Prologis, Inc. (PLD) Q3 2012 Earnings Report, Transcript and Summary

Tracy Ward Hamid R. Moghadam - Chairman of the Board, Co-Chief Executive Officer and Member of Executive Committee Timothy Brosnan Walter C. Rakowich - Co-Chief Executive Officer, Director and Chairman of Executive Committee Thomas S. Olinger - Chief Financial Officer Eugene F. Reilly - Chief Executive Officer of the Americas Gary A. Anderson - Chief Executive Officer of Europe and Asia Michael S. Curless - Chief Investment Officer and Chairman of Investment Committee

Brendan Maiorana - Wells Fargo Securities, LLC, Research Division Chris Caton - Morgan Stanley, Research Division Jeffrey Spector - BofA Merrill Lynch, Research Division Michael Bilerman - Citigroup Inc, Research Division Craig Mailman - KeyBanc Capital Markets Inc., Research Division Steve Sakwa - ISI Group Inc., Research Division David Toti - Cantor Fitzgerald & Co., Research Division John Stewart - Green Street Advisors, Inc., Research Division Ross T. Nussbaum - UBS Investment Bank, Research Division John W. Guinee - Stifel, Nicolaus & Co., Inc., Research Division Michael J. Salinsky - RBC Capital Markets, LLC, Research Division Michael W. Mueller - JP Morgan Chase & Co, Research Division James C. Feldman - BofA Merrill Lynch, Research Division

Good afternoon, everyone. My name is Sarah, and I will be your conference operator today. At this time, I'd like to welcome you all to the Prologis Third Quarter 2012 Earnings Conference Call. [Operator Instructions] Thank you. I'd now like to the call over to our host, Ms. Tracy Ward. You may begin your conference.

Thank you, Sarah, and good morning, everyone. Welcome to our third quarter 2012 conference call. The supplemental document is available on our website at prologis.com under Investor Relations. This morning, we will hear from Hamid Moghadam, Chairman and Co-CEO, who will comment on the macroeconomy and market condition; and then from Tom Olinger, CFO, who will cover results and guidance. Additionally, we are joined today by members of our executive team including Walt Rakowich; Gary Anderson; Mike Curless; Nancy Hemmenway; Guy Jaquier; Ed Nekritz; and Gene Reilly. Before we begin our 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 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. I'd like also to state that 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 reconciliation to those measures. [Operator Instructions] Hamid, will you please begin?

Thank you, Tracy. Good morning, everyone, and welcome to our third quarter call. Let me start by saying how pleased I am with our results, which are the strongest for our company since the start of the global financials crisis. We'll keep our prepared remarks brief, as you just heard from us last month at our investor forum. Our focus today will be on the macroeconomy, realtime market conditions and our operating results. First, let me offer some observations at the economic indicators that most affect our business. Global trade volumes remain well above peak and the IMF forecast growth of over 3% for this year and 4.5% for 2013. Consumption is strong, with retail sales coming in at over 5.5% year-over-year and online sales growing 3x faster. Real inventories have increased with an annual rate of 3% this year. Interestingly, inventories are the only major economic indicator that remains low peak by about 3%. We think there is ample room for growth in inventories as consumer confidence improves. The increase in consumption and the rebuilding of inventories is translating into further improvement in the operating environment. Net absorption in the U.S. was positive for the quarter at 20 million square feet. While this is slightly below our forecast, it's worth noting that new supply also came in below our forecast. Deliveries in the quarter represented a fraction of the obsolescence rate. For the fourth quarter, we expect a healthy level of absorption around 50 million square feet, which is in line with normal seasonal patterns. Looking to 2013, we expect 160 million square feet of total absorption. Next year's forecast may prove to be conservative as it doesn't account for a housing recovery, which appears to be in its early stages. In terms of what we're hearing from our customers, the majority of our global markets, customers are confident about their prospects for the fourth quarter. We think this bodes well for the holiday season. As they look to 2013, our customers continue to focus on operating efficiencies and growth from e-commerce. Same-day delivery may be coming sooner than we all thought. Space utilization is very high, and the simple fact is that the number of our customers are no longer able to delay the business around space procurement. They're at the point of needing to press forward with new facilities, and we're seeing this in our high-level build-to-suit activity. Turning now to our third quarter results, our teams around the globe did an outstanding job leasing a record 39 million square feet in our operating and development portfolios. A real bright spot has been leasing in units less than 100,000 feet. Occupancy in these smaller spaces was up 80 basis points in the quarter and 270 basis points year-over-year. This segment is closely tied to the housing market. Growing demand and increases in occupancy are also having a positive impact on rent. In fact, we expect rents on rollover to turn positive in the next quarter and remain positive throughout most, if not all, of 2013. The lack of supply and increasing rents are driving our development starts, especially for larger buildings. During the quarter, we started 10 new projects globally, 2/3 of which were build-to-suits. Our margins on year-to-date starts are roughly 19%. While we don't expect to sustain this level of profitability over the cycle, these trends clearly support the value of our land make. Of course as conditions improve, new competitors will enter the markets we already serve. This will be challenging for them because the global markets have high barriers to entry. Lending policy changes such as Dodd-Frank and the new Basel III will require incremental capital charges that are up to 50% higher for real estate construction loans relative to traditional corporate lending. In fact, we are already seeing lenders adopt these new risk-based capital rules with more conservative lending standards. Changes in lending policies will impact new deliveries. We believe this cycle will be different as these new lending requirements will place a governor on overbuilding by merchant developers, who simply won't be able to secure funding for new construction. Turning to dispositions and contributions. As we mentioned on our last call, the fourth quarter will be a busy time for us as we have a number of packages on the market. We're making good progress, and Tom will elaborate on that in a minute. Looking at Private Capital, during the quarter we completed an important milestone with PEPR by taking 100% ownership of the fund. Our team is making progress recapitalizing our European portfolio. We also concluded Prologis North America Fund 11 by disposing of the remaining asset in the fund. This brings our total of funds rationalized to 7 since the close of the merger. To sum up, we had an outstanding third quarter, and we have an excellent momentum heading into the end of the year. With that, I'll turn it over to Tom.

Thanks, Hamid. This morning I'll cover 3 topics. First, a recap of our third quarter results; second, a review of our disposition and contribution activity; and third, an update on our guidance for the remainder of the year. Before I begin, I'd like to point out new disclosure in our supplemental related to pro rata or look-through balance sheet NOI and EBITDA data. While we've always disclosed debt on a look-through basis, as I mentioned at our investment forum, we think this enhanced disclosure will help you further understand our capital structure and earnings drivers. Now let's look at our results. Core FFO for the third quarter was $0.49 a share and included a tax benefit of approximately $0.06 a share. We have forecasted the tax benefit to only be $0.03 a share, in line with what we reported last year, the tax benefit related to certain contributions from previous years, and we do not expect to recognize any similar significant benefits going forward. Excluding the tax benefit, core FFO was $0.43 a share, about $0.01 ahead of our expectations due primarily to higher NOI driven by better-than-expected occupancy, rents and favorable FX. I'd like to point out that this quarter represented the first period of year-over-year results for the combined company, so going forward, we'll have comparable results. Moving to our operating portfolio metrics, occupancy at the end of the quarter was 93.1%, up 70 basis points sequentially and 210 basis points year-over-year. Occupancy in the Americas was up 110 basis points, with strong leasing activity across a majority of our markets, particularly in the San Francisco Bay Area, Eastern Pennsylvania, Dallas and Mexico City. Notably, we have seen a pickup in demand in the border markets of Mexico for the first time in a few years. In Europe, occupancy was essentially flat. Given our visibility into leased but not yet occupied spaces, we expect our occupancy in Europe to increase in the fourth quarter. Leasing activity was a record for the quarter at 39 million square feet, which is about 5 million square feet higher than our quarterly average. Same-store rents change on rollover decreased 1.8% for the third quarter. The significant year-over-year occupancy gains, combined with low rent roll downs led to an increase in both GAAP and capped same-store NOI in the quarter of 2.7% and 3%, respectively. On the capital deployment front, we committed $620 million of capital in the quarter, of which $483 million was our share. Total deployment included $386 million of development starts, $112 million of building acquisitions and $122 million of land and infrastructure. Moving to capital sources. In the third quarter, we completed $174 million of disposition and contributions of which $141 million was our share. On the balance sheet front, the third quarter was a push relative to sources and users. The increase in our debt metrics this quarter relates to movements in foreign currency. Absent the FX movement, our LTV and debt to EBITDA metrics were essentially flat. As we discussed previously, we have several initiatives underway in the capital sources front. I'd like to spend a minute and provide an update on the different components of dispositions and contributions currently in process. First, dispositions. Our 10 quarter plan, which we updated at the investor's forum, contemplates our share of total dispositions of $3.4 billion. Today, we've completed about $1.6 billion, our share. As we mentioned last quarter, we brought a number of packages to market setting up for a busy fourth quarter. We're currently working on about $1 billion of gross dispositions. We expect to sell, place under contract or receive offers on over 90% of these transactions by the end of this month. This is part of our global and regional market investment strategy and relates principally to non-strategic assets in the U.S., but also in Europe and Japan. Next, contributions. Our 10 quarter plan includes our share of contributions to existing funds of $2.2 billion. To date, we've completed more than $800 million on an our-share basis. The remaining contributions relates to funds in Europe and Latin America, where the vast majority of the investment capacity for the contributions is in place. The final component of our 10 quarter plan is contributions to new funds or ventures. Our share of contributions to planned new ventures or funds is $6.1 billion, which is primarily made up of the recapitalization efforts underway in Europe and Japan. The activities in our 10 quarter plan thus far have basically allowed us to sell fund development and other investments, as well as consolidate NA2 earlier in the year on a leveraged neutral basis. The balance of our fourth quarter and 2013 10 quarter plan activity is what will drive deleveraging. Let's now move to guidance for the remainder of 2012. Based on our performance year-to-date and our expectations for the fourth quarter, we're increasing our full year core FFO to $1.72 to $1.74 per share, up from $1.64 to $1.70 per share. From a foreign currency standpoint, we're assuming an average euro rate of 1.3 and an average yen rate of 80 for the fourth quarter. For operations, we're forecasting to be at the high end of both our 2012 same-store NOI guidance of 1% to 2%, as well as the high end of our year-end occupancy range of 93% to 93.5%. As Hamid mentioned, we believe we've reached the end of lease roll downs and expect rent change on rollover to turn a positive within the next quarter. On the expense side, we will likely come in at the top end of our annual net G&A guidance of $213 million. However, we could be slightly above this level, depending on the timing and nature of the disposition and contribution activity in the fourth quarter. For capital deployment, we're increasing full year forecast to $1.9 billion to $2.1 billion with our overall share of total expected investment to be about 70%. Deployment includes $1.4 billion to $1.5 billion of development starts, primarily in the Americas and Japan, up from $1.1 billion to $1.4 billion. And we're narrowing our acquisitions guidance to $450 million to $550 million, with majority of the activity related to our current investment ventures in the Americas. Turning to contributions and dispositions, we're maintaining our annual range of $3.5 billion to $7 billion. As I mentioned earlier, we have a lot of activity on this front. Excluding the dispositions and contributions activity already completed through the third quarter, we're left with a range of $2.2 billion to $5.7 billion for the fourth quarter. As we previously stated, this activity can vary significantly based on the recapitalization of the Europe and Japan operating assets. If one of these transactions happens in the fourth quarter we could be at the high end of our guidance, while if neither happens, we could be slightly below the low end of our guidance. That being said, we continue to feel good about completing the 10 quarter plan by the end of 2013. Our share of the contribution and disposition proceeds will range from 60% to 75%, depending on the mix of transactions. We continue to remain disciplined and patient and will only complete transactions that makes sense in terms of valuation and structure, and that is what ultimately drives timing. In closing, we feel great about the quarter. Operating fundamentals continue to improve, and we remain focused on our strategic priorities to further strengthen our balance sheet and position our platform for continued growth. With that, I'll turn the call back to Hamid.

Thanks, Tom. Before we open the call to your questions, I'd like to say a few words about my partner and Co-CEO's, Walt Rakowich, immeasurable contributions to Prologis over the last 18 years. As you know, Walt is retiring at the end of December. What you may not know is that this is his 56th earnings call and his last one as a participant. The REIT industry has evolved in the 18 years since Walt joined the company, and Walt's steady hand and unwavering commitment have helped pave the road to success for our organization. His sense of commitment was evident in 2008 when he came back from retirement to lead the company through its darkest days. He did a heck of a job turning things around, made a lot of tough decisions in the face of adversity. Walt is a standup guy and a class act, and I can't think of anyone else who I'd like to have been paired up with to lead this company over the last few years. He let the integration of the company following the merger, and he did an outstanding job leading the charge to regain full control of PEPR's assets allowing us to recapitalize our Europe platform ahead of schedule. It's a little early because he's going to be around for a couple more months, but I know that I speak on behalf of the entire Prologis family when I wish him the very best. We're pleased to know that he will now be able to spend more time on his philanthropic endeavors and of course with his family. Walt, you want to say a few words?

Thanks, Hamid. Well, I know we are all here to talk about earnings, so I will be brief. But I just want to thank all the investors and the analysts that have supported the company and supported what we've done over the years, and I'm looking forward to seeing you all at NAREIT one last time. And I'd also like to thank our people from legacy Prologis people to the new Prologis people that have really made our success a reality. But, Hamid, I got to tell you, it has been great working with you over the last 2 years in this journey. And you have done an incredible job, and I'm going to just say very brief, I'm very, very proud to have been your partner. Very, very proud. So thank you, and let's turn it over to get some questions asked here.

Thanks.

Sarah, if we can open up for questions, that would be great.

[Operator Instructions] Your first question comes from Brendan Maiorana of Wells Fargo.

Question, I guess, probably related to Tom, I just wanted to dive into the end disposition outlook a little bit that implied guidance for the back half of the year, 2 point -- or for the fourth quarter rather, $2.2 billion to $5.7 billion. Can you give us a sense of one, how close do you feel you are on either getting a European transaction done, which may move you more to the midpoint or higher end of that guidance? And then two, if you look at what I think is roughly $2 billion of asset sales or dispositions outside of either Europe or Japan, how should we think about the likely cap rates and the timing of those dispositions and how confident you are that they'll close in the fourth quarter?

Okay, Brandon, let me start by answering your questions about Japan and Europe, and Tom will answer the question about the balance of the activity. On Japan, I'd just like to give you a somewhat scripted response. We've been working hard on a Japan recapitalization and in fact, have received one of the 2 major licenses required for J-REIT. Any consideration of a development fund that's secondary to our decision-making on our long-term vehicle in Japan, which will probably not happen this year, I'm not in a position to comment further on our Japan plans at this time. So moving on to Europe. As you know, we've actually made progress on controlling PEPR sooner than we thought. That was always in the very back end of our 2003, '13 10 quarter plan. And obviously we started the recapitalization process now earlier than we expected. Unfortunately, these things are minor. You kind of only hear about them when they're done, and you really have no sense of how much progress we're making or not making as we work on these things. So it's kind of difficult for me to comment because we have ongoing dialogue on this topic. But I feel really good that when you take into account the 2013 10 quarter plan, which is what we've laid out, that we'll meet not only all our objectives with respect to deleveraging, but also our other priorities of realigning our portfolio with our strategy and also getting the asset utilization up. So -- and I wish I could give you more specifics about that right now, but I can't.

Brandon, on your question regarding how we feel about our disposition activity and cap rates, we feel good about our disposition activity. The bulk of it's in the U.S. Cap rates will likely be in the high 6s to around 7. And that lines up with what our thinking is around our entire 10 Q plan, particularly when you think about Japan assets being in the mid to low 5s. But again we feel good about our disposition activity that is before us. And as I mentioned, we've got about $1 billion in the market, 90% of that we think we're going to sell, have under contract or select a buyer by the end of this month. And on the contributions front, that's a process we're working through. But the main point there is that our funds that are taking the contributions, which is largely Europe and some of Latin America, have the vast majority of the funding. To complete those transactions, it's just a matter of timing of when those contributions happen.

Your next question comes from Chris Caton, Morgan Stanley.

I was hoping you could comment on the leasing environment in CapEx. The AFFO statement shows a little over $60 million of leasing and maintenance together. As you’re renewing or releasing properties that were last leased at the trough of the market, is there any temporary shift in capital required to secure the rent increases that you're seeing in the portfolio now or expect to see next year?

Sure, Chris, this is Gene. Let me take that. I might kick it to Gary. The short answer is no. We are not seeing additional GI requirements or other building improvements required to get the spaces leased or to push rents. And if you look at our stats, there's a couple of things to keep in mind. You see a general uptick in capital as a percentage of NOI, but that's driven by seasonality and it's also driven by the fact that we did a ton of leasing during the quarter. So if you look -- we would expect these numbers to come back into range. And if you look at the past 4 quarters, that's a pretty good guide to what we see going forward. So you got naturally have an upward trend during the course of the year in capital.

Your next question comes from Jeff Spector, Bank of America.

I'm here with Jamie Feldman. And just thinking about PLD AMB going forward, I'm sure you and Hamid have had some great debates on division strategy. I guess, Hamid, can you talk about that a little bit? How has Walt impacted your thoughts about the future strategy, the future Prologis here going forward?

Jeff, it's a good question, and the honest answer to it is that while Walt and I are not in agreement on everything all the time, but I would say that with respect to our strategy which we've laid out and discussed and fully vetted before the merger was even announced, I would say we started out being 95% aligned and the last 5% we worked out. So it's been a very collaborative effort, and I'm going to really miss Walt going forward because he's been a great division to the company and a great sounding board. The best thing about him is that it is very hard for CEOs to let go. And Walt has been very supportive without, in any way, feeling that he needs to get involved in the minutia on a day-to-day basis. So we sort of figured out what we're each kind of focused on at the beginning, we supported one another throughout. And I'm really going to miss him. So let me leave it at that.

Your next question comes from Michael Bilerman, Citi.

I'm just curious. As you think about the deleveraging plan and the sources for deleveraging. And obviously there's a lot of irons in the fire in terms of asset sales and contributions. And I think, Tom, you actually mentioned that in the Investor Day and you talked a little bit on the call about being disciplined and patient about trying to get the best execution. I'm curious how you think about your stock in terms of selling equity for a more immediate impact to that deleveraging goal. And then how you think about selling equity relative to an NAV estimate of 35 to 38, but also a $59 NAV that you put out for 2016. How you think about selling equity in that context and effectively if that's the view of value, you effectively just would never do it because you'd be diluting shareholders that dramatically and reducing that growth. Then I want to understand how you're thinking about those levers as we move forward.

Michael, let me start that, and I'll pass it over to Tom. I think one of the things we try to make very clear in the investor forum was that we have 4 pillars to our strategic plan going forward. And the 2 pillars that are -- or the 3 pillars that are relevant to your question are our realignment strategy, getting our portfolio to align with our strategy of global markets. That naturally puts us in a position of selling a bunch of assets that are not a fit for the company’s strategy and that produces some capital for the company. But really the decision is driven by a portfolio realignment goal. Secondly, we want to rationalize our funds and have a risk mitigation measure. Because we are global company, we need to manage our exposure to these foreign currencies. And the best way of doing that is by using Private Capital vehicles and matching our remaining equity with local debt. That's the way we neutralize ourselves. While the formation of Private Capital activity, which was really delayed for the last 3 or 4 years post the financial crisis, that also produces capital. But really we have that goal of mitigating risk anyway, whether or not we had a deleveraging third pillar. And then we come down to deleveraging, and we have to look at the results of the sale activity, the fund formation activity, and see where that takes us at the end of the day. And at the end of the day, if we actually accomplish all the things that we've got planned, I think our leverage will be actually in the low 20% range, lower than our target of 23%. So to go and issue equity, put the pricing aside right now, would be a little crazy because that would drive our percentage of leverage even below 23% when we're done with the plan. And we're not doing anything unnatural with the plan in terms of timing. I mean we're taking our time, and we deliver it, and we want to get good execution on that. So to make a long story short, I think the path that we're on will get us there. But this is not a religious belief. If at any point in time we see that issuing equity is an attractive alternative for our shareholders -- and by the way, the $59 thing, that was a 4-year out kind of a number. I think we've been very clear that our NAV is 35 to 38, and a company like us should be trading with the right balance sheet at the premium to NAV just like all the other blue chip companies. So you can read that as you will, but we think sort of on the upper end of NAV and some premium over that is when even thinking about equity, if we needed it, it would begin to make sense. And based on our plan, I don't think we need it. But we'll see how the plan goes. We're very confident about it. Tom?

To Hamid's point on do we need it, I mean clearly from a user standpoint, we would not need to issue equity when we look at our development pipeline and our users from that perspective. It's clearly growing, and we're seeing a lot of opportunity. But even in the face of that growth, I don't see a need for us to raise equity because we're going to have more than ample sources from this 10 quarter plan. And our challenge actually won't be -- it's going to be finding ways to use that additional capital that's coming in that has those additional uses over and above our deployment opportunities, and over and above our debt that's maturing. So from that perspective as well, we would not need to raise equity.

Your next question comes from Craig Mailman, KeyBanc Capital.

Jordan Sadler's on the line with me as well. I was hoping maybe you guys could drill down a little bit more to the expectations on rent spreads turning positive. Maybe if you can offer any color on the magnitude we're going to see in 4Q and heading into 2013. And then just a breakdown of which markets you're seeing the best momentum in versus the ones that are going to be the biggest drag going forward.

This is Gene. I'll start with answering the question. First of all, it is really, really difficult to predict this going positive or negative. So getting much more precise on that wouldn't be a very good idea. I mean the best way to look at this is, what is the trajectory of this line? And we're clearly headed to turning positive. We think that will happen next quarter. Frankly, when it does happen, it may bounce around. It may go slightly negative. But it is clearly headed in the right direction. In terms of individual markets, Southern California, South Florida, parts of New Jersey would clearly be places where we're going to have the opportunity to push rents. We have extremely high occupancies. But frankly, if you look at some of our regional markets, and you can look this up in the supplemental, we're really pushing occupancies in these markets as well. So what we see happening is a broad-based recovery in fundamentals in the Americas, and I'll let Gary speak to other geographies. And outside of the U.S., Mexico conditions are very, very tight and rents are frankly going really fast in Brazil. So rather than be precise about what happens next quarter, I think the really important thing here is what's happening with fundamentals, and what will drive a sustainable increase in rents and create an environment where we can frankly push rents really hard going forward into the next year.

Just to underscore what Gene said, I mean if you look again at the trailing 4 quarters, the trend is very, very clear, and it's undeniable. We are headed in the right direction. We have been heading in the right direction since the second quarter of 2010. And again, I think we all believe that 2003 -- 2013 in the aggregate will be positive. When you look at Europe, again we're sort of bouncing around. We're in an inflection point in Europe, and we're starting to see rent growth in certain of the global markets in certain size ranges. The global markets where we're seeing traction would be the East and West Midlands, London; in Germany would be Hamburg and Cologne. And we're seeing some traction in actually the south of France and also the south of Poland. In Asia, rents are strong throughout China. Again, we talked last month about China having 8.1% rent growth compounded per year. And they continue to trend positively. And in Japan, again we're actually seeing rent growth in the Tokyo and Osaka markets, particularly in Class A space. And that rent growth we're seeing is 4% to 6%. So again we're headed in the right direction, and we're highly confident of that for 2013.

The next question comes from Steve Sakwa of ISI Group.

I guess I just wanted to see if you could kind of balance for us the third quarter earnings season is coming in pretty weak for a lot of multinational companies. I mean some of that is driven by FX, but a lot of these companies are missing on the top line and just citing kind of weaker business conditions. And you mentioned a number of positive things kind of early in your comments, and I'm just wondering to what extent some of the factors that are impacting some of these multinationals just haven't really caught up with the fundamentals or do you think there's just something very different about what's impacting your business and what's impacting their business?

The latter, and let me try to elaborate on that. We just had our Customer Advisory Board Meeting in Denver about a week and a half ago, and we had our global large customers represented there. These are household names that you've heard of, and it usually involves the head of real estate. And they basically said exactly what you just said. He said the fundamentals of our business are not great, but we are out of space. And we have kicked the can down the road and kicked the can down the road, but there's population growth, there's consumption growth. And while we don't have pricing power on the top line, we have needs for space. And we got to take out costs out of our system, and the only way we can take costs out of our system is by revamping our logistics chain. So that's one thing that makes our business a little different than the other businesses. The other factor is e-commerce. A lot of these retailers, a lot of these companies are setting up parallel distribution chains for their e-commerce divisions, and that's picking up a fair amount of new space. The part that's missing or has been missing now in terms of a demand driver was the housing market. And actually based on my reading of your stuff, you guy's maybe are even more bullish on that than we are. But certainly the housing market is turning, and that will turn on that last engine that's going to fill up our 100,000 square foot spaces. So look, all you got to do is look around you and the business environment in terms of top line growth for these companies is not strong. But the need to restructure their supply chain and to take costs out, and the fact that they delayed taking space and kicked the can down the road for the last 4 years in the face of almost 12 million more people, consumers in the U.S. than 4 years ago and similar kinds of growth in many of the other regions, probably with the exception of Europe, is what's leading to our success. And by the way, we didn't have the kind of surge coming out of the downturn that some of the other companies did. But it was primarily an earnings surge for them. It wasn't a top line search because really they were taking out their personnel cost, and that was driving their bottom line growth. So top line is anemic. We're a solution for taking out cost out of the system, and they just can't delay it anymore is what we're hearing from these guys.

Your next question comes from David Toti of Cantor Fitzgerald. David Toti - Cantor Fitzgerald & Co., Research Division: I'm here with Evan Smith as well. I have a very quick question. We're hearing from a number of our broker affiliates from the ground in the U.S. that port volumes are picking up pretty maturely. Are you seeing this in the context of your assets and also in the context of sort of mixed messages from both FedEx and UPS, especially with regards to the results today?

This is Gene. I'll start, and I think others are going to have points of view. Well port volumes are recorded, and they are picking up. And yes we're seeing that, but frankly they've also been volatile. And the other thing is when you compare what's happening with real trade that will affect demand in our buildings with, for example, what's FedEx's last commentary on their business, they are 2 different things. We have to be very careful to understand what's happening in terms of a company like FedEx in -- across all their businesses versus what will affect demand and distribution space. So as Hamid just said a moment ago, and we're seeing a lot of demand coming from reinvestment into the supply chain. And if you think about it, we've got a 0 interest rate environment. Companies have a lot of cash on the balance sheet. This is probably going to be a pretty weak earnings season. But where you invest money, it can get a very good return on investment by investing into the supply chain. And frankly for some of them, it's really their only alternative of using capital. So at this point, that's pretty meaningful.

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

Tom, I have a very short 4-part question for you. Can you please remind us again what -- how much you expect to book in merger costs in the fourth quarter? And then can you please put the tax benefit in layman's terms for us? I presume that was noncash, but can you kind of explain what it’s related to and how it worked? Then can you please give us the cash mark-to-market and when you think you'll see the inflection point on a cash basis? And then last but not least, just comparing square footages quarter-to-quarter, it looks like some of the assets held for sale might be in France, so could you address what you expect the cap rates to be on the assets held for sale in France?

Okay, I will address a couple of those first and then Gene and Mike can help me out. So on the merger costs, we're coming in or we're forecasting $75 million approximately for the full year. On the tax benefit, the tax benefit, we realized this quarter was consistent with what we've seen in the past several years in the third quarter. As tax returns get filed and completed, there are true ups that happen. And the bulk of the true ups or the benefit is coming through really related to contributions, activity that happened in the treatment of dividends around those contributions and how you account for those. And as we true up and finalize our tax returns, those true ups surface and we clean them up. The other important aspect of that is it is noncash, but when we built up those reserves, there was a cash component to it to the extent that it might relate to interest and the like on dividends. So -- and it did go to through core FFO, and that's why it's being reflected as core FFO now. So when the reserves were built [indiscernible] core FFO, when the reserves are released, it comes back through core FFO. But the important thing here is not so much the mechanics of what happened is we don't expect these to be -- have similar such benefits going forward. We're really through set contribution period and don't see any more like that. But it is eventually cash because that's a liability that we do not need to satisfy at this point. Your next question was on cash mark-to-market. I'll ask Gene to comment on that.

Yes, as we're talking about mark-to-market in terms of our rents, I think we've been saying it's pretty much right on top of market rents at the moment. And it's trending in a positive direction. Just want to say it's marginally positive.

And that's true of Europe and Asia. Europe's right on top of mark-to-market. Japan's under-rented and China's significantly under-rented today.

And then, John, your last question was on the held for sale pool in France but as you know, we won't comment on any transaction until it happens. So once we close the transaction, we'll talk to you about cap rates in general.

Your next question comes from Ross Nussbaum of UBS.

I'm here with Gabe Hilmoe. These are questions unrelated. The first is it looks like you booked about $20 million of merger acquisition and integration expenses in the quarter. Just curious what those were, given that there's already been some distance since the merger occurred. The second question relates to the leasing CapEx. Looks like it's ticked up in a trailing 4-quarter basis up to 12.7% of your NOI. Or maybe expressed differently, you're now spending $1.50 per square foot in TIs. I'm curious, does that relate at all to the higher retention rate? Are you consciously selling out and putting a little more capital out the door upfront or is that merely a coincidence?

9 Ross, this is Tom. I'll take the merger acquisition piece first. It's really a function of timing this quarter. It's 2 pieces. One is just as people are leaving the company, that's triggering certain merger costs. And people are winding down in Q3 as well as Q4. There's also some restructuring that we talked about last quarter that is happening in our European finance organization. That's a piece of it. And then there's some professional costs as well that are higher this quarter. And that's a little bit to do with the European finance restructuring and also the closeout. As you know, we brought PEPR in-house this quarter, and we fully -- there are some costs related to that as well.

Okay, Ross, let me try to answer the rollover costs. We leased 39 million square feet this quarter. And if you look at our portfolio of 565 million feet or whatever it is and look at an average lease term, which today is about 5 years, that is the normal level of rollover and leasing. It should be a little under 30 million feet. So when we calculate those costs per square foot, we're dividing them by the entire portfolio. So because we're leasing 20% more space, there are going to be more leasing costs in this quarter compared to a quarter where leasing activity is actually lower not in a per square foot basis, but on a percentage of NOI basis because it's a percentage of the entire NOI. If you actually look at the trends on a per square foot of leasing, they bounce around, but they're not trending up. They were lower, then they picked up and now they're ticking lower. There's a seasonality to this because there's a lot of leasing in the fourth quarter that's month to month, and those leases virtually have no TIs. They're all on an as-is basis. So while you do get some volatility in December, but if you look at the annual numbers and compare them even though we don't have comparable numbers, it doesn't seem to us that there's anything going on.

The other thing I would add to that is when you look at the leasing and turnover cost in terms of term that we're leasing, the cost on a per term basis is actually down. So we're not behind occupancy at any -- from any perspective. I mean our costs are actually trending down on a per term basis.

Your next question comes from John Guinee of Stifel. John W. Guinee - Stifel, Nicolaus & Co., Inc., Research Division: First, Walt, we are really going to miss you. Second, the way it looks to me, Tom, is that you're basically implying about a $0.40 per share FFO in the fourth quarter. And with all these asset sales, you're probably going to be trending down a little bit in 2013, which I think is all well and good. But the big issue is that the primary valuation metric for PLD is implied cap or premium discount to NAV. Can you talk a little bit about how you're managing the dispositions such that your implied cap rate doesn't decline at all as you have $4 billion, $5 billion worth of asset sales? And you're continually looking at this on a going forward basis, I'm assuming.

John, this is Hamid. We actually are not that smart to manage the timing of disposition. We have a pretty robust process for determining what assets are strategic and what are not, and it started out with a sort of global regional other market exercise. And then within the global markets, we looked at trimming our portfolio. So we have a sell list of what we want to sell over the first couple of years post merger. If anything, we've actually made better progress on that than we expected to because the markets have been good for selling assets, and we've been selling more assets as we've had success in the marketplace. So we don't really try to time it with respect to, "Oh, if we sell these assets, the cap rate looks high this quarter and maybe that will hit our NAV maybe later." We're just getting it done. Obviously the assets we're selling, and we'll report on the aggregate number and see it in our supplemental, are the lower quality assets in our portfolio. We've been very explicit about that. So whatever -- the direction of cap rates in the company on the assets that remain will be going down because we're selling the high cap rate assets out the back. So you should expect that trend -- in a static cap rate world, our cap rate should go down over time because the portfolio is getting higher quality every day. And if you really want have a discussion about cap rates, we'd be happy to sit down and tell you what we think cap rates are market by market. It'd probably take too long to do it on this call. But we have very clear views on that. And I think we're responsible for if not half, probably 1/3 of the product that's being put on the market and being sold. So we kind of know what's going on in the market with respect to real estate sales. And the market is very good.

John, from a standpoint of run rate, if you look at the midpoint of our full year guidance which is $1.73, that implies we did $1.32 year-to-date. So that would imply $0.41 for Q4 to that midpoint. And it is a lower run rate than what we experienced in Q3 net of the deferred taxes. And it really is a function of the lumpiness that we're going to see regarding contributions and distributions. No, it's not -- unfortunately, it's not a straight line, and we're going to have ebbs and flows in Q3 with a lower quarter. We expect Q4 to be a much bigger quarter. And so there is some dilution in there, namely with our ability to redeploy the proceeds in the most accretive way, not just paying down the line but also being able to put it into new developments and the like and waiting for more higher interest rate debt to mature.

Let me give you one more thought on a way to think about dilution, which is I think your question. Basically, we know what activity we're going to do in terms of dispositions and fund formations, and we've given you ranges on the plan, and that's what we're executing. And if you put timing aside a little bit, we know what kind of debt we're going to get to, to repay preferreds and all that kind of stuff over time. And depending on the timing of those, those could be breakeven or they could be 200 kind of basis points to the bad depending on whether we're selling high-cap assets and retiring low-cost debt in a given quarter or something. But that's not where the major dilution numbers are going to come from. The major dilution number or accretion number is going to come up -- come out with how much land we monetize because the incremental return on our development pipeline is very high because the land is earning a negative return in terms of carrying cost and property taxes and all that. So the more of our land that we put into build-to-suit or our production, the quicker or the less dilution we have, and maybe we can have accretion if we put a lot of it to work. The message we hope that you take away from this call is that actually our build-to-suit business is going really, really well, and it's really picked up.

Your next question comes from Michael Bilerman of Citi.

Tom, just a couple of quick follow-ups. I definitely appreciate the pro rata information on income statement balance sheet. Do you have just the first one, just same-store NOI on a pro rata see through basis? Obviously 2.7% is everything altogether, that's number one. Number two is just on the merger expenses, which you've talked about little bit on this call. You obviously say it a lot this quarter. You have you said $75 million for the year, which is $22.5 million for the fourth quarter. We're up to about $210 million of expenses. My memory, which is a little bit weak, but I think it was like $175, $200 of target when you guys announced the merger. And so I'm just curious, are we -- after the fourth quarter, is it ending? Because now we're at $210 relative to that original budget, so that's number two. Number three was just on rent growth. I want to -- when you talk about rent spreads turning positive next year, is there any rent growth built into that assumption for 2013? And the last question is just on Page 36. You have an adjustment of straight-line rents and amortization of lease intangibles, which is a positive $15 million. Can you break that out between what is current, which you disclosed as being negative $4 million? Is the balance everything related to the development pipeline as a positive adjustment?

Michael, so on the same-store NOI look through, I don't have that...

And let me just say this. We don't actually track it that way. Culturally, would be a really bad thing to do. With respect to operating statistics of our portfolio, we have the one-portfolio policy. And whether it's in funds or balance sheets, our operating people responsible for delivering that performance are judged and measured by the overall results, not what they do for the funds versus the balance sheet. So we don't even keep track of it that way, and culturally, it would be a really bad signal to keep track of it that way.

But, Michael, I wouldn't -- we can get you that number. I wouldn't expect it to be materially different than what we reported in any meaningful way, just given the mix of assets. And particularly given the strength in U.S., I would actually expect it might be a little higher given the proportion of U.S. On merger costs, we're done at the end of 2012 with merger costs. And what's happening in relation to our regional estimate, it's really 2 things. I guess 3 -- 2 things. The first is when we originally gave that guidance, we hadn't contemplated the PEPR cost, that's one. And the second piece of it is we just have higher costs related to personnel. And it's a function of 2 things. One, more synergies, more people that we had redundant positions than we originally estimated, so that's a good thing. It clearly drove our merger savings higher, but there was a cost to that. And the second piece was the financial reorg we're doing in Europe. So those pieces would make up the majority of the delta over our original estimate. And again, timing will close that out on -- at the end of 2012. Your last question regarding straight-line rent, again, I don't have that memory, but we can break that out for you.

Your next question comes from Michael Salinsky of RBC Capital Markets.

Hamid, I think you mentioned that you expect a little bit more -- you expect the margins to come in a little bit in your earlier comments. And also just looking out to the fourth quarter there, you talked a lot about e-retailing. How are you looking at inventory build on the retail side right now? Have you seen a normal build there or has that been a bit light?

No, I think it's still light compared to -- we're going to a choppy market. There's an election. There's a fiscal cliff. Three's all the stuff that you read about in the paper, so I think people are not getting over to excuse with respect to the amount of inventory they're going to carry in the chain. Having said that, I think consumer confidence is a lot stronger than most people would've guessed given all these headwinds. So I think we'll see. I think these guys are going to have a pretty good Christmas. And we may get caught pretty short on inventory into the new year. But that's a guess. I'm not an expert. You guys know more about that stuff than I do.

Margins?

Oh, margins. Margins -- look, our land bank has gone from my getting a lot of questions about, is it worth any sense [ph] of what you're carrying here to how much more than what you're carrying it is its worth. I mean clearly, a 19% margin will tell you that our land cost basis aggregate is low because normal margins shouldn't be 19%. I think normal margins should be 14%, 15% for spec products and maybe 10%, 12% for build-to-suit. And the 19% is not the most impressive number. The 19%, given the mix of build-to-suits, was actually pretty impressive, but it just means that the land may be mispriced in a different way than people think.

Your next question comes from Brendan Maiorana.

Hamid, a question. I just want to follow up on the land. I heard the comments earlier that development seems like it is -- it's improving, the outlook is improving, the margins are high, and you mentioned I think in an earlier response to a question that land is going to drive earnings growth just given that it's a negative carry today. But you did start development during the quarter, but there was about $90 million of land acquisitions and $90 million of land monetized through development. When do you think that calculation starts to whittle your land balance down that you monetize land more than what you buy?

So I think as we laid out in our investor forum, I think a company our size that thinks that the opportunities are in the world in a normal year, about $2.5 billion needs to have about $1.5 billion of land around. And we now have about $2 billion of land around. So over time, and I would say 3, 4 years, we'll get our land bank down to where it needs to be. But it's going -- where it needs to be is about $1.5 billion. So it's not materially lower than what it is today. Now the reason land goes up is that when you put land into production, you have to put infrastructure into it and that counts as land. So land going up in the short term -- we bought a few parcels, particularly for some of our build-to-suits. For example, we bought some adjacent parcels to some parcels that we have because the build-to-suit that we procured needed more land than we had. And more importantly, we put infrastructure into the land, and that drives up the cost. So as you wrap up your development activity, your land number is actually going to go up because of infrastructure before it starts coming down. But we are pretty confident that we are on a good path. And if you take a 3, 4, 5-year view, we'll get down to where the land should be. Mike?

I think it would be important to add, we are in very select situations, reloading our development machine with buying select parcels in places like Paris, Tokyo and L.A. But of all the land we bought this year, it's important to note that some 85% of that land will be put into production by 2013. So we are buying it but putting it very quickly back into production. In fact, 1/2 of the land we bought this year will be in production by the end of this year.

Your next question comes from Michael Mueller, JPMorgan. Michael W. Mueller - JP Morgan Chase & Co, Research Division: In terms of the question, what part of the 10-quarter plan do you think is -- maybe the right term isn't the riskiest, but, yes, call it the riskiest to pull off by the end of 2013? Is it raising the capital in Europe? Is it raising the capital in Japan? Is it finding buyers for noncore stuff in the Americas?

The risk is part of the plan. In terms of timing or in terms of actually getting done? Michael W. Mueller - JP Morgan Chase & Co, Research Division: Yes, getting done in the time frame you were talking about.

By 2013? I don't see it being risky. I don't -- I'm not trying to be Pollyannaish, but I don't see a whole lot of risk in executing it during the entire 10 quarter plan. I think if you're asking me what part of them will happen in the fourth quarter and what part of it will happen in the second quarter next year or first going next year, I think there's a lot of volatility around that. And I got to tell you, we've got to really be careful about those kinds of motivations not driving us to do silly deals, which we won't. So if we're all patient, take a deep breath, we'll get there and we'll get there -- we'll more than get there, I think, by the end of this plan.

Your next question comes from Jeff Spector, Bank of America.

This is actually Jamie Feldman here with Jeff. I guess my first part of my question is just a follow-up to that prior question. How are you guys thinking about the risk from the fiscal cliff and what seems to be generally slowing business decision-making on both your fourth quarter expectations and full year for next year for the 10 quarter plan? And then my actual question is actually following up, Hamid, you commented you think new lending requirements might hold back new development this cycle. I was hoping you could give maybe some examples of that or a little more color on what you mean and across what markets.

Okay, on the fiscal cliff and all the economic headwinds, all I can tell you is what our customers are telling us and what they're telling us is that they don't have a lot of pricing power, that their top line growth is anemic, they're selling more units but not with a lot of pricing power. So their margins are under pressure, and supply chain is the key to them actually maintaining margin or slowing down its erosion. So it's not like they want to spend money on more real estate, but they kind of got to, to maintain the unit flows that they're dealing with even at lower margins. That's the essence of what we're hearing from our customers. And the second part -- spending. Oh, yes. Actually I was talking to a couple of lenders at ULI last week, and it was interesting. They are -- most of the big lenders are already operating under Basel III with respect to these capital charges, even though they're not required to be. And boy, the mass of it is very punitive on construction lending. All construction lending is recoursed. The loan-to-value ratios are 60% to 65% with recourse to the best borrowers. I mean the matches doesn't work for a private guy trying to put 35%, 40% equity into a deal to do a spec deal at a low margin. So I think it's going to be pretty tough to build a new building. In fact there was an article, I think, in the Wall Street Journal today in the Journal that the bankers are screaming and they're going for some relief to the regulators to try to loosen this up a little bit. But the way it's structured now, I don't think you're going to see supply coming on board the way it has in previous cycles, which is really good for us. Okay, that was the last question. So thank you for being here. And let me just leave you with 3 key takeaways. First we had a great quarter, and we're making excellent progress on our strategic priorities. Second, the main drivers of the recent uptick in demand are lack of construction, supply chain reconfiguration and growth in consumption, all the things we've just talked about. Third, the team and I are excited about the momentum we're taking into the fourth quarter, and we very much look forward to ending the year at a high note. Thank you for joining us, and we'll see many of you at May week.

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