The operator introduces the Prologis Fourth Quarter 2023 Earnings Conference Call and states that all participants are in a listen-only mode. The SVP of Investor Relations, Jill Sawyer, delivers a disclaimer about forward-looking statements and introduces the CFO, Tim Arndt, who will cover the company's results, market conditions, and guidance. Arndt thanks the team for their efforts in achieving 11% earnings growth in 2023 and a 10.3% CAGR since the merger. The CEO and executive team are also present on the call.

The company has made significant investments and raised capital despite a challenging environment. They have also shared their positive outlook for the future at an Investor Forum. The market is expected to see a decline in development starts and an improvement in customer sentiment, leading to strong market rent growth. The company has reported strong results for the year, with a record net effective rent change and same-store growth. Southern California remains the strongest market for cash flow growth.

In the fourth quarter, the company began over $2 billion worth of new developments, with almost half of them being build-to-suit projects. They also have over 500 megawatts of solar and storage in operation and are currently constructing an additional 70 megawatts. The company had a quiet quarter in terms of financing, but for the full year, they raised over $12 billion at a weighted average rate of 4.5%. Market conditions showed an increase in vacancy and a decrease in utilization, but customer interest has revived and build-to-suit inquiries are expected to remain active. The company's global view is that rents declined by 90 basis points, primarily due to a 7% decline in Southern California.

The global market rents grew by 6%, slightly below expectations, resulting in a 57% lease mark-to-market at the end of the quarter. Southern California is experiencing a decrease in rent growth due to increased availability and competition in leasing. However, there is positive news as the supply pipeline is emptying and shipping disruptions are leading to a need for resiliency and just in case approach to inventories. Strategic Capital and Valuations saw a decline of 5.5% in U.S. values during the quarter, leading to a pause in appraisal based activity.

Prologis is committed to responsible governance and timely valuations in their franchise. They plan to resume activity in USLF and have a big year of stabilization ahead with a range of $3.6 billion to $4 billion in expected yields. They also plan to start development projects and take sale portfolios to the market. They forecast GAAP earnings and core FFO, with the potential for promote revenue in some areas.

The article concludes by stating that the market is not yet out of the woods, but the company is optimistic about the upcoming year. They have many initiatives in place to add value and will provide updates throughout the year. They address concerns about market rent growth and will now provide high level rent growth expectations on a rolling 12 month forward view. They believe there will be modestly positive rent growth aligned with inflation and will continue to update this on future calls. The first question in the Q&A session asks about the strong leasing spreads, with a big difference between Prologis and the overall portfolio performance, indicating a stronger performance in the U.S.

The speaker, Tim Arndt, predicts that the gap in performance between the U.S. and other countries in terms of lease mark-to-market impact will remain wide in the future. He also expects rent growth to accelerate in 2025 and 2026 as supply decreases. Another speaker, Chris Caton, mentions that vacancy rates are lower on the coast and higher in the Sun Belt, with better rent growth in the latter in 2023.

The speaker asks two questions about the company's recent uptick in property improvements and tenant sentiment. The other speaker explains that the increase in property improvements is due to timing and deferred maintenance, and that the overall CapEx has remained consistent. They also discuss the potential for improved tenant leasing in the future.

The company has seen a marginal improvement in tenant sentiment in the last 30 days, driven by healthy proposal volumes and strong customer dialogs. 45% of available space is currently in discussion with active proposals, and build-to-suit conversations are also improving. The overall build-to-suit pipeline has grown quarter-over-quarter. The company's published research report in September predicted a recovery in market share, which is now playing out in port activities. Development starts are down two-thirds from the peak, and the company is seeing little in terms of new starts broadly. However, they have started over $1 billion worth of spec in the fourth quarter. This may impact their decision to do spec development versus build-to-suit in the future.

The company has seen a decline in starts in the marketplace, but is now focusing on increasing starts in 2024. They have a healthy guidance for 2024 starts, with an appetite for spec and a projected 40% build-to-suit volume. They also have $40 billion worth of opportunities in their land bank and the ability to make quarterly decisions on where to build. The next question asked about the breakdown of the $3 billion plus development start guidance, with a focus on traditional industrial versus data centers. The company recently gave guidance on their data center business, with 20 opportunities, 3 gigawatts, and $7-8 billion worth of investment over the next five years. They also started over $500 million worth of data centers in the fourth quarter alone.

The company has a large presence in the data center market, owning thousands of buildings and acres of land. They are actively growing their data center pipeline and negotiating with big customers. They are cautious about projecting data center volume due to competition. Their data center business is part of their long-term plan to recycle capital into logistics. The cash flow timeline for data centers is longer than traditional industrial, with powered shell taking 12-15 months to cash flow and turnkey taking longer due to complex installations. Negotiating posture is important in these deals.

The speaker discusses the company's decision to not reveal specific information about their customers in order to maintain leverage. They also provide an update on supply and demand trends, expecting an increase in vacancy rates in the first half of the year but a subsequent decrease. The speaker also mentions feeling positive about retailers needing to restock inventories, indicating good space utilization.

The speaker explains that historically, demand for leasing and lease proposals follows a one, two, three, four pattern, with the fourth quarter being the strongest due to the Christmas season. However, this year, retail sales were better than expected, causing retailers to be more cautious with inventories and leading to lower utilization rates. The speaker also mentions that valuations and cap rates have been affected by the movement in the 10 year, and it is uncertain if pricing has adjusted correctly or if there will be continued volatility in the near term.

The speaker discusses the potential volatility in the market and how it presents investment opportunities. They believe that the real pricing and returns have not changed significantly, but the expectations of market participants are converging. They also mention that the supply of new deliveries will drop off in the second quarter and the vacancy rate will increase to 6%, but this is still a historically low level. It will take some time for the vacancy to decline and absorb the availability.

The vacancy rate is expected to decrease from 6% to 5.5% and potentially 5% due to a supply cliff. The company has a positive outlook for development stabilizations despite high supply levels in the first half of the year. They have already pulled in some stabilizations originally planned for 2024 and the current ones are 46% leased. There is currently disruption at East Coast ports, but it is too early to see how tenants will adapt. The clarification of a labor agreement on the West Coast is helping decision making and growth in Southern California.

The speaker believes that concerns about LA's absorption are over and will not be a topic of discussion in the future. However, other disruptions such as issues with the Panama Canal or conflicts in the Persian Gulf could still impact shipping. The speaker also mentions that COVID was thought to be the main unknown factor, but now other events are reminding people to have a more conservative inventory strategy. This could lead to increased demand for big-box leasing. Some of the largest customers are showing interest in leasing again.

The company is seeing positive trends in the e-commerce sector and believes that the economy is not as bad as expected. They are seeing big-box retailers coming back into the market. They decline to give specific market forecasts, but they expect international markets to outperform the US in terms of rent growth.

The speaker discusses strong market rent growth in various international markets, including Brazil, Mexico, Northern Europe, and Toronto. They also mention that the UK is outperforming. They then answer a question about demand and leading indicators, stating that there will be 250 million square feet of net absorption in 2024 compared to 192 million in 2023. They consult a variety of leading indicators, some with a nine to 12-month lease conversion time. The speaker also addresses a question about cash rent spreads and portfolio mark-to-market, stating that they saw a 49% lease mark-to-market at the end of the year and that there has been a wide divergence in cash to net effective rent spreads due to high absolute rent levels and large rent bumps.

The speaker, Chris Caton, discusses the expected points for next year and mentions Duke as a factor. The next question from Todd Thomas is about the company's acquisition pipeline and the trend in spreads between stabilized yields and cap rates for development projects. Dan Letter responds by saying that there is a strong acquisition pipeline and that the spread between stabilized yields and cap rates has been tightening due to volatile capital markets.

Chris Caton and Tim Arndt discuss the development portfolio and the estimated margin of 22. They also mention that tenants may have delayed decisions due to macro uncertainty, but with the holiday season and low inventory levels, their mindset may be changing. However, it is too early to tell for sure and it would be best to reach out to them directly for their feedback.

The speaker is thanking the listener for attending their Investor Day and for their feedback. They look forward to speaking again in the next quarter. The operator then ends the call.

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