Q4 2020 Prologis Inc Earnings Call
Okay.
[music].
Welcome to the total largest Q4 earnings conference call.
Name is Amy and I will be your operator for today's call.
At this time all participants are in a listen only mode.
Later, we will conduct a question and answer session.
To ask a question. During this time, we will need to press Star then one on your telephone.
Please note that this conference is being recorded.
I would now like to turn the call over to Tracy Ward Tracy again.
Thanks, Amy and good morning, everyone welcome to our fourth quarter 2020 earnings conference call. The supplemental document is available on our website at <unk> Dot com under Investor Relations I'd like to state that this conference call will contain forward looking statements under federal Securities laws. These states.
<unk> are based on current expectations estimates and projections about the market and the industry in which <unk> operates as well as management's beliefs and assumptions.
Forward looking statements are not guarantees of performance and actual operating results may be affected by a variety of factors for a list of those factors. Please refer to the forward looking statement notice in our 10-K or SEC filings. Additionally, our fourth quarter results press release and supplemental do contain financial measures such as <unk>.
<unk> and EBITDA that are non-GAAP measures and in accordance with Reg G. We have provided a reconciliation to those measures.
Morning, we'll hear from somebody from Tom Olinger, our CFO, who will cover results and real time market conditions as well as guidance Hamid will get down Gary Anderson, Chris Caton, Mike Curless ban letter Edna <unk> gene Reilly and Colleen Mckeown are also here with us today with that I'll turn the call over to Tom Tom will you. Please begin.
Thank you Tracy and good morning, everyone and thank you for joining our call today I.
I want to begin by acknowledging our team and their great work. This past year in an incredibly challenging year, our accomplishments were significant from possible because of the work we've done over the last 10 years building a best in class portfolio that is critical supply chain and center.
Customers during.
During the year, we closed on $17 billion or on a day further fortified our balance sheet with lower rates and longer maturity generated over $1 $1 billion from free cash flow after dividends.
And importantly continued to deliver sector leading earnings growth.
The merger in 2011% earnings CAGR of nine 5% without promotes has outperformed the other logistics read by more than 350 basis points annually. This is the result of a unique business model, which has consistently outperformed year after year.
Turning to our view of the operating environment, our proprietary data shows that the strong demand we experienced from the third quarter has continued globally leases signed in the fourth quarter were a record 65 million square feet or more than 1 million square feet per business day. This was driven by new leasing, which rose 22% year over year on a size adjusted basis.
A broad range of customers signed new leases in the fourth quarter led by consumer products food and beverage electronics from health care segments.
E Commerce activity accounted for 19, 8% of new leasing.
The need for speed and flexibility is also reflected in elevated short term leasing which was up 58% in the quarter, a three PL retail and transportation customers rates to secure space ahead of the holidays.
Lease proposals remained at healthy levels.
In the U S fourth quarter net absorption was the highest on record at 100 million square feet and an excess of new supply of 90 million square feet.
Rents in our markets grew by three 2% with all the growth coming in the back half of 2020, we anticipate rents to grow by approximately 5% in 2021.
Houston is the only U S market on our watch list.
As a reminder, we moved to Atlanta in Central Pennsylvania from our list in the second quarter.
In 2021, and we expect supply to decline year on year balanced with demand at 280 million square feet each.
Conditions are also healthy in our other markets across the globe.
In Europe rents began to rise in the fourth quarter and we expect two 5% of additional growth in 2021 led by Northern Europe and the U K.
The implications of Brexit have been largely positive for us and we anticipated four years ago, when Brexit was first announced inventory.
Inventory disaggregation will eventually lead to higher inventory levels in both the UK and the continent.
We're watching new supply in Poland and Spain.
But for context. These two markets account for just one 7% of our share of NOI.
In Tokyo, and Osaka at Historic high levels of supply are being met with very strong demand.
Two thirds of the development pipeline is already pre leased and we expect market vacancy to remain below 2%.
For China suppliers moderating even as the market remains soft.
In our portfolio, we leased a record 10 million square feet in the second half of the year a credit to the great work of our new China leadership team.
Turning to evaluations, our logistics portfolio posted the largest sequential increase in a decade rising 5% in the U S and globally and are now nearly 6% above pre pandemic levels.
Applying this increase to our $142 billion owned and managed portfolio, we estimate the value of our real estate rose by $7 million in the fourth quarter.
We expect continued fundamental improvement in 2021 and beyond based on three drivers.
First the powerful economic recovery, including the highest GDP growth in the U S and more than two decades.
Combination of corporate and personal savings as well as significant governmental stimulus, there's a loaded spring, which will translate to significant economic growth in the back half as vaccines continue to rollout.
Second the pandemic accelerated the retail revolution.
E Commerce penetration rate jumped 480 basis points to 20% of goods sold in the U S. In 2020 based on early reports ecommerce holiday sales grew by at least 30%, while we expect the share of goods purchased online to grow further apart later this year with not surprises as consumers expand spending on <unk>.
Services and experiences over goods.
Our customers continue to plan for a long term retooling supply chains for increased E fulfillment should generate cumulative incremental demand of 200 million square feet or more over the next several years.
Third we expect higher inventory levels.
Inventory to sales ratios remained near all time lows. We believe this had an impact on our customer space utilization as it ticked down to 83% in the fourth quarter.
We see early signs of inventory restocking as containerized import volumes in the U S rose 24% in November and are on pace to set a quarterly record.
Longer term the need for more resilient supply chain will lead to higher inventory levels, we estimate that a 5% increase in inventory levels would produce incremental demand of nearly 300 million square feet in the U S alone.
These changes will take years to play out driving strong long term demand.
Turning to results the work we've done to create the best in class portfolio scale and lowest cost structure in the industry is delivering exceptional financial results.
2020 core <unk>, excluding promotes grew by 14% and came in at the high end of our range at $3 58 per share. We also recognized record net promote income of 22 per share.
Net effective rent change on rollover in the fourth quarter was 28% led by the U S. At 32, 1% both high watermarks for the year or.
Our in place to market rent spread now stands at 12, 8% up about 60 basis points sequentially.
Collections continue to outpace 2019 levels and as of this morning, we collected over 99% of fourth quarter rents and over 95% of January.
Bad debt was 42 basis points for the quarter and 43 basis points for the year, both below our expectations.
Our share of cash same store NOI growth was 3% and led by the U S. A three 5%.
We made meaningful progress on the sale of non strategic assets acquired from Liberty, We settled disputes related to the construction of the Philadelphia four seasons hotel and the Comcast Technology Center.
We completed the disposition of our 20% ownership interest in the hotel and the previously announced portfolio in the U K.
To date, we have sold more than $600 million of former liberty assets exceeding.
Exceeding our underwritten values by more than 18%.
We now have less than $400 million of former Liberty non logistics assets remaining.
Consisting primarily of our interest in the Comcast headquarters.
From a strategic capital our team raised $3 $1 billion in 2020 with 40% from new investors, we have yet to meet in person.
Market and property tours as well as due diligence activities were all conducted virtually as our team capitalized on our early investments in digital infrastructure.
Our balance sheet remains the best in the industry with liquidity and combined leverage capacity between Prologis Center opened in the vehicles of more than $13 billion.
Our capital markets activity in the quarter brought our total average interest rate down to 2%.
We will look for additional opportunities to refinance at attractive rates.
At current interest rates and our mix of currencies. So we could issue 10 year debt at a blended all in rate of 1%.
Turning to our guidance for 2021 here are the key components on an our share basis, we expect cash same store NOI growth to range between three five to four 5%, we're estimating bad debt expense to range between 20% and 40 basis points of gross revenues and average occupancy for our operating portfolio and range between 95, five and 96 five.
5%.
We expect a seasonal occupancy drop in the first quarter.
Then trend higher as the year progresses.
For strategic capital, we expect revenue, excluding promotes to range between $435 million and $450 million.
Promote revenue will be negligible in 2021 in fact, we will have net promote expenses of <unk> <unk> per share for the year, which relates to the amortization of costs from prior periods promotes.
Our historic net promote income has averaged approximately 20 basis points of third party AUM, which would be six to seven of earnings per share based on current promoted both AUM.
Looking ahead recent property appreciation leads us to expect net promote income per share in 2022 to be at or above the historic average.
We expect to start between two three and $2 7 billion from new development was 45% build to suits and for stabilization to range between one nine and $2 1 billion dispositions will range between one and $1 $4 billion with the majority expected to close in the first half of 2021.
Sure.
We're forecasting net deployment uses of $350 million at the midpoint and as a result of our leverage will remain.
Effectively flat in 2021.
Putting this all together, we expect core <unk>, including the two <unk> of net promote expense to range between $3 88 to $3, a net <unk> <unk> per share.
Core <unk>, excluding promotes will range between $3 90.
And $4 per share with year over year growth at the midpoint of more than 10% delivering another year of exceptional growth.
We enter 2021 with optimism and confidence or.
Our ability to deliver value for our customers beyond real estate, using our unmatched purchasing power and significant investments in technology innovation and data are significant competitive advantages that will drive further outperformance with that I'll turn it back to the operator for your questions.
And as planned ladies and gentlemen, if you would like to ask a question. Please go ahead and press Star then the number one on your telephone keypad.
Our first question today comes from the line of Caitlin Burrows with Goldman Sachs. Please proceed with your question.
Hi, good morning.
Your guidance, which makes quantified.
I'll maybe start.
Almost 20% higher than last year.
Could you just go through the balance of the speculative.
Speculative development, how much cash.
This is Blake.
The increase.
Yeah. Caitlin this is Jim I'll take that question and you are breaking up a little bit, but I think youre talking about.
Development activity in the coming year.
This year about 85%.
What we're guiding to a named transactions.
Very cute placeholders.
And as Tom mentioned, we're 45% build a suit in the forecast and it is really difficult.
<unk>.
<unk>.
Forecast, how that's going to play out.
Yes.
If there is a bias it probably is to the upside but at this point, we're comfortable with the forecast.
Got it okay.
And then if I could ask this.
You mentioned that.
But from leasing with that just wondering how those short term leases to Gary regularly from in terms of Mike.
Good day.
Okay.
Thanks, Caitlin you broke up a little bit there, but I think just how they.
Our thought process around short term leasing.
I think we're going to continue to see short term leasing probably stay at elevated levels, just given the tightness of the market and the need for customers to act and move quickly.
As we get into 2021, I hope that addresses your question.
Your next question comes from the line of Vikram Malhotra with Morgan Stanley. Please proceed with your question.
Thanks for taking the questions.
Maybe just first one going to the core guidance same store NOI guidance, if we sort of look at your components would be occupancy on average slight uptick esque.
Escalators, which I'm assuming 253%.
Bumps that you're going to get from from from exploration.
<unk> rent expiring seems to me that if I put all that together you should be kind of well if not well above but above 4%. So I'm. Just wondering if you can walk us through maybe what the puts are there and what would get you to the bottom end of that range.
Yes, the simplest way to look at it for same store in 2021 is it's all driven primarily by rent change on roll So think about 25% role.
I am sorry, 15% roll lease role and from a GAAP perspective think about 25% ish rent change on roll and as you mentioned occupancy and bad debt are pretty consistent don't move much year over year. So that drives the GAAP same store from a cash perspective think about that same 15% Roe.
I'll call. It 12 ish percent rent change on roll Youre going to see bumps of around three and a quarter.
On the portfolio in place and then Youll see a little bit of normal free rents out of that but those components should get you right near the midpoint of our guidance.
Your next question comes from the line of Jamie Feldman with Bank of America. Please.
Please proceed with your question.
Thank you.
I was hoping to take a step back a little bit and just get your perspectives on the election, and what you think it might mean in terms of policy or kind of reaction or customer reaction to just kind of the leadership.
In terms of what you think might change for warehouse demand, whether certain markets look more interesting or any themes or trends do you think we should be watching and I guess thinking about the spine.
Bye America plan I'm wondering what your thoughts are on that as well. Thank you.
Sure Jamie I'll take a stab at that I think the most significant near term thing is going to be the.
Infrastructure spending and that will have a positive effect on demand for our product.
With respect to buy U S. First in all we had that in the previous administration, but if you actually look at the numbers that don't support the newspaper headlines so.
We don't think theres going to be a material change in net.
Because it hasn't we haven't had any of that in the last four years, either and that was pretty much the same.
<unk> promoted policy.
But the big drivers of our business is not necessarily economic policy.
Just the mix of consumption between bricks and mortar and E commerce.
The underlying growth rate of the economy, which should be very strong.
Bouncing from a down year, basically and recovering all of that in 2021. So we think those are the two big drivers in an economic policy will.
Affected a little bit around the edges, but not the main driver.
Your next question comes from the line of Steve <unk> with <unk>.
Evercore ISI. Please proceed with your question.
Thanks, Good morning.
I guess I wanted to take Tom's comment about the 65 million square feet of leasing in the quarter, which is exceptionally strong and maybe just look at page four of the supplemental where you had that chart that shows new lease proposals and then the space utilization and I'm, just trying to kind of square the proposals with kind of the.
Strong leasing and then I'm just curious why the utilization figure is trending downward and maybe not upward.
Actually I'm going to take that it's pretty simple people are running out of inventory because they haven't pre positioned enough inventory in the system to support.
The level of activity and remember we need more inventory in the online channel than we do in the offline channel and one of the big issues with inventories that we can't get the containers back to China.
And so actually even could support a much higher utilization.
And lower levels of stock outs, but that's what's going on.
Okay.
Your next question comes from the line of John Kim with BMO capital markets.
Please proceed with your question.
Thanks, Good morning in the fourth quarter development starts ramped up but with a lower expected development margin of 23%.
Slight lowered those with good activity. This quarter can you just comment on this dynamic.
Good run rate going forward on the margin.
Yeah.
Yes, I'll take that so you are going to see and have seen for the past sales.
Yes.
Forecast of margin.
Quite a bit lower than our two mines.
Jim.
Historically because of either under it.
Margins now we have been we have been beating these margins for a variety of reasons.
Rent growth rent growth.
Cap rate compression, but.
I would I would expect and I think we've been paying us for a long time day youll.
C over time margins will normalize.
But.
That really depends on what the future.
Cap rate environment looks like.
Okay.
Your next question comes from the lineup you reported.
Scotiabank.
Proceed with your question.
Thank you I was hoping you could just talk a little bit about expectations for rent growth.
Different regions and this year and maybe you can break that up if you see a difference between gateway distribution markets versus multi market distribution city distribution and last touch.
Hey, Gary It's Chris here, Yes, we expect U S rent growth to be 5% from 2020, and a little bit better than 4% globally.
In terms of the different product types look we highlighted a couple of geographies that we expect to outperform for example, the.
The U K and northern Europe.
And in the United States, we've had a combination of.
The major last touch to the distribution market as well as some gateway distribution markets outperforming moving here in New York, New Jersey being in Toronto in Southern California. They outperformed in 2020, we expect them to outperform in 2021.
Your next question comes from the line of Derek Johnston.
Inc.
Thank you for your question.
Hi, everyone. Thank you I would like to hear more about the evolving demand and leasing dynamics in the European portfolio and really specifically when it comes to occupancy which until last year was a bit of a headwind slipping every quarter starting back in <unk> 2018, now admittedly from a high point.
But but but how do things feel on the ground in Europe have outlets in fact stabilized and can we expect growth from here.
I believe this is the first positive year over year comp in six quarters.
Yes that may be the case in terms of the math of it Europe is generally.
A more balanced market than the U S.
Demand and supply seem to move in together and generally vacancy rates are lower.
The two exceptions.
Probably I would say the big exception is prevalent.
And from time to time, you'd get Spain, So it's moving up to that.
Volatile end of the market, but the rest of Europe is very well occupied so it's really.
Volume of rollovers in Poland, and in Spain that drive that.
Bounce in occupancy on the margin but throughout.
Occupancies in Europe has been higher than the rest of our portfolio in the U S anyway.
Your next question comes from the line of email me real quick with Citi. Please proceed to pay us.
Good day everyone.
Maybe this is one for you.
Do you think that the exit or EQT deal announced this morning provides any read through to your private capital business.
Well I think our private capital business continues to be undervalued by the street.
You got to do is look at the comps.
Comp sales.
Publicly traded.
From a management firms.
And once you consider the fact that well over 90% of our assets are an infinite light vehicles.
And they generate significant promotes from time to time.
And that our margins keep on increasing I think that multiples should be in the low twenties, but I think most of the NAV models that I see.
The low teens or maybe even 10.
So I think the street continues to undervalue that business would it be worth more if we crystallize that value in the transits very specific transaction sure but is it worth the headache on a company that has the $140 billion of assets too.
Can move around the value by 50.
Or a buck of share probably not.
So.
We think there is upside to our NAV from our investment management business.
Your next question comes from the line of Michael Carroll with RBC capital market.
Please proceed with your question.
Yes. Thanks can you provide some color on the tenant demand youre seeing I mean, I know in the beginning of the year in the middle of the year a lot of the demand or Amazon specifically has been extremely active and have you seen or do you expect to see that tenant interest to broaden out more meaningfully as we move into 2021.
Yes, let me start it and then Mike can give you more color, but we think demand is pretty broad.
Sure E Commerce gets a lot of the headlines.
On the margin that is the source of new demand, but there's plenty of demand from other other sectors that continues and formed a strong base and within the E. Commerce sector of course, Amazon is the biggest players. So they get a lot of play, but remember Amazon is Warren change of our total ABR and.
And there are lots of other tenants that are doing well in fact, I would say everybody is pretty much doing well would be exception of day uses that support hospitality like.
Convention exhibition people and things of that nature of the rest of the market is pretty pretty strong Mike.
And to provide more color on that.
Let's look at it in traditional leasing and build to suits on the leasing front their fourth quarter performance sort of normalized compared to typical Amazon.
Members with us after a robust Amazon activity in quarters, two and three but the message. There is there's plenty of other companies broad base that are grabbing traditional E com leasing and I think that speaks to the.
Velocity going forward and then on the build to suit side, Yes, Amazon was very active we did six build to suits with them in the quarter and call. It.
Churn for the year at a 28, however, there was a ton of restructuring well underway with the home improvement folks food and beverage healthcare well underway with restructuring pre COVID-19, perhaps they took a couple of months pause during COVID-19, but man, they're coming back with a vengeance and marching forward with those restructurings and so while we'll see.
See plenty of Amazon I'm really encouraged the other uses we just signed a big lease with Kraft about a month ago and working with a ton of brand names next year, we'll be happy to talk more about.
Your next question comes from the line of Craig Melman with Keybanc.
Keybanc capital markets. Please proceed with your question.
Hey, guys, maybe a follow up to an earlier question, but I think last year, we were talking about.
The cadence potentially development stabilization given kind of the buildup of of starts in the resurgence there and I'm just kind of curious it looks year over year like that pace of stabilization is expected to slow is there.
Something going on there that.
Change that outlook.
Well the only thing I can think of is that we the third.
Some starts.
Immediately.
When COVID-19 hit because we didn't know what kind of environment, we were in but I believe it essentially restarted most if not all of those things and we'll be restarting them. So I think we just got.
That pushed out but.
The volume Thats behind it is very significant so I would say the total level of.
Stabilization will be increased in the next couple of years.
Beyond what it would have been and what our expectations would have been certainly at the at the beginning of Covid, but I would say even more than our expectations at the beginning of the year.
Beginning of last year prior to Covid.
Your next question comes from the line of Tom Catherwood.
Let's proceed with your question.
Thank you good morning, I wanted to go back to something Chris had mentioned about above average rent growth for last touch assets, which makes a lot of sense. Obviously, we understand the supply constrained nature of industrial markets major cities, but it seems like nowadays every real estate developer is an industrial developer, especially in new.
City, we're seeing a big.
In infill industrial projects could this jump in development activity create a supply demand imbalance and potentially put the brakes on our rent growth for some of your last touch assets.
It could but I think what's going on in New York and elsewhere is that Theres a lot of price discovery, nobody really knows what the ability to pay us for some of these customers.
And in all of these locations, we've underestimated the rental value.
At least for the time being.
All of the price discovery has been good.
And the other thing you should take into account is that in these infill locations you're going to have a lot of developers, but youre not going to have a lot more land or buildings that can be rehabilitated. So so I think you'll see it in terms of pressure on pricing of those assets.
More than you would see in an absolute supply because the supply is pretty inelastic and it will show up in price.
Your next question comes from the line of Bruce <unk> with Wells Fargo. Please proceed with your question.
Great. Thanks, good morning.
Hoping to get a little bit more color on the investment sales market and your interest in acquisitions. There have been several large portfolios in the U S. Specifically that have traded either in the second half of last year or early on this year and I know you guys typically are looking at.
Anything sizable that hits the market so without getting into specifics unless you want to can you just talk about what's kept you on the sidelines in these situations is it pricing and underwriting being stretched.
More of a geographic footprint that just doesn't overlap enough or maybe it's just your focus on more on development at this point any color there would be helpful.
So all of the above let me give you a quick answer and gene will well from the banks.
We are not good buyers of core core real estate.
Auction by brokerage house, where there are 55 people showing up at the margin a lot of these people have to be.
Buildup, there industrial capability and everybody is trying to get into that business because the other property types.
I don't off for very many opportunities so those kinds of duking it out on on price is not our business.
So that means that building out our land bank doing value added acquisitions, where we can bring our leasing and operational expertise to the payable feels that our Harry et cetera, et cetera, but general framework for looking at deals.
Is.
Returns, how we can differentiate and have a competitive advantage and also in the case some portfolio deals what that fit is if we have to buy 100 buildings and sell 90 of them, that's probably not a very attractive transaction for us.
So the other thing I would just mentioned is net.
<unk> you.
Pose the question in a sense that we're only going after big deals, we do a lot of $5 million deals to they just don't show up so where they're looking at pretty much everything that moves out there and.
And where there would offers on most if not all of the ones that meet our quality standards, but thankfully in a lot of those core situations. We lose so we're good with that were on the selling side of a lot of those.
Transactions as well.
Yes.
Yes.
Couple of things I mean last year, we had 300 batteries go through investment Committee. So it's need said, we look at the range of deal sizes.
And we look at every single deal.
Every single deal will underwrite it look at it.
We're a bit picky on quality.
That's an explanation.
And.
We were.
We execute when it makes sense for us, but I wouldn't read into this.
Were uninterested.
Okay.
Your next question from from the line of growth with Baird.
With your question.
Either Tom I wanted to follow up on something.
A larger percentage of short term leases I think in the fourth quarter, but we did see lease economics erode just elaborate it was marginal but we just see it happen I'm wondering.
Economics were just a delay from Covid era.
Sure.
Sure.
Moving to the right amount of lease economics are the same lease economics I should say.
Another question I'm not sure if it's related or not.
Loss from <unk>.
Since the end of our $2 50 to 500000 square foot boxes, really offset with gains of one to $2 50 range is.
Is this having an impact on the economics, I guess I'm trying to figure out from the economics are going and what's driving kind of economic occupancy trends.
David I'll take both of those on the first one remember leases less than one year are excluded from our leasing metrics, that's consistent with what we do across our the agreement we have with with our other logistics around metrics.
What's happening is if youre looking at turnover costs.
The higher mix of new leasing versus renewals, we saw that in Q3, we saw in Q4.
And that is what is driving turnover costs slightly higher.
This quarter same story last quarter, and then regarding economics I Wouldnt needs look, yes, we did see strong space.
Space sizes under 100000 square feet.
And obviously went up 100 basis points, but I wouldn't look at the other segments are quite strong I think thats just.
Some activity that happened.
Quarter end and it is noise and all segments are doing quite well.
Your next question comes from the line of Eric Frankel with Green Street. Please proceed with your question.
Thank you this might be related to Blaine or a question just about capital allocation, but.
You mentioned that you're still most of the nonindustrial assets from the Liberty portfolio, but it looks like they're held for sales portfolio is still somewhat elevated so maybe you could talk about the pace of those sales going forward.
And then secondly on the operating portfolio looking at Bay area occupancy went down about 300 basis points or so quarter over quarter. So maybe just comment on how the local economic environment. There is affecting industrial but thank you.
Yes on the.
On the pace of sales.
We mentioned with our need for capital.
Even though depending on how you measure at 19, 20% leverage so.
We don't want to dilute ourselves and those assets are and doing nothing other than appreciating. So we'll be we'll take our time with respect to selling the industrial assets and we will match them with our capital needs self funding model with respect to the Bay area. My General comment and gene May want to say more about this is that the bay area.
Soft there is no question that.
That the Bay area after.
Most of the decade of straight run up.
It has gotten hit pretty hard in this downturn. So I would say, it's softer than L. A in a big way.
But the good news is that there's been so much rental appreciation that even as these leases expire is still in many cases, we're rolling them up.
Two to market, but the market is just not as high as it would've been.
Say a year ago.
Yeah, Eric the only thing I'd add on.
San Francisco.
Agree with everything <unk> said.
And one thing to keep in mind vacancy is 665% in the San Francisco Bay area. So it isn't as if you have.
A weak conditions on top of a very high vacancy rate.
So we're watching it and obviously that performances.
Very much disconnected with the.
Without a but.
Fundamentally vacancies are not there right now.
One other thing I would say about the Bay area I think the number is 10, maybe 12 million square feet has been taken out of supply.
In the last five years or so and that trend continues because we are competing land uses just gobble up industrial so actually it's one of those markets where supply in the core Bay area Submarkets is actually going down.
It's being converted to <unk>.
Life Science is being converted to appointments all kinds of other things.
Your next question comes from the line of strength.
<unk> be at full price.
Please with your question.
Hey, Thanks occupancy globally, so a nice improvement in <unk>, but could you talk about what drove the strong rebound in ending occupancy in Asia specifically.
Mike.
We got a new team in place in China than it has been very aggressive in leasing space and.
The vast majority of our expect vacancy in China was.
Sure.
Our vacancy in the company and the spec basis was in China, and we're addressing that.
<unk> team is doing a fabulous job.
Your next question comes from the line, Jonathan Petersen with Jefferies.
Moving to your question Gary.
Thanks.
Yeah Hamid I was hoping to maybe pick up on what you were just talking about with the Bay area and maybe just think more broadly I'm just looking at your top four markets in the U S. Southern California, New York, New Jersey Bay area, and Chicago, Obviously places that through the pandemic has seen.
Decent outflows of people into the southeast so.
I realize that supply is constrained in those markets. So I'm just thinking in terms of incremental investment going forward. I mean, do we expect more investment in places like Dallas, and Atlanta, and Florida Places that are benefiting demographically or do you think you can.
I would expect things to go back to how they were.
Look I think all of the markets that you mentioned were running so far above trend for a decade and that had created so many imbalances that I actually think it's pretty good to take a breather for some of those markets no I don't really think California's falling into the ocean. There are a lot of people in the middle of the country sharing for that but it is.
Not going to happen I mean, just look at the last quarter.
You've had.
Look at the market cap that's been created in this area, it's probably more than it has been created in the decade and some of those markets. So.
No I don't think so the numbers are actually pretty interesting. If you look at the overall, California numbers I don't have them specifically for the Bay area.
But.
This year and the way they measure it's a June 30 year end, but in the year ended June 30, you had.
260000 people move out of California that compares to the year before like a more normal year of about 230000 people. So there is always this training that happens with all of that is about a half a percent of the total population of California, and you still have internal growth. So.
California is still growing it's just not growing at the same pace as it was before and.
And I think some of the outflows have to do with temporary work from home kind of situations. We don't expect all of those things.
Last forever, so youll have some people coming back to California I think.
Housing prices have moderated certainly on the rental side. So yeah, I think California yourself, there than it's been but it's been on such a tear that up.
It would have had to come to some kind of a moderation in the past.
Our next question comes from the line of Kevin Kim Your.
Your line is open.
Thanks, Good morning out there.
You've already touched on this but maybe I can follow up on it have your underwriting standard parameters have changed at all looking at between 21 and on the margin where do you think is better versus the average industrial build or a buyer.
I think our underwriting has moved down with the required returns that move down.
In the same direction as the.
Weighted average cost of capital has moved down.
Capital market returns are lower so real estate returns are.
Lower as well, what we really look at this relative value and there's a lot of these situations the weighted the money coming into the industrial sector has created the situation, where good assets and bad assets or not so great assets yields compressing between the two.
And people just wanted to pick that industrial box so.
A lot of those people also tend to be leveraged buyers in which they can take better advantage of those lower rates.
So.
But the way we underwrite.
The assets in terms of quality and its ability and the ability of those assets to compete in the marketplace that has never changed.
Mary filter, but obviously.
Because of higher rents and lower cap rates pricing has changed.
Your next question comes from the line of.
From 13 working.
With your question yes.
Hi, I'm looking at you had Toby impelled ownership stakes of about 50% there do you see that gravitating down anytime soon.
U S. L V is our venture with Norges actually they're both our venture with Norges and our deal with them was that we would be 50 50 partners.
We have certain rights to sell down to 20% in one of those ventures.
But.
No we like it it's been a good investment and we continue to hold it in.
We've got plenty of capital coming from other places mostly disposition. So we havent tapped that source or for capital. It's there if we needed but I don't think we're going to need it for quite some time, we can self fund and have been on strategic dispositions and also our contributions.
Your next question comes from the line of Liberal with Scotiabank.
Please with your question.
Hi system interconnect.
Sure.
You have been recently doing a lot more analysis on nabors shed that depth as well as availability in some markets for example, in Atlanta, and some market seem to tell them does like inland Empire No one puts up a flier more than a page long.
So I'm interested in understanding whether the labor shed or labor availability issue is.
Is it back or is it in certain markets and if you could shed some light on what market.
Is it a problem and if it is.
I think labor shortage of labor is you weren't coming through perfectly growth clearly, but I think your question was.
As labor continuing to be a constraint the answer is yes pretty much everywhere and.
So I was really some price frankly, when I heard from our large customers I think back in April and May in the early stages of the Covid relatively early stages of Covid that labor continues to be the number one number two and number three problem.
Got it would have moderated.
Given.
Given the.
The downturn in the unemployment rate and the key in that calculus is quality of labor.
So so we've taken a lot of steps as you know with our community workforce initiative to try to address that from our customers, but no matter how hard we work or how large that initiatives get it's not going to even begin to make a dent in the problem that we have either.
Graphical.
Differences from place to place for sure, but those geographical.
Differences have already adjusted because people don't put their warehouses in places where there is no.
Labour whatsoever, they put it in places where there is labor, but they're just not as much labor as they would like so they're all competing with one another and the turnover rates and that kind of labor. It's very high it's about 40% a year. So people move for relatively small changes in compensation that environment.
And.
Customers are paying more attention to environment and all of those.
And then at these that can really be more attractive to labor. In addition to paint line.
Your next question comes from the line of Jamie Feldman with Bank of America. Please proceed with your question.
Thanks for taking a follow up.
We've seen some news on pro largest buying some urban land lately I'm just curious.
How should we think about multi story.
Composition of your 'twenty, one development starts.
Similarly.
The rotation from REIT sweetheart bricks and mortar to ecommerce.
Additional thoughts from the research you've put out on retail conversions and maybe that becoming a larger part of your 21 development site.
Well, Jamie I don't know what paper zero, frankly, but we've been buying urban land in terms of the covered land plays.
For at least seven or eight years, and a pretty steady basis. So we've been at this at this business for a long time and we're Brian.
Then they can get in certain markets, but no we've been after it for quite some time and it's not just in the U S. Also in Europe.
We're buying those covered land place and those can be either leased as staging areas. You can get very good returns on those while you wait for.
The market or rents or entitlements to convert them to industrial and we don't have a multistory strategy specifically, we have an infill strategy and net inflow strategy drives you to multi story in certain locations with certain land economics, but there is nothing in our business plan.
And that says Biogen shall bim three multi story buildings this year.
We were very opportunistic in net in that sense.
Your next question comes from the line of Emmanuel Korchman with Citi.
Thank you for your question.
Hey, Tom earlier, I think you discussed 200 million square feet of incremental demand.
Over the next few years, how much of that do you think can get taken care of by just.
Innovation within the existing boxes, rejiggering automation, more racking et cetera versus true incremental demand that's going to lead to leasing from from your end or others.
Actual interest is probably in a better position to answer that we've done a lot of work around automation and modernizing space. So Chris why don't you talk to that.
Sure. So the stat that mainly referring to E. Commerce, specifically, we expect it will generate 150 million square feet, perhaps more in the U S 200 million square feet, Michael more globally.
No I don't think I don't think its about efficiency and the introduction of technologies. I think this is about meeting the strength in supply chain over time as it relates specific to automation. The research. We've done is to take a look at the productivity of assets both <unk>.
Through the through the brick and mortar supply chain as well as the E Commerce supply chain, we don't see a lot of change there instead, when we look at that incremental 200 million square feet going forward youre going to see that focus on latched last touch locations and city distribution locations, particularly in the world's global markets those 24 hour.
Cities and as tall as Mike was referring to earlier I think there's going be a lot of diversity in that customer mix a lot of customers are starting to reassess how they want to go to market with E. Commerce in 2021, and beyond and I think youre going to see a lot of diversity. There. So it's much more about bringing in the real estate requirements.
Rather than introducing technology.
Yes, and if I can jump at the end of that I didn't answer that part of Jamie's question about the retail conversions, but can you have our latest thinking in that and of course as paper. So I don't have a whole lot to add to.
To that I think you will see more headlines about that the natural space converted but you will see some space converted so.
For a variety of reasons that you can read about from the paper.
Your next question comes from the line of John Kim with BMO Capital markets. Please proceed with your question.
Thank you on the Liberty portfolio. Originally you considered $3 5 billion of dispositions now it looks like Youre looking to sell about $1 billion.
Because you don't really need the proceeds but can you just refresh the growth how much of liberty the Richmond portfolio.
Considered non core for the company going forward.
Yes, that'd meal hasn't changed it's about three and a half still that three and a half if I remember correctly about 700 of it is not logistics.
And well put it this way its office and suburban office, we sold some of that the only thing that really remains.
On that front is the downtown Philly assets.
Links to Comcast.
So the rest of the assets that are available for sale or just straight up industrial and you know these assets would be considered the top I don't know 25% of most portfolios out there, it's just a bit on <unk>.
Might meet our standards, but they are perfectly fine assets and and they are appreciating and as you've heard but I think Tom mentioned that even on the non industrial ones, we picked up 18% more value than than we underwrote. So on industrial I think we're even going to do better than that it's just no sense as we could.
Channel is that a really high price right now, but if the capital sitting around not doing anything we'll give a bunch of it back in terms of dilution. So.
So we're going to be patient with that.
John that was the last question. So again, everyone. Thank you for being on our call and we look forward to talking to you during the course of the coming quarter take care.
And this concludes today's conference call. Thank you from your participation.
Now disconnect.
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