AMB Property Corporation Q3 2009 Earnings Call Transcript

AMB Property Corporation (AMB)

Q3 2009 Earnings Call

October 21, 2009 1:00 pm ET

Executives

Tracy Ward – Vice President Investor Relations

Hamid Moghadam - Chairman and Chief Executive Officer

Tom Olinger – Chief Financial Officer

Gene Reilly - President, The Americas

Guy F. Jaquier - President, Europe & Asia

John Roberts, Jr. – President, Private Capital

Analysts

Jamie Feldman - Bank of America-Merrill Lynch

Michael Bilerman - Citi

Sloan Bohlen - Goldman Sachs

David Fick - Stifel Nicolaus

Chris [Ketcham] – Morgan Stanley

Ross Nussbaum - UBS

George Auerbach – ISI Group

Dave Rogers – RBC Capital Markets

Michael Mueller - JPMorgan

Cedric Lachance - Green Street Advisors

Ki Bin Kim - Macquerie

Wilkes Graham - FBR

Presentation

Operator

Welcome everyone to the AMB third quarter earnings conference call. (Operator Instructions) I will now turn the conference over to Ms. Tracy Ward, Vice President of Investor Relations and Corporate Communication. Please go ahead, Ma’am.

Tracy Ward

Thank you. Good morning everyone. Thank you for joining us this morning. Before we begin formal remarks, I would like to remind you that this call is the property of AMB Property Corporation and is being recorded.

The speakers on today's call will make various remarks regarding future expectations, plans and prospects for the company such as those related to our liquidity and de-levering plans, our capital deployment activities, our planned dispositions, our development and private capital businesses, our leasing activities, expected earnings and our future business plans.

These remarks constitute forward-looking statements for the purposes of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. AMB assumes no obligation to update or supplement these forward-looking statements. Such forward-looking statements involve important factors that could cause actual results to differ materially from those in forward-looking statements including those risks discussed in AMB's December 31, 2008 10-K, which is on file with the SEC.

Reconciliations from GAAP financial measures to non-GAAP financial measures are provided in the supplemental analyst package, which is posted on the company's website at amb.com.

This morning I will turn the call over to Hamid Moghadam, Chairman and CEO, who will comment on the macroeconomic environment and customer sentiment and future earnings potential; and Tom Olinger, our Chief Financial Officer who will comment on financial position, a review of our financial results and provide guidance before we open the call to your questions. Also in attendance with us here today are Gene Reilly, President of the Americas; Guy Jaquier, President, Europe and Asia and John Roberts, President, Private Capital.

Hamid, will you begin?

Hamid Moghadam

Thanks, Tracy. Good morning and welcome to our third quarter earnings call. In our time together this morning we would like to accomplish three objectives. First, given where we are in the cycle we would like to update you on the primary drivers of demand for our business. Second, we will share with you our current outlook for our company and our business in the coming year. Third, we will highlight the key growth initiatives for AMB.

Let me start by talking about the real estate cycle. We believe we are in an inflection point where the signs of recovery in our business are becoming quite clear. Specifically, the stabilizing credit markets are leading to a rebound in industrial production and GDP growth as well as an improvement in trade volumes.

Industrial production is now increasing in the majority of the economies around the world after hitting unsustainably low levels relative to demand. Following nearly a year and a half of steep declines, production is showing consistent, positive growth including double digit gains in the leading Asian markets.

Container volumes through major ports have also continued to improve through recent months. Though still 10% lower than their July 2008 peak, global container volumes have increased by about 60% from their February lows. We have seen a comparable rebound in air cargo tonnage. International volumes are off 15% from the November 2007 peak, but they are also up 60% from the January trough.

Inventories have continued to fall through August, the latest month for which data is available. Retail sales excluding autos are up 2% since April and are forecasted to grow even faster in the fourth quarter. This is likely to lead to a robust rebuilding of inventories in the coming months. The ratio of inventories to sales is now tied with its historic low which coincided of the peak sales of the last cycle. This is quite remarkable given the low level of current sales in the economy. Even if the ratio remains stuck at this depressed level inventories are likely to increase right along with increases in final sales.

Consensus estimates for global GDP growth have been revised upwards for five consecutive months. Current forecasts for U.S. and global GDP growth in 2010 stand at approximately 2.7% setting the stage for a sharp recovery in trade and importantly an improving demand picture for our product.

Let’s now look at customer sentiment. At the end of last year into the first quarter customer activity retracted as both leasing and capital expenditure decisions were put on hold and businesses focused on cutting costs and squeezing efficiencies. As we entered the second quarter, sentiment improved and the prevailing view started to take hold that we were reaching the bottom and the economy and freight volumes were stabilizing. As a result, decision making resumed and the number of property showings and deals under negotiation started to increase.

Today we see further improvements in activity. Our strongest customers are gearing up for future expansion and executing previously shelved plans to optimize their supply chains for sustainability and as a hedge for fuel price increases. As you know, the first wave of demand goes into filling existing leased space that remains underutilized. It is only after buildings fill up, and we have a long ways to go before that occurs, that we will see demand for incremental new space.

It is important to note that the positive impact from leasing decisions made today will take at least 3-6 months to show up as occupancy gains and revenue growth for us. This resumption of activity is consistent with previous cycles and reflects industrial real estate’s lagging relationship with the overall economy. Though we are optimistic about the future direction of our business we continue to contend with a challenging and competitive operating environment.

Industrial availability in the U.S. increased 50 basis points since last quarter and now stands at 13.5% with effective rents continuing to decline in many markets albeit at a slower rate than before. With only 17 million square feet delivered in the quarter, new construction continues at a record low level replacing less than half the space that was rendered obsolete in the same period. While improving by 1/3 over the prior quarter net absorption was still a negative 50 million square feet bringing the year-to-date total to a negative 225 million square feet, the biggest annual decline on record.

Given these factors, we expect that the improvements in U.S. industrial markets will take some time to materialize. Our research models currently forecast net absorption to turn positive in the second half of 2010.

Let’s now turn to a quick update on our priorities. By way of reminder, last year at this time we established three objectives which included strengthening our balance sheet, realigning our cost structure and making sure that our company emerged from the downturn in a strong position to pursue growth. You watched us successfully address the first two priorities. We fortified our balance sheet by raising $550 million in equity, completing over 670 million in contributions and dispositions at attractive cap rates and repurchasing $185 million in bonds.

Simultaneously we reduced our gross annual overhead from a run rate of $195 million to about $130 million. These actions reduced our debt to assets from 51% to 43%, decreased our share of debt and funding to complete the development pipeline by over $950 million and increased our liquidity to $1.3 billion.

Now it is time to focus on the future. We believe that the quality of our portfolio and the strength of our balance sheet will provide us with excellent opportunities for sustainable growth into the future. To capitalize on our position we have established three key initiatives which include realizing the full potential of our low yielding assets, finding opportunities to invest with positive spreads using our currency and forming new private capital vehicles to take advantage of emerging opportunities that require deployment of fresh capital.

The first opportunity for growth is to get more out of our low yielding assets. This means first stabilizing our core portfolio back to its historic average of 95%. Returning to 95% occupancy will generate $20 million of incremental FFO even with today’s depressed rents. Second, stabilizing our development projects. At the end of the third quarter we had more than 10 million square feet of vacant space in our development portfolio which is almost fully funded and is ready to contribute significantly to our earnings.

The lease up of our development pipeline can generate an additional $50 million of FFO. Third, realizing value from our land bank. We own $575 million of entitled land, the vast majority of which is located in key strategic markets benefiting from favorable long-term supply/demand trends. This will certainly not happen overnight but with limited new construction in the pipeline we believe that the volume in build-to-suits will increase as it has in the aftermath of every other downturn.

Even if we did nothing more with the proceeds than to retire debt this exercise can results in as much as $50 million of additional FFO. These activities will also absorb incremental development overhead that could lead to an additional $25 million of annual FFO. Taken altogether there is a potential for an additional $110 million of FFO which I believe we are getting very little credit for in today’s market. I am confident that we will make significant progress of improving visibility of this embedded earnings potential over the next 12-18 months thereby increasing the desirability of our currency to potential property contributors.

We saw in the early to mid 90’s that companies with strong balance sheets, good access to capital markets and attractive acquisition currency were in a great position to capitalize on opportunities that emerged from that downturn. In time and in the aftermath of the current downturn we expect to see a similar arbitrage between real estate values in the public and private markets. We don’t see this favorable pricing relationship today, at least not in the case of our company. We believe there are two explanations for this.

First, the public markets have been quick to adjust while the private markets which usually lag have taken longer to fully reflect the decline in values. The second explanation is unique to AMB and has to do with the drag of our low yielding assets which I discussed previously. As mentioned earlier we expect this drag to be temporary and to disappear as we lease up our vacancy and make progress in realizing the potential of our land bank.

Our strong balance sheet and attractive currency put us in an excellent position to offer solutions to institutional investors who are looking for liquidity from their properties as well as developers who find our OP structure an attractive way of achieving their de-levering and tax objectives. It is difficult to make reliable predictions in an uncertain and fluid market such as the one we are in today. Unlike many others, however, we don’t believe that the level of distress in the industrial markets will be such that quality investments will become available at double digit cap rates; certainly not based on today’s market rents.

In fact, to us it appears that cap rates for industrial assets have stabilized. In fact, this will become more obvious as some pending transactions close. We also believe this cycle is different than the early 90’s in at least three important respects. First, absolute interest rates are much lower and properties can continue to service debt at lower occupancy rates even with higher levels of debt. Second, there isn’t the kind of over-building we experienced in the early 90’s. Demand is down because of the severe economic downturn but new supply is not a problem. Finally, there is more organized capital to take advantage of emerging investing opportunities.

However, we do expect to be able to acquire good, quality assets in our markets at significant discounts or replacement values even with materially lower land cost assumptions. These investments are likely to be priced with a stabilized cap rate of 8-9% for high quality assets in U.S. core markets. Of course, property specific considerations could easily push pricing above or below this range.

It is our view that with the recent increases in cap rates combined with low levels of construction will provide an excellent opportunity for a patient investor to capture a significant upside in rents as supply and demand return to equilibrium following an even modest but sustained economic recovery.

While we are beginning to see some interesting deals, we will continue to be patient and deliberate in our approach. My estimate is that in the next six months we will be in a position to return to positive spread investing and that will in turn lead to excellent earnings momentum for us going forward.

Our third growth initiative will be the formation of new private capital ventures around the world to take advantage of emerging investment opportunities. We see an important dynamic unfolding in the private capital business. The denominator effect has largely been reversed with a rallying in the capital markets and the gradual write down of private real estate values. For the first time in 18 months we are seeing certain major global investors engaging in active dialogue with us as they consider new allocations.

What we are hearing from them is they are under allocated to industrial real estate and they are seeking attractive values in some of our key markets around the world especially in the U.S. We are also hearing their interest is to work with focused operators who are prepared to put skin on the game and those who are going to be survivors in the next stage of the cycle. They tell us they have little or no interest in complexity, old one-way governing structures and excessive leverage, nor in working with sponsors who behave selfishly in this downturn.

Given these market dynamics we plan on forming new vehicles that will allow us to take advantage of emerging opportunities in a number of key markets around the world. As you know, we have increased our resources in AMB Capital Partners in the last few months. I look forward to reporting on our progress in this important area in the coming months.

I will now turn it over to Tom to review our results and guidance.

Tom Olinger

Thanks Hamid. I would like to cover three topics today. First, I will give you an update on the industrial markets. Second, I will recap the quarter and our financial position. Third, provide you with guidance for the remainder of the year as well as a first look at 2010.

First, an update of the industrial markets. We agree with the consensus view that global GDP will have grown by 3% in the third quarter. Based on our experience we therefore expect to see improvements in occupancy starting in the second half of 2010 followed by market run increases in 2011. This view of the recovery underpins our guidance for the next year.

Industrial vacancy rates in the U.S. continued to rise in the third quarter albeit at a slower pace in the primary markets. Rents have continued to deteriorate but we see evidence that rental rates have begun to bottom. We expect occupancy in the U.S. markets to stabilize in the second half of 2010 and rental rates to recover in 2011.

Turning to Mexico, the economy has been severely impacted by the global economic downturn and demand for distribution space was very weak for the first half of 2009. However, in the third quarter we had a significant pick up in leasing interest and signed deals in Mexico City, Monterrey and Guadalajara.

Western Europe entered the recession later and the rate of decline was not as steep as the U.S. We continue to expect Europe to recover later than the U.S. Absorption of its distribution space continues to be limited across most markets but sentiment appears to be slowly improving as both interest rates and cap rates seem to be stabilizing.

Japan was significantly impacted by the drop off in exports in the first six months of this year. Along with an increase in the auto sector, we see a structural shift in high value exports such as technology to China replacing volume that previously went to the U.S. Sentiment appears cautious but is improving as some customers are once again planning for the long-term.

Looking to China, government policy and spending programs have helped maintain growth in domestic retail sales at a 15% annual rate this year. We continue to expect China to be on the front end of the global recovery.

Before getting to our results and guidance I want to provide a brief update on our financial position. We further improved our balance sheet and liquidity during the third quarter. Our liquidity increased $100 million during the quarter to $1.3 billion consisting of capacity in our lines of over $1.1 billion and more than $200 million cash. We also further improved our maturity laddering as we continue to refinance debt at attractive rates.

For example, last week we closed on the refinancing of our $325 million unsecured term facility. We upsized the facility to $345 million and extended the maturity to September of 2012. The new facility now includes Euro and Yen trenches and carries a current interest rate of 275 basis points over the applicable LIBOR index. We also have the option to increase the facility up to $425 million at any time prior to October 2011. Our ability to upsize and extend this facility is a testament to the strength of our balance sheet as well as the quality and depth of our lender relationship.

As Hamid mentioned we have completed a significant number of de-levering initiatives year-to-date. Given this progress and our preparation for the next phase of growth we have spent time analyzing what our long-term leverage targets should be. The two principal measures of levers that we utilize are debt to assets and fixed charge coverage levels. We have set our long-term leverage goals to be approximately 35-40% for debt to assets and approximately 2.5 times for fixed charge coverage. Our coverage charge is based on core earnings and excludes gains from development or promotes. Our coverage ratio of 2.5 times provides significant cash flow above our obligation and covenant levels.

It is important to note that these targets are on a look through basis meaning they include AMB’s share of joint venture debt. At the end of the third quarter our share of debt to assets was 43% and coverage 3.4 times. Excluding gains our coverage for the quarter was 2.2 times. We believe we can achieve our long-term leverage goal target by a combination of fully utilizing our development assets and realizing the value of our land bank through build-to-suit activity, new ventures or sales.

We believe we can achieve our long-term fixed charge coverage target by a combination of stabilizing the operating portfolio to its historical average occupancy of 95%, leasing up with the development pipeline and realizing the value of our land bank. These are long-term leverage goals. Given our leverage levels and the strength of our balance sheet today we can be patient and prudent in the steps we take to achieve them. We will ensure these steps will further maximize long-term shareholder value.

The bottom line is we continue to have a strong balance sheet, significant liquidity and are well positioned to address our financial obligations well in advance of their contractual maturities. We are close to achieving our long-term leverage targets and are well positioned to take advantage of growth opportunities going forward.

Now let’s move to a review of our results for the third quarter. For the quarter FFO was $0.71 per share. During the quarter we completed dispositions of $290 million at a 6.2% cap rate which generated $0.36 of development and VAC gains. As a result, the bulk of these gains came from the sale of Park One.

Core FFO for the quarter was $0.35 per share, slightly higher than our expectations. As a reminder, core FFO relates to real estate operations and private capital revenues and excludes the recognition of gains related to development activities and non-cash impairment and restructuring charges. NOI was slightly better than we had projected for the quarter due primarily to occupancy. Same store growth was down 7% for the quarter driven mostly by the decline in average occupancy over the comparable period. Without the effect of foreign currency same store NOI was down 7.6% for the quarter.

Our quarter ending average occupancies were 91% and 90.4% respectively. This compares to 90.5% and 91.1% for the second quarter of 2009. Our quarter end occupancy in the U.S. portfolio was 380 basis points above the national average. We commenced almost 9.9 million square feet of leases in our operating portfolio during the third quarter which was a record amount. Our retention rate for the quarter was 68% and 61% on a trailing four-quarter basis. Rent changes on rollovers on a trailing four quarter basis was down 3.9% and down 10.3% for the third quarter. The quarterly decline is understandable given the peak to trough decline in market rents.

The majority of the rent change in the quarter related to leases of less than four years of duration. We further generated savings on leasing costs with a combination of shorter deals, less direct spend competition from cash strapped landlords and a tenant base more focused in most cases on occupancy costs rather than amenities. We continue to take a long-term view and while we are very focused on occupancy we will balance short-term earnings and long-term asset value.

During the quarter we leased 935,000 square feet in our development pipeline with particular strength in Japan and Mexico while the U.S. and Europe continued to be slow. We have, however, seen an increase in customer activity and we expect leasing volume in these markets to pick up. From a customer receivables standpoint we have not seen an increase in the number of bankruptcies and write offs from the second quarter. We continue to reserve approximately 100 basis points of revenues for bad debt and continue to believe that our receivables are adequately reserved. Private capital income and G&A were both in line with our expectations for the quarter.

Switching to guidance for 2009 we are increasing our full-year core FFO guidance to $1.45 to $1.46 per share. For the operating portfolio we expect our average occupancy for 2009 to be 91-91.5% at the top half of our prior guidance. We expect our cash basis same store growth lease termination fees and without the effect foreign currency exchange to be down 4.5-5% which is slightly below the low end of our previous guidance. We are forecasting private capital fee income to be $0.26 to $0.27 per share, consistent with our prior guidance and our net G&A forecast of $0.83 to $0.84 per share in 2009, up $0.01 from our prior guidance.

Now let’s move to 2010 guidance. Based on the view that the global economy is now in the early stages of recovery we expect our average portfolio occupancy to bottom out within the next two quarters and then begin to recover. We expect the slope of the recovery will not be as steep as the slope of the decline. On a quarterly basis, we expect cash basis same store growth to remain negative through the first half of 2010 and then begin to turn modestly positive on a quarterly basis in the second half.

Given these recovery assumptions, we are forecasting average occupancy for 2010 to be between 90-92% and cash basis same store growth before lease termination fees and without the effect of foreign currency exchange to be flat to down 2%. One thing to consider from an occupancy standpoint is the amount of scheduled lease expirations in 2010. As of the end of the third quarter 2010 lease expirations represented 12.9% of ABR. This compares to a year ago when we faced 2009 lease expirations of 17.2% of ABR. In addition the 2010 lease expirations are fairly evenly distributed throughout the year. As a result, there is significantly lower occupancy risk in 2010 as compared to 2009.

We continue to expect to stabilize the development portfolio by the end of 2010 based on momentum from the third quarter and activity levels to date. To put this in perspective, in the peaks of 2007 and 2008 we leased approximately 8 million square feet per year. We expect to lease about half of that amount in 2009. In 2010 we expect to achieve 2/3 of that run rate globally with the exception of China where we have really just begun to deliver product. There we expect to do about 1.5 million square feet.

We expect private capital fee income excluding incentive fees to be $0.19 to $0.20 per share next year. There are no forecasted incentive fees in 2010. We are forecasting net G&A to be $0.79 to $0.81 next year. This reflects our current run rate achieved through our cost savings and restructuring initiatives implemented in the last year partially offset by lower capitalized development overhead. For 2010 we are forecasting about $3 million of capitalized development overhead versus about $10 million in 2009.

We are forecasting operating property dispositions of $100 million the majority of which relates to the REIT. Based on these assumptions, our full year 2010 core FFO guidance is $1.29 to $1.36 per share. The lower FFO projection for next year versus 2009 is driven by a full year’s impact of our de-levering activities and lower capitalized interest and development overhead partially offset by the projected lease up of the development pipeline.

As mentioned, our core FFO guidance does not include earnings from any deployment activity. Given the growth initiatives underway we are forecasting capital deployment in 2010 of $300-500 million. This consists of both development starts and acquisitions of $150-250 million each. We are assuming we will fund this capital deployment activity on our balance sheet and therefore we are not including any private capital initiatives in this guidance. The earnings potential related to the 2010 deployment activity is about $0.03 to $0.05 of FFO per share which again is not included in our core FFO guidance.

In closing, I am very pleased with our accomplishments and significant progress on enhancing our financial flexibility over the last nine months. We have delivered ahead of plan, on our priorities and are solidly positioned for the future. With that I will turn the call back to Hamid.

Hamid Moghadam

Thanks Tom. Let me close by summarizing the key takeaways from our call. First, we are in the early stages of recovering from this severe economic downturn. What we are seeing and hearing from our strongest customers is that the worst is over and they are turning their attention to playing offense and capitalizing on their competitive advantages.

Second, we have now completed the necessary steps to strengthen our balance sheet and to optimize our cost structure. We successfully navigated through the downturn and are now well positioned for solid growth in the post-recovery world.

Third, we are working on three specific growth strategies. Namely, improved asset utilization, spread investing using our shares as currency and new private capital initiatives to take advantage of the opportunities presented by the recovering markets.

We look forward to reporting on our progress to you in each of these areas in the coming quarters. With that, let’s open up the call to your questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from the line of Jamie Feldman - Bank of America-Merrill Lynch.

Jamie Feldman - Bank of America-Merrill Lynch

I was hoping you could address how we should think about the amount of slack that is in the warehouse system right now so even if we do see a recovery in inventory or a recovery in any of the general data points, how much space is leased right now that is just not being used and how does that factor into your views of net absorption in 2010?

Gene Reilly

Let me take a shot at that. As I think we have said in prior calls, in this part of the cycle as we look at shadow space, and let’s describe your question as shadow space, it is significantly different than what we experienced in the recession after 9/11 so at that point in time we had an awful lot of space leased in advance of projected growth. So you had a fair amount of leased space that was never occupied. In this cycle we had virtually none of that. We certainly have space that was occupied and now isn’t but we try to get a gauge of what our occupancy is or our utilization factor is. It probably ranges from 5-10% of the space and that is looking at the Americas. Guy can speak to Europe and Asia that isn’t utilized. I don’t think it is significant. It is certainly not anywhere near what we saw at the last point in the cycle but having said that, we do need to lease up some of that space before we begin to see growth. That is reflected in our outlook on occupancies.

Guy Jaquier

I would say in Europe we are seeing about the same 5% or 10% maybe as far as shadow space. China we are not seeing much at all expect for some particular port locations and in Japan again I would say similar plus or minus the 5% range.

Operator

The next question comes from the line of Michael Bilerman – Citi.

Michael Bilerman - Citi

I was wondering if you could just comment on you contributed two assets into Alliance Fund three during the quarter and effectively took back paper in the fund. I am curious as you think about taking back equity in the fund that is currently yielding about 5.5% NOI yield on the book investments how you feel about effectively buying into that portfolio and then aside from that also recognizing gains but I think you would argue that 5.5% is not the right valuation for industrial today. So I was wondering if you could just sort of talk about that?

Hamid Moghadam

I’m not sure where you get the 5.5 from. I think the contribution cap rate…

Michael Bilerman - Citi

The 5.5 is just taking your cash NOI in the fund from your supplemental on page 24, cash NOI of $45 million annualizing that and dividing by the gross book assets of the fund so that the current yield of the fund assets is 5.5 and by taking back paper you are effectively buying into the fund at 5.5.

Tom Olinger

One thing, just to clarify in how you arrived at that percentage we wouldn’t view that as being the NAV of the fund implicit to that you are analyzing this quarter’s results and it is not a stabilized occupancy NOI that you are attributing value to.

Hamid Moghadam

Let me give you what the facts are. The NAV of the fund re-valued every quarter and based on the NAV of the fund the contribution value was in the eights. I don’t recall the exact number but it is between 8-8.5% which is kind of where the NAV of the fund was and where the cap rate on the assets were. So it was a complete equivalent trade. Really the purpose was not in any way to generate gains or anything like that. In fact the gains were on the order of $1 million. They were rounding there. The real purpose of doing that was to de-lever the fund and to capitalize the fund to a very prudent level and we have actually had some very good debt restructuring and reduction of debt in that fund so the fund is in an excellent position and really the purpose was to move those assets and further bolster the balance sheet at about an equivalent trade.

Operator

The next question comes from the line of Sloan Bohlen - Goldman Sachs.

Sloan Bohlen - Goldman Sachs

A question on capital allocation. You kind of laid out some of the different methods in which you might invest going forward. Could you maybe touch a little bit upon what the different costs of each of those capital sources are and as it relates to that where you would look to invest the fund in China or whether you would use OP units overseas? Maybe if you could elaborate a little bit more on your thinking.

Hamid Moghadam

Good question. First of all this year probably is the toughest year we have ever had in terms of finding out meaningful projections for capital deployment for obvious reasons. Really if you think about it our capital deployment could be zero or it could be $5 billion. It all depends on the opportunities that are there and what the spreads are at the inflection point. We have taken our best stab at it. The governing factors are that we are not going to lever up to do that business. We are going to do it on a leverage neutral basis and it has to have a significant spread. So the immediate question is how do you do it on a leverage neutral basis. Are you going to go out there and raise equity or what are you going to do? There are really two ways of raising equity. One is to raise equity and that has a cost of about 10-15% between the discount and the costs associated with that.

The other way is to use OP units and currency which is a more economic way for us and frankly it is a more attractive way of doing it for a certain class of institutional or individual sellers, if you will, or contributor. That certainly is where we think much of the activity will be in this part of the cycle and by the way it may not happen but this is very much like the environment that we saw in the aftermath of the downturn in the early 90’s and that is where we saw a lot of these deals take place. I can elaborate a little bit more on that in terms of helping people de-lever, etc. To answer your question the capital is going to be matched to the investment opportunity. We have said for some time that we are not selling any more assets unless we can find a place to re-deploy the capital that will improve our NAV, that will be accretive, that will improve the quality of the portfolio and we have some assets that could be sold if we find the investment opportunities to invest on the other side. Rest assured we will do this only on a leverage neutral basis or leverage reducing basis and only in a way that is enhancing to our portfolio in terms of returns or quality.

Operator

The next question comes from the line of David Fick - Stifel Nicolaus.

David Fick - Stifel Nicolaus

Can you comment on your hindsight your equity offering and the amount of dilution you took and the pricing given that you did it all in more than one stage?

Hamid Moghadam

With the benefit of all the information that I have today I would say we should have probably waited to issue equity but unfortunately I didn’t have the information that I have today. I think in terms of our deliberations with the board one of the comments I remember that I made to them is that I hope by making this decision we will all look pretty stupid pretty quickly. I guess we did. I don’t actually mean that. I was sort of kidding there. I think it was the right thing to do. You could argue whether we should have done $50-100 million less or not but we wanted all questions taken off the table with respect to any balance sheet issues whatsoever and I think we accomplished that very well. Frankly, not to take credit for a lot of things but I do think it did actually start kind of a transformation of the industry to some extent too in terms of other deals that were done.

Tom Olinger

I would add on to that and say I think there is a qualitative aspect of what we did as well that from a standpoint of our investors, from our customers and opportunities it put us in a position to capitalize on. That you can’t measure from a number but we are clearly seeing that today and I think that was as big a benefit to the quantitative aspects as well.

Hamid Moghadam

One of the reasons our cap rates and dispositions, for example, have been so attractive is that we simply have the opportunity of saying no to people because we are in a very strong capital position and we didn’t need to sell anything to capitalize our balance sheet. There are ways we picked it up on the other side that may not be readily quantifiable or apparent but I am not going to sit here and tell you that those are $10 a share today. But they are something.

Operator

The next question comes from the line of Chris [Ketcham] – Morgan Stanley.

Chris [Ketcham] – Morgan Stanley

My question is around the secured debt refinancing that is coming up in the fourth quarter and in 2010 in spite of 280 next year after extension options. How have your discussions gone as you have gotten closer to the maturities here? Do you see any differences between the wholly owned, unconsolidated JV’s and then the cost of funds? I think the weighted average across all securities is 3.5 and what type of change might you see?

Tom Olinger

We have seen an improvement in the last quarter definitely on the ability to at least on the pricing on the secured side, pricing has definitely come in. I think part of that was quite frankly the further unlocking of the unsecured market and it really brought in pricing on the secured market as well. When looking specifically at our secured maturities in 2009 we have a turn sheet already for that one. We will take care of that one in short order. In 2010 we are already in discussion with our lenders. These are great assets with moderate LTV. We really see no issues at all and quite frankly that extends out as we look out through 2012 with our maturities. No difference between how we treat or how our lenders look at secured debt on the REIT versus our fund. Really no difference. As Hamid mentioned we run those balance sheet no different than our own. We have the same strategies around both. So secured debt refinancing for us is going very, very well.

Operator

The next question comes from the line of Ross Nussbaum – UBS.

Ross Nussbaum - UBS

I wanted to ask a little bit about the 2010 same store commentary that you made with respect to it potentially turning positive in the back half of the year. I was trying to reconcile if your occupancy forecast I believe was 90-92% for next year which would imply sort of plus one or minus one percent I think from where you are now and rents look like they have rolled down about 10% this quarter, I am guessing it is going to be similar next year. It would seem to be that in order to get positive NOI in the second half of next year you would need occupancy to be moving a good 100 basis points higher by this point next year to offset the rent roll down. Is that a fair way of looking at it?

Tom Olinger

It is although I will tell you when you look at and you try to look at the occupancy standpoint and also look at the same store that is a cash basis same store growth and free rent can significantly impact that so there is not always symmetry between the two. The other thing you need to look at as well that is going to drive NOI growth is just contractual rent bumps. About 75% roughly of our portfolio has some sort of contractual rent bump and I think that closes the gap.

Operator

The next question comes from the line of George Auerbach – ISI Group.

George Auerbach – ISI Group

To go back to sales and contributions this quarter up $177 million from the development properties. What was the amount of income producing properties sold in the quarter and maybe you can give us some color on the average occupancy rate of the properties, where the properties are located, whether the 6% is a cash or debt number and finally where the in place leases are relative to market?

Tom Olinger

Remember a large piece of what we sold in Q3 was Park One; that was $125 million of that. Regarding the remainder, it was largely operating properties and I think would reflect similar attributes to our portfolio in general. There was clearly nothing that was unique about these assets in any way from an occupancy or change in rents standpoint.

Hamid Moghadam

One comment I have read in some of the analyst reports and I just wanted to clarify that is that some people think that the cap rates are sounding low because we are selling less than fully occupied properties and only capping the income that is represented by the less than full occupancy. Let me assure you that is not the case. When we report cap rates to you in every case whether it is on the buy or on the sell we report stabilized cap rates. So the cap rates are not artificially low because we are only selling a 60% leased property. We are always, even if the property is leased at that level, we stabilize it when we report cap rates to you.

Operator

The next question comes from the line of Dave Rogers – RBC Capital Markets.

Dave Rogers – RBC Capital Markets

If one of you could maybe clarify or just give a little bit more color on the private capital, the negotiations you are having particularly with respect to China or Japan and what hurdles there might be between now and making those announcements.

Guy Jaquier

Let me give you a general flavor of how those discussions with private capital have changed over the year. I would say the first half of the year we were having a lot of conversations with investors in our funds who were really in damage control mode. They had a lot of problems elsewhere in their portfolio. They wanted us to come in and tell them how our portfolio was doing, make them feel comfortable that we were handling problems that might be coming up in leasing or in existing financing and then to make sure that they didn’t have to worry about us. It was a lot of that sort of care and feeding.

I would say in the third quarter of this year, this last quarter those conversations changed to more of them wanting to understand where the opportunities were. They were making plans for future investment, maybe whether it is the end of this year or more likely in 2010 but they were forming their plans. I would say those conversations today have moved more into okay how do we make a deal? What are the terms? How do you address governance? What is the plan going forward? So that is how the nature of those have changed.

Your specific questions on Japan and China, we are not currently pursuing recapitalization of the Japan portfolio. As Hamid and Tom have addressed, our balance sheet is really fixed and so we don’t really feel the need to do anything with that today. With respect to China we are in active discussions with a number of parties and we will make further announcements when it is appropriate.

Hamid Moghadam

The only thing I would add to what Guy said is maybe a longer term trend is that we are definitely seeing a difference in the way people used to allocate capital in the prior cycle and the way they are talking about allocating capital going forward. I would say the major differences are there is an intense focus on sponsorship and the quality of the [GP] and I think the business at least for now appears to be moving from generalist to people who actually focus on a particular geography and a particular property type as opposed to just buying a bunch of stuff and watching cap rates go down. So that is one big trend. The other trend that we see is that they are interested in more transparent and less leveraged structures and buy and large the larger investors are very, very focused on the governance of some of these funds.

Surprisingly we have not seen a lot of push back or negotiation on fees and terms. It is just more on the governance and the types of sponsorship that the fund has. More than the last cycle before.

Operator

The next question comes from the line of Michael Mueller – JP Morgan.

Michael Mueller – JP Morgan

You talked about the potential upside to come from FFO from leasing the development pipeline, potentially monetizing land bank, etc. When you look out over the next few years and look at the debt maturity schedule and what is set to roll on that side how much gets eaten into from that rolling from X costs to Y costs?

Tom Olinger

If you look out just over the next, through 2012, we really don’t have a lot rolling at all quite frankly. We have secured debt which we talked about and we feel very comfortable about that rolling. We have our line rolling going forward but if you followed the LIBOR interest curve and the forward curve today and look out by year and if you believe the curve that would probably be 40-50 bps increase in our average occupancy per year.

Hamid Moghadam

Our average interest rate.

Tom Olinger

Sorry. Thank you. Our average interest rate per year. So the impact is not very large.

Hamid Moghadam

I think the bigger potential impact is how do we want to plan for our liability structure. What is the appropriate percentage of floating versus fixed, etc. I think probably we want to be in the teen’s in terms of floating to fixed ratio and the fixed rates are actually pretty good today. Maybe they are not the absolute lowest that they were in the last cycle but frankly they are better than 95% of my career and that is getting to be a pretty long time. So rates are pretty good. There is not that much of a spread there.

Operator

The next question comes from the line of Cedric Lachance - Green Street Advisors.

Cedric Lachance - Green Street Advisors

I just want to go back to the private capital and the ability to raise the capital. When I look at the transaction to the Alliance Fund 3 obviously there was no new net capital provided by the partners. When I look at fund commitments for existing funds there is very little in place. I am curious as to whether or not you will have the ability to raise incremental capital in the existing funds or if you can only raise capital for future JV’s.

Tom Olinger

First of all let me just point out that as you correctly say the subject you are talking about is looking back over the last couple of quarters and what we are talking about is what we expect to see in the next couple of quarters. Because we are at an inflection point those two can be materially different. We are just talking about what we are seeing at this real time in the marketplace.

One thing we have seen in our existing vehicles is that we are having some people…if you remember in our Alliance Fund 3 for example we had a 12% redemption queue. We have seen some people take themselves out of that redemption queue and others talking about taking themselves out of that redemption queue. So to the extent that a reduction in exit is the first stage to raising new capital I am pretty optimistic about our ability to raise capital in those vehicles but I think that will take longer than fresh capital and the reason for it is this; people want to make sure that in terms of valuations in an open end vehicle you are not continuing to write down property. So I would suspect there is going to be a time where people see one or two quarters of stabilization of values and then they are comfortable that they don’t have downside and I think then you will see actually a flood of capital into that and more than a normal amount. That is exactly, by the way, what happened in the early 90’s because that would be a great way of buying a specified portfolio at an attractive cap rate.

Of course the investors that are in those funds know that. That is why they are withdrawing their redemption requests. So I feel optimistic about that but I think it is going to be probably a year before you see meaningful capital invest. Fresh capital to fresh ventures is easier because you don’t have the valuation issue or the valuation risk in terms of an existing portfolio so I think that will happen sooner.

Operator

The next question comes from the line of Ki Bin Kim – Macquerie.

Ki Bin Kim - Macquerie

To follow-up on Cedric’s last question, are the new capital joint ventures are their contracts more aggressive towards being more favorable to the capital partner where the carryover structure is the carryover is a lot higher? Or is the contribution cap rates set more aggressively in favor of the partner? My second question is going back to your macroeconomic comments, how much of an impact will the lower dollar have on U.S. import volumes and therefore demand going forward?

Guy Jaquier

Let me try answering your first question. As Hamid said earlier with respect to the private capital negotiations ongoing we are seeing far less push back on the terms and promotes. I think that investors coming in know that the sponsors have to pay their overhead. They know they have to make a profit at the end of the day. They are looking at alignment of interests very carefully. They have learned something about that in this phase of the economy. But they are not overall pushing back on terms as much. A lot of it is governance, transparency and really the comment we see coming up a lot is we want a partner. We want a sponsor. We want a GP who is honest and he tells us what is going on and gets ahead of problems and articulates that to us so we know what we are doing as an LP.

So it is a lot of that level than can we reduce the promote by X percent or something like that.

Hamid Moghadam

Just adding on to what Guy talked about here, in terms of specific terms there are a couple of things that are going away. For example, a catch up structure in the promote of the fund I would say is a non-starter. We never had that. So that may be a trend in the marketplace that is bad for some people but we never actually did that so it doesn’t matter to us. I would say to your specific question of what is happening to hurdle rates before splitting promotes, at most there is 100 basis point change in that in terms of that in the market. So maybe eight or maybe nine but not always.

I don’t think like Guy said there is a big difference on all those things. With respect to your second question with regard to the impact of the dollar on imports, obviously classic economic theory would tell you that would not be good but two things I think mitigate that. One is the volume of imports has fallen a lot so you are kind of going off of a slower base and I think the positive impact of the growing economy and growing consumption will offset the trends with the dollar. Secondly, a lot of those things that are being imported we don’t make anymore. So unless we import them from somewhere I’m not sure how we are going to get apparel or toys or some of these other things that account for a lot of the lower cost imports.

I think what it may mean is a little more inflation here in terms of importing inflation.

Operator

The next question comes from the line of Jamie Feldman - Bank of America-Merrill Lynch.

Jamie Feldman - Bank of America-Merrill Lynch

A quick follow-up. Based on the guidance range you laid out for 2010, what do you estimate for dividend coverage with the dividend at the current level?

Tom Olinger

Dividend coverage with FFO at the high end would be about 80%. That would move higher if you put in any of the deployment activity at $0.35.

Operator

The next question comes from the line of Michael Bilerman – Citi.

Michael Bilerman - Citi

I just wanted to come back to the balance sheet side of it. You talked about wanting to get your balance sheet floating rate perspective down to the low teen’s. You are sitting today I believe in the mid 30% range and that is clearly what is driving your average interest rate on the entire debt pie of about 4.5%. When you think about moving to fix more of your debt, clearly in the REIT industry it is in the low teen’s, how much of that is baked into your 2010 guidance? Your current five and ten years bonds, while just an indication, are trading at 7-8% and so clearly just moving a substantial piece of your debt from floating to fixed would be a huge drag. I’m just trying to determine how much of that has already been taken into account as you think about your forecast.

Hamid Moghadam

I will let Tom actually answer some of the specific questions with respect to the numbers but let me just point out two things. Any time anybody can find some of our bonds that we can actually buy for 7-8% I would sure like to buy some of them but we have tried and we can’t buy them. Obviously the price on the street is different than what you can deploy capital in those things at. We would love to buy some of those.

The second thing is there will be naturally some pay down of that floating rate debt as we de-lever. I think we shared with you some of our longer-term leverage targets and as we de-lever all of it, or most of it, will come from the floating rate portion and we will get there. By the way, one of the reasons we have more floating rate debt is not because we were trying to play the interest rate game or reduce our interest rate costs. The reason was we had a development business and the development business had to be financially short-term capital. That development business is now turning into a long-term hold business and obviously our capital structure needs to adjust to coincide with that. So it wasn’t a play on interest rates. It was just a mix of our business which has changed.

Tom Olinger

Another thing, when you look at the rates, a lot of that rate is impacted by Japan. We do have some construction debt there that is floating. So that certainly brings it down. When we forecast and look out to 2010 we do have that maturing and being paid off and as you pointed out the rates on unsecured or secured are debt different so we have some flexibility there. So we have baked it in. One other thing too is when you look at the 325 or now the 345 facility we just redid and extended we are going to float a little bit on that because we think that is the smart thing to do as we look at the curve. Believe me we are watching that and we will take the right steps to swap any of that variable when we think it is the right time to do so.

Operator

The next question comes from the line of David Fick - Stifel Nicolaus.

David Fick - Stifel Nicolaus

A follow-up. Can you talk about the normalized cap rate for the developments you sold excluding Park One? You may have referenced that. I just didn’t know or was clear on it.

Tom Olinger

The cap rate if you exclude Park One and really also exclude the Japan asset sale in Q1 was right around 8%.

Hamid Moghadam

I think he is asking specifically about these recent development deals. I think in the U.S. they were in the 8-8.5% range. The 8.2 to 8.4 range. Somewhere in that. I don’t remember the exact number. We can get back to you on that exactly but it is in that range I am pretty sure.

Operator

The next question comes from the line of Cedric Lachance - Green Street Advisors.

Cedric Lachance - Green Street Advisors

Just one more perhaps on private capital. I noticed that the overhead that is allocated to that business has reduced quite dramatically over the past couple of years. I am trying to understand, what are the needs of this business in terms of personnel given that now you have more assets than you had in 2008 or 2007 and that you might need to extend the business over time. Do you have the right people in place? Should we expect the number of people to grow over time?

Tom Olinger

I think what is happening is that we have formed these very large, open end funds and the number of vehicles we have has actually not grown by our capital under management has grown so we are actually becoming more efficient in the portfolio management function because the average portfolio manager is running larger funds. Those relationships are more driven by the number of funds and relationships than the capital in each. Also, the vast majority of our infrastructure is actually our operating infrastructure which is not at all allocated to the fund management business because as you know we operate properties under our one portfolio process with ownership line approaches. So the vast majority of overhead in that business is actually not in that business but in the operating business.

Operator

The next question comes from the line of George Auerbach – ISI Group.

George Auerbach – ISI Group

Could you help me understand the 5-6% sequential increase in portfolio in [inaudible] just given that [ad] declined, rents rolled down and the overall square footage was essentially flat sequentially?

Tom Olinger

I think what that really is movement of assets out of the held for sale for the buckets of discontinued ops back up into a normal operation. Also you would also have to look at the impact of free rent on our NOI.

Operator

The next question comes from the line of Wilkes Graham – FBR.

Wilkes Graham – FBR

I had to jump off for a second so I apologize if you have already answered this. I just want to make sure that I am reading this right. You have about 10 million square feet of vacant square footage in the development pipeline now when you combine the pipeline and the square feet that are available for sale or contribution. Is it right adding up the comments that you made about doing roughly 4-5 million square feet of leasing this year in the pipeline and I think maybe 6 million next year that you want to lease about 1.5 million square feet per quarter over the next five quarters and that is built into the 2010 guidance you gave?

Tom Olinger

That is correct.

Hamid Moghadam

Actually Guy has a really good way of describing this that I will share with you. In the best of times, 2007 and 2008, we were leasing at a rate of about 8 million feet in our development program. That actually excluded China altogether because we didn’t have that much business in China. That was the peak of the market. In the trough of the market this year we are leasing maybe on an annualized rate of around 4-4.5 million square feet or something. So I think our assumption for next year is somewhere in between those two numbers which actually is quite reasonable if you think that we are going to have an economy sort of in between and then if you add China to it there will actually be a lot more than that but we haven’t added China to that number. If you actually throw in China that number would go up pretty significantly.

So that is one way of top down getting comfortable with our assumptions.

As I look at the queue there is nobody else on the line. I want to thank you for your interest in AMB and we look forward I guess to talking to you in 2010 if not before. Thank you.

Operator

Ladies and gentlemen this concludes today’s conference call. You may now disconnect.

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