Prologis Inc (PLD) 2016 Q4 法說會逐字稿

Good morning. My name is Scott and I'll be your conference operator today. At this time I would like to welcome everyone to the Prologis fourth-quarter 2016 earnings conference call.

(Operator Instructions)

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

Thanks, Scott, and good morning, everyone. Welcome to our fourth-quarter 2016 conference call. The supplemental document is available on our website at Prologis.com under Investor Relations. This morning we'll hear from Tom Olinger, our CFO, who will cover results and guidance, and Hamid Moghadam, our Chairman and CEO, who will comment on the Company's strategy and outlook. 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 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 fourth-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 Tom and we'll get started.

Thanks, Tracy. Good morning and thanks for joining our fourth-quarter earnings call. Our format today will be different than previous calls. I will cover highlights for the quarter and guidance for 2017, and then I'll turn the all over to Hamid who will put this quarter's performance into context of the recent past and our future outlook.

We had an excellent quarter and an outstanding 2016. Core FFO was $0.63 per share for the quarter and $2.57 per share for the year. This is an increase of 15% over 2015 and consistent with our three-year CAGR of 16%.

We earned promotes of $0.01 in the quarter and $0.15 per share for the year. Excluding promotes, core FFO was up 11%.

For the full year, we leased over 180 million square feet as demand for our best-in-class portfolio remains strong. Our properties are located in major population centers where consumption is concentrated and proximity to consumers has never been more critical to supply chain. Global occupancy reached an all-time high of 97.1%. Europe also achieved record occupancy at 96.7%.

Our share of net effective rent change on rollover was 16%. The US led the way at over 23%, the fourth consecutive quarter above 20%. Notably, the UK was also above 20% rent change for the second consecutive quarter. Our share of net effective same-store NOI growth was 3.2% for the quarter and 5.6% for the full year.

On the deployment front we had another very productive year creating significant value for our shareholders. Development stabilizations had an estimated margin of 27% and value creation of over $570 million. Development starts had an estimated margin of over 20%. And our net deployment activity generated surplus cash of $1.4 billion.

Let's spend a moment on our financial position. We achieved our goal of having one of the top balance sheets in the REIT sector. The rating upgrades of A3 and A-minus in the quarter are an acknowledgment of our prudent financial management and balance sheet strength.

Our look-through leverage at year end was 27.1% on market capitalization and 34.6% on a book basis. Debt to EBITDA including gains was 4.7 times. And our liquidity was over $4 billion. We remain well positioned to self fund our future deployment. We also continue to be well protected from foreign currency movements as we ended the year with 92% of our net equity in US dollars. The bottom line is, our balance sheet and liquidity have never been stronger.

Moving to 2017, I'll cover a few guidance highlights on an our-share basis. For complete detail refer to page 5 of our supplemental.

We continue to expect net effective same-store NOI growth of between 4% and 5%. As discussed at our Investor Day, our in-place leases are about 12% under rented and this will be the primary driver of same-store growth going forward. Our share of cash same-store NOI should be higher than net effective by 50 to100 basis points for the year.

Our development starts are consistent with 2016 levels. However, our disposition volume is much lower as we've sold a vast majority of our non-strategic assets. Going forward, you'll see our contribution and disposition activity in line with development levels as we continue to self fund.

I want to point out that as a result of the significant amount of cash at year end there will be a slight drag on core FFO of $0.02 to $0.03 per share in the first quarter, given the timing of putting that capital back to work. Related to FX, our 2017 estimated core FFO is effectively fully hedged relative to the US dollar and we've already hedged most of 2018. For net G&A we're forecasting a range of $210 million to $220 million, down 3% at the mid-point from last year as we continue to become more efficient.

For strategic capital I want to highlight that there will be a timing mismatch throughout the year between when the promote revenue is recognized in the second quarter and when all of the related promote expenses are reflected. However, we continue to expect net promote income for the full-year 2017 of between $0.06 and $0.08 a share.

Putting all this together, 2017 core FFO, including promotes, will range between $2.60 and $2.70 per share. Excluding promotes, our core FFO at the mid-point is 7% higher year over year.

In closing, we had an excellent year. We enter 2017 with terrific momentum and the business keeps getting simpler, as evidenced by the brevity of my remarks. As you've heard, guidance is unchanged from what we provided at our November Investor Day. However, I would say the overall outlook for our business today is more positive, particularly in Europe. While we are mindful of potential political and regulatory changes, we remain confident given our best-in-class portfolio, balance sheet strength and liquidity, and durable NOI growth And with that I'll turn it over to Hamid.

Thanks, Tom. I want to use my time with you today to put our recent performance into a longer term context and to share my outlook for the next few years. It's hard to imagine that it's been almost six years since we announced the merger between Prologis and AMB. Our initial focus following the merger's closing was to integrate the two companies and to deliver on our promised synergies.

Shortly thereafter, we announced a 10-quarter plan focused on realigning our portfolio, monetizing our land bank, rationalizing our strategic capital business, strengthening our balance sheet, and investing in technology to make our teams more productive. We met or exceeded the plan's objectives almost a year ahead of schedule.

Following the 10-quarter plan we transitioned to Vision 2016, our strategic plan to capitalize on what we saw as a significant recovery in rental rates following the sharp decline we saw during the global financial crisis. Our forecast calls for a compounded 6% per year recovery in rents in the Americas through 2016, which at the time seemed an overly optimistic assumption by some.

The fourth quarter represents the culmination of Vision 2016. Actual rental growth in our markets in the Americas ended up ahead of our forecast at 8% per year. This helped drive core FFO growth of 16% per year, substantially in excess of the plan, this sector and most REITs.

2017 is a very different environment than six years ago when we announced our merger, or four year ago when we called for a sharp rebound in rents. I believe we're now at the cusp of yet another important market transition to a phase for which Prologis is ideally positioned.

As you heard from Tom earlier, and as you'll hear from our industry colleagues, markets are as healthy as they've been in several decades. Occupancies are at record levels, rental growth is extremely strong, and the strength is not just in eCommerce. In fact, our sectors like housing, will be the source for additional demand going forward.

In the recent recovery phase of the US market, rising tides have lifted all boats. In the next phase, location and quality will matter much more, and there will be a meaningful performance differentiation within the US logistic markets.

Continental Europe is lagging the US by about three years. We believe Europe will further extend the growth cycle for our Company as its recovery picks up steam. What's been a headwind for us will become a tailwind for the foreseeable future.

There's a significant embedded rental upside in most industrial portfolios, and in our case about 12% overall and 15% in the Americas. But we need to acknowledge that the easy part of the cycle is behind us. Market rental growth going forward will moderate, starting in 2017. However, our same-store NOI growth will remain strong into the foreseeable future, probably well beyond 2019, especially in large markets with high barriers to entry.

What we like about this picture is that supply remains disciplined and, as a result, growth will be more sustainable than in past cycles. In this environment it will be more important than ever to be closer to key customers and to offer them the right real estate solutions in key markets around the world.

Before I turn it over to Q&A I'd like to share with you our priorities for the next few years, including a number of important new initiatives that we've been working on as part of our new strategic plan. In addition to completing the final batch of our non-strategic sales, which remains a priority, the new initiatives are focused around customer experience, application of technology to streamline operations, and advanced data analytics.

These activities are designed to further simplify our business, get us closer to our customers, and help make us faster, smarter and better. We're seeing tangible results from these initiatives already, especially on the customer side, and we'll share these with you in the coming months and years. Let's now turn to your questions. Operator?

(Operator Instructions)

Your first question comes from the line of Tom Catherwood from BTIG.

Thanks. Good morning over there. Obviously we've seen a lot of statements that have come out of the new Administration. You guys spoke at length about it and the potential impact at the Investor Day. But since the Investor Day how has the outlook changed for your business and how are you planning on potential trade impacts in your strategy going forward?

Yes, let me start with that. Maybe I'll turn it over to Chris Caton, our Global Head of Research, after this for his comments because he's been studying this pretty closely. I would say there is a great deal of uncertainty out there, given all the talk about trade with China and Mexico specifically. So, I think until there's some resolution on this, there will continue to be uncertainty. But we haven't seen that translating into any negative impact on our business so far. In fact, I would say most of the euphoria around the election has to do with a brighter economic outlook in the US and a brighter outlook on the part of our customers, on the margin.

Now, let's take some extreme cases of what could happen. In the extreme case -- and I don't think, by the way, this is the base case -- if we put a wall not just in our southern border but all around this country and we'll stop trading with the rest of the world -- while I think the long-term impact of that, actually, would be negative not just for our business but every business because the rate of economic growth would slow. But specific to our industrial business, for sure manufacturing will have to take place somewhere, which means it will have to take place in the US. So, demand will go up in the US, for sure.

Now, there are going to be places in the world where demand will suffer. And I think northern Mexico, along the border, and China would be the two places where demand would suffer. Those two markets account for 2% of our overall activity. The US accounts for 73% of our activity.

So, while I acknowledge that there will be a head wind on overall economic growth, actually its impact on us could be very positive in the short term. But that's not what I want, that's not what I expect, and that's not what I'm looking for. I think the more likely outcome is going to be a cleaning up some of the provisions of NAFTA. There are some issues that need to be modernized. I think it makes sense to do that. And I, frankly, think that the stage has been set from a negotiating point of view where that can be done pretty quickly and easily compared to expectations.

China's a little bit of a different story. I think in China, I'm afraid we are heading for something a little more serious. But only time will tell how that's going to play out. Chris, what do you want to add?

I think that's a pretty complete answer.

Okay. Let's leave it at that, then.

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

Thanks. Hamid, can you just comment on what you see in supply trends going forward? I know it hasn't been a huge issue in the past couple years, but at least according to some brokers it seems to be increasing and across more markets.

Yes. Our outlook for supply and demand this year, meaning this past year 2016, was that they were going to be at the same level in the low 200 million square foot range in the US and about 70 million feet in Europe. And, actually, we were surprised because demand ended up being more like 260 million feet and supply ended up being 180 million feet. We continued the deficit in supply that has persisted since the recovery.

Again, this year in 2017 we're calling for low 200 million square feet of supply and demand. We're expecting those two to be about the same. Which is, by the way, great because at 5%, 6% overall vacancy and a defective vacancy in the kind of product that we traffic in being in the 3%, 4% range in most markets, I think that's a very healthy situation. So we're calling for supply and demand to equalize.

Let's say we're off. Let's say supply ends up being 20 million, 30 million feet more. Across a base that won't even register on the vacancy rate. So, I think people are just overly focused on that issue.

Fundamentally, I think the financial, the banking system for encouraging undisciplined development has changed. Now if something changes in the political and regulatory environment where the banks will go nuts again, that's a new ballgame, but I don't see that just yet. And I don't think those regulations are just US regulations. I think they are Basel III and the like that impose some discipline on the banking system.

So, it's good to keep an eye on supply. I think it's been the Achilles heel of the real estate business for as long as I remember. So, please continue to ask about it, continue to be concerned about it, but I don't think that it's going to drive the performance of our business in the next couple years.

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

Hi, everyone. I wanted to go back to market fundamentals for the quarter. Leasing volume is down a little, tenant retention is below 80%, it looks like leasing costs ticked up as a result. Realizing that market fundamentals remain very healthy, is there any reason to think that demand decelerated in the fourth quarter versus what we saw earlier in 2016?

Demand did not decelerate. We ran out of space to lease. And the reason retention is down is, as I've told you every quarter, we're trying to drive rents. We would like our retention to be a little bit lower and for our rental growth on the margin to benefit from that incremental rent growth. So, nothing in the quarter surprised me. Tom, do you have anything else?

No, I think it's consistent. Again, as we had said, we had little roll this quarter. It's pretty seasonal that we go into Q4 with pretty minimal roll, and that was the big driver. But we certainly don't see any change in customer behavior, customer activity, customer decision-making. All of that, quite frankly, is tracking better than what we would have laid out to you guys in November.

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

Thanks, guys. I was hoping to just get a little bit of color on the second sequential decline same-store revenues you guys had. I think last quarter there were some CAM trueups that drove the sequential decline. But we expect that to maybe be more one-time, but we saw a decline again this quarter. Just curious what drove the deceleration this quarter and maybe how it looks on a cash basis to see if we're seeing the same trend.

Craig, this is Tom. You're right. In this quarter the sequential decline was driven, number one, by just lower occupancy in the same-store pool, if you looked Q3 to Q4. There's about a 50 basis points lower benefit of occupancy. And the second thing would be, as you alluded to, to recovery revenue timing. So, they are all one-time timing issues.

As we look into 2017, we see occupancy levels very consistent year over year, so the big driver same-store is all about rent change. And to put those numbers into context of our guidance, of that 4% to 5% range, we feel very good about that guidance range. And if you think about very similar rent change on roll year over year, about 17.5%, and you put that on 22.5% roll, what's a contractual roll plus some pulling leases forward, very consistent with what we have done in the prior years, that gets you right to about 4%.

Then when you look at expense leverage and indexation, remember, we get the benefit of indexation, particularly in places like Europe, that all adds up to another 50 basis points. So, that puts you right in the middle of our guidance range for 2017.

Our next question comes from the line of Vincent Chao with Deutsche Bank.

Hi, everyone. I just wanted to talk about the lease rate being at 97% and record occupancy in the US and Europe, and then also your comments about the retention going down, driving rents a little bit harder. I'm just curious if the current availability changes your view on development starts, the mix of build to suit versus spec. And, geographically, it sounds like a lot of the commentary on Europe was very positive versus your previous outlook. Are you more inclined to build in Europe today than a few months ago?

Vincent, Europe is more of a Built-to-suite market than a spec market anyway. So, yes, a lot of the development in Europe is going to be build to suit. Maybe, Mike, you want to talk about the flavor of our development activity. It's very much consistent with last year, is the way I think about it. But Mike?

Yes. An easy way, last year we did 45% in the Americas, 25% in Europe and 30% in Asia. That was a little bit up in the Americas, slightly down in Europe and slightly up in Asia. I would expect this year's ratio to be about the same.

A couple other things to note -- 90% of the activity is going to take place in our global markets. And if I had to hazard a guess today, I'd peg the build-to-suite range in the 40% to 50% range, which is comparable to what we did last year. And I think we feel very bullish in our ability to do those build to suits. But that's a good range as we sit here today.

The only thing I would add to all of that is that when we look at our development volume for 2017 at this time of the year, you guys should know, about 90% of that is baked in. So, really, at the end of the day, what our development volume does on the margin in the back $100 million, $200 million of it is whether stuff flips into December or January of next year. And we don't do unnatural things to meet guidance in that regard. Let's just be clear about that.

For example, I think three of our 2016 build to suits we've just done in the first couple of weeks of 2017. And if we had done them in 2016 we would have blown through the top of our guidance range. We don't really play those kinds of timing games and we let those things happen when they do. We're not going to spend a bunch of money digging through the show to start a building to call it a start if it doesn't make sense to do that.

And we've got a great head start on that business already for this quarter.

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

Hi. Good morning. A couple questions on the international markets. Saw the yields on the other Americas -- Canada, Mexico, Brazil developments -- slide down about 40 bps Q over Q, based on your last disclosure. How much is this a factor of higher pre-leased activity or the yield's actually shrinking because of trade shock?

And the second questions are on the Cyrela stake. We're reading a lot of reports from brokers, as well as actually you guys, talking about net absorption dropping 60% year over year in Brazil in the logistics sector. So, interested in what we should read into this move around acquiring the additional stake. Are you calling for a bottom to that market?

You've got a few questions there, Sumit. This is Gene. Relative to the first question, this is all mix and it's a lot less Brazil. At this point in the cycle we're not building buildings in Brazil. Obviously those yields are much higher. So, don't get distracted with that.

With respect to what's going on with Brazil and the CCP situation, demand right now in Brazil is pretty soft. And we expect that in 2017 it's going to remain that way based upon the economic and political environment. Having said that, we're very optimistic long term. Are we calling a bottom? I wouldn't say we're calling a bottom but we see things getting better from this point forward.

And related to the CCP announcement, Brazilian law requires that public companies disclose even agreements that are not binding. When there is a definitive agreement, we'll lay out for all of you guys the relevant information. But that's the first step towards recapitalizing the business in Brazil. We're very excited about that. And, as I said, we're very excited about the future of that market going forward.

I would add to Gene's comments that I think the combination of the currency, which is well off the bottom, the governance change that happened in Brazil, and the interest rate picture, which is one of the few places in the world where interest rates are coming down, I think things will bode well for Brazil. And I for one am bullish on Brazil going forward. It's not going to zoom ahead from here but I think this is a pretty interesting entry point from both a fundamental real estate valuation and also currency valuation point of view.

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

Hi, guys, good morning. I was just wondering, Hamid, if you can talk a little bit about just leasing momentum and pace, and whether the volatility post election around any of these trade policies have caused tenants to either pause or revisit their leasing strategy?

Honest to goodness, we ask that question on a weekly basis of our people and the answer is no, no, no, no. I tell you what I hear. It's not like we are being Pollyannish or sticking our head in the sand. It would be a pretty obvious concern and you guys are right to ask about it. But we haven't seen it. In fact, if we were doing our Analyst day again today, we would be slightly more positive in the US and a lot more positive in Europe. So, the answer is no, we haven't seen it.

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

Hi, guys, it's Josh Dennerlein here with Jamie. Could you speak about investor appetite for your funds? Any change post election? And also curious to know the rationale, as well as what sparked L&D's consolidation of its JV fund with PELP?

I think on the last thing you're referring to PTELF and ELV, Alliance, combining together. We've been on a strategy of trying to simplify the number of different vehicles we have everywhere, including Europe. And our goal is to get in each major arena in the US and to Europe to one major JV and one major open end fund. That's a goal. We made a good first step in that direction here in Europe by combining PTELF and Alliance.

And those two strategies were identical. Those two funds had the exact same strategy. It was a good thing for us, it simplified our business. It was a good thing for Alliance because it allowed them to deploy more capital with us and to have a bigger vehicle and a more diversified pool. So that one is done.

With respect to demand for our funds, I would say in the US we have a lot of demand from outside the US for US vehicles, including some new sources of capital that we had never seen before, including some funds coming out of Japan through the pension system that is going through some changes in regulation and the like. It's early dates for that but that's a new source of capital we hadn't seen before.

I think the US funds are slowing down a little bit, based on what I'm seeing, on the margin, because they are meeting their allocations by and large. But their allocations are always lagging because the denominator keeps getting bigger and so the allocations the next quarter are going to go up. So, I don't expect that to be a meaningful slowdown. I think it's only at the margin.

So, the simple answer to your question would be no. There's a lot of interest for logistics product, high-quality logistics product, every where around the world. In fact, we're surprised by the amount of interest there is in low-quality logistics product around the world. So, no, we don't see anything.

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

Thanks. Hi, guys. Earlier, you'd brought up your expectations for demand and supply to reach parity in 2017, also for rent growth to moderate a bit this year. But can you talk about the ability for market rents to continue to push higher once supply starts outpacing demand? Maybe you can give us your thoughts on this dynamic and what you're seeing in the market to support a runway for market rents beyond 2017. Thanks.

I think, as I mentioned in my comments, the last four or five years of projecting rental growth have been pretty easy. We fell into a deep hole. And just climbing out of that hole with replacement costs going up was what we thought 6% rental growth in the US and it ended up being 8% per year growth.

Going forward, I think rental growth is going to slow down because we're calling essentially for a market that is plus or minus at the equilibrium in the US. And given the quality of the portfolio and our locations and the like, I think it's going to be inflation-plus type of rental growth. I think we've spoken to you guys about a 15% mark to market in the US plus 3% growth beyond that in terms of market rent. I think we'll do better than that. We just said 3% for modeling purposes but I think we will in the near term do better than that. How much better than that, we're going to have to see.

Europe is interesting. This is an important point I'm trying to communicate, so, please, this one is worth focusing on. There is going to be a time, and we think that time is 2018, we'll know for sure when we get there, where rental growth in Europe can exceed the rental growth in the US. That will drive same-store growth for Prologis beyond just our US portfolio. And I think that's a unique benefit that we have as a Company.

We definitely suffered the bad part of the cycle by virtue of having Europe be a drag on our performance. I think Europe can turn into a positive boost on performance from 2018 onward. So, that would be my commentary on rents.

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

Thank you. I know this might be a bit of a dead issue, but do you anticipate any reincarnation of TPP in any form that would hurt you or help your business in Asia and the US?

We don't have any particular insights on that beyond what you and we read in the paper.

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

Hi, this is Ryan Wineman here with Tom. How would you guys expect a border adjustment tax to impact demand for industrial real estate in both the US and abroad?

Thanks for the question. This is Chris Caton. Hamid, I think, gave an excellent outline on the global trends. And in particular these efforts focused on stimulating job growth, wage growth, in general stimulated in the US consumer, would be big positives for our business.

From a how might things change perspective, I think there are two key points that I'd add to Hamid's earlier remarks. The first is the majority of the US markets are really focused on local consumption. And these are not initial trans shipment points. And then when we think about some of these markets that do have a component that are in the initial point of contact for international trade, growth has been excellent in these markets even as trade growth over the last few years has been moderate. So, supply chain modernization continues in these markets, almost irrespective of the trade picture.

And that would be LA, Dallas, Chicago and New Jersey. Those would be the four major markets that have a trans shipment component to them. So, if you want to focus on those, those are the markets to pay attention to.

The next question comes from the line of John Guinee with Stifel Nicolaus.

I noticed that on page 26 your land position got down below $1.3 billion, which is probably one-third of what it was at the height. Can you talk about what you're thinking about land right now? And, also, I did notice that I think 50% of your land is in the UK, Mexico, central valley of California and a couple other unusual places.

John, thank you for acknowledging that. Just a brief history of land bank at Prologis. At the time of the merger, the land bank was in the low 2s, and the original cost of that land bank, I think, was in the mid to high 3s. So, we certainly started with a lot of land.

And it's not as if we haven't been buying land. We've been buying land, good land, during this period, but we've been selling and monetizing more of it over time. Our share of land is about $1.250 billion and our total land is about 1.4 billion or something like that, on that order. Our goal is to get to two years of land that we own. Given our pace of development and land as a percentage of total development cost, that argues for about $800 million, our share, and $1 billion overall land bank across the board.

It will take us some time to get there because, to be perfectly honest with you, there is a couple hundred million dollars of land that is the lowest-quality land we have that's the least strategic land, I would say $200 million of that, that will take a long time for us to sell. So, we have to carry that. So, think of our goal of $800 million of our share and $1 billion overall as really being $1 billion and $1.2 billion for awhile until we can work our way through that land.

But it's a good market for selling land. It's a good market for monetizing land. We are getting much more efficient in terms of how little land we need to support our $2.5 billion-ish development activity -- which is good.

Your next question comes from the line of Rob Simone with Evercore ISI.

Hi, guys, thanks a lot for taking the question. I was wondering -- and this piggybacks on an earlier question -- we know that Mexico is obviously a small part of the business today, but has there been any change in your thinking around your land positions there just vis-a-vis a longer-term outlook for the business? And, if not, what would it take to change your view?

Rob, this is Gene. Let me take that one. In terms of what's going on with Mexico, let me start with what do we see happening on the ground. Demand is still very strong in the population centers. I would say customers on the border are a little bit hesitant right now, for obvious reasons.

But turning to your question on land, Hamid just addressed this question. Overall we feel very good about the progress we've made. We probably have too much land in places like Houston. And Mexico absolutely stands out as one of those markets.

We have some land in Mexico which is in the bucket. As Hamid referenced, it's going to take some time to grind through. But we also have some very well-positioned land in population centers. And I think we're actually going to monetize through development a fair amount of that over the next couple of years.

I don't think the composition of that land bank, the magnitude of it, is too large. But the composition of the land bank is in the places that we'd like it to be so I don't think we're going to change strategy there.

The value of the land bank is in Mexico City and Monterey. The acreage may be in the border cities but the value of the land is in Mexico City and Monterey. And I would tell you there's a shortage of quality land in Mexico City. Absorption and development has exceeded our expectations. And actually rental growth in peso has been tremendous, even throughout all of this talk about bad things happening to Mexico.

The issue is that the currency has been weak. I would draw a distinction between inland markets, consumer markets and the border markets. The border markets, yes, the acreage is high but the value of that land is not that much.

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

Yes, hi. I was wondering, are you expecting any cap rate movements in 2017? And have you made any changes to underwriting for acquisitions in particular?

Michael, we haven't been active acquirers in quite some time. Our volume of acquisitions in 2016 was one of the lowest it's been. We've been saying that cap rates are too low for a long time and we keep getting surprised that they keep going lower.

One thing I will tell you about cap rates, I don't think they are as sensitive, at least in the private market, to interest rate movements as the public markets thinks they are. You know the trade. There's some talk of interest rates going up and REITs sell off and six months later they come roaring back.

The private market is a lot less volatile with respect to those cap rates. Portfolios have been consistently selling in the marketplace at values that are in excess of our internal NAVs. In fact, non-strategic asset sales, which is mostly what we've been doing, there's been about a 5% surprise across the board for us compared to our internal carrying values. And this is the lowest-quality portion of our portfolio. So, we've been wrong and we've been surprised on cap rates being low and lower than what we think.

What will happen in the future, I think it's a function of how much interest rates do actually increase. Remember, cap rates were about the same place that they've been but interest rates are 250 to 300 basis points lower today than they were back in 2007. So, there's nothing that says cap rates have to go up if 10-year treasuries get to 4% or something like that. So, I don't know, but so far we've had a decline in cap rates in recent past as opposed to an increase in cap rate.

Your next question comes from the line of Neil Malkin with RBC Capital Markets.

Thanks, guys. Your European exposure as a percentage of NOI is about 17%. And I'm just wondering if you could talk about what you see happening as far as scenarios go. You did this earlier in the call with the US. But there's a lot of very big important elections coming up in Germany, France, the Netherlands, et cetera. And lately the rise in this Euro-skeptic protectionist regimes across those countries have gained popularity in earnest. And I just wonder if you guys have thought at all about what would happen if those parties got into power. And, if so, what would happen to either the euro currency, the impact on your businesses, your tenants, commerce in general over there? Any thoughts would be helpful.

The good thing about our business, Neil, is that nobody leases warehouse space because they like to do something fancy. They lease warehouse space because necessities of life go through warehouses. I don't see people needing less food, less apparel or less toilet paper because of the politics of the country.

I think the best recent example of that was Brexit. There was all this brouhaha about Brexit just killing demand in the UK, and we're 99-point-something leased in the UK. And we've had probably the best six-month run in the UK that I can ever remember. So, some of these things don't follow conventional wisdom of the sky falling down.

I don't have any particular views on the currency but we run our business in a currency-agnostic way. That's why we are 92% in US dollars and that's why we hedge a year or two of earnings ahead of time, because we're not in that business, we're not better than anybody else in predicting currency. But we run our business in a manner where we are, in effect, hedged against those kinds of risks.

So, I think as long as consumption continues in Europe -- and it is the world's largest market, it's 375 million people, maybe chopped up into smaller pieces but those people are still there consuming regardless of what their politics are -- I feel pretty good about Europe.

Let me just share our base case. We basically got an up arrow on Europe today. And if you just look at what's happening on the ground, this quarter Europe, again, up 60 basis points. And the big gains actually came in our weaker, I would say, regions -- Southern Europe, which is trending up to 95.5% occupied and Central and Eastern Europe which trends up to 96.5% occupied.

The other place where we made gains is another place that we were struggling -- less than 100,000-square-foot spaces. Again, we went up by 240 basis points. We're up to 93% occupied today. We've had four quarters of positive rental change. And as Hamid mentioned earlier, we're expecting cap rates to moderate. So, our view is that rents are going to continue to increase.

So, that's our forward forecast, our expectation for the next several years. Our expectation is that you're going to see a tail wind.

Your next question comes from the line of David Rodgers with Robert W. Baird.

Good morning. This is Dick here with Dave. A lot of my questions have been asked already. But, real quickly, with regards to your 2017 occupancy guidance, this is about 100 basis points lower than where you ended the year. Is this conservative or are you seeing something specifically, given where 2016 ended?

No, nothing in particular. I think there is some level of conservatism in that number. I would expect us to probably be a little higher. But I think what's more important, what drives NOI, as you all know, is average occupancy, and average occupancy is what we expect to be very similar year over year.

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

Thanks. I just wanted to get back to land for a second. Can you guys talk about land prices in general? It seems like we've seen a major increase in most of the primary markets thus far this cycle. So, do you think further increases in land pricing are possible? And how have the increased prices influenced your ability to, number one, purchase land in your targeted markets and sub markets, and, number two, continue to achieve the expectable yields on those developments?

Blaine, this is Mike Curless. If you think about our land portfolio, we've mentioned this a couple of times here recently, but we view our portfolio to be at least 17% under valued. And we're certainly seeing land prices uptick, particularly in the larger global markets. But we're also seeing rents higher in those markets which justify higher land prices.

So, we're as selective as ever, our primary acquisitions, our expansions of our existing parks, and those sites that we think we can churn through in two to three years. So, we're being very selective on what we buy but there's a market out there for us to be successful in this environment.

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

Thank you for the follow-up. I was wondering if you could comment a little bit about, I think we're seeing a little bit more in the press about 3D printing and automation starting to make its way into supply chains -- in very small amounts at this point but I was hoping you could maybe touch upon and give some examples of your customers upon this technology or what you might see going forward. Thank you.

I think 3D is an important technology and I think it will be really consistent with automation and localized manufacturing. I think what people miss is that they think somehow 3D printing skips the supply chain. But the material that goes into 3D printing has got to come from somewhere, and it needs its own supply chain. So, I don't really think it really affects demand for industrial real estate in a major way. In fact, because the supply chain will be less bulk for 3D printing -- because 3D printing, as opposed to mass production, is about mass customization and more localized production -- I think it requires a more complex supply chain.

But I think it would be very difficult for 3D printing for most products to compete with the price of mass production, particularly within the introduction of automation. So, I think it's a great technology for innovation, for prototyping, but it's not really great technology for mass production. So, that's our view of it.

By the way, it's not new. 3D printing has been around for a long time. I remember, actually, in 1986 being at an MIT campus visit where they were actually printing models of cars, the kind they used to make with clay models, using layers of 3D printing laying down. I think the auto technology uses it a lot for component and body manufacturing. So, it's been around for a long time. It's getting better all the time, though.

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

Hi. Just a quick question. Any particular reasons why the investment capacity went down from $3.1 billion/$3.2 billion to $2.6 billion this quarter?

We've stopped trying to raise funds as long as we have uninvested funds and [queues]. As we work down those funds we'll go raise some more capital. It's not a real issue. We'll raise capital when we need to invest capital, when there are deployment opportunities.

Also, there's a timing lag just between the redemptions that we've done and just normal capital raising, the cyclical nature of that.

We actually reduced our share in our funds and allowed some of the queues to invest in our funds as a way of satisfying those queues.

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

It's Jordan Sadler. I just wanted to get a little clarity here on the view on Europe, if you could. First, what's driving the confidence here on Europe? And how can you tilt the portfolio to be a little bit better positioned to capitalize on the opportunity you see coming?

I think our European portfolio is really well positioned. We've spent a lot of time and effort on cleaning up our European portfolio in the last couple of years. And I think it's really well positioned and it's solid. It's by far the best portfolio in Europe.

So, I think we're extremely well positioned to benefit from that. I think the lagging part of Europe, if you're going to pick on one place, is France. I think we're about to see some major political changes in France so I think that will help our French portfolio, particularly Paris portfolio, which has been lagging.

That was the last question. I appreciate everyone's interest in the Company and look forward to seeing you next quarter, if not sooner. Thank you.

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