Prologis, Inc.

Welcome to the Prologis Q4 Earnings Conference Call. My name is Julianne, 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. To ask a question, you will need to press star followed by the number 1. Also note that this conference is being recorded. I'd now like to turn the call over to Tracy Ward. Tracy, you may begin.

Thanks, Julianne, and good morning, everyone. Welcome to our fourth quarter 2019 conference call. The supplemental document is available on our IR website on Prologis.com. 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 Prologis operates, as well as management's beliefs and assumptions. Forward-looking statements are not guarantees of performance, and actual operating results may be affected by a variety of factors. For a list of those factors, please refer to the forward-looking statement notice in our 10-K or SEC filings. Additionally, our fourth quarter results press release and supplemental do contain financial measures such as FFO and EBITDA that are non-GAAP measures. And in accordance with Reg G, we have provided a reconciliation to those measures. On October 27th, we announced the merger between Prologis and Liberty Property Trust. Materials regarding the transaction are posted on the company's website. and are available on the SEC's website. This includes the joint proxy statement containing detailed information about the transaction. This call will focus on our fourth quarter and full year results as well as our 2020 outlook. The company will not provide comments related to this transaction beyond what is included in our prepared remarks. This morning we'll hear from Tom Olinger, our CFO, who will cover guidance, results in the company's outlook, and also with us for today's call are Hamid Moghadam, Gary Anderson, Chris Gayton, Mike Kurlis, Colleen McEwen, Ed Neckerts, and Gene Riley. With that, I'll turn the call over to Tom, and we'll get started.

Thank you, Tracy. Good morning, everyone, and thank you for joining our call today. The fourth quarter closed out another excellent year. Core FFO was $0.84 per share for the quarter, $3.31 per share for the year. The full year includes a record for net promotes of 18 cents per share. Core FFO excluding promotes grew 10% for the year and was more than 2% above our initial guidance. As we enter 2020, market conditions are very good, and we've seen no meaningful impact on our business from trade or retailer bankruptcies. Supply chains are increasingly mission critical to our customers' businesses, which is generating demand as they undergo structural changes to deliver high service levels. We see increased requirements across markets and product categories as more customers seek to strengthen their fulfillment capabilities. Our proprietary customer metrics reflect healthy activity, showing deal gestation and conversion rates are consistent with the third quarter. U.S. market fundamentals remain excellent. I'd like to share Prologis' assessment of supply and demand as data providers use a variety of methodologies, resulting in a range of estimates. Completions in 2019 were 275 million square feet, flat compared with 2018. Higher replacement costs, land scarcity, and elongated permitting remained governors to supply. Net absorption was 240 million square feet, but limited by historic low market vacancy, which ended the year at 4.6%. up 10 basis points from last quarter and 20 basis points from last year. Market rents in our U.S. portfolio increased by 8% in 2019. We have no new additions to our watch list this quarter, but here is some color on two markets that remain on the list. In Houston, while demand is strong, vacancy is 6.7% and expected to remain elevated, which will constrain near-term rent growth. we have a low role in the IPT and LPT Houston portfolios in 2020. Our near-term outlook for Pennsylvania is more positive, specifically core Lehigh Valley, where demand has accelerated, the supply pipeline has decreased, and vacancy declined 140 basis points to 3.2% at year-end. In Europe, activity remains healthy. Rent growth on the continent in 2019 was more than 6%. the highest on record. Fundamentals in Japan continue to improve, with vacancy in Tokyo and Osaka at their lowest points in five years, and rent growth is accelerating. Turning to operations for the quarter, we leased nearly 38 million square feet with an average term of 73 months. Quarter-end occupancy was flat sequentially at 96.5%, while the U.S. ticked down 30 basis points as our team is focused on pushing rate and term. Rent change on rollover was just under 30% and led by the U.S. at 34%. Our share of cash seems to rely growth was 4.6% and was impacted by a 60 basis point reduction in average occupancy. Again, consistent with our strategy to maximize long-term lease economics. Globally, our in-place-to-market rent spread increased once again and is now over 15.5% or more than $450 million in annual NOI. Moving to strategic capital, 2019 was a record-breaking year. We raised $6.5 billion of equity from 75 new and existing investors and grew our third-party AUM to $38 billion. Our strategic capital business delivers a durable revenue stream with 90% of fees coming from long-term or perpetual vehicles, a critical differentiator that is often overlooked and undervalued. For deployment, we had a record year for development starts and stabilizations. We started $2.9 billion in new projects, 43% of which were build-a-suits. Stabilizations were $2.5 billion with an estimated margin of 37% and value creation of $911 million. Additionally, we realized $468 million in development gains in 2019. We continue to have significant investment capacity to self-fund our run rate deployment for the foreseeable future. With over $11 billion of liquidity and potential fund sell-downs, as well as an incremental $4.5 billion of third-party investment capacity in our ventures today. For 2020, given we just held our investor forum in November, our guidance remains consistent and includes the acquisitions of IPT, which closed on January 8th, and Liberty, which we expect to close on February 4th. Here are the highlights, and on our shared basis, but for complete detail, refer to page 5 of our supplemental. Our cash-seemed sterile and allied growth range is unchanged at 4.25% to 5.25%, and I'd like to highlight two points. First, we're increasing our 2020 global market rent forecast by 120 basis points to 4.8%. This increase will have a minimal impact on same store this year given our lease expirations, but importantly will increase our mark-to-market and future NOI growth. And second, the first quarter of 2020 will be up against a tough comp from Q1 of 2019, which benefited from an 80 basis point occupancy uplift. As a result, we expect same store NOI growth to be lower in the first quarter, but then accelerate in the back half of the year. For strategic capital, we expect revenue excluding promotes of $350 to $360 million and net promote income of $115 million. The IPT integration is largely complete and the Liberty closing preparations are on track. We are confident about hitting our Liberty synergy targets on day one. For dispositions, we now expect a range of $1.3 to $1.5 billion, which includes approximately $1 billion of sales from the IPT and Liberty portfolios. When we announced the IPT and Liberty acquisitions, we identified approximately $3.8 billion of combined non-strategic sales on an R-share basis. Of this balance, $350 million has already closed or is under contract, and with the sale of an additional $1 billion in 2020, we will have approximately $2.4 billion of non-strategic assets remaining at the end of the year, representing just 2% of our asset base. These are good assets. We will work through these portfolios in due time, and we don't see a need to hurry. Given our low leverage at 18%, we will dispose of the non-strategic assets at a pace that allows us to match sales proceeds with deployment opportunities. For net G&A, we're forecasting a range between $275 and $285 million, which includes $6 to $8 million of one-time transition and wind-down costs related to Liberty. Excluding these costs, annual G&A growth at the midpoint is 2.4%, while managing 15% more real estate. We expect 2020 core FFO to range between $3.67 and $3.75 per share, including 15 cents of net promote income. Year-over-year growth, excluding promotes, is approximately 14% at the midpoint. To wrap up, we expect 2020 to be another exceptional year of growth. We look forward to adding Liberty's high-quality assets to our portfolio and welcoming 35 of their employees to the Prologis team. With that, I'll turn it back to Julianne for your questions.