Q3 2023 Prologis Inc Earnings Call
[music].
Speaker 1: better. Greetings and welcome to the Prologis third quarter 2023 earnings conference call.
Greetings and welcome to the pro largest third quarter 2023 earnings conference call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Jill Sawyer Senior Vice President of Investor Relations. Thank you Jill you may begin.
Speaker 2: Thanks John and good morning everyone. Welcome to our third quarter 2023 earnings conference call. The supplemental document is available on our website at prologis.com under investor relations.
Thanks, John and good morning, everyone welcome to our third quarter 2023 earnings conference call. The supplemental document is available on our website at <unk> com under Investor Relations.
Speaker 2: 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.
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 <unk> operates as well as management's beliefs and assumptions.
Speaker 2: Forward-looking statements are not guaranteed the performance and actual operating results may be affected by a variety of factors. For a list of those factors, please refer to the Forward-looking statement notice in our 10K or other SEC filing.
Forward looking statements are not guarantees of performance and actual operating results may be affected by a variety of factors.
A list of those factors. Please refer to the forward looking statement notice in our 10-K or other SEC filings.
Speaker 2: Additionally, our third quarter results, press release and supplemental, do contain financial measures such as FFO and EBITDA that are non-GAP and in accordance with REGG, we have provided a reconciliation to those measures. I'd like to welcome Tim, our Anthracia FO, who will cover results real-time market conditions in guidance. We invoke at M, our CEO , and our entire executive team are also with us today, but that I'll hand the call over to Tim.
Additionally, our third quarter results press release, and supplemental do contain financial measures such as episode and EBITDA that are non-GAAP .
In accordance with Reg G. We have provided a reconciliation to those measures I'd like to welcome to our interim CFO , who will cover our results real time market conditions and guidance.
When you look at M. I C E O and our entire executive team are also with US today with that I'll hand, the call over to Tim.
Speaker 3: Thanks, Jill. Good morning, everybody, and thank you for joining our call.
Thanks, Jill good morning, everybody and thank you for joining our call.
Speaker 3: The third quarter, market continuation of themes we've been anticipating for more than a year, namely growing supply, translating to increased market vacancy, continued moderation of demand, and market rent growth that will slow until the low levels of new starts drive reduced availability over time.
The third quarter marked a continuation of themes, we've been anticipating for more than a year, namely growing supply translating to increased market vacancy continued moderation of demand in market rent growth that will slow until the low levels of new starts to drive reduced availability over time with.
We've operated in accordance with these views and both our approach to leasing as well as timing of new development.
Speaker 3: We've operated in accordance with these views in both our approach to leasing as well as timing of new development.
Speaker 3: What's incremental to our forecast is that continued hawkish posture from central banks and the impact it's had on rates is delaying decision making and willingness to take expansion space early. The geopolitical backdrop has clearly become more troubling as well, a mounting to a lack of clarity that will likely weigh on demand.
What's incremental to our forecast is that continued hawkish posture from central banks and the impact it's had on rates is delaying decision, making and willingness to take expansion space early.
The geopolitical backdrop has clearly become more troubling as well amounting to a lack of clarity that will likely weigh on demand.
In the meantime, it also playing out so our expectation is that our existing lease mark to market will drive durable earnings growth as it did in delivering record rent change this quarter as well as strong earnings and same store growth.
Speaker 3: In the meantime, and also playing out to our expectations, is that our existing lease market will drive durable earnings growth as it did in delivering record rent change this quarter, as well as strong earnings and same store growth.
We remain focused on the fact, we own assets is critical to the supply chain.
Speaker 3: We remain focused on the fact that we own assets critical to the supply chain with long-term secular drivers that remain intact. Further, the outlook for future supply will continue to face structural barriers, ultimately driving occupancy, rents, and value.
Long term secular drivers that remain intact.
The outlook for future supply will continue to face structural barriers ultimately driving occupancy rents and values.
In terms of our results, we had an excellent quarter with course F O. Excluding net promote income of $1 33 per share.
Speaker 3: In terms of our results, we had an excellent quarter with core of a flow excluding net promoting income of a Dow or 33 per share. This result includes approximately three cents of one time items related to interest and termination income, as well as the timing of expenses, which we can address in Q&A.
This result includes approximately <unk> <unk> of one time items related to interest in termination income as well as the timing of expenses, which we can addressing Q&A.
Occupancy ticked up over the quarter to 97, 5% aided by retention of 77%.
Speaker 3: Occupancy ticked up over the quarter to 97.5%, aided by retention of 77%.
Speaker 3: Net effective rent change was a record 84% at our share, with notable contributions from northern New Jersey at 200%, Toronto at 187%, and Southern California at 165%.
Net effective rent change was a record 84% at our share with notable contributions from northern New Jersey at 200% Toronto at 187% and Southern California at 165% same store growth on a net effective in cash basis was $9 three and nine 5% respectively.
Speaker 3: Same store growth on a net effective in cash basis was 9.3 and 9.5% respectively driven predominantly by rent chain.
Driven predominantly by rent change.
Speaker 3: We call market rents grow roughly 60 basis points during the quarter. The slower pace embedded in our forecast. In combination with the strong build of in place rents, our lease market recalculates to 62% as of September .
We saw market rents grow roughly 60 basis points during the quarter the slower pace embedded in our forecast.
In combination with the strong build of in place rents are lease mark to market re calculates to 62% as of September .
We raised approximately $1 $4 billion of new financings at an average interest rate of 3.2% comprised principally of $760 million within our ventures as well as a recast of our yen credit facility, increasing our aggregate line availability.
Speaker 3: We raised approximately $1.4 billion in new financing at an average interest rate of 3.2%, comprised principally of $760 million within our ventures, as well as a recast of our yen credit facility, increasing our aggregate line availability.
Speaker 3: In combination with our cash position, we ended the quarter with a record $6.9 billion of liquidity.
In combination with our cash position, we ended the quarter with a record $6 $9 billion of liquidity.
Finally, it's noteworthy that our debt to EBITDA has remained very low and essentially flat all year hovering in the mid four times range. Despite our increased financing activity a demonstration of the tremendous growth in our nominal EBITDA.
Speaker 3: Finally, it's noteworthy that our debt to EBITDA has remained very low and essentially flat all year, hovering in the mid-four times range despite our increased financing activity. A demonstration of the tremendous growth in our nominal thesis.
Turning to our markets, while rising vacancy remains historically very low in the U S Mexico and Europe .
Speaker 3: Turning to our markets, while rising, vacancy remains historically very low in the US, Mexico, and Europe . Market vacancy increased approximately 70 basis points during the quarter in the US, driven by low absorption as well as recently delivered, but on least, completion.
Vacancy increased approximately 70 basis points during the quarter in the U S driven by low absorption as well as recently delivered but on leased completions Europe experienced similar dynamics with an overall increase in market vacancy of 50 basis points.
Speaker 3: Europe experienced similar dynamics with an overall increase in market vacancy of 50 bases.
Speaker 3: At the macro level, our expectations for the U.S. are for completions to outpace net absorption by accumulative 150 to 200 million square feet over the next three quarters. Then over the subsequent three quarters, we see that trend reversing with demand exceeding supply and recovering a net 75 to 125 million square feet.
At the macro level, our expectations for the U S. Our completions to outpace net absorption by a cumulative 150 to 200 million square feet over the next three quarters.
Then over the subsequent three quarters, we see that trend reversing with demand exceeding supply and recovering in that 75 to 125 million square feet.
Speaker 3: That trend may extend further into 2025 as we believe development starts over the next several quarters are likely to remain low. Whatever the precise path we expect that as they can be normalizes over the long term, our portfolio will outperform the markets due to both its location and quality, as well as the strength of our relationships and operating plans.
That trend may extend further into 2020 five as we believe development starts over the next several quarters are likely to remain low.
Over the precise path, we expect that as vacancy normalizes over the long term our portfolio outperformed the market due to both its location and quality as well as the strength of our relationships and operating platform.
Speaker 3: In this regard, our portfolio has been largely resilient to moderating demand. Our teams would describe the depth of our leasing pipeline as consistent with the last few quarters. In coming fresh off of one of our customer advisory board sessions, it's clear that our customers have plans to continue to expand their footprints, increasing capacity and resiliency. However, what's also clear is that they are slowing such investments until there is more clarity in the economic environment.
In this regard our portfolio has been largely resilient to moderating demand. Our teams will describe the depth of our leasing pipeline is consistent with the last few quarters.
Coming fresh off of one of our customer Advisory Board sessions.
Clear that our customers have plans to continue to expand their footprint increasing capacity and resiliency.
However, what's also clear is that they are slowing such investments until there's more clarity in the economic environment.
In the U S rents increase in most of our markets with the strongest located in the Sunbelt mid Atlantic and Northern California regions, Europe , and Mexico were also bright spots for growth in the quarter.
Speaker 3: In the U.S., rent increase in most of our markets with the strongest located in the Spundelt, Mid-Atlantic, and Northern California region. Europe and Mexico were also bright spots for growth in the quarter.
Speaker 3: Rents across our Southern California submarkets decline approximately 2% as it continues to adjust to higher levels of vacant.
Rents across our southern California, Submarkets declined approximately 2% as it continues to adjust to higher levels of vacancy.
Well the markets and outlets are mixed we remain confidence in continued market rent growth in the U S and globally over the coming year, albeit at a slower pace, while the pipeline continues to get absorbed.
Speaker 3: Well, the markets and outlook are mixed. We remain confident in continued market rent growth in the US and globally over the coming year. I'll be at a slower pace while the pipeline continues to get absorbed.
Speaker 3: From our appraisals, U.S. values declined approximately 3% while European values remain stable in fact having a very modest write-up.
From our appraisals U S values declined approximately 3% while European values remained stable in fact, having a very modest write up.
Speaker 3: The difference isn't too surprising as the Fed's language around inflation and the economy has had more effect in the U.S. capital markets driving the 10-year-up 100 basis points in far-last earnings call compared to the bun at just 50 basis.
The difference isn't too surprising as the fed language around inflation in the economy has had more effect in the U S capital markets driving the 10 year up 100 basis points since our last earnings call compared to the button at just 50 basis points.
Speaker 3: We believe that this is likely another instance, as we saw one year ago, where U.S. appraisals at the end of the quarter have not had sufficient time to react to the increase in rates, and we are thus pausing on appraisal-based activity in USLF for at least one quarter.
We believe that this is likely another instance, as we saw one year ago or U S. Appraisals at the end of the quarter have not had sufficient time to react to the increase in rates and we are thus pausing on appraisal based activity in U S. O left for at least one quarter.
Elsewhere, our values in Mexico are up eight 5%, while China experienced its first meaningful decline of six 5% a write down that we don't believe is fully run its course.
Speaker 3: Elsewhere values in Mexico are up 8.5%, while China experienced its first meaningful decline of 6.5%, a write-down that we don't believe has fully run its course.
Our funds experienced their first quarter of net positive inflows with approximately $180 million of new commitments versus new redemption request of $115 million.
Speaker 3: Our funds experience their 1st quarter of net positive inflows. With approximately 180M dollars of new commitments. Versus new redemption requests of 115M dollars.
Speaker 3: Given other activity in the corridor, the net redemptions have been reduced from their height of 1.6 billion dollars to approximately 700 million dollars, or roughly 2% of third party AUM.
Given the other activity in the quarter. The net redemptions have been reduced from their height of $1 $6 billion to approximately $700 million are roughly 2% of third party <unk>.
In terms of our own deployment development starts ramped up during the quarter crossing $1 billion over half of which is related to a data center opportunity in our central region, a testament to our higher and better use strategy and strategically located land bank.
Speaker 3: In terms of our own deployment development start ramped up during the quarter, crossing $1 billion, over half of which is related to a data center opportunity in our central region, a testament to our higher and better use strategy and strategically located land bank.
Speaker 3: Also notable is the acquisition of $118 million of land, including a strategic parcel in Las Vegas, which will build out an additional 10 million square feet over time and bring our total build out of land globally to over $40 billion.
Also notable is the acquisition of $118 million of land, including a strategic parcel in Las Vegas, which will build out an additional 10 million square feet over time and brings our total build out of land globally to over $40 billion.
Speaker 3: We are laser focused in identifying and executing on value creation in our core business, our energy business, and their adjacency.
We are laser focused in identifying and executing on value creation in our core business, our energy business and there are adjacencies.
Speaker 3: Combined with the deck capacity and liquidity we've worked hard to build and preserve, we see the environment as rich with opportunity.
Bind with the debt capacity and liquidity, we work hard to build and preserve.
The environment is rich with opportunity.
Speaker 3: Moving the guidance, we are increasing the average occupancy to range between 97 and a quarter and 97.5%. As a result, we are increasing our same store guidance to a range of 9 to 9.4% on a net effective basis, and 9 to 3.4 to 10% on a cash base.
Moving to guidance, we are increasing the average occupancy to range between 97 in the quarter and 97, 5%.
As a result, we are increasing our same store guidance to a range of 9% to 9.25% on a net effective basis, and nine and three quarters to 10% on a cash basis.
Speaker 3: Remaintaining our strategic capital revenue guidance, excluding promotes to a range of $520 to $530 million, and adjusting GNA guidance to range between $390 and $395 million.
Maintaining our strategic capital revenue guidance, excluding promotes to a range of $5 $20 million to $530 million and adjusting G&A guidance to range between 390 and $395 million.
Our development start guidance is increased to a new range of three to $3 $5 billion at our share driven primarily from the datacenter start mentioned earlier.
Speaker 3: Our development start guidance is increased to a new range of three to three and a half billion dollars at our share driven primarily from the data center start mentioned earlier.
Speaker 3: We have 500 million dollars of contribution and disposition activity during the quarter. And given our commentary on USLF valuations, we are pausing our planned contributions into that vehicle this quarter and reducing our combined contribution and disposition guidance to a range of 1.7 to 2.3 billion dollars.
We have $500 million of contribution and disposition activity during the quarter and given our commentary on USF valuations. We are pausing our planned contributions into that vehicle this quarter and reducing our combined contribution and disposition guidance to a range of one seven to $2 $3 billion.
In the end, we are adjusting guidance for GAAP earnings from a range of $3 30 to $3 35 per share we are increasing our core <unk>, including promotes guidance to a range of $5 58 to $5 60 per share and our increasing core <unk>, excluding promotes to range between five eight and $5 10 per share growth of nearly 10.5%.
Speaker 3: In the end, we are adjusting guidance for gap earnings and the range of 330 to 335 per share. We are increasing our core FFO, including promotes guidance to a range of 558 to 560 per share and are increasing core FFO excluding promotes to a range between 508 and 510 per share, growth of nearly 10.5%.
Speaker 3: I know that many of you are focusing on 2024, so I'd like to take an opportunity to remind you that the Duke portfolio will be entering the same store pool in 2024, which will widen the recently observed delta between net effective and cash same store growth. This is of course because Duke rents were marked to market at close one year ago. So it's contribution to net effective same store growth and earnings will be minimal, even though the cash rent change will be on par with the rest of the prologist portfolio.
I know that many of you are focusing on 2024, so I'd like to take an opportunity to remind you that the Duke portfolio will be entering the same store pool in 2024, which will widen the recently observed delta between net effective and cash same store growth.
This is of course, because Duke rents were mark to market at close one year ago. So its contribution to net effective same store growth and earnings will be minimal even though the cash rent change will be on par with the rest of the <unk> portfolio.
In closing we are navigating the current environment assured that whatever the economy brings in the short term we are positioned to outperform over the long term.
Speaker 3: In closing, we are navigating the current environment, assured that whatever the economy brings in the short term, we are positioned to outperform over the long term. This stems from not only to premiere, logistics portfolio and customer franchise with one of the best balance sheets amongst corporates, but also highly visible earnings and portfolio growth ahead of us.
Stems from not only the Vermeer logistics portfolio and customer franchise with one of the best balance sheets amongst corporates.
Also highly visible earnings and portfolio growth ahead of US we know that turbulent times can bring opportunity for those who are prepared and that's been central to our strategy and management as a company.
Speaker 3: We know that turbulent times can bring opportunity for those who are prepared, and that's been central to our strategy and management as a company.
I'd like to also remind you of our upcoming Investor Forum on December 13th in New York are first in four years.
Speaker 3: But I'd also remind you of our upcoming investor forum on December 13th in New York, our first in four years. We're looking forward to spending the day with you, sharing more about our business, outlook, and opportunities ahead. Additional information is available on our website and in our earnings press release. And with that, I will hand it back to the operator for your questions.
Looking forward to spending the day with you sharing more about our business outlook and opportunities ahead.
Information is available on our website and in our earnings press release, and with that I will hand, it back to the operator for your questions.
Thank you we will now be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is in the queue. You May press star two if he 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 poll for questions.
Okay.
And the first question comes from the line of Michael Goldsmith with UBS. Please proceed with your question.
Speaker 4: Good morning, thanks for not partaking my question. I mean, Tim, can you help us reconcile some of the comments from the prepared remarks you talked about? Maybe softer demand, but then there's, you're calling for accelerating the number of bill to suit development. The same time occupancy has been.
Good morning, Thanks, a lot for taking my question for me Tim can you help us reconcile some of the comments from the prepared remarks, you talked about maybe softer demand. But then there is you are calling for accelerating the number of build to suit developments at the same time occupancy has been stronger than anticipated in that book.
Speaker 4: longer than anticipated and that's before the lower development starts at the market. So how should we think about all of these moving pieces and just the trajectory of the supply demand dynamics, kind of as we exit 23 and into 2020?
For the lower development starts to hit the market. So how should we think about all of these moving pieces and just the trajectory of <unk>.
The supply demand dynamics, and then as we exit 'twenty three and into 2024.
Speaker 5: Sure, demand is definitely softer. It's closer to normal, maybe even a little bit below normal at this instant. There is a lot of latent demand that large companies having large requirements are continuing to talk to us about built suits, but they're reluctant to pull the...
Sure.
And is definitely softer.
It's closer to normal maybe even a little bit below normal at this instance, there is a lot of latent demand that large companies, having large requirements are continuing to talk to us about build to suits, but they're reluctant to pull that.
And the next question comes from the line of Craig Mailman with Citi. Please proceed with your question.
Yes.
Speaker 6: Hey guys, let me go through it in color here because I don't have it in color here either.
Let me know if you can travel again, because I'm, having trouble hearing you.
Just wanted to touch on the datacenter.
Speaker 6: wanted to touch on the data center business use and recorder and see if you guys could break out with the yields on those were relative to the blended yields on the overall development starts and maybe just give a little bit more color about the opportunity with your partner on this one the plans on whether you're going to hold this or anticipate selling upon completion again just a little bit more about
In the quarter and see if you guys could break out what the yields were well.
The blended yield on the overall development starts and maybe you can just give a little bit more color about the opportunity.
Your partner on this one.
There's been a whole bits or anticipate settlement upon.
Completion of then.
A little bit more about it.
The past.
Speaker 6: that has to be within the land bank to do more of these things in the shell.
Actually more of these data centers Dallas.
Ladies and gentlemen, please remain on the line, which is having a little technical difficulty here like you. Please remain on the line.
Okay.
Okay.
Yeah.
Okay.
Speaker 5: I'm sorry, we're having some technical difficulties here and I can't really explain it. Hello. Can you guys hear you?
I'm, sorry, we're having some technical difficulties here and I can't really explain it.
Hello can you guys here.
You can hear me again, okay. So let me finish the first question and then I'll go to the second question to the extent I heard it which wasn't great.
Speaker 5: You can hear me again. Okay. So let me finish the first question and then I'll go to the second question to the extent I heard it, which wasn't great. On the first question, what I wanted to say is that the data centers account for a pretty significant volume of the bill pursuits.
On the first question what I wanted to say is that the data centers account for a pretty significant volume of the built to suits.
Speaker 5: And that's why they're higher, but industrial logistics built to suits are kind of in par and in line with our expectations. The reason I keep...
And and that's why they're higher but industrial logistics build to suits are kind of in par and in line with our expectations.
The reason occupancy.
Speaker 5: It's higher, it's unique to the quality of our portfolio and just a natural role of leases but market occupancy
It's higher it's unique to the quality of our portfolio and just the natural roll of that.
But market occupancy is slightly lower so we are outperforming the market by more than we did before I think that covers the first question. The second question was how should we think about the build to suits in terms of that its effect on our going in yields and alike and for that I'm gonna.
Speaker 5: is slightly lower. So we're outperforming the market by more than we did before. I think that covers the first question.
Speaker 5: The second question was how should we think about the built-to-suits in terms of its effect on our going in yields and the like?
Speaker 5: And for that, I'm going to turn it over to Dan here. But general-
I'll turn it over to <unk>.
To Dan here, but generally the built to suit strategy of ours is.
Speaker 5: The built-asute strategy of ours is an extension of our higher and best-use strategy. We own a lot of high-quality land in markets.
As an extension of our higher and best used strategy, we own a lot of high quality land in markets that are in the path of development and our popular data center markets and while we may occasionally buy land.
Speaker 5: that are in the path of development and our popular data center markets. And while we may occasionally buy land for data centers.
For data centers, our primary strategy is converting our existing portfolio to datacenter product to the extent they have power availability, we were getting a lot of people knocking on our door.
Speaker 5: Our primary strategies converting our existing portfolio to data center product to the extent they have
Speaker 5: Power availability, we're getting a lot of people knocking on our door for those opportunities and we think going forward, it's going to be a pretty significant part of our activity, although it's lumpy and less-
For those opportunities and we think going forward.
It's going to be a pretty significant part of our activity, although it's lumpy and less.
Speaker 5: prone to precise predictions like the logistic business. But you will hear more about
Prone to precise predictions like the logistic business, but you will hear more about that now strategically and this is important to understand we funded our business without issuing any equity basically since 2012 last 10 or 11 years, we have not issued any equity.
Speaker 5: Now strategically, this is important to understand, we funded our business without issuing any equity basically since 2012. Last 10 or 11 years, we have not issued any equity.
Speaker 5: How we can answer businesses by disposing of real estate that was non-strategic to us, logistics real estate. And we've done a lot of dispositions.
How we financed our business is by disposing of real estate that was non strategic to us logistics real estate and we've done a lot of dispositions you can think of the data center strategy as a way of funding our growth that's where the growth capital is going to come from we are not at the moment interest that in.
Speaker 5: You can think of the data center strategy as a way of funding our growth. That's where the growth capital is gonna come from. We are not at the moment interested in being in that business in terms of long-term ownership. It's more of a development and harvest strategy and that capital that comes out of the margins of those deals.
Being in that business in terms of long term ownership, it's more of a development and harvest strategy and that capital that comes out of the margins of those deals will be a substantial contributor to our growth going forward. Dan do you want to talk about the initial yields on.
Speaker 5: will be a substantial contributor to our growth going forward. Tan, you want to talk about the initial yields on...
On the data center.
Speaker 7: Well, what I would say is on this particular data center, we're under a strict confidentiality, so we can't be speaking about any particular deal points by any means. But what I would say is we've been building capabilities internally to ensure that we hit the market for these deals. And you'll see those play out as we announce more data centers going forward.
Well, what I would say is on this particular data center, we're under a strict confidentiality. So we can be speaking about any particular deal points by any means but what I would say is we've been building capabilities internally to ensure that we hit the market for these deals.
You'll see those play out as.
We announced more data centers going forward.
Speaker 5: What I would say generally, though, without getting specific on this opportunity, we think the margins that come out of our data center business by definition, based on our historic costs of land or even the market value of land, will be orders of magnitude higher than they would be under logistics bill that. So multiples of a normal margin.
What I would say generally though without getting specific on this opportunity. We think the margins that come out of our data center business by definition based on our historic cost of land or even the market value of land will be orders of magnitude higher than they would be under logistics.
So multiples of our normal margin.
And the next question comes from the line of Steve Sochua with Evercore ISI. Please proceed with your question.
Yeah. Thanks.
Speaker 8: yeah thanks and good morning i just want to follow up on the development and just make sure i understand on that uh... fourth quarter you know i think you've got something like uh... one point nine billion of of plan star it's given that you know you've done about one point four year date so just curious does that include other data centers or is that all traditional industrial and if so uh... you know what is the mix between spec and build a suit on that uh... fourth quarter start time
I just wanted to follow up on the development and just make sure I understand on the fourth quarter.
I think you've got something like a $1 9 billion of planned starts given that you've done about 1.4 year to date. So just curious does that include other data centers or is that all traditional industrial and if so what is the mix between spec and build to suit.
On that fourth quarter starts volume thanks.
Sure. Steve This is Dan so the lion's share of our our Q4 starts our logistics starts we have one maybe two small smaller data center starts than we have forecasted but.
Speaker 7: First, Steve, this is Dan. So the lion's share of our Q4 starts, our logistics starts. We have one, maybe two small, smaller data center starts that we have forecasted, but overall, it's about 50, 50, build the suit and spec. And let me just highlight that we've been calling for a back-end loaded forecast for about four quarters.
Overall.
It's about 50 50 build to suit and spec and let me just highlight that we've been calling for a back end loaded forecast for about four quarters now.
As we talk about.
Speaker 7: As we talk about market development starts now at 65%, I guess down 65% from the peak. This is playing out exactly as we expected and we've been gearing up all year for a really heavy Q4 start.
Market development starts now at 65% I guess down 65% from the Pete This is playing out exactly as we expected and we've been gearing up all year for a really heavy Q4 start time.
Speaker 5: Yeah, the portion of built to suits is obviously a lot higher than that if you include the data.
Yeah, Dan portion of built to suits is obviously a lot higher than that if you include the data centers.
Speaker 5: What Dan meant was a mix of logistics and logistics back versus built-in.
What that meant was a mix of logistics and logistics spec versus built to suit correct.
Okay.
And the next question comes from the line of Todd Thomas with Keybanc Capital markets. Please proceed with your question.
Okay.
Speaker 9: Hi, thanks. Question, as you think about 2024, Tim, you mentioned that market rent growth increased 60 basis points relative to last quarter. That's down from 2.5% last quarter. I think you indicated that market rent growth is expected to be positive.
Hi, Thanks.
Question.
As you think about 2020 for Tim you mentioned that market rank growth increased 60 basis points.
<unk> to last quarter, that's down from two 5% last quarter. I think you indicated that market rent growth is expected to be positive in the year ahead.
As we think about the trajectory of of rank growth and what Youre anticipating do you see potential for sequential or year over year decreases in market rents in the U S or globally over the next few quarters as deliveries outpaced absorption or do you expect rent growth to stay positive.
Throughout that period during that timeframe.
Hey, John It's Chris Cade and thanks for the question, Yes, we expect rent growth to remain positive throughout that time period.
Speaker 10: It's Chris Kaden, thanks for the question. Yes, we expect rent growth to remain positive throughout that time period. Market conditions are stable and there are handful of markets that we've talked about that are softer but by and large. Markets are proving resilient with rent growth in line or ahead of inflation.
Market conditions are stable and there are a handful of markets that we've talked about that are softer, but by and large.
Markets are proving resilient with with rent growth in line or ahead of inflation.
And the next question comes from the line of Caitlin Burrows with Goldman Sachs. Please proceed with your question.
Speaker 11: Hi everyone, maybe we could talk about property acquisitions a little. I know it's not as large of an activity as developments, but guidance for this year increased full transaction volumes. And then industry level are down significantly. You did the $3 billion acquisition mid-year. So what sorts of acquisitions are most interesting to you today? Could you talk a little bit about who you're buying from, maybe why they're selling, and how you get comfortable on what the right price should be?
Hi, everyone, maybe we could talk about property acquisition, it's a little I know, it's not as large of that activity is developments, but guidance for this year increased transaction volumes and then industry level are down significantly you did the $3 billion acquisition midyear. So what sorts of acquisitions are most interesting to you today could you talk a little.
A bit about who you're buying from maybe why they are selling.
How do you get comfortable on what the right price should be.
Sure.
Speaker 5: You know, it's a dynamic market and I think that's the essence of your question. It's really hard to get a handle on what the returns should be and how we look at acquisitions. But here's here's
It's a dynamic market and I think that's the that's the essence of your question, it's really hard to get a handle on what the returns should be and how we look at acquisitions, but here's here's.
Speaker 5: Here's a model for thinking about it. First of all, we are even pickier than we have been with respect to quality and fit with our portfolio.
Here is the models, we're thinking about it is first of all we are even pick here than we have been with respect to quality and fit with our portfolio.
Speaker 5: We're not before, you know, you had to buy the good with the great in portfolios and we had to go through the massive
We're not before you had to buy the good with the grades and portfolios and we have to go through the massive.
Speaker 5: Exercise of disposing of the property that we didn't want which we did actually quite successfully in a declining Caprate environment and we actually made money on it, but we don't expect that to be the case going forward So we're really being picky about what we buy the portfolios that we're going to buy are almost virtually 100% whole portfolios
Exercise of disposing of the properties that we didn't want which we did actually quite successfully in a declining cap rate environment, and we actually made money on it but we don't expect that to be decades going forward. So we're really being picky about what we buy the portfolio that we're going to buy our almost virtually 100% whole portfolios secondly.
Operator: Greetings and welcome to the Prologis 3rd Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation.
Operator: If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded.
Speaker 5: Secondly, if you really think that, look at where Treasuries are, 150 basis points have gone to call it 4.5%, 300 basis points increase. Those kinds of properties, core properties were trading in the high fives, low six IRRs. Let's stay away from cap rates because of a market complexity of talking about cap rates. But call it?
If you really think that.
Look at where treasuries are 150 basis points have gone to call. It four 5% 300 300 basis points increase.
Jill Sawyer: It is now my pleasure to introduce your host, Jill Sawyer, Senior Vice President of Investor Relations. Thank you, Jill, you may begin. Thanks, John, and good morning, everyone.
Those kinds of.
Properties core properties were trading in the high fives low six irr's, let's stay away from cap rates because of mark to market complexity of talking about cap rates, but call. It six so just say adjusting for the change in treasury yields Simplistically, you would have to see a 9% unleveraged IRR.
Tim: Welcome to our 3rd quarter 2023 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 security 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, beliefs and assumptions. Forward-looking statements are not guarantees of performance and actual operating results may be affected by a variety of factors.
Tim: For a list of those factors, please refer to the forward-looking statement notice in our 10K or other SEC filing. Additionally, our 3rd quarter results, press release and supplemental do contain financial measures such as FSO and EBITDA that are non-GAP. In accordance with REGG, we have provided a reconciliation to those measures.
Speaker 5: So just adjusting for the change in treasury yields, simplistically, you would have to see a nine unleveraged IRR.
And that's if supply and demand of capital or sort of an equilibrium and we get a sense that theres going to be more opportunities coming our way and it is in the capital.
Speaker 5: And that's if supply and demand of capital were sort of in equilibrium. We get a sense that there's going to be more opportunities coming our way. And it is in a capital constrained environment. And we happen to be in a fortunate position of having a really good balance sheet and able to take advantage of those. I don't think there's going to be distress, distress in the in the terms of a.
Constrained environment.
And we happen to be in the fortunate position of having a really good balance sheet and able to take advantage of those I don't think theres going to be distressed or stressed in the in the terms of our.
Post savings and loan crisis or any of the downturn, but I think the opportunity set is going to exceed the available capital and I think we.
Speaker 5: post savings and loan crisis or any of the downturns, but I think the opportunity set is gonna exceed the available capital. And I think we'll be taking advantage of that. So I would say.
Tim: I'd like to welcome Tim, R&S or CSO, who will cover results, real-time market conditions in guidance. We both at M, RCEO and our entire executive team are also with us today, but that I'll hand the call over to Tim. Thanks, Jill. Good morning, everybody, and thank you for joining our call. The 3rd quarter marked the continuation of themes we've been anticipating for more than a year, namely growing supply, translating to increase market vacancy, continued moderation of demand, and market rent growth that will slow until the low levels of new starts drive reduced availability over time.
We will be taking advantage of that so I would say.
Speaker 7: unleveraged IRRs that have a nine-handle on them, and maybe as much as nine and a half, depending on the circumstances. And we are seeing that supply loosen up and come to the market. So expect to see more transactions in the next six months. Dan, do you have anything to add? The only thing I would add is our teams
Unleveraged IRR is that are have a nine handle on them, maybe as much as 99 and a half depending on the circumstances and we are seeing that supply and loosen up and come to the market. So I expect to see more transactions in the next six months.
Yeah, the only thing I would add as you know our teams.
Speaker 7: around the globe are literally turning over every stone daily. And this is land acquisitions, this is core acquisitions, it's value ad acquisitions, and the teams turn to opportunistic right now. And so it's really hard to peg exactly where we're gonna land our acquisition volume for the year, which is why you saw us move it up a couple hundred million after this Phoenix transaction. But overall, I think our teams are gonna continue to find opportunistic transactions.
Around the globe are literally turning over every stone daily and this is land acquisitions. This is core acquisitions, it's value add acquisitions and the teams turned to opportunistic right now and so it's really hard to peg exactly what we're going to land our acquisition volume for the year, which is why you saw us move it up a couple of hundred million. After this.
Tim: We've operated in accordance with these views in both our approach to leasing, as well as timing of new development. What's incremental to our forecast is that continued hawkish posture from central banks and the impact it's had on rates is delaying decision making and willingness to take expansion space early. The geopolitical backdrop has clearly become more troubling as well, amounting to a lack of clarity that will likely weigh on demand. Point. In the meantime, and also playing out to our expectations, is that our existing lease mark to market will drive durable earnings growth, as it did in delivering record rent change this quarter, as well as strong earnings and same store growth.
Phoenix transaction, but overall.
Think our teams are going to continue to find.
Opportunistic transactions.
Since assistant with what Amin just said on the returns.
Yeah.
Speaker 12: and the next
And the next question comes from John Kim with BMO Capital markets. Please proceed with your question.
Tim: We remain focused on the fact that we own assets critical to the supply chain, with long-term, spectacular drivers that remain intact. Further, the outlook for future supply will continue to face structural barriers, ultimately driving occupancy rents and values. In terms of our results, we had an excellent quarter with core of FLO, excluding net promoting income of $1.33 per share. This result includes approximately three cents of one-time items related to interest in termination income, as well as the timing of expenses, which we can address in Q&A.
Thank you I just wanted to clarify so you are expecting over the next few quarters of significant demand shortfall and I'm wondering if during that time period are you planning to be.
Speaker 13: Thank you. I just wanted to clarify, so you're expecting over the next few quarters the significant demand shortfall. And I'm wondering if during that time period, are you planning to be more aggressive on rents and concessions to try to hold occupancy or you can hold rates just given supplies going to start to come down after that? And also if you could provide an update on the Market Rental forecast for 2023.
Be more aggressive on rents and concessions to try to hold occupancy or are you going to hold rates.
Just given supply is going to start to come down after that and also if you could provide an update on the market rental forecast for 2023.
Speaker 5: Yeah, on the rental forecast, I'm afraid you're gonna have to wait for that one we issue guidance and we get into that. And, you know, one thing we're gonna stay away from is quarter by quarter and forced casting of rents. It's hard enough to guess what it is on an annual basis, much less on a quarter forecast. So, who's the first part of the question?
Yeah on the rental forecast I'm afraid you're going to have to wait for that when we issue guidance when we get into that and one thing we're going to stay away from is quarter by quarter at force casting of rents it's hard enough to guess what it is on an annual basis much less.
Tim: Occupancy ticked up over the quarter to 97.5%, aided by retention of 77%. Now the effect of rent change was a record 84% at our share, with notable contributions from Northern New Jersey at 200%, Toronto at 187%, and Southern California at 165%. Same store growth on a net effective in cash basis was 9.3% and 9.5% respectively, driven predominantly by rent change. We saw market rents grow roughly 60 basis points during the quarter, the slower pace embedded in our forecast.
On a quarter to quarter forecast. So what was the first part of the question.
Okay.
Okay.
Speaker 5: Oh, occupancy trade-off. It depends on the actual markets. There are about 20% of the markets that I can see us driving for occupancy and about 80% of the markets that are still in equilibrium or tighter. But the key to your question is what you asked in the middle of it, which is...
Occupancy trade off it depends on the on the actual markets. There are about 20% of the markets that I can see us driving for occupancy and about 80% of the markets that are still in equilibrium or tighter.
But the key to your question is what.
You asked in the middle of it which is how do you expect that to change and the reason, we're not going to get super aggressive on rents is because we have a belief that I mean, just look at the starts there are down 65% and even with moderating demand, we're going to get something like 60 or 70% of that shortfall.
Tim: In combination with the strong build of in-place rents, our lease market recalculates to 62% as of September. We raised approximately $1.4 billion in new financing at an average interest rate of 3.2%, comprised principally of $760 million within our ventures, as well as a recast of our yen credit facility, increasing our aggregate line availability. In combination with our cash position, we ended the quarter with the record $6.9 billion of liquidity. Finally, it's noteworthy that our debt to EBITDA has remained very low and essentially flat all year, hovering in the mid four times range despite our increased financing activity, a demonstration of the tremendous growth in our nominal fees it does.
Speaker 5: How do you expect that to change? And the reason we're not gonna get super aggressive on rent?
Speaker 5: is because we have a belief that uh... i mean just look at the start there down sixty five percent and even would moderating demand we're gonna get something like sixty or seventy percent of that shortfall that we're gonna encounter in the next three quarters shortfall of demand we're gonna get it back in the subsequent
We're going to encounter in the next three quarters short follow up demand, we're going to get it back in the subsequent three quarters. So there is no sense really going cheap.
Speaker 5: three-quarters. So there's no sense really going cheap. It's just, but, but I would take 20% of our markets, we're going to be more focused on I.T.P.
But.
I would say, 20% of our markets, we're going to be more focused on occupancy.
Okay.
Okay.
And the next question comes from the line of Nicholas <unk> with Scotiabank. Please proceed with your question.
Speaker 14: oh thanks uh... just just a two-quarter on southern california so i guess first want to see if you you know you see any benefit in your portfolio uh... since September in terms of the you know the port
Thanks, just a two parter on southern California, So I guess first I want to see if you're seeing any benefit in your portfolio.
Tim: Turning to more markets, while rising, vacancy remains historically very low in the U.S. Mexico and Europe. Market vacancy increased approximately 70 basis points during the quarter in the U.S., driven by low absorption as well as recently delivered but on leased completions. Europe experienced similar dynamics with an overall increase in market vacancy of 50 basis points. At the macro level, our expectations for the U.S, are for completions to outpace net absorption by accumulative 150 to 200 million square feet over the next three quarters.
In September in terms of the you know the port.
Being resolve the workers' strikes.
Speaker 14: being resolved the workers strikes uh... you know impacting ill li based in our inland party to see any benefit there pick up an activity and then secondly uh... just want to hear latest thoughts on you know why you think uh... you know some of the weakness that you've said they're in rents uh... in southern california what what that dynamic is out there that would you know be different than other markets meaning that you know southern california is not uh... a leading indicator for you know other parts of your portfolio
Impacting L L a basin or inland Empire, if youre seeing any benefit there and pick up in activity and then secondly.
Just wanted to hear latest thoughts on you know why you think some.
Tim: Then over the subsequent three quarters, we see that trend reversing with demand exceeding supply and recovering a net 75 to 125 million square feet. That trend may extend further into 2025 as we believe development starts over the next several quarters. Our likely to remain low. Whatever the precise path we expect that as vacancy normalizes over the long term, our portfolio will outperform the markets to both its location and quality as well as the strength of our relationships and operating platform.
Some of the weakness that you've cited there in rents.
In southern California, what what that dynamic is out there that would be different than other markets, meaning that southern California is not a leading indicator for other parts of your portfolio.
Speaker 5: Well, Southern California is very geared towards basically influence. 40% of the influence into this country came through Southern California and that number dropped dramatically because of the...
While southern Southern California, it's very.
Geared towards <unk>.
Basically influenced 40% of the inflows into this country came through southern California, and that number dropped dramatically because of the.
Speaker 5: labor issues uh... it's too soon uh... to see any recovery because we're also going into the christmas season and anything that's going to be in a store for christmas is already been on the water and through the ports and all that so i think you can see the effects of that uh... next year in terms of recovery of of of flows
Labor issues.
It's too soon to see any recovery because we're also going into the Christmas season than anything that's going to be in a store for Christmas has already been on the water and through the ports and all that so I think you're going to see the effects of that next year in terms of recovery.
Tim: In this regard, our portfolio has been largely resilient to moderating demand. Our teams will describe the depth of our leasing pipeline as consistent with the last few quarters. In coming fresh off of one of our customer advisory board sessions, it's clear that our couple of course have plans to continue to expand their footprints, increasing capacity and resiliency. However, what's also clear is that they are slowing such investments until there is more clarity in the economic Johnson.
Flows.
Speaker 5: Uh, about half of what used to come through the LA used to stay in the LA base in Southern California and half of it was
About half of what used to come through with la used to stay in the L. A basin, southern California and half of it was shipped.
Shipped elsewhere, we think they have that stays in southern California for sure will stay there or come back and some of some of the rest will also revert back to southern California, I'm not smart enough to know, whether we're going to get half of it back or three quarters of it back, but we'll get there pretty substantial portion of it back it won't be.
Speaker 5: ship to elsewhere. We think the half that stays in Southern California, for sure, will stay there or come back. And some of the rest will also revert back to Southern California. I'm not smart enough to know whether we're gonna get half of it back or three quarters of it back.
Tim: In the U.S., rent increase in most of our markets with the strongest located in the Spun Belt, Mid Atlantic, and Northern California region. Europe and Mexico were also bright spots for growth in the quarter. Rents across our Southern California submarkets declined approximately 2% as it continues to adjust to higher levels of vacancy. While the markets and outlook are mixed, we remain confident in continued market rent growth in the U.S, and globally over the coming year, albeit at a slower pace while the pipeline continues to get absorbed.
Speaker 1: but we'll get a pretty substantial portion of it back. It will be more into the first or second quarter next year before you see it in the numbers. Chris, when I have anything. Yeah, I'll build on that by saying is the market is digesting the demand and supply picture. There's a mean described. We are beginning to see some differentiation in submarkets where LA Orange County is proving more resilient and inland empires a bit softer. And the next question.
More into the first or second quarter of next year before you see it in the numbers, Chris when I had then yes, I'll build on that by saying as the market is digesting the demand and supply picture. There can mean described we are beginning to see some differentiation in submarkets, where L. A orange county is proving more resilient in inland Empire is a bit softer.
Tim: From our appraisals, U.S, values declined approximately 3% while European values remain stable in fact having a very modest write-up. The difference isn't too surprising as the fed language around inflation and the economy has had more effect in the U.S, capital markets driving the 10-year-up 100 basis points in far-last earnings call compared to the bun at just 50 basis points. We believe that this is likely another instance as we saw one year ago where U.S, appraisals at the end of the quarter have not had sufficient time to react to the increase in rates and we are thus pausing on appraisal-based activity in U.S.L.F, for at least one quarter.
And the next question comes from the line of Camille Bonnell with Bank of America. Please proceed with your question.
Good morning, first a clarification and then I wanted to get your thoughts on guidance.
Can you clarify.
<unk> 19 in the opening remarks and got a sequential.
Speaker 15: and real basis. And then appreciate majority of your racing for 2023 has been addressed. And there's little that could change your core outlook from here. But one of better understand the level of conservative and being captured into guidance looking into your end. What could change your views more positively or next?
Okay.
Appreciate majority of new leasing for 2023 has been <unk> and there's little that could change our outlook from here, but wanted to better understand the level of conservatism.
Hackett into guidance looking into year end what could change.
Tim: Elsewhere values in Mexico are of 8.5% while China experienced its first meaningful decline of 6.5%, a write down that we don't believe has fully run its course. Our funds experience their first quarter of net positive inflows with approximately $180 million of new commitments versus new redemption requests of $115 million. Given another activity in the quarter, the net redemptions have been reduced from their height of $1.6 billion to approximately $700 million are roughly 2% of third-party AUMs.
Your views more confidently are negatively.
Okay.
Thanks, Neil It's Tim Yeah, just a clarification on the first part that was a quarter over quarter number and socal, the 2% decline and then in terms of what could change the fourth quarter. The answer is very little at this point.
Speaker 3: Hey, Tim, yeah, just the clarification on the first part, that was the quarter of a quarter number in SoCal, the 2% decline. And then in terms of what could change the fourth quarter, the answer is very little at this point. Certainly on the rent change side of things, most all of that, least in this already ink.
Certainly on the rent change side of things most all of that leasing is already inked.
Tim: In terms of our own deployment development starts ramped up during the quarter, crossing $1 billion over half of which is related to a data center opportunity in our central region. A testament to our higher and better use strategy and strategically located land bank. Also notable is the acquisition of $118 million of land including a strategic parcel in Las Vegas which will build out an additional 10 million square feet over time and bring our total build out of land globally to over $40 billion.
Speaker 10: We could have some surprises.
We could have some surprises.
Very moderate I would say on the occupancy side of that I actually don't expect that we've a pretty tight range on occupancy as you know Scott.
Speaker 10: very moderate, I would say on the occupancy side, but I actually don't expect that with a pretty tight range on occupancy as you know. So I don't think you will see anything. Take us outside of our...
I don't think you'll see anything take.
Take us outside of our guidance.
Okay.
Yes.
And the next question comes from the line of Ron Camden with Morgan Stanley . Please proceed with your question.
Speaker 14: Hey, just a quick two part of follow up. Just one on the development starts and the data centers, which is intriguing.
Hey, just a quick two part follow up just one on the development starts and the data centers, which is intriguing.
Speaker 14: Any way to put some numbers on that on how many starts can be done annually? Is it 200 million? Is it 500 million? Like how big can this get as a fallup number one? And then number two on sort of the rank rows.
Any way to put some numbers on that or how many starts can be done annually is that 200 million with fiber in your mind like how big can this gap.
Tim: We are laser focused in identifying and executing on value creation in our core business, our energy business, and their adjacencies. Combined with the debt capacity and liquidity we were hard to build and preserve, we see the environment as rich with opportunity. Moving the guidance, we are increasing the average occupancy to range between 97 and a quarter and 97 and a half percent. As a result, we are increasing our same store guidance to a range of 9 to 9 and a quarter percent on a net effective basis and 9 and 3 quarters to 10 percent on a cash basis.
Follow up number one and then number two on sort of the rank growth. Appreciate we want to stay away from sort of specific numbers, but as you're sort of thinking about next year, what are sort of the key markets Southern California being one.
Speaker 14: We appreciate we want to stay away from sort of specific numbers, but as you're sort of thinking about next year, what are sort of the key markets, Southern California being one potentially being sort of a headwind? Maybe can you talk about what are some of the, you know, the neutral or potential tailwinds in terms of markets for next year?
Potentially being sort of a headwind maybe can you talk about what are some of that the neutral or potential tailwind in terms of markets for next year. Thanks.
Okay. Thank you.
Speaker 5: Your first question was great advertising for our investor day because that's what was going to develop the time to is understanding our essentials business, our data center business, and all those things. So let me defer answering that question to that date. And by the way, even on that date, you're not going to get as specific an answer as you would like.
First question was great advertising for our Investor day, because that's what we're going to devote the time too is understanding our essentials business, our data center business and all those things. So let me defer answering that question to that date and by the way even in that they do we're not going to get as specific an answer as he would like.
Tim: Remaintaining our strategic capital revenue guidance, excluding promotes to a range of $520 to $530 million and adjusting G&A guidance to range between $390 and $395 million. Our development start guidance is increased to a new range of 3 to 3.5 billion at our share driven primarily from the data center start mentioned earlier. We have $500 million of contribution and disposition activity during the quarter and given our commentary on USLF valuations, we are pausing our planned contributions into that vehicle this quarter and reducing our combined contribution and disposition guidance to a range of 1.7 to $2.3 billion.
Speaker 10: tell you that in advance because these are very lumpy and it depends what quarter or what year it deals length. Chris, do you want to address the second board? Yeah, absolutely. I might start by just saying one way to think about ring growth, going forward, it's to think about the replacement cost.
I would tell you that in advance because these are very lumpy and it depends what quarter or what your ideal lenses, Chris do you want to address the second part yes, absolutely you know I might start by just saying one way to think about rent growth going forward is to think about the replacement costs math, we have really seen construction costs proved resilient.
Speaker 16: We have really seen construction costs prove resilient and replacement costs prove resilient. And the interest rate dynamic that I mean described earlier translates to the rents that are required to warrant new development. So over a medium-term horizon couple years, that's going to play one of the most important
And replacement costs proved resilient and the interest rate dynamic that you described earlier translates to the rents that are required to warrant new developments. So over a medium term horizon couple of years, that's going to play one of the most important.
Tim: In the end, we are adjusting guidance for gap earnings and a range of 330 to 335 per share. We are increasing our core of FFO, including promotes guidance to a range of 558 to 560 per share, and our increasing core of FFO excluding promotes to a range between 508 and 510 per share, growth of nearly 10.5%. I know that many of you are focusing on 2024, so I'd like to take an opportunity to remind you that the Duke portfolio will be entering the same store pool in 2024, which will widen the recently observed delta between net effective and cash same-store growth.
Factors into evaluating rent growth.
Speaker 16: factors into evaluating rent growth. As it relates to different markets, which was your question, I think it's probably fair to point to the Tim's comments on the markets that have proved the strongest so far this year. Mid-Atlantic, SunBal, Northern California, are markets that stand out in my mind in the US. And there is a range of them globally, whether it's Toronto, Mexico, Germany, and the Netherlands. So that's what I would look to.
As it relates to different markets, which was your question I think it's probably fair to point to Tim's comments on the markets that have proved this the strongest so far this year.
Atlantic Sunbelt, Northern California markets that stand out in my mind in the U S and there is a range of them globally, whether it's Toronto, Mexico, Germany, and the Netherlands.
Tim: This is of course because Duke rents were marked a market at close one year ago, so its contribution to net effective same-store growth and earnings will be minimal, even though the cash rent change will be on par with the rest of the Prologis portfolio. In closing, we are navigating the current environment, assured that whatever the economy brings in the short term, we are positioned to outperform over the long term. The stems from not only to premiere, logistics portfolio, and customer franchise with one of the best balance sheets amongst corporates, but also highly visible earnings and portfolio growth ahead of us.
So that's that's what I would look to.
Okay.
And the next question comes from the line of Anthony Powell with Barclays. Please proceed with your question.
Speaker 17: I get one more on market rent growth. I think last quarter of your game, the 2023 forecast is 79%. I don't know if you updated that today and are you gonna be providing those and kind of updated on quarterly basis.
Hi, Good morning, I guess, one more in on market rent growth I think last quarter. You gave a 2023 forecast of 79% I don't know if you updated that today.
Are you going to be for Brian you can kind of update it on a quarterly basis going forward.
Yeah.
Speaker 16: So, hey, the view is 7% in the United globally in the U.S. We're about mid-sixes so far this year, so that implies growth in the fourth quarter as we described earlier. And then as it relates to forward guidance, I'd like to underline our upcoming investor day in December as the time to look for new information.
So the view is 7% and the United globally and in the U S were about mid sixes. So far this year, so that implies growth in the fourth quarter. As we described earlier and then as it relates to forward guidance I would like to underline our upcoming Investor day.
Tim: We know that turbulent times can bring opportunity for those who are prepared, and that's been central to our strategy and management as a company. I'd like to also remind you of our upcoming investor forum on December 13th in New York, our first and four years. We're looking forward to spending the day with you, sharing more about our business, outlook, and opportunities ahead. Additional information is available on our website and in our earnings press release.
December is the time to look for new information.
Yeah.
And the next question comes from the line of Michael Carroll with RBC Capital markets. Please proceed with your question.
Yes, Thanks, how does the 150 to 200 million square feet gap between supply and demand over the next three quarters compared to your expectation for all of 2023 now correct me if I'm wrong I believe that you highlighted that there was going to be about 150 million square foot gap in 'twenty. Three I mean is that still a fair assumption or has there.
Speaker 18: yet thanks how does the one hundred fifty to two hundred million square feet gap between supply and demand or the next three quarters compared to your expectation for all of uh... twenty twenty three now correct me if i'm wrong i believe that you highlight it that there's going to be about a hundred fifty million square foot gap in twenty three i mean is that still a fair assumption or has this uh... delay in demand due to the market uncertainty has kind of uh... why that out a little bit
Tim: And with that, I will hand it back to the operator for your questions. Thank you.
Operator: We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the queue. You may press star two 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 will be pulled for questions.
Yes.
Delay in demand due to the market uncertainty is kind of widen that out a little bit.
Speaker 16: Hi, thanks for the question against Chris. So, to give you the total numbers, we are on pace to see 490 million square feet of deliveries in the United States this year against the 195 million square feet of net absorption. So, that gap is wider. And some of that relates simply not so much to the softness in demand that you're describing, but the timing of deliveries of the pipeline.
Alright. Thanks for the question again, it's Chris So just to give you. The total numbers we are on pace to see 490 million square feet of deliveries in the United States. This year against the 195 million square feet of net absorption. So the gap is wider and some of that relates simply not so much to the softness in.
Michael Goldsmith: And the first question comes in the line of Michael Goldsmith with UBS. Please proceed with your question.
Tim: Good morning. Thanks a lot for taking my question. I need Tim. Can you help us reconcile some of the comments from the prepared remarks you talked about? Maybe softer demand, but then there's a you're calling for accelerating the number of build to suit development. The same time occupancy has been stronger than anticipated and that's before the lower development starts at the market. So how should we think about all of these moving pieces and just the trajectory of the supply demand dynamics and as we exit 23 and into 2024.
And demand that you're describing but the.
Timing of deliveries of the pipeline if anything our view of where the pipelines going has come down not gone up over the last 90 days related to the trend in starts and so really it's a it's really timing as it relates to that gap.
Speaker 16: If anything, our view of where the pipeline is going has come down not gone up over the last 90 days related to the trend and starts. And so really it's really timing as it relates to that gap.
Speaker 5: Yeah, but I would say our previous forecast is not to anticipate the sudden jump in rates that has come in the last month and a half.
Yes, but I would say our previous forecast did not anticipate the sudden jump in rates that has come in the last month and a half.
Speaker 5: You know, we thought that treasuries were going to settle in the mid-3s, not mid-4s, maybe mid-to-high-3s and not mid-4s, or approaching five. So that, I think, has taken and shifted some of the demand out. But the thing that encourages me, and we'll have to wait to see this.
We thought that treasuries, we're going to settle in the mid threes not mid fours, maybe mid to high threes, and nutmeg force or approaching $5. So that I think has taken.
Tim: Sure, demand is definitely softer. It's closer to normal, maybe even a little bit below normal at this instant. There is a lot of latent demand that large companies having large requirements are continuing to talk to us about built to suits, but they're reluctant to pull the.
<unk> shifted some of the demand now, but the thing that encourages me and we'll have to see.
Wait to see this is that companies are not shutting down their dialogue with us in terms of law.
Speaker 5: that companies are not shutting down their dialogue with us in terms of their long term needs and are built to suit
Their long term needs and our built to suit.
Speaker 5: discussions are every bit as good as they've been, you know, across most cycles.
Craig Mailman: And the next question comes in the line of Craig. Mark Mailman, with City, please proceed with your question. Hey guys, let me know if you're going to come over here because I haven't come over here in years, but I just wanted to touch on the data center, built a few times older, and see if you guys could break out with the yields on the world relative to the blended yields on the overall development starts, and maybe just give a little bit more color about the opportunity this partner on this one.
Discussions are every bit as good as they've been.
Across most cycles, but theyre not pulling the trigger just yet given that those things generally involves major capital expenditures and those are all being scrutinized by the C suite pretty pretty tight fleet. These days.
Speaker 5: but they're not pulling the trigger just yet given that those things generally involved major capital expenditures and those are all being scrutinized by the peace week pretty pretty tightly these days
Yeah.
And the next question comes from the line of Vikram Malhotra with Mizuho. Please proceed with your question.
Speaker 19: Thanks, I just wanted to get a better sense of you talked about
Thanks, I just wanted to get a better sense of you talked about.
Craig Mailman: The plans of whether you're going to hold this or anticipate selling upon completion of that image, a little bit more about the capacity within the land bank to do more of these data center shelves. Ladies and gentlemen, please remain on the line, we're just having a little technical difficulty here, like you please remain on the line. I'm sorry, we're having some technical difficulties here, and I can't really explain it. Can you guys hear me again?
Yeah.
Speaker 19: differing growth, I guess, across soak in rent growth, across so-called mid-Atlantic, I think you referenced Sunbelt. Can you just give us a better sense of the magnitude of this dispersion? And I guess, Chris, do you expect this dispersion to continue over the next call? It's six to twelve months.
Deferring growth I guess across silk and rent growth across Socal mid Atlantic I think you referenced sunbelt.
Can you just give us a better sense of the magnitude of the dispersion and I guess, Chris do you expect the dispersion to continue over the next call. It six to 12 months.
So the magnitude of the dispersion so just to be clear in terms of strength versus weaknesses, because I don't want to be sure that wasn't completed the strong markets include the mid Atlantic Sunbelt.
Speaker 16: So the magnitude of the dispersion, so just to be clear, in terms of strengths versus weaknesses, I wanna be sure that wasn't conflated. The strong markets include the Mid-Atlantic, Sunbelt, Northern California, and really they're only a handful of soft markets. So Cal, we've talked about Indies of Market that's been flat all year.
More than California, and really there are only a handful of soft market Socal, we've talked about India as a market that's been flat all year.
Speaker 16: In terms of dispersion, there is a fair amount of say-ness in the trend, whether you look at it on quarterly or a calendar year basis.
In terms of dispersion.
There is a fair amount of sameness in the trend whether you look at it on a quarterly or a calendar year basis. So rents.
Speaker 16: Rent are trending in the annualized rate from the from the third quarter of the team discussed.
Our rents are trending in the annualized rate from the from the third quarter that Tim discussed with some markets moderately ahead like the strong markets. I described and then just really one or two markets that are notably weaker so I guess I suppose there is that dispersion.
Speaker 16: with some market moderately ahead like the strong market that I described and then just really one or two markets that are notably weaker so I guess I suppose there's that dispersion.
Tim: Okay, so let me finish the first question and then I'll go to the second question to the extent I heard it, which wasn't great. On the first question, what I wanted to say is that the data centers account for pretty significant volume of the built suits, and that's why they're higher. But industrial logistics built to suits are kind of in par and in line with our expectations. The reason occupancy is higher, it's unique to the quality of our portfolio and just the natural role of leases, but market occupancy is slightly lower. So we're out performing the market by more than we did before.
Okay.
And the next question comes from the line of Mike Mueller with Jpmorgan. Please proceed with your question.
Tim: I think that covers the first question. The second question was, how should we think about the built to suits in terms of its effect on our going in yields and the like? And for that, I'm going to turn it over to Dan here, but generally, the built to suit strategy of ours is an extension of our higher and best use strategy. We own a lot of high quality land in markets that are in the path of development and our popular data center markets.
Yeah, Hi.
Speaker 20: Yeah, hi. I've know you've used land in the past for higher and better uses, but do you think you'd be looking at these development of the data center developments?
No you've used landed in the past for higher and better uses but do you think you'd be looking at these development.
Data center developments to the same degree that you would be looking at them. If you werent seeing a normalizing of the traditional industrial demand.
Speaker 20: same degree that you would be looking at them if you weren't seeing a normalizing of a traditional industrial demand.
Speaker 5: Absolutely, because the margins embedded in the data center development are orders of magnitude higher. Certainly on the basis of market value, under industrial use or purchase price under industrial use. So we would be doing that even if the market was tight.
Absolutely because the margins embedded in the datacenter development, Mike are orders of magnitude higher.
Certainly on the basis of market value on their industrial user or purchase price under in the industrial use so we would be doing that even if the market was tight as a drum.
Speaker 5: uh... and by the way let's not get carried away the market is in the high-force occupancy i mean they can see sorry that that is
And by the way, let's not get carried away the market is in the high fours occupancy I mean vacancy sorry that that is.
Speaker 5: You know, absent 21 and 22, I would have said that would be my, you know, my Christmas present would be, you know, vacancy rates that are sub five in any part of the cycle other than the last couple of years. So the markets are strong, but the data center opportunities.
You know absent in 'twenty, one and 'twenty two I would've said that would be my.
My Christmas present would be you know vacancy rates that are sub five in any part of the cycle other than the last couple of years. So so the markets are strong, but the data center opportunities.
Tim: And while we may occasionally buy land for data centers, our primary strategies converting our existing portfolio to data center products to the extent they have power availability. We're getting a lot of people knocking on our door for those opportunities and we think going forward, it's going to be a pretty significant part of our activity, although it's lumpy and less prone to precise predictions like the logistic business, but you'll hear more about that.
Speaker 5: If you can get the power, the demand is there and it's been sort of boosted by AI and a bunch of other things. So we see sort of a rush of the large players and they're all big credit players into the business and they can't get enough of this stuff to keep up with demand.
If you can get the power the demand is there and it's been sort of boosted by AI and a bunch of other things. So we see sort of a rush of the large players and they're all big credit players into the business.
And they can't get enough of this stuff to keep up with demand.
And the next question comes from the line of Bill Crow with Raymond James. Please proceed with your question.
Tim: Now, strategically, this is important to understand, we funded our business without issuing any equity, basically since 2012. Last 10 or 11 years, we have not issued any equity. How we finance our business is by disposing of real estate that was non strategic to us, logistics real estate. And we've done a lot of distributions. You can think of the data center strategy as a way of funding our growth. That's where the growth capital is going to come from.
Speaker 21: Yeah, thanks. Two quick questions. First of all, on the economy, I'm wondering if you're seeing any changes to your watch list among your tenants or any sectors in particular that are starting to show weakness. And the second question is really, in order to get that kind of 9%
Yes. Thanks, two quick questions first of all on the economy Im wondering if youre seeing any changes to your watch list among your tenants or any sectors. In particular that are starting to show weakness and the second question is really in order to get the kind of 9%.
Speaker 21: or the returns on acquisitions. You have to target.
The returns on acquisitions.
Do you have to target longer Walter.
Speaker 21: How do you get that if we don't see this dress among current holders or owners?
How do you get that if we don't see distress among current holders who are owners. Thanks.
Tim: We are not at the moment interested in being in that business in terms of long term ownership. It's more of a development and harvest strategy and that capital that comes out of the margins of those deals will be a substantial contributor to our growth going forward.
So our credit issues are fairly modest and they usually involve retailers and we have the built in 85% plus mark to market on those leases that we've identified as potential potential risks and we've actually captured some of those spreads.
Speaker 5: So our credit issues are fairly modest and they usually involve retailers and we have a built in 85% plus mark to market on those leases that we've identified as potential risks.
Tim: Then you want to talk about the initial yields on the data center. Well, what I would say is on this particular data center, we're under a strict confidentiality, so we can't be speaking about any particular deal points by any means, but what I would say is we've been building capabilities internally to ensure that we hit the market for these deals and you'll see those play out as we we announced more data centers going forward.
Speaker 5: And, you know, we've actually captured some of those threats and already improved our position by buying out those leases or just getting them back and releasing the space in a short period of time. So I don't think credit is a particularly important consideration in this cycle.
R&D improved our position by buying out those leases or just getting them back and re leasing of the space in a short period of time. So I don't think credit is a particularly important consideration in this in this cycle.
Okay.
And then the second question on the wallets extended Walt as being necessary for the kind of IRR.
Speaker 10: And then the second question on the wall to extended wallets being necessary for the kind of IRRs were targeting an acquisition.
Targeting and acquisitions.
Tim: What I would say generally, though, without getting specific on this opportunity, we think the margins that come out of our data center business by definition, based on our historic costs of land or even the market value of land, will be orders of magnitude higher than they would be under logistics, build out so multiples of a normal margin.
Speaker 5: We're using the same least terms and acquisitions than we always have been. There's not, I mean, if you look at 30 years of history, I mean, our waltz have been between four and a half years and six years or something like that on average in our releases. So it doesn't move around that much.
Using the same.
Lease terms and acquisitions. Then then we always have been there's not I mean, if you look at 30 years of history I mean, our walls have been between four and a half years and six years or something like that on average our leases. So it doesn't move around that much.
Speaker 7: Yeah, that I would just pile on there that we look at these opportunities of, whether it be one to three or four years of negative leverage as an opportunity, really. We look at total return on every deal. And again, we take it to our filters of quality.
Yes, I would just pile on there.
We look at these opportunities, but whether it be one to three or four year depot years of negative leverage as an opportunity really we look at total return on every deal and again, we take it through our filters of quality.
Steve Sakwa: And the next question comes to the line of Steve Sakwa with Evercore ISI.
Dan: Please proceed with your question. Yeah, thanks. Good morning. I just wanted to follow up on the development and just make sure I understand on the fourth quarter, you know, I think you've got something like 1.9 billion of plant starts given that, you know, you've done about 1.4 year to date. So just curious, does that include other data centers or is that all traditional industrial? And if so, you know, what is the mix between spec and build the suit on that fourth quarter starts, I am thanks.
Speaker 7: Mark the market and whether we want to hold a long term or not, and then we layer that on with our potential essentials, revenues and synergies and otherwise. So while it's one consideration, so are all these other factors.
Mark to market and weather.
Whether we want to hold it long term or not and then we.
That on with our potential essentials revenues and synergies.
Otherwise so well.
Well, it's one consideration so are all these other factors.
Okay.
And the next question comes from the line of Blaine Heck with Wells Fargo. Please proceed with your question.
Great. Thanks, just wanted to follow up on guidance you touched on this a little bit the guidance implies a decrease in <unk> in the fourth quarter can you just talk a little bit more specifically about some of the moving pieces there and one time items that are influencing the numbers in the third or fourth quarters, and whether any of that noise is going to persist into 2024.
Speaker 22: Great, thanks. Just wanted to follow up on guidance. You touched on this a little bit, but guidance implies a decrease in FFO in the fourth quarter. Can you just talk a little bit more specifically about some of the moving pieces there and one-time items that are influencing the numbers in the third or fourth quarters and whether any event noise is going to persist into 2020.
Dan: Here Steve, this is Dan. So the lion's share of our few four starts are logistics starts. We have one, maybe two small smaller data center starts that we have forecasted. But overall, it's about 50 50 build the suit and spec and let me just highlight that we've been calling for a backend loaded forecast for about four quarters now. As we talk about market development starts now at 65, I guess down 65% from the peak.
Speaker 10: Yeah, the answer to the last part, no, I don't expect anything into 2024. Basically of the three cents, a couple of pennies that were related to.
Yes, I'll answer the last part is no I don't expect anything into 2024 basically of the three.
A couple of pennies over were related to termination income from some leases that were canceled and then higher interest income there was about two cents there I would call that thats permanent to the year and then the other pending in the quarter I would say is more of a timing issue.
Speaker 3: Termination income from some leases that were canceled.
Speaker 10: And then higher interest income. There's about two cents there. I would call that that's permanent to the year. And then the other penny in the quarter, I would say is more of a timing issue. Specifically in taxes, we'll see some lower taxes in the third quarter, but higher again in the fourth quarter. So if you take that with regard to the role, if you take that three cents out, you're basically rolling from, let's call it 130 to 128 in the fourth quarter is what's implied in our guidance.
Dan: This is playing out exactly as we expected and we've been gearing up all year for a really heavy Q4 start. Yeah, the portion of both suits, obviously, a lot higher than that if you include the data centers. What Dan meant was a mix of logistics and logistics back versus bill.
Pacifically in taxes will see some lower taxes in the third quarter, but higher again in the fourth quarter. So if you take that with regard to the Royall. If you take that three out Youre basically rolling from let's call. It 130 to $1 28 in the fourth quarter is what's implied in our guidance and basically you would you would roll.
Speaker 3: And basically you would roll in a line forward. We're gonna probably add two cents from just base same store growth, quarter over quarter.
Todd Thomas: And the next question comes from the line of Todd Thomas with Keybank Capital Markets.
<unk> NOI forward, we're going to probably add two cents from just base same store growth quarter over quarter.
Chris Kaden: Please proceed with your question. Hi, thanks. Question, you know, as you think about 2024, Tim, you mentioned that market rent growth increased 60 basis points relative to last quarter. That's down from two and a half percent last quarter. I think you indicated that market rent growth is expected to be positive in the year ahead.
Speaker 10: And then the declines are going to come from mainly ramping of development. We see much more.
And then the declines are going to come from mainly ramping of development, we see much more.
Investment in land and CIP, starting to build and you should be aware in your models you know our cost of funding development in the short term is essentially 6% think of that as sofa plus plus our line rate. We're capping interest at our in place that is how this works that's at 3%. So in the short term that's a drag on core.
Speaker 3: investment in land and CIP starting to build and you should be aware in your models. You know our cost of funding development in the short term is essentially six percent. Think of that as so for plus our line rate or tapping interest at our in place debt is how this works. That's at three percent. So in the short term that's a drag on coreFFO.
Chris Kaden: You know, as we think about the trajectory of of rank growth and what you're anticipating, do you see potential for sequential or year-rear decreases in market rents in the US or globally over the next few quarters as deliveries outpace absorption or do you expect rank growth to stay positive throughout that period during that time frame. Todd, it's Chris Kaden. Thanks for the question. Yes, we expect rent growth to remain positive throughout that time period. Market conditions are stable and there are a handful of markets that we've talked about that are softer but by and large markets are proving resilient with with rent growth in line or ahead of inflation.
<unk>.
Seen mainly in interest expense, obviously over the long term margin and value creation is there but.
Speaker 10: seen mainly in interest expense. Obviously over the long term, the margin of value creation is there, but we will see that drag pick up as developments ramp.
But we will see that drag pickup as developments ramp.
Yeah.
And the next question comes from the line of key bin Kim with <unk> Securities. Please proceed with your question.
Speaker 23: Thanks, good morning. Two quick ones here. First, on a utilization rate that ticked down a little bit this quarter, I was wondering if you can provide any more color around that. And second, if you look at the larger development landscape and look at competitors that are developing, I would assume that the pressure for them to lease up space and maybe they have to pay back the loans to banks probably increases as we move forward. You know,
Thanks, Good morning, two two quick ones here first.
First on the utilization rate ticked down a little bit this quarter.
I was wondering if you can provide any more color around that and second if you look at the larger development landscape and look at competitors that are developing.
I would assume that the pressure for them to lease up space, maybe they have to pay back the loans to banks probably increases as weak as we move forward.
Caitlin Burrows: And the next question comes from the line of Caitlin Burrows with Goldman Sachs. Please proceed with your question. Hi, everyone. Maybe we could talk about property acquisitions a little. I know it's not as large of an activity as developments, but guidance for this year increased full transaction volumes. And then industry level are down significantly. You did the $3 billion acquisition mid-year. So what sorts of acquisitions are most interesting to you today? Could you talk a little bit about who you're buying from, maybe why they're selling and how you get comfortable on what the right price should be?
I'm not sure how big these developers are or.
Speaker 23: How much capital do they have behind them? Is there any risk that as these developers look to secure tenants that could drive rental rental rates lower, going forward?
How much capital would be half behind them, but is there any risk that as these developers look to secure tenants that could drive rental rates lower going forward.
Hey, Ben I'll take the utilization question. Thanks for it as you see on the page in the supplemental there are multiple metrics on the page and we look at all of them in totality and additional ones that are not included in the supplemental. So we have a range of proprietary data, whether it's our ibi survey tenants in them.
Speaker 16: Aiki Ben, I'll take the utilization question. Thanks for it. As you see on the page in supplemental, there are multiple metrics on the page, and we look at all of them in totality and additional ones that are not included in this supplemental. So we have a range of proprietary data, whether it's our IBI survey, tenants in the market, customer decision making time frames, or sales pipeline.
Tim: Sure. You know, it's a dynamic market, and I think that's the essence of your question. It's really hard to get a handle on what the returns should begin. We look at acquisitions, but here's a model for thinking about it. First of all, we are even pickier than we have been with respect to quality and fit with our portfolio. We're not before, you know, you had to buy the good with the great in portfolios, and we had to go through the massive exercise of disposing of the property that we didn't want, which we didn't actually quite successfully in a declining cap rate environment that we actually made money on it, but we don't expect that to be the case going forward.
Customer decision, making timeframes, our sales pipeline specific to the utilization data that lags that does not lead economic and real estate cycles, we've seen that over time.
Speaker 16: specific to the utilization data, that lags, that does not lead economic and real estate cycles. We've seen that over time. And so what I think this is best understood in the context of today's retail sales numbers, which shows a resilient consumer that is upperforming expectations and leading to lower utilization levels.
Tim: So we're really being picky about what we buy, the portfolios that we're going to buy are almost virtually 100% whole portfolios. Secondly, if you really think that, look at where Treasuries are, 150 basis points have gone to call it 4.5%, 300 basis points increase. Those kinds of properties, core properties, we're trading in the high fives, low six IRRs. Let's stay away from cap rates because of a market complexity of talking about cap rates, but call it six.
And so what I think this is best understood in the context of today's retail sales numbers, which shows a resilient consumer that is outperforming expectations and leading to a lower utilization levels.
Speaker 5: Yeah, on the second issue of opportunities, there are a lot of merchant developers that were bank financed and active in the market. And they are just about completing their projects now. They have some interest reserve obviously built into their lease up plans, but their lease up plans are going to get extended.
And the second issue.
Opportunities there are lot of merchant developers and our bank financed and.
Active in the market and they are.
Just about completing their projects now they have some interest reserve obviously built in.
And to their lease up plans, but their lease up plans are going to get extended.
So actually I think what's going to happen is that they can't really be afford to rent the space of the lower rate I think they are more likely to actually sell their positions.
Speaker 5: So actually, I think what's gonna happen is that they can't really be afford to rent the space of the lower rate. I think they're more likely to actually sell their positions.
Speaker 5: to people with stronger balance sheets. And we've already seen and taken advantage of a couple of instances like this. So don't be surprised to see us buy some vacant completed shells.
Two people with stronger balance sheets, and we've already seen and taken advantage of a couple of instances.
Like this so don't be surprised to see us buy some bacon completed shelves at at discounts to replacement cost.
Speaker 5: at discount seroplacement cost. Because...
Tim: So just the adjusting for the change in treasury yields, simplicity, you would have to see a nine unloversed IRR, and that's if supply and demand of capital were sort of in equilibrium. We get a sense that there's going to be more opportunities coming our way, and it is in a capital constrained environment, and we happen to be in the fortunate position of having a really good balance sheet and able to take advantage of those.
Because it's because of our view on demand and supply with 65% decline in supply. We think if you get into late 'twenty early 'twenty five we're going to be in a pretty strong market. So.
Speaker 5: You know, it's because of our view on demand and supply, would 65% decline in supply. We think if you get into late 24 early 25, we're gonna be in a pretty strong market. So this is where balance should matter. This is where quality of location and product matters. And we're gonna be very selective about the project that I described.
This is this is the way our balance sheet matters. This is where quality of location and product matters and we're going to be very selective about the projects that I described but.
Speaker 5: But that's why we've been building our...
Tim: I don't think there's going to be distress, distress in the terms of post savings on loan crisis or any of the downturns, but I think the opportunity set is going to exceed the available capital, and I think we'll be taking advantage of that. So I would say unloversed IRRs that have a nine handle on them and maybe as much as nine and a half depending on the circumstances. And we are seeing that supply loosen up and come to the market, so expect to see more transactions in the next six months.
But that's why we've been building.
Speaker 5: our balance sheet and keeping our leverage around 20% all this time. This is where we put it to work.
Our balance sheet and keeping our leverage at around 20% all this time.
This is when we put it to work.
And the next question comes from the line of Vince to Bone with Green Street. Please proceed with your question.
Hi, good morning.
Speaker 22: Hi, good morning. I have a follow up on an earlier comment about, about 20% of your markets, your managing for occupancy, not pushing rent. So what are those markets where industrial landlords have less pricing power today?
A follow up on an earlier comment about you know about 20% of your markets you are managing for occupancy not pushing rents. So what are those markets, where industrial landlords have less pricing power today.
Tim: And do you have anything to add? The only thing I would add is our teams around the globe are literally turning over every stone daily, and this is land acquisitions, this is core acquisitions, it's value ad acquisitions, and the teams turn to opportunistic right now. And so it's really hard to peg exactly where we're going to land our acquisition volume for the year, which is why you saw us move it up a couple hundred million after this this Phoenix transaction, but overall, I think our teams are going to continue to find opportunistic transactions.
Speaker 16: So our events we covered a couple of them talked about Southern California point to Houston Indianapolis and then outside the US the softest market might be Poland and China and China And I think I'd offer Now that market vacancies are beginning to gap out again I think we're going to see quality make a bigger difference in terms of portfolio mix
So our events, we covered a couple of them talked about southern California point to Houston, Indianapolis, and then outside the U S. The softest market might be Poland, and China, and China, and I think I'd offer now that market vacancies are beginning to gap out again.
I think we're going to see quality make a bigger difference in terms of portfolio mix.
Okay.
Okay.
Okay.
And the next question comes from the line of Vikram Malhotra with Mizuho. Please proceed with your question.
John Kim: and the next question comes from John Kim with BMO Capital Markets. Please proceed with your question. Thank you. I just wanted to clarify. So you're expecting over the next few quarters the significant demand shortfall. And I'm wondering if during that time period, are you planning to be more aggressive on rents and concessions to try to hold occupancy? Are you going to hold rates? Just given supplies going to start to come down after that. And also if you could provide an update on the market rental forecast for 2023.
Just wanted to get your thoughts that this clarify one thing more broadly.
Speaker 19: If this one gets your thoughts to describe, if I want to think more broadly.
Speaker 19: Two trends, I guess, one, just the whole reshoring team that we're hearing more and more about. And in fact, in just Amazon, they've put a lot of capital into the course and across the country. I'm just wondering, when you marry those two things together, is there a greater investment moving towards the Midwest or a more manufacturing pocket? Is that an opportunity for PLD going forward?
No.
I guess, one just the whole reassuring.
We're hearing more and more about.
Then second just Amazon.
A lot of capital into the into the core and across the country I'm just wondering sort of when you marry those two things together is there sort of greater investment kind of moving towards the Midwest or more manufacturing pocket.
Is that sort of an opportunity for really going forward.
Yeah.
So generally speaking I would say.
Speaker 5: So generally speaking, I would say on where manufacturing is taking place.
On on where manufacturing is taking place in Asia. There is a lot of manufacturing still in Asia, It's not all in China and it had been gradually declining in China in the last couple of years anyway. It was first of all first moving to Western China and then it was spreading to other places in southeast Asia, but theyre going to be.
Tim: Yeah, on the rental forecast, I'm afraid you're going to have to wait for that one issue guidance and we get into that. And, you know, one thing we're going to stay away from is quarter by quarter forced casting of rents. It's hard enough to guess what it is on an annual basis much less on a quarter to quarter forecast. Yeah, so what's the first part of the question? Oh, it depends on the actual markets.
Speaker 5: In Asia, there's a lot of manufacturing still in Asia. It's not all in China. And it had been gradually declining in China in the last couple of years anyway. It was first moving to Western China, and then it was spreading to other places and it's fast East Asia. But there are gonna be strong flows still from those places. It's just not gonna be all from China. But the container doesn't care where there's coming from somewhere else or China. It lands in the same place.
<unk> flow still from those places is just not going to be all from China, but the container it doesn't care, whether it's coming from somewhere else.
Or China it lands in the same ports secondly demand is in our product is mostly driven by consumption and not manufacturing in manufacturing. The finished product ends up in a container and on the truck or a ship. So the warehouses of charter a ship so that manufacturing per se.
Tim: There are about 20% of the markets that I can see us driving for occupancy and about 80% of the markets that are still in equilibrium or tighter. But the key to your question is what you asked in the middle of it, which is, how do you expect that to change? And the reason we're not going to get super aggressive on rent is because we have a belief that I mean, just look at the starts, they're down 65% and even with moderating demand, we're going to get something like 60 or 70% of that shortfall that we're going to encounter in the next three quarters shortfall of demand.
Speaker 5: Secondly, demand in our product is mostly driven by consumption and not manufacturing. In manufacturing, the finished product ends up in a container and on a truck or a ship.
Speaker 5: So the warehouse is a truck or a ship. So manufacturing per se doesn't generate a lot of demand. When those containers land in places where consumption takes place, that's when the demand is generated for deconsolidation. Now those markets happen to be in populous parts of the country, because that's where the consumption is. And those markets tend to be high barrier to entry markets.
Isn't it doesn't generate a lot of demand windows containers land.
In places where consumption takes place that's when the demand is generated for deconsolidation now those markets happen to be in populous parts of the country, because that's where the consumption is and those markets tend to be a high barrier to entry markets. So we don't think the dynamic of onshoring to this extent.
Tim: And we're going to get it back in the subsequent three quarters. So there's no sense really going cheap. It's just, but, but I would take 20% of our markets. We're going to be more focused on that.
Speaker 5: So we don't think that dynamic of unshoring to these extent.
Speaker 5: that it exists is going to change things around all that much. The biggest beneficiary.
That it exists is going to change things around all that much the biggest beneficiary.
Speaker 5: of on-shoring has been actually near-shoring and it's been in northern Mexico.
Onshoring has been actually near shoring and it's been in Northern Mexico.
Nicholas Joseph: And the next question comes to the line of Nicholas, you look out with Koshabank. Please proceed with your question. Oh, thanks. Just just a two-pointer on Southern California. So I guess first want to see if you see any benefit in your portfolio since September in terms of the, you know, the port. Being resolved, the workers strikes, you know, impacting, you know, L.A. Basin or Inland Empire, if you see any benefit there and pick up an activity.
Speaker 5: Northern Mexico markets are 100% occupied and there's insatiable demand.
Northern Mexico markets are 100% occupied and there is an insatiable demand.
Speaker 5: for product in those markets and most of that is for our Basically distribution buildings that are used for manufacturing purposes So that's where we've seen the material demand if there's more demand coming for manufacturing in the US A we haven't really seen it and if we do see it will be the beneficiary of it Because we're well positioned in those central markets as well
For our product in those markets and most of that is for.
Or basically distribution buildings that are used for manufacturing purposes. So that's why we've seen them material demand. If there is more demand coming for manufacturing in the U S. A we haven't really seen that and if we do see it will be the beneficiary of it.
Because we are well positioned in those central markets as well.
Nicholas Joseph: And then secondly, just want to hear latest thoughts on, you know, why you think, you know, some of the weakness that you've said there in rents in Southern California, what, what that dynamic is out there that would, you know, be different than other markets, meaning that, you know, Southern California is not a leading indicator for, you know, other parts of your portfolio. Well, Southern California is very geared towards basically inflows. 40% of the inflows into this country came through Southern California and that number dropped dramatically because of the labor issues.
Okay.
And our last question comes from the line of Blaine Heck with Wells Fargo. Please proceed with your question.
Speaker 20: Great, thanks. I mean, just a bigger picture question for you. Can you talk about how you're thinking about managing exposure to geopolitical risk and instability? And maybe to what extent the latest turmoil in the Middle East could impact your operations, if at all?
Great. Thanks, I mean, just the bigger picture question for you can you talk about how you're thinking about managing exposure to geopolitical risk in an instability and maybe to what extent the latest turmoil in the middle East could impact your operations if at all.
Speaker 5: Yeah, I think the effect is going to be indirect because, you know, the middle east is not obviously a source of product or exports or we're not active in any of those markets. So it will be a second order effect on the macro economy. And, you know, if the Fed remains very aggressive on rates,
Yeah, I think the effect is going to be indirect because.
The minerals is not obviously, a source of product or exports or we're not active in any of those markets. So it will be a second order effect on the macro economy and you know if the fed remains very aggressive on rates.
Nicholas Joseph: It's too soon to see any recovery because we're also going into the Christmas season and anything that's going to be in a store for Christmas has already been on the water and through the ports and all that. So I think you're going to see the effects of that next year in terms of recovery of flows. About half of what used to come through L.A, used to stay in the L.A. Basin Southern California and half of it was shipped elsewhere.
Speaker 5: if you believe they're talking all of a sudden we have some drop-off in demand because people that conflict expands and you know the nightmare scenario would be that you know a couple of tankers get sunk in the Persian Gulf at the narrow end and oil goes to 200 bucks a barrel I mean you know the bets are off but boy if we see that scenario I can't think of that better business
If you believe Theyre talk and all of a sudden we have.
Some drop off in demand because people that conflict the expands in.
The nightmare scenario would be that couple of tankers get sunk in the Persian Gulf at the narrow and then <unk>.
Oil goes to 200 Bucks a barrel I mean.
Nicholas Joseph: We think the half that stays in Southern California for sure will stay there or come back and some of some of the rest will also revert back to Southern California. I'm not smart enough to know whether we're going to get half of it back or three quarters of it back, but we'll get a pretty substantial portion of it back. It will be more into the first or second quarter next year before you see the numbers.
That's our off but boy if if we see that scenario I can't think of a better business.
Speaker 5: uh... to to want to be and i hate to see that scenario happen but actually on a relative basis it should be good for our business because it will mean that people will first of all inventory becomes really important
Two to one of the and I hate to see that scenario happen, but actually on a relative basis. It should be good for our business because it will mean that people will first of all inventory becomes really important.
Speaker 5: And it means that it's yet one more uncertainty, like the pandemic, like the earthquake, like all these other disruptions that we've seen that will push the general posture of companies from just in time to just in case. So.
And it means that it's yet one more uncertainty like the pandemic like the earthquake like all of these other disruptions that we've seen that will push the general posture of companies from just in time.
Chris: Chris, when I had anything. Yeah, I'll build on that by saying is the market is digesting the demand and supply picture. There's a me described. We are beginning to see some differentiation in submarkets where L.A. Orange County is proving more resilient and inland empire is a bit soft.
Two just in case.
Speaker 5: I hate to say it would be good, because it's an awful situation that's going there, and before this is all over, a lot of innocent people are going to get killed, and I don't want to see this happen. But I don't think its impact on the business on a relative basis is going to be...
So I hate to say it would be good because it's an awful situation thats fine there and before this is all over a lot of innocent people are going to get killed and I don't want to see this happen, but I don't think its impact on the business on a relative.
Kamil Bonnel: And the next question comes in the line of Kamil Bonnel with Bank of America. Please proceed with your question.
Tim: Good morning. First, the clarification that I want to get your thoughts on guidance. Can you clarify if the so-called market rent change in the opening remarks is on a sequential or annual basis? And then appreciate majority of your leasing for 2023 has been addressed. And there's little that could change your court outlook from here, but one of better understand the level of conservative being acted into guidance, looking into your and what could change your views more positively or negatively.
This is going to be.
Speaker 5: terrible. I'm honestly more worried about the Fed overdoing it than that conflict escalating, but you know, those things are very hard to predict.
Terrible.
Amit honestly more worried about the fed overdoing it.
Then that conflict the escalating but you know.
Those things are very hard to predict.
Speaker 24: I think that was our last question. So we really appreciate your participation. Really look forward to seeing all of you at our upcoming investor day. And I promise it will be really good. So take care. This concludes today.
I think that was our last question. So we really appreciate your participation really look forward to seeing all of you at our upcoming Investor day, and I promise it will be really good so.
Take care.
This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a great day.
Tim: Thank you. Hey, it's Tim. Yeah, just the clarification on the first part that was a quarter of a quarter number in so-called the 2% decline. And then in terms of what could change the fourth quarter, the answer is very little at this point. You know, certainly on the rent change side of things, most all of that leasing is already inked. We could have some surprises. It is very moderate. I would say on the occupancy side, but I actually don't expect that with a pretty tight range on occupancy, as you know. So I don't think you will see anything. Take us outside of our government.
Okay.
Okay.
Okay.
Yeah.
Ron Camden: And the next question comes in the line of Ron Camden with Morgan Stanley. Please proceed with your question. Hey, just a quick two part of follow up just one on the development starts and the data centers, which is intriguing. Any way to put some numbers on that on how many starts can be done annually? Is it 200 million? Is it 500 million? Like how big can this get as a follow up number one?
Okay.
Speaker 25: And.
Ron Camden: And then number two on sort of the rent growth. Appreciate we want to stay away from sort of specific numbers, but as you're sort of thinking about next year, what are sort of the key markets Southern California being one potentially being sort of a headwind? Maybe can you talk about what are some of the, you know, the neutral or potential tailwinds in terms of markets for next year?
Tim: Thanks. Okay. Your first question was great advertising for our investor day because that's what was going to devote the time to is understanding our essentials business, our data center business and all those things. So let me defer answering that question to that date. And by the way, even on that date, you're not going to get as specific an answer as you would like. I just tell you that in advance because these are very lumpy and it depends what quarter of what your ideal lens is.
Tim: Chris, do you want to address the second board? Yeah, absolutely. You know, I might start by just saying one way to think about rent growth going forward. It's to think about the replacement cost math. We have really seen construction costs prove resilient and replacement costs prove resilient. And the interest rate dynamic that I mean described earlier translates to the rents that are required to warrant new development. So over a medium term horizon couple years, that's going to play one of the most important factors into evaluating rent growth.
Tim: As it relates to different markets, which was your question, I think it's probably fair to point to the Tim's comments on the markets that have proved the strongest so far this year. Mid-Atlantic, Sunbelt Northern California markets that stand out in my mind in the US. And there is a range of them globally, whether it's Toronto, Mexico, Germany and the Netherlands.
Chris: So that's that's what I would look to.
Anthony Powell: And the next question comes from the line of Anthony Powell, with Barclays, please proceed with your question. Hi, good morning. I guess one more on market rent growth. I think last quarter of your year gave you a 2023 forecast of 79%. I don't know if you updated that today and are you going to be providing those who kind of updated on quarterly basis more forward. So hey, the view is 7% in the United globally in the U.S. We're about mid-sixes so far this year, so that implies growth in the fourth quarter as we described earlier.
Tim: And then as it relates to forward guidance, I'd like to underline our upcoming investor day in December as the time to look for new information.
Michael Carroll: And the next question comes to the line of Michael Carroll with RBC Capital Markets. Please proceed with your question. Yeah, thanks. How does the 150 to 200 million square feet gap between supply and demand over the next three quarters compared to your expectation for all of 2023? Now, correct me if I'm wrong. I believe that you highlighted that there's going to be about 150 million square foot gap in 23. I mean, is that still a fair assumption or has this delay in demand due to the market uncertainty has kind of widened that out a little bit?
Chris: Hi, thanks for the question against Chris. So just to give you the total numbers, we are on pace to see 490 million square feet of deliveries in the United States this year against the 195 million square feet of net absorption. So that gap is wider and some of that relates simply not so much to the softness in demand that you're describing, but the timing of deliveries of the pipeline. If anything, our view of where the pipeline is going has come down not gone up over the last 90 days related to the trend and starts.
Chris: And so really it's it's really timing as a release that gap. Yeah, but I would say our previous forecast did not anticipate the sudden jump and rates that has come in the last month and a half. You know, we thought that treasuries were going to settle in the mid threes, not mid fours, maybe mid to high threes and not mid fours or approaching five so that I think has taken and shifted some of the demand out.
Chris: But the thing that encourages me and we'll have to see the wait to see this is that companies are not shutting down their dialogue with us in terms of their long term needs and are built to suit. Discussions are every bit as good as they've been, you know, across most cycles, but they're not pulling this trigger just yet given that those things generally involve major capital expenditures and those are all being scrutinized by the fee suite pretty, pretty tightly these days.
Vikram Mahorda: And the next question comes in the line of Vikram, Mahorda with Mizuhau, please proceed with your question. Thanks, I just wanted to get a better sense of you talked about differing growth, I guess, across soak in rent growth, across so cal mid Atlantic, I think you referenced some belt. Can you just give us a better sense of the magnitude of this dispersion and I guess Chris, do you expect this dispersion to continue over the next call it six to 12 months.
Chris: So the magnitude of the dispersion, so just to be clear, in terms of strengths versus weaknesses, I want to be sure that wasn't conflated. The strong markets include the Mid Atlantic, Sunbelt, Northern California, and really they're only a handful of soft markets. So Cal, we've talked about India's a market that's been flat all year. In terms of dispersion, there is a fair amount of, sameness in the trend, whether you look at it on a quarterly or a calendar, your basis.
Chris: So rents are trending in the annualized rate from the, from the third quarter of the team discussed, with some markets moderately ahead, like the strong markets that described, and then just really one or two markets that are notably weaker. So I guess I suppose there's that dispersion.
Mike Mueller: And the next question comes from the line of Mike Mueller with JP Morgan, please proceed with your question. Yeah, hi, I know you know you've used land in the past for higher and better uses, but do you think you'd be looking at these development, the data center developments, to the same degree that you would be looking at them, if you weren't seeing normalizing of a traditional industrial demand? Absolutely, because the margins embedded in the data center development, Mike are orders of magnitude higher, certainly on the basis of market value, under industrial use or purchase products under industrial use.
Mike Mueller: So we would be doing that even if the market was tight as a drum. And by the way, let's not get carried away. The market is in the high fours occupancy, I mean vacancy, sorry, that that is, you know, absent 21 and 22, I would have said that would be my, you know, my Christmas present would be, you know, vacancy rates that are stuff five in any part of the cycle other than the last couple of years.
Mike Mueller: So, so the markets are strong, but the data center opportunities, if you can get the power, the demand is there and it's been sort of boosted by AI and a bunch of other things. So we see sort of a rush of the large players and they're all big credit players into the business and they can't get enough of this stuff to keep up with demand.
Bill Crow: And the next question comes to the line of Bill Crow with Raymond James. Please proceed with your question. Yeah, thanks.
Tim: Two quick questions. First of all, in the economy, I'm wondering if you're seeing any changes to your watch list among your tenants or any sectors in particular that are starting to show weakness. And the second question is really in order to get the kind of 9% arrow, arrow, the returns on acquisitions. Do you have to target longer walls or how do you get that if we don't see this dress among current holders or owners?
Tim: Thanks. So our credit issues are fairly modest and they usually involve retailers and we have a built in 85% plus mark to market on those leases that we've identified as potential potential risks. And you know, we've actually captured some of those threats and already improved our position by buying out those leases or just getting him back and releasing the space in the short period of time. So I don't think credit is a particularly important consideration in this in this cycle.
Tim: Michael, the second question on the wall to extended wallets being necessary for the kind of IRRs were targeting in acquisitions. We're using the same least terms in acquisitions than we always have been. There's not, I mean, if you look at 30 years of history, I mean, our wallets have been between four and a half years and six years or something like that on average and our releases. So it doesn't move around that much.
Tim: You know, that I would just pile on there that we look at these opportunities of whether it be one to three or four years of negative leverage as an opportunity, really. We look at total return on every deal. And again, we take it to our filters of quality. Mark the market and, you know, whether we want to hold a long term or not. And then we layer that on with our potential essentials revenues and synergies and otherwise. So wallets, one consideration. So are all these other factors.
Bill Crow: And the next question comes from the line of blame heck with Wells Fargo. Please proceed with your question. Great. Thanks. Just wanted to follow up on guidance. You touched on this a little bit. The guidance implies a decrease in FFO in the fourth quarter. Can you just talk a little bit more specifically about some of the moving pieces there and one time items that are influencing the numbers and the third or fourth quarters. And whether any event noise is going to persist into 2024. Yeah, answer the last part.
Tim: No, I don't expect anything into 2024. Basically of the three cents, a couple of pennies that were related to termination income from some leases that were canceled. And then higher interest income. There's about two cents there. I would call that that's permanent to the year. And then the other penny in the quarter, I would say is more of a timing issue, specifically in taxes will see some lower taxes in the third quarter, but higher again in the fourth quarter.
Tim: So if you take that with with regard to the role, if you take that three cents out, you're basically rolling from what's called 130 to 128 in the fourth quarters, what's implied in our guidance. And basically you would you would roll in a lie forward. We're going to probably add two cents from just base, same store growth quarter of the quarter. And then the clients are going to come from mainly ramping of development.
Tim: We see much more investment in land and CIP starting to build. And you should be aware in your models, you know, our cost of funding development in the short term is essentially six percent think of that as so for plus plus our line rate. We're capping interest at our in place debt is how this works. That's that three percent. So in the short term, that's a drag on core FFO. So being mainly in interest expense, obviously over the long term, the margin and value creation is there, but we will see that drag pick up as developments ramp.
Ki Kim: And the next question comes from the line of key bin Kim with truest securities, please proceed with your question. Thanks. Good morning. Two quick ones here. First on a utilization rate that ticked down a little bit this quarter. I was wondering if you can provide any more color around that. And second, if you look at the larger development landscape and look at competitors are developing, I would assume that the pressure for them to lease up space and maybe they have to pay back the loans to banks probably increases as we as we move forward.
Ki Kim: You know, I'm not sure how big these developers are or how much capital they have behind them, but is there any risk that as these developers look to secure tenants that could drive rental rates lower going forward?
Tim: Hey, Ki Ben, I'll take the utilization question. Thanks for it. As you see on the page and supplemental, there are multiple metrics on the page. And we look at all of them in totality and additional ones that are having included in this supplemental. So we have a range of proprietary data, whether it's our IBI survey, tenants in the market, customer decision making timeframes are sales pipeline, specific to the utilization data that lags that does not lead economic and real estate cycles.
Tim: We've seen that over time. And so what I think this is best understood in the context of today's retail sales numbers, which shows a resilient consumer that is upperforming expectations and leading to lower utilization. Yeah, on the second issue of opportunities, there are a lot of merchant developers that were bank finance and active in the market. And they are just about completing their projects now. They have some interest reserve, obviously built into their lease up plans, but their lease up plans are going to get extended.
Tim: So actually, I think what's going to happen is that they can't really be afford to rent the space of the lower rate. I think they're more likely to actually sell their positions to people with stronger balance sheets. And we've already seen and taken advantage of a couple of instances like this. So don't be surprised to see us buy some vacant completed shells at at this cancer replacement cost because, you know, it's because of our view on demand and supply would 65% decline in supply.
Tim: We think if you get into late 24 early 25, we're going to be in a pretty strong market. So this is where balance sheet matters. This is where quality of location and product matters. And we're going to be very selective about the project that I described, but, but that's why we've been building our balance sheet and keeping our leverage around 20% all this time. This is where we put it to work.
Vince Tibone: And the next question comes in the line of Vince to bone with Green Street. Please proceed with your question. Hi, good morning. I have a follow up on an earlier comment about about 20% of your markets. You're managing for occupancy, not pushing rent. So what are those markets where industrial landlords have less pricing power today? Or Vince, we covered a couple of them talked about Southern California point to Houston, Indianapolis, and then outside the US, the softest market might be Poland and China and China. And I think I'd offer now that market vacancies are beginning to gap out again.
Tim: I think we're going to see quality make a bigger difference in terms of portfolio mix.
Vikram Mahorda: And the next question comes in the line of Vikram. Horta, with Mizuhau, please proceed with your question. This is one of the get your thoughts to describe one thing more broadly. You know, two times I guess one just the whole reshoring team that, you know, we're hearing more and more about. And in fact, in just Amazon, as you know, they've put a lot of capital into the into the course and across the country.
Vikram Mahorda: I'm just wondering, sort of when you marry those two things together, is there, you know, sort of greater investment, kind of moving towards the Midwest, or more manufacturing pocket? Is that sort of an opportunity for, you know, to be able to go in forward? So generally speaking, I would say on where manufacturing is taking place in Asia, there's a lot of manufacturing still in Asia. It's not all in China. And it had been gradually declining in China in the last couple of years anyway.
Vikram Mahorda: It was for some first moving to Western China. And then it was, it was spreading to other places in Southeast Asia, but they're going to be strong flows still from those places. It's just not going to be all from China, but the container doesn't care where there's coming from, you know, somewhere else or China. It lands in the same port. Secondly, demand in our product is mostly driven by consumption and not manufacturing.
Vikram Mahorda: In manufacturing, the finished product ends up in a container and on the truck or ship. So the warehouse is a truck or ship so that manufacturing per se doesn't, doesn't generate a lot of demand when those containers land in places where consumption takes place. That's when the demand is generated for deconsolidation. Now those markets happen to be in populous parts of the country, because that's where the consumption is. And those markets tend to be high barrier to entry markets.
Tim: So we don't think the dynamic of unshoring to these extent that it exists is going to change things around all that much. The biggest beneficiary of unshoring has been actually near shoring and it's been in northern Mexico, northern Mexico markets are 100% occupied and there's insatiable demand for product in those markets. And most of that is for our basically distribution buildings that are used for manufacturing purposes. So that's where we've seen the material demand. If there's more demand coming for manufacturing in the USA, we haven't really seen it. And if we do see it, we'll be the beneficiary of it because we're well positioned in those central markets as well.
Tim: And our last question comes from the line of Blainehack with Wells Fargo. Please proceed with your question. Great. Thanks. I mean, just a bigger picture question for you.
Tim: Can you talk about how you're thinking about managing exposure to geopolitical risk and instability and maybe to what extent the latest turmoil in the Middle East could impact your operations if at all? Yeah, I think the effect is going to be indirect because, you know, the Middle East is not obviously a source of product or exports or we're not active in any of those markets. So it will be a second order effect on the macro economy.
Tim: And, you know, if the Fed remains very aggressive on rates. If you believe they're talk and all of a sudden we have some drop off in demand because people that conflict expands. And, you know, the nightmare scenario would be that, you know, a couple of tankers gets sunk in the Persian Gulf at the narrow end and oil goes 200 bucks a barrel. I mean, you know, the bets are off. But boy, if we see that scenario, I can't think of the better business to want to be and I hate to see that scenario happen, but actually on a relative basis, it should be good for our business because it will mean that people will, first of all, inventory becomes really important.
Tim: And it means that it's yet one more uncertainty like the pandemic, like the earthquake, like all these other disruptions that we've seen that will push the general posture of companies from just in time to just in case. So I hate to say it would be good because it's an awful situation that's going there and before this is all over, a lot of innocent people are going to get killed and I don't want to see this happen, but I don't think it's impact on the business on a relative basis is going to be terrible. I'm honestly more worried about the Fed overdoing it than that conflict escalating, but, you know, those things are very hard to predict.
Tim: I think that was our last question, so we really appreciate your participation, really look forward to seeing all of you at our upcoming investor day and I promise it will be really good, so take care.