Prologis, Inc. (PLD) Q4 2013 Earnings Report, Transcript and Summary

Tracy A. Ward - Senior Vice President of IR & Corporate Communications Hamid R. Moghadam - Chairman, Chief Executive Officer and Member of Executive Committee Thomas S. Olinger - Chief Financial Officer Eugene F. Reilly - Chief Executive Officer of the Americas Gary E. 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 David Toti - Cantor Fitzgerald & Co., Research Division Michael Bilerman - Citigroup Inc, Research Division James C. Feldman - BofA Merrill Lynch, Research Division David B. Rodgers - Robert W. Baird & Co. Incorporated, Research Division Ki Bin Kim - SunTrust Robinson Humphrey, Inc., Research Division Vance H. Edelson - Morgan Stanley, Research Division Ross T. Nussbaum - UBS Investment Bank, Research Division Eric Frankel - Green Street Advisors, Inc., Research Division John W. Guinee - Stifel, Nicolaus & Co., Inc., Research Division Steve Sakwa - ISI Group Inc., Research Division Michael J. Salinsky - RBC Capital Markets, LLC, Research Division Michael W. Mueller - JP Morgan Chase & Co, Research Division James W. Sullivan - Cowen and Company, LLC, Research Division Craig Mailman - KeyBanc Capital Markets Inc., Research Division

Good morning my name is Melissa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Prologis Fourth Quarter Earnings Conference Call [Operator Instructions] I would now like to turn the call over to your host, Ms. Tracy Ward, SVP Investor Relations, you may begin your conference.

Thank you, Melissa, and good morning, everyone. Welcome to our fourth quarter 2013 conference call. The supplemental document is available on our website at prologis.com under Investor Relations. This morning, we'll hear from Hamid Moghadam, Chairman and CEO, who will comment on the company's strategy and the market environment; and then from Tom Olinger, our CFO, who will cover results and guidance. Additionally, we are joined today by members of our executive team including Gary Anderson, Mike Curless, Gene Reilly and Diana Scott. Before we begin our prepared remarks, I'd like to state that this conference call will contain forward-looking statements under Federal Securities Laws. These statements are based on current expectations, estimates and projections about the market and the industry in which Prologis operates, as well as management's beliefs and assumptions. Forward-looking statements are not guarantees of performance, and actual operating results may be affected by a variety of factors. For a list of those factors, please refer to the forward-looking statement notice in our 10-K or SEC filing. Additionally, our fourth quarter results press release and supplemental do contain financial measures such as FFO and EBITDA that are non-GAAP measures and in accordance with Reg G, we have provided a reconciliation to those measures. [Operator Instructions] Hamid, will you please begin?

Thanks, Tracy, and good morning, everyone. I'd like to keep my comments brief at a high level today. We had a great quarter, capping a very strong year. We are seeing strong improving market conditions pretty much around the world. The U.S. markets in particular, have been terrific with record absorption and very low levels of new construction. And against this backdrop, our business has been firing on pretty much all cylinders. Operations were strong with good rent and occupancy growth across the globe. Our development business ended the year with solid volumes and profit margins well ahead of long-term averages. We had a record year in strategic capital with 2 major new ventures, China and the U.S. both closing around year end. Looking forward, we have a very straightforward business plan based on rising rents, value creation through development and economies of scale from growth in AUM. In fact, if you were going to ask me about the prospects for our business compared to last September when we held our Analyst Day, I would have to say that we are well ahead of those expectations. Of course, there are always risks that we can't control such as yield politics, Capitol Hill, the Fed, undisciplined developers. But overall, we feel very good about our business going forward. Our team has worked very hard for the last 3 years to simplify our company and to build a solid foundation for growth. I believe we're at the beginning of a multiyear cycle when our hard work will pay off in terms of great results for our shareholders. Let me now turn it over to Tom and let him fill in some of the specifics for you.

Thanks, Hamid. I'll start with our financial results. Core FFO for the fourth quarter was $0.43 per share and for 2013 was $1.65 per share. Our share of value creation from stabilizations was $125 million in the quarter and $372 million for the year were approximately $0.74 a share. Investment management income in the fourth quarter was higher sequentially due to the increase in assets under management and the recognition of a $6 million promote. Moving to operations, it was a great quarter and our results continue to do demonstrate the high quality of our portfolio. We closed the year with occupancy at 95.1%, which was above the top end of our guidance range after leasing a record 44 million square feet during the quarter. GAAP rent change on the rollover was 5.9% and positive across all geographic divisions. Cash rent change on rollover was a negative 2.3%. Same-store NOI increased 2.7% on a GAAP basis and 3% on an adjusted cash basis. Turning to capital deployment. In the fourth quarter, we committed $1.1 billion, with $842 million, our share, in new development starts, building acquisitions and investments in funds and ventures. We reduced our land bank during the year by $300 million to $1.6 billion through development starts of $450 million and land sales of $100 million offset by acquisitions and infrastructure spend. For contributions and dispositions, we completed $1.8 billion in the fourth quarter with $1.4 billion, our share. Subsequent to quarter end, we announced the signing of USLV, our U.S. joint venture with Norges Bank and a contribution of $1 billion of properties to this vehicle. With a large volume of disposition and contribution activity in the fourth quarter, along with the closing of USLV in early January, we generated approximately $900 million of excess cash available to fund 2014 growth. With these contributions, our asset repositioning plan is essentially complete. As we look forward, contributions will be primarily from the stabilization of assets off of our development pipeline while dispositions will be part of a selective culling process. Turning to capital markets. We completed $3.9 billion of activity in the fourth quarter. These transactions were effectively leveraged neutral, but reduced interest cost and extended term. For the full year, the bulk of our capital markets activity focused on the refinancing of our unsecured bonds, effectively lowering the average interest rate by 105 basis points to 4.5% and extending the maturity to over 6 years. We ended the year with leverage modestly higher than we expected, largely due to the timing of the contribution to USLV in January. Look through leverage adjusted for the USLV net proceeds is 35.8%. Going forward, we have a clear runway with no significant debt maturities until 2016. We'll continue to look at opportunities to get after our medium term expirations if the economics make sense. Even in the phase of rising interest rates, we believe we can further extend our maturities and lower our borrowing costs in a meaningful way. Now let's turn to guidance for 2014. We expect year end occupancy to reach between 95% and 96.5%. Consistent with our normal seasonal patterns, we expect occupancy to decline in the first quarter then trend higher over the remainder of the year. We expect further strengthening of releasing spreads in 2014, in line with our rank growth projections. We're forecasting 2014 GAAP same-store NOI to increase between 3% and 4%. We expect investment management income including promotes to range between $200 million and $210 million, while investment management expenses will range between $95 million and $100 million. For FX, we're assuming the euro at $1.35 and the yen at JPY 105 for the entire year. And U.S. dollar net equity at the end of 2014 to range between 85% and 90%. On the expense side, we expect net G&A to range between $230 million and $240 million. This is an increase of 2.5% at the midpoint, which is about half of the expected growth of AUM for 2014. For capital deployment, our 2014 forecast is between $2.3 billion and $3.2 billion. This includes $1.8 billion to $2.2 billion of development starts with 80% our share, and building acquisitions between $500 million and $1 billion with our share at 40%. Turning to contributions and dispositions guidance. We expect contributions to range between $2 billion and $2.25 billion, which includes the January contribution to the USLV with our share at 50% and dispositions to range between $500 million and $750 million with 80% our share. Putting this all together, we expect full-year core FFO to be in the range of $1.74 to $1.82 per share. Core FFO will not be evenly distributed between quarters as Q1 will be lower than the fourth quarter of 2013 given the timing of capital redeployment and seasonality of Q1 lease roll. From a big picture perspective, we're expecting 2014 core FFO growth of 8% at the midpoint of our range driven by rent growth and increased NOI from development stabilization. Netted of the friction to redeploy the $900 million of cash we have to invest. To sum up, we had a great quarter and we have excellent momentum heading into 2014. With that, I'll turn it over to the operator for questions.

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

I wanted to ask a little bit about how you guys are managing the occupancy relative to pushing rate. I think in 2013, you pushed rate a little bit more and that caused occupancy to lag in the earlier quarters before picking up in Q4. How do you think about the friction between rate and occupancy as you look out in 2014? And can you give us a sense of your pushing rents, what that means in terms of order of magnitude? Is that 5% higher? Is it 10%, is it 15%? Any color on that would be helpful as well.

Sure Brendan, it's Gene, let me start with that, and I'll kick it over to Gary. So we're really focused on pushing both of those metrics. And obviously, you see a lot -- you saw a lot of occupancy pick up in the fourth quarter. That wasn't because we switched focus to occupancy from rent growth, really, I would tell you more primarily focus on rent growth. And let me also give you some color into what's going on in the U.S. before I kick it to Gary. So in the U.S., we had a third quarter rent change of 7.4% and that actually increased pretty materially to 8.3% in the fourth quarter. So we're having a lot of success pushing rents. We get very low vacancies in the markets and obviously, low vacancies in the portfolio. Looking into 2014, we'll have a rent change of about 10% overall for the global portfolio during the year. And you're going to see that ramp up materially over the year, particularly in the U.S. where we've got a lot of pricing power. So I'll give it to Gary for the ...

Yes, Brendan, I'll just say again we are hitting the sweet spot right now. We're going to be averaging 95% to 96%. That's a good place for us to be pushing rents globally. If you look at Asia, today we're sitting at almost 97% occupied and we are pushing rents there. You've seen almost 6% rent change in those markets. In Europe, it's a little bit different story. It's a mixed bag. We're pushing rents where we can, particularly in the U.K. and northern Europe. Some the markets in Central and Eastern Europe. And in other markets, we continue to solve for occupancy. And that's really how it's going to be until we get to again sort of that 95% to 96% level. But even in Europe, we had positive rent change and positive rent change for the second consecutive quarter. So all in all, we're feeling pretty good about our prospects.

Your next question comes from the line of David Toti of Cantor Fitzgerald. David Toti - Cantor Fitzgerald & Co., Research Division: Maybe I missed this. Did you guys comment on the expense decline in the quarter? Was it a tax adjustment or some sort of weird comp?

Yes, David, this is Tom Olinger. I'm assuming you're referring to the drop in operating expenses in the quarter. That was largely driven by a decline in CAM expenses. So we saw a similar decline in revenues. So the drop in CAM expenses moved -- the drop -- overall drop is 4.5%. It moved 3.5% of that 4.5%. And that also knocked down revenues by about 1%. So it was really just an reclass of CAM expenses and revenues and had no impact on the bottom line growth. We also did see about 1% of the decrease was related to better bad debt recovery. So that was a positive that was driving the bottom line.

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

Question, Tom, just in terms of the balance sheet. You were very successful last year and you talked about extending your debt duration, lowering your cost. And to do that though, you went in the market and you bought back a lot of bonds. And I think over the course of the year, you had upwards of $300 million of debt prepayment make-wholes and charges, so call it about $0.60 of cash out the door and you'll accrete that balance. And I'm just curious as you think to '14, how aggressive do you want to be at continuing that strategy which is obviously having a near-term positive effect on core FFO, but is cash out the door that you have to accrete over time. And I'm just trying to think about how you're trying to make that tradeoff from an NPV perspective versus a current basis?

Michael, if you don't mind. I'll take that again and remind you of my answer from last quarter. We -- the way we price these things is that the spot time when we're making decision to redeem and reissue at a longer maturity, we try to manage the present value of that entire activity within 1% of the debt amount. So that's up where we start. But the way it actually works is that you end up issuing immediately. But you end up redeeming with a lag. And by just dumb luck, every time we did it last year, interest rates went up in the interim, so actually we ended up instead of incurring a 1% cost, present value cost, we actually ended up ahead on a present value basis. So every transaction was present value positive. Now with respect to its impact on FFO and accounting, you're absolutely correct. That happened to be the accounting limit. But as you know, we don't have a lot to say about what the accounting treatment is. I can assure you that is not a criteria that we look at in making those kinds of decisions.

I guess Michael, as we look to 2014, we'll continue to look at our inner maturities and where this math make sense and the economics prove out it's a need. As we said, we'll continue to go after those bonds, because we do have a view that rates are going to go up and we want to get in front of that as best we can. And we think that the long-term benefit to that of locking in those rates is the right thing to do.

Your next question comes from the line of Jeffrey Specter of Bank of America Merrill Lynch.

This is Jamie Feldman here with Jeff. So we're -- Hamid, we noticed in your comments you were talking about some of the risks you can't control and one of them was undisciplined developers. So can you talk a little bit about -- more about what you're seeing in terms of that risk? And then your thoughts on kind of how long we are -- how long the cycle continues before we really start to see that become an issue and pressure rents?

Sure, Jamie, the reason I threw it in is that I knew somebody would bring it up in the Q&A so I just wanted to get ahead of it. So here's what I really think. Developers have not forgotten how to build buildings and there are lots of them around. I don't think banks have forgotten how to lend to developers, although they're are a little bit more cautious at the beginning of this cycle. But I'm sure in time, with a couple of good quarters and years behind us, the banks will become less disciplined. So I don't think those are the real reasons why the development loans have been so low. I think the reasons are pretty simple. Their rents have not been there given what's happening to costs of land and costs of construction to develop profitably in many other markets in the U.S. And certainly, rents haven't been there to do any development in the smaller building category, because that sector has been pretty low in occupancy and depressed. And that accounts for a big chunk of the market, normally. Where you've seen development is places like L.A. and Houston and a few other markets where rents have been at the levels that justified new development. So I think -- this is actually good news. I think we'll see muted levels of development. We think development next year could be about around 100 million feet in the U.S. 110 million maybe. And we think absorption is going to be north of $200 million. The gap will be smaller than this year. But a hundred -- I'm sorry, all those dollars are square feet. The gap will be smaller. But still, 100 million square feet of gap is unheard of other than last year or 2, we haven't seen that in our entire career. So I think development is going to ramp up, because more and more markets will reach replacement cost rents. That's good news because if the rents actually get there, while there'll be more competition on the development side, I think we'll do a lot better in terms of capturing those rents. So we fully expect development to ramp up over time. But it'll still be a very good environment if you compare it to the last 30 years.

Your next question comes from the line of Dave Rodgers of Robert W Baird. David B. Rodgers - Robert W. Baird & Co. Incorporated, Research Division: I guess maybe for Gene or for Hamid, 4Q commencements, obviously, pretty strong for the portfolio overall, but I'm a little bit more curious about the seasonality and the discussions that you're having today with tenants with housing data a little bit weaker in the fourth quarter, retail sales weaker in the fourth quarter. Now are you seeing any hesitation either on small or big box spaces related to kind of a weaker economic environment in the fourth quarter, are they having any impact on the discussions for first quarter leasing and uptake?

Sure, David, it's Gene and Mike might jump in a little bit too. Well, first of all the fourth quarter activity was really, really strong in terms of the leasing. And while -- when the government shutdown took place, there was certainly some concerns a few months ago. But we've actually seen inquiries in overall tenant dialogue increasing dramatically toward the end of the year. And so far, that's continued into this year. So if you look at our starts volume in the fourth quarter I would not attribute that to anything other than it's a normal cycle and the projects we had teed up ready to go happened to start in the fourth quarter. So we remain quite bullish as we look into next year. Candidly, I think we're going to probably do better than we think on the build-to-suit front, because that has picked up. Build-to-suit inquiries tailed off a little bit towards the middle in the fall last year but again, that's all picked up as well. And Mike, I don't know if you have color as well?

Yes I would suggest the pipeline in both the U.S. and Europe are as strong as we've seen here in the last couple of years. And I think the customers' ability is to actually make decisions seems on the increase and so we're bullish relative to just overall activity and our ability to convert that into real volume next year.

Let me make one more point on housing because you brought that up. Clearly the housing data has been really spotty. It looks good in 1 month then it tails off. But if we look at where our demand is coming from, it's pretty heavy in that area. So construction materials, furniture and other housing-related activities are clearly leading other segments of our customer base. So maybe they're wishful about the future. I think although, if you look at the overall trends in housing, you're going to see a bad report 1 month. But overall, it's trending in the right direction. And at least our customers are voting with their feet in those segments.

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

Can we spend a couple of seconds on your same-store guidance? Could you help us break it down in terms of what part is coming from same-store revenue and what portion is coming from expenses? Especially, given that there's a couple of moving parts, this look like your first quarter 2014 number will have a unusual expense comp as well, if you could kind of tie that all together for us?

Ki Bin, it's Tom. So if you look at the midpoint of our same-store GAAP NOI guidance of 3.5%, about 1.5% of that is going to come through higher occupancy. About 1.5% of that is going to come through rent growth, rent change on rollover, just high rents. And then about 50 basis points is going to come through indexations, where that don't get captured then in straight lines. So if you got a 2% contractual bump every year, now that gets straight line. But if you are going off of the CPI index, for example, that gets picked up. You don't straight line. You can't straight line that component. So those -- that piece of the rent bumps is about 50 basis points. So that's how you get to the 3.5%. Overall big picture. I don't expect to see any significant moves at all in those numbers related to any one-time sort of items or unusual periods. I think it's pretty clean number.

Your next question comes from the line of Vance Edelson of Morgan Stanley.

So just following up on the competitive supply in the build-to-suit demand. Back in the third quarter, I think about 2/3 of the development starts were build-to-suits. And that might have been unusually high. But during the fourth quarter, that dropped to less than 30%. So I'm wondering would you chalk that up to natural volatility? Or does such a large swing suggest any increased confidence on your part that the build it and they will come approach is going to be successful, given the demand you're expecting? Or is it that you have an interest in getting ahead of the competitive supply that's inevitably going to come?

This is Mike. I would suggest the last quarter, that's such a small sample supply and mix issue relative to the ratios. As we look forward to this year, we'd anticipate build-to-suits would be in the 25% range, which is lower than we've seen in the past, where our build-to-suits have been in the 40% to 55% range and that actually gives us some encouragement. Given our global platform, our customer reach that there's some built-in bias to the upside relative to our volume associated with build-to-suits.

Your next question comes from the line of Ross Nussbaum of UBS.

You did a nice job in the fourth quarter of working down the land bank a little bit down to just under $1.6 billion. Can you talk a little bit about what your goal is for year end '14 for where the land bank's going to go given your development start guidance? And then talk to us a little bit about what you think the current market value of that land is today, Hamid, given some of your earlier comments on cost.

This is Mike. Why don't I address the land bank. We did put up significant debt in the bank -- land bank this year about $300 million. Which gets us right in the zone as we've talked about for a couple of years in terms of the ideal size. Our work this year is to continue to improve the quality of that land bank and we're down to the last remaining 15% or so parcels that we'll continue to sell out of the system, and end up with the primary parcels to put in production. And we have sold 170 million last year, we'll do that kind of number again this year. And we will very selectively replenish our land bank with the high-quality sites for those sites we can put in production. And Hamid, do you want to address there.

Sure. I mean, if you just look at our development margins, I think we've talked about this in previous quarters. If you sort of pick a number of 10% for build-to-suit and maybe 14%, 15% for a typical spec deal, given our mix, we should be in the 12%, 13% range and we're substantially higher than that, like 10 points higher than that depending on the quarter. So 10 points of extra margin is coming not because we're great developers, but because we've got cheap land. So 10% on land, which is usually 25% of the overall mix, you could argue, could be 30%, 40% undervaluation of land. Now nobody around here is courageous enough to step up and say our land is 30% or 40% undervalued. And certainly, not all of our land is valued that attractively. But I definitely do think we're around 20% undervalued in terms of book value and there's a big arrow north on that. And while we're on land, let me tell you. Based on what we're seeing in most markets, most of this land that's in our books is probably dates back to 2005 or something like that and went through the cycle and got impaired. So the next series of lands that are going to come up are going to be almost 10 years beyond when this land in the inventory was acquired. The world's really changed in terms of entitlement costs, in terms of what concrete costs and what exactions are and all that. So I think the next series of land that is put -- new land that comes into production is going to have a much, much higher cost than the old land. And that's why I'm so confident about replacement cost continuing to go up and rents alongside with it, and why I'm so optimistic that this development engine that everybody's scared about is not going to very quickly exceed demand. It will, eventually. But I think we've got a couple of 3 years before that happens.

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

My question is related to the last one that was just asked. But can you talk about the replacement cost and rent concept and given that your -- you've increased your spec at all to start this year. Just where you're underwriting you're current development relative to where rents are being achieved today?

I think we generally perform around the globe on spec deals. Margins today in the mid-teens and we're not projecting a whole lot of rent growth, certainly not beyond inflation. And we're ending up with results that are better than that. I mean, that's been really the summary of the experience over the last 12 to 24 months. But I mean in a normalized market, Eric, I think spec deals should be, certainly in the U.S., should have margins and we'll call it 14%, 15% range. We're definitely getting higher than that in some of the less developed markets like Brazil. So, but it should be in that range.

Our placement costs are moving up, I mean, that's clear in basically all of our market, maybe with the exception of some of the European markets, but replacement costs are definitely heading north, as are rents.

Your next question comes from the line of John Guinee of Stifel, Nicolaus. John W. Guinee - Stifel, Nicolaus & Co., Inc., Research Division: This is, I think, for you, Tom. Kind of a three-part question. First, I think you said in your guidance assumption that net U.S. equity would be 85% to 90%. And if I get -- if I'm getting the definition right, it was 77% per page 30 of your sub. So if I'm correct in saying that, how does it grow from 77% to 85% to 90%? Second is, your GAAP rents appear to be going up around 6% over the last couple of quarters, but your cash is down a little bit, maybe 2% or 3%. Which seems like a pretty widespread for an average lease term of 3.5 to 5 years. So kind of how does that math work? And then third is, does the $6 million promote in your core FFO?

Okay. John, I will take that. And we'll let you have a three-part question since we butchered your last name. So on the first on how do we get to 85% to 90% U.S. net equity from 77% today? It's largely going to be from repatriating money. We're -- when we look at funding needs, we're going to continue to push for euro and yen denominated debt and bring down our U.S. dollar denominated debt and move those funds around. And we'll continue to look at hedging opportunities where we see them to be attractive and take advantage of those. So those would be the biggest tools that we can use and obviously, as you know, we've done a lot with moving assets, overseas assets and investment of funds which certainly helps that as well. On your -- I'm going to take your third question here, is this promote income in core FFO? It is. For sure. And your second one... John W. Guinee - Stifel, Nicolaus & Co., Inc., Research Division: And it was in 2013 too?

Yes, it was. It's been throughout 2013. And then your other question, your last question was cash versus GAAP and why that spread? We provide the cash rent change. And as you know, we don't track it. We don't use it to manage our business that way because it can obviously lead to unusual fluctuations, just based on how the lease is structured, whether you have a free rent on the front end or the back end or you -- or how the ramp escalates over time, what really matters from our perspective is what the overall economics of that cash flow stream is over the life of that contractual lease. What it is in month 1 versus what it is in month 60 really doesn't matter. At the end of the day, it's what the economics are over the whole contractual term. So yes, you can get some fluctuations between cash and GAAP between quarters just due to mix and how certain things are structured versus what's rolling off. But I would tell you, looking to '14, I would expect that number to move into positive territory just with where -- with our trajectory of GAAP rent change, I would expect this cash number although we don't forecast it, I would expect it to be positive in '14.

Yes. And I think that GAAP is going to get closer and closer and I think in about 1 year or 2, it could flip.

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

I guess I just wanted to circle back on the development front, Hamid. I know that you guys have really not been driven by a specific development target. But given all the comments that you had this morning about how good the business is, how much rent growth is going up, I guess I'm a bit surprised that the development volume's only up around $100 million. And I guess given some of the comments that Gene made about build-to-suits going up, I guess the question is what's that risk that 1 or 2 quarters from now the development [indiscernible] meaningfully?

So Steve, the way we forecast development volume is that we look at the visibility that we have on deals that are pretty much in the bag. And I would say last year at this time, when we're sitting around and giving you guidance, we had about 60% visibility as to the number for the year. And that number has moved to sort of like 80% visibility on what we have. So we're pretty good with the number, particularly at the lower end of the range. Not that many good things have to happen during the year for us to be able to exceed that. And some good things always happen, some bad things happen. But we're really solid on our development guidance type of numbers. I guarantee you this, if there are good development opportunities in markets that we see that we think we can capture, we're going to take advantage of those. But we're not going to drive to some artificial number to keep the perception of what makes investors happy. We -- we're going to underwrite that as we see it game time decision. And again, go back to my comment, not all markets, in fact, most markets are still not at the level where with today's rents, you can generate acceptable margins. I think that situation will change very quickly. So maybe our numbers for the back half of the year are too conservative. Time will tell. But we'll rather start off the beginning of the year at a conservative level and see how it plays out. So I -- if I were going to say -- if I were a betting person, I would say it would be at the higher end of that range or maybe even higher.

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

Hamid, just going back to your opening comment there in terms of, and also factoring kind of the supply. We need to talk about the -- being well ahead in the sector relative to your expectations, does that imply that you -- when you look at the cycle this time, you now expect stronger growth relative to where you had presented at your Investor Day? Or you expect the cycle to be a bit more compressed with development ramping up in the back half?

I think, Michael, that we came out with a pretty aggressive rental forecast based on the feedback we got from the investors. We actually thought we came with a very realistic rental forecast. And by the way, we got the same comments back in 2012 Analyst Day. I think on both of those, the market has played out ahead of what we told you guys. And I think at the time we talked about what our expectations were, people thought we were a little crazy and overly aggressive. I'm just telling you, it's playing out faster. I think ultimately, where these rents go, before they get to equilibrium is purely driven by replacement cost in some of these markets. And I would tell you, replacement cost is also accelerating faster than we thought. So on both those scores, I think it definitely will happen quicker whether ultimately we get more rental growth or not, I'm not ready to forecast that yet. That's still out 3 or 4 years. But so far, the signs are pretty good.

Your next question comes from the line of Mike Mueller of JPMorgan. Michael W. Mueller - JP Morgan Chase & Co, Research Division: Going to the promotes for a second. Tom, I was just wondering if you could about what's in the 2014 numbers?

Okay. For '14 we have a similar level of promote, core FFO promote, so about $0.04 in 2014. And it relates to our USLF venture.

If I can follow up on that, and I think this would be a useful guide for you, because it's very hard to -- for you to get inside our promotes fund by fund and all that kind of stuff. The way I think about it is that we have about $16 billion, $17 billion of third-party capital under management. And most of our -- I mean, we ought to able to do at least 100 basis points over our threshold in terms of preferred return. So if -- and our normal promote participations are 15% to 20%. So the easy way to think about it is that if we outperform by 100 basis points and we get somewhere between 15% or 20% of that for the company, once you net it against the comp effect of that, call it 10% of the excess growth. So call it 10 basis points, call it 10 basis points of $16 billion, $17 billion under management. So we'll be in that 3% or 4% range. It will probably be a little higher in the near term than that. Because A, we're outperforming our benchmarks by more than 100 basis points and B, we're recovering from a pretty deep hole in valuations that are driving returns. But I think over the very long term, it should be on the order of 10 to call it 15 basis points of third party AUM net to the bottom line across the cycle.

Your next question comes from the line of Jim Sullivan of Cowen Group.

Hamid, given your comments about development and I guess, Tom's comments about the direction of interest rates. I just wonder if you're changing your hurdle rates for development in any of the markets in which you are active?

Jim, we do, constantly. We actually change not so much the hurdles, but the cost of capital in every market that we operate on a quarterly basis based on what's happening in the capital markets and in each of those economies, et cetera. But necessarily, that the margins that we'd like to get over and above the normal cost of capital in terms of investing in operating real estate, those are fairly stable. I mean, so think of it, if you're thinking about it in terms of bond spreads, we definitely have views -- changing views on what the base rate will be. But in terms of what the spread is, that we want to achieve over that, that's fairly constant. And it's in the range of low teens for build-to-suits. I mean, if it's a great credit, 20-year deal with fabulous credit, we might go down to a high single digit margin. But generally, in the low double-digit for build-to-suits and mid-teens for spec deals, pretty much across the board. Places like Brazil, we might tack on a little bit more in Brazil and China to the margin requirement on spec. But that's generally the guideline.

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

Tom, I was just wondering if you can perhaps just spend a moment just on sources in uses. It looks at least that your share, if you were to take the sales and contributions, you're raising just under $1.6 billion. And then from a use perspective, you have, obviously, the acquisitions of $300 million [ph] and then development on a start basis, $1.6 billion. Though I recognize your spend would be very different. And then you're also contributing land. Though it sounds like from Hamid's response to a prior question you made the land bank at $1.6 billion even if you put in and call it, $300 million to $400 million [ph] of land and for the current developments, you're probably reigniting that. I know you have about almost $500 million of cash and you're going to have some free cash flow next year excess of $100 million. So I'm just trying to figure out how in your mind, you're thinking about sources and uses of capital. For next year or this year.

So Michael, Tom will give you a detailed answer. But the real answer is that we have a bunch of non-strategic assets left that we can sell at any time in a very good market. And that's something that we value. If we need capital, we've got a pretty attractive place where we can go to get that. And that's what our plan will be. But if you'd like, Tom can take you through the details.

Yes, Michael, if you -- your numbers are really right on. If you look at our deployment guidance, what we gave in use at the midpoint. You would see net deployment growth of call it $250 million to $300 million, not talking about the land bank. But as Hamid said, we have a lot of ways to fund it. Primarily, we're going to be running our line at virtually 0, most of 2014. So we at any one point in time will be able to tap that $2.5 billion plus of capacity. So we're not concerned about how we fund growth.

Yes, let me say one other thing about capital needs. I mean, $300 million for acquisitions. As you know, and I've stated many years in a row. Our acquisition guidance were -- is meaningless, I think. Because who knows? I mean, we only -- we might invest 0, if there are no good deals. We might invest $10 billion, if there are really good deals. In fact, the year I said it's 0 to $5 billion, we ended up doing the merger with Prologis. So it could be any wide range of numbers. So we don't really -- we can't really look at our capital planning in such a debit credit kind of way. We got to look at it more strategically and in a broader view.

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

Question -- 2 quick questions. One on occupancy, you guys are obviously expecting to trend 95% to 96%. Just as we look into 2015, sort of what are the thoughts about where stabilized occupancy could go for the current portfolio that you guys have? And then the other quick question is just, are there any markets where you guys are still have in place rents that are above market? And that could drag as we head into next year?

Yes, it's Gene. Let me start with that. First of all, at this point, we don't have any markets in the Americas, at least that have above market rents, I mean Gary can follow up on this. In terms of stabilized occupancy, that number is 95%. Can we run in L.A. within a 2% embedded local vacancy rate, should we run higher than that? Yes. And we will. But overall, 95% is the number you ought to be working with.

Yes. No, I totally agree 95% to 96% is how we think about the markets and that's again where we can push rents. In Japan and in China, no markets that are over rented today, I would say. Certainly, markets that were active in and trying to grow in. And in Europe, I'd say 3. France, Hungary and Italy, those are the 3 markets that may be over rented today.

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

Just a quick question. If you look at CDF spreads in Europe, it seems like even the past couple of quarters we're now back down to 2007 levels. Could you comment on any kind of trends you're seeing in cap rates and if those have adjusted in the past 0.5 years or so downwards?

Yes, if you go back to our Investor Day, we predicted over the 3-year period, we'd see, call it 75 to 80 basis points of cap rate compression. And we said at that time we thought that it might actually move more quickly. We had sort of spread that out over the 3-year period. My view is very clear. It is moving much more quickly than we had anticipated. I'd say, easily, 25 basis points today. And moving in a positive direction relative to values. I have seen more portfolio transactions over the course of the last 12 months than I have in my career in Europe, and there is capital chasing those transactions, so I expect the trend to continue through the balance of this year for sure.

Yes, I think there'll be a big lag in terms of how the appraisers work through that number and all that. But if you ignore that stuff, cap rates are really falling in Europe and on a real-time basis, much faster than will show up in the appraisals, at least for the next 12 to 24 months.

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

Just 2 quick follow-ups. Sorry, if I missed this before but Tom, did you disclose your same-store guidance on a cash basis?

No. We did not. But I'll tell you. So cash same-store for next year should be a little above 4%.

Your next question comes from the line of Jeffrey Specter of Bank of America Merrill Lynch.

This is Jamie Feldman with Jeff again. Tying in for the last cap rate question in Europe, can you talk also about the appetite for assets that you're seeing both in the U.S. and Asia and what you're seeing in terms of cap rates, maybe changes in underwriting assumptions and what's happening, how people are thinking about the rising interest rates any impact on valuations?

We have seen no impact -- well, we've seen actually a little bit of a positive impact on valuations in the U.S. I would say cap rates on core assets are down probably since in the last quarter by maybe 10-ish basis points. And on secondary market assets, maybe a little bit more than that, maybe 25 basis points. As I've said before, I really think other than short-term blips and like in May, I think until interest rates 10-year bond gets to the mid 4s, I think we're good on cap rates in the U.S. I don't expect further compression, but I certainly don't expect expansion. And that's 150 basis points above where we are today, and maybe a little bit more in terms of room on the treasury on the 10-year treasury before we have to worry about CapEx. In Europe, you heard the discussions. I won't go over that. I think maybe there's been a little bit of cap rate expansion maybe on the order of 10 basis points, probably in a place like Brazil or maybe even Mexico, given the EM situation. In Japan, oh my god. I mean, you look at the disconnect between public markets and private markets. I mean, cap rates are, in the public markets are, I don't know, 120 to 150 basis points below where they are in private markets. So I think that will continue to drive cap rates in Japan down. And in China, there isn't enough visibility in terms of transaction volume to be able to report on that with certainty. But I think it's down a tiny smidgen if I were going to pick a number.

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

Question for Tom. Just beyond the Norges U.S. joint venture formation there. Do you expect any additional funds for JV formation in 2014 as part of your 2% to 2.5% contribution of forecast?

No, Michael, we do not. There would be 2 existing vehicles and as you've seen from the capital raising we've done over the year, a record capital raising. And with the very low leverage to no leverage in these vehicles, we are -- they are -- have a lot of capital and are hungry to grow.

Your next question comes from the line of John Guinee of Stifel, Nicolaus. John W. Guinee - Stifel, Nicolaus & Co., Inc., Research Division: Mike, Carlos has just given all the questions about cap rates and portfolios and all that. What's the status on the IIT portfolio?

John, they actually pronounced your name correctly, but I will not be able to respond to that as you know we can't talk about any. John W. Guinee - Stifel, Nicolaus & Co., Inc., Research Division: What's the IIT portfolio?

Yes, potentially new acquisitions. Sorry.

Your last question comes from the line of Brendan Maiorana of Wells Fargo.

For Tom. Tom, the capital outlook for the year, you talked a lot about that, kind of leveraged neutral throughout the year. If I think about the timing of that, I guess with the USLV venture, I would think that there is more capital coming in the door early in the year and then you put more of that out throughout the year. So if I look at the overall 8% FFO growth year-over-year compared to the kind of the 10% FFO growth that you guys had provided at your Investor Day, should we kind of think that there's an increasing ramp in the rate of growth, sort of in the back half of the year relative to the first half of the year?

Absolutely, Brendan. If you look at the components of the growth. If you use Q4 '13 as a -- compared to the midpoint of our guidance. If Q4 annualizes about $1.70, so if you want to grow that $1.70 to the midpoint of our $1.78, you've got about $0.09 from same-store growth, you've got $0.08 from development NOI growth. And then you have about $0.08 of drag or friction from redeploying that cash. As I said in my prepared remarks, we have about $900 million of cash. We ended the year with about $450 million and we generated another about $450 million with the USLV transaction. So as I said, earnings in Q1 will be down for the Q4 run rate and then we're going to ramp back up. And then particularly to your point in the second half, we'll -- we should see core FFO ramp significantly.

Yes, Brendan the only thing I would add to that, I think just to tie it to our investor conference and our forecast for that. Even though we -- we're talking about sort of a 4-year timeframe, within the 4 years, it certainly is more backend oriented because it doesn't have the dilution upfront. And the interesting thing is, given the recovery in rents, and I'm not talking about projected further recovery in rents. But just the recovery that we had to date in rents. Just like on the way down, it takes a while for the numbers to get marked down, on the way up, it takes a while for the numbers to get marked up. So I think whatever momentum is going to come through in this rental growth, is going to benefit us for many, many years. So we -- if we're going to forecast that again today, we would just still say that the 4-year ramp is more backend oriented too, not just within the year, but also within the 4 years. Anyway, that was the last question. Thank you for participating in our call. I know today's a busy day. So we'll let you go. Thank you and see you next quarter.

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