Q4 2023 Prologis Inc Earnings Call
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Greetings and welcome to the pro largest fourth 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 and as a reminder, this conference is.
Recorded.
It is now my pleasure to introduce to you Jill Sawyer as V P with Investor Relations. Thank you Jill you may begin.
Jill: Thanks, John and good morning, everyone welcome to our fourth quarter 2023 earnings call. The supplemental document is available on our website at <unk> Dot com under Investor Relations.
Jill: To state that this conference call will contain forward looking statements under federal Securities laws.
Jill: 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.
Jill: Looking statements are not guarantees of performance actual operating results may be affected by a variety of factors for a list of those factors. Please refer to the forward looking statement notice in our 10-K or other SEC filings.
Jill: Additionally, our fourth quarter earnings press release, and supplemental do contain financial measures such as <unk> and EBITDA that are non-GAAP and in accordance with Reg G. We have provided a reconciliation to those measures.
Speaker Change: I'd like to welcome Tim Orange, our CFO, who will cover results real time market conditions and guidance amid Morgan M. A C E O and our entire executive team are also with US today with that I'll hand, the call over to Tim. Thanks.
Tim Orange: Thanks, Joe I'd like to start our call by recognizing and thanking our team for the incredible effort given over 2023, while it was a turbulent year in many ways. We ended it by delivering nearly 11% earnings growth and driving our 12 year earnings CAGR since merger to 10, 3%, we deployed over $7 billion into new investments.
Tim Orange: <unk> raised nearly $2 billion of strategic capital in a very challenging environment and delivered excellent operating results, while serving and growing customer relationships.
Tim Orange: We're also appreciative of the opportunity we had at our Investor Forum last month.
Tim Orange: Our vision and outlook for the company over the coming years.
Tim Orange: The environment is setting up in line or better than our expectations with development starts across the market continuing to decline by two thirds from peak and an improvement in customer sentiment that appears more constructive than just 90 days ago.
Tim Orange: That said, we still see challenges in some submarkets as near term outsize deliveries are met with still recovering demand, but our thesis remains the same as we've been describing for over a year and detailed last month in New York, which is that the supply cliff will converge with normalized demand later this year delivering an environment conducive to strong market rent.
Tim Orange: Growth.
Tim Orange: We believe that annual market rent growth will average between four and 6% over the next three years with 2024 being modestly positive and ramping thereafter.
Tim Orange: Turning to our results. We finished the year strong with quarterly core <unk>, excluding promotes of $1 29 per share, bringing the full year to the top end of our guidance of $5.10 per share.
Tim Orange: While market occupancy declined by approximately 100 basis points, our portfolio gained 10 basis points to end the year at 97, 6%.
Tim Orange: Net effective rent change over the quarter was 74%, bringing the full year to a record of 77% with another impressive results out of southern California at over 150 per cent. A reminder, that it remains the strongest market for cash flow growth. Despite near term choppiness given the large quantum of its lease mark to market.
Tim Orange: And again same store on a net effective basis was seven 8%, while cash was eight and a half per cent.
Tim Orange: We started over $2 billion of new developments in the quarter across 46 projects in 27 markets with nearly 50% of the activity and build to suits.
Tim Orange: In energy and as seen in our new supplemental disclosure, we stand at year end with approximately 515 megawatts of solar and storage and operation with an additional 70 currently under construction.
Tim Orange: We had a quiet quarter on the financing front, raising approximately $300 million, but our full year of activity closed out at over $12 billion at a weighted average rate of four 5% in term of 10 years. Our total debt portfolio remains at an overall in place rate of just 3% with more than nine years of average remaining life.
Yeah.
Tim Orange: Turning to market conditions, the increase in fourth quarter market vacancy was in line with our expectations and driven by demand remained moderate as customers exercised caution in their spending while completions hit an all time high.
Tim Orange: Development starts however have continued to fall across the U S and Europe, extending and deepening the future supply shortfall.
Tim Orange: On the ground our teams are seeing revived customer interest with healthy showing activity to start the year.
Tim Orange: This includes build to suit inquiries, which we expect to remain active for Prologis. Following a strong year in 2023.
Tim Orange: Our proprietary metrics point to normal levels of activity with proposals in gestation timing in line or a bit better than historical norms.
Tim Orange: Utilization declined in the quarter to approximately 83% in keeping with this morning's report a decrease in the inventory to sales ratio. We view this positively because utilization ought to increase from here as stronger than expected retail sales over the fourth quarter and holiday season drove lower inventories, which will need to be replenished.
Tim Orange: Turning to market rents are global views that rents declined this quarter by 90 basis points, but predominantly impacted by an estimated 7% decline in southern California.
Our full year view is that global market rents grew by 6% just below our expectations ultimately driving or at least mark to market to end the quarter at 57% after capturing approximately $100 million in realized NOI growth from leases rolling up to market.
Tim Orange: The outlier on rent growth is clearly southern California, while our portfolio was only two 6% vacant at year end growing availability has made leasing very competitive.
Tim Orange: Combined with a 110% increase in rents since 2020, the rents retracement is understandable historically, there has never been a market where the delta between expiring in market rents has been so large that it provides ample room for property owners to deviate from market.
Tim Orange: In order to attract customers.
Tim Orange: So looking ahead the positive news is that we were watching two trends reverse. The first is that the supply pipeline is clearly empty with little in the way of new starts and the second is that the escalating issues in both the Suez and Panama canals.
Tim Orange: With the resolution of the West Coast Labor negotiations are moving shipment volumes back to the west.
Tim Orange: While this bodes well for Socal and still early we are watching east coast Port markets more closely.
Tim Orange: In any event all of these disruptions are reiterating the underlying need for resiliency and adjusting case approach to inventories.
Tim Orange: Summing this all up globally, we recognize the high volume of near term deliveries that need to be absorbed into our markets over the next few quarters, but we are very pleased with our ability thus far to build occupancy drive rents and illustrate more differentiation in our portfolio as market vacancy growths.
Tim Orange: Okay.
As for strategic capital and valuations, we saw U S values declined approximately five 5% during the quarter, which was our expectation and the reason we paused our appraisal based activity, which includes calling and redeeming capital as well as asset contributions we run an industry leading franchise in which we aim to set the standard for governance.
Tim Orange: Including timely accurate and independent valuations.
Tim Orange: Going out when pronounced of lags in valuations emerge as protected investors and demonstrated how we stand apart as a responsible partner.
With this quarter's value declines and a more stabilized rate environment will resume activity in U S. L S, including the funding of our $250 million commitment announced in the second half of 'twenty three.
Tim Orange: Turning to guidance and all of our share in terms of operating metrics. We are guiding average occupancy to range between 96, and a half and 97, 5% with occupancy likely to step down in the first quarter and rebuild over the course of the year.
Tim Orange: Cash same store will range between eight and 9% in net effective same store growth will range from 7% to 8%.
Tim Orange: We're forecasting net G&A to range between 420, and $440 million and strategic capital income to range from $530 to $550 million.
Tim Orange: We have a very big year stabilization activity ahead of us with a range of $3 $6 billion to $4 billion at expected yields of approximately 6.25%.
On the new deployment front, we are guiding development starts to range between 3 billion and $3 5 billion with estimated build to suit mix of 40%.
Tim Orange: And we plan to take sale portfolios to the market over the year with expected proceeds to range between $800 million and $1 2 billion and Additionally forecast $1 75 to two 5 billion and contributions to our strategic capital vehicles.
Tim Orange: In the end, we are forecasting GAAP earnings to range between $3 20, and $3 45 per share.
Tim Orange: Core <unk>, excluding promotes will range from $5 50 to $5 64 per share for <unk>, including net promote expense will range between $5 42, and $5 56 per share each a bit higher than our preliminary guidance at the investor for them well.
Tim Orange: While we do not forecast any promote revenue at this time.
Tim Orange: There are some small opportunities that do exist and fever prolonged just.
Tim Orange: And our new P. J L F vehicle in Japan.
Tim Orange: In closing, we know that the market is not yet out of the woods with regards to incoming supply, but the combination of a stronger backdrop continued low level of starts in a calmer capital markets environment has us optimistic that 'twenty 'twenty four will be another great year as.
Tim Orange: As you know from our Investor day, we have many initiatives in flight designed to add value beyond our real estate and because of our real estate.
Tim Orange: We look forward to continuing to execute on our plan and providing you updates throughout the year.
Tim Orange: And before we move to Q&A I'd like to get ahead of questions, which have grown a little more frequent in recent quarters surrounding market rent growth.
Tim Orange: Unintentionally, we set an expectation that we could forecast market rents to a single point of accuracy and increasingly short time periods and honestly, we're just not that good.
Got no way from a practice that was originally aimed at high level and directional.
Tim Orange: So what we've elected to do in order to help investors without perpetuating. The issue is to simply provide high level rent growth expectations on a rolling 12 month forward view.
Tim Orange: As mentioned earlier in terms of our three year CAGR of 4% to 6%. We believe we will see modestly positive rent growth aligned with inflation over the next 12 months and we'll continue to update this rolling view on our future calls.
Tim Orange: With that we will now take your questions operator.
Speaker Change: 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 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.
Speaker Change: While we poll for questions.
And the first question comes from the line of Tom Catherwood with BTG. Please proceed with your question.
Tom Catherwood: Excellent. Thank you.
Got it.
Tom Catherwood: Maybe taking a look at your at your leasing spreads.
Tom Catherwood: Obviously very strong performance during the quarter, but also a big spread between prolonged just share and the kind of overall portfolio performance.
Tom Catherwood: Which suggests stronger performance out of the U S.
Tom Catherwood: Going forward into 'twenty four are you expecting this gap in performance to tightened at all or should the U S continued to lead the way as far as spreads go this year.
Speaker Change: I'll take that I think Tom that it will actually be relatively similar you know theres a pretty long tail.
Speaker Change: How the lease mark to market is going to.
Speaker Change: Affect quarterly rent change it will sustain for quite a while in other words and since it's much more pronounced in the U S than anywhere else in the World I would expect we are we do see that continue to statewide.
Speaker Change: Thank you and the next question comes from the line of Ronald Camden with Morgan Stanley. Please proceed with your question.
Ronald Camden: Hey, just two quick ones for me. So one we've been looking at a lot of the broker reports talking about rising availability rates you guys have flagged it as well.
Ronald Camden: Just curious what you guys are seeing and sort of the sunbelt markets versus sort of the coastal.
Ronald Camden: That's trending sort of in line or what's your expectation and so forth.
Ronald Camden: Would be the first.
Ronald Camden: Hey, it's Chris Cade and I'll take that so the year is the year closed out with market vacancy rates are at mid five percentages like Tim described and the vacancy rates remained lower on that or on the coasts excuse me, so both east coast and West Coast.
Ronald Camden: And higher in the Sunbelt, what we are seeing as it relates to pricing as there was better pricing better rent growth in the sunbelt markets outperforming the codes in 2023.
Speaker Change: Great and if I could just follow up on the market rent growth comment I think you said rolling 12 months sort of inflationary plus or minus so clearly that's implying sort of an acceleration in 'twenty five and 26.
Speaker Change: As supply comes down to that is that sort of how you guys are thinking about it.
Speaker Change: That's exactly right.
Speaker Change: Thank you and the next question comes from the line of Craig Mailman with Citi. Please proceed with your question.
Craig Mailman: Great. Thanks, two quick ones here I guess.
Craig Mailman: First question would be could you guys just go through what the uptick in property improvements and the Capex section, where there is a pretty big jump.
Speaker Change: In <unk> versus prior quarters, and then just second Tim you had kind of touched on this that sentiment is improving here.
Speaker Change: There may be better traffic going back to the west coast with everything going on in the Red Sea.
Speaker Change: That just in case.
Speaker Change: To be more prudent inventory method, there just kind of curious because big tenant leasing has been kind of slower over the last 12 to 18 months are you seeing any early green shoots of that improving and you guys are talking with customers.
Speaker Change: Yes, I'll take the first part here Craig on the Capex.
Speaker Change: If you take a look at the supplemental I'd first start by widening out on overall capex before staring at property improvements and there is just a good example here of the need to look at annual are trailing numbers as this can be a pretty volatile number quarterly here you can see on the full year as a percentage of our NOI.
We were about 14% or roughly 15% the prior year and focusing in on property improvement side suggests the same that you have to look at a trailing basis. We we do tend to see higher levels of property improvement activity in the fourth quarter just by nature.
Speaker Change: But we're catching up on the full year you can see we averaged 12 cents on the year versus the 21 that we had in the quarter. So that's really just a timing issue.
One more thing that you can see here as the year over year average on that basis 12 versus the prior year 10, and I'll explain that differential as you know just some inflationary.
Speaker Change: Piece and then the second would be some deferred maintenance and work that we're executing on the Duke portfolio.
And maybe this is Dan Craig on that second part of your question related to tenant sentiment.
Dan Craig: I'd say at the Investor Day, we had talked about a marginally better.
Dan Craig: Tenant sentiment.
Dan Craig: The Q3 earnings call and I would say, it's even marginally better than that in the last 30 days. This is fueled by our healthy proposal volumes.
Dan Craig: Customer dialogues have been strong 45% of our available space.
Dan Craig: In discussion right now with active proposals.
Dan Craig: We've anecdotally.
Dan Craig: Just a number of conversations with our customer led solutions group are build to suit conversations are.
Dan Craig: Improving as well our overall build to suit pipeline has grown quarter over quarter, so whether that be some of the.
Dan Craig: Issues related to the.
Read see issues in the canal issues or not.
Speaker Change: Chris will have some comments on that yes, I will just go further Craig as it relates to port activity. We went out on a limb in September with a published research reports, calling for recovery in market share and that is really really playing out and the port activities and.
Chris Cade: In November of West Coast ports were up 24% year on year inbound shipments are up even more.
Chris Cade: And that will translate to leasing overtime.
Chris Cade: Okay.
Speaker Change: Thank you and the next question comes from the line of Caitlin Burrows with Goldman Sachs. Please proceed with your question.
Caitlin Burrows: Hi, Good morning, Tim Tim earlier, you mentioned, how development starts are down maybe two thirds from the peak and that Youre seeing little in terms of new starts broadly when we look at your own build to suit.
Caitlin Burrows: <unk> of development. It is up year over year, and then that earlier question just on customer sentiment. So combining all of those pieces. How do you think that impacts your decision to do spec development versus built to suit over the course of this year.
Caitlin Burrows: Caitlin This is Dan I'll respond here a few thoughts for you first of all we started just over $1 billion worth of <unk> back in the fourth quarter.
Caitlin Burrows: So.
Dan Craig: We had talked over the last several quarters about the.
Dan Craig: Mining starts in the marketplace and Thats when we wanted to come out come out of the gate here with some starts and Thats, what youre seeing us do right now.
Dan Craig: We have a pretty healthy.
Dan Craig: Guidance here for 2024 starts.
Dan Craig: <unk>.
Dan Craig: Owned and managed of about $4 billion. If you think about it that's 25 million square feet or so of starts that we could be doing this year and we have a development portfolio right now of about 50 million square feet. So we've got an appetite for spec or build to suit volume. We think is going to shake out in that 40%.
Dan Craig: <unk> as we've projected.
Dan Craig: And then keep in mind, we talked about this plenty at the Investor day, we have $40 billion worth of opportunities and our land bank and we have the ability to make decisions on a quarterly basis, where we're going to build we own this land in <unk>.
Dan Craig: <unk> 50 markets around the globe 300 different sites, so plenty of opportunities there.
Dan Craig: Okay.
Speaker Change: And the next question comes from the line of Keybanc Kim with <unk> Securities. Please proceed with your question.
Ki Bin Kim: Thanks, Dan and good morning, I, just wanted to touch on the development start guidance of $3 billion plus this year.
Dan Craig: Can you just help us break that down versus traditional industrial versus like data centers or other property types.
Dan Craig: And that's a pre lease percentage that youre expecting differ a whole lot and sorry to add a third here.
Dan Craig: Typically how long would that data center developments take to cash flow.
Dan Craig: Sure Kevin This is Dan.
Dan Craig: That fair.
Dan Craig: First of all we gave some guidance on our data center business 30 days ago.
Dan Craig: Investor Day, we talked about over the next five years.
Dan Craig: 20, or so opportunities three gigawatts.
Data centers, 7% to $8 billion worth of investment those numbers have not changed so matter of fact, one thing we couldn't disclose at Investor Day was we started over 500 million worth of data centers in the in the fourth quarter alone.
Dan Craig: You won't see US guide to data centers. These are very lumpy deals and if you think about our data center opportunities we own over 5500 buildings.
Dan Craig: We own or control over 12000 acres globally. So we have one of the most important components of Datacenters, we control the land right.
Dan Craig: We talked about.
Dan Craig: <unk> applications at Investor Day, we talked about a number below 50 that number is now approaching 60, our team is very active.
Dan Craig: Growing that datacenter pipeline.
Dan Craig: And then the third component of it would be customers and we're talking to the big hyperscale or on a regular basis.
Dan Craig: <unk>.
Dan Craig: We think it's prudent for us to.
Dan Craig: To be careful on how we.
Dan Craig: Project out what our datacenter volume will be because theres, a competitive nature to this as well.
Dan Craig: We're negotiating with these customers and we think it's important for us. So we will absolutely share with you when these projects on the horizon.
Dan Craig: But right now our start volume is largely industrial.
Dan Craig: And then keep in mind, our data center business is a part of our long higher and better use business, we're going to build we're going to merchant build these and we're going to recycle that capital into the business, we love so much which is logistics.
Speaker Change: Yes. So your question about how long it will take them to cash flow and there is a wider range than traditional industrial but I would say on kind of powered shells and it's more in the 12 to 15 month range from start and on turnkey, depending on who does it end when the customer doesn't know or we do it it could be long.
Speaker Change: And that by about a year because since the installations are pretty complicated to get these going but all of that is built into the budget and the economics of the of the transaction at this point that Dan made on the negotiating posture is really important I mean, the last thing we want to do there four or five customers out there.
Speaker Change: And it's pretty obvious given the scale of the numbers they can they can figure out.
Speaker Change: Which project is in our guidance for the next quarter. If we wanted to go in that direction and that basically reduces our leverage so we're just not going to do that.
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: And the next question comes from the line of Jay <unk> with Evercore ISI. Please proceed with your question.
Jay: Hey, Thanks, Good morning, I'm wondering if you could just provide a little bit of commentary on the supply and demand trends over the next couple of quarters.
Jay: Previously you said that you think deliveries will outpace demand for the next couple of quarters and then the inverse will happen after that so just any update on that would be great.
Chris Cade: Hi, Jay it's Chris cadence.
Chris Cade: So we project 250 million square feet of net absorption in the calendar year, and 285 million square feet of completions and that's going to be front end loaded, particularly on the supply side and so we think you'll see the vacancy rate rise by another 50 to 75 basis points here.
Chris Cade: In the first half of the year, peaking at 6% maybe six 1%.
Chris Cade: And then making a meaningful move through the subsequent rest of the year and into 2025 and 2026 based on the trend in starts that we've profiled for Ya.
Chris Cade: Let me just punctuate that vacancy rates will go up through the second quarter.
Chris Cade: Don't be surprised by that but we're pretty confident they'll come back down after that.
Chris Cade: Oh.
Speaker Change: And the next question comes from the line of Nicholas <unk> with Scotiabank. Please proceed with your question.
Nicholas: Thanks, I just wanted to go back to the space utilization comment made Tim about feeling that at this point retailers like we have to restock inventories. This is actually a good sign worst case that utilization is I guess I'm wondering if you could give us some remind us sort of seasonally how this may play out historically in terms of.
Nicholas: Leasing demand picking up from <unk> retailers because of that issue of restocking and then.
Nicholas: As well in terms of the lease proposals picking up in the fourth quarter. If you had any benefit already from that industry or even anecdotally you could talk a little bit about.
Speaker Change: Discussions there thanks.
Speaker Change: Yes, so the easy way of thinking about this is is this.
Basically absorption and demand for our product follows two to three or four scenarios as you move through the quarters its backend loaded towards the fourth quarter.
Speaker Change: And that's historically been the relationship because so much of the activity occurs in the fourth quarter and so much of that activity would have been based on anticipation late earlier.
In terms of the Christmas season, so much into sales during the Christmas season that volatility is the most in the in the fourth quarter.
Speaker Change: This year, our retail sales and in particular E com sales were better than People's expectations, and the retailers were cut short and Tony.
Speaker Change: One they were a little overstocked in 'twenty, two and now they're there we're back to being very careful with inventories. So they got caught short of inventories again, that's why utilization is done they're schizophrenic theyre always they always have too much or too little you can never get it right and the good news is that this Christmas.
Speaker Change: Season was.
Speaker Change: Stronger than everybody anticipated.
Speaker Change: Does it take for that to work its way back to normal.
Speaker Change: Okay.
Speaker Change: And the next question comes from the line of Blaine Heck with Wells Fargo. Please proceed with your question.
Blaine Heck: Great. Thanks can you just talk broadly about valuation and cap rates and given the continued movement in the 10 year I guess do you think that pricing is adjusted correctly or could we see continued volatility in the near term and I guess does that potential volatility present, you with any investment opportunity.
Speaker Change: Yeah, we don't think real pricing and real returns have really changed because.
Speaker Change: Our return expectations should've been higher six months ago, because of higher treasury rates and nobody was trading based on those higher return requirements. So nothing really happened. So it was a theoretical.
Speaker Change: Decline in values I think with the treasuries now having come down I know they've gone up a little bit just most recently, but net net they are down.
Speaker Change: I think.
Speaker Change: The reality is the expectations of the market participants and Thats theoretical pricing of assets is converging bottom line. We think we're seeing the near bottom evaluations both in the U S and Europe and I think with this level of stability in sort of bottom forming youll see.
Speaker Change: More volume coming through in terms of real deals.
Speaker Change: Okay.
Speaker Change: And the next question comes from the line of Michael Goldsmith with UBS. Please proceed with your question.
Michael Goldsmith: Good afternoon, and thanks, a lot for taking my question. Another supply demand question, but just as we think about the the clip of new deliveries coming online it sounds like that that drops off it.
Michael Goldsmith: The second quarter.
Michael Goldsmith: There is an extended period of time, we're going to need to lease these up and so <unk> and.
Michael Goldsmith: Flexion.
Michael Goldsmith: When when supply gets better and then combined with what.
Michael Goldsmith: What youre seeing on the demand side does that mean does that happen.
Michael Goldsmith: Through the third quarter and into the fourth quarter or is that kind of happened.
Michael Goldsmith: Who knows to deliveries slow thanks.
Michael Goldsmith: Yeah.
Michael Goldsmith: Hi, it's Chris So I'll start off by offering look the vacancy rates can go up to 6%.
Chris Cade: They are very clear with the whole team is clear on that bear in mind that as a very a very low level in the context of history and so yes. It will take you know there'll be time for vacancy to decline to soak up that availability, but it's it's going from a low level to an even lower level. So it's a bit like the vacancy rates.
Chris Cade: Can I go from six it's going to move to five and a half and likely to five given the supply cliff that we see.
Speaker Change: And the next question comes from the line of Camille Bonnell with Bank of America. Please proceed with your question.
Hi, good morning.
Camille Bonnell: Outlook for development stabilization is quite positive despite the supply environment remaining elevated for the first half of this year. So could you just expand on what the expected timing is around for that and then.
Camille Bonnell: If you can just follow up a little bit more on your comments around tenant inventory.
Camille Bonnell: What are they telling you in terms of how they plan to adapt to any persisting disruption around east coast ports. Thank you.
Camille Bonnell: This is Dan I'll start.
Dan Craig: With your question on stabilization as it is a big year on stabilization for us.
We actually started the year out with some good news late.
Dan Craig: December we actually pulled in for stabilization that we hadn't expected to happen in the first quarter of 2024.
But overall the timing of those stabilization, it's spread out pretty well throughout the year.
Speaker Change: And one number I would just point to us.
Speaker Change: 2024 stabilization volume is 46% leased already which is actually three or 400 basis points above the average at this point over the last several years.
Speaker Change: And coming on to Chris I want to jump in on the on the disruption of the ports, you're really just now seeing the diversions as it relates to the disruptions in both Panama.
Speaker Change: And.
Speaker Change: And the Red Sea and Suez and so it's a bit early for us to see real medium term leasing decisions in response to these disruptions, but number one is a clarification of the ratification of the labor agreement on the West Coast is providing a clear landscape for decision, making and the engines of growth are beginning to.
Speaker Change: Kick in in Southern California.
Speaker Change: Let me make that point a little stronger.
I think all this concern about la is over and it hasnt shown up in the numbers yet, but it will in the next six months. So I don't think it will be sitting here on calls like this worrying about la and its absorption.
Speaker Change: Now we will be worrying about something else I am sure. We will I don't know, whether that's going to be the east coast or a houston or whatever but yeah, I mean, <unk> seen two big movements.
Speaker Change: Not just <unk>, it's also a Panama canal and the water issues there.
Speaker Change: The expense of shipping through the canal.
Speaker Change: Is it leading to more.
Speaker Change: A reversion back to the normal way of doing it which is getting it to a land in Atlanta, Virginia It over.
Speaker Change: But there could be other disruptions that could be something can blow up in the Persian Gulf. So it's very hard to predict those things. The big message is this we can spend a lot of time guessing as to what the share of West Coast East Coast is all of that the point is people thought COVID-19 was the big.
Speaker Change: Non factor and know that Covid is over the world just kind of go back to a stable predictable just in time type of inventory strategy I think each one of these things, whether it's Panama, whether its suez, whether it's <unk> or in the middle East, whether it's something in the Persian Gulf will remind people that they generally need to have a more conservative inventory.
Speaker Change: Strategy and Thats, the big long term driver.
Speaker Change: Which is going to be a tailwind for demand that we haven't really seen play out just yet we're pretty confident that will.
Speaker Change: And our next question comes from the line of Mike Mueller with Jpmorgan. Please proceed with your question.
Michael W. Mueller: Yeah, Hi, do your comments about seeing revived customer interest apply to big box leasing as well.
Michael W. Mueller: Yeah.
Speaker Change: Yes in fact, I would say some of the largest customers that we talk to.
Speaker Change: Our.
To use or use an overused word there are definitely some green shoots their posture is changing from that of <unk>.
Speaker Change: Just hold off.
And that's held off as long as they can because they are building out their networks.
Particularly on the E comm side, and I think given that the economy Hasnt tanked like everybody thought it would a year and a half ago. I think there are tiptoeing out there and with the first couple of doing it I think the rest will follow so.
Speaker Change: So I think the big box guys aren't coming out of the shadows and and taken out some space again.
Speaker Change: Yeah.
Speaker Change: And our next question comes from the line of John Kim with BMO Capital markets. Please proceed with your question.
John P. Kim: Thank you.
John P. Kim: On your commentary on southern California, coming rents coming down 7% can you give the same color on New York, New Jersey, that's a market you've seen a larger decline sequentially in occupancy and discussing issue with port volumes in the canals.
John P. Kim: We are not going to get into accordingly rent forecast and we're not going to get into market by market forecast, we run at $1 2 billion square foot business and I think we R&D in terms of a company of our size and disclosure and details are definitely in the 99 percentile and we just don't have that ability.
John P. Kim: So we're not going to.
John P. Kim: Put some numbers out there that we can't be certain up so.
John P. Kim: So if you don't mind, just let's stay away from that find level a dissection.
John P. Kim: And our ability.
John P. Kim: Okay.
And the next question comes from the line of Nick Tillman with Baird. Please proceed with your question.
Nick Tillman: Sarah you guys touched a little bit on that.
Okay.
Nick Tillman: At your Investor form you kind of mentioned that.
Nick Tillman: <unk> ex U S to outperform our U S and our market rent growth standpoint is still is that still the case and then maybe.
Nick Tillman: Could you just highlight some markets a little bit more incrementally positive on over the last 30 days of activity. Thanks.
Nick Tillman: Hi, This is Chris Yeah, Indeed, we saw.
Nick Tillman: Yeah.
Chris Cade: International outperformed in the fourth quarter. Our view is it will outperform in 2024 and there are a wide range of international markets that are enjoying really strong market rent growth Latin America, both Brazil and Mexico.
Chris Cade: Turning to Europe, probably northern Europe is the strongest and then here in North America. Toronto is a market that is also enjoying outsized growth, yes, U K is outperforming too.
Speaker Change: And the next question comes from the line of Vikram Malhotra with Mizuho. Please proceed with your question.
Vikram Malhotra: Hi, Thanks for taking the questions just two quick ones. So.
Vikram Malhotra: Just first of all going back Chris I guess your comment around $250 million in demand if I heard that correctly 24.
Vikram Malhotra: Can you just give us what's the actual number in 'twenty three you're comparing that to end with your leading indicators just how long does the <unk>.
Vikram Malhotra: The leading indicator sort of take in terms of conversion to leave it. So that's just the first one to understand the comparison and the trajectory and then second do you mind, just giving us some specifics on.
Vikram Malhotra: What youre baking into our numbers for cash rent spreads and where portfolio Mark to market is thank you.
Vikram Malhotra: Hey, it's Chris Thanks for the question Vikram I'll take the first one so 250 million square feet of net absorption in 2024 compared to 192 million square feet of net absorption in 2023.
Vikram Malhotra: We would consult a wide range of leading indicators some of which are contemporary and some that have a nine to 12 months.
Vikram Malhotra: Yes.
Speaker Change: Vikram I'll take on the.
Speaker Change: Gives me, it's Tim on the lease Mark to market I'll, just say again I don't.
Speaker Change: Particularly value the cash view of the lease Mark to market I think is fraught with a few issues, but to answer. The question. We saw it at 49% at the end of the year and I would expect you know we've seen a pretty wide divergence in cash to net effective rent spreads because of.
Speaker Change: A few things that the absolute level of rents has been so high and the bumps has been pretty large around 4% as you've known so the ROE and also Duke.
Speaker Change: So a factor as well of course, so the roughly 2025 points that we've been seeing lately I expect we will see mostly continue into.
Next year.
Speaker Change: Yeah.
Speaker Change: And the next question comes from the line of Todd Thomas with Keybanc Capital markets. Please proceed with your question.
Todd Michael Thomas: Hi, Thanks, just wanted to ask about capital deployment two questions actually first can you talk a little bit more about the acquisition pipeline today and whether you are seeing in.
Todd Michael Thomas: An increase in seller interest to transact more deals coming to market more product hitting the market and then second spread.
Todd Michael Thomas: The spread between stabilized yields and cap rates for both development stabilization is on new starts narrowed in the quarter can you talk a little bit about that trend.
Todd Michael Thomas: And spreads and what we might expect in 'twenty four.
Todd Michael Thomas: Particularly as you move forward just given the mix of build to suits in spec developments and.
Todd Michael Thomas: Some of the higher better use projects that you are ramping up on.
Todd Michael Thomas: Sure Todd This is Dan I'll respond to your questions here first of all yes is the quick answer to your first part of the question regarding the acquisition pipeline. Our teams are out there turn it over every stone.
Todd Michael Thomas: He was a low volume year in the marketplace.
Dan Craig: Last year, and I expect that to be much much higher this year.
Dan Craig: Very strong acquisition pipeline and then spreads on the stabilized yields.
Dan Craig: In our development portfolio.
Yes, we've been talking for the last several quarters about that tightening.
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Dan Craig: Cap rate expansion in that spread tightening and what that would do to impact overall development portfolio and that really just has to do with the cost of capital volatile capital markets and.
Dan Craig: Who knows where that's going to go from here it's certainly.
Dan Craig: I'm going to have something to do with the 10 year and what the tenure does and the volatility in the capital markets, but overall.
We billed in foreign risks in our.
Dan Craig: Overall development portfolio for the numbers that you actually see.
Speaker Change: And that spread go ahead Tim.
Tim Orange: Just highlight I think what were if we look at the development portfolio, you'll see the margin. They are estimated at 22 historically, that's still a very good very good margin and under conservative underwriting assumptions I would remind everybody. We've got an inflated cost of carry in there we've got longer lease up times and things that we expect that will be so.
Tim Orange: I'm pretty confident we'll be several points above that estimated margin anyway.
Speaker Change: And the next question comes from the line of Michael Carroll with RBC Capital markets. Please proceed with your question.
Michael Carroll: Yeah. Thanks, I guess, maybe Chris could you provide some color on tenants mindset to adding more inventory I mean is it fair to say that tenants or at least some tenants have delayed these decisions over the past year, just due to the macro uncertainty and when does this change may have customers discussions changed at all given the holiday season that you kind of.
Chris Cade: As highlighted in how they didn't have enough inventory levels. I mean has that been changing or are they ready to make those investments today.
Chris Cade: Hey, Mike It's Chris I think you might've answered your own question totally agree with the sentiment in the direction you are taking it.
Chris Cade: And there is likely to be.
Chris Cade: <unk> posture going forward and then I would also propose it you can also reach out to them and get their feedback.
I bet you, they're answering as they have no idea.
Chris Cade: I mean, it's just been 16 days rates at 16 17 days since the end of the year, but many of them haven't even added up their numbers and I think those guys Didnt come out with earnings releases until much later, so with Michael's question that was the last one I wanted to thank you for not only this call but also attending.
Chris Cade: Our Investor Day, we've got a lot of great feedback from you and we will make these things better and better over time and look forward to talking to you next quarter, if not before take care.
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation.
Chris Cade: Goodbye.
Chris Cade: Okay.
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Chris Cade: Okay.
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Chris Cade: Hmm.