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AMB Property Corporation (NYSE:AMB)

Q1 2010 Earnings Call

April 21, 2010 1:00 pm ET

Executives

Tracy Ward – Vice President Investor Relations & Corporate Communication

Hamid R. Moghadamn – Chairman of the Board & Chief Executive Officer

Thomas S. Olinger – Chief Financial Officer

Eugene F. Reilly – President North America

Guy F. Jaquier – President Europe and Asia & President Private Capital

Analysts

Dave Rodgers – RBC Capital Markets

Michael Bilerman – Citi

Ross Nussbaum – UBS

Sloan Bohlen – Goldman Sachs

Steve Sakwa – ISI Group

Mitchell Germain – JMP Securities

Michael Mueller – JP Morgan

Steven Frankel – Green Street Advisors

Ki Kim – Macquarie Research Equities

George Auerbach – ISI Group

David Harris – Broadpoint

Operator

At this time I would like to welcome everyone to the AMB first quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question and answer session. (Operator Instructions) I would now like to turn the conference over to Ms. Tracy Ward.

Tracy Ward

Before we begin formal remarks I’d 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 leasing activities, our private capital business, our capital deployment activities, our planned dispositions, our development business, our expected earnings and our future business plan. These remarks constitute forward-looking statements for the purposes of the Safe Harbor provision of the Private Security 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 result to differ materially from those in the forward-looking statements including those risks discussed in AMB’s December 31, 2009 10K which is on file with the SEC. Reconciliations of 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 Moghadamn, Chairman and CEO who will comment on the macroeconomic environment and customer sentiment and Tom Olinger, our Chief Financial Officer who will comment on our financial position, review our financial results and provide an update on guidance before we open the call to your questions. Also in attendance with us here today are Gene Reilly, President of the Americas and Guy Jaquier, President Europe, Asia & Private Capital.

Hamid R. Moghadamn

Welcome to our first quarter and my 50th earnings call. As you will see our financial and operating results were in line with our expectations and point to the excellent progress we are making on our business priorities. 2010 is shaping up to be a very good year for us. Before we review the quarter’s highlights I would like to share with you our thoughts on the economy, our markets, what we are seeing from our customers and the outlook for our business.

First, the momentum in the global economic recovery is strong and it appears to have legs which is consistent with what we have been seeing and saying over the past few quarters. Going back to the first quarter of ’09, you may recall that we talked a lot about the key drivers of our business namely global trade and inventory and our expectations of how they would play out even in a scenario when economic recovery was modest.

In the interest of time I won’t go over this territory again, suffice it to say that the downturn and the subsequent recovery have been consistent with our expectations which at that time were viewed as overly optimistic. In our view the global recovery is very much on track. For example, since bottoming in early 2009, global trade has been improving at a healthy pace in both the ocean and the air sectors. Specifically, container volumes through the major global ports are up about 24% from the trough although still 7% to 10% below comparable periods in 2007 and 2008.

International air cargo is up 28% year-to-date from its January 2009 trough. This growth was an unexpected and positive surprise and the result of customers who continue to manage their lean inventories. Air cargo volumes are only now 5% to 10% below peak levels. As we look to inventories, we’re at the early stages of inventory rebuilding. Monthly numbers indicate that inventories are finally expanding and should continue to make a meaningful contribution to GDP growth in the coming quarters. However, we expect the inventory to sales ratio to remain low as sales continue to grow faster than inventories.

Turning now to our customers, you may recall from last quarter that we highlighted a notable improvement in customer sentiment, that many of our large global customers were optimistic for the first time in many months and had even started talking about growth. This confidence continues to improve and is confirmed by the positive news about increases in manufacturing, industrial production and consumer spending not to mention the improvements in air cargo and container freight volumes.

In addition, the transportation based logistic providers are reporting better than expected financial results for the first quarter with meaningful revenue bumps in many cases since the first time since the downturn began. While customer sentiment is a good story and bodes well for the future, it will take some additional time before it translates in to demand. As a matter of fact, the pace of new demand continues to be moderate while customers work through back filling their existing capacity. This is consistent with our expectations and understandable as customers need more time to kick their tires.

Now, I’d like to offer an overview of the operating environment in the US. The deterioration rate is flatten out and in some markets on the margin its improving. In the US net absorption was less negative than in the quarter at -17 million square feet, essentially flat relative to the product base of 13 billion square feet. Availability increased by about 10 basis points to 14%, the smallest increase in 10 quarters.

Our coastal markets showed marginal signs of improvement with availability at 12% for the past two quarters which we think indicates a bottom in those markets. The delivery of new product and the pipeline of projects under construction continue to achieve historic lows. We continue to believe that record low deliveries met by moderate demand will drive the availability rate back down in the second half of the year.

Consensus trade forecast implies significant improvement in net absorption starting in mid 2010. These numbers indicate that we’re progressing through the inflection point in line with our expectations. The encouraging pace of global economic recovery coupled with a stabilized operating environment has opened up interest opportunities for capital deployment for us which is why we raised equity a couple of weeks ago.

In general, we think about future deployment opportunities in four categories: first, we plan to make additional investments in our two open end funds with investor interest continuing to increase, we expect new third party equity allocations in to our open end vehicles and we expect to make additional investments alongside our partners. We believe these funds formed and managed by AMB represent best in class portfolios in are currently trading at attractive valuations.

Second, we plan to fund our co-investment capital for new ventures. We have several irons in the fire on new ventures which will require meaningful co-investment from AMB along with our institutional partners. Increasingly, we’re seeing strong interest from large global players who are on the leading edge of the investment curve. They want to align with focused operators with a clear strategy. Committed to transparency we’re well capitalized and willing to put the skin in the game. We expect 2010 to be a banner year for AMB in terms of private capital fundraising.

Third, we plan to acquire value added assets on the company’s balance sheet. By value add we mean properties that require lease up or other operating expertise and provide for great long term value creation. I’ll take a moment to give you some more color on that. Our acquisition pipeline is building as we are beginning to see more properties with issues coming to market. Increasing cash flow pressure from a high availability rate is expected to bring more sellers to the market in the nearer term.

Vacant or partially vacant assets are expected to trade at significant discounts to replacement costs. This is an interesting point in the cycle. With conviction and timing of recovery for operating fundamentals and as such we’re willing to take on leasing risk in an improving environment. We believe the scale of our operating platform and the depth of our expertise gives us significant competitive advantage. The best third party acquisition opportunities for our company right now will be in the value added sector versus core which trades at a premium to our current stock price.

Fourth, we’ll pursue build to suits particularly in markets where our existing land bank can be put to work. Even with availability at an all time high, these customer led build to suit opportunities materialize for a variety of reasons: first, location is an important factor in cases where a customer’s proximity to their customers is key; second, configuration, when customer specific requirements can’t be met by the existing product in the market; third, counterparty risk comes in to play when these users require developer who can execute.

In today’s environment there are far fewer viable financially sound competitors who can be flexible and have the wherewithal to deliver in a reliable fashion. This is particularly the case in emerging markets where global customers require a higher level of certainty on execution. We’ll also consider limited spec developments in markets like Brazil and China where demand from our customers can’t be met with the existing supply.

In summary we’re excited by the near and long term capital deployment opportunities for our company and as always, we’ll be patient and we’ll maintain our disciplined approach to execution. I’ll now turn it over to Tom.

Thomas S. Olinger

I’d like to cover four topics: first, give you an update on what we’re seeing in our industrial markets; second, recap our first quarter results; third, discuss our equity raise and deployment opportunities; and fourth, provide you with an update on guidance for 2010. Let’s start with an overview of our industrial markets. While we continue to contend with a challenging operating environment, the pace of the recovery and operating fundamentals is playing out as we expected and consistent with our views in prior earnings calls.

As Hamid mentioned, customer sentiment continues to improve and this is translating in to an increase in activity in most markets around the global. This increase in activity relates to more customer dialog, property showings, RFPs and deals under negotiation. Our outlook for operating fundamentals has not changed. We continue to expect improvement in occupancy in the second half of this year and gain further traction in to 2010. We believe that rents have bottomed in most of our markets today.

As we discussed in our March research paper we expect to see significant rent growth in most of our markets over the next two to three years. Recovery across our global markets is not occurring uniformly. I’d like to provide you with some color on what we’re seeing today in our various markets around the world. Beginning in the Americas we’re seeing some improvement in our submarkets of Baltimore, LA’s South Bay, South Florida’s Airport West, Toronto and Mexico City. These submarkets have been active with some of them turning in positive net absorption during the quarter.

Mexico City is a prime example with both positive absorption and market rent growth, this strength is frankly coming a little faster than we anticipated and driven by both domestic consumption and a rapidly recovering manufacturing sector. Seattle and San Francisco seem to be a little behind the recovery at this point although we’re encouraged by the same recent uptick in activity that we’re experiencing in our other coastal markets.

At this point the inland markets of Atlanta, Chicago, Minneapolis and New Jersey’s Exit 8A are generally weak. Moving to Europe, our fundamentals have held up reasonably well which we believe is due to our well located portfolio and modest roll over. During the quarter there were moderate improvements in Paris and Hamburg while Leon, Amsterdam and Madrid remained among the most challenging markets.

We continue to expect the recovery in western Europe to lag the US by about six months and we may see a drop in occupancy in our portfolio over the next quarter or two from its current level of 94%. Japan is better than the headlines might have suggest. For the first time in about 18 months our customers in Japan are telling us that their customers are once again profitable which is leading to an increased willingness to engage in long term planning and to make long term commitments. In Tokyo we stabilized two development projects and leased more than 215,000 square feet in the quarter.

Looking to China, government policy, spending programs and an improvement in employment continue to support the economic economy and drive strong growth. We had a significant pick up in leasing activity in our development portfolio in the first quarter signing more than 330,000 square feet. This includes our first lease at [inaudible] logistic center one month before shell completion. We continue to see China on the front end of the global recovery. While there is considerable media coverage about potential real estate bubble in China, much of this speculation is in the residential sector. The industrial markets have maintained a more solid footing.

Moving to Brazil, its economy is underpinned by a strong natural resource sector and sustainable growth in domestic consumption. The bottom line is its customers are beginning to book business, see profits and plan for future growth. The improvement in the macroeconomic indicators and increase in activity at our properties during the first quarter supports our forecast for a recovery of operating fundamentals beginning in the back half of 2010.

Moving to our results for the quarter, FFO as adjusted was $0.31 per share. This includes $0.02 of development gains in the quarter but excludes the restructuring charge. Core FFO which excludes both the development gains and the restructuring charges was $0.29 per share in line with our guidance range we provided in connection with our April equity offering. Same store NOI was down 5.1% for the first quarter driven primarily by lower occupancy. Without the effect of foreign currency, same store NOI decreased 6.5%.

Both our quarter end and average occupancy were in line with our forecast at 90.5% and 90.3% respectively. The 70 basis point decrease in quarter end occupancy from year end was primarily attributable to the decline in month-to-month leasing associated with our typical seasonal holiday demand in the fourth quarter. Our quarter end occupancy in the US continues to significantly outpace the national markets.

We had a solid quarter of leasing volume commencing approximately 8.4 million square feet in our operating portfolio. In our development portfolio we leased 1.2 million square feet in the first quarter in line with our forecast. This leaves about 5.8 million square feet to stabilize. For context, in the last four quarters we leased approximately five million square feet in our development portfolio and our outlook for the next three quarters is better than the last. This momentum has carried over in to the second quarter and we have good traction for the majority of our spaces.

Also, approximately three million square feet of our development vacancy is in China, Japan and Mexico where we have good leasing activity as I just mentioned. We continue to expect to stabilize the development portfolio by the end of the year. Our retention rate on a trailing four quarters basis was about 65%. Our first quarter retention came in around 72%, a significant improvement over last quarter and back in line with our long term historical average.

Rent changes on rollovers were negative 9.1% on a trailing four quarter basis. Roll down was -9.5% for the quarter, a slight improvement over the fourth quarter. From a customer receivable standpoint we’re starting to see write offs decline. Private capital revenue was in line with our expectations for the quarter however, it is down sequentially due to a $3 million incentive fee that we recognized from development activity in the fourth quarter.

Development gains in the quarter totaled $3.3 million on $22.9 million of development dispositions with an average margin of 13.6%. G&A for the quarter was slightly higher than our projected run rate for the remainder of the year primarily due to the timing of certain expenses. Interest expense was in line with expectations and includes a full quarter impact of the $500 million bond offering we completed last November.

Let’s now turn to our April equity offering and deployment opportunities. We issued $18.2 million shares in connection with the equity offering generating net proceeds of $479 million. This new capital enables us to continue to take advantage of investment opportunities while maintaining our strong balance sheet and significant liquidity. Using a leverage target of 40%, the offering proceeds add capacity for approximately $800 million of deployment.

Our capital deployment efforts are underway on a number of fronts. As we previously announced in January, we invested $150 million in our two open ended funds and in April we invested an additional $50 million in to our US logistic fund along with $29 million in new third party investments. During the quarter we acquired two assets in our US logistic fund for $46 million at an 8.2% stabilized cap rate and we completed our first investment in Brazil with an acquisition of 58 acres with our joint venture partner CCP. We expect to announce additional activity in Brazil in the coming quarters.

The deployment pipeline is growing as we are seeing more properties come to market and development opportunities surface. We’re confident we’ll be able to deploy the equity proceeds in a manner that will generate returns that are accretive to both NAV and FFO. Now, let’s look forward with guidance for 2010. As we mentioned last quarter, a key variable in our 2010 guidance is determining how and when the economic recovery translates in to increased demand for our properties. Our view on the recovery and how it impacts our 2010 forecast has not changed.

We still expect average occupancy for 2010 to be 90% to 92%. This assumes occupancy will essentially be flat through the first half and end the year at around 93%. We are maintaining our cash same store growth before lease termination fees and without the effect of foreign currency to be flat to down 2%. We continue to expect to be at the low end of this range for the full year and for cash same store growth to turn modestly positive in the fourth quarter.

Private capital fee income is expected to be $27 to $29 million and does not include any incentive fees. Our net G&A forecast remains at $122 to $125 million. I want to point out that this forecast assumes we capitalize less than $5 million of development overhead and it does not include $3 to $4 million in restructuring charges that we expect to incur in 2010 related to our outsourcing initiatives.

We are maintaining our disposition guidance of $100 million, the majority of which relates to the REIT. Moving to capital deployment, we will deploy capital both at the REIT and at the funds. I will now walk you through both the sources and uses related to our deployment forecast for 2010. First, for the REIT; from a sourcing perspective we will have about $580 million comprised of $480 million from the equity raise and about $100 million from projected operating dispositions. From a uses perspective for the REIT we’re forecasting a total of $500 to $600 million for 2010. This includes the $200 million that we’ve already invested in our funds, an additional $100 to $150 million of fund related investments including additional equity in our open ended funds as well as our co-investment in new ventures and $200 to $300 million of balance sheet added acquisitions and development.

Now, deployment for our funds; we currently have about $400 million of investment capacity in our two open ended funds. We also expect that additional new third party capital will be raised in these funds as well as in new ventures. From a uses perspective for the funds, we’re forecasting $400 to $600 million of acquisitions in 2010. Combining capital deployment for both the REIT and the funds in 2010 we’re forecasting third party acquisitions and development of $600 million to $900 million and investments in our funds of $300 to $350 million.

It’s important to note that total REIT deployment is effectively leverage neutral given the leverage levels associated with our investment in the funds. Our full year 2010 core FFO forecast is $1.26 to $1.33 per share consistent with our prior guidance. A few things to highlight related to this guidance; it includes the impact of the April equity offering and our deployment assumptions. Our guidance also includes acquisition costs associated with deployment. Accounting rules now require acquisition related costs to be expensed as incurred. And, as a reminder, our core FFO guidance does not include any development gains or restructuring charges.

We clearly have a lot of moving pieces this year with respect to our guidance. Fundamentals are at an inflection point and we are beginning to deploy capital. As always, we are focused on long term investment returns. As a result, there may be a short term drag on earnings related to value add acquisitions which will likely come with vacancy and investments in to development that do not fully contribute to earnings until stabilization. In addition, there is also short term friction from paying down the lines in the interim.

We believe that our 2010 guidance covers a broad range of deployment outcomes due largely to investments already made in our funds. We currently assume that any variance from our deployment range will likely be to the upside. To wrap up, we are in a great position to take advantage of emerging opportunities and to continue to profitably grow our company. We have the balance sheet and significant liquidity and we’re back on the path of sustainable growth.

With that, I’ll turn the call back to Hamid.

Hamid R. Moghadamn

Before we open up the call to questions, there are three key points I’d like you to take away from today’s call. First, the global economic recovery is very much on track and we’re right where we expected to be in relation to it. Second, we believe we have the financial resources both public and private to capitalize on the economic recovery. Our portfolio of inflow, seaport and airport properties is uniquely positioned to outperform as the global economy recovers and beyond.

Third, we’re confident about the quality and dedication of our team and the strength of our reputation. These are essential ingredients for successful execution. In other words, meeting and beating the expectations of our customers, shareholders and institutional partners day in and day out. We remain deeply committed to the relationships we’ve built over time and through numerous cycles with all our key constituencies.

Over the last 26 years we’ve built a solid foundation with the best in class properties, platforms and people. This foundation and the opportunities ahead position us to achieve balance and sustainable growth. I’m personally more excited about the possibilities for AMB over the next few years than I’ve been for many years. With that, let’s go to your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Dave Rodgers – RBC Capital Markets.

Dave Rodgers – RBC Capital Markets

Hamid, a broader question for you and I think Tom alluded to this in the commentary, that you’ve seen a little bit of weakness in Atlanta and maybe the New Jersey markets and Seattle as well and I think when you look at port activity for Seattle, for New Jersey, those numbers haven’t yet recovered. Is there anything that with the new baseline of broader activity being set a little bit lower than where we saw peak activities of course, is there anything in your portfolio that you think is just going to take longer to recover? Should we be expecting kind of a broad based recovery or are there certain fundamental drivers that maybe are going to drive mix shift in the portfolio that may last several years going forward?

Hamid R. Moghadamn

That’s a good question. First of all the sequence of recovery is that first industrial production picks up, then things get on containers so shipping volumes and air cargo volumes really pick up and then these things hit the ports and you see it in inventory numbers and eventually in demand for industrial space. So there’s a sequence to these things that is basically the reverse of what happened two years ago. That’s a general mechanism by which demand starts up again.

In terms of its impact on our portfolio, I actually think our coastal market and our port and airport markets are going to do pretty well. Probably the places that I am more concerned are the middle of the country, we have exposure clearly in Chicago that might lag. So I think as you work your way from the edges to the center that’s the way demand will reemerge. Gene may have some ideas on that too.

Eugene F. Reilly

Just a couple of things, I think New Jersey will rebound so we’re believers that port activity there will ultimately pick up so we think northern New Jersey markets will recover. Just to follow on Hamid’s comments I think Chicago is the single biggest major market that I’m concerned with. Essentially Chicago has very little or no population growth. The markets of Atlanta and Dallas have struggled, we think their prospects for rebounding are better than Chicago because of the population growth. We still think O’Hare will be a good submarket but overall we’re a little concerned about Chicago.

Operator

Your next question comes from Michael Bilerman – Citi.

Michael Bilerman – Citi

Hamid can you talk a little bit more about the private capital business? I think in your opening comments you called it was going to be a banner year for the private capital business and maybe you can expand a little bit about the amount of capital that you’re targeting? And I think Tom, you talked about putting in about $100 to $150 million in seating those new funds so I’m just curious how much capital is going to be raised alongside the capital you’re going to give and then how quickly you think that capital is going to be deployed? Are there large scale acquisitions in those markets that you’re looking at where you’re effectively trying to raise the capital quickly to be able to take advantage of that?

Hamid R. Moghadamn

Michael, I wish I knew the precise answer to all those questions because every day we’ve got to play it out and see how the market evolves and everything. But in terms of level of interest from private capital investors it’s been a quite two to two and a half years. Meanwhile, asset basis go up notwithstanding some of the write downs that are being recovered and real estate has been written down by now so what was working against allocations to real estate which was the denominator factor is now kind of reversing. So, that general trend is in place and it’s probably exhibiting itself more in funds that started out going in to this downturn with even more lower allocations to real estate.

Now, if you look at that, the volume of private capital picking up and you look around the landscape and look at where that capital went in the last five to seven years, most of that went in to highly leverage opportunistic strategies and I don’t see that continuing over the next couple of years. What we’re really hearing from customers, from investors is that they really prefer specialist, they prefer global over local, they prefer people who have skin in the game.

If you almost go down and design all the things that they’re talking about, you check off all the boxes that AMB happens to be fortunate to be in. I think the volumes are going to pick up, I think our share will pick up and as you know we have put the private capital strategy on hold for two years because basically there was no demand. We have significant assets in Japan, in China, in Europe, in Canada and now in Brazil as we ramp up over there, and Mexico that were intended to go in to private capital vehicles and didn’t during this two year period.

Eventually, those will be sources of net liquidity to the company. So what we will get back from recapitalization of those platforms in the private market will exceed what our co-investment requirements are for those vehicles. So I think net/net/net we’re going to free up a fair amount of capital from our existing balance sheet assets that are in these oversea platforms and the pace at which we do that, we’ll do it in a manner that’s matched with the opportunities that emerge because we don’t want to get too liquid too quickly.

If you were really thinking about one of the things that we’re spending a lot of time on is getting liquid too quickly. We think we have a great balance sheet, we think we can continue to have a great balance sheet as we bring private capital in to these platforms and we are in a fortunate position that we’re having really good dialog with many, many investors. More than really as far back as I remember.

Thomas S. Olinger

Gene, do you want to cover his deployment question regarding what we’re seeing from a deployment opportunity standpoint?

Eugene F. Reilly

Yes, I guess in the big picture we see opportunities and I’ll just hit the Americas quickly and maybe Guy can pick up elsewhere. But, we see increasing deal flow in core opportunities and that would go in the US logistic line, our open ended fund. We see value added opportunities that deal flow there has not been very good to date but we see some reasons why that may pick up substantially particularly in the US. Then finally build to suit is an area that we’ve seen a ramp up, a pretty significant ramp up over the last couple of quarters. In the US we have some opportunities but Mexico and Brazil are by far the strongest opportunities in that department.

Thomas S. Olinger

The only thing I would add Gene is that one of the trend we’ve seen also is over the past year there were a lot of properties owned by open ended funds that were not quite mark-to-market. So for those funds to sell a property, to reposition a portfolio they were looking at the prospect of maybe getting a trade executed at less than what they were carrying it on their books. Now, that appraisals have caught up and the markets have either stabilized or in some submarkets have started to rebound, they’re looking at a prospect to be able to trade basically at their mark-to-market value or maybe even slightly above which is starting to bring out some more properties to market.

Operator

Your next question comes from Ross Nussbaum – UBS.

Ross Nussbaum – UBS

Can you talk a little bit about the economics on the $200 million that you put in to the US logistics fund? How is that working?

Thomas S. Olinger

Well, from an economic standpoint what we earn on that investment we put in $200 million and the FFO yield on that is around 9%. So that investment is really offsetting the bulk of the dilution from the equity raise this year.

Hamid R. Moghadamn

Just to be clear we put $150 in the US logistic fund and $50 in our European open ended fund. But, what Tom described applies to both.

Operator

Your next question comes from Sloan Bohlen – Goldman Sachs.

Sloan Bohlen – Goldman Sachs

Just a question on deployment, for investment in the funds can you give us a sense of how often those funds are reappraised? I think you just mentioned 9% but whether you expect that for the majority of the year or when that maybe resets? Then second to that, for value add acquisitions if you can maybe take a stab at what a cap rate for those sales may be?

Guy F. Jaquier

Let me take your first question and then maybe have Gene address your second question. With respect to the open end funds, they’re opened for new investment every quarter. Each of those funds has a policy that their assets will be appraised at least once a year on a rolling basis. Frankly, we’ve been appraising them more often. They’ve all been reappraised and marked-to-market as of the end of the year and on a more accelerated basis on a rolling quarter basis. We’ll continue to do that probably until the markets get a little bit more clear and then maybe go back to a once a year.

Eugene F. Reilly

On the value added acquisition they come in a variety of forms but assuming you’re buying vacancy, a completely vacant building, we think today our margins so to speak on that would be 10% to 15%, potentially even higher than that. So if you want to look at it on a cap rate basis, if the best product in good US markets is in the low sevens, add 100 to 150 basis points to that. But basically we’re seeing margin opportunities that approach where speculative development margins were during the peak so fairly attractive.

Hamid R. Moghadamn

The only thing I would add to what Guy said is that you asked what the return would be, what that 9% would be. The 9% is locked in when we invested the capital because that was based on the value at the end of the year for the first $100 million and the end of this quarter for the next $50 million so those returns are locked in. Obviously, if those funds are appraised at higher vales which is our expectation as the cap rates – we think cap rates have declined by maybe 125 basis points in the US in the last certainly six to nine months. So those if you will, value upticks will add to the appreciation return of that capital investment but obviously you asked about FFO so FFO would be that 9%.

Operator

Your next question comes from Steve Sakwa – ISI Group.

Steve Sakwa – ISI Group

I guess I wanted to circle back to the build to suit comment. I guess given the increased vacancy across most markets, I guess what’s the thought process from company’s looking at build to suits versus kind of leasing what’s in the market today?

Eugene F. Reilly

There isn’t any doubt that in most US markets you price out a build to suit and you’re looking at rental rates above the market. In the US, one thing that is taking place is that as product is leased up there are circumstances where a tenant with a specific location requirement can’t find what it needs. So you are seeing more build to suit deal flow. I would say though that build to suit activity or future activity is very unpredictable in the US precisely for the point you bring up.

Now, turning to Mexico and Brazil, in Brazil you do not have those dynamics you have virtually no vacancy in Class A product so it’s a very different circumstance. In Mexico, rents are actually increasingly in some submarkets in Mexico right now. Build to suits would tend to be higher than spot market rents but it’s much more competitive than it is in the US and that Steve is why we expect to see more activity south of the border.

Guy F. Jaquier

Just to add to what Gene is talking about, for many of our customers if you look at their overall cost structure, rent as a component of their total structure is sometimes like 8%, the rest being transportation costs, labor, many other things. So when they’re running their model to optimize their network there are other costs they’re trying to drive out of the system that yes, if their rent goes from 8% to 9% it may be that those costs are offset by other savings, transportation being one of the biggest that they can drive out of their system and may, to get the location they want, the configuration they want, be willing to take an above market rent.

Operator

Your next question comes from Mitchell Germain – JMP Securities.

Mitchell Germain – JMP Securities

Can you guys talk about your customers in China and why you feel you’re so isolated from a potential residential bubble?

Guy F. Jaquier

I don’t know that we said isolated from a residential bubble but residential is a different market. There seems to be a lot of concern over speculative purchasing of condominiums, individuals buying two, three, four trying to rent them, flipping them and that sort of thing and Chinese government is looking at this very closely, is trying to enact policy to put a damper on this partly because of the concerns they don’t want prices getting away from frankly the common man so they can’t buy a house.

If you look at where people in China are investing their money, it’s in the stock market and residential. I mean, that’s where a lot of this excess liquidity is going. That has nothing to do with industrial supply and demand. So what we deal with day-to-day are customers who are dealing with import/export, customers who are helping supply product for internal demand, it’s just a whole different business than what you typically read about in the paper.

Hamid R. Moghadamn

The economy is still growing at 11% or at the low 8% and now at 11% so that generates demand for consumption and things that go through warehouses. I think China even with the residential bubble, there are going to be a lot of houses and condos built in China. It’s just that when that bubble burst because they’ve increased the down payment requirements or they’ve instituted rules like you can’t have houses in cities that you don’t live in, etc., etc. That may lead to a price correction but there are a lot of people that need better housing in China and that probably is enough demand there for the next 30 years to operate at high volumes.

So if your question is would building materials and all those kinds of things that sometimes go through warehouses fall off the cliff because their residential market goes in to the tank, we really don’t have a concern about that because the volume will be there.

Operator

Your next question comes from Michael Mueller – JP Morgan.

Michael Mueller – JP Morgan

I have a question on private capital but first Tom, can you clarify your comments on the acquisition costs being in estimates? How much is it and is it included in the G&A number as well? I guess on private capital guidance is $27 to $29, that looks the same as it was last quarter but it seems like now you’re expecting a lot more fund acquisitions. I’m wondering if you could just walk us through why that number doesn’t change?

Thomas S. Olinger

First on the acquisition costs, it’s not in our G&A, it would be in other expenses is where we would reflect it. We’ve forecasted about 75 basis points of acquisition costs to run through there so those expenses are running through our forecasted guidance. Your other question was on why isn’t our private capital revenue increasing? It’s really two things that are offsetting each other, the first is as we invest additional equity in to our open ended funds we increase our ownership and we reduce the third party fees that we get a charge, asset management fees against those so that revenue is declining as we increase our ownership in those funds. What’s offsetting that is your point that we are forming new funds and will be generating new revenue but it just so happens in 2010 the way it plays out those two pretty much offset.

Operator

Your next question comes from Steven Frankel – Green Street Advisors.

Steven Frankel – Green Street Advisors

Just a couple of question regarding capital deployment regarding the new $50 million that you’ve contributed, I should say acquired in to the logistics fund, was that also at an 8.5% nominal cap rate like in the first quarter? Also, a couple of questions just regarding some of these decent deals, it looks like you guys bought properties in LA for a little bit over $100 a foot and you’ve also from what I see in RCA had bought a value added building there for a material discount today. Can you talk about some of those recent deals and the pricing indicates where the market is today?

Hamid R. Moghadamn

I’ll take the first one, the pricing on the US logistics one I think has ticked down to 8.4 based on the most recent appraisal so it’s approximately the same, it’s a hair under what we bought the first one at. Gene, do you want to talk about the acquisition?

Eugene F. Reilly

That deal is 175,000 foot building on 55 acres of land so the cost per foot is a bit misleading. The basic of that deal is a long term lease and we’re basically carrying land at a return of around 7% which grows at bumps of 6% every two years. So we think we’re buying land at 50% of peak and we’re getting paid pretty well to carry it.

Operator

Your next question comes from Ki Kim – Macquarie Research Equities.

Ki Kim – Macquarie Research Equities

A two part question, going back to your funds, how much total capital do you think you can invest in the open end funds? I think you tossed out the $150 million number but I just wanted to double check. Second, as you invest more money in to your funds obviously there is diminishing returns and what does that schedule look like as you’re investing more going forward?

Thomas S. Olinger

On your first question, we put in $200 million already and we’re forecasting to put in anywhere between $100 to $150 million in additional investments in our funds but that’s got two components to it. That includes additional investments in our two open ended funds, our Europe fund and our US logistic fund as well as funding our equity in any new ventures that we might form. So that $100 to $150 has got two components to it.

Operator

Your next question comes from Michael Bilerman – Citi.

Michael Bilerman – Citi

Just a two parter, the first is just on operations on rent, I think Tom you had mentioned rents being down about 9.5% in the first quarter and how that was better than the fourth quarter where they were down 11.5% and better than the third quarter where they were down 10%. If I remember there was some commentary on the prior call about some bigger deals that were skewing those numbers to the downside but I guess now we have three quarters where we’re solidly in this high single digit, low double digit range.

I’m just curious, from Hamid’s commentary it sounds like the tenant interest is certainly better but the rents are still being marked down, I’m just wondering how that will trend through the year and especially as you start to think of your rollover the next couple of years that’s going up from $7 this year to $7.25 to almost $8 in 2012, what sort of near term mark-to-market that we should be thinking about relative to rent?

Hamid R. Moghadamn

I’m going to start the answer to your question and then Gene will continue. Just to be clear on what I said, what I was talking about is what the market is doing right this second. Obviously, what it’s doing this second is in most US markets it’s flat and in some it’s declining a little bit and in some it’s firming up a little bit. I think what we said now for almost a year is that our expectation is that occupancies will trough in the second quarter this year and they will have positive absorption in the back half of this year in the US and we won’t get any rental growth until really early 2011.

That’s what we said. So we have not expected things and we still don’t expect rental levels to increase materially at these levels. We think that’s going to come in 2011, 2012. You’ve seen our research work lately, we think when that happens it can be very significant because of the deep discount to replacement costs. So, so far it’s playing the way that we talked about.

In terms of the specific mark-to-market in the portfolio and by the way, most of the rental drop happened in 2009. Remember occupancy at the end of 2008, our occupancy was 96%, really the crisis hasn’t reflected itself in to rents. Then, it dropped like a rock both in terms of occupancy and rent throughout most of 2009 and in 2010 the incremental drop in occupancy and rent has been very, very minimal. I would say 80% of the drop sort of occurred in 2009 so you would expect those rental declines to be relatively steady.

Eugene F. Reilly

We would peg that at about 5% to 10% across the portfolio. There are several different metrics to look at, our rent roll downs are going to continue to look high and that’s going to continue fairly far in to the future and that’s the first statistic I think you brought up. For the year, that will be 10%, 15%, it’s going to be higher. But, our mark today is about 5% to 10% and as Hamid mentioned, our same store will begin to turn positive later in the year.

As we look in to 2011, 2012 you get better comps, those numbers are going to look better and as we said before, we think that you will see rent spikes. It’s going to take place in different markets at different points in time but looking ahead over the next three years there isn’t any question that’s going to happen.

Operator

Your next question comes from George Auerbach – ISI Group.

George Auerbach – ISI Group

I know it’s difficult to generalize but thinking over the last six months, what percentages of the leases you have signed have been net expansions for the tenants and what percentage would you say were net reductions in the amount of square foot the tenant leased?

Eugene F. Reilly

That’s a very good question and you’re correct, it’s hard to generalize. But, I would tell you that net expansions have been extremely rare, that’s a very, very low percentage of the leases that we signed over frankly the last year and a half or so. Net reductions, we have not seen huge reductions in space either but I think if you balance it all out it’s probably somewhat on the negative side or otherwise it wouldn’t have negative absorption.

Hamid R. Moghadamn

If you figure out in the US we lost 250 million feet last year of occupied space, that was the negative absorption and the year before we lost 100 million so that’s in aggregate 360. Let’s say what happened this year and all that, by the time this is all over let’s say we lose 400 or 500 million feet off of a base of 13 billion feet or whatever, that’s why your vacancy rate went from 8% to 14% in the US. That’s where the 6% is. So clearly the trend is towards either people going out of business or shrinking space up to now.

But, we think 14%ish is kind of the peak and it’s going to start going the other way. Before that, I don’t think we ever had a year where absorption was negative and here we are with two years of it in a row of pretty significant levels. What we just saw in the last few years has been unprecedented obviously.

Guy F. Jaquier

One last comment on that, the nature of the discussion we’re having with these customers has changed. Again, your customer was more of the deals we’ve done but I’m going to give you a little more color on the nature of the discussions. Last year, there were a lot more discussions where someone had 100,000 feet and came in for renewal and wanted to talk to you about I only need 80,000 feet. That was the dynamic of the discussion.

Hamid R. Moghadamn

Or, I want to pay for 80,000 feet.

Guy F. Jaquier

Today, and I’ll say even in the last month to two months, is the first time we’ve been having the discussion where someone comes in and says, “I have 100,000 square feet and I actually want to talk about an option to lease another 20,000 or 40,000.” That is a discussion that we haven’t had in the six months that you’re talking about. We’ll see how that translates in to leasing going forward but at least they are thinking about growing their businesses and how they’re going to expand in the future year or two years.

Operator

Your next question comes from David Harris – Broadpoint.

David Harris – Broadpoint

I’m just trying to play catch up here, I’ve got a two part question with regard to the funds, are we talking about expansion in the same geographies as your existing footprint? My second part of the question is are we talking about similar terms as you might have expected to negotiate with your investors as a couple of years ago? In particular, the hurdle rate?

Guy F. Jaquier

I think the first part was are we talking to institutional investors in the same areas that we have existing platforms? The answer to that is yes with the exception of Brazil which is obviously a new platform for us. With respect to I think the second part of your question was terms we’re seeing and hurdle rates, the investors that have come back in to the market I’ll say the beginning of this year, they’re less focused on basically trying to beat fees down and more concerned with governance, with risk control, risk management, on transparency and visibility.

The various aspects of the total fee package whether it’s base fee or hurdle rates or incentive fees moves around. The total package NPV of that fee stream has not changed materially I’ll say but what is changed a lot is they’re very focused on levels of leverage. Not only loan-to-value in a fund or a venture but what type of leverage that is. Obviously, they don’t want recourse but are you cross collateralizing it, is it fixed, is it floating, what are the covenants? Those are the types of things that the dialog has really gotten more about.

Hamid R. Moghadamn

I think that we should end on David’s question and we’ll take his return as a good omen on the REIT market and look forward to talking to you next quarter. Thank you.

Operator

This will conclude today’s conference call. You may now disconnect.

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