Prologis, Inc.
Q3 2008 Earnings Call Transcript

Published: 23 Oct 2008

[Operator:]

Good morning, my name is Shana and I'll be your conference facilitator today. I would like to welcome everyone to the ProLogis third quarter 2008 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, Shana. Good morning, everyone, and welcome to our third quarter 2008 conference call. By now, you should have all received an e-mail with the link to our supplemental, but if not, the documents are available on our Web site at www.prologis.com under Investor Relations. This morning, we’ll hear from Jeff Schwartz, CEO, his comments on the overall environment; and then Bill Sullivan, CFO, will cover liquidity and capacity. Additionally, we are joined today by Walt Rakowich, President and COO; Ted Antenucci, Chief Investment Officer; and Diane Paddison, Executive Director of Global Operations. Before we begin prepared remarks, I’d like to quickly say that this conference call will contain forward-looking statements under Federal Securities Laws. These statements are based on current expectations, estimates, and projections about the market and the industry in which ProLogis operates, as well as management's beliefs and assumptions. Forward-looking statements are not guarantees of performance and actual operating results may be affected by a variety of factors. For a list of those factors, please refer to the forward-looking statement notice in our 10-K. I’d also like to add that our third quarter results press release and supplemental do contain financial measures such as FFO and EBITDA that are non-GAAP measures. And in accordance with Reg G, we have provided a reconciliation to those measures. And as we’ve done in the past to allow a broader range of investors and analysts an opportunity to ask their questions, we will ask you to please limit your questions to one at a time. Jeff, would you please begin?

[Jeff Schwartz:]

Yes, thank you so much, Melissa. Before we get started, I’d like to mention that we’ll be changing things up a bit on our call. Given the current climate, we thought it would be better to limit our opening remarks to Bill and myself and allow more time for your questions. So I’ll start by covering our strategy for how we plan to work our way through the extraordinary global economic events that have transpired, with Bill following providing greater detail. Needless to say, these are extraordinarily difficult times, so I won’t belabor the point by reciting the litany of recent issues in the financial markets. Suffice it to say that these events are having a profound effect on global economies, access to credit, private and public real estate pricing, and customer decision-making. So how is this affecting our business? Well, through the third quarter, industrial real estate fundamentals held up reasonably well, and our global leasing activity was slightly ahead of the level we achieved in the second quarter. We also continue to realize growth in rents and net operating income in our same store portfolio. However, customer demand has begun to moderate in recent weeks as around the globe, companies are pausing to assess how their businesses might be affected by this turmoil. Our global operating teams have done an excellent job of managing both lease expirations and the credit quality of our customers as overall market conditions have softened. Retention is at record high levels, and our overall occupancies continue to outperform market averages due to the strength of our customer relationships. And our turnover costs continue to be some of the lowest in the business. Additionally, over the past four years, we have repositioned a significant percentage of our ownership positions, both on balance sheet and within our investment management business, to the markets with the greatest stability and in some cases, even growth in this environment; Shanghai, Beijing, Seoul, Tokyo, Warsaw, Los Angeles, among others. While this and the stable nature of industrial business does not make us recession-proof, it does add to recession resistance. This operational focus has let to solid property performance. We are building upon this strong foundation by focusing on the income streams produced by our direct-owned properties and our investment management business, which are both stable and predictable. It’s clear that in this market, our 13-year track record of progressively creating greater value through development activity is being heavily discounted or more accurately, not being recognized at all by investors. We firmly believe that while development has been an important component of our business, it is but one of the many levers from which we can drive NAV. It has enabled us to respond to customer requirements and to quickly establish market leadership positions around the world. However, it has also been a less predictable source of earnings, both on the upside as we reap the benefits of declining cap rates during recent years. And now, on the flip side of that equation, the margin compression we talked about previously exceeds anyone’s expectations requiring a reset in our required development yields. Given the greater degree of uncertainty in today’s market, we have significantly reduced new development starts to mitigate risk, increase liquidity, and reduce leverage and now expect to start between $2.7 billion and $2.9 billion this year. We continue to reduce the risk profile of our development pipeline by focusing development on build to suits and in emerging markets where there is a chronic shortage of space and new development is being absorbed relatively quickly. We are still assessing our anticipated level of starts for 2009, and we’ll provide direction on this as we firm up guidance for next year. But, we will take an extremely conservative approach given the current and anticipated economic conditions. Obviously, a curtailment in starts means our earnings will slow, but that is not our primary focus. We are focused on increasing liquidity, maintaining a strong balance sheet, carefully assessing opportunities to reduce nonessential business spending, and continuing our best in class investment management and property operations. Given today’s financial markets, there has been a lot of concern about company’s ability to access the credit markets to refinance both corporate and property level debt. And in the cases of companies with investment management platforms, there are questions about the ability to continue to contribute assets to funds in order to recycle capital and de-lever. Let me make a few points in this regard and then Bill will cover these topics in more detail. First, we have addressed all of our 2008 corporate maturities and are focused on 2009, which has a relatively low level of direct debt maturity. Similarly, we have successfully put debt in place in our property funds, again with very little remaining for this year and then working on next year’s maturities. We have $3.9 billion of remaining third party equity commitments to our funds, which when leveraged at target levels provides $11.1 billion of total capacity. These equity commitments are backed by subscription agreements which have no active redemption preservations. In those jurisdictions where we do not currently have funds in place, we have the option and capacity to hold completed development assets on our balance sheet, lease them and recognize the net operating income. Most importantly, it is our intent through reducing our CDFS pipeline, making contributions to our funds, and strong expense management to reduce our company’s debt levels by 15% to 20% or approximately $2 billion in 2009. Very few companies have developed an investment management platform with sufficient investment capacity in place to accomplish such de-leveraging, while simultaneously enhancing the quality and stability of earnings. Before I turn it over to Bill, I’d like to add that with respect to our long-term opportunities, nothing has changed. Global trade continues to grow albeit at a slower pace, but the shifts in trading patterns driven by where production takes place and where consumers need those products are not easily reversed. Emerging markets around the globe will continue to need modern distribution facilities to serve their growing populations, and more mature distribution markets like US and UK will continue to need space to replace obsolete inventory and make supply chains more efficient once the economies begin to recover. ProLogis is well-positioned in the right markets with well-located facilities and the people and customer relationships in place to weather the storm. Now, let me turn it over to Bill.

[Bill Sullivan:]

Thanks Jeff. As Jeff stated in his remarks, given the current environment, we believe it is more prudent to focus on liquidity and preparing for the future rather than short-term earnings. As such, I do not intend to comment directly on our third quarter results, although we would be glad to answer any questions you may have therein. At the end of my remarks, I will provide some commentary on our guidance revision. In breaking from our usual routine on this conference call, I will focus the majority of my comments on the issues that we are focused on. Those are; funds-related debt maturities, on balance sheet debt, scheduled maturities and overall liquidity, our development pipeline, and funds capacity. I intend to be very detailed so bear with me. Starting with the fund-related debt maturities, there was approximately $2 billion of fund debt with 2008 maturities as of December 31, 2007. As of September 30, we had refinanced $1.8 billion of that amount and in addition, financed an additional $1.1 billion of borrowings in connection with the property fund contributions. At September 30, as newly-depicted on page 11 of the supplemental, we had an additional $386 million of debt maturing in the funds consisting of $166 million in our NA3 Fund with Lehman Brothers, $99 million in our Mexico Fund, and $121 million in our Japan Fund II. The Lehman maturity is frustrating, following their bankruptcy. However, after repeated attempts to contact appropriate people inside Lehman or their bankruptcy advisors, we finally spoke with a knowledgeable representative just yesterday, wherein he clearly indicated they are intending to sit down with us shortly to discuss an extension of the existing loan as well as hopefully agree upon a game plan for a long-term value maximization of their equity interest in this fund. In sum, good discussion much appreciated by us. The Mexico Fund loan was refinanced in its entirety on October 7 with a four-year loan and a 6% coupon. Japan Fund II has two loans maturing in December 2008, one of which is in documentation and is anticipated to close this month. The second loan has an agreed upon-term sheet, will go into documentation shortly, and is targeted to close in November. Looking at 2009, our property funds have $1.46 billion of debt maturing. We are in active discussions with US Life Company, German mortgage banks, and our Japanese relationship banks with respect to our refinancing requirements. With the exception of a bridge loan from Citibank on our NA2 Fund, our 2009 fund refinancing requirements are modestly leveraged based upon the underlying collateral value available for refinance. Let me touch on each of the funds with debt maturities in 2009. PEPR has a maturing CMBS transaction totaling $478 million in July 2009. The underlying assets provide two to one coverage on the loan and therefore should be refinanceable as the foreign credit market reopen. We are in active discussions with various German mortgage banks as we speak and have a focus on alternatives should that market not reopen widely. The ProLogis California Fund has debt maturities of approximately $316 million in 2009. The properties in this fund were contributed in 1999 and have appreciated substantially since. The loan-to-value on the assets secured by these loans is well below 40%, and we are in active but early discussions with US Life Company lenders to refinance this. North America Property Fund 11 has a June maturity of approximately $14.5 million at low leverage. We will address this in the early 2009. The NA2 Fund has maturities of approximately $560 million in 2009, comprised of a $62 million Life Company loan due in January, a $452 million city bridge, and a $46 million Life Company loan due in August. We have rate locks on a 10-year deal relative to the January Life Company maturity and will use approximately $42 million of excess proceeds from that refinancing to reduce the city bridge. The August Life Company maturity will be handled in the ordinary course of business as we get into 2009. The city bridge matures in July and we are in active discussions with the bank relative to that loan as well as their underlying equity investment. Finally, Japan Fund II has approximately $92 million in maturities beginning in August 2009. We have not experienced any significant issues in financing or refinancing our Japan assets, and we’ll deal with these maturities accordingly. We have a variety of other financings that we are working on for the funds. This is just part of what we do on a day-to-day basis. Europe remains the toughest market for term financing today. But we are confident that the government programs put in place over the past few weeks will open the markets for our relatively low leveraged requirements. Secondly, let me address the on-balance sheet debt and liquidity. I hope everyone had a chance to see our press release yesterday regarding a new line of credit with Bank of Communications, totaling 5 billion RMB or a little over $700 million that can be used to fund future development projects in China. Turning specifically to our quarter-end balance sheet, at September 30, we had $11.1 billion in funded debt outstanding. The debt consisted of $2.98 billion outstanding under our various lines of credit, and $8.1 billion outstanding under our bonds and secured debt. Let me spend a few moments on each of these components. Relative to our lines of credit at September 30, we have total capacity within our various lines of $4.36 billion, thereby leaving borrowing capacity under these lines of $1.2 billion which together with $341 million in cash on the balance sheet, provides over $1.5 billion of liquidity available to the company. The lines of credit consist of four components. The global line, excluding the China tranche, has a total commitment of $3.59 billion with $1.1 billion of available capacity. This line matures in October 2009 but is extendable to October 2010 solely at our option, which option we intend to exercise. The China specific tranche of the global line, as of September 30, had a total commitment of 721 million RMB or $105.8 million, of which $92.7 million was outstanding. This tranche currently matures in May 2009. We have been in discussions with existing and new participant banks regarding the extension of this facility over the past few months, and currently have commitments to increase the facility by approximately $60 million and extend the maturity to three years from execution. This increase in extension is targeted to be completed in early December. The multi-currency line represents a total committed facility of $600 million, of which $552 million was drawn at September 30. This facility, like the global line, matures in October 2009 but is extendable for one year to October 2010 solely at our option, again which we expect to exercise. Finally, we have a 364-day committed sterling facility, totaling 35 million pound sterling; the equivalent of $63 million with $48 million outstanding under letters of credit, leaving $15 million of available capacity. This facility matures on November 15, 2008 and is in the process of being renewed for another 364-day period. Relative to our bonds and secured debt, at December 31, 2007, ProLogis had on-balance sheet debt, 2008 debt maturities that totaled $963 million, all of which have been successfully refinanced as a result of our May 2008 public debt offerings that totaled $1.15 billion. Looking to 2009, ProLogis has on-balance sheet debt maturities totaling $353 million, $250 million of which relates to a floating rate notation that is due on August 2009. To the extent that debt markets do not open up, we are targeting to repay the 2009 maturities out of cash flow and/or availability under the global line. Collectively, the bank and bond covenant or documents contain a variety of financial covenants, including a minimum consolidated debt books net worth test, fixed charge coverage ratio test, and unencumbered debt service with coverage ratio, overall leverage test, a restricted investment test, a secured debt test, and a restriction on distributions based on FFO. We have plenty of room on all of our covenants currently and are confident in our ability to meet these covenants in the future. I want to give special thanks to our Treasury teams around the globe. They have done an outstanding job of managing our debt maturities in this most difficult of environments. Turning to our development pipeline, in September 30, our pipelines totaled $8.2 billion, a decrease of nearly $400 million from June 30. Approximately $200 million of this reduction was the result of contributions in excess of development starts with the majority of the remainder a result of the strength in US dollar, particularly against the euro. Additionally, the pipeline shows a 530 basis point increase in overall lease percentage, increasing to 47.7% from 42.4% at June 30, a result of solid leasing effort in Q3 as well as our deliberate risk mitigation efforts focused on build to suit opportunity. This is a great start to de-risking the pipeline and we will make even more substantial progress on this front in the months ahead. Finally, ProLogis currently has six funds which we are actively investing. At September 30, these six funds had total equity commitments of $4.9 billion with third party equity commitments representing $3.9 billion of that amount. On a targeted leverage basis, the funds had total capacity at September 30 of $11.1 billion. Roughly $2 billion of net overall capacity is in our China Acquisition Fund leaving $9 billion of capacity as it relates to those funds established to acquire the properties that we developed. Let me briefly touch on the pipeline-related funds and their relative capacities at September 30. The North American Industrial Fund has remaining equity of $626 million and an estimated asset value capacity of $1.4 billion versus an existing North American pipeline of $1.5 billion. The fund investment period expires in March 2009, and we’ve been in discussions with investors regarding the extension of the investment period. The ProLogis Mexico Fund has $291 million of remaining equity and an estimated asset value capacity of $647 million. Currently, Mexico has a total pipeline of $344 million. The Japan Fund II has $238 million in remaining equity and $681 million in estimated asset value capacity. We estimate that Japan Fund II will fill its investment capacity by the end of Q2 2009 and our overall pipeline is $1.9 billion. In Korea, we have approximately $150 million in equity remaining in the fund with an estimated current asset value capacity of $320 million. Korea’s pipeline is $54 million. This fund has ample capacity for future development and acquisition opportunity. ProLogis European Property Fund has remaining equity of $2.7 billion and a leveraged asset value capacity of $5.9 billion. Europe’s current pipeline is $3.3 billion providing ample room for further development and acquisition activity. As we have said on many occasions, we are constantly talking to investors about new funds and fund opportunity, and therefore expect to continue to expand our funds capacity. However, just to be clear, in speaking with our senior operating people, to the extent that we were not to have capacity with one or more of our funds relative to our pipeline properties, we would be glad to hold any of these properties on our balance sheet as long-term investments. Finally, let me touch on the change in guidance for Q4 and some commentary on 2009. While no one appears to be focused much on 2008 any longer, approximately 50% of the difference between our most recent guidance and the $3.60 to $3.70 range announced today is related to an anticipated steeper slowdown in lease up than originally expected in a resulting delay in the timing of various contributions. 10% of the decrease is associated with the tougher cap rate environment, while the remaining 40% of the decrease relates to a variety of factors including FX rates, taxes and documentation hurdles on preparing properties for contribution. This change in guidance following on the revision we announced in midSeptember is a reflection of just how difficult the environment has become. Given these market conditions, putting forth guidance for next year is a real challenge. We anticipate growth in income from our investment management business driven by expected contributions to the fund as well as fund-related acquisitions. CDFS income will be lower, reflecting both lower margin assumptions and a reduction in starts in both 2008 and 2009. Property operations are holding up reasonably well, but we are concerned about additional occupancy slippage which may lead to modestly lower level of income from this segment. Clearly, we intend to reduce our G&A in 2009. Finally, we intend to provide substantially more specific update on the key drivers of all of these elements as we approach year end, but in no case later than our fourth quarter call. In some, let me reiterate, we have our fund debt maturities well under control. We are highly focused on de-levering the company and we have over $1.5 billion of existing liquidity. Our pipeline is being de-risked in rapid fashion and our fund capacity is unique and should be much appreciated in these times. And now, I’ll turn it back to Jeff.

[Jeff Schwartz:]

Thanks, Bill. This is undoubtedly the most painful period from a capital market’s perspective in any of our lifetime. However, we remain firm in our commitment to create long-term value for our public and private investors, associates, and customers. We have a well-leased portfolio of high quality properties, excellent customer and capital relationships, and the resolve to maintain and strengthen our balance sheet, to ensure that we are one of the companies that emerges from this period poised to take advantage of opportunities as they arise. Operator, we’ll now take questions.

[Operator:]

Thank you. (Operator instructions) And we’ll take our first question from Steve Sakwa with Merrill Lynch.

[Steve Sakwa:]

Good morning. Two questions. Jeff, first of all, I guess in light of the environment here, why wouldn’t you just basically shut the entire development pipeline down now given that you’ve got $8 billion of properties and some form of stabilization period and/or lease up, which by most accounts would be at least a two-year potential delivery of supply into funds. I mean, I guess, why wouldn’t you take a more dramatic reduction in development at this point?

[Jeff Schwartz:]

Steve, I’ll start that and I’ll turn that over to Ted to elaborate and we’ve both been involved in this on a global basis, Ted particularly in North America and more involved – and myself outside of the US. But effectively that’s what we’ve done. Beginning in September, we have done nothing but build to suit starts, and those are serving customer relationships that we’ve had for an extended period of time. We’ve also both put in – increased our expected investment yield or decreased our expected value upon completion to be conservative and those required that our teams, not only have things 100% pre-lease, but also increased our required margins substantially above where there were previously – to ask what they were previously – quite frankly at a minimum on those. So effectively, when you see our starts in Q4, and our expectation is in the first half of next year, there’ll be very few development starts again only pre-leased buildings as we assess the market conditions, but your point is well taken and something that we’ve already put into effect.

[Steve Sakwa:]

Okay. And then secondly, can you maybe – I mean Bill did a very good job outlining kind of the capacity of the funds given that there seems to be very little debt available. You have an ability to finish products and then complete it and sell it into funds using 100% equity or do these investors effectively require the use of leverage and therefore if leverage isn’t available, assets cannot be contributed?

[Bill Sullivan:]

Steve, this is Bill. According to our funds, we have the ability in our discretion to use 100% equity to fund any of the contributions, and so effectively take that one off the table. But there is debt available and I hope then sort of talking through our fund debt activity. We have lot of things that we’ve closed in the last five to six weeks. We’ve got a number of closings coming up in the coming weeks and we’ve got term sheets and commitments and other activities on other financings. And so I think the death of the refinancing market is slightly overstated at this point at low leverage. We are finding opportunities to finance the majority of these assets. Having said that, we can use all equity if we so choose and in certain instances, it may make sense to use all our equity and wait for the markets to settle down and then lever up.

[Operator:]

And we’ll take our next question from Michael Mueller with JP Morgan.

[Michael Mueller:]

Yes, hi. I was wondering, can you talk a little bit about if you’re going through the regions and talk about where you see the market cap rates today versus the yields that you have achieved on development, and maybe tie all that together ultimately to how you look at dividend coverage these days to the extent that gains shrink materially?

[Jeff Schwartz:]

Mike, that was a good question. One that if we look at all the markets we’re in and went into great detail, we could be here an hour answering that question, but something we spend a great deal of time on. But I’ll start it and then just maybe – we try not to do too much of having multiple people answer the same question but this may be the rare exception where Ted and Sully jump in and add color or add on additional depth or detail to what I’ll go through. If you look at the US, we think that cap rates have moved 50 to 75 basis points already for Class A product building, which is the only products we have. Those are well-located in great markets with long-term strong demand. You hate to – when things look gloomy as they do today, it’s easy to lose sight of the fact that these are long-term great markets, but we think the cap rates have moved 50 to 75 basis points already. Is it a potential for them moving up further? Absolutely. How far, whether it’s 0 to another 50 or 75 basis points? Time will tell. You look at – that’s within the US and then obviously, cap rates are lower on the coast where we’ve repositioned a lot of our assets over the last few years in the California, the New Jerseys, et cetera. If you go to Europe, clearly the market that has had the most substantial cap rate movement or the greatest value diminution of any place we know, of any developed country I should say, has been the UK where we’ve seen cap rates move out in our magnitude by 30%. Things that were in the 5.5% and 5.25% range are now pushing closer to 7% to the cap rate, so there’s been significant value diminution there in the UK. On the continent, quite frankly, we’ve seen less. Probably to date, 25 to 50 bps. We’re being conservative on how we look at the world thinking that that could again move out by 25 to 75 basis points over the coming year if things continue to be stay difficult. But as Sully said, there is a reopening of the credit markets on brief market as banks have been nationalizing, and the tremendous liquidities have been pumped into the markets. So while we’re taking a conservative approach, we’re planning for the worst, hoping for the best as it relates to cap rates there and we may all be pleasantly surprised, but we’re not planning for it. As you move to Asia, cap rates in Japan have probably moved out 25 to 50 dips. This is the same time where the financing markets have remained relatively open or very much open, I should say, relative to the rest of the world. But the Japanese banks missed out on making the mistakes of their counterparts throughout the rest of the world because they were solving their own problems from the burst of the bubble in 1988 and emerged from all these as some of the strongest banks in the world. And they’ve continued to lend to us, we’ve got great relationships with the major Japanese banks and that’s been a great source of capital. As you move to China, you’ve probably seen less cap rate movement there than anywhere else in the world which is not surprising. You might have seen 25 bps. Our expectation is while you may see a little expansion there, given the growth, the current numbers, the official government numbers, and the best economic forecasters, you’re looking at 9% GDP growth even in 2009 in China. Even if you’d say, I think that’s overstated and go contrary to the best economic forecasters out there and cut that to 6% GDP growth, you’re still looking at economic performance that the rest of the world would kill for. Case in point, the numbers that JLL put out for the first six months of this year showed a 15% rental growth in Shanghai. Again, that’s an exception around the world. We wish all the global markets were like that, but that’s why you are seeing continued investor interest in the China market because of the growth prospects there. I hope that it kind of answers the question and we’ve traditionally underwritten to 15% to 20% development yields as we talked about in the past. Does this put pressure on our margins? Absolutely, but the beauty of our business is it’s a relatively short development cycle. Today, we’re resetting our expected yields on anything we would start. And to Steve’s comment earlier, we’re starting very little today but when the market improves, we have the ability to reset our expected investment yields underwrite to those standards and make investments accordingly and bring back to those margins, the 15% to 20% historical margins as the economies improve. Whether that be as – best case scenario people look at the end of ’09, whether it’s in ‘10, whether it’s ‘11, we’re there. We’re very disciplined and very resolved to stay disciplined, strengthen our balance sheet, and long-term create value for our shareholders and investors.

[Operator:]

And we’ll take our next question from Dave Rodgers with RBC Capital Markets.

[Dave Rodgers:]

Good morning. Thanks, guys. I wanted to follow up on an earlier question with respect to the equity take-out, not using any debts within the fund to take out contribution. What would you estimate the impact to be to the price? I’m guessing that there are certain underwriting hurdles within the funds separately. How would that impact PLD’s earnings, gains, or contribution prices in 2009? And then, Bill, if you could also address how much availability are on your warehouse lines of credit in total across the funds within the fund structure themselves?

[Bill Sullivan:]

Okay, let’s see. First answer to that is there’s no impact on the underwriting criteria or the valuation methodology, the contributions going to the fund. At the time of the contribution, they just – we do it with equity versus debt if that makes sense. So, on the next scenario, there’s no impact or change from that perspective. In terms of the availability under the funds, I think we have (inaudible). But I think we have $300 million available under the European line of credits today on PEP II, another $300 million under PEPR, and about $100 million under North America today. And again, in particular as it relates to PEP II, we have a fund bridge financing that’s committed to that will reduce the outstandings under that and free up some of that capacity as we move forward. We have financing schedule to close in Mexico next week that will free up capacity there as well.

[Jeff Schwartz:]

Bill, you may want to hit – Mike had a question previously on dividend coverage.

[Bill Sullivan:]

I think we’re comfortable with our dividend coverage, we were thinking low 40’s. Previously what we’ve targeted is probably taking that up into the ends of the 50 to 60 range in 2009 and beyond – and to the extent. On the grand scheme of things, to the extent that our CDFS profitability were to come under some pressure, first and foremost, we view it as somewhat of a temporary phenomenon as we underwrite to the new environment in the future. And so you may see a little bit of that for a year, but that’s in line with what we’ve talked about historically.

[Jeff Schwartz:]

And we feel good about our dividend and our coverage.

[Operator:]

And we’ll take our next question from Jeff Miller with JMG Capital.

[Jeff Miller:]

Thanks, it’s been asked and answered.

[Jeff Schwartz:]

Thank you.

[Operator:]

And we’ll take our next question from Chris Haley with Wachovia.

[Chris Haley:]

Good morning.

[Melissa Marsden:]

Good morning.

[Chris Haley:]

The stock market and bond market are implying a pretty significant value destruction over the last three to six months. And to tell you, the bond markets, some of your bonds are trading as if your credit (inaudible) is less than most of your peers, public and – I wanted to see if you could offer a little bit of opinion about where you see or what specifically you can offer regarding credit worthiness and cashbook potential either – not so much in your supplemental but in a separate presentation, you could come out and lay out 2009 and 2010 maturity, risks, stress test. I think that would be very helpful and in that context, you offered very good amounts of information about specific funds and maturities, but one of the questions just asked was how much capacity do you have in aggregate on your credit line? And if you were to assume those developments that you currently have in process in the unfunded amount, what would that do to your debt ratios, coverage ratios of that nature because most of those properties are not yet generating income above leverage cost. It would be helpful if you can offer any initial thoughts and any commentary regarding market activity.

[Bill Sullivan:]

Let’s see. Well, let’s just hope it’s possible, Chris. But let me just give you some color, look from the fund side, okay, what we’ve said is a worst-case scenario, if we have to do all equity on the contributions, we’ve given you what we believe is sort of perfect clarity to what the equity commitments are on those funds, and a large portion of our pipeline is covered by the equity in those funds, particularly through the next 12 months or so. And so we feel pretty good about that. In terms of the color on the cash flow and the availability, I think we’ll continually reassess and look at providing total clarity both in the supplementals and in our conference calls in terms of our liquidity position. I actually think we did a – took a giant leap forward today. So hopefully, some of what you may have wanted to know before the call, we answered on the call and we’ll certainly discuss that in more detail at (inaudible) and then, again, in what I hope to be a cleaner version of the supplemental in Q4. And so, in terms of overall liquidity, we stress test debt covenants and liquidity in a lot of different ways, and that’s why we say if you took CDFS contributions to zero and held the assets on our balance sheet, we’re in fine shape relative to all our debt covenants and leverage test, etc., etc. And so, that's sort of the draconian stress test and we feel real good about it. So if that provides or gives you any comfort, I hope so and we’ll certainly get into more detail as the months progress.

[Operator:]

And we’ll take our next question from Jamie Feldman with UBS.

[Jamie Feldman:]

Thank you. As we look at the current CDFS pipeline, what percentage of that is 95% or 100% leased, basically ready for contribution?

[Jeff Schwartz:]

Hang on a second please.

[Diane Paddison:]

Yes. I have it.

[Bill Sullivan:]

Go ahead, Diane.

[Diane Paddison:]

Currently, we have about $1.4 billion that is above 93% leased that are in different stages of being ready to contribute. Some of the assets are built to suit, so they are leased but it will be a while before they’re finished and then other assets are in China which currently we don’t have the fund to contribute those that are in the process of putting together the fund.

[Bill Sullivan:]

We look at the 93% plus leased as opposed to 100% as a metric, which is why we scrambled to get the 100% number which actually we could get, but it would take a couple of minutes. But we look at the 93% as the highest threshold in any of our funds to constitute a stabilized property and make contribution. It ranges from 90% to 93% depending on the fund, so that’s why we look at 93%.

[Operator:]

We’ll take our next question from David Fick with Stifel Nicolaus.

[David Fick:]

Good morning. You've got today about $2.7 billion of land, of which roughly $1.1 million is US or North America, $1.3 million is Europe and another $400 million in Asia. That is roughly $600 million this year in the first three quarters. I guess the question is why and what didn’t you see about this market that you see today? Second, what is your forward land strategy? And third, what about write-offs given that you bought a lot of this stuff at the peak of the market, clearly you would build to a loss on some of this land today?

[Bill Sullivan:]

David, I’ll start that and I’ll turn it over to Ted. We’ve seen some growth in our land bank, that is, with good infrastructure into some sites that we’ve bought previously, that's a more substantial number than one might think. There is a tremendous amount of value creation which leads into your second or third sub point on potential impairments or loss of value. But a lot of this land, we went through the (inaudible) process. We go through infrastructure process. We had and still have significant margins from basis to – from our basis to market value and when we do that – so the way we look at our land bank, we have some really valuable parcels, particularly in the UK. Are they ready to develop today given the state of the market? No. Do we feel like we've still created value given the quality of our land and settlement, operations, and teams? Yes. And in the US, it is a similar situation. In Europe – or I should say in Asia, it’s close to being just in time with the exception, purchase of land and build the buildings, we have slowed that down as Steve’s comment was in the beginning. We slowed that down in Japan slightly, although we still feel great about our sites there. And in China, we've got a very strategic land positions there which allows us to continue to grow. Ted?

[Ted Antenucci:]

I wanted, first, to step back to Jamie's question real quickly. Diane hit on the part of the properties that we have that are over 93% leased which are the stabilized pool. In addition to that, there is another $1.1 billion of gross proceeds that are under development, so when you total the two together, we actually have $2.6 properties – gross proceeds for properties that are either under development or completed. But, yes, they are over 93% leased. I wanted to first clarify that. And then in terms of our overall – Jeff, you really touched on the majority of the response to David’s question. But I think we feel overall very good about our land positions and the buildings that we’re building. We are clearly in a rising cap rate environment, that concerning I look at our contributions this quarter and see a wide variety of properties in different locations around the world, some of which have still relatively high profit margins and frankly a couple of larger contributions that have zero margins. I think we’re going to see that type of mix and our geographic diversity is definitely coming into plan. I mean we’re seeing areas where there is still strength and we’re seeing areas of weakness, and when you blend it all together we are still above par. I mean our CDFS margins are still strong. We anticipate finishing out the year in the 18% range. That's the range that we’ve always talked about, 15% to 20% and even in these tough times as we see things tailing off, there are still areas that we are doing well.

[Operator:]

We’ll take our next question from Michael Bilerman with Citi.

[Michael Bilerman:]

Good morning. I have got some (inaudible) as well. Jeff, I wanted to come back to the dividend again. You talked a little bit about how things have changed in mid-September where when you had reduced guidance, you also increased the dividend by 10% and you talked a lot about trying to maintain liquidity and having balance sheet leverage and if you just took your numbers for this year at 370, you have $2.30 of CDFS gain, so about $1.40 of FFO, $0.45 of CapEx, $0.40 of capitalized interest, another $0.10 deduction for straight-line rents, so I’m just trying to get my arms around how you think about the dividend in that context and why not try to maintain as much liquidity as possible and I’m not sure why your taxable net income is negative. (inaudible) you need to do, but just from a cash flow perspective, it would seem that if you start meaningfully lowering the CDFS portion which is a possibility next year, you will be overfunding the dividend by a significant extent.

[Jeff Schwartz:]

Good question and I’m glad you asked it. The way we – one, I think if you look at the CDFS gains, that’s without allocating the appropriate share of overheads and we look at that, it is a much smaller percentage of our overall gains than the market has perceived it to be, and clearly it’s – we’re going to over the coming years reduce the percentage of our income that comes from transactional income or transactional type gains, and transition more to investment management model where it's annuities, both fees and returns as well as wholly-owned returns while maintaining our core of excellence within development, but doing in different ways. That being said, we feel as Bill said, very good about our overall dividend coverage everywhere we stress test. Looking forward, we feel good about it. We think it’s – yes. We think the right way forward in delevering and taking a stronger and stronger balance sheet throughout 2009 is by completing assets, as Ted said, there is an over $2.6 billion or at $2.6 billion of assets that are already leased and ready for contribution within our fund structures to continue leasing the remainder of the portfolio, make those contributions, significantly slow down or starts to limit those to only build to suits to again immediately contributable and provide net operating income. And by doing so, we find a way to delever the balance sheet significantly while maintaining the dividend. The other thing that we missed out in the whole analysis is as we dramatically decrease our development starts and continue to make contributions to our funds, we are lowering our interest expense very significantly. And that – once we put that into our model and do the stress testing that Sully was talking about, quite frankly we sleep better at night after we did all that. I know that I sleep a whole lot better at night and feel very comfortable.

[Bill Sullivan:]

Right. Just – look, again from the stress testing in point, one thing to be clear is we have a pretty sizable return capital incorporated into our dividend. And so we are in no way, shape, or form, at the level of taxable income that requires us to distribute anywhere near that but we’re comfortable with our dividend.

[Operator:]

And we’ll take our next question from Lou Taylor from Deutsche Bank.

[Lou Taylor:]

Thanks, and I’m ready to stay on the team here because I have the taste for the same question as Michael and Doug has, and I don’t quite understand them that, Bill. I mean, just going off on FFO number, XCDFS, color or so, that even if you were selling properties and cap rates are up so that you’re building liquidity, you’re maintaining the overhead because you are building and selling properties, but there’s no margin. You have the G&A. I mean, build us off from the $140 million into what the dividend coverage should be because it looks – the dividend looks just very, very high relative to a core FFO number, much less an FAD number. So just could you put the numbers behind it and give us some comfort here.

[Bill Sullivan:]

Yes, we’ll probably go through it mainly and walk through the whole map on that and also describing some of the – focus is on the stress test side of effort but coming from a stress test standpoint and in grasping of things if we divide – were not contribute properties into the property fund it is basically a gain. We become a very sizable portfolio high quality real estate with great NOI underneath it, collecting rent and managing our business and that provides substantial cash flow much like in – and under that scenario we have a substantially higher dividend pay off ratio but more in line with traditional reviews And so, again, we all constantly look at the opportunities and the issues associated with the deal with, and take those lines into account.

[Jeff Schwartz:]

Operator, we’ll take two more questions.

[Operator:]

I will take our next question from Mark Streeter with JP Morgan

[Mark Streeter:]

Gentlemen, good afternoon, I’m on the team. I have a question, a couple of questions. Number one is really for Bill and Jeff on your strategy and how you’re managing the market’s perception of the company. It’s clearly – the credit market has lost space in the company’s credit worthiness falling up on Chris Haley’s comments. And I’m wondering, you should have waited for the conference call here to give some more disclosure on the credit side in funding and liquidity. Yet, I’ve spoken to a lot of your bondholders who are disappointed that you haven’t come out swinging earlier. And I’m wondering if you can talk a little bit about the decision for how you’re managing the perception.

[Bill Sullivan:]

Mark, like I said, if you look at the focus of our call today, if you look at the focus of the company, if you talk to any of our people around the world – whether you talked to our people in Asia and North America and Europe, everything, our entire focuses on managing our portfolio, leasing up are pipeline, which you can see the result of that with our – our pipeline reaching a 540 basis points on one quarter alone with reduction the size of the pipeline. The drastic reduction in any development starts, and again, focus only on pre-lease with strong credit. And if you look at the focus and tone of our call today, it is all focused upon managing the company, strengthening the balance sheet, reducing leverage, increasing liquidity, and being not just a survivor out of this economic/financial crisis that is going on around the world. Not just – but be the strongest survivor and be there to take advantage of opportunities when things recover. But we are solely focus on this. It’s exceptionally important, not just to the people in this room on the call today, but to every one of our associates throughout the world, and they’re all fully committed to making this very successful and very strong.

[Jeff Schwartz:]

But let me comment as well, Mark. Just – on virtually every conference call that we had, and every investor presentation that we’ve done including the Merrill Lynch conference in September about the same time as our guidance revision then therein. We have focused on our liquidity and the fact that we have strong liquidity, that we have our maturities well under control that we’ve done a good job in re-financing our fund-related debt, et cetera. And whether people chose not to listen or not to pay attention and to take things to extreme, I think there was a perception that will focus on 2009 with the Global Line maturity, and we’ve said for the better part of the year that that line is extendable in 2010, we’re going to do that et cetera. The other side of it is, we ramped up pretty quickly and it’s a testament of the company in terms of its ability to ramp up for development activity, et cetera, particularly in the merging markets. On the other hand, we’ve been able to ramped down and the – if you look at our pipeline, we took it down by $400 million in one quarter. We had a 530 basis points for leasing side of that equation through a very deliberate and exerted efforts, and we’re telling everybody we have the capacity to turn this thing much quicker than people might have otherwise imagine. And so, we’re going to do a lever, and we’re pretty excited about it.

[Operator:]

And we’ll take our last question from Mitch Jermaine [ph] with Bank of America Securities.

[Mitch Jermaine:]

Hey guys. Bill, what’s the comprising you’re getting quoted from the West companies and if you can just confirmed on the current terms of the global credit line, do they stay upon extension?

[Bill Sullivan:]

Yes, we have to pay a one time fee which I think is 0.75 basis points for the extension.

[Mitch Jermaine:]

Okay great.

[Bill Sullivan:]

In terms of pricing, on the various financing today, and again, you got to keep things in strive relative to any day or point in time. For example, we talked about the facility coming due in NA2 in January. We rate lock [ph] on that about two weeks ago. It’s a 6.3% coupon, 10-year interest only maturity in 58% loan-to-value. And so, it’s pretty good indication in the fine brief [ph] market today, the pricing that might have been a 120 basis points six months ago, is right now closer to 175 basis points in that market –

[Mitch Jermaine:]

Which is still very good.

[Bill Sullivan:]

– but you still – you swap that to fix and you’re below six. And so, that the pricing down the secured debt – now, on the other side, in the life company market today, there are a variety of people out there and they’re saying, “Hey, 7% is my floor.” And so, certainly, that spread some gap out a little bit, but the base rent is coming down. And so, the overall pricing in the secured market is not unattractive in today’s world.

[Mitch Jermaine:]

Comment.

[Bill Sullivan:]

What’s that?

[Mitch Jermaine:]

Remember the comment on Japan also.

[Bill Sullivan:]

Yes, Japan made all the spreads some gap out, but we’re still in the mid-two’s, overall.

[Mitch Jermaine:]

Overall.

[Bill Sullivan:]

And so, there’s a tremendous positive spread investment on the development activity there as well. The banking of communications line was a great example of the PBLC rate which is about as good as you can do in Chapman. And so, we feel pretty good about it.

[Jeff Schwartz:]

Well, we’d like to thank everyone. We appreciate your time. We’re excited about what we need to accomplish and know what we need to accomplish, and fully committed and resolve to not – to surviving this economic storm but not just surviving it. Surviving it is the strongest survivor as we grow through this. Thank you all for your time.

[Operator:]

This concludes today’s conference. A replay of this call will be available today, October 23, at 12