Prologis Inc (PLD) 2016 Q1 法說會逐字稿

Good afternoon. My name is Kim, and I will be your conference operator today. At this time, I would like to welcome everyone to the first-quarter 2016 Prologis earnings call.

(Operator Instructions)

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

Thanks, Kim, and good morning, everyone. Welcome to our first-quarter 2016 conference call. The supplemental document is available on our website at Prologis.com under investor relations. This morning, we'll hear from Hamid Moghadam, our Chairman and CEO, who will comment on the Company's strategy and the market environment. And then from Tom Olinger, our CFO, who will cover results and guidance. Also joining us for today's call are Gary Anderson, Mike Curless, Ed Nekritz, Gene Reilly, and Diana Scott. Before we begin our prepared remarks, I'd like to state that this conference call will contain forward-looking statements under federal securities laws. These statements are based on current expectations, estimates, and projections about the market and the industry in which Prologis operates as well as management's beliefs and assumptions.

Forward-looking statements are not guarantees of performance and actual operating results may be affected by a variety of factors. For a list of those factors, please refer to the forward-looking statement notice in our 10-K or SEC filings. Additionally, our first-quarter 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, we'll get started and I'll turn the call over to Hamid.

Thanks, Tracy, and good morning, everyone. 2016 is off to a great start.

The momentum we had at the end of last year has continued into the new year. We posted record first-quarter numbers on rent change which was stronger than expected at over 20% and core FFO which grew 24% year over year. At this point in the cycle, we're pushing rent growth over occupancy. Nevertheless, occupancy is still very high at over 96%. These and other metrics, which Tom will discuss in a moment, point to continued growth ahead for Prologis.

I'd like to take a moment to elaborate on how and where we make our money. Many of you already know this but I believe it's worth repeating. We make over 90% of our core FFO by collecting rent. The rest is generated by fees and promotes from our strategic capital business. Together, rents and fees represent a stable cash flow created from our operating portfolio. Separately, the value creation from our development business, including value-added conversions, propels our future earnings growth, so our operating and development activities address how we make money. Now as to where we make our money, when collecting rents, 72% is in the US and 28% comes from abroad. Roughly 90% of our net equity is in US dollars.

Many ask us why we're global. In short, we're global because our customers are global and so we've organized our business to capitalize on this unique aspect of our sector. About two-thirds of our development value creation, fees, and promotes are generated outside the US. As an aside, these benefits actually cover more than 100% of our global overhead. I view Prologis as an owner/operator in the US and a fund manager and developer in Europe and Asia. We have minimal exposure to emerging economies. Market conditions remain favorable in the world's most vibrant centers of commerce. In these strategic locations, demand was solid with supplies still very disciplined. These business conditions have persisted for several years now.

While we anticipate supply/demand reaching equilibrium this year, we see few obstacles on the road ahead that could disrupt that balance. In the US, quality properties remain scarce which is leading to strong rent growth and high occupancies. We'll continue to signal watch list markets. In this quarter, we have no new markets to call out. In Europe and Asia, rents are up modestly from last quarter, balanced by slightly lower occupancies. In Mexico, rents are up slightly and occupancies flat while in Brazil, rents are down modestly but occupancies at 100%. The key drivers of our business, consumption and eCommerce, continue to grow faster than underlying economies. We have every reason to expect these trends to continue into the future.

KTR is all paid off. Our funding activities, specifically the short-term loan associated with that deal, concluded less than one year after it was announced and ahead of schedule. With the transaction paid in full and the portfolio integrated, today's call is probably the last time you'll hear us talk about KTR. We have capacity to fund more than five years of capital deployment. At our current run rate, our total annual funding requirement is $600 million. We expect to fund this through the rebalancing of our co-investment ventures, reducing our land bank, and selling our remaining non-strategic assets.

These one-time sources total more than $3.5 billion and give us the ability to fund more than five years of net deployment activity. We'll further simplify our business over time. Over the last several years, we made great strides in optimizing our business to put us on a path for long-term sustained earnings growth. In addition, look for us to continue to streamline our business through the ongoing realignment of our portfolio, further G&A efficiencies, land bank optimization, and reduced leverage.

Now, let me turn it over to Tom for further comments.

Thanks, Hamid. We began a year with terrific results.

Core FFO was $0.61 per share for the quarter, an increase of 24% year over year and driven by strong operating fundamentals and an increase in AUM. Starting with operations, occupancy in the US was 96.6% at quarter end and 95.4% outside the US. Leasing volume for the quarter was a record at 46 million square feet. Just a quick reminder that my comments as I go through the rest of the operating and capital deployment activity will focus on our share. GAAP rent change on rollover was an all-time high of 20.1% led by the US at 27.2% and 4% outside the US. GAAP same-store NOI increased 7.4%, positive across all major geographies and driven by the US at 9.6%.

There are two items I want to highlight. First, as we've previously discussed, the negative impact on GAAP NOI from the amortization of lease intangibles related to the merger burned off in the second quarter of 2015. As a result, this had a positive non-cash impact of about 170 basis points on GAAP same-store growth in the quarter. Second, expense timing drove an approximate 70 basis points of positive impact. After adjusting for these two items, GAAP same-store growth was 5%, which is attributable to the strong rental increases and year-over-year occupancy gains. Strategic capital fees were $50 million for the quarter with a majority coming from our international ventures. Capital deployment activity is progressing as planned.

There are two items I would like to highlight this quarter. First, that our stabilizations had an estimated margin of 27% and second, that build-to-suits comprised 42% of our development starts. Turning to capital markets, our leverage on a book basis was 38.1% at quarter end and 33.9% based on market capitalization. Debt to EBITDA including gains improved to 5.6 times. As Hamid mentioned, we fully repaid the $400 million term loan associated with the KTR acquisition and liquidity remains strong.

Last quarter, or I'm sorry, this week, we recast our global line of credit, lowering our spread by 10 basis points and increasing the capacity by $640 million. As a result, our total line capacity is now $3.4 billion, further enhancing our current significant liquidity levels. We expect to see further improvement in our debt metrics throughout the remainder of the year as our venture rebalancings were completed this month and the pace of dispositions accelerate. The continued strengthening of our balance sheet was acknowledged this quarter by both Moody's and Standard & Poor's upgraded our credit outlook to positive. We believe we are on the doorstep of an A rating.

Before discussing guidance, I wanted to highlight the enhancements to our earnings supplemental this quarter. The changes are based on the feedback we received from investors and analysts as well as to better align our disclosure with how we think about and how we run the Company. As part of this, we've revisited the classification of certain personnel costs in our income statement, which had the effect of increasing expenses related to our strategic capital business by $17 million on an annual basis and reducing G&A by the same amount. There is no bottom-line impact on net income or core FFO. For context, we completed a significant volume of co-investment activity over the past five years and almost doubled our third-party AUM. With this increase, we now have more full-time employees dedicated to our strategic capital business.

Moving to 2016 guidance, we're maintaining guidance for most of our operating metrics, capital deployment, and strategic capital revenues, all of which you can see on page 6 of our supplemental. On same-store NOI, we are increasing the bottom end and narrowing the range to between 4% and 4.5% with a bias towards the upper half of this range. For net G&A, we are lowering the range to between $218 million and $228 million to reflect the reclassification I just mentioned. Related to FX, our 2016 earnings remain well insulated from foreign currency fluctuations as over 95% are hedged. We continue to expect to generate $1 billion of total proceeds in excess of our capital needs in 2016. This consists of $400 million in net deployment proceeds, $198 million of cash that we already received from the completion of the Facebook installment sale, and $400 million from the ownership rebalancing in our US LF and PTELF ventures which we will receive in a few weeks.

Further, we like what we are seeing in the disposition market and are likely to increase our volume, so while operating conditions are stronger than we expected, we are not increasing our core FFO given the potential dilution from increased dispositions. Therefore, we are maintaining our 2016 core FFO guidance of between $2.50 and $2.60 per share. This includes $0.17 to $0.19 per share of promotes, which we'll recognize in the second half of this year. If we assume normalized annual net promotes of $0.05 per share, our core FFO for 2016 would range between $2.38 to $2.46 per share. Core FFO will not be evenly distributed for the balance of the year given the timing of our asset sales and venture rebalancing. As a result, we expect core FFO to be $0.03 to $0.04 lower in the second quarter followed by an acceleration in the back half of the year from promote income.

In closing, we are off to a really good start. Our focus for the rest of 2016 is simply about capturing the significant spreads between in place and market rents, generating profitable returns by putting our land bank to work, and continuing to strengthen our balance sheet.

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

(Operator Instructions)

Your first question comes from Steve Sakwa from Evercore.

Hi, good morning. Steve Sakwa here. Hamid, I guess I was just wondering if you could talk a little bit about the development business and what you're seeing. Obviously, the fundamentals continue to be stronger than maybe you've expected.

I know you didn't have a huge start figure in the first quarter but I'm just wondering as you sort of look out for the balance of the year, was the risk to the starts number to the upside or to the downside. How do you sort of assess that at this point and what are your tenants sort of looking for today?

Steve, I think the risk is to the upside because pretty much everything that we're likely to do we know about so by definition, if some build-to-suit walks in the door or something happens, it's going to be on the upside because pretty much everything is baked. The other thing I would comment on generally, development start volume is that we're basically doing the same or a little bit more than last year except for Brazil. So with obvious reasons, we're not developing a whole lot of new product in Brazil.

I think people have gotten too excited in terms of our guidance being a little bit down in development starts. I don't think you can read that much into that anyway.

Your next question comes from Ross Nussbaum from UBS.

Hi, good morning out there. Hamid, as we think about demand for industrial space, we spend a lot of time thinking about inventory levels given the historical correlation between absorption and inventories, and then I'd look at what's been going on with inventory to sales ratios lately, and I say lately its been ramping the last couple years but over the last year or two its been ramping quite significantly. How do you think inventory to sales ratios are going to play out here going forward? Do you think we're going to see a bit more modest inventory growth given what's going on in the economy and how does that play out in terms of demand for your space?

Ross, that's a very good question and I think the answer is too soon to know for sure, but it appears that secular decline in inventory to sales ratio that all of you are used to seeing in our materials going back 15 years or something really has reversed in the last three years, and there are lots of explanations for it but the most credible one I think is the one that as more sales shift to eCommerce, there are more SKUs and there's a need to keep more inventory around and as a result, there may be a secular shift. If that's the case that a unexpected windfall to demand for industrial space. We have not built our business with that expectation but that will be a nice surprise if it happens and if it has legs forever, so too soon to tell for sure but I think the early signs are really good.

Your next question comes from Ki Bin Kim from SunTrust.

Thank you. So going back to your opening comments, Hamid, you talked about the $3.5 billion of one-time funding sources and how you're funding your -- you're going to be self-funding for the next five years of activity, and that's been a pretty consistent message coming from you guys lately. But I guess the equation to issue equity or not issue equity and how to fund that activity is a different equation at $40 versus $45 stock price. Could you just talk about how you think about that as your stock price has changed or is it still -- that $3.5 billion, is that still your primary source, how you want to fund it?

Look, I'm not going to sit here and say that we will never do equity if the stock price is at $60 or $70 or something like that. We would be foolish not to do that because that clearly would be higher than our NAV.

But our view of NAV, we've been pretty open about it, $46, $47 a share. That doesn't really include the value for development business and I guess there's a long debate as to whether that business is worth a 1 multiple or a 10 multiple.

I can tell you that it's not worth the 15 or 20 multiple that people were valuing it at 2007, that's for sure. But it's worth something. It's worth at least a homebuilder. I think it's worth $3 or $5 a share pretty easily if you look at it as a homebuilder.

So you add up all of that stuff, the number is around high $40s, low $50s kind of for the way I look at our NAV. So I don't even think about it so I don't think the equation has changed between $40 and $45 because we're still way below where I think the value of the Company is.

But you know, you've got to look at equity in the context of other investment opportunities. If some portfolio comes up on the market or I don't think it's going to happen but if something happens where we have an advantage to buy $45 of NAV at $20, we may take advantage of that but I don't think that's going to happen, and we're not an issuer of equity and I think it is a complete waste of time for people to spend energy thinking about that issue at these kinds of numbers.

Your next question comes from the line of Blaine Heck with Wells Fargo.

Good morning out there. You guys have talked about getting your land balance down to about $1 billion or under and some of that obviously involves monetizing land through development but it also involves disposing of land. So my question is, have you seen any movement in land values over the past six months or so, especially as you and some of your public peers have become a little bit more conservative with respect to the expected starts this year?

I think land values in terms of good developable land that's near-term developable has gone up as rents have gone up, and it's very hard to find good land in the right markets. Entitlement costs are going up, infrastructure costs are going up, communities are getting tougher on land so general trend in land values has been up.

I would say among our many, many parcels, every quarter we value our land using a land residual analysis, and I would say by and large the trend has been up. There are I would say three or four parcels out of a very large number may be down but the general trend is up, but it's not up as much as it would have been a year ago or two years ago. The pace of land value growth has moderated.

The other thing I would point out is that yes, our land bank is about $1.5 billion book value, $1.4 billion book value but the market value of that in our view, again based on pretty robust analysis is approaching $2 billion, maybe in the low $2 billion range so in terms of what we can work our land bank down is not $0.5 billion down to $1 billion. It's like $1 billion down to $1 billion in terms of market value because the market value of land is what we are targeting for. We've got quite a bit of liquidity that can come out of the land bank to add to that $3.5 billion we have talked about.

Your next question comes from the line of Juan Sanabria with Bank of America.

Good morning. I was just hoping you could touch a little bit more deeply on the same-store NOI expense comment about some one-time items related to timing, and how we should think about that for the balance of the year and maybe if you could touch on the differences by geography.

Juan, this is Tom. I'll start. The decline -- the benefit we got from the lower occupancy expenses in Q1 this year was really a function of Q1 of 2015 being higher than normal, so if you go back and you look at the increase of Q1 of 2015, I think it was around 7%. We had some one-time true-ups going on in there, some other non-recurring items, and that's really what's driving the benefit we saw this quarter or the decrease this quarter. Going forward for the remainder of the year, I wouldn't expect really any meaningful change in operating expenses from this run rate in any meaningful way.

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

Thank you. First, just a couple portfolio specific questions. Could you comment on the occupancy declines in Houston and Pennsylvania? And then secondly, perhaps you can touch -- perhaps provide an eCommerce update and just if you can relay your experiences about your customers in terms of how they accommodated eCommerce growth during the holiday season and whether they see any changes in their supply chain as a result. Thank you.

Eric, it's Gene. I'll start with that at least. Well obviously, Houston and Pennsylvania are two markets that we've called out as markets we're concerned about. Houston, pretty obvious reasons why, and Pennsylvania is a combination of a spike in supply and demand tailing off.

But I wouldn't draw any conclusions, Eric, about the specific adjustments in vacancy in those markets. I don't think that's going to continue for a long time. I think in both cases, we're going to end up in the mid-90%s but let me say a couple other things about both of them.

So Houston has been on our watch list. Vacancy was up a little bit over the quarter, and it has 8 million square feet under construction. We're defensive there, and I think we've been saying that for awhile.

While the macro headwind obviously persists, we are almost 96% leased. The pipe is 50% pre-leased and there's still a 6% vacancy rate in Houston, and Houston isn't creating a lot of jobs but it's net positive, not negative at this point in time. And then in terms of Pennsylvania, probably we're a little more cautious in terms of Pennsylvania at this point in time.

To your point on eCommerce trends, Eric, we don't see any new trends coming out of this prior season. I think that everybody participating in this space is still just really trying to figure out the supply chain, both the last mile which everybody is talking about these days all the way to the origin of the product because different participants handle it differently, so we don't really have anything new for you right now. I don't know, Gary, if you see anything different in Europe.

I'd just say there are two trends that have occurred over the last two years, two important customer segments. One is automotive and the other is eCommerce, and the eCommerce side of the equation isn't a seasonal thing. You posed your question in terms of seasonality.

It's really a structural change I think in the way companies are doing business today. And if you lock at our own portfolio as an example, two or three years ago it was about 5% our total portfolio. Today it's double that. So it's clearly an important driver and one that I wouldn't think about just in terms of a seasonal type trend.

Your next question comes from the line of Michael Mueller with JPMorgan.

I was wondering if you can comment on any trends you're seeing with respect to the time to lease your spec developments. Has it been static? Has it been going up at all?

I would say the best way of answering that question is how we're doing compared to our underwriting and we are literally within 1 point or 2, and I think we're 1 point or 2 ahead consistent with our underwriting, so no, I wouldn't say our expectations have changed.

Your next question comes from the line of Manny Korchman with Citi.

Thank you. Hamid, if we can just turn to the comment you made in the press release and then repeated on the call about sort of trends exceeding underlying economies. Are the economies performing sort of at your expectations and trends are just that much better or are you seeing a slowing and trends are really kind of where you expected but the economies are not?

Manny, my take on the economies and now I'm really out of my depth of expertise here, but it seems to me that the US economy is sort of a mid to high 2% grower minus energy, so that means it's a 1.5% to 2% grower, and so the trends that affect our business -- remember, energy doesn't -- it goes through pipelines. It doesn't go through warehouses. The energy pricing generally being lower has led to better consumption numbers and more of that consumption is shifting to the eCommerce channel, which is more space intensive so those two things have made demand for our product better than they would have been based on the overall economic numbers.

On top of that, this issue I talked about earlier which is the inventory to sales ratios trending up which may be a third factor or you may look at it as part of the second factor which is eCommerce. I don't know, one of those two. So there are either two or three factors that are making our demand drivers for our business better than the underlying economy.

That's my take of it. I don't know for sure but we'll see, but that's what I think is going on.

(Operator Instructions)

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

Great. Thanks for taking my questions. My question has to do with international markets. Obviously, you guys have visibility into international markets more so than a lot of other industrial landlords out there. Just wondering if you can comment on the trends in fundamentals in both Europe and Asia and then if you're seeing any movement in cap rates as well?

Let's start in Europe. Cap rates are generally flat for the last couple of quarters. Our expectation there though is that you could see another 15 to 30 basis points this year. Trends are good.

For the first time, we're viewing Europe as potential tailwind to the Company. The outlook when you are looking at market vacancies as a whole is that vacancies, not occupancy, but vacancies will drop 60 basis points so we'll be at somewhere around market vacancies about 5.8% which is nearing sort of US levels. So we expect Europe to perform well on a go forward basis.

And in Asia, the markets there I think are performing well. Japan is sitting there at about 96.3% occupied, and we're seeing good net absorption so Japan is performing well. China is a business that I think some have concern of. It's a small business for us but one that again is performing pretty well.

We're at about 92% occupied in our overall portfolio, but if you look at the supplemental you'll see that there's a lease to occupied spread of about 200 basis points so you should expect occupancies in China to trend up. The other comment I'd make about China is that we've done about 2 million square feet of development leasing this quarter, which is about 30% of the total leasing for the quarter for the Company, so it's performing pretty well. So net-net, I'd say that the international markets are performing to expectation and will become a tailwind.

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

Hi, guys. Maybe just going back to Tom's comments about potentially ramping dispositions. What are you seeing in different markets that's given you the confidence that maybe you can do that and which geographies are you seeing a deeper disposition pool than others at this point?

Hi. This is Mike Curless. Let me hit that. It's probably important to set the backdrop in terms of what we're selling to put this in context. 80% of what we're selling is in the US, and the majority of those buildings are older product in our global markets where the heavy buyer interest continues to be. And with a few exceptions, the most of what we're selling is in the $25 million range so if you think about it, in addition to our usual buyers, you can add in local regional investors and even user buyers that really expands that buyer pool and gives us plenty of confidence to get this work done. So we feel very good about the execution heading our way.

Your next question comes from the line of Erin Aslakson with Stifel.

Hi, good morning out there. I think this question is probably more for Mike Curless, but just in terms of the strong same-store NOI growth you buys put up for the quarter, if you had to break that out across the US in terms of which sub-markets are contributing or contracting that number, that would be helpful. And then also, are you still seeing strong institutional demand in terms of asset acquisitions for these potential sales you're discussing?

Do you mind if I take the executive from Indiana that will answer that question?

Not at all.

I'll do the back half.

We'll let Tom do that.

So on the same-store as far as where we're seeing strength, and Gene should weigh in here, you would clearly look at the coastal markets is where you're going to see the significant amount of rent change that drove same-store growth, and I think as we look to the balance of the year, our rent change on roll looks really, really good and maybe Gene can comment on that aspect.

Yes, absolutely. Tom is right. So if you look at the coastal markets, we've been at pretty much full occupancy there for a couple of years actually in those cases, so it's all about rent growth. And in places like LA, LA County is less than 2% vacant. Actually, it's in the low 1%s. Toronto, for example, is 1.8% vacant and at those types of occupancy levels, a lot a lot of pricing power so it's definitely skewed to those types of markets.

In terms of buyer interest, the institutional interest is definitely there particularly in light of where we're selling and what we're selling so healthy activity in that segment.

Your next question comes from the line of Brad Burke with Goldman Sachs.

Thank you. Just a question on leverage levels and uses of cash. There was a modest sequential decline in net debt from the fourth quarter, but it looks like you've already realized over half of that $1 billion you're guiding to for proceeds for the full year.

So just wanted to know if there's something else beyond development that we should be thinking about as a substantial use of cash in the quarter? And then also whether we should continue to expect net proceeds deployed to reduce net debt over the remainder of the year?

Hi, Brad. It's Tom. So I'll take those questions. First on LTV, you're right. LTV, you would have appeared didn't decline enough based on our activity for the quarter. And what's happening is it's really a function of the weakening of the dollar and the strengthening of the yen and euro and there's a denominator effect that I'll explain.

So when you think about it, about half of our debt is in yen and euro but only about 25% of our assets are, so when the yen and the euro increase against that liability, that debt, that increase took our debt levels up in US dollar terms by about $300 million, but we didn't have the same $300 million increase in our denominator because only 25% of our assets are in euro and yen. So there's a denominator effect and that impacted leverage by about 70 basis points this quarter, so you really economically, we had about 100 basis points decline this quarter, a little over actually but that's FX noise.

On your point about deployment proceeds for the rest of the year and how we're going to use that $1 billion of cash, we're going to look at our debt stack and we're going to determine if there is debt where we can economically or frictionlessly pay that off. We do have a multi-currency term loan that's out there that matures in a couple of years that would fit that bill. We always look at bond maturities to see if there's economically it makes sense to do that or we'll sit on cash, but I would tell you when you look at our guidance, either the debt that we have to pay off is extremely low rate debt so it doesn't have a significant impact on our results for the rest of the year.

And to also state the obvious, the corresponding asset value increase in the same currencies obviously doesn't factor into that leverage calculation, so you need to take that into account as well so it's not as if our debt went up and the asset didn't go up. Both of those are in the same currency.

Your next question comes from the line of Sumit Sharma with Morgan Stanley.

Hi. A question about the G&A. I understand the reclassification and what you were talking about but you also mentioned that there's further efficiencies in the G&A line, so wondering whether you're seeing sort of active decline in G&A as percent of NOI or is it just as more developments come online, the G&A load as a percentage of assets just sort of goes down naturally?

Yes. Actually, it's the opposite. I think since the development volume is actually coming down a little bit, there will be less capitalized development over time. The total level of G&A is flat and therefore G&A as a percentage of AUM is coming down. The reclassification doesn't have anything to do with that. We're looking at total G&A and the capitalized portion is actually coming down, too, as the volumes come down.

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

Thank you. I wanted to circle back on the increased disposition guidance and, Mike, your comments on the selling older assets in global markets. I think we observed over the last few years that cap rate spreads between A and B and C quality properties have widened pretty significantly over that time period, and so I'm wondering if that spread is somehow decreased over the last year or so and that's why you're increasing disposition guidance.

Eric, first of all, we haven't increased our disposition guidance but relative to the spreads, we certainly haven't seen them increase and I think the pricing that we're seeing in those markets relative to what we're selling, we're very comfortable with and optimistic about our ability to execute at those numbers.

Maybe, I can clarify an issue here. We're not selling bad assets in bad markets or anything like that. We're just selling at this point, we're down to virtually all of our assets being in our target market.

We're just calling the older assets in those target markets so we're not selling assets in tertiary markets or whatever. We really didn't own assets in tertiary markets to start with so the spread widening that you're talking about really doesn't affect the Prologis portfolio and hasn't even in the last couple of years.

Your next question comes from the line of Manny Korchman with Citi.

Hi, thanks, guys. Just thinking about the AFFO guidance that you've presented and as the element of it that includes development gains, how do we think about that business or that part of AFFO going forward? Is that going to cause lumpiness in that FFO or is that $150 million to $200 million a good annual run rate to think about?

I think the way to think, the way I think about it is that we think about the recurring AFFO as the driver of our dividends, and we work really hard to manage the impact of the lumpy part of AFFO that comes from dispositions through a variety of mechanisms like 1031s and all kinds of things, so but we never think about those things in terms of the dividend structure.

I'd just point out one more, two things. Our payout ratio this year including all of the gains will be about 70% payout ratio. If you want to back out all the gains, which is not the right run rate but just to stress it, that would be about 85% payout ratio, of AFFO.

Our problem is the opposite to be honest with you is how to keep our dividend from getting too high.

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

Hi, guys. Just a question on kind of rent spreads here versus what you guys did on the leasing capital in the quarter. Obviously, rent spreads you guys said came in a little bit above your expectations. Was there anything that skewed those numbers this quarter and can you kind of juxtapose those with the 6.7% of lease value this quarter? Is that kind of sustainable at those levels or was it just higher levels of renewals?

Yes, to the second part of the question, this is really related to the lease term because the 6.7% is the aggregate value of the lease which is obviously influenced by the term. And to give you some perspective on that, in the Americas, our average term has grown over the last five quarters from 42 months to just under 56, so we've been really pushing term and I think we've talked about this on some prior calls. As a company overall, it's about 10 months.

It is a pretty dramatic increase, so that's what drives the number but to same-store, let me give you some color on what we see going through the year. So this is driven by the Americas in part because of the health of the markets and in part because of the structure of our leases, but we're just under 24% during the quarter.

We're not going to sustain that through the year. This is a volatile stat by quarter because it's just a piece of the portfolio but we'll be close to 20% for the year by judging it, so we're going to be really, really strong on the stat but there's a little bit of an outlier.

Great. Since that was the last question, let me thank all of you for your interest in the Company and look forward to seeing you next quarter. Take care.

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