Prologis, Inc. (PLD) Q3 2011 Earnings Report, Transcript and Summary

Good afternoon. My name is Matthew, and I will be your conference operator today. At this time, I would like to welcome everyone to the Prologis Third Quarter Earnings Conference Call. [Operator Instructions] Tracy Ward, you may begin your conference.

Thank you, Matthew. Good morning, everyone. Thank you to our third quarter 2011 conference call. The supplemental document is available on our website at Prologis.com under Investor Relations. This morning, we'll hear from Hamid Moghadam, Co-CEO and Chairman, to comment on the company's strategy and market environment. Then from Bill Sullivan, CFO, who will cover results and guidance. Walt Rakowich, Co-CEO, is joining us today from Europe. Additionally, we are joined by Gary Anderson, Mike Curless, Guy Jaquier, Tom Olinger and Gene Reilly. Before we begin the prepared remarks, I'd like to quickly state that this conference call will contain forward-looking statements under federal securities Laws. These statements are based upon 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. I'd also like to state that our third quarter results press release and supplemental package do contain financial measures, such as FFO and EBITDA that are non-GAAP measures. And in accordance with Reg G, we have provided reconciliation to those measures. [Operator Instructions] Hamid, will you please begin?

Thanks, Tracy. Good morning, everyone, and thank you for joining us today. Let me start by saying that I'm very pleased with our third quarter results, our first full quarter of reporting as a combined company. The integration has come together better than expected, and we're already realizing important synergies that will provide long-term benefits to our organization and our shareholders. Execution is solid across all of our business lines, and the implementation of our strategic plan is ahead of schedule. You may recall from our second quarter conference call that we outlined the 4 priorities that will serve as our roadmap for the next 2 years. As a reminder, these priorities are: first, to further strengthen our financial position; second, to better align our portfolio with our investment strategy; third, to streamline our private capital business; and fourth, to build the most effective and efficient global organization in the industry. Our first priority of balance sheet management revolves around dispositions and contributions. We've made great progress and completed $844 million in dispositions and contributions since the beginning of the second quarter. Given the number of transactions in the most recent quarter, the market has clearly spoken that there is no shortage of demand and that capital is available for quality industrial real estate. As a result, we have significantly increased our guidance for disposition and contribution activity for the second half of 2011. Bill will go -- take you through the specifics of that a little later. Our second strategic priority is to align our portfolio with our investment strategy. Last quarter, we completed the compressive review of our entire holdings to identify assets and markets that had a lower level strategic fit with the rest of our ownership. As part of this plan, we exited New Orleans and are well on our way to exiting Korea. On the deployment front, we invested $286 million into new acquisitions and development starts, specifically breaking ground on developments in Japan, Germany and Southern California, where customer demand exceeds existing supply, and we monetized over $20 million of our land bank in the process. In the current economic environment, we're being very selective with our capital deployment decisions, acquiring properties and commencing development only where demand is sound and where underwriting economics justify the risks. I'd now like to turn to our third priority, which is to streamline our private capital business. We've begun implementing a plan to rationalize our funds into a smaller number of differentiated investment vehicles, with appropriate fee structures reflective of the quality of the Prologis brand and the services we provide. In the third quarter and continuing into the fourth quarter, we sold our 20% interest in the ProLogis Korea Fund, liquidated the first phase of the Prologis North American Properties Fund I with the sale of $120 million of assets, and completed the sale of the SGP portfolio into our U.S. Targeted Logistics Fund. Looking into the near future, we're in the various stages of discussions with partners in 4 U.S. funds relating to liquidation, wind down or other restructurings, totaling about $3 billion in private capital assets. At the end of this process, we expect to have a fewer number of differentiated funds, covering the full array of our activities around the globe. These funds will have profitable fee structures and will provide our institutional partners with the best ways of investing in industrial real estate. Evidence of the acceptance of this plan is that we've already achieved the record year of capital raising, and expect to see continued interest from our investing partners. Our top priority remains the recapitalization of our Japan assets, and we've commenced the marketing of 2 new funds in that region. In short, we feel great about the prospects for our private capital business. Our fourth priority, building the most effective and efficient organization in the business, relates to our people, processes and systems. In August, we brought together the company's top 100 leaders for a 2.5-day off-site working session. The level of engagement was very high, and I left the session with a confidence that we're working as one team with one set of goals and a clear roadmap for going forward. We've equipped all leaders with enhanced tools that will further enable realtime monitoring of key performance indicators across the different aspects of our business, including business unit risk, ROI and G&A. The integration team is intensely focused on building a world-class management information system, which, once complete, will provide our teams and the company with the data and infrastructure that is unparalleled in the industry. As always, but especially in today's environment, we believe our success is all about execution. If we execute well, we can navigate our business through any market cycle. While economic growth maybe slower than originally anticipated, we expect the rebuilding of inventories to normalized levels to be a powerful driver of demand for industrial real estate, just as we've discussed for some time now. Today, the utilization rate of our facilities remains high, and we see incremental demand for new space going forward. This is evidenced by leasing activity, which was strong across all our major regions including Europe. In fact, the team delivered the strongest third quarter of leasing since 2008. Much of the success we've had in the third quarter was a result of the talented and dedicated global team firing on all cylinders. Walt and I are very proud of what the team has accomplished thus far, and we're just getting started. Now I'll turn the call over to Bill so he can walk you through the financial results and update you on our guidance.

Thanks, Hamid. This morning, I will focus my comments on 5 key areas: first, enhancement to our supplemental package; second, results from the quarter; third, our capital markets activity; fourth, guidance for the balance of the year; and fifth, the progress on merger integration. Following our second quarter call, we actively sought input to the supplemental disclosures from investors, research analysts, as well as our own people. As a result, we made what we believe are significant enhancements to the package this quarter. Notably, we expanded the disclosure of our operating portfolio on land by market. We reoriented the capital deployment schedules, detailing the totals, as well as our share of the dispositions, acquisitions and development. We enhanced the visibility into our co-investment funds. We added disclosure around our debt metrics. And finally, we modified the NAV component disclosure to provide a clearer view of the operating portfolio NOI for valuation purposes. We look forward to your feedback on these expanded disclosures and will continue to listen to reasonable suggestions for incremental or clarifying data opportunities. Now let me turn to the third quarter financials. For the quarter, core FFO was $0.44 per share, inclusive of a current tax benefit equal to approximately $0.03 per share. The operating performance for the quarter exceeded our internal forecast, principally due to: better-than-expected occupancy, driving higher NOI; lower-than-forecasted G&A, reflective of our focus on and success in driving the merger synergies; and lower-than-forecasted interest expense, principally based on lower borrowing costs. Moving now to our operating portfolio and metrics. Leasing volume was solid across all regions and, in total, we leased 33.4 million square feet during the quarter. Europe was a particular bright spot in the quarter, given the macro issues which resurfaced in mid-August. Our European operating portfolio ended the quarter at 90% occupied, up 70 bps from Q2. Our overall operating portfolio was 91% occupied at the end of the third quarter and increased 30 basis points from the second quarter end. In our same-store portfolio, net operating income declined by 0.7% in the third quarter. As a result of the purchase accounting, we marked all of the AMB and PEPR leases to market and restarted rent leveling. The net impact of these noncash adjustments was approximately 70 basis points. Without the adjustment, same-store NOI would have been flat. Our same-store NOI will be similarly impacted through Q2 2012. Our expectation is the same store [ph] NOI for 2011 will be plus or minus 50 basis points for the year. From a capital deployment perspective, we have built in dispositions and contributions, totaling $333 million for the quarter at a weighted average cap rate of 7.3% and land sales proceeds of $58 million. Prologis's share of the proceeds from those transactions totaled $292 million. We acquired $121 million of buildings in the third quarter at a weighted average stabilized cap rate of 7.2%. Prologis's share of total investment was $70 million. We commenced $134 million of development, which monetized $20 million of land from our balance sheet. Of the total expected investment, 38% was inside the funds and 62% was on the balance sheet. Prologis's share of total investment was $98 million. Turning now to capital markets. We had a busy quarter on the capital markets front, completing over $975 million of capital markets transaction, of which $550 million was Prologis's share. We bought back $135 million of our 2012 convertible debt in the open market. We bought EUR 64 million or about $85 million of the PEPR 2014 bonds in the open market. We paid off EUR 109 million or about $146 million of PEPR's 2012 corporate term loan with the proceeds from the PEPR equity offering and PEPR retained cash flow. Importantly, PEPR's debt rating was upgraded to investment grade, and the interest rate on the PEPR bonds was reduced by 175 basis points as of October 23. We paid off refinanced or extended $410 million of other secured and unsecured debt, and we closed on a new $200 million unsecured line of credit for our U.S. Logistics Fund. This 4-year term facility will be used as interim capital for acquisition activity, prior to refinancing on a long-term basis. Q3 was kind of a push relative to debt paydowns. However, our overall debt metrics improved due to the underlying operating performance. We have positioned ourselves well to achieve the deleveraging that we have as one of our 4 strategic priorities. In that vein, since the beginning of Q4, we have closed on $453 million of contributions, with Prologis receiving 100% of the proceeds. Those proceeds were used to pay down $320 million of 2011 and 2012 secured debt maturities, as well as over $125 million of our line, all of which was on our balance sheet. Let me turn now to our guidance for the remainder of 2011. In light of the robust sales environment for industrial property, as well as our desire to fully kickstart our deleveraging, we are substantially increasing our disposition guidance for the second half of the year to $1.8 billion to $2 billion from the original target range of $1.2 billion to $1.5 billion. With $844 million of contributions and dispositions completed so far in the second half, we need just over $1 billion during the remainder of Q4 to reach the midpoint of our guidance, of which over 90% will be Prologis's share. We expect roughly 37% of that will come from contributions to the funds and 63% will be third-party sales. The assets related to the fund contributions have been identified and the funds have the capital raised and allocated. Our third-party sales activity is well underway, focused predominately in the U.S. and Europe, with more assets or portfolios active than necessary to achieve our target. Turning to the acquisition guidance. We will continue to be disciplined in our capital deployment and only complete capital transactions that meet our return and risk hurdles. Our original guidance on building acquisitions for the second half of 2011 was a range of $300 million to $550 million. We are now lowering the range to $225 million to $275 million, our share which will be 30%. We closed on $121 million in Q3. Therefore, our guidance range for Q4 is roughly $100 million to $150 million, with 100% of that activity scheduled to take place in the European and U.S. funds. For development starts, our original guidance for the second half of 2011 was a range of $600 million to $800 million, which we are now reducing to $325 million to $375 million. We started $134 million of developments in Q3, of which Prologis's share was $98 million. Our guidance range for Q4 is $190 million to $240 million of development starts. Approximately 60% of those are targeted to take place inside the funds, while 40% or so will be on the balance sheet and Prologis's overall share will be approximately $130 million. Roughly $250 million of the guidance reduction relates to timing around the number of build-to-suit transactions. We remain confident in those transactions, but it moved the expected timing to 2012. Based on our performance in the third quarter and our expectations for the fourth quarter operating environment, we are raising our core FFO guidance for the second half of 2011 to $0.83 to $0.85 per share. This represents an increase in second half guidance of $0.04 per share from midpoint-to-midpoint. With $0.44 of core FFO reported for Q3, this translates to guidance of $0.39 to $0.41 per share in core FFO for Q4. Of the $0.44 per share core FFO in Q3, $0.03 was a tax benefit that was expected and embedded in our original guidance, and hence, $0.41 was the run rate on operations. Our substantial disposition and contribution activity planned for Q4 will have a dilutive effect versus our Q3 NOI run rate. This decrease is expected to be mostly offset by increased NOI associated with the expected occupancy gains, as well as a decrease in interest expense, as we used much of the Q4 sales and contribution proceeds to pay down debt. Finally, let's turn to our integration and merger savings. We are very pleased with our overall progress, which is on target for $90 million or more of merger savings. We are ahead of plan from our original plan, from a timing standpoint. In addition to this merger cost savings, we are also realizing significant interest cost reductions related to the reduced borrowing margin on our lines of credit. In closing, we feel great about where we are and where we are going. This merger is working. We are performing well and are executing on every one of our strategic initiatives. At this point, I will turn the call back to the operator to open up for questions.

[Operator Instructions] Your first question comes from the line of Ross Nussbaum with UBS.

On the disposition front, can you add a little color to the types of assets that you're selling? I know you mentioned U.S. and Europe primarily, but what types of assets fit the profile for the increased dispositions. And as we look ahead into 2012, is it reasonable to assume that this pick up in disposition activity is the trend that we should expect into next year as well?

This is Mike Curless. In terms of profile, the mix of the offerings are out there. We currently have 8 packages worldwide that are out, 5 in the U.S., 3 in Europe. And I'd say it's a good blend of older and newer product in both global and regional markets, and we would expect that similar mix to carry forward into next year. And we would anticipate that we'd have a very active disposition platform next year as well.

Your next question comes from the line of John Guinee with Stifel, Nicolaus. John W. Guinee - Stifel, Nicolaus & Co., Inc., Research Division: Mike, why don't you just drill in a little deeper on that and talk about the fact that some of your buildings have relatively short lease terms, some of them have much longer lease terms, some of them are still probably above market, some of them are below market, and talk about how you think about your dispositions as it relates to premium or discount to replacement costs and overall of exiting markets.

Okay. John, let me take this strategically and Mike can fill in the details. The bottom line is that we have divided up our markets into the 3 categories that I think we explained on the last call. We have the global markets, which are really representing about 80% of our current holdings that are tied to the global supply chain, and they're identified in our supplemental. You can see what they are. Those, we're basically pruning. Very small, I would say, less than 5% of those will be sold over the next couple of years. And it's really just that we have some soft markets that are not a perfect fit or there are specific assets that may have issues. There may be user sales involved in that. There are -- but a very small portion of those assets are being sold. Then we have the markets that are the regional markets that represent about 12%, 13% of our holdings. I would say, there, we're going to, over time, own the top 50% in terms of quality and age of those assets in those regional markets, and we're going to increase our holdings by building out our land bank in those markets. So basically, we'll sell some, will build out the land bank, and we will generally have some holdings of assets and regional markets but probably smaller than the 12%, 13% that we have today. And then we have the balance of the portfolio, which is 7% in other markets, that you can think of as exit markets, and those markets will be eventually sold -- will be sold out over the next 3 years. So with respect to trends with leasing, length and all that, there -- it's more of a submarket asset decision than what the specifics of leasing are at any given moment. Obviously, if a building is vacant and it's going to be discounted heavily, we'll lease it before we put it in the pool. But we're selling enough of the stuff over time, and we have enough visibility into what we're going to do in the future that we can generally manage that process pretty well. So I wouldn't read too much into the trends of all that. With respect to replacement costs, I would tell you that with land at market and, of course, nobody really knows what the -- what market value for land is today, I would say most of the dispositions would be still at a discount to a replacement cost. But of course, some of them maybe older products, so how do you factor depreciation and all that. But I would say we're not selling too many assets at above replacement costs, where replacement cost is a hard thing to establish. Mike, any additional color on that?

Don't think so.

Your next question comes from the line of Jamie Sullivan with Bank of America.

So my question is in terms of the leasing discussions you had in the third quarter, the kinds of leases you signed in the third quarter versus what you are having -- kind of discussions you're having today and even for people who are looking in the fourth quarter. Is there any change in the kinds of demand? I mean, for example, like, was third quarter more pent-up demand that's finally is getting signed or has -- maybe now has changed? I'm just trying to get a little more color on what's really going on out there.

Right, Jamie, this is Gene. Let me take a stab at that and maybe Gary can put some color for Europe and Asia. But frankly, we really haven't seen that. We've seen the same patterns of a lot of demand from larger companies typically looking for larger floor plates, and those spaces are really beginning to run out in the U.S. at least. But that pattern continues. In terms of small businesses and small units, frankly, we expected, given the headwinds that we faced in August and September, to see that dampen back quite a bit, and we really didn't see it. Perhaps that's something we're going to see translate in the fourth quarter. We'll see, Jamie, but we didn't see that either. And as a matter of fact, for those units, there is positive absorption in our portfolio and the broader national markets. And these are for the small units. But I think your question is really directed to what have the -- of the economic headwinds or macro headwinds in August and September done to the nature of demand. Frankly, in the Americas, we really haven't seen it set in.

Jamie, let me give you a little bit color on Europe. When you look at traffic, July and August is as July and August is in Europe. It's typically lower than in April and May, but again, that's typical for summer months. We saw very, very strong September and October shaping up nicely. When you look at really what's happened over the course of the last 3 quarters in terms of trends, we've got 2 things happening in Europe, you've got a consolation trend and you got an expansion joint. 20% of the deals that we did over the first 3 quarters were consolidations. And basically, what's happening are companies are still trying to squeeze costs out of supply chain. That makes perfect sense in this environment. The second thing that's happening though that I think is more interesting is we're seeing expansions. You've got 52% of our leases were the first 3 quarters that are in some form of expansion mode, and that is directly tied to the fact that you've got very, very high utilization rates from our European customers, in excess of 90% in some cases. So I think one of the things that we're seeing and the result of that is that take up of space. There's literally no new spec space in Europe, and you see that manifested in build-to-suit development. Today, when you look at the build-to-suits we've done, we have 14 development starts, 10 of which were build-to-suits in Europe. So I think demand is still good. We expect it to be strong through the balance of the year.

Your next question comes from the line of Chris Caton with Morgan Stanley.

I was hoping we could talk for a second about the private capital markets. How is -- how are your LP partners doing in terms of contributing new capital? And if you could specifically comment on progress in Japan, that would be helpful.

Sure, Chris. This is Guy. Let me start with the Japan part. We are in the market with a private placement memorandum on our Japan fund. As such, there's not a lot I can talk about on the public call so as not to be seen as soliciting. But those initial discussions are going well. There'll be 2 funds: one an open-end fund, to which we'll contribute our assets on our balance sheet; and second, the development fund that we will -- it will be our exclusive development vehicle for about the next 3 years in Japan. With respect to discussions with private capital investors, we've had a series of meetings with them. We had investor forums in New York and Paris over the last quarter. This is the fall conference season. We've created a number of other venues in which to talk to them. But in general, I'd say that they're still interested in industrial real estate. A lot of these pension funds, institutions that they have in a mixed asset portfolio looking for 10% real estate, if that's their allocation, those don't change. Those don't change week-to-week or month-to-month. It's still a 10% allocation, and these are things they review over a year or 2 or 3 years. I think -- and also talking to them, if you elevate the discussion to maybe the CIO level, everyone's looking at where there might be risks, but in this environment, do you want to take money out of real estate and put it in bonds? That's not a question that they're asking themselves right now. I think on the margin, where we might be seeing a shift, in the spring, there's a lot more discussion of, “boy, core has gotten pretty expensive, cap rates are getting low, is it overbought.” You've heard people pontificating on now might be a time to go up the risk curve, go for a little yield. You're hearing much less of that right now, where I think people are appreciating a little bit more the safety of core. But I think it's still going to be a good fundraising environment for us for the next several quarters.

Your next question comes from the line of Michael Bilerman with Citi.

Anyways, Hamid or Bill, I want to spend some time just talking about the balance sheet, which is obviously one of your key priorities. Where you sit today, debt-to-gross assets is about 46%, debt-to-core-cash EBITDA, call it, 9.5, 9.6x on an annualized basis. And you obviously have about $1 billion of contributions and sales in the fourth quarter, which obviously helps debt to gross assets come down, but it doesn't make -- it only makes 0.25-point dent in debt-to-EBITDA because you're selling away cash flow. So what exactly -- as you think about your targets, what are you targeting specifically to get to in terms of your debt metrics? And I realize part of it's deleveraging and part of it's going to be increases in existing cash flow. In -- how are you going to get to those targets? And then what sort of dilution should the Street sort of expect as you delever? And, Bill, you talked about the fourth quarter being lower because you're starting to sell assets, and obviously selling assets at 7%, 7.5%, 8% cap rates and paying back a little coupon debt is dilutive. So I'm just trying to put it all together about where you really want to be. Hamid just talked about top 3 balance sheet, but can we just get specific in terms of what are you exactly targeting on a debt-to-EBITDA, debt-to-assets and how you get there?

Miguel, I'd like to address that excellent question. Basically, the answer is the same as the material that we showed you in our equity offering. And I think just to refresh your memory on the 3 metrics, I think in terms of debt turns to EBITDA by 2013, we're going to be in the 5 to 6x range. In terms of lever of -- level of debt to book or market capital or whatever you want to look at it, we're going to be around 30%. Bill and I had a little thing going, whether we're going to be 30% to 35%, I think we settled that around 30%. We're going to have a little bit of preferred on top of that. And in terms of coverage, we're going to get into the high 2s, and half of that improvement is going to come from operating results and half of it is going to come from deleveraging. The dilution is not as bad as you think because we're monetizing land at the same time, which has negative yields. And when you blend that in with dispositions -- and I don't know where you got your 8%, the dispositions have been in the low 7s, and we're actually not selling the best assets in that portfolio. And you look at the fact that the Japan assets on our balance sheet are probably 5.5% cap assets. We're actually probably going to be moving off of the balance sheet between land at 0 or negative, Japan at 5.5%. And, let's say, U.S.-type dispositions at low 7s, we're probably going to be moving assets off the books at 5.5% to 6%. And we have some opportunities to buy back some pretty expensive debt at about that. So this is one of the few times in life that you can actually delever and not suffer too much dilution and, hopefully, get multiple expansion because of a better balance sheet. So that would be the big picture number. Bill, do you want to -- and I think we're doing all that sooner than we thought based on the progress, at least, on dispo side. Bill, you want to add color on that?

Yes. I'm going to add, I think you hit the metrics right on, Hamid. And I would emphasize that particularly as we look into 2012 and what our target dispositions are going to be, we're not guiding for 2012 today. But I mean, Japan is obviously our #1 focus, and that is a pretty good cap rate market today. And so it will be modestly dilutive, but between occupancy gains that we expect, rental bumps and hope for a turnaround in rental rates over the next 2 years, as well as disposition of the land, it, overall, will not be as dilutive as one might think.

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

Returning to your comments about decrease in the development starts for the second half of this year -- or fourth quarter and maybe going forward in 2012. How much of that is being driven by your decision to decrease spec development versus build-to-suit activity? And could you also tie that in with how much land you think you can monetize in 2012?

We're not going to guide to anything on 2012, Ki, but I'd -- let's let Mike kind of talk about the specifically and build-to-suit.

Just kind of circling back to [indiscernible] comments, the delta in the guidance this year is driven by approximately $250 million build-to-suits that we're actively working on, that just have been pushed into the 2012. We fully expect to be successful on those deals. So again the operative part there is a reduction. It's a delay in the build-to-suit volume. We have not had any marginal or any noticeable decrease in our plant spec volume. Spec buildings we've built this year have been all very well thought out and then they're in markets that we have existing parts, long track records and in cities and end markets that have extremely high demand.

Yes. I just -- I would add I think our development starts for the rest of the year, you're going to see in -- again, some of those better markets, floor spec development in Brazil and other submarkets where -- and we've talked about these. We're highly focused on a number of submarkets or markets in the U.S. and in Europe, where spec development, in fact, does make sense today. And back to Jamie's comment earlier, in the grand scheme of things, the -- most all of our markets are running out of a big box space today. And so there is a trend towards leasing the bigger spaces today with the lack of new supply. Don't be surprised to see a larger build-to-suit, as well as, in select markets, spec activity because we think the demand is there.

Yes. I don't want to pile on here, but I think there's some important some things but maybe we're assuming and we should say it, so that we're all on the same page. I think the fact of the matter is that the big companies around the world are using this downturn as an opportunity to take cost out of their supply chains, because the top line growth in their businesses is more anemic than they would have thought otherwise. So when you can't grow your top line as much, you try to focus on cost. And those companies have the balance sheet and access to capital to be able to invest in their supply chain. So the first thing they want to do is consolidate, and they go around looking for buildings. And they all start with a build-to-suit requirement, because usually the operating people want to design the perfect building for them. Except when they get out there, they realize that there are still some spec buildings lying around that while not perfect, they can lease at 70% of what it would cost to build a new building. So the first order of business is for all of those things to get filled up, and they just did. I mean basically, our buildings over 250,000 feet, I think, are 99% occupied. So there is very little that they can see in bulk space in our portfolio, and I think we have a probably a pretty reasonable view of the market, about 600 million feet of space, so. And the big spaces are gone. So the next phase is that those things -- they can't buy those buildings anymore at 70% of replacement cost or lease them at that rent. They're going to have to actually go through with their build-to-suit. And there's a little bit of sticker shock involved in that and that delays decisions. So that's kind of what the dynamics of the marketplace is. But at the end of the day, unless somebody beams in some really big buildings from outer space, it's going to lead to more build-to-suit activities going forward, not because we're in such a great economy but because they need to continue to take costs out of the system. So that's the dynamic of the market.

And that's what exactly we've seen in Gary's region, what the high percentage of build-to-suits do to the dearth large available spaces in existing buildings.

Your next question comes from the line of Michael Mueller with JPMorgan. Michael W. Mueller - JP Morgan Chase & Co, Research Division: I know you don't want to talk about 2012 with respect to dispositions, but just when you think about the next few years, think about assets that you would like to sell to third parties, product that you'd like to ultimately put into fund, can -- what is the overall size of the pool that you are looking at selling or contributing at this point in time at PLD share?

I think I will refer you right back to when we did the equity offering in July. Nothing has changed from the kind of numbers we were talking about. Basically, we have a deleveraging strategy based on some fund contribution, some third-party sales and a new fund formation and our numbers, in our view, has not changed in any material way. The only thing that has changed is that on the contributions and third-party sales, we're executing much faster than we thought before. And I think at the time, the consensus of most people listening to our deleveraging plans was that we were being aggressive. And I don't know ultimately whether we -- it will prove that we're aggressive or not, but I think we're actually, on the front end, appear to have been somewhat conservative. We're doing better than what we thought, but nothing's really changed.

Your next question comes from the line of George Auerbach with ISI Group.

Just a follow-up on Ki's questions. Can you help us think about how the development pipeline could or should ramp up over the next few quarters? I know you spoke in the past of a $2-billion-plus annual start run rate. But it seems, at the time, it keeps getting delayed by some macro headwinds. In your view, do you guys have paid the kind of $2 billion run rate will be a 2012-'13 event or should we see this being a bit further out than that?

George, I really can't give you a prediction on what the world economy is going to do in the next couple of years. And I think the worst part of any kind of guidance is capital deployment guidance, because it depends on what the opportunities are, and the opportunities, at best, we have a 6-month view of what they are. So beyond that, we get into speculation. I think the 2 number -- $2 million -- actually, it's a $2 million to $3 million number that you recall -- billion dollar number that you recall is a summation of our business leaders in various markets in the world telling us what they think the run rate opportunities are in their markets at the market equilibrium. So when things are normal and vacancies are at equilibrium, what is the volume of business that you can do to that market? You add up all that, and it ends up being about $2.3 billion, $2.4 billion. But whether it takes us 2 years to get there or 3 years to get there or never to get there, I mean, we're not going to try to drive to that number just to meet an artificial guidance and do bad deals. We're going to be patient and do the right deals. And if we're to fall short of that, so be it.

Your next question comes from the line of John Stewart with Green Street Advisors.

First of all, I wanted to echo Jamie's point on the much-improved disclosure. I think all of your public market constituents appreciate that, so thank you for that. Hamid, I was intrigued by your comment about the $3 billion of U.S. funds that you're winding down. I was hoping you could give us an update in terms of that process, where you stand. And then I appreciate that you aren't giving 2012 guidance and can't really forecast the global economy out 2 to 3 years, but I was hoping you could give us a bit of macro perspective, ideally on the U.S., Europe and Asia, over the next few months. And then two, it's -- maybe a related point. Just curious that all of your investment activity assumptions are dilutive. You're ratcheting up your disposition guidance and reducing investment and development and acquisitions, yet raising FFO for the fourth quarter. So just hoping you could touch on that as well.

Okay. Let me -- let Bill do the numbers for the fourth quarter. In terms of absorption, we do have a point of view, but frankly, it's a little frustrating to talk about it because nobody believes it anyway, so -- but actually, we've been pretty remarkably good at predicting absorption. Three years ago, we said that the market was going to turn and U.S. was going to absorb 100-million feet starting mid-2010 and everybody basically pooh-poohed that. And this year, we said that absorption was going to be in the mid-100-million-foot range in the U.S., and I think it's going to end up being 135 million feet. And at least, based on 3 quarters, we're well on track to have that. And I don't think we've really changed our view because of what the headlines have been in the last couple of months. I think if you're going to ask me for a number for 2012 in the U.S. absorption of industrial space, I'd say it's in the mid-100s, call it 140 million to 150 million feet on that range. And that's what our model show and that's what IAI and IBI indicate today. Of course, that doesn't assume any further inflection points in things that we don't control. So we -- and by the way, that's not spectacular. I mean, this economy should be -- the U.S. market should be absorbing 250 million feet a year, so we're way subpar in terms of a normal market. So it's still a pretty anemic market, but it's not a negative market. The key difference between now and 2008 is that 2008 came after many good years, and people were always at growth projections. People had always over-leased space in anticipation of growth, and there was excess capacity in the system. In this time around, they've squeezed everything they can, so they're very tight on space. And as the inventory to sales ratio recovers, and it has been recovering in the last 3 or 4 months, even in light of the slowing economy, that's really what's driving absorption. It's not really GDP growth that's driving absorption. On the $3-billion private capital thing, I didn't say we're going to get out of $3 billion of assets. I said $3 billion of funds are in play. The end result of that will not be that $3 billion of assets go away. In fact, we're going to end up with a bunch of those assets, because we own a percentage of those assets. And we may buy some more and we'll end up recapitalizing some of those assets in the fewer vehicles that we have going forward. With respect to the specifics supporting that statement, Guy, do you want to make some comments?

Yes, sure. This is Guy. Those are 4 existing funds we have. They are under fee structures that really don't allow us to make a profit for the management that we do. They also have governance in which we have to go to our partners or a third party for approval on decisions down to the operating level, like leasing and things. And on a 600-million square foot portfolio, it just doesn't make sense to have a certain portion of them that our teams can't manage and lease like they do the rest. So we are in conversations with our partners and investors. I think what you'll see over the next couple of quarters is those 4 funds drop off of our supplemental. Some of those assets will be sold, some will be transferred to our partners, and a number of them will just come on to our balance sheet. You'll see them on the balance sheet for a while until they go back out into other funds, and we expect that to happen over the next couple of quarters.

If I just add to that and, Guy, tell me if I'm speaking out of school, but I mean, I'm thinking of 3 specifically, is our underlying investors actually want to continue to buy, but we have funds. Our open-ended funds are focused on very specific strategies. So part of this is even eliminating some of the conflicts on buying, and I don't know how big a deal is.

Yes. Just one last comment to make sure that it's not taken wrong. All 4 of these are conversations that we initiated based on the directions that we're going strategically, the private capital platform. None of these are initiated by our partners.

And finally, John, on the analysts package, thank you. Your comments and comments we got from others are very helpful in revamping that and...

And Tracy and her team did a fabulous job.

Yes, did a great job.

Seeking out opinions and then guiding that process, so.

Your next question comes from the line of Sloan Bohlen with Goldman Sachs.

Maybe if we could stick with the a $3-billion wind down just for a second. Could you guys even provide sort of kind of a big goal post for us to look at in terms of maybe timing, potential proceeds, how much debt is tied to those funds? Just give us a sense of what could come up the balance sheet.

If I were going to pick a guess, and it will be a really big guess, is that we're going to end up retaining more than 50% of those assets. And on average, those assets are 50%, 60% probably levered. So those -- but that's a real wild guess. And all of these things are in play, so I don't think -- I don't want that to become to firm a guidance or whatever. But that's sort of magnitude what we're talking about, which in the context, by the way, of $45 billion platform even though those are billions of dollars, it's not a needle moving in very major way.

Your next question comes from the line of Dave Rodgers with RBC Capital Mortgage (sic) [Markets].

Hamid, in that thing during your presentation you referenced earlier, I think one of the last sources of capital was the recapitalization of PEPR, and you discussed it to some degree on the last call. I was wondering if you can provide an update on -- we can obviously see in the supplement where you are with the ownership, but the hurdles to getting to the point, both legally and financially, where you could begin to siphon that off the balance sheet again and broad range again, maybe wide goal post in the sense of when you would be ready to do that.

I'll let Walt actually talk about that. Walt?

Yes. Hopefully, everybody can hear me. Dave, first of all, I'd say that we've been very focused on, first of all, managing the operations and PEPR's debt profile. Bill went through some of those metrics, and we were pretty doggone pleased that we got the upgrade from Moody's. We're going to save EUR 9 million a year in interest. And also as Bill said, we're not done yet. We're going to continue to retain cash flow and continue to pay down debt. So we are -- we've been very focused on the operations. I'd say as regards to our plans for the future, I don't think anybody believes that PEPR is in the right structure for the long run. But these things take time to sort out, mainly because the process involves multiple parties, some regulatory oversight, that sort of thing. I just think it's too early to speculate at this point in time on our plans right now. And so in the meantime, we're going to continue to focus on operating the portfolio. And I think we'll let you know more as we gain a little bit more insight in the future. But I think it's going to take some time and there are multiple parties and the like involved at this point.

Yes. The only thing I would add to what Walt said is that if you go back and look at the presentation that we both referenced, you'll see that the PEPR recap is actually in the different section and towards the bottom of the page. I think the assumption you should make about that is that we're totally comfortable holding PEPR as it is for a long period of time, and that plan goes to 2013. So without being predictive about the timing, I would say we're hankering for the long term of owning and running PEPR the way it is. And if we end up doing something different with it, great.

Your next question comes from the line of Steven Benyik with Jefferies & Company. Steven Benyik - Jefferies & Company, Inc., Research Division: Great. I was hoping to delve a little bit further into the asset sales side of the equation. You're looking at over $600 million of asset sales through year-end to third parties. I was hoping you could talk a little about the profile, the buyers that are interested in those assets. And then just more broadly, when you're looking at getting down to a 5, 6x net debt-to-EBITDA, you're probably looking at a couple of billion, $2 billion to $3 billion of dispositions annually through 2013. So I'm wondering on those back-end loaded dispositions, is there a meaningful difference between what has been sold recently, that $844 million, versus future sales, then some of those could be coming from more of the regional or other markets that represents 137 million square feet according to the sub?

Okay. In terms of the profile of sales down feature, as I mentioned before, I see the profile, the types of buildings to be very similar. And in terms of our disposition activity right now, the early read is -- has been very positive. We have a large portfolio of United States and one of the United Kingdom. We just received 22 offers across those 2 portfolios. So we're pretty excited with respect to the initial reads in terms of the activity. We have offers coming in on the balance of those here in the next couple of weeks. So for this year, again, we feel very confident in terms of our ability to exceed the midpoint of the guidance. And I feel comfortable about getting that ramped up.

Yes. And I don't know what you're referring to as the 137 million square feet, but I think one way to think about it, if you're going to want to be very numeric about it is that I think you should think about 3% to 5% of global markets. You should think of 30%, 40% net because we're going to be obviously building out on land bank. 30%, 40% of the regional markets and all of the other markets, essentially, over the 3-year time period. And the only thing you should conclude is that it's actually not back-end loaded, but more front-end loaded than our plan was that we laid out in July. Because as you just heard, we're basically -- we're seeing a good market, and we're actually moving more of that up. And don't forget the contribution side, which is the side that we control more and have very good visibility into, because that accounts -- the contributions and formations of new funds, the Japan fund, for example, are a big source of that. So even putting PEPR aside, per the previous question, we have significant fund contribution, fund formation and third-party sale opportunities available. In fact, we have, I would say, probably 130%, 140% of what we need between all those different venues. So we don't have to execute all of them.

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

Hamid, I just wanted to get some commentary on how you see the dividend going forward, given that you don't seem to be covering it on a cash flow basis at this point. And the ramp-up and disposition activity late this year and next year, combined with lower acquisitions and development, doesn't really bode well for coverage, at least, in the near to midterms. So just wanted to see how you're thinking about that.

Let me jump in for one quick second and everybody can slice and dice numbers. But we monitor sources and uses statement on a monthly basis. And at this point, our AFFO, the way that we view it internally and calculate it is right on top of the dividend. And so we cover through AFFO. On the dividend side and really our capital markets transactions are the plus or minus on our debt reduction. And so again, I'd be happy to -- and Tracy here or myself or the combination, sort of walk through offline with where you're thinking about AFFO. But we cover our dividend today. We're not guiding to anything we might do in 2012 as it relates to operations capital or dividend at this point. And we're not being nasty here. We're just -- that will come as we pool together all the budgets, and all of that is a subject to our Board of Director's approval in our December meeting, not so -- but we're covering the dividend today. So look to the capital markets transactions as the plus or minus on the debt reductions, so.

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

Just 2 quick questions. One, have you guys looked at the FASB accounting proposal for fair value accounting for real estate. And given that in terms of a low dollar value property type, how much do you think that'll cost you on an annualized basis? And second, I guess, it changes weekly, but if I look at the CDF market for your debt, it's come down significantly from the peaks. And when you guys look at just overall refinancing, is it mortgage debt or unsecured? And what you think the mark-to-market will be going forward?

I'm sorry, I was laughing about the fair market value accounting. I may have missed some of the second part of it. On the fair market value accounting, let me just address it in a couple of ways. We fair market value a whole bunch of the funds today and so the cost associated with doing that is already embedded in the cost structure. And to the extent that if reserve or some form there thereof comes into play, yes, there will be some incremental costs associated with the appraisal activity, et cetera. It's sort of -- you don't want to get me on my high horse relative to FASB at this point, because they're changing so many things in a period of economic uncertainty. That is sort of goofy. But anyway, we're taking that into account and every time I turn around the sort of the move to that is getting pushed off one more year or so. We would actually prefer the sort of fair market value accounting today, because it would give us an opportunity to let people know the value creation that we're going to generate through our development activities, et cetera, and get away from this sort of gains and losses and things like that. So overall, the cost -- it will cost us a little more. I don't think it's going to be anything exponential. And I feel good about that. In terms of our refinancing strategy or debt financing strategy, let me simplify it as best as I can, which is, everything that's on our balance sheet today, our intend is to pay off as it comes due. And so -- and I've said this a couple of times, you may see us do something in the form of a public bond in Europe or a bank longer-term term loan in Europe to get some euro-denominated debt, because we do want to lower and put it in more of a natural hedge to the euro currencies. We don't -- we wouldn't do that because we need the cash. We'd do that basically to try to get some of our U.S.-dollar denominated debt into euros. But on the balance sheet, effectively assume that everything that comes due for the foreseeable future is going to be paid off as it matures. On the -- in the fund side, the funds and the underlying investors in certain instances like leverage, and most of them are targeted in that 45% to 50% range. We have a couple of funds that are new fund with Allianz, and Europe is an example of an unlevered fund. We don't use leverage in Brazil today. But overall, most of the fund investors sort of target that 45 to 50% levered category. Today, the vast majority of that debt is secured. We're looking in the future and particularly with the larger open-ended funds of going to more of an unsecured debt structure, because it gives us term and a little more flexibility and gives us unencumbered assets. So that if we have a pinch in a financing environment in one way shape or form, we have sufficient assets that we could use on a secured basis. But particularly in Europe, the secured financing is readily available. It continues. We've done a lot of transactions. We're doing more in the fourth quarter here, et cetera. But it doesn't come with term. And so in essence, what you're going to see is probably a move to a more of an unsecured debt strategy in the funds, but that won't eliminate all the secured debt.

Yes. The only thing I would add, Ki Bin, is -- and you touched on Bill's favorite subject, because he can get a chuckle out of this accounting something. We kid him about that, internally, quite a bit With respect to the CDF issue, I want to address something that may not be apparent. One of the things that actually keeps me up at night a little bit is that I wish we could buy our debt back based on what shows up on the Bloomberg screen because we can. Because I think one of our real issues is going to be that we're delevering faster than we thought, and we're getting more cash because of the dispositions. The pace of disposition's faster than we can get at our debt that expires. So I would love to be able to actually, as we generate cash from these proceeds, be able to go back and buy the debt back at what's theoretically on the screen, on the CBS, but we can't. I mean, it just -- we always have to end up paying a lot more than that.

We've asked all the bankers to figure out how we can buy it, how we...

Yes. So if you guys can figure out a way that we can buy at what's on the Bloomberg screen, it would be very helpful to us but -- because we'd push on disposing them faster.

Your next question comes from the line of Dee Sakwa with ISI Group.

It's Steve Sakwa from ISI. Hamid, I just want to know if you could talk a little bit about the rent roll downs. It seems like it's been sort of persistently stuck here in kind of the high single digits. And I know at one point you thought that, that number might trend towards kind of flat in 2012 and certainly turn positive in 2013. And I'm just wondering given the uncertainty we're seeing in the marketplace, do you see that getting pushed out at all, or do you see enough strength taking place in the markets where you can actually see kind of the rent roll turning positive sometime at 2012?

Well, from a very macro picture, I would say that, that ranges 2012 or 2013 and we have a little bit of an in-house thing going on about that, actually going back about 2 years exactly, when the turning point will be. But let me turn it over to Gene for the specifics.

Yes. I think those -- that forecast holds and the other thing you got to remember about this metric, it's really, really volatile. It's a chunk of the portfolio, and it is affected by what happened in the prior period. So it will be volatile. And you're going to see it go up. You're going to see it go down. But it will trend in that direction. And obviously, we're getting into a period now where we're rolling leases that were signed sort of postcrisis, and we did shorten up lease terms on both companies. As to when that inflection point is, as Hamid mentioned, maybe that's a bet, but it's in that -- it's going to be in that neighborhood, in my view.

My bet is third quarter '12, but that's not the official company position.

Really?

Yes.

Your next question comes from the line of Michael Bilerman with Citi.

Yes. But I just had a couple of just income statement follow-ups. And I don't know if my line's is going to stay open, so let me just list them, which is, you talked about a $0.03 tax benefit, and I just want to know what line items that was fully embedded in the income statement. Can you talk a little bit about -- now that you've gotten the G&A savings a little bit earlier, and it looks you've capitalized maybe at a bit more, but just how that sort of G&A forecast? And how we should think about the synergies on where you are heading into next year? And then just a clarification on the 5 to 6x leverage, Hamid, that you mentioned, is that consolidated PLD balance sheet, or is that a fully looked through number? And I believe you quote that, on either case, on a GAAP basis. But I just want to make sure that the terminology that we have down pat.

Great.

So I've got recent tax benefit. I got the look-through leverage, and what was your middle one?

G&A.

Okay. On the $0.03 tax benefit, it's in the current tax line on the FFO statement. And again big picture is if you looked historically at PLD, we have this sort of tax benefit virtually every third quarter. And it really relates to accruals also for tax positions that we take upon filing tax returns. As those tax returns to reach their 3-year anniversary, you reverse those accrual that are -- so it's pretty consistent theme throughout, et cetera. But what you'd see in a normal quarter, and again, there's variation because of different things, but you'd see, I don't know, anywhere from $7 million to $9 million worth of tax expense on that current tax line item in the FFO statement in sort of an average quarter. We got a positive $4 million this quarter. So you're basically seeing that $0.03 tax benefit roll through that line. On the G&A front, we are modestly ahead of plan in terms of the G&A savings. We are not done yet. Let me tell you, we're -- we've got a number of initiatives underway that we're focused on in terms of entity consolidations, et cetera, et cetera, that will hopefully drive cost out of the system. I think we've got real good transparency into where all these costs are. We'll put together the 2012 budget and ripping it apart. There's a high focus on it. And so hopefully, we'll see continued G&A savings. I'm not sure when you say the capitalization is slightly higher. It's a little tough to tell because I don't think you had fabulous transparency into that in some of the historical numbers. And so our capitalization is right on for -- from a pro-forma basis. We sort of saw that. On the debt metrics, those are on look through. Hamid, won't let me talk about the balance sheet. I just try, try as I might, he doesn't want me to talk about the balance sheet debt anymore. So everything we talked about on debt metrics is on a look-through basis. And I will emphasize, from time to time, how much of that debt came off our balance sheet just because it's the accountant in me.

Your next question comes from the line of John Stewart with Green Street Advisors.

Bill, can you remind us how much you guys have yet to go in terms of merger integration costs that will hit over the next 5 quarters? And then maybe -- would it be possible to have Tom comment on systems integration?

Well, let me have Tom comment on both of those.

I'll take both. On the merger cost side, we'll probably -- we'll have around $55 million to $60 million of merger-related costs that will come in between Q4 and the end of 2012. The vast majority of that is compensation related to folks that are in transition that have been identified, that will be leaving the company between now and the end of 2012. So in total, that would get us around $170 million to $180 million in total merger cost that you'll see run through our income statement. On the integration side, things are going very well. And quite frankly, all of the heavy lifting around the integration is really completed. We've got some things that will continue on for a period of time, like Bill mentioned, entity consolidation and the like. But the real heavy lifting, everything around that has been completed. We've got all of the operations teams and the back-office functions around the world fully integrated at this point. Our big focus right now has shifted to the system side, where we're upgrading our systems. We're building a world-class -- what we believe will be a world-class technology platform. So I'm saying that I think we'll be unique in the real estate industry, given our global reach and our FX requirements. Our plan so far is going very, very well in that regard, and we think the system will give us a strategic advantage in order to mine data realtime. When you think about a portfolio of 600 million square feet and tapping into that portfolio with realtime data decision-making, looking around corners, very, very excited about what that will do. We've got a very strong executive sponsorship for it, and we've got a great team in place to make it happen. And a little specifics around the -- what you're going to see going forward, we'll have a global ERD [ph] leasing system up in April of 2012. We'll have a updated version of PeopleSoft up in October of '12, and we'll have an Oracle database analytic engine around that, that will come up in tandem with both systems. The bottom line, we feel good about our progress on that front.

The only thing I want to add to this is that there has been some -- I've read some reports about the -- our systems is not going well or anything like that, I think that may have been attributable to a comment that I made that I think to -- at the one of the conferences where people said, "Well, what keeps you up at night." And I said "Look, we are right now running 2 parallel systems for some period of time until this ERD thing gets complete in the first quarter." And that has created a lot of stress and hard work on the part of our people in the field who are really dealing with the complexities of 2 systems. So in the interest of perfect candor, I would say, a lot of our property management and accounting people in the field are working really, really hard to flawlessly execute and close the books on time, make sure that the tenants are billed on time and all that, and they've been fabulous. And we haven't missed a single beat. But until the systems are in place, that part of our organization is going to continue to have to work pretty hard. That's all I meant. The integration is actually going quite well and the system's part is very much on track. We're not going off and buying an off-the-shelf system that exists. We're basically creating it for industry in a global context. So I think this thing is going to be really good when it's done.

Your next question comes from the line of Jamie Sullivan with Bank of America.

And you probably already answered this, but did you guys mention -- or can you talk a little bit about any change in either the fund piece stream or fund operations based on the restructurings?

Sure, I'll try it. This is Guy. I mean, I think we made the comments earlier, but I think what you'll see is some of the unprofitable funds that we've had will drop off. I mean, those assets -- we'll retain a number of those assets, and they'll be redirected [ph] back into other funds. So I think you'll see, initially, some of those fees drop off for a quarter or so, and I think you'll then see them come back on. We also have some new funds that we're launching, like the Japan fund. I think we've got -- you'll see start to come on in sort of the middle of next year.

Okay. I think that's the last of the questions. So let me just make a few comments at the end. As I've started with this morning, I'm very pleased with the third quarter results on many fronts. Bottom line, there are 3 key takeaways from today's call. First, during the quarter, we made great strides at executing our strategic plan. Second, we're making excellent process on integrating our people systems and operations. We're really fortunate to have a team of highly competent and dedicated individuals who really spared no effort to make sure that the needs of our customers and investors are met everyday. And finally, despite the recent slowdown in the global economic recovery, we remain excited about the opportunities that we see ahead. In short, we're rolling with considerable momentum into the fourth quarter. Thanks for joining us today, and we look forward to seeing many of you at NAREIT in a couple of weeks.

And this concludes today's conference call. You may now disconnect.