Prologis, Inc. (PLD) Q2 2015 Earnings Report, Transcript and Summary

Tracy A. Ward - SVP-Investor Relations & Corporate Communications Hamid R. Moghadam - Chairman & Chief Executive Officer Thomas S. Olinger - Chief Financial Officer Michael S. Curless - Chief Investment Officer Eugene F. Reilly - Chief Executive Officer-Americas Region Timothy D. Arndt - Senior Vice President, Strategic Planning and Analysis, Prologis, Inc.

Steve Sakwa - Evercore ISI George Auerbach - Credit Suisse Securities (USA) LLC (Broker) Craig Mailman - KeyBanc Capital Markets, Inc. Vance Edelson - Morgan Stanley & Co. LLC Brendan Maiorana - Wells Fargo Securities LLC Eric J. Frankel - Green Street Advisors, Inc. John W. Guinee - Stifel, Nicolaus & Co., Inc. Brad K. Burke - Goldman Sachs & Co. Dave B. Rodgers - Robert W. Baird & Co., Inc. (Broker) Vincent Chao - Deutsche Bank Securities, Inc. Emmanuel Korchman - Citigroup Global Markets, Inc. (Broker) Ki Bin Kim - SunTrust Robinson Humphrey, Inc. Ross T. Nussbaum - UBS Securities LLC Jamie C. Feldman - Bank of America Merrill Lynch Jordan Sadler - KeyBanc Capital Markets, Inc. Sumit Sharma - Morgan Stanley & Co. LLC

Good morning, my name is Kyle and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Prologis Second Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you. I'd now like to turn the call over to Ms. Tracy Ward, Senior Vice President of Investor Relations. Ma'am, you may begin your conference. Tracy A. Ward - SVP-Investor Relations & Corporate Communications: Thanks, Kyle and good morning, everyone. Welcome to our second quarter 2015 conference call. The supplemental document is available on our website at prologis.com under Investor Relations. This morning, we'll hear from Hamid Moghadam, our Chairman and CEO, who will comment on our company's strategy and the market environment; and then from Tom Olinger, our CFO who'll 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 conference call will contain forward-looking statements under federal securities laws. These statements are based on current expectations, estimates and projections about the market and the industry in which Prologis operates as well as management's beliefs and assumptions. Forward-looking statements are not guarantees of performance, and actual operating results may be affected by a variety of factors. For a list of those factors, please refer to the forward-looking statement notice in our 10-K or SEC filings. Additionally, our second quarter results press release and supplemental do contain financial measures, such as FFO, 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. Hamid? Hamid R. Moghadam - Chairman & Chief Executive Officer: Thanks, Tracy, and good morning, everyone. We just finished the great quarter and our financial results reflect very favorable market conditions and solid execution by the Prologis team. In fact, this year is shaping up to be one of the strongest in my 35 years in the business. We're halfway through the three-year plan we outlined for you at our Analyst Day in September of 2013. Let me take a few moments to highlight our key accomplishments since that date. Capitalizing on the imminent rental recovery was the most important objective among our three key priorities as outlined in the plan. Our market rent growth forecast of 20% to 25% between 2013 and 2017 was viewed as quite bold at that time. Yet with the Americas and Asia slightly ahead of forecast and Europe slightly behind, the rent recovery cycle is unfolding pretty much as we expected leading to substantial growth in our earnings. The strong rental recovery has been particularly pronounced in the U.S. where the increases are becoming evident in our rent growth and financial results. Our investment strategy with this focus on global market has enabled us to achieve rent increases of 22% with our share of same-store NOI exceeding 7% in the second quarter. New supply in the U.S. continues to be absorbed at a rapid pace, driving vacancy down to 15-year lows. Our forecast calls for declining vacancy rates in the U.S. through the end of 2016 with supply and demand reaching equilibrium in 2017. As the largest owner in the sector, we're constantly on the lookout for signs of overbuilding, as we have a vested interest in preventing oversupply in our markets. We'll not be shy about sounding the alarm bell at the first sign of undisciplined development. Don't be surprised if our future spec starts remain flat or even moderate compared to starts this year. In Europe, improved customer sentiment is leading to growth in occupancies and rents, especially in the UK and Northern Europe. Markets in Central and Eastern Europe are also on demand, albeit at a slower rate. Even Southern Europe, which has lagged the other regions, is showing modest improvement. The big story in Europe, however, is continued cap rate compression, which began about two years ago. The rates on the continent have tightened by about 150 basis points since 2013 and we expect them to drop another 50 basis points to 75 basis points over the next 12 months. In addition, appraisals in Europe continue to lag real-time transactions by about 50 basis points. Turning to Asia, rents in Japan are growing at a healthy pace and vacancies are low. Competition, however, is seeding up, putting pressure on land prices and development margins. In China, procuring land in the top-tier markets remains a challenge, but high-quality product continues to lease in line with pro forma. Our second key priority was to put our land bank to work to realize its embedded value, while meeting the needs of our customers. Midway through our three-year plan, we've generated $540 million in value creation or about a $1 per share in NAV on $1.9 billion of stabilizations. At full build out, our land bank can support more than $10 billion of additional development or about four years of activity at our current pace. Our development margins will remain elevated and our closure rate on built-to-suit is running very high. We'll remain disciplined with our development starts and expect to create about $400 million or $0.75 a share of incremental NAV annually through our development activity. Our third priority was to use our scale to grow earnings with minimal incremental overhead. At this point in the cycle, asset growth is likely to come through development and less from pure acquisitions, unless of course we're able to capitalize on a competitive advantage in a given situation; for example, through the use of appropriately priced OP units. The KTR transaction is an excellent example of these principles and action. It's rare to have the opportunity to deliver significant immediate accretion to shareholders by finding a portfolio of such quality, which is so consistent with our own. The KTR transaction reduced our G&A to AUM ratio by more than 15% to 54 basis points. The continued build-out of our land banks will make us even more efficient as we scale our portfolio organically. Turning to capital flows, globally we see considerable investor demand for high-quality industrial real estate. In the U.S., we announced these stabilized cap rates in the mid-to-high 4% range in our best global market. And as I've mentioned before, in Europe cap rates continue to fall as demonstrated by our fund valuations, where cap rates compressed by another 30 basis points in the quarter. Before handling the call over to Tom I'd like to leave you with a couple of thoughts. The benefits of scale are clear and manifest themselves in important ways such as lower G&A costs, lower financing rates, and wider array of financing options and a higher share of wallet from key customers. However, size alone does not make us better. We are better only when we deliver profitably on our objectives. Over the past several years, we've taken great care to position our portfolio to where it is today and we're confident that our efforts will pay off in terms of superior same store NOI growth in the coming years. Factoring in core FFO growth in 2014 and the midpoint of our 2015 guidance, we'll have averaged 15.5% annual FFO growth over this two-year period. AFFO is growing even at faster rate, requiring us to increase our dividends three times over the past 18 months for a cumulative increase of 43%. With two years of results in, we've already surpassed what was considered to be an ambitious three-year plan as presented on that Analyst Day. With that, I'll turn it over to Tom, who'll take you through the numbers and guidance.

Thanks, Hamid. We had an outstanding second quarter and strong first half of 2015. Before I begin with our results, I want to remind you that we completed the acquisition of KTR on May 29. The properties were acquired by USLV, our joint venture with Norges. You'll see the impact run throughout our financial statements since we consolidate this venture. The portfolio is fully integrated. The assets have been successfully on-boarded in the day-to-day management of the properties has been transitioned to our regional teams, a terrific example of our ability to scale efficiently. Now let's start with results for the quarter. Core FFO was $0.52 a share, up 8% over Q2 of 2014. For the first half of the year, core FFO was $1.01 per share, up 11% over the first half of last year. Based on feedback we've received from investors and analysts as well as that our share of operations and deployment drives our earnings, this will be the focus of our disclosures going forward. We will, however, continue to provide owned and managed information in our quarterly supplemental. Quarter-end occupancy excluding the KTR assets was 95.6%, up 100% basis points over the second quarter last year. The KTR portfolio was 89% occupied at the time we announced the acquisition. The operations team is making great progress placing this portfolio, which was 92% leased at the end of the quarter. GAAP rent change on rollover was 16.6% and the highest quarterly level we recorded to-date. Rent change was positive across all regions and led by the U.S. at 22.2%. GAAP same-store NOI increased 5.9% in the quarter and was led by the U.S. at 7.1%. Now moving to capital deployment for the quarter, which again is on an our share basis. We continue to deliver very profitable developments. Development stabilizations were $578 million, with an estimated margin of over 31% and value creation of $179 million or $0.34 a share. Development starts totaled $799 million with an estimated margin of 19.6%. Acquisitions were driven by KTR in total $3.2 billion at a stabilized cap rate of 5.5%. And contributions and building dispositions totaled $415 million with a stabilized cap rate of 5.9%. Turning to capital markets, we continue to tap the foreign debt markets at very attractive terms. We completed $3.1 billion of financing activity in the quarter at a weighted average interest rate of 1.6% and term of almost five years. This included $1.6 billion, which was denominated in euro and yen. Leverage at quarter end was 40.2% on a gross book value basis and $39.2% on total market capitalization basis, which is how most REIT's disclose leverage. Debt-to-adjusted EBITDA and fixed charge coverage excluding realized gains was 7.6 times and 3.7 times for the quarter respectively. We have approximately $1.3 billion of short-term financing related to KTR, consisting of the $1 billion term loans due in 2017 and the remainder on our line. Our plan is to repay this balance through asset sales, and I'll get into the specifics of that in a moment. We continue to maintain significant liquidity subsequent to the closing of the KTR acquisition, with over $2.4 billion at quarter end, plus we have no unsecured debt maturities until 2017. Now let's turn to our outlook and guidance for the year. For operations, we're maintaining our year-end occupancy range of between 95.5% and 96.5%, and continue to expect development stabilizations for 2015 of $1.7 billion to $1.9 billion. We're establishing guidance for our share of GAAP same-store NOI to range between 5% and 5.5%. Looking forward, the majority of our same-store NOI growth will be driven by capturing the current spread between in place and market rents as leases roll. To put this into perspective, even with no further market rent growth, our share of same-store NOI in 2016 should grow at about 4% from just capturing today's rent spread. Our assumption, however, is that market rents will continue to grow. We continue to expect net G&A for 2015 to range between $235 million and $245 million. On the strategic capital front, we've increased our expected revenue range to between $200 million and $210 million. Also included in our guidance is an expected net promote from our PELP venture in the fourth quarter of 2015 of about $0.04. In terms of capital deployment, I'll refer you to our supplemental, page eight, for detail on our updated guidance ranges and our share of each activity. You'll note the most significant change is the increase in disposition guidance, as well as we believe this is a great time to sell non-strategic assets that we have value maximized. At the midpoint, our share of the expected net deployment for the second half of 2015 is about $350 million proceeds. But I need to point out that the Morris industrial transaction is included in our acquisition guidance, which we will fund with approximately $400 million OP units. Therefore, the total cash net deployment proceeds for the second half will be approximately $750 million. Now let me spend a minute discussing the plan to permanently capitalize KTR and focus on three aspects. First, we will retire the short-term KTR borrowings of $1.3 billion through a combination of dispositions and contributions, primarily in the U.S. and Europe. With the proceeds generated in the back half of this year, we will repay approximately 60% of this balance and take our leverage to roughly 37%. We'll complete the remainder of the plan in the first half of next year to fully retire the KTR borrowings and fund our development needs. At that point, our leverage would be in the mid 30%s, in line with our target credit metrics and on a path to an A rating. Second, this plan does not assume any sell down of our fund interest. The reason we've prioritized dispositions in this plan is because we expect substantial increases in European valuations over the next year. Since the downturn, we have opportunistically acquired additional interest in many of our ventures, particularly in Europe. As a result, we are well above our long-term ownership target of 20%, and giving us significant financial capacity. For example, reducing our interest to this level in our ventures would generate upwards of $3 billion of capital at today's values, providing substantial embedded liquidity, optionality, and capacity to fund our capital needs beyond the conclusion of this plan. Third, given our confidence in this plan and the embedded capacity within these ventures, we have no need to issue equity, as it'd generate excess liquidity based on our current deployment outlook, and is also consistent with our view of attaining an A rating. Putting our guidance all together, we're increasing the midpoint of our 2015 core FFO, which we now expect to range between $2.18 and $2.22 per share. This represents 17% year-over-year growth, or an increase of $0.32 at the midpoint of our guidance, which follows 14% growth last year. As Hamid mentioned, our AFFO is growing faster than our core FFO in 2015, and as a result, we announced an increase in our third quarter dividend to $0.40 a share. In closing, we had a great quarter and our outlook for our business is equally as strong. With that, I'll turn the call over to the operator for questions.

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

Thanks, good morning. Tom, I was just wondering if you could provide a little more clarity on I guess the cap rates that you might expect, a range of cap rates from the asset sales to fund the KTR deal? I'm just trying to think about maybe what the negative arbitrage would be between what you bought KTR for and the cap rates on dispositions?

The cap rates are going to be on average; again, you need to think about this as just being not only dispositions but contributions. I think overall, you're going to see those be in the mid-to-high – the low 5%s on contributions, all the way up to the – maybe the mid-to-high 6% on some dispositions. When you blend that all together, one thing you need to take into consideration, though, is, when we contribute assets for funds, we also get incremental fees, which certainly offsets the dilution. Hamid R. Moghadam - Chairman & Chief Executive Officer: The other thing is, Steve, there's some land sales as well in that, and of course, the cap rate on land sales is zero. So, I think it will end up being in the mid-to-high 5%s, when you blend it all together.

Your next question comes from the line of George Auerbach from Credit Suisse. Your line is open. George Auerbach - Credit Suisse Securities (USA) LLC (Broker): Thanks, good morning. Tom, with KTR closed, can you now talk more specifically about which portfolios, or the overall size of the assets that you have in the market for sale in the U.S. and Europe to fund KTR? And in addition, can you just clarify your comment on PELP, the sell-down? It sounded to me like, from your comments, that we should no longer expect a sell-down of PELP this year.

That's correct. So, to be clear, our plans is not – our plan to permanently finance the KTR outstanding balance of $1.3 billion assumes no sell-down in our European ventures. And again, as I mentioned, the reason we're focusing on dispositions and contributions for this plan is because we expect substantial cap rate compression in Europe over the next year, and as we look at how we're value maximizing assets on sale, we're prioritizing dispositions and contributions. Hamid R. Moghadam - Chairman & Chief Executive Officer: The other thing I would add to that is actually selling in our funds would be the easiest execution that we have out there, because really all we got to do is look at the NAV at the end of the quarter based on appraisals and make a phone call to actually to get that done. So, there is very little execution risk on that. It's just that as I mentioned to you, there is a lag in cap rates from reality. There's about 50 basis points of lag between appraised cap rates and reality in the marketplace, and we think the reality of the marketplace is poised for further compression. So, yes, we could go do the easy thing and put this thing to bed tomorrow, but we'd be leaving about 100 basis points of value on the table and we have lots of other ways of getting to the same place. But we have this as a plan B with $3 billion of cushion. So, we're not losing a lot of sleep over this.

This is Mike. In terms of the geographic distribution of the portfolios that we currently have in the marketplace or will have very shortly out there, it's a good spread of about a dozen markets, some global markets as well as some regional markets. I think it's a good mix of product that'd be attractive to what we're seeing as a very large buyer pool out there. And in terms of pricing, we have high expectations given the outstanding cap rates we're seeing now in the U.S. It's a really good time to put incremental portfolios out in the market and we're bullish on our ability to get that done by year end.

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

Just want to follow-up on the disposition theme here. Looking at where you guys are trading relative to private market cap rates, just thoughts on ramping the disposition program even further to potentially buy back stock. Hamid R. Moghadam - Chairman & Chief Executive Officer: Well, one thing at a time. I mean, first, our dispositions I want to emphasize the plan – the disposition plan actually has nothing to do with KTR. We would have sold these very same properties as the final step in the clean-up of our portfolio to align it with our strategy, just like the properties we sold in 2011, 2012, and 2013 and 2014. So, it's just basically the last phase of that. So, KTR, other than a few properties out of KTR itself, does not really impact our disposition plan. It's business as usual. It happens to coincide with paying off the financing that we took on in connection with KTR. But that's just coincidental. So, that's the way we're looking at financing our business and any of you guys have anything else to add to that?

Your next question comes from the line of Vance Edelson from Morgan Stanley. Your line is open. Vance Edelson - Morgan Stanley & Co. LLC: Thank you. You mentioned that the development margin should remain elevated. Could you comment on development yields by market first across the U.S.? We've heard there are some cities where it could be as low as 4%, others more like 6% or higher. And then if you could also provide the international color on the build yields as well. Thanks. Hamid R. Moghadam - Chairman & Chief Executive Officer: Gene, will address that question. I did not address one part of Craig's question, which is on stock buyback. Look, we're going to continue to execute on our disposition plan and also the fund sell-down to align with what our long-term ownership plans are in those funds. Obviously, we'll be in a substantially liquid position. We'll be a lot more liquid than what we need to achieve our A rating. And that capital is available for all kinds of purposes, including potentially stock buyback, but we are nine months to a year away from that because that would be the last thing we would execute on. So, depends on where the stock sits at that point in time, and right now we think our priority should be selling our non-strategic assets and paying off the financing associated with KTR and the stock buybacks are something that will come later, and we'll have the capacity to do a lot of that obviously. So this whole issue of equity issuance, which is – everybody keeps worrying and talking about, honestly we don't get it, because the problem we're trying to solve is excess liquidity not a lack of liquidity. Gene, you want to start?

Yeah, yeah with respect to the development margin, so the U.S. will be sort of high teens and as we've said that we're going to remain elevated in margins, I would say at least over the next 12 months, that I could see. In terms of where that actual returns on cost are, I mean it really range from the mid to high 5%s, in LA for example, if you were to do a build to suit in a 4.5% cap rate environment, it could be that low and they range into the mid 7% depending on U.S. market. So if you look at Mexico, you're going to be in low to mid 8%s, and then of course in Brazil you're going to be in the 10% to 13% in terms of return on cost. Hamid R. Moghadam - Chairman & Chief Executive Officer: Our development yields in Europe, Continental Europe I'd say 7%, 7.5% something like that, in the UK probably in the 5% to 6% range depending on the market. Obviously, if you're in the London market, it's going to be lower than if you're up in the Midlands. In China, I'd say they're close to the same as Continental Europe probably in that 7%, 7.5% range and then Japan, obviously lower than that 5.5% to 6%. But again, we expect yields to be pretty healthy for the foreseeable future, cap rates are compressing in Europe and values are strong in Asia.

And our land bank is still – books substantially less than fair value.

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 dividend raise. Your AFFO, Hamid, I think you mentioned has grown pretty nicely, grown faster than FFO and probably somewhere around $1.80 or $1.85 share annually. So you've got nice coverage relative to the dividend but you guys do capitalize G&A into development, so that doesn't hit the P&L and then you capitalize some interest expense as well. And we're at a good point in the business cycle. But if development slows down and you start to expense some of those costs that are capitalized, do you still feel like you'd have solid coverage of the dividend at $1.60 relative to an AFFO number if you had to expense a few more of those items?

Yeah. Hey, Brendan. Brendan, this is Tom. So, absolutely we have very strong coverage when you look at where our payout ratios are, we look at this with realized gains because that's TI and that's got to go out the door or a proportion of it does. So we're in a low 60% payout ratio. If you want to exclude realized gains, which we don't look at, but we would be in the mid to high 80%s exactly where we've been long-term after this divined raise. So we feel good about our coverage. We actually need to raise our dividend, not only – we're not trying to just meet our payout ratios or our target, we're really trying to make sure we're paying out the statutory minimum. So we've got TI pressure that we need to increase – continue to increase the dividend to make sure we're getting the right amount of TI dividends out the door. Now on your question about capitalized cost, to put in perspective, we'll capitalize about $70 million of development overhead this year and maybe $65 million of capped interest. So when you look at that $70 million against midpoint of starts for $2.6 billion, that's about 2.6% or 2.7%. So it's a fairly conservative cap – fairly conservative capitalization ratio when you think about what is actually out in the marketplace. So, even if you would cut those capitalized costs by $10 million or $20 million, which is I think would be a pretty substantial cut that would have a very minimal impact on our AFFO given the nominal amount of AFFO that we have out there. So bottom-line, we feel really good about our coverage and in that scenario, I don't think it would materially cover – materially impact our dividend payout ratio, particularly as we look at our growth prospects going forward from rents rolling to market. Hamid R. Moghadam - Chairman & Chief Executive Officer: Hey, Brendan, can I give you one little other piece of color. I mean, we've got a big advantage in that we're a global developer, and we've talked about this in the past. Look at the spread of our development activity, it is very broad and there's one building per market, we've got – we're building in each one of the geographies, $2.5 billion of development spend is not a big deal for us, we can certainly do more, but we have the advantage of literally picking the markets that we want to develop in. So I think $2.5 billion run rate is a pretty safe rate.

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

Thank you. I wanted to touch upon the operating portfolio a little bit. First, I'm not sure, do you ever mention what your cash releasing spreads were by market? And second, regarding releasing spreads, which markets benefited the most? Were there global markets, were there more of the regional markets or just like to get a little bit of more color on that. Thank you.

Eric, I'll take the cash rent change on rollover question. So, I did not mention it, but the cash rent change on rollover was about 4.5% for the quarter as compared to the GAAP rent change. Now that's spread a little wider than what we've had in the past, but what's happening is given the significant spread between market and rolling rents, our customers are asking for help to mitigate really the sticker shock that's happening with the significant rise in market rates, just look at this quarter alone. In the U.S., we saw 23% increase in spot rates to rolling rates and as a result, we're trying to help customers ease into these higher rents with escalations, and really just in the initial part of the lease. So that's why it's really important to look at the net effect of rents calculation, because that captures the economics of the overall lease. Looking at the cash rent change, you pick up just that spot change from the last lease to the initial lease, which clearly doesn't represent the economics of what you're signing up for. So we focus on the GAAP net effective.

Your next question comes from the line of John Guinee from Stifel. Your line is open. John W. Guinee - Stifel, Nicolaus & Co., Inc.: Great, thank you. Here's my question, I'm trying to get to the bottom of it, is you've got great same-store NOI growth. You've got excellent mark-to-market. You have a good value creation and development pipeline. But if I look at PLD at a 5% fixed cap rate, your per share in 2013 was $46.80 and your per share (31:07) for 2015 is $47.70, which is less than a dollar of value creation from 2013 to 2015. So I can't quite see where the leakage is and do you guys have any explanation for that? Hamid R. Moghadam - Chairman & Chief Executive Officer: I'm not sure how that math works, John. I mean the NOI number is growing. If you're taking the same cap rate and applying it, actually interest rates are increasing, so the mark-to-market on the debt should be getting smaller and we're creating $400 million of NAV though the development process every year. So I got to look at the detailed math of what you're talking about, but I'm not sure I totally understand it. There is some degree of FX factored into that, but again, most of that is mitigated because of the fact that we have matched liabilities with our assets overseas. So, I mean I can't do that math for you right now but would be happy to take you through that analysis. By our estimation, our NAV should grow by about a $1 a share, a little less than a $1 a share though the development activity and in the foreseeable future, we see earnings growth in the low-double digit range and probably even 10% just to pick an easy number. So that'd be $3 to $4 of NAV growth. So I don't know what you're doing with your math, but happy to take a look at it. John W. Guinee - Stifel, Nicolaus & Co., Inc.: Am I still on the line? Hamid R. Moghadam - Chairman & Chief Executive Officer: You are. John W. Guinee - Stifel, Nicolaus & Co., Inc.: Oh, this math just comes from page 34 to 36 from your NAV. This is not anything I'm doing creatively or uniquely. I'm just tracking your NAV as presented in your supplemental every quarter for the last three or four years.

Well, the other piece of it, John, would be the cap rate that you're assuming as well, on that NOI. Hamid R. Moghadam - Chairman & Chief Executive Officer: There's definitely been cap rate compression over the last 12 months, for sure. And I don't know if you're using a constant cap rate or what you're doing.

Your next question comes from the line of Brad Burke from Goldman Sachs. Brad K. Burke - Goldman Sachs & Co.: Good morning guys. I wanted to ask about your leverage mix. Obviously, you're able to issue a lot of debt this quarter at a very low rate. Just want to get an update on how you're thinking about the mix of floating rate in non-U.S. dollar denominated debt versus where you're at today?

Brad, this is Tom. So, today, we're at about – in the high teens on variable rate debt. Prior to the KTR funding, we were in the high-single digits. We're going to get back to that high-single digit range once we complete the permanent funding plan, and with selling dispositions and contributions that will fund this. So we'll get back down to that range. Our bias is to go long and to fix as much interest as we can at this point, just given where rates are. Regarding the mix of foreign currency debt versus U.S. dollar debt, based on where our U.S. dollar net equity is, we're at about at 90.6% at the end of this quarter, once we complete the KTR plan, we're going to be pushing more of the middle, middle 90%s, of U.S. dollar net equity. So, we don't have really any room today to move up our proportionate of foreign dollar debt. Going forward, we will do our best to match fund our foreign-denominated asset growth with foreign-denominated debt.

Your next question comes from line of Dave Rodgers from Baird. Your line is open. Dave B. Rodgers - Robert W. Baird & Co., Inc. (Broker): Yes, good morning, guys. Maybe for Mike, a question on construction cost. Can you talk about what you're seeing in terms of the construction cost components increasing? And maybe a second part to that is, how do you see construction cost keeping pace with rent growth here, particularly in the U.S., in the near-term?

Dave, in terms of construction costs, we're seeing there has been increases in the U.S. over the last couple of years, in the 3% to 4% range, perhaps as high as 5% in select markets where competition is more intense. For the most part in the global markets, we're seeing rents outpace that, that's why you're seeing some construction, that you are from a supply standpoint. Going forward, we anticipate that moderating a bit, maybe into the 2% or 3% range, but I think there is still some pretty significant competition for construction services, given the heavy load of development activity that's out there. Hamid R. Moghadam - Chairman & Chief Executive Officer: And in Europe, I'd just say, we haven't really seen significant construction cost increases, because there isn't a lot of development going on today, maybe just a bit. China, we're seeing some small increases as supply continues to move forward, and Japan is the interesting one. Japan, we had a spike right when the 2020 Olympics were announced, and then it peaked and it basically stopped. And we think that, as you get closer to the 2020 Olympics, you're going to see construction cost increases in Japan. At the same time today, we're seeing land increases, very significant land increases, in Japan. So, I think that underpins a pretty healthy story for rent growth in Japan over the next several years.

And land is increasing pretty much across the board in the U.S., along with entitlement cost. So, while construction increases have been moderate, we think they're going to outpace inflation. Overall replacement costs are going up pretty rapidly.

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

Hey, good morning, everyone. I just want to go back to the rent spreads here, which were quite strong in the quarter, accelerated from the first quarter. But I think, when they were talked about originally, there was some negative mix in the first half, more European leasing than in the second half. Just curious if that maybe didn't play out the way you thought, and that was part of the reason why we saw such strength in the first half spreads, or if that's still going to be a positive tailwind to you in the back half, and if you could maybe quantify that, how that mix is changing?

Vince, this is Tom. We've really normalized the mix, starting in Q2. Q1, we were – and part of last year, as you point out, we were more heavily weighted towards Europe, and particularly Southern Europe and Central and Eastern Europe, so it's moderated. So that would be one thing. And then second would just be the strength of the U.S. markets and the proportion of leasing with the U.S. markets driving these returns. So going forward, I think we'll expect – I don't foresee any real mix issues like we had in the past with Europe, with U.S. being disproportionally different.

Your next question comes from the line of Manny Korchman from Citi. Your line is open.

Hey guys, good morning. If we could just go back to your earlier comment on cap rates compressing in Europe and your hesitation to sell there at the moment, can you balance that against, A, your acquisition plans for the rest of the year, maybe into next year, and how much of that will be in Europe? And B, how you get comfort (38:47) buying in the U.S. and selling in the U.S. at the same time?

Well, from a mix standpoint, if you look at our acquisitions this year, it's very much – you really need to look at the remainder of the year. It is weighted towards the U.S. and the Morris industrial transaction, which we agreed upon pricing there probably six to nine months ago. So, from that standpoint, we are focusing on – that's a big driver of the U.S., as well as, we do have some U.S. 1031 activity going forward. When it looks about balancing, buying in the U.S. versus Europe, we're always looking at the relative returns, and the overall growth profile of what we're buying and what we're selling. And as – looking at the KTR portfolio, in particular, very high quality portfolio that we expect to perform right in line with the rest of our U.S. portfolio. Look at how our U.S. portfolio is performing right now. We expect the KTR portfolio, similar quality, to perform equally as well. I think that is a big testament to why we wanted to buy that portfolio. Hamid R. Moghadam - Chairman & Chief Executive Officer: The only comment I'd make with respect to Europe is as Tom said in his prepared remarks, we've obviously increased our ownership position in our funds, that's the best acquisition that can make. Over the last several years, we've been buying portfolios and as we've told you there, well, we'd like to buy more in Europe, there aren't a lot of portfolios to buy, so we're focusing our time on those one-off acquisitions, and those value-add deals, and you can see it coming through in our numbers. We did two building acquisitions, one in Prague and one in Netherlands in the second quarter, and a total of $144 million year-to-date. If we could get more in Europe and it was good quality stuff, we would do that. At the same time, we will be selling non-strategic assets in Europe, when we feel like they're value maximized. So we are going to be both buyer and seller in a market like this.

And rounding out the activity in the U.S. the majority of it outside of the large portfolios of Morris and KTR are the value-add acquisitions in U.S. as well, where our local teams identify those, those aren't subject to the same pricing pressures in general that we see on the larger portfolios and it's a way we keep our acquisition activity strong in U.S. more on a case-by-case, project-by-project basis.

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

Thank you. So Hamid, maybe we can go back to the earlier conversation regarding capital deployment and KTR. And I think I heard you correctly when you said that you didn't fully understand the market's reaction to equity overhang risk, some of the things that you've heard from the buy side. If you could reflect on just what has happened in the past four months or so with the KTR deal, what are some of the things that you possibly learned or maybe you could have done differently maybe a forward equity issuance or maybe just a whole host of things that you could have done differently or not. I was just curious what your reflections are regarding that and how your stock price reacted post the deal and what feedback you received from investors? Hamid R. Moghadam - Chairman & Chief Executive Officer: Okay. That's a really good question. The thing that I learned is that you can be totally honest with people in the way you present something. And in the interest of being super honest and straightforward with people, you could convey an impression that could be really inaccurate. So let me elaborate. Every M&A deal that a company does, they talk about its accretion using the capital structure that will be deployed immediately to fund that acquisition, which in our case is 1.5% debt. And we should have come out maybe and said this deal is not only NAV neutral because we're buying in the (42:51) market, but it is accretive to the tune of 15% or some crazy number like that because we're financing it on the margin with 1.5% debt. And that would have been the least if you will honest thing – honest way we could have portrayed it. So we elected not to do that. We used the word, this is how accretive it is on a leverage neutral basis. And I think the market read that as, we are immediately going to finance this on a leverage neutral basis, and I think it created an overhang. I mean, remember, we own a lot of the stock. We're not selling our stock at a 10% discount or now 20% discount to real estate value just to buy fully-priced real estate. We get that math. I mean come on guys, we've been doing this for a while, okay. So, clearly, that is not what we intended to do. We know all the sources that we have. We know how much non-strategic assets we have that we're going to have to sell, anyway whether we do KTR or not. Sure we have to sell a few more with KTR because as we've mentioned to you, about 5% of KTR is long-term non-strategic. So, yeah, we're going to sell our non-strategic assets and that happens to fully fund this transaction over a 12-month period, and to us that's very comfortable. We are committed to our single A rating, but that doesn't mean we need to achieve it tomorrow. We're heading in that direction. We are not telling you different story to the rating agencies that we're telling to the equity holders, all of what we've told you has been consistent and in my belief presented in the most responsible way possible. But I think the issue about the leverage neutral language and the talking about the timing that was assumed that we're going to get this in balance right this second half after it closes. I think we're actually misinterpreted by the market and we'll take the responsibility for that miscommunication. But the reality is, we'll clearly fund this transaction within a year. Our leverage ratios will be back in line consistent with that single A rating and above and beyond this, we've got about $3 billion in effect equity firepower sitting in our funds that once those funds and ventures are valued properly, particularly in Europe because of continued cap rate compression and closure of that appraisal lag. We'll take advantage of those in a way that it matches with our needs – with our capital needs. So we don't have a big capital drag on our income statement. I hope that clarifies.

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

Hi, thanks. Hamid, you had commented that we shouldn't be surprised if the development pipeline stabilizes or goes down as we look out over the next few years. I'm going to assume that we should also expect the same from the land bank but perhaps you could comment a little more, is there any expectation the market should have that the land bank could really move down beyond what happens to the development pipeline just so that you get more of these non-income producing assets off your book so that your earnings multiple isn't negatively impacted by that? Hamid R. Moghadam - Chairman & Chief Executive Officer: Sure, that's a really good question. To be perfectly candid with you, not all of our land is strategic. In fact, we've quantified, classified about $400 million of our land as non-strategic, meaning that we don't intend to develop it, either somebody else is going to develop it or we'll sell it to user or something like that. So of our book value of land bank that you see today, $400 million of it should not be there, and we're going to sell that no matter what and not replace it with anything else. So the land bank for sure would come down. Then in a normal market, we will be acquiring land at the same rate as we'll be putting land into production. We'll reach some level of equilibrium at some point. Our best guess is that in that situation, we would have a $1.2 billion, $1.3 billion of land, which is about two years of development at the run rate of $2.5 billion and the math on that is pretty simple. Two years of $2.5 billion development is $5 billion and land is about 25% of the total. So that gets you to about $1.250 billion of land that we need to carry around here. And so if you want to be in the development business and generate whatever we generated, I think it was 17 unleveraged by IRRs over a period of 15 years, you've got to have land. The unfortunate thing as you all know in our business, we don't get to cap that as earnings, and that's fine, because I think when industry counted that as earnings bad things happened. So we're good, but it's real money. It's real cash that comes in the bank in the company and it's real NAV that's created and we can patient to realize that value. So the bottom line is, we like the development business. You have to have some land to account for it to be able to play in that business. It's the highest rate of return business we have, but we have too much land in relation to our development volume going forward. As to my comment that we're going to moderate it is that look four years ago, five years ago, before there was a development business in the depth of the crisis, we told all of you that our annual development volume is going to normalize from $2 billion to $3 billion a year globally and in some markets and in sometimes, it's going to get closer to $3 billion and in sometimes, it's going to get closer to $2 billion. And I guess what I'm saying is that it's been going steadily up in the last three or four years and now it's about $2.6 billion, $2.7 billion. Don't be surprised if that comes down to $2.4 billion, $2.5 billion or something like. I mean that's very normal, and we're going to bounce around numbers like that going forward.

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

Great, thank you. I'm here with Jeff Spector as well. Can you just talk a little bit about the KTR yields and how they came in or how they are coming in versus your original expectations? I think on the first quarter call you guys had said the in place was a 5.2% cash, this stabilized was a 5.5% and if you backed out the CIP in land it's a 4.85%. And along the same lines if you look at there was an occupancy dip across the portfolio in the second quarter, can you talk about how much of that was KTR versus the rest of your portfolio and what gives you comfort on getting to the guidance you've laid out which is at least a 10 basis point growth if not more?

Yeah. So, Jamie. It's Gene. I think KTR had a 20 basis point effect globally. But let me get to your yield. So things are playing out as expected, if anything the rents we're getting on new leases. And by the way we've signed about 40 leases since we've announced this transaction about 2.5 million square feet in that portfolio, but we're right out of 5.5% yield on a stabilized basis. So this is the same way we describe any acquisition. So that's 95% occupancy. At 89%, you're correct, it was around a 5.2%, but we're already at 92% leased in this portfolio. And our plan is to be just under 95% by the end of the year. So we're a little ahead of schedule relative to the 12-months timeframe that we outlined to get KTR in line with the rest of the U.S. portfolio, or said another way, around 96%. So, hopefully that clears up the yield. I mean I see upsides in the yields because the rents coming in a little better than we expected.

Jamie, on your point about the 4.9% cap rate. I think you meant to say that if you include the land in the CIP, in addition to the operating assets, the yield would be 4.9%.

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

Hello. Can you hear me? Hamid R. Moghadam - Chairman & Chief Executive Officer: Go ahead, Craig.

Hey, it's Jordan Sadler here with Craig. Just a clarification. Can you – are you saying that and I think I understand the sentiment, but there's no equity in the plan any longer. I think last call and where some of the confusion came in was, Tom, you gave the example on a leverage neutral basis talking about the issuance of potentially $1.5 billion of equity. So obviously there's some communication about that ultimate financing, which I know I now understand was not imminent necessarily in terms of how you were trying to communicate it. But now you're saying the plan just does not assume equity, this is going to be done through asset sales. Hamid R. Moghadam - Chairman & Chief Executive Officer: If I may take that question because it's my bad more than company's or Tom. I think we laid out alternative financing plans for you. I think we laid out three financing plans and one of them included equity, and two of them did not include equity. And we wanted to be – we wanted to give you the bookends of what could happen in terms of financing this deal. Our current plan and the one that we're executing right now assumes no equity, the only equity that exists is in effect the OP units that are part of the Morris transaction that go with the Morris acquisition. I mean if you want to really define equity in a broad way and just by way of reminder the valuation of that equity is fixed at where our NAV was on whatever we negotiated that deal about a year ago. It's $43.11, which by the way after discount, issuance discounts and all that is equivalent of $45 a share. So that's the only equity that's ever been in the plan before or after KTR and there is none contemplated in the current plan.

Your next question comes from the line of John Guinee from Stifel. You line is open. John W. Guinee - Stifel, Nicolaus & Co., Inc.: Yes, on a lighter note, going back to Europe, I've been watching the Tour de France almost every night, and I have yet to see a PLD roof or a PLD sponsor on any of the teams. Are you guys doing that this year over there?

(54:25) Hamid R. Moghadam - Chairman & Chief Executive Officer: It's too expensive, John. It's too expensive to get your name on that – on those jerseys, as you know, so we're going to keep our money for dividend growth, but...

You may see something on the roofs, though. Hamid R. Moghadam - Chairman & Chief Executive Officer: Yeah, so John, you asked a good question, and Tim Arndt, our Treasurer, has been actually trying to reconcile the numbers for you, so instead of waiting, I think he is prepared to talk about it right now. So let's answer your last question now.

Yeah. Hey, John. I'm guessing, I think, between the two periods you described, you're seeing, if we look at, (55:02) I believe you're holding cap rates constant, understand that; the NOI growth is flowing through; you're probably seeing an addition of something like $3 to $4 a share on that basis, and I'm guessing you're also seeing something on the order of $1.50 a share in terms of development value creation added over that period. I think the components you're missing are, we had about a $1 come through, the way we present our NAV in the supplemental, what would appear to be loss from debt extinguishment, which is a temporary phenomena, we bear those debt premiums initially and we earn them back in a period of about two to three years through lower interest expense subsequently. So that'll be coming back through the NAV statements through about 2018, 2019. The other component that would deserve acknowledgment is, it's really 2013 when we got ahead of all of our hedging and debt placements, and until that got up and running, it's a fact that we probably saw about $1 to $1.50 of NAV loss before that program got completed. If you looked at what we did in terms of bond financing in the euro market, as that market opened up, that principally got done in 2014. So, you know we're fully hedged now, we won't see any further loss from FX in NAV today, and we'll earn the debt extinguishment back in about two to three years. Hamid R. Moghadam - Chairman & Chief Executive Officer: And John, so that you understand the strategy behind the timing of that euro match funding. The time we did the merger, 40% of Prologis' equity was in foreign currencies – I mean, I'm sorry, in U.S. dollar. 60% of Prologis' equity was in foreign dollars and to that date we had – certainly I had not ever heard a single call about currency exposure in this company. One of our first objectives, the day the transaction closed, that we said we're going to neutralize and insulate this company against currency movement. But we couldn't do it immediately because remember, the PEPR was a big component. We had to bring PEPR in and then recapitalize it with PELP, all that stuff, until we could get all the puppies in the right pond, we couldn't really refinance the transaction. So, as soon as we got these pieces in the right buckets, we basically executed on our immunization strategy on FX, which is – it's really like debt extinguishment. Basically, you had an FX hit upfront, and you're going to earn it back over time in terms of earnings and matching on the debt side. So, if we hadn't done that, at that time, the launch that Tim just qualified for you for $1.50 would have been in excess of $5 a share.

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

Thanks for all the questions. Tom, not to beat a dead horse, but regarding the releasing spreads, could you clarify what the average rent bumps you're getting on new leases? Second, regarding disposition plans, how many market exits do you guys plan over the next year or so? And then third, related to the KTR deal, it looks like New Jersey had the biggest dip in occupancy, so just want to understand if there's any particular buildings that need to get leased up? Thank you.

Eric, I'll take the first part of that. So our bumps over the life of the lease really aren't changing on a long-term basis. What's really happening is, the initial rent in this, call it the first maybe six months of leases that are getting stepped up. So instead of walking somebody to market day one, the sticker shock that is happening, tenants would like to walk into that say, over three months or six months. So that initial rent, you're not seeing the full mark-to-market day one, but you are going to see it over the next quarter or two.

Eric, let me give you an example. And this is real life and, during this past quarter, we had like a dozen examples like this. So put yourself in a tenant's position, you're paying $3 a foot in rent and the market rent today is $5. That exists all over the United States, okay? That's real sticker shock, and we may cut a deal at $5 flat, okay, in which case you'd have a 66% cash rent change, or you may say, all right, we're going to give you $3 for the first year, then it's $5, then it's $6.25 for the next two years. That's a 0% cash rent change. And that second deal has a higher net present value to us. So, it's – the problem with this statistic is that, in volatile periods on the upward cycle and the downward cycle, it doesn't really tell the whole story. Hamid R. Moghadam - Chairman & Chief Executive Officer: Yeah, with all due respect, and we should stick to real estate, which is our business, and leave analytics to you guys. But in any asset class where the duration of the leases is longer than one year, the concept of cash to cash comparison becomes a little problematic. In apartments and hotels that – or whatever – that concept works just fine, because there is no profile through the term of the lease. But the minute you get into four or five year leases, you can do all kinds of shapes of leasing with different present value implications that will affect that number, but really doesn't affect the effective rent. But we'll continue to report it and I'm sure you'll continue to look at it, but honestly in the way we run our business, we're not that focused on that number.

Yes, we could also make our teams confirmed to a policy that would make us look better, but I want to do that. I want these guys to do smart deals based on what the market gives them. So your other question was on New Jersey. So we have 750,000 square foot development go into the operating pool this quarter and that really is the driver of the occupancy. With respect to that building, we've good activity one it. We're not really worried about it and New Jersey overall has frankly had quite a bit of construction over the last year, but that's very much moderated, not much in the pipeline. So, we feel good about that market long-term, but it's that development that was pulled into the pool that caused that. Hamid R. Moghadam - Chairman & Chief Executive Officer: And it was a Prologis development, not a KTR development.

Correct.

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

Thanks. A follow-up for Tom. So the property operating margin in the quarter was pretty high. It was close to 73%, which I think is one of the highest that you guys have had in Q2 for the past several years and was up sequentially from Q1 pretty materially even though occupancy levels were down. Just wondering if there was anything unusual that hit this quarter such that the operating margin might be impacted from the run rate – from the Q2 level for the back half of the year or as we think about it for 2016?

Nothing unusual that would move that materially. We're – just given where occupancies are trending, right, very high and where we're seeing – revenues are certainly growing a heck of a lot faster than expenses and occupancy is going up, so our operating leverage is increasing meaningfully and that is what's going to drive that margin.

Your next question comes from the line of Sumit Sharma from Morgan Stanley. Your line is open. Sumit Sharma - Morgan Stanley & Co. LLC: Sorry, no questions. They've all been asked. Thanks Hamid R. Moghadam - Chairman & Chief Executive Officer: Great. I think that was the last question. Again, I want to thank you for participating. We're really feeling good about our business and we are not taking our eye off the risks that are entailed in our business. So – and rest assured we are vigilant but excited about finally having our day in the sun. Thank you.

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