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
Chris [Canton] – Morgan Stanley
Michael Bilerman - Citi
Steven Frankel – Greenstreet Advisors
Sloan Bohlen - Goldman Sachs
Ki Bin Kim - Macquerie
Jamie Feldman - Bank of America-Merrill Lynch
Ross Nussbaum - UBS
Michael Mueller - JPMorgan
Mitch Germain – JMP Securities
Joshua Barber – Stifel Nicolaus
Dave Rogers – RBC Capital Markets
George Auerbach – ISI Group
Steve Sakwa – ISI Group
AMB Property Corporation (AMB) Q4 2009 Earnings Call February 2, 2010 1:00 PM ET
Operator
Welcome everyone to the AMB fourth quarter earnings conference call. (Operator Instructions) I would now like to turn today’s conference over to Ms. Tracy Ward. Please go ahead, Ma’am.
Tracy Ward
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, our leasing activities, our private capital business, our capital deployment activities, our planned dispositions, our development businesses, our 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 our financial position, provide a review of our financial results and guidance before we open the call to your questions. Also in attendance with us today are Gene Reilly, President of the Americas and Guy Jaquier, President, Europe and Asia.
Hamid, will you begin?
Hamid Moghadam
Thanks, Tracy. Good morning everyone and thank you for joining us for the call today. This morning I would like to cover three key areas; First our view of the economy as it affects our business, current industrial market conditions and customer sentiment. Second, our growth initiatives as we move into the next phase of the business cycle. Third, our outlook for the company in the coming year.
Let me begin with our thoughts on the global economic recovery. First, production is gaining momentum. From its trough in June global industrial production is up about 8% through year end. Even at these improved levels there is still a lot of room for expansion as industrial production is still down more than 12% from the peak. Second, global trade is leading the recovery. Air cargo volumes experienced a strong rebound in the fourth quarter, a trend which is continuing into January. Specifically, international cargo was up24% year-over-year in December and in excess of that from its trough.
As a precursor to inventory restocking, we have kept a close eye on air cargo, the proverbial canary in the coal mine of the logistics business. Air cargo is the direct beneficiary of emergency shipments made in response to inventories that were too tightly managed during the downturn. Now as the economy recovers retailers and manufacturers have had to rush shipments via air as sales outpaced their conservative expectations.
We are seeing similar strength in container volumes. For the major ports reporting data through December container volumes are up 45% from February troughs, an 11% year-over-year. This rebound was led by U.S. ports which were up more than 16% over the same period driven by exports. For the major U.S. ports reporting data through December, exports are up almost 40% while imports rose 4%. With container traffic up across the board we expect year-over-year gains to continue in the first quarter of 2010 particularly on the import side.
Third, the decline in inventories is moderating. Inventories fell by 0.5% in the fourth quarter, their smallest decline of the year. Even though inventories are expected to grow in the first quarter, sales are likely to grow even faster, keeping the inventory to sales ratio near its historic low. We expect it will take some time for inventories to stabilize to their pre-crisis levels. As we indicated in our June research the unprecedented collapse in inventories long proceeded the downturn and was much deeper than the decline in final sales. We are confident the inventory adjustment process will be similarly strong on the rebound.
While we are optimistic about what is happening with these leading indicators it is important to remember we are at an inflection point and it will take some time for the recovery to translate into new demand for industrial real estate.
Let’s turn now to an overview of the U.S. logistics market which continues to be challenging. National availability increased 40 basis points to about 14% posting another historic high. 2009 went down as the worst on record for industrial net absorption at a negative 265 million square feet. The negative trend decelerated over the course of the year slowing to a minus 38 million square feet in the fourth quarter, slightly better than our expectations. We believe we have reached the inflection point in our coastal markets as net absorption was flat and availability unchanged at 12%. This was a clear improvement over the previous 10 quarters and similar to what we saw at the tail end of the last downturn.
The impact of increased demand on vacancies will be further enhanced by extremely low additions to supply. New construction in 2009 came in at an all time low of 71 million square feet, trickling down to about 15 million square feet in the fourth quarter. Deliveries in 2009 represent one-third of the historic average and about half the rate of obsolescence. 2010 deliveries are expected to be even lower. Given the positive momentum in production, trade and inventories, our research calls for net absorption in the U.S. to turn positive in the third quarter.
Our confidence in the recovery is bolstered by what we are seeing and hearing from our customers. Their outlook which began improving in the second quarter has taken on a new level of optimism in the last two months. In real time customers are expressing increased confidence, improved profitability and high growth expectations for 2010.
This is very encouraging news and comes to us a little earlier than we had anticipated. In fact, for the first time since mid 2008 we find that our large global customers are talking about growth. They appear to have conviction in their forecast and they tell us they are budgeting for moderate increases in 2010. This is a significant change from the cost management focus that dominated their thinking in 2009. Driving this increased optimism are the improvements in the leading indicators of demand in air and ocean freight. Several of the air cargo and ocean carriers have told us that they are surprised by the continuation of the growth which began in December and has persisted through January. This visibility is giving freight carriers confidence about continued momentum into the spring.
What this all means is customers are back filling existing capacity and are executing on their business development and expansion decisions previously on hold. As existing space reaches capacity the need for expansion will drive new demand for space. We believe that demand is being further revived as major retail and consumer product companies work to optimize their supply chains. These improvements will lead to a natural progression of demand for industrial real estate, demand which we continue to expect to be modest for the next one or two quarters but should accelerate in the second half of the year.
Let’s now shift to our three growth priorities for 2010. First, we will improve the utilization of our existing assets by filling our core operating portfolio closer to our historic average occupancy of 95%, by completing the build out and leasing of our development portfolio and by realizing value from our land back through new ventures, sales and build to suit projects.
Second, we intend to invest in quality assets with total returns above our cost of capital. Deal flow appears to be ramping up and we are evaluating multiple opportunities across the globe. Some our best investment opportunities can be found in our own open end funds, where we have added to our ownership on an accretive basis. Other opportunities are arising as the markets gain greater transparency and sellers of good assets come off the sidelines. Our ability to provide solutions to lenders, institutional investors and private developers in need of workouts or capital infusion gives us access to a proprietary pipeline. We are also beginning to see some interesting build to suit requirements and are in discussions on a number of projects around the globe.
We also expect that as short-term interest rates increase there will be additional pressure on highly levered owners of industrial assets leading to increased investment opportunities in the second half of the year.
Our third growth initiative is the formation of new private capital vehicles. We are actively engaged in discussions with a number of institutional investors across the globe who would like to put capital to work in the logistics sector. Recent market activity reflects an increasing level of investor interest for stabilized core investor portfolios such as ours. Growing levels of investor capital is being met by the scarcity of product as well as the dirth of stable investment platforms and experienced management teams.
These conditions are providing a strong floor for property valuation and represent a terrific opportunity for AMB. In fact, I would like to share some news about our funds that evidences this change in sentiment. Since last quarter we have had about $270 million swing in capital commitments into our open end funds comprising of $50 million in new, third party capital. This represents the first capital raise since April of 2008. About $70 million in investor rescissions, reducing the current Fund three queue to approximately $15 million or 1.8% of the fund’s equity. This remaining queue will be eliminated within the next couple of weeks.
Finally our own $150 million investment in our own funds. $100 million in Fund Three and $50 million in the Europe Fund. We believe this shift in sentiment is the acknowledgement of the terrific value and potential of these vehicles and also the trust that investors have put into sponsors who have distinguished themselves in this downturn. At today’s attractive pricing we are a buyer now and possibly in the future in our own funds. After all where else could we find such high quality portfolios that we know so well at such attractive pricing?
I will now turn it over to Tom to review the financial performance.
Tom Olinger
Thanks Hamid. I would like to cover three topics today. First, an update on our capital markets activities. Second, recap our fourth quarter and full year results. Third, provide you with update guidance for 2010.
We took some additional steps in the fourth quarter to further strengthen our financial position having resolved all of our significant near-term debt maturities we shifted our focus to our intermediate maturities. In the fourth quarter we embarked on a strategy to further lengthen our maturities schedule and minimize our maturities over the next 3-4 years. This involved issuing long-term bonds, repurchasing intermediate bonds, repaying a secured facility early and extending and expanding an unsecured term facility.
All of this financing activity resulted in a very busy quarter as we completed $1.6 billion of transactions. Here are some specifics on our fourth quarter financing activity. We issued $500 million of bonds consisting of 7 and 10 year trenches of $250 million each. We repurchased $214 million in bonds maturing in 2010 to 2013 including $165 million through a tender offer and $45 million through open market purchases. We repaid our $230 million secured term loan facility. We refinanced our unsecured multi-currency term loan facility which was upsized to $445 million and extended its maturity to 2012. And we repurchased our Series D preferred units at a 15% discount with $68 million of our common stock.
In addition, subsequent to year-end we repaid or refinanced an additional $144 million of secured debt which was scheduled to mature in 2010. The net result of our fourth quarter financing activity while effectively leverage neutral was to extend the weighted average remaining life of over 25% of our debt to more than 5.5 years at an average interest rate of just under 5%. Our only significant unsecured debt maturities through 2012 are the bank facilities and $134 million of our bonds. Our already significant liquidity position increased by $100 million to $1.4 billion at year-end consisting of capacity on our three global lines of $1.2 billion and over $200 million of cash.
The bottom line is our balance sheet is in great shape, we have ample liquidity and a clear maturities runway into 2013. We are committed to maintaining our solid financial position and will continue to look for opportunities to further trim out our maturities and move towards our long-term leverage goals we discussed last quarter.
Now let’s move to our results. FFO for the fourth quarter was $0.29 per share. I want to highlight three significant transactions during the fourth quarter which are reflected in FFO. As a result of our financing activities we reported an $11.6 million charge related to debt extinguishment and a $9.8 million redemption gain in connection with the preferred unit exchange. We also incurred $2.5 million in severance charges in the quarter. These three transactions netted to about a $0.03 loss of FFO.
Core FFO which does not include these items or gains from development activities was $0.32 per share in the fourth quarter. For 2009 core FFO was $1.46 per share. Core operations were slightly better than our forecast primarily due to higher average occupancy. Both our quarter end and average occupancy increased from the third quarter to 91.2% and 90.7% respectively. Our quarter end occupancy in the U.S. continues to significantly outperform the national markets by 510 basis points which is above our historical spread by about 50 basis points.
We had another strong quarter of leasing volume commencing approximately 7.8 million square feet of space in our operating portfolio during the fourth quarter, well above our historical average. 2009 was a record leasing year for us with 29 million square feet of commencements. This leasing velocity is a testament to the strength of our global operations teams who arguably faced the most challenging leasing conditions on record this past year.
During the quarter we reduced vacancy in our development portfolio by 2.5 million square feet. This includes the lease up of 1.5 million square feet and the sale of a vacant one million square foot development project which brought our total resolutions to 4.9 million square feet for 2009. Same store NOI was down 7.3% for the quarter and 4.5% for the year driven by declines in average occupancy over the comparable period. Without the effect of foreign currency same store NOI was down 8.9% for the fourth quarter and 4.7% for the year.
Rent changes on rollovers were negative 11.5 for the quarter and 6.9% on a trailing four quarter basis. This rent change is not surprising given the magnitude of peak to trough rental declines we have seen in our global markets. While we remain focused on occupancy we will continue to take a long-term view and we will balance short-term earnings with long-term asset value.
From a customer receivables standpoint write offs remain in line with our historical average at this point in the cycle and appear to be leveling. Private capital income was in line with our expectations for the quarter. G&A was also in line with our expectations at $115 million for 2009 and reflects our current quarterly run rate achieved through our cost saving and restructuring initiatives partially offset by lower capitalized development overhead which was only $9 million for 2009.
In the fourth quarter we began implementing a company initiatives to outsource various global property accounting and other back office functions. This initiative will improve the efficiency, cost structure and scalability of our back office operations. During the fourth quarter we incurred $2.5 million in severance costs. We expect to incur additional severance in 2010 related to completing this initiative. Once complete we expect to realize about $5 million in annual savings. Interest expense was about $2 million higher in the quarter due to the $500 million bond offering completed in November.
Now let’s look forward. I would like to put into context our view of the global economic recovery and when we expect to see improvements translate into our operating results and 2010 guidance. As Hamid indicated, the recovery in industrial production and trade is well underway. A key variable for our 2010 guidance is determining how the economy recovery translates into demand for our properties. As in prior cycles, the recovery and operating fundamentals will lag the macro economy by a couple of quarters which is reflected in our 2010 guidance.
We expect that our operating fundamentals in the first half of 2010 will generally be characterized as bouncing along the bottom and then improve in the second half of the year. We continue to expect that the slope of the recovery will not be as steep as the slope of the decline. We are maintaining our average occupancy forecast of 90-92% in 2010. We expect occupancy to be effectively flat through the second or third quarter of 2010 and then increase in the fourth quarter.
Given the shape of the recovery, we expect to see negative rent change on rollovers for all of 2010. We are forecasting cash same store growth before lease termination fees and without the impact of FX to be flat to down 2%. Given the amount of higher free rent we are currently seeing, we expect to be at the low end of this range and for same store growth to remain negative through the next three quarters before turning modestly positive in the fourth quarter.
It is important to remember that this is a cash metric and as a result the structure of concessions can significantly impact first year cash NOI. At the end of 2009 we have 6.9 million square feet remaining to stabilize in the development portfolio. We continue to expect to achieve stabilization by the end of 2010. Our 2010 development leasing levels represent approximately 2/3 of our historical annual pace.
We are forecasting private capital fee income to be $27-29 million in 2010 which does not include any incentive fees. Our net G&A forecast remains at $122-125 million. Net G&A is up from 2009 levels primarily due to lower capitalized development overhead. In addition, our 2010 G&A guidance does not include severance charges. We expect to incur $2-3 million of severance charges in 2010 related to our outsourcing initiatives.
We continue to forecast operating property dispositions of $100 million the majority of which relates to the REIT. After setting our initial 2010 earnings guidance in October we completed two transactions which will impact 2010 FFO; the bond offering in November which was larger than we had contemplated, will increase interest expense for the year by about $0.06. We believe the earnings impact of a larger bond deal is more than compensation for by the extended maturities. The higher interest expense will be partially offset by an increase in income of about $0.03 related to our investment in our two open ended funds in the first quarter. As a result, we are revising our full-year 2010 FFO guidance to $1.26 to $1.33 per share, down $0.03 which is the net impact of these two transactions.
As a reminder, our core FFO guidance excludes any gains from development activity and nonrecurring charges consistent with 2009.
Now moving to deployment opportunities, as Hamid mentioned, we believe the best real estate we can buy today is in our funds. Fund Three was appraised at an 8.5% stabilized cap rate at year-end while the Europe fund was at 7.4%. We believe these are positioned for growth and represent a great investment. Looking forward there are several areas for additional deployment opportunities.
First, we have the ability to make additional investments in our two open ended funds. Second, we are beginning to see our acquisition pipeline grow both through our proprietary opportunities and as more deals are coming to market. Third, we are seeing a global increase in build to suit activity and some signs of pent up demand in countries that still lack supply of modern, Class A facilities such as Brazil. Lastly, a institutional investor interest is picking up we are focused on forming new ventures and funds which may provide another avenue for deployment.
At this point it is difficult to project the timing or level of additional deployment for 2010. Therefore we have not reflected any potential deployment activity or private capital revenue from new fund formation in our guidance. We will keep you posted on our progress in the coming months on the development front.
Overall, I am very pleased with our financial position and flexibility. We are well prepared to take advantage of opportunities as they arise and to resume on a path of growth. With that I will turn the call back to Hamid.
Hamid Moghadam
Thanks Tom. Before we turn the call over to your questions there are three key takeaways that I would like to leave you with.
First, indicators for global economic recovery are all pointing up. We are expecting improving economic conditions will lead to an increase in industrial demand particularly in our seaport and airport markets which capture the dominant share of the recovering trade activity.
Second, we expect to see earnings growth from improved asset utilization as we back fill vacant space and realize value from completed development projects. Opportunities are emerging around the globe and we are evaluating a number of investments in various continents all supported by customer requirements.
Third, our accomplishments in 2009 are the byproduct of a dedicated and engaged team. We have worked hard to get here and everyone pulled together to get the job done. As a result of these efforts, we are well positioned to take advantage of the excellent investment opportunities that are now emerging around the world. We are optimistic about the return to growth in 2010 as well as the long-term prospects for our business. Our capital, platforms and people are ready to be deployed to support the activities of our customers and to produce leading returns for our investors and shareholders. With that we are ready for your questions.
Question and Answer Session
Operator
(Operator Instructions) The first question comes from the line of Chris [Canton] – Morgan Stanley.
Chris [Canton] – Morgan Stanley
My question is regarding your approach to rent negotiations and lease renewals. That has kind of continued to trend down and I am wondering how tenant mentality is evolving. Are they still looking for long-term deals or low rent? How are you approaching those negotiations?
Gene Reilly
I think in general customer sentiment is generally turning up. In terms of how that translates into lease negotiations, we do have difficult environments out there. There is high level of vacancies in a lot of the markets we work in. But in several of them we see rents bottoming. In an isolated few we actually see rents bumping up off the bottom. It might be also helpful to just give you a picture of what customers are thinking for the future.
The most recent negotiations we have had on leases have been challenging but looking forward we see much more optimism with our customers. If you look at customers in the transportation business, the integrators, the cargo handlers, they all had much, much better December and January performance than they expected. They were surprised by that and their level of optimism for the future we think took a significant turn. Frankly that is why we are calling for an inflection point on customer sentiment. Their forward-looking ideas about their business have really turned positive so we think that is going to take time to play out but the leading indicators are quite good right now.
Chris [Canton] – Morgan Stanley
So the rents rolled down around 8% in the quarter. How do you anticipate that going for 2010 lease maturities?
Gene Reilly
As I think we said in the prepared remarks we expect that rent roll down will continue throughout the year. We are not going to forecast beyond that. Roll downs of course do not benefit from increased occupancy so what you are going to see is same store will continue to slide for the first half of the year. That will rebound in the second half but you will see the continuation of roll downs for a bit frankly because they don’t benefit from increases in occupancy which we expect by the year-end.
Hamid Moghadam
Maybe it is worthwhile clarifying one point here. I think the reason rents are continuing to roll down is because we are rolling down old rents that were at high levels generally from the pre-crisis levels. We are not calling for too many more quarters of rents going down on the margin in terms of what the market rents are. In fact we think we are at the bottom. So the negative marks you see are compared to the in place numbers, not the current market trends.
Operator
The next question comes from the line of Michael Bilerman – Citi.
Michael Bilerman - Citi
Can you spend a little bit more time talking about your investment into Fund Three? In terms of how much of that $100 million was used to potentially fund investor requirements replacing the equity that was there versus incremental equity to sort of de-lever the fund or go out for new acquisitions and if you can just clarify, I think Tom made a comment the U.S. fund was valued at 8.5% stabilized NOI and Europe at a 7.4%. What would that actually be on a current NOI basis?
Hamid Moghadam
In the case of the current versus stabilized they are very close because the occupancy levels actually in the funds are near stabilized. They are both around 95% leased so there won’t be a big difference between those two numbers. I think a little bit lower in the case of the U.S. but not at all any different in the case of Europe. In terms of the flow of funds, our decision to invest in the fund was simply because we saw really good values in the fund and we thought we would take advantage of that and we actually made the same opportunity available to all of our investors to do the same. That is why a couple of people really stepped up and invested new capital into the fund and we are having additional discussions about further investments into these funds as well.
As a signal, I guess people read that to be a very positive signal and we had a redemption queue that at the beginning of the quarter was in the order of $80-85 million, and all of that basically or $70 million of that basically disappeared so our redemption queue is down to $15 million and we expect to redeem that out in the next couple of weeks once we get the paperwork done. So really actually the money is going into the fund and then the fund is redeeming this remaining $15 million worth of investors. Also the new capital from third parties is going into the fund.
So think of it as $50 million of third-party capital, $100 million of our capital going into the fund and what is coming out of the fund is $15 million through fund remaining redemptions and the rest of it will be available for new investment and possibly paying down some debt, which is again capacity for new investments.
Operator
The next question comes from the line of Steven Frankel – Greenstreet Advisors.
Steven Frankel – Greenstreet Advisors
Just a quick question, kind of a follow-up from Mike’s question about Alliance Fund three. We noticed there is a new development property in that fund that is about 560,000 square feet. It also looks like a new start for 2011 stabilization. Are you thinking of shifting more development to the funds now?
Gene Reilly
This is an asset that really isn’t a ground up development. It is a property in San Francisco which is really more of a redevelopment. As to the second part of your question in Alliance Fund Three we do not expect future contributions.
Hamid Moghadam
By the way, this asset was already into the fund. So it was an operating asset we had acquired I want to say 3-4 years ago that had some old leases that expired about a year ago and that set it up for a planned renovation/redevelopment which we are doing right now. That is why it was reclassed. It was not a new investment.
Operator
The next question comes from the line of Sloan Bohlen - Goldman Sachs.
Sloan Bohlen - Goldman Sachs
I just want to take another shot at Michael’s question. Hamid in the past you have talked about where an appropriate leverage level for the entire company would be. Do you have something similar in mind for where you would want leverage in your funds to be? As a follow-on to that, as you think about new private capital where do you expect you could set leverage in that fund or where do you feel your co-investment levels would have to be relative to funds you have done in the past?
Hamid Moghadam
Good questions. First of all with respect to the limits of the funds, both of our open end funds in Europe and in the U.S. have a limit of 60% on LTV on leverage I believe or something on that order. It is actually 65% in one case and 60% in another case. We have actually operated under lower levels of leverage by and large but of course unit cap rates moving around as they have in the last 1.5-2 years makes it pretty tough to dial in the leverage too precisely. Long-term, the maximum being in the low 60’s call it, our feeling is we operate most of them around 60% leverage and that would be a good target overall.
In terms of how long we take to get there and what combination of new capital goes towards de-levering and what portion goes to new investments, we are going to take a very gradual approach towards that because frankly I think the cap rates are as we mentioned and as we demonstrated with our own investment are too high. I think as those cap rates come down over time the value will go up and the funds will be in actually very good shape with respect to their leverage targets.
With respect to the second part of your question which is co-investment requirements for new funds, basically the trend we are seeing in the private capital business is major investors around the world after the experience of the last cycle really want significant co-investment, they want to invest with operators and we are hearing an increased interest in working with specialists as opposed to just capital allocators. Basically operating companies. I think we check every single one of those boxes. I think we are putting in a significant amount of capital within our funds. Our requirement, for example for Fund Three, was originally 20% and once we hit $150 million in total capital commitment we could stop at that moment and not put in any more capital. In fact we have put roughly double the capital requirement now in the fund.
As I mentioned in my prepared remarks we might even put in more. We like our own cooking. We think these are really great funds and frankly it is the best place we can get returns. So as long as the returns continue to be very good we will be very committed. At minimum we are putting 20% of capital in our funds which definitely is sufficient capital to create alignment from the perspective of our LPs.
Tom Olinger
I want to add on one thing to the end of that regarding your first question around debt. Both of the funds, the Europe fund doesn’t have any debt due until 2013. The Fund Three had only $27 million of debt due in 2010. We did go ahead and pay that debt off already and we have a small line there we did pay down. So we have used about $65 million at this point to pay down debt.
Operator
The next question comes from the line of Ki Bin Kim – Macquerie.
Ki Bin Kim - Macquerie
If I just follow-up on the funds question, it looks like from the gross asset value standpoint and the planned gross capitalization standpoint you are pretty much at capacity for the funds. What kind of room do you have for expanding the overall size of the funds?
Hamid Moghadam
Since we don’t want to lever up, the expansion of the fund is going to be a function of additional capital raises but our visibility and confidence with respect to capital raises is the strongest it has been in a couple of years. Guy go you want to add to that?
Guy Jaquier
We are actually in a number of discussions with global investors in U.S., Europe and Asia. What we are seeing is there is a lot of interest in the U.S. right now for core, stabilized assets 94% leased and again that open end fund we have is checking all those boxes. The queue will be removed. The dividend is reinstated. We are very confident we will be seeing new capital going into that which will be available for new investment.
Similarly we are seeing interest in core for Europe. There might be a little bit of a lag there again as far as the confidence of the recovery in Europe being a little bit behind the U.S. but we are seeing interest there. Additionally in Japan for core investment. There is other capital that is looking for more sort of value-enhanced strategies. Again, looking at the U.S. deals more with a little bit of hair on them, deals that have leasing risk, helping to fix capital stacks, that type of investment. We are also seeing capital that is interested in Japan, again looking to help recapitalize assets. On the emerging side we are seeing a lot of interest in Brazil and China at the moment.
Ki Bin Kim - Macquerie
A follow-up, if Alliance Fund Three was being priced at an 8.5% cap rate and your development pipeline right now is expected to yield 6.8% does that kind of imply you mean you won’t be able to sell your development assets into the funds given the pricing discrepancy?
Gene Reilly
First of all, in terms of Alliance Fund Three we are not going to be contributing development assets to that fund in any event. If you look across the spectrum of our pipeline the returns in the U.S. are right around 8% and in Europe they are around 7.5% and then Asia and developments around 7%. So there is obviously a spectrum to it and we think the 8 makes sense for these developments which are brand new, very high quality assets. The first part of your question, there won’t be contributed to the Alliance Fund in any event.
Tom Olinger
Just to clarify, the yield scene was playing out were after our impairment charges. So to be on a comparative basis.
Hamid Moghadam
But the key issue is that you cannot compare the overall yields of the entire development portfolio to the returns on the U.S. fund because the geographical mix is weighed down significantly by $500-600 million of Japan assets that are there at a couple of hundred basis points lower return. So on a U.S. to fund basis we are actually very comfortable with where we have marked those development deals.
Operator
The next question comes from the line of Jamie Feldman - Bank of America-Merrill Lynch.
Jamie Feldman - Bank of America-Merrill Lynch
I was hoping we could talk a little bit more about your discussions with customers. You said in your prepared remarks you suggested that they are getting more confident, feeling like they have more visibility on the future but they do feel there is going to be some time before there is true net absorption. Can you talk a little bit about what your customers are saying in terms of the slack in their current supply chains or in their current warehouse space? Also any themes you are seeing as the recovery starts whether it is want to be near the ports, don’t want to be near the ports, just how we should be thinking about this recovery from what you are seeing so far.
Hamid Moghadam
Those are all good questions. Let me take them one at a time and then I would like to hear what Gene has to say also about these. First of all in terms of the way the recovery is going to play out we think it is similar to the way the downturn played out. Consumption went down a little bit, production went down a lot, trade slowed down a lot and that affected the port and airport markets a lot. I think just a restocking of the supply chain is going to reverse that in basically the same order. Talking about consumption, from peak to trough which is now almost a year ago in March of 2009, consumption was down in the U.S. by 1.9%. We have gotten about half of that back. So consumption from peak levels down about 1% but as you know, and you have heard us talk about this many times, industrial production was down in the high teens. So that is just the supply chain refilling back up and I think it is going to refill back up in the same order as it emptied out.
In terms of the customers I think you ought to pay attention to what they are telling the street. UPS announced earnings today. You can listen to those. The global supply chain is really coming back. It fell off the cliff and it is really coming back. That part of it I am pretty confident about. I am pretty confident that ultimately the supply chain will get back in line with the decline in final sales which has been relatively modest. What remains to be seen and I think this is the really key question is after that restocking is over then you really depend on economic growth to keep it up. Your guess there is as good as mine. I think that trend is being overwhelmed by the restocking trend.
Once we are back restocked to a normalized inventory level, is the economy going to grow at 2% or at 4% and for how long, that is a really important question and I am not really qualified to answer that right now. Gene?
Gene Reilly
Let me get to some of your other questions. In terms of capacity utilization that is a tough thing to measure obviously. We do the best we can. Big picture, if companies are using 95% of their space that is about full capacity. You can’t get much better than that. I would take where we are at right now to be probably around 90 or the low 90’s. So we don’t have the shadow space. Across the portfolio of course there are individual exceptions but we don’t have the shadow space that certainly we saw in the last downturn. So I feel pretty good about that. I point out we believe it is going to be another couple of quarters before you see positive absorption in the market. So there is a little bit of slack yet to be taken up.
In terms of the customer sentiment, as I said a few moments ago I will tell you their outlook just in the last 30-45 days seems to be much better. In terms of who wins in this, there is definitely a flight to quality. You see this playing out in markets all over the U.S. and I believe in Europe where quality buildings are getting absorption and weak buildings are not. Ports, absolutely are winning. We are seeing tenants who may not have been able to afford being near a port. They are going to move in that direction.
Operator
The next question comes from the line of Ross Nussbaum – UBS.
Ross Nussbaum - UBS
If I could push you a little bit on a comment I thought I heard in the prepared remarks, I think Tom said you thought in Q4 of this year same store NOI could potentially turn positive. Is that right?
Tom Olinger
Yes.
Ross Nussbaum - UBS
Help me on the math there. What I am looking at is if we are talking negative leasing spreads to a tune of negative 11-12% and you have 13% of your leases rolling this year, you are in the hole to a tune of about negative 1.5% in terms of just your same store revenue rolling down. That would suggest to me you are going to need a healthy 100-150 bps of occupancy on a year-over-year basis by the end of the year to at least get that number in the right direction. Is that roughly the right math?
Tom Olinger
That is right. But what I was saying is we will see quarterly same store improve, not for the full year, but quarterly. The other thing you need to factor in as well is probably 75% of our portfolio has some sort of a contractual rent bump in it. That rent bump I think will dwarf the rent roll down on the 15% of the portfolio that is rolling down. As you point out the increased occupancy buffers or certainly supports the same store growth.
Operator
The next question comes from the line of Michael Mueller – JPMorgan.
Michael Mueller - JPMorgan
Going back to a comment you made about 2010 guidance, when you talked about no additional capital deployment being assumed. Was that just for new ventures being contemplated at this point because I thought prior guidance had about $100-150 million of acquisitions in it?
Tom Olinger
Actually the prior guidance did not have any acquisitions in it. We gave a range of what we thought we might see, $300-500 million of deployment being both development and acquisition. We did not include that in our base guidance and this time our base guidance doesn’t include anything. It does reflect our $150 million investments in our funds but nothing else and no new fund formation.
Operator
The next question comes from the line of Mitch Germain – JMP Securities.
Mitch Germain – JMP Securities
The $50 million of new third party equity was that new funded investments or repeating investments?
Guy Jaquier
Those were investors that were already in the funds. They were already in Fund Three and actually a couple of them had been in the queue, took themselves off the queue and put in new capital.
Operator
The next question comes from the line of Joshua Barber – Stifel Nicolaus.
Joshua Barber – Stifel Nicolaus
In light of some of your comments about the renewed optimism of some of your customers are you seeing a willingness to sign longer term leases than they have been in the last year? Just to keep going off that, what does that mean for you with rents where they are today?
Hamid Moghadam
You know it is an interesting thing that happens every time at about this point in the cycle. The customers want to go longer than we want to go. I would say we are there. That to me is the best indication that they think business is getting a lot better. Gene do you have any additional color on that?
Gene Reilly
The only other thing I would add is we have seen a very large increase in build to suit requirements which are by nature long term commitments. We will see how those play out but in the last quarter we have seen that spike up dramatically.
Operator
The next question comes from the line of Dave Rogers – RBC Capital Markets.
Dave Rogers – RBC Capital Markets
I wanted to go back to the acquisition topic if I could. I think I heard you say in the comments, if I didn’t I am sorry to put words in your mouth, but you talked about second half acquisition opportunities could maybe start to emerge a little bit more. If you didn’t say that, sorry. If you did, what gives you confidence in that second half increased offerings on the acquisition front against the back drop if these owners have held on long enough to get to the point where they are seeing positive absorption why do they come to market at this point? Then how do you think pricing looks relative to your fund at that point?
Hamid Moghadam
First of all there was basically no transaction activity for about a year until the fourth quarter of this year of any scale. Here and there there were some deals but very low volumes. I think the pricing that was achieved or price talk that was achieved in the fourth quarter on a couple of notable transactions was a lot more attractive than most people thought. In fact, I would say at cap rates that are substantially lower than what at least some public companies I am aware of are trading. So, pricing in industrial has surprised people on the upside. So by definition those would not be at those levels accretive acquisitions unless two things change.
Obviously valuation of public companies goes up, cost of capital goes down or those things become more accretive. So I think if you are looking at stabilized, clean, leased core type assets, those are pretty expensive in the good markets. I think there is opportunity in under-leased assets and transactions I think Guy referred to them as deals with hair on them. I think to the extent there are under leased assets, vacant assets in good markets, those are tougher for most people to buy. I think the owners of those assets may be able to carry them when interest rates are basically zero and spreads are 300-400 basis points. They have 4% cost of money on those. So they can break even at low levels of occupancy and hold on. But if interest rates do in fact pick up on the short-hand I think their break even points are going to go significantly higher than where they are now and maybe higher than what their property can support.
By that time they will be out of interest reserve. That is why I am saying there will be more deal flow of deals with challenges in the back half of the year. On the core, really prime stuff there seems to be ample capital out there and those cap rates are pretty restless.
Operator
The next question comes from the line of George Auerbach – ISI Group.
George Auerbach – ISI Group
I don’t think I heard you use the term rent spike in your prepared remarks when talking about the near-term outlook and fundamentals. Have your thoughts on a sharp recovery in rents changed at all?
Hamid Moghadam
Our view is pretty simple. Our view is that if you take the replacement cost of assets, and I am not smart enough to know where land is but kind of for talking purposes around here we take peak land values and we cut them in half because that is an easy math. We don’t want to make this too complicated. If you do that, if you really take land values at peak, cut them in half and put sort of a 9-9.5% return on them which is what I would want to get for it to do a respective development deal, the rents you end up with in most markets are probably 30-40% higher than what the spot rents are in those markets.
Somewhere, somehow that gap needs to get closed over time. Once there is positive demand. When there is negative absorption rents can stay there for a long, long time. And in markets where there is going to be negative absorption and there are lots of those. There are lots of markets where there is not going to be any absorption no matter what happens to the economy, I think that is going to be the case. But in markets where you are going to have positive absorption eventually that gap will close and when that gap closes unless the cost of capital changes or the cost of concrete changes, rents are going to have to move 30-40% to justify new construction.
We may debate how long that is going to take and we have a lot of internal analysis that tries to look at the recovery period market by market but generally I would say it is 2-4 years in most markets we operate in. I don’t know about some of the out of favor markets or markets where there hasn’t been absorption for five years but in the markets that are relevant to us it is a 2-4 year period. I am not going to say we are going to get the full 30-40% because maybe there is a discount for somewhat older product, less than the latest, greatest product but I think there is going to be a substantial spike if we have positive absorption in the 2-4 year timeframe in the markets that are relevant to us in the U.S. for sure.
Operator
The next question comes from the line of Michael Bilerman – Citi.
Michael Bilerman - Citi
I have a follow-up in terms of the leverage but also I guess your equity in Fund Three. You mentioned the $46 million of cash NOI that is coming out of Fund Three is the stabilization and so if you annualize that you get about $185 million of NOI out of that fund and at an 8.5 cap rate that would be about $2.2 billion of asset value with $1.7 billion of debt you get to 75-77% of leverage. Maybe you look at it a different way your current equity in the fund is about $210 million with about a 23% ownership. That would imply about $900 million of equity in the fund or $2.6 billion based on your book basis or a 7% yield. I guess I am trying to triangulate between the two.
Hamid Moghadam
You are doing a good job except you are a little low because of some…I won’t take all the time to take you through the math but I think the asset base is on the order of $2.5 billion in round numbers. The leverage ratio probably has a high 6 or low 7 in front of it. With the post-quarter transactions we described to you that leverage is working its way down to low 6’s.
As I mentioned, our view is those properties are valued at roughly maybe 100 basis points too wide based on what we are seeing in the marketplace. If you make that adjustment obviously the value goes up and the leverage goes down. So I think we are in the high 5’s with respect to leverage based on what we think ultimately the cap rates should be but of course we are not in the business of valuing these funds and telling the appraisers what to assume or anything like that. That is a very independent process that takes place.
Operator
The next question comes from the line of Steve Sakwa – ISI Group.
Steve Sakwa – ISI Group
I know it might be a little bit of ways away but how do you think about the dividend? What kind of metrics are you looking at to then think about maybe a dividend increase?
Hamid Moghadam
Actually that is a really good question and obviously as a major shareholder I think about the dividend a lot. I think our portfolio is under producing its potential. It is an issue of under utilization of assets that we have now discussed on a couple of calls. I think between the gap to stabilization level of 95% and the developmental leasing that is going to take place and some land monetization that can take place, and of course there are all kinds of other factors going on like interest rates moving around and all that, it could be $100-120 million of NOI in our portfolio embedded just from recurring sources.
At some point the development business is going to come back and there are going to be other engines of growth and there is going to be coming back and again just like you said, it may be hard to imagine that given the trauma we have all been through in the last two years, but those things will come back. I think this company is capable of producing substantially more in terms of recurring revenues. Then the other couple of engines of growth in terms of private capital, incentive fees, development, etc. will kick in. I think while we have set our dividend at a level that is sustainable with our level of business today I can look at lots of other things that can happen in the next 12-24 months that will force us to increase the dividend. Let’s wait for those things to actually happen before we do that.
I think that was the last question in the queue. I want to thank you for your participation and we look forward to seeing you all next quarter. Thank you.
Operator
Ladies and gentlemen, this concludes today’s conference call. You may now disconnect.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!