Prologis, Inc. (PLD) Q2 2019 Earnings Report, Transcript and Summary

Welcome to the Prologis Q2 Earnings Conference Call. My name is Chris, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions] Also note, this conference is being recorded. I'd now like to turn the call over to Tracy Ward. Tracy, you may begin.

Thank you, Chris. Good morning, everyone. Welcome to Prologis second quarter earnings call. If you have not yet downloaded the press release, it is available on Prologis' website at prologis.com under Investor Relations. This morning, you'll hear from Tom Olinger, our Chief Financial Officer and Gene Reilly, Prologis's Chief Investment Officer. Also, joining us in today for the call is Hamid Moghadam, Gary Anderson, Chris Caton, Mike Curless, Ed Nekritz and Colleen McKeown. 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 the company operate, as well as the beliefs and assumptions of management. Some of these factors are referred to in Prologis' 10-K or SEC filings. Additional factors that could cause actual results to differ include, but are not limited to, the expected timing and likelihood of the completion of the transaction with IPT, including the ability to attain the approval of their stockholders and the risk that the conditions of the closing of the transaction may not be satisfied. Forward-looking statements are not guarantees of performance and the actual operating results may differ. Finally, this call will contain financial measures, such as FFO, EBITDA that are non-GAAP measures and in accordance with Reg-G, the company has provided a reconciliation to those measures in our earnings package. With that, I will turn the call over to Tom. Tom, will you please begin.

Thanks Tracy. Good morning. And thank you for joining us today. We had another excellent quarter. Our proprietary operating metrics continue to reflect strong demand. Showings, average deal gestation and conversion rates remain either in line or better than last quarter as our customers further build out their supply chain capabilities in the face of strength. Market conditions in the U.S. continue to be very healthy. Demand is diverse and overall supply is disciplined. Starts in the U.S. are concentrated in low barrier markets, while supply in the high barrier markets is not keeping pace with GDP growth, let alone demand for logistics facilities closer to the endpoint of consumption. Continental Europe remained strong and we expect rent growth this year to be the highest in more than a decade. In Japan, despite moderating economic growth, business is quite good. Demand continues to be boosted by ecommerce, while supply is being steadily absorbed. With the improvement we are seeing in the Osaka market, we are removing it from our market watch list. We are raising our 2019 global rent growth estimates by approximately 100 basis points to over 5.5% as low vacancies and rising replacement costs continue to push market rents higher. Looking to the quarter. We leased 37 million square feet, including 5 million square feet in our development portfolio. Period-end occupancy was flat sequentially. Rent change on a role continues to be outstanding, but are shared over 25% and led by U.S. at 30%. We expect rent change to trend higher in the back half of the year. Our share of cash same-store NOI growth was 4.6%. Notably, Europe was 5.3%, driven by rent growth which we have anticipated. Core FFO was $0.77 per share for the second quarter. G&A in the quarter was higher than expected, driven by stock-based compensation, resulting from the increase in our share price. This impact was mostly offset by higher than forecasted promo to them. For deployment, starts were $324 million in the quarter. The pace of starts will increase meaningfully in the second half of the year. In fact, we've already started 250 million of build-to-suits in the first two weeks of July. We completed over $600 million in dispositions and contributions, resulting in $200 million of realized gains in the quarter. Now, for 2019 guidance highlights which are on an our-share basis. And note that our guidance does not include the impacts from the IPT acquisition. We are increasing and narrowing our cash same-store NOI guidance to a range of 4.5% to 5%. We're holding the top end of our range as we continue to prioritize the rents over occupancy. We're raising the midpoint for both development starts and contributions by $100 million, and realized development gains by $50 million. We still expect about $400 million net usage, which we plan to fund with free cash flow and a modest increase in leverage. Net promote income for the full year is now expected to be $0.16 per share, an increase of $0.02 from our prior guidance. Effectively, all of the remaining net promote income will be earned in the third quarter. For the full year, we are increasing our 2019 core FFO guidance midpoint by $0.05, and narrowing the range between $3.26 and $3.30 per share. And our revised midpoint growth and core FFO per share, excluding promotes, is 9.5% higher than last year. Over the past five years, our growth has clearly been exceptional with a CAGR of almost 12%, while de-levering by 800 basis points. As I mentioned, this guidance does not include IPT. The acquisition of this high-quality portfolio, which Gene will cover in more detail, captures significant costs and revenue synergies, delivering shareholder value on day-one. We planned a whole new portfolio through one or both of our U.S. private vehicles, and expect the transaction to close no later than the first quarter of 2020. Depending on the ultimate allocation, our investment via the ventures is likely the range between $1 billion and $1.4 billion, which we will fund with cash and debt. The resulting annual core FFO accretion is expected to range between $0.05 and $0.06 per share on a stabilized basis. This transaction will have a minimal impact on leverage with loan to value rising about 150 basis points upon the completion of the non-strategic asset sales to approximately 21%. We do not plan to add any corporate overhead in connection with this acquisition and as a result expect G&A as a percentage of [AUM] decreased by 4%. I feel that several questions lately about how we will continue to grow given our size, we think about growth and three components. The first is organic and based on the quality and strength of our portfolio. This is by far the most important and sustainable driver of growth that also deserves the highest multiple. The second is the value creation from development and to build out of our land bank. The third component is arbitraging the pricing between public and private markets. This is episodic, out of the hands of management and not sustainable over the long-term. We focus on the first two components, which have been the driver of our superior performance, and will continue to be the foundation of our long term growth. To sum up, the second quarter was a continuation of what has already been a very good year. I have never felt better about our growth outlook. And with that, I'll turn it over to Gene.

Thanks, Tom. I'm pleased to share the details about our merger agreement by IPT. Portfolio comprises 37.5 million square feet and 24 U.S. markets, 22 of which are the largest target markets. The assets are located in sub-markets we consider strategic and where we already have the benefit and scale, and a proven operating presence. The portfolio is slightly younger than the balance of our existing U.S. assets and otherwise, very similar in terms of customer profile and physical characteristics. Over the normal course of business, we anticipated disposition program of approximately $800 million or 20% of the portfolio. The $4 billion price works out to 4.5% stabilized cap rate and a cap rate of just under 4.9% using current market rents. And then $106 a square foot, we believe we are purchasing the portfolio at a small discount to replace some costs. We are not purchasing the IPT operating platform and therefore, our incremental hiring activity will be limited to leasing and property management personnel necessary to manage the portfolio. As IPT leases roll overtime, the Prologis teams will have the benefit of deeper market knowledge and relationships, greater flexibility, access to better information, bigger market share and ultimately, the ability to provide the best service to our customers and generate more revenue. The $0.05 to $0.06 of accretion that Tom mentioned does not include the potential benefits of procurement, ancillary revenue sources, or our other platform initiatives currently underway. During the past eight years, we've integrated over $45 billion in very large portfolio transactions, including the AMB Prologis transaction, KTR and DCT. In each case, we outperformed our synergy forecast and we expect to do so here. So in short, we're highly confident in our ability to integrate these assets into our portfolio. And with that, I'll turn the call over to the operator for questions.

[Operator Instructions] Your first question comes from Jeremy Metz with BMO. Your line is open.

Tom, you mentioned your allocation to IPT will be in the 25% to 35% range of your share. Even though in the past, you have a queue of investors waiting to get into the funds. You've talked about wanting to bring your stake there down to the 15% level give or take over time. So is there a thought to take even less of this deal initially and then sticking with that? Maybe you can talk about the Promote opportunity, and how much that $0.05 to $0.06 of accretion is fee driven? Thanks.

Thanks Jeremy. A couple things. So the way to think about our incremental investment. If you split the portfolio equally between the two funds, our ownership is 41%. And USLV, it does not use equity, USLF does. So we would think about 50% leverage targets to fund this deal from an USLF transaction. So think about $3 billion of equity that needed to come to the table our 40% of that is $1.2 billion. When you think about the accretion, the accretion is, primarily the vast majority of the accretion is operating efficiencies. So the $0.05 to $0.06 is $0.035 of operating efficiencies between $0.015 to $0.02 of incremental leverage and about a penny about a half of penny or less of actually purchase get to us. And so the accretion is quite strong. Most of that is cash. The fee components would be baked in that $0.035 I talked about and that's roughly $0.02.

Yes, at the beginning of that Tom mentioned, you won't require any equity. You meant that doesn't require any debt…

That's right.

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

It's Michael Bilermanhere with Manny. I guess if you step back from it, there's such a strong amount of NOI potential within this portfolio. Why not own the whole thing? And clearly, you have the ability to finance at lower rates, whether it's in Europe or in Asia, which would provide you even more accretion buying in U.S. portfolio and owning $4 billion of assets, and getting all of the 40 basis points of upside in the market rents would all flow to the bottom-line versus the trade-off of the incremental fees you're getting. Certainly is there to be able to do it too, at north of $80, you certainly could issue equity and/or debt a little bit as well?

This is Hamid, Michael. We don't really view our strategic capital business as where we put our bad deals or the ones that are not accretive. It is an integral part of our business. And it is part of our strategy going forward. And that's the vehicle -- those are the vehicles that we've established exactly for doing this thing. So we're sticking to that business plan and it's not like the good ones go to the balance sheets and the bad ones go to the fund. We all do it the same way. Also, the return on equity in the funds is obviously greater, because of the leverage through the asset management fees and the like. So, that's the strategy. It's been the strategy and it will remain the strategy.

Michael, on your debt question about U.S. versus non-U.S. debt. We only would do that to the extent we're matching foreign assets with foreign debt. About 79% of our debt today is non-dollar. We have not assumed in our accretion that we would use any non-dollar financing peers, all U.S. dollar financing. Do we have the ability to do a little more non-dollar financing? Sure, but none of us that's baked into these numbers.

Your next question comes from Derek Johnston with Deutsche Bank. Your line is open.

I guess, switching to Europe. Certainly, a strong contributor in 2Q and this is while EU and global consensus gross estimates were falling. Is there a lag that we should be concerned about filtering through to the back half of '19 leasing metrics? And is there any further update on the outlook for rent growth? Or the healthy absorption rates that we've seen in the EU post 2Q?

This is Gene. I'll start with the answer and I think Chris Caton will pile on as well. So, we just don't see headwinds in the operating environment. And you've got basically 3% vacancy rates across the continent. You get steady demand. You get demand in excess of very low economic growth but you have steady demand. And we just don't -- we don't see trade concerns, we don't see Brexit coming up in any customer dialog. So things look pretty good right now. And we also don't see excessive supply other than in some very isolated individual markets.

Yes, Gene is spot on. The market is unfolding a lot like we anticipated at the beginning of the year. That's low 3% vacancy rates, that's rental rates on a net effective basis that are on pace to rise. More than 6% on the continent rents are call it, more than 3% in the first half of the year. So there's really good momentum and we feel confident looking forward.

But on the other side of that, the UK has slowed down a bit and the continent is stronger than we thought. So, I don't think Brexit not having any effect, its right. I think definitely the UK had slowed down some, particularly in the midlands.

Your next question comes from Caitlin Burrows with Goldman Sachs. Your line is open.

Maybe back to the IPT acquisition. I was just wondering if you could comment on what the interest level was like, or the competition from other potential acquirers. And what do you think differentiated Prologis, either in your assumptions, financing, or something else allowing you to ultimately win this deal?

Well, ultimately, I can't tell you who bid on the portfolio. I can tell you it was a competitive process. And as I think everybody knows on this call, there is plenty of capital interested in this real estate. As for our competitive advantage, I don't think it's any of the items you've listed. But I do think certainty of close, particularly for a vehicle like this publicly held vehicle was critical. And so, I think their confidence and our ability to negotiate complete this transaction smoothly, was important.

Yes, also the proxy will have plenty of the details from what they looked at on the other side. So, we'll both find out.

Your next question is from Steve Sakwa with Evercore ISI. Your line is open.

Thanks, good morning. I just wanted to see if you could comment a little bit on the NOI guidance, Tom. You did about 5% in the first half of the year. The high end, you kept unchanged at 5%. So that assumes flattish growth in the back half at the low end assumes 4%. And I realize you're facing some tougher occupancy comps the back half of the year. But just can you help us think through the low and the high end, given where we sit here today and what drives you to both of those two points?

Yes, Steve, you nailed it. It's really occupancy impact. We are continuing to push rents. We are seeing occupancies dip a little bit. I think we certainly have room to push rents more. If you just looked at our retention, you look at our occupancy you look at our rent growth. As I mentioned in my prepared remarks, I think we're going to see and we will see rent change on a roll accelerate in the second half. We talked about rents growth increasing and why are we taking the top end up is because of occupancy. We're going to push rents and we don't have a lot of role in the second half. But this is really setting up for just longer durable runway for same store growth where our mark-to-markets holding at over 15% even with rolling 25% in the quarter. And if you really look at same-store, think about -- as we said in the last couple of calls, 2019 is a transitional year for same-store in that we have lower occupancy. So that's been a headwind this year. But if you think about the real driver of your same-store rent change your roll, it's been accelerating. Our trailing fourth quarter rent change on a roll is up over 300 basis points in the last four quarters. It is going to go higher, going forward. So the fundamental driver of same-store is intact and it is growing, and it will grow. But one thing on retention, we're seeing retention is very high on the larger spaces. And we're pushing rents across the board. I think we have an opportunity to push rents across all of our space sizes.

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

I know you had said that you expect your development starts to ramp up in the back half of the year. Can you just talk about what, both build-to-suit and spec pipeline looks like today? And as we think ahead to next year, do you think that -- and we're hearing across a lot of markets that there's an expectation that pipelines may actually shrink given less available land and even maybe less capital to put to work? I just want to get your thoughts on how you think things are shaping up over the next 12 months or so in terms of the supply and demand story and your ability to keep putting capital to work?

Jamie, its Mike Curless. So I'll hit the build-to-suit and then I'll flip it to Gene on the spec. Certainly seen -- a lot of you've seen some public announcements from some of our larger customers with major plans for significant rollouts. So, I'd say there's definitely an up arrow on the requirements and the demands. It is more challenging to deliver build-to-suits these days, zoning and land availability and some of the more global markets. But we're certainly working through that. Our build-to-suit percentage lows in the 27% range this quarter that's very lumpy, as you know Jamie, I think you got to look at it across four quarters. And I fully expect very robust quarter coming up as we speak right now, as Tom mentioned, with $250 million build-to-suit stars already underway. And I'd look towards our build-to-suit percentage to be in the range in the high 30s, largely driven by some significant national rollouts. Gene, on spec?

So Jamie we've, as you can see, taken out the midpoint $100 million. Some of that’s captured by the increased build-to-suit activity Mike talked about. So, I'd say there's a very modest increase in spec. But I don't -- we don't -- when we see opportunities, as you know, we have a robust land bank. So we have the ability to start building, but we're not going to do it unless we see market opportunity, and we do. So, basically, the answer to your question is, we're going to have a modest increase based on our prior guidance throughout the rest of this year.

Your next question comes from Vikram Malhotra with Morgan Stanley. Your line is open.

So just wanted to clarify, I think you said mark-to-market across the four portfolios holding at 15%. Can you break that between the U.S. and Europe? And also, just clarify what the mark-to-market is in IPT?

I'll take the first piece. So in our portfolio today, Prologis U.S., is around 17% and Europe is around 11%. So our blended is about 15.5%.

IPT is pretty much in line with the rest of our U.S. assets.

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

A quick questions for you, just looking -- I know you guys didn't buy the whole IPT portfolio relative to the numbers that they had in their financials. But it looked like '17 and '18, they were trending below 2% same store growth. And I'm just curious, I know you guys have some operational efficiencies baked in. But as you guys look at your legacy PLD portfolio growth profile versus what you're ultimately going to bring into the portfolio. Will this ultimately be accretive to your growth portfolio or inline or dilutive from your perspective?

I think slightly accretive. And I mean to be frank we have not studied their historical operating performance. What we have study is the location and quality of the assets, which we like. We bought them onto our platform, I'd say, it's a marginal increase.

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

I guess a couple of questions on IPT portfolio. First, can you just talk a little bit about what prompted this deal? What was the thinking behind it, I don't think its scaled. Do you have enough of it? And even the financial accretion was quite a success it seems like that by and itself wouldn't prompt the deal of this size. So, can maybe talk about the other points that we haven't covered?

I think that level and the availability of high quality portfolios is dwindling. And these portfolios are going into capital sources that are permanent. And I think there's a limited supply of this stuff and they're really good market. So whenever there is an opportunity to pick up some of those assets and scale, you'll see us competing for those opportunities. And because of the clustering effect around our own portfolio, which is also focused on the same markets, we can really squeeze a lot more juice out of those oranges.

Your next question comes from Nick Yulico with Scotiabank. Your line is open. Nick Yulico, you're unmute, so your line is open.

For IPT, I think you said 20% of the portfolio is a sale candidate non-strategic asset. Can you just talk about why they're non-strategic and how you underwrote those assets from a -- how we should think about a cap rate on sale those assets?

Could you repeat the first part of the question?

So, I think you said that…

For sale portfolio, which is 20%, a small portion of it is two markets, Memphis and Salt Lake City, which we're not present in. So that's about 5% of it. And the balance of it is the pruning of the markets where we have a presence, but we don't really see a fit between that portion and our assets, that portion of the portfolio and our existing assets. So, it's a combination of market exits in those two cases and pruning in the case of the rest.

And I just want to pile on that a bit. These disposition assets are good assets. They're not assets that are consistent with our strategy. But I think these assets will be relatively easy to dispose of as compared to some of our prior activities.

Yes, one other data point for you. This is not the first time we've gone through cleanup of assets. We've sold about $14 billion of assets in the last five or six years. And you might be interested that on average we've exceeded our expectations by about 6% on the sales prices. So we're pretty comfortable that we can exit these assets at the premium.

Your next question is from Dave Rodgers with Baird. Your line is open.

Yes, for Tom or Hamid, just maybe talking about the construction pipeline just nationally, or maybe even internationally. You said you took Osaka off the watch list for as a market. Have you added any and where do you see the most competition today? I think Tom you referenced the supply in your comments?

It's Gene, I'll start and I think Chris will finish the answer. But if we look at the globe as compared to last quarter, there really aren't very many differences. As you heard us say over the past four or five years, frankly, certain markets in South Dallas and certain markets in Atlanta, i.e. in Chicago, Central Pennsylvania, once in a while, Inland Empire East and the U.S. come-on and come-off the list. And what's interesting is that in prior cycles markets never came off the list, they just kept over-building them until you're in a crisis. So that picture really hasn't changed internationally. The one note that we have is Osaka. Osaka's vacancy was very elevated. It's now, I think 9% or 10%. So it may come back on the list. But at this point, we're pretty comfortable. A lot of reduction in that vacancy rate recently. Chris, I don't know if you have…

Yes, Gene, You're spot on, I'd add, in fact there have been no additions this year. And that you have to look back to last year for the additions to this list. And as we mentioned in Midland is a market and then also Houston were addition late last year, so no additions this year and one subtraction.

Your next question is from Jon Petersen with Jefferies. Your line is open.

Probably a question for Gene or maybe Chris Caton. I think with the DCT transaction, you talked about how -- when you get a certain concentration in sub-markets you're able to push rent a bit harder, I forget exactly how you framed that. But I'm curious with the IPT transaction if you call out any sub-markets that you now have a dominant market position that you didn't have before? And then second one probably for Tom. Just to clarify, this transaction won't require any new common equity for Prologis, right?

I'll take the second one, absolutely not, no equity.

So, the way we look at asset clusters and that's one way we describe this is if we're adding assets to the market that, let's say, we have 20 buildings, 25 buildings and call that 3 million to 4 million square feet. There is a clustering effect that we have tracked and we have tested. And there is no question you get incremental NOI. I'm not going to go into any specific details on that. But you have a situation when you're adding to a cluster, or you're adding enough to a smaller concentration that we already own. And you then created a cluster. And in this case we have one market that, you for sure, have created a cluster that will be Portland. There's a pretty good concentration here in Portland, PA and Baltimore, also fall in that category. And otherwise, we're just adding on to very, very big, big concentrations. And Chris, I don't know if you want to add anything to that.

I think that was perfect. The only thing I would add is that the benefit doesn't just accrue to the newly acquired portfolios, also, accrues to the existing portfolio, which is by far the more important of the two pieces.

Your next question is from John Guinee with Stifel. Your line is open.

Hamid, first congratulations. As I recall, you acquired DCT at about $118 a foot and a 4.2 in place cap rate. Talk a little bit about the quality difference between IPT and DCT, which obviously has the same initial investment and strategy in the initial roots?

Yes, so we bought DCT at 4.6 cap rate and it was stock for stock deal. So, it was more of a relative valuation exercise than an absolute valuation exercise. So, I don't think you can conclude much about market cap rates based on looking at that. But this one in terms of quality, I would say, if you look at the whole portion, DCT was 95% hold, this is 80% hold and 20% sell. So in that sense, I would mark the DCT portfolio as better, because it has less to dispose. But if you look at the 80% and the 95%, I would say they were comparable.

Your next question is from Eric Frankel with Green Street Advisors. Your line is open.

Just to go back to the price of the IPT deal, that's a 4.5% cap rate, you quoted that based on your definition of stabilization. So maybe the cap rate would be a little bit higher based on current input occupancy. And then second, do you guys believe that you paid some maybe aggregation premium rather than if you brought this entire portfolio on a one-off basis? And then finally, based on where interest rates have gone the last few months. Do you think cap rates, in general, have declined for good quality industrial assets? Thank you.

So couple of comments on the cap rates. I mean, cap rates are really difficult things to talk about, because all kinds of people use different approaches to them. Just to be clear, the way we call it something a cap rate is that it's the purchase price plus all the closing costs, plus the CapEx required to get it to stabilize occupancy, if necessary. And includes a vacancy allowance, which is critical because the portfolio is over leased 95% we adjust it back down to 95%. So our cap rates oftentimes we shake our heads to the reported cap rates that we see in the marketplace, because that's certainly not the cap rates that we underwrote. And you can imagine that we look at pretty much every deal. So that's one commentary on methodology. With respect to the direction of cap rates, I will tell you that this was since DCT the third significant portfolios that we looked at and competed for and obviously, in the other two cases, we were not successful. Our pricing did not change as to the whole portion of those portfolios at all pretty consistent. I'm not smart enough to tell you whether there was a portfolio or not, but we did not attribute one to the portfolio on this one or any of the other ones. But on the other ones, we were unsuccessful and on this one, we'll be successful, so who knows.

Erick, just one more thing. On the cost side of that equation, we also mark any debt to market. And I think, often people leave that out of the equation and you have to, you have to factor it.

And in this one, there wasn't any of that. But on the others, there're actually been significant margins.

Your next question is from Michael Carroll with RBC Capital Markets. Your line is open.

Can you provide a quick macro update? I know you included some conservatism in your prior guidance ranges. Did you remove that conservatism in the updated range? And how's the logistic real estate market remain largely inflated from the headline trade fears that we continue to hear about?

So I'll start. No more conservatism in our guidance. And I would just tell you from what we see from our customer perspective, as I mentioned in my opening remarks, we're seeing very consistent sequential quarter activity as it relates to showings, gestation, conversion rates, all that's holding or slightly better. So from what we see in our pipeline, it continues to be quite good.

This is Mike. From a customer perspective, no meaningful impact other than perhaps a little blip with some increased inventories and spot examples, but nothing significant.

Yes, I think you maybe referring to the commentary on the fourth quarter call, where we were just coming off of a significant stock market sell-off and things were a little wobbly, generally with the overall economy in January. And we talked about having in the most recent two weeks, reduced our internal planning, that's all done. We're back on track. So, if you're referring to that, you can ignore all that.

Your next question is from Michael Mueller with JP Morgan. Your line is open.

What's the timeframe to dispose of the remaining IPT sale assets? Will it all be done in 2020?

Michael, this is Gene. We tend not to put our deadlines on that. In the current environment, I was telling, I think we need to do it fairly quickly in that timeframe. But we do it on the normal course of business. It has to be consistent with everything else we're doing. And then we have to see where the demand patterns on it. Sometimes you can aggregate a portfolio and move quickly, other cases maximizing value means one-off. So -- but that timeframe within 2020 is probably reasonable.

And our last question comes from Manny Korchman with Citi. Your line is open.

It's Michael Bilerman. I had a few more. I'm hope you can address one at a time. But just in terms of…

Michael, you can go continuously, because you are the last one. So we can go on with…

How much time do you have?

Don't get carried away…

So, just in terms of upside potential, squeezing more juice out of these oranges in this portfolio. You talked about, I think, you mentioned the 4.5% stabilized and 4.9% cap rate assuming current market rents. But then when another analyst asked about the mark-to-market, you mentioned the Prologis portfolio was 17% but these assets were similar. But the difference in cap rate 4.5% to 4.9% is only about 8% upside on market rents. So, I didn't know what the difference was or what maybe driving down the yield, the numbers didn't match up.

Its cash, cash versus effective cap base…

So, the 4.5% to 4.9% is a cash. So your mark-to-market on a cash basis in the Prologis portfolio would be 8%, 9% also. That 17% is a GAAP number?

It's about 10%. So the 4.5% and 4.9% are not precise numbers either, obviously. So we were going to take out four decimals, Hamid didn’t like that, so…

Michael, the other thing is that there's a difference between the hold portfolio and the sell portfolio. So, the hold portfolio has a bigger mark-to-market, because those are stronger markets by and large and they've had more rent appreciations. But the primary difference is the cash versus GAAP number, which is about 5 points.

And then just to go through actually on the whole portfolio. Is the plan to warehouse that $800 million of assets on Prologis' balance sheet? Or is the entirety of the $4 billion going into one or the two funds and those assets will be sold out of the funds? I'm just trying to understand the dynamics going on?

It's the latter, Michael. It's the latter.

The assets will be going to the funds. Any sale assets will be sold by the funds.

By the funds, and that will just reduce your effective ownership or your contribution in those funds?

Not really, Michael, because we have a revolving line of credit that we pull up and down. So we're probably not going to pull capital out of the funds. We'll just leave it in there for future growth.

And then just I wanted to come back to my original question about doing this wholly owned versus in the funds. And I recognize DCT was a stock-for-stock transaction. But that didn't alleviate you from having the ability to sell DCT assets to the funds, if you chose to. So I'm just really trying to understand these two larger scale M&A transactions. One yes, it was stock for stock. This one is a cash deal, the non-traded public REIT that you're doing for all cash. I guess, why was DCT all balance sheet and why was IPT a fund asset?

Good question. First of all, the choice of currency is not always ours. Sometimes the settler demands different kinds of currencies. But yes, that deals we do on balance sheet. And to them buy a deal and then sell it to the fund, there're just too much frictional cost associated with that. And oftentimes, the structuring of the transaction prevents that for some period of time. So, it gets complicated to do that. In terms of cash transactions, or cash portion of certain transactions, we're committed to do those deals, as I mentioned to in the funds. I mean, that's our business model and we'll continue to do that. These are, by the way, now very, very significant funds. I mean, you'll look at where a USLF will be at the end of this deal, it's going to be north of $12 billion. You look at where our European fund PELF is. It's about an $11 billion vehicle. I mean these, on a standalone basis, could be some of the largest REITs out there. So, they have ongoing needs. They're very successful vehicles. And we like the fact that we have the ability to use cash and currency to address a range of opportunities.

Just last one just in terms of Asia and the macro environment. At least coming out of Citi's earnings yesterday, there was a slowdown in loan activity out of our Asia client base, in particular everything that's happening with China and the U.S., the Chinese corporates borrowing less money given the uncertainty going on between the two countries. Is there anything that you're finding at least locally in Asia? And I know what's happening in the U.S. But anything in Asia that you've seen would indicate any slow down on the industrial side?

Okay, this is going to be your last question, because somebody jumped in. But look, China is definitely slower but the overall -- slower than it has been for some time, and we see that on the ground. But the dynamics of the industrial real estate market in China are much more driven by availability of land from the one seller that has land, the government. And they've been always reluctant to supply the market with what it needs in terms of industrial land. And the reason for that is that industrial users don't generate taxes. And there is no property tax system in China. So they get their tax revenue based on registered capital. And people don't usually register their capital where their warehouses are. So there's always a shortage of land in the key markets in China. So even with a more modest economic growth, there's just not enough supply of product in a lot of these markets. So, the strength of the industrial market is driven by domestic consumption and a shortage of industrial land. Consumption for the first time slowed from the mid-teens to the high-single-digit. So, that's really important to keep in mind. And by the way, my commentary about the shortage of land applies to the Tier 1-1.5 type markets in which we operate. Some of the outlying areas you can get more land, but that's not relevant to our business. And remember, the tailwind of e-commerce in all of these different places where the consumption takes more space than normal consumption would have a decade ago.

The last question comes from Vikram Malhotra with Morgan Stanley. Your line is open.

Thanks for leaving the follow up. Sorry for the background noise. Just one quick question, sorry if I missed this. Did you change the disclosure of the same store NOI calculation? I believe you used to provide same store revenue and expense separately. Could you give us those two components?

Yes, we'll be giving those components. If you look at the back of our sub, you can see the detail in order for you to calculate same store own and manage. The SEC did their annual review of our K, we had one comment and that one comment was that they asked us to modify our owned advantage NOI disclosure. That actually approved our disclosure quite a few years back. But in light of their view around pro rata financial information, they asked us to modify the disclosure, because they took a view that this was pro rata and they just asked us to modify it. So, we can't show you the percentage. But if you look at our footnote and back this up, you can calculate the percentage.

Great. Thank you, everybody. Look forward to seeing you next quarter if not sooner. Thank you.

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