Q1 2023 Prologis Inc Earnings Call

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Speaker 2: Greetings and welcome to the ProLodge's first quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad.

Speaker 2: And as a reminder, this conference is being recorded. It is now my pleasure to introduce to you Jill Sawyer, Vice President of Investor Relations. Thank you, Jill. You may begin.

Speaker 3: Thanks, John . Good morning, everyone. Welcome to our first quarter 2023 earnings conference call. The supplemental document is available on our website at Prologis.com under investor relations.

Speaker 3: I'd like to state that this conference call will contain forward-looking statements under federal securities laws.

Speaker 3: 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.

Speaker 3: 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 10K or other SEC filings.

Speaker 3: Additionally, our first quarter results press release and supplemental do contain financial measures such as FFO and EBITDA that are non-GAAP measures. And in accordance with Reg G, we have provided a reconciliation to those measures.

Speaker 3: I'd like to welcome Tim Arndt, our CFO , who will cover results, real-time market conditions, and guidance. Hamid Moghanim, our CEO , and our entire executive team are also with us today. With that, I'll hand the call over to Tim.

Speaker 4: Thanks, Jill. Good morning everybody and welcome to our first quarter earnings call. We begin the year with results and conditions that remain strong. Market rents have continued to grow, demand has been consistent, and we're seeing sharp declines in new construction limiting future supply.

Speaker 4: While logistics real estate is very healthy, the macroeconomic picture continues to be a concern, and we anticipate it could weigh on customer sentiment over the balance of the year, translating to some demand that could be delayed into 2024.

Speaker 4: However, this will overlap with the slowdown of new deliveries, creating a sustained dynamic for high occupancy and continued rent growth into next year.

Speaker 4: Beginning with our results, our core FFO excluding promotes was $1.23 per share and including promotes was $1.22 per share. Our results benefited from higher NLI in the quarter but offset by approximately 2 cents of higher insurance expense from an unusually active storm season experiencing a year's worth of claims activity in just the first quarter.

Speaker 4: In terms of our operating results, both ending and average occupancy for the quarter were 98%, holding average occupancy flat to the fourth quarter.

Speaker 4: Rent change was 69% on a net effective basis and 42% on a cash basis, each a record.

Speaker 4: The unusually widespread between the two is reflective of lower free rent and higher escalations in our new leasing.

Speaker 4: Despite the step-up of in-place rents, our lease mark-to-market expanded to 68% during the quarter as market rank growth remains strong and slightly ahead of expectations.

Speaker 4: With the remaining lease term of roughly four years, this lease mark to market represents over $2.85 per share of incremental earnings as our lease is rolled to market, providing visibility to future income and dividend growth.

Speaker 4: These results drove record same store growth, 9.9% on a net effective basis and 11.4% on a cash basis. However, down Swingthy Day asks quite Clicker's day for a good Helen

Speaker 4: During the quarter, our efforts on the balance sheet were focused on liquidity, raising over $3.6 billion in new financings for Prologis and our ventures at an interest rate of 4.6% in a term of nearly 14 years.

Speaker 4: This fundraising total does not include $1 billion of additional capacity from a recast of our global line of credit, which closes in April and brings our total borrowing potential under our lines to $6.5 billion. As mentioned, fundamentals in our markets remain strong, but we expect that a more cautious outlook will lay on the pace of demand.

Speaker 4: This is not a new perspective as our forecast 90 days ago prepared for a weakening sentiment and held a top-down view for some occupancy loss over the year.

Speaker 4: We haven't changed that outlook, but we also haven't upgraded it despite the quarter's outperformance.

Speaker 4: As an update on proprietary metrics, our proposal activity ticked up in absolute terms and is in line with strong market conditions as a percent of available space.

Speaker 4: Approximately 99% of the units across our 1.2 billion square feet are either leased or in negotiation.

Speaker 4: Utilization ticked down to 85%, which is normalizing to a level that our customers view as optimal.

Speaker 4: E-commerce leasing increased during the quarter to 19% of all new leasing.

Speaker 4: We avoid drawing conclusions from a single quarter of activity on most metrics, but it's notable here that e-commerce leasing picked up meaningfully back towards its five-year average.

Speaker 4: As we've said before, we ultimately look at retention, pre-leasing, and rent achievement as the best real-time metrics of portfolio health, and on that basis, our results are certainly very strong.

Speaker 4: We expect that the current 3.5% vacancy rate in our U.S. markets will build to the low 4s toward the end of the year before turning back to the mid-3s by late 2024 due to the lack of incoming supply and accounting for moderating demand.

Speaker 4: We anticipate a similar path in our European markets, and of course even a 5% vacancy rate is historically excellent and supportive of strong rental growth.

Speaker 4: We expect this pattern to play out in our true months of supply metric, which was a very healthy 30 months in the U.S. and should decline into the 20s next year.

Speaker 4: We're watching markets that have large development pipelines such as a few in the Sunbelt in the US, but so far that supply also seems manageable.

Speaker 4: In Europe , most of our focus is on the UK where development starts have continued, even as demand is moderated, which will lift market vacancies and may pressure rents.

Speaker 4: Japan is also a market which is expected to see larger increases in vacancy over the year but similarly expects a slowdown in new supply through the surges in land and construction costs.

Speaker 4: Taking all of these movements into account, we are holding our market rent growth forecast for the year at 10% in the US and 9% globally.

Speaker 4: In capital markets, transactions continue to be few and far between, but a pickup in activity suggests we will see a busier second quarter.

Speaker 4: appraised values in our funds declined 1% in the US and 2% in Europe during the quarter and 8 and 18% respectively from the peak. It's worth noting that our view of public market prices and NAVs that they have adjusted much more than is warranted for these levels of write-down.

Speaker 4: redemption requests in our open-ended funds have slowed significantly with the redemption queue nearly unchanged around 5% of net asset value.

Speaker 4: This is reflective of both a slower pace of new redemptions as well as rescissions of prior requests.

Speaker 4: Combined with over $150 million of new commitments made, our net-view is essentially unchanged from last year.

Speaker 4: Last quarter, we described our approach to fulfilling redemption requests, which is based on an overarching objective to be consistent and fair to all investors, requiring a few porters for valuers to catch up.

Speaker 4: In that regard, as appraisals seem to be nearing fair value, we plan to redeem units in PELF this quarter given the swifter response to value changes in Europe and expect to do the same in USF next quarter.

Speaker 4: In turn, we view this as an excellent time to invest more of our capital into the vehicles, which we'll be doing over the coming quarters in some meaningful numbers.

Speaker 4: Turning to guidance, we are tightening and increasing average octopin seeder range between 97.25 and 97.75%, a 25 basis point increase at the midpoint.

Speaker 4: Our SAME store will benefit from this increase, driving our net effective guidance to a range of 8.5 to 9.25% and Cass SAME store of 9 to 9.75%.

Speaker 4: We are forecasting our lease mark to market to end the year close to 70%.

Speaker 4: Extracting the 2024 component of this suggests rent change should exceed 85% next year even without continued market rent growth, which is a clear illustration of how our exceptional rent change will not only endure but continue to grow.

Speaker 4: We expect G&A to range between $380 and $390 million and strategic capital revenues excluding promotes to range between $515 and $530 million.

Speaker 4: We are maintaining our forecast for net promote income of $380 million. Given the size of the USLF and the potential for small changes in value to have a meaningful downside, there is potential for upside here and we believe we have the downside covered.

Speaker 4: We had few development starts in the quarter, a reflection of our discipline, but our pipeline is deep and we are maintaining our guidance of $2.5 to $3 billion for the year. We expect the pace to remain slow in the second quarter, putting the bulk of the activity into the second half.

Speaker 4: It's noteworthy that following a belief that construction costs may decline in the coming quarters, we now see them as likely to increase, mostly in line with inflation. As new fundraising has become visible, we forecast contributions to be concentrated in the second half, totaling $2 to $3 billion when combined with forecasted dispositions.

Speaker 4: So in total, we expect GAAP earnings to range between $310 and $325 per share. We are increasing our core FFO including promotes guidance to a range of $542 to $550 per share.

Speaker 4: And further, we are guiding Core FFO excluding promotes to range between 502 and 510 per share with the midpoint representing 10% growth over 2022.

I'd like to close with a few observations that we've made about our standing in the equity markets, which we found interesting and wanted to share.

Today we sit as the 68th largest company in the S&P 500 ahead of names like GE, American Express, Cigna, Citigroup, as well as Ford and GM combined. Also notice that with our plan $3.3 billion of dividends this year,

We rank 40 seconds in terms of total cash returned to investors. Of these top 42 dividend payers, Prologis has outgrown the group by 500 basis points per year over the last three years. In fact, since our IPO, we have paid over $15 billion in dividends at a 15% pager, which is anotheron ourqt.org path.

ranking 13th on growth in the entire S&P 100. While getting bigger has never been our objective, we thought the context would be eye-opening.

So in closing, we feel great about the health of our business, even in the face of a slowing economy. Most importantly, nothing we have seen alters the path of its underlying secular drivers or the long-term potential of our platform.

In that regard, we're excited to tell you much more about that outlook and our platform later in the year. Last week we announced our upcoming Investor Day to be held at the New York Stock Exchange this December .

We hope to see many of you there in person and tuned into the live webcast Where we will showcase our deep bench of talent and the strong differentiators that define our company More details on that to come. With that, I will hand it back to the operator for your questions.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. If you would like to ask a question, please press star 1 on your telephone keypad. If you would like to ask a question, please press star 2 on your telephone keypad.

We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions.

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

Hi, good morning everyone. Maybe on development, Tim, you touched on it briefly, but the earnings release mentions how the build out of your land bank is a driver of growth. And this quarter, like you mentioned, starts for only like 50 million versus recent quarters over a billion. And it sounds like that is expected to ramp up significantly to over a billion again in the second half. So just wondering what metrics or other things.

Our teams are very much on the offense.

Every day our teams around the globe looking at new opportunities.

We have over 38 billion of potential TI embedded in our land bank and we could flip the switch tomorrow and start 10 billion if we wanted to. We're going to continue to look at these deals on a case-by-case basis but when you see the overall volatility in the market you see the 10-year move 50-60 basis points on a weekly basis like we have.

We're maintaining the discipline, and we're disciplined because we can be. And we're ramping up our starts towards the end of the year, and we expect to see the overall marketplace ramp down.

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

Thank you. Good morning. So, net absorption across the U.S. in the first quarter was a little bit lighter than what we've seen in recent memory. So, I was just curious, what kind of risk do you see to occupancy or rent growth as a sector tries to, in the near term, absorb the new supply coming through? Hi, Kevin. This is Hamid. There's always a risk in this environment.

really slow down as we go into 2024. So it's normalizing. That's the best way I can describe it. But I wouldn't even be surprised if it falls further. Given all the stuff that we read in the papers, the CEOs that are making big capex decisions, basically push their people to see if they can start it a week, a quarter later or two.

Our view, we don't have a forecast for development starts. We only have one because you guys asked us for one. We don't internally have one. We have land, we have entitlements on much of that land, about 80% of that land. We can start it at any time and we don't just look at our data at the end of the quarter. We see it every day as we lease a million square feet a day.

So we can meter that development into the marketplace as we see fit and make those adjustments. Well, we're ready to go if we need to do more or less either way. At the end of the day, our company's story is about organic growth and that's the high-value form of growth.

that's the one that we pay the most attention to and actually that's easier to figure out in this environment given the very big mark to market which I've never seen in this business before. So in a way our job is actually easier in terms of predictability of earnings and growth.

And our next question comes from the line of Steve Sacwa with Evercore. Please proceed with your question.

Yeah, thanks. Good morning. I just wanted to focus a little bit on the acquisitions, which is not a very large number in their Hameed, but I'm just wondering what you're seeing from a distressed opportunity set and then maybe tie in to the comments Tim made about the funds and you know you tend to like you be putting more money into the funds as you redeem some of the partners.

Just trying to tie those two capital uses together. Sure, I think there's very little distress in the marketplace. Industrial real estate has done really well. I assume other people have significant mark to market, although I doubt if they're quite the same level as ours.

But there's protection in terms of that market to market and other portfolios. And there are no forced sellers because leverage in the industry is pretty low. So we're not looking for distressed opportunities, but we are looking for opportunities that reflect the increasing cost of capital compared to, let's call it a year, a year and a half ago.

And you should know, we look at every deal that anybody does, and it's not hard to figure out that if you want to sell something, you call Proligis. So, you know, our feeling is people are still stuck on the old values, and buyers are expecting a substantial discussion.

capital out or put capital in depending on the cycle of the marketplace. Back even in the global financial crisis when A and B was much smaller and the balance sheet was weaker, we stepped in and put a couple hundred million dollars in our funds when we thought that the time was right.

We continue to do the same thing. I don't think it's a big deal one way or another, but it's a great place to buy high quality real estate that we know and we like. So that's the way we think about it.

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

Great. Thanks. Good morning out there. Can you talk about demand related to nearshoring or onshoring? Which markets are seeing an outside impact related to that trend and maybe how Prologis is positioned to benefit from it?

Sure, let me start then. I'll pitch it over to Chris. The biggest impact is on northern Mexico. Those markets along the border are literally on fire. There is no vacancy and we're seeing a lot of near-shoring happening there as sort of a diversification move. We're also seeing...

But Mexico is the big story here. The unshoring part, I mean, honestly, other than what I read in the papers and the chip business, which is real, the rest of it is wishful thinking, mostly.

So they're very isolated examples, but you look at the numbers and they're not that significant. Chris, do you want to add to that? Sure, I think that's really well described. Blaine, I'd say there isn't great data on this, but that which we see is that it is a building trend in northern Mexico. So it takes time for those supply chains to relocate, set up the ecosystems they need to really function properly and resiliently, and that is happening and will continue to happen. And we expect it to grow in the coming years as well.

85% by the end of next year in the absence of rent growth. So maybe

clarify that if I misheard it. And then second question, just, you know, as you guys are seeing conditions on the ground, clearly we saw some of the numbers and you guys discussed it, normalized here in the first quarter, but could you just talk about maybe how we should think about the cadence or.

anything incremental of what tenants are saying so that, you know, we don't get surprised the next quarter or two with with some of the fundamental numbers here coming through as supply does deliver in some of the markets that you know have had more in the pipeline like in LA and NFastland that fire

Dallas sort of market to then, you know, just also you guys maintained your 10% market right growth. Has that shifted dramatically within markets where some may have weakened significantly while others have grown or is that pretty consistent across the board? I apologize. I know that was a lot at once.

Nice try on packing all that in one place.

I guess we'll address all three of those. So I'll start Craig, and I'm glad you asked if there's confusion on the point. You're right that we said we will, we believe we'll see a 70% lease mark to market at the entire portfolio at the end of this year after we roll leases over the course of the year and we have some continued.

rent growth built. What I was trying to highlight there was that if you just take out the component of that that is rolling in 2024 just so you have a sense of how this this rent change is going to endure, that slice of the 70% on its own is 85% without any more market rank growth in the next nine months.

So that just gives you very clear visibility on how the rent change is going to stay high, how it's going to translate to same store growth. So that was the intention there. Yeah, let me take the second part, and I'll pitch it to Chris for the third part of the question. Look, you'll be surprised if we're surprised. And we really worked hard at not being surprised.

And the best indicator of what's happening is the ongoing leasing and proposals and all that stuff that we're involved in and you guys don't really see directly other than at the end of the quarter. So I would say I would describe market conditions as very good to excellent. They're not exceptional like they were a year and a half or two years ago. But they're...

Atlanta, way down the south, etc. Those markets through all the cycles have been prone to overdevelopment and softening of demand when business slows down. So we're watching those very carefully but I wouldn't characterize any of them as watchlist markets now. Otherwise we would have classified them as such.

The 10% rental growth is an overall number, but there is a very wide dispersion around that 10%. And, Chris, you want to elaborate on that? Yeah, indeed, there is a wide dispersion. And we've been accustomed over the years talking about outperformance on the coast and lower growth and lower barrier markets.

Historically, that outperformance has averaged 250 to 500 basis points in any given year. This year, that 10% sees more at the lower end of that range, more like 200 to 250 basis point outperformance on the coast versus the lower barrier markets. And so that is where we saw the resilience. And I would also point to other...

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

Hi everybody good morning. The dislocation between public and private market logistic asset values you know obviously is weighing on possible M&A you know but as Fed policy nears peak rates and currently projects a pause.

Do you see valuations converging between public and private assets and secondly, thus a pickup in capital recycling?

Yeah, I definitely do see a convergence over time and private markets are always slow to adjust on the way up and on the way down because it's all backward looking appraisals and people look for comps. But we don't really view the market that way and we view that disconnect as an opportunity.

continued erosion on private values in the next quarter, particularly in the United States. On the other hand, I think the public values are over discounted. And we see those actually picking up as there is more evidence in the private market that CeCOLO brought together to improve the Guang drop a lot of those apologized as well as

you know, the world is not falling off the cliff. So I think you'll get a conversion from both sides, and this is not at all unusual compared to past cycles. I would say every cycle gets a little better, but there's still a pretty significant disconnect. And of course, you know, private values can be whatever you want them to be if you are trying to...

market to unlock and to transact and trying to get these appraisers to be realistic about their valuations. But I can tell you, based on conversations with them, they are getting a lot of pressure the other way from a lot of other people. So they find it somewhat unusual that.

that we want to see a more aligned set of values that will unlock market and liquidity.

And the next question comes from the line of Vikram Malhotra with Mizzouho. Please proceed with your question. Thanks for taking the question. So just maybe going back to your comments about more unevenness or maybe just some upward pressure and vacancy across.

Can you just sort of give us your latest view? You said not worried about SoCal, but how would you rank SoCal across your other coastal markets today? And if there is an additional or some softening that you may see, does the Duke acquisition sort of change the overall prospect for the PLDUS portfolio? Well, let's talk about propositions. Let's talk about all dissaleigh's or your position or whatever you're talking about, and then some unofficial implications on your

in Southern California. So if we had more space, I think we would have more absorption in Southern California as well. The Duke acquisition, as we've described many times, is very aligned with our portfolio. So it fundamentally doesn't change in any way our view of markets.

or desired allocation of our capital to those markets is very much aligned with the pre-merger Prologis portfolio. So, the only thing I would tell you about Duke is that generally speaking, based on the leases that we've done,

since we acquired the portfolio, we are kind of on the order of 4 to 5 percent higher than we thought we would be in terms of the performance of that portfolio. And the next question comes in the line of John Kim with the...

since we acquired the portfolio, we are kind of on the order of 4 to 5 percent higher than we thought we would be in terms of the performance of that portfolio. And the next question comes from the line of John Kim with BMO Capital Markets. Please proceed with your questions.

Good morning. Tim, you mentioned the fund redemption requests were unchanged at 5% of NAV. Do you still expect the redemption to go basically down to zero in light of the Main Issue?

Hey John , we didn't hear any of that. Are you on a cell phone? Can you get closer to it or something? Because you're cutting into it.

Is that better? It's better, yeah. Okay, sorry about that.

Sure, you mentioned the fund redemption requests were unchanged, but I was wondering if you expect those redemptions to go down to zero in the back half of the year as previously stated in light of weakening demand that you are seeing on the tenant side? I don't know. I can't really predict the portfolio decisions of well over a couple of hundred different investors making those decisions.

private equity, stocks, bonds, et cetera, because everything's gotten hit with increased interest rates. Bonds have not been a safe place to be either. So it's because of them getting over-allocated to real estate because of the decline in the value of the other asset classes, more than real estate. It's because of the decline in the value of the other asset classes. So it's because of the decline in the value of the other asset classes.

And among real estate, if you want liquidity, where are you going to go? You're going to go to industrial, you're going to go to apartments, etc., etc. You're not going to go to office buildings because you're not going to be able to get any liquidity out of those. So, that's what's driving all this. It doesn't, I wouldn't look there for learning anything about what's going on with the industrial industry.

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

I'm sorry, the last part was availability of loans. Construction loans. Construction loans. The answer to that one is... Construction loans. Yeah.

Yeah, the answer to that one is absolutely yes. I think there's been a significant pullback in the availability of construction loans.

On the rest, what do you think? You were talking about customer demand. We're seeing broad-based customer demand, really. Even looking at our e-commerce, we had 40 unique e-commerce users last quarter alone, with Amazon actually being a small slice of that. Very, very small. So, overall, broad-based demand, no particular pockets of softness.

I would say housing is probably the only aspect that's a little below normal. But again, if you look at the overall numbers, if you sort of forget about 2021 and early 2022 and you saw these numbers that we're seeing now, you would feel really good about them.

It's just that in the context of those exceptional years, they're a little bit softer. But they're still considered to be really good markets. Chris? Hey Vince, I think I heard in the middle of your question, what is the trend in development starts in the wake of SVB? So it's worth knowing the numbers, which is in the first quarter in the United States, development starts were off 40% from their peak across our markets.

down, such a sudden slowdown in construction volume in our business. It's just been, and I'm not sure it's only it was related to Silicon Valley Bank, it was already happening before that and SPB just made it worse. And our next question comes from the line of Nicholas...

please proceed with your question.

Thanks, I just want to go back to some of the commentary about demand may be spilling into 2024 as companies take longer time to make financial decisions. I guess what I'm wondering is how much is that in Outlook or just broader corporations taking longer times to make financial decisions versus

taking space this year.

You know, the utilization rate peaked all time at 87%, and today is at 85%. And there is a couple points of margin of error on those numbers anyway. So I would say utilization is really high. If utilization were in the high 70s, I would tell you there is a lot of shadow space and people are going to wait to grow into that.

lot of time on. I mean, they basically haven't given any space back, maybe 7 or 8 million square feet, yet it's taken half the airtime on all these calls for the last year. It just has not been material. I mean, we're looking for something that just doesn't exist. Will it exist? I don't know. I'm not clairvoyant. But so far, it's been a long time.

It doesn't appear that customers are giving back material amounts of space or anything like that. It's totally within the normal band of how our business works across the site. And the next question comes from the line of Michael Goldsmith.

that customers are giving back material amounts of space or anything like that. It's totally within the normal band of how our business works across the cycle. And the next question comes from the line of Michael Goldsmith with UBS. Please proceed with your...

question. Good afternoon, thanks a lot for taking my question. My question is on your view for the balance of the year and what has changed if anything on a qualitative and quantitative basis. So you provided some commentary on your cautious outlook on demand and that wasn't new but at the same time you took up the same story in a lie guidance.

maintain direct forecasts, just trying to understand, you know, if there's been an evolution you're thinking on how the rest of the year plays out. Thanks.

Hey Michael, it's Tim. No, look, I think you heard our comments correctly and I like that you're pointing out they're relatively unchanged. The same store move is largely a function of an occupancy move. You know, we just retained a decent amount of occupancy in the first quarter. We think that's going to extend throughout the year.

some of the one-time items, but that combination is what is impacting same store from here.

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

Hey, good morning. Retention remains pretty elevated here, but at 80%, but maybe on the tenants that don't resign, what's like their primary reason for not resigning? Is it them outgrowing their current footprint? Or a case of them just getting priced out of the market? Trying to tie that really to your occupancy in the sub 100,000 square foot areas being a little bit lighter than the rest of the leasing categories.

So the reasons for non-renewal are either good reasons or bad reasons. The bad reason is that the company goes broke.

or the company, so the neutral reasons are the company decides to go somewhere else out of one market into another market. The bad reasons are, sorry, the good reasons are that we just don't have a space that fits the growing need of that customer to be accommodated.

or the shrinking need of that customer to be accommodated. So they have to go somewhere else. We do track the reason for non-renewal of every single lease that doesn't renew. And one of the things that we track very closely is that we lose the space to a competitor because of pricing.

that statistics is like in the two, three, four percent range and I think it's too low because it means that we're not pushing rents hard enough.

So we're not losing tenants because of rent. We're losing tenants because we just can't accommodate them or they go broke or they move somewhere else. And those have been the reasons for the last.

Hello. Following up on an earlier comment about the vacancy in Southern California region being below 2%, I think the growing concern is actually on the availability rate or how much sublease activity has picked up, which is something we really haven't seen in the past.

So I understand at least within the Southern California region the supply seems manageable given how difficult it is to build in this market But could you share your thoughts on how you think this might evolve in upcoming months and whether or not this is a potential risk You're tracking closely

So two ways to approach that. First I'll give you this, this is Chris by the way Camille. First is the sublease data and the second is our true months of supply data. So sublease nationally in the United States is on an availability rate basis, 60 basis points in the first quarter. The 10-year average, 60 basis points.

The recent low indeed was 40 basis points, so it's moved up 20 basis points. Now the pre-COVID average, or the pre-COVID low, excuse me, was 50 basis points, and the peak in the global financial crisis was 1.1%. If you just summarize all that, first off I'd offer that it's not a lot of availability.

And the second is we're at the low end or at a normal level in sublease. And then I'd also point you to our views on true months of supply that Tim described in our earnings transcript, which said that at 30 months today, we have a very good market environment consistent with 10% market rent growth. And as supply decelerates and slows, we think that will go back down into the 20s, improving the market landscape.

And the next question comes from the line of Ronald Camdem with Morgan Stanley . Please proceed with your question. Hey great, just one one quick one and so on the expected vacancy rate you talked about three and a half currently rising

throughout the year and then going back down by the end of 24. I was just wondering if you could provide a little bit more color on the supply and demand assumptions that are going into that. How much is demand normalizing? How much is supply normalizing to get back to that 3.5? The corollary to that would be if you're expecting 10% market run growth this year,

Historically, if you find yourself at that vacancy level at the end of 24, what sort of the market rent growth experience that we should have? And then the other quick one, sorry, is on the 85% gap mark to market for 24, can you talk about what that number is for 23? Thanks. Thank you for your feedback.

Thanks for the question Ronald. So thank you for the opportunity to clarify our market statistics. I want to be very clear. So let's talk about net absorption in the 30 markets where Prologis operates in the United States. Last year net absorption was 375 million square feet. We call that a 275 this year.

and we expect a similar, perhaps higher number as the macro environment clarifies and some of the decisions that get delayed this year land into 24. So that will be on the demand side. Completions, we have a bit of a clearer view as we look out to 24. So, but starting with 2022, 375 million square feet of supply as well. That's deliveries.

We expect 445 million square feet of deliveries this year as the supply pipeline empties. And that will fall sharply, perhaps by half or more, into 2024. And so when you put these numbers together, you'll see the vacancy rising from low 3s last year to 4 or a bit higher later this year and then back into the mid 3s.

The way to think about it is that demand is normalized from exceptionally high levels and the supply response has been in excess of that normalization of demand because of banking crisis.

sort of macro concerns. So I think the supply response has been much more dramatic than the effect on demand and that's why the market's going to tighten up again. Of course, absence of calamity or something like that. One important point to keep in mind is what is a normal vacancy rate because we have been years away from a normal vacancy rate.

And I would just pile on on your third question there on the 24 component of our lease mark to market this year the end The same metric is in the low 80s I think I intimated that last quarter on the call just just as a measure of what we expected our rent change would be This year those are I'm really talking about the same thing in that context. So Roughly in the low 80s for 23

And our next question comes from the line of Mike Muller with JP Morgan. Please proceed with your question. Yeah, hi. I dropped for a minute so I apologize if this was asked. Can you talk about what the full year development start yield expectation is compared to the high 7 plus percent yield that had the first quarter?

Hi Mike, this is Dan. The yield you saw in the first quarter was a couple of build to suits, really small volume. What I would say is I would just look to last year and doing better than last year's yield.

on our on our starts this year? I think the vast majority of the starts are in the sixes and I would say the cap rates are up 75 basis points. Some margins have gone from 30-40% to 20-30% something like that. I mean those are some rough numbers.

And the next question comes from the line of Tom Catherwood with BTIG. Please proceed with your question. Thanks. Good morning, everyone. I want to touch on tenant health for a bit. You know, obviously we talk about higher costs of capital and less availability of debt when it comes to real estate, but it's also impacting operating.

Let's talk about credit loss as a measure of customer stability, bad debt ratio and all that. It's historically in our business has been in the tens of basis points, even when you had the collapse in demand in the immediate aftermath of COVID.

That number got to 60 basis points. So, Chris, what would you guess our number is going to get to in this cycle when it's all over in terms of bad debt? I'd say 20. I'm jumping in here. I think 20 will be an average. Yeah. I mean, we don't see it in the numbers and the number of bankruptcies, et cetera.

that those kinds of tenant departures are actually an upside. So if anybody sort of has problems with their business or is looking to downsize, we look at that as an opportunity to do a buyout and actually be able to extract higher rents in the marketplace. So really not a concern. And that number, those numbers that I talked about, are out there. You can go look at them, you know, and...

plot the curve, they've been coming down substantially as opposed to from very low levels but they're still coming down.

I might add on to that one final thought, which is I think the 20 that I'm throwing out is a reflection of some mix shift on credit, I think. In the last five years with the markets this tight, we've not only been able to push rents, keep the portfolio occupied, but we've been greatly enhancing the credit profile of our rent roll and we think we've got a really strong customer base.

Yeah, one final statistic that you guys don't have visibility to but I'm reading up my sheet of stats here historical average of credit watch tenants

For us the long-term historical average has been four point nine percent We just watch him by the way the average actual default has been point one five so we worry about a lot more things than we should That credit watch

number today is at 3.35. So it's down substantially. And so is the actual bad death ratio.

We worry about a lot of things, but most of them don't actually happen and the numbers are actually quite healthy. Not just not even adjusting for the cycle and the fact that it's a softening cycle, but just even in the best of markets these statistics would show up as very good.

And the next question comes from the line of Todd Thomas with KeyBank. Please proceed. Hi, thanks. I wanted to follow up on the demand environment and your comments about a more challenging macro in relation to development starts. I guess, how much visibility do you actually have on starts in the second half of the year?

Is that due to improved economics around rents or moderating construction costs, which I think you mentioned, or really a combination of the two? And do you expect to see further improvements in development yields as you look out in the future? Yeah. Most of our land is entitled.

Entitlement is a pretty broad definition. Fully entitled means that you pulled the building permit on the specific building that you can start, but you might have entitlements and you haven't pulled the specific building permit because you don't exactly know how big a building you're going to build or in what configuration.

But 80% of our land is entitled, in terms of discretionary entitlement, and about 20% to 30% of our land is really good to go with building permits pulled. So that is not a limiter on our ability to start development. So we can start whatever it is that we want to start with.

on the buildings that are starting today. The comment about construction costs has nothing to do with what you're seeing on the starts today. It will affect yield on starts down the road. Our view has changed. That's one area where our view has changed materially. We thought there would be some softening.

of construction costs to the tune of 5 to 10 percent. And because of IRA and all this new fiscal stimulus going into the construction industry, I mean it uses the same labor, same materials and everything, contractors still have pretty good pricing power. So that's what we thought was going to be a 5 to 10 percent.

please proceed.

Hi, good morning. Quicker for me, I guess. Any change in the tenor of conversations with your lending partners or underwriters after the SIBB collapse, or are you seeing just increased confidence from your partners as you seek to do financing in the future? They're asking us a lot of money. No, I'm not really. I mean, where is it?

That balance sheet is bulletproof. I mean, frankly, we have a better balance sheet than most of our banks, so no. And we're not really a bank borrower per se. We tap into the capital markets all the time. And the next question comes from the line of Michael Caro with RBC. Please proceed. Yeah, thanks. I just wanted to follow up on your planner potential willingness to invest in.

quicker than they have been in the US. But I suspect we're only a quarter or so away from even the US adjusting to a normalized value, at least we hope.

Look, it's a $140 billion balance sheet. So even if we just wanted to allocate 1% of it, and I'm not saying we're going to allocate 1%, I'm just trying to size the issue for you. That could be a billion and a half dollars. We're probably not going to invest a billion and a half dollars, but it's going to be like a small portion of our overall balance sheet. Bye.

We love that stuff because we know it, we like it, it's exactly the kind of property we want to have. And, you know, redemption gives us a really good opportunity to do that without affecting the strategy or the fund. And the next question comes from the line of Jamie Feldman with Wells Fargo. Please proceed.

Great, thank you. I thought your commentary on credit was pretty interesting in terms of how low it is. I guess you have such a wide view of what's going on in the world. Can you just talk through maybe across your region some of the data points you're seeing that either give you some confidence in where the economy is heading or give you some concern about where the economy is heading and how that...

factors into where you want to put capital to work? I'll just say two things. This is more global comment than the US comment. Japan is having more supply than it normally has, but demand is actually still pretty strong. I'm a little worried about vacancy rates in Japan going up into the mid teens.

So that's one place we're seeing it. The UK has actually been pretty surprisingly good on the industrial side. If you look at the headlines for the UK, you would expect more trouble than what we're seeing in the industrial market.

In the US, I can't think of a trend that is worth talking about there. The markets are generally pretty good. I mean, can you guys think of anything? Hey, Jamie. It's Chris Kaidan. You know, there's been a lot of economic news over the last few weeks and I think there are probably three takeaways. The first is consumers are stable notwithstanding all the noise in that and it seems to be treading towards perhaps GDP growth of 2% if not a bit higher.

Second, I think quite clearly e-commerce is re-accelerating with online shopping now back on trend to taking 100 basis points of share from in-store. And the third is indeed inventories are rising, but they have not yet risen to pre-COVID levels, let alone a higher level for resilience.

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

where we will be speaking to you. So, look forward to seeing all of you, and take care. And that concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a great day....

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