PLD
#Good morning, and thank you for joining our second quarter earnings call
I’ll cover the highlights for the quarter, provide updated 2017 guidance and then turn the call over to <UNK>
We had another strong start with core FFO of $0.84 per share, which included net-promote income of $0.18. Net promote income came in above our guidance due to higher real estate values in our USLF portfolio, as well as $4 million promote from our FIBRA that was not in our forecast
Core FFO, excluding promotes of $0.66 per share, up $0.03 sequentially, driven by same-store NOI growth
We leased almost 47 million square feet during the quarter and have just 4% of the portfolio rolling in the second half of the year as our customers are securing space well before their leases expire
As we’ve discussed on previous calls, our strategy has been to push rents to maximize overall lease economics
And as a result, occupancy could decline modestly
Our operating results reflect this strategy
Global occupancy at the end of the quarter was 96.2%, a sequential decrease of 40 basis points
Market rent growth exceeded our expectations, which help drive our share of net effective rent change on rollover to a record 24%
was 29%, the sixth consecutive quarter above 20%
Our share of net effective same-store NOI growth was 4.6%, primarily driven by releasing spreads
led the way with growth of 5.2%
Moving to capital deployment for the quarter
Development starts were the highest quarterly level in the last several years at approximately $900 million
Margins on both starts and stabilizations continue to be very good at over 20%
Dispositions and contributions are on track as buyer interest remains strong and cap rates continue to compress
Recall, we’ve been focused on streamlining our ventures into fewer more profitable vehicles
I’d like to discuss two transactions that further this initiative and highlight our unique ability to source capital through this business
First, as previously announced, we entered into an agreement to acquire the remaining partner’s interest in our Brazil platform for approximately $360 million; second, after quarter end, we contributed $2.8 billion in U.S
assets from our former NAIF fund to USLF at stabilized cap rate of 5.4%
This valuation was structured to be consistent with the buyout of the remaining NAIF investor in the first quarter of this year
Investor interest was very strong and USLF raised over $950 million from 14 new and existing investors to fund this transaction
We received cash proceeds of $720 million and additional units valued at $1.2 billion, which increased our interest in USLF from 14% to 27%
Our current ownership leaves us with another $1.3 billion of built-in liquidity as we redeem our position down over time to our long term target of 15%
Turning to capital markets
We continue to access debt globally at very attractive rates
We completed $2.9 billion of financing activity with the vast majority denominated in sterling and yen
As a result of this activity, we extended our term, lowered our rate and increased our U.S
dollar net equity
Leverage, following the USLF transaction, was approximately 25% on market capitalization basis and debt to adjusted EBITDA with gains was less than 4.5 times
Our balance sheet has never been stronger with liquidity of $3.7 billion and significant built-in capital from future co-investment rebalancing
As a result, we're extremely well positioned to self-fund our future deployment for the foreseeable future
Moving to guidance for 2017 which I will provide on an our share basis
We're increasing the midpoint and nearing the range of our year-end occupancy forecast to be between 96.5% and 97%
We now expect same-store NOI growth for the year to be approximately 5%
Cash same-store NOI growth should be over 6% for the year as a lag from longer lease terms and steeper rent bumps begins to close
Given the increase in market rents, our in-place leases are now under rented by 13% globally and 17% in the U.S
This further builds our organic earnings potential and will drive strong NOI growth for the next several years
Given continued strong demand from customers, we're increasing our starts guidance by $200 million to range between $1.8 billion and $2.1 billion, built-to-suits will comprise about 45%
We're also increasing our disposition and contribution guidance by $250 million in total
Full year deployment guidance excludes the contributions to USLF and the planned acquisition of our partner’s interest in Brazil
Our strategic capital net promote income will be $0.16 for the full year as we have no other promotes scheduled for the remainder of 2017. Again, I want to highlight there'll still be a difference in the timing of promote revenue and its related expenses
We will recognize $0.02 of additional promote expenses over the balance of this year
Putting this all together, we're increasing our 2017 core FFO by $0.05 at the midpoint and nearing the range between $2.78 and $2.82 per share
The main drivers of our guidance increase includes $0.03 from higher promotes and $0.02 from core operations
Our revised guidance, excluding promotes, represents year-over-year increase of 9% at the midpoint
To wrap up, we had a great quarter and are entering the second half of the year with strong momentum
And with that, I'll turn the call over to <UNK>
On the cap rates, we’re seeing cap rate, I’d say, modestly decline in the U.S
probably 10 basis much lower Q1 to Q2; probably expect similar levels in Europe but given some transactions that we expect to close; in the third quarter, we would certainly expect Europe more expansion and contraction start in Europe in the second half of the year; in Japan, given some pending transactions as well, we would expect top rates to continue to go lower; and with our other pending transactions that are rumored to be potentially closing in third quarter; in Asia, I think it would also be another strong indication of compressing values for assets, but I’d also say how asset management business get valued
Jamie, one thing I just would add
What's really driving the compression, particularly in the U.S
, is rent growth
And I think given the trajectory of rent growth, higher rents, higher rents are causing valuations to go up and cap rates the cost of that for higher growth expectation
So if you're talking about mark-to-market for rents, basically where we are right now looking at our re-leasing spreads, if rent is growing market rents are growing more than 4% or 5% that spread will expand
And that's what we saw in the first half of the year and that's opposite of what we expect
So this year for sure, it'll stay where it's at and maybe expand a little bit
But that's a bit of a threshold that I want to keep 4% or 5% in excess of that you're going to see the mark-to-market
No, we do not expect any special dividends we can shelter that income
The big increase that you're seeing in our EPS guidance is the expected gain, book gain on the USLF transaction, that’s about $0.87. But we can defer that gain, because the vast majority of that gain, we sold down roughly a third part of the $2.8 billion we put in there
So the other is just basis switching out from direct ownership to indirect ownership
So that gets sheltered
<UNK> to your question, so from a yield perspective think about cap rates for operating assets, stabilized operating assets, cap rates for the nine in front of it
We also acquired land as part of this
So I think the yield on combined basis for the four investments we will make is going to have a seven in front of it
And when you think about total NOI from Brazil going forward after we close on this last transaction for Brazil, we’ll be around 2% of our NOI our share
From a same store perspective, as <UNK> said, we don't have a lot to place to same-store
The really only variable on same-store in the second half is really going to be on the margin with occupancy, that’s what’s still little role each time the vast majority of what's going to get ---+ what's going to go in service
So that's happening
I think when you think about the same-store in the second half for our midpoint is going to be 4.8%
And when you think about that number that has all rent change
The first half of this year and prior years, we've seen a boost in our same-store from occupancy gains
Occupancies are now leveling off
So it's all about rent change
So when you think about ’18 rents, same-store should accelerate, because as <UNK> said, we have built up in-place to market is ---+ that gap is wider, which means our rent change on role in '18 is going to be higher than our rent change in role in '17, that's gapping out
So that has to mean our same-store NOI will be higher in '18 than we're going to see in the back half of 2017. So that's really what's going on
And so don’t be surprised if you see leasing volume be slower in the second half of the year, because we’re going really from now on, we’re working on 2018 lease renewals
