Prologis, Inc.
Q4 2007 Earnings Call Transcript

Published: 1 May 2008

[Operator:]

Good morning, my name is Anthony and I'll be your conference facilitator today. I would like to welcome everyone to the ProLogis fourth quarter year-end 2007 financial results conference call. Today's call is being recorded. All lines are currently in a listen-only mode to prevent any background noise. After the speakers' presentation there will be a question-and-answer session. [Operator Instructions]. At this time I'd like to turn the conference over to Ms. Melissa Marsden, Senior Vice President of Investor Relations and Corporate Communications with ProLogis. Please go ahead, ma'am.

[Melissa Marsden:]

Thank you, Anthony. Good morning, everyone and welcome to our fourth quarter and year-end 2007 conference call. By now you should all have received an e-mail with a link to our supplemental and our guidance assumptions, but if not the documents are available on our website at ProLogis.com under Investor Relations. This morning we'll hear first from Jeff Schwartz, CEO to comment on key accomplishments and our sustainability initiatives; Walt Rakowich, President & COO will cover ProLogis' operating property performance and global leasing activities; Ted Antenucci, Chief Investment Officer will discuss investment activity and Bill Sullivan, CFO will cover financial performance and guidance. Before we get underway, I'd like to state that this conference call will contain forward-looking statements under Federal Securities Laws. These statement 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 these factors please refer to the forward-looking statement notice in our 10-K. I'd also like to add that our fourth quarter results press release and supplemental do contain financial measures such as FFO and EBITDA that are non-GAAP measures. In accordance with Reg G we have provided a reconciliation to those. And as we've done in the past, to give a broader range of investors and analysts the opportunity to ask their questions, we ask you to please limit yourself to one question at a time. Jeff, would you please begin.

[Jeffrey H. Schwartz:]

Yes. Thank you, Melissa, and good morning, everyone. 2007 was an outstanding year for ProLogis with strong performance including a 24.6% increase in for funds from operations over 2006 and solid operating fundamentals. But most importantly, 2007 was an year in which we positioned ourselves extremely well. Both organizationally and financially for 2008 and beyond. Quickly summarizing our key accomplishments for 2007. We achieved excellent results in each of our business segments. Operating property performance was solid as occupancies remain stable at approximately 95% and we saw strong same-store rent growth throughout the year. We significantly enhanced our Investment Management Platform with the formation of four new property funds, one each in the U.S., Mexico, Europe and South Korea and also acquired the shares from MacQuarie Prologis Trust, later contributing those assets to a fifth fund. In total, we secured equity commitments that allow to us grow our Investment Management business to more than $33 billion from our current level of $19 billion in assets under management. In our development or CDFS business, we began a record $4.1 billion of new development starts, supported by the strength of global demand in existing markets and our expansion into major new logistics areas. During the year we entered the Middle East with our first project in Dubai and initiated development activity in South Korea as well as in new high growth markets throughout China, Japan, Central Europe and Mexico. Also during the year we acquired the industrial business of Parkridge, our best competitor in Europe, and invested in Parkridge's mixed use in retail business and we made substantial progress in our global retail and mixed use business through Catellus Development Group in the U.S. and our investment in SZITIC-CP's retail development business in China. We also strengthened our balance sheet and reduced our exposure to floating rate date debt with the issuance of two convertible securities generating more than $2.2 billion of proceeds at very attractive rates. Between the $14.5 billion of capacity we raised in our Investment Management Platform and the $2.2 billion of convertible securities at 2.1% average interest rate, we have positioned ourselves incredibly well to take advantage of current market conditions. Turning to our outlook for this year and beyond, we continue to closely monitor market conditions and economic indicators, leveraging the experience of our local market professionals, many of whom have been through previous cycles as well as an internal research team. The global credit crunch, U.S. economic slowdown and surge in oil prices are expected to slow global GDP growth to about 4.6% in 2008 from an estimated 5.1% in 2007. To put this in perspective, global GDP growth over the last 25 years has averaged 3.7% or only 80% of expected 2008 global GDP growth. This is obviously due to the growth in emerging markets such as China and India. Economists disagree about the level of decoupling between the U.S. and other economies but it's important to keep in mind that global demand for logistics space is not directly correlated to economic growth. In fact, the majority of our growth throughout Europe and Japan was undertaken during a time of weak or negative GDP growth in many of those countries. In the majority of markets outside the U.S., demand for distribution space continues to be driven by growth in global trade, currently more than triple the growth rate of global GDP, obsolescence, and the need for more efficient distribution networks. We believe our geographic breadth and leading presence in the world's top logistics markets mitigates the impact of any single economy on our overall results. Remember, 80% to 85% of our growth this year will be outside the U.S. Like many companies, we've become more cautious on our outlook for the U.S. During fourth quarter, we saw a slight slowing of net absorption and a 0.25 point decline in national occupancies, although most markets are generally in balance. Still, we have shifted our development mix in the U.S. to a larger portion of build-to-suit business, which has a strong risk-adjusted return profile. We also believe that the tightening of credit has already caused the drop-off in the development of speculative distribution facilities by private developers, which will provide us with opportunities. We continue to see a flight to quality. I said it for the first time in August after we announced the formation of our new funds and it remains true. Credit is available for quality assets and low-to-moderately leveraged business models, although at more expense spreads mitigated by lower treasuries. We continue to see a similar situation with cap rates. There is a divergence between quality, Class A product, where cap rates remain relatively stable and lower grade product where cap rates have risen substantially. Globally, institutional demand for high quality assets remains strong. As we've said for the last couple years, over the long term, development is a mid- to-high teens margin business. We continue to believe this. Given the visibility to our current development pipeline, we are comfortable that margins on our developed properties and repositioned acquisitions will average about 21% in 2008. Importantly, given the size and scale of our pipeline, our disposition volumes are significantly higher than a few years ago, so we expect to continue to grow income from our CDFS business. Now I'd like to spend just a minute discussing our sustainability initiatives. We recently announced that going forward all of our new U.S. development projects will comply with environmental standards developed by the U.S. Green Building Council and we will register every building for lead certification, the national standard for environmentally responsible construction. Additionally, we are developing sustainability checklists for all buildings we develop on a global basis to ensure that we remain the global leader in sustainable development of distribution facilities. While clear [ph] evidence for the industrial sector is limited, studies for other property types have shown that Green Building significantly reduce operating costs for customers and are commanding higher rents. We think this is the right thing to do, not only for the environment, but for our customers and ultimately for our shareholders as well. As I transition the call to my long time partner and close friend Walt Rakowich who will retire in 2009, let me take a moment to recognize his many contributions to the growth of our company and establishment of the strong position financially and organizationally we are in today. Walt will continue his current position for the next year continuing to help drive our company, while working with me on his transition. While we are all sorry to see him leave, we understand his strong desire to focus his time on his family and on charitable endeavors. Walt?

[Walter C. Rakowich:]

Thanks, Jeff. As most of you know… know by now I'm planning to retire from ProLogis after this year to spend a little more time with my wife and my high schoolchildren before that opportunity eludes me when they go off to college in a few years, and I will tell you that it's been a tough decision because ProLogis has so many bright and energetic people with frankly can do attitudes. It's a contagious place to work and a fun place to work and I want you all to know that I'm proud to be a part of this company and what's been accomplished in my 15 years here, and I'm committed to working this year with Jeff and others to add value where it makes sense and to making the company an even better place than it is today. Now, onward and upward let me talk about our operating performance. It remained solid throughout the fourth quarter, supported by the key growth drivers that Jeff mentioned a few minutes ago. Our fourth quarter leasing at just over 30 million square feet was actually more active than each of the previous three quarters bolstered by an 81% retention rate on renewals. Same-store rental rates grew by 5.6% for the quarter and 8% for the full year, and overall occupancies picked up about 10 basis points to 95.6% with Asia at 99%, Europe at 93% and North America at just under 96%. Notwithstanding these strong operating metrics we're watching for signs of market weakness. We've been closely monitoring delinquencies, bankruptcies, tracking sublease space and doubling our communication with our customers. Right now, somewhat surprisingly our markets are holding up well in the U.S. and very well outside the U.S. Let me first touch on Asia. Same-store rents on turnovers grew in Asia by 47% for the quarter and 18% for the year. In Japan, our 24 million square foot stabilized portfolio is about 99.1% leased. Recently completed inventory space continues to be attractive to users in the market with about 400,000 square feet of new leases signed since the beginning of the year. In China, our stabilized portfolio of about 9 million square feet is 99.4% leased. During the quarter, we signed more than 960,000 square feet of leases at our parks in Beijing, Guangzhou, Shanghai and Shenzhen. And in South Korea, we kicked off our new fund with approximately $50 million in acquisitions during the second half of '07, all in and around the Seoul metropolitan area. And based on the activity we see in that market, we expect to commence construction on a minimum of four new developments in South Korea this year. Our operations in Europe have also performed very well with same-store rental growth on turnovers of 24% for the quarter and 13.5% for the year. In the U.K. despite seeing a slight upward shift in Class A cap rates, our business remains solid with leasing activity during the year in line with the prior year at over 4 million square feet. In addition, the pace of inquiries for space has thus far carried over into 2008. Importantly, we signed over 1.8 million square feet of new leases in the U.K. in the fourth quarter which is good velocity relative to historical quarterly performance. On the continent, demand also remains good with a dwindling supply of new competitive product. Without question, the real estate credit markets in Europe have slowed down many of our less capitalized competitors and put us in a unique position to build product with far less risk. Just a few data points, in Southern Europe which includes France, Italy and Spain, we signed over 3.9 million square feet of leases on new development in '07 of which 73% were build-to-suits, essentially pre-leased in advance of construction. In Germany, the largest economy in Europe, we signed over 4.4 million square feet of transactions last year in new developments, over 95% of which were build-to-suits. This activity is three times the leasing business we did in Germany in 2006, and is in large part due to the tremendous team we've assembled there in our industry vertical focus that we implemented in 2007. In North America, our market officers are reporting some level of slowing in leasing velocity, although the markets overall are still fairly active. Very little sublease space has been put back on the market and those bankruptcies that we have seen have been isolated to smaller more regional companies. With that as a backdrop, we're pleased with our operating performance in North America during the fourth quarter with stabilized occupancies increasing from 95.63% to 95.86%. Same-store rental growth on turnovers was 3.3% for the quarter and 7.1% for the year. As for the top 30 U.S. markets, the vacancy rate moved up a bit from 7.5% to 7.8% due to fourth quarter deliveries of 45 million square feet outpacing net absorption of 26 million square feet. However, we do expect to see supply of new product at considerably lower levels in 2008 given the current credit conditions and an expectation of a slower U.S. economy. As in Europe, we believe this environment will be very good for us given our access to capital and strong customer relationships, and it is those very customer relationships enhanced by our diversified platform that provide us with a real competitive advantage, especially in tougher environments. During the fourth quarter, we added another of our major customers to the ranks of those we serve on three continents with the signing of leases in Rotterdam, Columbus and Memphis with MenLo Logistics. These new leases bring us to nearly 1.8 square feet with MenLo in nine locations. As importantly, we expect to do a lot more incremental business with them as they continue to expand their footprint globally. And now let me turn it over to Ted who will talk further about our development and investment highlights.

[Ted R. Antenucci:]

Thanks, Walt. The continued strength in global demand that Jeff and Walt describe supported starts of nearly $2.1 billion in the quarter, bringing full year starts to $4.1 billion, including $169 million in our retail and mixed use business. Roughly 49% of the $4.1 billion was in Europe, 28% in Asia and 23% in North America. Our pipeline of properties under development at the end of the quarter represents about $3.9 billion of total expected investment. Combined with completed developments and repositioned acquisitions of $3.7 billion, we have a strong CDFS pipeline of more than $7.6 billion, that was 46.3% leased at year-end, very consistent with our pipeline of $6.2 billion last quarter that was 47.7% leased. Most important, CDFS completed developments and repositioned acquisitions are on average 61% leased, which supports growth in our Investment Management Platform and is a stable source of future CDFS income. As Jeff and Walt mentioned, we have increased our focus on build-to-suit starts to mitigate risk. In fact, driven by a dedicated group in the U.S., about 23% of full-year U.S. starts were build-to-suits. In addition, we had roughly $70 million of key development deals during the year. We are also capturing a significant amount of incremental build-to-suit activity in other global markets. In Europe, nearly 37% of the year's $2 billion plus of starts were build-to-suits, including $140 million in Germany in the fourth quarter alone. We also had a good year for starts in France, with roughly 80% of those being build-to-suits, including two adjacent 226,000 square foot facilities for tire companies Bridgestone and Continental outside Orion [ph]. And we had strong development activity in central Europe with pre-leased projects started during the quarter in Poland and Slovakia. In addition, we have seen more build-to-suit demand in Japan. During the year, we signed our second build-to-suit lease with SRI the logistics Sumitomo Rubber for 250,000 square foot facility at ProLogis park Koriyama [ph] and we will soon complete a new 350,000 square foot build-to-suit in Tokyo for Cal Corp. [ph], a manufacturer of beauty and healthcare products. In total we started over $1 billion of build-to-suit business globally in 2007, more than double the $388 million started in 2006. We continue to evaluate market conditions prior to undertaking inventory starts and feel comfortable with our mix of build-to-suit development and inventory projects. Of course, replenishing our land bank is critical to support the expansion of our development pipeline. To that end, during the fourth quarter, we acquired major land parcels in the Inland Empire, Phoenix, Toronto, and Wallace [ph]. In Europe, we acquired roughly 425 acres, much of that was associated with build-to-suits in Germany as well as in Poland, the Czech Republic, Hungary and France. In Asia, we acquired land to support additional development in China where we added positions in Tianjin, Chinjou [ph], and Guangzhou. Now I'd like to address our starts for 2008, which we expect to be between $4.4 billion and $4.8 billion. That's an increase of $300 million to $700 million over our starts in 2007. For North America, we believe our starts will be in line with 2007 with U.S. slightly down offset by growth in Mexico and Canada. European starts should be slightly higher than in 2007 given the growth in Central Europe. Most of our 2008 incremental growth will come from China, Japan and South Korea due to stronger expected economic growth, high obsolescence of existing space and further penetration of existing markets and expansion into new markets. We also expect to see an increase in our mixed use developments globally. To wrap up, we continue to identify and capitalize on exciting new opportunities. To expand our global development business and we feel very comfortable with the modest increase in our expectations for additional development activity this year and in the future. And now I'll turn it over to Bill.

[William E. Sullivan:]

Thanks, Ted. First let me cover our 2007 results and then I'll cover 2008 guidance. For the full-year 2007 FFO was $4.61 per share, up 24.6% over 2006, exceeding the $4.50 top end of our guidance, primarily due to continued strong operating property performance and slightly better than expected development margins. $4.61 per share included approximately $0.36 per share in various gains from the MPR transaction included in Q3 2007. Earnings per share of $3.94 were up 18.7% over last year and in line with guidance of $3.80 to $4 per share. Let me touch on the major components of our 2007 FFO performance. Beginning with property operations, for 2007 our net operating income from our wholly owned portfolio was $787 million, driven by same-store NOI growth of 5.2% as a result of occupancy growth of 2.9% and rent growth of 8% in the same-store pool turnovers for the year. Customer retention was 78% for the year, coming in ahead of our original expectations of 65% to 75%. It was a strong year and we met or exceeded guidance in every key property operations measure. Turning to our CDFS business, we had development starts of approximately $4.1 billion in 2007, an increase over 2006 of 62% and just slightly above the top end of our most recent guidance of $3.8 billion to $4 billion in starts. Dispositions and contributions totaled $6.1 billion for 2007, inclusive of roughly $650 million from non-CDFS dispositions. In line with our accounting policy and consistent with the NAREIT definition of FFO $200 million of gains we recognized in 2007 from these non-CDFS transactions were not included in our FFO, nor in our calculation of margins. CDFS dispositions totaled $5.4 billion, inclusive of approximately $2 billion of assets from the MPR transaction. Total CDFS income for the year was $786 million, slightly ahead of our Investor Day guidance of $775 million. Profitability in our CDFS business was strong with post tax post deferral margins for the year of 34% from our developed and repositioned assets and 17.1% on a blended basis slightly ahead of our guidance of 16%. Recall that last quarter we broke out proceeds and margins between developed and repositioned assets in the acquired property portfolios on our income and FFO statements as well as on page 17 of the supplemental, so you can see the gain in margins associated with each category of disposition proceeds. Our Investment Management Fees and our share of fund FFO totaled $254 million for 2007, which represented an increase of over 40% compared to 2006, excluding the $159 million gains and promotes from the PEPR IPO in the North American funds re-capitalization in 2006. The significant growth in fees and fund FFO was directly attributable to the nearly $7 billion in growth in our funds under management during 2007. On the expense side, full year G&A of $205 million was in line with our revised guidance last quarter of $200 million to $205 million. The 2007 G&A includes a $5 million contribution to the ProLogis Foundation. Net interest expense of $368 million was slightly below our most recent 2007 guidance of $375 million, principally due to the convertible debt issuance in November, which was largely used to pay down the Q4 debt maturity and our global line of credit. Looking at our capital structure, our balance sheet is in good shape with on balance sheet funded debt at 38.2% of total market capitalization as of December 31, 2007, and a 53.3% of total book capital. At year-end 2007, we had approximately $1.64 billion available under our global lines of credit and over $400 million of cash providing substantial liquidity to pursue our objectives in 2008. The debt markets, particularly in the U.S. and Europe are in substantial disarray in the current uncertain economic environment. However, we are finding ample sources of debt capital to refinance the debt maturities we have in 2008 both on our balance sheet as well as in the funds. We have approximately $965 million of balance sheet debt maturing in 2008. $265million of which will be refinanced upon a scheduled asset contribution to our Japan Fund II, while the remaining $700 million will be refinanced through a planned corporate bond issuance later this year. Within our funds, we have approximately $1.9 billion of debt with 2008 maturities which we have been working on as a matter of course. At this point in time, we have commitments and/or rate lock agreements on $1.6 billion of bad debt that are in various stages of documentation and we'll have RFPs out on the later in the year maturities within the next few weeks. Despite the existing credit crunch, we are finding a fairly vibrant life company in European mortgage bank market available to finance lower leverage high quality assets such as ours. Turning to 2008 expectations, we are reiterating our guidance range for 2008 of $4.65 to $4.85 in FFO per share. If you exclude the $0.36 in FFO gains in 2007 from the MPR transaction, this equates to 11.7% year-over-year growth at the midpoint of our 2008 FFO per share range. We expect to generate $3.15 to $3.35 in earnings per share in 2008, reflecting a substantially lower level of planned operating portfolio dispositions than 2007. We expect FFO from property operations to be in line with 2007 FFO, based on a slightly smaller base of operating properties offset by projected growth in same-store NOI and same store rental rates in the range of 3$ to 4%. We also expect occupancies to remain relatively stable at around 95%. In our development business we expect CDFS dispositions and contributions to range between $4.5 billion and $4.9 billion with CDFS post tax, post deferral margins in a range of 18% to 21%. Given our visibility into embedded gains within our CDFS pipeline, we are confident in our ability to produce CDFS income of between $730 million and $750 million on a post deferral post tax basis. The growth in assets under management that will result from the fund contributions in 2008 will generate property fund fees of between $130 million and $140 million. Our share of property fund FFO is anticipated to increase to between $190 million and $210 million. On a combined basis at the midpoint of this guidance, this represents a nearly 32% increase over 2007. Our guidance does not include the recognition of any promotes or incentive returns for 2008. We expect that other CDFS income, which includes development management and CDFS joint venture income will be between $45 million and $50 million for 2008 versus $46 million for 2007. Due to the pay-down of many of the notes receivable previously included in this category, the interest income is no longer meaningful, and therefore other CDFS will consist of just development management fees and income from our CDFS joint ventures going forward. While this income will be lumpy, we anticipate significant growth over time. We expect our G&A expense to increase by approximately 10% over 2007 levels, principally due to continued investment in our global infrastructure. While we expect our interest expense to decrease by approximately $60 million principally due to the full year effect of the convertible note offerings in 2007. Overall we feel very good about the momentum in our three operating segments, the strength of our balance sheet to finance our growth and hence our ability to achieve the guidance we have laid out for 2008. And now I'll turn it back to Jeff for a quick synopsis.

[Jeffrey H. Schwartz:]

Thank you, Bill. Before I open the call to questions, I'd like to leave you with four key takeaways. Number one, with the leading global real estate platform we have achieved significant diversification, while the U.S. may be slowing in excess of 85% of our projected growth and development starts will be outside the U.S. Global GDP growth, excluding the U.S. is still expected to be 5.4% in 2008. Number two, that being said, our U.S. portfolio remains strong with 95% plus occupancy, a growing build-to-suit business, strong credit tenant and solid operating fundamentals. Number three, we have in excess of $14 billion of capacity within our Investment Management Platform. Number four, most importantly, we have deep talented experienced teams throughout the world and are extremely well positioned financially and organizationally to take advantage of market conditions in 2008 and beyond. Operator, we'll take questions now. Question and Answer

[Operator:]

Thank you, sir. [Operator Instructions]. We will go first to Jay Habermann at Goldman Sachs. Please go ahead, sir.

[Jonathan Habermann:]

Hi, good morning. I am here with Swan Bowan [ph] as well. And well, congratulations on your decision. I'm sure it was a difficult one. But just wanted to start off, I guess with comments on the supply-demand imbalance. It seems to be the first quarter you referred that obviously the supply exceeded demand by quite a bit. And obviously focused here in the US. So I know you've guided 3% to 4% NOI growth for the year, but is the business really being impacted by the slowing U.S. economy? And I guess more broadly what are you looking at in terms of data points where you might be scaling back your development pipeline at some point in the future if in fact growth slows?

[Jeffrey H. Schwartz:]

Well Jay, we'll just start by saying, you are correct and your assessment that that is a U.S. only phenomena at this point, well it's... albeit limited in the U.S. and I think Walt wants to add some color to the U.S. prospective.

[Walter C. Rakowich:]

Yes, Jay, it is a good question. You're right. The fourth quarter was the first we saw that. Now the interesting thing is that the supply that was delivered in the fourth quarter and frankly last year was right in line with the year before. What happened was that there was a slowing in absorption. And that should be no surprise to any of us, and I think what we believe is going to happen next year is we do believe absorption in the U.S. will slow. It's hard to say how much but it will slow. This year it was 120 million square feet and the total supply was 140 with the fourth quarter. We think that what is going to happen however is that the absorption will slow, but we think the supply is going to precipitously fall out where we seeing it today because a lot of the sort of the regional or the less capitalized people are just simply not putting up buildings anymore. It's just not the... they just have trouble getting credit. And that I think will play into our advantage. And so in any case that... I mean that's sort of the backdrop of the overall situation. Ted, do you want to add to that?

[Ted R. Antenucci:]

Walt, I think you covered most of it. Overall Jay, things within our portfolio and our pipeline are still doing well. So, we are anticipating and preparing ourselves for some level of a slowdown, but so far we have been able to continue to lease up our buildings and there is no one area that we are overly focused on or concerned about.

[Walter C. Rakowich:]

Jim, let me just make one other comment. I think the one question you had asked overall is about our development starts. Ted sort of laid it out in what he... in terms of what our global starts will look like, but I wouldn't be surprised if our starts in the US go down somewhat this year. And in fact, frankly, we are planning for that. I mean if you look at overall North America, I think Ted's comment was that it would be flat because we've seen a pickup in Mexico and probably some decline in the US. And so really, our development growth is outside of the US this year.

[Operator:]

And we will take our next question from Michael Beamerman [ph] at Citi.

[Unidentified Analyst:]

Thank you. John Litt is on the phone with me as well. When you think about your new developments starts, where you are seeing it drives 85% or 80%, 85% outside the US. How about what’s already been completed and sort of what you're expecting to sell and lease out in order to generate the CDFS gains in 2008? Can you sort of talk through a little bit about what is sitting on the books today ready to be sold, what the prognosis is for leasing and also the mix by region as you go out and generate the gains in '08?

[Jeffrey H. Schwartz:]

Michael and John, that’s a great question. Ted, you want to hit that?

[Ted R. Antenucci:]

Yes, I don't have get the numbers in front of me Michael, but for the most part it is… we are sticking with 80% to 85% of growth outside of the US, would be consistent with our contributions and what we got in our pipeline, I mean the majority… I don't have the exact number, but the majority of what we’ve got in our pipeline is going to… is also outside the US. This trend towards diversifying our starts and doing more globally wasn't necessarily with the intend that things may or may not slowdown in the US. It was just how far our growth has been and it’s been very significant outside the US over the past three to five years.

[Jeffrey H. Schwartz:]

And Michael, I think the thing I would add to that would be to say, look, we expect in our guidance that we’ve talked about $4.5 billion to $4.9 billion in overall contributions. If you back out a profit margin on that, the numbers are obviously lets say it is 20% margin, are roughly $4 billion to $4.5 billion, which means that we are contributing somewhere in the neighborhood of 50% of our overall pipeline and that pipeline today is roughly 50% leased. So we feel good about the contributions this year relative to where we are in terms of leasing as well.

[William E. Sullivan:]

If you think through the math, as we looked at our 2007 development starts, that sort of ratio is going to be where the contributions come from. And so on 2008, you're going to get… maybe slightly less than half of CDFS profits from European contributions, you're going to get somewhere between 10% and 15% of the CDFS profits from US and Canada and, we still see some sizeable gains in Japan. So, it is going to follow where our developments starts are.

[Jeffrey H. Schwartz:]

Michael, it is Jeff. As you can… held by the number of people that wanted to jump in and answer your question, real feel pretty comfortable with the answer. We are very, very pleased with our lease up, we are very pleased with the status of leasing within our portfolio, with the execution by our teams around the world and we've had great people and they have done a great job and we feel very good about that leasing.

[Walter C. Rakowich:]

The other thing Michael, and we all are pilling on here, is the build-to-suit activity in the U.S. and we made a strong commitment to that early last year and that’s hit up a big for us. I mean, 23% of what we build were build-to-suit. So a huge percentage of what we did last year was effectively hedged to the leasing environment and that was thought through. I mean we set up a special group to that. That was an initiative that we've really pushed and we continue to see growth in build-to-suit in the U.S. So we are pretty enthusiastic about that.

[Operator:]

We'll take our next question from Jamey Feldman at UBS. Please go ahead.

[James Feldman:]

Great. Thank you. I was hoping you could give a little more perspective on what you're seeing from your tenant base and your fund client, so I guess it is a two-part question. First of all, the fund investors are they in any position where they are trying to get a reprise fund contribution or maybe pull back a little bit on any... I guess do they have any ability to pull back on some of the funding that they have already allocated?

[Jeffrey H. Schwartz:]

Jamey, I will answer that. It's Jeff. One, they don't have any ability to do that within the documents. We have firm subscription agreements from some of the leading global institutions, sovereign wealth funds around the world. That being said, I am in constant contact with some of the largest real estate investors globally, the people that are instrumental in our funds and it is just the opposite. They see this as an opportunity, particularly we see investors in Europe that are looking at the U.S. both from the valuation of the dollar as an opportunity to invest in the U.S. We see U.S. investors want to invest with us in Europe and Asia, as evidenced by what we did in August, which isn't that long ago, which was at Friday height of uncertainty in the credit market where we had our largest investors significantly upsize at the 11th hour and caused us to be oversubscribed in our European Properties Fund our second one. And from a tenant stand point or customer standpoint, we are seeing continued strong build-to-suit demand as they reconfigure the distribution network, you look at the 80% metrics, you look at the growth. In Germany, phenomenal results there, phenomenal results in Japan and China. As Ted noted, strong results for the U.S. So I guess the unequivocal answer… the question is we are seeing strong demand from our fund investors and we are cautious but we continue to see strong demand from our customers and we would monitor, we ask that question on a weekly basis, but it remains relatively strong.

[Operator:]

We will take our next question from Chris Pike at Merrill Lynch. Mr. Pike, please go ahead. Your line is open sir. We will take our next question from Michael Mueller at JPMorgan.

[Michael Mueller:]

Yeah, hi. With respect to the $4.4 billion to $4.8 billion in development starts this year, what portion of that is expected to be build-to-suit? Ted, I think you said it was about $1 billion for '07. And then what portion of the spec development which you characterize as being more of a peer reconfiguration play where you may have a little less sensitivity to changes in the economic conditions?

[Ted R. Antenucci:]

I am sorry, Michael, I got the first part what was the last part? [inaudible]

[Michael Mueller:]

Yes, can you hear me?

[Ted R. Antenucci:]

Yes.

[Michael Mueller:]

Okay. The first part was when you look at the $4.4 billion to $4.8 billion in starts this year, what portion would be build-to-suits? I think that number you said for '07 was about $1 billion. And then when you are looking at the spec component of the development this year, what portion of that would you characterize as being more of a pure reconfiguration play where you maybe a little less sensitive to what happens with changes in the economies?

[Ted R. Antenucci:]

The first part is probably to answer than the second. We expect our built-to-suit business to continue to grow and I think 30% to 35% of our starts is our target and some we think is really achievable, which should be consistent with last year maybe little bit better than last year. On the spec portion being, part of the... the reconfiguration, I'm not sure if you... what you're really referring to, but the bottom line is we're very... we're able to be and are very selective in terms of what markets we start speculative [ph] product in and we're focused on... we are focused on markets like Southern California and China, Asia I mean really throughout Europe port markets areas where there is significant global trade. So I think that answers the question.

[Jeffrey H. Schwartz:]

Michael I think your question, which is probably, had been through multiple cycles as I have and Walt... some of it either the gray haired or losing hair people around the room, but the... not because of current market conditions that's for sure, but what we've seen traditionally in any sort of downturn if we are talking about the U.S. in particular is... a continued to drive by customers to cut cost in any sort of downturn, we're seeing it from some people today we won't mention the names of the customers, but customers that are somewhat associated in retailing/homebuilding industries that you would think to have some softness today. We've had a lot of build… things that we haven't announced yet, but build-to-suit activity with them, major lease assigned with them as they're trying to reconfigure their distribution network today in the U.S. and it's... we've seen in every cycle, our expectation we will continue to see in this cycle whether it's 30%, 40%, 50%, 60% of the total it's hard to say, but it's clearly a driver of the business and mitigates our business in particular against downturns in the economy somewhat.

[Operator:]

And we'll take your next question from Chris Haley of Wachovia.

[Chris Haley:]

Good morning. Both onward and upward congratulations.

[Jeffrey H. Schwartz:]

Thanks, Chris.

[Chris Haley:]

Bill, I have a question for you on balance sheet capacity, excluding the capacity within the funds. I think one of the stress test you guys do is, you had to hold assets on your balance sheet before contribution and one of the conditions would be that lease up either stops or doesn't meet the threshold in which funds would invest in the assets. Could you say, maybe a little bit of a walk through in terms of how you look at this, in terms of how much you would have put on your balance sheet... what type of considerations that we should we think about?

[William E. Sullivan:]

Chris, first of all let me put it this way. I think we have, in addition to our cash and current capacity under our global line of credit, we have the capacity under our convents to borrow an additional billion dollars or so, which we don't have at this point any intention of doing. But we have borrowing capacity under our balance sheet equal to about 14% of our... 15% of our existing capacity of global lines of credit and cash. So we feel pretty comfortable from that standpoint. And again that the issue or question for us, when we think about what would we hold on our balance sheet, we monitor the development starts and the contribution opportunities and potential actively. And as we look at our 2008 contribution activity, there is about 65% of our contribution properties that are ready to go on in sort of first and second may be the early third quarter. And so, those are underway now. So, we have a strong piece of our expectation for 2008 already embedded in our portfolio of operations. So we feel pretty good about that.

[Operator:]

We will take our next question from David Harris at Lehman Brothers.

[David Harris:]

Yeah, good morning everyone. Ted, simple question for you. The ground [ph] margins on build-to-suit typically come in lower than you spec build?

[Ted R. Antenucci:]

They do David. I mean typically they are coming a little bit lower. It depends partially on whether or not we are doing a build-to-suit on land that we own and control or land that has been designated by the customer and we acquire on their behalf. We look at the build-to-suit business as incremental, I mean our starts came in 2007 substantially above 2006. And a lot of that was... it was incremental in fact in fact, you could have make the augment that the entire increase of $1 billion was incremental to [inaudible] was attributable to the build-to-suit. So we look it as a way to grow our customer relations. It is a solid reliable source of CDFS income. It hedges your pipeline. We are very excited about the percentage at least our pipeline and what that affords us in the future and that would allows us to do in terms of doing some level of inventory projects throughout the world and feel very comfortable that we have got a significant bank of properties that we can contribute because once they are released, funds are... our agreements with the funds is that they will take the leased property. So it's a balancing act. But, we still make good money on the build-to-suit and it's a great business to be in.

[Jeffrey H. Schwartz:]

We would like it from a risk adjusted rate of return. We think the margins are healthy and they are clearly incremental that drives and strengthen customer relationships as well as the drive growth in our asset management platform, our Invested Management Platform, incremental assets management fees, incremental incentive fees in the long run, we love the business.

[Operator:]

And we will take our next question from Scott Udone with MetLife [ph].

[Unidentified Analyst:]

Yes. Good morning. A couple of questions from a fixed income perspective. First of all Walt, best of luck you have been and will be missed.

[Walter C. Rakowich:]

Thanks Scott. I appreciate you saying that.

[Unidentified Analyst:]

And then the question would be, as you look towards 2008 and approaching the corporate debt market, most fixed income investors would look at the changes you have made indenture in 2005 to allow the leveraging of the capitalized funds management fees to be, the most egregious example of the loosening of credit terms in the REIT market. Given the fact that we are in the credit crunch and given the fact that credit investors will be more discriminating when you come to market in 2008. Is the company considering abandoning that approach for its future debt deals?

[Ted R. Antenucci:]

Scott, no, we are not. I mean, again we... you and I had discussions on this. and I suspect you had discusses on that prior to my arrival. But, one of the things I would hope that people would come to realize, if they don't already is the annuity like nature of these fees and the growth opportunity, that's seen in 2007 where... as a result of increasing our funds under management from $12.3 billion to just slightly over $19 billion, we had 40% plus growth in our FFO and fees from our funds management activity and we expect 32% plus growth in 2008. And so I... Jeff is kind enough a couple of minutes ago to not include me the in the people who have seen the cycle goes, because he knows that I've seen somewhere between 1 and 2 more cycles than anybody else in the room, we're behind. I go...my heart is back to 1990, in that timeframe, which was a real estate depression. And I looked at the investment management business inside my old firm Lazard Partners, and it was annuity like and it was fabulous recurring revenue in a very difficult time when I view this as fabulous recurring revenue in this time.

[Jeffrey H. Schwartz:]

It's the safest most stable strongest form of cash flow, which is why it typically rewarded the highest multiple, if you look at the great asset management companies around the world. And we would like to have a lot more of it and we're going to continue grow the Investment Management Platform. Operator we'll take two more questions.

[Operator:]

And we'll go next to Mitch Germain at Banc of America Securities.

[Mitch Germain:]

Hi, everyone. Ted you mentioned some land acquisitions. Have you seen any drastic change in cost over the last six months?

[Ted R. Antenucci:]

Mitch, that's a great question. And I think in some markets in the U.S. you would assume that would be happening and so far it is not. Rev [ph] has been really strong throughout the U.S., and although we haven't seen much in Class A products in terms of cap rate decompression and cap rates are going up. We've seen the rents going up and I think that's supporting people maintaining land prices. We... and in outside of the U.S. for the most part... most of the markets are actually quite strong and we're seeing land values go up. So as we sit here today we haven't seen land prices go down it wouldn't surprise me if they tick down a little bit in certain markets in the U.S..

[Jeffrey H. Schwartz:]

I think the real opportunity, Mitch would be outside the core industrial markets. Core industrial markets have remained strong from an occupancy standpoint. Remained strong from rental growth standpoint. So the opportunities that are out there in the land values or land costs are outside the industrial sector. We'll take one more question operator please.

[Operator:]

And we will take our final question from David Cohen Morgan Stanley.

[David Cohen:]

Hi, good morning. I just wanted to talk about the margins again 23.5% this quarter has obviously been coming down closer to where you guys say the normalized range is. But when you look at the 23.5%, how much was due to kind of this lower initial yields versus this higher cap rates on the appraisals. And then looking into 2008 the 18% to 21%. Is that any... is that differ from your original assumptions when we had your Investor Conference last year and then looking into '09, where do you think those margins will go from there?

[Jeffrey H. Schwartz:]

Well, let me touch on that. First of all as you... we have some additional contributions of the acquired property portfolios in 2008, that... so our development, our margins on our development activity. The peer development activity in 2008 will be above the 21% probably in the mid… low-to-mid 20s, okay and that would be brought down to what we are guiding to sort of 18% to 21% versus as a result of including some of the incremental acquired property portfolios in the contribution activity. Some of that has been anticipated to be included in 2007 and for structural reasons in terms of getting the properties in the right entities et cetera, was pushed off into 2008. On so we… as you saw we have a slight up tick in Q4 versus we had the original and guided to and we have a little bit of a decrease in the margins for 2008 as a result of inclusion of those property funds. But what we talked about it back in Investor Day was sort of 19% to 21%, I think, I think we are now talking 18 to 21%. So not a sizeable difference in the margin activity.

[Jeffrey H. Schwartz:]

I would like to thank everyone for joining us today and I feel I will be missed in talking about 2007 the outstanding year we had and the way we'll positioned for 2008 and beyond. Without thanking our leadership team outside the US, who are on the call with us today but from Walt, Ted, Bill and I want to say thank you to [inaudible] Gary Anderson and rest of our senior management team inside the US and outside the US. We've done a great job in positioning in the company. Thank you, thanks everyone for joining us today.

[Operator:]

This does conclude today's presentation, we thank everyone for their participation, you may disconnect your lines at any time.