Good afternoon, ladies and gentlemen. My name is Ryan and I will be your conference operator today. At this time, I would like to welcome everyone to the Prologis Third Quarter Earnings Call. All lines have been placed on mute in order to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions) I would now like to turn our call over to Ms. Tracy Ward, Senior Vice President of Investor Relations. Please go ahead.

Thanks, Ryan, and good morning, everyone. Welcome to our third quarter conference call. The supplemental document is available on our website at prologis.com under Investor Relations. This morning we will hear from Hamid Moghadam, our 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. Also joining us for today’s call are Gary Anderson; Mike Curless; Ed Nekritz; Gene Reilly; and Diana Scott. Before we begin our prepared remarks, I’d like to state this call will contain forward-looking statements under federal securities laws. These statements are based on current expectations, estimates and projections about the market and the industry in which Prologis operates, as well as management’s beliefs and assumptions. Forward-looking statements are not guarantees of performance and actual operating results maybe 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 third quarter results press release and supplemental do contain financial measures, such as FFO and EBITDA that are non-GAAP measures, and in accordance with Reg G, we have provided a reconciliation to those measures. With that, I’ll turn the call over to Hamid and we’ll get started.

Thanks, Tracy, and good morning, everyone. It's only been a month since our last Investor event, so I’ll keep my comments brief. Our focus today is on real-time market conditions, the company's growth objectives and our results. Let me start with a few observations about the operating environment. Despite cautious macroeconomic headlines, our global markets continue to benefit from decent demand with occupancy and rents rising. In the U.S. net absorption is running at nearly doubled the pace of completion and vacancies are near all-time lows in many markets. There are, however, a few markets where supply has caught up and vacancies will be trending higher in the next year, such as Indi, Houston and Dallas. The transaction market remains very competitive and there is significant capital chasing quality product. As is often the case, the private markets are ahead of the public markets and maybe themselves pushing cap rates to historic lows. We now see stabilized cap rates below 5% in a growing number of our global markets. Turning to Europe, on the operating side of the business, demand is improving, despite ongoing macroeconomic uncertainty. Northern Europe and U.K. are leading the recovery with higher occupancy levels and the ability to push rents. Although, we begun to see markets recovery in parts of Southern, Central and Eastern Europe, it will take time for rental growth to materialized in those regions. Investor demand for industrial real estate is robust, as capital continues to flow into Europe. These inflows are compressing cap rates, creating an additional headwind for market rent growth. On the deployment side, the key is to be nimble in this changing landscape. We believe the window for portfolio acquisitions is closing quickly and as a result, our focus will turn towards one-off deals where we can add the…

Thank you, Hamid. I’ll start with our results for the third quarter. Core FFO was $0.48 per share, leasing volume for the operating portfolio was 37 million square feet, an increase of 8 million square feet over Q2. Quarter end occupancy was 95%, up 40 basis points from the second quarter and 110 basis points year-over-year. The sequential increase in occupancy was driven by Europe and spaces under 100,000 square feet. GAAP rent change on rollover was 9.7% positive across all regions and led by the U.S. at 15.5%. Cash rent change on rollover was positive 1.6%. GAAP same-store NOI on an owned and managed basis increased 3.7%. The main driver of the growth was a 2.9% increase in revenues with consisted of an increase in average occupancy of 120 basis points, rent growth of 150 basis points is almost 26% of our leases in the same-store pool rolled in the prior four quarters at an average rental increase of 5.8% and about 30 basis points from indexation. As we discussed at our Investor event last month, the majority of our share of NOI is from the U.S. due to the fact that 6% of our portfolio is located here and we hold almost all of our foreign operating assets and ventures. GAAP same-store NOI on our share basis in the third quarter was about 4%, driven by the U.S. with growth of 6.3%. On an adjusted cash basis owned and managed same-store NOI grew 4%. Turning to capital deployment, during the third quarter development stabilizations were $223 million, with an estimated margin of 26%, well above our long-term expected margins. We generated $57 million of our share value creation an $0.11 -- or $0.11 per share. Development starts totaled $698 million, with an estimated margin of 19%. We acquired…

(Operator Instructions) Your first question comes from the line of Ross Nussbaum from UBS. Your line is open.

Hi. Thanks. Good morning. Hamid, you opened the call with some comments about supply having caught up in a few markets. I'm curious when I look at the CBRE data for the third quarter, it showed 60 million square feet of demand in the U.S. or net absorption against 30 million square feet of deliveries, which obviously implies that demand is still exceeding supply in most markets. Which of your MSAs are you seeing with the greatest disparity between where demand is and supply on the positive side?

I guess in terms of surprise, the inland empire has had very strong absorption. We were a little worried about that market, I think the last time we talked. And we were surprised by the upside and absorption. But in terms of actual gap for the quarter -- I don’t carry those details in my head. I would say that three that stand out the other way are the three that we mentioned. But most of the markets have the deficit and some have a pretty significant deficit. Gene, do you know -- can you give Ross more color on the individual market?

Yeah, Ross. I mean, there is -- there is certainly a few markets in the U.S. where you’ve set a dramatic balances. And why don’t we follow-up with you on the details. The way we look at this though is -- and we look at our own portfolios where our occupancy is at, relative to that particular market. And for the purpose of this call, we focus more on where we’re concerned about oversupply. And as we’ve mentioned, there is a couple of spots, where we see that. But if you look at the aggregate numbers, obviously we’re 2x demand versus supply.

Thanks.

Your next question comes from the line of David Toti from Cantor Fitzgerald. Your line is open.

Great. Thanks. Hamid, I just -- I want to follow up on that first question and so broaden it a bit in terms of what does the company look for relative to the development landscape in terms of signals that would cause you to potentially pull back on volumes, especially around spec obviously if supply levels are one but is your point where yield thresholds become problematic as well?

Sure. Let me -- I have the chart in front of me of this deficit. So Cal has a pretty big deficit. San Francisco Bay Area has a huge deficit. And Seattle has flipped through a pretty big deficit. Southern Florida, which is Miami has a big deficit. Above more, Washington has a big deficit. So those would be the markets in the -- at the moment with a run rate, 12 months run rate of absorption is significantly higher than the delivery. So that’s just to answer Ross’ question. In terms of signals that we look at, look these buildings are -- the good things about industrial business is and the bad thing about the industrial business is that these are small, relatively small incremental investments. We’re not building a million mass square foot office building that in two years we’ll find that whether the market is good or not. We’re delivering the fifth or sixth building easily in a part. The part is already full. So it’s very incremental. So we’re not genius. If we put up a building and it takes too long to lease up, we don’t put up the next one. And we manage our exposure that way. It maybe a little bit more sophisticated than that but not a whole lot more.

Your next question comes from the line of Brendan Maiorana from Wells Fargo. Your line is open.

Thanks. Good morning. I wanted to ask about the dispositions and contributions. I think you mentioned that you are looking to increase the level of non-core dispositions going forward. If I look at what you guys put on Page 28 of the supplemental, overall dispositions are I think around $800 million in the quarter, average cap rate was 6% but it was kind of skewed by Japan which is low cap rate market and suggest that what you guys sold in the U.S. is maybe at relatively high caps. So how should we sort of think about the dispositions that are slated for the remainder of the year and next year and the cap rates or income loss that you are likely to get from what you sell?

I would listen to our guidance because that will be baked into our guidance. But generally you shouldn’t be surprised try that our dispositions are higher cap rate than our acquisitions in the equivalent markets because we’re selling the bottom 20% of our portfolio. So that shouldn’t surprise you. The fact that we’ve done better than that in the last two, three years is because cap rates have compressed a lot, so we sold stuff at a lot better cap rates than we thought we would but we're okay with that. And that is actually baked into nay guidance we provide to you. Again, it’s a $50 billion company. We can sort of spend our time talking about 200,000 square foot building here and there. So we have to take a more aggregate view of it.

Your next question comes from the line of Brad Burke from Goldman Sachs. Your line is open. Again, Brad Burke, your line is open. Please check that your line is unmuted.

Just click off mute. Thanks guys. Good morning. Wanted to ask about the rent spreads that you saw in the quarter, clearly a nice improvement quarter-over-quarter, looks like both in the U.S. and outside the U.S. I think it's fair to say that the overall macro sentiment outside the U.S. did not improve in the third quarter. So, I was hoping you can comment on what you are hearing from your tenants overseas. How you're thinking about the momentum in market rents, either positive or negative from where you are now and what you are thinking about going forward?

Okay. So, I’d say customers in Asia are still quite optimistic, demand still exceeds supply certainly in Japan and China. Our rent spreads in both those markets were quite wide this quarter, in China are quite wide. In Europe, it's really more about consolidation. The big themes for our customers who are 3 POS and e-commerce which really were driving. Expansion was happy, I would say and Gene will speak to this more in the U.S. and Asia. Not so much in Europe, was really more about consolidation. And in terms of the customers that were most active this quarter, consumer goods were very active. Pharma and others as well as the two that I think were driving and automotive I suppose as well. All of those were up over the last quarter and above historical averages. But again rent spreads in Europe, pretty significant in the U.K. and Northern Europe and not so in other parts. Again, we squeezed out slightly positive rent spreads this quarter in Europe as we are growing occupancy.

Yeah. But I would add to what Gary said is that there are definitely some markets in Europe where rent spreads are negative. I mean, France would be one where you get under the 3/6/9 structure escalating rents. And then when you get to the end of it you fall off. Central and Eastern Europe, we were renewing at below -- in some cases below in-place rents. So it's -- sort of it’s a seesaw. There is some positive, some negative and I think it’s about even right now.

Right.

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

Thank you. Hey, Tom, can you explain the pretty big gap, pretty big difference rather between cash and gap leasing spreads?

Well, we’ve talked historically that we would expect that spread to be 6% to 8% and it was right on 8% this quarter, almost right on top of that. So it is tracking exactly where we thought it was. And as we talked about at the investor day, if you think about the gap rents increasing by contractual rates at 2.5% to 3% a year and you look at a four or five year lease and you compare of, you are going to take the midpoint of that net effective gap rent, lease over lease and you are going to take the cash rent that's probably only going to grow, call it 3% or 4% whatever that’s in a normal market. So that’s how you get that 6% to 8% spread that we would expect.

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

Terrific. Thank you. You mentioned the uneven microenvironment and even in the U.S., the data points at times have been conflicting over the past quarter. Is there anything you can share regarding the pace of your U.S. leasing activity? Was demand generally improving during the quarter and would you say you're getting any type of holiday related lift from the consumer goods segment?

Yeah, it’s Gene. I'll take that one. Demand is definitely accelerating in the U.S. It's a bit early in the third quarter to talk about holiday demand but we are seeing that right now. But overall, we're seeing very good broad-based demand. We’ve talked in previous calls a lot about the housing business and that's a catalyst that we are looking to kick in. And while housing starts have disappointed economists and probably all of us generally, they are up over 15% year-over-year and we are seeing that come through primarily in small spaces. Our small spaces under hundred 100,000 feet are up about 290 basis points year-over-year in terms of occupancy. So that’s something I would highlight. The overall numbers aren’t huge but that's driving demand. But we are just really, really optimistic and happy with the nature of the demand. We don't have any weak markets. We don't really have any week submarket and I would say we had some acceleration in demand through that quarter.

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

Hi. This is Kevin Varin with Michael. As you think about the increased capital you’ve committed to acquisitions sequentially and then also when you add in the buy-in of the additional stake in the North American fund, how are you thinking about funding that in order to stay leverage neutral? And then I guess, are you comfortable moving up leverage or should we assume you will get more dispositions or will you seek to raise common equity either on the ATM or in issuant?

Hi. This is Kevin Varin with Michael. As you think about the increased capital you’ve committed to acquisitions sequentially and then also when you add in the buy-in of the additional stake in the North American fund, how are you thinking about funding that in order to stay leverage neutral? And then I guess, are you comfortable moving up leverage or should we assume you will get more dispositions or will you seek to raise common equity either on the ATM or in issuant?

This is Tom. So from a standpoint of funding our growth, right now -- today, our line stands fully undrawn today. We had a balance outstanding at the end of the quarter. But we took that out when we did our Eurobond in early October. So we are sitting on significant liquidity. When we look at the first half of 2015, we see some pretty meaningful contributions that will be happening and some other dispositions. So we feel really good about our ability to fund our incremental growth. That being said, going over the long haul, we are going to run this business in the low-to-mid 3% LTV. And as we have incremental growth, we are going to have to fund that consistent with that long-term goal. And if that means issuing equity of the ATM, we will do that at the right time.

But not at a discount NAV.

But not at a discount NAV.

Your next question comes from the line of Jordan Sadler from KeyBanc Capital Markets. Your line is open.

Hi. Can you maybe drill down a little bit on Europe and on a forward-looking basis, obviously, you continued to see the escalation in occupancy and the traction there. But there's some puts and takes in terms of by country. Just expectation in terms of going forward, what we should expect on the occupancy front there if that will offset potential roll downs that you may see?

Yeah. Sure. As we’ve said over the last couple of quarters, we are starting to see softer occupancy in Europe where we need to and are having difficulty pushing rents. And that strategy I think has played out certainly this quarter, as we are up 90 basis points and it’s been pretty broad-based. If you look across our four regions, Southern Europe is up 130 basis points, U.K. is up 90, CEF, 80 and Northern Europe about 60. So we are certainly been able to drive occupancy levels. I’d say there have been some notable surprises. The markets that have been lagging, that continued to lag to a certain extent but we’ve got traction and now which is Hungary, France and Italy. I think that would have been a surprise to the upside. In terms of being able to hold on to that occupancy, I feel certainly good about that going into the fourth quarter. You just need to look at our leased occupancy spreads and they are pretty significant and growing. So, I'm very confident that we are going to hold this occupancy into the fourth quarter and beyond. Again, the one thing that’s part of our control is the macroeconomic environment and that’s something that we are tracking, but it’s something that we don’t control. So we are highly focused on our own operations.

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

Great. Thank you. So it looks like you took on high-end of your deployment service guidance slightly? Can you just talk a little bit about what drove that as it just stuff that will get pushed into next year or is there other some markets where you think it is time to stop developing and then how we should think about this heading into next year for start?

Jamie, this is Mike Curless. We’re at the stage of the air where all of our remaining projects are identified and so we have full visibility on what we expect to do by year end, we are highly confident that the volume will see and the balance of the air will be at or above where we came through in the third quarter. So nothing significant going on there, whatsoever, we are highly confident in terms of what we’ll see for the end of the year and into next year, we are very confident about volume going into the first quarter.

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

And also second question is on amortization of lease intangibles? I wouldn’t think that will be a negative not a positive adjustment to your GAAP rent change? Just curious if you could just help me understand why that contributes to 50 base points of growth?

Hi, Ki Bin, it’s Tom. So two -- a couple of things on same-store growth next year, I think there is opportunities from an OpEx standpoint that we could see -- we should see our revenue growth exceed that of our OpEx, I would expect that, which certainly helps NOI growth. I would -- I think there is -- we’ve talked about occupancy -- average occupancy increase for next year and that illustration not guidance of 50 basis points. I think, as I see things today and where occupancy is, we could that could be better than 50 basis points next year. And then on your second question regarding the lease intangibles, that works both ways, so a lease intangible, when you have a purchase accounting event or an acquisition, you mark those leases to market either above or below market and when those leases happen to be above market you might be giving cash rents of $5 and market might be $450. So, GAAP says okay that $0.50 delta, you need to take that even though you are giving cash in the bank, you have to reduce that from your revenues. So that’s what’s happening with that amortization. It was just the timing of when that intangible was set up. It was set up in the downturn.

Yeah. Let me add one more thing and draw your attention to Page 22 of the supplemental. So we have new disclosure on what our rolling leases look like in the next couple of years. So without getting into detail, I mean, if you do some quick math around where our rent changes today and what is expiring in the future, I think that will help you dealt with the rent growth side of the equation. And the other thing I would add to it, the one thing we can really debate around here is how much rents are going to grow. But I can tell you in the Americas at least, if you look at our occupancy levels, if you look at the market occupancy levels means six of our global markets are at all time occupancy highs, 10 of our largest markets are 97% leased better. I can't think of a better environment for pushing rents. Now that’s going to change over a long period of time based on supply. But if I think about what’s our potential for rent growth and then look at what’s rolling, I think its acts are pretty good. But Page 22 should be helpful with that.

Your next question comes from the line of Vincent Chao from Deutsche Bank. Your line is open.

Hi everyone. I just wanted to go back to the housing starts and some of the traction you are seeing on the smaller side of things. Just curious, I mean, if starts continue to slow, just curious what level will you start to get a little bit worried about some of the housing related demand and maybe some of the demand you are seeing for the under 1,00,000 square feet tenants?

Yeah. As I said earlier, right now, it’s kind of on fire. And the other thing we haven't talked about is what is our rent growth potential. And I think if you looked at some call scripts from a year ago or two years ago, that segment rents absolutely plummeted. But replacement cost is really high in that segment. So our rent change in the last quarter for smaller spaces was 15.5% in the Americas, so a big rent change along with occupancy pick up. Getting back to your question, it isn’t as if we’ve seen a huge demand from the housing sector. I’m just playing out that starts year-over-year were actually are up. So if we still are sort of more amount than a million units a year, I don’t think it’s going to impact demand in that segment. If it goes to 500,000 units back to where it was in 2009, then we probably have some issues. But we don't really think that's likely to happen. In fact, we think it will pick up marginally from a million units a year.

Your next question comes from the line of Gabriel Hilmoe from ISI Group. Your line is open.

Thanks. Tom, just going back to the gap rents spreads and looking at the fourth quarter, what’s being baked into the fourth quarter with guidance? And then I guess, can you just give a sense of the geographic mix of leases rolling in ‘15?

Okay. So as far as what our guidance for same-store implies for Q4, it’s really right in the range. I think year-to-date, our same-store growth is around -- on a gap, our owned and basis is about 3.5%, so we were expecting Q4 to range between 3.5% and 3.7%. When we look at mix going into 2015 versus ’14, I think, three regions standout. The first would be the Central Region in the U.S. That has had a disproportionate amount of leasing in 2014. It would be our lowest lengths of all -- any of our regions in the Americas because of where it’s located. And then the other two regions would be Southern Europe which is France, primarily in Central and Eastern Europe, highlighting Poland and consistent with what I said at our investor day. We had a higher role in those two markets than we normally have and that normalizes in 2015. So as Gene said when we look at rents rolling next year and where they are rolling, we feel really good about our rent growth because we’re putting up 9.7% today. And on an apples-and-apples basis, when you look at mix where we are signing leases today and where we are rolling leases next year, we certainly expect that rent change to accelerate just based on where rents are today. That’s not predicated on any significant rent growth to hit higher rent change numbers next year.

Your next question comes from Dave Rodgers from Robert W. Baird. Your line is open.

Hey. Good morning. Maybe for Hamid and for Gary, obviously, pace of acquisitions in Europe accelerated and it continues to do so which is good to see. At a fixed cap rate or just over a 6% cap rate in Europe and say a 5% or so in the U.S. plus or minus, I guess, what point does that rent growth in Europe really kind of kick in to get to the point where your returns are equivalent? I guess, what’s your forecast for rent growth in Europe that makes a 6% there and look as good as maybe a 5% here, given the robust commentary on this call over the last couple of quarters about just outsize rent growth in the U.S?

I think 6% cap rate would be not an accurate reflection of the opportunity in Europe. I think you will see a pretty heavy dose of U.K in that.

London Specifically

London Specifically and London is probably got higher rent growth than the U.S. So if you look at Continental Europe, I think cap rates are more in the 6.5% to as much as 7.25% range. And on equivalent quality of market, that’s about a 200 basis points premium to the same markets in the U.S. because in the very best markets in the U.S. you are in the high 4s. And while in the short-term rental growth in the U.S is much better than it is in Europe. We think that discount to replacement cost in Europe will drive rents in the long-term. More -- I think more of the U.S. rental growth, market rental growth not in our portfolio because there is a lag, but market rental growth has already taken place. We think, we’re actually probably 80% plus into the gap between spot market rents and replacement cost rents closing, the gap we talked about three years ago in our Investor Day. So the rest of the way from here is the last 20% plus any inflationary growth we may get in the U.S. In Europe, we’re early in that gap closing and actually the compressing cap rates are delaying and extending that rental recovery, because you can build a new product with lower rents in a defining cap rate environment. So, anyway, to summarize it all, put the U.K aside. We’re really deploying capital in Europe in the high 6% as well as 7%, call it mid 6s to low 7. And we think that’s a pretty healthy premium in growth. In other ways, when you combine that with lower growth, we think that still gets you better total returns than the U.S going forward.

Still huge discount to replacements cost…

Yeah.

… especially what Hamid was saying and you don’t have supply coming on to the market today.

Right.

Your next question comes from the line of Mike Mueller from JPMorgan. Your line is open.

Thanks. Hi. Just going back to dispositions and if you look out to the next couple of years 2015, ‘16, are the numbers you’re talking about increasing the pace to significantly different than what you’re doing now in 2014?

No. I think, we -- you’re going to see our disposition activity really moderate. As we’ve been working hard since the merger, we’ve really worked down our other markets. Our regional markets are getting close to 10% our long-term target. And we’ll see a mix, we’ll probably see more dispositions coming out of Europe in the next year or two and less in the U.S. and that’s just timing of where we see the markets.

Yeah. Just to be clear on reconcile those two comments. We are going to sell more of everywhere, particularly the U.S. sooner than we would have otherwise. But we’re actually running out of non-strategic things to sell. So where you think kind of to the end of that portfolio cleanup process, but whatever is left is going to -- we’re going to keep on doing it.

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

Hi. Thanks for taking my question. With regard to the land acquisitions you made during the quarter? Are you guys taking more of a just in time inventory approach there or you more just opportunistically banking it for the right time?

This is Mike. Our land size is exactly what we’ve laid out over the last couple of year. A long-term target for land banks still remains at a $1.5 billion and we tend to get there over the next couple of years, which it give us a two-year supply as we said for the development pipeline going forward. But as you look at the next couple of quarters, we’re going to continue to restock in strategic and selective locations in global markets like U.K., Brazil, Tokyo and the Bay Area. So we can get ready for the development volumes we expect in 2015 and ‘16. And then later in the year, you’re going to see our monetization kick in from development and we’ll continue our strong progress of selling non-strategic sites. So at the end of the day you’re going to see our land bank go directionally that $1.5 billion target. Not going to happen a straight line but we’re making good progress there.

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

Thanks. Just give me your comments about mix changes in the higher relative U.S. exposure. Do you have the releasing spreads for the quarter at a proportionate basis? And then as we think about ’15 and ’16, you referenced page 22, there where you provide the expiry rents? Can you quantify how that -- how those in-place rents today compared to market kind of what’s the mark-to-market in-place today?

Hi. This is Tom. So don’t have the proportionate numbers on hand, but if you think about just our share of the NOI as in the Americas and U.S. is about 72% to 73%, Europe 23%, Asia is the rest. That’s the allocation you want to do for that. And then regarding where market rents are, again, I’ll let Gene weigh in if he wants. But when you look at on an apples-and-apples basis, we did wrenching to almost 10% this quarter and from on a mixed basis of what’s rolling next year, we have a lower net effective rents next year than what’s rolling this year, absent any rent growth. And we would expect with today's rents to roll, to have higher rent change next year than this year.

Your next question comes from the line of Steve Manaker from Oppenheimer. Your line is open.

Thank you. Can you talk to me about why the tax went negative this quarter? Thanks, Tom.

Yeah. So we had a deferred tax liability of about $30 million and it related to built-in gain on an acquisition from a very long time ago and the statutes on that rent and we release that liability. Now that did not affect core FFO in anyway. We don't take the benefit of any deferred tax benefits in our core FFO. So that was just a release of a liability that we had to put on our books at the time of the acquisition.

Contingent.

And we wrote it off as a non-cash event.

Your next question comes from the line of John Guinee from Stifel. Your line is open.

Close, John Guinee here.

Hey, they’re getting better.

You should hear what they call me. Just a quick and simple question, too tired now. Seems to me about this time last year, you raised your dividend 18% and I can't remember if that was to an elective dividend increase or a cash driven dividend increase. Can you refresh our memories as to why the dividend got raised to 18% around this time last year and what’s your thought process is currently for this year?

So, John, our AFFO for this year is going to go up more than 20%, which is why we raised our dividend to 18%. From a tax perspective, if you look at our core AFFO payout ratio, which as you know does not include any development activity; our core payout ratio is going to be around 92% -- 91% or 92% in 2014. But taxable when we monetize our developments, that’s taxable events and when you look at our development gains for the year, we will be paying out something in the range of about 75% AFFO in 2014. So from a tax perspective, yes, we do need to continue to increase our dividends when you look at the amount of the development value creations that we are recognizing and is being taxed.

Yeah. The FADs do count those as real gains and real money. And if we couldn’t count it straight this kind of thing, we’d be in really good shape.

Okay.

To be accurate, the dividend increase was in February of this year. Might have said last year, I’m sorry.

(Operator Instructions) Your next question comes from the line of Brendan Maiorana from Wells Fargo. Your line is open.

Thanks. Hamid and Gene, I had a follow-up on some comments you made earlier in the call. Hamid you mentioned that you felt like 80% of the disparity between market rents and replacement cost rents have been realized in the U.S. at this point of time, which I think going back to your ‘12 or ‘13 investor day, you guys thought sort of 25% kind of rent growth was required to kind of get margin rents up to replacement cost rents. So 80% has been realized that’s kind of 20% out of the 25%. How does that -- which would suggest maybe 5% kind of excess market rent growth beyond inflation? But, Gene, if I heard your comments, earlier it sounds like you think you probably can push rents more than 5% given where occupancy levels are and the fundamentals in your market, so just wondering if you can kind of reconcile those two comments?

Yeah. Let me answer first and Hamid can say as you ask. But yeah, I do believe that and there is two reasons for it. One, replacements costs continued to move and in the U.S., they are not moving rapidly right now other than land but land has gone up very quickly. And I think you’ll see an acceleration in replacement costs. So that dynamic continues to play into the equation. But otherwise, we will get to a point where we will be able to push rents beyond replacement costs for some period of time that’s not going to be a long period of time. But if you are in a supply and demand situation where there is basically no vacant space you are going to able to push rents. So we have to be careful that’s temporary because ultimately supply will come on, but for some period of time that will be true, absolutely.

Yeah. Let me just clarify. I think there are actually three components through rental increases that we talked about three years ago. And by the way thank you for remembering that because when -- at the time we came out with that forecast, most people thought we are crazy. And we are actually low in retrospect but the first is just climbing out of the hole, just getting back what we lost during the down turn which I called the bounce back. The second is replacement cost accelerating beyond inflation because the contractors will start wanting to get their margins back when prices will go up and all that. And the third is getting on the normal equilibrium inflationary track for rental growth. My comment was that I think we’re 80%, may be the more off the bounce back from the hole we fell in. We still have the above inflation replacement cost growth because while the land portion is kicked in, the construction portion is about to kick in. I mean we’re getting, we’re seeing some high construction pricing in some markets. So I think that will prepare our rents for a while and then we’ll get on the normal inflationary track. And Gene is absolutely right we’re going to over shoot it for some time and then it’s going to come back down to the trend line. So I am not saying the rent growth is ending but, here is what I am saying let me go on he record and tell you what I really think about this. I think people are way too excited about the long-term rental growth picture in the U.S. Yes you’ve heard it from Hamid. Rents in the U.S. will not go up 6%,7% forever, which is why some of these people are paying ridicules cap rates that they are assuming their performance not going to happen. It may happen for couple of years but its going to revert down to more of an inflationary growth number. On the other hand, I think every body has written off Europe as a dead continent and its never going to happen again. I think they are wrong. I think where we are in the U.S. two, may be two and a half years ago and their parts of Europe that we are going to have, have already had U.K. fabulous rental growth and occupancy growth. And I think if you look at where rents are going in the cap rates you are seeing, there have been some terrific bargains in Europe over the last 10 or 12 months may be two years that people have overlooked. And I think those opportunities are going away quickly. They are getting snapped up pretty quickly. So, I think people are too optimistic about the U.S. in the long term and too pessimist speaking about the Europe in long term. Time will tell whether that statement is correct or not.

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

Thanks. Can you just go into little more detail regarding the National Industrial Funding, where you had decided to further consolidate the portfolio? What’s the game plan there? Are you not earning FTEs there? Do you plan to eventually introduce new investors to the fund or what exactly is happening?

Well as -- you know, after the merger we have two open end funds in the U.S. We had USLV which was the old -- excuse me USLF, which is the old and the open-end fund which is actually a true open-end fund. It goes out and raises capital every quarter. It can redeem investors who want to leave. It can bring in new investors. It can make new investments. It’s a living, breathing dynamic open end fund like an open end fund is supposed to be. The old NAIF fund was a really a club deal with a couple of big investors, one really big investors and couple of more smaller investors. And it really didn’t have the right governance because the smaller investors didn’t have liquidity, the investors could decide whether we could raise money in the fund or not raise money in the fund. It hadn’t acquired any thing in the couple of years because it couldn’t. So it kind of missed the opportunity to take the advantage of the investments opportunities that were available in the market place. It was really an ill-conceived vehicle. So our strategy is very simple. We want to have few competing vehicles in any given region. We want to minimize the number of competing vehicles and between the two, this seem to be the one that needed to be rationalized. And some of the investors in it, wanted liquidity and some of them didn’t. So we accommodated the ones that wanted liquidity and we are happy owning the real state. We know it well. We’d like the real state. We don’t mind having our money invested in it. And once we can do something about it and we control it if that day ever comes, we’ll do something in terms of recapitalizing it. Meanwhile, we are happy holding on to it and just basically to static fun that we will operate for the foreseeable future.

Your next question comes from the line of Michael Bilerman from Citi. Your line is open. Again Michael your line is open. Please check that your phone is unmated.

Apologies. Good morning. Haven’t done that in a little while.

Michael, we didn’t think you’d ever be that quiet.

You cannot, nor could I. I wanted to came back to your comment about not showing equity below NAV because the opposite obviously you have the ability to do, which is to buy your stock at a discounted NAV if you believe its there. I sort of view that if you think about the buying of NAIF into assets you now manage, you can take that up the scale and buy into a company that you know extraordinarily well that has a lot of other growth drivers outside of this pure assets. In terms of the asset management business, the development business and Tom, talked all about the liquidity that the company is generating and will generate in next year through some of dispositions and you have a lot of choices to put that liquidity. And you obviously made the choice to invest onto NAIF which is as almost $500 million of equity commitment but $1.1 billion of total enterprise value with your share of the debt coming on. It’s just a lot of capital. I’m just wondering, how you weigh buying into that versus buying your stock which would have the same certain implications in terms of capital commitment?

Excellent question. We did look at that and by the way every time Gene comes to me and say, what are we buying more, more of something in the U.S. I tell him we are only more of everything. We think it’s a better deal. Our conclusion was that actually buying into NAIF was a more attractive return on invested capital than buying our stock. I think a stock buyback has a couple of components, an important signaling component and an investment decision. I don’t think it’s purely an investment decision. We unlike your clients are not in the business of buying and selling our stock everyday. So somewhat of the permanent directional choice and it’s got to be a pretty significant discount, there is a discount. We’re pretty -- we are not shy about telling people what we think our NAV is. We think it’s in the range of $43 with no value attributed to the development business. So -- and people may argue that it’s $42 and we can have that debate but it’s in that range. This was a pretty attractive yield on invested capital. And I think by buying our company we would have a higher mix of everything that we invest in, Europe, Japan, everything. This was a U.S. investment. So they’re not directly comparable yields. And we thought -- we just thought this was a much better use of capital. This is not as permanent decision as a share buyback either because this -- I think we’re going to end up doing something with this fund down the road in terms of recapitalizing it. So in the mean time, we’re happy to enjoy the yield and to be more invested in the U.S. given the operating parameters here. By the way, we’re pretty active in Europe too as you saw in third-party acquisition so. But stock buyback are really at the end of the day what we compare lot of our investment too. And there is healthy debate that goes on, that’s about that in the shot.

Your next question comes from the line of Jamie Feldman from Bank of America Merrill Lynch. Your line is open. Again Jamie Feldman your line is open. Please check that your phone is unmuted.

Thank you. So going back to your comment on rent growth, saying you think the market is little too excited about the long-term rent growth in the U.S. when maybe not excited enough about Europe. What you guys think there is still room for cap rate compression across your regions and where cap rates have probably bottomed out?

Well, let’s start with the statement that we’ve been wrong about cap rate compression in the last two years. We thought that it wasn’t going to happen and it keeps happening certainly in the U.S. I think there is a lot more cap rate compression that happen in Europe that’s for sure. I think Japan cap rates are going to compress because the public market trades at a 150 basis point lower cap rate. Sorry -- the public market trades with the 150 basis point lower cap rates than the private market. And that’s the work of Japanese laws where you can't really contribute assets to a J-REIT at lower than in appraised NAV. So there is this disconnect between public and private market. And public markets value real estate much more expensively. So those two areas, I'm pretty sure about cap rates going down. My bet is that cap rates that are stable are going up in the U.S. when people realize that for instant growth 6% year forever. But I've been wrong about that’s so let’s acknowledge that. And I think, Mexico is going to have lower cap rates. Cap rates in Mexico are going to come down a little bit. But the big trade -- I think the big insight is that I think cap rates are flat to up in the U.S. and I think people are getting a little exuberant about industrial rules state pricing in the U.S.

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

So just a one quick one, just on Page 18 of the supp, the turnover cost, Gene, I don’t if you comment a little bit of that. The trend line looks it’s going up, up to 9.3% in this prior quarter. And I would've thought the reverse. I would thought that as your rent spreads are widening the value of the lease is going up. And rents moving up that you actually have to spend less to get…

Yes. Spread.

As I am (indiscernible) there was something going on.

No. I get it. This quarter is interesting. Every individual division actually dropped. This is entirely mix. So it’s more U.S. deals which have a significantly higher turnover cost relative to others. And off course, releasing more small spaces and they’ve higher commissions in TIs. But I would tell you, Michael, this has been pretty constant, pretty flat. I think it’s going to continue to look that way. So this is really -- it’s really a mix issue in terms of where we did leasing.

Your last question comes from the line of Michael Salinsky from RBC Capital Markets. Your line is open.

Thank you. Just given the comments about non-core sales versus potential issues, what percentage of the portfolios today which you consider kind of non-core is applicable for sales. And then also given your comments about cap rates, would you look to sell core assets just given the aggressive pricing in the expectation that cap rates may rise over the next 12 to 24 months?

Sub 5%, I would say non-core at this time. And of course that definition changes overtime. As market change in asset age and different things happen. So I would -- but I would say we’re down to certainly well under 5% maybe, maybe as low as 3%. So it’s getting down there. With respect to sale of assets that are core to our strategy, we do sell lot of those two from time to time. For example, there are other parameters. For example, people pay a lot of money for long term net lease deals. And we've been selling a lot of those because our view value and the markets view value are different. So we would be authority to that sort of thing. We have value added conversions in the Bay Area. The Bay Area is on fire. I mean, people are buying our -- 30, 40-year old buying the building or high rise office site at 4x the value that we ascribed to them and you had ascribe to them in your NAV. We’ll sell those. There are users opportunities that are not going to adore, the guy is just got to have our building and it’s a strategic building. So we will sell those. But at market, we’re not really a seller of normal good operating real estates because by the time you look at the cost of selling it, the time to redeploy it, we’d be really redeploy the money. That said to be a 5% or 10% premium before you come out even. And that’s -- the market is not quite that frosty yet. But if we see a bigger spread than that, off course, we’re a seller.

We have no further question.

I think it was the last question. Yeah. So thank you for joining our call. I know you’ve got a lot more to go to. We kept this under an hour and look forward to talking to you next year. Bye-bye.

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