Welcome to the Prologis Q3 Earnings Conference Call. My name is Emily, and I'll be your operator for today's call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. Also note this conference is being recorded.
I'd now like to turn the call over to Tracy Ward. Tracy, you may begin.
Thanks, Emily, and good morning, everyone. Welcome to our Q3 2018 conference call. The supplemental document is available on our website at prologis.comunderinvestorrelations. 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 Coa 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 ks or SEC filings. Additionally, our Q3 results, 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. This morning, we'll hear from Tom Olinger, our CFO, who will cover results and guidance and then Hamid Moghaddam, our Chairman and CEO, who will comment on the company's outlook.
Gary Anderson, Clint Caton, Mike Curless, Ed Nekritz, Gene Riley and Colleen McEwen are also here with us today. With that, I'll turn the call over to Tom and
we'll get started. Thanks, Tracy. Good morning and
thank you for joining our Q3 earnings call. First, I'll start with an update on our $8,500,000,000 acquisition of DTT. Our financial and operating results reflect this mid quarter transaction, which closed on August 22. The integration went exceptionally well and is complete, and we've refinanced the $1,800,000,000 of debt we assumed in the transaction at an average interest rate of 2.4 percent and a term of over 13 years. We've already met our expected annual synergies run rate of $80,000,000 with the vast majority of that in cash savings.
Now our focus is on realizing incremental $40,000,000 of future annual value creation from development and revenue synergies. Turning to market condition, fundamentals remain healthy and well located space continues to be in high demand. There were several notable bankruptcies announced recently and our exposure to these firms is minimal. These customers lease from us about less than 30 basis points of our net effective rent. We've been monitoring these companies for some time and are confident we'll be able to quickly lease up any spaces we get back from these customers at higher rents, given they are approximately 10% below market.
Broadly, we feel very good about our business. Market rents across our portfolio are growing in line with our forecast with Europe slightly ahead. Switching to results. CoreFO, FFO for the Q3 was $0.72 per share. Our share of cash same store NOI growth was 5.9%, led by the U.
S. At 7.1%. Our share of net effective rent change on the roll was more than 22% and was also led by the U. S. At over 30%.
Occupancy was up more than 120 basis points year over year to 97 point percent with Europe at 98%, up 2 60 basis points over the same period. Leasing volume totaled approximately 37,000,000 square feet with an average term of more than 5 years. This includes 5,300,000 square feet in development leasing. Development stabilizations in the 3rd quarter had an estimated margin of 36%, bringing our year to date total value creation to $475,000,000
So far
this year, we've realized $329,000,000 in gains on the monetization of development projects. Disposition and contribution activity in the quarter was approximately $460,000,000 As previously announced, we closed a $1,100,000,000 sale of the Maple Tree in early October with our share of the proceeds totaling over $600,000,000 We expect to close the 2nd phase of this transaction totaling $170,000,000 by year end. During the quarter, we reduced our weighted average interest rate to 2.7% and extended our weighted average term to 6 years through the issuance of long duration tenors up to 30 years. Our balance sheet remains one of the best in the business, and we continue to access capital globally at attractive terms. Our $3,500,000,000 of liquidity and over $6,000,000,000 in potential fund rebalancing allow us flexibility to self fund our development well into the next decade.
This substantial amount of dry powder positions us to capitalize on attractive employment opportunities as market dislocations arise. Looking forward, I know many of you are looking for 2019 guidance, but you'll have to wait until our Q4 call as this is our normal practice. For 2018 guidance, I'll cover the highlights on our share basis. So for complete detail, refer to Page 5 of our supplemental. Also note our guidance includes the impact of the DCT acquisition.
We're maintaining the midpoint of our cash same store NOI range of 6.5%. For net promote income, we're forecasting approximately $0.05 per share in the Q4 and $0.13 for the full year. Our share of net deployment proceeds at the midpoint remains unchanged at $350,000,000 We are narrowing the range of our 2018 core FFO between $3.01 $3.03 per share.
To put this in context, when
we laid out our 3 year plan at our investor form in November 2016, we call for 7% to 8% annual growth, excluding promotes. At the midpoint of our 2018 guidance, we'll have averaged 9 point 3 percent for the 1st 2 years, far exceeding this plan. Importantly, this will be achieved while completing the realignment of our portfolio and reducing our leverage by almost 500 basis points. With that, I'll turn it over to Hidin.
Thanks, Tom. I'll keep my remarks brief as our results were once again strong and straightforward. I'd like to address 4 key areas. First, I know many of you are focused on topics of trade, tariff and retailer bankruptcies, which have dominated the news lately. As you might imagine, we're keenly focused on these potential risks as well.
But to date, we've seen no measurable impact on our business. Sure, if we search real hard, we can point to 1 or 2 companies who backed out our lease negotiations in the U. S, but the impact of those isolated cases was negligible in the In fact, our latest forecast for the U. S. This year has revised up net absorption by 15% to 260,000,000 square feet.
Completions in 2018 will fall short of demand for the 9th consecutive year, this time by an estimated 10,000,000 square feet. 2nd, I want to talk about Europe, which remains a bright spot for us. Our markets in Continental Europe are strong and getting stronger. Vacancies are at historic lows, customer sentiment is improving and escalating replacement costs are driving up rental rates. In spite of somewhat moderating rents in the UK, overall rent growth in Europe for the 1st 3 quarters has already made 2019 the strongest year in more than a decade.
Looking to 2019, there's a real possibility that market rent growth in Europe could overtake that of a very strong U. S. Market, which is great news for us in terms of continued same store growth well into the next decade. 3rd, our multi year disposition plan is not complete. Since the Prologis A&B merger in 2011, we sold more than $14,000,000 in non strategic assets and we invested the proceeds into acquisitions and developments, the combination of which increased our percentage of holdings in global markets from 79% to approximately 90% today.
I'm very proud of our team who worked tirelessly to accomplish this long term objective. As a result, our portfolio has never been in as good a shape as it is today. While we realize the benefits of this high quality portfolio in the good times, the real differentiation will become apparent in tougher market environments. 4th, as we close this chapter in our company's evolution, we enter a new era where we can capitalize on the tremendous benefits that come from scale. These benefits include one of the lowest cost of capital in the industry, unparalleled purchasing power, the most streamlined and efficient organizational structure, an intense focus on customer service, the ability to invest in innovation and technology and down the road the opportunity to capitalize on proprietary data opportunities all for the benefit of customers.
We worked hard to create these advantages and look forward to putting them into action to create value well beyond the NAV of our underlying real estate. Emily, let's open the call to questions.
Thank you.
And our first question comes from the line of Craig Mailman from KeyBanc Capital Markets. Your line is open.
Hi, guys. I know this question has kind of been asked in the past, but just given where retention rates were this quarter, I think the highest in the past 2 years, along with your commentary about the focus on proximity, Just curious updated thoughts here on the tenant's ability to absorb further increases, how hard your team is pushing. I guess I'm just surprised that you're able to push 11% cash run spreads and still keep 82% of tenants. So maybe just an update on the environment and maybe where the mark to market is and how you guys feel that's trending?
Look, the markets are really strong and that's why we're getting these increases. Get a little spooked. And when they go shop the market, they tend to come back and get a little spooked. And when they go shop the market, they tend to come back and renew their lease because what we told them was an indication of where the market was. So we're doing our best to push down retention, but obviously not hard enough.
So we'll work harder in future quarters.
Our next question comes from the line of Jeremy Metz from BMO Capital Markets. Your line is open.
Hey. Sticking with rents and your comments about Europe accelerating and could actually maybe pass the U. S. Next year, I was wondering if you guys can give a little more perhaps market specific color on where you're seeing the most acceleration in Europe and diversely where in the U. S.
You're starting to see things moderate the most? And then in terms of the continuing trade fight here that we're seeing with China, are you starting to see any impact from your tenants, particularly on the West Coast where you have more of that importer exposure?
So I don't know why that statement led to the conclusion that actually we've seen in a couple of notes that have been published that just because we think Europe is going to do really well on a relative basis, that means the U. S. Is going to do less well. That wasn't our intent. The U.
S. Is doing extremely well. Europe was later in recovery and has more to recover and we're getting it more all at once we think in 2019. 2018 was really the turning point for Europe and we just see that spread accelerating going forward. We fully expect the U.
S. To continue to be a strong market. And as I mentioned in my prepared remarks, we haven't seen really other than 1 or 2 tenants, and we sat around this table and thought really hard about the examples that we could come up with for you guys. But we could come up with 2 that were possibly customers that decided not to go forward with the leases because of potential trade wars. Now put that in the context of 2 89 leases that we signed last quarter.
In the U. S. Only. In the U. S.
Only. So it's really irrelevant. I mean, I can think of 20 other reasons why tenants stopped negotiating or drop out of a negotiation. And certainly, the trade stuff has not yet in any way translated to any action on the ground that we can tell.
Our next question comes from the line of Steve Sakwa from Evercore ISI. Your line is open.
Thanks. Good morning. Haneet, I was hoping you could maybe just talk a little bit about the development business. And given the rise in import prices and steel and concrete, I'm just curious how you're looking
at the development business today and whether you feel like that volume could accelerate into next year?
I don't think the volume will accelerate into next year, but give us another quarter to really refine our numbers and come back to you on that. We're not really ready to talk about that. But when we talked about our thesis for rent growth many years ago now, a lot of it was recovery from obviously the global financial crisis. But if you may remember and you will remember
because you were there, we
that are going to provide an umbrella for pricing product and that's happening right now. Construction costs have been going up at double digit rates in the U. S. We don't like it, but it translates into higher rents. And as you can see from our margins, they're roughly double.
The margins on completions is double the margins on starts because as good a job as we try to do on figuring out what margins are on starts, we've been surprised by rental growth beyond our projections. And to be perfectly candid, more cap rate compression than we ever hoped for. So, so far, the construction costs are not affecting margins or development decisions.
Our next question comes from the line of Manny Korchman from Citi. Your line is open.
Hey, guys. Hamid, if we respect to sort of tenant discussions, have there been any changes in the pace of leasing, especially for developments or spec developments and the time that it's taking tenants to make decisions on whether to take a spot or not?
Manny, this is Gene. That's a very good question. So we track the time it takes from when we commence the conversation with a customer through the entire leasing process to completion and there's 4 steps and I won't get into the details. But basically that time frame, let's call it, it's about 46 days at this point and it has stayed relatively stable over time. So that's something we watch really carefully.
How long is the gestation period for a deal? So, so far so far no change to it.
Our next question comes from the line of Jamie Feldman from Bank of America Merrill Lynch. Your line is open.
Great. Thank you. Good morning. So I just wanted to focus on the guidance. So if you add up the other assumptions from the press release, it looks like those items add up to about a net almost a penny of higher guidance.
So I'm just curious like was there what was the offset or the drag that kind of kept your number as it is? And then also as you think about the DCT integration, can you just talk about things that were better than you expected, things that were worse than you expected as you put the 2 portfolios together?
Yes. So Jamie, this is Tom. So on your first question on the guidance, I think when you think about guidance, you need to look at it for the full year. We've increased guidance meaningfully over the full year, both on core and on promotes. As we get into the back half of the year, particularly Q4, we've got very little roll.
So your ability to move that number with higher market rents and the like is limited. As it relates to DCT, we hit our synergies right on the mark. We did outperform on the cash piece of interest, but when you look at actually what's running through the GAAP income statement, we were again right on the mark. So we feel good about hitting those synergies and particularly how well and quickly we've integrated the portfolio.
Yes, we also had about $0.60 of extra, if you will, what do you call it, severance and other charges related to some turnover, which was anticipated on plan for. So actually, I think we did better than we thought we would do. And if we didn't have that, we would do even better than that.
Our next question comes from the line of Ki Bin Kim from SunTrust. Your line is open.
Hey, guys. Can you provide an early glimpse into some of your big data initiatives and some
of the services you're trying to develop for your customers and how
you see that evolving and perhaps impacting your business over time?
Yes, too early to talk about the data stuff. That's more of a 3 to 5 year thing. We're working right now on revenue management as the first initiative for big data. And On that one, we'll have something to talk about early next year. But on the other initiatives for customers, let me ask Gary to talk about some of those.
Yes. So Ki Bin, we had set up a procurement organization and I think we discussed this in
the past and that is up
and running today focused both on sort of G and A, OpEx and CapEx activities. We're also focusing on our construction supply chain. So taking advantage of the sort of $2,000,000,000 plus in hard cost spend. And what we're looking at now is to really support our customers, particularly the smallest customers relative to their pain points. So anything that they need with respect to moving into a facility, we're looking at providing.
And we're really in the process right now of rolling out an MVP product and testing it in a couple of markets. More to follow, I think, next year though with respect to what that really means with respect to earnings and revenues.
Our next question comes from the line of Vikram Malhotra from Morgan Stanley. Your line is open.
Thanks for taking the question. Just sticking to sort of rent growth, and this is really maybe a 6 month year sort of question. You talked about the 1st leg being recovery, 2nd megabit essentially being the higher costs. I wanted to get a bit more color on your rent growth versus market assumes no market rent growth, but it also assumes that logistics as a percent of the real estate as a percent of supply chain or real estate as a percent of supply chain does not really change. Can you talk about if you were able to see more efficiencies, whether it's transport or warehouse operations, how could that rent growth spectrum be elongated?
Just give us some sense of any sensitivities you may have done or any?
So Vikram, that's an excellent question. And I really invite you to go look at the last three papers that Chris Caton and his team have put out because that's really the heart of the question that we try to answer in those. And I'm not going to do it justice. But fundamentally, 3% to 5% of supply chain costs are warehouse rents. And obviously, there are lots of savings because of e commerce, you're eliminating some retail events, not everything is going in e commerce, but some of it is.
And over time, transportation and labor costs are probably going to go down. In the short term, they're actually going up because of oil prices and labor costs. But in the long term, they're coming down because of renewables, autonomous driving in trucks and more automation being introduced in these buildings. So we think for locations that are really, really special and that is the real close infill stuff that does not have substitute, customers can pay not 5% more, 10% more, they can pay double or triple. I mean, think of it as the old retail or retail minus type of price sensitivity, because the turnover of those spaces is really high and there's very little of them.
And by the way, they're not going to look like a traditional 36 foot clear warehouse with doors galore. I mean, they're going to be all kinds of spaces that are funky and maybe older and much more infill. And we've got lots of those in our portfolio. So on that segment, the price sensitivity is very low. It's all about service levels and serving the customer in a quick window.
So there you could have very significant doubling, tripling of rents. And we're seeing to some examples of that as we're rolling over infill spaces and as we are frankly building new multi storey infill product. The rents have been very encouraging on that. The stuff that's further out and there's more land and more competition, I think you can expect a lower normal rate of growth on that because it's not quite as scarce as the really infill stuff. So I would differentiate between those and it's not a binary thing.
It's just a continuous relationship. The closer you get to the customer and the more infill the need becomes, the less price sensitivity you have at this point in the cycle.
Our next question comes from the line of Blaine Heck from Wells Fargo. Your line is open.
Thanks. Related to that, I just wanted to get a little color on asset pricing here. It seems as though we've seen cap rates holding steady or even continuing to decrease in the infill and coastal markets, given the kind of wall of capital that continues to flow into those locations. But I'm wondering if you're seeing any markets where maybe there has been an inflection and you're seeing cap rates increase at all as interest rates have crept up recently?
Blaine, this is Mike. We're certainly not seeing any isolated in
the markets and conversely just continue to see additional cath rate compression. And in fact, we've seen some other portfolios that are out in the market. We're continuing to be very encouraged in which way pricing is going.
Our next question comes from the line of John Guinee from Stifel. Your line is open.
Okay, great. Sort of one multi phased question. First, your thoughts on Prop 13 in California. 2nd, I think you retrofitted an industrial building and delivered a powered shell for Amazon Web Services in Northern Virginia a while ago, sold it at a sub-five cap. So are you active in the data center build to suit at all?
And then 3rd, what's your current thinking on Amazon newest prototype, which I've heard is maybe 100 to 150 foot floor plate, but 120 foot vertical for their infill distribution business.
Okay. Let me try to end quickly and maybe the guys can elaborate. Prop 13, not this time, probably in the next election. We're going to get it in 2020 or 2022. I mean, at some point, that's where the money is and that's where the politicians are going to look.
So I think you probably will have a split tax roll there is my guess. In Northern Virginia, we don't really start out building data centers. We start out building our traditional office warehouse product and customers come to us because of the unique attributes of those locations and pay us a lot more rent, better credit and longer term leases and they put in all the improvements for data centers. So life's good there, but not because we're so smart, it's just because that location has some unique characteristics. And finally, on Amazon products, let me not specifically talk about Amazon, but generally you could imagine that people who need distribution space in major cities have to go more vertical to use up less land because these markets are totally out of land.
So anybody who can go multilayer and squeeze more density on a smaller piece of land is going to try going that. Mike, do you want to say anything more about that?
Yes. I mean, we're obviously staying very close to what's going on in AMSAT because they lead the market in terms of trends. We have plenty of activities underway to understand their ever changing needs and we're on top of that. And as you'd expect, we're going to be in
the middle of those discussions going forward.
Our next question comes from the line of Nick Yulico from Scotiabank. Your line is open.
Thanks. I wanted to turn back to the tariff issue. I mean, the data when
you look at it for the L.
A. Long Beach ports shows it's the most exposed to the Chinese tariff issue net import markets by a wide margin, also has more exposure to Chinese imports than the rest of the U. S. So when we think about your Southern California portfolio, your largest market, perhaps you could just dig into that regional a bit and understand how tariffs could potentially impact demand for space over the next year. I imagine and it's not an issue for the entire portfolio there, but only some portion
of it. Love to hear your thoughts. We'd love to both buy more real estate in LA. So if you think anybody is spooked by the trades and tariffs, turn them our way. We'd like to increase our position.
That is the most dynamic market in the U. S. The LA basin accounts for well over 50% of what comes into that region. And California is now the number 5 economy in the world. So we love that market.
And every day, you've got costs going up, entitlements getting tougher, real supply constraints, not just in terms of physical land, but in terms of all the other stuff hoops that you have to jump through to be able to build the building. So we love those markets.
Our next question comes from the line of Derek Johnston from Deutsche Bank. Your line is open.
Good morning out there. Could we follow-up on the densification? Could you guys talk about your multilevel warehouse strategy? Just give us an update on the lease up of your Seattle project, if you could? And how are approvals going for your project in San Fran?
And are there any updates to the 6 markets which you feel could be potentially tapped for these type of developments in the future?
Let's start from with the last one. No, our feeling is that the real opportunities in those six markets and there are a couple of other global markets we would add to that. London would be certainly one of them. Paris is the other one in Europe. And the ones in Asia that we can act on is primarily in Japan.
So limited number of markets, but a fairly substantial opportunity. The development approval process for San Francisco is a multi year process. We're going to have to go through a significant EIR process. But San Francisco does want to preserve those kinds of jobs because a lot of them have been eliminated by conversion of those buildings, PDR buildings to office space and the like. So they actually look at those kinds of living wage jobs in these buildings as a good thing.
So you can't predict these political issues, but while we wait, we're clipping a nice 5%, 6% return on that site and we'll be very patient in terms of securing the ultimate approval. It's a big project, so it's going to take a while. With respect to Seattle, the substantial completion is going to be at the end of the month and we have activities for well over 100% of the space. So I would expect by the end of the Q1, we'll be full up there at very strong rents, much stronger than we underwrote. Remember, a 3 story product, nobody's ever had experience with it.
So you really need people to see the product up and running. And if you haven't seen it, you go look at it, it's pretty impressive.
Our next question comes from the line of Tom Catherwood from BTIG. Your line is open.
Thank you. Moving over to labor for a second. In September, you guys announced a community workforce initiative in Southern California. With unemployment kind of as low as it's been in 50 years, how do you incorporate workforce capacity into your investment decisions? And are you seeing your tenants either look to different markets to gain access to labor or make additional investments in automation to make up for a smaller employee base?
Yes. So with respect to labor being an important issue, I mean, we think it's so important that we've added this section to our investment committee memos where we evaluate acquisitions and developments that covers labor availability directly. On our community workforce initiative, let me turn it over to Ed Netgritz, who's been running with that. Yes. Thanks.
So we introduced our first program, ELA, and the conversation with the customer is now about something other than rent. It's about how do we make their lives better, how do we help their jobs. And what we're doing with that is internship programs in our communities where we're developing assets, excuse me, and making sure that our customers are tied into our customers. Our customers are tied into our the labor needs and we are focused on making sure that these students, young students have the ability to get jobs in their communities, stay in their communities, create better economies for the labor in our pool where we're operating. Yes.
We're not going to set up, if you will, nonprofits all around the country to improve the labor situation. What we're really doing is finding the best NGOs that are in this business and we are supporting them with our capital and supporting them with employment opportunities following graduation and completion of the program. So it's really about bridge building and supporting it with capital. And we're quite serious about this. And I think it's a really important thing for us to do.
There's a whole other discussion about the social impact of this and limited opportunities for high school kids and all that with a lot of the traditional jobs going away. So we think it's important that we take the leadership on this initiative.
And our next question comes from the line of Michael Carroll from RBC Capital Markets. Your line is open.
Yes, thanks. Can you guys talk a little bit about your initiative to pursue more gross leases in the marketplace today versus net leases? How aggressive is Prologis in the market right now pursuing those? And what has Tenant's responses been? Have they liked the new structure of going with
the gross versus the net lead structure?
Yes. Sure, Michael. This is Jane. So the lease you're talking about, we call the clear lease, and it is effectively a gross lease structure. 100% of all leases in the United States today and in Mexico, soon in Europe, are proposed as clear leases.
So we're taking this very seriously. I think we have something like 70%, 75% adoption at this point. So we've done 100 of these leases already. And from in terms of the customer reaction, it's been overwhelmingly positive, more so than we expected. And this is and I'll touch on this.
This is really about simplifying the lives of our customers and frankly, the lives of our people who manage these properties. And so far it's going great.
I mean, it's by the way, the reason, James said almost gross leases is that the property taxes are excluded from that calculation. But in other words, the tenants get the bills for property taxes directly because we're not in a position to control those any better than they are. But if you really look at the structure of our business, it's crazy. I mean, we are asking a tenant who may have one location in one city, a 100,000 square foot small to medium sized business to underwrite for snow removal and fixing our dock levelers and fixing our air conditioning unit and all that. And really it sets up for a very adversarial situation where they gladly pay the rent, which is the big number and then we spend all our lives negotiating the nickels and nines on these little things.
We're in a much better position to underwrite those costs because we've got a big portfolio that we can spread it over and we have good purchasing power to drive economics with vendors by aggregating all this demand. So the way the business was done historically was when the industry was fragmented and the landlords had 1 or 2 buildings. I think when you get to our kind of scale, we got to put that scale to use for our customers. And ultimately, that translates into rents that ultimately flows to our investors.
Our next question comes from the line of Eric Frankel from Green Street Advisors. Your line is open.
Thank you. Just a few quick questions. First, just regarding development. Your start this quarter, margins were
a little bit thinner than what
we've seen in the last few quarters. I'm just wondering if that's a mix issue related to build to suit.
My second question is related to
G and A. Can you just comment on the severance and turnover that you have within your team? And then 3rd, I just noticed in your same store statistics, your operating expenses did increase a good amount over 5%. And so I'm just wondering if that's all real estate taxes and so wouldn't be affected by your it's a new gross lease structure. Thank you.
Hey, Eric. I'll start with your last few questions. So on the increase in expenses in the same store pool, what you're seeing is the impact of reimbursable expenses, which is both revenues and expenses. If you back that component out, I think you're going to see rents grow at around 4.5% and expenses grow like 60 basis points. So it's all reimbursement noise you're seeing run through there.
On your on the G and A question, it was really, as Sameet mentioned, we have done some restructuring and making some investments in personnel around technology. And as a result, we were bringing in people and some people have left and you're seeing those expenses go through. And that would be the main component of the G and A.
Yes, I'm not going to get into the details of our personnel decisions on an audience call, that's for sure. With respect to margins, Eric, I'll take mid-30s margins every day and we thank our blessings. We go into this stuff thinking that we're going to get 15%. So the fact that we're getting more than double that is good news and I can't possibly see how that could be anything other than good news. And but it's not going to last forever.
I mean, the margins of this business have to be have historically been in the low to mid teens. And that's what we're assuming in our all our activity and that's how we're underwriting stuff and to the extent we get better than that, we're blessed.
Our next question comes from the line of Michael Mueller from JPMorgan. Your line is open.
Yes. Hi. If the market rent growth in Europe does go ahead of the U. S. Next year in 2019, how long until the same thing happens with rent spreads and NOI growth?
A while, because you need many years of rental growth to create that spread. The mark to market in Europe, I think the last time I looked at is around 10%, it's 9% or 10%. And obviously, it's in the high teens in the U. S, what is it, 18% or something? 19%.
19%. So the U. S. Is double what Europe is and you need to have a couple of years of pretty steep rental growth that are not being captured by the rollover of leases to widen that wedge. So a while, I don't know, I haven't done the math, but a while.
Our next question comes from the line of Manny Korchman from Citi. Your line is open.
Just thinking about dispositions, especially in light of the DCT deal, should we expect disposition volumes to increase next year because you have those assets within DCT that you want to sell? Or do you think that, that pace will be consistent with what you've done over the last couple of years? So, Manny, as I mentioned in my prepared remarks, in the last 7 years since the merger, we sold $14,000,000,000 of real estate. That's $2,000,000,000 a year or $500,000,000 a quarter. And we've talked about DCT being $560,000,000 of non strategic assets.
We are in no hurry to do that. And at our historical pace, that's a quarter's worth of work. So it's not at all a big deal, but we're not in a hurry to do that. As far as we're concerned, the big strategic part of the disposition program is done and over with, with the Maple Tree transaction, call 1% to 2% of a $90,000,000,000 portfolio, you could have $1,000,000,000 to $2,000,000,000 of sales every year, and we're certainly going to do that in the normal course of action business. When somebody comes to us and offers a user comes to us and offers a price that we can't refuse or the person next door wants to control our site at the premium price, there are always going to be opportunities to call the portfolio profitably and we'll be always looking out for that.
But that's sort of different than a non strategic disposition program. That program has come to an end.
Our next question comes from the line of David Harris from UniPlan. Your line is open.
Hi, good day everybody. It's not clear at the moment whether we're going to get a hard Brexit or a soft Brexit. Could you just explain how you're positioned around this and what your contingency planning? And also, if we do get a hard Brexit next spring, would that affect your view that Europe will be as positive as you first outlined?
Well, yes, I wish I knew all those answers with precision. I mean, I don't know. Our UK portfolio is in the high 90% lease. The average lease term in the UK is well over 10 years. The credit is exceptional.
As you know, particularly, the UK is a tough place to get entitlement and processing land is a multiyear exercise. So we think the and the UK has been on fire. Literally, I would put UK right on top of the list since the global financial crisis in terms of rent recovery and performance compared to the best of the best markets in the U. S, I mean, L. A, San Francisco and all that, you would expect that to moderate at some point.
I don't know if it's related to Brexit or not, but still I would take the UK as one of the best markets in Europe or anywhere. It's just not as crazy as it was a year or 2 ago. A year or 2 ago, you had Brexit that's booked up, a lot of people that were planning to put on developments and demand didn't change. So you had a very, very unusual situation that led to very big rent increases. But we're very comfortable with about the business in the UK.
David, the other side of that is just we obviously are you can see we have significant liquidity and financial capacity on our balance sheet and in our funds. So if there's an opportunity for us to take advantage of, we will certainly
do that. I don't think we'll get that chance.
Our next question comes from the line of Eric Frankel from Green Street Advisors. Your line is open.
Thank you. Just a clarification
and another follow-up question. Just around development, Ombre is referring to development start this quarter. So I think you have development profit margins of 17%, which is, I guess, the lowest this cycle. So I'm just trying to understand how that emanating, whether it's a construction cost issue or whether it's just more competitive in terms of development environment. And then, obviously, I don't want to get too much into what guidance is going to
look like next year. But part of
the rationale for the DTT deal is that there will be better external growth opportunities related to that. So I'd assume that there would be also higher overall development volumes as a result of having a larger asset base and more opportunities to grow with your customers. So I was hoping you could remark on that. Thank you.
Okay. As you go through the cycle, a couple of things happen.
You use
up the really old low basis land at book value. And therefore, everything else being the same, your margins are going to go down because we now have used up more and more of really old basis land and you're buying more land on the margin of market. So you would expect pro form a margins to go down on starts and we're pretty conservative about those. And I don't think yes, you correctly point out that the pro form a margins on starts is the lowest it's ever been, but it's twice as big as it should be. So we don't lose a lot of sleep over that honestly.
And in every case, it's come in higher than what we perform on. So we're pretty comfortable with those. I'm not sure I got your second question second part of your question. Is it that, oh, the DTT part. Look, on DTT, you've gotten to answer your question very clearly, you would have had to have known what our development volume would have been without DTC and then you can compare it to whatever we guide to next quarter and reach your own conclusions.
But I think the easier way to do that would be just to look at the development that we're doing on the DCT land in the near term and that will give you a very good indication of the extra volume that we're doing.
Yes. So Eric, just put some numbers around that.
In 2018, we'll do about $100,000,000
more in development than we otherwise would without BCP. And then we had a land bank that supports $500,000,000 to $600,000,000 of additional development. And when we give you guidance for 2019, that will be embedded in it. How much of it will we do? I can't tell you at this point.
But for sure, it will expand the volume a bit.
Yes. And just to be clear, I mean, we feel great about the DCT deal. I mean, the only reason that we did it is that we think long term is really accretive. Actually short term and long term is very accretive to our business, and we love the quality of the portfolio. So you'll see those numbers coming through.
Our growth rate is going to be pretty good.
Our next question comes from the line of Craig Mailman from KeyBanc Capital Markets. Your line is open.
Hey, guys. Just a few follow ups. As it relates to guidance for development starts and dispositions, looks like you have some wood to chop here in the Q4. Just curious on what the pipelines look like there? And then just second, Tom, you had noted it would have been, I think, around 4.5% same store revenue growth this quarter if you pull out the reimbursable impact.
Do you have kind of how it's trended over the last 2 to 3 quarters on the same basis?
Craig, I'll take your second one first. I think we've been kind of in that zone of around 4% when you strip out. And that makes sense when you look at our rent change and what you're seeing. That would be I'll check that, but I think that's in the zone of what we're seeing. And then on your other question on starts and this build guidance, remember, we just closed in early October $1,100,000,000 Maple Tree transaction, we've got another $170,000,000 in a second phase that's right behind the federal close this year.
And the balance on so that's the disposal side and I'll let Mike address the starts. Yes. To put a finer point on that with those 2 incremental closings, we're 85 percent
of the way through the work to be done on dispositions. This time last year, we would
have been in about 60% sort of way ahead of the game there. With respect to our confidence in the DevelopmentStarz volume, we, in the last couple of years, have done approximately $1,000,000,000 in each of the 4th quarters. Our visibility to the remaining pipeline is as high as it's ever been in this quarter, and we feel very confident in our ability to give those kind of numbers through the end of this quarter.
Yes, development is always back end longest loaded into the Q4. That's the way the business works for some reason. Anyway, Craig, thank you for that question. It's the last one. And I want to thank everybody for joining our call.
Look forward to talking to you at NAREIT.
And this concludes today's conference call. You may now disconnect.