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AMB Property (NYSE:AMB)

Q1 2011 Earnings Call

April 20, 2011 1:00 pm ET

Executives

Guy Jaquier - President of Private Capital, Europe & Asia Region

Eugene Reilly - President of North America Region

Tracy Ward - Vice President of Investor Relations & Corporate Communications

Thomas Olinger - Chief Financial Officer and Chairman of Investment Committee

Hamid Moghadam - Co-Founder, Chairman, Chief Executive Officer, President and Member of Executive Committee

Analysts

James Feldman - BofA Merrill Lynch

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

Sloan Bohlen - Goldman Sachs Group Inc.

Ki Kim - Macquarie Research

David Rodgers - RBC Capital Markets, LLC

Ralph Davies - JP Morgan Chase & Co

Evan Smith - FBR Capital Markets & Co.

Steven Frankel - Green Street Advisors, Inc.

Ross Nussbaum - UBS Investment Bank

Michael Bilerman - Citigroup Inc

David Harris - Gleacher & Company, Inc.

Operator

Good afternoon. My name is Nickisia, and I will be your conference operator. At this time, I would like to welcome everyone to the AMB Property Corporation's First Quarter Earnings Conference Call. [Operator Instructions] Thank you. I would now turn the call over to Ms. Tracy Ward. Ma'am, you may begin your conference

Tracy Ward

Thank you. Good morning, everyone. And thank you for joining us this morning. 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. Earlier this year, we announced a merger of equals between ProLogis and AMB. Materials regarding the transaction are posted on both companies' websites. In addition, the joint proxy statement has been filed and contains information about the transaction. This call will focus on our first quarter 2011 financial results.

Please be aware that statements made during this call that are not historical may be deemed forward-looking statements. Actual results may differ materially from those indicated by forward-looking statements due to a variety of risks and uncertainty. Please refer to our filings with the Securities and Exchange Commission, including our 2010 10-K for a detailed discussion of these risks. Acknowledging the fact that this call may be webcast for a period of time, we believe it's important to note that today's call includes time-sensitive information that may be accurate only as of today's date, April 20, 2011.

The company's supplemental information package was filed earlier today with the SEC on Form 8-K. The filing is posted on the AMB website in the Investor Relations section under Financial Information Supplemental Report. Also included in our supplemental information package are reconciliations from GAAP financial measures to non-GAAP financial measures.

This morning, I will turn the call over to Hamid Moghadam, Chairman and CEO, who will comment on the macroeconomic environment and customer sentiment. And Tom Olinger, our Chief Financial Officer, will review our financial operating results and provide an update on 2011 guidance before we open the call to your questions. Gene Reilly, President Americas, and Guy Jaquier, President Europe and Asia and Private Capital, are also in the call today. Hamid, will you please begin?

Hamid Moghadam

Thanks, Tracy. Good morning, and welcome to our first quarter earnings call. As you'll see, our financial and operating results were in line with our expectations and point to the good progress we're making on our business priorities. Before we get started, I'd like to spend a few moments on the events that took place in Japan last month. We feel very fortunate and thankful that none of our employees or customers were injured during the earthquake and tsunami. Our teams on the ground went above and beyond helping our customers restore their businesses, and they continue to do so. We are pleased to report that today, all AMB buildings in Japan are online and that none of our buildings experienced any downtime with the exception of our one facility in Sendai, which was down for just under four weeks.

Now as we review the progress we've made on our key priorities, I'd like to put them in the context of the long-term strategy we articulated at our investor forum in September. You may recall our position then was that the market conditions and operating fundamentals would continue to improve and that our global platforms were ready to create value. We have the resources, both talent and capital, in place, and we have several irons in the fire regarding new co-investment ventures around the globe. In effect, we are prepared to go on offense. Well, conditions have improved, and we are definitely on offense.

Following a banner year in 2010, we raised more than $1.1 billion in Private Capital in the first quarter of 2011 making it a record quarter for us. In fact, it was an AMB record for any 12-month period. Private Capital continues to be an important driver of our business. And with the third-party equity we raised this quarter, we have $3.2 billion of deployment capacity in our funds, which will allow us to invest in opportunities around the world.

Co-investment ventures provide us with the ability to recapitalize our existing platform and to increase our balance sheet capacity. And we forged strong strategic relationships in the process. With new Private Capital vehicles established in Mexico, Brazil, Europe and China, we'll now turn our fundraising focus to Japan where we see significantly improved development opportunities going forward.

Looking at capital deployment in the first quarter, we’ve put more than $320 million to work. We broke ground on developments in Beijing, Hamburg, São Paulo and Osaka markets in which customer demand exceeds existing supply.

In addition to creating value, these starts allow us to monetize our land bank and to recover development G&A. After the quarter end, we acquired our partner [ph] share of our SGP venture. This brings our capital deployment to date to more than $0.5 billion dollars putting us in a position to meet our annual deployment guidance.

Now turning to leasing activity in our portfolio, you may recall that we expected this to be a heavy quarter of leasing volume, that teams across the globe did an excellent job and leased a record $8.9 million square feet in the operating portfolio. This amount of leasing was the highest level for our first quarter and the second highest level for any quarter in our 27-year history. We ended the quarter at 92.8% occupied. This represents a 90 basis-point drop from year-end occupancy, but our results were materially better than the 100 to 150 basis points decline we had forecasted.

Development leasing, on the other hand, was disappointing at less than 0.5 million square feet. But Japan leasing has turned around for us, and we expect to stabilize our legacy development portfolio this month. Since the earthquake, we have signed new leases for 100% of our Sendai project. We think that Japan may offer some of the biggest development opportunities over the next few years.

While we're disappointed with the level of development lease this quarter, it's important to note that the remaining 1.2 million square feet represents less than 1% of our entire portfolio. Despite some headwinds, the recovery in global trade is on track, which is leading to an increase in demand for logistics space. Global trade volumes are already above peak, and current IMF forecast for 2011 indicate additional growth in global trade at more than 7%.

In terms of consumption, retailers are posting good results and container volumes are also above peak. This trend is similar throughout the Americas and Asia with Brazil and China well above their previous peaks and some markets in Europe continuing to lag.

Real inventories have recovered halfway from the trough and are still building. With the economy and consumption above peak levels and growing, we expect inventory growth to contribute to meaningful demand for investor real estate over the course of the year. Now let's look at customer sentiment, which is improving in the U.S., flat in Europe and bullish across Asia.

Anecdotally, some of our customers are indicating that they're increasing their safety stock in response to the disruption in Japan as well as the economic recovery in the U.S. Specifically, we see an increase in inquiries on leasing velocity Osaka and Tokyo as there's been a flight to class A quality distribution space as companies are rethinking their business continuity plans. Osaka is expected to benefit from companies electing to have ancillary facilities in the region as opposed to a single large facility in Tokyo.

Now, I'd like to provide an overview of the operating environment. Net absorption in the U.S. was positive for the third consecutive quarter at 30 million square feet, above the historic average for our first quarter, which is typically the slowest quarter of the year. The recovery was broad-based, with about 2/3 of the national market showing improvement over the quarter. Notably, AMB's hub and gateway markets accounted for more than 70% of net absorption in the U.S. Net effective rents have stabilized in nearly all markets and have been improving in some markets. In fact, we're seeing evidence of this in South Florida, Southern California and Germany.

Brazil and China remain our strongest markets with high demand and strong rent growth. In summary, I'm pleased with significant progress we've made in the first quarter. The team has maintained a sharp focus on our priorities. We are excited about the capital deployment opportunities for our company and, as always, will be patient and disciplined in our execution.

Tom?

Thomas Olinger

Thanks, Hamid. I'll start with our results for the first Quarter. Core FFO, as adjusted, was $0.32 per share, in line with our forecast. This excludes the recognition and development gains of $1.1 million as well as merger costs of $3.7 million. Leasing volume was very strong with 8.9 million square feet leased during the quarter. Occupancy in our U.S. portfolio significantly outperformed the national markets by 660 basis points, materially above our long-term average.

Our average occupancy was 92.4%, down 20 basis points from the fourth quarter. Rent changes on rollovers decreased 12.1% in the first quarter and 12.6% for the trailing four quarters. Cash same-store NOI for the quarter was 0.2% as compared to the first quarter of 2010. The increase was driven by a 200 basis-point improvement in average same-store occupancy offset by rent roll downs and higher operating expenses related to a few one-time items. Private Capital revenue for the quarter was in line with our forecast. As Hamid mentioned, we had a great quarter of capital raising.

G&A came in at slightly lower than expected due to higher capitalized overhead costs resulting from the timing of development activities. We capitalized $3.7 million of overhead in the first quarter. I want to point out that our core FFO for the quarter excludes the $2.7 million of uninsured losses associated with the earthquake and tsunami in Japan. The majority of the losses related to our facility in Sendai. The losses reflected as a component of depreciation expense effectively reducing the basis of the properties for the damage incurred. This is consistent with how we've historically treated uninsured losses. To give you some perspective, this loss represents less than 0.5% of the gross asset value of our Japan platform.

Turning now to capital deployment. We deployed $323 million during the first quarter, which included $300 million of new development starts and $23 million in acquisitions comprised of two properties at a stabilized cap rate at 6.2%. Subsequent to quarter end, we acquired our partners' 50% interest in the AMB-SGP joint venture. This portfolio comprises 8.2 million square feet of U.S. industrial real estate valued at $430 million.

And also subsequent to quarter end, we entered into a five-year extension of our AMB-SGP Mexico venture. Year-to-date, we've recycled over $250 million in capital in dispositions and contributions including $78 million of dispositions in the first quarter and $168 million of net assets that we contributed to our China venture subsequent to quarter end.

Let's move to our balance sheet. It was a quiet quarter for financing as we had minimal debt maturities. While we're getting significant interest from our banks, we're putting the extension of our $500 million global line of credit on hold given the pending merger with ProLogis.

We continue to maintain strong liquidity and ended the quarter with $1.4 billion, consisting of $1.2 billion of availability on our lines and more than $200 million in cash. Now, let's turn to our guidance for 2011.

We're maintaining our full year Core FFO, as adjusted, forecast of $1.30 to $1.40 per share. As a reminder, this guidance excludes the recognition of gains from development activities and excludes any impact from or comps associated with the proposed ProLogis merger.

Our forecast assumes the global economic recovery will continue through 2011 led by our target markets. We expect our U.S. portfolio to continue to outperform the national markets.

Starting with operations, we are narrowing our average occupancy range to between 93% and 94%. We forecast occupancy to trend higher through the rest of the year and reach 95% by the end of 2011. We feel good about our ability to hit our year end occupancy forecast of 95%, given the leasing volumes we've achieved in the first quarter. While we expect effective rent growth in select markets in 2011, rent change on rollovers will be negative during the year, given leases rolling down from prior cycle peaks.

For cash, same-store NOI, we are forecasting growth of 1% to 3% without the impact of FX. We expect the embedded rent bumps to about 85% of our portfolio to offset the negative NOI impact of rent roll down. As a result, the majority of our occupancy gains through the remainder of the year should translate into same-store NOI growth in 2011.

Now let's turn to our capital deployment guidance. We're maintaining our full year forecast of $1.1 billion to $1.5 billion, about a third of which will be on our balance sheet. This includes $500 million to $700 million in development starts, primarily outside the U.S., and $600 million to $800 million of acquisitions largely in Europe and the U.S. With acquisition of our partners interest in the SGP venture, we are on pace to reach this forecast.

For 2011, we expect property operating dispositions of about $100 million. Of course, this is one measure that could move up significantly post-merger. We are also forecasting contributions of $250 million to $350 million to our various funds, which includes the $168 million of China contributions I mentioned earlier. We are not including any potential gains from these contributions in our Core FFO guidance. For Private Capital in 2011, we expect revenue of $36 million to $41 million, which includes deployment reimbursements of $5 million to $9 million and does not include any promotes.

Our net G&A forecast is unchanged at $125 million to $130 million. We expect to capitalize $7 million to $9 million of development overhead. It's important to note that quarterly FFO will not be evenly distributed for the remainder of 2011. We continue to expect FFO to build by quarter consistent with occupancy and capital deployment increases.

Now briefly touching on the merger with ProLogis, you may have heard Walt [Walter Rakowich] and Bill's [William Sullivan's] update on their call earlier today. The merger is proceeding as planned, and we are very busy with integration activities, and we plan to be ready to hit the ground running on day one of the new company. We continue to expect to achieve the $80 million of gross G&A synergies on an annual run rate basis by the end of 2012 and are very excited about the combined prospects going forward.

To wrap up, we had a strong quarter. We feel very good heading into the remainder of 2011. We expect to continue to see improved asset utilization, scaling of our overhead as value creation and activities ramp up and we will put capital to work to the advantage of deployment opportunities as they arrive. With that, we'll open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Jamie Feldman.

James Feldman - BofA Merrill Lynch

Hamid, I was just hoping you could talk a little bit about conversations you're having with tenants about the higher cost of oil and how you think this plays through on the logistics infrastructure and people's decision-making?

Hamid Moghadam

I think you need a long-term level for oil prices to stay above $100 for that to really affect long-term planning of networks and all of that, Jamie. So these guys look at optimizing their networks and their ideal locations all the time. And once those input variables change, the ideal configuration changes. But again, it requires some period of time to pass. But if oil stays at a very high level, you would expect probably a larger number of warehouses and closer to major population centers. In other words, people will sacrifice inventory levels and labor cost savings as a trade off against lower transportation and energy cost. And I think if that were to happen, which it’s too soon for it to be happening now, it would benefit certainly the inflow portion of our portfolio.

James Feldman - BofA Merrill Lynch

And then can you talk a little bit about your view on leverage of the combined businesses once the deal closes and kind of where you're comfortable?

Hamid Moghadam

Well, I think you have heard me say that I would like this company to have one of the best three balance sheets in the business. And internally, we've talked about it being A-eligible. We've had some discussions whether actually want to be an A-rated company or whether we want to be a solid BBB+, but we've always described it as being A-eligible. Now that will take some period of time. And as opportunities arise in the short term, we may actually go up and leverage and then go down on leverage. But really, the long-term path for leverage is well down from here. And I think that was one of the important takeaways of what we've all learned in the last couple of years.

James Feldman - BofA Merrill Lynch

I guess, what are your thoughts on getting there?

Hamid Moghadam

In terms of actions, obviously, the strategy of the company is to be disposing of some real estate in non-core markets, further contributions through fund formation in places where we have a lot of balance sheet capacity deployed today. Obviously, Japan comes to mind because the two companies will have a significant presence in those markets, and that capital will be used for two purposes: One, to build out the land bank, which is currently non-productive; and secondly, to lower leverage. And actually based on analysis we've done in models we have for our future, we actually delever very nicely, very quickly and maybe even a little bit too much. So let me leave it at that. Tom, do you have any additional comments?

Thomas Olinger

I would say on the coverage front, too, the two things you'll see happening is the synergies that the merger would provide definitely boosting coverage, as well as asset utilization. And as rent growth kicks in and development pipelines lease up that are significant contributors to improved coverage as well.

Operator

Your next question comes from the line of Steven Frankel with Green Street Advisors.

Steven Frankel - Green Street Advisors, Inc.

Guys, I have a couple of questions regarding the fund business. And Hamid, I want to compliment you first for having such a clean record of corporate governance at the rate and fund levels over time. And it’s really become impressive how strong your brand is in the private equity world right now. I guess kind of my first question is, what are your thoughts on ProLogis' fund business, and how do you plan to reshape it? Do you plan to be as accommodating to Pepper [ph], one of their partners, as you've been with GIC for the recent SGP joint ventures?

Hamid Moghadam

Steve, first of all, thank you for your observations. Secondly, my observation about the ProLogis Private Capital business is that it's very significant in scale and they've had a lot of success over time. The wisdom of having a public company managed by another public company and all that are things that, with the benefit of some experience, people may have different views about. But I would say that those guys generally have done a good job on corporate governance. This is a tough situation that they find themselves in. It's probably best if I don't comment directly on that because we're not really in the driver's seat. We try to play a constructive role in the dialogues. But I think Walt and company have done a pretty good job to date particularly in the last month or so being responsive to the questions that have arisen. And suffice it to say that I think AMB's commitment to good corporate governance is not going to change going forward in the new format. But I do think the ProLogis guys shared our view as well. So I don't think it's one side imposing its view on another. I think we're both committed to that. With respect to your contrasting SGP and Pepper [ph], I'm not sure I would draw that comparison. SGP was really an opportunity for our investor to harvest their investment after a ten-year period, which was the original term of the partnership. And instead of selling it on the open market, we had a negotiated transaction because we could. They were well-represented. There are sophisticated rules for investors, and we were representing the shareholders and we came at a good solution, which you now see resulting in a closing first quarter. Pepper [ph] got different elements in that there's certainly an element of governance that was at least the beginning of the conversation on the dialogue and all of that where government’s related, but I think the involvement of other companies in the business have changed the character of that, unfortunately. So let's just leave it at that. I’ve probably said more than I should.

Operator

Our next question comes from the line of Ki Bin Lim (sic) [Ki Bin Kim] from Macquarie.

Ki Kim - Macquarie Research

Going back to Japan, have you guys looked at how much damage was caused by the earthquake in the northern region of Japan and what potential dollar value that is? And is there any chance that you could partner up with some of these landowners that might have gotten wiped out and weren't insured?

Guy Jaquier

This is Guy. I'll answer that. We haven't done any comprehensive review of the dollar volume of damage to the general market in northern Japan. Our own experience is we have one asset there in Sendai. It's modern, well constructed. It survived the earthquake and the tsunami actually very well. Obviously, if you’ve been watching CNN, you'd see other buildings in the market did less well and really that has led to an increased focus on the part of customers to come to buildings like ours, and that's really why today we're sitting there with 100% of the building leased or with lease reservation contracts from other users who want that type of real estate. And as far as more ventures going forward, really, we'll not comment on that at this time.

Operator

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

Michael Bilerman - Citigroup Inc

Hamid, just as you think back to your first quarter leasing, you talked about being the highest first quarter on record and one of the highest quarters overall, and you compare and contrast to PLD, which the first quarter leasing fell short a little bit and I think it was a lot more tempered commentary. How much, I guess, are you sort of looking at the two? Is it a market share issue? Do you think that there's something different going in the two portfolios? And I guess when you look at those numbers as they're eventually going to come into yours, there's still a big waft to get to the end of the year. Obviously, the first quarter was a little bit light, partially driven by the lower leasing. And I guess how are you sort of putting everything together now being able to see both sides of it in a lot more granular detail?

Hamid Moghadam

I think if you look at ProLogis' performance in markets that are common with AMB, I think you will find that their performance is in line with what ours has been. They do have a higher percentage of regional markets as opposed to global markets than we do in their portfolio, particularly in the U.S., and those markets are going to be somewhat lagging. So I think that may explain the difference in perspective. We are in fewer, better markets. They're in those markets, both a couple of other markets that are not as good, and that may change the outlook a little bit. I think while this next comment of mine is not going to apply to operating statistics, I think it will probably apply to a state of mind. I mean, we are in two markets around the globe, China and Brazil, which they are not in. And those are probably our two best markets. So that makes us probably sound a little bit better than they do. Conversely, they are much bigger than we are in Europe, and if there were one region in the world where probably things are lagging, it would've been Japan and Europe, and now, I think Japan, because of unfortunate events that have happened is going to be actually pretty positive going forward. So I think it leaves Europe as the lagging area of the world. So I think maybe those differences account for a little bit change in tone, but I don't think there's anything fundamentally different between our approaches or our performance in the common markets.

Operator

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

Ross Nussbaum - UBS Investment Bank

A couple of questions on the SGP joint venture. First…

[Technical Difficulty]

Operator

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

Sloan Bohlen - Goldman Sachs Group Inc.

Hamid, I was wondering maybe if you could touch on -- a question was asked during the ProLogis call about mark-to-markets going forward as we look through the back end of this year and then into next year. I was wondering what your view is for how much you need in terms of kind of the flat to be taken out of vacancy to see some real rent growth?

Hamid Moghadam

Let me make the macro comment and then turn it to Gene for the details of the portfolio. I think the vacancy rates need to drop by 3% to 4% for us to get pricing power uniformly across all markets in the U.S., which is I think where your question is focused. I think some markets were beginning to get some pricing power. I think LA is getting to that point, South Florida is getting to that point and maybe New Jersey is approaching those areas. But I think, generally, the market needs to gain 3 or 4 points of occupancy points. Interestingly, we're about 4 points below peak inventory levels today. So I think when inventories normalize, we'll be at a point where we'll have pricing power, generally. I do expect that to occur in 2012, probably first half of 2012, but we've had pretty extensive research that we've shared with you guys on that, and I'll just refer you to that. Gene, do you want to make...

Eugene Reilly

I don't think there's much more color I can add other than that number is a different number in depending on which market you're looking at. In LA, you have vacancy rates that are in some cases in the fives or lower. And that's a market where you need some lower vacancy rates to have pricing power. But where that's taking place and the two big areas in the U.S. would be Airport West in Miami and a couple of submarkets in Los Angeles. You're seeing actually pretty significant upward pressure on rents. The other markets I would note, in Brazil, you've had significant upward pressure because of lack of supply and China as well.

Operator

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

Ross Nussbaum - UBS Investment Bank

I've got sort of a series questions tied together on the SGP joint venture. Tom, if I heard you correctly, I thought you had stated a $430 million valuation. And if I'm looking at Page 18 in the supplemental correctly, it looks like the book value was $480 million. So I wanted to try to tie those out. And then secondarily, can you talk to the IRR over the ten-year life of that fund for your partner as well as to AMB? And then finally, is there going to be any incentive distribution received in the second quarter from that transaction?

Thomas Olinger

Hey Ross, this is Tom. I'll take the first question. You're right. It's valued at $430 million, and that was the gross book value at the higher number. The value was at $430 million, that's correct.

Guy Jaquier

And Ross, carryover your second question but your third question relative to a promote, no there would not be a promoter on that. Oh, the second one was the IRR. We're really not in a position to comment on IRRs on individual ventures.

Hamid Moghadam

Well, put it this way, it was positive but it was below our expectation. But it was definitely a positive IRR. Not one of the best-performing investments or joint ventures we have.

Thomas Olinger

And Ross, I want to go back to your first question on the $480 million. The one reason why that $480 million is a little misleading if you're trying to go to, well, is that how much we invested in it. That also includes all the TIs [ph] and leasing commissions that were incurred over that ten-year hold period that would've been amortized through the leasing revenues generated, so you can't look at that number and to try to assess the overall profitability of that venture.

Hamid Moghadam

Yes, it's even more complicated than that, because if I recall, that was an early -- we formed that venture in think in the late 90s maybe early 2000s. And a lot of those assets actually came from when we were a private. So there's been a book value change when we went public. There was a book value change when it was contributed to the venture. There was capital invested. So I think all of that makes it pretty complicated to get to where you're going.

Ross Nussbaum - UBS Investment Bank

And just to clarify in that piece, would that imply there's a charge coming through in the second quarter to adjust that book value back to the valuation of the transaction?

Thomas Olinger

No, not at all, Ross. Again, because all of those TIs [ph] and LCs [ph] have been amortized over the period. In each point, it even goes even further back than 2001 when we formed this fund because they were on our books for a long period of time. So that gross number is misleading from that perspective.

Hamid Moghadam

And in my recollection is that the IRR is single-digit but in the high single-digit, mid- to high single digits, but certainly less than what we would expect, which would have been in the low double-digit range for that vintage of an investment.

Operator

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

David Harris - Gleacher & Company, Inc.

I wonder if you could just elaborate a little bit more on the circumstances in Japan. I heard your optimism about the longer term on redevelopment, and we heard that from ProLogis this morning, and I concur with that. But I'm just wondering in the short-term is there are not a sort of slowdown in leasing volume? And then the second point on this is I'm just wondering if there are any spillover effects in other markets around the world with all of these supply chain disruptions and perhaps a movement away from some large multinationals from being so dependent on a just-in-time system?

Guy Jaquier

Sure, this is Guy. Why don't I start with that and then maybe if Hamid wants to follow up, he can. With respect to Japan in the short term, I mean you'll see that we're pretty well fully leased. So short term disruptions are not something we're concerned with, especially with the commencement of our deal in Osaka. In the long-term, we are bullish on the economy. Construction in Japan takes a little bit longer so this is a project that be delivered in the middle of next year. So it's really more of an intermediate view. We are seeing increased trends for redundancy in the Japan market. Also, we have to consider that these were construction costs that were locked in prior to the earthquake. And there are various views that construction costs may be going up in the near future, so this is a good chance to keep those costs locked in. Relative to the more macro trends on safety stock…

Hamid Moghadam

Yes, clearly, everything we're reading but not seeing yet, but reading just like you're reading, is that there's going to be more redundancy in safety stock and people are not going to run inventories that tight. Which is, by the way, one of the reasons -- remember about eight or nine months ago, people were talking about how people discovered a new way or technology of running the economy with a lot less inventory? And we pointed that at that point that, no, while we are on this secular decline in the inventory-to-sales ratio like you've seen from us for the last 50 years, we don't think there's anything that this recession caused that is going to make it jump down to even a lower steeper curve. Well, this is one of those things that's going to bend the curve back up a little bit. But long-term, we think the trend is down, less inventory per unit of GDP but not a quantum leap differently. My next comment about Japan -- you're going to have to forgive me on this one. But I think our enthusiasm for Japan in our statements is consciously tempered because of the respect we have to what has happened over there. Frankly, to talk about all the great business opportunities over there when there's so many people suffering, we just don't feel good about that. But let me just say that the business prospects over there are actually pretty strong and leave it at that. And then if we can play a constructive and profitable role in building back up the infrastructure of Japan, we will do so. And let me also say that I've been just very impressed and have a lot of admiration for the way the Japanese people have taken this. I mean, can you imagine, God forbid, if that had happened over here in the U.S. and the riots that would have ensued, et cetera, et cetera. I think it just points to the dignity of that culture.

Operator

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

Ralph Davies - JP Morgan Chase & Co

It's Ralph Davies on with Mike. I had a question in terms of the development starts that you guys accomplished in the first quarter. Can you talk about how much of that's spec build? And then looking forward to the remainder of your pipeline, how much of that you anticipate will be spec versus build-to-suit?

Eugene Reilly

Ralph, it's Gene. Let me take that. We have a variety of projects here which are all spec. I think it'd be helpful to describe all of them individually. So I'll start in Brazil, and Guy can pick it up from there. In Brazil, we're starting 600,000 feet, which is the second phase of our Cachemar [ph] park project, and that's north of São Paulo. So this is a project you may recall, our first phase is 640,000 feet, and that was fully committed very early on in construction. And frankly, the 600,000 feet we're starting has probably 2x of demand on it. And I'm very comfortable that'll be leased before it's finished and perhaps it may even start more in that particular park before year end. So that's a fully speculative product but a tremendous amount of demand.

[Technical Difficulty]

Guy Jaquier

The other three development projects that we started this year or this quarter, Hausbruch 7, which is in Hamburg, Germany. Again it's a market that we're pretty much fully occupied, and the market is very tight. For those of you who are on our analyst tour, I think it was November of '09, we showed you our Hausbruch project. This is right adjacent to it. It's a site we picked up that we can redevelop. The other one is Beijing Capital [International] Airport. It's about 1 million square foot project, really a stone's throw from Beijing airport, right next to a transit terminal. Again, that's a market that's very tight. No large blocks of space, and we're seeing increasing rents. And the third one we already talked about is in Osaka. It's a 1 million square foot project down the road from our successful Nagasaki projects.

Hamid Moghadam

So the bottom line is very few of them are actual build-to-suits, but we're pretty confident that a bunch of them are going to get leased before completion. And we do have a couple of build-to-suits that we're working on that we're close on. So let's go to your question, Sri.

Evan Smith - FBR Capital Markets & Co.

This is Evan Smith on with Sri [Nagarajan]. I was just hoping you guys could provide a little bit more color on the leasing spreads, what they averaged in just the first quarter and also in the fourth quarter? And then also if there are any few large leases or key markets that were driving the leasing spreads down in the first quarter?

Eugene Reilly

This is Gene. Let me take that. There isn't anything I think noteworthy relative to individual markets driving these spreads. In the big picture, let's take a look at where we ended the quarter and how we look at this stat going out to the year. I think on the last call we mentioned, we expected a negative 12 plus or minus number for 2011. We came in with this quarter that, that number is actually slightly better than we expected. And I would guess at this point that, for 2011, we'll come in slightly better than the negative 12. But I'd remind everyone, this is the last stat to turn positive. Things are playing out pretty much the way we expected, and it will be 2012 before you see meaningful change. At that point, we're going to begin to roll leases that were signed in 2008, 2009, where you're getting into better comps, frankly. So, this is a stat that, again, it's the last to roll. It will be a bit stubborn, and look to 2012 for that to begin recovery.

Operator

Our next question comes from the line of Dave Rodgers with RBC Capital Markets.

David Rodgers - RBC Capital Markets, LLC

A question for Hamid or perhaps Gene. I guess more concerning to the shippers today, it seems to be that oil would seem to be the limited availability of containers out there as well as the high utilization of full truck load carriers. I'm wondering with consumption outpacing inventory of late, are you having negotiations or in your discussions -- are those tenants that are looking at additional space concerned about the ability to get inventory into the new space that they're committing to? Is that impacting decision-making in the near term? And do you think that if it is harder and harder to get inventories in through containers, et cetera, will we see a shift perhaps back to air, which could delay the recovery of your business? And I guess the other way to ask that is, is there anything in there that hurts the AMB model here in the near-term?

Hamid Moghadam

Well, if I could take that. That stores are basically getting the inventory pretty much directly because of the problems you mentioned. And I think that sales really at the end of last year around Christmas season were just so much stronger that a lot of the inventory coming through the ports was going directly to retail locations and bypassing the DCs [distribution centers] because they were just running to catch up. And to some extent, that has continued for the reasons that you're talking about. And by the way, if you want to add another constraint on top of all this, it's just the number of drivers that you can get to drive your trucks. So people thought the roll was going to come to an end. It relieved a lot of the constraints that we're operating in our business. And now, with the business coming back, those same old constraints are being talked about including capacity at ports and drivers and now containers and all of that kind of stuff. The good news is we're in a business where the long-term trends are 7% growth on the top line, and we'll have to deal with the constraints in the short run. The air cargo business being the beneficiary of, I guess, emergency shipments, I can't think of a company that would be better positioned to benefit from that than AMB. As you know, air cargo is, while not a huge part of our business, is as big a part of our business as anybody else's business. And we're seeing that continue in terms of strength, although it's moderating because I think the containers are picking up their real share.

Eugene Reilly

And I guess let me just add quickly, the only other fact that may result here is that the shortage of drivers, long-haul drivers, probably on balance will benefit East Coast ports. So you could see a few products coming into the West Coast and shipped or driven across the U.S. We haven't seen that really materialize yet, but that's a trend that we expect to materialize.

Operator

Our next question comes from the line of David Harris with the Gleacher.

David Harris - Gleacher & Company, Inc.

The adjustments with depreciation on your development profits, can you remind me how that's generated, because you’re booking development profits on assets where you've already taken depreciation?

Guy Jaquier

We did, David. And if you look at our FFO definition, we spelled that out. But we had one contribution or one sale this quarter in Q1 where the asset has stabilized, probably about a year and a half ago to two years ago. And we sold that asset, and we backed to the accumulated depreciation out of that gain. Now what we've always said was if we've developed an asset, then that asset, when we sell and monetize it, would qualify for FFO. As you know, we would back it out of core FFO, but that's our treatment.

Operator

Our next question comes from the line of Ki Bin Mim (sic) [Ki Bin Kim] with Macquarie.

Ki Kim - Macquarie Research

This one is kind of far out, but what do you think about the expansion of the Panama Canal? And do you think you'll be entering kind of southern east markets more so than you have now?

Hamid Moghadam

Well, we kind of answered Savanna for that reason back in 2006. And the thesis has not changed in any way. We think the West Coast ports are going to be pretty busy, and we think the overflow is going to go to the East Coast including Savanna, which is the best-positioned port, and we actually have a pretty significant land position in that market to benefit from that trend. The global economic crisis put a 2.5 year interruption in that thesis but we think the long-term thesis is still very valid.

Eugene Reilly

And Ki, it's Gene, just to add to that. It's really not that far away. It's 2014. That project looks to be finished on schedule. So it really isn't that far away, and it's just another driver that ought to help East Coast ports, and not just Savanna but New York, New Jersey, Miami, Charleston and others.

Operator

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

James Feldman - BofA Merrill Lynch

I was just hoping you could comment on your current backlog for private capital raises. I mean, it was certainly a good quarter, but kind of what does it look like from here?

Hamid Moghadam

Jamie, we're not trying to raise capital for any platform just now. We'll continue -- we haven't, by the way, talked about it, but we continue to raise money in our open-end funds, and that's an important part of our business. So we'll do a bit of that. But really, the main focus is going to be on Japan. That's the big platform that is on our balance sheet and actually ProLogis' balance sheet, and that is going to be probably an effort that will start in the back half of this year, but we don't expect it to close until 2012 at the earliest. So we don't have a whole bunch of other things that we're trying to accomplish today. I will give these guys a couple of weekends off.

Operator

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

Michael Bilerman - Citigroup Inc

Just a quick follow-up, the NOI sequentially went down about 5%. I think you had talked in your -- that’s just in your supplemental package where you showed sort of the adjusted NOI, cash NOI, going down by about 127.5 to about 121. I think in your opening comments, you talked a little bit about some OpEx items, and I got to assume the rent on rollovers was maybe the other piece sequentially that was impacting it. But it just seemed like a big number. And the second thing was just the FFO from unconsolidated JVs, that went up and it looks like the Europe fund went up substantially even though all the cash NOIs were flat. And so I just didn't know what was driving that increase and whether that reverses in the back half of the year or not.

Thomas Olinger

Sure, Michael, this is Tom. On the NOI, we had probably around $2.5 million of onetime expenses that flowed through the consolidated NOI you're seeing. And some of that was a little bit of snow removal Midwest in the East Coast. Some of that was from real estate taxes. Those were really onetime costs. If you carved those out of the same-store NOI, you would see our same-store NOI go up about 1.5% this quarter. So on a run rate basis, that should be excluded. On the JV side, there were some onetime items boosting revenue a little bit in Europe, as you pointed out, related to a straight-line rent. I think that's probably about $1 million high on a run rate basis. Now when you're looking at the NAV page and looking at that NOI decrease, a couple of things to note, one would be the Minneapolis sale that's out of those numbers, another one would be lower fund ownership during the quarter that's taking that down, the third piece would be onetime expenses that I noted and then the last piece would be there is an impact of rent roll downs on NOI, probably around $2 million for the quarter as you pointed out.

Michael Bilerman - Citigroup Inc

And then just specific on the on the unconsolidated JVs, the NOIs were flat, right? So it had about -- well, actually NOI was down but your share of FFO went from $16 million to $21 million. So your FFO contribution went up $5 million but your share of cash NOI actually went down by $1.5 million?

Thomas Olinger

That's right. And again, the cash piece was about flat. The biggest impact on NOI was from a straight-line basis, and the other piece would be acquisition costs in Q4 that would be pulling that number down.

Michael Bilerman - Citigroup Inc

In 4Q?

Thomas Olinger

Yes, sir.

Operator

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

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

If you talk to the investment sales brokers out there, there is just a wall of private capital in excess of $100 billion for core industrial real estate. And I think you maybe had $100 million, $150 million of guidance for dispositions stateside. What's sort of the most you could do? What's the most aggressive disposition plan you could have?

Hamid Moghadam

Out of the AMB portfolio alone, John, or combined portfolio? Let me talk about the AMB portfolio, alone.

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

Both actually.

Hamid Moghadam

AMB's portfolio is pretty well-aligned with our strategy. I think if we really pushed it, there could be $500 million to $750 million, not all in the balance sheet. Some in funds that are probably strategically not the ideal fit for our portfolio that would be candidates for sale. And of those, some are encumbered by secured financing in other constraints. So I would say the range for AMB alone could be $500 million maximum in the near term. And then we have a couple of value-added conversion projects that could get accelerated. So I don't know, maybe $600 million, $700 million in total. And probably it would not be a bad assumption to on a size-adjusted basis extrapolate that to ProLogis as an approximation.

Thanks, John. And with that, let me just thank you for all your questions, everyone. I'm just very proud of the way the team has been able to focus on and execute the offensive game plan given all the other activities that are going on right now and all the good stuff that we can't really discuss with you today. So I'm pleased with the result for the quarter. It's really shaping up to be a great year for us. Momentum is strong across all our business lines and the execution of our strategic plan is very much on track. In closing, let me just leave you with three points. Our financial performance reflects the excellent progress we've made on our priorities; number two, the global economic recovery is strengthening; and number three, the fundamentals of logistics real estate continue to improve, and we expect to see an increase in demand for industrial space globally, and our company is very well-positioned to meet that demand.

Let me also share with you that this has been our and my 54th earnings call as a public company. That's a really long time, and it may be my very last with you as AMB. I think it's safe to say that we're all very excited about the future, and we look forward to speaking with you next quarter, and we'll have lots to talk about at that point. Thank you.

Operator

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

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