ProLogis, Inc. (PLD)

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ProLogis (PLD)

Q4 2009 Earnings Call Transcript

February 11, 2010 10:00 am ET


Melissa Marsden – Managing Director, IR and Corporate Communications

Walt Rakowich – CEO

Bill Sullivan – CFO

Ted Antenucci – President and Chief Investment Officer

Chuck Sullivan – Head, Global Operations

Gary Anderson – Head, Global Investment Management


James Feldman – Bank of America

Michael Bilerman – Citigroup

Paul Morgan – Morgan Stanley

Sloan Bohlen – Goldman Sachs

Ross Nussbaum – UBS

Ki Kim – Macquarie

Michael Mueller – J.P. Morgan

Steven Frankel – Green Street Advisors

George Auerbach – ISI Group

Michael O'Dell [ph] – AIG Asset [ph]



Good morning. My name is Christopher and I will be your conference facilitator today. I would like to welcome everyone to the ProLogis fourth quarter 2009 year-end 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) The questions will be taken in the order which they are received. Also please limit yourself to one question at a time.

At this time, I would like to turn the conference over to Ms. Melissa Marsden, Managing Director of Investor Relations and Corporate Communications with ProLogis. Please go ahead, ma'am.

Melissa Marsden

Thank you, Christopher. Good morning, everyone and welcome to our fourth quarter and year end 2009 conference call. By now you should all have received an email with a link to our supplemental as well as our business drivers, but if not, the documents are available on our website at under Investor Relations.

This morning, we will hear from Walt Rakowich, CEO, to comment on the market environment and then Bill Sullivan, CFO, will cover results and guidance. Additionally, we are joined today by Ted Antenucci, President and Chief Investment Officer, Chuck Sullivan, Head of Global Operations and Gary Anderson, Head of Global Investment Management.

Before we begin prepared remarks, I would like to state that this conference call will contain forward-looking statements under federal securities laws. These statements are based on current expectations, estimates and projections about the market and the industry which ProLogis operates as well as management's beliefs and assumptions. Forward-looking statements are not guaranteed to 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 statements notice in our SEC filings. I would 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 and in accordance with Reg G, we have provided a reconciliation to those measures.

And as we have done in the past, to allow a broader range of investors and analysts an opportunity to ask their questions, we will ask you to limit your questions to one at a time.

Walt, would you please begin?

Walt Rakowich

Sure. Thanks, Melissa. Good morning, everyone. Today, I'm going to talk about what we are currently seeing in our markets, our outlook for fundamentals throughout 2010 and how we plan to reposition our asset base in the future. Bill will have more on our financial results and guidance for 2010 in a moment.

As we enter 2010, we are cautiously optimistic. On the one hand, markets are improving and the dynamics in the business point to better days ahead. On the other hand, we are acutely aware of the macro environment, tremendous capacity still left in the economy, unemployment continuing to plague us in many areas of the world and rising government debt with no near-term solution. These are problems that will not go away soon and we are continuously assessing their potential impact on our business. However, with that as a backdrop, let's talk about what we are seeing in our industry.

In our third quarter conference call, we noted that our global markets were beginning to show some signs of stability. In Q4, we saw continuation of this trend. For the first time in five quarters, we saw positive net demand of just over 3 million square feet in the top 31 North American markets.

In Europe, we saw a similar trend in our markets with positive net demand of 3.5 million square feet. Delivery still outpaced net demand in the U.S., resulting in a slight drop in occupancies, but that trend should reverse itself in Q1 or Q2 this year as new deliveries will slow to a trickle.

In Europe, occupancies were flat from Q3 to Q4. Overall market rents are still soft, of course and they will be until occupancies rise. However, they too are stabilizing as leasing volumes pick up. It's interesting to note that ProLogis's overall leasing volume was up 9.4% in Q4 over Q3.

Now there are three things we are seeing in the markets today that point to a potentially better environment. First, a complete lack of new supply. Second, rising construction costs. And third, higher expected rates of return. Those three characteristics are inconsistent with the soft rental environment that we see today. And of course, without an increase in demand these factors are less relevant, but with net new demand, they could have a significant impact. So let me explain.

As a general statement since 2007, market rents declined by roughly 20% globally, while cap rates rose by about 20 to 25%. Under those conditions, there should not be a substantial amount of new development unless buildings could be built for 40% or so less than they could two years ago. And of course that hasn't happened, so new supply is virtually nonexistent.

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