Prologis, Inc.

Welcome to the Pelagis Q3 Earnings Conference Call. My name is Michelle, and I will 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. At that time, please limit yourself to one question. If you have a follow-up, please get back in the queue. Also note that this conference is being recorded. I would now like to turn the call over to Tracy Ward. Tracy, you may begin.

Thank you, Michelle. Good morning, everyone. Welcome to the Prologis Third Quarter Earnings Call. If you have not yet downloaded the press release, it's available on our website at prologis.com under Investor Relations. This morning, you'll hear from Tom Olinger, our Chief Financial Officer, and also joining us for the call is Hamid Moghadam, Gary Anderson, Chris Caton, Mike Curliss, Ed Neckert, Colleen McEwen, and Gene Riley. 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 company operates, as well as the beliefs and assumptions of management. Both of these factors are referred to in Prologis' 10-K or SEC filings. Additional factors that could cause actual results to differ materially include but are not limited to the expected timing and likelihood of the completion of the transaction with IPT, including their ability to obtain the requisite approval of their stockholders and the risk that conditions to the closing of the transaction may not be satisfied. Forward-looking statements are not guarantees of performance, and 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, We have provided a reconciliation to those measures in our earnings package. With that, I'll turn the call over to Tom, and Tom, will you please begin?

Thanks, Tracy. Good morning, everyone, and thank you for joining our call today. We had another outstanding quarter. Customer sentiment remains positive, and we see no meaningful impact on our business from uncertainties surrounding trade. Our proprietary operating metrics reflect healthy demand, showing deal gestation conversion rates are positive, and in line with last quarter as our customers improve their supply chains in response to consumer demand for ever faster delivery times. U.S. market fundamentals are strong. I'd like to share our assessment of third quarter market statistics as we've seen more divergent viewpoints than normal. We've seen historically low vacancy in the mid-fours with supply and demand balanced at 75 million square feet each. Rents have outperformed, and as a result, we are raising our 2019 U.S. rent growth forecast from 6% to 7%, leading to an 80 basis point increase in our global rent forecast to 6.5%. Activity across Europe remains healthy. In the U.K., while overall demand is solid and our build-a-suit pipeline is very active, we are highlighting the Midlands as a supply risk. We continue to forecast 2019 rent growth on the continent to be the highest in more than a decade. Fundamentals in Japan are improving, with vacancy in Tokyo at less than 3% and Osaka at less than 6%, the lowest points in five years. From an operating standpoint, you will see that our quarterly results reflect our strategy of prioritizing rents over occupancy to maximize long-term lease economics. We leased 38 million square feet, including nearly 6 million square feet in our development portfolio. Quarter-end occupancy was 96.5%. down 30 basis points sequentially, and remains above our five-year average. Rent change on roll for the quarter hit an all-time high of 37%, led by the U.S. at 41.7%. Our share of cash seems to rely growth was 4.3% for the quarter, which was impacted by a 60 basis point reduction in average occupancy. Again, consistent with our strategy to push rents. Globally our insights to market rent spread widened by 40 basis points in the quarter and is now almost 15 and a half percent or over $400 million in nominal terms. Core FFO was 97 cents per share for the third quarter, which included 18 cents of net promote income from our Pell venture. The promote came in above our forecast as your valuations increased more than 2% in the third quarter. For deployment, Starts in the quarter were $577 million with an estimated margin of 22% and included about two-thirds billed to suits. The pace of starts will increase significantly in the fourth quarter. Stabilizations were $658 million with an estimated margin of 37% and value creation of over $242 million. We continue to access capital globally at very attractive terms. During the quarter, we issued $2.8 billion of debt, primarily in euro, at a weighted average fixed interest rate of under 1% and a weighted average term of more than 14 years. It's worth pointing out that we have an annual need for an incremental $600 million of non-dollar debt to naturally hedge our growing international assets. These issuances lowered our total weighted average interest rate by 10 basis points to 2.4% and lengthened our weighted average maturity by about two years to just under eight years. We continue to maintain significant investment capacity on the balance sheet with $11.7 billion of liquidity and potential fund sell-downs. In addition, there's an incremental $5.4 billion of existing third-party investment capacity in our ventures today. Guidance for 2020, which I know many of you are looking for, will be provided at our upcoming investor forum on November 5th. For 2019 guidance, I'll cover the highlights and then our share basis, and note this guidance does not include the positive impact of the IPT acquisition. We're increasing the bottom end of our cash-same-store NOI guidance by 25 basis points and now expect a range of 4.75% to 5%. We are raising the midpoint for development starts by $250 million and now expect starts to range between $2.2 and $2.5 billion. Build-A-Suce will comprise more than 40% of total starts, which is above our initial expectations. We are projecting $650 million of net deployment uses, which we plan to fund with free cash flow and debt. Net promote income for the full year is now expected to be $0.18 per share, an increase of $0.02 from our prior guidance. For the full year, we're increasing our 2019 core FFO guidance midpoint by 3 cents and narrowing the range to between $3.30 and $3.32 per share. At our revised midpoint, growth in core FFO per share excluding promotes is 10% higher than last year. Over the past five years, our growth has clearly been exceptional with a CAGR of almost 12% while de-levering from 27% to 18%. As I mentioned, this guidance excludes the acquisition of IPT, which we expect to close in January of 2020. We plan to split the $4 billion portfolio equally between our two U.S. vehicles. Private capital investor interest continues to be robust, as evidenced by the record fundraising in our ventures in the third quarter. Our pro rata investment will be approximately $1.3 billion, which we will fund with cash and debt. We continue to expect the annual core FFO accretion from IPT to range between 5 and 6 cents per share, or roughly 2% on a stabilized basis. The acquisition of this high-quality portfolio will capture significant revenue and cost synergies and deliver shareholder value on day one. To sum up, the third quarter was a continuation of what has already been an excellent year. I feel great about our outlook for the rest of the year and beyond. And with that, I'll turn it to Michelle for your questions.