Q1 2021 Prologis Inc Earnings Call

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To the prologis Q1-twenty-one earnings conference call. My name is Julian and I will be your operator for today's call at this time. All participants are in a listen-only mode, but later we will conduct a question-and-answer session to ask the question during the sessions only press star followed by the number one on your telephone keypad. Also note that this conference is being recorded off to turn the call over to Tracy Ward Tracy you may begin. Thanks and good morning everyone Welcome to our first quarter 2021 earnings conference call. The Supper Club document is available on our website at prologis under investor relations. I'd like to state that this conference call will contain forward-looking statements under Federal Securities laws. These statements are based on current expectations estimates and projections about the market and the industry in which prologis operates as well as Management's beliefs and assumptions phone number.

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 first quarter results, press release and supplemental do contain Financial measures such as ffo and Eva. That are non-gaap measures and in accordance with G. We have provided a Reconciliation to those measures this morning. We'll hear from Tom Olinger our CFO who will cover results real-time market conditions and guidance Hamid. Moghadam Henderson, Tim, aren't Chris Kaden Mike curless Dan letter ethnic groups, Jean Riley and Cole Ian McEwan are also here with us today with that. I'll turn the call over to Tom and Tom. Will you please begin?

Thanks, Tracy. Good morning everyone and thank you for joining our call today positive momentum in the fourth quarter has carried into twenty Twenty-One as evidenced by our operating results profitable activities and strong Outlook demand driven by the powerful economic recovery retail Revolution and higher inventory levels is unfolding more strongly than we expected headlines in Chicago last 90 days and then at estimate the value of resilient Supply chains, those who were prepared are now growing and taking market share. There is great momentum moving through the supply chains that signaled by retail sales import volume and Rising inventory levels. This will continue as in recording sales ratios have just begun to rise as companies raised to keep Pace with demand.

Starting with our proprietary metrics and our view of the market space utilization is 84.5% of 100 basis points in the last 90 days. Our customers tell us their activity log rising at the fastest Pace since 2019. Please proposals to reach 93 million square feet and the first quarter a new high-water Mark enter up 13% from mm just for the size of our portfolio lease signings were sixty million square feet are second-highest quarter on record much as its activities in New leasing as a result retention offers 69% a quarter as we're optimizing credit and rent given our high volume of lease signings. Our portfolio operating portfolio was 96.4% least according to our leasing this continues to broaden a strong demand continuing from space sizes above a hundred thousand square feet and small spaces. Demand is improving.

Congress demands are made.

Elevated representing 25% of new lease signings in the first quarter. The balance of leasing is diverse with outsized growth among companies that provide food and consumer products as well as renewed momentum in the construction segment as housing expands in the US. We now expect net absorption of three hundred million square feet in 2021, which would be the highest in history too. Strong demand is being matched by Supply and we expect three hundred million square feet of deliveries this year. However, Supply remains broadly disciplined years of historic low vacancy rates have constrain and due to the lack of available properties particularly in the most desirable Market many of our markets face shortages of landfill Logistics uses in addition obsolescence and conversions to higher the better use added to this broad-based scarcity vacancies are below 2% in many of our top markets such as Southern California in Toronto Germany's main markets in Tokyo.

Our supply watch list continues to include just for Markets Houston Madrid Poland and West China which taken together account for just over 5% of our rental. I moved here recently. We began to see a rapid acceleration and replacement costs in the US. We expect replacement cost to increase 20 to 25% over the two-year period through 2021 the Augusta straight ever. Our procurement team is proactively mitigating these increases by securing favorable pricing and delivery schedules. For example, the team has procured steel for 5.2 million square feet of start a pricing roughly 5% below market and providing us with the ten to twenty weeks schedule advantage.

Strengthening demand and ultra-low vacancies are leading customers to increasingly compete for space, which is translating into pricing power.

Brent Rose to the quarter which was up 2.4% in the US out performed our expectations. We are raising our 2021 rent forecast six and half percent in the US tax percent globally are in place to Market rent spread now stands at 13.6% of 80 basis points. Sequentially this represents future annual incremental organic an hour-and-a-half Detention of more than six hundred million dollars.

Trade evaluation Logistics assets values are up a record seven and half percent over the last two quarters away to Capital has emerged coming both from rising real estate allocations and invest strategic for you reassessing their property Focus type applying devaluation of live to our $148 billion dollar owned and managed portfolio. We estimate that the value of our real estate Roll by more than ten billion dollars over the past two quarters moving to resolve the work. We've done the position portfolio and optimize the balance sheet is continuing to deliver excellent Financial results for the quarter core ffo was ninety seven cents per share which includes net promote expense of $0.01 net effect of rent change on rollover was 27% led by the US.

We are very enticing rent.

Over occupancy and substantially all of our markets occupancy a quarter in was 95.6% down sixty basis points sequentially in line with normal first quarter seasonality month rent collections. Remain very strong read effectively had no bad debt expense in the quarter our share of cash seems to rely growth was 4.5% driven by the us at 5.8% or strategic Capital our team raised one point four billion dollars in the first quarter as investor demand remains. Robust Equity Q's for open-ended vehicles are off all time high and More Than 3 billion dollars at quarter-end. This level of interest is another indicator that valuations for high Quality. Logistics assets should continue to increase look up the balance sheet. We continue to maintain excellent Financial strength with the put it in Combined leverage capacity between prologis and are open that it Vehicles now totaling $14.

We were able to get in front of the recent increase the interest rates and the issue 3 and 1/2 billion dollars of debt with a weighted average rate of 96 basis points and a term of eleven years this activity included the issuance of a 10-year US dollar bond with a spread of 55 basis points the lowest tenure refunds forever and the completion of our fifteenth green Bond offering. Yep, that's backing these bonds of the product of two decades of sustainable development. Our debt maturity stack is an excellent shape with minimum security detail 20-26 subsequent to quarter-end wage was in a green revolving credit facility adding $500 million dollars more capacity to our already exceptionally strong liquidity position moving to guidance for 21 or Outlook is more positive across the board here are the updates on our share basis.

We're increasing our cash seems startled. I broke midpoint by 75 basis points and narrowing the range to four-and-a-half to five percent. We now expect that debt expense to be in line with our historical a at approximately 20 basis points of gross revenues down from our prior guidance midpoint of 30 basis points. We're increasing our average occupancy midpoint for our operating portfolio by fifty basis point ninety, six and a half percent strategic Capital Revenue, excluding remote will now range between $450 and $460 billion dollars of 12 and 1/2 million dollars at the minimum wage increase is primarily due to higher Asset Management fees resulting from increased property values, whether you look at public comments or recent transactions, both would indicate that our strategic business is significantly under back. We are increasing development starts by four hundred million dollars and now expect a mid-point of two point nine billion dollars build. It suits for prize money.

40% of the volume our land portfolio today comprised of land options and covered land Place supports approximately $17 billion dollars of future development wage increasing the midpoint for disposition and contributions by eight hundred million dollars in total consistent with the rise and asset values and higher contributions were increasing realized development game like two hundred million dollars with a new midpoint of 750 million dollars you got the plumbing uses are now expected to be fifty million dollars with leverage remaining effectively flat in 1221 putting this all together bring freezing our core ffo midpoint by $0.06 and narrowing the range to $3.96 to $4.02 per share core ffo, excuse me, promote range between $3.90 and $4.04 per share representing your rear growth at the midpoint of 12%

our efforts over the past

Ten years to reposition the portfolio and balance you have set us up to outperform and twenty Twenty-One and Beyond and you're probably tired of us saying this but it continues to be true. We believe them to yours for the company are still ahead of us with that. I'll turn it back to the operator for your question.

Thank you, as a reminder to ask a question, please. Press star followed by the number one on your telephone keypad to answer your questions, please press the pound key. Your first question will come from the South Morgan Stanley please go ahead for mine is open. Thanks so much and good morning. Everyone, maybe just building off of some of the comments. I heard where you know strategic capital is undervalued and you're just much more bullish about the growth prospects, I guess from you know, sitting on the on the other side investors and you know, the street generally understand the things look really good, you know fun that they've improved any wise is trending up. So I guess I'm just looking forward, you know, what would you say are, you know some of the areas of organic growth that could surprise us positively and and second what does this mean for prologis has ability to do external growth be a development or even larger scale m&a. Thanks.

Let me let me take a crack at that. I think organic growth is the prospects are actually better than they've been in as far as I remember replacement costs are moving very quickly and interest rates are moving up or you know, generally up in the last six or seven months. So both of those things are you for the need for higher rents depends allow the development now lowering cap rates mitigate that a bit but you know, we don't we can't really count on that. So A prudent divorce with more higher input costs and higher yield requirements would have to get higher rents to make that work that just puts a pricing umbrella over our choice friends and widens that in place to Market spread which gives us more pricing power going forward and given our concentration and focus on the most desirable month.

It's where the supply picture is the tightest I think organic growth is always the engine that we count on for propelling our growth. All the other stuff is dead take and it's basically a cap rate conversion between the private markets or the public markets or or the public market valuation of two different companies in the case of MMA. Do not thanks we control but where we invest how we invest how we push rents how we use our scale to drive value for our customers and how we extract that value in the month of high rent and other fees for services is really where we add value or you know, the external growth can come and grow come and go having said that we have great external growth prospects do without having to do deals. We have a great land bank. They're well-positioned. We have a

even greater Shadowland Bank

And covered lamp plates you add it all up together and we can probably grow the portfolio organically by this size of one of the top three companies in the sector just with the Lambda we are dead. So I feel really good about both organic and external sources of growth for the company.

No, next question comes from Elvis Rodriguez from Bank of America, please go ahead and line is open.

Good morning. And this is for Ahmad or Tom. I'm a call you mentioned the procurement team that you have at the ability to secure lower steel prices versus the market. Can you talk a little bit about sort of the team and what the team is doing there? And you know how that helps you versus your competitors near-term and longer-term. Yeah. Let me start it off turn it over to Gary. Actually, he'll receives that function look scale gives us the advantage in two ways one we can make both deals and two we don't have to guess right about we're going to use the steel because we can spread it over a bigger base and if we guess wrong and one project we're going to use it up in another project. So so those are really good good to have to be able to play with but Gary once you have to that. Yeah. Hey all this so, you know, we set this function almost three years ago now and really focused on birth.

Controllable spend primarily on the construction side and and on t i and operating expense side and we set a goal at that time of delivery hundred fifty million dollars per year in savings and we have exceeded that this is the first time in my view in the company's history that we've actually taken advantage of our scale in a way that way but I think is really meaningful and you're starting to see it show up in development margins and operating margins and you know both Tom and indeed mentioned steel. It's not just about Iraq during a 5 to 10% cost savings on steel. It's about procuring those critical raw materials. Tom mentioned tend to twenty weeks of schedule advantage and I'm talking development particularly build the suits that is a game-changer. So I think you know, I think that the procurement organization is created a real competitive Advantage for us not only on the construction and coughing.

But also on the essential side where we're now starting to uh, deliver a different type of value proposition beyond the four walls and a roof.

Your next question concerns a manual korchman from City twist had your line is open. Hey, good morning. Tom. You talked about the drivers of the retention being I think an upgrade you said to to the credit quality and maybe tenancy, um, but maybe I was a little bit surprised at the the occupancy dip and and I realized that one I usually seasonally lower but given that just amount of demand thought that maybe that would have been a little bit less. So could you could you address both of those topics or the the seasonal occupation dip as well as the the retention and what we should look at for attention going through the rest of the year here is we said we we are we have more turn in the portfolio's worth pushing, you know in certain indications credit and pushing rent. We have excellent credit quality by looking at our stats and our low bad debts. Um, I think retention is going to improve over the years.

it's something we really don't look at and

I wouldn't Focus too much on it. I would focus on our leasing momentum and our rent growth and rent change growth. And I think if you look at both, um, there are accelerating. The only thing I would point to do is look at our least percentage at the end of the quarter. We were ninety 6.4% So we are leasing up, uh that vacancy and again, I point to the record level of proposals Thursday and um increasing rents. So I think we're we're we're making the right decision for the real estate, uh by pushing the rent and getting the right tenants into those spaces.

Hey many I would I would have two things there. First of all, we can make the occupancy be whatever we want and retention be whatever we want. If we were more Douglas on Thursday and what we can get and I do think that we're actually leaving the market in that direction. The other thing is you may remember from last year around this time. Maybe it was the second quarter call. I don't remember but we talked about we're taking very careful notes on who's behaving and who's not behaving when the markets really softened and there were people who were requesting the referrals and we're we're really trying to take advantage of the situation where the businesses were not distressed. Those are the people that given wage flight between two tenants on on a given space are going to be on the losing end of that fight. So, you know people's behavior does does affect how we make these leasing decisions. Yep.

That hurts a retention stat. So be it will make more money and we'll have a better portfolio of customers.

Your next question comes and Derek Johnson from Georgia Bank, please go ahead your line is open. Hi everyone. This is speaking on the development side. You have yields compressing across most or all of the markets through 2022 and Beyond but but not as much as we would have thought. I mean given steel prices up around a hundred percent. I don't think a five or 10% discount off, you know gets us to that yield stickiness. So is this due to the cost basis on your land bank, or is it more demand and growth in rent or enough to offset expenses in the office writing process at this point? Thanks guys. First of all, you should be clear in reported margins. We don't use Book value. We use the market value at the time. We do the we start construction, but land markets have been moving these increases, you know, if you figure it takes nine to twelve months to build the building a lot of this steep price escalation wage.

And during the period in the last nine to twelve months. So um, so we haven't had we don't we don't adjust the land bases in the middle of a project because my end is going up we do it at the beginning of the month. So we've had good surprise margin expansion. If you will from from rents being higher remember a lot of these things are also released. So, if we were if the space were available again, we could at least that the higher rate that's why I focused on in place to Market rents because that's what really is the additional Fuel and the page for extending the rental growth time. Your next question comes from Craig mailman from KeyBank, please go ahead your line is open. You guys just wanted to touch on same-store here, you know, we kind of figured maybe the initial cut was a little bit conservative, but the 75 basis point increase was was pretty strong.

for first-quarter Upward revision, and I know that you know

MCA guide says moving higher, but just could you walk through maybe the your bridges into what really drove that upside here and gave you guys confidence to bump it that high this year and hopefully give yourself continued room to the upside the next couple of quarters.

Okay, you know the main driver this is Samson driver or receive short brofist in place the market for all but the increase that we saw quarter record on our guidance. It would be oxy oxy fifty basis points that that's lower by 10 to 12 basis points and we are seeing higher rent row and you know, most of them are in growth. We're going to get in the out years, but we're getting a little bit of benefit of that uh down here, but those would be the main drivers of the increase. But again, I I would point you to the proposal level. The record level proposals demand is excellent and am releasing up space and I rent.

Your next question comes from keeping him from truest, please go ahead your line is open for the morning. So I mean when your team has 24,000 very interesting Venture Capital Investments and there's some pretty clear things that come across which is mainly seeking to reduce customer pain Point reducing truck detention times or route optimization and improving a Workforce efficiency or Energy Efficiency. Uh, and that's to say all these ideas work out perfectly my a couple of questions are what could it mean for the field you platform? What does success look like to you in this Arena and lastly? Where do you think we are in terms of converting these novel ideas too broad industry adoption.

Well, the last part of your question is that we were very early because we're on the leading tip of that sphere and we are early in implementing it so very very early age. By the way, it was this key been because my earphone fell out by the way, you know more about that Venture Capital portfolio based on the report that you wrote last week that I wrote down and you can answer this question actually better than I can but we've made roughly as you pointed out about 30 Investments totaling about a hundred million dollars, I would look odd if if and and I said this 5 years 6 years ago when we started this activity if those Investments were 5x multiple, which is a good venture capital from okay. It's great. We made we make five hundred million dollars, but you know, it costs a company which has got an Enterprise value of a hundred billion dollars, you know, it's interesting, but it's not dead.

Just not a game-changer. But if we can change the effectiveness of our business the value of our business to our customers by 5% Now you're talking some serious though. I mean that's five billion dollars. So so really the way the reason we're doing all this stuff is not because we're great Venture capitalists, but because we can actually assess the quality of life the idea in this sector, we're not we're not in other sectors and we can actually affect the outcome probability by by letting those companies get traction quickly improve the product offering et cetera, et cetera. So by the way not all of them are going to be successful for sure and we've had one that has not been a sales rep so far, but that's actually a pretty good track record for a portfolio of the size. If you know 20% of them work out will be very very happy, but primarily happy birth.

if its impact on our customers and how

fourth floor

your next question comes from John Kim from BMO Capital markets his go ahead Carolina's open. Thank you a question on retail conversions Amazon has been more actively pursuing the retail distribution conversion, although primarily in secondary markets last fall you estimated. This would amount to approximately 5% of last-mile stock over ten year period has changed on the amount or the timing change at all since you report last fall.

No, it's probably even we were in the high side, I think.

I mean we're working on lots of these deals probably more than anybody combined everybody come by and but they're really tough. You know, the ten twenty thousand square feet conversions you can you can do but if you think about it in the context of our business, I continue to believe that they're going to be very attractive but they're going to be few and far between and you got to go through the five stages of grief to get to them. So, you know, they're tough.

Your next question comes from Blaine Heck from Wells Fargo, please go ahead your line is open great. Thanks. We noticed you guys bought a good amount of land. I think it was $225 million in the quarter given where your land Holdings and land bank stands. Now. Do you think you'll need to keep buying similar amounts quarterly or was this may be outsized and and maybe in anticipation of continued increases in land values and then just given the increase in land prices that we've seen this cycle. Where do you think that fair value of of your land bank stands relative to the book value?

Let me start the alternate over to Gene for some specifics and Tom for his guests on the land value, but we are not that precise with respect to land purchases. We're opportunistic. So a lot of these land deals have long just station. So and we we certainly can time what quarter they fall and we work on these things for years and years and sometimes they never happen. Sometimes they happen in a quarter different than what we thought would happen. So it would happen so don't spend so much time on the quarter because we don't control that but the overall quality of the land bank and the size of land bank is is one factor, but we're it is is also another Factor so our overall number may look in line with what our goals are but they're definitely markets that we're short on my end and some markets that we maybe log online and and we we're constantly in the process of the job.

Based on our in-house underwriting Our Land Bank Book value is about 40% on their values and that moves that number is not coming up fairly quickly based on what you heard earlier. But Jane Tom, do you guys have anything to add to that?

Yeah, I guess this is Jean. I'll just you know ad in terms of the magnitude you're going to see this number move up. It's going to move up in tandem with how long our development development activity moves up and frankly land as a percentage of overall cost is is also increasing with these escalations off and and I'd also add our our development volumes. If you look at the midpoint of our guidance for this year the updated guidance, it's it's less than half and half percent of AUM.

So we we have room to go on and that's spec development activity. So so we're going to move this number up and I don't really have anything else except the to punctuate the quarterly almost even annual numbers aren't that important? Because we see our opportunity with land is to buy a big complex difficult pieces. So we're not paying retail. Uh, so time. I don't know if you have anything else to and you know, what added it's not just the land bank, but it's come back in place where you're going to see, uh, really important, uh, strategic Acquisitions that allow us to further develop these variables.

Your next question comes from Michael Carroll from RBC Capital markets, please go ahead to the line is open.

Yep. Thanks Utama ticket earlier in the call. You mentioned that you estimate Supply will be around 300 million square feet and twenty Twenty-One, but Houston's the only Market where there is current issues you're tracking. I mean, are there any other markets that you think could become an issue over the next twelve plus months or is demand just so broadly strong that will take down all that excess based off potentially way in I called that for markets in Houston was the one in the US. Um, but I mean across the board where we're trying to do and where our tenants want to be against this largely. Um, very very in. So we're going to watch the bulk markets like we we always do like a phoenix that type of Market will watch it but those markets are working effectively now, but I'll turn it over to you if any other color

Yeah, use, you know Houston has a couple of issues. I mean, it's got a nine plus percent vacancy rate and over supply and demand issues. So it's going to take some time for that market to to stabilize Phoenix is on our watch list, but frankly there isn't that bad and Tom Tom really hit it. I mean the submarkets we like to operate in um are very healthy right. Now. Most of them are quite constrained and these entitlement processes that are just getting more difficult and and longer so, you know, I see equilibrium out there for a while and and if we're really honest we've been in equilibrium in the US at least for about four years. So obviously we're calling for that with three hundred each of demand and Supply this year. I think you're going to

I think you're going to see that.

for a while

Your next question comes from Steve sakwa from evercore is I please go ahead drive line is open. Yes, and it's just two quick questions Tom on the on the weighted average term of the lease. Is that what kind of drop down here in the first quarter? I know it was also lower in the first quarter last year just anything there and then secondly to me as it relates to sort of things like the Suez Canal blockage and and dislocation and and transportation systems and and low inventories. You know, what is your expectation for? I guess structurally higher inventory and better demand going forward.

This time I'll take the first one the shorter-term on the operating leasing was all mixed. It was higher southern Europe pretty good France where you've got three year lease has China for example lower the UK where we have our long leases. So it's all mixed. Uh, the the length of leases when you look across markets are are stable. It's not producing.

Yeah, and Steve in terms of structural inventory levels. There are three things that are driving up. I'm for sure. They're going to be up in my estimation for the foreseeable future. The first retro thing is that people are just carrying more safety stock because with all the fluctuations cope with induced and swiss Canal induced and everything else and do something, you know, they you just need to carry more inventory to buffer yourself from these risks because the cost of Lots sales is much greater than the additional cost of carrying inventory. So across the board not Quantified that as 5 to 10% more inventory in a steady state environment. I think using Christmas paper on that and if I were going to pick a number it would be on the higher end of that range more closer to the 10% So that's a big driver. Secondly inventory to sales ratios have been really stretched chain. I mean we're

The starting point of where inventories are is very stretched and and it just has to normalize to its to its regular level. And then the third thing is that the transition to e-commerce that percentage goes up will drive that number up. So so I think yeah, we're going to have more inventory zakat system. But only there's a fourth thing and I hadn't thought about it first, but you have utilization rates that are $85 86% So it's not like there's a lot of faith in in the system so that the mechanism for having more inventory will translate for demand to demand for more space pretty quickly because those are very high divorce rates.

Your next question comes from Steve on some Green Street, please go ahead and line is open. Hi, good morning. Could you provide some additional color under US market range forecast particularly? How Coastal Market rent growth compares to Don Costa markets?

Yeah, I do. It's Chris Caden. Thanks for the question indeed. It's actually widening and widening out as I think you're you might be suggesting so in the US six and half percent but the top five markets with 70% or better growth, New Jersey Baltimore Toronto. Obviously, that's Canada Southern California and Seattle. I think you can see the pattern there. That's for sure your broader Coastal Market by contract if we exclude Houston the low end of the range or markets that are running in kind of a a two to 3% range, so that brackets it for you.

Your next question comes from Top catherwood from btig, please go ahead Drive is open. Excellent. Thank you very much actually following up on that previous question and took his comments. So want to focus on development starts in the central us if we look back at 2019 you guys started roughly 2.6 million square feet of developments wage in the first three quarters of 21, you started less than six hundred thousand square feet. And then just in the last two quarters its accelerated to 3.1 million square feet. Can you provide some detail and kind of what you're seeing that's driving this investment acceleration and especially, you know, give them Chris's comments and the bifurcation and rent growth does your investment banker in that in these kind of Central Markets in any way reflect an expectation that Coastal markets could be weaker over the long term.

Oh, you guys really think we're smart. We're not that smart. Let's just start with that and and our business doesn't lend itself to quarter to go by quarter analysis. So I could put those two facts together. We have no clue what exactly development starts are going to be by quarter in a region going forward. We can give you a pretty good sense of roughly overall development team is roughly percentages of where it's going to be rough percentages of how much of it is built to suit, but when you're talking about numbers in the two and half million square foot range per quarter cup to see that the million feet can really move that number around and depending on where that lands like but really affects the numbers so I I hate to be in the position of some of these smaller companies and took those questions because I mean for them, they must be a really tough question to answer given that they don't have the benefits of the law of large numbers, but but honestly We're Not Dead

There is nothing systemic in the central region other than the fact that obviously we're not going to do a lot of development in Houston. And I would say Dallas playing large has State stronger than we would have expected. So those are the two things I would I would tell you in terms of our strategy but quarterback quarter numbers. I have no clue.

Your next question comes from David Rodgers from there to pick ahead your line is open.

Yeah, maybe first question is Tom. I wanted to ask you about the turnover cost and the concessions on the leases in the last couple of quarters obviously lease proposals have been up. Is that a function of maybe smaller leases or the lease term you address earlier? And then I was hoping maybe Jean could talk a little bit more about small leases and maybe the percentage that that's making up of your lease proposals going out the door and what the trend is there thanks wage, and I'll turn over cost and concessions concessions aren't uh, really increasing at all. What you're seeing on turnover costs is really a mix issue driven by more new leasing relative to Renewal thing and concessions are typically a bit higher on renewal leasing. So you and you're seeing that next. Uh, also with turnover costs. We're certainly seeing higher rent and withdraw Austin including least conditions, that will be a driver as well when you think about short-term, um leasing or I'm sorry leasing or smaller space.

Basis it is is is certainly improving this quarter particularly. When we look at a proposal levels proposal Levels by segment where I believe we're the highest could go through Thursday is um in the Border almost all all the segments. So proposal activity is is good and right change is accelerating. So I think we're going to see a smaller space is improved. Um, uh pretty well over the next uh-uh balance of the year.

Your next question comes through rentals from UBS, please go ahead your line is open. Hey, thanks. Could you just talk about your community Workforce initiative and how he's doing given the labor the labor shortages, you know you read in the press and then how do you think Warehouse automation May Advance over the next couple of years to help alleviate that thanks.

There's a paper on Warehouse automation that Chris wrote about three or four months ago that I think lays out. Our thesis around that there are aspects of it that lending there were aspects of the activities in the warehouse that lend themselves more easily to Automation. And those aspects are going to take place sooner than vocal automation. But companies are being used pushed into more automation than they would otherwise use because of the labor shortage and if the labor shortage didn't exist, they wouldn't automate so much because it's expensive and the ROI is are pretty Improvement in many cases, but they simply have to do them to meet the service levels that their their customers demand of them on the committee Workforce initiative. Let me turn it over to that next trip to overseas that activity for us at once you make some comments great. Thanks for the question. So at the end of 2020 we are trained in x

Tesla 5,000 individuals and we

We're well on our way to our goal 25,000 train throughout the globe. We have nine programs underway in the us and we just announced expansion to CWI program in the UK. So we fully expect to hit our goals. Number one. Number two, the connectivity that we have with our customers is very significant as they're looking for us to help them train and enhance their their initiatives with your employees not just from acquiring employees but also retaining employees and I will mention it's also significant development for us to be in front of our local municipalities in terms of showing showing and demonstrating to them that we are focused on delivering labor in order to keep those communities vibrant. The last thing I'll say is that we're in the bath pros and negotiating certifications for our programs. So they will be industry known certifications that we're also very excited about

Your next question comes from Mike Miller from JP Morgan, please go ahead remind his open. Yeah. Hi development starts be increased to about three billion 421 but typically to see that number increased meaningfully or the next few years.

Mike it's it's Gino. I'll take that one. You know, it is hard to say I am going to do next year and the year after my cuz obviously the market environment is going to guide us but as I said earlier at this point are speculative development starts off will do as much billed as soon as we can do and that is obviously going very well right now, but our speculative activity at less than one and half percent of of em, em is is relatively low. So the market environment looks really good right now the years to come, you know, we'll cross that bridge when we come to it.

Mike you would actually remember this because when we were coming out of the downturn of 2008, I think it was in our 2011-12 know it was in our 2010 analyst meeting before the merger would prologis that we actually said for the next decade development guidance is going to be between 2 and 3 billion. That's a reasonable amount of development to expect and at that time remember everybody was scared of prologis kind of numbers around five million five billion dollars and you know that whole debacle. So phone number from literally eleven years ago was 2 to 3 billion and that was with a m b which at the time was about two hundred and fifty million square feet today. The new prologis is a billion square feet. That's four times as big so to normalize that number for today given the size of the base. That number would have to be eight to twelve billion dollars a month.

You know the fact that we're doing through.

2 3 and 1/2 or whatever it ends up being is in the historical context and the size of the company is much much smaller than the numbers you used to see in the mid-to-late eighties. And the reason for that is that development is that much tougher to do particularly in the market that people have faith that they want to be at that time people didn't have quite the same appreciation of the quality differences between markets that they do now but so in a historical context, those are really small phone numbers, I mean to get to their equivalent you would have to take for Life old provide guidance Build A and B Guidance the old Liberty Guidance the old DCT guide dog and a couple of private things in between them. Add them all up together. So I gave there is a potential upside opportunity if we could get our end on good land dead.

That is where the Dilemma lies. That's why I think there's so much pressure on rents going forward.

Our next question comes from Caitlin Burrows and Goldman Sachs, please go ahead your line is open. Hi. I was just wondering maybe if you could talk about leasing volumes, obviously, they're really strong. Could you go back who who you're seeing the most demand from what type of tenants how broad it is in any recent shift that you've noticed either stronger or probably weaker.

Yeah, I think they're healthy companies really stepped up in pretty much every sector during close at and use that opportunity particularly the early days to jump in and do more activity obviously cpg companies food and beverage companies e, of any form. Those are the growth sectors I think housing is going to accelerate because housing has been dead operating into pretty low-level Healthcare is accelerating for other reasons that you can imagine but Chris, you know, we're or Mike. Do you want to add to that?

Yeah, I can add just give a little more flavor obviously e-commerce is a big component of it, but certainly not all about Amazon. Certainly. They're the most active customer but we're seeing a lot of activity from the top of the Walmarts Home Depot's and lots of evidence of the the Chinese players making their way to the US and Europe as well. And then don't forget about just some of the conventional players that are really affected right now food and beverage very active Transportation Factory just said to build the suits this quarter in addition to Amazon with Kellogg's and FedEx that represent, the continued strength of the durability this broad customer demand that we're saying

Your next question comes from Raymond James, please. Go ahead your line is open. Yeah, good morning. Thanks. I just wanted to follow up on the discussion replacement cost application for construction cost inflation. How should we think about that that growth translate into a ffo and and maintenance capex?

I I think a longer-term that will add to the growth rate in terms of same story. Anyway long term meaning, you know, five for five years compared to what it would have been without that cost increase in replacement cost but it's a hard thing to prove because you know, you you never going to know what it would have been to compare it to but I think it's a longer kind of burn and that compounded with the with the challenge of getting more land. I just think that those needs to be a Tailwind for rent growth into the foreseeable future and you know going back to something that I think we shared extensively with you guys a couple of years ago at the end of the day rant is anywhere between two and four percent of supply chain costs and people are just getting smarter about how to use well-located real estate Abuja.

Actually save cost on the other aspects of supply chain cost as they are pulling together. There's space buyers and their logisticians and I will set up inventory and the people who do the demographic analysis of where they want to locate think so, so I think all of that is going to translate into longer runway for rental growth compared to would have been of course turnover costs are going to go up as well because you know, you steal and all that in in building out the space but I think patience as a percentage of rents, which is the way we like to look at them. I don't think they're going to change that much because rents are going to be affected by the same factors to

Your next question comes from Elvis Rodriguez from Bank of America, please go ahead and line is open.

I just one more question. Maybe this one's for gene or or how many it if you want to comment Amazon in particular. So on RJ will call last week. They noted that there's an increased interest in medium size boxes from that tenant. Can you talk about sort of their demand in the quarter your expectation for them for the year and just generically what you're seeing and their shift and their supply chains off.

Well, Mike is actually probably the best person to answer that but you know, they they've gone out and built out by far that the you know, the base infrastructure of the big buildings off and now it's a trench warfare of getting them more last touch type applications and filling in behind it in terms of square footage. You won't add up to the same impressive numbers, but those are $500 per Investments and that's where their focus is going to be. I would say, they're pretty much ahead of everybody else in terms of the backbone infrastructure. And now it's a race for the last touch

Like anything? Yeah, just just a further add-on last year was a historic year in terms of Amazon's square footage leasing. I think you'll see the same kind of a loss if not more going for in terms of the transaction account. But I mean, it's Point there's going to be they're going to be smaller facilities and more Focus incrementally, uh, spent in places like Mexico and I am in Europe seeing evidence of that already and we're certainly well positioned to take advantage of those opportunities there as well.

Thank you, Mike.

That was the last question. So we really appreciate your interest in the company and look forward to our continuing dialogue. Take care.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect goodbye off off off off.