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Prologis' CEO Discusses Q1 2012 Results - Earnings Call Transcript

We've been somewhat below plan in capital deployment, but we expect development volume to pick up in the coming quarters due to lack of supply of Class A facilities, which I'll address in a moment. Interestingly, we're once again seeing opportunities to utilize our platform for value-added conversions. During the quarter, we completed one such transaction in Silicon Valley, generating an economic gain of more than $23 million or 38% higher than the value of the property as an industrial asset.

Turning to Private Capital, I'd like use this opportunity to give you an update on our Japan operations as well as our Private Capital initiatives there. I spent last week in Japan, and my time with the team further reinforced my assessment of the quality and scale of opportunities that we have before us in that market. We're having great success leasing our development projects in Japan, often prior to the completion of construction. You recently saw our press release on a million-square-foot development project in Tokyo that was fully leased before we broke ground. We expect to have more news of this nature to share with you in the coming weeks and months.

At the same time, vacancies for modern [ph] logistic facilities in Tokyo and Osaka have fallen below 5% and rents are moving up. Our operating assets in Japan represent the highest quality product in the market and actually within our entire portfolio. With cash yields in the mid-5% range and long-term financing costs under 2%, Japan offers the highest cash spreads among all of our global markets, and local investors appear eager to allocate capital to real estate and this yield starved environment. We've seen strong Japanese fund flows into the U.S. REITs as well as J-REITs, the latter causing a narrowing of the gap between J-REIT share prices and their underlying NAVs. As a result, we are reassessing our fund-formation strategy for Japan. We're now upsizing our development fund to be formed later this year. We're receiving strong interest from our large global investors and are substantially oversubscribed in this fund.

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