Operator:

Welcome to the Prologis Second Quarter 2024 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to Justin Meng, Senior Vice President, Head of Investor Relations. Thank you. You may begin.

Tim Arndt:

Thank you, Justin, and thank you all for joining our call. We had solid execution against our second quarter plan, which showed improvement over the first quarter, underpinned by a pickup in overall market activity. In fact, we leased 52 million square feet in our portfolio, a 27% increase over the first quarter and one of our highest quarters in the past few years. This helped in delivering occupancy, which outperformed our forecast and more importantly at rent change well over 70%. This was achieved in an environment where decision making has remained slow as many customers optimize existing footprints before committing to new space. As a result, we expect many property owners to continue to prioritize occupancy in select markets with higher availability, keeping pressure on rents. That said, the bright spot continues to be the depletion of the supply pipeline and successive quarters of very low development starts. We believe we are near peak vacancy and this dearth of new supply is setting the stage for more favorable conditions in 2025. As evidenced by very strong rent change this quarter, our lease mark-to-market is serving to sustain meaningful growth through this transition. In terms of results for the quarter, core FFO, excluding promotes, was $1.36 per share and including net promote expense was $1.34 per share. We earned promote revenue within our FIBRA vehicle in Mexico, marking the seventh year of such achievements since its IPO and speaking to the high quality of our portfolio and team in that market. Global occupancy at our share ended the quarter at 96.5%. Our U.S. portfolio continues to outperform the market by over 320 basis points, a meaningful spread that has widened from our historic norm of roughly 175 basis points. As vacancy normalizes in our markets, we expect this flight to quality to continue. We crystallized $100 million of our lease mark to market during the quarter. As of June, we estimate that the net effective market rents are 42% above in-place rents, representing $2 billion of potential NOI. Over 40% of the decline in our lease mark to market ratio is due to this quarter's mark-to-market capture. Net effective rent change was nearly 74% based on commencement and is 64% based on new signings. This metric can be volatile between quarters due to mix, but we continue to expect full year net effective rent change to be above 70%, illustrating the outsized mark to market opportunity that will remain in the near and intermediate term. Our same-store growth was 7.2% on a cash basis, 5.5% on a net effective basis, each strong despite the impact of over 100 basis points of decline in average occupancy year over year, as well as the effect of fair value lease adjustments on net effective growth from the Duke acquisition. We deployed over $700 million into new development projects and acquisitions during the quarter and also closed on over $1 billion in dispositions and contributions at values exceeding our initial expectations. We continue to grow our solar energy business with the installed capacity of our operating portfolio now at 524 megawatts, with an additional 134 megawatts currently under construction, the total of which will generate approximately $55 million of NOI once stabilized in line with our forecast. Finally, we raised $1.2 billion of debt across our balance sheet and funds at a weighted average rate of 4.4% and a term of 11 years. Outside of this total, we also launched our $1 billion commercial paper program, which has thus far saved an average of 60 basis points on our short-term borrowing costs in the U.S. In terms of our markets, there are several encouraging signs for demand, including port volumes on both the East and West Coast, as well as increased volume of proposal activity we've seen across our portfolio. While overall leasing has increased since the first quarter, the tone of our conversations with customers warrants continued caution in the near term. Even though space utilization sits at near a normal range, approximately 85%, we find that many customers simply lack urgency, still prioritizing cost containment in light of an uncertain economic and political environment, both of which will be clearer soon. In the meantime, development starts remain muted and below pre-COVID levels. Quarterly completions peaked last year at 140 million square feet and are projected to approach 50 million square feet by the fourth quarter of this year. We estimate vacancies in our U.S. and European markets will peak over the next few quarters, likely creating a shift in tone as customers assess the requirements heading into 2025. Until then, rent growth will be anemic in most markets and down modestly in some. Southern California remains its own story, where demand remains sluggish and vacancy continues to drift higher. While we've observed some green shoots over the last 90 days, we expect soft conditions to persist over the next 12 months. Globally, we estimate that effective market rents declined 2% during the quarter, with 75% of the decline attributed to SoCal. Because there is so much conflicting data available to investors, it's worth mentioning that we measure market rent growth by evaluating effective rents achieved, not asking rents before concessions, a difference that can be as wide as 5% to 10%. We'd summarize by highlighting that most of the puts and takes across our global portfolio have provided conditions that are largely stable with reason for intermediate-term optimism due to several quarters of low starts and subdued but positive demand. Turning to capital markets. Value saw modest increases in the second quarter for our U.S. and European funds. There's greater depth amongst buyers of logistics properties and lenders are more active, together reducing yield requirements. In particular, buyer pools for well-located core product are growing now with multiple bidders back in the mix. We saw this very clearly in a large portfolio sale we closed this quarter, which was originally brought to the market last fall. Interest was reasonable at the time, but we felt pricing was off, elected to wait, and achieved 28% higher value in the end. I'd like to provide a brief update on our data center business, where we are having very good momentum across our pipeline. As you know, access to power is the key to unlocking value, and our dedicated energy and sustainability teams are leveraging our expertise in net-zero carbon solutions, solar generation, and battery storage to ensure that we're in the pole position with all of the major utilities. To date, we have secured 1.3 gigawatts of power. Of this, 450 megawatts is currently under construction in $1.2 billion of TEI. 300 megawatts is in active pre-development with an expected $700 million of TEI, leaving 550 megawatts as available and currently undergoing build-to-suit discussions. Beyond all of this, we are also in advanced stages of procurement for an additional 1.5 gigawatts, which is key to delivering on our five-year outlook for $7 billion to $8 billion of total data center investment. Overall, we've made significant progress growing this business and are optimistic about the targets we laid out at our Investor Day. Turning to guidance. We are making few changes as the year is playing out to our expectations. As such, we're maintaining our forecast for average occupancy, same-store, G&A, development starts, and stabilizations. There are only a few small changes otherwise. We are lowering our guidance for strategic capital revenue by $10 million only to account for the impact of FX rates, which are hedged elsewhere under P&L and will not affect overall earnings. Due to the increased activity we're seeing in the capital markets and deals completed year-to-date, we are increasing our acquisitions guidance to a new range of $1 billion to $1.5 billion and similarly increasing our guidance for overall dispositions and contributions to a range of $2.75 billion to $3.65 billion. Ultimately, we are increasing our GAAP earnings to a range of $3.25 to $3.45 per share. Core FFO excluding net promote expense will range between $5.46 and $5.54 per share, while core FFO including promotes will range from $5.39 to $5.47 per share, a slight increase at the midpoint from our prior guidance attributed to the FIBRA promote. Our core earnings guidance calls for nearly 8% growth at the midpoint, which ranks in the 87th percentile of S&P 500 REITs. We've been unique in our ability to generate leading growth over a long period of time, not only through a superior business model and portfolio, but also from our commitment to leveraging all that comes from our scale, including adjacent verticals strategic to our core business. Our focus is simply to continue to deliver on this industry-leading and durable growth. As we close, I'd also like to highlight an upcoming event, our annual GROUNDBREAKERS Thought Leadership Forum on October 2nd in London. The program is taking shape as our best yet, exploring the surprising intersection of logistics and health, energy, and even fashion. Additional information for the forum is available on our website, and we hope to see you there or online. With that, I'll hand the call back to the operator for your questions.

Blaine Heck:

Thanks. Good morning out there. It looks like your occupancy and rent spreads improved as the quarter progressed just looking at results versus the NAREIT update. Can you just talk about whether that momentum has continued into the third quarter, and if there are any specific markets that might have driven that improvement? And related to that, on occupancy guidance, the maintained guidance implies some downside during the second half of the year. Can you just talk about what's driving that trajectory, please?

Justin Meng:

Thank you, Blaine. Operator, next question.

Unidentified Analyst:

Thanks. It's Nick Joseph here with Craig. Maybe just on the demand side. Obviously, it sounds like you're seeing and feeling an improvement there, but I was hoping you could talk about some of the demand differences across different size ranges and geographies?

Justin Meng:

Thank you. Operator, next question.

Ronald Kamden:

Great. Just a quick question on sort of the rent growth conversation I think you talked about down 2% in 2Q after being down 1% in 1Q '24. Maybe if you could just provide some commentary on what the expectations are for the back half of the year and the 4% to 6% sort of rent growth targets long term. How do you guys think about that going forward? Thanks.

Justin Meng:

Thank you, Ron. Operator, next question.

Steve Sakwa:

Yes, thanks. Tim, I think you commented on the lease proposals, but I was just wondering if you could provide a little bit more detail. Obviously, that green line is up strongly and to the right. And I'm just curious how much of that is for new activity, for vacant space or development, and how much of that might be for renewal activity, just to frame it out, because that number is up quite a bit, even from the past couple of years.

Justin Meng:

Thank you, Steve. Operator, next question.

Camille Bonnel:

Good morning. The pace of development stabilization seems to be tracking ahead at this halfway point of the year. So, was wondering, how does this compare to what was budgeted in your guidance? And out in the West Coast, it looks like you've made some good progress stabilizing some of these developments. So, can you talk to some general terms on rents versus underwriting and how much of that was new leases signed in the quarter? Thank you.

Justin Meng:

Thank you, Camille. Operator, next question.

Jonathon Petersen:

Great. Thank you. So I was looking at your top tenant list. It looks like an increase in square feet lease to Amazon and Home Depot. We're hearing from other people that Amazon is more active this year. Whether you want to talk about them specifically or maybe we can frame it. In the context of what impact is some of these larger players in the market being more active in leasing have on the overall market. Like are people waiting for them to make decisions before we start to see an uptick in activity. Is that kind of what's happening right now?

Justin Meng:

Thank you, Jon. Operator, next question.

Caitlin Burrows:

Hi, everyone. Maybe just on the transaction market, I think Tim, earlier you mentioned how the depth of buyers is deeper and the disposition you did was at a materially higher valuation now versus. 2023. So I guess. What are you guys seeing from an acquisition potential on your side who is selling and kind of your opportunity there in the near term?

Hamid Moghadam:

Yes, the other thing I would add to that, Caitlin, is that you have closed end funds that are coming to the end of their lives, and those portfolios need to be liquidated. And the investors generally because of what's going on in their portfolio not just in real estate, but also in other private asset classes need liquidity because they have outstanding commitment. So there's pressure from those guys to realize these sales and industrial real estate has been one of the places that their performance has been really great and crystallization of those values is important. So it's a natural course of things. And you have some deferred sales volume. That was put on suspended animation for the last 24 months. That's now coming through. But generally, I would say the transaction market is very good right now, with multiple offers for good portfolios and the sweet spot is a couple of $200 million, I would say. Not mega deals and not timing deals, but sort of in the $100 million $200 million range.

Operator:

Thank you. Our next question comes from the line of Nick Thillman with Baird. Please proceed with your question.

Tim Arndt:

Sure. Nick. Thanks. On the retention front, we typically forecast between 70% and 80%. Think of it as 75, and that's a good number, and I would characterize that as our expectations over the coming several quarters and then free rent. I think we may have discussed this recently. I would view free rent as. Just reverting to mean levels. We had kind of is another area where we had some surge pricing, if you will. Some much lower free rent over the last few years. And now the market normalizes as at different pace in different places. It's coming back to a more normalized level as well.

Operator:

Our next question comes from the line of Vikram Malhotra with Mizuho Securities. Please proceed with your question.

Chris Caton:

Hi, Vikram. Thanks for the question. It's Chris. So as it relates to demand, just for those following along, net absorption in the first quarter was $26 million square feet, 27 million square feet. We have it at $43 million square feet in the second. And so, we expect 40 to 50 million square feet in net absorption. I think that's the tone that Tim had in his script and that we have here on the call for you. That'll leave - us with a full year net absorption on 160 million to 170 million square feet. Tim's going to take the rest.

Hamid Moghadam:

Yes, one other perspective I might provide to you is that the big change since our 4% to 6% three-year forecast, has actually been in concessions. So those concessions have, I mean, in other words, if you had two forecasts, one for asking rents and one for effective rents, the effective rent one has been affected more since our Investor Day when we laid out that assumption. Not all of it. The face rents have come down in Southern California, certainly, but most of it has been expansion in the concessions. And we see those burning off over the next 12 months as markets come into, even the weaker markets come into balance. Just to give you a sense of something that Chris mentioned before, Southern California accounts for about 23% of our rents over the next 12 months. What we categorize as sort of the weakest market, are another 21% of our rental profile for the next 12 months. And only 56% of the rents rolling over in the next 12 months are in stable or healthy markets. So, this is really a Southern California problem where it's both an expansion in concessions and a reduction in face rent. Fortunately, and this is really important. Southern California is the market with the largest mark-to-market in the next 12 months, even with the declines that we're projecting. So there is pretty good downside protection, in fact, upside protection, if there's such a word, on those expiring rents in Southern California. So, ironically, the weakest markets have the most mark-to-market, certainly in the near term.

Operator:

Thank you. Our next question comes from the line of John Kim with BMO Capital Markets. Please proceed with your question.

Hamid Moghadam:

Thanks, John. And I realize this was also Blaine's question that I missed earlier, so thanks for coming back to it. The 96% comment was very specific about where we thought the second quarter was going to land. I would say that the year-to-date average that we have so far, we're around 96.6% year-to-date. The midpoint of our guidance is 96.25%. That just reflects some tougher roll and so a little bit longer lease-up time that we see in new leasing. I hope it's conservative. I suppose there's that possibility, but we feel good about the range that we've established.

Justin Meng:

Thank you, John. Operator, next question.

Vince Tibone:

Hi, good morning. Cap allocation guidance implies an acceleration of starts in the back half of the year. Are these all mostly planned logistics starts, or are there some data centers in there as well? And related to all this, kind of what markets would you be comfortable starting a spec project today in the current environment?

Hamid Moghadam:

But if you're asking for specific names of markets, I would say Mexico is super strong. Nashville, Houston, the Southeast, pretty strong and demand there. Northern Europe is very strong. So those are the places you're most likely to see spec development starts.

Operator:

Thank you. Our next question comes from the line of Ki Bin Kim with Truist Securities. Please proceed with your question.

Hamid Moghadam:

We are more optimistic about our data center business, since the time of our Investor Day. I think where some of those numbers come from, Ki Bin. Part of it is, we've done some excellent recruiting in terms of specialists in the sector that, have joined the team and are very excited. And secondly, the energy team that we have, the renewable energy team that we have, has excellent relationships with utilities. And that's something that oftentimes is missing, in a lot of data center companies that have just got the real estate component. And obviously we know the five hyperscalers really well. And in this environment, the ability to finance and deliver and execute becomes super important. These are mission critical deployments for these companies. And it is increasingly difficult for private players that don't have a balance sheet, to compete in that market. So, we think the competitive position for a lot just both, because of talent and balance sheet, are just going to get better and better going forward.

Operator:

Our next question comes from the line of Mike Mueller with JPMorgan. Please proceed with your question.

Hamid Moghadam:

Hi, Mike. Thanks for the question. So the 3PL market is really an interesting dynamic right now. What we're seeing is certainly slack in the system, more acute in Southern California, where there are simply just more 3PLs, almost double the average across the U.S. And that's where they took up a lot more space during COVID. Now, you can't deliver for a customer in a market that you don't have space. And a lot of the excess space that 3PLs have, is scattered throughout their networks. By way of example, one of our top 25 customers came to us recently and said, we have six to seven percent excess space in our network. Yet a 750,000 square foot need emerged in a major market, which led to a long-term, very large lease for us.

Justin Meng:

Thank you, Mike. Operator, next question.

Michael Goldsmith:

Good afternoon. Thanks a lot for taking my question. You continue to remain confident on the intermediate term outlook, particularly on the demand side. So maybe just to sum everything up that we've heard already today, what evidence do you see today that gets you excited? And then can you kind of walk us through, how you see the timing of the recovery playing out? Thanks.

Justin Meng:

Thank you, Michael. Operator, next question.

Todd Thomas:

Hi, thanks. Hamid, just following up on that a little bit, I'd be curious to get your thoughts on another maybe uncertain item, the potential impact tariffs might have on trade and industrial real estate in the U.S. And just, whether conversations you're having today with tenants, or prospective tenants might be impacted as a result. And really, does that change anything, potentially, how you think about allocating capital globally?

Justin Meng:

Thank you, Todd. Operator, next question.

Nicholas Yulico:

Oh, yes. Hi, thanks. You talked earlier about the transaction market pricing improving. Can you relate that to the strategic capital revenue? How should we think about kind of where the funds are valued right now, whether there could be upside potential revenue for that versus on the fund flow side, what you're seeing?

Justin Meng:

All right. So I think that was the last question. Thank you again for your interest in the company and everybody enjoy the rest of the summer. We'll see you pretty soon hopefully at Groundbreakers. Thank you.

Operator:

Greetings and welcome to the Prologis First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] And as a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Natasha Law, Director of Investor Relations. Thank you, Natasha. You may begin.

Tim Arndt:

Good morning and thank you for joining our call. We've had a good start to the year in terms of our operating and financial results in the first quarter. We delivered strong rent change, drove occupancy slightly ahead of our forecast, raised nearly $5 billion in capital, including $750 million in strategic capital, and made important headway in our Energy business. That said, as we evaluate the market, persistent inflation and high interest rates have kept more customers focused on controlling costs. The resulting delay in decision making, easily observed through the first quarter's below average net absorption, will translate to lower leasing volume within the year. Accordingly, we've opted to adjust our guidance early, getting ahead of what looks like a period of occupancy below our forecast in the near term and its effect on same store in a number of our higher rent markets. This is punctuated, of course, by a more pronounced period of correction still underway in Southern California. New starts, however, continues to be surprisingly disciplined, adding to the expectation for limited new supply in the back half of '24, but also extending deeper into '25. When considered alongside muted demand, we arrive at a view that the operating environment has only changed modestly in aggregate, and that demand is simply pushing out by a few quarters. The outcome of this may simply mean moving towards a long-term occupancy expectation more swiftly this year, which sets up for a better next year. Turning to our results for the quarter. Core FFO, excluding promotes, was $1.31 per share and including net promote expense was $1.28 per share, essentially in line with our forecast. Occupancy in the portfolio ended the quarter at 97%. For context, the US market declined 310 basis points since its peak in the summer of '22, while our portfolio's occupancy has only declined 80 basis points, resulting in vacancy today for Prologis that is less than half of that in our markets and reflective of our portfolio quality. Net effective rent change was 68% based on commencements and 70% based on new signings. Following this in-place increase and changes in market rents, our net effective lease mark-to-market stands at 50%, representing over $2.2 billion of rent to harvest without any additional market rent growth from here. Rent growth captured just for the single quarter was approximately $110 million on an annualized basis and at our share. Our same-store growth on a cash basis was 5.7% and on a net effective basis was 4.1%. The same-store from rent change alone was strong at approximately 9%, but is impacted by a 130 basis point change in year-over-year vacancy, as well as 150 basis points from fair value lease adjustments with the Duke portfolio's inclusion in our same-store pool. Additionally, there were approximately 175 basis points of items specific to the quarter, including one-time reconciling items from 2023, as well as unfavorable comps from low expenses last year. We started over $270 million of new developments in the quarter, bringing our portfolio to approximately $7.5 billion at our share, with estimated value creation of over $1.7 billion, a number we feel increasingly confident in with value stabilizing. In our Energy business, we've made meaningful progress on this year's deployment, including the signing of 405 megawatts of long-term storage-related contracts with investment-grade utilities. We also delivered the largest EV fleet charging project in the United States, less than 15 miles from both the ports of LA and Long beach. Finally, we raised $4.1 billion of debt across our balance sheet and funds at a weighted average rate of 4.7% and a term of 10 years. Our debt portfolio has an overall in-place rate of just 3.1%, with more than nine years of average remaining life and liquidity at the end of the quarter of over $5.8 billion. Turning to market conditions. Most broad economic data from unemployment to retail sales to the health of the consumer remain very strong. And while our tour proposal and other proprietary metrics are similarly positive, overall leasing activity and net absorption are running below expectations. Net absorption in the US, for example, was very low this quarter at just 27 million square feet. So while the macro landscape and supply chains continue to generate a need for space, we think it's prudent to expect continued headwinds on overall absorption over the next few quarters. The interest rate environment and its associated volatility have weighed on customer decision making, especially as the 10 year has increased 70 basis points from its level just 90 days ago and expectations for Fed rate cuts have moved from potentially six to now possibly zero. In parallel, sublease and space utilization rates highlight that some customers have available capacity, driven in part by the high rate of absorption through the pandemic. This dynamic of available space intersecting with the desire for cost containment is what leads to lower absorption and is playing out at different rates across submarkets and customers. For example, while slow leasing has persisted so far this year for less capitalized customers and 3PLs, we see a handful of large e-commerce and retail customers further along in this process, such as Amazon, who voiced caution two years ago, but is now active in several global markets and has openly discussed plans to commit to significant amounts of new space. The overall leasing slowdown is most felt in only a handful of markets. Southern California and the Inland Empire being the most acute. In fact, rents in most of our US markets are generally flat, several are up, and it is mainly elongated downtime affecting near-term occupancy and NOI. While Southern California leasing has been challenging, it has not slowed the tremendous uplift we realize every single quarter from rent change on rollover, which was 120% for the market in the first quarter, with the Inland Empire at 156%, nearly the highest in our portfolio. In Europe, rents grew overall during the quarter, which we believe will remain the case over the balance of the year. And of course, LATAM continues to impress with very high occupancy and market rent growth that has led the globe in recent quarters. Overall, global market rents declined slightly over 1% in the quarter, driven mostly by Southern California, and would have been slightly positive if excluded. I'd like to spend a moment on Baltimore, where we own over 18 million square feet and has been a dynamic market of ours for decades. Our employees, customers and properties are all safe following the bridge collapse last month and our customers expect to be able to withstand the disruption with little impact to their businesses. Shifting to capital markets. Valuations increased in all of our geographies, except for China, which saw a very small decline. Over the last 1.5 years, global values have decreased despite increases in cash flow due to cap rate expansion. As cap rates have stabilized, cash flow growth now has the ability to translate to value growth. Even though modest, the value uplift in the US and Europe are important as strategic capital investors have been looking for values to not only bottom, but actually turn upwards before committing new capital. With Europe a bit ahead of the US in this regard, it is indeed where we've seen stronger fund-raising interest in recent quarters. We also had a successful equity raise in FIBRA Prologis, raising over $500 million for deployment into both assets to be contributed from our balance sheet, as well as pursuits of third-party acquisitions. Transaction volumes and activity have ticked up in recent weeks and pricing has certainly improved. As always, we are actively looking at acquisition opportunities across all of our markets, but our focus remains on the development of our land bank, which provides an opportunity for over $38 billion of build out with a return on incremental capital of approximately 8.5%. In terms of guidance, in light of our views on demand and leasing pace in the coming quarters, we are reducing our average occupancy guidance to range between 95.75% and 96.75% of the 75 basis point adjustment from the midpoint. It's important to understand that approximately two-thirds of this change stems from our higher rent markets, meaning they create a disproportionate impact on same store in 2024. Same-store growth on a net effective basis will range between 5.5% and 6.5%, a reduction of 150 basis points, which accounts for the average occupancy decline, slightly lower rent change for the year as well as 30 basis points of annualized impact from the one-time items in the first quarter mentioned earlier. Our revised range on a cash basis is now 6.25% to 7.25%. We are maintaining our guidance for strategic capital revenue, excluding promotes, to a range of $530 million to $550 million and reducing our G&A guidance to a range of $415 million to $430 million. We are adjusting development start guidance for the year to a revised range of $2.5 billion to $3 billion at our share, reflecting our discipline in speculative starts and the timing impact this has in the calendar year. As we've always said, we don't consider our guidance to be a target internally and each deal ultimately needs to be rational and accretive on its own. In the end, we are forecasting GAAP earnings to range between $3.15 per share and $3.35 per share. Core FFO, including net promote expense, will range between $5.37 per share and $5.47 per share, while core FFO, excluding promotes, will range from $5.45 per share to $5.55 per share. Our updated guidance calls for core earnings growth of nearly 8% at the midpoint. As we close out, I'd like to underscore the message of the call, which is that while we have only a modest change of view in the intermediate term, our confidence in the long term is intact. And putting timing aside, we are encouraged by the outlook for supply in the back half of this year and '25, have tremendous lease mark-to-market to harvest in the interim, and are pleased to see valuations, fundraising and transaction activity all picking up. With that, I'll turn the call over to the operator for your questions.

Caitlin Burrows:

Hi. Good morning, everyone. It seems like, I guess, occupancy and maybe pricing are coming in a little lower than you had previously expected. So I was wondering, could you go through how much or what pieces might be more macro driven and how much is certain markets weighing on the outlook? Tim, you did mention how some of the high rent markets are having an outsize impact. So wondering if you could just go through what might be more macro versus market specific. Thanks.

Operator:

And the next question comes from the line of Steve Sakwa with Evercore ISI. Please proceed with your question.

Tim Arndt:

Steve, let me take a stab at that. If you are sensing any acute change in our outlook, you're not reading our call correctly. We have picked a three-year window, I think, in our Analyst Day to give you our expectations. And the first year of that window has moved around. So our outlook for the back period of second and third year essentially the same and could be even better given how much deferred demand is building up. If our proposals were down, if our tours were down, I would be more concerned. But companies are out looking at this space. And if you think nothing has changed in the last 45 or 90 days with respect to the Fed outlook, you must be reading different newspapers than I am. So I would tell you that people are just scared of pulling the trigger until the Fed gives the all clear sign with the first rate cut. So, yes, we are not instantaneous in our data transmission to us and to you, but I can assure you that you will always hear our views immediately as we form them and as we get them from the marketplace.

Michael Goldsmith:

Good morning. Thanks a lot for taking my question. It sounds like demand has been pushed out or the rebound in demand has been pushed out of a few quarters. So I was wondering what evidence do you have that would support that? And then how do we compare that to some of the proprietary metrics that you put together, which seem to indicate that things are actually pretty positive or accelerating? Thank you.

Tim Arndt:

Yeah. The only thing I would add to that is that the effect is not uniform in all markets. And I think what's going on -- and this is a theory. This is not a fact. It's a theory, but it's based on 40 years of looking at this stuff. Southern California has over 30% share for 3PLs and the rest of the US market has a little under 20% share of 3PLs. 3PLs are serve two purposes. One, they provide outsourcing of for logistic activities, but they also create surge space. In other words, companies use 3PLs as a way of flexing up and down. So markets that have a bigger exposure to 3PLs are likely to feel the impacts of shifts in sentiment sooner than other markets on the way down and on the way up. Also, there are certain customers who have instantaneous access to sales data and activity. And I would say the e-commerce players, the big ones, have the best data on that, because they see the trends on a daily minute-by-minute basis. Those guys were early in terms of curtailing their demand. And I got to tell you, they're out there pretty aggressively and don't listen to what we say, listen to what they say in their own annual reports, in their own interviews with the press. And I think you'll see that they feel pretty confident about their business and they're a bit ahead of the curve. Now, all of this is subject to missiles not flying in the Middle East and the Fed not going crazy and God knows what else can happen in this world. So but as far as we see, the indications are really good. And this certainly does not feel like any of the other downturns that I've been part of. So again the word huge sounds a little bit of an overreaction to me.

Craig Mailman:

Hey guys. Maybe coming at this from another way, and Hamid, I know you don't like the word acute, but maybe this seems a little bit more preemptive, because if you guys are seeing a lot of the metrics in line with your budget, retention was kind of in line with where you guys have been the last couple of quarters. It feels like this is an anticipation of maybe slower takedowns that you're seeing. I mean, is there anything else on the expiration side of the equation that you guys have a couple bigger known move outs now that are going to skew numbers? I'm just trying to get a sense of how much of this is actually what you're seeing real time versus just giving yourself a little bit of cushion so that you don't have to kind of readjust later in the year. And also, just a question on development. How much of this kind of occupancy decline is just developments coming out a little bit less leased than maybe you had thought? A couple of months ago, we noticed your development margins were pretty -- were single-digit this quarter. I don't remember the last time I've seen that. And is that a reflection of this? Or is there something else going on as well?

Dan Letter:

Yeah. The margins this quarter, it's actually an isolated event here. We had about 15, 17 projects stabilized. We had one project that just had a confluence of events take place, whether it be weather, some infrastructure, municipal requirements. And it just came in at a pretty negative margin, weighing down the overall average margin for the quarter. If you pull that out, our margin for the quarter would actually be more reasonable 15%, 16%.

Camille Bonnel:

Hi. Hamid, you mentioned how the company likes to be early on calling things, but I noticed that you only updated your outlook on operations and guidance. So can you help us understand how conservative guidance levels are? Or could we see more downward revisions, for example, if you start to pull back on the capital deployment front? Thank you.

Tim Arndt:

And Camille, it's Tim, I might build on your first -- the first part of your question as well, which is that at prevailing cap rates and the cost of debt and everything else, there's very little you could actually do in deployment in the year to affect earnings in year one or two. I find that deployment changes tend to have kind of a push effect on earnings. So you should probably have that in your thinking as you watch our guidance.

Nikita Bely:

Good morning, guys. The $150 million of other real estate investments. Curious, what exactly was that on the sales? And maybe also, if you could talk about the reduction in development starts. So any color on that, geographic focus or spec or something else?

Nikita Bely:

Reduction in development starts for this year. Any additional information you could provide on what drove that, whether it was geographic based or asset specific or built-to-suit pullback?

Hamid Moghadam:

Yeah. And the only thing I would add to that is that even though we made the adjustment on both the built-to-suit and the spec part, the bias is greater on the spec part. We actually feel pretty good about our built-to-suit volume going forward. So it's really the spec which is discretionary, and we can, as Dan said, write that at any time.

Blaine Heck:

Great. Thanks. So you've called out Southern California as being soft again. Can you just talk about any specific segments of the market that are particularly weak whether that's by submarket or size? And what makes you confident in the recovery even as it seems it might be delayed kind of relative to your original expectations? And secondly, just curious if you can expand on which other high-rent markets might be weighing on the outlook. Thanks.

Hamid Moghadam:

Yes. The other thing I would say about Southern California is that don't discount the effect of the port labor issue that was resolved. That took longer, a lot longer than most people thought. And that affects a lot of the people -- a lot of the users in the South Bay immediately adjacent to the ports and the like. So that market can get tight real quick if that port volume comes back. I think that the small to medium spaces in the Inland Empire are kind of a mismatch. They're, by and large, the older buildings that were built there when the market was not really designed for the big 500,000 million square foot buildings. And those are -- somebody who wants a lot of space has to go to the Inland Empire. Somebody who wants 100,000 to 200,000 feet has more choices. So that's where the softness is in the Inland Empire.

Vince Tibone:

Hi. Good morning. Could you discuss the markets of relative strength in your portfolio in terms of demand and market rents? And also, are you seeing any different levels of demand by building size, more broadly? We noticed that occupancy fell the most on a sequential basis, for buildings less than 100,000 square feet, but actually grew for buildings 250,000 to 500,000. So just curious if those trends on occupancy are kind of a fair representation of the demand profile today.

Operator:

And the next question comes from the line of Ki Bin Kim with Truist Securities. Please proceed with your question

Tim Arndt:

Hey, Ki Bin, it's Tim. I'll take the front half of your question just on free rent. We have seen an increase in free rent. I think what's important to remember there is we've had exceedingly low amounts of free rent granted in the last few years. And I would say the current rates that we've seen in this last quarter, and what we're bracing forward this year, would still not really be on par with long-term averages. I would say that concession is not fully back to normal. But it is turning up logically in this environment.

Operator:

And the next question comes from the line of Tom Catherwood with BTIG. Please proceed with your question

Hamid Moghadam:

I don't think Baltimore has been a big deal in terms of its impact on our business. It's obviously been a big deal to the people who died in the accident and the like, but -- and to traffic patterns. But not to the customer. The customers have enough optionality that they can deal with those kinds of disruptions. I do think the geopolitical stuff has people a little wigged out, more -- definitely more than last quarter. And look at the interest rates, I mean, we're up a good 70, 80 basis points since the last time we all met. And I think that didn't happen evenly throughout the quarter. I think in the last month that sentiment has changed pretty dramatically. So I think both of those things are weighing on decisions, particularly if the decisions are discretionary. And people, when there are no choices like they were no choices in Southern California, they always lease more space than they need because they don't want to be held short. And when the opposite is and they have some choices, they take their time because they expect better deals if they wait. And that difference, even if it's minor, even if it's 5% to the upside and 5% to the downside can be a 10% swing, which are sort of the kind of numbers we're talking about here. So that's very much what happens in the short term. In the long term, demand has to match supply and they can't keep doing that forever. So now if you're going to ask me exactly what that point is, I can't really tell you. But we think it's a matter of quarters, not years.

Jonathan Petersen:

Great. Thank you. Maybe one more question on the port of Baltimore. I know it's not a big container traffic port, but have you seen any knock-on demand show up in other East Coast markets given the dislocation that's created? And then also, maybe a part two, but I know SoCal has been weak over the past year, you've talked about that a lot, and the resets already happened. I guess I'm curious if you could help us contextualize, from where we stand today, if you compare the strength of like SoCal versus the East Coast markets like New Jersey and Pennsylvania, like from where we stand today, which one looks the best over the next year?

Hamid Moghadam:

Yes. The way I would answer that question is that if you limit it to the next 12 months, I would go PA, New Jersey, SoCal. And if you ask me for the longer term, I would go SoCal, New Jersey, PA. And I would put all three of them in the upper 1/3 of markets across cycles. Maybe the upper 20% of markets across cycles.

Ronald Kamdem:

Hey, good morning. Just hoping we could put some numbers on the soft demand that you seem to be messaging. So previously you were forecasting 1.5% of stock of net absorption this year. I'm just wondering what that number has shifted to given what's happened over the past 30 to 45 days. And if you can tie in where you see sort of availability rates and next 12-month market rent growth. Thanks.

Chris Caton:

Yes. As it relates to market vacancies, we look at vacancies, not availabilities. Availability is a range between 150 and 250 basis points above these figures, depending on the cycle. We have vacancies peaking in the mid-6s later this year. So that's up about 20, 30 basis points versus what we discussed last year. I think what's important to understand in the cycle is the recovery potential in 2025 related to each of the constituent pieces. Hamid walked you through the demand picture. But what's important to recognize is the supply picture. That was a big factor over the last year, 18 months. And the meaningful falloff in supply is marked. It's off 80% from peak. It's off about 1/3 from pre-COVID levels. So we're talking about 35 million square feet of starts in the first quarter. That annualizes to about 160 million, 170 million square feet. So you're going to actually see this snap later this year and into next year, and those vacancy rates moving noticeably down, likely to move noticeably down from mid-6s towards 5% over the course of next year.

Operator:

And the next question comes from the line of John Kim with BMO Capital Markets. Please proceed with your question

Hamid Moghadam:

So we've actually tried to test that theory by looking at whether Southern California's loss has translated into an equal gain in adjacent markets like Vegas and Phoenix. And the answer is, while absorption has increased in those markets, it doesn't fully account for the drop-off in Southern California. So some of that demand has just been deferred. And the question is when will deferred demand convert to real demand. And that's the $64 million question. Is it one quarter? Is it two quarters? Is it three quarters? Don't know. We think it's a couple of quarters. But it will happen. And particularly the port coming back, that part accounts for over 30% of imports in the US, and it's been basically down. So we think it's going to -- that's going to have a dramatic effect. Now we may have missed it already for this Christmas season, I don't know. But certainly, next year, that market is going to come back absent a recession or some kind of geopolitical blow-up.

Operator:

And the next question comes from the line of Vikram Malhotra with Mizuho. Please proceed with your question

Tim Arndt:

Hey, Vikram, it's Tim. We're not calling anything on '25 and '26. In my prepared remarks -- or maybe I should say, I think our view would be that our views are upheld. And what I tried to highlight in the opening remarks is that if we get to a little bit lower average occupancy this year, recognizing that our three-year forecast called for a more normalized level of occupancy in the end anyway, that's where this concept of, well, maybe the adjustment to same-store from an occupancy change is coming a bit more this year than it would otherwise next year. But right now, we would hold out our view for '25 and '26 in terms of aggregate NOI and same store. Now rent change in this very immediate term, I'm sorry, market rent growth is a little bit below expectations. That will have some effect, but that will be relatively muted through same-store over the period.

Chris Caton:

And then just on the detailed question on what's happening in market rent growth in the first quarter. Southern California, down 6%, and US down about 1%, 1.2%. So when you multiply it through, you can see all other markets are flat.

Nicholas Yulico:

Yeah, hi. I was just hoping to get a feel for, again, going back to the occupancy guidance, if there's a way that you can give us a feel for how much decline in new leasing commencements you have been embedded in the number this year. Because it sounds like the retention ratios have been better, so leasing velocity on the new side seems subdued. You talked about that leasing demand forecast being down, I think it was 30% on the numbers you gave, the 250 million to 175 million in the US. How much is like new leasing in the portfolio going to be down this year for the guidance?

Operator:

And the next question comes from the line of Todd Thomas with KeyBanc Capital Markets. Please proceed with your question

Tim Arndt:

Hey, Todd, it's Tim. Yes. On rent change, so as mentioned, we had 67% start in the quarter. The signings were 70. So you do get a sense that it can move up and down each quarter. You may also recall, we had very strong rent change on signings in Q4, which may leave you wondering why didn't that show up here in Q1 on the commencements? And that's speaking to just how long this pre-leasing period can be. It can be more than just three months. And for that reason, I expect we'll probably see rent change right now, my view would be it's going to be above Q1, in Q2, and then also higher on the full year, in the low to mid-70s, over 2024 is our current view.

Operator:

And our final question comes from the line of Vince Tibone with Green Street. Please proceed with your question

Hamid Moghadam:

A really interesting question. So this is what has really surprised me from this cycle. We are getting calls from merchant developers that have had financing, have completed projects and are getting panicked. And for us to look at those opportunities. Boy, we're looking at those opportunities. Because that's where a good balance sheet and that's where being on your front foot is all about. I think there were a lot of people in this business that thought, we'll just get some financing at zero cost and throw up some buildings and it will lease. And I think that's what accounted for some of that over-exuberance on the development side. And I think we're going to end up being beneficiaries of that, and I'm seeing that real time. So, yes, I think people who are merchant developers and do not have the financial wherewithal are acting in a somewhat distressed way sooner than I would have guessed. And we're happy about that.

Operator:

And ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

Operator:

Greetings, and welcome to the Prologis Fourth Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] And as a reminder, this conference is being recorded. It is now my pleasure to introduce to you, Jill Sawyer, SVP with Investor Relations. Thank you, Jill. You may begin.

Tim Arndt:

Thanks, Jill. I'd like to start our call by recognizing and thanking our team for the incredible effort given over 2023. While it was a turbulent year in many ways, we ended it by delivering nearly 11% earnings growth and driving our 12-year earnings CAGR since merger to 10.3%. We deployed over $7 billion into new investments, raised nearly $2 billion of strategic capital in a very challenging environment and delivered excellent operating results while serving and growing customer relationships. We're also appreciative of the opportunity we had at our Investor Forum last month to share our vision and outlook for the company over the coming years. The environment is setting up in line or better than our expectations with development starts across the market continuing to decline by two-thirds from peak and an improvement in customer sentiment that appears more constructive than just 90 days ago. That said, we still see challenges in some submarkets as near-term outsized deliveries are met with still recovering demand. But our thesis remains the same as we've been describing for over a year and detailed last month in New York, which is that the supply cliff will converge with normalized demand later this year, delivering an environment conducive to strong market rent growth. We believe that annual market rent growth will average between 4% and 6% over the next three years, with 2024 being modestly positive and ramping thereafter. Turning to our results. We finished the year strong with quarterly core FFO, excluding promotes of $1.29 per share, bringing the full year to the top end of our guidance $5.10 per share. While market occupancy declined by approximately 100 basis points, our portfolio gained 10 basis points to end the year at 97.6%. Net effective rent change over the quarter was 74%, bringing the full year to a record of 77%, with another impressive results out of Southern California at over 150%, a reminder that it remains the strongest market for cash flow growth despite near-term choppiness given the large quantum of its lease mark-to-market. In the end, same-store on a net effective basis was 7.8%, while cash was 8.5%. We started over $2 billion of new developments in the quarter across 46 projects in 27 markets with nearly 50% of the activity in build-to-suit. In Energy and as seen in our new supplemental disclosure, we stand at year end with approximately 515 megawatts of solar and storage in operation with an additional 70 currently under construction. We had a quiet quarter on the financing front, raising approximately $300 million, but our full year of activity closed out at over $12 billion at a weighted average rate of 4.5% and term of 10 years. Our total debt portfolio remains at an overall in-place rate of just 3% with more than nine years of average remaining life. Turning to market conditions. The increase in fourth quarter market vacancy was in line with our expectations and driven by demand that remained moderate as customers exercised caution in their spending, while completions hit an all-time high. Development starts, however, have continued to fall across the U.S. and Europe, extending and deepening the future supply shortfall. On the ground, our teams are seeing revived customer interest with healthy showing activity to start the year. This includes build-to-suit inquiries, which we expect to remain active for Prologis following a strong year in 2023. Our proprietary metrics point to normal levels of activity with proposals and gestation timing in line or a bit better than historical norms. Utilization declined in the quarter to approximately 83% and keeping with this morning's report a decrease in the inventory to sales ratio. We view this positively because utilization also increased from here as stronger than expected retail sales over the fourth quarter and holiday season drove lower inventories, which will need to be replenished. Turning to market rents. Our global view is that rents declined this quarter by 90 basis points, but predominantly impacted by an estimated 7% decline in Southern California. Our full year view is that global market rents grew by 6%, just below our expectations, ultimately driving our lease mark-to-market to end the quarter at 57% after capturing approximately $100 million in realized NOI growth from leases rolling up to market. The outlier on rent growth is clearly Southern California. While our portfolio was only 2.6% vacant at year end, growing availability has made leasing very competitive. Combined with a 110% increase in rents since 2020, the rent retracement is understandable. Historically, there has never been a market where the delta between expiring and market rents has been so large that it provides ample room for property owners to deviate from market in order to attract customers. But looking ahead, the positive news is that we are launching two trends reverse. The first is that the supply pipeline is clearly emptying with little in the way of new starts. And the second is that the escalating issues in both the Suez and Panama canals together with the resolution of the West Coast labor negotiations are moving shipment volumes back to the West. While this bodes well for SoCal and still early, we are watching East Coast port markets more closely. In any event, all of these disruptions are reiterating the underlying need for resiliency and the just in case approach to inventories. Summing this all up globally, we recognize the high volume of near term deliveries that need to be absorbed into our markets over the next few quarters. But we are very pleased with our ability thus far to build occupancy, drive rents, and illustrate more differentiation in our portfolio as market vacancy grows. As for Strategic Capital and Valuations, we saw U.S. values decline approximately 5.5% during the quarter, which was our expectation and the reason we paused our appraisal based activity, which includes calling and redeeming capital as well as asset contributions. We run an industry leading franchise in which we aim to set the standard for governance, including timely, accurate, and independent valuations. Calling out when pronounced lags and valuations emerge has protected investors and demonstrated how we stand apart as a responsible partner. With this quarter's value declines in a more stabilized rate environment, we'll resume activity in USLF including the funding of our $250 million commitment announced in the second half of '23. Turning to guidance and all at our share. In terms of operating metrics, we are guiding average occupancy to range between 96.5% and 97.5% with occupancy likely to step down in the first quarter and rebuild over the course of the year. Cash same-store will range between 8% and 9% and net effective same-store growth will range from 7% to 8%. We are forecasting net G&A to range between $420 million and $440 million and Strategic Capital income to range from $530 million to $550 million. We have a very big year of stabilization activity ahead of us with a range of $3.6 billion to $4 billion, and expected yields of approximately 6.25%. On the new deployment front, we are guiding development starts to range between $3 billion and $3.5 billion with the estimated build to suit mix of 40%. And we plan to take sale portfolios to the market over the year with expected proceeds to range between $800 million and $1.2 billion and additionally forecast $1.75 billion to $2.25 billion in contributions to our Strategic Capital vehicles. In the end, we are forecasting GAAP earnings to range between $3.20 and $3.45 per share. Core FFO excluding promotes will range from $5.50 to $5.64 per share, while core FFO including net promote expense will range between $5.42 and $5.56 per share, each a bit higher than our preliminary guidance at the Investor Forum. While we do not forecast any promote revenue at this time, there are some small opportunities that do exist in FIBRA Prologis and our new PJLF vehicle in Japan. In closing, we know that the market is not yet out of the woods with regards to incoming supply, but the combination of a stronger backdrop continued low level of starts and a calmer capital markets environment has us optimistic that 2024 will be another great year. As you know from our Investor Day, we have many initiatives in flight designed to add value beyond our real estate and because of our real estate. We look forward to continuing to execute on our plan and providing you updates throughout the year. And before we move to Q&A, I'd like to get ahead of questions which have grown a little more frequent in recent quarters surrounding market rent growth. Unintentionally, we set an expectation that we could forecast market rents to a single point of accuracy in increasingly short time periods, and honestly, we're just not that good. We've gotten away from a practice that was originally aimed at being high level and directional. So what we've elected to do in order to help investors without perpetuating the issue is to simply provide high level rent growth expectations on a rolling 12 month forward view. As mentioned earlier, in terms of our three year CAGR of 4% to 6%, we believe we'll see modestly positive rent growth aligned with inflation over the next 12 months and we'll continue to update this rolling view on our future calls. With that, we will now take your questions. Operator?

Thomas Catherwood:

Excellent. Thank you. Kind of, maybe taking a look at your leasing spreads, obviously very strong performance during the quarter, but also a big spread between Prologis share and the kind of overall portfolio performance, which suggests a stronger performance out of the U.S. Going forward in the '24, are you expecting this gap in performance to tighten at all or should the U.S. continue to lead the way as far as spreads go this year?

Operator:

Thank you. And the next question comes from the line of Ronald Kamdem with Morgan Stanley. Please proceed with your question.

Chris Caton:

Hey. It's Chris Caton. I'll take that. So the year is -- or the year closed out with market vacancy rates at mid-5%, just like Tim described, and the vacancy rates remained lower on the coast, excuse me, so both East Coast and West Coast and higher in the Sun Belt. What we are seeing as it relates to pricing is there was better pricing, better rent growth in the Sun Belt markets outperforming the Coast in 2023.

Tim Arndt:

That's exactly right.

Craig Mailman:

Great. Thanks. Two quick ones here. I guess, first question would be, could you guys just go through what the uptick in property improvements in the CapEx section were? There's a pretty big jump in 4Q versus prior quarters. And then just second, Tim, you had kind of touched on this that tenant sentiment is improving here and there may be better traffic going back to the West Coast with everything going on the Red Sea, and the realization that just in case maybe a more prudent inventory method. But I'm just kind of curious because big tenant leasing has been kind of slower over the last 12 months to 18 months. Are you seeing any early green shoots on that improving as you guys are talking with customers?

Dan Letter:

And maybe -- this is Dan. Craig, on the second part of your question related to tenant sentiment, I would say, at the Investor Day, we had talked about a marginally better tenant sentiment from the Q3 earnings call. And I would say, it's even marginally better than that in the last 30 days. This is fueled by our healthy proposal volumes. Customer dialogs have been strong. 45% of our available space is in discussion right now with active proposals. We've anecdotally had just a number of conversations with our customer-led solutions group. Our build-to-suit conversations are improving as well. Our overall build-to-suit pipeline has grown quarter-over-quarter. So, whether that be some of the issues related to the Red Sea issues and the Canal issues or not, I think Chris will have some comments on that.

Operator:

Thank you. And the next question comes from the line of Caitlin Burrows with Goldman Sachs. Please proceed with your question.

Dan Letter:

Caitlin, this is Dan. I'll respond here. A few thoughts for you. First of all, we started just over $1 billion worth of spec in the fourth quarter. So, we had talked over the last several quarters about the decline in starts in the marketplace and that's when we wanted to come out of the gate here with some starts and that's what you're seeing us do right now. We have a pretty healthy guidance here for the 2024 starts, at owned and managed of about $4 billion. And if you think about it, that's 25 million square feet or so of starts that we could be doing this year. And we have a development portfolio right now of about 50 million square feet. So, we've got an appetite for spec. Our build-to-suit volume we think is going to shake out in that 40% range as we've projected. And then keep in mind, we talked about this plenty at the Investor Day, we have $40 billion worth of opportunities in our land bank. And we have the ability to make decisions on a quarterly basis where we're going to build. We own this land in 50 markets around the globe, 300 different sites. So, plenty of opportunities there.

Ki Bin Kim:

Thanks, and good morning. I just wanted to touch on the development start guidance of $3 billion plus this year. Can you just help us break that down versus -- so traditional industrial versus like data centers or other property types? And does the pre-lease percentage that you're expecting differ a whole lot? And sorry to add a third here, typically, how long would the data center developments take to cash flow?

Tim Arndt:

Yeah. So your question about how long it will take them to cash flow and there is a wider range than traditional industrial. But I would say on kind of powered shell, it's more in the 12 month to 15 month range from start. And on turnkey, depending on who does it and whether the customer does it or we do it, it could be longer than that by about a year, because since the installations are pretty complicated to get these going. But all of that is built into the budgets and the economics of the transaction. And this point that Dan made on the negotiating posture is really important. I mean, the last thing we want to do, there are four or five customers out there and it's pretty obvious given the scale of the numbers they can figure out which project is in our guidance for the next quarter if we wanted to go in that direction, and that basically reduces our leverage. So we're just not going to do that.

Jay Poskitt:

Hey, thanks. Good morning. I was wondering, if you could just provide a little bit of commentary on the supply and demand trends over the next couple of quarters. You previously said that you think deliveries will outpace demand for the next couple of quarters and then the inverse will happen after that. So just any update on that would be great.

Tim Arndt:

Let me just punctuate that, the vacancy rates will go up through the second quarter. So don't be surprised by that. But we're pretty confident they'll come back down after that.

Nicholas Yulico:

Thanks. I just wanted to go back to the space utilization comment you made, Tim, about feeling that at this point retailers like we have to restock inventories. So this is actually a good sign where space utilization is. I guess, I'm wondering, if you could give us some reminder sort of seasonally how this may play out historically in terms of leasing demand picking up from 3PL or retailers because of that issue of restocking? And then, as well in terms of the lease proposals picking up in the fourth quarter, if you had any benefit already from that industry, or even anecdotally, you could talk a little bit about the discussions there. Thanks.

Operator:

And the next question comes from the line of Blaine Heck with Wells Fargo. Please proceed with your question.

Tim Arndt:

Yeah. We don't think the real pricing and real returns have really changed because a return expectation should have been higher six months ago because the higher treasury rates. But nobody was trading based on those higher return requirements. So nothing really happened. So it was a theoretical decline in values. I think with the treasuries now having come down, I know they've gone up a little bit just most recently, but net-net, they're down. I think the reality is the expectations of the market participants and the theoretical pricing of assets is converging. Bottom line, we think we're seeing the near bottom valuations, both in the U.S. and Europe. And I think with this level of stability and sort of bottom forming, you'll see more volume coming through in terms of real deals.

Michael Goldsmith:

Good afternoon. Thanks a lot for taking my question. Another supply demand question, but just as we think about the cliff of new deliveries coming online, it sounds like that, that drops off in the second quarter. Is there an extended period of time where we're going to need to lease these up? And so the inflection when supply gets better and then combined with what you're seeing on the demand side, does that mean that -- does that happen through the third quarter and into the fourth quarter, or is that kind of happening just as soon as the deliveries slow? Thanks.

Operator:

And the next question comes from the line of Camille Bonnel with Bank of America. Please proceed with your question.

Dan Letter:

Camille, this is Dan. I'll start with your question on stabilization. It is a big year on stabilizations for us. We actually started the year out with some good news. Late December, we actually pulled in for stabilizations that we had expected to happen in the first quarter of 2024. But overall, the timing of those stabilizations, it's spread out pretty well throughout the year. And one number I would just point to is, that 2024 stabilization volume is 46% leased already, which is actually 300 basis points, 400 basis points above the average at this point over the last several years.

Dan Letter:

Let me make that point a little stronger. I think all this concern about LA is over, and it hasn't shown up in the numbers yet, but it will in the next six months. So, I don't think we'll be sitting here on calls like this worrying about LA and its absorption. Now, will we worry about something else? I'm sure we will. I don't know whether that's going to be the East Coast or Houston or whatever. But yeah, I mean, you've seen two big movements. It's not just Suez, it's also Panama Canal and the water issues there. And the expense of shipping stuff through the canal is leading to more reversion back to the normal way of doing it, which is getting it to LA and then land, bridging it over, but there could be other disruptions. It could be something can blow up in the Persian Gulf. So it's very hard to predict those things. The big message is this, we can spend a lot of time guessing as to what the share of West Coast is, East Coast is, all of that. The point is, people thought COVID was the big unknown factor. And now that COVID is over, the world is going to go back to a stable, predictable, just in time type of inventory strategy. I think each one of these things, whether it's Panama, whether it's Suez, whether it's -- or in the Middle East, whether it's something in the Persian Gulf, will remind people that they generally need to have a more conservative inventory strategy. And that's the big long term driver which is going to be a tailwind for demand that we haven't really seen play out just yet. We're pretty confident that will.

Michael Mueller:

Yeah. Hi. Do your comments about seeing revived customer interest apply to big-box leasing as well?

Operator:

And our next question comes from the line of John Kim with BMO Capital Markets. Please proceed with your question.

Tim Arndt:

We are not going to get into quarterly rent forecast and we're not going to get into market-by-market forecast. We run a 1.2 billion square foot business. And I think we already, in terms of a company of our size and disclosure and details, are definitely in the 99th percentile. And we just don't have that ability. So we're not going to put some numbers out there that we can't be certain of. So, if you don't mind just let's stay away from that fine level of dissection beyond our ability.

Nicholas Thillman:

You guys touched on a little bit on the [Technical Difficulty]. At your Investor Forum, you kind of mentioned that you expected ex-U.S. to outperform U.S. in a market rent growth standpoint. It's still -- is that still the case? And then maybe could you just highlight some markets that you're a little bit more incrementally positive on over the last 30 days of activity? Thanks.

Tim Arndt:

Yeah. UK is outperforming too.

Vikram Malhotra:

Hi. Thanks for taking the question. Just two quick ones. So, just first of all going back, Chris, I guess to your comment around 250 million in demand, if I heard that correctly in '24. Can you just give us what's the actual number in '23, you're comparing that to? And with your leading indicators just how long does the -- do the leading indicator sort of take in terms of conversion to leases? So, that's just the first one to understand the comparison of the trajectory. And then second, do you mind just giving us some specifics on what you're baking in for numbers for cash rent spreads and where portfolio mark-to-market is? Thank you.

Tim Arndt:

Vikram, I'll take on the -- excuse me, it's Tim, on the lease mark-to-market. I'll just say again, I don't particularly value the cash view of the lease mark-to-market. I think it's fraught with a few issues. But to answer the question, we saw that 49% at the end of the year. And I would expect, we've seen a pretty wide divergence in cash to net effective of rent spreads because of a few things, the absolute level rents has been so high and the bumps has been pretty large around 4% as you've known. So the roughtly...

Tim Arndt:

Duke is a factor as well, of course. So, the roughly 20, 25 points that we've been seeing lately, I expect we'll see mostly continue into next year.

Todd Thomas:

Hi, thanks. Just wanted to ask about capital deployment, two questions actually. First, can you talk a little bit more about the acquisition pipeline today and whether you are seeing an increase in seller interest to transact more deals coming to market and more product hitting the market? And then second, the spread between stabilized yields and cap rates for both development stabilizations and new starts narrowed in the quarter, can you talk a little bit about that trend in spreads and what we might expect in '24, particularly as you move forward? Just given the mix of build-to-suits in spec developments and some of the higher and better-use projects that you're ramping up on.

Chris Caton:

Yeah. I'll just highlight, I think if we look at the development portfolio, see the margin they are estimated at 22. Historically, that's still a very good margin. And under conservative, underwriting assumptions, I would remind everybody we've got an inflated cost to carry. And there we've got longer lease-up times and things that we expect that will be. So I am pretty confident will be several points above that estimated margin anyway.

Michael Carroll:

Yeah. Thanks. I guess, maybe Chris, can you provide some color on tenants' mindsets to adding more inventory? I mean, is it fair to say that tenants, or at least some tenants have delayed these decisions over the past year, just due to the macro uncertainty? And what does this change may have customer discussions changed at all given the holiday season that you kind of highlighted and how they didn't have enough inventory levels. I mean, has that been changing, are they ready to make those investments today?

Tim Arndt:

Yeah. I bet you that answer is, they have no idea. I mean, it's just been since 16 days, right? 16, 17 days since the end of the year. Many of them haven't even added up their numbers and I think those guys don't come out with earnings releases until much later. So with Michael's question, that was the last one. I wanted to thank you for not only this call but also attending our Investor Day, we got a lot of great feedback from you and we'll make these things better and better over time and look forward to talking to you next quarter, if not before. Take care.

Operator:

Greetings. And welcome to the Prologis Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jill Sawyer, Senior Vice President of Investor Relations. Thank you, Jill. You may begin.

Tim Arndt:

Thanks Jill. Good morning, everybody, and thank you for joining our call. The third quarter marked a continuation of themes we have been anticipating for more than a year, namely; growing supply translating to increased market vacancy; continued moderation of demand; and market rent growth that will slow until the low levels of new starts drive reduced availability over-time. We have operated in accordance with these views in both our approach to leasing, as well as timing of new development. What’s incremental to our forecast is that continued hawkish posture from central banks and the impact it’s had on rates is delaying decision-making and willingness to take expansion space early. The geopolitical backdrop has clearly become more troubling as well amounting to a lack of clarity that will likely weigh on demand. In the meantime, and also playing out to our expectations is that our existing lease mark-to-market will drive durable earnings growth as it did in delivering record rent change this quarter, as well as strong earnings and same-store growth. We remain focused on the fact that we own assets critical to the supply chain with long-term secular drivers that remain intact. Further, the outlook for future supply will continue to face structural barriers, ultimately driving occupancy, rents and values. In terms of our results, we had an excellent quarter with core FFO excluding net promote income of $1.33 per share. This result includes approximately $0.03 of one-time items related to interest and termination income, as well as the timing of expenses, which we can address in Q&A. Occupancy ticked up over the quarter to 97.5%, aided by retention of 77%. Net effective rent change was a record 84% at our share, with notable contributions from Northern New Jersey at 200%, Toronto at 187% and Southern California at 165%. Same-store growth on a net effective and cash basis was 9.3% and 9.5%, respectively, driven predominantly by rent change. We saw market rents grow roughly 60 basis points during the quarter, the slower pace embedded in our forecast. In combination with the strong build of in-place rents, our lease mark-to-market recalculates to 62% as of September. We raised approximately $1.4 billion in new financings at an average interest rate of 3.2%, comprised principally of $760 million within our ventures, as well as a recast of our Yen credit facility increasing our aggregate line availability. In combination with our cash position, we ended the quarter with a record $6.9 billion of liquidity. Finally, it’s noteworthy that our debt-to-EBITDA has remained very low and essentially flat all year, hovering in the mid-4 times range, despite our increased financing activity, a demonstration of the tremendous growth in our nominal EBITDA. Turning to our markets, while rising, vacancy remains historically very low in the U.S., Mexico and Europe. Market vacancy increased approximately 70 basis points during the quarter in the U.S., driven by low absorption, as well as recently delivered but unleased completions. Europe experienced similar dynamics with an overall increase in market vacancy of 50 basis points. At the macro level our expectations for the U.S. are for completions to outpace net absorption by a cumulative 150 million square feet to 200 million square feet over the next three quarters. Then, over the subsequent three quarters, we see that trend reversing with demand exceeding supply and recovering the net 75 million to 125 million square feet. That trend may extend further into 2025, as we believe development starts over the next several quarters are likely to remain low. Whatever the precise path, we expect that as vacancy normalizes over the long-term, our portfolio will outperform the market due to both its location and quality, as well as the strength of our relationships and operating platform. In this regard, our portfolio has been largely resilient to moderating demand. Our teams would describe the depth of our leasing pipeline as consistent with the last few quarters. In coming fresh off of one of our customer advisory board sessions, it’s clear that our customers have plans to continue to expand their footprint, increasing capacity and resiliency. However, what’s also clear is that they are slowing such investments until there is more clarity in the economic environment. In the U.S., rents increased in most of our markets with the strongest located in the Sunbelt, Mid-Atlantic and Northern California regions. Europe and Mexico were also bright spots for growth in the quarter. Rents across our Southern California sub-markets declined approximately 2% as it continues to adjust to higher levels of vacancy. While the markets and outlook are mixed, we remain confident in continued market rent growth in the U.S. and globally over the coming year, albeit at a slow pace while the pipeline continues to get absorbed. From our appraisals, U.S. values declined approximately 3% while European values remain stable, in fact, having a very modest write-up. The difference isn’t too surprising as the Fed’s language around inflation and the economy has had more effect in the U.S. capital markets, driving the 10-year up 100 basis points since our last earnings call, compared to the bund [ph] at just 50 basis points. We believe that this is likely another instance, as we saw one year ago, where U.S. appraisals at the end of the quarter have not had sufficient time to react to the increase in rates and we are thus pausing on appraisal-based activity in USLF for at least one quarter. Elsewhere, values in Mexico are up 8.5%, while China experienced its first meaningful decline of 6.5%, a write-down that we don’t believe has fully run its course. Our funds experienced their first quarter of net positive inflows with approximately $180 million of new commitments versus new redemption requests of $115 million. Given other activity in the quarter, the net redemptions have been reduced from their height of $1.6 billion to approximately $700 million or roughly 2% of third-party AUMs. In terms of our own deployment, development starts ramped up during the quarter, crossing $1 billion, over half of which is related to a data center opportunity in our central region, a testament to our higher and better use strategy and strategically located land bank. Also notable is the acquisition of $118 million of land, including a strategic parcel in Las Vegas, which will build out an additional 10 million square feet over time and brings our total build-out of land globally to over $40 billion. We are laser focused in identifying and executing on value creation in our core business, our energy business, and their adjacencies. Combined with the debt capacity and liquidity we have worked hard to build and preserve, we see the environment as rich with opportunity. Moving to guidance, we are increasing the average occupancy to a range between 97.25% and 97.5%. As a result, we are increasing our same-store guidance to a range of 9% to 9.25% on a net effective basis and 9.75% to 10% on a cash basis. We are maintaining our strategic capital revenue guidance, excluding promotes to a range of $520 million to $530 million and adjusting G&A guidance to range between $390 million and $395 million. Our development starts guidance is increased to a new range of $3 billion to $3.5 billion at our share, driven primarily from the data center start mentioned earlier. We have $500 million of contribution and disposition activity during the quarter and given our commentary on USLF valuations, we are pausing our planned contributions into that vehicle this quarter and reducing our combined contribution and disposition guidance to a range of $1.7 billion to $2.3 billion. In the end, we are adjusting guidance for GAAP earnings to a range of $3.30 per share to $3.35 per share. We are increasing our core FFO, including promotes guidance to a range of $5.58 per share to $5.60 per share and are increasing core FFO, excluding promotes to a range between $5.08 per share and $5.10 per share, growth of nearly 10.5%. I know that many of you are focusing on 2024, so I’d like to take an opportunity to remind you that the Duke portfolio will be entering the same-store pool in 2024, which will widen the recently observed delta between net effective and cash same-store growth. This is, of course, because Duke rents were mark-to-market at close one year ago, so its contribution to net effective same-store growth and earnings will be minimal, even though the cash rent change will be on par with the rest of the Prologis portfolio. In closing, we are navigating the current environment, assured that whatever the economy brings in the short-term, we are positioned to outperform over the long-term. This stems from not only the premier logistics portfolio and customer franchise with one of the best balance sheets amongst corporates, but also highly visible earnings and portfolio growth ahead of us. We know that turbulent times can bring opportunity for those who are prepared and that’s been central to our strategy and management as a company. I’d like to also remind you of our upcoming Investor Forum on December 13th in New York, our first in four years. We are looking forward to spending the day with you, sharing more about our business, outlook and opportunities ahead. Additional information is available on our website and in our earnings press release. And with that, I will hand it back to the Operator for your questions.

Michael Goldsmith:

Good morning. Thanks a lot for taking my question. I mean, Tim, can you help us reconcile some of the comments from the prepared remarks? You talked about maybe softer demand, but then there’s -- you are calling for accelerating the number of build-to-suit developments. At the same time, occupancy has been stronger than anticipated and that’s before the lower development starts hit the market. So how should we think about all of these moving pieces and just the trajectory of the supply-demand dynamics as we exit 2023 and into 2024? Thanks.

Operator:

And the next question comes from the line of Craig Mailman with Citi. Please proceed with your question.

Operator:

Ladies and gentlemen, please remain on the line. We are just having a difficulty here. Thank you. Please remain on the line.

Craig Mailman:

Hello.

Dan Letter:

Well, what I would say is, on this particular data center, we are under a strict confidentiality. So we can’t be speaking about any particular yield points by any means. But what I would say is, we have been building capabilities internally to ensure that we hit the market for these deals and you will see those play out as we announce more data centers going forward.

Operator:

And the next question comes from the line of Steve Sakwa with Evercore ISI. Please proceed with your question.

Dan Letter:

Sure, Steve. This is Dan. So the lion’s share of our Q4 starts are logistics starts. We have one, maybe two smaller data center starts that we have forecasted. But overall, it’s about 50-50 build-to-suit and spec. And let me just highlight that we have been calling for a back-end loaded forecast for about four quarters now. As we talk about market development starts now at 65% -- I guess down 65% from the peak, this is playing out exactly as we expected and we have been gearing up all year for a really heavy Q4 start volume.

Dan Letter:

Correct.

Todd Thomas:

Hi. Thanks. Question, as you think about 2024, Tim, you mentioned that market rent growth increased 60 basis points relative to last quarter. That’s down from 2.5% last quarter. I think you indicated that market rent growth is expected to be positive in the year ahead. As we think about the trajectory of rent growth and what you are anticipating, do you see potential for sequential or year-over-year decreases in market rents in the U.S. or globally over the next few quarters as deliveries outpace absorption or do you expect rent growth to stay positive throughout that period during that timeframe?

Operator:

And the next question comes from the line of Caitlin Burrows with Goldman Sachs. Please proceed with your question.

Hamid Moghadam:

Sure. It’s a dynamic market and I think that’s the essence of your question. It’s really hard to get a handle on what the returns should be and how we look at acquisitions. But here’s a model for thinking about it. First of all, we are even pickier than we have been with respect to quality and fit with our portfolio. We are not -- before you had to buy the good with the great in portfolios and we had to go through the massive exercise of disposing of the properties that we didn’t want, which we did actually quite successfully in a declining cap rate environment and we actually made money on it, but we don’t expect that to be the case going forward. So we are really being picky about what we buy. The portfolios that we are going to buy are almost virtually 100% whole portfolios. Secondly, if you really think that, look at where treasuries are, 150 basis points have gone to, call it 4.5%, 300 basis points increased. Those kinds of properties, core properties, we are trading in the high 5%s, low 6% IRRs. Let’s stay away from cap rates because of a market-to-market complexity of talking about cap rates. But call it 6%. So just adjusting for the change in treasury yields, simplistically, you would have to see a 9% on leveraged IRR and that’s if supply and demand of capital were sort of in equilibrium. We get a sense that there’s going to be more opportunities coming our way and it is in a capital-constrained environment and we happen to be in the fortunate position of having a really good balance sheet and able to take advantage of those. I don’t think there’s going to be distress in the terms of a post-savings and loan crisis or any of the downturns, but I think the opportunity set is going to exceed the available capital and I think we will be taking advantage of that. So I would say on leveraged IRRs that have a 9% handle on them, maybe as much as 9.5% depending on the circumstances. And we are seeing that supply loosen up and come to the market. So expect to see more transactions in the next six months. Dan, do you have anything to add?

Operator:

And the next question comes from John Kim with BMO Capital Markets. Please proceed with your question.

Hamid Moghadam:

Yeah. On the rental forecast, I am afraid you are going to have to wait for that when we issue guidance and we get into that. And one thing we are going to stay away from is quarter-by-quarter forecasting of rents. It’s hard enough to guess what it is on an annual basis, much less on a quarter-to-quarter forecast. So what was the first part of the question? Oh, occupancy trade-off.

Hamid Moghadam:

It depends on the actual markets. There are about 20% of the markets that I can see us driving for occupancy and about 80% of the markets that are still in equilibrium or tighter. But the key to your question is what you asked in the middle of it, which is, how do you expect that to change? And the reason we are not going to get super aggressive on rents is because we have a belief that, I mean, just look at the starts. They are down 65% and even with moderating demand, we are going to get something like 60% or 70% of that shortfall that we are going to encounter in the next three quarters shortfall of demand, we are going to get it back in the subsequent three quarters. So there’s no sense really going cheap, it’s just. But I would say 20% of our markets, we are going to be more focused on occupancy.

Nicholas Yulico:

Oh! Thanks. Just a two-porter on Southern California. So I guess, first, I wanted to see if you are seeing any benefit in your portfolio since September in terms of the port being resolved, the worker strikes impacting LA Basin or Inland Empire, if you are seeing any benefit there and pick up any activity. And then, secondly, just wanted to hear latest thoughts on why you think some of the weakness that you have cited there in rents in Southern California, what that dynamic is out there that would be different than other markets, meaning that Southern California is not a leading indicator for other parts of your portfolio?

Chris Caton:

Yeah. I will build on that by saying as the market is digesting the demand and supply picture that Hamid described. We are beginning to see some differentiation in submarkets where LA, Orange County is proving more resilient and the Inland Empire is a bit softer.

Camille Bonnel:

Good morning. First, a clarification that I want to get your thoughts on guidance. Can you clarify if the SoCal market rent change in the opening remarks is on a sequential or annual basis? And then appreciate majority of your leasing for 2023 has been addressed and there’s little that could change your core outlook from here, but want to better understand the level of conservatives being factored into guidance looking into your end. What could change your views more positively or negatively? Thank you.

Operator:

And the next question comes from the line of Ron Kamdem with Morgan Stanley. Please proceed with your question.

Hamid Moghadam:

Okay. Your first question was great advertising for our Investor Day because that’s what we are going to devote the time to is understanding our essentials business, our data center business and all those things. So let me defer answering that question to that date. And by the way, even on that date, you are not going to get as specific an answer as you would like. I just tell you that in advance, because these are very lumpy and it depends what quarter or what year a deal lands in. Chris, do you want to address the second part?

Operator:

And the next question comes from the line of Anthony Powell with Barclays. Please proceed with your question.

Tim Arndt:

So, hey, the view is 7% in United -- globally and in the U.S. We are about mid-6s so far this year, so that implies growth in the fourth quarter as we described earlier. And then as it relates to forward guidance, I’d like to underline our upcoming Investor Day in December as the time to look for new information.

Michael Carroll:

Yeah. Thanks. How does the 150 million square feet to 200 million square feet gap between supply and demand over the next three quarters compare to your expectation for all of 2023? Now, correct me if I am wrong, I believe that you highlighted that there’s going to be about 150 million square foot gap in 2023. I mean, is that still a fair assumption or has this delay in demand due to the market uncertainty has kind of widened that out a little bit?

Hamid Moghadam:

Yeah. But I would say, our previous forecast did not anticipate the sudden jump in rates that has come in the last month and a half. We thought that treasuries were going to settle in the mid-3s, not mid-4s, maybe mid to high 3s and not mid-4s or approaching 5. So that I think has taken and shifted some of the demand out. But the thing that encourages me and we will have to see -- wait to see this, is that companies are not shutting down their dialogue with us in terms of their long-term needs and are build-to-suit discussions are every bit as good as they have been across most cycles. But they are not pulling the trigger just yet, given that those things generally involve major capital expenditures and those are all being scrutinized by the C-suite pretty tightly these days.

Vikram Malhotra:

Thanks. I just wanted to get a better sense of, you talked about deferring growth, I guess, across SoCal -- in rent growth across SoCal, Mid-Atlantic, I think, you referenced Sunbelt. Can you just give us a better sense of the magnitude of this dispersion? And I guess, Chris, do you expect this dispersion to continue over the next, call it, six months to months?

Operator:

And the next question comes from the line of Mike Mueller with JPMorgan. Please proceed with your question.

Hamid Moghadam:

Absolutely. Because the margins embedded in the data center development, Mike, are orders of magnitude higher, certainly on the basis of market value under industrial use or purchase price under industrial use. So we would be doing that even if the market was tight as a drum. And by the way, let’s not get carried away. The market is in the high 4s occupancy, I mean, vacancy, sorry, that is absent 2021 and 2022 I would have said that would be my Christmas present would be vacancy rates that are sub-5 in any part of the cycle other than the last couple of years. So the markets are strong, but the data center opportunities, if you can get the power, the demand is there and it’s been boosted by AI and a bunch of other things. So we see sort of a rush of data center opportunities and the large players and they are all big credit players into the business and they can’t get enough of this stuff to keep up with demand.

Bill Crow:

Yeah. Thanks. Two quick questions. First of all, on the economy, I am wondering if you are seeing any changes to your watch list among your tenants or any sectors in particular that are starting to show weakness. And the second question is really in order to get the kind of 9% ROE returns on acquisitions, do you have to target longer waltz or how do you get that if we don’t see distress among current holders or owners? Thanks.

Tim Arndt:

And then the second question on the waltz, extended waltz being necessary for the kind of IRRs we are targeting in acquisitions.

Tim Arndt:

Yeah. I would just pile on there that we look at these opportunities of whether it be one year to three years or four years of negative leverage as an opportunity, really. We look at total return on every deal. And again, we take it through our filters of quality, mark-to-market and whether we want to hold it long-term or not and then we layer that on with our potential essentials, revenues and synergies and otherwise. So while it’s one consideration, so are all these other factors.

Blaine Heck:

Great. Thanks. I just wanted to follow up on guidance. You touched on this a little bit, but guidance implies a decrease in FFO in the fourth quarter. Can you just talk a little bit more specifically about some of the moving pieces there and one-time items that are influencing the numbers in the third or fourth quarters and whether any of that noise is going to persist into 2024?

Operator:

And the next question comes from the line of Ki Bin Kim with Truist Securities. Please proceed with your question.

Chris Caton:

Hey, Ki Bin. I will take the utilization question. Thanks for it. As you see on the page in supplemental, there are multiple metrics on the page and we look at all of them in totality and additional ones that are not included in the supplemental. So we have a range of proprietary data, whether it’s our IBI survey, tenants in the market, customer decision-making timeframes, our sales pipeline. Specific to the utilization data, that lags. That does not lead economic and real estate cycles we have seen that over time. And so what I think this is best understood in the context of today’s retail sales numbers, which shows a resilient consumer that is outperforming expectations and leading to lower utilization levels.

Operator:

And the next question comes from the line of Vince Tibone with Green Street. Please proceed with your question.

Tim Arndt:

Sure, Vince. We covered a couple of them. I talked about Southern California. I point to Houston, Indianapolis, and then outside the U.S., the softest market might be Poland.

Tim Arndt:

And China and I think I’d offer now that market vacancies are beginning to gap out again, I think we are going to see quality make a bigger difference in terms of portfolio mix.

Vikram Malhotra:

I just wanted to get your thoughts to just clarify one thing more broadly. Two trends, I guess, one, just the whole reshoring team that we are hearing more and more about. And then second, just Amazon as they have put a lot of capital into the coast and across the country. I am just wondering sort of when you marry those two things together, is there sort of greater investment moving towards the Midwest or more manufacturing pockets? Is that an opportunity for PLD going forward?

Operator:

And our last question comes from the line of Blaine Heck with Wells Fargo. Please proceed with your question.

Hamid Moghadam:

Yeah. I think the effect is going to be indirect, because the Middle East is not obviously a source of product or exports or we are not active in any of those markets. So it will be a second order effect on the macro economy. And if the Fed remains very aggressive on rates, if you believe their talk and all of a sudden we have some drop off in demand, because that conflict expands and the nightmare scenario would be that a couple of tankers get sunk in the Persian Gulf at the narrow end and oil goes to $200 a barrel. I mean, the bets are off. But boy, if we see that scenario, I can’t think of a better business to want to be in and I hate to see that scenario happen. But actually on a relative basis, it should be good for our business, because it will mean that people will, first of all, inventory becomes really important and it means that -- it’s yet one more uncertainty like the pandemic, like the earthquake, like all these other disruptions that we have seen that will push the general posture of companies from just in time to just in case. So I hate to say it would be good because it’s an awful situation that’s going there and before this is all over, a lot of innocent people are going to get killed and I don’t want to see this happen. But I don’t think its impact on the business on a relative basis is going to be terrible. I am honestly more worried about the Fed overdoing it than that conflict escalating. But those things are very hard to predict. I think that was our last question. So we really appreciate your participation. Really look forward to seeing all of you at our upcoming Investor Day and I promise it will be really good. So take care.

Operator:

Greetings and welcome to the Prologis Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note that this conference is being recorded. I will now turn the conference over to our host, Jill Sawyer, Vice President of Investor Relations. Thank you. You may begin.

Tim Arndt:

Thanks, Jill. Good morning, everybody, and welcome to our second quarter earnings call. We had a very good quarter with outstanding results across our uniquely diversified business. It was highlighted by record rent change, a ramp up in development starts roughly half of which were build-to-suit and the acquisition of over $3 billion of real estate at accretive returns deepening our scale in key markets. We also earned record strategic capital income and raised $1.2 billion in new equity across the vehicles. We are watching markets closely and we’ve been clear that we expect vacancies to arise over the course of the year from a normalization of demand and elevated development deliveries. We’ve indeed seen vacancy build and expected to reach the mid-fours in the US by year end but continue to believe that fundamentals will regain momentum in 2024 with the outlook for new supply declining as development starts continue to fall this year. In short, our outlook is completely unchanged and we feel great about our business. Turning to our results, core FFO excluding promotes was $1.25 per share and including promotes was $1.83 per share, both ahead of our forecast. Our promote income was generated from both USLF and FIBRA Prologis and meaningfully exceeded our guidance. USLF generated promote revenue at Prologis share of over $635 million. In its three year performance period, assets grew by over $10 billion and the fund delivered an IRR of over 20% net of all fees and with very low leverage. In terms of our operating results, average occupancy for the quarter was 97.5%, down 50 basis points from the first quarter and in line with our expectations. Rent change on starts was a record on both a net effective and cash basis, 79% and 48% respectively. Net effective rent change on signings of more forward-looking build was an impressive 87% with notable rent change from Phoenix at a 137%, Northern New Jersey at 150% and Southern California at a 181%. Global markets also contributed to strong signings with Mexico at 34%, the UK at 36%, Central Europe at 51%, and Canada at a 150%. Bottom-line rent change has been both robust and broad based. Market rents continued to grow albeit at a slower pace increasing a little over 1.5% in the quarter. In-place rents grew by approximately 2.5% over the quarter, the net of which translates to a lease mark-to-market of 66%, down from 68%. We explained last quarter that our lease mark-to-market would generate $2.85 per share of incremental earnings as leases roll over time without any additional market rent growth. Interestingly, that future upside is virtually unchanged at June 30th, even though we crystallized rental increases over the quarter. This is because a lower lease market-to-market is now being applied to a larger base of in-place NOI. Ultimately, same-store growth is our most important operating metric and this quarter remained exceptional at 8.9% on a net effective basis and 10.7% on cash. I'd like to highlight that even with $4 billion of investment during the quarter, the balance sheet remains in impeccable shape, with liquidity of approximately $6.4 billion and debt-to-EBITDA of 4.2x. We raised approximately $7 billion in debt financing across four currencies at an interest rate of 4.9% and an average term of eight years. Turning to our markets, the trend to normalization, which we've been speaking to for some time continues. Proposal activity, gestation and pre-leasing of vacancy are all within a few percent of their pre-COVID levels, a period which we’ve highlighted many times was itself historically strong. Our IDI sentiment index ticked in the quarter to over 58 indicating a continued strong backdrop for demand as described by our customers and further supported by utilization increasing to 85.5%. Unsurprisingly, customers have been more deliberate in their decision-making amidst the uptick in vacancy. We continue to believe that this will be a short-lived reprieve as construction starts have indeed declined significantly for our expectations. Starts in the second quarter were down approximately 40% across our US markets and 50% in Europe. We see deliveries in 2024 falling short of demand, reducing vacancy over the course of next year. Significant attention has been given to Southern California in recent months, while our portfolio is over 97% leased and we are achieving record rent change, vacancy has grown partially due to port operations that have not yet returned to normal. Additionally, some customers are re-evaluating expansion in the Inland Empire diversifying operations to other Southwest markets. With all this in mind, we've reduced our rent growth forecast for Southern California in 2023. However given what is still low vacancy together with structural headwinds to new supply and a huge consumption base, we believe strongly in this market. The global nature of our portfolio means that we will see markets contribute to growth in different periods evening out peaks and troughs. We see this playing out in a number of markets across the globe, where our rent growth forecast is increasing this quarter such as Las Vegas, Texas, Europe and Mexico to name a few. All this together with the more than 5% rent growth to-date has us re-forecasting the full year to a range of 7% to 9% on a global basis. What matters more than what will transpire in the next six months is what we see over the medium term, which is growth that will be fueled by escalating replacement costs, growing barriers to new supply and ongoing secular drivers of demand. Late in the second quarter we announced and closed on the acquisition of over 14 million square foot portfolio in many of our best US markets. We estimate an 8% unlevered IRR simply at the property level, exclusive of additional return driven by property management synergies, essentials opportunities, including solar and the upside we expect through revenue management. While this was the largest transaction in the quarter, overall activity increased slightly bringing additional price discovery to the market. In Europe values have been relatively stable, experiencing a 1% decline over the second quarter. Latin America saw an increase in values with write-ups in Brazil and Mexico of 2% and 5% respectively and write-downs in the US were in line with expectations approximately 5% driving the cumulative decline over the last year to 12%. With this move, we view the values as fair and are proceeding on redemption in USLF for the third quarter. New redemption requests in the quarter totaled approximately $800 million and was concentrated in USLF and our China venture where values have held up better. Together with other activity the net redemption queue stands at approximately $1.6 billion. Outside of open-ended funds, the company raised an incremental $1.2 billion comprised of $500 million in the FIBRA and NPR, as well as a new $700 million commitment for a complementary vehicle in Japan, PJLF, which is detailed in our supplemental. Before turning to guidance, I'd like to mention a few updates across our Essentials business. We added 45 megawatts of new solar production and storage in the first half of the year, bringing our platform total to 450 megawatts, nearly 50% of the way to our 1 gigawatt goal for 2025. Additionally, Prologis Mobility, our EV business has more than 65 lead charging sites in the pipeline across the US and Europe. In terms of our outlook for the balance of the year, we are guiding average occupancy to range between 97% and 97.5%. We are increasing our same-store guidance eight three quarters to nine and a quarter percent on a net effective basis and 9.5% to 10% on a cash basis. Net effective rent change propelling same stores will continue to accelerate in the next two quarters and average approximately 80% over the year. We are maintaining our G&A guidance to range between $380 million and $390 million and are increasing our strategic capital revenue guidance excluding promotes to range between $520 million and $530 million. As a result of the outperformance in USLF’s promotes, we are increasing our forecast for net promote income to $475 million. Year-to-date, we are in excess of this amount, but the amortization expense will continue over the back half of the year. Development starts picked up during the quarter with commencements of 12 projects around the globe and while we remained very selective on new spec starts, we are maintaining our guidance to $2.5 billion to $3 billion for the year. We had over $550 million in contribution in disposition activity during the quarter concentrated in Japan and Mexico and are maintaining guidance of $2 billion to $3 billion. Putting it all together, we are increasing guidance for GAAP earnings to range between $3.30 and $3.40 per share. We are increasing core FFO including promotes guidance to a range of $5.56 to $5.60 per share and increasing core FFO executing promotes to range between $5.06 and $5.10 per share with the midpoint representing over 10% annual growth marking our fourth consecutive year of double-digit earnings growth. The quarter highlighted many ways that Prologis has diversified itself across geographies, business lines and capital sources, while rents in some markets decelerate, others with different demand drivers are now accelerating. We're seeing the same balance with property values as demonstrated over the quarter. Further, we generate incremental cash flows and value creation outside of the pure rent business in closely related and synergistic platforms, namely Strategic Capital development and now Essentials. Our fundraising efforts also demonstrate the value of having alternatives. Clearly, our wide access to debt capital has been a tremendous advantage, but we also benefit from access to varied equity sources for our ventures by utilizing open end vehicles, JVs and public structures, we have the ability to be opportunistic and proactive in changing capital markets. As we close, I'd like to remind you of two upcoming events of Prologis later in the year. Our Groundbreakers Thought Leadership Forum on September 27th, right here in San Francisco, and our Investor Forum on December 13th in New York. Additional information for each is available on our website. With that, I will hand it back to the operator for your questions.

Tom Catherwood :

Thank you, and good morning all. Tim, appreciate your commentary around guidance on projected rent growth. Kind of a two-part question on that first. Have you adjusted your projection for US rent growth? I think it was previously 10% and you mentioned it globally now. And then, can you provide some more detail around those markets or regions where as you said you've seen you know rent growth and values kind of exceed expectations and then conversely are there others like Southern California that have somewhat lagged your expectations?

Operator:

Our next question comes from Blaine Heck with Wells Fargo. Please state your question.

Chris Caton:

Hey, it's Chris Caton. So, really when we look at that data, the right way to look at that is against our open availabilities. And when you put those proposals against our open availabilities they are actually in line or above the historical average, 48% is that number, it's something we've used in the past on these calls. And so how we do make the proposal numbers you're talking about tie with that view, well, there are two or three drivers. The first is that the availabilities just, the role that we have in the next 12 months are low relative to history. The second is those proposal volumes do include, sometimes multiple proposals on a single unit and that has declined over the last year as we've discussed previously. And then, third, there's some seasonality where June would be a soft month.

Craig Mailman:

Yes. Thank you very much. Maybe it's open two questions here, I guess, maybe Tim and Chris to follow-up on Tom's question around the market rent growth. It looks like the U.S. dropped about 200 basis points. And if could you give us some more numbers around what the biggest moving parts of that were from a market perspective? And then, separately on, on occupancy here, you guys seemed at 80 BPS sequentially on ending core occupancy and then you're 50 basis points on average. But, Secaucus, New Jersey, Central Valley, Atlanta, all kind of came down here. Just curious if there's, if that's where you're seeing the more supply or if you had any incremental impact from the Blackstone acquisition that was laid some of those numbers?

Hamid Moghadam:

Yeah. The one thing I would add to that is that, I think we mentioned to you last quarter that we would be continuing to push rents pretty hard and would like to see occupancies a bit lower than 98%. So, what you think is consistent with what we're planning to do and actually we accomplished what we wanted to do in that we tracked a number of leases that we lose because of price and how hard we were pushing. And we modulate around that to figure out the trade-off between rents and occupancy. So we did see as a result of our efforts, an uptick in basically the percentage of deals lost due to price. It went up from about 10% to about 20%, which is kind of where we would like to have it. So it’s [Indiscernible].

Caitlin Burrows:

Hi, good morning, everyone. Maybe like to mention there has been a lot of discussion about Southern California. So ask another one there, but I guess just thinking about the idea that it might be lagging now, can you give more details on what could be causing the change in that market? Kind of how long it could last in which market could potentially face similar issues?

Operator:

Thank you. And our next question comes from Steve Sakwa with Evercore. Please state your question.

Hamid Moghadam :

Yeah. Let me start on the development volume and then pitch it over to Dan for the other commentary. We do not care about development starts. We do not care about acquisition guidance. We will - we make all these decisions one-by-one and only when it makes sense to pull the trigger on these. They're buying large already more or less and we could, on a discretionary basis, start all of them today. But that would not be a wise thing to do and we're not going to do it just to meet some artificial guidance. I think the main driver of earnings in this company, which is what we all care about is rental growth and same-store growth. And all I can tell you is that with mid-60s mark-to-market, you can model whatever scenario you want, including zero rent growth from here on out. And for the next four years, five years, you're going to get same-store NOI increase of 7.5% with no rental growth from this point forward. You put in our normalized forecast for a rental growth our best guess and that same-store growth will be at 8.5%. Both of those numbers are consistent with low-double-digit earnings growth, while maintaining our leverage, which is, which is so low. So, I don't - we don't need development starts to drive anything, and we're not going to get in a position of – or jeopardizing our pricing power by virtue of wanting to meet an artificial development goal. Now having said all that, we will start the ones that we think we can lease efficiently and economically and quickly. And the land is there. The approvals are there. And our ability to put buildings up is there. So, there is no benefit in front end loading that stuff and pushing it ahead of where it needs to be. Dan, do you want to address the site question?

Operator:

Thank you. And your next question comes from Ki Bin Kim with Truist. Please state your question.

Dan Letter:

Yeah. I mean, certainly, portfolios that we would acquire would be at a discount to replacement cost. And replacement costs has moved up tremendously in the last couple of years by virtue of - forget about the land piece, because that's a squishy piece that's related to rent and all that. But the construction piece has really, really escalated. So to buy standing inventory in our best markets is always a really great thing that we look at. The quality of the portfolio was quite high, I would say very close to our own portfolio. The percentage that we would dispose of is zero. So it was hand selected to meet our requirements. I wouldn't call it a steal. We didn't steal anything. I think it's a market rate transaction and with the upside built into the rents, you know, 8% IRR in a world that I think is going to be a sub 3% inflation rate. And then, all the added things we can put on top of it and with Essentials and all that, I've developed capital at those rates all day long.

Michael Goldsmith:

Good morning. Thanks a lot for taking my question. The lease percentage of the development pipeline has been dropping pretty materially kind of back to 2019 levels. What are the factors there? And does this impact your ability that hate your yields expected on these developments?

Operator:

Our next question comes from Nick Thillman with Baird. Please state your question.

Hamid Moghadam :

No. They go somewhere else. I mean, those are real needs and at the end of the day, warehouse rent is - as a percentage of total logistic cost is relatively small. So they are not going to go out of business because of that. I mean, frankly, the pressure on energy prices, on fuel prices, on labor prices and all that, if you are going to worry about something those are more significant than their ability to pay rent. 70% is not a unusually low retention rate. I mean, if you, again forget about the last three years where there was no space and people had no choice, that would be a very normal rate of retention for us, going back and looking at it over 10, 20 year timeframe. So, and we are trying to find out what the efficient point is for losing customers because of price. We can make that number be zero, but that would not be wise because that means we're not pushing rents as hard. So, 20% is definitely still below where I would start worrying about dial and get the other way. If it got to about 30%, we may want to moderate on that. But still, generally speaking, the bias is towards pushing rents and not occupancies. Now markets where that is not the case, we’ll dial it back some. But that's a decision we make day-to-day based on the data that we see. It’s not a top down type of decision.

Ronald Kamdem:

Hey. Just a couple quick ones. Just going back to the market rent growth forecast and also Southern California, can you give us some context in terms of what was the first half growth on the market rent growth? Number one. And then, number two, when you talk about sort of Southern California, decelerating, is there a way to get some context on – is it just a deceleration or should we be bracing for things to potentially turn negative in that market?

Operator:

Our next question comes from Michael Carroll with RBC Capital Markets. Please state your question.

Tim Arndt:

We would be in the 80s. Let me put it that way right now, and that would contemplate market rent growth from here. So, we feel good about still hitting that kind of number, but we will give full guidance on it later in the year.

Operator:

Your next question comes from Camille Bonnel with Bank of America. Please state your question.

Tim Arndt:

Well, I'll take the first one. I think I want to be sure we're not conflating a couple things on same-store. So Hamid’s illustration earlier was about a four year horizon what we think will unfold in terms of market rent growth. That would be that roughly 8.5% coverage. And I'll go…

Tim Arndt:

Sorry.

Tim Arndt:

Yeah. So, and that number by the way incidentally incorporates what will happen in due confirms of its fair value lease adjustments and what we think will happen in occupancy. So that's kind of fully baked and that's a four-year discussion. In terms of this year, there's going to be very little that could change in any direction on market rents that would affect this year's same-store growth. Just too much of the lease mark-to-market and the year frankly are now baked that we're going to land pretty tightly in the range that I…

Tim Arndt:

Yeah, true.

Operator:

Our next question comes from John Kim with BMO Capital Markets. Please go ahead.

Tim Arndt:

Yeah, I'll pick up on the on the earning side. It's about a $0.05 roughly of our are raise would be attributable to that. The remainder would be the same-store component.

Operator:

The next question comes from Nicholas Yulico with Scotiabank. Please state your question.

Chris Caton:

Yeah, I'm going to make a general comment and it applies maybe a bit more to 3PLs, but it applies to everybody. Southern California is a market were embedded mark-to-market is well over 100%. The 3PL business is a very low margin business. Very thin margin business. If you've taken ten percent more space than you would needed and now with the changed outlook you think you need 10% less than you need it before that's a 20% swing in how much space you're going to need the over the over the longer term. If you can make three or four x what you would make at a year - in a year, moving boxes around by subleasing that space, you would do that. So, the propensity to adjust your space to your needs is much greater in this cycle because of this significant mark-to-market that's in better than some of these leases. Now, if you're in a market where - and I can't think of a market like that. But let's say you were in a market where you're essentially a market or 10% below, by the time you pay a leasing commission and encourage the downtime and maybe put some TI's in the space, you're not going to make money on that space. So it's more of a cost avoidance and therefore not much of that happens. Southern California is actually viewed as a source of profit for these guys to sublease their real estate. So they're going to do it much quicker than before and that's in fact what we’ve seen. So and - it all goes back to having less than 1% vacancy in this market not too long ago. So, look, Southern California has been a crazy rent growth market for the for as long as I remember, whether you look at 30 years or five years or three years, but the last three years have been have just been ridiculous. And for anybody to think that that would continue forever, I - we certainly don't make our investment decisions based on that and we don't operate our portfolio like that. So, we're not surprised about what's going on in Southern California.

Vikram Malhotra:

Thanks for taking the question. There is do two questions. One, just looking at the lease proposal chart, correct me if I'm wrong, I think this is all in square feet and I'm just wondering how this would compare, whether you look at it as a percent of expirations or the portfolio just because you're a much bigger portfolio today with Duke in there and other acquisitions. So as a percent of the portfolio is, there something unique in terms of the trend downward it would seem as a percentage it's probably much lower. So if you clarify that number one. And then, just number two, bigger picture, Hamid, if you're talking about normalization in trends to still healthy levels but that's just in normalizing to 2019. Where do you think the risk premium should be for public private warehouse space? Should it be higher? Is it fair as it is today? Thanks.

Hamid Moghadam :

And then Vikram on the proposal volumes, yes as square footage and as to reconciling it I'd point you to the answer earlier to the same question and happy to go through it offline if that's not sufficient for you.

Todd Thomas:

Hi, thanks. Just the number one on market rent growth. You've previously talked about a 300 to 500 basis points spread in market rent growth between coastal and non-coastal markets. In light of your comments around Southern California, can you just talk about how you expect that spread to trend as you look ahead to 2024? And are there other coastal markets that you would include in the discussion with Southern California as you think about the labor strikes and the impact that that's having at the ports?

Chris Caton :

Yes, 100%.

Operator:

Our next question comes from Anthony Powell with Barclays. Please state your question.

Hamid Moghadam :

Yeah, I’ll start it and pitch it over to Chris then. Look, the reason we stopped contribution is not because we didn't have the capacity to buy these assets in our funds, we did because they're very low leveraged. The reason we did is that we couldn't really look our investors in the eyes and say that we all have clarity around the values for the fund, for – for the properties that are being contributed. So we're not in a rush to do that. There were some companies that force these decisions back in the last cycle that that - and we didn't, and we fared much better than those companies that force, - forced the contributions. So as long as there is clarity on valuations, we will contribute assets at least we would be willing to contribute assets. But I remind all of you, at the end of the day, the independent advisory board for each fund makes a decision of whether they want to accept those contributions or not. It's not a must put, must take kind of a situation at all. So, but, we couldn't very much look them in the eyes and say that this is the value because there was uncertainty around it. In the markets that you mentioned, there is clarity around the values. Europe, we felt that it reached a point of clarity at the end of last quarter and we believe the U.S. is not becoming very clear too. And the whole process took about three quarters from the downturn, which is what we expected this to say based on experience. So you should expect contributions to continue at the sort of a normal or maybe somewhat modulated pace.

Hamid Moghadam :

Caton, do you have anything to add to that?

Operator:

Thank you. And our next question from Mike Mueller with JP Morgan. Please go ahead.

Hamid Moghadam :

We are not trying to dispose of a whole lot because remember, we're almost through all the liberty ones and Duke had very little dispositions associated with. We sold a couple of them of late and the latest Blackstone portfolio has zero dispositions in it. So, I mean, other than the normal sort of Bluebird dispositions we're kind of reaching the end of cleaning up the portfolio. There are few deals here and there, but then what would you add to that?

Hamid Moghadam :

But it's not a material amount. It’s not going to move the need on our company.

Nick Joseph:

Thanks actually, Nick Joseph here with Craig. Just going back to the comment you made earlier on the Blackstone portfolio deal you said you worked with the seller, kind of what would work the both sides and obviously they are lot clearly there was a lot to choose from. So, what were you focused on, is there from a portfolio or strategic perspective in terms of the assets you’ve acquired?

Operator:

Our next question comes from Jamie Feldman with Wells Fargo. Please state your question.

Hamid Moghadam :

Yeah. U.S. has got the highest rent growth over time of any of these markets because it's a more dynamic economy, bigger GDP growth I think than Europe certainly. But Europe has always been a sort of more muted market in terms of supply. Vacancy rates are always lower in Europe and land is metered out by usually government authorities. It’s not so much of a free market. You go buy from the former land. So, it's a more muted growth pattern than the US one. But we mitigate that because we employ more of a fund structure in Europe. So the combination of the earnings on the fund management business plus the growth in the underlying real estate business makes up for the - makes up for that difference. Asia, China used to be a powerhouse in terms of economic growth. It frankly has surprised everybody coming out of it with respect to how slow it's been to turnaround. I'm not smart enough to know whether that's a, that's a long-term trend, or a short-term trend. But that market has gone from basically 10% per year type of GDP growth to more like a 5% rate of growth. Japan, probably the best long-term market for us, from a development point of view has always had low rent growth. 1% to 2% rent growth would be great. But boy!! there's no CapEx. There's no turnover. There is, - and yields have maintained themselves in Japan, better than anywhere else. There's been no cap rate expansion in Japan at all. And remember, there's hardly any mark-to-market. So there is no cap rate expansion. And in fact, I would say there's probably 10, 15 basis points of compression in the last 12 months. So it's a good development market and from an operating point of view, we talk cap rates. But at the end of the day, the cash flows in Japan are very strong. There's very little of it leaks out to CapEx and other things. So, each market is different and each market when you look at it as a portfolio plays its role within our overall business.

Camille Bonnel :

Hi. Thanks for taking my question. Does the valuation of your USLF fun take into account the recent portfolio acquisition you announced or is that more of a comp for next quarter?

Operator:

Thank you. And that concludes today's conference of parties. All parties may disconnect. Have a good day.

Operator:

Greetings and welcome to the Prologis First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] And as a reminder this conference is being recorded. It is now my pleasure to introduce to you Jill Sawyer, Vice President of Investor Relations. Thank you, Jill. You may begin.

Tim Arndt:

Thanks, Jill. Good morning, everybody, and welcome to our first quarter earnings call. We began the year with results and conditions that remained strong. Market rents have continued to grow, demand has been consistent and we're seeing sharp declines in new construction limiting future supply. While logistics real estate is very healthy, the macroeconomic picture continues to be a concern and we anticipate it could weigh on customer sentiment over the balance of the year translate into some demand that could be delayed into 2024. However, this will overlap with a slowdown of new deliveries, creating a sustained dynamic for high occupancy and continued rent growth into next year. Beginning with our results, our core FFO excluding promotes was $1.23 per share and including promotes was $1.22 per share. Our results benefited from higher NOI in the quarter but offset by approximately $0.02 of higher insurance expense from an unusually active storm season experiencing a year's worth of claims activity in just the first quarter. In terms of our operating results, both ending and average occupancy for the quarter were 98%, holding average occupancy flat for the fourth quarter. Rent change was 69% on a net effective basis and 42% on a cash basis each a record. The unusually wide spread between the two is reflective of lower free rent and higher escalations in our new leasing. Despite the step-up of in-place rents, our lease mark-to-market expanded to 68% during the quarter as market rent growth remained strong and slightly ahead of expectations. With the remaining lease term of roughly four years, this lease mark-to-market represents over $2.85 per share of incremental earnings as our leases roll the market, providing visibility to future income and dividend growth. These results drove record same-store growth 9.9% on a net effective basis and 11.4% on a cash basis. During the quarter, our efforts on the balance sheet were focused on liquidity, raising over $3.6 billion in new financings for Prologis and our ventures at an interest rate of 4.6% and a term of nearly 14 years. This fundraising total does not include $1 billion of additional capacity from a recast of our global line-of-credit, which closed in April, and brings our total borrowing potential under our lines to $6.5 billion. As mentioned, fundamentals in our markets remain strong, but we expect that a more cautious outlook will weigh on the pace of demand. This is not a new perspective as our forecast 90 days ago prepared for a weakening sentiment and how the top-down view for some occupancy loss over the year. We haven't changed that outlook, but we also haven't upgraded it despite the quarter's outperformance. As an update on proprietary metrics, our proposal activity ticked up in absolute terms and is in line with strong market conditions as a percent of available space. Approximately 99% of the units across our 1.2 billion square feet are either leased or in negotiation. Utilization ticked down to 85%, which is normalizing to a level that our customers view as optimal. E-commerce leasing increased during the quarter to 19% of all new leasing. We avoid drawing conclusions from a single quarter of activity on most metrics, but it's notable here, that e-commerce leasing picked up meaningfully back towards its five-year average. As we've said before, we ultimately look at retention, pre-leasing and rent achievement as the best real-time metrics of portfolio health, and on that basis, our results are certainly very strong. We expect that the current 3.5% vacancy rate in our US markets will build to the low 4s toward the end of the year, before turning back to the mid-3s by late 2024, due to the lack of incoming supply and accounting for moderating demand. We anticipate a similar path in our European markets, and of course, even a 5% vacancy rate is historically excellent and supportive of strong rental growth. We expect this pattern to play out in our true months of supply metric, which was a very healthy 30 months in the US and should decline into the 20s next year. We are launching markets that have large development pipelines such as a few in the Sunbelt in the US, but so far that supply also seems manageable. In Europe, most of our focus is on the UK, where development starts have continued even as demand has moderated, which will lift market vacancies and may pressure rents. And Japan is also a market which is expected to see larger increases in vacancy over the year, but similarly, expects a slowdown in new supply due to surges in land and construction costs. Taking all of these movements into account, we are holding our market rent growth forecast for the year at 10% in the US and 9% globally. In capital markets, transactions continue to be few and far between, but the pickup in activity suggests, we will see a busier second quarter. Appraised values in our funds declined 1% in the US and 2% in Europe during the quarter and 8% and 18% respectively from the peak. It's worth noting that our view of public market prices and NAVs that they have adjusted much more than is warranted for these levels of write-down. Redemption requests and our open-ended funds have slowed significantly with the redemption queue nearly unchanged around 5% of net asset value. This is reflective of both a slower pace of new redemptions as well as rescissions of prior requests. Combined with over $150 million of new commitments made our net queue is essentially unchanged from last year. Last quarter, we described our approach to fulfilling redemption requests, which is based on an overarching objective to be consistent and fair to all investors, requiring a few quarters for valuers to catch up. In that regard, as appraisal seem to be nearing fair value, we plan to redeem units in this quarter, given the swift response to value changes in Europe and expect to do the same in USLF next quarter. In turn, we view this as an excellent time to invest more of our capital into the vehicles, which we'll be doing over the coming quarters and some meaningful numbers. Turning to guidance. We are tightening and increasing average occupancy to range between 97.25% and 97.75%, a 25 basis point increase at the midpoint. Our same-store will benefit from this increase driving our net effective guidance to a range of 8.5% to 9.25%, and cash same-store of 9% to 9.75%. We are forecasting our lease mark-to-market to end the year close to 70%. Extracting the 2024 component of this suggests rent change should exceed 85% next year, even without continued market rent growth, which is a clear illustration of how our exceptional rent change will not only endure but continue to grow. We expect G&A to range between $380 million and $390 million and strategic capital revenues excluding promotes to range between $515 million and $530 million. We are maintaining our forecast for net promote income of $380 million, and given the size of USLF and the potential for small changes in value to have a meaningful impact, there is potential for upside here and we believe we have the downside covered. We had few development starts in the quarter, a reflection of our discipline, but our pipeline is deep and we are maintaining our guidance of $2.5 billion to $3 billion for the year. We expect the pace to remain slow in the second quarter, putting the bulk of the activity into the second half. It's noteworthy that following the belief that construction costs may decline in the coming quarters. We now see them as likely to increase mostly in line with inflation. As new fundraising has become visible, we forecast contributions to be concentrated in the second half totaling $2 billion to $3 billion when combined with forecasted dispositions. So in total, we expect GAAP earnings to range between $3.10 per share and $3.25 per share. We are increasing our core FFO including promotes guidance to a range of $5.42 per share to $5.50 per share, and further, we are guiding core FFO excluding promotes to range between $5.02 per share and $5.10 per share, with the midpoint representing 10% growth over 2022. I'd like to close with a few observations that we've made about our standing in the equity markets, which we found interesting and wanted to share. Today, we sit as the 68th largest company in the S&P 500 ahead of names like GE, American Express, Cigna, Citigroup, as well as Ford and GM combined. Also of notice that with our planned $3.3 billion of dividends this year, we ranked 42nd in terms of total cash return to investors. Of these top 42 dividend payers, Prologis has outgrown the group by 500 basis points per year over the last three years. And in fact, since our IPO, we have paid over $15 billion in dividends at a 15% CAGR, ranking 13th on growth in the entire S&P 100. While getting bigger has never been our objective, we thought the context would be eye-opening. So in closing, we feel great about the health of our business, even in the face of a slowing economy, most importantly, nothing we have seen alters the path of its underlying secular drivers for the long-term potential of our platform. In that regard, we're excited to tell you much more about that outlook and our platform later in the year. Last week, we announced our upcoming Investor Day to be held at the New York Stock Exchange this December. We hope to see many of you there in person and tuned into the live webcast, where we will showcase our deep bench of talents and the strong differentiators that define our company. More details on that to come. But with that I'll hand it back to the operator for your questions.

Caitlin Burrows:

Hi. Good morning, everyone. Maybe on development. Tim, you touched on it briefly, but the earnings release mentions how the build-out of your land bank is a driver of growth, and this quarter, like you mentioned starts for only like $50 million versus recent quarters over a billion. And it sounds like that is expected to ramp up significantly to over a billion again in the second half. So just wondering what metrics or other things that you're looking at to drive the starts activity? And what makes you confident that increasing starts so significantly later this year is kind of possible and the right thing to do?

Operator:

And our next question comes from the line of Ki Bin Kim with Truist. Please proceed with your question.

Hamid Moghadam:

Hi, Ki Bin. This is Hamid. There's always a risk in this environment. I mean there's so many unknowables, but we've gotten spoiled to 350 million square feet of demand in the last couple of years. Let's just put this in a context. I mean in the past, we would have been very happy with even these lower levels of absorption, particularly when you consider that starts are way down and they're going to -- deliveries are going to really slow down as we go into 2024. So it's normalizing. That's the best way I can describe, but I wouldn't even be surprised if it falls further given all the stuff that we read in the papers. The CEOs that are making big CapEx decisions, basically push their people to see if they can start the week -- a quarter later or two quarters later. But that's all borrow demand, if you will, that is future demand that is getting deferred. So we're not that excited by one way or another. And just to finish the previous question that Dan started, our view, we don't have a forecast for development starts. We only have one because you guys asked us for one. We don't internally have one. We have a plan. We have entitlements on much of that land, about 80% of that land, we can start at any time. And we don't just look at our data at the end-of-the quarter. We see it every day as we lease a million square feet a day, so we can meter that development into the marketplace, as we see fit and make those adjustments. We're ready to go if we need to do more or less either way. At the end of the day, our company's story is about organic growth, and that's the high value form of growth and that's the one that we pay the most attention to, and actually, that's easier to figure out in this environment, given the very big mark-to-market which I've never seen in this business before. So in a way, our job is actually easier in terms of predictability of earnings and growth.

Steve Sakwa:

Yeah. Thanks. Good morning. I just wanted to focus a little bit on the acquisitions, which is not a very large number in there, Hamid, but I'm just wondering what you're seeing from a distressed opportunity said, and then maybe tie into the comments Tim made about the funds and you know you tend to like you'd be putting more money into the funds as you redeem some of the partners. So just trying to put tie those two I guess capital uses together.

Operator:

And our next question comes from the line of Blaine Heck with Wells Fargo. Please proceed with your question.

Hamid Moghadam:

Sure. Let me start and then I'll pitch it over to Chris. The biggest impact is on Northern Mexico. Those markets along the border are literally on fire. There is no vacancy and we're seeing a lot of near shoring happening there as sort of a diversification move. We're also seeing some of the China manufacturing bleed out to the rest of Southeast Asia, but we're not really active in those smaller markets, but we do see that. And it's moving west in China and it's moving to other areas in Southeast Asia. But Mexico is the big story here. The on-shoring part, I mean, honestly, other than what I read in the papers, and the chip business which is real, the rest of it is wishful thinking mostly. So they're very isolated examples, but you look at the numbers and they are not that significant. Chris, do you want to add to that?

Operator:

Thank you. And the next question is from the line of Craig Mailman with Citi. Please proceed with your question.

Hamid Moghadam:

Nice try unpacking all that in one question.

Hamid R. Moghadam:

Yeah. Let me take the second part and I'll pitch it to Chris for the third part of the question. Look, you'll be surprised if we're surprised. So -- and we really worked hard at not being surprised. And the best indicator of what's happening is the ongoing leasing and proposals and all that stuff that we're involved and you guys don't really see directly other than at the end of the quarter. So I would say -- I would describe market conditions as very good to excellent. They are not exceptional like they were a year and a half or two years ago, but they are very good to excellent. The markets you mentioned LA and Inland Empire, not worried about those at all. I mean, those markets are in the one percentage -- one percentage to two percentage vacancy rate. When you get to Dallas and particularly South Dallas and some other markets like Atlanta, way down the South, et cetera, those markets through all the cycles have been prone to over-development and softening of demand when a business was down. So we're watching those very carefully, but I wouldn't characterize any of them as watchlist markets now, otherwise, we would have classified them as such. The 10% rental growth is an overall number, but there is a very wide dispersion around that 10%. And Chris, do you want to elaborate on that?

Operator:

And our next question comes from the line of Derek Johnston with Deutsche Bank. Please proceed with your question.

Hamid Moghadam:

Yeah. I definitely do see a convergence over time, and private markets are always slow to adjust on the way up and on the way down because it's all backward looking appraisals and people look for comps. And -- but we don't really view the market that way and we view that disconnect as an opportunity because look, we have a very clear view of what the capital markets tell us in terms of the new cost of capital, and we're interested in deploying capital at above that new higher number. And private values are not yet there that's why we see some continued erosion on private values in the next quarter particularly in the United States. On the other hand, I think the public values are over-discounted and we see those actually picking up as there is more evidence in the private market that the world is not falling off the cliff. So I think you'll get a conversion from both sides and this is not at all unusual compared to past cycles. I would say every cycle gets a little better, but there is still a pretty significant disconnect. And of course, private values can be, whatever you want them to be if you're trying again to prove a point or trying to make a statement. So we are actually, our moat with appraisals -- appraisers that we work with is to continue to point them to the cost of capital as opposed to comps that don't exist. So we are on the other side of that argument. We're trying to get this market to get unlock and to transact and trying to get these appraisers to be realistic about their valuations. But I can tell you, based on conversations with them, they're getting a lot of pressure the other way from a lot of other people. So they find it somewhat unusual that we want to see a more aligned set of values that will unlock market and liquidity.

Vikram Malhotra:

Thanks for taking the questions. So just maybe going back to your comments about more unevenness or maybe just some upward pressure on vacancy across the US. Can you just sort of give us your latest view on -- you said not worried about SoCal, but how would you rank sort of SoCal across your other coastal markets today? And if there is a sort of additional or some softening that you may see, does the Duke acquisition sort of change the overall prospects for the PLD US portfolio?

Operator:

And the next question comes from the line of John Kim with BMO Capital Markets. Please proceed with your question.

Tim Arndt:

Hey, John, we didn't hear any of that. Are you on a cell phone? And if you are, can you get closer to it or something because you were cutting in there?

Tim Arndt:

It's better. Yeah.

Tim Arndt:

So can you start all over?

Tim Arndt:

I don't know. I can't really predict the portfolio decisions of well over a couple of hundred different investors making those decisions differently. I would say to the extent that there is -- there are redemptions. They are generally not because of the performance of the real estate assets that are invested with us. They are either have to do with denominator issues on their other asset classes, private equity, stock bonds, et cetera, because everything has gotten hit with increased interest rates. Bonds have not been a safe place to be either. So it's because of them getting over allocated to real estate because of the decline in the value of the other asset classes more than real estate. And among real estate, if you want liquidity, where are you going to go? You're going to go to industrial. You're going to go to apartments, et cetera, et cetera. You're not going to go to office buildings because you're not going to be able to get any liquidity out of those. So that's what's driving all this. It doesn't -- I wouldn't look there for learning anything about what's going on with the industrial market because that's a reaction to a lot of different things that have nothing to do with industrial demand with supply.

Vince Tibone:

Hi. Good morning. Have you seen any material changes in tenant demand or industry-wide development starts activity since the banking crisis? And then on the latter point, has the availability of construction loans changed significantly in the last few months?

Tim Arndt:

Constructions loan.

Vince Tibone:

Construction loan.

Tim Arndt:

Yes, you were talking about customer demand. We're seeing broad-based customer demand really even looking at our e-commerce, we had 40 unique e-commerce users last quarter alone with Amazon actually being a small size of that very, very small. So overall, broad-based demand, no particular pockets of softness.

Chris Caton:

Hey, Vince, I think I heard in the middle of your question, what is the trend in development starts in the wake of SVB. So it's worth knowing the numbers, which is in the first quarter in the United States development starts were off 40% from their peak across our markets and 45% in Europe. And based on the comment I made earlier around construction debt availability, these numbers are going to -- you're going to continue to see starts to curtail in the marketplace.

Operator:

And our next question comes from the line of Nicholas Yulico in Scotiabank. Please proceed with your question.

Hamid Moghadam:

The utilization rate peaked all time at 87%. And today, it's at 85%. And there is a couple of points of margin error on those numbers anyway. But -- so I would say utilization is really high. If it were -- if utilization were in the high 70s, I would tell you there's a lot of shadow space and people are going to wait to grow into that space or put it on the market for sub leasing, but we're not seeing that. So I don't think there's a lot of excess slack in the system. And even if you look at the well over publicized Amazon stories that a lot of people waste a lot of time on. I mean, they basically haven't given anything space back, maybe 7 million or 8 million square feet. Yet it's taken half the airtime on all these costs for the last year. It just has not been material. I mean, we're looking for something that just doesn't exist. Will it exist? I don't know. I'm not clairvoyant. But so far, it doesn't appear that customers are giving back material amounts of space or anything like that. It's totally within the normal band of how our business works across the cycle.

Michael Goldsmith:

Good afternoon. Thanks a lot for taking my question. My question is on your view for the balance of the year and what has changed, if anything, on a qualitative and quantitative basis? So you provided some commentary on your cautious outlook on demand and that wasn't new, but at the same time, you took up the same-store NOI guidance, maintained your rent forecasts. Just trying to understand if there's been an evolution in your thinking on how the rest of the year plays out? Thanks.

Operator:

And the next question comes from the line of Nick Thillman with Robert W. Baird. Please proceed with your question.

Hamid Moghadam:

So the reason for non-renewal are either good reasons or bad reasons. The bad reason is that the company goes broke or the company -- so the neutral reasons are the company decides to go somewhere else out of one market into another market. The bad reasons are, sorry, the good reasons are that we just don't have a space that fits the growing need of that customer to be accommodated or the shrinking need of that customer to be accommodated. So they have to go somewhere else. We do track the reason for non-renewal of every single lease that doesn't renew. And one of the things that we track very closely is that we lose the space to a competitor because of pricing. And that statistic is like in the 2%, 3%, 4% range, and I think it's too low because it means that we're not pushing rents hard enough. So it's -- we're not losing tenants because of rent. We're losing tenants because we just can't accommodate them or they go broke or they move somewhere else. And those have been the reasons for the last 40 years I've been doing this.

Camille Bonnel:

Hello. Following up on an earlier comment about the vacancy in Southern California region being below 2%. I think the growing concern is actually on the availability rate or how much sublease activity has picked up which is something we really haven't seen in the past. So I understand, at least within the Southern California region, the supply seems manageable given how difficult it is to build in this market, but could you share your thoughts on how you think this might evolve in upcoming months? And whether or not this is a potential risk you're tracking closely?

Operator:

And the next question comes from the line of Ronald Kamdem with Morgan Stanley. Please proceed with your question.

Chris Caton:

Thanks for the question, Ronald. So thank you for the opportunity to clarify our market statistics. I want to be very clear. So let's talk about net absorption in the 30 markets where Prologis operates in the United States. Last year, net absorption was 375 million square feet. We call that at 275 this year, and we expect a similar or perhaps higher numbers of macro environment clarifies and some of the decisions that get delayed this year land into '24. So that will be on the demand side completions. We have a bit of a clearer view as we look out to '24. So but starting with 2022, 375 million square feet of supply as well, that's deliveries. We expect 445 million square feet of deliveries this year as a supply pipeline empties and that will fall sharply, perhaps by half or more into 2024. And so when you put these numbers together, you'll see the vacancy rising from low 3s last year to 4 or a bit higher later this year and then back into the mid-3s.

Tim Arndt:

One important point to keep in mind is what is a normal vacancy rate because we have been years away from a normal vacancy rate. The historical range for our business is 5% to 10% with pricing power occurring in the 6% to 7% market vacancy rate. So we're talking about 3.5% to 4% market vacancies, half of what is typically seen as a way to see pricing power.

Operator:

And our next question comes from the line of Mike Mueller with JPMorgan. Please proceed with your question.

Dan Letter:

Yes. Hi, Mike. This is Dan. The yield that you saw in the first quarter was a couple of build-to-suits, really small volume. And what I would say is I would just look to last year and doing better than last year's yield on our starts this year.

Operator:

And the next question comes from the line of Tom Catherwood with BTIG. Please proceed with your question.

Hamid Moghadam:

Let's talk about credit loss as a measure of customer stability. Bad debt ratio and all that. It's historically, in our business has been in the tens of basis points. Even when you had the lapse in demand in the immediate aftermath of COVID that number got to 60 basis points. So -- and Chris, what would you guess our number is going to get to in the cycle when it's all over in terms of bad debt.

Hamid Moghadam:

Yes. So I mean, we don't see it in the numbers and the number of bankruptcies, et cetera, et cetera, that we're monitoring and working on are really not unusual in fact, I would say, that's somewhat unusual. I was expecting more of them than we're seeing in this point in the cycle. And honestly, we would like to see more of them because, frankly, there's so much mark-to-market in those leases that those kinds of tenant departures are actually an upside. So if anybody sort of has problems with their business or is looking to downsize. We look at that as an opportunity to do a buyout and actually be able to extract higher rents in the marketplace. So really not a concern. And that number -- those numbers that I talked about are out there. You can go look at them and plot the curve. They've been coming down substantially as opposed to from very low levels, but they're still coming down.

Hamid Moghadam:

Yes. One final statistic that you guys don't have visibility to, but I'm reading off my sheet of stats here. Historical average of credit watch tenants for us, long-term historical average has been 4.9%. We just watch them. By the way, the average actual default has been 0.15. So we worry about a lot more things than we should. That credit watch number today is at 3.35. So it's down substantially. And so is the actual bad debt ratio. So we worry about a lot of things, but most of them don't actually happen and the numbers are actually quite healthy, not just -- not even adjusting for the cycle and the fact that it's a softening cycle, but just even in the best of markets, these statistics would show up as very good.

Todd Thomas:

Hi. Thanks. I wanted to follow up on the demand environment and your comments about a more challenging macro in relation to the development starts. I guess, how much visibility do you actually have on starts in the second half of the year as it pertains to the full year target of $2.5 billion to $3 billion? How quickly can that ramp up? And then development yields for what's under construction, they were higher by 20 basis points versus last quarter on the '23 and '24 under construction pipeline. Is that due to improved economics around rents or moderating construction costs which I think you mentioned or really a combination of the two? And do you expect to see further improvements in development yields as you look out in the future?

Operator:

And the next question comes from the line of Anthony Powell with Barclays. Please proceed.

Hamid Moghadam:

They're asking us a lot of money. No, it's not really. I mean where that balance sheet is bulletproof. I mean, frankly, we have better balance sheet than most of our banks. So no and we're not really a bank borrower per se, we tap into the capital markets all the time.

Michael Carroll:

Yeah, thanks. I just wanted to follow up on your planner potential willingness to invest into the property funds. And can you quantify how much you would like? Or are you willing to invest in those funds? And are there any particular ones that you would want to invest in like USLF or PELF or is that still a TBD right now?

Operator:

And the next question comes from the line of Jamie Feldman with Wells Fargo. Please proceed.

Hamid Moghadam:

I'll just take two things. This is more a global comment than US comment. Japan is having more supply than it normally has, but demand is actually still pretty strong. I'm a little worried about vacancy rates in Japan going up into the mid-teens. So that's one place we're seeing it. The U.K. has actually been pretty surprisingly good on the industrial side. If you look at the headlines for the U.K., you would expect more trouble than what we're seeing in the industrial market. In the U.S., it's -- I can't think of a trend that it's worth talking about that. The markets are generally pretty good. I mean can you guys think of anything?

Hamid Moghadam:

With Jamie's question, that's the last one in the queue. I wanted to thank all of you for participating in our call. We're excited over here because it's our 40th anniversary that we'll be celebrating in June. And there are going to be lots of opportunities between the investor meeting later on in the year and also GROUNDBREAKERS where we will be speaking to you. So I look forward to seeing all of you and take care.

Operator:

Greetings. And welcome to the Prologis Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note that this conference will be recorded. I will now turn the conference over to our host, Jill Sawyer, Vice President, Investor Relations. Thank you. You may begin.

Tim Arndt:

Thanks, Jill. Good morning, everybody, and welcome to our fourth quarter earnings call. Let me begin by thanking our global team for delivering an excellent quarter and year. We have had outstanding results despite challenging headwinds from the capital markets and the overall economic backdrop. In the face of this, our focus has been to serve our customers and investors putting our heads down and executing on our long-term plan. As you see in our results, our portfolio is in excellent shape, driven by still strong demand and a continued lack of availability. This foundation for our business not only drove our nearly 13% increase in year-over-year core earnings, but it also sets up the company for sustainable growth for years to come. Turning to results. Core FFO excluding promotes was $4.61 per share and including promotes was $5.16 per share, ahead of our forecast. In the fourth quarter, our operating results again generated several new records. Occupancy increased to 98.2%, with retention of 82%. The Prologis portfolio excluding Duke added 30-basis-point of the 40-basis-point increase over the quarter. While we tend to quote occupancy, it is notable that the portfolio is 98.6% leased, a record that underscores the tightness across our markets. Rent change for the quarter was 51% on a net effective basis. The step down from our third quarter rent change of 60% is a reflection of mix and not market rents. In fact, market rent growth exceeded expectations during the quarter, increasing our lease mark-to-market to a record 67%. These results drove same-store growth to 7.7% on a net effective basis and 9.1% on cash. The Duke portfolio having closed on October 3rd, is fully integrated in these results, with the exception of same-store growth, which will not be reflected until the first quarter of 2024. On the balance sheet, while access to the debt markets have remained challenging for many issuers, we successfully executed a number of transactions during the quarter, raising over $1.1 billion at an interest rate below 3%, including $700 million of new unsecured borrowings out of Japan and Canada. Our credit metrics continue to be excellent and we have maintained over $4 billion of liquidity at year-end with borrowing capacity across Prologis and the open-ended funds of $20 billion, expanded significantly due to our balance sheet growth from the Duke acquisition. With regard to our markets and leasing activity, the bottomline is that conditions remain healthy and there is little we see across our results or proprietary metrics that point to a meaningful slowdown. We see a normalization of demand and when combined with low vacancy, it continues to translate to a meaningful increase in rents. Across our markets, rent growth was nearly 5% during the quarter, driving the full year to 28%. Proposal activity for available space was consistent with our recent history, and given persistent low vacancy, there is simply a very small number of units to even propose deals on. As evidenced, over 99% of our portfolio is either currently leased or in negotiation. Utilization remains high at 86%, near its all time record and deal gestation ticked up over the quarter, indicative of more careful consideration and time being taken in leasing decisions. While we are watching e-commerce carefully, its share of overall retail sales have increased to 22%, which is 600 basis points above its pre-pandemic level. Putting the nuance of mix, timing and other factors aside, as measured by retention, occupancy or rent change, it is clear that customers need to commit to space to market conditions, which offer them very little choice. In terms of supply, the development pipeline across our market stands at 565 million square feet and our expectation for the year is that the pipeline will decline. Deliveries will put modest upward pressure on vacancies from 3.3% today towards 4% later in the year. However, new development starts are slowing in response to the market environment, which will reduce vacancies in late 2023 or 2024. In Europe, we expect deliveries to outpace absorption by approximately 30 million square feet, expanding the current 2.6% vacancy rate to approximately 3.5%. Finally, and as expected, our true months of supply metric grew to 25 months in the U.S. from 22 months last quarter. As a reminder, this metric has averaged roughly 36 months over the last 10 years. In capital markets, transactions continue to be slow in the fourth quarter, making price discovery challenging. That said, return requirements are trending to the low-to-mid 7% range. This expansion further affected appraised values in our funds, although continued rent growth has mitigated some of the effect. Our U.S. values, which were appraised by third parties every quarter, declined 6% this quarter and 7% over the entire second half. In Europe, values declined approximately 12% during the quarter and 16% over the half. Our open-end funds have received only modest redemption requests, less than 3% of net asset value during the quarter, totaling 5% across the second half. Our flagship funds have strong balance sheets with low leverage, largely undrawn credit facilities, cash on hand and undrawn equity commitments. While we believe the value declines over the second half reflect market, investors are still adjusting to a new environment. Because we strive to be consistent in our actions and fair to all investors, we will redeem units call equity and resume asset contributions when price discovery has run its course. We expect that to be one quarter to two quarters away likely sooner in Europe. This will ensure certainty, fairness and consistency to all of our investors. Turning to our outlook for 2023, while our macro forecast assumes a moderate recession, which may put headwinds on demand, our business is driven by secular forces and long-term planning by our customers that should limit the impact unless such a downturn becomes significant and protracted. As mentioned earlier, we believe vacancy will build in the market and our portfolio, both of which are unsustainably low. Putting this sentiment together with our outlook on supply and demand, our 2023 rent forecast calls for approximately 10% growth in the U.S. and 9% globally. We acknowledge that our rent forecasts have proven conservative in recent years, but we are comfortable with this starting point given the environment. Specific to our portfolio and on an our share basis, we expect average occupancy to range between 96.5% and 97.5%, roughly 50 basis points lower than the 2022 midpoint. Combined with rent change, we forecast to generate net effective same-store growth of approximately 8% to 9% with casting store growth between 8.5% and 9.5%. Given these assumptions, we believe our lease mark-to-market will be sustained or even increased over 2023, ending the year between 65% and 70%, and providing visibility to an incremental $2.9 billion of NOI after the more than $300 million that will become realized over the course of this year. We expect G&A to range between $370 million and $385 million, reflecting not only inflation in wages and other corporate costs, but also additional investments we are making in our Essentials business particularly in the energy teams. In that regard, we expect the contribution to FFO from Essentials to range between $0.07 and $0.09 this year. This reflects 70% growth in revenues and tax credits from 2022, but offset in the near-term by our higher Duke related share count and the G&A investments just mentioned. In terms of operational metrics for the business, we expect to add 115 megawatts of solar power over the year driving the portfolio to approximately 540 megawatts by year end. It’s worth noting that we closed 2022 as the second largest on-site power producer in the U.S., a position we will build upon with our plan for 1 gigawatt of production and storage by 2025. We also forecast to have over 20 EV charging clusters installed and operational by year-end. In deployment, we will continue to be disciplined in our approach to new starts. We have over $39 billion of opportunities to select from in our land bank and between our expectations for build-to-suits and logical markets prospect, we see an active year of starts initially to range between $2.5 billion and $3 billion with a real opportunity to grow as conditions warrant. As mentioned earlier, we plan for redemptions to be cleared out over the year and private fundraising to resume. Accordingly, we forecast contribution activity to occur primarily in the second half and resulting in combined contribution and disposition guidance of $2 billion to $3 billion. Finally, in strategic capital, we forecast revenues excluding promotes to range between $500 million and $525 million, which is impacted by valuation write-downs across 2022 and the first half of 2023. We are forecasting net promote income of $0.40 based on an assumption that U -- that values in USLF, primary source of 2023 promotes will decline further from values at year end, every 1% change in asset value equates to slightly less than $0.02 of net promote income. Putting this all together, we expect core FFO excluding promotes to range between $5 per share and $5.10 per share. At the midpoint of our guidance, this represents approximately 9.5% growth over 2022. We are guiding core FFO including promotes to range between $5.40 per share and $5.50 per share. In closing, this guidance builds upon an exceptional three-year period of sector-leading earnings growth. At our 2019 Investor Day, we presented a three-year plan, targeting 8.5% annual growth, we achieved nearly 14% over this period, 550 basis points of annual outperformance. We expect 2023 to be a year where headlines continue to be disconnected from our business and ability to deliver strong growth and valuation. While there are many unknowns generally, there are more knowns in our business that are clear, such as our lease mark-to-market, significant and visible opportunity in our land bank, a need for excitement for -- a need and excitement for a new generation of sustainable energy solutions, and a dedicated team that is the best in the business and laser focused on delivering leading results. We will now turn the call over to the Operator to take your questions.

Steve Sakwa:

Yeah. Thanks. I guess good morning out there. Tim, I just wanted to clarify in your kind of going through your guidance, you throw out a lot of numbers. I just want to make sure on the mark-to-market numbers that are embedded in your same-store NOI growth of 8% to 9% GAAP and 8.5% to 9.5% cash. Just what are you expecting for cash and GAAP leasing spreads and I just want to make sure that’s different than the kind of overall portfolio mark-to-market you talked about 65% to 70%?

Operator:

Thank you. Our next question comes from Craig Mailman with Citi. Please state your question.

Tim Arndt:

Yeah. I will take -- Craig, it’s Tim. I will take the first half and Dan can help with the second. This is really a date issue, I would say, not even an issue, but just a function of the date. We have a large amount of that group of stabilization we believe will occur in the first quarter of 2024 and I think there is a very real possibility that if we improve some of the leasing timing by just a month or two, we could see a decent amount of that actually fall back into 2023. So it’s just a function of crossing over a calendar year to lay up the mix of all of our projects is landing.

Operator:

Thank you. And our next question comes from Ki Bin Kim with Truist. Please state your question.

Tim Arndt:

Hey, Ki Bin. So what I would do with regard to investment capacity is relying more on the way I am describing it in our prepared remarks, the $20 billion and $4 billion or $5 billion across the funds. The number that’s presented in the sup, which is what I think you are referring to is a bit technical about the current amount of equity that can be drawn in the funds and then that number is levered slightly, so that’s why it’s a bit understated. The number we supplemented with in prepared remarks is looking at the overall leverage of the fund and how much more capacity sits beyond just that of committed equity post-leverage. So, for example, our USLF venture is very low leverage, just about 10% and that creates an incredible amount of debt capacity, as you can imagine. And I think that winds up addressing your second question, which is the liquidity and the funds for contributions, there’s a lot there for us to have over time.

Derek Johnston:

Hi, everyone. How are you doing? Can you give us an update on the markets in Europe, the mark-to-market there, any leasing trends? I think you touched briefly on the private market transaction backdrop. We definitely see the U.S. mark-to-market getting wider. I guess how do you view demand in Europe and the differences between the U.S. and Europe unfolding in 2023? Thank you.

Dan Letter:

Yeah. Sure. Mark-to-market -- lease mark-to-market in Europe is about 28%, and I would say, just overall, we feel very good about the leasing demand in Europe right now. We talked about at the -- in the remarks about an expansion in the vacancy, but overall, we feel really good about where it’s headed.

Operator:

Thank you. Our next question comes from Nick Yulico with Scotiabank. Please state your question.

Hamid Moghadam:

Yeah. The only category that is significantly below the trend and is likely to be that way is housing, because the starts are slowing. But with respect to other detail, Chris, do you want to take that?

Hamid Moghadam:

Yeah. And retail sales on a real basis, notwithstanding the weaker for instance December and November are good. I think it’s between 2.5% and 3% up compared to the year before. So, yeah, you do hear the headlines of the weaker with retailers, but I think if you look at it overall, it’s actually pretty positive. It’s more positive than the headlines. I wouldn’t say, it’s super positive, but it’s much better than the headlines.

Michael Goldsmith:

Good morning. Good afternoon. Thanks a lot for taking my question. You clearly laid out the building blocks of your same-store NOI growth of 8.5% to 9.5% in 2023, where you have a high level of visibility, obviously, a lot of macro uncertainty out there. Can you provide the specific assumptions you have used for your initial 2023 outlook and then just where and how a change in the macro environment could provide upside or downside to your initial guidance? Thanks.

Tim Arndt:

Yeah. Just building on that, Michael, if you, within the supplemental, you can see our lease expiration schedule. Out of that, you will see we have about 13% rolling and that’s a mix of what is stated as expiring, which is another 9%, but also things that we have already addressed ahead of entering the year here. So the footnotes will tell you that. You get to 13% there. SME said, start with the 67% lease mark-to-market. You have got 10% market rent growth for the year. You assume we will get that halfway through the year. One thing we see people get wrong is that will take you to a certain amount of rent change. You actually get half that rent change this year, you get half of 2022’s rent change as well. There is a mathematic thing that you need to be mindful of given the quantum of rent change we are talking about lately. That will all get you to close to 9% and then we backed off an assumption on occupancy loss, which we couldn’t point to right now, but just feels prudent in the environment, so we have taken our guidance down there a bit.

Vince Tibone:

Hi. Good morning. How should we think about the organic same-store NOI growth for the legacy Duke portfolio in 2023, given them that’s outside of guidance? Is it lower than guidance for the legacy PLD portfolio in the same ballpark, just given the thought that you do any color you could share would be helpful?

Tim Arndt:

Well, I think, an important thing to remember here and we have seen some people not have this entirely correct modeling is just understanding that on a GAAP basis there will be very little same-store. There’s potential for some, but because we mark the leases up to market now at the close on a net effective basis there will be very little same-store growth, that’s contemplated in our guidance. On a cash basis, I expect it would look quite similar to Prologis.

Hamid Moghadam:

Thanks.

Hamid Moghadam:

By the way, if I can continue that. One thing that you didn’t ask, but it’s important in this context, and Dan can elaborate, is that the rental performance of the Duke portfolio on the few spaces that have come up for releasing or were in progress during the time we were doing the transaction are trending significantly higher than what we had underwritten. Dan, can you quantify that?

Operator:

Next question comes from Tom Catherwood with BTIG. Please state your question.

Hamid Moghadam:

So given that Tim was in kindergarten when cycle started, Tim and I are a little bit different than our recession outlook, but I don’t think it matters. I think Tim would tell you that if there’s a recession, there’s a very mild recession and my bet would be that we wouldn’t have a recession, but it would be close to zero GDP growth for a while. So call it recession or no recession, but the same outcome. I think what’s different about other cycles and I say that with a lot of dislike for the phrase that’s different this time is that, there were really two situations where we had negative absorption in the U.S., which is where we have data. One was on the hill of dotcom and there you had a high vacancy rate. On top of it, you had a very low utilization rate because there was a lot of capital for these dotcom, particularly e-commerce retailers and they were taking space way ahead of demand, so there was a lot of shadow space too. So when you add those two, it was a very, very high vacancy type of market during that time, so 2000, 2001 timeframe. The next time you had a pretty significant negative absorption with 2008, 2009, and we all know the reasons for that. And there, you also started with a significantly higher vacancy rate. I think it was 7% or 8% before the music stopped and all I can tell you is that, Prologis -- the old Prologis with the funny LA loan [ph] had 52 million square feet of vacant spec space that they had to lease. I think AMD at the time have like 8 million square feet or 9 million square feet. So nothing like you are talking about here, particularly given the different scale of the company and how lease we are starting out. Now even in that situation where we are normally at about 95% occupancy, we went down to about 91% in both cases. So I don’t see anything near that. I mean it’s mathematically impossible. Even if absorption goes to zero right now, we don’t lease any more of the under development spec space and absorption goes to zero, I mean, you will be under 5% vacancy, which used to be considered a great strong market. And the capital up, we didn’t have this kind of mark-to-market. I mean the mark-to-markets in those days were in the mid single-digit range and now we are talking about 70% almost. So a very different picture.

Todd Thomas:

Yeah. Hi. Thanks. Good morning. I just had a question about market rents actually, so the 10% market rent forecast in the U.S. Can you just discuss that or break it out a little bit for us in terms of coastal versus non-coastal in terms of your expectations just in the context of supply growth that you are seeing and the demand backdrop in general?

Operator:

Thank you. Our next question comes from Ronald Kamdem with Morgan Stanley. Please state your question.

Hamid Moghadam:

Yeah. There are two things that usually drive redemption requests. One is sort of the denominator effect and people needing and two is some folks want to arbitrage the lag between the -- how quickly the public markets adjust and the backward looking appraisal process. In our experience in past downturns, the second has taken about three quarters to be fully reflected in appraisals. So we really don’t want to disadvantage one group of investors. By the way, the vast majority of our investors, 95% of them, because a couple of points of people want to arbitrage that difference, so we want to make sure the valuations are right before those things transact. We think Europe has actually adjusted quicker than the U.S. and that’s why we think there’s maybe another quarter to go before Europe fully adjust. So we are committed to taking care of those redemptions in the next quarter. And we think the U.S. may take another quarter to adjust and we will take care of those in the second quarter. Here is what’s important and people don’t get about the structure of our funds. First of all, our leverage is in the low 20% range on these funds. So there’s oodles of liquidity in these firms to basically be able to handle any redemption requests -- any reasonable redemption request. And secondly, we started with the Q and we started with some cash on hand. So, again, there are lots of sources for addressing those redemption requests. I think you should assume that redemptions that have been effective as of the end of this quarter will, by and large, be taken care of by the middle of the year and sooner in Europe. So you can model that math beyond that. Now I will tell you one other thing, which is kind of interesting. Prologis could be a buyer up in these fronts, and in fact, even in the global financial crisis, where the old AMB was in a tighter spot with respect to leverage, we actually stepped up and bought on very attractive terms with adjusted values, a couple of hundred million dollars of real estate and we actually offered it to our outside investors first and then we stepped in and bought it. And you know what, the next quarter, all the redemptions went away, because people realized that the people who know the most about this portfolio are buyers at these prices. So it’s really about getting the values, right? And we started writing down these portfolios a quarter or two ago and our appraisal process is independent. We have nothing to do about it and that’s very, very different than some of the redemption situations that we have all been reading about.

Camille Bonnel:

Hi. Good morning. On your development guidance, can you give us some color on how much conservatism is built into your development starts? And also you are expecting another year of strong stabilization, what assumptions are you making in terms of timing of these projects and is any of the increase in guidance driven by projects from last year taking longer to complete due to longer construction time lines?

Hamid Moghadam:

Yeah. There has not been a material delay in any of our construction project, if you look at them on an aggregated basis. So that is not -- that has not shifted stabilizations from 2022 to 2023 or anything like that. Yeah, I can’t even think of an example that comes close. And even on the cost side, because we have been thoughtful about procurement and securing some of these type supplies ahead of time. That’s been actually something that we use as a competitive advantage in marketing to build-to-suits, because we have got a bunch of steel and we have got a bunch of air conditioning units and electric panels and things that are insured supply are already sitting in our warehouse waiting to be deployed into our land bank. So no, there’s nothing funny going on about that, and by the way, the stabilizations are not just a function of completion of construction, but also leasing being stabilized at 90% or more and that factor hasn’t delayed stabilizations either. We have been leasing actually ahead of plan to this day and I think we will -- I expect to continue to do that.

John Kim:

Thank you. On the subject of fund redemptions, there are some unlisted funds or non-traded REITs with a different leverage profile than yours, different investor base that are seeing a significant amount of redemption requests and I was wondering if you anticipate this will lead to increased asset sales on the block and potentially some more opportunities for you on the acquisition side?

Operator:

Thank you. Next question comes from Michael Carroll with RBC. Please state your question.

Hamid Moghadam:

Yeah. We are watching everything really carefully. I mean I am not -- believe me, we have been through enough cycles and enough where things can happen that none of us predict that we want to be vigilant. That’s why we are starting out the year with very conservative assumptions and things that we can deliver. I mean, I think even on this basis, we are going to, I think, put up unbelievably good numbers. I mean, who can think of almost a digit kind of returns or growth off of such strong growth, 14% per year earnings growth consistently for the last three years. So I think the arrow is up. But, yeah, I mean nobody predicted Putin going into Europe last year. It’s usually the stuff that you don’t -- you can’t predict. I mean, am I worried about inflation really thanking our numbers? No. Am I really worried about recession thanking our numbers? No. Am I worried about e-commerce going out the window and people going back to shopping deals the way without that percentage going up? No, I am not worried about those things. But I am worried about things that I don’t even know what to worry about. You get my drip there, anyway. So, yeah, there’s always bad stuff that can happen that are out of the realm of normal projections.

Mike Mueller:

Yeah. Hi. What are the anticipated yields for your 2023 development starts?

Operator:

Thank you. Our next question comes from Anthony Powell with Barclays. Please state your question.

Hamid Moghadam:

Yeah. I don’t think utilization actually moved that much. I mean the peak utilization ever all time was 87%. And I think that 1 point is well within the sampling bias that can take place, because it’s not a perfect data set. It’s a sample of large data sets. So I don’t think there’s a meaningful trend in certainly not a decelerating trend in utilization. With respect to port volumes, I think, port volumes are pretty meaningless in the last -- really since COVID started, because there were so many fits and starts and play things being in the wrong place and all that. And yeah, the West Coast ports have lower volumes today than they did before, but the East Coast and golf ports are getting a lot more volume than they did before. So on an aggregate basis, port volumes are just fine and if you look at the lag that it takes too many empty containers on one side of the ocean, and factories shutting down on the other side of the ocean and all that. I think until the market normalizes, you can’t really draw any conclusions from port volumes. So I don’t see either one of those two trends affecting demand. Chris, do you want to?

Hamid Moghadam:

Yeah. Notwithstanding that increase in real inventories, we still think we are less than halfway towards equilibrium level of inventories about 45% of the way there. So we think there’s a lot of tailwind behind inventories, too.

Blaine Heck:

Great. Thanks. So related to that last question, and Hamid, your comments on that progress towards equilibrium inventory, can you just talk about your recent conversations with customers? What’s your sense for how they are balancing this investment need and CapEx spend against concerns about the economic slowdown or recession and higher overall cost of capital?

Mike Curless:

Yeah. I would just to pile on. I mean, on a net basis, the activity is still very strong, decision time line is definitely have stretched out of people to be more cautious. But remember, these structural configurations we have been talking about for two year or three years continue to march on, perhaps, at a bit of a slower rate, but ultimately, it comes down to the fear of not having the right space when you needed to hear from now is overwriting, taking space that’s a little bit too early. So broadly we feel pretty good about this overall activity.

Craig Mailman:

Hey, guys. I just want to follow up on these demand discussions, because this is a constant question I get from clients here and maybe it’s more of a Chris question, but Hamid feel free to jump in, too. Just in terms of in these era of low vacancies were really not in the least, so net absorption is not necessarily the best leading indicator of demand. I mean what are you guys using at least to kind of use as your forward-looking indicator on and destruction or something that the market could look to, because it just seems like retentions are still high, availability is low, construction could fall off, but everyone is talking about inventories big higher, utilization will be higher, so people needing less of the space, but it’s just from your commentary, it seems like this is not really filtering through what you guys are seeing and just some thoughts there. Then related to that, Chris, I mean, what would it take for market rents to actually turn negative, because that’s a question I get a lot as well and I am just kind of curious in your modeling kind of what inputs with that to really turn to get that from the positive 10% you are seeing to somewhere below zero?

Chris Caton:

Yeah. A couple of specifics, I would lead with our proprietary data leads us to these conclusions. So for example, our sales force pipeline, if we look at the vacancy that we do have, 46% has deals working. That’s in line or above the average that we have experienced through COVID to say nothing of the conversations that Mike and Scott and our customer led solutions team have. In terms of public data, which I think I heard you ask about, Craig. We do publish our IBI survey and our utilization data and so figures like 60, on our IVI, it’s a diffusion index. So that’s consistent with this good or great tone that the team has struck and 86% on utilization, which was discussed earlier are ways that you can see that in the marketplace. And then as it relates to what it would take for rents to fall, Hamid described it very specifically. And I’d add one piece of data that, I don’t see commonly discussed in the marketplace, but it’s important to know, which is development starts rather than development completions. Starts in the U.S. were off by a third in the fourth quarter relative to their 2022 trend and on the Continental Europe, they were off by 45%. So we are seeing a sharp marking to market at the capital market environment, the valuation environment and what those buildings might be worth for some of those other folks building buildings.

Operator:

Thank you. And our next question comes from Vince Tibone with Green Street. Please state your question.

Hamid Moghadam:

I would generally tell you that the smaller spaces are having a tougher time to the extent of anybody having a tougher time, but Chris is looking up the specific. They are not radically different, but why don’t we do this, why don’t we go to the next -- you got it.

Hamid Moghadam:

Yeah.

Hamid Moghadam:

Oh! Yeah.

Hamid Moghadam:

Okay. That’s different than I would have guessed and I bet you it’s because there was more available space to absorb in those categories. Those categories were less leased. And by the way, we have them, too. I mean we have some smaller than 100,000 square foot unit. So I would say, occupancy was a little bit lower, so there was more room to lease product at the higher end.

Operator:

And our next question comes from Jamie Feldman with Wells Fargo. Please state your question.

Hamid Moghadam:

So two things. I think the Essentials business, in terms of percentage growth, I think, our mobility business would be the biggest, because it’s the smallest right now to start with. So any growth will be the biggest. But in terms of dollar contribution, I would say, solar and storage are coming on the strongest today and operations is to close second behind. I will pitch it to Gary if he has any more to say about that after this. Second part of the question was -- oh, cap rate. So cap rates are really misleading. So we got to be careful about that. Cap rates at market, assuming that you had a building a year and a half ago at market and you have a building at market today, I would guess it’s 50 basis points to 75 basis points maybe 100 basis points, okay? It’s -- call it, 50 basis points to 100 basis points. But you have had all this rental growth in between. So the observed cap rates for the same building this year versus last year with rents that are higher by, I don’t know, 10%, 15% or something, would not have moved as much. So, and if you get into weird situations, like some building that was leased five years ago when it comes on the market and it’s -- and the in-place rent is less than half of what market is, that building could have a lower cap rate than it would have had a year ago. IRR is what’s really important based on reasonable assumptions and my guess is that if I were going to pick a number, I would say, low to -- low 7, 7.25-ish in the U.S. and maybe a little bit lower than that in Europe with growth of, say, 4%-ish percent across a 10-year projection, something like that, approximately. Gary, anything on.

Hamid Moghadam:

By the way, that 2025 number that Gary just mentioned, it’s going to be recapturing maybe 15%, 20% of the total opportunity within our portfolio. So there will be a huge runway for growth, and frankly, we are beginning to see more deals out of our own platform, because customers are taking us to buildings that they lease from other people to do the same level of service to them in those other situations. So I can’t even begin to quantify that out of platform opportunities. So we are really excited about our Essentials business. Okay.

Hamid Moghadam:

I think we are at the top of the hour. I know we have one more question, but maybe we can take that outside the call, Anthony, with our apologies. But thank you for your interest in the company and we look forward to seeing you next quarter. Take care.

Operator:

Greetings, and welcome to Prologis Third Quarter 2022 Earnings Conference Call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] I would now like to turn the call over to Jill Sawyer, Vice President of Investor Relations. Thank you. You may now begin.

Tim Arndt:

Thanks, Jill. Good morning, everybody, and thank you for joining our call. We are clearly in a volatile macro environment where ongoing inflation, steeply rising interest rates and the war and energy crisis in Europe are pressuring the global economy. And while we're closely monitoring each element, the fundamentals in our business are very strong, and our read of supply and demand in our markets remains out of sync with the headlines. This morning, we reported excellent third quarter results, which generated many new records in the quarter. Yet, we will spend less time on these results and more time describing our view of the market and how we're navigating the environment. Before doing so, I'd like to thank our teams across the entire organization who did an exceptional job keeping focus on the business, especially while working through the Duke acquisition, which closed on October 3. We fully integrated the portfolio, achieved our day 1 synergies and look forward to the next phase, which is to build AFFO accretion through incremental property cash flows and Essentials income. We move forward with a better portfolio, a larger and stronger balance sheet, talented new employees and new customers to whom we can introduce to our Essentials business. Turning to results. Core FFO was $1.73 per share, including $0.57 of net promote income earned principally from our PELP venture in Europe. Our annual guidance for promotes was $0.60, with most of the revenue to be earned in the third quarter. The amount came in below expectations due to a nearly 5% write-down of European asset values in the quarter, partially offset by an increase in NAV from debt mark-to-market. In the end, the promote was a record high, while the fund enjoyed a high teens annualized IRR across the 3-year performance period despite the recent markdown. I'll note a few operating stats from the quarter, all of which were records for the company. Ending occupancy increased 10 basis points over the quarter to 97.8%. Same-store growth was 8.3% on a net effective basis and 9.3% on a cash basis. Both were driven primarily by rent change, which was 60% on a net effective basis. Separately, the Duke portfolio ended the quarter with 99% occupancy and net effective rent change of 54%. While these markets are outstanding, they are also backward looking. So we've kept focus on more contemporaneous data, namely rent change on signings, which was 84% during the quarter, and our lease mark-to-market, which now stands at nearly 62%. Finally, we had a very active quarter on the balance sheet, raising over $3 billion of debt in a variety of markets and currencies given our broad access, including a $650 million green bond issued in late September. We ended the quarter with debt-to-EBITDA of 4.3x, excluding gains, providing us significant investment capacity. Turning to our observations of current conditions. We continue to see scarcity of available space across our markets. Vacancy rates are at historic lows, and our own occupancy sits at a record high. Market rent growth in the third quarter remained robust in response to this scarcity and continued strong demand. Color across the markets remains generally upbeat in terms of customer inquiries, and our proprietary metrics also reveal healthy activity even if they've softened from the peak demand generated during COVID to levels still above long-term averages. Transaction gestation was stable during the third quarter at 62 days, proposals via available units slowed during the third quarter to levels more in line with the pace of 2019 and indicative of less urgency to renew space far ahead of exploration. Inside our properties are metrics point of activity that is increasing with our IBI index at 63.8%, the 80th percentile and utilization up to 86.6%, the 95th percentile. Our certain customers have publicly announced a pause in CapEx spending, particularly those with more mature supply chains. But active dialogue with the majority of our customers confirms an overarching need to increase space as supply chain resiliency remains a top concern. Shifting to supply. We're seeing initial signs of a deceleration in development activity across our markets as construction and capital costs continue to increase. We believe we could see a gap in deliveries emerge in late '23 or early '24. As for today, our true months of supply metrics sits at a healthy 22 months, up from 18 months last quarter. We've previously explained that we expect to see this metric climb into a low 30 months range, still at a level reflecting a strong operating environment. It's important to acknowledge where supply is being delivered as our submarket location strategies minimize our exposure to new supply. For example, in our coastal U.S. markets where we generate over 50% of our global NOI, vacancies are just 1.7%. Geographically, we have an increased level of focus on Europe given the ongoing war and growing energy crisis. While we're reporting record results, including occupancy at 98.6% in a market with 2.4% vacancy, we are closely monitoring conditions. Customers are exercising caution in response to rising energy costs, which may create headwinds to near-term demand. That said, we also believe that new supply will now decline around 15% in 2023, which should support occupancy. The U.S. remains strong, where we now generate 87% of our NOI with the addition of Duke. Our teams continue to see solid activity, although acknowledging a reduced number of prospects for space compared to what we saw during the frenzy of COVID. Rent change on signings during the quarter was 93%, demonstrating a continuation of favorable pricing dynamics. In Latin America, both Mexico and Brazil are performing well, with very high occupancy over 98% and rent change across the region of 24%. And in Asia, construction costs in Japan are rising most acutely from the weakness in the yen, as well as from competition for key materials to complete construction. Market vacancies have increased, but this constraint on new supply, particularly out to '23 and '24, should provide an offset. The combined picture was positive to third quarter market rent growth, exceeding our expectations and driving a 300 basis point increase of our '22 global forecast to 26%, with the U.S. at 28%, significantly up from the 10% and 11%, respectively, in our initial guidance. It's difficult to fully know the impact of this market rent growth on values given the limited transaction volume in the market. But our view is that the increase in return requirements is more than offsetting rent growth and indeed pressuring values. Based on prior cycles, we can safely assume it will take few quarters for full price discovery to be made as markets stabilize and transaction volumes build. With all this in mind, we're carefully managing the business and approaching our markets with a sense of caution much as we did at the onset of the pandemic. In leasing, despite the very strong spot environment, we are carefully watching for softening demand and will assume that there will be further macro deterioration. In some markets, this will have us managing more for occupancy than rent growth, but in many others, we believe pricing will remain favorable given very low availability. This is an environment where our revenue management capabilities will be the most useful and allow us to manage such decisions lease-by-lease. With deployment, we are reducing our starts guidance to a range of $4.2 billion to $4.6 billion, and we expect our fourth quarter starts will be 60% build-to-suit, reflecting a more cautious approach to deployment in the coming months, aiming to be very selective in new projects. And in terms of strategic capital, we previously mentioned that we expect to see an increase in redemption activity. While we did have inflows from numerous investors, redemptions grew by $1.3 billion, which, for context, is just 3% of our open-end third-party AUM. Our funds have sufficient equity queues to address this activity. In combination with equity called during the quarter, we now sit at net neutral queues. The open-ended funds have ample investment capacity based on overall low leverage, and we are optimistic about the long-term growth of the business. In the near term, we will be prudent as we evaluate further capital deployment, including a pause on contributions in the short term. Turning to guidance, which includes Duke portfolio for the fourth quarter. We are maintaining our guidance for average occupancy, while increasing our net effective same-store guidance to 7.5% to 7.75%, and our cash same-store guidance to 8.5% to 8.75%. We expect to see our lease mark-to-market around 65% at the end of the year. We now expect acquisitions to range between $1.9 billion to $2.1 billion, which increased due to our acquisition activity in Europe during the quarter, and contributions and dispositions to range between $2.1 billion to $2.3 billion. Finally, we are increasing core FFO, excluding Promotes, to $4.60 to $4.62 per share, which includes approximately $0.05 of accretion related to the acquisition of Duke. We are guiding core FFO with Promotes to be $5.12 to $5.14 per share, which incorporates a lower Promote guidance of $0.52, reflective of the higher share count resulting from the Duke transaction. I'd like to point out that our earnings have been unimpacted by FX over this extremely volatile year due to our capital strategy and approach to hedging. The same is true for our equity base, which has very minimal exposure outside of the U.S. dollar despite our global footprint. We will continue to protect both proactively and programmatically. To close, we're proud of how we've positioned the business and are optimistic about the organic growth ahead. We own hard assets with contractual revenues, significant embedded mark-to-market and have meaningful secular drivers that continue to play out. As an organization, we have long had an entrepreneurial and growth mindset. Today, adding new business lines and cash flow streams that are synergistic with our already unique model. We have built the company to thrive across cycles, including uncertain environments like today, where we can seize opportunities and continue to set our business and portfolio apart. We'll now turn the call over to the operator for your questions.

Steve Sakwa:

I don't know, Tim or Hamid, I guess what I'm trying to sort of circle up here is that, I understand why development starts would come down in light of what's going on globally, but yet stabilizations are up but the contributions are down. And I guess what I'm trying to really square up is if the funds still have capacity and they're still interested in deploying money, I'm trying to just really circle up why contributions into funds would be down, which is also impacting development gains? So is it a pricing issue? Is it a lack of leasing on the assets? I guess, I'm just trying to get a little more color on why that contributions number is down. And I guess I can understand why dispositions would be down in this uncertain capital markets environment, but I'm just trying to get a little bit better handle on the contribution side.

Tim Arndt :

I would just add, Steve, in relation to your comment on gains in next year, I would just point out that the value creation is occurring regardless of that monetization event. If we hold the development assets on our balance sheet, it's still there at a very attractive yield. And we believe many of those assets will still find their way to the fund. It's just a time, a pause right now.

Craig Mailman:

I just want to go back, Tim, to your commentary, there was, I think, an overarching message that fundamentals are still very strong. And the way it looks to me, you could still have accelerating core growth into next year. But at the same time, you clearly mentioned that some markets you guys would have to be kind of revenue manager here. I just kind of would like a little bit of color on maybe the percentage of those markets or how we should think about what's really at risk from a fundamental perspective? And then also, just as it relates to Duke, clearly, debt rates have moved against you a little bit. And so relative to your initial accretion, there's probably a little bit of a headwind there. And I'm just curious, too, as you guys kind of start to bid and kind of coming down a bit this year, where is your updated accretion number for Duke for the first 12 months?

Tim Arndt :

And Craig, I'll just pick up your question on the debt in Duke. You're right. Since we announced the transaction in June, depending where you're on the curve, we're 100 to 200 basis points higher in interest rates. So that does hit the debt mark-to-market piece of things. I think if we were redoing the entire accretion on the year, we'd be still in the range, but at the lower end of that original $0.20 to $0.25 today.

Operator:

Our next question comes from the line of Derek Johnston with Deutsche Bank.

Hamid Moghadam :

Some of the weaker markets in Europe have strengthened, like Spain would come to mind or France would come to mind. The perennial strong markets in Europe were the U.K. and Germany, historically, Northern Europe. And they remain strong, but we wouldn't be surprised if Germany weakened a bit and the U.K. weakened a bit. In terms of weak markets in Europe, I would say, if you really force me to name one, I would say it's Hungary, which is a very, very small part of our overall business. Poland is actually, too much to our surprise, pretty strong. It must be because of the in-migration of a lot of Ukrainians into Poland and the additional consumption that they drive. But markets in Europe are tighter than they are in the U.S. in aggregate, and that's why vacancy rates are lower. But there's no question that Europe will have lower growth or more if we go into a recession, a bigger recession than the U.S., but by no means is it weak. Quite to the contrary, pretty strong.

NichYulico:

I just wanted to touch on sort of thinking about as we are heading into a weaker economic environment, most people think there's a global recession coming. If you could give us some context of how to think about potential occupancy impact to the portfolio. I mean, I think most of the third-party brokerage firms are citing something like 100 basis points of U.S. vacancy increase next year because of slowing absorption, some supply picking up. I guess, I'm curious what you thought about that. And then also from a credit loss standpoint, how we should think about the portfolio in sort of a historical context, kind of framing out where you have sort of a credit watch list today and potential occupancy impact on top of just an overall market occupancy impact from a credit loss standpoint in the portfolio if we are heading into a recession.

Operator:

Our next question comes from the line of Michael Goldsmith with UBS.

Hamid Moghadam :

Promote levels are very sensitive to exit cap rates that you assumed. So that's a pretty tough question to answer. But if we stress test our numbers from the last time we spoke, the Promote for USLF next year is going to be on par with what it is this year for PELF. But that number can move in either direction by a significant amount, depending to what happens to exit cap rates. And by the way, both of those years, '22 and '23, will be record Promotes by a factor of 2 or 3.

Ki Bin Kim:

I just want to go back to the question about contributions and your fund business. Can you remind us what the pricing mechanism is for your funds for you to contribute assets? If I remember correctly, that was a broker pref, but obviously, you don't want to force anything into your fund investors. So I'm just curious, what is causing the pause or temporary pause in contributions? Is it just an agreement or agreed upon price that you can't come to or is it something different? And second question, Hamid, if I think about the business bigger picture, if we didn't have this market volatility, I would have expected your company to contribute an increasing level of assets to your fund business because you have to kind of keep up with the development pipeline. But given that that's probably not going to happen, how should we think about the company taking on more assets on the balance sheet, better for our earnings but also higher leverage? I'm just trying to better understand that dynamic going forward.

Operator:

Our next question comes from the line of Tom Catherwood with BTIG.

Hamid Moghadam :

I'm going to let Mike give you a broader view of demand other than the customers you asked about. But let me hit those 2. We have 0 givebacks on Amazon. Zero. We thought we were going to have 2 out of like 160, we have 0. And they continue to take new space from us. So I don't know what all this excitement is all about, but we haven't seen it in the marketplace. They were on a tear in 2020 and '21, and they probably overcommitted to space, and they just reeled that back a bit. But they talked about 30 million feet coming online. We don't think it's even going to be 10 million feet and none of it is in the spaces that we have. So that's Amazon. FedEx is consolidating some of its ground operations with airport operations. We're going to be a beneficiary of that. And we're not going to lose any FedEx business as a result of that. And we're in regular conversation with these people. So those 2 customers specifically, no issue, and we have vetted this about as best as anybody can. With respect to the broader customer picture, Mike?

Operator:

Our next question comes from the line of Vince Tibone with Green Street.

Tim Arndt :

Vince, yes, the increase is exclusively based on the outperformance in the third quarter. We thought in the present landscape, it would not be appropriate to make an increase. But as we look into next year, I think it's appropriate to expect mid- to high single digits. As Hamid mentioned, we opened this year with a similar level of caution and have seen subsequent increases. We monitor this on a real-time basis let alone reporting out on a quarterly basis. And some of the things that go into that is the ongoing significant momentum, right? So rents were up 6% in the quarter against ultra-low vacancies, healthy demand, healthy leading indicators but set against the macro uncertainty that we've described.

Operator:

Our next question comes from the line of Todd Thomas with KeyBanc Capital Markets.

Hamid Moghadam :

Yes. Just -- I remember, Duke's leases were longer than ours. So the average turnover based on the average duration of the Duke leases is like 10%, 12% a year. I don't remember what it is exactly in the next 12 months, that’s your question was on. And we think we're a couple of points ahead. But a couple of points ahead affecting 10% to 12% of the portfolio for an average of 6 months is what we're talking about in terms of its impact on the next year. So it will be a small impact. I think the bigger impact will be what we can do once we get our hands on the rest of the portfolio rolling over through revenue management. And we think overall, maybe that could be 2% or 3% above underwriting. I also think there will be a couple of hundred basis points pickup in terms of folding essential sales on top of that. But it will take a little while for us to sort of build those relationships with those customers in those locations and all that. On the second part of your question, Tim will address that.

Operator:

Our next question comes from the line of Blaine Heck with Wells Fargo.

Hamid Moghadam :

Yes. My view of the economy is that the Fed was behind the 8 ball, and they are now really running hard to catch up and they're going to overshoot in their reaction. And everybody expects these things to have an immediate effect. Look, I'm not as smart as the guys running the Fed, but these things typically have a 2-year lag. So I think we're going to whipsaw this economy. And there is no reason this economy should be in a recession other than just wanting to wring out this inflation. And this is a personal editorial. This is not a company position, but I believe more -- based on what I'm seeing, more of the inflation is actually affected by not that systemic wage price push that we saw in other times of high inflation. By the way, I was there. When I started my career, the 10-year bond was 14% and prime rate was 22%. But that was a psychology that was built into the marketplace. I think -- and it took bulker in October of '79 to wring that out. But the market had gone 6 or 7 years with that becoming the norm. This is very different. We were just talking about 2% inflation a year ago, and it just spiked up. So a lot of that, I think, is going to dissipate as things normalize and trade flows and the like normalize, but that's a personal point of view. So I am concerned about inflation. I think the Fed is all going to overdo it. Whether we have a recession or not, I don't know why people are so focused on this recession question. To me, a 0.25% growth rate in the GDP when the potential is 2%, 2.5% for the U.S. and 1.5% for Europe is a bad thing. Now whether technically a bunch of smoke will come out of the pipe, that says we officially have a recession, that's less important, but we are definitely under kind of underperform the capacity of this industry. The consumer is in great shape. The consumer balance sheets are in great shape. So I see a lot of reasons for optimism. I mean, look at all these calls that we were all having a quarter ago. I think the psychology has changed dramatically because of all this aggressive Fed action. So I've done a good job of not answering the question. If you had to ask me last quarter what's the probability of a recession in the next year, I would have told you 90-10. Today, I would go 60-40 or maybe 50-50. I think we're much closer in the U.S. I think in Europe, we will go into a very slight shallow recession. With respect to its impact on development starts, I think the market is undersupplied with space. But we don't have to make that decision today. We don't. Every start decision is made deal-by-deal, and we will have the benefit of up-to-minute information and actually some information about the future because we're talking to prospects. So if we think the prospects are there to lease it up, we'll build the building. And if not, I don't really care about guidance. We try to give you the best guidance we can, but we don't run our business according to guidance. We could be lower or we could be higher. I think we're going to surprise people on the upside. But let's wait and see. We don't have to make that decision today.

Ronald Kamdem:

Just going back to the lease signing of 84% during the quarter. It sort of suggests that the commenced leases should be accelerating as well. But how do I marry that with the full year same-store NOI guidance where you're guiding for $8.625 for the year, but year-to-date, it's 8.7. sso suggesting a little bit of deceleration? Just trying to understand what could be driving that? Is it occupancy of the comp versus the lease signing that's accelerating?

Operator:

Our next question comes from the line of Camille Bonnel with Bank of America.

Hamid Moghadam :

Virtually all leases have escalators. I would guess the average is 3.5-ish, maybe approaching 4. And yes, 4, I'm getting a lot of 4s, thumbs up here. And what was --

Hamid Moghadam :

Yes. And I think that was it. Did you have a third part to your question?

Hamid Moghadam :

Well, they're contractually obligated to increase. So it's not -- and they're contractual. They're not CPI-driven or anything like that. So I guess unless the tenant goes broke, there is no risk to that.

John Kim:

I realize that the markets are very fluid, but I did want to ask about the 4.1% cap rate that you have stabilized on your development starts. I guess, industrial would be the 1 asset class that you could argue the most for negative leverage given the strong mark-to-market that you have, but new developments are signed basically at market. So it doesn't have its same mark-to-market potential. So can you make the argument or couldn't you make the argument that new development should be at a higher cap rate, which I know was counterintuitive to how it's been recently, but it's reflective of that market today?