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Prologis' (PLD) CEO Hamid Moghadam on Q1 2016 Results - Earnings Call Transcript

Prologis, Inc., (NYSE:PLD)

Q1 2016 Earnings Conference Call

Executives

Tracy Ward - SVP, IR

Hamid Moghadam - Chairman & CEO

Tom Olinger - CFO

Gary Anderson - CEO, Europe & Asia

Mike Curless - Chief Investment Officer

Gene Reilly - CEO, The Americas

Analysts

Steve Sakwa - Evercore

Ross Nussbaum - UBS

Ki Bin Kim - SunTrust

Blaine Heck - Wells Fargo

Juan Sanabria - Bank of America

Eric Frankel - Green Street Advisors

Michael Mueller - J.P. Morgan

Manny Korchman - Citi

Tom Lesnick - Capital One Securities

Craig Mailman - KeyBanc

Erin Aslakson - Stifel

Brad Burke - Goldman Sachs

Sumit Sharma - Morgan Stanley

Operator

Good afternoon. My name is Kim, and I'll be your conference operator today. At this time, I would like to welcome everyone to the First Quarter 2016 Prologis' Earnings 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.

Tracy Ward

Thanks, Kim, and good morning, everyone. Welcome to our first 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 the market environment; and then from 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 on our 10-K or SEC filings.

Additionally, our first quarter press release and supplemental do contain financial measures such as FFO and EBITDA that are non-GAAP measures and, in accordance with Reg G, we have provided a reconciliation to those measures.

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

Hamid Moghadam

Thanks, Tracy, and good morning everyone. 2016 is off to a great start. The momentum we had at the end of last year has continued into the New Year. We posted record first quarter numbers on rent change, which was stronger than expected at over 20%, and core FFO which grew 24% year-over-year.

At this point in the cycle, we're pushing rent growth over occupancy. Nevertheless occupancy is still very high at over 96%. These and other metrics which Tom will discuss in a moment point to continued growth ahead for Prologis.

I'd like to take a moment to elaborate on how and where we make our money. Many of you already know this but I believe it's worth repeating. We make over 90% of our core FFO by collecting rents. The rest is generated by fees and promotes from our strategic capital business. Together rents and fees represent a stable cash flow created from our operating portfolio.

Separately, the value creation from our development business, including value added conversions, propels our future earnings growth. So our operating and development activities address how we make money.

Now as to where we make our money when collecting rents 72% is in the U.S. and 28% comes from abroad, roughly 90% of our net equities in U.S. dollars.

Many ask us why we're global. In short, we are global because our customers are global and so we've organized our business to capitalize on this unique aspect of our sector. About two-thirds of our development value creation fees and promotes are generated outside the U.S. As an aside these benefits actually cover more than a 100% of our global overhead.

I view Prologis as an owner/operator in the U.S. and a fund manager and developer in Europe and Asia. We have minimal exposure to emerging economies.

Market conditions remain favorable under world's most vibrant centers of commerce. In these strategic locations, demand was solid with supply still very disciplined. These business conditions have persisted for several years now. While we anticipate supply/demand reaching equilibrium this year, we see few obstacles on the road ahead that could disrupt that balance.

In the U.S. quality properties remains scare which is leading to strong rent growth and high occupancies. We will continue to signal watch list markets. In this quarter we have no new markets to call out. In Europe and Asia, rents are up modestly from last quarter, balanced by slightly lower occupancies. In Mexico, rents were up slightly, and occupancies flat, while in Brazil rents are down modestly, but occupancy is at a 100%.

The key drivers of our business consumption and e-commerce continue to grow faster than underlying economies. We have every reason to expect these trends to continue into the future.

KCR is all paid off. Our funding activities, specifically the short-term loan associated with that deal concluded less than one year after it was announced and ahead of schedule. With the transaction paid in full, and the portfolio integrated, today's call is probably the last time you will hear us talk about KCR.

We have capacity to fund more than five years of capital deployment. At our current run rate, our total annual funding requirement is $600 million. We expect to fund this through the rebalancing of our co-investment ventures, reducing our land bank, and selling our remaining non-strategic assets. These one-time sources total more than $3.5 billion and give us the ability to fund more than five years of net deployment activity.

We will further simply our business overtime. Over the last several years we made great strides in optimizing our business to put us on a path for long-term sustained earnings growth. In addition look for us to continue to streamline our business through the ongoing realignment of our portfolio, further G&A efficiencies, land bank optimization, and reduced leverage.

Now, let me turn it over to Tom, for further comments.

Tom Olinger

Thanks, Hamid. We began the year with terrific results. Core FFO was $0.61 per share for the quarter and increased to 24% year-over-year and driven by strong operating fundamentals and an increase in AUM.

Starting with operations, occupancy in the U.S. was 96.6% at quarter end and 95.4% outside the U.S. Leasing volume for the quarter was a record at 46 million square feet. Just a quick reminder that my comments as I go through the rest of the operating and capital deployment activity will focus on our share.

GAAP rent change on rollover was an all-time high of 20.1% led by the U.S. of 27.2% and 4% outside the U.S.

GAAP same-store NOI increased 7.4% positive across all major geographies and driven by the U.S. at 9.6%. There are two items I want to highlight. First, as we previously discussed, the negative impact on GAAP NOI from the amortization of lease intangibles related to the merger burned off in the second quarter of 2015. As a result, this had a positive non-cash impact of about 170 basis points on GAAP same-store growth in the quarter. Second, expense timing drove an approximate 70 basis points positive impact. After adjusting for these two items, GAAP same-store growth was 5% which is attributable to the strong rental increases and year-over-year occupancy gains.

Strategic capital fees were $50 million for the quarter, with the majority coming from our international ventures. Capital deployment activity is progressing as planned. There are two items I would like to highlight this quarter. First, that our stabilization had an estimated margin of 27%, and second, that build-to-suits comprised 42% of our development starts.

Turning to capital markets, our leverage on a book basis was 38.1% at quarter-end and 33.9% based on market capitalization. Debt-to-EBITDA, including gains, improved to 5.6 times. As Hamid mentioned, we fully repaid the $400 million term loan associated with the KTR acquisition and liquidity remained strong.

Last quarter, I'm sorry, this week we recast our global line of credit, lowering our spread by 10 basis points and increasing the capacity by 640 million. As a result, our total line capacity is now 3.4 billion further enhancing our current significant liquidity levels.

We expect to see further improvement in our debt metrics throughout the remainder of the year, as our venture rebalancings were completed this month and the pace of dispositions accelerate. The continued strengthening of our balance sheet was acknowledged this quarter by both Moody's and Standard & Poor's upgraded our credit outlook to positive. We believe we are on the doorstep of an A rating.

Before discussing guidance, I wanted to highlight enhancements to our earnings supplemental this quarter. The changes are based on the feedback we received from investors and analysts as well as to better align our disclosure with how we think about and how we run the company. As part of this, we revisited the classification of certain personnel cost in our income statement which had the effect of increasing expenses related to our strategic capital business by $17 million on an annual basis and reducing G&A by the same amount. There is no bottom-line impact on net income or core FFO.

For context we completed a significant volume of co-investment activity over the past five years and almost doubled our third-party AUM. With this increase, we now have more full-time employees dedicated to our strategic capital business.

Moving to 2016 guidance, we're maintaining guidance for most of our operating metrics, capital deployment, and strategic capital revenues, all of which you can see on Page 6 of our supplemental.

On same-store NOI, we are increasing the bottom-end and narrowing the range to between 4% and 4.5% with the bias towards the upper half of this range.

For net G&A, we are lowering the range to between $218 million and $228 million to reflect the reclassification I just mentioned. Related to FX, our 2016 earnings remain well insulated from foreign currency fluctuations, as over 95% are hedged.

We continue to expect to generate $1 billion of total proceeds in excess of our capital needs in 2016. This consist $400 million in net deployment proceeds, $198 million of cash that we already received from the completion of the Facebook installment sale, and $400 million from the ownership rebalancing in our USLF and PTELF ventures which we will receive in a few weeks.

Further we like what we are seeing in the disposition market and are likely to increase our volume. So while operating conditions are stronger than we expected, we are not increasing our core FFO given the potential dilution from increased dispositions. Therefore we are maintaining our 2016 core FFO guidance of between $2.50 and $2.60 per share. This includes $0.17 to $0.19 per share of promotes which were recognized in the second half of this year. If we assume normalized annual net promotes of $0.05 per share, our core FFO for 2016 would range between $2.38 to $2.46 per share.

Core FFO will not be evenly distributed for the balance of the year given the timing of our asset sales and venture rebalancing. As a result, we expect core FFO to be $0.03 to $0.04 lower in the second quarter followed by an acceleration in the back half of the year from promote income.

In closing, we are off to a really good start. Our focus for the rest of the 2016 is simply about capturing the significant spreads between inflates and market rents, generating profitable returns...


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