Prologis Inc (PLD) — Q4 2016 Earnings Call Transcript

Thanks, Scott, and good morning, everyone. Welcome to our Fourth Quarter 2016 Conference Call. The supplemental document is available on our website at prologis.com under Investor Relations. This morning, we'll hear from Tom Olinger, our CFO, who will cover results and guidance and Hamid Moghadam, our Chairman and CEO, who will comment on the company's strategy and outlook. 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 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 fourth 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 Tom, and we'll get started.

Thanks, Tracy. Good morning and thanks for joining our fourth quarter earnings call. Our format today will be different than previous calls. I will cover highlights for the quarter and guidance for 2017 and then I'll turn the call over to Hamid, who will put this quarter's performance in the context of the recent past and our future outlook. We had an excellent quarter in an outstanding 2016. Core FFO was $0.63 per share for the quarter and $2.57 per share for the year. This is an increase of 15% over 2015 and consistent with our three-year CAGR of 16%. We earned promotes of $0.01 and $0.15 per share for the year. Excluding promotes, Core FFO was up 11%. For the full year, we leased over 180 million square feet as demand for our best-in-class portfolio remains strong. Our properties are located in major population centers where consumption is concentrated and proximity to consumers has never been more critical to supply chain. Global occupancy reached an all-time high of 97.1%. Europe also achieved record occupancy at 96.7%. Our share net effective rent change on rollover was 16%. The U.S. led the way at over 23% for the fourth consecutive quarter above the 20%. Notably, the U.K. was also above 20% rent change for the second consecutive quarter. Our share net effective same store NOI growth was 3.2% for the quarter and 5.6% for the full year. On the deployment front, we had another very productive year creating significant value for shareholders. Development stabilization had an estimated margin of 27% and value creation of over $570 million. Development starts had an estimated margin of over 20% and our net deployment activity generated surplus cash of $1.4 billion. Let's spend a moment on our financial position. We achieved our goal of having one of the top balance sheets in the REIT sector. The rating upgrades of A3 and A- in the quarter are acknowledgment of our prudent financial management and balance sheet strength. Our look-through leverage at year-end was 27.1% on market capitalization and 34.6% on a book basis. Debt to EBITDA, including gains, was 4.7 times and our liquidity was over $4 billion. We remain well positioned to self-fund our future employment. We also continue to be well protected from foreign currency movements as we ended the year with 92% of our net equity in U.S. dollars. The bottom line is our balance sheet and liquidity have never been stronger. Moving to 2017 I’ll cover a few guidance highlights on our share basis, so for complete detail refer to Page 5 of our supplemental. We continue to expect net effective same store NOI growth of between 4% and 5%. As discussed at our Investor Day, our in-place leases are about 12% under-rented and this will be the primary driver of same-store growth going forward. Our share cash same-store NOI should be higher than net affected by 5200 basis points for the year. Our development starts are consistent with 2016 levels. However, our disposition volume is much lower as we sold the vast majority of our non-strategic assets. Going forward, you will see a contribution and disposition activity in line with development levels, as we continue to self-fund. I want to point out that as a result of the significant amount of cash at year-end, there will be a slight drag on Core FFO of $0.02 to $0.03 per share on the first quarter, given the timing of putting the capital back to work. Related to FX, our 2017 estimated core FFO was effectively fully hedged relative to the U.S. dollar and we've already hedged most of 2018. For net G&A we're forecasting a range of $210 million to $220 million, down 3% at the midpoint from last year as we continue to become more efficient. For strategic capital, I want to highlight that there will be a timing mismatch throughout the year between when that promote revenue is recognized in the second quarter and when all the related promote expenses are reflected. However, we continue to expect net promote income for the full year 2017 of between $0.06 and $0.08 a share. Putting this all together, 2017 Core FFO including promotes will range between $2.60 and $2.70 per share. Excluding promotes, our Core FFO at the midpoint is 7% higher year-over-year. In closing, we had an excellent year; we entered 2017 with terrific momentum and the business keeps getting simpler as evidenced by the brevity of my remarks as you've heard guidance is unchanged from what we provided at our November Investor Day. However, I would say the overall outlook for a business today is more positive, particularly in Europe. While we are mindful of potential political and regulatory changes, we remain confident given our best-in-class portfolio, balance sheet strength, liquidity, and durable NOI growth. And with that, I'll turn it over to Hamid.

Thanks Tom. I want to use my time with you today to put our recent performance in the longer-term context and to share my outlook for the next few years. It's hard to imagine that it's been almost six years since we announced the merger between Prologis and AMB. Our initial focus following the merger's closing was to integrate the two companies and to deliver on our promised synergies. Shortly thereafter, we announced the Vision 2016 plan focused on realigning our portfolio, monetizing our land bank, rationalizing our strategic capital business, strengthening our balance sheet, and investing in technology to make our teams more productive. We met or exceeded the planned objectives almost a year ahead of schedule. Following the 10-quarter plan, we transitioned to Vision 2016. Our strategic plan to capitalize on what we saw as a significant recovery in rental rates following the sharp decline we experienced during the global financial crisis. Our forecast called for a compounded 6% per year recovery in rents in the Americas to 2016, which at the time seemed overly optimistic by some. The fourth quarter represented the culmination of Vision 2016. Actual rental growth in our markets in the Americas ended up ahead of our forecast at 8% per year. This helped drive core FFO growth of 16% per year, substantially in excess of the plans communicated by most REITs. 2017 is a very different environment than six years ago when we announced our merger or four years ago when we projected a sharp rebounding of rents. I believe we're now at the cusp of yet another important market transition to a phase for which Prologis is ideally positioned. As you heard from Tom earlier and as you'll hear from our industry colleagues, markets are as healthy as they have been in several decades. Occupancies are at record levels, rental growth is extremely strong and the strength is not just e-commerce. In fact, there are sectors like housing that will be sources for additional demand going forward. In the recent recovery phase of the U.S. market, rising tides have lifted all boats. In the next phase, location and quality will matter much more, and there will be meaningful performance differentiation within the U.S. logistics markets. Continental Europe is lagging behind the U.S. by about three years. We believe Europe will further extend the growth cycle for our company as its recovery picks up steam. What's been a headwind for us will become a tailwind for the foreseeable future. There is a significant embedded rental upside in most industrial portfolios and in our case about 12% of our overall and 15% in the Americas, but we need to acknowledge that the easy part of the cycle is behind us. Market rental growth going forward will moderate starting in 2017. However, our same-store NOI growth will remain strong into the foreseeable future, probably well beyond 2019, especially in large markets with high barriers to entry. What we like about this picture is that supply remains disciplined and as a result, growth will be more sustainable than in past cycles. In this environment, it will be more important than ever to be closer to key customers and to offer them the right real estate solutions in key markets around the world. Before I turn it over to Q&A, I'd like to share with you our priorities for the next few years, including a number of important new initiatives that we've been working on as part of our new strategic plan. In addition to completing the final batch of our non-strategic sales, which remains a priority, the new initiatives are focused on customer experience, application of technology to streamline operations, and advanced data analytics. These activities are designed to further simplify our business, get us closer to our customers, and help make us faster, smarter, and better. We're seeing tangible results from these initiatives already, especially on the customer side and will share these with you in the coming months and years. Let's now turn to your questions.

Thanks. Good morning over there. Obviously we've seen a lot of statements that have come out of the new Administration. You guys spoke at length about it and the potential impact at the Investor Day. But since the Investor Day how has the outlook changed for your business and how are you planning on potential trade impacts in your strategy going forward?

Yes, let me start with that and maybe I'll turn it over to Chris Caton, our Global Head of Research after this for his comments because he's been setting this up pretty closely. So I would say there is a great deal of uncertainty out there given all the talk about trade with China and Mexico specifically. So I think until there is some resolution on this, there will continue to be uncertainty, but we haven't seen that translating into any negative impact on our business so far. In fact, I would say most of the euphoria around the election has to do with a brighter economic outlook in the U.S. and a brighter outlook on the part of our customers on the margin. Now let's take some extreme cases of what could happen. In the extreme case, and I don't think, by the way, this is the base case, we pull a wall not just in our southern border, but all around this country and will stop trading with the rest of the world. While I think the long term impact of that would actually be negative not just for our business but for every business because the rate of economic growth would slow, but specific to the industrial business for sure, manufacturing will have to take place somewhere, which means it will have to be in the U.S. So demand will go up in the U.S. for sure. Now, there are going to be places in the world where demand will suffer, and I think Northern Mexico along the border and China would be two places where demand would suffer. Those two markets account for 2% of our overall activity. The U.S. accounts for 73% of our activity. So while I acknowledge that there will be a headwind on overall economic growth, actually its impact on us could be very positive in the short term, but that's not what I want, that’s not what I expect and that’s how I'm looking at it. I think the more likely outcome is going to be a cleanup of some of the provisions of NAFTA; there are some issues that need to be modernized, and I frankly think that this stage has been set from a negotiating point of view, or that can be done pretty quickly and pretty easily compared to expectations. China is a little bit of a different story. I think in China I’m afraid we’re heading for something a little more serious, but only time will tell how that's going to play out. Chris, what do you want to add?

I think that's a pretty complete answer.

Thanks. Hamid, can you just comment on what you see in supply trends going forward? I know it hasn't been a huge issue in the past couple of years, but at least according to some brokers it seems to be increasing across more markets.

Our outlook for supply this year was that supply and demand this year, meaning this past year 2016, was that they were going to be at the same level in the low 200 million square-foot range in the U.S. and about 70 million feet in Europe. And actually we were surprised because demand ended up being more like 260 million feet and supply ended up being 180 million feet. So we continue to have a deficit in supply that has persisted since the recovery. So again this year in 2017 we're calling for low $200 million square feet of supply and demand. We're expecting those two to be about the same, which is, by the way, great because at 56% overall vacancy and at defective vacancy in the kind of product that we traffic in being in the 34% range in most markets, I think that’s a very, very healthy situation. So we're calling for supply and demand to equalize; let’s say we're off let's say supply ends up being 20 million, 30 million feet more across the board, that won't even register on the vacancy rate. So I think people are just overly focused on that issue. Fundamentally, I think the banking system for encouraging undisciplined development has changed. Now if something changes in the political and regulatory environment where the banks go nuts again, that's a new ballgame, but I don't see that just yet, and I don't think those regulations are just U.S. regulations; I think they are Basel III and the like that impose some discipline on the banking system. So it's good to keep an eye on supply, I think it's been a clear area of concern for the real estate business for as long as I remember. So please continue to ask about it, continue to be concerned about it, but I don't think it's going to drive the performance of our business in the next couple of years.

Hi, everyone. I wanted to go back to market fundamentals for the quarter. Leasing volume is down a little, tenant retention is below 80%, it looks like leasing costs ticked up as a result. Realizing that market fundamentals remain very healthy, is there any reason to think that demand decelerated in the fourth quarter versus what we saw earlier in 2016?

Demand did not decelerate; we ran out of space to lease. And the reason retention is down is as I have told you every quarter we're trying to drive around. So we would like our retention to be a little bit lower and for our rent growth on the margin to benefit from that incremental rent growth. So nothing in the quarter surprised me. Tom, do you have anything else?

No, it's consistent again as Hamid said we had little rollover this quarter; it's pretty seasonal that we go into Q4 with pretty minimal rollover and that was the big driver, but we certainly don't see any change in the customer behavior, customer activity, customer decision-making; all of that quite frankly is tracking better than what we laid out to you guys in November.

Thanks, guys. I was hoping to just get a little bit of color on the second sequential decline in same-store revenues you guys had. I think last quarter there were some CAM true-ups that drove the sequential decline, but we expect that to maybe be more one-time, but we saw a decline again this quarter. Just curious what drove the deceleration this quarter and maybe how it looks on a cash basis to see if we're seeing the same trend.

Hi Craig, this is Tom; so you’re right - in this quarter the sequential decline was driven number one just lower occupancy in the same-store pool if you look from Q3 to Q4, so there's about a 50 basis point lower benefit of occupancy, and the second thing would be as you alluded to recovery revenue timing. So they're all one-time timing issues that we look into 2017; we see occupancy levels very consistent year-over-year, so the big driver same-store is all about rent change and to put those numbers in context of our guidance of that 4% to 5% range we feel very, very good about that guidance range. If you think about similar rent change on roll year-over-year about 17.5% and you put that on 22.5% roll, which is some pulling leases forward very consistently with what we’ve done in the prior year, that gets you right about 4%, and when you look at expense leverage and you look at indexation remember we get the benefit of indexation particularly in places like Europe. That all adds up to another 50 basis points. So that puts you right in the middle of our guidance range for 2017.

Hi, everyone. I just wanted to talk about the lease rate being at 97% and record occupancy in the U.S. and Europe, and then also your comments about the retention going down driving rents a little harder. I'm just curious if the current availability changes your view on development starts, the mix of build-to-suit versus spec. And, geographically, it sounds like a lot of the commentary on Europe was very positive versus your previous outlook. Are you more inclined to build in Europe today than a few months ago?

Vincent, Europe is more of a build-to-suit market than the spec market anyway, so, yes, a lot of the development in Europe is going to be build-to-suit. And maybe Mike you want to talk about the flavor of our development activity and it's very much consistent with last year as I think about it.

Look, last year we did 45% in Americas, 25% in Europe, and 13% in Asia; that was a little bit up in the Americas, slightly down in Europe, and slightly up in Asia. I expect this year's ratio to be about the same, and a couple of other things to note are 90% of the activities are going to take place in our global markets. I would point out I think yesterday I take the build-to-suit range in the 40% to 50% range, which is comparable to what we did last year, and I think we feel very bullish on our ability to do these build-to-suits, but that's a good range as we sit here today.

Yes, the only thing I would add to all of that is that when we look at our development volume for 2017 at this time of the year, you guys should know about 90% of that is baked in. So really at the end of the day what our development volume does on the margin, in the back $100 million, $200 million of it if weather stuff flips into December or January of next year and we don’t do on natural things to meet guidance in that regard, let’s just be clear about that. For example, I think three of our 2016 build-to-suit we’ve just done in the first couple of weeks of 2017. And if we had done them in 2016 we would have blown through the top of our guidance range. So we don’t really play those kinds of timing games and we let those things happen when they do. I mean, we're going to spend a bunch of money digging through the snow to start a building to call it a start if it doesn’t make sense to do that.

We've got a great head start on our business already for this quarter.

Hi. Good morning. A couple of questions on the international markets, saw the yields on the Americas, Canada, Mexico, Brazil development sort of side down about 40 bips q-o-q based on your last disclosure? I guess how much of this is a factor of higher pre-leased activity or the use actually kind of shrinking with other trade shock? And the second question is on the Cyrela stake. We're reading a lot of reports from brokers as well as actually you guys talking about net absorption dropping 60% year-over-year in Brazil in the logistic sector, so interested in what we should read into this move around acquiring the additional stake. Are you calling for a bottom to that market?

Sumit, this is Eugene. So relative to the first question, it's really - this is all mix and it's a lot less Brazil. I mean at this point in a cycle we are not building buildings in Brazil, obviously those yields are much higher. So don't get distracted with that. With respect to what's going on with Brazil in the CCP situation. So demand right now in Brazil is pretty soft and we expect that in 2017 it's going to remain that way based upon the economic and political environment. Having said that, we're very, very optimistic long-term; we're calling a bottom; I wouldn't say we're calling a bottom, but we see things getting better from this point forward. And related to the CCP announcement, Brazilian law requires that public companies disclose even agreements that are not binding. When there is a definitive agreement, we will have for all you guys the relevant information. But that's the first step towards recapitalizing the business in Brazil. We're very excited about that and as I said we're very excited about the future that market going forward.

I would add to Gene's comments that I think the combination of the currency, which is well up to bottom the governance change that happened in Brazil, and the interest rate picture, which is one of the few places in the world where interest rates are coming down. I think things will bode well for Brazil and I am bullish on Brazil going forward; it's not going to zoom and sort of add from here, but I think this is a pretty interesting entry point from both fundamental real estate valuation and also currency valuation point of view.

Hi, guys. Good morning. I was just wondering - Hamid if you can talk a little bit about just leasing momentum and pace and whether the volatility post-election on any of these trade policies have caused either pause or revisit their leasing strategy?

Honest to goodness, we ask that question on a weekly basis of our people and the answer is no, no, no. I'll tell you what I hear; it's not like we are being Pollyannaish or sticking our head in the sand, it would be a pretty obvious concern and you guys are right to ask about it. But we haven't seen it; in fact if we were doing our Analyst Day again today, we would be slightly more positive, in the U.S. and a lot more positive in Europe. So the answer is no, we haven’t seen it.

Hi, guys, it's Josh Dennerlein here with Jamie. Could you speak about investor appetite for your funds? Any change post-election? And also curious to know the rationale, as well as what sparked L&D's consolidation of its JV fund with PELP?

Well, I think you are - on the last thing you're referring to PELP and ELV Alliance combining together. Look we have been on a strategy we're trying to simplify the number of different vehicles we have everywhere including Europe. And our goal is to get in each major arena in the U.S. and Europe to one major JVM, one major open-end fund and that's a goal. We made a good first step in that direction here in Europe by combining PELP and Alliance. So that - and those two strategies were identical. Those two funds have the exact same strategy and it was a good thing for us as it simplified our business. It was a good thing for Alliance because it allowed them to deploy more capital with us and to have a bigger vehicle and a more diversified pool. So that one is done and with respect to the demand for our funds, I would say in the U.S. we have a lot of demand from outside the U.S. for U.S. vehicles, including some new sources of capital that we have never seen before, including some funds coming out of Japan through the pension system that is going through some changes in regulation and the like. It's early days for that but that's a new source of capital we've seen before. I think the U.S. funds are slowing down a little bit based on what I'm seeing on the margin because they are meeting their allocations by and large, but their allocations are always lagging because the denominator keeps getting bigger, and so the allocations for next quarter are going to go upside. I don't expect that to be a meaningful slowdown; I think it's only at the margin. So the simple answer to your question would be no. There is a lot of interest in logistics product, high-quality logistics product everywhere around the world. In fact, we are kind of surprised by the amount of interest; there is low quality logistics around the world. So, no, we don’t see anything.

Thanks. Hi, guys. Earlier, you'd brought up your expectations for demand and supply to reach parity in 2017, also for rent growth to moderate a bit this year. But can you talk about the ability for market rents to continue to push higher once supply starts outpacing demand? Maybe you can give us your thoughts on this dynamic and what you're seeing in the market to support a runway for market rents beyond 2017. Thanks.

Well, I think as I mentioned in my comments the last four or five years of projected rental growth have been pretty easy; we fell into a deep hole and just climbing out of that hole with replacement costs going up was what we thought 6% rental growth in the U.S. and then dumping 8% per year growth. Going forward I think rental growth is going to slow down because we're calling essentially for a market that’s plus or minus at the equilibrium in the U.S. and given the quality of the portfolio in our locations and the like, I think it's gonna be inflation plus type of rental growth. I think we've spoken to you guys about a 15% mark-to-market in the U.S. plus 3% growth beyond that in terms of market rent; I think we will do better than that but we just had 3% for modeling purposes, but I think we will in the near term do better than that, how much better than that I guess we'll have to see. Europe is interesting; this is an important point I'm trying to communicate so please - this one is what we’re focusing on. There is going to be a time and we think that time is 2018; we’ll know for sure when we get there. While rental growth in Europe can exceed rental growth in the U.S. and that will drive same-store growth for Prologis beyond just our U.S. portfolio and I think that's a unique benefit that we have as a company. I mean we definitely separated the back part of the cycle by virtue of having a European drag on our performance; I think Europe can turn into a positive boost on performance from 2018 onwards. So that would be my commentary on rents.

Thank you. I know this might be a bit of a dead issue, but do you anticipate any reincarnation of TPP in any form that would hurt you or help your business in Asia and the U.S.?

Eric, we don't have any particular insights on that beyond what you and we read in the paper.

Hi, this is Ryan Wineman here with Tom. How would you guys expect a border adjustment tax to impact demand for industrial real estate in both the U.S. and abroad?

Hi, thanks for the question; this is Chris Caton. Hamid gave an excellent outline on the global trends and in particular these efforts focused on stimulating job growth, wage growth in general and U.S. consumer I would be big positive for business. From a - how might things change perspective, I think there are kind of two key points that I would add to Hamid's earlier remarks. The first is the majority of the U.S. markets are really focused on local consumptions and these are not initial shipment points. And then we think about some of these markets that do have a component that are kind of initial points of contact for international trade, look growth has been excellent in these markets even as trade growth over the last few years has been moderate. So supply chain modernization continues in this market, some irrespective of the trade picture.

And that would be LA, Dallas, Chicago, and New Jersey. Those would be the four major markets that have a transshipment component to them. So if you’re going to focus on those, those are the markets to pay attention to.

I noticed that on Page 26 your land position got down below $1.3 billion, which is probably one-third of what it was at the height. Can you talk about what you're thinking about land right now? And, also, I did notice that I think 50% of your land is in the U.K., Mexico, Central Valley of California, and a couple other unusual places.

So John, thank you for acknowledging that. I mean, just the brief history of land bank at Prologis. At the time of the merger, the land bank was in the low $2 billion range and the original cost of that land bank I think was in the mid-to-high $3 billion range. So we certainly started with a lot of land, and it's not as if we haven't been buying land. We've been buying land, good land during this period, but we've been selling and monetizing more of it over time. So our share of land is about $1.25 billion and our total land value is about $1.4 billion or something like that on that order. Our goal is to get to two years of land that we own and given our pace of development and land as a percentage of total development cost, that argues for about $800 million our share and a $1 billion overall land bank across the board. It will take some time to get there because to be perfectly honest with you, there are a couple of $100 million of land that is the lowest quality land and our least strategic land; I would say $200 million of that will take a long time for us to sell so we've got to carry that till we can get it off. So think of our goal of $800 million of our share and $1 billion overall as really being $1 billion and $1.2 billion for a while until we can work our way through that land. But it’s a good market for selling land; it’s a good market for monetizing land, and we are getting much more efficient in terms of how much land we need to support our $2.5 billion development activity which is good.

Hi, guys, thanks a lot for taking the question. I was wondering - and this piggybacks on an earlier question - we know that Mexico is obviously a small part of the business today, but has there been any change in your thinking around your land positions there just vis-a-vis a longer-term outlook for the business? And, if not, what would it take to change your view?

Rob, this is Gene; let me take that one. So in terms of what's going on with Mexico, let me start with what we see happening on the ground. So demand is still very strong in the population centers; I would say customers on the border are a little bit hesitant right now for obvious reasons but turning to your question on land, Hamid just addressed this question. Overall we feel very good about the progress we've made. We probably have too much land in places like Houston and Mexico absolutely stands out as one of those markets. We have some land in Mexico which is in the bucket and needs time to take some to grind through, but we also have some very well-positioned land in population centers and I think what we're actually going to monetize through development a fair amount of that over the next couple years. So I don't think the composition of that land bank is; the magnitude of it is too large but the composition of the land bank is in the places that we'd like it to be, so I don't think we’re going to change strategy there.

The value of the land bank is Mexico City and Monterey; the acreage maybe in the border cities, but the value of the land is in Mexico City and Monterey. And I would tell you there's a shortage of quality land in Mexico City; absorption and development has exceeded our expectations and actually rental growth in peso has been tremendous even throughout all this talk about bad things happening to Mexico; the issue is that the currency has been weak. So I would guard distinction between the land markets, consumer markets, and the border markets. The border market yes, the acreage is high but the value of that land is not that much.

Yes, hi. I was wondering, are you expecting any cap rate movements in 2017? And have you made any changes to underwriting for acquisitions in particular?

Michael, we haven't been active acquirers in quite some time. Our volume of acquisitions in 2016 was one of the lowest it's been. So we've been saying that cap rates are too low for a long time and we keep getting surprised that they go lower. One thing I will tell you about cap rates, I don't think they are as sensitive, at least in the private market, to interest rate movement as the public markets think they are. So, you know, in the trade there’s some talk of interest rates going up in REIT selloff, and six months later they come roaring back. The private market is a lot less volatile with respect to those cap rates, and our portfolios have been consistently selling in the marketplace at values that are in excess of our internal NAVs. In fact, non-strategic asset sales, which is mostly what we've been doing, there's been about a 5% surprise across the board for us compared to our internal carrying values. And this is the lowest quality portion of our portfolio. So we've been wrong and we've been surprised on cap rates being low and lower than what we think. What will happen in the future I think is a function of how much interest rates do actually increase. Remember, cap rates were about the same place that they have been, but interest rates are 250 to 300 basis points lower today than they were back in 2007. So there's nothing that says cap rates have to go up if 10-year treasuries get to 4% or something like that. So I don't know but so far we've had declining cap rates in the recent past as opposed to an increasing cap rate.

Thanks, guys. Your European exposure as percent of your NOI got 17% and I just wondering if you could talk about what you see happening as far as the scenario go, you kind of did this earlier in the call with U.S. but there's a lot of very big important elections coming up in Germany, France, the Netherlands, etc. And maybe we know the rise in this sort of Eurosceptic protectionist regimes across those countries have gained popularity in earnest. And I just wondering if you guys have thought all about what would happen if those parties got into power and if so, what would have into either the euro currency, the impact on your businesses or your tenants, commerce, and general over there, any thought would be helpful.

The good thing about our business, Neil, is that nobody leases warehouse space because they like to do something fancy. They lease warehouse space because necessities of life go through warehouses. And I don't see people eating less food, less apparel, or less toilet paper because of the politics of the country. I think the best recent example of that was Brexit; I mean there was all this brouhaha, but Brexit didn't kill demand in the U.K. and we're 99. something leased in the U.K. and we had probably the best six-month run in the U.K. that I can ever remember. So some of these things kind of don't follow conventional wisdom of the sky falling, and I don’t have any particular views on currency, but we run our business in a currency agnostic way; that's why we're 92% in U.S. dollars and that's why we hedged a year or two of earnings ahead of time because we don't - we're not better than anybody else in predicting currency. But we run our business in a manner where we're, in effect, hedged against those kinds of risks. So, I think as long as consumption continues in Europe - and it is the world's largest market with 375 million people may be chopped up into smaller pieces, but those people are still there consuming regardless of what their politics are. I feel pretty good about Europe.

Neil, let me just share sort of our base case, I mean we've basically got an up arrow on Europe today and if you just look at what's happening on the ground, this quarter Europe again up 60 basis points. And the big gains actually came in our weaker, I would say, regions; Southern Europe which is trending up to 95.5% occupied and Central and Eastern Europe which trended up to 96.5% occupied. The other place where we made gains is another place that we are struggling less than a hundred thousand square-foot basis. Again we went up by 240 basis points up to 93% occupied today. We've had four quarters of positive rental change. And as Hamid mentioned earlier we're expecting a cap rates to moderate, so our view is that rents are going to continue to increase. So that's sort of our forward forecast; our expectation for the next several years. Our expectation is that you are going to see a tail end.

This is Dick here with Dave. A lot of my questions have been asked already. But, real quickly, with regards to your 2017 occupancy guidance, this is about 100 basis points lower than where you ended the year. Is this conservative or are you seeing something specifically, given where 2016 ended?

No, nothing particularly; I think there is some level of conservatism in that number. I would expect us to probably be a little higher, but I think what's more important is what drives NOI as you all know is average occupancy and average occupancy is what we expect to be very similar year-over-year.

Thanks. I just wanted to get back to land for a second. Can you guys talk about land prices in general? It seems like we've seen a major increase in most of the primary markets thus far this cycle. So, do you think further increases in land pricing are possible? And how have the increased prices influenced your ability to, number one, purchase land in your targeted markets and submarkets, and, number two, continue to achieve the expected yields on those developments?

Blaine, this is Mike Curless. If you think about our land portfolio we've mentioned this a couple of times here recently, but we view our portfolio to be at least 17% undervalued, and we're certainly seeing land prices uptick particularly in the larger global markets, but we're also seeing rents higher in those markets, which justify higher land prices. So we're selected as ever. Our primary acquisitions are expenses of our existing parks and those sites that we think we can turn through in two to three years. So we're being very selective on what we buy and there's a market out there for us to be successful in this environment.

Thank you for the follow-up. I can understand the confusion regarding the land question. I was wondering if you could provide some insights about the increasing attention in the media towards 3D printing and automation beginning to enter supply chains. Although it's still in the early stages, I would appreciate it if you could discuss some examples from your customers regarding this technology and what you foresee in the future. Thank you.

I believe 3D printing is a significant technology that aligns well with automation and localized manufacturing. Many people mistakenly think that 3D printing eliminates the supply chain, but the materials required for it still need to come from somewhere and have their own supply chain. Therefore, I don't believe it will greatly impact the demand for industrial real estate. In fact, since 3D printing involves less bulk and focuses on mass customization and localized production, it necessitates a more complex supply chain. Competing with the pricing of mass production, especially with the advent of automation, will be challenging for most products using 3D printing. I see it as a fantastic tool for innovation and prototyping, but not particularly suited for mass production. It's worth noting that 3D printing isn't new; it's been around for a long time. I recall visiting an MIT campus in 1986 where they were using it to print car models that previously required clay. This technology has been evolving and improving continuously.

Hi. Just a quick question. Any particular reasons why the investment capacity went down from $3.1 billion/$3.2 billion to $2.6 billion this quarter?

That's been capacity - we have stopped trying to raise funds as long as we have uninvested funds and queues, and as we work down those funds we'll go raise somewhere on capital. It's not a real issue, I mean we will raise capital when we need to invest capital when there are deployment opportunities.

Also, there is a timing lag just between the redemption that we've done and just normal capital raising; that part of the cyclical nature of that.

We actually reduced our share in our funds and allowed some of the accused to invest in our funds as a way of satisfying those kits.

It's Jordan Sadler. I just wanted to get a little clarity here on the view on Europe, if you could. First, what's driving the confidence here on Europe? And how can you tilt the portfolio to be a little bit better positioned to capitalize on the opportunity you see coming?

So I think our European portfolio is really well-positioned; I mean we've spent a lot of time in an effort on cleaning up our European portfolio in the last couple of years and I think it's really well-positioned, and it's a solid. It's by far the best portfolio in Europe. So I think we're extremely well-positioned to benefit from that. I think the lagging part of Europe if you’re going to pick on one place, it's France and I think we're about to see some major political changes in France. So I think that will help our French portfolio, particularly our Paris portfolio which has been lagging. That was the last question. So I really appreciate everyone's interest in the company and look forward to seeing you next quarter, not sooner. Thank you.