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Prologis (NYSE:PLD)

Q1 2012 Earnings Call

May 01, 2012 12:00 pm ET

Executives

Tracy Ward -

Hamid R. Moghadam - Co-Chief Executive Officer, Chairman, and Member of Executive Committee

William E. Sullivan - Chief Financial Officer

Eugene F. Reilly - Chief Executive Officer of the Americas

Gary A. Anderson - Chief Executive Officer of Europe and Asia

Unknown Executive -

Guy F. Jaquier - Chief Executive Officer of Private Capital

Michael S. Curless - Chief Investment Officer and Chairman of Investment Committee

Analysts

Ross T. Nussbaum - UBS Investment Bank, Research Division

Jeffrey Spector - BofA Merrill Lynch, Research Division

Paul Morgan - Morgan Stanley, Research Division

Steve Sakwa - ISI Group Inc., Research Division

Craig Mailman - KeyBanc Capital Markets Inc., Research Division

Ki Bin Kim - Macquarie Research

Michael Bilerman - Citigroup Inc, Research Division

Srikanth Nagarajan - Cantor Fitzgerald & Co., Research Division

David Rodgers - RBC Capital Markets, LLC, Research Division

Brendan Maiorana - Wells Fargo Securities, LLC, Research Division

John W. Guinee - Stifel, Nicolaus & Co., Inc., Research Division

John Stewart - Green Street Advisors, Inc., Research Division

Michael W. Mueller - JP Morgan Chase & Co, Research Division

Chris Caton - Morgan Stanley, Research Division

James C. Feldman - BofA Merrill Lynch, Research Division

Operator

Good afternoon. My name is Melissa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Prologis First Quarter Earnings Conference Call. [Operator Instructions].

I would now like to turn the call over to your host, Tracy Ward, Senior Vice President, Investor Relations. You may begin your conference.

Tracy Ward

Thank you, Melissa. Good morning, everyone. Welcome to our first quarter 2012 conference call. The supplemental document is available on our website at prologis.com under Investor Relations. This morning, we'll hear from Hamid Moghadam, co-CEO and Chairman, who will provide an update relative to the company's priorities and will share the company's view of the operating environment. He will then turn it over to Bill Sullivan, CFO, to cover results and guidance. Additionally, we are joined by members of our executive team, including Walt Rakowich, Gary Anderson, Mike Curless, Nancy Hemenway, Guy Jaquier, Ed Nekritz, Tom Olinger and Gene Reilly.

Before we begin the prepared remarks, I'd like to quickly 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 forward-looking statement notice in our 10-K or on SEC filings.

I'd also like to state that the first quarter results press release and our supplemental do contain financial measures, such as FFO and EBITDA that are non-GAAP measures. And in accordance with Reg G, we've provided a reconciliation to those measures. [Operator Instructions]

Hamid, will you please begin?

Hamid R. Moghadam

Thanks, Tracy, and good morning, everyone. Welcome to our first quarter 2012 earnings call. This morning I'll provide an update on our key priorities and share our views of the operating environment. Our results exceeded our expectations. It's shaping up to be a very good year for us with strong momentum across all of our business lines and solid execution on our 4 key priorities. We've made excellent progress on strengthening our financial position, as well as aligning our portfolio with our investment strategy. We are now 3 calendar quarters into our 10-quarter post-merger strategic plan, and we generated $1.4 billion from our net disposition contribution and deployment activities. This amount is about $650 million or 45% ahead of our 10-quarter plan to date. As a result of this realignment activity, we've been able to increase our share of assets in global markets from 79% to 84% and reduced our assets in other or exit markets from 8% to 6%. These trends will continue as we execute the balance of our 10-quarter plan.

We've been somewhat below plan in capital deployment, but we expect development volume to pick up in the coming quarters due to lack of supply of Class A facilities, which I'll address in a moment. Interestingly, we're once again seeing opportunities to utilize our platform for value-added conversions. During the quarter, we completed one such transaction in Silicon Valley, generating an economic gain of more than $23 million or 38% higher than the value of the property as an industrial asset.

Turning to Private Capital, I'd like use this opportunity to give you an update on our Japan operations as well as our Private Capital initiatives there. I spent last week in Japan, and my time with the team further reinforced my assessment of the quality and scale of opportunities that we have before us in that market. We're having great success leasing our development projects in Japan, often prior to the completion of construction. You recently saw our press release on a million-square-foot development project in Tokyo that was fully leased before we broke ground. We expect to have more news of this nature to share with you in the coming weeks and months.

At the same time, vacancies for modern [ph] logistic facilities in Tokyo and Osaka have fallen below 5% and rents are moving up. Our operating assets in Japan represent the highest quality product in the market and actually within our entire portfolio. With cash yields in the mid-5% range and long-term financing costs under 2%, Japan offers the highest cash spreads among all of our global markets, and local investors appear eager to allocate capital to real estate in this yield starved environment. We've seen strong Japanese fund flows into the U.S. REITs as well as J-REITs, the latter causing a narrowing of the gap between J-REIT share prices and their underlying NAVs. As a result, we are reassessing our fund-formation strategy for Japan. We're now upsizing our development fund to be formed later this year. We're receiving strong interest from our large global investors and are substantially oversubscribed in this fund.

At the same time, we're taking another look at that J-REIT market as an alternative to the private open-end fund as the future vehicle for long-term ownership of operating assets in Japan. While we've not yet chosen this as our preferred structure, we think it is only prudent to see if the J-REIT market offers a better alternative for our company. It will take some time for us to explore this alternative fully.

In the meantime, the capital markets are now offering us the opportunity to mitigate our yen FX exposure by swapping some of our existing U.S. debt into yen-denominated obligations. This strategy has the added advantage of reducing the associated interest cost by more than 150 basis points a year. This review process will surely delay the formation of our Japan ownership vehicle, but we're confident that we'll meet our 10-quarter deleveraging plan by executing on a number of other initiatives in Europe and Americas.

Turning now to our fourth priority, we make great progress on improving the utilization of our assets. Our leasing teams continue to deliver excellent results across the board. Leasing activity was stronger than expected, a very positive sign in the first quarter, which is usually a soft leasing quarter. And notably, rent change on rollover was strongest it's been for many years.

For the first time in 4 years, market rents have surpassed our in-place rents. While there will be some volatility in this metric over the next couple of quarters, this improvement occurred earlier than our earlier forecast. We expect the going-forward trend to be similarly positive.

Additionally, our land bank decreased by about $50 million driven by the monetization of land into new development projects.

Let me now offer a few observations on the economic trends we monitor most closely. Global trade volumes remained well above peak and the current IMS forecast indicates additional growth in global trade of 4% this year and 5.6% next year. Relative to consumption, retail sales remained strong, and container volumes are also above peak levels. This is prevalent throughout the Americas and Asia, with Brazil and China taking the lead.

Inventories remained a key demand driver for industrial real estate in the U.S. During the quarter, real inventories grew in excess of our internal forecast at a 4% annualized rate, causing the real inventory-to-sales ratio to move slightly off its record low. The growth in consumption and rebuilding of inventories is translating into further improvements in the operating environment.

Net absorption in the U.S. was positive for the seventh consecutive quarter at 25 million square feet. We continue to forecast absorption at a healthy 160 million square feet for 2012, up 1/3 from last year. This improvement in absorption, combined with continued record low new construction volumes, is driving the increases in rental rate in many of the global markets where Class A is scarce. While some European markets continue to lag the U.S., our teams continue to deliver strong results as occupancy increased by 50 basis points from the fourth quarter. Bear in mind that the vast majority of our European portfolio is located in the U.K. and Northern Europe, France and Poland, which continue to perform well on a relative basis.

Our customers, particularly in the U.S., are increasingly optimistic.

To sum up, we're making great progress on our priorities. Our markets in the Americas, China and especially Japan will provide strong growth prospects for us over the next 18 to 24 months. While there are macroeconomic headwinds in Europe, our team there has done an outstanding job of leasing space at good rates in an uncertain economic environment.

Before handing the call over to Bill, I'd like to say a few words about his substantial contributions to Prologis over the last 5 years. As you know, Sully is retiring from the company and this will be his last call with us. Sully has been the key leader on Prologis' executive team and a fixture on these calls since April 2007. The world has changed dramatically over this period, and Prologis has come a long way since as a company. One important constant throughout this period has been Sully's unwavering commitment to our shareholders, and we owe many thanks for his tireless efforts on behalf of the company. Walt and I truly believe that Prologis would not be where it is today had it not been for Bill Sullivan's incredible leadership and dedication to our company. Sully's leadership, business acumen, integrity and laser-like focus on always getting it right have proved invaluable to Walt and me, the executive team and to the company. Bill's decision to retire earlier than the original plan is a testament to how quickly the 2 companies have come together. He's ready to move forward knowing that his work at Prologis is complete, his efforts are appreciated and his legacy of excellence is admired by all his colleagues in and out of the company. We all wish him the very best for the future, and we'll certainly miss his camaraderie and wonderful sense of humor.

With that, let me turn the call over to Bill.

William E. Sullivan

Thanks for those kind words, Hamid. I'm not worthy. This morning, I plan to cover 3 aspects of the company's financial position and strategy: First, the summary of our Q1 results; second, an overview of our capital markets activity; and third, an update on our guidance for the year.

Let's start with our Q1 results. For the first quarter 2012, we generated core FFO of $0.40 per share, which modestly exceeded our internal forecast. The outperformance was principally due to higher-than-expected net operating income across our portfolio. Typically, you see a material decline in occupancy in the first quarter of the year. The slight increase experienced this quarter, combined with a slight roll down in same-store rents, contributed to higher-than-expected rental income. Additionally, the mild winter minimized seasonal operating expenses, although we also had a corresponding decline in reimbursable revenue and therefore, the drop in operating cost has a minimal impact on NOI.

Offsetting the operating performance was a quarter-over-quarter increase of approximately $9 million in net G&A. Only $3 million of which is recurring. Slightly over $4 million of this increase is seasonal to the quarter, approximately $3 million related to new compensation programs and approximately $2 million related to mark-to-market adjustments on existing compensation plans given the increase in our stock price over the quarter.

Diving deeper into the operating portfolio. All regions contributed to the strong leasing volume, and, in total, we leased about 31 million square feet during the quarter. In spite of the economic headwinds, Europe generated another solid quarter of leasing, posting a 50 basis point increase in occupancy from the fourth quarter. Rent change on rollover decreased a modest 1.1%, the lowest rent rolled down we have seen in over 3 years. The solid occupancy gains year-over-year, combined with the modest rent roll-downs, culminated in an increase in same-store NOI of 1.7%.

Turning to dispositions and contributions. During the quarter, we completed $994 million in land and building dispositions and contributions. Our share of the proceeds was $762 million. The building dispo's and contro's were priced at a weighted average stabilized cap rate of 7.2%, which was modestly better than our expectations, demonstrating that demand remained strong for high-quality industrial real estate even in secondary markets. $13.5 million of these proceeds were from land dispositions and we also monetized about $50 million in land that was put to work in new developments.

On the capital deployment front. During the first quarter, we committed approximately $322 million of capital, of which, approximately $244 million was Prologis' share. Total deployment included $211 million of development starts, $71 million of building acquisitions and $40 million of land acquisitions and infrastructure spend. From a fund rationalization perspective, we had a very productive quarter. We bought out our partner's 63% interest in NA2 and now own 100% of this $1.6 billion portfolio. As we talked about on our fourth quarter call, this purchase is modestly accretive to FFO but dilutive relative to our debt metrics. We concluded and dissolved P Cal [Prologis California] fund, dividing the portfolio equally with our partner, bringing our 50% share of the fund's $1 billion of real estate directly onto the balance sheet. And we disposed the 11 of the 12 assets held in Fund 11 and expect to wind up this fund later this year. During the quarter, we also raised $128 million of third-party equity for Prologis' targeted U.S. Logistics Fund.

Turning now to capital markets. During the quarter, we completed more than $1.3 billion of debt financings and refinancings, with approximately $1 billion related to the REIT and $296 million on behalf of our property funds. Notable transactions for the REIT include a $642 million multicurrency senior term loan and an all-in drawn margin of 150 basis points over LIBOR, that is extendable at our option through 2017, and $372 million in TMK bond financings with a weighted average term of 5 years and a weighted average rate of 1.05%. Both of these financings were beneficial from a natural currency hedging perspective. Importantly, we have paid down $1.4 billion of debt on a look-through basis since the second quarter of 2011. We remain highly focused on delevering the balance sheet, enhancing our unencumbered asset pool and expect to make significant progress on improving our leverage and debt metrics over the course of 2012 and '13.

Notably, already in Q2, we have paid off $449 million of our 2.25% convertible notes and repaid $59 million of senior unsecured notes at maturity.

Now I'm turning to guidance for 2012. We are maintaining our full year core FFO forecast of $1.60 to $1.70 per share. As a reminder, our core FFO excludes any gains or losses from real estate transactions, as well as any impairment charges and merger integration cost. From an operating perspective, we are modestly increasing same-store NOI guidance for the year to 1% to 2% positive, based on the strength of the first quarter occupancy and better-than-expected rent roll-downs. We continue to expect occupancy to trend higher reaching 92.5% to 93.5% by the end of 2012. And while we still expect to see net effective rent growth in select markets, rent change on rollovers is expected to be more negative in Q1 given leases rolling down from prior cycle peaks. However, we continue to believe we are nearing the end of this roll-down cycle.

On the expense side, we now expect net G&A to total $208 million to $213 million for the year, given the marked-to-market on the comp plans we saw in Q1 as well as expected increases to professional fees associated with fund activities and systems implementation.

On the capital deployment front, we are maintaining our full year forecast of $1.5 billion to $2 billion, about 60% of which will be our overall share of total expected investment. The vast majority is targeted for the second half of the year and includes $1.1 billion to $1.4 billion of development starts primarily outside the U.S. and $400 million to $600 million of acquisitions, mostly in funds in the Americas and Europe.

Finally, we continue to expect contributions and dispositions in 2012 to total $4.5 billion to $5.5 billion with a potentially larger emphasis on dispo's and contro's in the Americas and less in Japan. Net of our co-investment in the fund activity, we expect Prologis' share of the proceeds to be approximately 75%.

Before closing, I will provide you with a quick update on our systems integration. Consistent with our plan, we completed the first of 3 milestones and are well on our way to creating a world-class information management platform. The new Yardi 7.0 system, implemented effective April 1, harmonizes our operating data and allows for the entire company to be on one instance of Yardi. It eliminates manual reconciliation. And our access to global operating property info on a realtime basis is fabulous. Finally, our field teams are ecstatic with the usability of the new system. This is a real home run.

In closing, we feel great about where we are and where we're going. With the heavy lifting associated with the merger and the first major step of the systems integration behind us, I feel it is an appropriate time for me to step aside and to focus on the next phase of my career aspirations. I have thoroughly enjoyed my time here working with the analyst community and working for our investors. Most importantly, working with the incredibly talented group of professionals at Prologis has been a highlight of my career. I'll leave soon, confident that Tom will do a fabulous job as the new CFO, and I wish Tom and the company all the best going forward.

At this point, I will turn the call back to the operator to open up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Ross Nussbaum with UBS.

Ross T. Nussbaum - UBS Investment Bank, Research Division

It's Ross Nussbaum. A question on Japan. Can you walk through maybe the pros and cons of what you see behind pursuing a J-REIT versus an open-end fund? And does the timing and decision to do that depend on what GLP does and how the market reacts to their potential offering?

Hamid R. Moghadam

The answer to the latter part is no, because we don't really plan our own strategies around other people's timing, which we don't control. The answer to the first part is that we don't know just yet. We are actually pursuing both avenues right now, and we were basically exclusively following the open-end fund format up until, I would say, a couple of weeks ago. But given the substantial interest and the narrowing spreads to NAV, the J-REITs are becoming just much more compelling, and of course the decision is not just an instantaneous decision, because those factors change. But if, in fact, the J-REIT market proves to be deeper than it's been, and we think there is a real need for a substantial company in this sector to be active in it, it may prove to be the better alternative. So I guess the most straightforward answer I can give you is that we're studying the 2 alternatives very carefully, next to each other, and we'll make a decision in good time. It is a pretty significant and permanent decision because it has long-term implications and we need to be thoughtful about making it. In the meantime, the real capital need of the company is in the development area because it's really going gangbusters. And so that one, we're going to go ahead and just get that one done, because the opportunities there are really proving to be larger and more profitable than we thought because of the rent cycle.

Operator

Your next question comes from the line of Jeff Spector from Bank of America Merrill Lynch.

Jeffrey Spector - BofA Merrill Lynch, Research Division

I'm here with Jamie Feldman. I guess, Hamid, if we could just focus a little bit on the ISM report today, definitely better results than what our economists were expecting. But they continue to call for or warn about the pending fiscal cliff in January. Can you just tie together, I guess, what you're thinking these days when you saw these results and the conversations you're having with your customer?

Hamid R. Moghadam

Okay. Let me answer that question and maybe even a broader question, which is that you guys know that we exceeded our expectations in the first quarter, and we weren't stepping on the scale in any way. I mean, it clearly, the first quarter is always a slower quarter. A lot of the month-to-month leases go away and, in the last 3 years, the first quarter has been pretty soft. That didn't happen this quarter, that's why we beat, by a couple of cents, our own internal estimates. But we had healthy debate internally about guidance and whether we should move guidance up or keep it where it is. And we decided to keep it where it is not because for the lack of confidence in our business. In fact, it looks terrific right now. But we've seen this movie before. In fact, we've seen the movie and the sequel and now we're looking at the third one. In '10 and '11 the market went soft on us in May, June. And we do have the fiscal cliff at the end of the year. I personally have no confidence in our politicians to get it right and it could happen again. So I'm not the best guy to address the fiscal cliff issue but I'm just telling you that all signals today from our business and our customers are fabulous, okay? Better than expectations. Even in Europe, better than expectations. By the way, I wouldn't add fabulous to Europe, I would just say better than our expectations and good, but fabulous everywhere else. But who knows? I mean, this could go soft on us again and you guys are better positioned and your economist is in probably better position to answer the question than we are around this table. But from our perspective, things look really good.

Operator

Your next question comes from the line of Paul Morgan from Morgan Stanley.

Paul Morgan - Morgan Stanley, Research Division

On the value-added conversions, you mentioned the one that you monetized in the last quarter. I mean that was a big initiative several years back and now clearly, at least in the Bay Areas, there's a healthy bid for land and development of other property types. I mean, is this something that we could see pick up over the course of the year, or are you actively trying to harvest more sites right now?

Eugene F. Reilly

Paul, this is Gene, let me take that. And Hamid might have some comments. But these things will tend to be episodic. We are pursuing a number of smaller, value-added transactions. Some are value-added acquisitions. In Phoenix, we have a couple of those that we've had vacant, had leased up. You'll see us sell those in the upcoming quarters. In terms of value-added conversion activity, we think we're moving into a market cycle where that activity will pick up dramatically. This is an opportunistic transaction we've talked about. Don't expect to see one of these every quarter. But we're certainly moving into a part of the cycle where these are beginning to make a lot more sense again.

Hamid R. Moghadam

And the only thing I would add is when we rolled out the strategy actually in '07, which now seems like ancient history, we actually said that going to be about $30 million a year, and guess what? It's been about $30 million a year. I think in the combined company, it's going to go up. And I do think Silicon Valley is on fire. These opportunities really come up in only a couple of markets. They don't happen in the less infield markets but certainly happen in Southern California in Silicon Valley and places like that. And based on what I'm seeing in Silicon Valley, that a lot of it is going to happen right there, in the Bay Area, given all the activity that's going on, I mean, social media and the other sectors. So yes, I think we're entering the sweet spot of the cycle. But I just want to remind everybody, we actually have delivered at about what we said we would back in '07, and we certainly didn't anticipate the great, whatever you want to call it, '08 to '10.

Operator

Your next question comes from line of Steve Sakwa with ISI Group.

Steve Sakwa - ISI Group Inc., Research Division

Hamid and Bill, I just want to make sure I understand kind of the math as it relates to the deleveraging and the contributions in sales as your kind of roll out for the balance of the year. So if I heard you correctly, $4.5 billion to $5.5 billion of contributions, of which your share is 75%. Can you just help us think about sort of how that progresses throughout the year? And then secondly, what, I guess, would be outright asset sales on top of that, or is that number embedded inside of that number?

William E. Sullivan

Steve, the building and land asset sales are embedded inside the number, and so total for the year and what we're targeting is the $4.5 billion to $5.5 billion, and we've done $1 billion so far this year. And our share of that first $1 billion was a little over 75%. And so as we look to the rest of the year, we're clearly focused on getting the Japan development fund done, which will add a couple hundred million dollars to that number. In Europe, we have sizable contributions targeted for the second half of the year, and we've got 3 active funds there that are acquiring right now in PEP II, Patel [ph] and our Allianz fund. And then in the U.S., Mexico and Brazil, we have a healthy pipeline of dispositions of assets and contributions, particularly in Mexico. And then it is likely that we will do one decent-sized fund on the order of $400 million to $500 million in the Americas between now and the end of the year. And so when you sort of add it all up, it's probably -- of the $4 billion that's left at the midpoint of that guidance, you could probably see something on the order of $2 billion coming out of Europe, a couple hundred million out of Asia and then the remainder out of the Americas.

Hamid R. Moghadam

Yes, and the only thing I would add to Bill's commentary is that we're really focused on this 10-quarter plan and, as you remember, we didn't actually really provide the detailed quarter-by-quarter numbers of that, because, frankly, when you do, then people get locked into that, and we are not that precise in terms of timing things. And we're certainly not going to do anything stupid to meet an arbitrary timetables. So really what we're trying to do is get to a certain balance sheet by 2013. And as I mentioned in my prepared remarks, we're actually way ahead in terms of the start we've gotten. We're also spending money, by the way, a little bit less, not as fast as we thought. Now I think some of that will catch up on the build-to-suits that we're doing, but net-net-net we continue to be committed to the balance sheet parameters that we talked about, and I think we're very much on track for getting it done by 2013.

Operator

Your next question comes from the line of Jordan Sadler from KeyBanc.

Craig Mailman - KeyBanc Capital Markets Inc., Research Division

It's Craig Mailman here with Jordan. Maybe could you just give more color on your comments regarding market rents versus the in-place rents to the portfolio. In what market are you guys seeing the biggest spreads between the 2?

Eugene F. Reilly

It's Gene. Let me just take that and I'll probably kick it to Gary for some color. But, I mean, if you look at across our portfolio, as Hamid mentioned, we think we've passed the really key threshold. We're in positive territory. And if you break it down a little bit, in the Americas markets, we're kind of right on top of that number. And frankly one of the markets that we are -- we have sort of the highest rents as compared to market, happens to be Los Angeles. And that also happens to be the, by far, the fastest rent growing market in the U.S. So that will turn on pretty quickly, and obviously it really has turned on a lot in the last 6 months. So that tends to move the needle a lot. In the Americas, in Brazil, we don't have this huge portfolio, but we're actually way below market rents, because they're accelerating quickly. Mexico, I'd say, we're probably right on top of it. I'll kick it to Gary for...

Gary A. Anderson

And in Europe, I think, again, we're right on top of the marked-to-market right at our portfolio rent level. Like Gene said in the Americas, for us, it's really the global markets that are driving rent change over time, markets like Hamburg and Paris like we've talked about in the past. In Asia, Japan is under rented today, so we're seeing rental increases in Asia, but the marked-to-market is certainly under 100%. And in China, it's well under 100%. So we're seeing pretty significant rent growth in those markets.

Operator

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

Ki Bin Kim - Macquarie Research

If I could squeeze in 2 quick questions. One, if you pursued a J-REIT strategy, would that be externally managed by PLD or internally managed? And second question, given the positive momentum we've had for several consecutive quarters in the industrial sector, and given that you have a $3 billion land bank that has been written down by $1 billion, most of it during the depth of the recession, I'm not sure how to ask this question, but how would you view your land bank, and if you could mark it to market based on the strong operating fundamentals you've seen, how would that look like and how would you describe your land bank today?

Hamid R. Moghadam

You answer the first, I'll answer...

Unknown Executive

Let me -- just from a J-REIT market, Ki, the J-REITs, by definition, are externally advised, and so there's a separate management company that if we pursued the J-REIT concept, we would intend to control and own that management company. But by definition, in Japan, the J-REITs have to be externally advised.

Hamid R. Moghadam

And to the question on land bank, I think, it's an excellent question. And one that we think about a lot. If you want to answer that question by looking at actually land comps that are trading, you'll have a very limited answer, because there aren't that many comps in terms of land trading in the U.S. or, frankly, anywhere else. Japan, there's a fair amount, because there's active development, but other than that there's not a lot of data points out there. But if you plug in sort of some of the rents that we're achieving in the better performing markets like L.A. and Miami and DC and places like that, Houston, and you crank through construction cost and you back into a land residuals, certainly we're at a place where the impaired values of land are way below what those land residuals are. Now nobody has started buying land on that basis yet, but I think they will. And I think, probably, the best answer to your question is a general one, which I think land is going to go -- it's what I said a couple of quarters ago, I think land is going to go from being something that everybody struggles with and there's a race between much you can haircut existing book value to one, that's going to be a source of tremendous growth an opportunity for our company and our customers going forward. So I think people's attitudes about land are going to change substantially.

Operator

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

Michael Bilerman - Citigroup Inc, Research Division

Hamid, I just want to come back to this exploration of J-REIT and effectively using a public company over there. As you think about the struggles that Prologis had with PEPR and you think about some of the other externally advised structures that were in Australia, Japan and other places. I mean why go down the road of having a listed entity versus what is your strong suit in terms of open-end funds and your fund investors in the Private Capital business where you have this long history with and just sort of go down the road, they're willing to pay the values that you want today to start the fund and you can accelerate your deleveraging goals and sort of get to this balance sheet that you want quicker rather than delay it potentially to the end of the year, because just as you said, who knows what could happen with fiscal things and you sort of have the bird in the hand right now. Why not just grab it with all the complexities and issues that may go around of having a public entity?

Hamid R. Moghadam

Okay. The question is the bird in the hand versus the one that's an unknown, and the answer is that the open-end fund is also not without its risks. For one thing, the open-end fund is going to be the first of its kind in Japan. And our timing on that, we've pushed back prior to this decision to look at the J-REIT alternative to the third quarter. We, in fact, have a book of business that I will let Guy talk about on the open-end fund, which makes it an extremely viable alternative for us, probably a quarter or 2 delayed. But very much there as a good solid alternative for us to benchmark the J-REIT alternative against. But we would be imprudent if we didn't look at that opportunity, and we're well aware of the challenges of an externally advised structure. But the good news in Japan is that, that's only available structure. So we're not doing anything weird or different. The idea of having a third-party advisor run these assets is actually the way J-REITs, as you know, are set up in Japan. So it's not, for lack of a better term, it's not a PEPR-type problem, where investors prefer really an internally managed structure with its own management because that option is not available. So I think it's a really different kettle of fish altogether from the PEPR-type project structures that are, I would agree with you, problematic. So to summarize, we have not made a decision. We have to evaluate the opportunity to its full extent. And when we do, we'll figure out, which one is the best for our company and our shareholders and that's the one we'll pursue. Guy, do you want to talk a little bit about the open-end fund.

Guy F. Jaquier

Sure. Relative to open-end fund, I mean, we are targeting $750 million of third-party equity for that. Today we have something over $1 billion worth of prospects in various forms of analysis, due diligence, approval. Some of those are extended processes people go through, but we found that when we get these prospects to Japan to look at our properties people, to meet our people, it's a strong story, and that's a story that we've got the best team on the ground. There's nobody else that has 100 or so local people who can develop lease, own and operate. The properties we have for our seed portfolio about $2.5 billion or more worth of properties. I mean these are our newest. I mean, these our newest and best, they've been completed in this last cycle, and they show really, really well. So we're not going to stop what we're doing on the open-end fund. We're going to do these 2 in parallel, so that we can find out what is the best option for Prologis.

Operator

Your next question comes from the line of Sri Nagarajan from Cantor Fitzgerald.

Srikanth Nagarajan - Cantor Fitzgerald & Co., Research Division

Just wanted to follow up on Hamid's comment on Japan open fund timeline being a little delayed, if you can just outline or give us some color on the delay there. And as well as a quick follow-up on the capital deployment. I mean you had guided about $770 million to $980 million in developments charge and could we fairly assume right now, given the state of the world economy, that most of this would be Japan-centric?

Hamid R. Moghadam

Mike will talk about the development volume. I think with respect to the open-end fund, you heard my answer and Guy's answer, so I'm not sure what else we have to add there. But originally, we produced documents for the Japan fund at the end of 2011. That's when we put the private placement memorandum together. The average time of formation of a fund today, and actually there was an article about this in one of the magazines that goes around, is about 18 months. So we had a very ambitious plan together, and we still have a very ambitious plan together even within the timetable that we're talking about. So we're talking about third or fourth quarter with that proceeding. So yes, it's a quarter behind, but that's not unusual in this environment, and we feel pretty good about that. It's just that I don't want to do something to get a quarter or 2 and meet an artificial timetable if it's not the best thing to do. So we're going to resist that, but you've already heard me say that. Mike, you want to talk about development...

Michael S. Curless

Sure. Let's talk a little bit about the mix of the pipeline for the year. We did get out, certainly, a fast start in the first quarter with $211 million of starts, and Japan was $163 million of that start. But overall, across the year, we envisioned the development pie looked something more like 40% in the Americas; 45% in Asia, heavily driven by Japan; and call it, 15% in Europe, and compared to our mix from last year, that would be 10 points higher in the Americas, about the same in Asia and 10 points lower in Europe, which feels pretty good relative to all of the factors in play. In terms of mix, 93% of that activity we had in the first quarter was build-to-suit. So we expect to see our build-to-suit percentage to be a good 15, 20 points higher than we saw last year. We have to see this number in approximately the 40s for this year in terms of build-to-suit percentage, given the fact that our pipelines are much more robust in the United States and Japan in terms of build-to-suit. So that gives you a little flavor for geography and mix on the development pipeline.

Operator

Your next question comes from the line of Dave Rodgers from our RBC Capital Markets.

David Rodgers - RBC Capital Markets, LLC, Research Division

Yes. Hamid, when I listened to your comments about the health of global trade or some of the forecast that you provided early on in your comments about U.S. land and the appreciation that you kind of expect to see there. Wondering along the same lines of the spec development comment that you just made is that, at what point do you feel comfortable really ramping up U.S. development? It seems like yield are coming back, market rents appreciating. Getting a sense for, is the hurdle for you guys more a balance sheet issue, where you'd like to monetize more the fund assets you brought on board, or is it a fundamental issue, and I guess the hurdles to get over that to really accelerate that U.S. spec pipeline?

Hamid R. Moghadam

It's absolutely not balance sheet, and by way of reminder, we are already a doing a couple of spec buildings in the U.S.; Houston, we did one; Miami; LA; Washington. We've got a big problem. We start to do spec buildings and they turn into build-to-suits. So I guess it's kind of a high class problem. They're leasing up a pretty quickly. So that's why they show up as maybe build-to-suits that are pre-leased, but I'm not really exaggerating. We've been doing this for some time and we'll continue to do it in a prudent way. But volume-driven development gets companies into trouble. We've seen that movie before, and we're going to be careful with development and the land is not going anywhere. It's sitting right there and it's very well located. And I think cap rates -- put it this way, cap rates I don't see going up anytime soon. And I'm pretty sure rents are going up, so whatever margin we have in them is going to improve as we prudently execute our plan.

Operator

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

Brendan Maiorana - Wells Fargo Securities, LLC, Research Division

So just to follow up on that, Hamid. I think the margin, the value creation margin, on the development starts in the quarter was around 26%, is that sort of a fair level that you guys think is appropriate throughout the region, if you exclude Japan and you look at Europe and the Americas? And if so, does that indicate that you think you're likely to accelerate the development just given that capital deployment level seem to be in line with what the expectations were a couple of months ago when you guys initially gave guidance?

Michael S. Curless

This is Mike. I'll take that one. In terms of the margin we saw in the first quarter, it was a higher margin than expect to be than our overall average, largely driven by the fact that activity took place in Japan and Brazil. And I would say, for the remainder of the year, we certainly expect our blended margins to normalize somewhat and be much more in our typical range, for example, we would fully expect all of our build-to-suits in U.S. and Europe to be in the margins in the 10-plus range and speculative construction would be in the mid-teens and/or higher. So over the entire year, we would expect more of a normalization, more of a blend that would translate to normalized margin we've seen in the past, slightly higher perhaps but in the mid-teens approaching 20s, on average.

Operator

Your next question comes from the line of John Guinee from Stifel.

John W. Guinee - Stifel, Nicolaus & Co., Inc., Research Division

Going back to the more mundane, Hamid, it looks to me like your re-leasing cost have been running about $1.35 to $1.40 for a while now. It went down to about $1.14 for this last quarter. About the same time you also showed an improvement in your rent roll-downs. Is there anything unusual going on here in terms of shorter lease term, more deals done in-house, that sort of thing that would cause this rather significant change?

Eugene F. Reilly

Yes, this is Gene. Let me take that question. It does have to do with shorter lease terms, and I would not expect the turnover cost to stay at $1.14 -- $1.30, $1.35 is a number that would be more sustainable. We did have a drop-off in lease term over the quarter, and we have high retention rate, and both of those things will tend to push down those costs. But I would not expect that to be a trend. In fact, the trend in terms of tenant demand is increasing comfort with longer lease terms. This really just had to do with the mix of deals we did in the quarter, and we had a couple of very large, very short-term renewals that were related to big customers with 3 or 4 moving pieces. So I would expect this to sort of go back to the trends that you've seen in the last couple of quarters.

Hamid R. Moghadam

And we're not trying to do more deals in house or anything like that, in fact, we have expanded our use of the brokerage network and we have more of an open listing kind of approach because we think that's the right way of doing that going forward, so we're not trying to save on commissions.

Operator

Your next question comes from line of John Stewart from Green Street Advisor.

John Stewart - Green Street Advisors, Inc., Research Division

Maybe one quick one for Hamid, if I may. How much better ballpark in terms of execution would you require to go to make the JV route worthwhile as opposed to an open-end fund? And then quickly for maybe either Bill or Tom, if you look at the net asset value detail on Page 28 and you zeroed on in the deferred income tax liability, the $620 million there. Can you remind us how much of that is related to PEPR, and then, hypothetically, if we were to assume that the end game is to sell off an 80% interest in PEPR, what would be both the accounting and economic ramifications?

Hamid R. Moghadam

Okay, John, let me answer the question. I don't think we will be sitting there side-by-side and looking at, okay, we're going to get 2% more out of one execution versus the other, so let's do that one. I don't think it's that kind of math. I think it's going to be an assessment of the long-term sustainability of each program. And whether than a natural, local investor base that likes to be uninvested and not have a currency issue, if you will, on a long dated asset, whether that is more sustainable, if you will, structure with more capacity because really our development business, as I said a couple of times, is ending up being a much bigger opportunity post-earthquake and tsunami than we thought. And so our capacity needs are going to go up because of the development pipeline being bigger, so it's really, which is a more sustainable and larger capacity pipe, because I think at the end of the day, the pricing is going to be pretty similar. Otherwise, we wouldn't do it. So it's on all the other intangibles that are going to drive the decision. Go ahead, Bill.

William E. Sullivan

Let me just add relative to the deferred taxes. I don't have the exact numbers in front of me, but on the $600-plus million, I'd say about 2/3 of it is related to PEPR. And ultimately PEPR, the vast majority of the PEPR assets are long-term -- high-quality long-term hold assets, and so any realization of that deferred income tax is a function of how we contribute and/or sell the assets, whether you sell assets directly or into these and the discussion on the net present value of that income tax liability. So we don't envision a substantial realization of that in the near future.

Operator

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

Michael W. Mueller - JP Morgan Chase & Co, Research Division

On the disposition guidance, the $4.5 billion to $5.5 billion is the same as what it was last quarter. Considering that you've taken Japan largely out of the mix, I know you gave us a breakdown of where you expect the dispositions to come from, but what changed relative to last quarter in terms of those other regions? Where did you pick up the slack from?

William E. Sullivan

I think we're slightly more focused on the Americas in terms of, again, getting out of some of the exit markets that we've identified as well as creating a fund within the Americas with some high-quality assets. It took a lot of assets on the balance sheet in the second -- in first quarter, and we have a fabulous portfolio of Canadian assets. And so the opportunities to create some fund vehicles, one or more, have gone up. And so that basically takes up the slack.

Hamid R. Moghadam

Seriously, here's the way I think about it, conceptually, and maybe it's helpful to you guys. The U.S., the 2 companies before merging had been in the U.S. the longest. A pretty substantial part of the portfolio was acquired, not developed. Some of these assets were in other exit markets or in regional markets that we're trying to down weight. So really the opportunity to sell assets in the U.S. is primarily strategic, because we're trying -- the biggest realignment opportunity anywhere in our universe is in the U.S., because that's probably, when we started, the biggest mismatch between the assets we want to hold in the long-term and the total assets that we have, the difference being salable properties. In Europe and in Japan, where the other 2 big concentrations are, those are essentially, by and large, developed assets very, very high quality, much higher fit between the totality of those assets and where we want to be strategically. So the realignment opportunities there are actually smaller than they are in the U.S. And that's more of a fund-formation type of balance sheet activity as opposed to selling to align with our portfolio. So we're getting very good reception in the U.S. on our asset sales, and so that's where we're going to push more business. And we think it's a very receptive market for selling assets in the U.S. In fact, it is better than the end of last year, and we're going to continue to execute in a prudent way. That's why we don't mind. I think we think assets in Europe that we have are trading at higher cap rates than they'll be trading in a year or 2. So we're not in a big hurry to sell in those markets assets or, frankly, to re-, if you will, contribute those assets immediately, because we think there's upside in the valuation, substantial upside in the valuation. So I think, strategically, the U.S. is where we're trying to point more of the sales and less of it overseas.

Operator

Your next question comes from the line of Paul Morgan from Morgan Stanley.

Chris Caton - Morgan Stanley, Research Division

It's Chris Caton with Paul. Hamid, I just wanted to follow up on that point, you talked about pricing in Europe. Can you kind of take us between A and B, and how do you see that market trending over the next year given some of the headwinds there from an asset pricing perspective, or from a capital raising perspective on a limited partners side.

Hamid R. Moghadam

I think the capital raising prospects for Europe are pretty good. People realize that Europe is a bargain today, and pretty much the same what happened to the U.S., some markets snapping back in terms of cap rates. And people are viewed -- well there's some people standing around waiting for distressed opportunities in Europe, and I think they'll essentially have the same experience as the people who were standing around distressed opportunities in the U.S. But to answer your question specifically, I think a lot of the valuations in Europe, European -- good quality European markets are in the 7s and those historically would've been in the 6s. And I think they will be the 6s within a reasonable period of time. So I think -- don't get me wrong, we are going to execute on our plan and all that, but on the margin, if we have the marginal million dollar portfolio to sell, we're more likely to sell it in the U.S. because it's closer to what its normalized value is in our view than in Europe. That's all I'm saying. But we're still going to form the funds and do our business the way we planned on it. It's just that there's a bias to not being in a hurry there because we think there's room in the CapEx to come in somewhat. Financing costs in Europe are maybe 50 basis points higher than they are in the U.S., but cap rates are way wider than that for the similar quality property. So it only makes sense that we do what I just described.

Operator

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

James C. Feldman - BofA Merrill Lynch, Research Division

Sticking with Europe, can you just give a little bit more color on operating fundamentals there? Kind of how deep is the pool of interested tenants, what your outlook for the rest of the year?

Gary A. Anderson

Sure. Jamie, It's Gary. Maybe I'll start with customer sentiment. I don't think customer sentiment in Europe has changed really for the past 8 quarters. There is cautious optimism, and you know our customers, basically, and have, for the past 2 years, really been really thoughtful about taking that incremental bit of space, but they have been taking that incremental bit of space as you can see in the numbers, 50 basis points this quarter and 280 basis points over the prior 3 quarters. Like last quarter, it's expansionary. They're sitting there basically at very, very high utilization rates, and they have to take that next incremental bit of space, and they're doing it. The key drivers in terms of our customers is still automotive. It's still e-commerce and it's nonfood retail. So again I think is cautious optimism and they're taking space as they actually have the business.

Hamid R. Moghadam

But they're not in a big rush to make decisions, which is exactly where the U.S. was maybe 2 years ago. And that's the difference. The deals are around and they'll take their time, and they got to go to 5 more committees and get 3 more approvals before they pull the trigger.

Gary A. Anderson

That's actually, probably the best comment because I mean, I think if the operating guys in the ground could make a decision for themselves, they would take incremental space, but they're having to kick that decision upstairs to corporate, and that decision process is prolonged.

Hamid R. Moghadam

But if you talk to our team in Europe, they are very -- our conversations go like this, "Are you sure you guys are sounding as positive, are we hearing you correctly?" It's really that kind of conversation -- we have a confident, competent team with great assets in Europe, and they're not backing off, and they have delivered, so far, delivered great.

Operator

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

Michael Bilerman - Citigroup Inc, Research Division

Hamid, with the stock now trading basically at the midpoint of your $35 to $38 NAV range, do you have any desire whatsoever to issue additional common equity, sort of in order to delever, and I understand you said there's no timeline, you sort of want get through the deleveraging through next year, but it does sound, at least, some of the assets, sales and contributions are pushed a little bit further back, as you sort of evaluate the J-REIT stuff and you put more product in the U.S. on the market. So I'm just curious how you think about equity today especially when it's trading basically in line with the NAV, so it's little bit less dilutive relative to the issuance last year.

Hamid R. Moghadam

Michael, I'm holding Sully back because he's trying jump on the table and answer that question, because every time in the past, I've tried to answer that question and I've totally messed it up. So let me have him, since he won't be on this call next quarter. Let me have him...

William E. Sullivan

So Michael, I will answer that question very simply, there's no right answer for that question. If we said yes, people would go crazy. And if we said no, people would go crazy. And so we have made the conscious decision that, that question will not be answered either in investor meetings or on these calls.

Hamid R. Moghadam

Or anywhere.

Operator

Your last question comes from line of Brendan Maiorana from Wells Fargo.

Brendan Maiorana - Wells Fargo Securities, LLC, Research Division

I just have a follow-up with respect to expiring rents. Do you guys think that the expiring rent levels are going to go down on a cash basis as you look out to the balance of 2012 and into 2013 given low rents that were signed at the trough of the markets, in late '09 -- I mean, late '08, '09 and '10, or were those more reflective of sort of the teaser rates and the cash rents that are in place from those low initial rents are now sort of closer to market?

Eugene F. Reilly

It's Gene. Let me take a stab at that. I'm not sure I'm completely understanding your question, but if you focus on what do expect for the remainder of 2012, and I think as Sully mentioned, if you look at the composition of what's rolling, and we look at the vintage years of those leases, we're going to see roll-downs that are more negative than you're seeing this quarter. And it will resume, the overall trend, toward positive rent change probably sometime end of the year, early next year. So hopefully that's responsive to the question, but if we look at the composition of those leases, they'll roll down a little more negative than you saw this quarter.

Hamid R. Moghadam

[indiscernible] fewer and fewer pre-peak leases though to sort of answer that piece of the question and if we're talking about rent change, one thing I would like to add about Europe for example is that, for the first time in 16 quarters, we've had positive rent change in Europe. That's an unbelievable stat. Now you can look at that stat any way, I mean, you can discount it because of mix, you can discount it because of the fact that there are higher percentage of renewals than new leases. But the fact remains that we are getting closer and closer to an inflection point and it's undeniably heading in the right direction.

William E. Sullivan

And just final point, our cash same-store NOI was actually closer to 4% this year, so well above the cap. And so we're starting to see this come through.

Hamid R. Moghadam

Okay. With that, that was last question. So let me just summarize. I think we have a really great first quarter, and I'm hoping that this will continue throughout the rest of 2012. Again, from our perspective, it sure seems that way, but you guys need to make up your own minds about fiscal cliff and the like. But the key takeaways are: Number one, operations around the globe are firing on all cylinders; secondly, we're ahead of our 10-quarter deleveraging plan and realignment plan, and we're confident that we'll meet our objectives in the timeframes that we've indicated them; and finally, the drivers of the business are all heading in the right direction, and we have the properties, the platform and the people in place to get ahead of those trends. Thank you for joining us today, and we'll see many of you at [indiscernible] in a couple of weeks.

Operator

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

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