Q4 2022 Prologis Inc Earnings Call
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Greetings and welcome to the Prologis 4th 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. If anyone should require operator assistance during the conference, please press star-zero on your telephone keypad.
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. Jill Sawyer, Vice President, Investor Relations.
Thanks, Diego, and good morning, everyone. Welcome to our fourth quarter 2022 earnings conference call. The supplemental document is available on our website at prologis.com under investor relations.
I'd like to state that this conference call will contain forward-looking statements under federal securities laws. These statements are based on current expectations, estimates, and projections about the market and the industry in which Prologis operates, as well as management's beliefs and assumptions.
Forward-looking statements are not guarantees of performance and actual operating results may be affected by a variety of factors. For a list of those factors, please refer to the forward-looking statement notice under 10-K or other SEC filings.
Additionally, our fourth quarter results press release and supplemental do contain financial measures such as FFO and EBITDA that are non-GAAP measures. In accordance with Reg G, we have provided a reconciliation to those measures.
I'd like to welcome Tim Arendt, our CFO , who will cover results, real-time market conditions, and guidance. Hamid Moghadam, our CEO , and our entire executive team are also with us today. With that, I'll hand the call over to Tim.
Thanks, Joe. 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've 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 $461 per share and including promotes was $516 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 of the 40 basis point increase over the quarter.
while we tend to quote occupancy, is notable that the portfolio is 98.6% least 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 has 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've maintained over $4 billion of liquidity at year-end with borrowing capacity across Prologis and the open-ended funds of $20 billion have expanded significantly due to our bouncy growth from the Duke acquisition.
With regard to our markets and leasing activity, the bottom line 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 corridor 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 has 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 in 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 years that the pipeline will decline.
Deliveries will put modest upward pressure on vacancies from 3.3% today toward 4% later in the year.
However, new development starts are slowing in response to the market environment, which will reduce vacancies in late 23 or 24.
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 monthly 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-ended 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 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 23 rent forecast calls for approximately 10% growth in the US 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 percent, roughly 50 basis points lower than the 22 midpoint.
Combined with rent change, we forecast to generate net effective same store growth of approximately 8 to 9%, with cash same store growth between 8.5 and 9.5%.
Given these assumptions, we believe our lease mark to market will be sustained or even increase over 23, ending the year between 65 and 70 percent and providing visibility to an incremental 2.9 billion dollars of NOI after the more than 300 million dollars that will become realized over the course of this year.
We expect GNA to range between $370 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 7 and 9 cents this year. This reflects 70% growth in revenues and tax credits from 22, 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 520 megawatts by year-end.
We're noting that we close 2022 as the second largest on-site power producer in the US, a position we will build upon with our plan for one 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. In between our expectations for build-to-suits and logical markets for spec, we see an active year of starts initially to range between $2.5 and $3 billion, with a real opportunity to grow.
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 two to three billion dollars.
Finally, in strategic capital, we forecast revenues excluding promotes to range between $500 and $525 million, which is impacted by valuation write downs across 22 and the first half of 23.
We are forecasting net promote income of 40 cents based on an assumption that values in USLF, primary source of 23 promotes, will decline further from values at year end. Every 1% change in asset value equates to slightly less than 2 cents of net promote income.
Putting this all together, we expect Core FFO excluding promotes to range between 5 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 $540 and $550 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, yet 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 value creation. 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 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'll now turn the call over to the operator to take your questions.
Thank you.
Ladies and gentlemen, at this time we will be conducting a question and answer session.
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Our first question comes from Steve Sacwa with Evercore. Please state your question.
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 saranal eye growth of 8 to 9 gap and 8.5 to 9.5 cash. Just what are you expecting for cash and gap leasing spreads and just want to make sure that's different than the kind of overall portfolio mark to market you talked about of 65 to 70 percent.
Yeah, they're going to be stronger as you think about the lease market to market. It's all of the leases so it represents old leases and leases just done. So clearly everything that will roll next year is going to be above the 67% we're quoting today. It's a little bit flatter than you might expect as we've looked at it. I think.
Leasing spreads next year are going to be in the high 70s to low 80s on a net effective basis and then as we know that the cash basis of that is trended towards about 1,500 basis points or so inside of that.
Thank you. Our next question comes from Craig Mailman with Citi. Please state your question.
Hey, good morning everyone. I just want to hit on the capital deployment side of things, maybe a two-parter here. Just first on the –
the stabilization to just the kind of the what you guys have stabilizing the 2.8 billion that your share.
Can you just bridge that gap versus the five and a half billion that you have on page 20 of expected? deliveries or completions in in 2023 and maybe just give us some sense of timing on that. I know I think about 30% of those are built the suits
So also how you're thinking about where the pre-leasing is on the balance of that as well and kind of how that layers into your occupancy assumption.
I'll 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.
29% of that, that's a.
in there as a build-to-suit. The pre-leasing is better than that 29% and I would say on track with historical averages even on a bigger data set here. So we feel really good about delivering our stabilizations at this year index.
Thank you. And our next question comes from Kee Bin Kim with Truis. Please state your question.
Thanks and good morning. I was curious about the investment capacity that you show in your supplemental of 1.5 billion is down from 4.2. I just want to understand what that actually represents and tying that to your comments about contributions perhaps picking back up if conditions...
settle out. How does that comment compare to the 1.5 billion dollar capacity and how much room do you ultimately have and increase the net capacity?
does that comment compare to the 1.5 billion dollar capacity and how much room do you ultimately have an increase in that capacity? Thank you.
Hey, Keevan. So what I would do with regard to investment capacity is rely more on the way I'm describing it in our prepared remarks, the 20 billion and four or five billion across the funds. The number that's presented in the sub, which is what I think you're referring to, is a bit technical about the current amount of equity that can be drawn in the funds. And then that number is
is very low leveraged, 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, you know, the liquidity and the funds for contributions. There's a lot there for us to tap over time.
Thank you. Our next question comes from Derek Johnson with Deutsche Bank. Please state your question.
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 US mark to market getting wider. How do you view demand in Europe and the differences between the US and Europe ?
has a lower vacancy rate than the U.S., if you can believe it. So that's the general backdrop. That's very consistent with the way Europe has behaved in the last 10 or 15 years. As to the specifics on mark-to-market and the like, Dan, you wanna cover that? Yeah, sure. Mark-to-market, least mark-to-market in Europe is about 28%.
I would say just overall we feel very good about the leasing demand in Europe right now. We talked about in the remarks about an expansion in the vacancy but overall feel really good about where it's headed. You know and the you might ask what about the UK because that's the one you hear about.
would be softer it has been and there's virtually no vacancy in Germany and some of the manufacturing coming back particularly autos etc are really strengthening Central and Eastern Europe the markets particularly Poland where
there's this perennial vacancy, it's sort of tightening up.
vacancy, it's sort of tightening up. Thank you.
Our next question comes from Nick Ulico with Scotiabank. Please state your question.
Thanks. I want to dig in a little bit to the sectors that you're seeing driving leasing demand, let's say in the fourth quarter and so forth this year, whether you've seen any changes in types of customers taking space versus a year ago. I guess we think about the broader retailer bucket.
where you did see some retailers reporting year-over-year sales declines in the back half of last year. I'm wondering if any pieces of that category is seeing less demand.
The only category that is significantly below trend and is likely to be that way is housing. This is usually what some of the preferences are.
slowing. But with respect to other details, Chris, do you want to take that? Yeah, that's absolutely right. Generally, Nick, it was diverse. So whether we look at consumer products, whether we look at apparel, food and beverage customers, we have a diverse range.
of customers leasing space from us beyond the housing categories, which would include construction, it could include home goods, that's the like.
Yeah, and retail sales on a real basis notwithstanding the weaker prints in 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 prints in December and November .
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.
Our next question comes from Michael Goldsmith with UBS. Please state your question.
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've used?
Actually, the assumptions about the macro environment, other than call it defaults or something that has an immediate effect, are not going to drive the numbers big time in 2023. Because a lot of the leasing that needs to take place in 2023 is already in progress or been dealt with. I'm Andrei IllEM considerate.
We are dealing with very high occupancy levels. To start with, there is not a whole lot of space to lease. And the real driver of those same store numbers is the huge mark-to-market in the portfolio that already exists. So don't expect, even if we change the assumptions by a lot,
the numbers for 2023 are not going to move that much. They will obviously move as you get further along into the future. So that's one comment I would make. The second comment I would make is that in every year in the last three or four years, we started the year with rental assumptions that we have exceeded.
sometimes by a factor of 3 to 4X. So, I'm not saying that's going to happen this year, but there is absolutely no reason in the world to go crazy on our assumptions with respect to rental rates, particularly they don't have an effect in 2023 anyway. So,...
we'll see how it plays. And if we see evidence of stronger rental growth, and my bet would be a surprise on the upside over our assumptions, not the other way around, then we'll let you know, and you can adjust the numbers according to him.
Yeah, just building on that Michael if you you know within the supplemental You can see our lease expiration schedule out of that You'll 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've already addressed ahead of entering the year here so that the footnotes will tell you that
you get to 13% there. As Hamid said, start with the 67% lease market to market. We've got 10% market rent growth of the year. You assume we'll get that halfway halfway through the year. One thing we see people get wrong is that'll take you to a certain amount of rent change. We actually get half that rent change this year. You get half of 22's rent change as well.
Mathematic thing that you need to be mindful of given the quantum of rent change we're talking about lately. That'll 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've taken our guidance down there a bit.
Thank you. Our next question comes from Vince Tabone with Green Street. Please go ahead. Is that right?
Hi, good morning. How should we think about the organic same store and why growth for the legacy Duke portfolio in 23 given that that's outside of guidance? Is it lower than guidance for the legacy PLD portfolio in the same ballpark? Just give them the size of the Duke DL any color you could share would be helpful.
Well, it would be lower for one reason anyway, which is that they started at the higher level of occupancy. So, putting even rents aside, on a same store basis, there's less opportunity. They generally had longer term leases because they generally had bigger spaces.
So that affects the mix. But Tim. Well, and I think an important thing to remember here, and we've seen some people not have this entirely correct in modeling, is just understanding that on a gap 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, and that's contemplated in our guidance. On a cash basis, I expect it would look quite similar to ProLadys.
That's really helpful.
Great.
Thank you. Our next question comes from... By the way, if I can continue that, one thing that you didn't ask, but it's important in this context, and then 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? Yeah, it actually goes as far as saying we expect to outperform in the operating portfolio to go 11 to 13%, call it. Now, eight of that is going to come from market rent growth.
So really 3-5% of that comes from just operating that portfolio in the Prologis platform.
Next question comes from Tom Catherwood with BTIG. Please go ahead. Thanks. Tim, you mentioned in your prepared remarks that the outlook for 23 assumes a recession. And if we look back to previous recessionary cycles, usually we get...
So within that backdrop of assuming a recession, how do you think it could be different this time? And kind of what do you have baked into your numbers for that for 23?
So given that Tim was in kindergarten when cycles started, Tim and I are a little bit different on 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.
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 healup.com 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 dot com, 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 was 2008-2009 and we all know the reasons for that. And there you also started with a significantly higher Rickins rate. I think it was 7 or 8% before the music stopped. And all I can tell you is that the old Prologist with the funny L alone...
had 52 million square feet of vacant spec space that they had to lease. I think AMD at the time had like 8 or 9 million square feet. So, nothing like you're talking about here, particularly given the different scale of the company and how we're 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 do not see anything near that. I mean it is mathematically impossible. Even if absorption goes to zero right now and we do not lease any more of the underdevelopment spec space..
and absorption goes to zero, I mean, you know, you will be under 5% vacancy, which used to be considered a great strong market. And to cap it all up, we didn't have this kind of mark to market. I mean, the market markets in those days were in the mid single digit range and now we're talking about 70% almost.
So the 10% market rent forecast forecast in the US. 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 you know, supply growth that you're seeing and the demand backdrop in general.
Yeah, hey, it's Chris. So indeed we expect 10% in the US. That's going to vary. You know, typical spread between coastal non coastal is three to 500 basis points. At least that's where it was running, say pre pandemic, and we expect a wider spread.
In the in the current environment, so whether you look at vacancy, whether you look at the under construction pipeline, whether you look at the momentum and pricing in the back half of last year, including fourth quarter that leads you to conclude on the coastal outperformance continuing at a greater than historical average in twenty twenty three.
Thank you. Our next question comes from Ronald Camden with Morgan Stanley . Please state your question.
Hey, I just want to go back to some of the comments on the third-party management. I think you talked about valuations being down 7% in the back half of last year and potentially continuing into this year and the redemptions potentially ending in the first half of this year.
two quarters of the year. Just want to get a sense, any more color of how you're thinking about that? Is it because the valuations have been repriced that you expect sort of the redemptions to stop? What should we be looking for to get more confidence in that? Thanks.
Yeah, there are two things that usually drive a redemption request. One is sort of the denominator effect and people needing the liquidity. And two is some folks want to arbitrage the lag between how quickly the public markets are operating in such phase.
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 wanna make sure the valuations are right before those things transact. We think Europe has actually adjusted quicker than the US.
and that's why we think there's maybe another quarter to go before Europe fully adjusts. So we're 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'll 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 is oodles of liquidity in these funds to basically be able to handle any reasonable redemption requests. We can, and still drive.
Secondly, we started with a queue 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'll tell you one other thing which is kind of interesting.
Pearlogis could be a buyer up in these funds 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, couple of hundred million dollars of real estate. And you know, we actually offered it to our outside investors first.
then we stepped in and bought it and you know what? The next quarter all the redemptions went away because people realize 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've all been reading about.
Thanks. Our next question comes from Camille Bonnell with Bank of America. Please state your question.
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're expecting another year of strong stabilizations. 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 timelines?
This is Dan. Let me start with this year's development start guidance. We're coming off our largest year of starts ever.
And just given the macro headlines, we decided to take a little bit more balanced approach. We slowed our starts at the end of last year. We don't expect to start up in earnest until the last half of this year. We think the build-to-soup business will pick up at the same time. So...
Call it conservatism, I call it discipline. And just feel really good about our approach given the volumes over the last year or two. And then stabilizations next year.
Stabilizations this year, Tim mentioned it earlier, what we think we could outperform, what we have in the books right now, demand continues to be strong. We talked about the development starts plummeting in the marketplace in the fourth quarter. We think they're going to be slower in the.
that.
That is not that has not shifted Stabilizations from 22 to 23 or anything like that Yeah, I can't I can't even think of an example that comes close and even on the cost side, you know because we've been thoughtful about procurement and and securing some of these tight supplies ahead of time
That's been actually something that we use as a competitive advantage in marketing to build the suits because we got a bunch of steel and we got a bunch of air conditioning units and electric panels and things that are in short supply 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... We'll see how it goes.
And I think I expect to continue to do that.
Thank you. Next question comes from John Kim with DMO Capital Markets. Please state your question.
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. I was wondering if you anticipate this will lead to increased asset sales on the block.
potentially some more opportunities for you on the acquisition side? I hope it does. I'm not optimistic that it will because you know if you look at even the denominator problem for most institutions and the fact that they generally have to reduce their exposure to
up their performance. So for them to dispose of those would put them in a even a more difficult situation. So I don't think there will be a lot of forced sellers in industrial because to the extent that you're dealing with a leverage issue or liquidity issue, if you sell your highest yielding asset, you keep tightening.
the coverage and news around your neck. So, as much as I'd like to, I don't think we'll see a lot of that. I think where we could see opportunities is actually within our own open-end fund availabilities. If the redemptions continue and we think the values are good, first we'll offer that to all the third-party investors.
then we'll step in and buy and we like that real estate we know it well and we operated and if it's priced right we were all buyers no problem
Thank you. Next question comes from Michael Carroll with RBC. Please state your question.
Yep, thanks. I guess, Hamid, I understand that POD and the industrial space in general are pretty well positioned in the current environment, despite the uncertainty. But is there anything that you're watching out for or any specific risks that you foresee for this space here in the next year plus or so?
Yes, we are watching everything really carefully. I mean, I'm not, believe me, we've been through enough cycles and enough weird things can happen that none of us predict that we want to be vigilant. That's why we're starting out the year with very conservative assumptions and things that we can deliver. I mean, I think even on...
arrows up. But yeah, I mean, you know, nobody predicted Putin going into Europe last year or it's usually the stuff that you don't.
you can't predict. I mean am I worried about inflation really tanking our numbers? No. Am I really worried about recession tanking our numbers? No. Am I worried about?
E-commerce going out the window and people going back to shopping the old way without that percentage going up No, I'm not worried about those things, but I am worried about things that I don't even know
what to worry about. You get my drift there. Anyway, so so yeah, there's always bad stuff that can happen that are out of the realm of normal projections.
Our next question comes from Mike Mueller with JP Morgan. Please state your question.
Yeah, hi. What are the anticipated yields for your 2023 development starts?
This is Dan. The anticipated yields are actually up.
Slightly, but still in the low sixes, six one-ish, six two-ish.
Thank you. Our next question comes from Anthony Powell. With Barclays, please sit your question.
Hi, good morning. Question on utilization, which increased in the quarter. What drove that growth given all the headlines we see about port volumes and whatnot declining, and how big of a driver of the higher utilization is for your outlook for this year, given your strong outlook this year?
Yes, I don't think utilization actually moved that much. I mean, the peak utilization ever, all time, was 87%. And I think that one point is well within the sampling bias that can take place because, you know, it's not a perfect data set.
sample of a large data set. So I don't think there's a meaningful trend in, certainly not a decelerating trend in visualization. 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 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 Gulf 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 volume. So.
I don't see any either one of those two trends affecting demand. Chris, you want to? Yeah, I'll just build on that by saying two things are also happening. One is market vacancies in the US are 3.2%, 3.3%, lower in Europe . That in its own right creates some pent-up demand and so there's a need to push utilization within the facilities. Only on Palne Hill where the current market nec Got answers
And then second, look, inventories are up 15% on a year on your basis, on a nominal basis and 9%, 10% on a real basis. So there is real structural demand lifting new demand as well as in place customers. Yeah, notwithstanding that increase in real inventories.
We still think we're 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.
Thank you. Our next question comes from Blaine Heck with Wells Fargo. Please state your question.
Great, thanks. So related to that last question, and I made 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're balancing this investment need and CapEx spend against concerns about the
are not don't have quite as much FOMO as they did before in other words they're not in the horde mentality of let's go get the space because
If we don't, somebody else will and all that. I think that the market has rationalized with respect to pace of leasing demand. And people are being more thoughtful about how they go about taking space. Because forget about what they pay us in rent. Every time you open a new large warehouse, there's a lot of capex that goes into it and –
see what really happened to their business during COVID. So they're very anxious to build out their full e-commerce supply chain, which is oftentimes a different one than their bricks-and-mortar supply chain. So I would say demand has broadened. It's much less all about Amazon. It's much broader than that, but it's pretty strong.
Is it the strongest it's ever been? No, it's not as strong as 2021. But compared to any 10-year period you want to look at, we would consider this a very strong market. Mike? Yeah, I would just pile on. I mean, on a net basis, the activity is still very strong. Decision timelines definitely have stretched out and people being more cautious. But remember, these trucks...
we feel pretty good about this overall activity.
Thank you, and our next question comes from Craig Mailman with Citi. Please state your question.
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 if you need to feel free to jump into. Just in terms of…
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 if you need feel free to jump into. Just in terms of in this era of...
low vacancies where really there's nothing to lose 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
demand destruction or something that the market could look to because it just seems like retention are still high, availability is low, construction could fall off, but everyone is talking about inventories being higher, utilizations being higher, so people meaning
less of the space, but it's just from your commentary seems like this is not really filtering through to what you guys are seeing. And just some thoughts there then, you know, related to that. Chris, I mean, what would it take for market rents to actually turn negative? Because that's a question. Thanks for your
I get a lot as well and I'm just kind of curious in your modeling kind of what inputs would doctor really turn to get that from you know the positive 10% you're seeing to somewhere below zero.
Okay, let me start and I'm sure Chris can give much more color. I would state this, in 40 years of doing this, this is the biggest disconnect that I've seen between the macroeconomy and the prospects for our business.
Usually those two things are much more aligned, and this time around they just appear to be completely disconnected for a variety of reasons that we talked about ad nauseum. I think where pricing goes away is vacancies going to 7-8% and staying there.
And if you do the math on that, you need another in the US.
that you need another in the US I don't know.
two three billion square feet of unleased construction coming on online and You can't do it overnight. Maybe maybe a billion something. I you know we can do the math, but it's it's a big number and You're not going to keep doing that if space that you if the first hundred million feet doesn't doesn't leave You're not going to do that and by the way this cycle
you have a couple of big players in the business that have much more to gain from the fundamentals of the business being stronger than a few bucks they may make on additional development.
So there is an economic incentive to be disciplined. In prior cycles, mostly driven by merchant builders and private developers, they didn't really care what the rental market was. They just wanted to build the product and sell it to somebody else and that would be their problem. Today those two sites are connected to one another. So I think that the motivations are really different.
and absent a nuclear war type of scenario. I just don't see vacancy rates going to a level that will lead to a reduction in rents. It's either going to be a demand collapse.
or a supply explosion and I don't see either one of them happening. The other thing I would say is that we lease a million square feet.
on a daily basis.
let's get our heads around that a million square feet on a daily basis. You know we throw these big numbers around without really...
Fully appreciating what the scale of that is. I mean that is
10x the amount of space anybody else leases in any sector in real estate. So by watching these customers and their behavior obviously we'll figure out if some bad stuff is about to happen and won't be waiting for the quarterly report to to analyze that. So Chris.
Do you have specifics? Yeah, a couple of specifics. I would lead with our proprietary data leads us to these conclusions. So for example, our Salesforce 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've 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 IBI, 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, Hameen described it very specifically, and I'd add one piece of data that I don't see commonly discussed in the marketplace, but is important to know.
which is development starts rather than development completions. Starts in the US were off by a third in the fourth quarter relative to their 2022 trend and on the continent in Europe they were off by 45%. So we're seeing a sharp marking the market of the capital market environment, the valuation environment and what those buildings.
might be worth for some of those other folks building buildings. By the way, banks are a lot more disciplined because now they have risk-based capital requirements.
So putting out a lot of construction loans on buildings that don't lease like used to happen in prior cycles Less likely to happen. So I think the market is generally smarter. There's a lot more data conversations Like we're having today never used to take place two decades ago. So the cycles were much more amplified
I think it's pretty hard for that to happen. But something can come out of left field. I'm not discounting that possibility. Something really bad could come out of left field and change all this, but I just can't think of what that thing would be. But none of us predicted the pandemic, I don't think, so things can happen.
Thank you. And our next question comes from Vince Tabone with Green Street. Please state your question.
Hi, thanks for taking my follow up. I just wanted to get any color on recent market rank growth and how that may differ between suite size. Like are you seeing any differences in performance between both buildings and smaller, more in-cell facilities? Love yous! See ya!
I would generally tell you that the smaller spaces are having a tougher time to the extent that anybody is having a tougher time. But Chris is looking up the specifics. They are not radically different, but why don't we do this? Why don't we go to the next? You got it? Okay.
It's strong across the board, but in fact, late in the year, we saw an improvement in those smaller units, which might be where your question's coming from. So it's diverse. 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 legal.
We flip it to submarkets and we look at, say, infill, which tend to have those smaller units. Infill outperformed in the U.S. by 400 basis points last year. We also say 34% in the U.S. in the infill submarkets versus...
to submarkets and we look at say infill which tend to have those smaller units, infill outperformed in the US by 400 basis points last year. So say 34% in the US in the infill submarkets versus 30% for the whole of the United States.
And our next question comes from Jamie Feldman with Wells Fargo. Please state your question.
Great, thank you. Just a quick follow-up from Blaine and myself.
Where do you expect to make the most progress on the essentials business in 23, and how does that factor into your guidance and earnings? And then also, if you could just say, you know, where you think cap rates are today versus, you know, the peak of the cycle, how much they've moved.
Where do you expect to make the most progress on the essentials business in 23, and how does that factor into your guidance and earnings? And then also if you could just say, where you think cap rates are today versus, the peak of the cycle, how much they've moved. Thank you.
So two things. I think the essential 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 a close second behind. I'll pitch it to Gary if he has any more to say about that after this. The second part of the question was cap rates. So cap rates are really misleading, so we've got to be careful about that.
Cap rates at market, assuming that you had a building a year and a half ago,
ad market and you have a building ad market today, I would guess it's 50 to 75 basis points, maybe 100 basis points. Call it 50 to 100 basis points.
But you've had all this rental growth in between. So the observed cap rate 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. And if you get into weird situations like some building that was leased five years ago and it comes on the market, you're going to see a lot of the
we're going to pick a number I would say low to low seven seven and a quarter ish in the US and maybe a little bit lower than that in in Europe with growth of say four ish percent across a ten-year projection something like that approximately
Gary, anything on? I think you hit it exactly, I mean, in 2023 our mix is going to be about 50% operations and about 50%...
energy and mobility. The growth rate obviously of mobility is going to be much higher because it's coming off of a basically a zero base. Where are we investing? We're investing in our energy and mobility businesses and that's where we're improving the capability because that's where we see the most significant growth over 25 and beyond. But I mean just to put a sort of stake in this we are very very
Convicted about the potential for these businesses. We're on track to generate our 300 million in revenues and tax benefits by 2025 Which we've talked about before and that is going to deliver about 25 cents per share in FFO And that would be a little bit above our hundred base That'll be about 100 basis points of growth per year compared to our 2019 investment
just mentioned is going to be with capturing maybe 15-20% of the total opportunity within our portfolio so there'll be a huge runway for growth and frankly we're 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're really excited about our essentials business.
Okay, I think we're 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. Thank you. This concludes today's conference. While parties may disconnect, have a great day.
assumptions and things that we can deliver. I mean I think even on this basis we're going to I think put up unbelievably good numbers. I mean who can think of almost the whole 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 you know nobody predicted Putin going into Europe last year or it's usually the stuff that you don't you can't predict. I mean am I worried about inflation really tanking our numbers? No. Am I really worried about recession tanking our numbers? No. Am I worried about e-commerce going out the window and people going back to shopping the old way without that percentage going up? No I'm not worried about those things but I am worried about things that I don't even know what to worry about. You get my drift there. Anyway so so yeah there's always bad stuff that can happen that are out of the realm of normal projections. Our next question comes from Mike Mueller with JP Morgan. Please state your question. Yeah hi what are the anticipated yields for your 2023 development starts? The anticipated this is Dan the anticipated yields are actually up slightly but still in the low section six one ish. Thank you. Our next question comes from Anthony Powell with Barclays. Please state your question. Hi good morning. Question on utilization which increased in the quarter what drove that growth given all the headlines we see about port volumes what not declining and how big of a driver of the higher utilization is for your outlook for this year given the strong your strong outlook this year? Yeah I don't think utilization actually moved that much. I mean the peak utilization ever all time was 87% and I think that that one point is well within the sampling bias that can take place because you know it's not a perfect data set it's a sample of a pretty large data data set 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 you know fits and starts and you know things being in the wrong place and all that.