Prologis Inc (PLD) Management Discusses Q2 2013 Results - Earnings Call Transcript

Jul.24.13 | About: Prologis (PLD)

Prologis (NYSE:PLD)

Q2 2013 Earnings Call

July 24, 2013 12:00 pm ET

Executives

Tracy A. Ward - Senior Vice President of IR & Corporate Communications

Hamid R. Moghadam - Chairman, Chief Executive Officer and Member of Executive Committee

Thomas S. Olinger - Chief Financial Officer

Michael S. Curless - Chief Investment Officer and Chairman of Investment Committee

Eugene F. Reilly - Chief Executive Officer of the Americas

Guy F. Jaquier - Member of Investment Committee

Analysts

George D. Auerbach - ISI Group Inc., Research Division

David Toti - Cantor Fitzgerald & Co., Research Division

John W. Guinee - Stifel, Nicolaus & Co., Inc., Research Division

Craig Mailman - KeyBanc Capital Markets Inc., Research Division

Ki Bin Kim - SunTrust Robinson Humphrey, Inc., Research Division

James C. Feldman - BofA Merrill Lynch, Research Division

Vance H. Edelson - Morgan Stanley, Research Division

Michael Bilerman - Citigroup Inc, Research Division

Brendan Maiorana - Wells Fargo Securities, LLC, Research Division

James W. Sullivan - Cowen and Company, LLC, Research Division

John Stewart - Green Street Advisors, Inc., Research Division

Ross T. Nussbaum - UBS Investment Bank, Research Division

Vincent Chao - Deutsche Bank AG, Research Division

Michael W. Mueller - JP Morgan Chase & Co, Research Division

Michael J. Salinsky - RBC Capital Markets, LLC, Research Division

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

Jonathan M. Petersen - MLV & Co LLC, Research Division

David B. Rodgers - Robert W. Baird & Co. Incorporated, Research Division

Operator

Good afternoon. My name is Tiffany, and I will be your conference operator today. At this time, I would like to welcome everyone to the Prologis Second Quarter Earnings Call. [Operator Instructions] Tracy Ward, you may begin your conference.

Tracy A. Ward

Thank you, Tiffany, and good morning, everyone. Welcome to our second quarter 2013 conference call. The supplemental document is available on our website at prologis.com under Investor Relations. This morning, we'll hear from Hamid Moghadam, Chairman and CEO, who will comment on the company's strategy and the market environment; and then from Tom Olinger, our CFO, who will cover results and guidance. Additionally, we are joined today by members of our executive team, including Gary Anderson, Mike Curless, Nancy Hemmenway, Guy Jaquier, Edward Nekritz, Gene Reilly and Diana Scott.

Before we begin our 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 first quarter results press release and supplemental do contain financial measures such as FFO, EBITDA that are non-GAAP measures, and in accordance with Reg G, we have provided reconciliation to those measures.

[Operator Instructions] Hamid, will you please begin?

Hamid R. Moghadam

Good morning, everyone, and thank you for joining us this morning. We are pleased to be hosting today's call from our operational headquarters in Denver. As you know, since the completion of the merger, we've been laser focused on our 10-quarter plan, which has guided our priorities as a new company. During this time, you watched us deliver on our 5 key strategic objectives. We've completed this plan 2 quarters ahead of our own ambitious schedule. Let me take a moment to review a few of the highlights.

Our most important objective was to align our portfolio with our investment strategy. We completed $10.2 billion of dispositions and contributions with an average cap rate of 6.9%. On the development front, we started more than $2.5 billion of new developments with an average yield of 7.8%. 45% of this volume was in build-to-suits. In addition, we acquired 925 million of new properties in our target markets at an average cap rate of 7.3%. The net result of this activity was an increased allocation to global markets from 79% at the merger to 85% today.

Our second objective was to improve the utilization of our assets. Occupancy post merger is up 300 basis points to 93.7%. During this period, we monetized $865 million of our land bank, mostly through development starts at an 18% value creation margin, as well as some third-party sales.

Streamlining our private capital business and positioning it for growth represented the third pillar of our plan. At the time of the merger, we had $25.7 billion of gross assets across 22 private capital entities. Our plan was to rationalize our funds into a smaller number of differentiated and profitable vehicles.

Today, we have $22.8 billion of gross assets under management across 15 ventures, and we expect our fund count to go down by a few more by the end of the year. Including the assets we brought on balance sheet, we have retained 96% of our original assets as part of our platform. We expect to grow our third-party assets under management from this point forward.

As part of our plan, we've been repositioning our business to focus on larger, long-duration ventures, open-end funds, and most recently, geographically focused public entities. These long-duration ventures now account for 84% of our investment management revenue versus 80 -- 68% at the merger.

We are also accessing alternative sources of public equity such as our newly formed J-REIT. Our strategy enables us to tap capital in both public and private formats for targeted geographies across our global platforms. In this regard, the team has raised $5.5 billion of new third-party strategic equities since the merger. This is on top of the $2.7 billion of equity we have raised at the headstock level during this period.

The strengthening of our financial position has been a core element of our plan and our fourth objective. Since the merger, we reduced our look-through leverage including preferreds from 50% to 36%, lowered debt-to-EBITDA from 10.4 to 7.4x, improved our share of equity in U.S. dollars from 45% to 75% and increased our line of credit capacity by $350 million while reducing our borrowing spreads by 40 basis points. We believe we're in the final stages of building one of the strongest balance sheets in the REIT industry and are optimistic that this strength will be reflected in our credit ratings going forward.

Our fifth objective was to build a highly effective and efficient global organization. As a combined company, we achieved over $115 million in merger synergies, well above our initial target of $80 million. In addition, we successfully implemented a major enterprise system that will provide us an information infrastructure that is unparalleled in our industry. We're also focused on building a culture of accountability and empowerment. We have equipped our leaders with a series of management tools that will help them manage their divisional profitability, overhead efficiency and business risk.

In summary, I'm incredibly proud of what the Prologis team has accomplished since the closing of the merger. These efforts have simplified our company and built a strong foundation for sustainable growth in the coming years. It's now time to focus on the future. We believe the scale and quality of our operating platform, the skill set of our team and the strength of our balance sheet provide us with unique competitive advantages going forward.

We've established a clear roadmap for growth in the coming years with a focus on 3 key priorities: first, to capitalize on rental recovery; second, to realize the potential of our land bank by putting it to work; and third, to use our scale and costumer relationships to grow earnings.

I'll take a minute to expand on each of these priorities. First, the rent recovery cycle is firmly underway and is accelerating in most markets at the pace ahead of the rental growth forecasts we laid out at our investor forum last September. This is best evidenced by the second quarter's 4% increase in rents on rollover.

Over the past 3 quarters, the U.S. industrial market has absorbed 164 million square feet of space. This is more than triple development completions during the same period, which were a mere 46 million square feet. This excess demand of 118 million square feet is the highest in the 33 years of data from CBRE. As we look forward, we're increasing our 2013 net absorption forecast for the U.S. to 180 million square feet, up from 150 million square feet. We expect to see a modest volume of completions at 65 million square feet.

Moving to Europe. Although still in recession, we believe Europe has reached an inflection point, in many ways, similar to what took place in the U.S. in mid-2010. We believe rents are off the bottom and cap rates are heading lower. In retrospect, it seems that our venture with Norges Bank was a watershed event in terms of restoring investor confidence in the European industrial market.

In Japan, the political changes are driving increased consumer confidence. Strong market conditions and healthy spreads are attracting capital from around the globe.

Turning to China. Despite the downward revisions to GDP, demand for Class A logistics space remains strong and much better than the headlines would suggest. Market rents continue to rise, and concessions have decreased across the country. Our portfolio in China is more than 96% leased, and rents have increased by more than 13% in the past year.

Globally, space utilization in our facilities is at the highest level we've seen since we've been tracking this metric. This means there is little or no shadow space in the system. Additional economic growth would translate directly into incremental demand for the logistic facilities. As this overutilization reverts to the norm, we could see an extended period of excess demand driving up rents even further.

Our second growth opportunity is to realize value from our land bank and our costumer relationships. The key to a successful development program is having strategic land control, and in this regard, we're in an excellent position. Our land bank is increasingly undervalued and will be an asset going forward. We have the potential to build an additional 200 million square feet or about $10 billion in new development at high incremental returns on land that is already paid for. We'll be prudent with our development starts, which we expect to average around $2.5 billion annually. The value creation potential on this level of starts will be approximately $300 million a year.

Our third growth opportunity is to use our scale to grow earnings. We have the ability to expand our global platform by at least $10 billion without adding much in the way of incremental overhead. We measure and disclose our overhead efficiency in terms of the ratio G&A to assets under management, which currently stands at 54 basis points. We believe we can add incremental AUM from here at a marginal overhead rate of 10 basis points or less, which will further drive efficiencies and earnings growth. We're beginning to see our acquisition pipeline grow both through proprietary opportunities such as buying up in our funds and as more third-party transactions come to market. This was the primary rationale for our equity offering in April.

Despite recent increases, interest rates are far from a level that would affect pricing in the U.S. and Europe. Cap rate spreads over 10-year treasuries remain above historical averages in our markets. In short, we're confident that these 3 strategies will enable us to generate above-average earnings growth in the coming years.

With that overview, I'll turn things over to Tom.

Thomas S. Olinger

Thanks, Hamid. This morning, I'll cover 3 areas: first, our results for the quarter; second, deployment, development value creation and capital markets activity; and third, updated guidance for 2013.

Starting with our results for the second quarter. Core FFO was $0.41 a share, $0.04 above our expectations. About $0.025 of the outperformance was from investment management income, primarily driven by a promote related to winding up Alliance Fund II. We had expected this will occur in the second half of 2013. Our share of development value creation was $79 million for the quarter, including $64 million that was monetized through sales and contributions at a 34% margin.

Turning to our operating portfolio. We had another strong quarter of leasing volume at 36.3 million square feet. Occupancy was 93.7% at quarter end, flat to the first quarter. Our teams in the ground are focused on driving rent growth versus occupancy at this point in the cycle. To that end, the GAAP rent change on rollover increased 4% for the quarter and was evident across all space sizes.

On our first quarter call, we were asked about cash rent change. This is not a measure we use internally to drive leasing decisions or evaluate our operating performance. We make our leasing decisions based on net effective rent change as this metric best reflects the underlying lease economics. To provide you with some perspective, cash rent change on rollover was down 3.4% for the quarter. Consistent with our GAAP figure, this metric includes rent change on all spaces signed during the quarter for both new and renewal leases and regardless of how long the spaces were vacant.

For the quarter, GAAP same-store NOI was up 70 basis points, and on an adjusted cash basis, was down 40 basis points. The decrease in cash same-store NOI this quarter is a result of increased free rent associated with longer lease terms and a greater volume of leasing in large spaces.

Moving to investment management. We had a very active quarter, completing an $800 million secondary offering for our J-REIT and rationalizing 2 ventures. The rationalization included Fund II that I mentioned earlier and the closeout of Japan Fund I. Retaining the high-quality assets of these 2 funds was a great outcome.

I want to point out that the $13 million promote related to Fund II was not included in investment management revenue but instead was reflected as a component of noncontrolling interest in the income statement. This accounting treatment is required since Fund II was a consolidated venture.

Now switching to our deployment activity. We took advantage of some great investing opportunities during the quarter, deploying $922 million, which included development starts, acquisitions and investment in our funds. With respect to our development business, it is strategically important to us that it provides our customers with modern, state-of-the-art logistics facilities and it generates real economic value.

We do not include development creation in our core FFO because not all value creation flows through our income statement to the extent we keep development on balance sheet. If we were under International Accounting Standards, all of the value creation would flow through earnings. Going forward, we'll provide you with development value creation on stabilization and upon monetization so you can value this business appropriately.

Our share of development value creation during the first half of the year was $393 million. This includes $311 million or $0.64 a share that was monetized through sales and contributions.

Turning to our capital markets activity. We had a very busy quarter, completing $4.3 billion of capital markets transactions. This included debt financing, refinancing, pay-downs and the redemption of preferred stock, as well as our $1.5 billion follow-on offering. As of the end of June, we invested about $600 million of the follow-on offering, in line with our forecast. And by year end, we expect to invest the majority of these proceeds with the remainder effectively left for delevering.

As of June 30, our look-through leverage was 35.8%. Net debt to EBITDA was 7.4x, and net debt to EBITDA adjusted for development was 6x.

During the quarter, we did incur $32.6 million of debt extinguishment costs primarily related to the prepayment of $350 million senior notes. These notes were due to mature in 2014 and had a coupon rate of 7.6%.

A very important part of our capital structure strategy is to minimize our foreign net equity exposure. During the quarter, we hatched EUR 800 million at an average economic exchange rate of 1.36 for a term of 4.5 years and JPY 250 million at an average economic exchange rate of 88.9 for a term of 5 years. Our U.S. dollar net equity was 75% at June 30, an increase of 600 basis points from the first quarter. We're forecasting our U.S. dollar net equity position to be approximately 80% by year end. Subsequent to quarter end, we recast our global line of credit and established an ATM program for $715 million, both of which provide us with further flexibility to fund our growth.

Let me now turn to our guidance for the remainder of 2013. For operations, we're maintaining our GAAP same-store NOI range of 1.5% to 2.5% and year-end occupancy to range between 94% and 95%. For FX, we're assuming the euro at 1.3 and the yen at 100 for the second half of the year.

On the expense side, we're forecasting net G&A to range between $225 million to $233 million. For capital deployment, we are seeing an increase in opportunities to invest and are now forecasting a range of $3.5 billion to $4.1 billion. This is an increase of $1.7 billion from our previous guidance and includes $1.8 billion to $2 billion of development starts, up $250 million from our prior guidance with our share at approximately 80%. We expect to stabilize about $1.4 billion of developments in 2013 at an estimated margin of approximately 25%, generating $350 million of value creation with $310 million our share.

Our deployment guidance also includes $800 million to $1 billion of building acquisitions, an increase of $400 million from prior guidance, with our share at about 40%, and fund investments of $900 million to $1.1 billion. We have a great opportunity to invest in our funds. The quality and location of our fund assets, along with our expectations for a significant rent recovery, make these investments very accretive.

Turning to contributions and dispositions. We're maintaining the top end of our guidance in the range to $8.5 billion to $10 billion for the year with our share proceeds at approximately 60%. We are narrowing our 2013 core FFO range to $1.63 to $1.67 per share. We expect our quarterly run rate for the second half to be at or above our Q2 run rate of $0.41 a share, driven by higher NOI from development stabilizations, deployment of the remaining equity offering proceeds, same-store NOI growth and lower interest expense.

Before I close, I want to mention 4 new disclosures in our supplemental this quarter. First, we added enhanced disclosure around development value creation. Second, we added average term for our quarterly leasing activity. Third, we added turnover cost as a percentage of leased value. And fourth, added property improvements per square foot on a trailing 12-month basis.

To sum up, we had a great quarter. Clearly, we had a number of moving parts related to the execution of our strategic priorities. However, when you take a step back and you compare our results with last year, our core FFO is essentially flat while leverage has been reduced by 10% and our U.S. net equity exposure has improved by 1,600 basis points. As we had forecasted, we were able to derisk our financial position with minimal impact on earnings.

With that, I'll turn it back to Hamid.

Hamid R. Moghadam

Thanks, Tom. There are 3 key takeaways that I'd like to leave you with. First, we expect improving economic conditions and the constrained supply picture to lead to a significant increase in demand and pricing power for our products around the globe. Second, we expect to see substantial earnings growth from 3 areas: the recovery in rents, putting our land bank to work and capitalizing on our scale and by continuing to expand in existing markets. Third, our accomplishments over the last 8 quarters are a direct result of the efforts of the dedicated and engaged team. This team has worked hard to get the company to its current position of strength, and we're all excited to take advantage of the opportunities that this platform will offer us in the coming years.

With that, we will open it up for your questions. Tiffany?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of George Auerbach with ISI Group.

George D. Auerbach - ISI Group Inc., Research Division

Tom or Hamid, can you maybe talk about the opportunity set in a bit more granularity in terms of your ability to buy into existing funds or the opportunities you see in Europe today?

Hamid R. Moghadam

Sure. In terms of our funds, I think you saw 2 really good examples in the past quarter. One was an acquisition that's been actually reported. We haven't announced that, but it's been widely reported, which is a portion of our NA3 portfolio that we had, and we're buying a portion of those assets. And secondly, we were able to buy up in our Allianz Fund II portfolio from 28% to 100% of the fund. And actually, the contribution of Japan Fund I to the J-REIT and -- which was funded by the secondary offering, is actually a way of actually acquiring assets without going through the balance sheet directly into that vehicle. So this is really good for our investors, too, because they get certainty of execution. They know that we're there to be for them, and it also provides us a cost-efficient way of accessing new assets. In Europe specifically, we think the appraisal community is lagging the reality of the marketplace. And we've been pretty vocal about this. So this is not a big secret. And yields and some funds are in the mid-7% range, which we think are very attractive returns, particularly once you think about what's going to happen to the cost of financing in Europe, exactly the same thing that happens to the cost and availability of financing here in the U.S. So that's one way of increasing our exposure. And now we have a lot more capacity given the J-REIT that we did. We can take advantage of that. We're not constrained by our allocation to Europe. And then we're seeing some opportunities, specifically in Southern Europe, where you can buy assets at significant discounts through replacement costs, even ignoring the price of land. You can buy assets, in some instances, in the 9s with very significant spreads over cost of treasury. So I think at a prudent level, we'll be net investors over there, and we'll use our existing vehicle to take advantage of those emerging opportunities.

Operator

Your next question comes from the line of David Toti with Cantor Fitzgerald.

David Toti - Cantor Fitzgerald & Co., Research Division

Tom, I have a question for you, and it's sort of a kind of big picture. If we look at the cap rates on the disposed assets in the second quarter, they seem to have compressed a little bit, and the same with the stabilized development yields on a sequential basis as well. And that seems to be happening around the same time that we're seeing some expansion in spreads and the cost of capital. Do you expect those trends in the yields to reverse in lockstep or in sort of correlation with the capital costs? Or do you expect more compression in those yields going into the second half of the year?

Hamid R. Moghadam

David, let me take that. I think that yield, in any given quarter, is more driven by mix than any big trend. So if you have a couple of big Japan deals or something in there, that could really move around the numbers in a big way. So I wouldn't read too much in the yields on a quarter-to-quarter basis. In terms of what our view of cap rates are around the globe, I think cap rates are going to decline in Europe or are declining in Europe. I think they are stable at the very low levels in the U.S. for really good assets and even good assets in secondary markets. I would say, sort of C assets in softer markets could see, haven't yet, could see a 25 or 50-basis-point increase in cap rates because those are usually acquired by highly leveraged buyers where they're more affected by interest rates. We, by and large, don't have any kind of that product. And the very little that we do, we never price it to the top tick of the market anyway. So I think we can absorb that kind of 25, 50-basis-point cap rate increase without missing our pricing expectations. But generally, I think the vast majority of the properties that we traffic in, I think the cap rate trend is down. And not to go too far on the limb, but cap rates are very comparable to where they were in, call it, late '07, early '08. But treasury, even with their increase, are good 200 basis points lower. So the spreads are actually pretty good.

Operator

Your next question comes from the line of John Guinee with Stifel.

John W. Guinee - Stifel, Nicolaus & Co., Inc., Research Division

I'm not sure who this question is for, but can you -- if you look at your 2 billion of land, I think that's the number, that 1.8 billion of land, how much of that would you expect to be able to deploy because demand is there in the next 3 years? And how much of it do you think is in inventory for longer than 3 years? And how much of it can be sold to a third party?

Hamid R. Moghadam

Thanks, John. I'll hand it over to Mike Curless.

Michael S. Curless

John, it's Mike. I would say that in the next 3 years, we would expect to deploy a good 75% of the entire land bank, if not more. And in terms of what we would attempt to sell, I think we mentioned before, about 15% of our entire land bank right now, we view as nonstrategic, and we have plans to sell those. Last year, we sold 30 parcels that fit that category. We've already sold 15 yet this year and expect to do more the balance of this year.

John W. Guinee - Stifel, Nicolaus & Co., Inc., Research Division

That would imply being able to develop, say, 15 million square feet in the Central Valley, 12 million square feet in Southern California. Is that really able to...

Eugene F. Reilly

John, it's Gene. Let me give you some color on this. You are correct. In the Central Valley, we have a very, very big piece of land that might be a -- could be a 15-year build-out. But that is very rare. I mean, if you look at most of our land parcels, our overall build-out timeframe for them is going to be anywhere from immediate to 3 years. So -- and by the way, we love that piece of land, and I wouldn't be surprised if we absorb it in less than 10 years. But I think that's somewhat of an outlier. And I think Mike said we'll absorb 75% or so of the land bank. 15% of it is for sale. So there's sort of 10% of cushion there.

Hamid R. Moghadam

Yes. The only other thing that I would add, John, is that specifically with respect to our Central Valley land, that's the price of land for a 300,000 square foot building in Tokyo. We bought that land really, really well. And really, to make -- the real investment in that land is the infrastructure that will be phased in over time as we take it down. So think of it as an option because really, the price was just the upfront ticket price to get into the game. And we feel really good about that position.

Michael S. Curless

And the percentages I referenced, were in terms of dollars, not acres.

Operator

Your next question comes from the line of Craig Mailman with KeyBanc.

Craig Mailman - KeyBanc Capital Markets Inc., Research Division

Just curious, I know, Hamid, you've kind of given your views here on cap rates in a lot of the markets. But just curious, have you guys changed at all the way you're underwriting acquisitions or developments to account for kind of the potential for rates to rise here? Or are there -- been no changes at all?

Hamid R. Moghadam

I think the best evidence of that is the margins that we report to you on starts every quarter and what we realize. And at least for the last 2 years, the realized margins have been far in excess of the way we underwrite. So we've been trailing, if you will, the movement in cap rates, and there's always -- I wouldn't say always, I mean, I'm sure in '08, we were over our skis on a couple of underwritings. But at this point in the cycle, we've been pleasantly surprised by the cap rates on our development stabilizations. So I think there's room in our numbers going forward.

Operator

Your next question comes from the line of Ki Bin Kim with SunTrust.

Ki Bin Kim - SunTrust Robinson Humphrey, Inc., Research Division

A question regarding your strategy on your capital stack. With your goal, with what you have been trying to develop $2.5 billion of new development and when acquisition is combined and with leverage not being the same kind of concern it was maybe 2 or 3 years ago, does 30% -- what would make you change your view on a 30% look-through leverage ratio, which seems pretty low? I mean, on a look-through basis, you'll be lower than Simon [ph], which is considered a blue-chip status. What would have to happen for you to change that view on overall leverage?

Hamid R. Moghadam

Dave [ph] is a pretty good friend, but I think we're lower leverage today, not at 30%, significantly. And I think it will be time before maybe we're recognized as having the same kind of balance sheet. But turning to the substance of your question, look, 35%, 36% that we're in today includes preferreds. So if you look at the normal capital structure that has 5% preferreds on it, we are already at a 30% leverage. Kind of the mix is a little different. But we're basically that way. So we feel good about our leverage. We work hard to get it here. We have a business model that has more development in it as you pointed out. So I think we need to be more prudent in terms of leverage on the balance sheet. Look -- and we want to leave some capacity for doing strategic stuff that come along from time to time. So you could see us fluctuate from 30 to high 30s, back down to 30s. But we want to manage it around that level. And I want to point out, the $2.5 billion development is not a goal. We do not have goals for development. Having goals for development gets you into trouble. That's our estimated volume of business that will be there to do profitably. If it's less than that, it's less than that. If it's more than that, so be it. But I think across the cycle, that's a reasonable number. But I want to emphasize, it's not a goal.

Operator

Your next question comes from the line of Jamie Feldman with Bank of America.

James C. Feldman - BofA Merrill Lynch, Research Division

Hamid, I was hoping you can talk a little bit more about your outlook for rent growth. I think you had said that rent growth is happening faster than you expected. How should we think about prospects for continued rent growth versus new supply coming online given you guys are growing your pipeline and it looks like you've got a higher percentage of spec than in the past? And kind of what are the other competitors doing that might put a damper on rent growth?

Hamid R. Moghadam

I think that is an invitation for you to come to our investor forum in September because we're going to devote a substantial amount of time taking you through our views on rent growth. And in addition to what we provided last year, we're going to talk about the profile of that rent growth as we see it as markets near stabilization. But we're pretty optimistic about the overall magnitude of the rent growth. Probably very consistent with our views last year. We just think the profile of getting there is a little quicker. I mean, we never, in our wildest dream, dreams imagined the 118 million square feet of absorption over construction deliveries. I mean, those are big numbers, and we think that's going to continue this year. So I think we're going to get there faster. And interestingly, some of our lagging markets, like in the Ohios, have been actually -- have pretty solid rent growth, albeit from very low and depressed levels. But it's rent growth, and that's happening a lot actually than we thought. Some of the other markets, like L.A., that were earlier in the cycle and have essentially reached their precrisis levels are probably going to taper off here in terms of rent growth. But some of the lagging markets, I think, quite a bit of rent growth. And the rent growth that we've experienced today, I mean, this is obvious to you, but has not rolled through our rent growth by any stretch of the imagination. It's just the spot rents that have rolled. We've got -- even if rents stop right here, we say, we're going to have 3 or 4 years of rent growth by the time the stuff rolls through. So we're feeling pretty good about it. But it's about time.

Operator

Your next question comes from the line of Vance Edelson with Morgan Stanley.

Vance H. Edelson - Morgan Stanley, Research Division

And now turning to the occupancy rate, I realized it varies by facility size. But with regard to the overall rate, it sounds like it's mainly by design that it's plateaued out a bit. You'd rather raise the rent than see occupancy significantly rise. So given that, do you think this level of occupancy is sort of the sweet spot than 94%, 95% range? Is that where you'd like to see it stay as you increase the rates?

Eugene F. Reilly

Right. This is Gene. Let me take that. Your observation is spot on. And if you want to drill onto the numbers a little bit, you saw a sequential decline, actually, in occupancy in the Americas by about 10 bps. What's important to emphasize is we are actually slightly ahead of our plan in the Americas because obviously, it depends on what's the composition of what's rolling. We expect to ramp into the mid to high 94% range. And yes, right around 95%, that is the sweet spot. And actually, above 93%, you can really push your assets. So our assets in the Americas, it's absolutely on rent growth. Those markets are leading the recovery. In Europe and Asia, they are different stages.

Hamid R. Moghadam

Yes, a little bit different. I mean, in Asia, we've been sitting around 96%, 97% occupied and obviously been pushing rents there even at a faster rate than we had anticipated last September. When we talked about China, we talked about sort of 5% to 6% compound annual rent growth that we were underwriting when historically they were about 8%. This first half of the year, we're at about 13% in China. Japan's up 6%, and we thought we'd be up, too. So again, a very, very positive trend. With respect to Europe, obviously, we're lagging, but we're holding occupancies at 93-plus percent. We've gained 20 basis points this quarter. So things are heading in the right direction. And again, if you sort of look at the trend with respect to rents, I feel pretty strongly that come the back half of this year, you're going to see positive rent change in Europe coming through as well.

Operator

Your next question comes from the line of Michael Bilerman with Citi.

Michael Bilerman - Citigroup Inc, Research Division

It's Michael Bilerman. Tom, I was wondering if you could just spend a couple of minutes just going through the back half deployment, as well as sale plans because a lot of the numbers are for the full year. And really, we're trying to understand, as the balance sheet as of June 30, really what the impact is in second half. And it would appear as though the predominance of the equity proceeds, $1.5 billion, are really going towards growth initiatives. If you were to take that $1.7 billion and multiply it by the percentages that you had, it totals $1.4 billion, so leaving very little for debt repayment. But I don't know from the sales perspective in the second half whether that's a source of other capital. So if you could sort of really break down that second half deployment between development and acquisitions and fund, as well as sales.

Thomas S. Olinger

Okay, thanks, Michael. So you're right in regards to the bulk of our equity-raised proceeds will be deployed in starts, acquisitions, investments and funds. We did take up our guidance on contributions and distributions, and that's about $1.5 billion. So that's incremental proceeds that you're seeing that allow us to fund that incremental $1.7 billion. But your numbers are very close. From how things will lay out in the second half, starts are back end loaded, but you'll see those fairly evenly through Q3 and Q4. Acquisitions will be more weighted to Q3 than Q4. And on contributions, you're going to see those weighted a little towards Q4 versus Q3.

Hamid R. Moghadam

Yes. And the only other thing, Michael, I would add to Tom's answer is that what we acquire may not always live on the balance sheet forever. So you should assume that we use private capital throughout -- the private or strategic capital throughout our business, and we may, at some point, recapitalize some of the stuff that we would acquire. So keep that in mind. Bottom line is with the second -- the last 30% of Norges in Europe and our convertibles being paid off, we already have 4 or 5 points of deleveraging that's kind of on the books. I mean, it's just a matter of time before that happens. So think of our 36 as sort of 32 plus 4, and we'll get there.

Thomas S. Olinger

And right now, we see leverage at year end at around 34%. So to Hamid's point with the Norges and the converts, that would put us right at the long-term target of look-through of 30%.

Hamid R. Moghadam

Yes. We're not even thinking about that issue anymore. We moved so far beyond that, that I think it's a matter of time before everybody figures it out.

Operator

Your next question comes from line of Brendan Maiorana with Wells Fargo.

Brendan Maiorana - Wells Fargo Securities, LLC, Research Division

I think it's a question for Tom. Just that the answers that you gave to Michael's question was the deployment timing of both development and acquisitions offset by contributions. If I think about the guidance outlook and the run rate in the back half of the year, I guess it suggests that maybe there's a little bit of a ramp but probably not a dramatic ramp as we think about Q3 to Q4, is that correct? And does your guidance in the back half of the year include any type of onetime gains like the promote that you got in the second quarter?

Thomas S. Olinger

No, it doesn't. So our next schedule promote is in 2014. So we are not modeling a promote in the second half. So there's not a promote in the second half to our guidance. But that does affect our run rate when you think about Q2 and the promote was in there. But when you look at Q2 without the promote of $0.39, we are going to be ramping up our core FFO without the promote. And you're seeing that through deployment of the remaining equity proceeds. You're seeing that through same-store NOI growth. You're seeing that through stabilization of developments. And some what have been impact of lower interest costs because in Q2, you did not see the full impact of our deleveraging efforts. So I think in the back half, you're going to see us grow off that core base, and we see it at 41-plus cents a quarter.

Operator

Your next question comes from the line of Jim Sullivan with Cowen Group.

James W. Sullivan - Cowen and Company, LLC, Research Division

Hamid, this is really a question for you based on your commentary on rent growth and the promise of a very exciting Analyst Day at the end of the year. And this really goes to the issue of the same property NOI, that forecast you have for the full year. I'm surprised that the range hasn't narrowed a little bit from the 1.5, 2.5 that you've retained all year given the results we've seen in the first half. And I guess the flat-out question here is that do you anticipate that your rental spreads in the coming quarters are going to be higher than they've ever been? Because that's what seems to be suggested here.

Hamid R. Moghadam

Jim, first of all, the excitement around the Analyst Day is mostly because of the America's Cup. We're about to talk about that. Secondly -- I guess that's unabashed marketing. The rent ramp, it takes a while for these things to work through the leases. And remember, the leasing that we report doesn't even kick in for another couple of months. So really at this point, you're looking at the year. There's 3 months of leasing left to be done. And no matter what we do, it's very hard to effect the numbers with that middle period as these leases make their way through the systems. So we've got to be a little bit more patient about the spot rent increase coming through, and you're absolutely right. I think it's going to reflect itself into the mark-to-market of rents. And last quarter, in answer to that question, we said about 5%. Our answer this quarter would be 5% to 10%. So we are higher than where we were before for precisely the reason that you mentioned.

Thomas S. Olinger

Jim, I want to add one thing just to emphasize what Hamid said. So when we report our leasing activity, that's based on signs. And we're typically signing leases 1 to 2 quarters in advance of their effective date. So we're signing leases in Q2 that are going to kick in, in Q3 and Q4. So you're seeing a lag -- you're not seeing the full impact of the rent change that happened that's being reported on the leasing in Q2. You're going to see that in Q3 and Q4. So Q2 is more of a reflection of the leasing activity that we reported to you in Q4 and Q1. So there's a lag there that our same-store NOIs should really start to pick up, as Hamid said with rent growth but as this lag between signings and effective date kicks in.

Operator

Your next question comes from the line of John Stewart with Green Street Advisors.

John Stewart - Green Street Advisors, Inc., Research Division

Hamid, a couple of questions for you. First of all, not looking for earnings guidance for next year, but you referenced the ability to generate above-average earnings growth over the next several years. What's your bogey? What are you referencing in terms of an average? And then you also mentioned that you think you can add $10 billion to the asset base with just 10 basis points of any incremental overhead. What's the optimal size for your asset base? And likewise, what's the optimal land bank when it comes to price? Did I hear that you expect to cycle 2 or 3/4 of it in the next 3 years? So that makes sense, but what's the optimal size when you think about replenishing the land bank?

Hamid R. Moghadam

Good questions. The optimal size of the land bank, it should be viewed in the context of the development run rate. And historically, our average value has been about 2.5 to 3 years worth of land. I think we should get more efficient and carry a little less than 2 years worth of land and just get the land -- control more land via options and other things that allow us to cycle through it a little quicker. But think for now as 2 years worth of development would be the appropriate amount of land. So if you think of this $2.5 billion, it's $5 billion of development in 2 years, and if land is 25% in Japan and places a little higher than that, I would like to see our land bank be around $1.2 billion to $1.5 billion, call it. It will take us to get there. And yes, we're chewing through land, but we are also getting new land every day. So it's not a static number. We won't see through it completely. What was your first question?

Tracy A. Ward

Rent growth.

Hamid R. Moghadam

Oh, rent growth. So I think the industrial business across the cycle has been sort of inflation, really long cycle. And I think the last 5 or 6 years, as we all know, had been an exception to that. Long term has been about inflation. I think if you're focused on supply constrained markets and the global markets that we are, I think rent growth could be 100 to 150 basis points ahead of that. So call it inflation at 2, 2.5; rent growth at 3, 3.5. That would be across the cycle. I think in the next 3 or 4 years, we could be 5% or 6% because we're closing that gap through replacement costs, by picking up an extra, call it, 2% to 3% for an incremental 4 or 5 years until we get to that level. So to answer your question about 300 basis points on top of what's normal would be my expectation.

Operator

Your next question comes from the line of Ross Nussbaum with UBS.

Ross T. Nussbaum - UBS Investment Bank, Research Division

I'm here with Gabe Hilmoe. When I think about where your capital deployment is going to occur over the next year or 2 in terms of the monetization of the land bank, in terms of the investments that you're going to be making in funds, and then I look at where your current footprint is in terms of your share, it would seem to me that it's possible that your exposure to Asia could go down a little bit. How should we be thinking about the importance of Asia to the platform? And ultimately, what percentage of NOI or asset value is it going to represent?

Hamid R. Moghadam

Yes. Our growth asset allocations, you're familiar with, I think, gross meaning where our gross assets are regardless of how they're financed. And those are roughly a little under 50% in the U.S., 10% are in the other Americas and the remaining 40% roughly split between Europe and Asia, just to use some pretty rough numbers. Europe is over that today. Asia is below that today. So that's the growth asset allocation. But in terms of our net asset allocation, meaning where our equity is, we certainly have a higher percentage of funds over time in Asia than we do in Europe or the U.S. because we started out the business with that model and now we have this public entity in Japan where the expensive assets live. So a lot of that stuff is going to be living in the public entity that we own 15% of. So in terms of our net equity exposure, we'll be way lower than that to Asia and to Europe, frankly, and much more than that to the U.S. And that's been a deliberate strategy. The strategy is to take advantage of global opportunities to serve customers, but we are a U.S. dividend player -- payer. So we need to manage our exposure to foreign currencies down significantly through the use of private capital vehicles and by, in effect, setting up our debt so that we have a natural hedge on those assets. That is very deliberate. But one of its implications is that our NOI or certainly our FFO will be less dependent on some of those overseas locations.

Operator

Your next question comes from the line of Vincent Chao with Deutsche Bank.

Vincent Chao - Deutsche Bank AG, Research Division

Just sticking with the FX commentary, just curious if in light of the target of 80% exposure to the U.S. dollar and if the dollar strengthens here more than you're modeling in today, how should we be thinking about the FFO impact here over the balance of 2013? If it's a maybe 5% strengthening versus what you're talking about today.

Thomas S. Olinger

Well, when you look at from an FX exposure on earnings, in the second half, a 5% move of currencies would be $0.015.

Hamid R. Moghadam

And currencies, by the way, don't move together. The yen and the euro kind of have been moving opposite to each other. So it depends on -- I mean, I think Tom is answering 5% bad on both. That kind of doesn't happen that way. So his answer is for maybe 10% bad on one and 5% good on the other one.

Thomas S. Olinger

And as I said in my remarks, we've got the euro at 1.3 and we have the yen at 100 in our model for the second half. So the impact of FX, as we've moved assets around and as our net U.S. equity exposure has grown to 75% this quarter, the impact of FX movements is diminishing in our portfolio. And we would like to take that, our long-term equity exposure, even up above 80%. We're going to do our best to mitigate that. The hedging strategies, the hedges we've put in place this quarter were part of that strategy. And we're going to continue to look for ways to further minimize that FX exposure.

Operator

Your next question comes from the line of Michael Mueller with JPMorgan.

Michael W. Mueller - JP Morgan Chase & Co, Research Division

I was wondering, can you talk a little bit about, once you get past 2013, what you see as a normalized level of disposition activities for the model? And not trying to sneak a second question in there, but Tom, a few questions ago, you referred to a 2014 promote. Can you just say, is it expected to be similar in size to what we had this year?

Thomas S. Olinger

I'll answer the second question first. I won't get into the size of the promotes. We'll wait and see how the performance continues out. But the bottom line is we were coming into a cycle where we believe we're going to see promotes on an annual basis from a variety of our funds. And we're obviously seeing significant asset appreciation around the world, and we see a lot of rent growth. So I think that bodes well for future promote levels.

Hamid R. Moghadam

And with respect to sales, I would be very surprised if our average volume of sales in the next couple of years would be outside of $500 million to $1 billion. $500 million to $1 billion a year. So it won't be lower than that and it won't be higher than that would be my best answer to you right now.

Operator

Your next question comes from the line of Michael Salinsky with RBC Capital Markets.

Michael J. Salinsky - RBC Capital Markets, LLC, Research Division

Hamid, I think you mentioned in your comments about a new enterprise system. Can you talk about the benefits you see from that new rollout? And also, just I believe on the last call, you talked about an 80% equity target for the U.S. just given the increase in deployment. How quickly do you think you can get there?

Hamid R. Moghadam

Okay. Could you clarify the second question? I'm not sure I quite understood that.

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

Sure. You talked about U.S. equity exposure of 80%. I think Tom gave in his prepared remarks -- I think he said a 600-basis-point increase you had in the quarter. Just given the increase in deployment, how fast do you think you can get to that kind of 80% target?

Hamid R. Moghadam

Okay. 80% would be by year end. And my target is 100%. Tom's target is 90%. We're negotiating on that one.

Thomas S. Olinger

That one's true.

Hamid R. Moghadam

And that will take us probably another year or 2, but we'll get to 80% by year end, no question about it. The ERP, once fully implemented, then we are like 90-plus percent implemented, will allow us to do 2 things. One, it will allow us to do some tactical stuff much more efficiently in terms of accounting for our assets, knowing our historic operating metrics, being able to ask all your questions much more efficiently in many different ways. So it will give us a much more efficient way of looking backwards. This is a simple way of thinking about it. I think its most important benefit, however, is that it will allow us to capture information on real time tenant activity, traffic activity through a CRM system that we're doing and also forecasting, 10-year forecasting, on a dynamic basis so we know the value of our assets all the time on a real life basis as opposed to this sort of cap rate approach. Once we get there, I think we'll be, hopefully, a lot smarter about what's happening down the road as opposed to what happened in the past. So efficiency is goal #1, and better market insight is goal #2 on full implementation. With respect to the -- I want to go back and answer a question that I think John asked that my colleagues just reminded me that I didn't answer, the optimal size of the portfolio. I think the optimal size needs to be defined by a market. For us to go into a bunch of new markets and grow $10 billion by doing a couple of $100 million here and a couple of $100 million there, that would be insane. It doesn't move the needle on a company of our size, and frankly, we'll have reverse efficiencies. We want to deepen in our existing markets. And I don't think there is a top side to how much we can drive efficiencies. I think we now, particularly with the ERP system in place, can scale very, very efficiently as long as the assets are in the same markets where we already have a presence. It becomes really easy. New markets are a different story.

Operator

Your next question comes from the line of Jon Petersen with MLV & Co.

Jonathan M. Petersen - MLV & Co LLC, Research Division

Just I was hoping you could help us better understand the $750 million ATM program that you recently put in place. Just kind of how you expect to use the proceeds or if you expect to use the proceeds, do you expect to kind of trickle it out over time to fund developments or use it here and there for acquisitions? Or is it something you're going to have to keep your options open? And then also, just in terms of guidance, what's assumed in terms of that program?

Thomas S. Olinger

Okay. So right now, as you said, Jon, we're going to use it on an as-needed basis. Right now, given our sources and uses that we see in our model [indiscernible] to raise equity, we're always going to watch our long-term capital goals. But foremost, we're going to have to be at the stock price where we're trading at a premium to NAV, number one, where we're valued. And then number two, we'll look at our various funding sources across all of our different -- our capital stack and make a determination. But right now, there wouldn't be an equity raised embedded in our guidance in the second half.

Operator

Your next question comes from the line of Dave Rodgers with Robert W. Baird.

David B. Rodgers - Robert W. Baird & Co. Incorporated, Research Division

Now U.S. industrial supply this year, I think, coming in around 60 million or 65 million square feet and just kind of highlighting the domestic market. You guys are about 5 million or 6 million square feet of that or 8% or 10%. As you look forward, I think, just reading between the lines, you're talking about maybe ramping up to a 20 million square foot annual number for the U.S. I guess 2 questions. Can you, one, comment on -- if you continue to be about 10% of the overall market, that it implied about 200 million square feet starts for the U.S. over the next couple of years. One, can the market handle that? And two, can you comment on, I guess, your competitors' ability to kind of deliver the same type of supply that you're thinking about profitably?

Eugene F. Reilly

Yes, this is Gene. Let me start with that. First of all, I don't think we're going to get to 20% of the market. We also don't think that supply is going to be so anemic at 65 million feet, so that's going to grow. And we really don't think of market share as either a catalyst to build more or some type of ceiling. We just simply look at market opportunity. But in terms of our ability to deliver space, first, the first threshold is, is the market there? Right now, the market is there for sure. I mean, we've talked about the excess demand we see. And the second is the capacity of our infrastructure. And we can probably double our current volume, adding only arms and legs at the shield levels. So capacity of the organization is there. But the one thing I want to stress is that, and we've referenced it earlier on the call, we will build based on demand, not based on what our competitors are doing or some arbitrary share of the market we're trying to hit. And then finally, as I think about our competitors' ability to deliver space, well, it's been -- there's been a lot less supply than we expected. We do have competitors. They have been cautious so far. And ultimately, the landscape in the U.S. has changed quite a bit. The old local developer model really is -- doesn't exist anymore. It's really mostly institutional capital. We're watching it carefully, but I think we'll be -- we'll have a less volatile supply environment going forward because of that.

Hamid R. Moghadam

Yes. We're not going to -- just to be clear, we're not going to do 20 million square feet in the U.S. We've never done 20 million square feet in the U.S. That will be $1 billion in the U.S., not going to happen.

Guy F. Jaquier

The beautiful thing about our platform is that it's sort of diverse. We have the ability to choose where we develop. And what we're trying to prove out is that we can build $2.5 billion on a run rate basis, we deliver 15% margins year in and year out. It's a sustainable profitable business. And we're advantaged relative to our competitors because of our platform and our choice.

Operator

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

Ki Bin Kim - SunTrust Robinson Humphrey, Inc., Research Division

Just a couple of quick follow-ups. That promote you booked this quarter, how much of that is influenced by you taking out -- taking full ownership of that JV? Because I think that's uncommon from what you've done in the past 2 -- if you look at promote just because of the closing of the JV itself. And second, it seems like it may be the quarter that promotes becomes a bigger picture of your company. If nothing changes in the industrial landscape from a rent growth perspective, what is the approximate level of promotes that are already embedded in your portfolio that you can probably, at the very least, expect to see in 2014 and beyond?

Guy F. Jaquier

Sure, Ki. This is Guy. I'm going to take the first one, and then I think maybe Hamid will take your second one. The promote on the Fund II was based on the price we paid for the assets, which was determined by appraisals. So there really was no impact on the amount of the promote based on pricing and how we structured the deal. The only thing it might have done is accelerated the timing of the closing. So if it's an IRR-driven fund or an IRR-driven promote, the fact that the investors got cash all at once versus a series of sales over a period of time might have an infinitesimal amount. But there's nothing in the structure that influence the promote.

Hamid R. Moghadam

Yes. And with respect to future levels of promotes, tough to speculate. It all depends on what that terminal value ends up being. But over time, I think you've heard me say before that we think promotes across the cycle should be on the order of 15 to 25 basis points of assets under management year in and year out. But there will be some years where there will be no promote and some years where there would be a promote. The good news is that we, by and large, don't put it into our guidance. And you guys don't give us credit for it anyway. So I guess it's not -- we don't worry about it a lot.

Operator

Your next question comes from the line of Michael Bilerman with Citi.

Michael Bilerman - Citigroup Inc, Research Division

Yes. It's just a quick follow-up, sort of. You mentioned leverage on an asset value basis by the end of the year. Where is that on debt to EBITDA? That's number one. Number two, if you look at CapEx on Page 16 on the trailing 4-quarter basis, that has been consistently rising. That's almost 15% this quarter relative to 12% at this point last year. Again, it's trailing 12. So it's a smooth number. Where is that -- is that going to -- are we going to go on the other side of that at some point? Because obviously, 300 basis points of NOI increases is a lot over the course of the year. And then just lastly, my prior question. You talked -- you didn't actually give me the numbers. What was going to be in the back half of the year in terms of deployment and sales? If you can actually break out the dollars, your share, so that we really understand the ins and outs of what's happening on the balance sheet, that would be helpful.

Hamid R. Moghadam

Yes. Michael, let me tell you. We're not going to predict to the nearest dollar what the deployment activity is going to be in the back end of the year because a lot of those things are up in the air and may or may not happen. And so we're not going to -- I think I'll have to review directional guidance, but we can't give you specific guidance on things that haven't happened yet. So that's the answer to that. As to the CapEx question, Gene, why don't you take that?

Eugene F. Reilly

Yes, sure. Michael, so let me -- it's going to be sort of a little bit of an essay answer. The punchline is that we think total CapEx as a percentage of NOI is going to decline in quarters ahead and be in the range of 13% to 14%. That's sort of the best estimate I can give you. But the way we look -- and we have tried to improve the disclosure in the supplemental, as Tom mentioned, and give it to you in the way we think about capital. So you got basic property improvements which are not affected by leasing volume and are constant. We think the best way to look at that is the trailing 4-quarter average, and that's pretty flat at about 600 square foot, and it's been flat for quite a long time. And then turnover costs, which represent the majority of capital, we track as a percentage of the total rental value of the leases in that period. That's very important because you've got to take into consideration rent levels and lease terms, in other words, what you're getting in return for the turnover costs. And this metric is fairly steady in the mid- to high 8% range. So the bottom line is we see capital as being fairly steady in terms of a trend line. If you look simply at CapEx as a percentage of NOI, you get a lot of noise because we think volume dramatically affects it over time. So our current curve, so to speak, has an upward trend to it. Over time, that's going to be, as I said, in the 13% or 14% range.

Hamid R. Moghadam

Well, one other thing is that leases now in the cycle are getting longer, so the commissions are getting bigger. That's why you want to look at it as a percentage of the lease consideration and not on a per square foot basis. We purposefully didn't want to sign long-term leases during the downturn. We do want to sign longer-term leases as the market approaches replacement cost trends. So that alone will drive that number up on a per foot basis but hopefully not as a percentage of the lease consideration.

Thomas S. Olinger

And Michael, on your debt-to-EBITDA question, we see debt to EBITDA about 6.75 at the end of the year. And debt to EBITDA adjusted for development would be about 5.75 at the end of the year.

Operator

Your next question comes from the line of Brendan Maiorana with Wells Fargo.

Brendan Maiorana - Wells Fargo Securities, LLC, Research Division

I just want to follow up on the development and capital deployment outlook. The margins in the quarter came in, and I guess we're right around 14%, kind of in line with the 12% to 15% longer-term target that you have but down from 20%, which what you guys were sort of over-earning, I guess, if you will, the past several quarters. So first, do you think that those excess margins of 20% that, that is likely over with now and we're in a much more normalized environment going forward? And then second, maybe can you frame up why the development yields would come in, the margins would come in, given that it seems like rent growth is accelerating? Your land bank is worth more now. And it would seem that the fundamentals are more positive. So I would think that on a historical land cost, that doesn't change that, that margin is actually -- would have been accelerating a little bit as opposed to coming in a little bit.

Michael S. Curless

This is Mike Curless. I think it's -- I don't get too worked up about any given quarter with respect to margins. I like to look at this over the long haul, as Hamid mentioned. And if you look at the entire year, our margins are right at 17.5%, which is entirely consistent with our 10-quarter plan of about 18%. So if you look over the broad spectrum, I think it indicates a couple of things. One, our level of land control and customer control is driving strong margins. We're building spec in the right spots where the fundamentals are strong. And furthermore, I think it points to our land bank's value where at 18% margins versus in excess, 3% or 4% of expected margins can point to an uplift in our land of 20% or so in our land bank. So net-net, I think we feel really good about these margins and expect those to continue throughout the rest of the year.

Hamid R. Moghadam

Brendan, let me be even more precise. I think this would be a low mark in the near term, and there's a margin you'll see coming through. And at the answer -- when we answered the question about margins, we're talking about margins, if you were to buy a new land and build a new property. To the extent that our land bank being undervalued is adding to excess margin, that is why we're arguing or you've heard us say before that we think our land bank is undervalued. So I don't -- I think if we were to go buy a piece of land today and build it with the rent that we pro forma, the margins would be in the low to mid-teens. With our actual land bank at historical book and some of it impaired, I think the margins are going to be a lot higher than that. And I think this quarter is a bit of an aberration. But the long-term margins in this business are not 20%. They're a little bit lower than that.

Operator

Your last question comes from the line of Jamie Feldman with Bank of America.

James C. Feldman - BofA Merrill Lynch, Research Division

Tom, just turning to the operating expenses in the same-store presentation. If you look at the last 4 quarters, they've really fluctuated. I think they were 3.5% in the second quarter. How are you thinking about that going forward? And maybe like if you compare 1Q '13 at 9% to 2Q '13 at 3.5%, what were the major differences?

Thomas S. Olinger

Jamie, this is Tom. So there is noise that goes through camp. There's some seasonality to it, some true-ups that we've had. There's always the famous no removal or lockups. No, that's right. There's variances in the first half of the year. But I do think the variances are going to settle down as we go forward. So I would expect to see same-store operating expenses to normalize, quite frankly, at inflation.

Operator

There are no further questions in queue at this time. I turn the conference back over to our presenters.

Hamid R. Moghadam

Okay. Thank you, everybody, and we look forward to seeing many of you in September in sunny San Francisco.

Operator

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

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ProLogis (PLD): Q2 FFO of $0.41 beats by $0.04. (PR)