The operator introduces the Prologis Third Quarter 2023 Earnings Conference Call and reminds participants that the call will be recorded. Jill Sawyer, Senior Vice President of Investor Relations, introduces the call and states that it will contain forward-looking statements. Tim Arndt, CFO, will cover results, market conditions, and guidance. The CEO and executive team are also present.

The third quarter saw an increase in market vacancy due to growing supply and a moderation of demand. Rent growth is expected to slow until new starts decrease availability. The company's focus on leasing and timing of new development has been in line with these expectations. Central bank policies and geopolitical uncertainty are causing delays in decision-making and expansion. The company's existing leases are expected to drive earnings growth. Results for the quarter were excellent with record rent change and strong earnings. Occupancy increased to 97.5% and net effective rent change was 84%. Same-store growth was 9.3% and 9.5% on a net effective and cash basis, respectively, driven by rent change.

During the quarter, market rents grew at a slower pace than expected, with a 60 basis point increase. The company raised $1.4 billion in new financing and ended the quarter with a record $6.9 billion in liquidity. Despite increased financing, the company's debt-to-EBITDA remained low and steady. Vacancy rates in the U.S., Mexico, and Europe are historically low, but saw a slight increase in the quarter due to low absorption and unleased completions. The company expects demand to exceed supply over the next three quarters, with a potential reversal in 2025. The company's portfolio is expected to outperform the market due to its location, quality, and strong relationships and operating platform.

The company's leasing pipeline remains consistent, but customers are slowing investments due to economic uncertainty. Rents increased in most markets, but declined in Southern California. The company expects slow market rent growth in the US and globally. US appraisals have not yet reacted to the increase in rates. Values in Mexico are up, but China experienced a decline. The company's funds saw positive inflows.

During the quarter, the company has reduced net redemptions to $700 million, increased development starts to $1 billion, and acquired $118 million of land for future development. They are focused on creating value in their core business and have a strong debt capacity and liquidity. They are increasing their occupancy and same-store guidance, maintaining their strategic capital revenue guidance, and adjusting their G&A guidance. Development starts guidance has also been increased, while contribution and disposition guidance has been reduced due to USLF valuations. The company is adjusting their GAAP earnings guidance to a range of $3.30 to $3.35 per share.

The company is increasing its core FFO and expects growth of nearly 10.5%. The Duke portfolio will be entering the same-store pool in 2024, which will affect net effective and cash same-store growth. The company is confident in its ability to outperform in the long-term due to its premier logistics portfolio, strong balance sheet, and visible earnings and portfolio growth. The company will be hosting an Investor Forum in December to share more about its business and opportunities. The first question in the Q&A portion of the call is from Michael Goldsmith of UBS.

The speaker responds to a question about the demand for build-to-suit developments and the current occupancy rates. They mention that demand is softer than usual, but there is still latent demand from large companies. They also discuss the yields on data center build-to-suits and potential plans for selling them upon completion.

The speaker is addressing two questions, the first being about the higher occupancy rate in data centers compared to the market average. They explain that this is due to the quality of their portfolio and their strategy of converting existing properties to data centers. The second question is about the impact of build-to-suits on their yields, and the speaker hands it over to Dan to explain their strategy of using data centers as a way to fund their growth without issuing equity.

The company is not interested in long-term ownership of a particular business, but rather in developing and harvesting it for growth. They cannot disclose specific information about their data center yields, but they are confident in the margins and expect them to be significantly higher than logistics build-out. In the fourth quarter, they have planned starts of $1.9 billion, mostly for logistics, with a smaller portion for data centers, split between build-to-suit and spec projects.

The speaker highlights the company's call for a back-end loaded forecast and mentions that market development has decreased by 65% from its peak. They have been preparing for a heavy Q4 start volume and clarify the mix of logistics and logistics spec versus build-to-suit. The next question is about market rent growth and the speaker expects it to remain positive throughout the next few quarters. The speaker also mentions that property acquisitions will be discussed.

The speaker discusses the current state of acquisitions in the real estate industry. They mention that their company is being more selective in their purchases and only looking for high-quality properties that fit their portfolio. They also mention that with the increase in treasury yields, they would need to see a 9% leveraged IRR in order to consider an acquisition. However, they believe that there may be more opportunities in the future due to a capital-constrained environment and their strong balance sheet.

The speaker does not anticipate any major financial distress, but expects there to be more opportunities for acquisitions in the next six months. The team is actively searching for potential deals and is open to various types of acquisitions. They are not providing specific rental forecasts for the upcoming quarters.

The speaker discusses the occupancy trade-off in different markets, stating that about 20% of markets are driving for occupancy while 80% are in equilibrium or tighter. They also mention that they will not be aggressive on rents due to a belief that demand will pick up in the next three quarters. The next question asks about the impact of the port strikes in Southern California, and the speaker explains that the region is heavily reliant on inflows, which have decreased due to the labor issues. They also mention that Southern California is not a leading indicator for other markets in their portfolio.

The recovery of flows in the LA Basin, Southern California is expected to be seen in the first or second quarter of next year. It is predicted that about half of the flows will stay in Southern California and some may revert back. The market is seeing differentiation in submarkets, with LA and Orange County being more resilient and the Inland Empire being softer. The market rent change mentioned in the opening remarks is on a quarter-over-quarter basis. The majority of leasing for 2023 has been addressed and there is little that could change the company's outlook. The guidance is factoring in a level of conservatism, and it is uncertain what factors could change the outlook positively or negatively.

The speaker is discussing potential changes in the fourth quarter and mentions that there may be some surprises in occupancy, but they don't expect anything to significantly impact their guidance. They also mention an upcoming Investor Day where they will discuss their essentials and data center business. The speaker then defers answering a question about the potential size of development starts to the Investor Day. The second part of the question is about rent growth and the speaker mentions that it is difficult to give a specific answer, but suggests thinking about replacement cost math.

The speaker discusses the resilience of construction and replacement costs, and how interest rates affect rent growth. They mention that the Mid-Atlantic, Sunbelt, Northern California, Toronto, Mexico, Germany, and the Netherlands are strong markets. The next question asks about market rent growth, and the speaker mentions a 7% forecast for the US and globally, with potential growth in the fourth quarter. They suggest waiting for more information at their upcoming Investor Day in December. Another question asks about the gap between supply and demand over the next three quarters compared to the expected gap in 2023, which the speaker estimates to be around 150 million square feet.

Chris Caton and Hamid Moghadam are discussing the current state of the market and how it is affecting demand for deliveries in the United States. They mention that the gap between deliveries and net absorption has widened, but this is mainly due to timing rather than a decrease in demand. They also note that the sudden increase in interest rates has affected demand, but companies are still discussing long-term needs and build-to-suit projects. They mention that rent growth is being deferred in certain regions, such as SoCal, Mid-Atlantic, and the Sunbelt, but do not provide specific numbers.

Chris Caton and Tim discussed the dispersion of strengths and weaknesses in the current market. They noted that while there are some stronger markets, such as the Mid-Atlantic, Sunbelt, and Northern California, there are only a handful of soft markets, including SoCal. The trend for rents is moderately ahead in some markets and weaker in one or two markets. Despite the normalization of traditional industrial demand, Prologis is still pursuing data center developments due to the significantly higher margins they offer. Hamid Moghadam also mentions that the current vacancy rate, while high at 4%, is still better than expected for this point in the cycle.

The data center market is strong due to increased demand from AI and other factors. Large players are rushing to acquire data centers, but there are challenges in obtaining enough power. There have been some credit issues with retailers, but they have been addressed with a 85% mark-to-market on leases. There have been no significant changes in lease terms for acquisitions.

The speaker mentions that the company sees opportunities in negative leverage and considers total return, quality, mark-to-market, long-term holding, potential revenues, synergies, and other factors. The next question is about guidance, which implies a decrease in FFO in the fourth quarter. The speaker explains that this is due to termination income, higher interest income, and timing issues with taxes, but these factors are not expected to persist into 2024. The decline in FFO is mainly due to ramping up development and increased investment in land and CIP.

The speaker discusses the cost of funding development in the short term, which is 6%. This includes the SOFR rate plus the line rate, with a cap at 3%. This will have a negative impact on core FFO, but will ultimately lead to value creation in the long term. The next question is about the utilization rate, which has decreased this quarter. The speaker explains that this data lags behind economic and real estate cycles and should be understood in the context of the current resilient consumer and strong retail sales numbers.

The speaker discusses the issue of opportunities in the market for merchant developers who are bank financed. They predict that these developers will not be able to afford to rent their space at lower rates and may instead sell their positions to those with stronger balance sheets. The speaker also mentions that they have been building their balance sheet and keeping their leverage low in order to take advantage of potential opportunities. They then answer a question about which markets have less pricing power for industrial landlords, mentioning Southern California, Houston, Indianapolis, Poland, and China. They also note that quality of location and product will become more important in these markets.

The speaker, Hamid Moghadam, responds to a question about the impact of the trends of reshoring and Amazon's investments on PLD. He states that while there may be some shift in manufacturing from China to other countries, it will not significantly affect PLD's demand for warehouses. He also mentions that the biggest beneficiary of reshoring has been near-shoring in northern Mexico.

The demand for manufacturing and distribution buildings in northern Mexico is high, and the company is well positioned to benefit from any increase in manufacturing in the US. The recent turmoil in the Middle East may have an indirect effect on the company's operations, but could potentially benefit the business if there is a disruption in the global economy.

The speaker expresses concern about the impact of a current conflict on innocent people, but believes it will not greatly affect business. They are more worried about the Fed's actions and look forward to an upcoming Investor Day. The teleconference ends with a thank you and goodbye.

This summary was generated with AI and may contain some inaccuracies.