Prologis Inc (PLD) 2018 Q3 法說會逐字稿

Welcome to the Prologis Q3 Earnings Conference Call.

My name is Emily, and I'll be your operator for today's call.

(Operator Instructions) Also note, this conference is being recorded.

I'd now like to turn the call over to Tracy Ward.

Tracy, you may begin.

Thanks, Emily, and good morning, everyone.

Welcome to our third quarter 2018 conference call.

A supplemental document is available on our website at prologis.com under Investor Relations.

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 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.

This morning, we'll hear from Tom Olinger, our CFO, who will cover results and guidance; and then Hamid Moghadam, our Chairman and CEO, who will comment on the company's outlook.

Gary Anderson, Chris Caton, Mike Curless, Ed Nekritz, Gene Reilly and Colleen McKeown are also here with us today.

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

Thanks, Tracy.

Good morning, and thank you for joining our third quarter earnings call.

First, I'll start with an update on our $8.5 billion acquisition of DCT.

Our financial and operating results reflect this mid-quarter transaction which closed on August 22.

The integration went exceptionally well and is complete, and we refinanced the $1.8 billion of debt we assumed in the transaction at an average interest rate of 2.4% and a term of over 13 years.

We've already hit our expected annual synergies run rate of $80 million with the vast majority of that in cash savings.

Now our focus is on realizing the incremental $40 million of future annual value creation from development and revenue synergies.

Turning to market conditions.

Fundamentals remain healthy, and well-located space continues to be in high demand.

There were several notable bankruptcies announced recently and our exposure to these firms is minimal.

These customers lease from us about less than 30 basis points of our net effective rent.

We've been monitoring these companies for some time and are confident we'll be able to quickly lease up any spaces we get back from these customers at higher rents, given they're approximately 10% below market.

Broadly, we feel very good about our business.

Market rents across our portfolio are growing in line with our forecast with Europe slightly ahead.

Switching to results.

Core FFO for the third quarter was $0.72 per share.

Our share of cash same-store NOI growth was 5.9%, led by the U.S. at 7.1%.

Our share net effective rent change on roll was more than 22% and was also led by the U.S. at over 30%.

Occupancy was up more than 120 basis points year-over-year to 97.5% with Europe at 98%, up 260 basis points over the same period.

Leasing volume totaled approximately 37 million square feet with an average term of more than 5 years.

This includes 5.3 million square feet of development leasing.

Development stabilizations in the third quarter had an estimated margin of 36%, bringing our year-to-date total value creation to $475 million.

So far this year, we've realized $329 million in gains on the monetization of development projects.

Disposition and contribution activity in the quarter was approximately $460 million.

As previously announced, we closed a $1.1 billion sale to Maple Tree in early October, with our share of the proceeds totaling over $600 million.

We expect to close the second phase of this transaction totaling $170 million by year-end.

During the quarter, we reduced our weighted average interest rate to 2.7% and extended our weighted average term to 6 years through the issuance of long-duration tenures up to 30 years.

Our balance sheet remains one of the best in the business, and we continue to access capital globally at attractive terms.

Our $3.5 billion of liquidity and over $6 billion in potential fund rebalancing allow us flexibility to self-fund our development well into the next decade.

This substantial amount of dry powder positions us to capitalize on attractive deployment opportunities as market dislocations arise.

Looking forward, I know many of you are looking for 2019 guidance, but you'll have to wait until our fourth quarter call as this is our normal practice.

For 2018 guidance, I'll cover the highlights on our share basis, so for complete detail, refer to Page 5 of our supplemental.

Also note our guidance includes the impact of the DCT acquisition.

We're maintaining the midpoint of our cash same-store NOI range of 6.5%.

For net promote income, we're forecasting approximately $0.05 per share on the fourth quarter and $0.13 for the full year.

Our share of net deployment proceeds at the midpoint remains unchanged at $350 million.

We are nearing the range for 2018 core FFO to between $3.01 and $3.03 per share.

To put this in context, when we laid out our 3-year plan at our Investor Forum in November 2016, we called for 7% to 8% annual growth, excluding promotes.

At the midpoint of our 2018 guidance, we'll have averaged 9.3% for the first 2 years, far exceeding this plan.

Importantly, this will be achieved while completing the realignment of our portfolio and reducing our leverage by almost 500 basis points.

With that, I'll turn it over to Hamid.

Thanks, Tom.

I'll keep my remarks brief as our results were once again strong and straightforward.

I'd like to address 4 key areas.

First, I know many of you are focused on topics of trade tariff and retailer bankruptcies, which have dominated the news lately.

As you might imagine, we're keenly focused on these potential risks as well, but to date, we've seen no measurable impact on our business.

Sure, if we search real hard, we can point to 1 or 2 companies who backed out of lease negotiations in the U.S., but the impact of those isolated cases was negligible in the context of our overall leasing volume.

There are plenty of other customers that are waiting in line for quality space and are frustrated by the shortage of suitable options.

In fact, our latest forecast for the U.S. this year has revised up net absorption by 15% to 260 million square feet.

Completions in 2018 will fall short of demand for the ninth consecutive year, this time by an estimated 10 million square feet.

Second, I want to talk about Europe, which remains a bright spot for us.

Our markets in Continental Europe are strong and getting stronger.

Vacancies are at historic lows, customer sentiment is improving and escalating replacement costs are driving up rental rates.

In spite of somewhat moderating rents in the U.K., overall rent growth in Europe for the first 3 quarters has already made 2018 the strongest year in more than a decade.

Looking to 2019.

There's a real possibility that market rent growth in Europe could overtake that of a very strong U.S. market, which is great news for us in terms of continued same-store growth well into the next decade.

Third, our multiyear disposition plan is now complete.

Since the Prologis-AMB merger in 2011, we sold more than $14 billion in nonstrategic assets and reinvested the proceeds into acquisitions and developments, the combination of which increased our percentage of holdings in global markets from 79% to approximately 90% today.

I'm very proud of our team who worked tirelessly to accomplish this long-term objective.

As a result, our portfolio has never been in as good a shape as it is today.

While we realize the benefits of this high-quality portfolio in the good times, the real differentiation will become apparent in tougher market environments.

Fourth, as we close this chapter in our company's evolution, we enter a new era where we can capitalize on the tremendous benefits that come from scale.

These benefits include one of the lowest cost of capital in the industry, unparalleled purchasing power, the most streamlined and efficient organizational structure and intense focus on customer service, the ability to invest in innovation and technology, and down the road, the opportunity to capitalize on proprietary data opportunities, all for the benefit of customers.

We've worked hard to create these advantages and look forward to putting them into action to create value well beyond the NAV of our underlying real estate.

Emily, let's open the call to questions.

(Operator Instructions) And our first question comes from the line of Craig Mailman from KeyBanc Capital Markets.

I know this question has kind of been asked in the past, but just given where retention rates were this quarter, I think the highest in the past 2 years along with your commentary about the focus on proximity, just curious, updated thoughts here on the tenant's ability to absorb further increases.

How hard your team is pushing.

I guess, I'm just surprised that you were able to push 11% cash rent spreads and still keep 82% of tenants.

So maybe just an update on the environment and maybe where the mark-to-market is and how do you guys feel that's trending.

Look, the markets are really strong and that's why we're getting these increases.

And not every discussion with every tenant starts out with the intention of them staying.

In fact, many of them, when they hear about the new rent, they're a little spooked, and when they go shop to market, they tend to come back and renew their lease because what we told them was an indication of where the market was.

So we're doing our best to push down retention, but obviously not hard enough.

So we'll work harder in future quarters.

Our next question comes from the line of Jeremy Metz from BMO Capital Markets.

Sticking with rents and your comments about Europe accelerating and could actually maybe pass the U.S. next year, I was wondering if you guys can give a little more perhaps market-specific color on where you're seeing the most acceleration in Europe.

And conversely, where in the U.S. you're starting to see things moderate the most.

And then in terms of the continuing trade fight here that we're seeing with China, are you starting to see a little -- seeing any impact from your tenants, particularly, in the West Coast where you have more of that import exposure?

So I don't know why that statement led to the conclusion that, actually we've seen it in a couple of notes that have been published, that just because we think Europe is going to do really well on a relative basis, that means that the U.S. is going to do less well.

That wasn't our intent.

The U.S. is doing extremely well.

Europe was later in recovery and has more to recover and we're getting to get more all at once, we think, in 2019.

2018 was really the turning point for Europe, and we just see that spread accelerating going forward.

We fully expect the U.S. to continue to be a strong market.

And as I mentioned in my prepared remarks, we haven't seen, really other than 1 or 2 tenants, and we sat around this table and talked really hard about the examples that we could come up for you guys, but we could come up with 2 that were possibly customers that decided not to go forward with their leases because of potential trade wars.

Now put that into context of 289 leases that we signed last quarter.

So...

In the U.S. only.

In the U.S. only.

So it's really irrelevant.

I mean, I can think of 20 other reasons why tenants stop negotiating or drop out of a negotiation, and certainly, the trade stuff has not yet, in any way, translated to any action on the ground that we can tell.

Our next question comes from the line of Steve Sakwa from Evercore ISI.

Hamid, I was hoping you could maybe just talk a little bit about the development business.

And given the rise in import prices and steel and concrete, I'm just curious how you're looking at the development business today and whether you feel like that volume could accelerate into next year.

I don't think the volume will accelerate into next year, but give us another quarter to really refine our numbers and come back to you on that.

We're not really ready to talk about that.

But when we talked about our thesis for rent growth many years ago now, a lot of it was recovery from obviously the global financial crisis.

But if you remember, and you will remember because you were there, we talked about the next leg being escalating replacement costs that are going to provide an umbrella for pricing product and that's happening right now.

Discretion costs have been going up at double-digit rates in the U.S. We don't like it, but it translates into higher rents.

And as you can see from our margins, they're roughly double.

The margins on completions is double the margins on starts because as good a job as we try to do on figuring out what margins are on starts, we've been surprised by rental growth beyond our projections.

And to be perfectly candid, more cap rate compression than we ever hope for.

So far, the construction costs are not affecting margins or development decisions.

Our next question comes from the line of Manny Korchman from Citi.

Hamid, if we stick to sort of tenant discussions, have there been any changes in the pace of leasing, especially for developments or spec developments and the time that it's taking tenants to make decisions on whether to take a spot or not?

Manny, this is Gene.

That's a very good question.

So we track the time it takes from when we commence a conversation with a customer through the entire leasing process to completion and there's 4 steps, and I won't get into the details.

But basically, that time frame, let's call it, it's about 46 days at this point, and it has stayed relatively stable over time.

So that's something we watch really carefully, how long is the gestation period for a deal.

So, so far, no change to it.

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

So I just wanted to focus on the guidance.

So if you add up the other assumptions from the press release, it looks like those items add up to about a net almost $0.01 of higher guidance.

So I'm just curious, like was there -- what was the offset or the drag that kind of kept your number as it is?

And then also, as you think about the DCT integration, can you just talk about things that were better than you expected, things that were worse than you expected as you put the 2 portfolios together?

Yes.

So Jamie, this is Tom.

So on your first question on the guidance, I think, when you think about guidance, you need to look at it for the full year.

We've increased guidance meaningfully over the full year both on core and on promotes.

As we get into the back half of the year, particularly Q4, we've got very little roll, so your ability to move that number with higher market rents and the like is limited.

As it relates to DCT, we hit our synergies right on the mark.

We did outperform on the cash piece of interest but when you look at actually what's running through the GAAP income statement, we were again right on the mark.

So we feel good about hitting those synergies and particularly how well and quickly we've integrated the portfolio.

Yes.

We also had about $0.60 of -- not $0.60, $0.006 of extra, if you will, what do you call it, severance and other charges related to some turnover, which was anticipated and planned for.

So actually, I think, we did better than we thought we would do.

And if we didn't have that, we would do even better than that.

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

Hamid, can you provide an early glimpse into some of your big data initiatives and some of the services you're trying to develop for your customers and how you see that evolving and perhaps impacting your business over time?

Yes.

Too early to talk about the data stuff.

That's more of a 3 to 5-year thing.

We're working right now on revenue management as the first initiative for big data.

On that one, we'll have something to talk about early next year.

But on the other initiatives for customers, let me ask Gary to talk about some of those.

Yes, so Ki Bin, we had set up a procurement organization.

And I think we discussed this in the past and that is up and running today, focused both on sort of G&A, OpEx and CapEx activities.

We're also focusing on our construction supply chain, so taking advantage of the sort of $2 billion-plus in hard cost spend.

And what we're looking at now is to really support our customers, particularly the smallest customers, relative to their pain point.

So anything that they need with respect to moving into a facility, we're looking at providing.

And we're really on the process right now of rolling out an MVP product and testing it in a couple of markets.

More to follow, I think, next year though, with respect to what that really means with respect to earnings and revenues.

Our next question comes from the line of Vikram Malhotra from Morgan Stanley.

Sticking to sort of rent growth and this is really maybe a 6-month [in your] sort of question.

You talked about the first leg being recovery, second leg of it potentially being the higher cost.

I wanted to get a bit more color on your rent growth versus market assumes no market rent growth, but it also assumes that logistics as a percent of the real estate -- as a percent of supply chain or real estate as a percent of supply chain does not really change.

Can you talk about if you were able to see more efficiencies, whether it's transport or warehouse operations, how could that rent growth spectrum be elongated?

Could you give us some sense of any sensitivities you may have done or any would help?

So Vikram, that's an excellent question.

And I really invite you to go look at the last 3 papers that Chris Caton and his team have put out because that's really the heart of the question that we try to answer in those, and I'm not going to do it justice.

But fundamentally, 3% to 5% of supply chain costs are warehouse rents and obviously, there are lots of savings because of e-commerce.

You're eliminating some retail rent, not everything is going e-commerce but some of it is.

And over time, transportation and labor costs are probably going to go down.

In the short term, they're actually going up because of oil prices and labor cost.

But in the long term, they're coming down because of renewables, autonomous driving in trucks and more automation being introduced in these buildings.

So we think for locations that are really, really special, and that is the real close infill stuff that does not have substitute.

Customers can pay not 5% more, 10% more, they can pay double or triple.

I mean, think of it as the old retail or retail minus type of price sensitivity because the turnover of those spaces is really high, and there's very little of them.

And by the way, they're not going to look like a traditional 36-foot clear warehouse with doors galore.

I mean, they're going to be all kinds of spaces that are funky and maybe older and much more infill.

And we've got lots of those in our portfolio.

So on that segment, the price sensitivity is very low.

It's all about service levels and serving the customer in a quick window.

So there, you could have very significant doubling, tripling of rents.

And we're seeing, to some extent, examples of that as we're rolling over infill spaces, and as we are, frankly, building new multistory infill product.

The rents have been very encouraging on that.

The stuff that's further out and there's more land and more competition, I think, you can expect a lower normal rate of growth on that because it's not quite as scarce as the really infill stuff.

So I would differentiate it between those.

And it's not a binary thing, it's just a continuous relationship.

The closer you get to the customer, and the more infill the need becomes, the less price sensitivity you have at this point in the cycle.

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

Related to that, I just wanted to get a little color on asset pricing here.

It seems as though we've seen cap rates holding steady or even continuing to decrease in the infill, in coastal markets given the kind of wall of capital that continues to flow into those locations.

I'm wondering if you're seeing any markets where maybe there's been an inflection and you're seeing cap rates increase at all as interest rates have crept up recently.

Blaine, this is Mike.

We're certainly not seeing any isolated markets and conversely, just continue to see additional cap rate compression.

And in fact, it seems to me, as our portfolios that are out in the market were -- continue to be very encouraged in which way pricing is going.

Our next question comes from the line of John Guinee from Stifel.

Sort of a one multi-phased question.

First, your thoughts on Prop 13 in California.

Second, I think you retrofitted an industrial building and delivered a powered shell for Amazon Web Services in Northern Virginia a while ago, sold it as a sub 5 cap.

So are you active in the data center build-to-suit at all?

And then third, what's your current thinking on Amazon's newest prototype, which I've heard is maybe 100 to 150-foot floor play foot, 120-foot vertical for their infill distribution business?

Okay, let me try to hit them quickly and maybe the guys can elaborate.

Prop 13, not this time, probably in the next election.

We're going to get it in 2020 or 2022.

I mean, at some point, that's where the money is and that's where the politicians are going to look.

So I think you probably will have a split actuarial there in my guess.

In Northern Virginia, we don't really start out building data centers.

We start out building our traditional office warehouse product and customers come to us because of the unique attributes of those locations and pay us a lot more rent, better credit and longer-term leases and they're putting all the improvements for data center.

So life's good there but not because we're so smart.

It's just because that location has some unique characteristics.

And finally, on Amazon prototypes, let me not specifically talk about Amazon but generally, you could imagine the people who needs distribution space in major cities has to go more vertical to use up less land because these markets are totally out of land.

So anybody who can go multilayer and squeeze more density on a smaller piece of land is going to try doing that.

Mike, do you want to say anything more about that?

Yes.

I mean, we're obviously staying very close to what's going on with Amazon because they lead the market in terms of trends.

We have plenty of activity underway to understand their ever-changing lease, and we're on top of it.

As you'd expect, we're going to be in the middle of those discussions going forward.

Our next question comes from the line of Nick Yulico from Scotiabank.

I wanted to turn back to the tariff issue.

I mean, the data, when you look at it for the L.A. Long Beach port shows it's the most exposed to the Chinese tariff issue, and that import market by a wide margin also has more exposure to Chinese imports than the rest of the U.S. So when you think about your Southern California portfolio, your largest market, perhaps you could just dig into that region a little bit and understand how tariffs could potentially impact demand for space over the next year.

I imagine it's not an issue for the entire portfolio there, but only some portion of it.

Would love to hear your thoughts.

We'd love to buy more real estate in L.A. So if you think anybody is spooked by the trades and tariffs, turn them our way.

We'd like to increase our position.

That is the most dynamic market in the U.S. The L.A. basin accounts for well over 50% of what comes into that region.

And California is now the #5 economy in the world, so we love that market.

And every day, you've got costs going up, entitlements getting tougher, real supply constraints not just in terms of physical land, but in terms of all the other stuff, hoops that you have to jump through to be able to build a building.

So we love those markets.

Our next question comes from the line of Derek Johnston from Deutsche Bank.

Could we follow up on the densification?

Could you guys talk about your multilevel warehouse strategy?

Just give us an update on the lease up of your Seattle project, if you could.

And how are approvals going for your project in San Fran?

And are there any updates to the 6 markets which you feel could be potentially tapped for these type of developments in the future?

Let's start from -- with the last one.

No, our feeling is that the real opportunity's in those 6 markets, and there are a couple of other global markets we would add to that.

London would be certainly one of them.

Paris is the other one in Europe.

And the ones in Asia that we can act on is primarily Japan.

So limited number of markets but a fairly substantial opportunity.

The development approval process for San Francisco is a multiyear process.

We're going to have to go through a significant EIR process.

But San Francisco does want to preserve those kinds of jobs because a lot of them have been eliminated by conversion of those buildings, PDR buildings to office space and the like.

So they actually looked at those kinds of living wage jobs and these buildings as a good thing.

So you can't predict these political issues but while we wait, we're clipping a nice 5%, 6% return on that site and we'll be very patient in terms of, I guess, securing the ultimate approval.

It's a big project so it's going to take a while.

With respect to Seattle, substantial completion is going to be at the end of the month and we have activity for well over 100% of the space.

So I would expect by the end of the first quarter, we'll be full up there at very strong rents.

Much stronger than we underwrote.

Remember, a 3-story product, nobody's ever had experience with it.

So you really need people to see the product up and running.

And if you haven't seen it, I would encourage you to go look at it.

It's pretty impressive.

Our next question comes from the line of Tom Catherwood from BTIG.

Moving over to labor for a second.

In September, you guys announced a community workforce initiative in Southern California.

With unemployment kind of as low as it's been in 50 years, how do you incorporate workforce capacity into your investment decisions?

And are you seeing your tenants either look to different markets to gain access to labor or make additional investments in automation to make up for a smaller employee base?

Yes.

So with respect to labor being an important issue, I mean, we think it's so important that we've added a section to our investment community memos where we -- the valued the acquisitions and developments that covers labor availability directly.

On our community workforce initiative, let me turn it over to Ed Nekritz, who's been running with that.

Yes.

Thanks.

So we introduced our first program in L.A., and the conversation with the consumer is now about something other than rent.

It's about how do we make their lives better, how do we help their jobs.

And what we're doing with that is internship programs in our communities where we're developing assets and making sure that our customers are tied into our customers.

Our customers are tied into our -- with the labor needs and we are focused on making sure that these students, young students have the ability to get jobs in their communities, stay in their communities, create better economies to labor in our -- where we're operating.

Yes.

We're not going to set up, if you will, nonprofits all around the country to improve the labor situation.

What we're really doing is finding the best NGOs that are in this business and we are supporting them with our capital and supporting them with employment opportunities following graduation and completion of the program.

So it's really about bridge building and supporting it with capital.

And we are quite serious about this, and I think it's a really important thing for us to do.

There's a whole other discussion about the social impact of this and limited opportunities for high school kids and all that with a lot of the traditional jobs going away.

So we think it's important that we take the leadership on this initiative.

And our next question comes from the line of Michael Carroll from RBC Capital Markets.

Can you guys talk a little bit about your initiative to pursue more gross leases in the marketplace today versus net leases?

How aggressive is Prologis in the market right now pursuing those?

And what has tenants' responses been?

Have they liked the new structure of going with the gross versus the net lease structure?

Yes, sure.

Michael, this is Gene.

The lease you're talking about we call the clear lease, and it is effectively a gross lease structure.

100% of our leases in the United States today and in Mexico, soon in Europe, are proposed as clear leases.

So we're taking this very seriously.

I think, we have something like 70%, 75% adoption at this point, so we've done hundreds of these leases already.

And in terms of the customer reaction, it's been overwhelmingly positive more so than we expected.

And just to touch on this, this is really about simplifying the lives of our customers, and frankly, the lives of our people who manage these properties.

And so, so far, it's going great.

I mean, it's -- by the way, the reason Gene said almost gross leases is that the property taxes are excluded from that calculation.

But in other words, the tenants get the bills for property taxes directly because we're not in a position to control those any better than they are.

But if you really look at the structure of our business, it's crazy.

I mean, we're asking a tenant who may have 1 location in 1 city, a 100,000 square foot small to medium-sized business to underwrite for snow removal and fixing our dock levelers and fixing our air-conditioning units and all that.

And really, it sets up for a very adversarial situation where they gladly pay the rent, which is the big number, and then we spend all our life negotiating the nickels and dimes of these little things.

We're in a much better position to underwrite those costs because we've got a big portfolio that we can spread it over, and we have good purchasing power to drive economics with vendors by aggregating all this demand.

So the way the business was done historically was when the industry was fragmented and the landlords had 1 or 2 buildings, I think when you get to our kind of scale, we've got to put that scale to use for our customers.

And ultimately, that translates into rents that ultimately flows to our investors.

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

Just a few quick questions.

First, just regarding development.

Your start this quarter, margins were a little bit thinner than what we've seen in the last few quarters.

I'm just wondering if that's a mix issue really to build-to-suit.

My second question is related to G&A.

Can you just comment on the severance and turnover that you have within your team?

And then third, I just noticed in your same-store statistics, your operating expenses did increase a good amount over 5%.

And so I'm just wondering if that's all real estate taxes, and so wouldn't be affected by your -- the new gross lease structure.

Eric, I'll start with your last 2 questions.

So on the increase in expenses in the same store pool, what you're seeing is the impact of reimbursable expenses, which hit both revenues and expenses.

If you back that component out, I think, you're going to see rents grow at around 4.5% and expenses grow like 60 basis points.

So it's all reimbursement noise you're seeing run through there.

On the G&A question, it was really -- as Hamid mentioned, we've done some restructuring and making some investments and personnel around technology.

And as a result, we're bringing in people and some people have left and you're seeing those expenses go through.

And that would be the main component of the G&A.

Yes, I'm not going to get into the details of our personnel decisions on a earnings call, that's for sure.

With respect to margin, Eric, I'll take mid-30s margins every day and we thank our blessings.

We go into this stuff thinking that we're going to get 15.

So the fact that we're getting more than double that is good news, and I can't possibly see how that could be anything other than good news.

And -- but it's not going to last forever.

I mean, the margins of this business have to be -- have historically been in the low to mid-teens.

And that's what we're assuming in all our activity, and that's how we're underwriting stuff.

And to the extent we get better than that, we're blessed.

Our next question comes from the line of Michael Mueller from JPMorgan.

If the market rent growth in Europe does go ahead with the U.S. next year in 2019, how long until the same thing happens with rent spreads and NOI growth?

A while because you need many years of rental growth to create that spread.

The mark to market in Europe, I think the last time I looked at is around 10%, it's 9% or 10%.

And obviously, it's in the high teens in the U.S.?

What is it, 18% or something?

19%.

19%.

So the U.S. has doubled what Europe is and you need to have a couple of years of pretty steep rental growth that are not being captured by the rollover leases to widen that wedge.

So a while.

I don't know, I haven't done the math but a while.

Our next question comes from the line of Manny Korchman from Citi.

Just thinking about dispositions, especially in light of the DCT deal.

Should we expect disposition volumes to increase next year because you have those assets within DCT that you want to sell?

Or do you think that, that pace will be consistent with what you've done in the last couple of years?

So Manny, as I mentioned in my prepared remarks, in the last 7 years of the merger, we sold $14 billion of real estate.

That's $2 billion a year or $0.5 billion a quarter.

And we've talked about DCT being $560 million of nonstrategic asset.

We are in no hurry to do that.

And at our historical pace, that's a quarter's worth of work.

So it's not at all a big deal, but we're not in a hurry to do that.

As far as we're concerned, the big strategic part of the disposition program is done and over with, with the Maple Tree transaction, the last one that we announced in a subsequent phase.

And of course, even if you turn over and call 1% to 2% of a $90 billion portfolio, you could have $1 billion to $2 billion of sales every year, and we're certainly going to do that in the normal course of action -- business.

When somebody comes to us and offers -- a user comes to us and offers a price that we can't refuse or the person next door wants to control our site at a premium price, there are always going to be opportunities to call the portfolio profitably and we'll be always looking out for that.

But that's sort of different than a nonstrategic disposition program.

That program has come to an end.

Our next question comes from the line of David Harris from Uniplan.

It's not clear at the moment whether we're going to have a hard Brexit or a soft Brexit.

Could you just explain how you're positioned around this and what your contingency planning?

And also, if we do get a hard Brexit next spring, would that affect your view that Europe will be as positive as you first outlined?

Well, yes.

I wish I knew all those answers with precision.

I mean, I don't know.

Our U.K. portfolio is in the high 90% lease.

The average lease term in the U.K. is well over 10 years.

The credit is exceptional, as you know, particularly the U.K. is a tough place to get entitlements and processing land is a multiyear exercise.

So we think -- and the U.K. has been on fire, literally.

I would put U.K. right on top of the list since the global financial crisis in terms of rent recovery and performance compared to the best of the best markets in the U.S., I mean, L.A., San Francisco and all that.

You would expect that to moderate at some point.

I don't know if it's related to Brexit or not, but still, I would take the U.K. as one of the best markets in Europe or anywhere.

It's just not as crazy as it was a year or 2 ago.

A year or 2 ago, you had Brexit that spooked off a lot of people that were planning to put on developments and demand in the chain.

So you had a very, very unusual situation that led to very big rent increases.

But we're very comfortable about the business in the U.K.

David, the other side of that is just what we obviously -- you can see we have significant liquidity and financial capacity on our balance sheet and in our funds.

So if there's an opportunity for us to take advantage of, we will certainly do that.

I don't think we'll get that chance.

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

Just a clarification and another follow-up question.

Just regards to development, I'm just referring to development starts this quarter because I think you have development profit margin of 17%, which is, I guess, the lowest this cycle.

So I'm just trying to understand how that -- what are the construction cost issue, whether it's just more competitive in terms of the development environment?

And then, obviously, I don't want to get too much into what guidance is going to look like next year, but part of the rationale for the DCT deal is that there would be better external growth opportunities related to that.

So I'd assume that there would be also higher overall development volume as a result of having a larger asset base and more opportunities to grow with your consumer.

So I was hoping you can remark on that.

Okay, as you go through the cycle, a couple of things happen.

You use up the really old low basis plan, that book value.

And therefore, everything else being the same, your margins are going to go down because we now have used up more and more of really old basis land and you're buying more land on the margin of market.

So you would expect pro forma margins to go down on starts, and we're pretty conservative about those.

And I don't think -- yes, you correctly point out that the pro forma margins of starts is as low as it's ever been, but it's twice as big as it should be.

So we don't lose a lot of sleep over that, honestly.

In every case, it's come in higher than what we performed at.

So we're pretty comfortable with those.

I'm not sure I got your second question, second part of your question.

Is it that -- oh, the DCT part.

Look, on DCT, you've got -- to answer your question very clearly, you would have to have known what our development volume would've been without DCT and then you can compare it to whatever we guide to next quarter and reach your own conclusions.

But I think the easier way to do that would be just to look at the development that we're doing on the DCT land in the near term, and that will give you a really good indication of the external volume that we're doing.

Yes.

So Eric, just to put some numbers around that.

In '18, we'll do about $100 million more in development than we otherwise would without DCT.

And then we have a land bank that supports $500 million to $600 million of additional development.

And when we give you guidance for 2019, that will be embedded.

How much is it, what we do, I can't tell you at this point.

But for sure, it will expand the volume a bit.

Yes.

And just to be clear, I mean, we feel great about the DCT deal.

I mean, the only reason that we did it is that we think long term, it's really accretive.

Actually, short term and long term, it's very accretive to our business and we love the quality of the portfolio, so you'll see those numbers coming through.

So our growth rate is going to be pretty good.

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

Guys, just a few follow-ups.

As it relates to guidance for development starts and dispositions, it looks like you have some wood to chop here in the fourth quarter.

Just curious on what the pipelines look like there.

And then just second, Tom, you had noted it would've been, I think, around 4.5% same-store revenue growth this quarter if you pull out the reimbursable impact.

Do you know kind of how that's trended over the last 2 to 3 quarters on the same basis?

Craig, I'll take your second one first.

I think we've been kind of in that zone of around 4% when you strip out.

And that makes sense when you look at our rent change and what you're seeing, that would be a -- I'll check that, but I think that's in the zone of what we're seeing.

And then on your other question on starts and dispo guidance, remember, we just closed in early October a $1.1 billion Maple Tree transaction.

We've got another 1 70 in the second phase that's right behind it that will close this year.

And the balance on -- so that's the dispo side and I'll let Mike address the starts.

Yes.

To put a finer point on that, with those 2 incremental closings, we're 85% of the way through the work to be done on dispositions.

This time last year, we would've been about 60%, so we're way ahead of the game there.

With respect to our confidence in the development starts volume, we, in the last couple of years, have done approximately $1 billion in each of the 4 quarters.

Our visibility to the remaining pipeline is as high as it's ever been in this quarter, and we feel very confident in our ability to do those kind of numbers through the end of this quarter.

Yes, development is always back-end-loaded into the fourth quarter.

It's just the way the business works or something.

Anyway, Craig, thank you for that question.

It's the last one.

And I want to thank everybody for joining our call.

We look forward to talking to you at NAREIT.

And this concludes today's conference call.

You may now disconnect.