Prologis Inc (PLD) 2016 Q3 法說會逐字稿

Good morning, good afternoon, my name is Kim and I'll be your conference operator today. At this time I would like to welcome everyone to the Prologis third-quarter 2016 earnings conference call.

(Operator Instructions)

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

Thanks, Kim, and good morning, everyone. Welcome to our third 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 market environment; and 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 third quarter results press release and supplementals do contain financial measures such as FFO and EBITDA that are non-GAAP measures. And in accordance with Reg-G, we have provided a reconciliation to those measures.

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

Thanks, Tracy, and good morning, everyone. We had another great quarter where all aspects of our business contributed positively to results.

Rent change on rollover was 15%, occupancy was up, and core FFO grew 26%. Our disposition and contribution activities are tracking ahead of plan, and we're developing in markets where there is scarcity of available Class A product. Of our development projects this year, nearly half are build-to-suits.

Favorable trends continue to support our operations. While e-commerce is a tailwind, we see broad-based strength in other industry categories such as automotive, consumer products, and residential construction. Additionally, customers continue to consolidate operations to improve supply chain efficiencies and move closer to large population centers.

Even though he global trade growth is converging towards global GDP growth, activity is robust in the top markets where our portfolio is focused. Market conditions remain very strong. As we survey our global markets, the supply/demand balance is still favorable and vacancy is near all-time lows.

In the US we now forecast 250 million square feet of new demand in 2016 versus our prior view of 225 million square feet. This new demand is driving positive rent change, up 23% last quarter, and high occupancies of 97%.

While the headlines out of Europe this past summer were alarming, our experience on the ground was positive. In the region, occupancy was up and rents increased. Of the total 46 million square feet we leased during the period, a record 35% was in Europe.

In the UK alone, we leased more than 2 million square feet, an exceptional quarter. Rent change in the UK was over 20% and we are 100% occupied. All in all, the UK was our second best performing market globally, after the US.

Conditions in Japan are strong, but because of temporary excess supply we expect a short-term bump in traditionally low vacancy in Tokyo and Osaka. In China, economic headlines have improved and demand is healthy, especially in tier-1 markets, where our portfolio is focused. While most of our markets are in good shape, risks of oversupply remain in the same cities we called out last quarter, in particular, south Dallas and Houston.

Separately, we continue to monitor Poland closely. Merchant builders there have used excessive concessions as a way to inflate headline rents before selling to investors. Recently, however, there have been instances where investors have shown better restraint in underwriting.

This is welcome news, but more buyer discipline is required before the market normalizes. Looking ahead, we're ready for a world of rising interest rates.

Eventually this will happen and when it does it will likely signal improving macro and consumer demand, which is good for our business. Higher rates also mean higher financing costs for our new developments, which favor the larger institutional players. In our case, however, we have plenty of capital to fund growth on our own.

Lastly, since spreads between the 10-year yield and cap rates are wider than normal, we don't believe modestly higher rates will affect cap rates materially in the long term. Still, we know rate hikes will hit REIT stocks in the short term as a knee-jerk reaction.

We see several years of strong earnings growth ahead. With our work on the balance sheet complete and our stronger than ever liquidity, we're now entirely focused on delivering consistent earnings and dividend growth.

Our leasing portfolio is 12% under-rented. This will drive rental growth for several years, even under a scenario of flattening market rents going forward. Also supporting our growth story, we own land in key strategic locations, so look for us to continue developing in the world's busiest consumption markets.

In short, our team is doing a great job. We look forward to reporting to you more detail at our investor forum on November 9 in New York. Tom?

Thanks, Hamid. For the third quarter, we generated core FFO of $0.73 per share, driven by outperformance in our real estate operations, and $0.14 of net promotes from two of our European ventures. Global occupancy was 96.6% at quarter end, up 60 basis points year-over-year. Europe's occupancy was 96.1%, an increase of 120 basis points over the same time period.

Quarterly leasing volume remained very good at 46 million square feet, a record 41 million from our operating portfolio. Year-to-date, we've leased over 141 million square feet as our best-in-class portfolio is more critical than ever to our customers' supply chain needs.

Our share net effective rent change on rollover was 15%, led by the US at over 23% for the second consecutive quarter. However, we did see a sequential decrease in our share of rent change driven by a higher mix of leasing in Europe and Asia this quarter. Our share of same store NOI increased 5.6%, with the US leading the way at 6.9%.

The pace of net deployment activity continues to be faster than our forecast. Year-to-date through the third quarter, development stabilizations totaled $1.5 billion, with an estimated margin of 28%. Development starts totaled $1.1 billion with an estimated margin of over 18%, and value creation of almost $200 million.

Dispositions and contributions totaled $1.7 billion, at a weighted average stabilized cap rate of 6.1%. Turning to capital markets. On a look-through basis, our leverage at quarter end was 28.8% on market capitalization and 37% on a book basis.

Debt to EBITDA, including gains, was 5.6 times and our liquidity was over $3.8 billion. We completed an opportunistic refinancing of three yen loans during the third quarter totaling $1.2 billion. The term for the new financing is just under seven years with a current interest rate of 65 basis points.

At quarter end, our share of debt had 5.2 years of average remaining term and a weighted average interest rate of 3.1%. Following a paydown of our multi-currency term loan post quarter end, 86% of our debt is fixed with nearly all of our floating rate debt being yen denominated. Moving to 2016 guidance.

I'll cover just the material changes on a Prologis share basis, so for complete detail, refer to page 5 of our supplemental. Due to continued strong operating fundamentals, we're increasing same store NOI growth to between 5.5% and 5.8%, up 65 basis points from our prior guidance. Development stabilizations have come in ahead of forecast given our strong leasing activity, and as a result, we're increasing the range to between $2 billion and $2.2 billion.

We're increasing the low end and midpoint of disposition and contribution volume, which we now expect to range between $2.5 billion and $2.9 billion. We're also raising development starts to between $1.8 billion and $2 billion, with build-to-suits representing over 45% of this volume. We're also increasing our development gains range to between $275 million and $300 million.

The net result of our deployment changes is that we expect to generate $100 million more net proceeds than previously expected, resulting in a cash surplus of $1.4 billion. As a reminder, this includes over $800 million of cash from fund ownership rebalancings and the Facebook note proceeds, all of which have already been completed.

We expect to end the year with liquidity at about $4 billion, market leverage at about 27%, book leverage below 35%, and debt to EBITDA with gains of about 5 times. Related to FX, our 2016 and 2017 estimated core FFO continues to be fully hedged relative to the US dollar, and we've already hedged about half of 2018. Net promotes for the full year are forecasted at $0.15, with the remaining $0.01 coming in the fourth quarter.

Putting this all together, we expect 2016 core FFO, including promotes, to range between $2.56 and $2.57 a share. The increase of $0.015 from our prior guidance midpoint is due to stronger operations, offset by additional dilution from higher liquidity. To wrap up, we're delivering 15% core FFO growth this year, in line with our thee-year CAGR of 16%, while at the same time improving our portfolio, building liquidity and further strengthening our balance sheet.

Our portfolio quality and financial strength have never been better. This puts us in a great position to continue to realize strong operating results, driven by the gap between in-place and market rents and to fund our growth.

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

(Operator Instructions)

Steve Sakwa with Evercore, your line is open.

Hamid, thanks for the comments on the market in general. I know you're not providing 2017 guidance, but as you sit here today and think about the next year or so versus where you were, maybe a year ago at this time, how do you feel about the markets in general and the ability to -- starts next year?

And then if you could just also comment a little bit more about the broadening of demand. Obviously, I think people are excited about the e-commerce and you tried to give us some other sectors. But do you guys track it? And could you be a little bit more specific about how much of the net demand is e-commerce, and how much are some of these other sectors?

Okay. Thanks, Steve.

In terms of 2017, I think you'll get a pretty good view of what we think at the investor forum. But at a very general level, I am feeling better about our business than I did a year ago, because demand exceeds, certainly in the US, what we expected a year ago.

If I were really looking for a potential negative, I would say that we are further along in capturing the spreads between in-place rents and market rents from the low levels of post financial crisis. But I fully expect our same store numbers to be very much in line with what we're seeing this year. We have less opportunity, obviously, on the occupancy side, but I think the rent side of the equation will be the same or maybe a little bit better. So, generally, feel very good about the business.

In terms of the sector issue, let me give you an essay answer. This is more complicated in our sector than you would think, because there are really three different things going on when you talk about customers. One is you're talking about what industry sector they're in.

Let's take BMW as an example. You could have a manufacturing facility leased to BMW. You can have a parts facility, or you could have a wholesale operation, which is distribution of cars. Those all would show up as automotive, but they're definitely different functions. If you take that concept to a retailer, it gets even more complicated because they can be bricks and mortar retail or they can be e-commerce retail, but they are a retailer.

So really there are three things we track, without over complicating this, is the industry sector of the tenant, in the case of BMW, automotive, the actual use of the space, whether it's manufacturing or distribution or whatever, and then the modality; is it a 3PL, is it a direct users facility, et cetera, et cetera. As you can see, this is a complicated thing and because of the 3PLs, we don't always have visibility through what the underlying business is that they do, because sometimes it changes.

So when we quote you, for example, statistics on e-commerce, that's really understating the contribution of e-commerce because we don't really know how much of that UPS building is e-commerce. And we classify UPS as an integrated logistic Company. So again, it's complicated. But I will tell you, looking through all of that, the things that stand out is that housing is really picking up by a couple hundred thousand units, and that's adding incremental demand which is really what took occupancies from 96% to 97% in the US.

If I were going to call out one thing, in addition to e-commerce, it will be that. Automotive is also very strong, but not as strong as the change on the margin of residential. Anyway, that's how we see it.

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

Good morning out there.

I just wanted to talk a little bit more about new construction and what you're seeing in the market. I think overall you said there's only a small number of metros out there where you're seeing any additional pressure maybe from construction.

Starting to hear more that there's some mid-sized boxes in the 150,000 to 300,000 square foot range that are being delivered with maybe a lack of demand, and the bifurcated demand being both small, more residential, as you talked about, and then maybe more large on the e-commerce side. So, are you seeing more of a bifurcation today as supply is increasing and do you start to worry about that?

Yes, Dave, it's Gene. Let me take that first, at least.

So, yes, we do see a bifurcation of the type of product that's being delivered. But frankly, in most cases, this is product that's needed.

You saw in the early stages of the recovery, we saw a lot of big-box development and a lot of absorption by Amazon and others with very, very big floor plates. What happened during the last five or six years is that the vacancy rate in smaller size increments have really tightened up. So you see more deliveries and medium to small size ranges, and, frankly, we're doing the same.

So are you going to see an odd deal that is misplaced? You probably will. But I think by and large most of these projects are well-suited. And overall, of course, there's still tremendous excess demand in the system.

Dave, in Europe I would just say it's a little bit different. Supply/demand is -- demand is still outpacing supply, generally. I would say that we're a little bit behind the US in that small spaces are not being absorbed as quickly as the US spaces.

So the concentration would have been, candidly, in bigger boxes, and candidly, in build-to-suits. If you look at our development pipeline, for example, over 60% of it this year is build-to-suit in Europe, so a little bit different dynamic than you see in the US today.

Yes, just to be very specific, at the beginning of the year we called for 225 million square feet of demand and 200 million square feet of supply, and we've both moved demand up to 250,000 square feet, as you heard in my comments, and supply we think is going to come in actually at 185,000 square feet, lower than we thought. Overall, supply is actually more constrained than what we predicted earlier and demand is stronger.

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

I was just hoping to clarify the earlier comment in the prepared remarks about the 12% under-leased on the portfolio right now. I just wanted to see if that compares exactly to the 15% mark-to-market you guys have been talking about more recently. And if that is the case, what's the driver there of the 300 basis point decline, given the pretty tight time frame with recent remarks? I'm just hoping you could give some potential trends and whether you guys are maybe just being conservative on potential market rent growth as we head into 2017 as one of the factors.

It's apples and oranges. The 12% is the global portfolio and the 15% is the US portfolio.

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

Thank you.

Quick question from your sup related to free rent. I just noticed that free rent has continued to increase in your portfolio. I think it now represents roughly 8% of your NOI-- of your consolidated NOI, so just wanted to understand that trend a little bit better. Thank you.

Hi Eric. It's Tom. The increase is all being driven by higher lease commencements in the quarter and really building occupancy. Plus, we have longer lease terms and rents are increasing very, very much as you can see in our rent change. So the combination of all that makes the nominal amount of free rent much higher. However, when you look at free rent as a percentage of the lease value, it's actually trending down.

So concessions are not going up. Concessions are actually going down in most markets. But this is just a normal thing that happens when you have -- you're in an environment where occupancies are increasing, and rents are rising and terms are going longer. It's all a very good thing because all of that is going to turn around and build cash same store NOI growth going forward.

Your next question comes from the line of Jeremy Metz with UBS. Your line is open.

Hey, guys. Just one on acquisitions.

There have obviously been a number of large portfolio transactions that have hit the market or closed recently. You had the Hill Ward deal, LBA, Cabot. So I was just wondering if you can comment on your appetite for these type of deals.

Did you look hard at any or all of them? If so, was it just pricing that didn't make sense there? Thanks.

We had no interest in any of the three that you mentioned. But we look at everything. It's just not our kind of product. I would say the LBA portfolio is a higher finish portfolio and really not distribution, by and large. And let me just leave the comments at that.

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

(Technical difficulty) and historically they've invested down the supply chain to reduce costs and, today for instance, Amazon has its own trucking fleets, as you know, taking away business from the likes of UPS and FedEx. With the ability to use space in the rear of these convenience stores as mini logistics centers, do you view that as a threat to demand for third-party logistics space?

I missed the first part of your question. I think you were on mute. But I think I get the gist of it.

Look, I don't think Amazon -- first of all, you're going to have to ask them. I don't have any insight into their long range plans. Secondly, if you look at their multiple and the expected growth that's associated with that, if they tie up a bunch of their balance sheet in warehouses or other facilities, that's not exactly what the market is giving them that capital at the very high multiple for.

I think what they've said publicly is that they are doing the investments in logistics and airplanes and all that kind of stuff, by the way, which they're all leasing, to supplement the volume that they get out of UPS and FedEx, and particularly, over very busy holiday seasons because a couple years ago, you remember, that there were some complications with some of the deliveries that they felt hurt their brand.

So that's what they're saying, at least publicly. But from a financing point of view and a capital markets point of view, it would be a really terrible use of capital for them I would think. So let's leave it at that.

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

Here's an easy one for you, Hamid. I'm looking at page 26 and I'm looking at your land portfolio owned and managed, and obviously this land can be anywhere from raw land to pad ready. And I notice some widely differing investments per square foot.

Looks like you're as high as $28 per buildable in the UK, $32 per buildable in northern New Jersey, a seemingly low $15 per square foot in Southern California. If I've got my numbers right, a stunningly low $2.50 per buildable foot in Chicago, $4 per buildable foot in central valley, which looks like you own all of the central valley. Can you talk about your land basis and how soon you can deploy that and that sort of thing?

John, first of all, you should pardon Kim. She's Canadian. She did a pretty good job on your name, I thought.

So look, land varies all over the place and the reasons for it is that rents vary all over the place. Essentially the way to think about it -- and you know this as an old real estate developer -- the building costs are not that different between different regions. They're a little different because of union and all that. But maybe they vary 20% in the US. But rents vary by a lot more than that and all of the difference falls to the residual, which is the land.

So if rents are higher and building costs -- rents are higher by 10%, 20% and building costs are the same, land could be 50%, 70% higher from one location compared to the other. And then when you get into Bay area and some of the anomalies, obviously, the differences get really magnified.

Secondly, as you pointed out, there's a big difference between land that is improved versus land that is still in raw condition. We have very little unentitled land. I mean like tiny, tiny unentitled land. So all of it is entitled, but not all of it is actually improved, because it would be imprudent to put in the improvements too far ahead on larger parks.

So I think at the end of the day what you need to look at, and we're not he providing that because that's a pro forma number that gets into a lot of assumptions, you want to really look at finished land per FAR. And that's really the true measure that we look at, and I think that's really correlated with rents less development costs. As to any of those specific markets, Gene, do you want to comment?

Yes, John. Just in general, and some of this will be repetitive, but some of those you quote, Chicago, for example, a very low number. We have tons of acreage on I-80 and, frankly, some of this land we're looking to sell. We've put no improvements into it.

And, by the way, the absolute number is very small. It's like a $3 million piece of land, but it's a lot of land.

Yes, exactly. So I'm happy to have a separate conversation with you, but it's -- it really ties back to what Hamid said. There's a lot of variability in this basket.

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

Hamid, I want to go back to your comment before about a knee-jerk REIT selloff, but on the direct market, you don't think that uptick in Fed funds rate will really impact valuations or cap rates. Can you, first, just explain your thoughts there, and second, maybe tell us what you're seeing in the direct market? Maybe in demand for your fund business? Just what you're seeing in how people are underwriting assets that gives you that confidence?

Okay. Well, the spreads, as I talked about between cap rates, and probably more accurately IRRs, projected IRRs and the 10-year Treasury are the widest they've ever been. I think you've heard me talk about this of before.

If you really think about the market being, in the long term, 1.5% to 2% inflation and bonds are 200 basis point premium, that argues for a 3.5% to 4% Treasury in the long-term, which is quite a ways from where we are here, and that consistent with 5.5%-ish type cap rates in our sector, makes sense in a historical context. And probably 6.5%, 7% IRRs. That's an appropriate spread over 10-year Treasury.

So I think nobody's paying for real estate as if 10-year Treasuries are going to be 1.8%, or whatever they are today, into the future. And I think the way to think about it is that investors in the short term are getting a windfall because they're really pricing against much higher Treasuries and collecting the bonus in the short term.

I don't know why there is so much focus on the Fed's fund rate. I think the world has become such a big macro thing and there's like 28 zillion people watching the same screen, and what some Fed Governor says at lunch one day -- I mean, I just don't know.

I don't borrow. We don't borrow at the Fed's funds rate, so whether it goes up or down 25 basis points, I don't really know. All I can tell you is that the last time they increased the Fed funds rate, the 10-year Treasury went down. So, what we care about actually got cheaper.

I'm not a market psychologist, so I'll leave that to others to explain the knee-jerk reaction. But that's what happens. REITs sell off and then six months later because of the stronger economy, which is the underlying cause of rates going up, it starts showing up in rents and they recover. And that's what historical facts have said.

In terms of fund demand, I would tell you that we have infinite fund demand in Europe, and in the US, fund demand is good, but I would say it's a little bit less than it was a year ago or two years ago. But it's still pretty solid. I think the numbers will end up being smaller in terms of new money allocated this year than last year when it's all over.

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

This is a two-part question. First, on your stabilized portfolio, as you show it year-to-date, what is the leased percentage in that portfolio, and if you could comment on how that's trended? And second part, as that definitionally stabilized portfolio goes into your operating portfolio, and I guess sometimes maybe below full occupancy, how much does that generally help the reported same-store NOI number over time?

Yes, we were scratching our head as to what you were referring to. I know some companies, when they report occupancy, they report overall occupancy including their under development stuff that is not fully leased or stabilized. We don't do that.

When we operate -- we have a definition of stabilization and a stabilization is the earlier of achievement of 90% occupancy for a development project or a year from certificate of occupancy. Right? So whether it leases or not it goes into the operating pool after a year, and it goes into the operating pool sooner than that when it hits 90%.

So the occupancies we report are the occupancies for the operating portfolio, and separately, we report the occupancy for the development portfolio. So our same store numbers are not boosted artificially by simply the lease-up of the development business. I know some other companies do it a different way. I'm not going to pass judgment on that, but I don't think it reflects as accurately the same store concept of stabilized properties.

I would just add on that typically, as Hamid said, we'll put these assets in the operating pool when they're 90% leased or 12 months post completion, the earlier of the two. And so generally that's not going to be a big mover at all within our same store. If something goes in that's under leased or not 90%; it's not typically going to be a driver at all. Our operating portfolio is just too big.

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

Hi everyone. Thanks for taking the question. Tom, question on the FFO guidance. Your full-year guide really hasn't changed all that much from what you introduced at the beginning of this year. Same store guidance, though, has increased by over 1.5%.

The development stabilization outlook is over $400 million higher. Are there things beyond just asset sales, which looked to be back-end loaded in the year anyway, that kept FFO from increasing more dramatically?

It's a good question. It's all about -- well, what happened was two things. One, think about the promote range we had, $0.14 to $0.16. We dialed that in to $0.15 for the year. So if you're trying to go back to why didn't we go to $2.58, there's your one penny.

The $0.02 up from the midpoint is all about same store guidance. You look at the 65 basis points same store increase, that gets you right on a penny and a half, a little over. And then the offset to those things would be, yes, we're creating more liquidity.

I would tell you generally, I think we are ahead of schedule on, actually, on deploying capital. Yes, we do have a lot going on in the fourth quarter, but it's definitely ahead of our forecast. And that is also a slight drag on earnings. So overall, the increase is all driven by improved operations, and a little smaller promote and deployment timing. Building more cash.

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

It's Michael Bilerman. And as a Canadian, I think Kim is doing an absolutely phenomenal job on this conference call. (Laughter)

We may all be Canadian soon. (Laughter)

That is right. It's up about a 10,000% in Google. Everyone is welcome to come and stay with my parents if they need to. (Laughter)

Hamid, you have your investor forum coming up in a couple of weeks. It's the first one in a couple of years. I'm curious as you think about bringing investors and analysts in, what are you looking -- what are you looking to accomplish? What's new that you want to be able, or you think is misunderstood, and what's that goal that you want people to come out in a couple of weeks to want to see you? What are you going to bring that's differentiated and new that you don't think people understand about the Company or the business?

Good question, actually. I wish that we would talk about more strategic things like that in these calls.

I would say if I were thinking about it, the three objectives that we have for the analyst meeting is to show you how, after massive work following the merger back in 2011, the business has been really simplified and there are lots of big moving pieces that have now all settled down, and you can really tell what's going on with Prologis based on good old real estate metrics of cap rates and same store growth and --.

So, I think there's a perception out there that Prologis is overly complicated, and I think we'd like people to appreciate how simplified we've made the business. So that's objective number one.

Objective number two is to show people that what the real drivers of supply and demand are. How they're different and why we have a good business with strong prospects for earning growth in the long term, and take you a couple of layers under the surface on those concepts and actually bring some third-party resources that can talk -- speak about the market, financing markets, as well as real estate markets, and really how customers think and behave. So that's the second thing.

And the third thing is that he we get a lot of questions on why global, and why development, and why all this stuff, and they're all related. And we want people to walk away with a better appreciation of the different components of our business and how they all fit together and how they energize one another. So if we can get those three key concepts across, I think we would call it a successful meeting.

Your next question comes from the line of Blaine Heck, Wells Fargo. Your line is open.

Tom just hit on this a little bit, but development starts thus far have been relatively low, around $1.1 billion at your share, a little under 60% of guidance leaves you almost $800 million to start in the fourth quarter. You guys did raise guidance for starts, so I assume you guys have confidence in the updated number, but can you just explain a little bit, some of the seasonality in starts and why there would appear to be so much more demand in the fourth quarter? And then how should we think about the mix between spec and build-to-suit in the fourth quarter?

Blaine, this is Mike Curless. Let me address that. If you look over the last three or four years, our first quarter is historically very light and our fourth quarters are very heavy. Typical years would have us doing 35% or more in the fourth quarter. This year, call it about 40%. 100% of that activity is completely identified.

In fact, we've had a handful of starts already underway in October, and all of this work is taking place within our existing parks on sites that we own. So we can really control the timing of those starts. So we're highly confident in our ability to fulfill the rest of this activity yet in this quarter.

And in terms of build-to-suit mix, it's approaching 50%. It's hovered in the high 30%s and 40%s over the last three or four years. We've been very active in the build-to-suit business. Had a record number of build-to-suits in the last 12 months. So our build-to-suit percentage is growing, also while development volume is growing, and that's a fairly big statement.

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

Your occupancy has obviously been going up over the course of the past year or so, but can you talk a little about retention, because it looks like this time last year it was about 87% and it's been trending down to about 80%? What are the dynamics behind that and where do you see it normalizing?

Michael, this is Gene. Let me take that. I really wouldn't read anything into it. If anything, I'd say 87% was probably an all-time high in the industry and is not sustainable.

So the levels -- frankly, if you are above 75%, I think you're doing just fine historically. So we've just seen in this recovery, incredible levels of retention, and we don't see anything in our activity that -- there's nothing to read into a decline. I'll put it that way.

Michael, actually, I would go further than that. I think we could have driven it lower. I don't think we pushed rents hard enough. That's why we're 96.6% occupied. If I had it my way, I would be a little bit lower.

Let me also take this opportunity to point out a difference in how we calculate retention and same store and all that. We don't make judgments about whether the tenant could have, would have, should have, did stay or go or whatever. We report actual retention. So if a tenant actually leaves the portfolio and goes into a bigger building, it's not retained in the way we calculate it.

As a result, I don't think our numbers are directly comparable with how other people may report it, because they apply judgment to it. And they filter a bunch of things out. So the numbers that you see from us are even non-retained people for good reasons, like expansions, are reflected in those numbers.

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

Thank you. Just two quick questions. One, have you seen any atypical holiday related leasing in the fourth quarter yet? I think we've just seen some recent articles about UPS and FedEx bulking up their portfolios a little bit for the holiday season. And then second, could you just provide a bit of a geographic breakdown on your cap rates and disposition? Thank you.

Sure. Eric, it's Gene. Just on the first part of your question, we're seeing nothing out of the ordinary. But I would say, those two customers you mentioned are particularly active right now. Some of that probably is related to the holidays, but I think they also have some general incremental demand coming out into the market. And Mike, you want to --

With respect to cap rates on our dispositions blending into low 6%s, we think those are solid numbers for -- keep in mind, for the mix of product that we're selling both in regional markets and global markets, and the average age of what we sold tends to be about twice as long as our typical age of a typical building in our portfolio.

I would say if you take our cap rates for the product that we are retaining and look at the cap rates for the product that we're selling, generally we're looking at about 100 basis point spread, which is explained by the quality. That's a rough rule of thumb. So in dragging you around the world on what cap rates are, I mean, cap rates are cap rates that we talk about and usually the quality that we're selling is 100 basis points higher than that.

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

It's Manny here. So, Norges] recently increased their real estate target allocations. Curious in recent discussions with them -- between you and them, has their appetite to buy more in Europe increased, and then maybe the flip side of that, do you have a desire to sell, especially as you look out at your own liquidity?

We don't have a desire to sell above and beyond our non-core assets. When we bought those two portfolios with Norges -- and by the way, with anybody else, we have a business plan as to what our nonstrategic assets that we want to dispose of over some period of time and we're executing along that plan. So there's no change in terms of what we want to sell or anything. What we're keeping is core and we're going to keep it for a long time.

As far as their specific plans, I would invite you to talk to them directly. But my -- we're, I think, their largest manager. I'm pretty clear about that. Certainly, their largest real estate relationship and maybe the largest relationship in any category. I'm not so sure about that.

So we're bumping up against concentration type limits in terms of how much business we can do for them. For them and for us, I might add. But we have an excellent relationship. We think the world of them and they've been really good and supporting partners.

We have one more.

All right. Thank you.

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

Thanks for taking the follow-up.

Just on Europe, I know you guys had $16 million for the whole quarter, and through July and August, if I remember right, you guys had said you had done $14 million. So, I'm just curious, it sounds like September may have fallen off a bit in terms of volume, and just curious what October has looked like so far and if there was anything, maybe things getting front-loaded in August versus September, or any kind of take-aways you guys have?

I can assure you nothing was front-loaded in August in Europe. They're not even around. (Laughter) That part is easy.

I think the original numbers that we quoted were including part of June for last quarter, when we were talking about total leasing, because we were quoting a number from the day that the referendum vote was taken, which I believe was June 23. We haven't seen a falloff at all.

Quite to the contrary. Leasing continues to be very strong. Demand continues to outpace supply. So we don't see any falloff today.

I will say that we do see lower expirations in Europe in the fourth quarter, so we will see volumes come down. But it's really a mix issue. As we said, Q3 we saw relatively high, very high leasing in Europe and Asia, and we're going to see that moderate. So you'll see the US be a bigger chunk of leasing in Q4.

That's a good point. We're running out of product to lease, to be honest with you. That's the issue. That was the last question. Again, let me thank you for your interest in the Company. Very much look forward to seeing you all in November in New York. We have great chachkies so please come and enjoy the day. Thank you.

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