Prologis, Inc. (NYSE:PLD)
Q3 2016 Results Conference Call
October 20, 2016 12:00 ET
Tracy Ward - SVP, IR & Corporate Communications
Hamid Moghadam - Chairman & CEO
Thomas Olinger - CFO
Eugene Reilly - CEO, The Americas
Gary Anderson - CEO, Europe & Asia
Michael Curless - CIO
Eric Frankel - Green Street Advisors
Emmanuel Korchman - Citigroup
Steve Sakwa - Evercore
David Rodgers - Robert W. Baird
Craig Mailman - KeyBanc Capital Markets
Robert Jeremy Metz - UBS Securities
Thomas Lesnick - Capital One Securities
John Guinee - Stifel
Jamie Colin Feldman - Bank of America
Brad Burke - Goldman Sachs
Blaine Heck - Wells Fargo
Michael Mueller - JPMorgan
Good morning, 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 Prologis' Third Quarter 2016 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Please limit yourself to one question. You may rejoin the queue for any follow-up questions. Thank you.
Ms. Tracy Ward, Senior Vice President, Investor Relations, you may begin your conference.
Thanks, Kim, and good morning, everyone. Welcome to our Third Quarter 2016 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 and market environment; and Tom Olinger, our CFO who will cover results and guidance. Also joining us for today's 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 second quarter results press release and supplemental do contain financial measures such as FFO and EBITDA that are non-GAAP measures. And in accordance to the 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.
Thanks, Tracy, and good morning, everyone. We had another great quarter where all aspects of our business contributed positively to results. Rent change on rollover was 15%, occupancy was up and core FFO grew 26%. Our disposition and contribution activities are tracking ahead of plan and we're developing in markets where there is scarcity of available class A product. Of our development projects this year, nearly half are build-to-suits.
Favorable trends continue to support our operations. While ecommerce is a tailwind, we see broad-based strength in other industry categories such as automotive, consumer products and residential construction. Additionally, customers continue to consolidate operations to improve supply chain efficiencies and move closer to large population centers. Even though global trade growth is converging towards global GDP growth, activity is robust in the top markets where our portfolio is focused.
Market conditions remain very strong. As we survey in our global markets, the supply demand balance is still favorable and they can see as near all-time lows. In the U.S. we now forecast 250 million square feet of new demand in 2016, versus our prior view of 225 million square feet. This new demand is driving positive rent change, up 23% last quarter and high occupancies of 97%.
While the headlines out of Europe despite summer were alarming, our experience on the ground was positive. In the region, occupancy was up and rents increase. Up to total of 46 million square feet were leased during the period, a record 35% was in Europe. In the UK alone, we leased more than two million square feet, an exceptional quarter.
Rent change in the UK was over 20% and we are 100% occupied. All in all, the UK was our second best performing market globally after the U.S. Conditions in Japan are strong, but because of temporary excess supply, we expect a short term bump in traditionally low vacancy in Tokyo and Osaka. In China, economic headlines have improved and demand is healthy especially in Tier-1 markets where our portfolio is focused.
While most of our markets are in good shape, risks of over supply remain in the same city we called out last quarter – in particular South Dallas and Houston. Separately, we continue to monitor Poland closely. Merchant builders there have used excessive concessions as a way to inflate headline grants before selling to investors. Recently however, there have been instances where investors have shown better restraint in underwriting. This is welcome news, but more buyer discipline is required before the market normalizes.
Looking ahead, we are ready for a world of rising interest rates. Eventually, this will happen and when it does, it will likely signal improving macro and consumer demand which is good for our business. Higher rates also mean higher financing cost for our new developments, which favor the larger institutional players. In our case however, we have plenty of capital to fund growth on our own.
Lastly, since spreads between the 10-year yield and cap rates are wider than normal, we don't believe modestly higher rates will affect cap rates materially in the long term. Still, we know rate hikes will hit reach stocks in the short term as a knee-jerk reaction.
We see several years of strong earnings growth ahead. With our work on the balance sheet complete and are stronger than ever liquidity, we're now entirely focused on delivering consistent earnings and dividend growth. Our leasing portfolio is 12% under rented. This will drive rental growth for several years, even under a scenario of flattening market rents going forward. Also supporting our growth story, we own land in key strategic locations. Look for us to continue developing in the world's busiest consumption markets.
In short, our team is doing a great job. We look forward to reporting to you more detail at our investor forum on November 9th in New York. Tom?
Thanks, Amid. For the third quarter, we generated core FFO of $0.73 per share, driven by out-performance in our real estate operations and $0.14 of net promotes from two of our European ventures. Global occupancy was 96.6% at quarter end of 60 basis points year-over-year; Europe's occupancy was 96.1%, an increase of 120 basis points over the same time period.
Quarterly leasing volume remained very good at 46 million square feet with a record 41 million from our operating portfolio. Year-to-date, we've leased over 141 million square feet as our best in class portfolio is more critical than ever to our customer supply chain needs.
Our share net effective rent change on rollover was 15%, led by the U.S. at over 23% for the second consecutive quarter. However, we did see a sequential decrease in our share of rent change driven by a higher mix of leasing in Europe and Asia this quarter. Our shares of same-store NOI increased 5.6% with U.S. leading the way at 6.9%.
The pace of net deployment activity continues to be faster than our forecast. Year-to-date through the third quarter, development stabilizations totaled $1.5 billion with an estimated margin of 28%. Development starts totaled $1.1 billion with an estimated margin of over 18% and value creation of almost $200 million. Dispositions with contributions totaled $1.7 billion at a weighted average stabilized cap rate of 6.1%.
Turning to capital markets; on a look through basis, our leverage at quarter end was 28.8% on market capitalization and 37% on a book basis. Debt EBITDA including gains was 5.6 times and our liquidity was over $3.8 billion. We completed an opportunistic refinancing of three [ph] loans during the third quarter, totaling $1.2 billion. The term for the new financing is just under seven years with the current interest rate of 65 basis points.
At quarter end, our share of debt had 5.2 years of average remaining term and a weighted average interest rate of 3.1%, following a pay down over a multi-currency term loan post quarter-end, 86% of our debt is fixed with nearly all of our floating rate debt being Yen denominated.
Moving to 2016 guidance, I'll cover just the material changes on the Prologis share basis, so for complete detail, refer to Page 5 of our supplemental. Due to continued strong operating fundamentals we're increasing same store NOI growth to between 5.5% and 5.8%, up 65 basis points from our prior guidance.
Development stabilizations have come in ahead of forecast, given our strong leasing activity and as a result, we're increasing the range to between $2 billion and $2.2 billion. We're increasing the low-end at mid-point of disposition contribution volume, which we now expect to range between $2.5 billion and $2.9 billion.
We're also raising development starts to between $1.8 billion and $2 billion, with build-to-suits representing over 45% of this volume and we're also increasing our development gains range to between $275 million and $300 million. The net results for deployment changes is that we expect to generate $100 million, more net proceeds than previously expected, resulting in a cash surplus of $1.4 billion. As a reminder, this includes over $800 million of cash from fund ownership rebalancing's and the Facebook note proceeds, all of which have already been completed.
We expect to end the year with liquidity at about $4 billion, market leverage at about 27%, book leverage below 35% and debt to EBITDA with gains of about five times. Related to FX, our 2016 and 2017 estimated core FFO continues to be fully-hedged relative to the U.S. dollar and we've already hedged about half of 2019.
Net promotes for the full year are forecasted at $0.15, with the remaining one penny coming in the fourth quarter. Putting this all together, we expect 2016 core FFO including promotes to range between $2.56 and $2.57 a share. The increase of $0.015 from our prior guidance in this point is due to stronger operations offset by additional dilution from higher liquidity.
To wrap up, we're delivering 15% core FFO growth this year, in line with our three-year CAGR of 16%, while at the same time improving our portfolio, building liquidity and further strengthening our balance sheet. Our portfolio quality and financial strength have never been better. This puts us in a great position to continue to realize strong operating results, driven by the GAAP between in place and market rents and to fund or grow.
With that, I'll it over to the operator for questions.
[Operator Instructions] Steve Sakwa with Evercore, your line is open.
Hamid, thanks for the comments, I guess on the market in general. I know you're not providing 2017 guidance, but as you sort of sit here today and think about the next year or so versus where you were maybe a year ago at this time, so how do you feel about the markets in general and the ability that sort of starts next year? And then if you could just also comment a little bit more about the broadening of demand, obviously I think people are excited about the ecommerce. Can you try to give us some other sectors? But do you guys track it and could you be a little bit more specific about how much of the I guess net demand is ecommerce and how much for some of these other sectors?
Okay. Thanks, Steve. In terms of 2017, I think you will get a pretty good deal of what we think at the investor forum. But at a very general level, I am feeling better about our business than I did a year ago because demand exceeds certainly in the U.S. of what we expected a year ago. If I were really looking for a potential negative, I would say that we are further along in capturing the spreads between in place rents and market rents from the low levels of post financial crisis. But I fully expect our same-store numbers to be very much in-line with what we are seeing this year. We have less opportunity obviously on the occupancy side, but I think the rent side of the equation will be the same or maybe a little bit better. So, generally feel very good about the business.
In terms of the sector issue, let me give you an essay answer. This is more complicated in our sector than you would think, because there are really three different things going on when you talk about customers. One is you're talking about what industry sector they're in. Let's take BMW as an example. You could have a manufacturing facility lease to BMW, you can have a parts facility or you could have sort of a wholesale operation, which is distribution of cars. Those all would show up as automotive, but they are definitely different functions. If you think that concept to a retailer, it gets even more complicated because they can be bricks and mortar retailer or they can be ecommerce retailer, but they're retailer.
So really the three things we track without over-complicating this is the industry sector of the tenant – in the case of the BMW automotive – the actual use of the space whether it's manufacturing or distribution or whatever; and then the modality. Is it a 3PL, direct user facility et cetera, et cetera. So as you can see, this is a complicated thing and because of the 3PLs, we don't always have visibility through what the underlying businesses that they do because sometimes it changes. So when we quote you for example statistics on ecommerce, that's really understating the contribution of ecommerce because we don't really know how much of that UPS building is ecommerce and we classify UPS as an integrated logistics company.
Again, it's complicated, but I will tell you, looking through all of that, the things that stand out is that housing is really picking up by a couple hundred thousand units and that's adding incremental demand which is really what took occupancies from 96% to 97% in the U.S. If ever we're going to call out one thing in addition to ecommerce, it will be that. Automotive is also very strong, but not as strong as the change on the margin of residential. Anyway, that's how we see it.
Thank you. And your next question comes from the line of Dave Rodgers with Baird. Your line is open.
Thank you. Good morning out there. I guess I wanted to talk a little bit more about new construction and what you're seeing on the market. I think overall you said there's only a small number of metros out there where you're seeing any additional pressure maybe from construction. I'm starting to hear more that there's some mid-sized boxes in the 150,000 to 300,000 square foot range that are being delivered with maybe a lack of demand and the bifurcated demand being both small, more residential as you talked about and then maybe more large on the ecommerce side. Are you seeing more of a bifurcation today as supply is increasing and do you start to worry about that?
Yes, David, it's Gene. Let me take that first at least. Yes, we do see a bifurcation of the type of product that's being delivered, but frankly in most cases, this is product that's needed. In the early stages of the recovery, we saw a lot of big box development and a lot of absorption by Amazon and others with very, very big floor plate. What happened during the last five or six years is that the vacancy rates in smaller size increments have really tightened up. So you see more deliveries in medium to small size ranges and frankly, we're doing the same. Are you going to see an odd deal that is misplaced? You probably will, but I think by enlarge, most of these projects are well suited and overall of course, there are still tremendous access demand in the system.
David, Europe; I would just say is a little bit different, demands still out-pacing supply generally. I would say that we're a little bit behind the U.S. and that small spaces are not being absorbed as quickly as the U.S. paces, so the concentration would have been candidly in bigger boxes and candidly in build-a-suits. So if you look at our development pipeline for example, over 60% of it this year is build-a-suit. Europe is a little bit different dynamic than you see in the U.S. today.
Yes. To be very specific, the beginning of the year, we call for 225 million square feet of demand and 200 million feet of supply and we've both moved demand up to 250 as you heard in my comments and supply, we think is going to come in actually as 185 or lower than we thought. So overall supply is actually more constrained than what we predicted earlier and demand is stronger.
And your next question comes from the line of Craig Mailman, KeyBanc Capital. Your line is open.
Hi, I was just hoping to clarify the earlier comment and prepared remarks about the 12% under leased on the portfolio right now. Just want to see if that compares exactly to the 15% mark-to-mark that you guys have been talking about more recently and if that is the case, what's the driver there of the 300 basis point decline given the pretty tight time frame with recent remarks? Just hoping you'd give some potential trends and whether you guys are maybe just being conservative on potential market rent growth as we head into '17 as one of the factors?
It's apples and oranges; the 12% is global portfolio and the 15% is the U.S. portfolio.
And your next question comes from the line of Eric Frankel with Green Street Advisors. Your line is now open.
Thank you. Quick question from [indiscernible] related to free rent. I just noticed that free rent is continued to increase in your portfolio and I think it now represents roughly 8% of the year NOI, of your consolidated NOI. So I just wanted to understand that trend a little better. Thank you.
Hi, Eric. It's Tom. The increase is all being driven by higher lease commencements in the quarter and really building occupancy plus we have longer lease terms and rents are increasing very, very much as you can see in your rent change. So a combination of all that makes the nominal amount of free rent much higher. However, when you look at free rent as a percentage of the lease value, it's actually trending down. So concessions are not going up, concession are actually going down in most markets but this is just a normal thing that happens when you are in an environment where occupancies are increasing, and rents are rising, and terms are going longer; it's all a very good thing because all of that is going to turn around and build our cash same-store NOI growth going forward.
And your next question comes from the line of Jeremy Metz with UBS. Your line is open.
Robert Jeremy Metz
Hey guys, just one on acquisitions, there has obviously been a number of large portfolio transactions that have hit the market or close recently in the Halword deal, Cabot [ph]; so I'm just wondering if you can comment on your appetite for these type of deals. Did you look hard at any or all of them and if so was it just pricing that didn't make sense there? Thanks.
We had no interest in any of the three that you mentioned but we look at everything, it's just not our kind of product. I mean I would say the LBA portfolio is a higher finished portfolio and really not distribution by and large. And let me just leave the comments with that.
And your next question comes from the line of Tom Lesnick with Capital One Securities. Your line is open.
And historical they've invested down the supply chain to reduce cost; and today for instance, Amazon has its own trucking fleets as you know taking away business from likes of UPS and FedEx but the ability to use space in rear of these community is mini logistics centers; do you view that as a threat to demand for third-party logistics base?
I missed the first part of your question; I think you were on mute but I think I get the jest of it. Look I don't think Amazon -- first of all, you're going to have to ask them. I don't have any insight into their long range plans. Secondly, if you look at their multiple and the expected growth that's associated with that, if they tie up a bunch of their balance sheet in warehouses or other facilities that's not exactly what the market is giving them that capital at a very high multiple for. So I think what they've said publicly is that they are doing the investments in logistics and airplanes and all that kind of stuff, by the way which they are leasing to supplement the volume that they get out of UPS and FedEx; and particularly over very busy holiday season because couple of years ago you remember that there were some complications with some of the deliveries that they felt wreck their brand.
So that's what they are saying at least publicly but from a financing point of view, and the capital markets point of view it would be a really terrible use of capital for them I would think. So let's leave it at that.
And your next question comes from the line of John Guinee with Stifel. Your line is open.
Its pretty close, John Guinee. Here is an easy one for you Hamid, I'm looking at page 26 and I'm looking at your land portfolio owned and managed and obviously the plan can be anywhere from raw land to pad-ready and I noticed widely differing investments per square foot; it looks like you're as high as $28 for buildable in the UK $32 per buildable in Northern New Jersey, seemingly low $15 per square foot in Southern California. If I've got my numbers right, a stunningly low $2.50 per buildable foot in Chicago; $4 per buildable foot in Central Valley which looks like you own of the Central Valley. But can you talk about your land bases and how soon you can deploy that and that sort of thing?
John, first of all you should pardon Kim, she is a Canadian, she did a pretty good job on your name. Look land varies all over the place and the reasons for it is that rents vary all over the place and essentially the way you think about it and you know this as an old real estate developer; the building costs are not that different between different regions, they are a little different because of the union and all that but maybe they vary 20% in the U.S. But rents vary by a lot more than that and all of the difference falls to the residual which is the land; so if rents are higher and building costs are -- rents are higher by 10%, 20% and building costs are the same; land could be 50%, 70% higher from one location compared to the other and then when you get into Bay Area and some of the anomalies, obviously differences get really magnified.
Secondly, as you've pointed out there is a big difference between lands that is improved versus land that is still in raw condition. We have very little unentitled land, I mean like tiny, tiny untitled land, so all of it is entitled but not all of it is actually improved because of the improvement to -- put in the improvements, it's too far ahead on larger perks [ph]. So I think at the end of the day which you need to look at and we're not providing that because that's a pro forma number that gets into a lot of assumptions. If you want to really look at finished land per FAR and that's really the true measure that we look at and I think that's really correlated with rents less development cost. As to any of those specific markets, Gene, do you want to comment?
Yes. John, just in general and some of this will be repetitive but some of those you quote; Chicago, for example, very low number. We have tons of acreage on our 80 and frankly some of this land we are looking to sell; we've put no improvements into it.
And by the way the absolute number is small, it's like a $3 million piece of land but it's a lot of land.
Yes exactly. I'm happy to have a separate conversation with you but it's -- it really ties back to what I mean -- there is a lot of variability in this basket.
And your next question comes from the line of Jamie Feldman with Bank of America. Your line is open.
Hamid, I want to go back to your comment before about a knee-jerk REIT sell-off but on the direct market you don't think that uptake in Fed funds rate will really impact valuations or cap rates? Can you first just kind of explain your thoughts there and second maybe tell us what you are seeing in the direct market maybe in demand for your fund business. Just kind of what you are seeing in how people are underrating assets that gives you that confidence.
Okay, the spreads as I talked about between cap rates, probably more accurately IOR is projected, IORs and the 10-year treasury are the lightest they've ever been, and if you -- I think you've heard me talk about this before; if you really think about the market being sort of in the long-term 1.5% to 2% inflation and bonds are 200 basis point premium, that's our argues for 3.5% to 4%. Treasury in the long-term which is quite away from where we are here and that consistent with 5.5% type cap rates in our sector makes sense in a historical context; and probably 6.5% to 7% IOR. So I mean that's an appropriate spread over 10-year treasury.
So I think nobody is paying for real estate as if 10-year treasuries are going to be 1.8% or whatever they are today into the future. And I think the way to think about it is that investors in the short-term are getting a windfall because they are really pricing against much higher treasuries and collecting the bonus in the short-term. I don't know why there is so much focus on the fed fund rate, I think the world has become such a big macro things and they are like 28 zillion people watching the same screen and what -- some Fed Governor says at lunch one day; I mean I just don't know.
I don't borrow -- we don't borrow at Fed funds rate; so whether it goes up or down 25 basis points, I don't really know. All I can tell you is that the last time they increased the Fed funds rate; the 10-year treasury went down. So what we care about actually got cheaper but I'm not a market psychologist so I'll leave that to others to explain the knee-jerk reaction but that's what happened; REIT sell-off and then six months later because of the stronger economy which is the underlying cause of rates going up, it starts showing up in rents and they recover and that's what historical facts have said.
In terms of fund demand, I would tell you that we have infinite fund demand in Europe and in the U.S. fund demand is good but I would say it's a little bit less than it was a year ago or two years ago but still pretty solid I think that numbers will end up being smaller in terms of new money allocated this year than last year when it's all over.
And your next question comes from line of Kaizen Kim [ph] with SunTrust. Your line is open.
Guys, so this is a two part question, first on your stabilized portfolio, as you show year-to-date, what if the least percentage in that portfolio and if you comment on how that's trended, a second part as that, definitely stabilized portfolio goes into your operate portfolio. And I guess sometimes maybe below full occupancy, how much of that generally help to reported same-store NOI number overtime.
Yes, we were scratching our heads as what you're referring to, I know some companies, When they report occupancies, their report overall occupancy, including their under development stuff that is not fully leased or stabilized, we don't do that when we operate, we have a definition of stabilization and the stabilization is the earlier of the achievement of 90% occupancy for development project or a year from certificate of occupancy. So whether leases are not they go into the operating pool, after year and it goes into the operating pool sooner than that when it hits 90%.
So their occupancy were report are the occupancies for the operating portfolio, and separately we report the occupancy for the development portfolio, so our same store numbers are not boosted artificially by simply the lease of the development business. I know some other companies do it a different way, I am not going to pass judgment on that but I don't think it reflects as accurately the same store concept of stabilizing properties.
Thank you, I will just add on that, typically estimates that we will put these assets in the operating pool, when they're 90% lease or 12-month post completion the earlier of the two, and so generally it's not going to be a big mover of all at the nursing store. Something goes in that's you know under least 90% it is not. We're going to be a driver at all our operating portfolio is just too big.
And your next question comes from a line of Brad Burke with Goldman Sachs. Your line is open.
All right. Thanks for taking the question ,from a question FFO guidance, your full year guidance really hasn't changed all that much from what you introduced at the beginning of this year, same sort guidance that increased by over 1.5% development stabilization outlook is over higher. Are there things beyond just asset sales? Which look to be back in loaded in the year anyway that they kept FFO from increasing more dramatically?
That's a good question, it's all about what happened was two things; one I think about the promote range we had $0.40 to $0.60; we dialed that into $0.50 for the year. So if you're trying to go back to why did we got to $0.58, there is your $0.01. The $0.02 up from the midpoint is all about same-store guidance, you look at the 65 basis points same-store increase that gets you right on a $1.5, a little over. And then the offset to those things would be; yes we're creating more liquidity, I would tell you generally I think we are ahead of schedule on actually, on are deploying capital yes we do have a lot going on in the fourth quarter, but it's definitely out of our forecast.
And that that is also a slight drag on earnings, so overall it was it increases all driven by improved operations. And little smaller promote and deployment timing, building more cash.
And your next question comes from the line of Emmanuel Korchman with Citi's your line is open.
It's Michael Bowman [ph] and as a Canadian, I think Tim is doing an absolutely phenomenal job on this conference call. That is right and its up about a 10,000% in Google; and that one's rocking to come and stay with my parents if they need to. So you have your investor form coming up in a couple of weeks, so the first one and then in a couple years and I'm curious if you think about bringing investors and analysts and what are you looking -- would you look into accomplish, what's new that you want to be able or you think its misunderstood and with that goal that you want people to come out in a in a couple weeks, to want to see what would you going to bring that differentiator news that you don't think people understand about that the company or the business.
Yes, good question actually. I wish that we would talk about more strategic thinkers like that in these calls. I would say if I were thinking about it and the three objectives that we have for the analyst meeting, is to show you how after massive work following the merger back in 2011, the business has been really simplified and there lots of big moving pieces that have now all settled down. And you can really tell what's going on with Prologis just based on good old real estate metrics of cap rates and same store growth, and so I think there's a perception out there that Prologis is overly complicated and I think we'd like people to appreciate how simplified would make the business. So that's objective number one.
Objective number two is to show people that what the real drivers of supply and demand are, how they are different and why we have a good business with strong prospects for earnings growth in the long term. And take you a couple of layers under the surface on those concepts, and actually bring some third party resources that can speak about the market financing market, as well as real estate markets. And really how customers think and behave. So that's the second thing. and the third thing is that we get a lot of questions on why global, and why development and why all this kind of stuff, and they're all related and we want to walk away with a better appreciation, of the different components of our business and how they all fit together and how they energize one another.
So if we can get those three key concepts across I think we would call that a successful meeting.
And your next question comes from the line of Blaine Heck with Wells Fargo. Your line is open.
I'm just going to set on this a little bit but development starts us far and relatively little around $1.1 billion in your share, a little bit above -- under 60% of guidance. We view almost $800 million start in the fourth quarter. You guys did raise guidance for start so I assume you guys have confidence in the updated number, but can you just explain a little bit some of the seasonality and starts and why there would appear to be so much more demand in the fourth quarter? And then how do we think about the mix between spec and build-to in the fourth quarter?
Blaine, this is Mike Curless, and let me address that; if you look over the last three or four years our first quarters are starkly very light in our fourth quarters are very heavy. Typical years would have us doing 35% or more in the fourth quarter, this year it's called about 4%. How to pursue that activity is completely identified fact we've had a handful of starts already on their way in October, and all of this work taking place it within our existing parks on sites that we own, so we can really control the timing of those starts. So we're highly confident, and our ability to fulfill the rest of this activity yet in this quarter. And in terms of build-to-suit mix it's approaching 50% it's covered in the high thirties and forties of the last three or four years we've been very active in the build-to-suit business had a record number build the suits the last 12 months, and so build-to-suit percentages growing, also while development volume is growing and that's a fairly big statement.
And your next question comes from a line of Michael Mueller with JPMorgan. Your line is open.
Your occupancy is obviously been going up over the course of the past year so, but can you talk a little bit about retention, because it looks like this time last year is about 87% and it's been trending down to about 80%, so what are the dynamics behind that? And where do you see it analyzing?
Michael, this is Gene, let me take that. Yes I really wouldn't read anything into it, if anything I'd say 87% was a probably an all-time high in the industry and is not sustainable. So the levels frankly if you're above 75% I think you're doing just fine historically, so we've just seen in this recovery incredible levels of retention, and we don't see anything in our activities that -- there is nothing to read into decline.
Michael, yes, actually I would go further than that. I think we could have driven it lower; I don't think we pushed it enough, that's why we're 96.6% occupied. So if I had my way I would be a little bit lower. And let me also take this opportunity to point out the difference in how we calculate retention and same-store and all that. We don't make judgments about whether the tenant could have, would have, should have did stay or go or whatever. We report actual retention. So if the tenant actually leads the portfolio and goes into a bigger building, it's not retained in our -- the way we calculate it. I don't think or -- as a result I don't think our numbers are directly comparable with how other people may report it because they apply judgment to it and they filter a bunch of things out.
So the numbers that you see from us are even non-retained people for good reasons like expansions, they are reflected in those numbers.
And your next question comes from the line of Eric Frankel with Green Street Advisors. Your line is now open.
Thank you. Just two quick questions; one, have you seen any atypical holiday related leasing in the fourth quarter yet? I think we've just seen some recent articles about UPS [ph] poking up their portfolio a little bit for the holiday season. And then second, could you just provide a bit of a geographic breakdown on your cap rates and disposition? Thank you.
Sure. I guess -- Eric, its Gene, just on the first part of your question. We're seeing nothing out of the ordinary but I would say those two customers you mentioned are particularly active right now. Some of that probably is related to the holidays but I think they also have some general incremental demand coming out into the market. Mike, you want to respond?
With respect to cap rates on our dispositions, blending into low sixes, we think that's -- those are solid numbers for the -- keep in mind for the mix of product that we're selling both in regional markets and global markets and the average age of what we saw tends to be about twice as long as the -- our typical age of our typical building in our portfolio.
I would say if you take our cap rates for the products that we are retaining and look at the cap rates for the products that we're selling, generally we're looking at about a 100 basis points spread which is explained by the quality, that's a rough draw [ph]. So instead of dragging you around the world on what cap rates are -- I mean cap rates are cap rates that we talk about and usually the quality that we're selling is 100 basis points higher than that.
And your next question comes from the line of Manny Korchman with Citigroup. Your line is open.
So nor just recently increased their real estate target allocations; I'm curious in recent discussions with them -- between you and them has their appetite to buy more in Europe increased. And then maybe the flipside of that, do you have a desire to sell, especially as you look at your own liquidity?
We don't have a desire to sell above and beyond our non-core assets. I mean when we bought those two portfolios, we nor -- by the way with anybody else we have a business plan as to what are non-strategic assets that we want to dispose of over some period of time and we're executing knowing that plan. So there is no change in terms of what we want to sell or anything; what we're keeping is core and we're going to keep it for long time. As far as their specific plans, I would invite you to talk to them directly but my -- I mean, we're -- I think their largest manager -- I'm pretty clear about that, certainly their largest real estate relationship and maybe the largest relationship in any category, I'm not so sure about that.
So we're bumping up against sort of concentration type limits in terms of how much business we can do for them; for them and for us, I might add. But we have an excellent relationship; we think the world [indiscernible] has been really good in supporting partners.
And your next question comes from the line of Craig Mailman with KeyBanc Capital. Your line is open.
Guys, thanks for taking the follow-up. Just on Europe and I know you guys at $16 million for the whole quarter and I guess through July and August if I remember, you guys had said you had done $14 million; so I'm just curious, it sounds like September may have fallen off a bit in terms of volume and just -- curious kind of what October has looked like so far? And if there was anything maybe things in frontload in August versus September, any kind of takeaways you guys have?
So I can assure you, nothing was frontloaded in August in Europe. They're not even around, that part is easy. I think the original numbers that recorded were including part of June for last quarter when we're talking about total leasing because we're quoting a number from the day that the referendum vote was taken which I believe is June 23. We haven't seen a fall-off at all quite to the contrary; leasing continues to be very strong, demand continues to outplay base supply. So we don't see any fall-off today.
I will say that we do see lower expirations in Europe in the fourth quarter, so we will see volumes come down but it's really a mixed issue. As we said, Q3 we say relatively high, very high leasing in Europe and Asia, and we're going to see that moderate. So you will see U.S. be a bigger chunk of leasing in Q4.
We're running out of products at least to be honest with you, that's the issue. That was the last question. So again, let me thank you for your interest in the company. Very much look forward to seeing you all in November in New York. We have great charge fees [ph], so please come and enjoy the day. Thank you.
Ladies and gentlemen, this concludes today's conference call. And you may now disconnect.
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