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ProLogis (NYSE:PLD)

Q1 2011 Earnings Call

April 20, 2011 10:00 am ET

Executives

Michael Curless -

Melissa Marsden - Senior Vice President of Investor Relations & Corporate Communications, Managing Director of Investor Relations & Corporate Communications and Member of Disclosure Committee

Walter Rakowich - Co- Chief Executive Officer, Trustee and Chairman of Executive Committee

William Sullivan - Chief Financial Officer and Member of Executive Committee

Analysts

Jamie Feldman - UBS

Steven Frankel - Canaccord Adams

Sloan Bohlen - Goldman Sachs Group Inc.

Ki Kim - Macquarie Research

John Guinee - Stifel, Nicolaus & Co., Inc.

David Rodgers - RBC Capital Markets, LLC

Steve Sakwa - ISI Group Inc.

Chris Canton

Ross Nussbaum - UBS Investment Bank

Michael Bilerman - Citigroup Inc

Michael Mueller - JP Morgan Chase & Co

Brendan Maiorana - Wells Fargo Securities, LLC

David Harris - Gleacher & Company, Inc.

Operator

Good morning. My name is Amanda, and I will be your conference facilitator today. I would like to welcome everyone to the ProLogis First Quarter 2011 Earnings Call. [Operator Instructions]

At this time, I would like to turn the conference over to Ms. Melissa Marsden, Managing Director of Investor Relations and Corporate Communications with ProLogis. Please go ahead, ma'am.

Melissa Marsden

Thank you, Amanda. Good morning, everyone, and welcome to our First Quarter 2011 Conference Call. By now, you should all have received an email with a link to our supplemental. But if not, it is available on our website at www.prologis.com under Investor Relations. This morning, we'll hear from Walt Rakowich, CEO, to comment on the market environment; and then Bill Sullivan, CFO, will cover results and guidance. Additionally, we are joined today by Gary Anderson, Global Head of Operations and Fund Management; and Mike Curless, Managing Director of Global Investments.

This conference call will contain forward-looking statements under Federal Securities Laws. These statements are based on current expectations, estimates and projections about the market and the industry in which ProLogis operates, as well as management's beliefs and assumptions.

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

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

Our prepared remarks today will be shorter than typical, and we intend to leave about the same amount of time for Q&A. But unfortunately, we do need to end today's call a few minutes before the hour. And as we've done in the past to give a broader range of investors and analysts the opportunity to ask their questions, we're going to ask you to please limit your question to one at a time.

Before I turn the call over to Walt, I'd like to add that this will mark my 50th and pending [indiscernible] to my final conference call with ProLogis. On behalf of Robin and Realty, the entire Investor Relations team of ProLogis, we'd like to say it's been a pleasure working with you over the year and we appreciate your support. Walt?

Walter Rakowich

Thanks, Melissa, and good morning, everyone. It's been an eventful quarter with a global events and merger related activities. So let me comment first on our markets and then Bill will comment further on the earnings and pending merger with AMB.

Overall, the steady recovery and industrial real estate continues. And while issues such as sovereign debt concerns, rising energy costs, military actions and the devastating earthquake in Japan, contributed to some deferrals of customer leasing and development decisions, we remain encouraged by the continued firming of market fundamentals that we're seeing.

In general, the key supply demand indicators we've been talking about for the past few quarters are still at play. Globally, we're not seeing a meaningful increase in speculative development and don't expect to see much for the foreseeable future.

In the top North American markets, we track completions with just 2.1 million square feet in the first quarter. Gross absorption in our North American markets was over 21 million square feet, compared to 17 million square feet in the fourth quarter of 2010, marking the fourth consecutive quarter of positive absorption.

And we are seeing the same trends in our international markets as well. In addition, utilization within our facilities remains high. And so we believe these indicators support the case for longer-term occupancy gains and rental rate growth as economic recovery progresses.

As for our operating portfolio, our overall lease percentage was down 30 basis points from Q4 and quarterly leasing activity was lower relative to our Q1 leasing last year. However, let me just add a little bit of color to the numbers.

First, almost every year, our occupancies fall a bit in Q1 due to the seasonal nature of the business. Second, our pool of properties is much smaller than last year, due to the sale of direct owned and fund assets in Q4.

In addition, fund explorations were at a much lower level of this year than last due to early renewals. And so these factors account for an overall lower level of leasing activity on year-over-year basis for Q1.

Lastly, we picked up an astonishing 108 basis points in the fourth quarter of 2010, which is an unusually large increase in any one quarter. I think it's important, perhaps more important, to focus on the overall leasing trend over Q3, which is still up 78 basis points.

As for rental rates on turnovers in our same-store portfolio, the trend is also improving. Rental rates declined 9.2% in the first quarter, an improvement over decline of 10.5% in Q4, and an average quarterly decline of 11.8% last year.

On the capital deployment front, our plan continues to be limited from an acquisition perspective and more focused on the development of new high-quality facilities where we can leverage off of our customer relationships and land positions to create value.

For the quarter, we started approximately $100 million of new development, which was 83% pre-leased. At today's cap rates, we believe value creation from these starts is approximately $15 million. We continue to have a strong pipeline of proposals and pursuits. And at this point in time, we remain very comfortable with our stand alone guidance of $800 million to $1 billion in starts for the year, although it may be more back-end loaded given the uncertainty in the timing of starts in Japan.

As we did last year, we plan to continue to recycle our capital from older properties in secondary markets to fund our new development. For the quarter, we closed on the sale of the majority of Catellus retail and mixed-use assets. So this transaction combined with smaller, one-off dispositions generated over $400 million of proceeds.

Our goal here is to continue to actively improve our geographic diversification and enhance the quality and concentration of our core industrial portfolio.

Now, let me spend a moment discussing the earthquake that hit Japan in March. As we all know, it was one of the largest earthquakes ever measured. And we're thankful that all of our employees and customers working on our buildings were okay. Our Japan team has done an incredible job of ensuring everyone's safety and minimizing the impact on our customers and their operations. Let me tell you, we are truly fortunate to have a great team of employees working out for us in Japan.

So those of you who have followed us for some time, may recall our presentation of ProLogis' patented seismic isolation system at past investor days. As a result of this superior engineering and the overall quality of our facilities, with the help of our team, the majority of our customers were operational within 24 to 48 hours. This is truly remarkable.

In Sendai, the area that was hardest hit, our building suffered minor damage other than flooding. Total cost for clean up and cosmetic repairs to all of our buildings in Japan is expected to be approximately $7 million, which was accrued for during the quarter. Now this is a very, very small amount when compared to our total invested capital of over $1.7 billion for all of our properties in Japan.

Prior to this catastrophic event, the real estate market in Japan was already showing strength. Since then, increase for our facilities have significantly increased especially from companies in older, less structurally sound buildings. As a result, we expect to see a substantial amount of new demand in a flight to quality by the second half of this year. This could have a positive impact on the amount of development we do in Japan later this year and into 2012.

As for our merger with AMB, we remain somewhat limited in what we can say except that our filings and integration remains on track. And Bill will have a few more specifics in a moment.

Turning to PEPR, last week we announced the purchase of approximately 11 million ordinary units of PEPR from a large institutional investor. These additional shares brought ProLogis' ownership interest in PEPR to approximately 39%.

As a result of crossing the 33.3% ownership threshold, we are required to launch a mandatory tender offer to acquire any or all of the remaining outstanding units, subject to approval of the offer document by the Luxembourg Regulator.

As we've stated in our release last week, we took this action for the benefit of all unit holders to provide them with liquidity at a strong value relative to where the shares had been trading in the last for years and relative to the NAV ]Net Asset Value]of the company.

Let me reiterate that this is an any or all tender. Meaning, that we would be comfortable buying the portion or all of the remaining units depending on unit holder interest. In addition, we have no desire to sell our interest in PEPR and expect that longer-term value will continue to be created in the years ahead.

Unfortunately, given our that our offer documentation is still under review, there's really is not much more I can say about our pending offer at this time.

Looking ahead, we continue to be optimistic about the recovery in the global investor real estate market and the opportunities we believe will arise to leverage customer relationships and capture an increasing share of the global distribution facilities market. And we believe the merger reinforces this optimism with the resulting platform uniquely positioned to serve customers with the facilities they need in the world's major logistics market. It will truly be a powerful combination of people, properties and relationships.

And now, let me turn it over to Bill.

William Sullivan

Thanks, Walt. This morning, I plan to cover the company's first quarter results, our view on 2011 standalone guidance and provide an update on the merger with AMB.

For the first quarter of 2011, we generated core FFO [funds from operation], excluding gains and items that affect comparability of $74.4 million or $0.13 per share. To arrive at the $0.13, we added back $12.9 million or $0.02 per share of adjustments associated with three events.

First, $6.9 million represented an accrual for the cleanup and repair costs resulting from the earthquake and tsunami in Japan. Second, $3.8 million represented costs incurred associated with our pending merger with AMB. And third, $2.2 million represents workforce reduction costs associated primarily with the sale of the Catellus assets.

While first quarter performance was very much in line with our internal expectations, on the fourth quarter conference call in February, we stated that we expected lower FFO per share in Q1 as a result of the loss of the Blackstone NOI, a partial quarter of the Catellus NOI and the full effect of the increased share count following our fourth quarter equity raise. There were four other factors contributing to the lower FFO, all which were budgeted.

First, we have lower property management and other fees due to recognition of a higher level of reimbursement from the funds in Q4, as well as higher leasing fees associated with the strong Q4 leasing activity. Second, we had lower development management fees, which are recognized as earned and fluctuate by quarter based on development activity.

Third, we had lower FFO from funds due to higher termination fees and other settlement payments in Q4, as well as the sale of a non-core joint venture in the fourth quarter.

And finally, current income tax expense increased due to various tax benefits in our European operations that were recognized in Q4.

As we move through 2011, we expect to see a modest increase in FFO each quarter. Principally as a result of number one; increased occupancy from existing site leases and the completion and lease up of a number of properties currently under development; number two, reduced G&A; and number three, increasing levels of capitalized interest as development activity ramps up.

Based on these expectations, we remain comfortable with our standalone 2011 guidance range for core FFO of $0.62 to $0.66 per share.

Now let me update you on a couple of aspects of the merger. As many of you know, we filed the S-4 on March 11 and received comments back from the SEC in early April. We have responded to these comments and are now waiting for further review from the SEC. Subject to additional comments, we anticipate a closing date in late May. The merger integration activities are on target, and we remain confident that we will achieve the $80 million of G&A savings by the end of 2012, as well as ultimately realize a significant improvement in our overall cost of capital. We are all working very hard to ensure a smooth transition.

Assuming that we are able to close in late May, our reported results for the full year are going to be somewhat confusing, especially our second quarter results. This is due to the fact that ProLogis, as the accounting inquirer, will report results from the second quarter that we'll have two months of ProLogis stand-alone operations and one month of combined company operations.

Unfortunately, it will be difficult to compare these numbers with ProLogis' previously reported results. We will do our best to communicate as clearly as possible, we intend to provide clear direction on second half expectations for the combined company during May week in June.

Before I turn it back to Walt, let me just add to Melissa's comments, and I think we all want to thank Melissa for an incredible effort over the past 10 or 11 years. And, as well as Robin and Rosie. That team does a fabulous job. And with that, let me turn it over to Walt.

Walter Rakowich

Thank you. Operator, we can open the discussion for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from John Guinee from Stifel, Nicolaus.

John Guinee - Stifel, Nicolaus & Co., Inc.

Melissa, by the way, you did a great job. Comparing Page 72 to Page 72, what you would see as sort of a jaw-dropping decrease in GAAP and cash NOI. Quarter-over-quarter and annualized, looks to me as if it maybe as much as about $11 million in the quarter and annualizing about $40 million was essentially the same portfolio. Can you walk through what's going on?

William Sullivan

Did you say comparing 72 to 72?

John Guinee - Stifel, Nicolaus & Co., Inc.

Components of NAV for PLD. Components of the net Asset value analysis page, Pages 71 and 72, essentially when you merge, if you look at your last quarter and this quarter and what you're doing is you’re, you change how you did it, but you merge the operating properties with the development properties. Essentially, when you look at them on an annualized NOI basis, you go from $676 million as of the fourth quarter, down to about $644 million of annualized NOI. So, $32 million drop. Essentially, what's the same portfolio, about 168 million square feet?

Walter Rakowich

Let me tell you. First of all, John, we can -- we need to get back to you on that because I don't have a specific answer for that other than the fact that we obviously sold the Blackstone portfolio in the fourth quarter, which would have a significant drop in our NOI, as well as the fund 6 through 9, that were sold in the fourth quarter as well. And we'll have to take a look the reconciliations, so we'll have Melissa get back to you on that.

Operator

Your next question comes from the line of Michael Bilerman from Citigroup.

Michael Bilerman - Citigroup Inc

Bill, you talked a little bit about FFO, increasing throughout the year and you talked about occupancy, reduced G&A and higher cap interest. But maybe you can get a little bit more granular with $0.13 in the first quarter and if you reiterated your $0.62 to $0.66, you effectively need a quarterly average of like a $0.16 to $0.18 in FFO, which is almost $20 million to $30 million of incremental FFO a quarter. And it just seems from the items that you listed that, that would tilt to get to. So I don't know if there's a sort of comfort level, probably more towards the low end of the range, and then really, really what gets to that amount of FFO as we move through the year?

William Sullivan

Michael, let me try to give you -- just grabbing some papers but in essence, we're going to experience decent reductions in G&A as we -- some of the departure of the Catellus personnel, particularly Ted, throughout the year has a decent movement on it in terms of eliminating ultimately the G&A associated with continued management of the Blackstone portfolio, et cetera. And so we've got a decent drop in G&A scheduled for the rest of the year. We have some tax benefits that will be generated in the rest of the year as well, more likely the third quarter and the fourth quarter on that. Our occupancy gains from things that are under development has a decent pickup as the year progresses. And again, assuming that we meet our development targets, we'll probably have a $4 million to $5 million increase in capitalized interest, which is a reduction of GAAP interest expense by the end of the year. Again, that will be back-end loaded. But if you look at the last couple of -- the last three quarters, looking at something on average, obviously increasing throughout the year of $0.16 to $0.17 is not a bad estimate.

Walter Rakowich

Michael, I think the other thing to look at would be to look at last year, look at the first quarter of last year where we did core FFO of about $0.11 a share. And we ended up the year, obviously in the mid-to-high 50s. So, I think it was $0.57 last year. The first quarter at 19% and versus this year, relatively pretty much the same trend. So I think Bill has pretty much articulated, we made a number of sales in the fourth quarter, all of which have kicked in into the first quarter without regard to the development lease up, which we clearly know we will get throughout the end of the year. I think you should see an acceleration in the numbers.

Operator

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

Ki Kim - Macquarie Research

Could you talk a little bit more about your longer-term plans in Europe, inline of what happened with PEPR in terms of long-term structure and how you plan to fund the additional share, purchase in PEPR and does it have an impact on how you view PEPF fund too?

Walter Rakowich

No, I think. What I would say is that nothing really has changed as it relates to the way that we are going to manage or continue to manage Europe at all. And as it relates to the financing of it, I think we have to step back and wait because we have -- as I mentioned, we are in the market at this point to acquire any or all. And so a lot of it depends on what we do acquire, if anything. But clearly, we have ample capacity on our line of credit and then build, you may want to add to that if you want.

William Sullivan

From a financing standpoint, we have over $1 billion available on our line of credit. Just to put things in perspective, we are also in anticipation or in the case of an all relative to PEPR, we lined up a UER 500 billion bridge facility. So we have ample and more than sufficient resources to finance it. Obviously, we've stated many times in the past, our focus is on deleveraging the company. And so longer-term, you can be assured that we have no interest in financing whenever we increase our ownership. And with PEPR were purely debt, and so we'll take care of that post the tender process. But again at this point, there's no certainty as to how much we'll get tendered, if any.

Operator

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

Ross Nussbaum - UBS Investment Bank

I just wanted to focus in a little bit. It looks like, as I look at the direct owned portfolio across the globe, it was the U.S. assets that had the largest sequential decline and it looks like it was a function of global [ph] lower retention rate as well as a slow down in leasing volume. If you had to ballpark that decline, how much was seasonal and how much was related to what we'll call macro issues? Can you give us some indication as to how much were broke out between seasonal and sort of a funding...

Walter Rakowich

Let me answer that question because first of all, I want everybody on the phone to understand very clearly that the leasing needs to be compared with the first quarter of last year, first of all. You can never compare a first quarter with a fourth quarter. Okay? I wouldn't, at least. Because the second, third and fourth quarters are always more active than the first quarter. And so when you look at the first quarter of this year versus the first quarter of last year in the direct owned portfolio, the leasing volume was down somewhere in the order of magnitude of roughly 15%. However, when you look at the sale of direct owned assets to Blackstone, those assets represented roughly 13% to 14% of the wholly owned pool. So the leasing activity is not really down relative to last year. It has everything to do with the fact that the overall portfolio of properties are much less then they were last year, first and foremost. As you mentioned, the funds in addition, the funds are down. However, keep in mind that we sold a number of fund properties as well last year, in funds 6 through 9. We did a number of early renewals in the third and fourth quarter of last year in our funds, which was great because it reduced the overall exposure to assets that were turning. And if you look at the retention ratios in the funds, first quarter of last year was 76% and it's 75% this year. Yes, the retention ratio was lower. Slightly lower, if you will, in the wholly owned pool, I think the retention ratio last year was about 71% and it's something like 66%. But that's, in my mind, that's not a material difference. And you're going to see those fluctuations quarter-to-quarter. Having said that, to answer the second part of your question, is it seasonal? Absolutely. Every year in the first quarter, you have seasonal demand that basically you ramp up in the fourth quarter for people that are distributing over the holidays and the Christmas season. And then those deals go away. The majority of your leases expire on 12/31. And then if you look at any one of the four quarters, the majority of them expire 12/31. So you're going to naturally have that in addition to the short-term nature. You're going to have more terms or I should say, probably, less retention, if you will, in that first quarter. It's hard for us to put an exact number on it, but I would tell you that seasonality of it, the increased early renewals that we had, as well as a the lower amount of wholly-owned assets that we had, as a result of the Blackstone, all pretty much are the reasons why leasing activity was lower in the first quarter.

Operator

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

Sloan Bohlen - Goldman Sachs Group Inc.

I'll kind of stick with Ross' questions just a little bit. The retention ratio, I surely understand the idea and overall volume being down, but the retention ratio being it 65% versus last years being closer to 72%, was there a reason given for why either renewals weren't there? Or somebody's concerns referenced in the release about sovereign debt issues or rising energy cost. Where those the reasons why tenants were resigning leases?

Walter Rakowich

It's really a good question. It's so hard to look at on a quarter-over-quarter basis. I'll tell you one thing, one thing, we do expect to see, as the market gets better, we actually think that our retention ratios may come down a little bit. Because people -- in the difficult time frame for the most part, people weren't moving. That was the good news and the bad news. The bad news was they weren't expanding. The good news was that they weren't moving. I believe that we will see over the course of the next year or two is a slight decline in the overall retention ratios in this business. And it's simply because companies are expanding and sometimes you have that opportunity to fill that expansion and sometimes you don't. And as a result of that, the companies won't renew. So we'll have to see, it's really difficult to look at one quarter, and I would caution you not to look at just one quarter and drop conclusion. But I would make a macro statement that I believe overall that retentions ratios, as the economy gets better, will probably trend a little bit down from where they've been.

Operator

Your next question is from Steven Frankel from Green Street.

Steven Frankel - Canaccord Adams

I just have a couple of questions related to the operating performance for the portfolio, you excluded your completed development. First of all, can you please provide the same store number for 1Q, you used to call it the adjusted portfolio on Page 53. Secondly, it looks like the U.S. Fund occupancy, which is the best proxy, I think we have in here for your core portfolio ex-developments, fell by about 100 bps sequentially versus about 80 bps for Europe. Is Europe starting to catch up or are any takeaways that you can provide to us just somehow the core non-development portfolios performed.

Walter Rakowich

I guess, I would say two things. I don't know Bill if you want to answer the adjusted portfolio?

William Sullivan

Let me answer that one first, Steve. Fortunately or unfortunately, we've set for a year now that going into 2011, we're combining our completed development properties in our core portfolio. And that's the way that we're tracking the data. And so we haven't spent a lot of time looking at the separation of those two. And we've indicated strongly, we're not going to report separate measures. For all intensive purposes, our completed development portfolio was 80% leased at the end of the year. And again I would say if you sort of want to try to -- the absolute same-store information, if you want to look, the lion's share by the vacancies in the old, completed development portfolio sits in Europe. And so you can track Europe, most specifically as it relates to a proxy for the performance of the completed Development portfolio versus the Core portfolio.

Walter Rakowich

And Steve, I would say to your second question. Where we've really began to see a real pickup in Europe, which is the bright spot is in Central Europe. One of the things we've been seeing is that the market there is a fairly thin. And while it had been -- really over the course of the last couple of years I think hit particularly hard. One of the things we've seen is it's rocketed back very quickly. And it really doesn't really take but, a couple of million of square feet the deals there to really move the numbers. And I'd say if I were to look at any region in Europe, that is the region that we're frankly most excited about in terms of the turnaround right now. And that has been driving our numbers overall in terms of our overall occupancies. In terms of, not just the occupancies in the first quarter, but what our expectations are for the rest of the year. So I'd say that's the bright spot. The difficulties in Europe continued to be Spain, Italy and the Benelux are probably softer regions within Europe. _

Operator

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

Jamie Feldman - UBS

Moving on to business. I guess the key for me here , or key question I have is, you compare -- I guess first is, the commentary Walter that you made in the press release over being a little bit more cautious on kind of the macro concerns. Can you talk about what regions maybe you're seeing that more than others and then within the U.S. kind of coastal versus non-coastal? And then also you can compare your press release versus AMB's. Theirs was noticeably more bullish without the same tone of caution. So I'm just trying to see if maybe you can makes sense...

Walter Rakowich

See? That means we are not comparing notes. I think, Jamie, it maybe a little bit of a style thing. We both see the same things in the market. I think -- what I'm trying to say, and what we are trying to say is that we do still see steady improvement. And if you would have ask our people out in the field, they would tell you that in February and March, they were kind of feeling, is this thing really moving in the right direction candidly in the last three to four weeks? Our people aren't feeling really good again. And so, I think it's a little bit -- I do think there was a little bit of caution out there being it for all honest with each other. Let's face it. I think January, February, March, there are a lot of events that occurred in the world. And I do think there were some companies that stepped back and took a bit of a pause and said, what does this all mean. But what we are beginning to see, particularly in the course of last three or four weeks, is that things are normalizing. Things are moving in a good direction. And we're seeing it in the overall markets. So if you ask a question, what markets are a little bit squishy, what markets feel good. It's all the same suspects that we've been talking about. And I would add probably a few more. I mean LA is doing great in the United States. I'd say San Francisco is starting to roll it back. Toronto still feels good and Washington D.C. feels good. Houston feels really good. And if you go to Europe, basically I just mentioned that Central Europe is definitely coming back. We are really good and feeling great about France and Germany. I mentioned a few markets that we don't feel as good about. And frankly, we feel pretty dog-gone good about Tokyo and Osaka. Because I got to tell you, I'd say that we've had more inquiries than we've ever had in Japan in just the last 30 days because there's a lot of people that are out there that are in structurally unsound buildings right now and I think that's going to drive our development. So yes, is it still a little bit patchy? Sure it is. And these things don't cure themselves in 1 or 2 quarters. But if you would ask us, do we feel better today than we felt at the end of the fourth quarter? And we frankly, at the end of the third quarter, I'd say absolutely yes. I think there are a few months of pause. And I think it's moving back in the right direction at this point in time. And I would also say don't read too far into first quarter numbers. Look at what happened to us last year and prior years. First quarter is always low and leasing activity in general is always somewhat off in the first quarter. And it is what it is. But overall, we feel very good about where things are heading.

Operator

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

Brendan Maiorana - Wells Fargo Securities, LLC

I have a question on the development pipeline. First, if you guys could just get refresh my memory in terms of the $800 million to $1 billion of development start, how much of that you expect to be built-the-suit versus spec? And then second, has there been any change in terms of the expected yields that you're looking for on the development projects, given that it appears cap rates have certainly compressed a little bit and financing rates remain low? It sounded like on the European projects that were started during the quarter, the $15 million of value creation potential is probably in line with where you were previously. So just interested if there's been any change in the development yield.

Walter Rakowich

I'm going to have Mike Curless talk a little bit about the $800 million to $1 billion. And then I'll address some of the yields in the value creation, the comment that I've made.

Michael Curless

As Walt have mentioned, we feel really good about our guidance and $800 million to $1 billion range. I think the easy way to look at is to break it up to three regions. Over 90% of that total volume is pretty equally split between Europe and Japan in terms of our expected volume there. And as we mentioned before, with $100 million in starts in Europe were well underway to our target there in Europe and have a good pipeline of activity behind that. And in Japan, the other 45%. We've got four -- as you know the projects in Japan are much larger in size, more expensive per square foot. We've got four very significant projects that we feel very positive about this year. Two were build the suites with LOIs. And then two are spec buildings that we have been working on for down for quite some time and have high expectations to see those coming out of the ground this year. So 90% of that pipeline is in really good shape. And then the balance, the 10% is in North America, albeit the smallest piece of the pie, so important part of the pie. As Walt mentioned, starts in general North America are a bit slow in the first quarter, and we're seeing that too on our end. But our history is showing than the North American volume tends to be back-end loaded. And we're confident we'll see some good results there to. Our pipeline just starting to fill up there with respect to building the suits.

Walter Rakowich

It might sound odd everybody on the phone, but I feel really, really good about Japan. On one hand, you got -- you know obviously, you've got difficult situation. But on one hand, you got a lot of inquiries that are coming in and we know that we will likely start more buildings. But the flip side of that is that there maybe delays simply because there's a lot of work that needs to happen in Japan that is much more important than ProLogis breaking ground. And the building contractors are obviously busy. And so we've got get to do that from a timing perspective. But I candidly feel really good about ultimately upstarting some buildings in Japan, given the tremendous interest that were seeing right now. As it relates to the yields, Brendan, I think we're starting to get back in somewhat of a normal situation where we would expect somewhere in the neighborhood of 15% margins. On our development -- cap rates have obviously compressed through out the world and that has been the good news for us. Obviously, if we have taken an impairment or I should say a series of impairments for the last couple of years on our land. And so the bases of the land, I think, is much more skewed to a market price today. There are going to be some pieces. We have some land that we did not identify for sale that we are holding for long-term hold on our balance sheet that we could not technically take it right down on. And so there may be some deals that come through in the future where it doesn't appear to be value creation because of the old land bases that's there. But right now, in the aggregate, everything we're doing is showing a positive value creation. And we feel pretty good about our land basis and moving forward in developing as we have in prior years.

William Sullivan

And I'll just add that the last piece that is, big picture, a ballpark you should assume that about 33% of our starts this year are by target per spec versus build-to-suit. And that could – that service [ph] could be a little higher on the specs side, focused on the Japan activity.

Operator

Your next question comes from the line of David Harris from Gleacher.

David Harris - Gleacher & Company, Inc.

Just elaborate a little bit more on the question on land and the write downs. If do you have anymore clarity as we sit here today having to walk through what you've done through all in terms of the merger about potential write-downs associated with the merger. And in particular, with regard to land?

Walter Rakowich

David, I don't think so. I think we feel pretty dog-gone good about where the values are. And to be candid with you, we have some data points. We didn't -- I think we had in the supplemental that we only sold $9 million of land in the first quarter. However, one of the things that, that doesn't show is that with the Catellus merger, there is someone in the neighborhood of $60 million to $70 million of land that also got closed. But we lumped that into the overall Catellus closing.

William Sullivan

About $37 million.

Walter Rakowich

$37 million, excuse me.

William Sullivan

In the first quarter and the rest will be...

Walter Rakowich

The rest would be on the second quarter. So we are actually selling land. But one of the things that I do have visibility into is that we've got a number of transactions now on the land side that we think we will be selling in the course of the next one to three quarters. Offers that have come in and so I'd say two things; one, we are seeing a lot more activity. Interestingly enough, some from the governmental agencies and alike, but also from developers. I think that's a good sign, but anyway. There is more land that people are willing to buy. And the other thing and probably more the important thing is that the data points we're seeing in terms of the offers are either at or slightly in excess of where we had written down the land down to. I mean in some cases, it might be slightly less, but on the aggregate, I'd say we are, we feel like the numbers that we wrote the land down to, parcel by parcel, so far all the comps are proving it out. I have no reason to believe that the bland prices are going to go down from here. I believe it will go up. So we don't have any intended land write down as a result of the merger, at least on the ProLogis side, I can't speak to the AMB side. But on the ProLogis side, we feel pretty dog-gone good about where our balance is.

Operator

Your next question comes from the line of Steve Sakwa from ISI group.

Steve Sakwa - ISI Group Inc.

I was wondering Walt, if you were built to just a draft, kind of the rent roll down for the balance of the year and I should look at into 2012. What do you expect in given your views of leasing?

Walter Rakowich

I'll give you a quick comment, Steve. I'd say that the rent roll downs -- if market rents didn't move at all, we would still have a year or two, probably two of rent roll downs in a declining fashion. Excuse me, improving fashion. One of the things we are beginning to see in some markets is, we are beginning to see market rents actually begin to rise. Albeit a modest pace. If I were a betting man, I would bet that we will see single-debt digit rent roll downs this year. And I think we'll see potentially no rent roll downs next year. Or it may be really low-single digit negative or maybe even single digit, really low positive next year. But I think it will improve substantially over the course of the next 12 to 18 months. Having said that, I think we've been very consistent with you guys in telling you that our expectation this year is we'll see negative roll downs. Again, I believe they'll be single digit.

Michael Curless

Generally speaking, one's concession and least turns of our stabilized across our markets around the world. We've talked about this being on a market by market basis. I think we said generally speaking the net effective rents we expect over the course of 2011 and '12 to be flat to up, moving in the right direction. So I don't think there's any really new news here.

Operator

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

Michael Mueller - JP Morgan Chase & Co

It's Ralph Davis on the line with Mike. I just was hoping you might be able provide some details in terms of the components of the Catellus portfolio that didn't close. And just in terms of expectations when they will end up closing?

Michael Curless

Ralph, we closed in the first quarter, some $353 million worth of the Catellus acquisition, perhaps our disposition. And then we have basically $130 million left to close, of which a good portion of that closed last week and we expect the balance of that to be closed safely in the second quarter.

William Sullivan

And I think it's quite closer to $150 million. But the big piece of that was L.A. Union Station which closed last week, and the rest of it is unrelated to issues relative to TPG's. It's predominantly focused and there are whole host of parcels that have rights of first refusal. And so, those are being acted on in large part by the parties that have the rights. So those are closed through the quarter through Q2. So we expect to have virtually a 100% of it closed by the end of the second quarter.

Walter Rakowich

Operator, we'll take two more questions.

Operator

Your next question comes from the line of David Rogers from RBC Capital Markets.

David Rodgers - RBC Capital Markets, LLC

You know Walt, I think you guys have made a lot of comments. I guess geographically about how the portfolios' performing and clarified a lot of the comments that you made in the press release. But I guess going back to the acceleration of inventory comment and no speculative development, are there subsets of the market, not geographically, but perhaps tenants or sizes that are driving a little incremental concerns or keeping pricing weaker than they should be at this point in time, with no speculative development. You can give color around those two points? That would be great.

Walter Rakowich

I think, Dave, there are always are segments, sub-market segments to the markets that might be a little bit weaker than others. So It would be hard for me to put my finger on one broad statement that I could make either for the United States or for the world in that regard. I will say this, which I think is really interesting. Statistically, if you look at it, starts are not really picking up meaningfully. I actually expected that we would see more speculative starts this year. And who knows, maybe we will in the second half of the year. But starts have actually been quite slow in the U.S. over the course of the last couple of quarters. And as I mentioned, the deliveries in the first quarter, that we track in the markets that we're in were only 2 million feet. So annualize that and you have 8 million feet. That's just off the charts in terms of low. Now the starts, interestingly enough, in Europe in the first quarter. We're somewhere in the neighborhood of 10 million square feet. And that should give you a better understanding. Europe does not have the amount of good product that you have in the United States. And so frankly, you're going to see developers starting more now over 80% of that was build-to-suit. And so, you don't have a lot of spec starts that are really happening in Europe, but you are having the reconfiguration that we talked about and that is driving development demand. I think that's going to continue. But for the most part, I don't think we're going to see much speculative development here for the next 12 months, and that's about all I can look out. Any sort of softness that we see in the market will be completely soft because of demand, not because of what we see in terms of new product coming online.

Michael Curless

But turning that around a little bit, and if you think about what customer segments are actually taking new space and we track that. If you take a look at the last five quarters, I mean clearly the three PL segment is always taking space, but you need to go a level beyond that. And if you look at those customer segments that are taking much more, it's the discount or is the supermarkets and convenient stores that makes perfect sense because in a recession, folks go to the cheaper places just to buy goods. Also with the net category, you've got Internet retailers who are taking a tremendous amount of sales over the course of the last five quarters. And again, paper and plastics companies, which makes sense. It's inventories are increasing a straight levels are increasing across the world. So I think that you can expect continued demand from those customer segments. And hopefully, those will drive our business and build-to-suit development.

Walter Rakowich

Dave, hope that answers your question. Operator, I can take one more.

Operator

Your last question comes from the line of Chris Canton from Morgan Stanley.

Chris Canton

Just wanted to follow up on development in Japan. What is your capacity there? If some looking at the K-write it looks like you have about, is it 52 acres and about 163 million in land? And If so, what type of pipeline is that support?

Walter Rakowich

That's a great question. I'm actually glad you asked that. You'll notice that we actually did make a land purchase this quarter and that should not be a signal to everybody that we're going to go out and buy a bunch of land. But the fact of the matter is that there are areas in the world where we want to continue to grow our development business and where we are land short. Now, 163 million of land may not or might sound like a lot. But in Japan, that's really three or four sites. It's not a lot, and it can be chewed up very quickly through the development, which we think will probably chew up a lot of it this year and so we are, if you will land light in Japan and we will -- and it's -- frankly it's difficult to be land heavy in Japan just because of how expensive it is. And so, I think you'll find that we will, over the course of the next year to two or three years, we will continue to buy land in Japan on an as-needed basis, but we will inventory very little of it. In other words, as we buy it, we'll be putting it into production as opposed to holding onto it and inventorying it. That's a great observation. And as I said, I think the 163 million probably gets chewed up in three or four deals. It would be virtually 0 after that.

William Sullivan

That's pretty consistent, going back a year ago now, we were talking about our land bank and trying to give you guys a heads-up. And if we're ever going to start buying land in the near future, it's going to be Japan because we were land constrained.

Walter Rakowich

I'd just like to say and I want to echo what Bill said before we hang up, I think all of you, most of you at least have worked with Melissa, Robin [ph] And Rosie [ph] and the team. And I think they are just absolutely the best IR team in the land certainly and perhaps in the world. I really do. And I think all of you would agree. And so if you could all, over the course of the next couple of weeks, give them a call, give them a pat on the back. And I think they know what job they've done but it's always nice to hear it from others. And I'd just like to say thank you, congratulations guys for an unbelievable run. You've done a terrific job. And I will miss you as my partner. Thank you, so much. And operator, I think we can end the call.

Operator

Thank you for participating in today's ProLogis First Quarter Earnings Conference Call. This conference call will be available for replay beginning today at 11 a.m. Eastern Standard Time to 9:00 p.m. [ph] Eastern Standard Time, on Thursday, May 5, 2011. To access this replay, you may dial 1(800)642-1687 domestically, or area code (706)645-9291 internationally. The replay passcode is 53819903. Thank you. You may now disconnect.

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