are getting done right now.

And the other 20%, by the way, is in the market or will shortly be in the market. Just to put this in context, the kind of disposition volume that we've done in prior years post merger is orders of magnitude larger than this. So, we are not losing a lot of sleep on the ability to execute here.

Vincent Chao, Deutsche Bank.

Good morning, everyone. Good afternoon. Can you just talk about -- I think I heard KTR renewal spreads are up 20%, so better than the overall portfolio -- can you remind us where you are at on the leasing front? I think it was 92% last quarter. And is that part of the uplift in the occupancy guidance here, is just KTR leasing up faster, as well?

It's Gene. Let me take that. We are 93% leased at this point so it is up marginally. Given the size of that portfolio it is not going to have a meaningful impact in the overall numbers. So, we are on track. My guess is we are going to beat our estimate when we announced this deal that within a year this portfolio would basically have a similar occupancy as the overall portfolio. So, so we are on track for that.

In terms of the spreads, you've got to be a little bit careful. A quarter is a quarter, and those will bounce around a lot. But deal by deal we are beating the underwriting so far. So, that is good news.

Manny Korchman, Citibank.

Hey, guys, good morning. Maybe as you look at your portfolio being near peak occupancy levels, is there anything that's changing in the way you are approaching deals or approaching relationships with customers, or anything else that's changing in the business?

The last time we were in the 96%-plus range was briefly in 2008. But, really, you've got to go back to 1999 before you see those kinds of occupancy levels. We try to balance occupancy with rent so we definitely push harder on rent when occupancy levels are at this level, particularly in the US. In Europe we are not, obviously, pushing quite as hard on rents. Rents are up slightly but our pricing power is not as strong as it is in the US, clearly.

The other things that we're doing with these leases is that we're really focused on term and credit. So, this enables us at this point in the cycle to lock in rates and escalations and good credit all at the same time. Those are the variables we play with at different points in the cycle.

Ki Bin Kim, SunTrust.

Thank you. Could you just comment on how to appraise cap rates are looking like in Europe? What is your current view on when those cap rates reach a 6% or sub 6% level that would maybe accelerate some of your European asset sales? And the second question, any commentary on directional fund flows into your funds right now?

Ki Bin, it's Gary. Let me take that. For the quarter, core cap rates in Europe are down about 20 basis points. The secondary market has basically been flat. They haven't moved much. So, overall you're sub 6% today. You're somewhere probably between 5.75% and 6% in our funds. So, certainly an improvement.

We are obviously looking at dipositions in Europe where they make sense and where we feel like we're getting value, and we will execute on those as and when they come. With respect to funds flow, we actually have a pretty deep queue in our open-ended fund today. And I would say that even that is underestimated. There's a shadow queue behind it. So, I think we are in pretty good shape in Europe today.

Yes. And let me just add to that. I think the reason we are not taking more capital and adding to the queue is that we want to get people's money invested in a reasonable period of time. And we don't want to take on capital that we don't see opportunities for in terms of investing in the marketplace.

Also the sub 6% cap rates that we are seeing, obviously the UK is really low. UK, in many instances, is in the 5%. And in some cases we've actually seen a 4 in front of some of the cap rates in the London and southeast type markets. But the Continent, even the worst markets on the Continent are now in the low to mid 6%. So, the Continent alone would be also under 6% on a blended basis.

Cap rates in Europe, I think when we talked to you a couple years ago when there was a lot of concern around cap rates in Europe, our estimate was that they were going to compress about 1.5%, 150 basis points. And at that time cap rates were about 8%. In fact, that's what we recapitalized PEPR at with the Norges transaction.

I've got to tell you, we were conservative. Cap rates in Europe have declined already by about 200 basis points from those days. We just had a very recent conversation with our team about this. The feeling is that there's probably another 25 to 50 basis points of cap rate compression remaining. So, our old 150 may end up being 250 basis points. We are not there quite yet but we are already past the 150.

Ross Nussbaum, UBS.

Hey, guys, good morning out there. You touched briefly on some thoughts on development starts for next year saying -- don't be surprised if they could be flat to down. I was hoping you could expand on that a little bit because I think one of the potential concerns out there is that development starts have ramped for the Company annually into this cycle, and at some point the market is probably going to look to see that number back down. So, can you talk about how you think, not just about 2016 but how you think about capital allocation and risk over the next couple of years with respect to those developments?

Ross, this is Hamid, let me take this since I was here during the entire cycle when we've talked about development volumes. Going back to actually right after the crisis, I think in one of our analyst days in New York, we talked about across the cycle development volumes being between $2 billion and $3 billion. That was a time, I think, where we were doing $300 million or $400 million of development in the really low point in the cycle. And I think the market had a hard time getting its head around $2 billion to $3 billion type numbers.

We said the average across the cycle would be about $2.5 billion. We've now slightly exceeded the $2.5 billion. As I mentioned in my prepared remarks, we are really cautious about starting spec. And I think the entire market is really cautious about starting spec. That's why our build-to-suit ratios are up from the low 30%s to the low 40%s.

We are getting 30%-plus margins. This is not because we are geniuses; it is because we have some cheap land and we are getting cap rate compression in some of these exits. Those two factors are contributing to strong margins.

But every time a look at is that development we really look at it against the alternative of selling the land at market. In fact, we analyze it with land being priced at market because that would be the other way for us to harvest value out of the portfolio. So, we are much more interested in getting strong margins out of our development pipeline than driving the volume by a couple hundred million dollars.

You should not read too much about my commentary about development volume. The point I wanted to make is that we are not building to some magical volume number. We don't have internal goals that we need to meet in that regard. We will build as much or as little as we think we can prudently lease and realize margins on.

Dave Rodgers, Baird.

Good morning. Maybe this question is either for Hamid or Gene, and it probably pertains mostly to the US. But with occupancy guidance of 96% to 96.5%, the spreads that we've seen, retention pushing 90%, do you think you are pushing rents hard enough? Do you think there's a greater ability to do so? Clearly the spread should get better based upon your comments earlier. But just curious about a cautious or more aggressive tone regarding taking retention down, maybe pushing occupancy down a little bit to get better rent growth.

Dave, that's really good question and I want to hear Gene's comment. (laughter)

It is a great question and the honest answer is no, I don't think we are pushing rents hard enough. We are pushing them harder than they've ever been pushed in the history of industrial real estate, I would point out. And I feel great about our spreads maybe compared to competitors or the rest of the market. But it becomes a very psychological game at this point.

I don't think we would look at let's strategically take down retention, for example, or get that nuanced. But I can tell you in our leasing discussions it is a different environment and we ask our teams different questions. One of the questions we've added is -- tell us about the deals you said no to, tell us about the leases that you backed away from and told the customer we are serious about this rent and if you need to go to another building, we understand, and I'm serious about that.

So, we are having those discussions. We are going to follow those transactions, see what happens to those spaces. It's a new world here. I've been doing this for 30 years so I've seen cycles and we have had very strong cycles in the past but nothing even approaching this.

Next year I would not be surprised if eight or nine US markets have a 3-handle on actual vacancy. Probably three or four already do. That is just uncharted territory. So, your question is a very good one. I can't give you a scientific answer but we are really focused on it.

Jamie Feldman, Bank of America.

Great, thank you. I'm here with Juan Sanabria, as well. Looking at the third-quarter development starts it looks like it was pretty light in the US, overweight in Europe and lighter in Asia. Can you talk about the composition of what you think you might start in the fourth quarter, the $1 billion of starts? And then as we think about next year being flat to down, what's the US composition? And then, in addition, just thinking about what do these numbers tell us about what is to come and how you are thinking about the market?

Jamie, this is Mike Curless. With respect to the Q3 volume, just natural things going on there with some build-to-suits that have been moved into the fourth quarter. Nothing unusual. Into the third quarter we have a heavy set of volume planned for the Q4, which is very typical for our Company. We've done that for the last several years.

If you look at the overall volume this year it is going to be up over, call it, 20%, at least, over last year. We've increased our build-to-suit percentage to well over 40%, all while keeping the margins around 20%. So, we as a Company feel really good about the quantity and the quality of this work, to Tom's point earlier. And as we look into next year we would expect the build-to-suit volume to continue to increase and we have volume that would be more measured compared to this year.

Brad Burke, Goldman Sachs.

Hi, everyone. Just a quick one on FX. I realize you are hedged for the remainder of this year and you've also done a lot to hedge your FX exposure on the debt side. But can you give us a sense of what kind of FX impact we should expect as those hedges start to roll off, the timing and the magnitude of any head wind that you might have?

Brad, it's Tom. On the earnings side we actually hedge out on the earnings side six to eight quarters ahead of where we are. So, so we are always hedging. And we walk ourselves into that hedging. We don't to 100% of the Q3 of 2017 at this point. We are almost fully hedged for our estimated earnings in 2016 and we are probably half hedged for estimated earnings in 2017. And those are just simple straightforward contracts that we do.

From an earnings perspective, from 2015 to 2016 the earnings impact from where we've locked in rates is probably $0.02 to $0.03 of an earnings drag on 2016. That being said, we still feel good about where 2016 earnings will come in. We will give you guidance next quarter on that but we feel really good about maintaining strong growth into 2016. So, it is baked into our numbers and we feel good about our growth prospects.

John Guinee, Stifel.

Great. Thank you. Just a couple comments which will lead into a question. It appears that looking at the funds flows out there that the incremental investor in the REIT space might be a generalist as opposed to the REIT-dedicated crowd. And as we all know, we can manage FFO versus the degrees of leverage and whether you borrow short or borrow long. So, Tom or Hamid, when you are looking at managing your evaluation metrics, NAV versus FFO, how are you thinking about managing those valuation metrics vis-a-vis the incremental buyer out there of your shares?

John, we manage our business for cash flow in our pocket and ultimately dividends to our investors and the growth for that. Because I don't think dedicated or non-dedicated investors have different appetite and interest in making money. I think they all want to make money and at the end of the day it's cash in their pocket and the growth in that cash profile.

We are real estate people so by definition we are more NAV focused. But those two things are not unrelated.

I think the issue, that I think you brought up last quarter, and I think your question implies this quarter, is that, has there been a lot of NAV creation in a constant cap rate environment. That would not be an appropriate way to look at our Company because we sold the bottom 20% of our portfolio. We sold our highest cap rate assets. And we've acquired in our target markets, presumably at the lowest cap rates and the best growth potential.

People can do any kind of analysis they want but at the end of the day I think what you should focus on, what I focus on, is dividends paid and the growth rates in those dividends over time.

Vance Edelson, Morgan Stanley.

Thanks. Hamid, you mentioned export-oriented softness in China. Are you seeing the same dynamic in the US? In other words, what effect is slower global economic growth having on your US domestic business when it comes to your more export-oriented tenants? Do you hear anything about sluggishness in their business that might affect leasing demand?

Exports have never been a really big driver of demand in the US. A lot of the containers that go out of the US are actually going out empty these days because of the strong dollar. Imports are much more significant in terms of driving demand.

And the weakness in the port markets in China compared to the consumption type buildings is mostly because of their imports of raw material and parts and things of that nature, not necessarily their exports. Exports generate warehouse demand not at the port and not at the market that we invest in. They generate that demand near the factory where the goods are produced on the export side. Exports are usually not a big deal in terms of industrial demand.

I would like to do one thing before we take the next question. I think Jamie asked about the mix of our development business and Mike skipped over that part of the answer. Based on our current projections -- and this will change -- the Americas in the fourth quarter remainder of the year, we think about 40% of our business will be in the Americas, 30% in Europe and 30% in Asia.

For 2016 it will be about one-third in the Americas, one-quarter in Europe and about 40% in Asia. And the Asian numbers are probably more driven by Japan than China. Japan will be bigger. And we have all those projects identified and it is pretty well known what we are going to build next to because we have the land and they're designed and they are ready to go. So, take that for whatever it is worth. I think it is going to be close to those kinds of numbers.

Michael Mueller, JPMorgan.

(inaudible) for opportunities for promote in 2016. So, wondering if you can talk about the potential magnitude of those compared to 2015?

This is Tom. Again, we will give guidance in the next quarter so I won't get specific. But if you look at where we are promoting next year we've got our two open-ended funds in Europe, PEPF II and [PATELS]. Those last were eligible for promote in 2013. They did not promote at that time.

They are up again in, I think, the second or third quarter -- I think third quarter of next year. And think about what cap rates, some of these comments about what cap rates have done over that period of time -- a pretty meaningful drop. And the promote is going to be calculated as a point-to-point valuation return.

Mike, they are going to be a lot higher. But please don't get excited because I think this business, promotes are the last bit of residual that remains after you get the capital back and the preferred returns. So, a little bit of movement on the terminal cap rate or on what happens can really move around promotes in a big way.

Based on what we see today they are going to be quite significant. But in terms of the way you should think about them in valuing the business, my sense is that across the cycle those promotes net to the Company are about 15% to 20% of assets under management on a fairly regular basis one you average it out over time.

Basis points.

Basis points, sorry. (laughter) I wish it were (inaudible). (laughter)

Eric Frankel, Green Street Advisors.

Thank you. Two quick questions. First, it seems like you have sold a lot more impaired land this quarter, so I was hoping you could comment on that and who the buyers were of that land. And, second, I noticed that your free rent balance went up pretty significantly from the second quarter to the third quarter so any color would be appreciated. Thank you.

Eric, it is Tom. I'll take the free rent one first. It's two-fold. First is, remember, I talked about in my prepared remarks the burn off of that lease intangible from the merger. That was a negative item. That fully burned off in Q3 for the first time, so that's part of it.

And then the second piece would just be we've got a bigger portfolio. So, think about adding KTR and the like, and the volume of leasing activity we are doing. Those would be the drivers.

Yes. And, remember, KTR was disproportionate because KTR had more vacancy and therefore more space to lease than the average of our portfolio.

And, Eric -- this is Mike -- with respect to land sales, we have an active quarter, and the primary buyers of our non-strategic lead have been users and some developers for building product that we don't tend to build.

Tom Lesnick, Capital One Securities.

Hi. Thanks for taking my questions. I just want to talk about the potential for going vertical for second, where rents are right now and infill locations in San Fran and Seattle. How close are those rents to justifying going vertical? And what does that potential repositioning opportunity represent for those markets for Prologis as a whole?

Tom, did you actually sneak into our customer advisory meeting in New York? Because this is exactly the two markets that we talked to customers around. We went as far as actually taking specific designs and getting their input on it on some very specific sites. And based on that we've tweaked some of our design ideas.

So, I think you're going to see us going probably two story, anyway, maybe three in San Francisco on a couple of places as we fine-tune this product. We're going to experiment with it. We are not going to all of a sudden go nuts with it but it is really something that I think the market is ready for.

Let me also mention another way that we go vertical in our sites that you may not normally think of it, and that is, in the last year we sold over $500 million of real estate -- that is $0.5 billion of real estate -- to users and companies of well-known technology companies with hundreds of billions of dollars of market cap. You could figure out who they are.

And they are going to go vertical on those properties because they are going to knock down our beautiful one-story warehouses and build corporate campuses or resi on them to house their employees. So, I think when you own infill real estate, as we've said many things, good things happen to it and I think we are beginning to see those good things happening to some of our properties.

(Operator Instructions)

Brendan Maiorana, Wells Fargo.

Thanks. Tom, I had a follow-up. You mentioned by end of the year, I think 38% leverage is where you expect to get to 7 times debt to EBITDA. And I think you said you've got $550 million of short-term refinancing that would be left at year end that you expect to get done by the middle of 2016. From a leverage perspective how should we think about net dispositions and the pace of dispositions and contributions in 2016 to get to your leverage targets?

Two things. When we are looking going forward we are thinking about not only funding this remaining by $550 million into next year but we also plan to self-fund all our deployment activity. So, starts, as well. When you think about -- I'm going to give you some rough numbers, just our share -- so, think about the $550 million we have to spend. And then if you think about how we recycle capital with our development program -- we build, we contribute into funds, we hold what's on the US on our balance sheet -- we need to raise about $600 million, maybe $650 million a year to keep that cycle going.

So, if you think about the $550 million plus $650 million, that's $1.2 billion. Now, acquisitions are going to be what acquisitions are, and we will fund those most likely through our joint ventures, whatever they are. So, if you think about the level of our share of proceeds we need to do to knock out development next year, as well as the $550 million, it would be in that range.

Yes, and I think the best way for you to monitor that is to look at our land balance. It will be lumpy, it will bounce around because we can't time everything perfectly. But I think it would be a very low balance on our line moving around quarter to quarter.

And, Brendan, I should add, I didn't answer your question about just trending of where our leverage and debt to EBITDA will go. I think if we look at this plan all encompassing, this self-fund next year, I think by the end of next year you are going to see us back in the mid-30s LTV-wise. Again, this is on a book basis, not a market cap, so we are being consistent here. And I think debt to EBITDA without any gains is going to get into the low 6 range. I think that's where we will be.

Manny Korchman, Citi.

Tom, in the past I think you've given releasing spreads for the other regions outside the US. Could you provide those? And could you also give us some color on same-store NOI growth US versus Asia and Europe?

Okay. I will start with the same-store NOI growth. Basically you saw in the US we were, on a GAAP basis, 8%. We were flat to maybe up 1% in Europe. And we were up, call it, 5%, give or take, blended Asia. So, when you put that all together and you think about our share, that's how you get to 6.2% our share same-store.

An easy way to think about how to calculate our share is roughly about 80% of our NOI comes from the Americas, 15% from Europe and 5% from Asia. That's how to roughly weight the different parameters.

As far as releasing spreads, again we talked about the US leading the way. We were at over 16%. I think in Asia, again, releasing spreads were around 3% to 4%. And in Europe it was fairly flat because what we are seeing in Europe is a large percentage of our leases there are actually indexed based on CPI. There's not a fixed factor, that is what the market is. And inflation has been pretty low, if not zero, in Europe, so we are not seeing a lot of year-over-year rent increases.

However, a lot of that has to do with -- and maybe more of it has to do with -- cap rate compression. That's the real headwind for earnings. So, you are only seeing part of the picture. You're seeing all the cap rates come through valuations. You're not seeing that yet in earnings. And we've got to have cap rates bottom out. And once they bottom out we will start to see rent growth.

But, I'll tell you, it is a great problem to have when you have $12 billion of real estate in Europe and cap rates continue to grind tighter. I will patiently wait for rent growth. I will take that trade any day.

Craig Mailman, Keybanc Capital.

Tom, it is Jordan Sadler here with Craig. I had a follow-up. I heard you say a couple times in the last answer about self-funding development. I think that was probably pretty intentional. But just as a clarification, is that self-fund, can we use that across the broader spectrum of investment activity, meaning including acquisitions, as well, at this point?

And then separately I had a question on expense growth in the quarter, if there was anything that drove the same-store expense up as much as it was.

I will answer the expense growth first. No, there was something with expense growth. It was really all around reimbursable expenses increased. A lot of it just real estate taxes and the increase in property values. But, again, we are almost majority triple net so that passes on right to -- our tenants pay that. The other thing I would add, with our occupancies becoming this high, our real slippage is getting lower, as well.

On your other question about self-funding, yes, I do mean to say all encompassing. As Hamid has said in the past, acquisitions are hard to predict. Those will get funded if they are in a fund within the funds. So, I would say yes, I think we're in a position, if we want to, to be able to fund all of our deployment -- development, acquisitions, anything we do -- by recycling capital.

It is interesting. I think KTR was almost a $6 billion company that we bought. I don't think there are too many companies around that can actually do a $6 billion acquisition, put away half of it at the time of close and have a plan that within three to four quarters self-fund that size of an acquisition. I think we have done that.

But you shouldn't expect and I don't expect us to be able to do major deals like that and still be self-funded. Obviously if we do major deals like that we need to capitalize the company. But in terms of our regular day-to-day acquisitions and development, yes, self-funding is the way to go.

And actually the other thing you should think about is we are very overfunded in our funds in terms of our percentage interest. So, we can let that glide down to the 20% and, in effect, have the funds be the source of our capital for 100% of the investment in those funds. So, there's a lot of room on the balance sheet and in the funds to take care of what we need to take care of.

John Guinee, Stifel.

Great. Hamid, I was just going to commend you because two or three quarters ago 80% of the questions were about your need to raise equity, which you successfully deflected and proved that you don't need to. So, congratulations.

Turning to the dividend question, when I look at your sizable gains and contributions into the funds, are you able to do that on a tax efficient basis or does that generate some tax impact? Tom, where are you on the dividend versus your taxable minimum? And how are you thinking about the dividend going forward given your successful development pipeline?

Good question, John, thank you. From a tax perspective the activity outside the US is subject to tax. And when we show you our margins, those margins are net of any taxes we pay. So, those are reflected. You are seeing that already.

We can be pretty efficient tax-wise overseas with our developments and but we do bring it back and that TI, that taxable income, does sit in our dividend. I feel good this year about our ability, that our dividend will cover our TI. It is pretty tight so there's not a lot of room for margin there -- IE, meaning that, as I look at our earnings going forward and our pace of development, that's a good trajectory for future dividend growth.

John, I will tell you that it has been five or six years since I had a meeting with Tom and his team about taxable income. And I find myself in one of those meetings once a week. So I don't know, he's working pretty hard at it.

Eric Frankel, Green Street Advisors.

Thank you. I can't imagine many REIT teams are too pleased with their price this year, but I was hoping you can comment on how that is impacting your capital allocation plans if at all.

I think the right answer that would get us an A on the test would be that, to the extent that we're selling at a discount to NAV, we should be selling assets and buying stock back, and the vice versa of that. We get that, we really do get that. But, unfortunately, with a business that has timeframes of a year or two, we don't run our business quarter to quarter and that tightly, so we need to think about where do we point the ship over a long period of time.

We are very focused on NAV. I think your point is valid and well understood. But incremental returns on our land bank and our development at 30% margins are very attractive. And it is a constant balancing that we do.

What I tell our people every time they walk in here to investment committees with a proposed acquisition or proposed development, I tell them -- how do those returns compare to my calling 1-800-your-favorite-investment-banker buying back stock? That's the answer that we compare it to. And those answers need to be compelling and that's how we allocate capital.

That was the last question so thank you for your interest in the Company. And we look forward to talking to you in 2016, if not sooner -- actually at NAREIT. Bye-bye.

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