Logo of jester cap with thought bubble with words 'Fool Transcripts' below it

Image source: The Motley Fool.

Prologis, Inc. (NYSE:PLD)
Q3 2018 Earnings Conference Call
Oct. 16, 2018, 12:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

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. If you would like to ask a question during this time, please press * then the number 1 on your telephone keypad. To withdraw your question, press the # key. Also note, this conference is being recorded.

I'd now like to turn the call over to Tracy Ward. Tracy, you may begin.

Tracy Ward -- Senior Vice President, Investor Relations and Corporate Communications

Thanks, Emily, and good morning, everyone. Welcome to our third quarter 2018 conference call. The supplemental document is available on our website at prologis.com under Investor Relations.

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 in our 10-K or SEC filings.

Additionally, our third quarter 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 Moghadam, our Chairman and CEO, who will comment on the company's outlook. Gary Anderson, Chris Caton, Mike Curless, Ed Nekritz, Gene Reilly, and Colleen McKeown are also here with us today.

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

Tom Olinger -- Chief Financial Officer

Thanks, Tracy. Good morning, and thank you for joining our third quarter earnings call. First, I'll start with an update on our $8.5 billion acquisition of DCT. Our financials and operating results reflect this mid-quarter transaction, which closed on August 22nd. The integration went exceptionally well and is complete, and we've refinanced the $1.8 billion of debt we assumed in the transaction at an average interest rate of 2.4% and a term of over 13 years. We've already hit our expected annual synergies run rate of $80 million, with the vast majority of that in cash savings. Now our focus is on realizing the incremental $40 million of future annual value creation from development and revenue synergies.

Turning to market conditions, 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 give back to these customers at higher rent, given they're 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, core FFO for the third quarter was $0.72 per share. Our share of cash same store NOI growth as 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 97.5%, with Europe at 98%, up 260 basis points over the same period. Leasing volume totaled approximately 37 million square feet, with an average term of more than five years. This includes 5.3 million square feet of development leasing. Development stabilizations in the third quarter had an estimated margin of 36%, bringing our year-to-date total value creation to $475 million. So far this year, we've realized $329 million in gains on the monetization of development projects. Disposition and contribution activity in the quarter was approximately $460 million.

As previously announced, we closed a $1.1 billion sale to Mapletree in early October, with our share of the proceeds totaling over $600 million. We expect to close the second phase of this transaction, totaling $170 million, by yearend. During the quarter, we reduced our weighted average interest rate to 2.7% and extended our weighted average term to six years through the issuance of long duration tenures up to 30 years. Our balance sheet remains one of the best in the business, and continue to access capital globally at attractive terms. Our $3.5 billion of liquidity and over $6 billion in potential fund rebalances 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 fourth quarter call, as this is our normal practice. For 2018 guidance, I'll cover the highlights on an our share basis, so for complete detail, refer to page five 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 fourth quarter and $0.13 for the full year. Our share of net deployment proceeds at the midpoint remains unchanged at $350 million. We are narrowing the range of our 2018 core FFO to between $3.01 and $3.03 per share.

To put this in context, when we laid out our three-year plan at our Investor Forum in November 2016, we called for 7% to 8% annual growth, excluding promotes. And the midpoint of our 2018 guidance, we'll have averaged 9.3% for the first two years, far exceeding this plan. Importantly, this will be achieved will completing the realignment of our portfolio and reducing our leverage by almost 500 basis points.

With that, I'll turn it over to Hamid.

Hamid Moghadam -- Chairman and Chief Executive Officer

Thanks, Tom. I'll keep my remarks brief, as our results were once again strong and straightforward. I'd like to address four 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're seeing no measurable impact on our business. Sure, if we searched real hard, we can point to one or two companies who backed out on lease negotiations in the U.S., but the impact of those isolated cases was negligible in the context of our overall leasing volume. There are plenty of other customers that are waiting in line for quality space and are frustrated by the shortage of suitable options. In fact, our latest forecast for the U.S. this year has revised up net absorption by 15% to 260 million square feet. Completions in 2018 will far fall short of demand for the ninth consecutive year, this time by an estimated 10 million square feet.

Second, 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 moderate rents in the UK, overall, rent growth in Europe for the first three quarters has already made 2018 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 the very strong U.S. market, which is great news for us in terms of continued same store growth well into the next decade.

Third, our multiyear disposition plan is now complete. With the Prologis AMB merger in 2011, we sold more than $14 billion in nonstrategic assets and reinvested the proceeds into acquisitions and development, the combination of which increased our percentage of holdings in global markets from 79% to approximately 90% to date. I'm very proud of our team, who worked tirelessly to accomplish this long-term objective. As a result, our portfolio's 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.

Fourth, 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 costs 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 ability to capitalize on proprietary data opportunities, all for the benefit of customers. We've 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.

Questions and Answers:

Operator

Thank you. And at this time, if you would like to ask a question over the phone, please press * then the number 1 on your telephone keypad. We'll pause for just a moment to compile the Q&A roster.

And our first question comes from the line of Craig Mailman from KeyBanc Capital Markets. Your line is open.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Hey, guys. I know this question's kind of been asked in the past, but just given where retention rates were this quarter, I think the highest in the past two years, along with your commentary about the focus on proximity, just curious, updated thoughts here on the tenants' 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 rent spread 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?

Hamid Moghadam -- Chairman and Chief Executive Officer

Look, the markets are really strong, and that's why we're getting these increases. And not every discussion with every tenant starts out with the intention of them staying. In fact, many of them, when they hear about the new rent, 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.

Operator

Our next question comes from the line of Jeremy Metz from BMO Capital Markets. Your line is open.

Jeremy Metz -- BMO Capital Markets -- Analyst

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 conversely, 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--seeing any impact from your tenants particularly on the West Coast, where you have more of that import exposure?

Hamid Moghadam -- Chairman and Chief Executive Officer

So, I don't know why that statement led to the conclusion that -- actually we've seen only a couple notes that have been published, that just because we think Europe is gonna do really well on a relative basis, that means the U.S. is gonna 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 one or two 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 two that were possibly customers that decided not to go forward with their leases because of potential trade wars. Now, put that into context of 289 leases that we signed last quarter. So --

Jeremy Metz -- BMO Capital Markets -- Analyst

In the U.S. only.

Hamid Moghadam -- Chairman and Chief Executive Officer

In the U.S. only. So, it's really irrelevant. I mean, I can think of 20 other reasons why tenants stop negotiating or drop out of a negotiation. And certainly, the trade stuff has not yet in any way translated to any action the ground that we can tell of.

Operator

Our next question comes from the line of Steve Sakwa from Evercore ISI. Your line is open.

Steve Sakwa -- Evercore ISI -- Analyst

Thanks. Good morning. Hamid, 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.

Hamid Moghadam -- Chairman and Chief Executive Officer

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 you know, 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 remember, and you will remember, because you were there, we talked about the next leg being escalating replacement costs that are gonna provide an umbrella for pricing product. And that's happening right now. Because 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 positions.

Operator

Our next question comes from the line of Manny Korchman from Citi. Your line is open.

Manny Korchman -- Citi -- Analyst

Hey, guys. Hamid, if we take the sort of tenant discussions, have there been any changes in the pace of leasing, especially for development or spec developments and the time that it's taking tenants to make decisions on whether to take a spot or not?

Gene Reilly -- Chief Executive Officer, The Americas

Hey, Manny. This is Gene. That's a very good question. So, we track the time it takes from when we commence a conversation with a customer through the entire leasing process to completion. And there's four steps, and I won't get into the details. But basically, that timeframe is -- 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, you know -- so far, no change to it.

Operator

Our next question comes from the line of Jamie Feldman from Bank of America Merrill Lynch. Your line is open.

Jamie Feldman -- Bank of America Merrill Lynch -- Analyst

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, 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 two portfolios together?

Tom

Yeah. 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.

Hamid Moghadam -- Chairman and Chief Executive Officer

Yeah. We also had about $0.60 of -- not $0.60. $0.06 of extra, if you will, what do you call it -- severance and other charges related to some turnover, which was anticipated and planned 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.

Operator

Our next question comes from the line of Ki Bin Kim from SunTrust. Your line is open.

Ki Bin Kim -- SunTrust -- Analyst

Hey, guys. Hey, Hamid. Can you provide an early glimpse into some of your big data initiatives and some of those services you're trying to develop for your customers, and how you see that evolving and perhaps impacting your business over time?

Hamid Moghadam -- Chairman and Chief Executive Officer

Yeah. Too early to talk about the data stuff. That's more of a three to five-year thing. We're working right 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.4

Gary Anderson -- Chief Executive Officer, Europe and Asia

Yeah. So, Ki Bin, we have set up a procurement organization -- and I think we've discussed this in the past -- and that is up in running today, focused both on sort of G&A opex and capex activities. We're also focusing on our construction supply chain. So, taking advantage of the sort of $2 billion-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 point. 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.

Operator

Our next question comes from the line of Vikram Malhotra from Morgan Stanley. Your line is open.

Vikram Malhotra -- Morgan Stanley -- Analyst

Thanks for taking the question. Sticking to sort of rent growth -- and this is really maybe a six month and year sort of question -- you talked about the first leg being recovery, second leg of it essentially being the higher cost. 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? If you can give us some sense of any sensitivities that you may have done or any end work?

Hamid Moghadam -- Chairman and Chief Executive Officer

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 gonna 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 rents. Not everything's going e-commerce but some of it is. And over time, transportation and labor costs are probably gonna go down. In the short-term, they're actually going up because of oil prices and the 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 substitutes, customers can pay not 5% more or 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 turn of those spaces is really high, and there's very little of them. And by the way, they're not gonna look like the traditional 36-foot clear warehouse with doors galore. I mean, they're gonna be all kinds of spaces that are funky and maybe older ,and much more infill. And we 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 extent examples of that as we're rolling over in those spaces, and as we are frankly building new multistory 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.

Operator

Our next question comes from the line of Blaine Heck from Wells Fargo. Your line is open.

Blaine Heck -- Wells Fargo -- Analyst

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. So, 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.

Mike Curless -- Chief Investment Officer

Hey, Blaine, this is Mike. We're certainly not seeing any isolated markets, and conversely, just continue to see additional cap rate compression. And in fact, seeing some other portfolios that are out in the market, we continue to be very encouraged in which way pricing's going.

Operator

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

John Guinee -- Stifel -- Analyst

Oh, OK, great. Sort of one multi-phased question. First ,your thoughts on Prop 13 in California. Second, I think you retrofitted an industrial building and delivered a powered shelf for Amazon web services in Northern Virginia a while ago, sold it as sub five cap. So, are you active in the data center build to suit at all? And then third, what's your current thinking on Amazon's newest prototype, which I've heard is maybe 100 to 150-foot floor plate, but 120 foot vertical, for their infill distribution business?

Hamid Moghadam -- Chairman and Chief Executive Officer

Hey. Let me try to hit them quickly, and maybe the guys can elaborate. Prop 13, not this time -- probably in the next election. We're gonna get it in 2020 or 2022. I mean, at some point, that's where the money is, and that's where the politicians are gonna 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 just start out building our traditional office warehouse product, and customers come to us because of the unique attributes to 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 prototypes, let me not just 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 gonna try doing that. Mike, do you want to say anything more about that?

Mike Curless -- Chief Investment Officer

Yeah. I mean, we're obviously staying very close to what's going on with Amazon because they lead the market in terms of trends. We have plenty of activity under way to understand their ever-changing needs, and we're on top of it. As you'd expect, we're gonna be in the middle of those discussions going forward.

Operator

Our next question comes from the line of Nick Yulico from Scotiabank. Your line is open.

Nick Yulico -- Scotiabank -- Analyst

Thanks. I wanted to turn back to the tariff issue. I mean, the data when you look at it for the LA Long Beach Port 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 and the rest of the U.S. So, when we think about your Southern California portfolio, your largest market, perhaps if 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 it's not an issue for the entire portfolio there, but only some portion of it? Love to hear your thoughts.

Hamid Moghadam -- Chairman and Chief Executive Officer

We'd love to buy more real estate in LA. So, if you think anybody's 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 base accounts were well over 50% of what comes in to that region. And California is now the number five economy in the world. So, we love that market, and every day, you got costs going up. Entitlements are 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 a building. So, we love those markets.

Operator

Our next question comes from the line of Derek Johnston from Deutsche Bank. Your line is open.

Derek Johnston -- Deutsche Bank -- Analyst

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 our approvals going for your project in San Fran.? And are there any updates to the six markets which you feel could be potentially tapped for these type of developments in the future?

Hamid Moghadam -- Chairman and Chief Executive Officer

Let's start 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 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 gonna have to go through a significant EIR process, but you know, 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 in 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 gonna take a while.

With respect to Seattle, substantial completion is gonna 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 first quarter, we'll be full up there at very strong rents, much stronger than we underwrote. Remember, a three-story product, nobody has ever had experience with it, so you really need people to see the product up and running. And if you haven't seen it, I would encourage you to go look at it. It's pretty impressive.

Operator

Our next question comes from the line of Tom Catherwood from BTIG. Your line is open.

Tom Catherwood -- BTIG -- Analyst

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?

Hamid Moghadam -- Chairman and Chief Executive Officer

Yeah. So, with respect to labor being an important issue, I mean, we think it's so important that we've added a section to our investment committee memos where we value the acquisitions and developments that covers labor availability directly. On our community workforce initiative, let me turn it over to Ed Nekritz, who's been running with that.

Ed Nekritz -- Chief Legal Officer and General Counsel

Yeah, thanks. So, we introduced our first program in LA, 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 in to our customers -- our customers our tied in with 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 and our pool over operating.

Hamid Moghadam -- Chairman and Chief Executive Officer

Yeah. We're not gonna 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 our 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.

Operator

And our next question comes from the line of Michael Carroll from RBC Capital Markets. Your line is open.

Michael Carroll -- RBC Capital Markets -- Analyst

Yeah, thanks. Can you guys talk a little bit about your initiative to pursue more gross leases in the marketplace today versus the net leases? How aggressive is Prologis in the market right now of pursuing those, and what have tenants' responses has been? Have they liked the new structure of going to gross versus a net lease structure?

Gene Reilly -- Chief Executive Officer, The Americas

Yeah, sure. Michael, this is Gene. 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 hundreds of these leases already. And in terms of the customer reaction, it's been overwhelmingly positive; more so than we expected. And just to 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, so far, it's going great.

Hamid Moghadam -- Chairman and Chief Executive Officer

I mean -- by the way, the reason Gene said almost gross leases is that the property taxes are excluded from that calculation. But in other words, the tenants get the bills from property taxes directly because we're not in 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 units, and all that. And really, it sets up for 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 dimes of these little things.

We're in a much better position to underwrite those costs because we've got a big portfolio though 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 one or two buildings. I think when you get to our kind of scale, we gotta put that scale to use for our customers. And ultimately, that translates into rents that ultimately flows to our investors.

Operator

Our next question comes from the line of Eric Frankel from Green Street Advisors. Your line is open.

Eric Frankel -- Green Street Advisors -- Analyst

Thank you. Just a few quick questions. First, just regarding development, your start this quarter, margins were a little bit better than what we've seen in the last few quarters. So, I'm just wondering if that's a mix issue related to build to suit. My second question is related to G&A. Can you just comment on the severance and turnover that you had within your team? And then third, I just noted 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 -- the new gross lease structure? Thank you.

Tom Olinger -- Chief Financial Officer

Hey, Eric. I'll start with your last two questions. So, on the increase and expenses in the same store, well, what you're seeing is the impact of reimbursable expenses, which hit both revenues and expenses. If you back that component out, I think you're gonna 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 the G&A question, it was really -- as Hamid mentioned, we've done some restructuring and making some investments in personnel around technology. And as a result, we're 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&A.

Hamid Moghadam -- Chairman and Chief Executive Officer

Yeah. I'm not gonna get into the details of our personnel decisions on an earnings 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 gonna 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. But it's not gonna last forever. I mean, the margins in this business have to be -- have historically been in the low to mid-teens, and that's what we're assuming in all our activity, and that's how we're underwriting stuff. And to the extent we get better than that, we're blessed.

Operator

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

Michael Mueller -- JPMorgan -- Analyst

Yeah, 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 rents spreads and NOI growth?

Hamid Moghadam -- Chairman and Chief Executive Officer

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 it is around 10%. It's 9% or 10%. And obviously, it's in the high teens in the U.S. What is it, 19% or so? 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, you know, a while. I don't know. I haven't done the math, but a while.

Operator

Our next question comes from the line of Manny Korchman from Citi. Your line is open.

Manny Korchman -- Citi -- Analyst

Hey, just thinking about the dispositions discussion in light of the DCT deal, should we expect disposition volumes to increase next year because you have those assets within DCT you want to sell, or do you think that pace will be consistent with what you've done in the last couple of years?

Hamid Moghadam -- Chairman and Chief Executive Officer

So, Manny, as I mentioned in my prepared remarks, in the last seven years since the merger, we sold $14 billion of real estate. That's $2 billion a year, or $0.5 billion a quarter. And we've talked about DCT being $560 million of nonstrategic 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 Mapletree transaction, the last one that we announced, and its subsequent phase. And of course, even if you turn over and cull 1% to 2% of a $90 billion portfolio, you could have $1 billion to $2 billion of sales every year, and we're certainly gonna 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 gonna be opportunities to cull the portfolio profitably and we'll be always looking out for that. But that's sort of different than a nonstrategic disposition program. That program has come to an end.

Operator

Our next question comes from the line of David Harris from Uniplan. Your line is open.

David Harris -- Uniplan -- Analyst

Hi, good day, everybody. Hey, 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 you're 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?

Hamid Moghadam -- Chairman and Chief Executive Officer

Well, yeah. I wish I knew all those answers with precision. I mean, I don't know. Our UK's 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 entitlements, and processing land is a multiyear exercise. So, we think the -- and the UK has been on fire. Literally, I would put the 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, LA, 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 no. 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 two ago. A year or two ago, you had Brexit that spooked off 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 about the business in the UK.

Gene Reilly -- Chief Executive Officer, The Americas

David, the other side of that is just, we obviously -- 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.

Hamid Moghadam -- Chairman and Chief Executive Officer

I don't think we'll get that chance.

Operator

Our next question comes from the line of Eric Frankel from Green Street Advisors. Your line is open.

Eric Frankel -- Green Street Advisors -- Analyst

Thank you. Just a clarification and another follow-up question. Just regarding development, I'm just referring to development start this quarter. So, I think you have development profit margin of 17%, which is, I guess, the lowest this cycle. So, I'm just trying to understand how that's 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 gonna look like next year, but part of the rationale for the DCT deal is that there would be better external growth opportunity related to that. So, I'd assume that there would be also higher overall development volume 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.

Hamid Moghadam -- Chairman and Chief Executive Officer

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 gonna 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 forma margins to go down on starts, and we're pretty conservative about those. And I don't think -- yeah, you correctly point out that the pro forma 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 then what we perform at, 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 DCT part. Look, on DCT, to answer your question very clearly, you would have had to have known what our development volume would have been without DCT, 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.

Tom Olinger -- Chief Financial Officer

Yeah. So, Eric, just to put some numbers around that, in 2018, we'll do about $100 more, $100 million more in development than we otherwise would without DCT. And then we had a land bank that supports $500 million to $600 million of additional development. And when we give you guidance for 2019, that'll be embedded in it. How much of it will we do? I can't tell you at this point, but for sure, we'll expand the volume a bit.

Hamid Moghadam -- Chairman and Chief Executive Officer

Yeah. 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, it's really accretive. Actually ,short-term and long-term, it 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 gonna be pretty good.

Operator

Our next question comes from the line of Craig Mailman from KeyBanc Capital Markets. Your line is open.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Hey, guys. Just a few follow-ups. As it relates to guidance for development starts and dispositions, it looks you have some wood to chop here in the fourth quarter. Just curious on what the pipelines look like there. And then just , 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 that's trended over the last two to three quarters on the same basis?

Tom Olinger -- Chief Financial Officer

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 dispo guidance, remember, we just closed in early October a $1.1 billion Mapletree transaction. We've got another $170 million in the second phase that's right behind it that'll close this year. And the balance on -- so, that's the dispo side, and I'll let Mike address the starts.

Mike Curless -- Chief Investment Officer

Yeah, to put a finer point on that, with those two incremental closings, we're 85% of the way through the work to be done on dispositions. This time last year, we would have been at about 60%, so we're way ahead of the game there. With respect to our confidence in the development starts volume, we in the last couple of years have done approximately a billion in each of the four 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 do those kind of numbers through the end of this quarter.

Hamid Moghadam -- Chairman and Chief Executive Officer

Yeah, development is always backend loaded into the fourth quarter. It's just the way the business works or something. 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 May Week.

Operator

And this concludes today's conference call. You may now disconnect.

Duration: 48 minutes

Call participants:

Tracy Ward -- Senior Vice President, Investor Relations and Corporate Communications

Tom Olinger -- Chief Financial Officer

Hamid Moghadam -- Chairman and Chief Executive Officer

Gene Reilly -- Chief Executive Officer, The Americas

Gary Anderson -- Chief Executive Officer, Europe and Asia

Mike Curless -- Chief Investment Officer

Ed Nekritz -- Chief Legal Officer and General Counsel

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Jeremy Metz -- BMO Capital Markets -- Analyst

Steve Sakwa -- Evercore ISI -- Analyst

Manny Korchman -- Citi -- Analyst

Jamie Feldman -- Bank of America Merrill Lynch -- Analyst

Ki Bin Kim -- SunTrust -- Analyst

Vikram Malhotra -- Morgan Stanley -- Analyst

Blaine Heck -- Wells Fargo -- Analyst

John Guinee -- Stifel -- Analyst

Nick Yulico -- Scotiabank -- Analyst

Derek Johnston -- Deutsche Bank -- Analyst

Tom Catherwood -- BTIG -- Analyst

Michael Carroll -- RBC Capital Markets -- Analyst

Eric Frankel -- Green Street Advisors -- Analyst

Michael Mueller -- JPMorgan -- Analyst

David Harris -- Uniplan -- Analyst

More PLD analysis

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

10 stocks we like better than Prologis
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has quadrupled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Prologis wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of August 6, 2018

Motley Fool Transcription has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.