ProLogis, Inc. (PLD)

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ProLogis (PLD)

Q2 2010 Earnings Call Transcript

July 22, 2010 10:00 am ET

Executives

Melissa Marsden – Managing Director, IR and Corporate Communications

Walt Rakowich – CEO

Bill Sullivan – CFO

Ted Antenucci – President and Chief Investment Officer

Chuck Sullivan – Head of Global Operations

Analysts

Michael Bilerman – Citi

Ross Nussbaum – UBS

Ki Bin Kim – Macquarie

Sloan Bohlen – Goldman Sachs

Shane Buckner – Wells Capital Management

Jamie Feldman – Bank of America

Chris Caton – Morgan Stanley

Steve Sakwa – ISI Group

Steven Frankel – Green Street Advisors

John Guinee – Stifel Nicolaus

Brendan Maiorana – Wells Fargo

Vincent Chao – Deutsche Bank

Presentation

Operator

Good morning. My name is Steve and I will be your conference operator today. I would like to welcome everyone to the ProLogis second quarter 2010 earnings conference. 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 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, Steve. Good morning, everyone. Welcome to our second quarter 2010 conference call. By now, you should all have received an e-mail with a link to our supplemental, but if not, the document is available on our website at ProLogis.com under Investor Relations.

This morning, we'll hear from Walt Rakowich, CEO, to comment on the market environment and then from Bill Sullivan, CFO, who will cover results and guidance. Additionally, we're 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'd like to quickly state that this conference call will contain forward-looking statements under Federal Securities laws. These statements are based on current expectations, estimates and projections about the market and the industry in which ProLogis operates as well as Management's beliefs and assumptions.

Forward-looking statements are not guarantees of performance and actual operating results may be affected by a variety of factors. For a list of those factors, please refer to the forward-looking statement notice in our 10-K or SEC filings.

I'd also like to state that our second 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 provide a broader range of investors and analysts with an opportunity to ask their questions, we will ask you to please limit your questions to one at a time.

Walt, would you please begin?

Walt Rakowich

Sure. Thanks, Melissa. Good morning, everyone. This morning I'll talk about business fundamentals and then update you on progress toward our goals for 2010, which we are very, very happy with. Bill will then discuss our earnings for the quarter and our financial outlook for the balance of the year. Overall, the market feels a lot like it did last quarter, bumping along the bottom, with some evidence of it strengthening in a few markets.

Consensus GDP forecasts have been revised down in most areas of the world. And our customers are reading the same headlines that we are and have the same concerns that we have. In general, I would say most of our customers still remain cautious about making definitive inventory expansion decisions.

Now, there are positive signs, however. In North America, market occupancies ticked up 16 basis points for the quarter and net absorption was positive at about 11 million square feet. This is the first time we've seen a positive movement in market occupancy since the third quarter of 2007.

And in Europe and Asia, supply chain reconfiguration and ownership shifts continue to drive demand for our newer, modern facilities. Now, I'll have more to say later on our new developments but we're making good progress, particularly abroad.

In our global portfolio, we achieved a 45 basis-point increase in our lease percentage during the quarter, driven by a nearly 500-basis point increase in leasing in our completed developments. As for rental rates, we think they have reached the floor in most markets, but same-store rental growth will continue to be challenging until such time as meaningful occupancy increases take place.

Our rental growth for the quarter was negative 15.7%, but note that less than 3% of the transactions drove about a quarter of the decline and many of those leases were short-term deals. In addition, bear in mind that we're now rolling down 2006/2007 rents, which were down at the peak of the market.

The good news is that our retention ratios remain extremely high, at approximately 80% and our portfolio remains well occupied relative to the overall market. That's due in large part to the quality of our people and the quality of our assets.

Another interesting thing, we see in the market is that values continue to rise for core industrial product. There is an ample amount of institutional capital on the sidelines and interest rates are low. Buyers can buy assets at below replacement costs due to low rental levels and there is no speculative supply being built.

Frankly, it's pretty good environment for buyers and for sellers, with the only impediment being that there is very little good industrial product for sale. In the beginning of this year, we set out a goal to sell $1.3 billion to $1.5 billion of primarily U.S. properties in order to fund and retain most of our new developments.

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