Prologis, Inc. (PLD) Q4 2014 Earnings Report, Transcript and Summary

Good morning. My name is Keith and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Prologis Fourth Quarter Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Tracy Ward, Senior Vice President, Investor Relations, you may begin your conference.

Thanks, Keith, and good morning, everyone. Welcome to our fourth quarter 2014 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 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. With that, I’ll turn the call over to Hamid and we’ll get started.

Thanks, Tracy, good morning, everyone. We had a terrific quarter to finish off an excellent year. A year into our three year strategic plan, which we presented to you back in September 2013, we are ahead on both earnings and deployment targets. Our outperformance reflects the strength of our reposition portfolio, which today is focused on the highest quality assets and the best markets around the globe. Our earnings in 2014 exceeded the top end of our guidance driven by operations and capital deployment. Let me take a few minutes to discuss the three key elements of our strategic plan. Our first priority has been capitalized on the rental recovery. The improvement in market fundamentals has been strong, but somewhat uneven across regions. It is well underway in the Americas, Asia and certain parts of Europe at a pace ahead of our initial projections, while Southern, Central and Eastern Europe lag behind. In the U.S., net absorption in 2014 was right on our forecast, double the rate of deliveries. Our U.S. occupancy outperformed the market by 320 basis points, demand was broad based. At year-end, we were more than 98% occupied in many of our markets. This occupancy combined with double-digit rent change on roll over resulted in same store NOI growth of more than 5% in the U.S. and 3.7% of overall. For 2015, we forecast deliveries of 165 million square feet against absorption of 225 million square feet leading to further increases in occupancies. Moving to Europe, despite the bifurcated recovery at 95%, our occupancy in the region outperformed the market by 210 basis points. As we forecasted, cap rate compression has been a headwind on rent the growth in Europe. What’s surprising is how far and how fast cap rates have dropped on the continent? While absorption and delivery information is hard to come by in Europe, we estimate Class A absorption of 66 million square feet compared to new deliveries of 45 million square feet in 2014. This drove market occupancy up by 150 basis points. Looking forward, market occupancies in Europe will continue to rise as the supplier remains constrained. We see space utilization running at a high level forcing customers to leave more space to support their incremental growth just as they did in the U.S. two years ago. In Asia, market conditions continue to be strong and pretty much on plan. Our second priority has been to realize value from our land bank through development. Last year, we put $430 million of land to work in developments with an estimated overall profit margin of 20%. These outside margins are driven by the low book value of our land which has a build out potential of about $11 billion of properties overtime. Our third priority has been to leverage our scale to grow earnings. Our global reach allows us to deploy capital where we see the highest risk-adjusted returns often ahead of the pack. In the U.S., where market conditions are strong and values are high, we have been a net seller of non-strategic holdings. Conversely in Europe, our focus was on development where we acquired quality assets at significant discounts to replacement cost. Timing here was critical as cap rates compressed throughout the year. For perspective, we took the proceeds from our dispositions and contributions at a weighted average cap rate of 6.2% and redeployed those proceeds into higher yielding assets at a weighted average cap rate of 6.8%. The net result was a favorable spread of 60 basis points on investments. As a result, we are able to grow earnings and at the same time, improve the quality of the portfolio. Moving to strategic capital, we continue to have a significant investor queue with steady interest across all our funds. In 2014, we raised about $2.5 billion of third-party strategic capital. What’s remarkable is that each of our funds has outperformed its respective benchmark for all time segments in the past five years. To sum it all up, we expect market conditions globally to improve from these healthy levels. Our market leading position in Q series around the world gives us the ability to deploy capital profitably and we have the financial capacity to carry out our plan. And as we’ve explained before, we are well insulated from movements in foreign currency. With that, I’ll turn it over to Tom.

Thanks, Hamid. We had great results for the fourth quarter and full year. Core FFO was $0.48 per share on the quarter and $1.88 in 2014, representing an increase of 14% year-over-year. Leasing volume for the operating portfolio in the quarter was 33 million square feet. Development leasing totaled 9 million square feet, our highest level in seven years as we continue to see strong demand for new space. Average term for leases signed in the quarter increased sequentially from 45 months to 60 months. Quarter-end occupancy was 96.1%, up 110 basis points from the third quarter. The sequential increase was driven by Europe, the Americas and spaces under 100,000 square feet. GAAP rent change on rollover was 6.2% led by the U.S. at 11.4%. This metric may sling quarter-to-quarter based on the composition of rolling leases. In 2015, we expect rent spreads to continue to increase and exceed 2014 levels. Cash rent change on rollover was flat for the quarter. GAAP same-store NOI on an owned and managed basis increased 4.1% in the quarter and 3.7% for the full year at the high-end of our prior 2014 guidance range. GAAP same-store NOI on a share basis in the fourth quarter was 4.9% driven by the outperformance in the Americas, which represents about 75% of our share of NOI. Moving to capital deployment, development stabilizations totaled $1.1 billion with $236 million our share value creation or $0.46 per share. Development starts in 2014 totals $2 billion with an estimated margin of 20% indicating the book value of our land bank continues to be significantly undervalued. We acquired $1.5 billion of buildings during the year was $659 million our share at a weighted average stabilized cap rate of 6.4%. The majority of the acquisitions were through our co-investment ventures in Europe. We invested $679 million in North American industrial fund at a 6.1% weighted average stabilized cap rate increasing our ownership to 66%; we begin consolidating this venture in our financial results this quarter. Contributions and dispositions totaled $3.2 billion driven by non-strategic asset sales in the U.S. and the formation of our U.S. logistic venture. Our share was $2.2 billion and was at a weighted average stabilized cap rate of 6.2%. Looking at realized gains in 2014, we generated a $172 from development and $37 million VAC’s. We measured the realized gains on VAC’s has the difference between the sales price and the value of the building based at on an industrial use. Turing to capital markets, we continue to exploit the low interest rate environment, while maintaining significant liquidity. In the fourth quarter, we issued a €600 million euro bond and raised a total of $356 million in equity with $214 million through the exercise of warrants related to the formation of our ELP venture back in 2012, and an [indiscernible] issued through our ATM program. Our debt metrics and liquidity strengthen this quarter as leverage declined to 36.5%, debt to adjusted EBITDA fell to 6.8 times and liquidity increased to $3.4. Another indication of the strengthening of our balance sheet is the significant amount of nominal fixed charge coverage. On a run-rate basis, we’re generating over $1 billion of excess EBITDA over fixed charges annually, our excess coverage is continue to grow in 2015, given expected leverage levels and pace of EBITDA growth. So we’ve discussed before we’ve taken significant steps to minimize our foreign currency exposure on both NAV and earnings. With our U.S. dollar net equity at 89%, we’ve effectively insulated our balance sheet in operations from movements in foreign currency. Europe comprises about 7% of our non-U.S. dollar net equity with sterling representing the majority of this exposure. We’ve minimized our Euro net equity exposure by naturally hedging with Euro denominated debt, which has the added benefit of very low borrowing costs. We currently have $3.8 billion Euro debt with an average interest rate of 2.6% and a term of over seven-years. While we have continued to see the U.S. dollar strengthen over the past quarter, the impact on Core FFO from the decline in the Euro and the Yen in the quarter was less than $0.01. The bottom line is we virtually eliminated the risk of FX movements significantly impacting our NAV and earnings. Let’s turn to 2015 guidance. For operations, we expect our year-end occupancy to range between 95.5% and 96.5%. We expect to stabilize $1.7 billion to $1.9 billion of developments, an increase of $700 million at the mid-point over 2014. We are forecasting that the increase in NOI from development stabilizations will be the largest driver of our 2015 Core FFO growth. The higher volume and stabilizations will contribute about $0.14 a share to 2015 Core FFO. Looking forward, stabilizations will continue to be a significant driver of NOI growth, given projected starts of approximately $2.5 billion in 2015. GAAP same store NOI on an owned and managed basis is expected to grow between 3.5% and 4.5%. As you know, it is our share of same store NOI that impacts earnings, we expect our share for same store growth in 2015 to be 5,200 basis points higher than owned and managed. As I mentioned earlier, this is driven by the higher performance and our higher ownership of the Americas relative to Europe and Asia. Our share same store NOI growth will contribute about $0.13 a share to 2015 Core FFO. Our net G&A, we expect the full year to range between $238 million and $248 million. We forecast the whole G&A flat despite a planned increase in AUM. On the capital deployment front, we are seeking an increase - we are seeing an increasing volume of profitable development opportunities in 2015 and expect starts to range between $2.3 billion and $2.6 billion. Our well located land bank and global customer relationships are driving increase build issues activity, which we expect to account for about one-third of our starts in 2015. On the specular [ph] development front, we are largely building in our existing [indiscernible] master parks. The average occupancy in the markets where we expect to start and stabilize back this year is about 97%. While acquisitions are always hard to forecast, we are estimating building acquisitions to range between $1 billion and $1.5 billion. We expect dispositions to increase from 2014 and range between $1.5 billion and $2 billion with activity coming from the Americas, Europe and value-add conversions in the U.S. Contributions to our co-investment ventures will be driven by development stabilizations, and are expected to range between $1.3 billion and $1.8 billion. We expect to realize development gains of between $200 million and $250 million in 2015. Putting this all together, our share of net deployment is about $600 million. For strategic capital, we expect revenue to range between $210 million and $220 million, which includes an expected net promote from our PELP venture in the fourth quarter of 2015 of between $0.03 and $0.04, which is in line with the net promotes we’ve earned in 2014. Now putting all of our guidance together, we expect 2015 Core FFO to range between $2.04 and $2.12 per share. This represents year-over-year growth of 11% or an increase of $0.20 at the midpoint of our guidance. The year-over-year growth is primarily driven by development stabilizations in our share of same-store NOI and reflects dilution of about $0.08 a share driven by the timing of dispositions and increased level of deployment during the year. From an FX perspective, we’ve hedged the majority of our affiliated 2015 Euro and Yen net earnings effectively insulating 2015 results from any FX movements. In closing, we are very pleased with our results for the quarter and the year. We delivered ahead of our 2014 plan and have strong momentum heading into 2015. With that, we will open up for questions. Operator?

[Operator Instructions] Your first question comes from the line of Brad Burke from Goldman Sachs. Your line is open.

Hey, good morning guys. I wanted to ask about the sources of capital over the course of 2015. It looks like you’re planning on deploying around $600 million into development and acquisitions over the course of the year, that’s net of your contribution and dispositions. You raised equity during the quarter. So I was wondering whether or not we should expect you’d be raising additional equity in 2015?

Thanks, Brad, its Tom.

Okay.

When you look at our net deployment in 2015, it’s about $600 million all together. If you exclude our share of acquisitions, we are actually generating about $200 million of net proceeds in 2015. So decision about how we’ll fund any growth really gets down to acquisitions. And it will be a function of the opportunities that we see in the markets and the volume of activity we see and the relative returns, and that’s going to drive our decision on how we capitalize and what equity we raise. We clearly have the ATM program it’s a highly efficient way to issue equity. We also have $3.4 billion of liquidity that we plan on maintaining that level. Our plan assumes that level of liquidity throughout the year, our lines under on and sitting on some cash. So we feel very good about our ability to fund any growth and it’s going to be a function of opportunities we see returns we can earn, and where our share price is trading.

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

Great, thank you. I was hoping you could focus a little bit on fundamental demand. Just give us some color on what weakness or any weakness you’re seeing from changes in oil prices and we’ve seen a pull back in some of the durable goods numbers I think that earnings were relatively weak today. So just kind of any big picture thoughts on what’s happening in the broader economy and the impact on demand as we roll into 2015?

Sure, Jamie, it’s Eugene. I’ll take that one. So so-far we’ve really haven’t seen an impact and of course impact from oil prices are going to take some time to apply itself out. So at the moment if you actually look at the markets that would be affected by that particular statistic, Houston and Dallas, they are looking pretty good right now. Now having said that, there isn’t any question that a long-term $4 to $5 price of oil is going to have negative impacts on Houston, and it’s probably going to have negative impacts on the state of taxes generally but we have not seen that. In fact, in Houston, fundamentals are robust. Our portfolio there is about almost 9% leased and about 10% of our customers have any exposure to - which roll in directly. So I’m not particularly concerned, but having said that, when we look at future capital deployment and development thoughts in the state of Texas, we will be very selective on the sub-markets where we’re active in and of course a very delicate one.

Yes, the only thing Jamie, I would add to that is that remember we have, we’re also pretty active in Europe and Japan and those are two net importers. And a drop in the price of oil actually helps those economies.

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

Thank you, good morning guys. Tom or may be can you just comment on the rent spreads in the quarter $6.2 versus $9.7 in the third quarter. How much was that was a function of market mix or your weakness or spending specifics you’ll be great.

Yes, this is Tom and I’ll let Gary or Eugene add-on. It really was a function of mix this quarter. And particularly in Europe and the amount of role we saw in Central and Eastern Europe.

Yes, I think that’s it, that’s the big story. So Europe counted for about 33% of our leasing this quarter, typically, you see it about 25% and 26%. And in disproportion amount of leasing was done in Central and Eastern Europe, which were markets that were lagging. I mean that’s not a good thing we’re leasing space in those tougher markets. So it’s driving occupancy and NOI. And as we’ve said, this number is going to be volatile quarter-to-quarter, but we feel very good about going into 2015 when you look at our annual rent change number. So we think it’s going to be up over 2014 and as Tom said in his opening remarks driving same store NOI about 3.5% to 4.5% range on an owned and managed basis and higher than that on a Prologic’s share basis given our disproportionate waiting to U.S, so a net-net we feel good about it.

Yes, the only thing I would add to this is that we are going to be positive and strong throughout the year. The first quarter will be the weakest quarter, which is because of demographics of the leases and our rent change will accelerate throughout the year. So just be prepared on that because you are going to have the same question three months from there.

Yes, same as [ph] expectation actually with respect to Europe, Southern and Central Europe.

Yes, for Q1, so good point, I’ll leave it.

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

Thanks. If I heard you correct on because you provide guidance on what you expect on realized development profit in 2015. And just a couple of questions around that, which I think is a important metric that I think we haven’t [Indiscernible] that for a very long time. What was on 2014 versus 2015 and if I just do some simple math, I mean it seems like the margin is closer to 15%, if I compared to your contribution guidance in 2015. So I guess with more disclosure. I have questions around that, but maybe if you could provide some more color?

Okay. We did discuss what our expectations are for realized development gains. So just to be clear, we talk about when we stabilize assets, we will talk about what our margins are at that time or margins are above 20% and what we are stabilizing, which is similarly high levels on starts. On for realized gains, those are gains as a function of ours contributing those developments overseas into our ventures are also third party sales. So those are realized, they go through the P&L. The most important thing about those realized gains are that’s taxable income and it drives AFFO growth as well as dividends. And we had a $172 million of realized development gains in 2014. We are forecasting realized development gains between $200 million and $250 million in 2015. That’s a function of higher stabilization that are coming off the development pipeline next year or in 2015, and those getting contributed into ventures as well.

Yes, and then of course there is the unrealized gains that are the other half that don’t even hit the P&L, which is pretty interesting you know, you are in a business that generates couple hundred million dollars of value creation and basically doesn’t show up anywhere in the P&L. Until couple of years later as in effect to getting free $200 million of real estate every year of that will produce a return. So over time you get the return, but you’re not getting it in anyway upfront.

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

Great thanks. Could you provide some color on U.S. rental rates and the continued strength there, specifically the relative rent change between larger and smaller warehouses and then what are some of the driving forces are for the demand in big-box versus small?

Yes, sure it’s Gene, I’ll take that. Our - we’re getting to occupancy levels that are historic, yet we haven’t seen before. And what we’re finding is that small customers that segment of the portfolio, I think had about a 180 basis point increase quarter-over-quarter. So that’s really the portion of the portfolio that we have left to lease. And frankly that’s where we have more pricing powers. So you have more rent growth with the smaller customers. And as I said on previous calls, that product has much higher replacement costs and we have ways to go before we reach that, so that’s where we’re going to see a continuation of that. In terms of big box and then Michael made some commentary on this, but we see sort of two types of demand going on in the United States. Big-box demand which is heavily oriented to e-commerce, we don’t see that slowing down. That’s going to be episodic quarter-to-quarter because they are very big transactions, so we think that will continue. And then on the small side of the spaces, you just have an awful lot of pent-up demand in that category and very little, it’s in construction and most of the markets.

Yes, but in terms if big-box demand, particularly in the build-to-suit segment, we’re seeing a definite increase on size requirements, which are reflective, I think of more confidence that the customers have in their futures space needs.

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

Yes, good morning everyone. I’m just curious in Europe, and the comment sounded very similar to what we have been hearing over the last couple of quarters, in terms of rents being capped by lowering cap rates, but obviously doing very well in the occupancy front. I was just curious given the economic conditions there and some of the key measures that are going on, if there’s been any particular markets where you’re seeing maybe an increased opportunity to deploy capital or invest that maybe a little bit different than what you have seen over the past few quarters. Just give an competitive level or your outlook for those markets.

Vincent, our thesis in Europe is to be simple. Our forecast when we prepared to 2015 plan, in no way anticipated obviously QE. So on the margin, QE in Europe, is a positive. So and that’s now reflected in our guidance or anything. So if anything on the margins, there is upside in our numbers going forward. Now is to how important that will be et cetera, I can’t really tell you but I tell you that cap rates in Europe have probably compressed 75 basis points anyway and maybe more in some places not UK. UK compressed couple of years ago, and it’s one of the most cap rate markets in the world. But the rest of Europe, I think has compressed 75 basis points to 100 basis points maybe depending on the market and that is definitely a headwind on rental growth. I think it will be a more emmenic [ph] rental growth as a result of that. But we’ll take it in terms of increased value its okay.

But Vincent, I guess one thing to add, in terms of the weight of capital and ECB is driving cap rates down. We’ve been in front of this, if you think about it. Look back to 2013, we deployed about $600 million in third party acquisitions; this year or last year rather 2014, about $1.2 billion; and prior to that, we’re investing in our funds. So I think we’ve been in front of it, certainly the tougher environment on a go forward basis to acquire I would say large portfolios and [indiscernible] but we’ll be selective.

Your next question comes from the line of Steve Sakwa from Evercore ISI. Your line is open.

Thanks. Good morning. Hamid, I can appreciate the fact that the business is performing well. And then you guys are in a position to increase development starts. I’m just wondering given some of the comments Jamie made about some of the consumer demand in drop some companies like CAT, how you guys think about manage the development risk and potentially what are the warning sign that would get you guys to potentially pull back on the development stats.

Steve, that’s a really good question and something that we think about all the time. Our business has a lag with what’s going on in the real economy. Remember when the business turned around sort of in 2011, we’re all sitting around wondering when, why people we’re not taking space and what the redoing was the utilization rate was going up, and utilization rate was absorbing all the net new demand. But not transplanting into more space being leased. And then finally people could no longer the utilization rate and they have to new space. Nobody wants to lease industrial space because they liked it they only do it because they have to. So finally, U.S. absorption picked up and that ended up being a big driver of demand. So as the economy has sputters and these - the data sets that are coming out are really erratic. I mean some data is really good and surprises people and some data like the cats of surprises the negative. I don’t think we’ll see the impact of that until couple of years down the road, and unless it’s a steady trend up one quarter, down one quarter, that won’t affect anything, but if it’s a steady decline obviously we’ll show up in our numbers and demand for our product down the road. But I don’t really think that that’s an overall, we are going to be experiencing that anytime soon. Now, how we manage this is pretty simple, we are buy and large most of our developments. Well, and third of them our businesses, so those are leased and we know actually 35% of them and we know kind of where that stands. And of the balance of 65% I would say the vast majority are in parts where we already have in a couple of buildings or many buildings and we are building the next incremental building. And those parks that has usually lead to the next building been built are 97% occupied today. So on the margin, we may guess wrong on one building in one park, but it’s not like the office business where you drop a million square foot building and three years later maybe you’re wrong about the market. It’s a very incremental kind of growth. So that’s what we do. We look at how space is leasing every day, every minute by talking to our people.

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

Yes, good morning out there. Tom, I was wondering if you can just provide a little bit more granularity in terms of the FFO increase is coming from development, I think you in your opening comments talked about $0.14 incremental in 2016 gross about $70 million of FFO. And I guess when I look at the development pieces that we have it’s about $700 billion give or take of pre-stabilized developments that are obviously rolling into 2015. And then overall $700 million increase in the amount [ph] of development stabilizations in 2015 out just to 2014. And I assume the pre-state wide developments are earlier and $1 billion out of the $2 billion of developing ending in 2015 or probably later. You are going to get this continual FFO growth. And so maybe just provide us a little bit more details of the up and down, exactly how much NOI was recognized in 2014 off of what base, how much of that is still over from last year and how much was coming at 2015 so I assume it’s probably helping 2016 as well?

Yes, Michael. Simple math would be we stabilized $1.5 billion in 2014, we’ll stabilize $1.8 billion if the midpoint in 2015, just take a simple half year convention. So we’re going to get a half a year pop from 2014, take the yield to 7.5%, we’re going to get half a year pop from 2015 stabilizations, so half of the $1.8 million take that at 7.5% yield. That gets you roughly $70 million, that’s your $0.14 a share. The important thing like you said is, what this means going forward. The pop we got in 2015 until our stabilizations of reach are steady state of development, you’re going to continue to see this incremental pop from stabilizations every year, because in 2016 we’re going to be stabilizing the other half, you’re going to get a full year run rate on that $1.8 billion. We’re starting about $2.5 billion at the midpoint in 2014, so that ought to be stabilizing in 2016. So I would see, I think we’re going to continue to see this pop until we reached the point that our stabilizations and our run rate at a steady state converge.

And the only other thing, Michael, I would add to that is that if you train a normalize kind of our earnings for the development ramp and all that, there is one other thing you normalize for and that is dispositions over acquisitions. Our dispositions tend to be more front-end loaded. Our acquisitions, and development completions and stabilizations tend to be back end completion. And that training mismatch erodes or dilutes us by about $0.08. So the $0.14 delivered will be offset by $0.08 of the bad in a steady state kind of environment. So net, net, net it’s not as big as you would think. And in a normalized year, obviously acquisitions and dispositions would be equal and would be roughly the same timing.

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

Hi good morning guys. I wanted to follow-up a little on Steve’s question, if market trends in the U.S. continue in the manner that they’ve been going which is that absorption has been outpacing construction so our industry occupancy rates are moving higher, it would lead me to believe that one of two things are about to have an either, you’re going to see accelerate market rank growth, or you’re going to have to see more supply coming. So I guess the question is which one is it MBD [ph] and why?

Ross, its Gene. I think both are going to happen, as you’re going to have one in certain markets, and the other in markets where you can have more supply. But overall at these levels we have nine markets above 98% of occupancy and 19 markets above 96%, that’s in our portfolio. And the underlying markets that we’re doing business in there are getting to occupancy levels they haven’t seen before. So my guess, and by the way at the same time the constraints on supplying new space, continue to get more difficult. So the entitlement process isn’t easier building our kind of product, building industrial product is particularly challenging. So I think you’re going to see more rent growth than immediate reaction in terms of new supply. As we’ve forecasted we think supply will pick up in the U.S. next year. And we’re going to get closer to equilibrium, but the other thing I’d point out is that as a percentage of stock, these new completions are still very, very low. And frankly as a percentage of stock, the net absorption is also low by historical standards. So there is probably some upside there as well.

But let me tie this just something that we talked about in I think our Analyst Day may be two to three years ago, when we laid out the thesis for very substantial rental growth, which in those days was actually quite a position to take and it actually has played out pretty much that way, may be a little bit better than the U.S. and a little less in Europe, but fundamentally the same way. We laid out three steps in this rental increase scenario. Step one, is just a simple rollover of lease time at the trough to market rents. Just spread to market of the existing leases. Number two, the catch up of market rents are that point in time to replacement cost rents, which is kind of the phase we’re in now. The third step is that as construction volumes increase, price of construction is going to go up and we’re seeing this in many markets at substantially higher than inflation, because margin will come back into the subs and into the general contractors, and construction costs were going up. And also land costs are going to be new cycle land cost with new entitlements, bursement [ph] and all of that. All of that stuff is coming in at significantly higher than inflation. So replacement cost is not a static number, it’s a number that is going up pretty fast right now. Now at some point it will normalize, but I think that we are in the middle to late stages of Phase II, but Phase III hasn’t even started. And there are some markets that are further behind, some markets that are more closer in. Inland Empire, I would say your rents are right about the place where you can develop profitably and interestingly, because of rent, it’s because cap rates, but same difference. So replacement cost as a moving target and expected to move a lot in the next couple of years.

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

We’re ready. Well, okay. Couple of one long question. Tom looks to us like your weighted average cost of interest went down from 4.2 to 3.6 as a result of all the tenders you did. What’s to us the back of the envelope is that’s worth about $0.10 a share in FFO growth for 2015 over 2014, is that the right math. And then second is what you are thinking about your dividend policy. And then for Hamid, PLD stock in oil is about 47 bucks a share will be higher in two years.

By the way, John, before we answer any of those questions, I just wanted to give credit to keys for doing the best pronunciation of your name ever. So let’s start with that.

Yeah.

So on the impact of the various debt tenders that we’ve done, I’d say over the last two years. The impact over on all of that has been about concerns like you said, however, we saw about $0.03 of that come through in our 2013 earnings or another $0.03 in 2014 and it will get about $0.03 to $0.04 to that in 2015. So the 2015 impact is really $0.03 to $0.04. Now, if you isolate only the impact of the tenders and your analysis you’ll get a higher number, but you can’t do that because you need to look at what we did to our overall capital stock. We used to run our lines at over $1 billion drawn at a very low interest rate. We are carrying zero outstanding balance at our line. So it is $0.10 is not the right number, it’s really $0.03 to $0.04 for next year.

And actually we’ve cashed on the balance sheet which fund the other way in terms of what it contributes. In terms of the - our stock price versus oil, I have no idea other than the fact that in the very long-term both of them are going to be up a lot. And with respect to dividends, which was the other part of your question, by the way pretty good job of asking three questions. But on the dividends, basically our AFFO is growing pretty rapidly and though our dividends is going to grow somewhere in line or lower than AFFO and higher than inflation it’s going to be in that range. So Tom, you wanted to add.

Yes, I will just add. Our AFFO growth in 2014 was about 22%. And looking at 2015, we see AFFO growth in line with Core FFO growth surround 11%. And we look at and we have to look at our AFFO with realized gains because that impacts our TI. And when we look at payout ratios, this year our AFFO payout would be about 74% and in 2015, I think, it’s going be probably even a little less than that payout ratio. So we’ll be in the low, somewhere in the low 70s, payout ratio in 2015.

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

Hi, just curious, the average maturity overall lease in this quarter, hope the 15 months relative to previous, I mean, even this comment was it something in particular this quarter, or are you seeing tenants trying to take a longer-term perspective on their space needs? And be aggressiveof the fact one for eachchannel that you guys have a pretty good queue of private capital, wanted to be deployed. May be just comment on what geographies that capital is looking for or may be any changes there, and that’s the hurdles. Where there return hurdles? Gary you have something.

Craig, I’ll take your first question. It’s Eugene. We have now for the last few quarter, we have been aggressively pushing term, with this part of cycle, we are pushing rents and looking for longer-term. Most of you will recall during the downturn we scaled back dramatically and do not want to lock in low rents, so that strategy has been shifting. We have a very, very large sort of quarter-to-quarter change 15 months don’t think of that as a trend. So there is a little that aberration there, but looking at say the trailing four quarters, we’re up about 10% for five months and you’re going to see that continue. So we’re going to continue putting term at least in the U.S. and in Europe it’s probably a different story. Garry has something.

Craig, I’ll just say that what’s driving it up, obviously the Americas in the U.K we’re about 75 months, that’s typically a longer-term lease market and you’ve got the market that’s in our favor. Obviously this particular quarter we had development leasing at $9 million square feet, which is driving in the quarter-to-quarter up, because the development leasing with high percentage of builder suites are generally longer-term. But that’s offset by what we’re doing in Continental Europe, we’re trying to stay short in Continental Europe, so our average lease term is about 36 months there, plus or minus, because we want to take advantage of the rental growth when it does come through.

In terms of interest and private capital I would say, it’s across the board. And at pretty high levels, I would say comparable to the mid-2000s, because there’s a lot of pent-up demand, these peoples set the market out for long time and not that there’s more liquidity in the markets there investors are back in. If I were going to pick one region, I would say Europe is getting the most interest on the margin. As people view Europe as a place that has some cap rate compression still left. And you know in Europe the appraisals are way behind reality. And most people understand that. So they’re trying to get their money invested based on old price as opposed to new prices that are being paid on the margin. But people really do believe this cap rate compression story and the value being less in the European markets.

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

Thanks, good morning. Tom heard your response to my [indiscernible] question about the development. Stabilization - has an impact in terms of FFO for 2015. If I look at 2014 stabilization, it was only $1.1 billion, which was down from 2013 even though starts, increased, have increased each year from 2011. What cost the stabilizations to be low in 2014 relative to kind of where it starts been in the past couple of years and do you see that risk or swing factor in FFO numbers could be as we look at 2015?

Yes, 2013 versus 2014 was a mix issue because a fair bit of the starts that we had in 2013 where in Japan. And the Japan construction cycle is probably more like 18 months to construct and that leads up. So that was the way that kind of over 2013 and the 2014. But going forward, Japan has been - we’ve had a very steady level of development starts 2013, 2014, 2015 in Japan. So I don’t see that swinging at all, and I’d see stabilizations should get closer and closer to our - forgetting average out like we said long-terms start somewhere in the $2.5 billion range. It’s probably going to take us in 2017 until we get that an equal run rate. But for simple map, I would use sort of a two year lag between starts and stabilizations, that’s a good real fund.

Your next question comes from the line of Tom Catherwood from Cowen & Company. Your line is open.

Just thinking about foreign currency here a bit, was wondering what the same store NOI would have been in the fourth quarter and for 2014, inclusive of the negative currency movement and when we think about that [ph] being 89% U.S. dollar net equity. What kind of exposure FFO was you think you have in 2015 as far as base swings in the year or at the end?

Yes, I’ll answer your second question first. As far as from a P&L perspective we have virtually zero impacts from any FX movements. We have hedged our estimated euro and yen net earnings for 2015 we hedged the euro at about a 1.20, 1.2 and the Yen at 1.20. So we are really locked in for earnings for 2015. So we’re fully insulated. On an NAV perspective, at 5% move of all of our foreign currencies against us is about $0.25 a share impact on NAV. The other item, yes well the other question was on same-store, we do report same-store on a constant currency basis, so you can see the real impact of what’s happening on the operation side. However, if we look at our same-store impacted by FX, our share would really go up, because we are disproportionably owned in the U.S., so about 75% of our NOI is in dollars. And that relative percentage the U.S. actually becomes a higher percentage, if you FX adjusted because the dollar has strengthened against other currency. So dollar goes up in that scenario, Euro and Yen impact goes down. So when you look at our share, it would actually be more positive on an FX adjusted basis. The other thing since you brought up FX I do want to touch on as we’ve got the question or two around, in our reconciliation of FFO to our net income down to our Core FFO about whether we are backing out the impact of unrealized FX losses. When you look at our operations virtually all of our FX activity around the world goes through our P&L is realized and goes through our FFO. The only thing that would go through unrealized FFO from a - I’m sorry, go through unrealized FX or anything around the derivative. We take those when they are realized. When you look at our P&L that line that says derivative losses in FX adjustments, there’s two things going on to that line, it’s a negative $20 million number that’s getting added back, so a positive $20 million number. That’s made up of a $36 million loss related to the mark-to-market on derivative, our derivative convertible debt security. So that convertible debt matures here in March, we think it’s going to convert into equity is the strike price is $38.72. From a GAAP perspective, we have to mark to fair value of that derivative debt against our share price. So our share price went up in the quarter, we had to recognize a loss related though. That we add back that was $36 million. We actually had about $20 million of FX unrealized gains in the quarter and that all related to our hedges that we have about in place, we have about $1 billion of hedges and those hedges, they are worth about $160 million, none of that $160 million have gains that we’ve realized over the last year since we have those hedges in place went through our P&L, zero. So that should go through our NAV but none of that’s going through our P&L. So everything, the vast majority of all the FX that happens around the world hits our P&L, hits our Core FFO.

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

Good afternoon guys. You talked about your share of the same-store NOI, can you talk a little bit, may be on your renewal basis kind of what your expectations may be the U.S. and Europe specifically. And then as you look forward to 2015, just given the compression we’ve seen in cap rate, as well as the growth that you realized around the primary markets, domestically in the U.S., where do you see the best growth opportunities domestically?

Okay, I’ll take the first question, just some color on where we would see same-store growth. I’ll talk about it on an owned and managed basis. We would see the U.S. in the mid-five, somewhere next year. Europe and Asia, in the call 1% to 2% range. Now blending that all together when you look at our proportion and ownership that’s how you get something in the mid to high fours for our share of same-store growth next year.

And the growth opportunities, if the question is related to where can we sort of push rents, more aggressively I draw your attention to the desktop manual look away with very, very high occupancies. But I want to call two markets that have really been laggards one is Chicago and the other Atlanta. Both of those markets sort of began to turn the corner in 2014. Huge amounts of absorption, and we’re actually seeing very, very strong rent growths in those markets. And for us that’s $50 million square feet of product and in terms of incremental growth in income, I would probably point to those two markets in terms of potential for the future.

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

Thank you. Hamid or Tom, who has the lower cost of capital. You or the investor in your strategic capital queue.

I think our investors in our strategic capital queue have the lower cost of capital for core product. I think we have a lower cost of capital for development activity.

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

Thanks, I’ve got a clarification question on the North American Industrial Fund consolidation this quarter. Ownership obviously increased from 42% in 2Q to 63% of 3Q, but it didn’t consolidate, what was the controlled threshold or test a qualified for a consolidation of 4Q that now that ownership is 66%?

This is Tom. It relates to the rights that the limited partners had in that fund and in Q4 we got down to just one remaining investor, so it’s ourselves and one investor, and as a result of that the limited partners rights control right went away. That was a triggering event getting down to one investor.

Your next question comes from the line of Dave Rodgers from Baird. Your line is open.

Yes, thanks. Either for Tom or for Mike, you talked lot about development in terms of the third of the starts being build-to-suit. Could you talk geographically where you expect those starts to be? That earlier I missed it. And now along those same lines, can you talk about whether you’re seeing any differential in margin or development yield that would be different, obviously geographically it varies? But any difference that you’re seeing start to emerge given kind of the economic environment out there? And then the second question just to Tom, on the promotes I think you did expect some promotes whether there is some potential this year, but I assume aren’t in guidance can you confirm that?

Yes, I’ll take the promote question first. In my prepared remarks, I did talk about our guidance does include $0.03 to $0.04 of net promote in 2015, in the fourth quarter of 2015 we have a promote opportunity with our PELP venture or Norges venture in Europe. And again that’s $0.03 to $0.04 that’s in our guidance in Q4 of 2015 and it’s consistent with the level of promote we’ve recognized up in 2013 and 2014 earnings.

And in terms of, this is Mike, in terms of the complex the makeup of the development volume, I think geographically, as Tom mentioned in his remarks, over 95% of the activity is going to take place in our global market where the fundamentals there are really strong call it 97% occupancy in those markets. From a margin perspective, we take the over in terms of our average relative to global markets relative to some of the regional markets we’re doing business in, but it’s not a big appreciable difference and we still think regional markets are very meaningful part of our business. And at the end of the day, build-to-suits ought to about 35% of the total volume and I would point out that 35% of the larger amount of volume this year would be about 25% increase in the build-to-suit volume from last year. We’re very bullish about how that pipeline looks given the amount of LOI’s and signed leases we have in terms of carry over volume already this year.

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

Hi, I just wondering Norges, the assets on balance sheet that you can contribute here in Norges JV this year, what are you thinking about that growth 2015?

We don’t have a contribution arrangement with Norges on any under assets, with the JV on the series of assets. Actually it’s two JVs, one in the U.S., one in Europe.

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

Yes, just for follow-ups, just in terms of the equity rates in the quarter, when, just in terms of timing, when were you sort of notified that Norges is going to exercise the warrants? And then also when did you make the decision to tap the ATM and at what price, did you do that? And I get the fact that the convert, this coming will give you more equity in March, but I guess where it starting today relative to your NAV, do you have a desire to tap the ATM further, given where it may have occurred in the fourth quarter?

So from a timing perspective, the Norges warrant was exercised in December. And we tapped the ATM program in December. Going back to our plans for 2015, again, it really gets back to acquisition opportunity. So if you strip out acquisitions, our share out of 2015 guidance net, net our deployment generates cash of I think roughly $200 million. So our decision to raise equity will line up with the opportunities we see in the returns that we see with those acquisitions. So that’s how we are looking at it. If we see great opportunities to acquire portfolios, we’ll think about the smartest way to capitalize that. And I think we’ve got a lot of different way to do that, when you think about our liquidity, our ability to tap the equity markets and the substantial equity queue that’s built up in all of our private capital, our strategic capital vehicles. So we got lots of different ways we can fund deployment in acquisition to particular, if we’d like the economics out there.

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

Just Scott I’m sorry. One of a question is that to imply Tom that you’re help promote this 4Q 2015 that also imply that Norges those from 50% to 80% in that same quarter or those apples and oranges?

Yes, those are apples and oranges. We have the ability and this is true and, I think, almost all of our funds where we can earn, we have the opportunity to promote every three years. Fourth quarter of 2015 is the third anniversary of the formation of the PELP venture. Therefore that is the first time, first quarter in which we can earn a promote. Likewise, if you look to 2016 and you can see this in our disclosure or supplemental as we’ve got two other funds, I think, it’s our PELP II fund and [indiscernible] Europe, both are up for promote opportunities in 2016. So we’re going to see a steady stream of promote opportunities over the next several years given as Hamid mentioned our funds are performing about their bench marks. So I would expect if that holds we’re going to see promotes not just in 2015, but continue one. Now the other thing you’re referencing is that the PELP sell down right that we have, but we can sell down our ownership interest down to a 20% interest. That is totally independent of any promote of that’s a separate decision and that’s going to be a function of how we want to deploy our capital globally, that’s going to trigger and what opportunities we have, if and when we trigger that sell down right.

It’s also a as long as we think that decision in 10 point increments, it’s not like all or none it’s an 10 point increment and it doesn’t all have to be - that decision doesn’t have to be made in 2015. We have that window coming up every year, so we can sell as much or as little as we want whenever we want pretty much.

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

Thank you. I want to talk about U.S. property values a little bit. Could you talk about the composition of the property sold during the quarter, I think, the weighted average stabilized cap rate at the lowest I’ve seen in awhile. I know that you guys have some unique properties you sold the south part of the Bay Area that where probably is going to be likely converted a couple of years. So I’d like to understand as to where property value thinks our cap rate might have moved?

I would say this we have a one property that would fall under the description of unusual in terms of unusual good, in terms of Bay Area with an upside potential. But the vast majority of our sales actually in the last couple of years have been non-strategic properties in smaller markets from the bottom of our portfolio. So with the exception of that one deal in Silicon Valley, the rest of it would be non-strategic sales. So on average it would be lower than median of our properties, probably a lot lower than the median of our properties. Eric, bottom line is the price stock on industrial cap rates in the U.S. are in the low fours on the very best markets. And in the low fives for most markets, I’m talking about brand new great product in the markets everybody wants to be in with a good credit tenant. And I would say low fives in most markets and sixes, six pluses and six, six and halves in some of the less strategic markets. I’m not sure, we deploy capital at those kinds of numbers in fact we won’t, but that’s where the market is.

Your last question comes from that line of Jamie Feldman from Bank of America Merrill Lynch. Your line is open.

Thanks, Hamid. I guess can you walk through where you think cap rates are for Europe along the same lines what you just did for the U.S.?

Sure. London and the Southeast would be four, Midland’s would be low fives, Southern Europe would be six and half to seven, with an aero down by the way on that one, Germany would be in the low fives, same with the rest of Northern Europe. What am I leaving out?

Eastern Europe.

Definitely in Eastern Europe would be six and half.

There are no further…

And I’m sorry, just a complete the global, since we talked about everywhere else. I think Japan is low fives hitting high fours and within the J-REIT structure it’s actually trading in high threes.

There are no further questions at this time. I’ll turn the call back over to the presenters.

Right, thank you everyone for being here, I know how you are battling to storm back ease all the best to you in dealing with that. I look forward to talking to you next quarter.

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