Prologis (PLD) Hamid R. Moghadam on Q4 2015 Results - Earnings Call Transcript

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Prologis, Inc. (NYSE:PLD)

Q4 2015 Earnings Call

January 26, 2016 12:00 pm ET

Executives

Tracy A. Ward - SVP-Investor Relations & Corporate Communications

Hamid R. Moghadam - Chairman & Chief Executive Officer

Thomas S. Olinger - Chief Financial Officer

Eugene F. Reilly - Chief Executive Officer-Americas Region

Gary E. Anderson - Chief Executive Officer-Europe & Asia Region

Michael S. Curless - Chief Investment Officer

Analysts

Juan C. Sanabria - Bank of America

Vincent Chao - Deutsche Bank Securities, Inc.

Dave B. Rodgers - Robert W. Baird & Co., Inc. (Broker)

Brendan Maiorana - Wells Fargo Securities LLC

David John Toti - BB&T Capital Markets

Emmanuel Korchman - Citigroup Global Markets, Inc. (Broker)

Ross T. Nussbaum - UBS Securities LLC

Brad K. Burke - Goldman Sachs & Co.

Michael W. Mueller - JPMorgan Securities LLC

Thomas J. Lesnick - Capital One Securities, Inc.

Craig Mailman - KeyBanc Capital Markets, Inc.

Eric J. Frankel - Green Street Advisors, LLC

Steve Sakwa - Evercore ISI

Sumit Sharma - Morgan Stanley & Co. LLC

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

Jonathan M. Petersen - Jefferies LLC

Operator

Good afternoon, my name is Kim, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Fourth Quarter Prologis' Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you.

Ms. Tracy Ward, Senior Vice President, Investor Relations, you may begin your conference.

Tracy A. Ward - SVP-Investor Relations & Corporate Communications

Thanks, Kim, and good morning, everyone. Welcome to our fourth quarter and full-year 2015 conference call. The supplemental document is available on our website at prologis.com under Investor Relations.

This morning, we'll hear from Hamid Moghadam, our Chairman and CEO, who will comment on the company's strategy, the market environment; and then from Tom Olinger, our CFO, who will cover results and guidance. Also joining us for today for the call are Gary Anderson, Mike Curless, Ed Nekritz, Gene Reilly, and Diana Scott.

Before we begin our prepared remarks, I'd like to state that 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 10-K or SEC filings. Additionally, our result's 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 a reconciliation to those measures.

With that, I'll turn the call over to Hamid, and we'll get started.

Hamid R. Moghadam - Chairman & Chief Executive Officer

Thanks, Tracy, and good morning. At Prologis, 2015 was a banner year. Business remained exceptionally strong in the fourth quarter, wrapping up a year that exceeded expectations in virtually all aspects of the business. Broad-based demand and restrained supply are creating favorable conditions around the world. Focusing on the top global and regional markets has helped us outperform the broader market.

Core FFO grew 19% year-over-year, occupancy reached a record 96.9%, and rents increased 13%. We're two years into our three-year strategic plan and have already exceeded all of our financial goals a year ahead of plan. Core FFO, however, doesn't tell the whole story. While the key drivers of our operating performance in core FFO are occupancy, rents, and fees, we also create value from our developments and value-added conversions. The results of these activities materially add to our NAV. Last year, value creation totaled $700 million, representing an additional $1.30 per share of NAV.

Industrial real estate market conditions are healthy in most of the world, in spite of concerns about emerging market economies, including slower growth in China. In Europe, for example, where we've allocated significant capital over the last several years, value appreciation has been extremely robust.

While several macroeconomic indicators tell a mixed story around the world, those most correlated with our business point to favorable business trends in 2016, these include: global consumption with flat growth in 2016 at over 4%; global trade up in 2016 by about 3.5%; U.S. container imports up in 2016 by about 5.5%; and strong e-commerce with growth again in the double digits. The best indicator for our business, however, is the health and outlook of our customers. Their space needs tell the story of global consumption. For many customers, that story is one of continued expansions.

Demand continues to exceed supply. As we said on our last call, equilibrium in the U.S. will likely be reached in late 2016. Globally, our share of in-place portfolio rents is 10% under market today which will lead to continued NOI growth ahead of inflation as lease would turn over. We're disciplined about managing risk in our spec development with a focus on profitability, not volume. Unlike previous cycles, other developers and lenders in our sector also appear to be showing discipline. As a result, a healthy supply/demand environment continues, now, in its sixth year.

Supply chain reconfiguration is a key long-term driver of our business. This is true for the full spectrum of our customer base. Where growth is slowing, customers are investing in ways to squeeze more efficiency out of their supply chain. Even in a low growth environment, our business can grow. At the other end of the spectrum, the growth in e-commerce continues to be a source of demand for industrial real estate. Online sales grew 15% in the U.S., while traditional retail grew only 2%. The allure for brick-and-mortar retailers to create or expand their e-commerce business will continue well into the future. To meet consumer demand for faster deliveries, this channel requires facilities that are closer to labor and population centers.

We speak regularly with our customers about their changing space needs. Good examples are Home Depot and Wal-Mart. Once considered traditional retailers, they are well underway with major reconfigurations of their supply chain, designed to handle the rapidly changing e-commerce segment.

Our existing building and development portfolio has accommodated our most sophisticated e-commerce customers' needs, and has done so across a wide range of space configurations from the largest fulfillment centers in our master-planned parks down to smaller last-mile delivery centers in our infill buildings.

We believe our business momentum will continue in 2016. This is due to steady market conditions and broad-based demand from other sectors such as food and beverage, automotive, and electronics. The last several years, we worked to realign our portfolio and strengthen our capital structure. We had an outstanding 2015 and made significant progress on our priorities finishing the year better positioned than ever. The result is a business that outperforms during improving macro conditions and can capitalize on opportunities in the downturn. Based on our customers' input and the position of our portfolio, we have a positive outlook for 2016.

Tom?

Thomas S. Olinger - Chief Financial Officer

Thanks, Hamid. We had great results for the fourth quarter and full year. Core FFO was $0.64 per share for the quarter and $2.23 per share for the year, an increase of 19% year-over-year. This includes $0.05 of net promote income we earned in the fourth quarter from our PELP venture. We exceeded the top end of our guidance primarily due to operations and timing of capital deployment.

Starting with operations, occupancy reached an all-time high of 96.9%, and was above 95% in every region. Our share GAAP rent change was 12.4%, driven by the U.S. at 18%. The KTR assets have performed ahead of our underwriting for both occupancy and rent change. KTR has been fully integrated in our portfolio and is included in the operating statistics I discussed.

Our share GAAP same-store NOI increased 6.6% in the quarter, driven by the U.S. at 8.7%. As we discussed last quarter, the negative impact on GAAP NOI from the amortization of lease intangibles related to the merger have fully burned off. This again had a positive impact of about 100 basis points on GAAP same store.

Moving to our share of capital deployment, we had an exceptional year and created significant value for our shareholders. We stabilized $1.6 billion of developments with an estimated margin of 33%. The initial yield on these stabilizations was 7.3%, and the incremental cash return, excluding already owned land, was 9.2%. Dispositions and contributions totaled $2.5 billion at a 5.3% weighted average stabilized cap rate and included $166 million of value creation from value-added conversions. Dispositions and contributions volume was about $400 million short of the midpoint of our guidance.

We elected to split a few sales across multiple buyers to maximize proceeds and deferred certain contribution to amass better scale, pushing this activity into the first half of 2016. We started $1.8 billion of development, with build-to-suits making up 44%. The starts will generate estimated value creation of $388 million and margin of 21%.

Turning to capital markets, we had an active quarter and closed the year with our lines of credit fully undrawn and reduced the short-term loan associated with the KTR acquisition to $400 million. We're on track to pay off the remainder of the term loan by the end of the first half of 2016, if not sooner. Our leverage on a book basis dropped 130 basis points to 38.4% at quarter-end. Debt-to-EBITDA, including gains, improved to 6 times for the quarter.

While leverage and debt-to-EBITDA are very important credit metrics, there are other factors which demonstrate the strength of our balance sheet. The first is liquidity. We ended the year with over $2.8 billion of liquidity and only 12% of our debt maturing in the next 24 months. Maintaining significant liquidity at all times is a pillar of our balance sheet strategy as it mitigates credit market disruptions and provides ready capital to be optimistic.

Second is our significant nominal EBITDA coverage. We have over $1.5 billion of annualized EBITDA in excess of our fixed charges underpinned by more than $25 billion of unencumbered assets. The bottom line is our balance sheet is in great shape and we expect it to get even stronger in 2016.

Let's switch 2016 guidance. For operation, we expect our year-end occupancy to range between 96% and 97% and our share of GAAP same-store NOI growth at between 3.5% and 4.5%. Cash same-store NOI growth should be higher than GAAP in 2016. The split of our share of NOI by geography will be approximately 80% Americas, 15% Europe, and 5% Asia. We expect our share development stabilizations to be between $1.6 billion and $1.8 billion. As stabilizations have increased meaningfully over the past few years and now approach our starts volume, we continue to see significant annual NOI growth from our developments. For 2016, we expect FFO from development stabilizations of $0.10 to $0.12 per share.

Related to FX, our 2016 earnings are very well insulated from foreign currency fluctuations as over 90% is already hedged. For net G&A, we're forecasting a range of $235 million to $245 million, essentially flat to last year at the midpoint while managing more than $6 billion in assets.

For strategic capital, we expect revenue without promotes to range between $180 million and $190 million. We have promote opportunities from three of our ventures in 2016, PTELF and PEPF II in the third quarter and USLV in the fourth quarter. We project net promotes to contribute between $0.17 and $0.19 per share to core FFO. The magnitude of these promotes is a testament to our strategic capital franchise as well as our strategy to allocate capital to Europe over the last five years. Over this period, we took advantage of a dislocation in asset prices in the market. Our European portfolio has consistently outperformed the market in terms of both occupancy and returns.

Our capital deployment guidance is spelled out in our supplemental. At the midpoint of our net deployment, we will generate proceeds of about $400 million. Additionally, we have two other very significant sources of cash in 2016. First, we will receive $198 million in cash in the first quarter from a completion of the installment sale related to Facebook; and second, we redeemed a total of $400 million between our USLF and PTELF ventures, which we'll fund in the second quarter of 2016.

This ownership rebalancing in these two open-ended funds is aligned with our long-term ownership targets and facilitates the deployment of substantial investment queues in these ventures. As a result, we expect to generate net deployment proceeds in excess of our capital needs of $1 billion in 2016, or $600 million after repayment of the last $400 million of the KTR term loan.

Putting this all together, we expect our 2016 core FFO to range between $2.50 and $2.60 per share including promotes. This represents 14% year-over-year growth, or an increase of $0.32 per share at the midpoint. We expect AFFO growth will exceed core FFO growth in 2016. If we assume a normalized annual net promote of $0.05 per share, our core FFO range for 2016 would be between $2.38 a share and $2.46, an increase of 9% year-over-year at the midpoint.

In closing, we had an incredible year and enter 2016 with confidence, though mindful of potential economic cross-currents. We have a portfolio that has never been in better shape, a strong balance sheet, and a plan that grows core FFO 14%, pays off the remaining KTR debt, self-funds all deployment, generates $1 billion of net deployment in excess of our capital needs, maintains significant liquidity, and provides flexibility and optionality to adjust to changes in market conditions.

With that, I'll turn it over to the operator for questions.

Question-and-Answer Session

Operator

Thank you. And the first question comes from the line of Juan Sanabria with Bank of America. Your line is open.

Juan C. Sanabria - Bank of America

Juan Sanabria here with Jeff Spector and Jamie Feldman. Just a question on the dividend. How do you guys think about the coverage relative to AFFO and, particularly just given the variability in developments?

Thomas S. Olinger - Chief Financial Officer

Yeah, Juan, this is Tom. I'll take that. So, a couple things to think about there. One, when you look at our coverage in 2015, our coverage with development gains is 69%; without development gains is 89%. For 2016, similar numbers would be with development gains of 65%, roughly, and without development gains of about 75%. So, we have significant AFFO coverage in excess of our dividend.

Now, you had a question about how the dividend might be impacted, if it could be impacted by changes in development. So, the first thing you need to think about, and I'm assuming you're referring to capitalized overhead and capitalized interest. So, the first thing you need to think about though is how are we capitalizing development. We're capitalizing development by self-funding. So, we're selling assets and rolling those into development. And we're selling assets that are yielding, let's just call it, 6%. And we're capping interest at a rate of roughly 3%. And when you look at our capital overhead, our capital overhead actually related to development, annually is about $47 million. And when you express that $47 million over development, it's about 3%.

So, if you think about, if we slow down development, let's just take an extreme example. Let's just assume there's no development. So, if we had development of $2 billion, we were going to sell $2 billion to fund that. The 6% we were earning on that development is going to stay in our income statement. The interest expense that we were to cap is going to stay in our income statement. The overhead that we were going cap is going to stay in our income statement. And you know what, there's a zero impact on our income statement because all of that NOI that we would have used to fund that development is going to stay in our books.

So, we're self-funding. So, if the development slows down, no impact on our earnings.

Operator

And your next question comes from the line of Vincent Chao from Deutsche Bank. Your line is open.

Vincent Chao - Deutsche Bank Securities, Inc.

Good afternoon, everyone. Just wanted to go back to the contribution for the quarter and the dispositions being a little lighter than you expected. Can you just give me a little bit more color on maybe what changed in the markets relative to your thinking at the end of third quarter that caused you kind of shift a little bit mid quarter in terms of your plans there?

Thomas S. Olinger - Chief Financial Officer

Yeah. This is Tom. I'll take that again. So, as I've said in my prepared remarks, we had some activity that just – that got pushed back – pushed into 2016. But I want you to focus on a couple things. And when I talked about the sources of cash that we have, we have $600 million that's locked and loaded that's going to close in the first and the second quarter of 2016 between the Facebook note and the fund rebalancing. That's $600 million. There's another $400 million of acquisitions alone that Mike can give color on that – dispositions, I'm sorry, that Mike can give color on that we feel extremely good about.

There's $1 billion of capital right there that we will realize very, very quickly in cash. So, it's really just a shift of timing at the end of the year, a point in time, and we elected to shift some activity into 2016 for very good economic reasons, but we feel great about where we are. We're ahead of schedule from a KTR standpoint. I talked – we talked about that funding paying off the remaining $400 million by the end of the first half of the year. I think it's going to be April, to be very specific, when you look at all the funding that we have in place that is certain to close.

Operator

And your next question comes from the line Dave Rodgers with Baird. Your line is open.

Dave B. Rodgers - Robert W. Baird & Co., Inc. (Broker)

Just wanted to talk a little bit about the development pipeline, up to about $3 billion now; about a third of that is leased. I think in your comments, Hamid, you talked about e-commerce staying pretty steady in terms of demand for space out there, but I guess I was wondering if on the ground or in the field you're seeing any potential cracks in the pace of lease up on the new development especially on the spec side. Just curious about kind of that leasing activity that you're seeing out there in the market.

Hamid R. Moghadam - Chairman & Chief Executive Officer

We're really looking for it. We read the same papers everybody else does, and obviously, we're very vigilant about it, but we haven't seen it. I mean, that's probably the question I ask the team every Monday and we have pretty real data on leasing. We track that stuff very closely and we haven't seen this. In fact, I would tell you, based on talking to our European guys the day before yesterday actually, or Friday, the sense is that Europe is starting with the bang. I mean, it's much stronger than before and I will say the U.S. continues to be pretty strong. So, if anything, if we're going to do our plan again, I would say we'd be slightly more optimistic about leasing because of Europe on balance.

Operator

And your next question comes from the line of Brendan Maiorana with Wells Fargo Securities. Your line is open.

Brendan Maiorana - Wells Fargo Securities LLC

Morning. Hamid, maybe related to that. So, it sounds like your comments were and performance in the quarter all very strong from a fundamental perspective. It sounds like you feel that way about the outlook. But it also feels like you're slowing down a little bit in terms of development starts. And so it feels like maybe you're scaling back the growth drivers of the business a little.

And I'm just wondering, is that because there's concern that there could be a slowdown or do you feel like it's just a prudent way to manage the business in what's fifth or sixth-year of an economic expansion? Or is this just more normal course, kind of what we should expect maybe around $2 billion of starts as opposed to $2.5 billion that I think you were running at last year?

Hamid R. Moghadam - Chairman & Chief Executive Officer

Brendan, you probably remember this, but back in the beginning of time, 2011 or something, we actually laid out a plan that talked about development in aggregate being about $2 billion to $3 billion a year on a run rate basis in total, not our share. Obviously, the numbers you're quoting are per share which are a little bit lower.

And I will still say that's an opportunity set. But why get ahead of ourselves? I mean, we've got a very robust build-to-suit pipeline right now. You can see that for the first time we're projecting build-to-suits to be over 50% of our leasing activity. Again, reading the same papers, we want to be cautious. There is nothing that will stop us from starting up more development if we see more opportunity down the road. As Tom mentioned, we have $1 billion more capital than we need to finance KTR. We have the capital. We can do it. We have a lot of the land already, and we have time to make that decision. So, I think we're being prudent and – but we'll do the right thing, whatever that may be at the time.

Operator

And your next question comes from the line David Toti with BB&T. Your line is open.

David John Toti - BB&T Capital Markets

Just a quick question on dispositions, the cap seemed a little bit higher. Can you walk us through the mix in the quarter?

Hamid R. Moghadam - Chairman & Chief Executive Officer

Sure. I mean, remember what we're selling. First of all, let me take you back to the time of the merger, again, beginning of time. We sold over $8 billion of properties. Just think about that. I mean, that I think would be the size of maybe the second largest company in the sector. That's what we've sold. And I think you know that we've been selling from the non-strategic end of the spectrum. So, you would expect those cap rates to be higher than our portfolio.

And there is a lot of talk out there about what would the value of the portfolio be on a constant cap rate basis and the like. When you sell $8 billion from the lower tier of your portfolio, the mix has a very substantial impact on what cap rate is, even in a steady environment on what's left in your portfolio. So, we think the IRR at the end of the day is what matters, and those cap rates are higher because the growth rates are lower. And we feel really good about our capital allocation decisions.

Just think about the capital we allocated to Europe a couple years ago. How did we fund that? We funded that by selling some non-strategic assets in Europe. At that time, people thought we were crazy. We're selling assets in the U.S. in the mid-6%s and low-7%s, and we were buying assets in Europe in the low-8%s. And those assets that we bought in the low-8%s are now in the high-5%s and low-6%s. So, you got to take a longer-term view of these, and I wouldn't read too much into any quarter-by-quarter things, particularly when you have this mix issue going on with the numbers at this scale.

Operator

And your next question comes from the line of Manny Korchman with Citigroup. Your line is open.

Emmanuel Korchman - Citigroup Global Markets, Inc. (Broker)

When thinking about the promote guidance for next year, what values are the promotes based on, and just how do you kind of get there?

Hamid R. Moghadam - Chairman & Chief Executive Officer

Let me clarify something about the promotes. We've had some (23:46) questions recently about our promotes that they – that's why we're selling assets. Our promotes have nothing to do with what assets we sell or what assets we hold. They're completely based, in the vast majority of the cases, on appraised values on a quarter-by-quarter basis at the time of the promote. So, actually, selling assets doesn't do anything to the promote. So, I just wanted to clarify that.

Secondly, I would say we have pretty good visibility into the valuations, because we appraise the portfolio, particularly the deals that are in the ventures, on a quarterly basis. We know what the carrying values are in the fourth quarter, and we put some sensitivity around that at scenarios that include cap rate expansion, flat cap rates, reducing cap rates, and we've picked a prudent number to project those. Now, to answer your specific question, the promotes today are based in the high-5%, low-6% cap rates, and we think there's a bit of room in those numbers to the good, but we're not going to get ahead of ourselves now.

Operator

And your next question comes from the line of Ross Nussbaum with UBS. Your line is open.

Ross T. Nussbaum - UBS Securities LLC

Hey, guys. Good morning out there. Can you talk to me a little bit about what you're expecting market rents to do this year in light of the comments that you had earlier about reaching equilibrium, and maybe some thoughts even into next years how the market rents for industrial plays out in the U.S.?

Hamid R. Moghadam - Chairman & Chief Executive Officer

Yeah. Let me – I'll let Gene address that. Gene?

Eugene F. Reilly - Chief Executive Officer-Americas Region

Yeah. So I think – and we talked about this last quarter, I believe, so we said we're going to reach equilibrium this year, but we're going to reach equilibrium in the U.S. at least at a sort of mid-5% vacancy rate. I think we'll be 5.7% at the end of it.

And I think you can grow rents substantially above inflation during an equilibrium period if your vacancy rate is that low. So I would guess for this year, we're going to see continued growth that's going to be 5%-ish. And my view beyond that is that it's probably 4% to 5% the following year, because I don't think we're going to see excess construction next year or the year after. So, it's in that range.

Hamid R. Moghadam - Chairman & Chief Executive Officer

The only thing I would add to what Gene said, Ross, is that for a couple years now, we've been predicting that cap rates are going to stay the same or expand, and we've been wrong about that. Now, if cap rates do stay the same or expand, rental growth will be stronger because the headwind of cap rate compression is going to be maybe turning into a tailwind or neutral wind, anyway. So, that's something to keep in mind as well.

Gary E. Anderson - Chief Executive Officer-Europe & Asia Region

I think that's particularly true in Europe obviously, where we had 70 basis points of cap rate compression over the last year, 20 basis points from the last quarter. And that's certainly been a headwind to, arguably, to push rents, but I expect that to subside back half of this year.

Operator

And your next question comes from the line of Brad Burke with Goldman Sachs. Your line is open.

Brad K. Burke - Goldman Sachs & Co.

Quick question on the same-store guidance. What does the same-store imply for GAAP rent spreads over the course of 2016? And if you can give some detail on how much of that is just marking leases to market that will roll over the next year and how much of that is your assumption on market rent growth.

Michael S. Curless - Chief Investment Officer

Okay.

Hamid R. Moghadam - Chairman & Chief Executive Officer

Hold on a second. If we have zero rental growth, our same-store will be 3.8% based on our numbers, if we have zero rent growth from here on out. I think that answers your question.

Operator

And your next question comes from the line of Mike Mueller with JPMorgan. Your line is open.

Michael W. Mueller - JPMorgan Securities LLC

Going to the build-to-suits, going back there, that percentage crept up throughout 2015. Where do you see the build-to-suit versus spec split penciling out in 2016 on a full-year basis?

Michael S. Curless - Chief Investment Officer

This is Mike Curless. Last year ended up at about 45%. And given our – and just to give you a little context, we've done 30 build-to-suits in the last 12 months and that's largely due to a function of our land control, customer control, and our development team. And as we look into next year, we've got more in the pipeline that we've ever had before at this stage of the year. And given the track record and all the reasons I mentioned before, we're very bullish on our ability to see those percentages approaching 50% next year.

Operator

And your next question comes from the line of Tom Lesnick with Capital One Securities. Your line is open.

Thomas J. Lesnick - Capital One Securities, Inc.

Thanks. Hamid, you previously used the call as a platform to call attention to markets or even submarkets that you've felt some concern about. Are there any that stand out to you today? And I guess on the flip side of that, are there any markets that you're particularly optimistic about for 2016?

Hamid R. Moghadam - Chairman & Chief Executive Officer

Sure, Tom. First of all, thank you for remembering that because I think that's a very important part of our responsibilities to call out markets that have any risk of getting overbuilt from our vantage point. And the reason I didn't mention it is because nothing has really changed in that regard. It's Houston obviously from demand reasons is a bit softer although it's holding up a bit better than we would have expected at this point. And Dallas continues to have a lot of development but absorption is keeping pace. So, so far so good, but we are really watching those two markets probably more than any others in the U.S.

I would say going over to Europe, Paris is a bit soft, and it's not really a supply problem; it's more of a demand problem. And I think some of it has to do with some of the terrorist fuss that went on last quarter, but I don't know; France has generally been a little bit slower. The place that's been surprisingly strong in Europe for us has been Spain. Spain has really done a turnaround, and I would say it's done extremely well. The UK was early in Europe, and we thought, gee, it got a little bit ahead of itself and it may go the other way or soften; it hasn't. It continues to be pretty strong in terms of cap rates.

And in the U.S., Chicago has been pretty good, on the upside in this cycle. And the large California markets continue to be very, very strong. In the longer term, I'm a little concerned about the technology sort of bubble in valuations and all that, and ultimately, that may have an impact on Bay Area numbers not next year and probably not the year after. But we've essentially taken a lot chips off the table from that R&D type of product. And I don't think it will have much more of an effect on distribution space.

Operator

And your next question comes from the line of Craig Mailman with KeyBanc. Your line is open.

Craig Mailman - KeyBanc Capital Markets, Inc.

Two quick ones. Tom, in the past you said cash same-store is typically about 50 bps above GAAP. Just curious if that spread should be a good way to think about it this year. And then just separately, you guys have kind of noted I think last quarter Europe cap rates were about 5.9%. Just wondering what the update is there and maybe thoughts on, Tom, you selling down fund interest?

Thomas S. Olinger - Chief Financial Officer

Okay. I'll take the first one. So, Craig, on cash same-store for 2016, I expect it to be probably 25 bps. Could be higher than that – than GAAP next year for 2016.

Hamid R. Moghadam - Chairman & Chief Executive Officer

Gary?

Gary E. Anderson - Chief Executive Officer-Europe & Asia Region

Yeah, cap rates in Europe were about 20 basis points down from that 5.9% that we mentioned last quarter. (31:42)

Hamid R. Moghadam - Chairman & Chief Executive Officer

We talked about the fund selldowns in the rebalancing part of Tom's prepared remarks, so that's what we're doing. Our funds are way over the percentage that we need to have in the funds, I mean, like double or triple what our percentage should we. And we're getting a lot of interest from our investors who are in the queues for investing in these funds to put their capital in and to invest. And we've gone to them and we've said, okay, we're prepared to sell down to accommodate your needs.

And by the way, we've also told the other investors, look, if you want to sell down along with us, come on down because we've got plenty of people who want to buy in and this is a good time to rebalance your portfolio. And one or two investors have taken advantage of that but, by and large, other people have not wanted to sell down. And we never intended to have 40% in our funds and the target was more around 15% or 20%. And we're not going to go all the way down to that level certainly, but we're going to get back to a more normal allocation of our funds.

I think, there are some transactions that are locked and loaded that are based on fourth quarter valuation. So, we know the values, we know the timing, we know the amount. And that's why we feel so confident in our capital plan and not at all concerned about the things that we were asked about in terms of dispositions in the fourth quarter and all that.

So, we're watching these things on a real-time basis and we have to adjust our disposition plans to balance the fund investments. And that can continue to be a source of capital for us. I think in a couple of quarters ago, we walked you through it. There was about $3 billion of capital available because of our excess investment in our fund. So, that is, in effect, a forward funding opportunity for anything that we may need capital for, and for the time being, we're really happy having our capital investment in there.

Operator

And your next question comes from the line of Eric Frankel with Green Street Advisors. Your line is open.

Eric J. Frankel - Green Street Advisors, LLC

Two-part question. One, Hamid, I think you mentioned that your portfolio is roughly 10% under market. Is that a fair assumption across your portfolio broadly, or is that a little bit higher in the – or a little bit more under market in the U.S. and a little bit less in Europe? And then the second question, I was hoping you could touch upon the land sales this quarter. It seems like land as a percent of your total operating portfolio has decreased pretty meaningfully.

Hamid R. Moghadam - Chairman & Chief Executive Officer

First of all, you're absolutely right, Eric. The U.S. is higher and Europe is lower. And surprisingly, Japan is higher than we thought. Before, Japan has always been sort of a flat 1% or 2%-type growth market, and I think our numbers are around 4% today. Secondly, those are our share numbers, which is based on our mix as opposed to the overall portfolio mix. That's where our capital is invested. I don't remember the exact numbers. What are they that went up to the 10% between U.S. and elsewhere?

Eugene F. Reilly - Chief Executive Officer-Americas Region

Eric, it's around 12% for the Americas.

Gary E. Anderson - Chief Executive Officer-Europe & Asia Region

Flat in Europe, 4.5% to 5% in Japan, as Hamid said, and about 2% China.

Hamid R. Moghadam - Chairman & Chief Executive Officer

Now, Eric, with respect to your question about land, that's quite conscious. As you've heard me talk about, we have too much land to support our development, and that's partly a legacy issue from the last cycle. And we've got a challenge because as we monetize land in our development, as value keeps going – their value, what remains keeps going up, and so we've got a bit of a headwind in terms of getting our land down. And you're just seeing the book value actually, the market value is substantially higher than that. So, we have a conscious decision to work down our land.

In fact, what I'd like to see in our Land B is to be under $1 billion because I think it can support two or three years of development with having that amount of land on our books. That means that we can unlock about $1 billion of capital from our land bank over some period of time. I hope it's sooner than later, but there's $1 billion of capital sitting there. If that were invested in income-producing properties, everything else being the same, that's another $60 million of earnings that are being wasted because they're parked in dead land. So, that's another, what, $0.12 a share that would be really meaningful to our business. And our team is working hard to getting the land bank done. It takes time, but we'll get there.

Operator

And your next question comes from the line of Steve Sakwa with Evercore. Your line is open.

Steve Sakwa - Evercore ISI

Tom, I know you answered the question about the difference between cash and GAAP, so thank you. I guess, just bigger picture, you mentioned kind of the Bay Area and just kind of your concerns. Just given your contacts and people you talk to, can you just maybe speak a little bit about kind of what you're seeing on the ground there from a technology funding DC perspective, and just kind of some of the things we ought to be looking at?

Hamid R. Moghadam - Chairman & Chief Executive Officer

Steve, as you know, I've been in this business since the early 1980s and herein. Originally, our business was entirely focused on the Bay Area. So we've seen, I don't know, four of these cycles before. It doesn't mean each one is going to be exactly the same as the last one. But it just feels like everything is overstretched.

And you're seeing a couple of canaries in the coal mine. You're seeing the IPOs get priced at the lower end of the range. You're seeing a lot of the companies go through down rounds and with the ratchets, really getting some investors displeased. All of that stuff ultimately will affect demand for space, particularly – and I should stop there because I'm not an office expert or R&D expert, and frankly, our portfolio with the Facebook and the other major sale in Moffett (37:34) is essentially – we're done with that product type almost.

So, it just feels like it's stretched. That's all I was trying to communicate there. I think the chances of real estate values going up a lot are not as high as their chances of values going down. How much is your guess is as good as mine.

Operator

And your next question comes from the line of Sumit Sharma with Morgan Stanley. Your line is open.

Sumit Sharma - Morgan Stanley & Co. LLC

Great quarter. Quick question on 2016, the guidance. So, if I took the fourth quarter annualized run rate ex the $0.05 promote, layered in your assets NOI growth and promote and development FFO contributions, it seems like you ought to be able to hit the high end of your FFO guidance range quite easily, perhaps even exceed it. So, I guess what are the offsetting factors that you're seeing?

Thomas S. Olinger - Chief Financial Officer

This is Tom. So, the other factor would just be the dilution from asset sales and that excess cash that we're generating, paying down lower yielding debt. But you're right. I mean, same-store growth should be about $0.12 at the midpoint; it's really easy to take our share of same-store NOI of about $1.5 billion at the midpoint of our guidance of 4%. There's your $0.12. I talked about stabilizations of NOI being $0.10 to $0.12. You will have a full run rate of KTR in 2016. That will add about another $0.05. And then there's about $0.08 of just the disposition sales drag that you're seeing. But high level, that gets you right there.

Operator

And your next question comes from the line of John Guinee with Stifel. Your line is open.

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

Hey. Thank you. I think probably this is for Tom, but maybe Hamid jumps in. If I'm – and correct me if I got this wrong, but I think I heard you say your GAAP rental rate increases U.S.-only was about 18% and GAAP same-store NOI growth about 8.7% U.S.-only. That would imply that you had a mid-20%s GAAP rental rate growth in certain markets and a 10%-plus same-store NOI growth in certain markets. Can you talk about those markets that are hitting those sort of numbers?

Eugene F. Reilly - Chief Executive Officer-Americas Region

Yeah, John, it's Gene. I can give you some high level color. I can't actually break it down market by market. But there is no question that GAAP spreads in certain markets are well in excess of 20%. Some of them, on a spot basis, if you just look at the quarter, it's probably 30%. In the U.S., we're 17 – 18% overall. And there's always going to be some volatility around that but, basically, the answer is yes if I'm understanding your question correctly.

Hamid R. Moghadam - Chairman & Chief Executive Officer

Yeah. And the same-store obviously is propelled by occupancy gains as well. So, some of those same markets are getting a tailwind of occupancy gains that's driving it. That would be harder to maintain when you're 97% leased. But the rents I (40:53)

Operator

And your next question comes from the line of Jon Petersen with Jefferies. Your line is open.

Jonathan M. Petersen - Jefferies LLC

Great. Thank you. So, a lot of people have asked about the dispositions and contributions. But I just want to ask you one other way. Last quarter, you talked about doing $400 million of contributions. You kind of talked about it as if that was in the bag. And it looks like you guys only completed about $100 million. I mean, what are we supposed to read into that? I mean, it just get pushed to January 1, just a timing issue, or you're getting a little bit of push back from your fund investors on taking some of these properties?

Thomas S. Olinger - Chief Financial Officer

No, this is Tom, it's all about timing. We looked to amass a certain amount of scale. And if we see another asset that might be leasing up ahead of schedule, we will wait to amass that versus trying to do that as a one-off or waiting. So, it's really timing. We feel very good about it. The process is very transparent on contributions. We don't have an obligation to sell. Our partners or ventures don't have an obligation to acquire, but we go through fair value. So, there is nothing there from a process standpoint that has changed or a lack of desire; it's really timing.

But you can see that timing shift when you look at our numbers, right. As far as the $1 billion that even without contributions, we see about $1 billion that's really locked and loaded, as we looked to the next quarter and a half. $600 million of that, Facebook and redemption is, gosh, two months away.

Operator

And your next question comes from the line of Brendan Maiorana with Wells Fargo Securities. Your line is open.

Brendan Maiorana - Wells Fargo Securities LLC

Thanks. Had a follow-up for Tom. So, you talked a lot about the $1 billion net proceeds coming in. What's that capital going to be used for and how should we think about that flowing through the model? Because it doesn't look like there's a lot of debt maturities for this year, and it doesn't look like there's a lot of the higher coupon unsecured debt that you guys have tendered for in the past that's available.

Thomas S. Olinger - Chief Financial Officer

Yeah. So, right now, if you go through that, we would be sitting on about $400 million of cash at the end of the year. So, we've got the KTR debt of $400 million that we talked about, and there's a little bit of secured that's maturing. But yeah, the model would imply that we would end the year with about $400 million, give or take, of cash.

Hamid R. Moghadam - Chairman & Chief Executive Officer

And nothing on those lines or...

Thomas S. Olinger - Chief Financial Officer

Line's undrawn.

Hamid R. Moghadam - Chairman & Chief Executive Officer

...that term loan.

Operator

And your next question comes from the line of Mike Mueller with JPMorgan. Your line is open.

Michael W. Mueller - JPMorgan Securities LLC

Hard to get out the queue. Well, actually, is the promoting come, is that expected to substantially hit or all hit in the third quarter with the European funds?

Hamid R. Moghadam - Chairman & Chief Executive Officer

Hey, Mike. I thought we almost had a first: somebody dropping out of the line. Tom, go ahead.

Thomas S. Olinger - Chief Financial Officer

So, again, we've got three promotes, two of which will hit in the third quarter, one in the fourth quarter. Just if you look sheer size of the AUM that's promote eligible, it's clearly, Q3 would be the larger quarter than Q4.

Operator

And your next question comes from the line of Dave Rodgers with Baird. Your line is open.

Dave B. Rodgers - Robert W. Baird & Co., Inc. (Broker)

Tom, could you give us a breakdown on the land sales and land sale gains as a part of the 2016 outlook? I did not hear it if you gave it. And then the second was I guess given where your leverage metrics are, given the high amount of liquidity that you have, are you guys angling for a debt ratings upgrade at any point, particularly going into the GICS code change later this year for investors? Just curious about that as well.

Thomas S. Olinger - Chief Financial Officer

Okay. So, I'll give you – directionally, as Hamid said, we want our land bank to go down in 2016. What's baked in there, I don't have the precise numbers, is probably the land bank dropping about – net, about $200 million.

Regarding – we feel really good about our balance sheet. We feel good about our plan and our flexibility. As we've said before, we feel that we're clearly on the path to an A rating. When that happens, that's up to the rating agencies. But tell you what, I feel extremely good about our plan, I feel extremely good about our balance sheet, and I'll leave it at that.

Hamid R. Moghadam - Chairman & Chief Executive Officer

Yeah. The one easy way of thinking about it is that our original plan had us getting to that point this year and when we consciously did the KTR transaction, we elected to postpone that goal by a year, but we're committed to it, and we will get there. (45:17)

Operator

And your next question comes from the line of Eric Frankel of Green Street Advisors. Your line is open.

Eric J. Frankel - Green Street Advisors, LLC

Thank you. Just two quick follow-up questions. One, now that the Morris portfolio is closed, and I guess you completed the eight parts of that transaction that were required, maybe you could give some broad economics of how that deal is working out.

And then second, obviously, we all understand how REITs have kind of traded down, all stocks have traded down at the start of the year, and you're also (45:45) about cap rates have stayed pretty stable, if not come down a little bit. Any thoughts to just taking advantage of really high private market values and delevering further even if it's past your leverage goals and just waiting for something to happen in the future, even with fundamentals being relatively strong?

Hamid R. Moghadam - Chairman & Chief Executive Officer

So, let me take that latter question, and Gene will address the Morris transaction. Everything in good time. Let's get to our first objective, which we've outlined, which is to fully fund KTR. I think we'll do that ahead of plan. We'll end up with a lot of cash on balance sheet, and we'll figure out what – how to best deploy that cash. And we're not at all afraid of selling more assets if we believe that's the prudent thing to do. So, we sit here and give forecast for something for 12 months from now and the world will change. So, for sure, we'll do something different than the plan that we've outlined for you, but it's our best guess. But we're looking at all those trade-offs every day.

Eugene F. Reilly - Chief Executive Officer-Americas Region

So, Eric, on the Morris deal, I mean, the quick answer is that deal was right at about a 5% cap, and that's $370 million of industrial. We had a couple million of development come with that. $1 million of that was leased before we closed, and we have leases working on the balance. So, the industrial part of it has worked out very well. I mean, that deal took a long time obviously, and values came our way during that period of time. And in terms of the retail sale, that was in and out in one quarter and on plan. So, a long difficult deal, but we ended up probably slightly better than expected.

Operator

And your next question comes from the line of Jon Petersen with Jefferies. Your line is open.

Jonathan M. Petersen - Jefferies LLC

Thanks. Just one follow-up – actually, two follow-ups. On the promote, you mentioned how it doesn't impact selling properties, doesn't matter; it's on appraised value, I get that. But I'm curious what the IRR return is over the last three years, like what the assumption is, that gets you to your $95 million midpoint in promotes.

Hamid R. Moghadam - Chairman & Chief Executive Officer

It's not our assumption. It's based on third-party appraisals, and the IRRs would be really high because a lot of these promote, the calculations have thresholds of preferred returns of around, I don't know, anywhere between 6% and 8% per year. But because of, obviously, cap rate compression and extraordinary rental growth over the last couple years, promotes for this coming cycle, if values hold up, are going to be really, really high.

But they are not indicative of sustainable levels of promotes for sure. But there is a – I don't know, there's a $0.05 or $0.06 level of promote that we feel is pretty sustainable and growing over time even in a normalized market environment. And for the foreseeable future, we're going to exceed that. And there may be some years we'll fall short of that, like in 2009, 2010, and 2011. But I think those kinds of numbers are repeatable.

Operator

And your final question comes from the line of John Guinee with Stifel. Your line is open.

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

One question on the dividend, and earnings per share numbers are not particularly accurate when it comes to taxable income. But it looks to us like your earnings per share for 2015 was $1.64. You paid $1.60 dividend. What's the correlation there? And then your guidance for 2016 on an EPS basis starts out surprisingly low at $0.28 to $0.36 given your balance sheet. We're surprised how low that is. Is it possible in this forum to talk through why the earnings per share for 2016 is so low? And can you – and what the ramp up would be to get up to the $1.60 dividend?

Thomas S. Olinger - Chief Financial Officer

John, this is Tom. So, net income is not the right place to start, right. You really should look at, quite frankly, AFFO would be a better indicator on relative dividend strength. In relation to the net income, we do not include in there any gains at all in that number. We – it's footnoted in there. So, that's why that number would appear low.

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

Perfect. Okay. Thank you.

Hamid R. Moghadam - Chairman & Chief Executive Officer

Well, thank you, everyone. Really appreciate your interest in the company and look forward to staying in touch. Bye-bye.

Operator

Ladies and gentlemen, this concludes today's conference call and you may now disconnect.

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