Q3 2024 Prologis Inc Earnings Call
Greetings and welcome to the Q3 2024 earnings Conference call.
Speaker Change: At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
Speaker Change: Require any operator assistance during the conference. Please press star zero on your telephone keypad and as a reminder, this conference is being recorded it is now my pleasure to introduce you to your host Justin Dang.
Speaker Change: V P head of Investor Relations. Thank you Justin you may begin.
Justin Dang: Thanks, John and good morning, everyone welcome to our third quarter 2024 earnings conference call the.
Justin Dang: The supplemental document is available on our website at <unk> Dot com under Investor Relations.
Justin Dang: I'd like to state that this conference call will contain forward looking statements under federal Securities laws.
Justin Dang: 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.
Justin Dang: Forward looking statements are not guarantees of performance and actual operating results may be affected by a variety of factors.
Justin Dang: A list of those factors. Please refer to the forward looking statement notice 10-K or other SEC filings.
Justin Dang: Additionally, our third quarter earnings press release, and supplemental do contain financial measures such as I thought that on 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 Archer, our CFO, who will cover results real time market conditions and guidance.
Speaker Change: I mean, most of them are CEO, Dan letter, President and Chris Jason Managing director are also with US today with that I'll hand, the call over to Pat.
Pat: Thank you Jonathan and welcome to everybody joining our call.
Pat: Before diving in I would like to share our concern for those affected by the recent hurricanes in the U S and Europe that impacted our employees customers and communities Thankfully our teams are safe and they're proactive customer outreach and assistance has been outstanding.
Pat: Pretty sustained limited damage for such a strong storms.
Pat: Overall, we are pleased with our operating and financial results as the third quarter played out to our expectations, well occupancy and rent softened against the backdrop of positive yes, a good demand we continued to deliver impressive net effective rent change due to the still powerful lease mark to market embedded in our portfolio, which bridges us through.
Pat: This soft patch so the next cycle of rent growth.
Pat: Turning to the quarter Corp. S. All excluding net promote expense was $1 45 per share and included net promote was $1 43 per share.
Pat: These results were slightly ahead of our forecast in the quarter included approximately three cents of income from a prolonged just ventures exit.
Pat: Period, ending occupancy was 96, 2% at our share nearly 300 basis points above the market as the flight to quality continues.
Pat: Net effective rent change was 68% and cash rent change was 44% we captured over $90 million have been alive by rolling leases up to market.
Pat: The portfolio produced net effective in cash same store growth of 6.2, and seven 2% respectively.
Pat: Revenues were impacted by approximately 35 basis points of bad debt, which is elevated from our normal 15 to 20 basis points.
Pat: Bankruptcy filings.
Pat: Broadly the good news is that the space we've taken back as a result has had embedded rental upside of over 60%.
Pat: Our overall portfolio lease mark to market finished the quarter at 34% representing $1 $6 billion of potential NOI.
Pat: Finally on the balance sheet, we raised $4 $6 billion of new debt across the largest center funds.
Pat: The weighted average rate of four 6% and the maturity of approximately nine years.
Pat: In terms of deployment, we had a very active quarter.
Pat: He started over half a billion dollars in development projects, including incremental capital to an existing data center development now pre leased to a hyperscale customer with the turnkey buildout.
Pat: We expanded our land bank driving our potential development opportunity over $40 billion, which now.
Pat: Our first two projects in India that support over 5 million square feet of new development.
Pat: We deployed over $1 $4 billion in third party acquisitions year to date, we have acquired over 14 million square feet of strategic assets at an estimated 20% discount to replacement cost.
Pat: We started development on 54 megawatts of new energy systems. Our momentum here is building and we continue to have and we expect to have generation capacity well over 600 megawatts at the end of this year with good line of sight to our one gigawatt goal by the end of 2025.
Pat: As mentioned Prologist ventures had a successful exit of an early round of investment in the Japanese workforce solution timing just produced a nine times multiple on our investment realizing a 65% IRR beyond.
Pat: Beyond the economics, our strategy and supply chain venture investing has delivered valuable insights for prologis and our customers.
Pat: Finally, zebra for largest our strategic capital vehicle in Mexico successfully closed a tender for this year is a therapy of which it now owns nearly 80% enhancing its leadership position in one of our best performing and highest growth global markets.
Pat: Turning to the operating environment conditions remain soft in many of our markets and as we've described over the last few quarters. This is despite healthy G. D P and consumption growth, we ascribed a weaker relationship between economic output and industrial absorption to be availability builds into the supply chain to Covid <unk>.
Pat: Generally earmarked for resiliency.
Pat: How available to operators as a source for cost containment.
Pat: But ultimately the ability to rely on this excess is diminishing as utilization reaches a level that will force decision, making an expansion the pace of which will vary by market.
Pat: Many customers are making progress in reducing this capacity through growth, while others are gaining efficiencies through consolidation.
Speaker Change: Yeah, and it's all serving to hold net absorption below pre COVID-19 levels impacting rents.
Speaker Change: Globally, we estimate that market rents decreased approximately 3% this quarter and roughly half this amount when excluding southern California.
Speaker Change: As we noted before southern California will take the longest to reach equilibrium.
Speaker Change: Activity has improved the remaining amounts of excess capacity will simply take time to work through that said, it's important to keep this context, our socal portfolio generated 84% rent change on commencement this quarter, even as it led the globe in market rent to claim a great example of the interplay between the spot reduction in rents.
Speaker Change: Against our lease mark to market.
Speaker Change: This has us well positioned to navigate the cyclical downturn.
Speaker Change: Taking it a step further we see the structural investment case for Socal is strengthening with new supply barriers that come into effect from recently enacted legislation and continued focus on carbon emissions.
Speaker Change: As always the rent picture is mixed and there remain many markets that are either flat or positive such as Houston, Atlanta, and Nashville, Northern Europe and of course, Latam remains very strong.
Speaker Change: Overall, a bottoming process is underway and we expect demand to remain soft in the near term.
Speaker Change: Looking ahead market vacancy is at or near its peak oil hovered, there as utilization of groups and global rents will bottom sometime mid next year.
Speaker Change: It stands to reason that there's a near term growth will be affected by the past market rents and occupancy have already taken.
Speaker Change: We remain very positive on the outlook for our business as vacancies are still low in the context of history starts are down significantly and supply deliveries are falling below their pre COVID-19 levels.
Speaker Change: Additionally, with replacement cost rents approximately 15% above today's market, even with land values marked down by a third from their peak the long term growth trajectory remains highly favorable.
Speaker Change: Moving onto capital markets, we've seen improved pricing and activity in the transaction market.
<unk> continued to grow U S and European values again increased approximately 1% in the quarter and Mexico saw an impressive two 2%.
Speaker Change: But the bottom seemingly at our strategic capital business had its most productive quarter in the last two years, raising a net $460 million overall.
Speaker Change: Overall, it appears private market sentiment is stronger than the public markets during the quarter transaction volumes increased and Unlevered IRR is compressed another 25 basis points.
Speaker Change: In terms of guidance, which I'll review at our share we are tightening our forecast for average occupancy to a range of 96 to 96, 5% and also tightening our forecast for cash same store growth to a range of six 5% to 7%.
Speaker Change: Our net effective same store growth is for a range of five 5% to 6%, which has been tightened and reduced modestly at the midpoint for the increased noncash write offs, we expect from higher bankruptcies in the balance of the year.
Speaker Change: We are tightening and slightly reducing our G&A guidance to a range of $415 million to $425 million and tightening our range for strategic capital revenue to $525 million to $535 million.
Speaker Change: We are reducing our overall development starts guidance to a range of $1 75 to 2.25 billion, which reflects both slow decision, making and build to suits and discipline on our part and deferring new spec development amid stubborn demand of course, where are the best positioned to react quickly as conditions warrant.
Speaker Change: With approximately $8 billion of pad ready development opportunities.
Speaker Change: We see attractive acquisition opportunities in the market and are increasing our guidance here, taking a range up to $1 75 to 2.25 billion.
Speaker Change: And finally, the forecast for a contribution of disposition activity is increasing to a new range of $3 billion to $4 billion.
Speaker Change: Selecting the improving transaction market and stronger fundraising and strategic capital.
Speaker Change: The positive spread between our buying and selling irr's year to date has been approximately 100 basis points.
Speaker Change: Putting it altogether, we are increasing our GAAP earnings to a range of $3 35 to $3 45 per share.
Speaker Change: Or if that's all including net promote expense will range between $5 42, and $5 46 per share core <unk>. Excluding net promote expense will range between $5 49, and $5 53 per share a one cent increase from our prior guidance.
Speaker Change: Well, obviously excludes our development gain guidance, but it is noteworthy to highlight our increased to a new range of.
Speaker Change: $375 million to $425 million.
Speaker Change: In closing, we had a very productive quarter in which we delivered strong operating results high occupancy high rent change and meaningful same store growth in a challenging market environment.
Speaker Change: Long side that performance, it's clear that we are focused on the future as evidenced in our very active deployment, expanding our global reach and product offerings.
Speaker Change: <unk> is well positioned to capitalize on the structural demand for logistics real estate and our focus on operational excellence customer Centricity and value creation will continue to drive strong performance across all market cycles.
Speaker Change: System with this drive for excellence I'd be remiss to not highlights our annual groundbreaker swarm, which we just held in London.
Speaker Change: Featured some of the most innovative companies of our day and we heard from the likes of the legendary Fred Smith of Fedex answer Tony Blair amongst many others Brown breakers deepens, our customer relationships and builds upon our thought leadership across the supply chain and its emerging foundation for clean energy and digital infrastructure.
Speaker Change: It was great to see so many of you there and a replay of the event is available on our website.
Speaker Change: With that I'll hand, the call back to the operator for your questions. Unfortunately immediate feeling under the weather today and while who's on the call. He may be limited in his responses.
Speaker Change: Operator.
Speaker Change: Yeah.
Speaker Change: Thank you Sir.
Speaker Change: At this time, we will be conducting a question and answer session. If you would like to ask a question. Please press the star key followed by one on your telephone keypad, a confirmation tone will indicate that your line is in the queue. You May press star two to remove a 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: In the interest of time, we ask that you. Please limit yourself to one question. Thank you one moment, please while we poll for questions.
Speaker Change: And the first question comes from the line of Tom Catherwood with BTG. Please proceed with your question.
Tom Catherwood: Thank you and good morning, everybody.
Tom Catherwood: Tim you noted mixed signals in the industrial markets vacancies are up obviously customers are taking longer to make decisions and on the macro side. Obviously, we see if the consumer continues to be stretched.
Tom Catherwood: You also noted you know.
They were strong leasing activity in Q3, you've raised acquisition guidance now for the second straight quarter. So kind of how do we square. These two kind of seemingly divergent topics together and what do you think it takes for customers what kind of catalyst I think takes for customers to move from hesitant.
Tom Catherwood: When it comes taking space to more active as we move into 'twenty five.
Speaker Change: Thanks, Tom Thanks for the question look at if I just start with the acquisitions guidance I would probably read that as our confidence in the long term for starters.
Speaker Change: We're very engaged in the business. We are very much looking at markets that we seek to build additional scale and deepen our presence and and our teams are scouring the market in that regard looking for opportunities one thing and put it into my remarks that I'd like you to really here is we're not really a buyer at market.
Irr's.
Speaker Change: We're typically looking for unusual construct off market deals are deals that we source, where we're looking for a premium to prevailing in the IRR such as those we've seen our appraisals. So take that as you were looking at our activity in the in the acquisitions market.
Speaker Change: In the near term, we just recognized that utilization is.
Speaker Change: It's really been the culprit of keeping a lid on demand and that's the message. We're trying to send here is that that has an end to it ultimately customers will work through what's available to them and it's gonna be sort of a spillover out of utilization into growth in occupancy.
Speaker Change: Okay.
Speaker Change: Thank you Tom Operator next question.
Speaker Change: And the next question comes from the line of Greg Malhotra with Mizuho. Please proceed with your question.
Speaker Change: Thanks, so much for taking the question I guess, just then maybe another one to you know perhaps square.
Speaker Change: You talked about the bottoming process on the call in the press release, I guess bottoming not bought them, but do you mind sort of squaring that with.
Speaker Change: Two things one just your updated view on market rent growth over the next 12 months and to.
Speaker Change: Just reducing development starts I talked the plan originally was.
Speaker Change: Keep stocks high so that when the market and flex and twenty-five you'd sort of B you don't have the product ready can you just square that bottoming and those two things hanging so much.
Speaker Change: Yeah. Thanks Vikram.
Speaker Change: Let's start with your first question, which was the scoring the rent growth in the near term here and let me. Let me highlight that we are near or in an inflection period right now and this is a timing forecasts have very high variability. So the quick answer to the near term view on rents is.
Speaker Change: Pretty much in line with where we were 90 days ago customers are very engaged but they're just not making decisions. So we expect the softness in rents to continue throughout this period.
Speaker Change: We actually think about this is for the long term.
Speaker Change: 90% of our leases roll after the next 12 months.
Speaker Change: So even if rents fluctuate minus 3% plus 3% it doesn't really matter and won't have significant impact on our long term earnings nor the value of the business.
Speaker Change: And the real driver for rent growth is replacement cost rents, which Tim said in his script replacement cost rents are 15% higher than today's market rents.
Speaker Change: So the gap between the market ranks and the replacement cost rents will ultimate lead to this rent growth.
Speaker Change: And so if you think about us being at peak vacancy or close to peak vacancy.
Speaker Change: Which we expect to endure for a certain segment portion maybe throughout 'twenty five a week.
Speaker Change: Hovering in that vacancy emerging late next year, and then accelerating thereafter, so we know the trend and we'll capture that rent growth in the longer term. We just don't necessarily know the slope of that recovery and and it's really hard to peg that and honestly when it comes down to it guessing on the short term. It has never been one of our strong suits.
Speaker Change: Yes, we're running the largest for the long term.
Speaker Change: The second part of your question had to do with our development starts.
Speaker Change: <unk> starts so we pushed those off Tim talked about discipline in the script here.
Speaker Change: Build to suits, it's about the pipeline remains pretty strong. It's just flat for the last four quarters, we've been talking about customers kicking the can down the road that's continuing in those build to suits are just moving into into next year and then from a staffing perspective, we are going to maintain that discipline that we've always maintained.
Speaker Change: We don't want to be building into the market fundamentals in many of these markets today.
Speaker Change: Categorical. So for example this.
This quarter, we actually started two buildings in Atlanta.
Speaker Change: Atlanta is headline vacancies, 9%.
Speaker Change: But then we look at the infill site that we have with no competition.
Speaker Change: Where on the 150 basis points.
Speaker Change: We don't have any spec risk. So we decided to move forward to that as we move forward with that building are those two buildings. So we can be building into those dead all.
Speaker Change: All completions a year out like we've been talking about doing so it is happening here and there we just see that accelerating more.
Speaker Change: In the coming quarters.
Speaker Change: And then let me finish with the fact that we have.
Speaker Change: Very large.
Speaker Change: Development book right now five 5 billion underway.
Speaker Change: Sure.
Speaker Change: And that's 33 million square feet of development underway.
Speaker Change: And then we also have $40 billion worth of opportunities right now in our land bank and so it actually 30% of that land is entitled ready to go and then two thirds of that is actually pad ready.
Speaker Change: Which means we really truncated the timeframes to go vertical with those sites. So we're going to be able to execute the strategy just like we talked about.
Speaker Change: Over the last several quarters, we're just youre.
Speaker Change: Youre going to see that happen.
Speaker Change: A little bit later.
Speaker Change: Okay.
Speaker Change: Thank you Vikram operator next question.
Speaker Change: And the next question comes from the line of John Kim with BMO Capital markets. Please proceed with your question.
John Kim: Thank you and good morning, so it looks like you're at a 6% beat on a quarter. So this quarter I think Tim you mentioned part of that was the pro latches.
John Kim: Ventures exit that you had and also on our numbers you had better.
Better than expected currency gains income taxes I wanted to make sure that was the case, but also why only raised full year guidance by one penny.
John Kim: Given the beat you had during this quarter.
Speaker Change: Hey, John Thanks.
Thanks for the question I would say you you'll see it as a b, we don't see it as a beat you sort of events that we were forecasting.
Speaker Change: For the year and for the quarter.
Speaker Change: And I would also highlight that the effects gains I think youre seeing in the P&L.
Speaker Change: [laughter] might be might be better offline, but there's complication between unrealized and unrealized you've probably seen a lot of unrealized there and you have to flow through to the F. O statement to understand what's actually realized suffice it to say very probably say you're never going to hear effects as some variance item in our <unk> as we had.
Speaker Change: All of our F. L earnings I think you know there was an item in tax where we had some sale of investment tax credits.
Speaker Change: In the quarter.
Speaker Change: Have fewer of those in the following quarter, but once again that together with debenture scheme are all previously contemplated in our guidance.
Speaker Change: Okay.
Thank you John Operator next question.
Speaker Change: And the next question comes from the line of Steve <unk> with Evercore ISI. Please proceed with your question.
Steve <unk>: Yeah. Thanks, Good morning, I guess on page 12, you guys break out your ending occupancy by unit size and I noticed sequentially. There was a much bigger drop on the spaces that were kind of below 250. So I'm. Just wondering if you can sort of speak to the strength of the bigger boxes, maybe the softness in the weaker.
And then just on the southern California, I noticed that your lease percentage in Socal went up about 120 basis points sequentially. So any comments just around southern California demand either by product type or you know L. A versus inland Empire would be helpful. Thanks.
Steve <unk>: Hey, Steve It's Chris Cade and thank you for the question I'll start with Southern California, and then I think a couple of us will jump in on different trends by size category.
Speaker Change: So I think I'll answer to your short term question, but it's worthwhile to step back and look at the broader trends in southern California, and take take a medium term view, we think southern California is a really bright outlook couple of legs to that stool. The first is southern California is a major consumption center, it's a two trillion economy.
Speaker Change: It's got 23 million people in the region is growing employment is up in the last year and jobs are up 3% since 2019.
Speaker Change: Second leg of this stool, southern California is growing as a gateway for international goods container imports into the ports of L. A and long beach are up 12% since 2019 now.
Speaker Change: <unk> global manufacturing patterns are shifting as I think you're aware, but they remain positive for southern California.
Speaker Change: Asian imports into the United States are up 21% since 2019 on an inflation adjusted basis, Yes, I think youre aware, China should be down and it did but only 6% since 2019 and so this is a testament to the China plus one strategy that we and others have been talking about there is significant growth in all other Asia.
Speaker Change: It's up 40% since 2019.
Speaker Change: Third leg of the stool on the outlook for southern California barriers to supply they are high and rising.
Speaker Change: Southern California has had scared plant availability onerous municipal requirements and now there are state restrictions with the adoption of stay below <unk> 98.
Speaker Change: These together with strict future new development.
Speaker Change: Now you're asking I think it's important to recognize headwinds remain for southern California, as Tim alluded to in express customers are still working through spare capacity, having taken more than they need it when vacancies are zero, but these long term trends will be more important over time.
Speaker Change: As it relates to the very short term cyclical contours of you're asking about a couple of things have emerged in the last 90 days. One is demand remained soft in L. A and there is a clear sort of upgrade cycle emerging there where class a is outperforming class b generally demand is better in the inland.
Speaker Change: Higher.
Speaker Change: Given the growth of the ports that I described earlier and Orange County, as a low market vacancy with.
Speaker Change: And that positions us better positioning us better to recover earlier.
Speaker Change: After the first size. The first question as it relates to the size I'm going to turn that over to Dan. Yes, just quickly on the sizes certainly we've had some impacts on the smaller sized spaces in China that you see there, but when I look at this number quarter over quarter.
Speaker Change: The smaller size space.
Speaker Change: Typically underperforming on an occupancy basis to the other three buckets as a matter of fact quarter over quarter three of the four buckets was down slightly so nothing really specific as it relates to historical trends.
Speaker Change: Yeah.
Speaker Change: Thank you Steve Operator next question.
Speaker Change: And the next question comes from the line of Michael Goldsmith with UBS. Please proceed with your question.
Michael Goldsmith: Good morning, Thanks, a lot for taking my question.
Michael Goldsmith: <unk> talked a little bit about how the customer has remained engaged but then also.
Michael Goldsmith: A lot of sources of uncertainty and presumably that's related to the macro and interest rates and the election. So I guess the question is.
Michael Goldsmith: Within the context of maybe past cycles or other periods of uncertainty how quickly given that demand yet.
Michael Goldsmith: Yeah as uninsured and she has been released so set another way like when when some of these factors stop weighing on the customer.
Michael Goldsmith: Does that translate to an almost immediate.
Michael Goldsmith: Please turn to demand or does it take a couple of quarters to ramp up from there.
Michael Goldsmith: Okay.
Michael Goldsmith: Hi, Michael Yeah, I heard your question as how quickly you can demand recover as uncertainty.
Michael Goldsmith: Is ads.
Speaker Change: So a couple thoughts on that first.
Speaker Change: Yeah, I think we should have a measured outlook on demand customers are engaged but taking taking taking their time in terms of making decisions.
Speaker Change: And we really are focused on spare capacity in the supply chain getting used up as Tim described earlier and we're seeing that happening. So utilization early this year at the beginning of this year was below 84% and its mid Eighty's 84 is now so it is in the building, which will be a catalyst for our customers.
To take space and indeed, there are these tailwind so if economic growth of trade growth of consumption growth and the acceleration of E Commerce continues.
Speaker Change: I think we should just over the near term have a measured level.
Speaker Change: The level of optimism here, we just need to watch the market.
Speaker Change: Yes.
Speaker Change: Thank you Michael Operator next question.
Speaker Change: And the next question comes from the line of Craig Melman with Citi. Please proceed with your question.
Craig Melman: Hey, good afternoon, maybe just circling back to capital deployment here on the development and acquisition front I guess on the development side, you know very helpful, where do you think replacement cost rents are relative to new starts but from a land basis perspective could you give us a sense of.
Craig Melman: Kind of what's in that ready to go bucket that actually kind of works from a basis perspective, given where rents are today I guess, that's one part of the question and then the other part just on acquisitions you guys are talking.
Seems like more bullish you raised guidance here, just curious kind of globally, where do you think.
Craig Melman: Uses of that are our best.
Targets are today and how do you fund that given you know on a stabilized basis. Your equity is probably up around 6% at least on my numbers is it are these more debt finance or these through the fund business can you just give us a sense of.
Craig Melman: Where and how you kind of want to put that capital out and whether you know you're interested in more bigger private portfolios or you know the historic a bigger platform deals you guys have done in the past.
Craig Melman: Hey, Greg It's Tim Let me congratulate you on getting three questions in there at.
Speaker Change: Once I, let me just start off on the funding and the balance sheet and pass it back to Dan on the capital deployment pieces I would still view us as having a lot of capacity in our in our own balance sheet, which has been incredible I'll say, we've raised a lot of debt proceeds over the last few years, while our normal capital recycling has been a little.
Speaker Change: Slow, but if you look at our supplemental look at our credit ratios over the last few years, including this morning, Theyre very healthy inconsistent uneven quite strong for our rating. So we've been able to tap into that and the reason that's been occurring is that EBITDA growth as what really guides that capacity remained.
Speaker Change: Very strong.
Speaker Change: Alongside the earnings growth.
Alongside that I would I would also say that as.
Speaker Change: As mentioned in my remarks, our strategic capital fund raising.
Speaker Change: Is improving not just what we raised in the quarter, but I feel like the body language and call notes that were getting suggests that it will continue to be strong so I think a.
Speaker Change: A resumption of more normalized levels of capital recycling via contributions as is very close and that has been as you know our principal source of funding and any of that.
Speaker Change: Yes, I think Craig on the deployment front.
Speaker Change: We.
Speaker Change: And in about 50 over 50 markets globally.
Speaker Change: Average vintage year is about 455 years old.
Speaker Change: The Mark on that book is about 120% of book, So we have plenty of opportunities.
Speaker Change: So.
Speaker Change: Today, and then keep in mind, a lot of that land the other 60% or so.
Speaker Change: And its way through entitlement when we create a lot of left ourselves as well over time. So we don't have a shortage of opportunities.
Speaker Change: And.
Speaker Change: Keep in mind as we underwrite these deals we put them in at market value.
Speaker Change: So we're where we just have such a wide dispersion of where this land bank exists and then we also have.
Speaker Change: That consists of.
Speaker Change: Land plays and options that you actually don't see that land banks, so again, not a shortage of opportunities and it's tough to point to any place globally, where we want to allocate more than others and south of the way we've ever operated red scale in virtually every market in which we operate so it really comes down to looking at every deal on a deal by deal base.
Speaker Change: This and doing the highest quality deals.
Speaker Change: Thank you Craig Operator next question.
Speaker Change: Okay.
Speaker Change: And the next question comes from the line of Caitlin Burrows with Goldman Sachs. Please proceed with your question.
Caitlin Burrows: Hi, Good morning, everyone on the earnings release commentary you mentioned, how prolonged this is a partner of choice to meet supply chain digital and energy infrastructure need. So could you give an update on the digital and energy side I know, it's a pretty open ended question, but with those business lines, new or what has been the focus year to date for them kind of what are the next near term steps and also can you clarify.
Caitlin Burrows: What portion of the starts development starts in the quarter might've been datacenters.
Speaker Change: Okay, I'll just pick up the energy piece and maybe pass it to Dan for Datacenters.
As we mentioned we have a good run rate of new energy starts in the quarter were talking about the solar business, both generation and storage.
Speaker Change: We're up over 50 megawatts in the quarter, which puts us at a really good pace run rate to that has been accelerating in our solar program, which two years ago was broadly focused really just in the United States has now expanded around the globe and is active in Europe, Latam and Asia. So.
Speaker Change: We feel as I mentioned really good about the escalating pace of that activity and where it's ultimately going to get us over 2025 are marching towards that one gigawatt of coal.
Speaker Change: Yeah, then on the other data Center fund overall 24 has been a call it a bit.
Speaker Change: <unk> exceeding the plan.
Speaker Change: We have focused on two things building, our pipeline and building the internal capabilities pullets are going extremely well.
Speaker Change: Have one six gigawatts of secured power of which 490 megawatts is currently under construction, we have an additional one four gigawatts in advanced stages, where we have high visibility to that procurement and then another over one five gigawatts of applications submitted in dozens of different.
Speaker Change: Locations around the world. So very pleased with the pipeline, we're building and the team are establishing there.
Speaker Change: You asked about the third quarter start that you see there that is a powered shell.
Speaker Change: Building that we started.
Speaker Change: A couple of years ago with a few different customers. We're working with it ended up turning into a turnkey deals. So what you see there is a conversion from a powered shell to turnkey.
Speaker Change: Thank you Caitlin operator next question.
Speaker Change: And the next question comes from the line of Vince <unk> with Green Street. Please proceed with your question.
Hi, Good morning could you share net absorption and supply completion in the quarter for U S portfolio and then also provide any update to your full year outlook for supply and demand. It sounds like you know nothing big change its surprised too much during the quarter, but just wanted to confirm your outlook and get the.
Speaker Change: Recent actuals there.
Speaker Change: Hey, Vince it's Chris Cade and thank you for the question and your read on the quarter is correct. So we saw 40 million square feet of net absorption in the quarter of 63 million square feet of completions. So, let's just zoom out and talk about the year and talk about how it's the direction. It's heading because we are progressing through this bottoming.
Speaker Change: So net absorption this year will amount to 160 million square feet and thats against deliveries that are 300 million square feet. So naturally market vacancies are rising they are rising up to six 8%.
Speaker Change: And it sounds like you know you're very familiar with historical data. So you'll know that six 8% with a low number in the totality of history, but theres something thats happening in the background, that's really that doesn't always get attention. We're talking about which is the emptying of supply chains. So deliveries peaked a year ago at 135 million square feet per key.
Speaker Change: <unk> and they fall into that number I gave you of 63 here this quarter, so less than half in terms of the decline and they will continue to decline.
Speaker Change: Into next year at work here in the backdrop also as starts are very low we have them at $40 42 million square feet in the quarter. So when you put all this together what you find is the under construction pipeline, which is about 215 million square feet. Today is at its lowest point since 2017, so we're gonna be going in to <unk>.
Speaker Change: 25, with a relatively low level of supply and then opportunity for demand to improve as we progress through this uncertainty and the spare capacity.
Speaker Change: Thank you Vince operator next question.
Speaker Change: And the next question comes from the line of Ronald Camden with Morgan Stanley. Please proceed with your question.
Speaker Change: Great Hey, just two quick ones.
Speaker Change: Following that last question in terms of asking it a different way.
Speaker Change: When are you thinking availability sort of piece of the portfolio I remember it was <unk> 24 is that sort of changed at all are ones that pushed out too and then the second part of the question. When we think about the same store cash NOI guidance for this year are there any sort of one timers puts and takes or comps that we should be aware of as we start to think about 2025.
Speaker Change: Hi, Thanks.
Speaker Change: Hey, Ron Chris cadence. So I think you said portfolio, but I think he might have meant market. So I'm going to answer for the market in terms of vacancies. So we still have vacancies, peaking in the later part of this year, but just taking a cautious stance on the direction of demand and that uncertainty and that spare capacity that we've described.
Speaker Change: We think you should anticipate a measured pace of basically of elongation of the peak over the course of the first part of next year, you'll see recovery emerge later next year and accelerate into 2026, I think thats something Dan described earlier.
Speaker Change: Hey, Brian It's Tim and then just picking up the second part of your question with regard to cash same store the answer would be no I can't think of anything to us.
Speaker Change: It would be onetime in nature, you know as we report that metric, we exclude things like lease termination fees that might fall in that category. So that's not there are any way the only thing I could maybe think of as free rent.
Speaker Change: <unk> is normalizing back to market norms, there could be a little more free rent next year than we have seen in the first half of this year, but that would be relatively small if I, if I widen out a little bit, though and take the question further on.
Speaker Change: Same store out in the future anyway, it's probably a good opportunity to just level set people on we've seen market rent.
Speaker Change: Declines thus far this year, we've been clear about them continuing a bit into next year. We've highlighted that occupancy is bottoming here and going to sit here for a handful of quarters. So looking ahead to next year, it's probably best to think about just the things that we know.
Speaker Change: What I would the way I would assemble our same store view going into next year would be to look at for starters. The rent changed either on a cash or a net effective basis that we've had thus far this year. We know that that's got a half year effect going into 2025, and then also make some assumptions about.
Speaker Change: What rent change might be in 2025. Similarly, following a half year convention I think if you put that math together today and think about a roll level at 10 or 11%.
Speaker Change: On a net effective basis, you'd probably find yourself says, it's something like 555% to 6% component for that component of our same store net.
Speaker Change: Net effective basis of course, we would have the impact of the F. L. A from the Duke portfolio that takes something like 100 off of that so you're squarely somewhere around five and then the last thing to think about is just occupancy trends.
Speaker Change: And again things really murky to forecast occupancy from here, but you can at least take into account. The fact that occupancies have been declining over the course of this year. So would stand a reason on at least on average basis. This year to next.
Speaker Change: That would probably be an additional headwind on same store.
Speaker Change: Yeah.
Speaker Change: Thank you Brian Operator next question.
Speaker Change: And the next question comes from the line of Blaine Heck with Wells Fargo. Please proceed with your question.
Great. Thanks, Good morning up there we've heard a lot recently about strong demand from Asia E Commerce and <unk> companies. So I was hoping you could talk about whether you signed any deals with those tenants and just your view on whether this is just a massive pull forward of demand ahead of potential tariff increases or whether you think those groups they'll continue.
Speaker Change: Lease space into 2025 and beyond.
Speaker Change: Hi, My name is Kristen. Thanks for the question I'll give you a concise answer and then I'll provide you some context because this is a growing category.
Speaker Change: So yes, we are leasing with these customers and yes, we think they will continue to lease space and into next year and beyond and no. We don't really think it's much related to any sort of pull forward as you asked but let's let's just zoom out and understand kind of the broader context here so to understand really all these three PL companies.
It is productive to first start with the Chinese e-commerce platforms, they're enjoying rapid growth. This year life, we're talking about $25, 50% annual growth and more depending on the concept and so the Chinese <unk>, obviously are performing the logistics here and theyre growing rapidly I would say they represent roughly 20% of net absorption this year.
Speaker Change: It also offers our businesses are diversifying and now they compete for all contracts not just Chinese e-commerce and so many of these customers are positioned for growth. They are signing long term leases and they are investing in their space.
Speaker Change: You ask after this concept of a pull forward and so it is natural to.
Speaker Change: So to think about how my tariffs and changes in tariffs affect these customers.
Speaker Change: And a couple of ways to think about it first the growth of this ecosystem.
Speaker Change: This is one that connects Asia manufacturers with American consumers and what they're doing is they're bypassing the traditional import distributors and they are doing in response to the past tariffs the margin pressure brought about by those tariffs.
So so in summary at that point some of the growth. This year is simply a shift in business model in response to past tariffs.
The second point, which I described earlier I spoke Asian imports are up 21% versus 2019 on an inflation adjusted basis and this is really fueled by that China, plus one manufacturing model and the.
Speaker Change: The growth of Asia ex China imports from Asia, ex China, which are up which are up 40% as I said and then in the third in the details of tariffs is something called de Minimis provisions you may be aware is a provision that allows guests to come in and avoid.
Speaker Change: Tariffs under a certain value these are likely to be wound down under a wide range of scenarios, but it's worth noting that these are only 3% dominion good coming in under the de Minimis provision are only 3% of Asian imports.
Speaker Change: So look as the category matures. It is a growth category for sure there'll be winners and losers and please know that we employ the same rigorous credit evaluation process here as we do with any and all of our prospective customers.
Speaker Change: Okay.
Speaker Change: Thank you Brian Operator next question.
Speaker Change: And the next question comes from the line of Nick <unk> with Baird. Please proceed with your question.
Nick: Thanks, Good morning out there we noticed in the past few quarters has been an uptick in lease commencement of a term less than a year in the core portfolio of roughly like 50% of commitments I guess wanted to get some more color on those tenants typically are these tenants opting for shorter term renewals. These new tenants kind of looking for sweet space keeping it out of certain macro anything you could provide there would be pretty healthy.
Speaker Change: Thank you.
Speaker Change: Hey, Nick it's Tim I think that's an element of it some uncertainty on the part of the customer I think more more so its recognition in certain cases, we're being very strategic about the level of rents in some of our markets and what's being locked in now.
Speaker Change: And there's just bespoke certain situations, where we see an opportunity to keep it on the shorter end, where we see some of the rent recovery happening sooner than maybe than the overall forecast and so theres a strategy in that part as well.
Speaker Change: Okay.
Speaker Change: Thank you Nick Operator next question.
Speaker Change: And the next question comes from the line of Josh <unk> with Bank of America. Please proceed with your question.
Speaker Change: Yeah, Hey, guys alright, thanks today, so I'm filling in for Jeff Saturday.
Speaker Change: Just looking at the occupancy across the regions it looks like Asia, and Latam kind of sort of step back any kind of trends to flag in those two regions versus maybe what youre seeing in the U S where it looks like it's more stabilizing at this point.
Speaker Change: Thanks for the question Josh.
Speaker Change: Really just comes down to the impact from China.
Speaker Change: Japan, certainly has some oversupply issues, we're dealing with as well.
Speaker Change: One of them is in good shape, there, but it's really China.
Speaker Change: The impact.
Speaker Change: Yes.
Speaker Change: Thank you Josh Operator next question.
Speaker Change: And the next question comes from the line of Mike Mueller with JP Morgan. Please proceed with your question.
Speaker Change: Yeah, Hi are there any specific pockets of the portfolio or regions that are driving the higher development stabilization guidance.
Speaker Change: Thanks for the question there Mike.
Speaker Change: This development book is spread all around the globe, So theres no trend to point to.
Speaker Change: Okay.
Speaker Change: Thank you Mike Operator next question.
And the next question comes from the line of Nicholas <unk> with Scotiabank. Please proceed with your question.
Speaker Change: Oh, Thanks, I just wanted to clarify a couple of numbers.
Speaker Change: I think you said that.
Speaker Change: The market rents globally were down 3% this quarter and then last quarter. The forecast was for the next 12 months down to two 5%. So are those the same periods on measurement I just from you know because it would seem then that that forecast was already hit.
Speaker Change: This quarter alone based on the sequential decline less of them.
Speaker Change: Fusing something here thanks.
Chris: Hi, Nicholas it's Chris Thanks for the question. So the time periods are going to be different you have the correct do you have the correct numbers and as Dan described.
Chris: We continue to see rents these soft in our view today is now a different rolling 12 month view and we remain cautious on rents over that time period and as Tim described in his script rents.
Rins softness should persist into the middle part of next year.
Speaker Change: Look I might just add that it's fair to interpret the way you're looking.
Speaker Change: Looking at those two numbers that yeah, we may be at the depending how you count at the north or South end of that range. You know maybe that'll be closer to five over the preceding 12 month period that we described last quarter.
But given what we saw so far in the third quarter.
Speaker Change: Yes.
Speaker Change: Thank you operator next question.
Speaker Change: Okay.
Speaker Change: And the next question comes from the line of Michael Carroll with RBC Capital markets. Please proceed with your question.
Speaker Change: Yeah.
Speaker Change: Hi, This is <unk> on for Mike I was just wondering what drove the jump in Capex this quarter. Thanks.
Speaker Change: Okay.
Speaker Change: I'm, sorry, I didn't hear the end of that question what drove what.
Speaker Change: The jump in Capex for this quarter.
Speaker Change: Well a lot of that is focused and you can see the components of capex in the supplemental between property improvements and leasing commissions and tenant improvements are there was a lot of leasing and socal in particular.
It's just a sort of a reminder, that rents there are very high the commissions windup in turn being quite high and then as you it's quite clear from our supplemental as well where we have <unk>.
Speaker Change: Pretty improvements disclosure that can be pretty lumpy between quarters and it was a bit elevated here in Q3, but.
Speaker Change: On a trailing 12 month basis very normal.
Speaker Change: Okay.
Speaker Change: Thank you Eddie.
Speaker Change: Our next question.
Speaker Change: And the next question comes from the line of Todd Thomas with Keybanc Capital markets. Please proceed with your question.
Todd Thomas: Hi, Thanks first can you can you just talk about leasing demand and absorption trends.
Todd Thomas: Throughout the quarter, a little bit how the quarter played out a bit July through September and then also in terms of the space utilization in comments that you've made around capacity in the portfolio.
Todd Thomas: Which seems to be an important input into your forecast.
Speaker Change: Your portfolio skews towards consumption and I'm just curious if you have any thoughts around the utilization metrics from from inventory levels or I guess inventory build.
Speaker Change: Ahead of the election and potential tariffs and also on the East coast Port strikes and whether you might expect to see some volatility on utilization in the near term.
Speaker Change: Hey, Todd, it's Chris Kate and thank you for the question questions answer on the first one is demand was steady.
Todd Thomas: Steady through the quarter, so no meaningful acceleration or deceleration, which I think is what you're asking.
Todd Thomas: As it relates to utilization I think it's look maybe we stepped back and cover some of the numbers that I alluded to earlier. So there is an upward trend. This year. The year started below 84% like I think I mentioned it in the South I think Houston Port for.
Todd Thomas: And there is no noise from quarter to quarter, which is a combination of goods.
Todd Thomas: <unk> is coming in and coming out as well as just a methodology which is.
Todd Thomas: Which is survey based.
Todd Thomas: I think if you step back and consider some of the context, one thing I wanted to add to your consideration is look import activity really shows there's an effort to restock supply chains.
Todd Thomas:
Todd Thomas: But this is occurring amidst a perhaps more resilient consumer than was expected and so those consumers are pulling goods out of supply chains and kind of keeping utilization a little bit below what we consider to be a normal level.
Speaker Change: Thank you Todd Operator next question.
Speaker Change: Next question comes from the line of Brendan Lynch with Barclays. Please proceed with your question.
Brendan Lynch: Great. Thanks for taking my question.
Brendan Lynch: It can help us reconcile the.
Brendan Lynch: Guidance from the December Investor day, it sounds like.
Brendan Lynch: No.
Brendan Lynch: Rent growth is around zero percent through 2026, and vacancy is going to peak out at a little bit higher than what you had been expecting so how should we think about your core if okay here over the next three years.
Tim Archer: Hey, Brian It's Tim.
Tim Archer: I would probably just put that aside I think theres been so much change right now in the markets that as I was doing earlier in describing the way to think about 2025 and just take a fresh look of where we are now with regard to the lease mark to market <unk> been rents over the next two.
Tim Archer: 12 months or whatever that that period is before we start to see it.
Tim Archer: Accelerate again, it's really important to appreciate.
Tim Archer: How much debt, 34% lease mark to market will sustain earnings.
Tim Archer: You kind of map out that is where rents will start a bit of a decline for the next 12 months and then an increase thereafter, you'll see on rent change alone.
Tim Archer: Six seven years of.
Tim Archer: Very strong mid single digit.
Tim Archer: Same store growth just out of the rent growth component by itself. So that's the underpinning you know over the long term you're going to think about the adders to that as you March down to the bottom line between financial and operating leverage admittedly. There is some headwinds on the financial leverage piece in the near term as interest rates are rolling up but over the long term that will be.
Tim Archer: Productive to the bottom end again and for projects then you're really going to think about all the other things that we do which is really growth and capital deployment are higher and better use activity in data centers strategic capital.
Tim Archer: Adventures the energy business. These are all adders to our growth that are.
Tim Archer: Complementary on their own, but I would say synergistic back to the core business as well and that's how you should think about long term growth for us.
Tim Archer: Okay.
Speaker Change: Thank you Brendan operator next question.
Speaker Change: Thank you. Our final question comes from the line of Steve <unk> with Evercore ISI. Please proceed with your question.
Yes. Thanks, I just wanted to clarify just two things I think Chris you said something about 25% of I think the demand this year it was.
Speaker Change: You know from a you know from these even three PL companies I guess was that your portfolio specifically are you, making a comment.
Speaker Change: The market or southern California in particular, I, just wanted to sort of clarify that.
Speaker Change #100: Thanks for the opportunity to clarify that's broadly across the marketplace.
Okay.
Speaker Change #100: Okay. Thank you that was the last question here.
Speaker Change #100: I'd like to just wrap up.
Speaker Change #100: By making a few points.
Unknown Executive: First, the Portland results met our expectations. Secondly, we think we're in a bottoming process that's underway, with completions very clearly in the downtrend.
Speaker Change #100: First the quarterly results met our expectations.
Speaker Change #100: Secondly, we think we're in a bottoming process.
Speaker Change #100: That's underway with completions very clearly in a downtrend.
Unknown Executive: Lastly, capital values are increasing; fundraising has improved, and we're actively investing in the future of our business, and we're in this for the long run. With that, we look forward to speaking to you at the upcoming conferences and again next quarter.
Speaker Change #100: Lastly, capital values are increasing fundraising has improved and we're actively investing in the future of our business and we're in this for the long run.
Speaker Change #100: With that we look forward to speaking to you at the upcoming conferences and again next quarter.
Unknown Executive: And ladies and gentlemen, that does conclude today's teleconference. You may disconnect your lines at this time. Have a great rest of the day. Thank you very much.
Speaker Change #101: And ladies and gentlemen that does conclude today's teleconference. You may disconnect. Your lines at this time have a great rest of the day.
Speaker Change #101: Okay.
Speaker Change #101: Yeah.
Speaker Change #101: Yeah.
Speaker Change #101: Uh-huh.
Speaker Change #101: Uh huh.
Speaker Change #101: [music].
Speaker Change #101: Mhm.
Speaker Change #101: [music].
Uh-huh.
Speaker Change #101: Okay.
Speaker Change #101: Hum.
Speaker Change #101: Okay.
Speaker Change #101: [music].
Speaker Change #101: Yeah.
Speaker Change #101: [music].