Prologis, Inc.

Welcome to the Prologist Q2 earnings conference call. My name is Chris and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you'd like to withdraw your question, press the pound key. Also note, this conference is being recorded. I'd now like to turn the call over to Tracy Ward. Tracy, you may begin.

Thank you, Chris. Good morning, everyone. Welcome to Prologis' second quarter earnings call. If you have not yet downloaded the press release, it's available on Prologis' website at Prologis.com under Investor Relations. This morning, you'll hear from Tom Olinger, our Chief Financial Officer, and Gene Riley, Prologis' Chief Investment Officer. Also joining us today for the call is Hamid Moghadam, Gary Anderson, Chris Gayton, Mike Curliss, Ed Neckritz, and Colleen McEwen. Before we begin our prepared remarks, I'd like to state that this conference call will contain forward-looking statements under federal securities laws. These statements are based on current expectations, estimates, and projections about the market and the industry in which the companies operate, as well as the beliefs and assumptions of management. Some of these factors are referred to in Prologis' 10-Ks or SEC filings. Additional factors that could cause actual results to differ include, but are not limited to, the expected timing and likelihood of the completion of the transaction with IPT, including the ability to obtain the approval of their stockholders and the risk that the conditions of the closing of the transaction may not be satisfied. Overlooking statements are not guarantees of performance and the actual operating results may differ. Finally, this call will contain financial measures such as FFO, EBITDA, that are non-GAAP measures. And in accordance with Reg G, the company has provided a reconciliation to those measures in our earnings package. With that, I will turn the call over to Tom. Tom, will you please begin?

Thanks, Tracy. Good morning, and thank you for joining us today. We had another excellent quarter. Our proprietary operating metrics continue to reflect strong demands. Showings, average deal gestation, and conversion rates remain either in line or better than last quarter as our customers further build out their supply chain capabilities in the face of trackability. Market conditions in the U.S. continue to be very healthy. Demand is diverse, and overall supply is disciplined. Starts in the U.S. are concentrated in low-barrier markets, while supply in the high-barrier markets is not keeping pace with GDP growth. let alone demand for logistics facilities closer to the end point of consumption. Continental Europe remains strong, and we expect rent growth this year to be the highest in more than a decade. In Japan, despite moderating economic growth, business is quite good. Demand continues to be boosted by e-commerce, while supply is being steadily absorbed. With the improvement we are seeing in the Osaka market, we are removing it from our market watch list. We are raising our 2019 global rent growth estimate by approximately 100 basis points to over 5.5%, as low vacancies and rising replacement costs continue to push market rents higher. Looking to the quarter, we leased 37 million square feet, including 5 million square feet in our development portfolio. Period end occupancy was flat sequentially. Rent change on roll continues to be outstanding, with ours shared over 25% and led by the U.S. at 30%. We expect rent change to trend higher in the back half of the year. Our share of cash seems to run on high growth was 4.6%. Notably, Europe was 5.3%, driven by rent growth, which we have anticipated. Core FFO was $0.77 per share for the second quarter. G&A in the quarter was higher than expected, driven by stock-based compensation resulting from the increase in our share price. This impact was mostly offset by higher than forecasted from overnight. Our deployment starts for $324 million in the quarter. The pace of starts will increase meaningfully in the second half of the year. In fact, we've already started $250 million of billed suits in the first two weeks of July. We completed over $600 million of dispositions and contributions, resulting in $200 million of realized gains in the quarter. Now for 2019 guidance highlights, which are on an R-share basis. And note that our guidance does not include the impact from the IPT acquisition. We are increasing and narrowing our cash same-store and alive guidance to a range of 4.5% to 5%. We're holding the top end of our range as we continue to prioritize rent over occupancy. We're raising the midpoint for both development starts and contributions by $100 million and realized development gains by $50 million. We still expect about $400 million in net uses, which we plan to fund with free cash flow and a modest increase in leverage. Net promote income for the full year is now expected to be 16 cents per share, an increase of 2 cents from our prior guidance. Effectively, all of the remaining net promote income will be earned in the third quarter. For the full year, we are increasing our 2019 core FFO guidance midpoint by 5 cents and narrowing the range to between $3.26 and $3.30 per share. At our revised midpoint, growth in core FFO per share excluding promotes is 9.5% higher than last year. Over the past five years, our growth has clearly been exceptional, with a CAGR of almost 12%, while de-levering by 800 basis points. As I mentioned, this guidance does not include IPT. The acquisition of this high-quality portfolio, which Gene will cover in more detail, captures significant cost and revenue synergies, delivering shareholder value on day one. We plan to hold the portfolio through one or both of our U.S. private vehicles and expect the transaction to close no later than the first quarter of 2020. Depending on the ultimate allocation, our investment via the ventures is likely to range between $1 and $1.4 billion, which we will fund with cash and debt. The resulting annual core FFO accretion is expected to range between five and six cents per share on a stabilized basis. This transaction will have a minimal impact on leverage, with loan-to-value rising about 150 basis points upon the completion of the non-strategic asset sales to approximately 21%. We do not plan to add any corporate overhead in connection with this acquisition, and as a result expect G&A as a percentage of AUX to decrease by 4%. I fielded several questions lately about how we will continue to grow given our size. We think about growth in three components. The first is organic and based on the quality and strength of our portfolio. This is by far the most important and sustainable driver of growth. It also deserves the highest multiple. The second is the value creation from development and the build out of our land bank. The third component is arbitraging the pricing between public and private markets. This is episodic. out of the hands of management and not sustainable over the long term. We focus on the first two components, which have been the driver of our superior performance and will continue to be the foundation of our long-term growth. To sum up, the second quarter was a continuation of what has already been a very good year. I have never felt better about our growth outlook. And with that, I'll turn it over to Gene.